<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 8, 2000
REGISTRATION NO. 333-95331
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
PEC SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
12750 FAIR LAKES CIRCLE
FAIRFAX, VIRGINIA 22033
703-679-4900
(Address of principal executive offices)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7379 54-1339972
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
--------------------------
DAVID C. KARLGAARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PEC SOLUTIONS, INC.
12750 FAIR LAKES CIRCLE
FAIRFAX, VIRGINIA 22033
703-679-4900
(Name, address, including zip code and telephone number, including area code of
agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
NANCY A. SPANGLER DOUGLAS R. NEWKIRK
PIPER MARBURY RUDNICK & WOLFE LLP SACHNOFF & WEAVER, LTD.
1850 CENTENNIAL PARK DRIVE, SUITE 610 30 S. WACKER DRIVE, SUITE 2900
RESTON, VA 20191-1517 CHICAGO, IL 60606
(703) 391-7100 (312) 207-1000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO BE MAXIMUM OFFERING AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE(1)
<S> <C> <C> <C>
Shares of Common Stock, par value $.01 8,050,000 shares $14.00 $112,700,000
<CAPTION>
AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE(2)
<S> <C>
Shares of Common Stock, par value $.01 $9,953
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act.
(2) A registration fee of $19,800 was paid at the time of the initial filing of
this registration statement.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY THE US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
SUBJECT TO COMPLETION--MARCH 8, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 2000
[LOGO]
7,000,000 SHARES OF COMMON STOCK
----------------------------------------------------------------------
PEC SOLUTIONS, INC.:
- - We provide a full range of Internet and other advanced technology services and
solutions to government agencies.
- - 12750 Fair Lakes Circle, Fairfax, Virginia 22033
PROPOSED SYMBOL & MARKET:
- - PECS/Nasdaq National Market
THE OFFERING:
- - We are offering 6,000,000 shares of our common stock.
- - This is our initial public offering and no public market currently exists for
our shares.
- - We anticipate that the initial public offering price will be between $12.00
and $14.00 per share.
- - The selling stockholders that we identify in this prospectus are offering an
additional 1,000,000 shares. PEC Solutions will not receive any proceeds from
the sale of the selling stockholders' shares.
- - The underwriters have an option to purchase an additional 1,050,000 shares
from the selling stockholders to cover over-allotments.
- - Closing: , 2000.
<TABLE>
- ----------------------------------------------------------------------------------------------------
PER SHARE TOTAL
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
Public Offering Price: $ $
Underwriting Fees:
Proceeds to PEC Solutions, Inc.:
Proceeds to the Selling Stockholders:
- ----------------------------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
- --------------------------------------------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
CHASE H&Q
<PAGE>
LEGG MASON WOOD WALKER
INCORPORATED
DLJDIRECT Inc.
<PAGE>
DESCRIPTION OF ARTWORK
Inside Front Cover
A photograph of large columns in front of a government building with an
individual walking past in the background.
The text across the middle of the picture reads: "Behind the walls of
government, a new American Revolution has begun." Below this text is additional
text that reads "Web Enabling Government PEC Solutions."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 5
Special Note Regarding
Forward-Looking Statements......... 11
Where You Can Find More Information.. 12
Corporate Information................ 12
Use of Proceeds...................... 13
Dividend Policy...................... 13
Capitalization....................... 14
Dilution............................. 15
Selected Historical Financial Data... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 17
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business............................. 23
Management........................... 34
Related Party Transactions........... 42
Principal and Selling Stockholders... 43
Description of Our Capital Stock..... 45
Shares Eligible for Future Sale...... 48
Underwriting......................... 50
Legal Matters........................ 52
Experts.............................. 52
Index to Financial Statements........ F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED BY MORE DETAILED INFORMATION APPEARING IN OTHER
SECTIONS OF THIS PROSPECTUS. THE OTHER INFORMATION IS IMPORTANT, SO PLEASE READ
THIS ENTIRE PROSPECTUS CAREFULLY.
PEC SOLUTIONS
PEC Solutions provides professional technology services that enable
government entities to harness the power of the Internet and other advanced
technologies to enhance productivity and improve services to the public. We
migrate computer systems using older technologies and paper-intensive processes
to integrated electronic government solutions, which are referred to as
eGovernment solutions. We web-enable government by designing, building and
managing Internet-based solutions. Our solutions provide users with rapid and
easy access to large amounts of data and result in improved information flows
among government workers as well as between government entities and their
constituents.
We are a TOTAL solutions provider of eGovernment services addressing the
full technology lifecycle. We formulate technology strategies with our clients,
we create fully integrated technology solutions and we manage and enhance these
solutions over time. The substantial experience we have gained in the government
marketplace allows us to design and implement complex mission-critical solutions
that meet the unique challenges presented by our clients. Our eGovernment
solutions include:
- designing and developing technology strategies and web-enabled enterprise
system architectures;
- building and engineering complex intranets, extranets and other high
performance infrastructures;
- integrating older technology or "legacy" systems with web-based
applications;
- applying leading encryption security technologies; and
- deploying and operating automated enterprise management systems.
We serve clients at all levels of government. We have worked with
organizations representing every cabinet-level department of the federal
government. Our largest clients include federal organizations such as: the
Bureau of Alcohol, Tobacco and Firearms; the Drug Enforcement Administration;
the Immigration and Naturalization Service; the Internal Revenue Service; the
intelligence community; and the Veterans Benefits Administration. We also
provide services to various state and local government entities as well as
private sector organizations. Over the last five years, we have provided more
than $145 million worth of services in the government market and have increased
our revenues at approximately a 48% compound annual growth rate.
OUR MARKET OPPORTUNITY
The emergence of the Internet as a means of handling information presents
numerous opportunities for government to improve the way it communicates
internally and with its constituents. Procurement reform has paved the way for
government organizations to obtain outsourced technology services to apply the
Internet and related technologies to their functions. According to International
Data Corporation, overall government spending on information technology services
is expected to increase from $11.8 billion in 1997 to $17.3 billion in 2002.
Government spending on Internet services alone is expected to grow at
approximately a 56% compound annual rate, reaching $2.8 billion in 2003.
1
<PAGE>
We believe that the government market for technology services is unlike the
private sector market. Most agencies have made substantial investments in legacy
systems and are forced by budgetary constraints to update rather than replace
these systems. Government systems must handle extremely large amounts of data
for large and widely dispersed workforces. Governments require heightened
security to protect sensitive and personal information. In addition, agencies
must operate in a complex environment of strict government regulations.
OUR ADVANTAGE
Our focus on eGovernment solutions enables us to address an organization's
most difficult technology challenges. From the executive management level to our
project leaders, we employ people who have substantial government knowledge and
experience. We use our broad technical skills and capabilities to design
solutions that interface with, and often salvage, the significant investments
that were made in aging legacy systems. For portions of our business, we develop
reusable solution sets, enhanced through numerous client engagements, that allow
us to deliver results to our clients faster, cheaper and with greater
reliability.
OUR STRATEGY
We intend to:
- maintain our leading-edge position in emerging technologies such as the
Internet and advanced security;
- increase federal government market penetration;
- enhance our brand and culture to continue to attract and retain clients
and top quality professionals;
- expand into state and local government and selected highly-regulated
commercial markets; and
- undertake a disciplined acquisition program to broaden our client base,
service offerings and geographic presence.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered:
By PEC Solutions......................... 6,000,000 shares
By the selling stockholders.............. 1,000,000 shares (a)
Total.................................. 7,000,000 shares
Common stock to be outstanding after the
offering................................. 24,959,046 shares (b)
Use of proceeds.............................. The net proceeds to us from the offering are
estimated to be $71.6 million. We will use
the net proceeds for general corporate
purposes, including working capital and
potential acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... PECS
</TABLE>
UNLESS STATED OTHERWISE, THE INFORMATION IN THIS PROSPECTUS:
- ASSUMES OUR COMMON STOCK WILL BE SOLD AT $13.00 PER SHARE, WHICH IS THE
MID-POINT OF THE RANGE SET FORTH ON THE COVER OF THIS PROSPECTUS;
- ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED; AND
- GIVES EFFECT TO A THREE-FOR-ONE STOCK SPLIT ON JANUARY 1, 2000, AND A
FURTHER TWO-FOR-ONE STOCK SPLIT ON MARCH 1, 2000.
- ------------------------
(A) IF THE UNDERWRITERS FULLY EXERCISE THEIR OVER-ALLOTMENT OPTION, THE SELLING
STOCKHOLDERS WILL SELL 1,050,000 ADDITIONAL SHARES OF COMMON STOCK THROUGH
THE OFFERING.
(B) THE NUMBER OF SHARES OF COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING
EXCLUDES (1) OPTIONS TO PURCHASE 4,622,797 SHARES OF COMMON STOCK
OUTSTANDING AT MARCH 1, 2000, AT A WEIGHTED AVERAGE EXERCISE PRICE OF $2.39
PER SHARE, AND (2) 1,287,807 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE
UPON EXERCISE OF OPTIONS THAT MAY BE GRANTED DURING 2000 UNDER OUR 2000
STOCK INCENTIVE PLAN.
3
<PAGE>
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
The following table presents summary historical financial data for our
business. You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $11,146 $16,216 $24,630 $41,457 $53,202
Gross profit (a)............................... 4,970 6,907 10,754 17,942 22,793
Operating income............................... 1,555 2,203 3,615 6,891 8,975
Net income..................................... 1,093 1,452 2,305 4,455 5,639
Earnings per share:
Basic........................................ $ 0.07 $ 0.08 $ 0.13 $ 0.26 $ 0.33
Diluted...................................... 0.06 0.07 0.10 0.20 0.24
</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.
The following table presents summary balance sheet data as of December 31,
1999. The as adjusted information illustrates the impact of the offering.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------
ACTUAL AS ADJUSTED
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 7,981 $79,621
Working capital............................................. 13,311 84,951
Total assets................................................ 24,400 96,040
Long-term debt.............................................. -- --
Total stockholders' equity.................................. 15,283 86,923
</TABLE>
4
<PAGE>
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD UNDERSTAND THAT SUCH AN
INVESTMENT INVOLVES RISK. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS AS
WELL AS ALL OF THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE YOU
DECIDE TO PURCHASE SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS COULD BE
ADVERSELY AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
SUBSTANTIALLY ALL OF OUR REVENUES WOULD BE THREATENED IF OUR RELATIONSHIPS
WITH AGENCIES OF THE FEDERAL
GOVERNMENT WERE HARMED
Our largest clients are agencies of the federal government. If the federal
government in general, or any significant government agency, uses less of our
services or terminates its relationship with us, our revenues could decline
substantially, and our business could be seriously harmed. During 1999,
contracts with the federal government and contracts with prime contractors of
the federal government accounted for approximately 96% of our revenues. During
that same period, our ten largest clients, all agencies of the federal
government, generated approximately 60% of our revenues, with the top five
clients accounting for 40% of our revenues. We believe that federal government
contracts are likely to continue to account for a significant portion of our
revenues for the foreseeable future. The volume of work that we perform for a
specific client, however, is likely to vary from year to year, and a significant
client in one year may not use our services as extensively, or at all, in a
subsequent year.
OUR GOVERNMENT CONTRACTS MAY BE TERMINATED PRIOR TO THEIR COMPLETION, AND IF
WE DO NOT REPLACE THEM, OUR OPERATING RESULTS MAY BE HARMED
We derive substantially all of our revenues from government contracts that
typically are awarded through competitive processes and span a one year base
period and one or more option years. The unexpected termination or nonrenewal of
one or more of our significant contracts could result in significant revenue
shortfalls. Our clients generally have the right not to exercise the option
periods. In addition, our contracts typically contain provisions permitting an
agency to terminate the contract on short notice, with or without cause.
Following termination, if the client requires further services of the type
provided in the contract, there is frequently a competitive rebidding process.
We may not win any particular rebid or be able to successfully bid on new
contracts to replace those that have been terminated. Even if we do win the
rebid, we may experience revenue shortfalls in periods where we anticipated
revenues from the contract rather than its termination and subsequent rebidding.
These revenue shortfalls could harm operating results for those periods.
OUR LACK OF LONG-TERM CONTRACTS WITH CLIENTS AND OUR RELATIVELY FIXED
OPERATING EXPENSES EXPOSE US TO GREATER
RISK OF INCURRING LOSSES
Our clients retain us on an engagement-by-engagement basis, rather than
under long-term contracts. We incur costs based on our expectations of future
revenues. Our operating expenses are relatively fixed and cannot be reduced on
short notice to compensate for unanticipated variations in the number or size of
engagements in progress. These factors make it difficult for us to predict our
revenues and operating results. If we fail to predict our revenues accurately,
it may seriously harm our financial condition and results of operation.
5
<PAGE>
A REDUCTION IN OR THE TERMINATION OF OUR SERVICES COULD LEAD TO
UNDERUTILIZATION OF OUR EMPLOYEES AND COULD HARM OUR OPERATING RESULTS
Our employee compensation expenses are relatively fixed. Therefore, if a
client defers, modifies or cancels an engagement or chooses not to retain us for
additional phases of a project, our operating results will be harmed unless we
can rapidly redeploy our employees to other engagements in order to minimize
underutilization.
FAILING TO MAINTAIN STRONG RELATIONSHIPS WITH PRIME CONTRACTORS COULD RESULT
IN A DECLINE IN OUR REVENUES
We derived approximately 40% of our revenues during 1999 through our
relationships with prime contractors, which, in turn, have contractual
relationships with end-clients. One of our prime contractors, Unisys, accounted
for 24% of our revenues during 1999. We expect to continue to depend on these
relationships for a material portion of our revenues in the foreseeable future.
If any of these prime contractors eliminate or reduce their engagements with us,
or have their engagements eliminated or reduced by their end-clients, we will
lose a source of revenues, which, if not replaced, will adversely affect our
operating results.
WE MUST RECRUIT AND RETAIN QUALIFIED PROFESSIONALS TO SUCCEED IN OUR
LABOR-INTENSIVE BUSINESS
Our future success depends in large part on our ability to recruit and
retain qualified professionals skilled in complex information technology
services and solutions, including encryption and other security systems. Such
personnel are in great demand and are likely to remain a limited resource in the
foreseeable future. Competition for qualified professionals is intense. Any
inability to recruit and retain a sufficient number of these professionals could
hinder the growth of our business.
WE MAY LOSE MONEY ON FIXED-PRICE CONTRACTS IF WE MISCALCULATE THE RESOURCES WE
NEED TO COMPLETE THE CONTRACT
We derived approximately 23% of our revenues in 1999 from fixed-price
contracts. We anticipate a material portion of our future engagements will
continue to be contracted at a fixed price. Unlike time and materials contracts,
for which we are reimbursed based on our actual expenditures of resources,
fixed-price contracts require us to price our contracts by predicting our
expenditures in advance. If we miscalculate the resources we need to complete
fixed-price engagements, our operating results could be seriously harmed because
we are not compensated for the higher costs. The risk that we may miscalculate
the resources we need is higher because we work with complex technologies in
compressed time frames.
WE COULD LOSE REVENUES AND CLIENTS AND EXPOSE OUR COMPANY TO LIABILITY IF WE
FAIL TO MEET CLIENT EXPECTATIONS
We create, implement and maintain technology solutions that are often
critical to our clients' operations. If our technology solutions or other
applications have significant defects or errors or fail to meet our clients'
expectations, we may:
- lose revenues due to adverse client reaction;
- be required to provide additional remediation services to a client at no
charge;
- receive negative publicity, which could damage our reputation and
adversely affect our ability to attract or retain clients; and
- suffer claims for substantial damages against us, regardless of our
responsibility for the failure.
While many of our contracts limit our liability for damages that may arise
from negligent acts, errors, mistakes or omissions in rendering services to our
clients, we cannot be sure that these contractual provisions will protect us
from liability for damages if we are sued. Furthermore, our general liability
insurance coverage may not continue to be available on reasonable terms or in
sufficient amounts to cover one or more large claims, or the insurer may
disclaim coverage as to any future claim. The successful assertion of any large
claim against us could seriously harm our business. Even if not successful, such
claims could result in significant legal and other costs and may be a
distraction to management.
6
<PAGE>
SECURITY BREACHES IN SENSITIVE GOVERNMENT SYSTEMS COULD RESULT IN THE LOSS OF
CLIENTS AND NEGATIVE PUBLICITY
Many of the systems we develop involve managing and protecting information
involved in law enforcement and other sensitive government functions. A security
breach in one of these systems could cause serious harm to our business, could
result in negative publicity and could prevent us from having further access to
such critically sensitive systems or other similarly sensitive areas for other
governmental clients.
IF WE CANNOT OBTAIN THE NECESSARY SECURITY CLEARANCES, WE MAY NOT BE ABLE TO
PERFORM CLASSIFIED WORK FOR THE GOVERNMENT AND OUR REVENUES MAY SUFFER
Government contracts require us, and some of our employees, to maintain
security clearances. If we lose or are unable to obtain security clearances, the
client can terminate the contract or decide not to renew it upon its expiration.
As a result, to the extent we cannot obtain the required security clearances for
our employees working on a particular engagement, we may not derive the revenue
anticipated from the engagement, which, if not replaced with revenue from other
engagements, could seriously harm our operating results.
WE DEPEND ON OUR SENIOR MANAGEMENT TEAM, AND THE LOSS OF ANY MEMBER MAY
ADVERSELY AFFECT OUR ABILITY TO OBTAIN AND MAINTAIN CLIENTS
We believe that our success will depend on the continued employment of our
senior management team, including David Karlgaard, our Chief Executive Officer,
Paul Rice, our Chief Operating Officer and Alan Harbitter, our Chief Technology
Officer. We have key man life insurance policies that cover Messrs. Karlgaard
and Rice up to $1 million and Mr. Harbitter up to $500,000. This dependence is
particularly important to our business because personal relationships are a
critical element of obtaining and maintaining client engagements. If one or more
members of our senior management team was unable or unwilling to continue in
their present positions, such persons would be difficult to replace and our
business could be seriously harmed. Furthermore, clients or other companies
seeking to develop in-house capabilities may hire away some of our key
employees. Employee defections to clients or competitors would not only result
in the loss of key employees but could also result in the loss of a client
relationship or a new business opportunity. Any losses of client relationships
could seriously harm our business.
WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, MANAGE AND INTEGRATE FUTURE
ACQUISITIONS, WHICH MAY HARM OUR OPERATING RESULTS
We may use a portion of the proceeds from this offering to acquire companies
or businesses that are complementary to ours. However, we have no immediate
plans or current agreements to acquire any additional companies or businesses,
and we cannot assure you that we will identify appropriate acquisition
candidates. If we do identify an appropriate acquisition candidate, we cannot
assure you that we would be able to successfully negotiate the terms of an
acquisition, finance the acquisition or integrate the acquired business into our
existing business. Negotiations of potential acquisitions and the integration of
an acquired business could disrupt our business by diverting management away
from day-to-day operations. Further, failure to successfully integrate any
acquisition may cause significant operating inefficiencies and adversely affect
our profitability. Consummating a merger could require us to raise additional
funds through additional equity or debt financing. Additional equity financing
could result in further dilution of the per share value of your stock.
Additional debt financing could force us to accept contractual limitations that
could harm our ability to grow.
AUDITS OF OUR GOVERNMENT CONTRACTS MAY RESULT IN A REDUCTION IN REVENUES WE
RECEIVE FROM THOSE CONTRACTS OR MAY RESULT IN CIVIL OR CRIMINAL PENALTIES THAT
COULD HARM OUR REPUTATION
Federal government agencies routinely audit government contracts. These
agencies review a contractor's performance on its contract, pricing practices,
cost structure and compliance with
7
<PAGE>
applicable laws, regulations and standards. An audit could result in a
substantial adjustment to our revenues because any costs found to be improperly
allocated to a specific contract will not be reimbursed, while improper costs
already reimbursed must be refunded. If a government audit uncovers improper or
illegal activities, we may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines and suspension or debarment from doing
business with federal government agencies. In addition, we could suffer serious
reputational harm if allegations of impropriety were made against us.
WE MAY BE LIABLE FOR PENALTIES UNDER A VARIETY OF PROCUREMENT RULES AND
REGULATIONS, AND CHANGES IN GOVERNMENT REGULATIONS COULD SLOW OUR GROWTH OR
REDUCE OUR PROFITABILITY
We must comply with and are affected by federal government regulations
relating to the formation, administration and performance of government
contracts. These regulations affect how we do business with our clients and may
impose added costs on our business. Any failure to comply with applicable laws
and regulations could result in contract termination, price or fee reductions or
suspension or debarment from contracting with the federal government. Further,
the federal government may reform its procurement practices or adopt new
contracting methods relating to the GSA schedule or other government-wide
contract vehicles. If we are unable to successfully adapt to those changes, our
business could be seriously harmed.
OUR FAILURE TO ADEQUATELY PROTECT OUR CONFIDENTIAL INFORMATION AND PROPRIETARY
RIGHTS MAY HARM OUR COMPETITIVE POSITION
While our employees execute confidentiality agreements, we cannot guarantee
that this will be adequate to deter misappropriation of our confidential
information. In addition, we may not be able to detect unauthorized use of our
intellectual property in order to take appropriate steps to enforce our rights.
If third parties infringe or misappropriate our copyrights, trademarks or other
proprietary information, our competitive position could be seriously harmed. In
addition, other parties may assert infringement claims against us or claim that
we have violated their intellectual property rights. Such claims, even if not
true, could result in significant legal and other costs and may be a distraction
to management. While we have applied for trademarks for PEC.com, PEC, PEC
Solutions, Web-enabling Government and the related symbols and designs, we
cannot assure you that these trademarks will be granted.
RISKS RELATED TO THE EGOVERNMENT SOLUTIONS MARKET
COMPETITION COULD RESULT IN PRICE REDUCTIONS, REDUCED PROFITABILITY AND LOSS
OF MARKET SHARE
Competition in the market for eGovernment solutions is intense. If we are
unable to differentiate our services from those of our competitors, our revenue
growth and operating margins may decline. Many of our competitors are larger and
have greater financial, technical, marketing and public relations resources,
larger client bases and greater brand or name recognition than us. Our larger
competitors may be able to provide clients with additional benefits, including
reduced prices. We may be unable to meet those prices, which may cause us to
lose business and market share. Alternatively, we could decide to meet the lower
prices, which could harm our profitability. If we fail to compete successfully,
our business could be seriously harmed.
Our current competitors include, and may in the future include, the
following:
- information technology services providers and large government contractors
such as American Management Systems, Andersen Consulting, Booz-Allen &
Hamilton, Computer Sciences Corporation, Electronic Data Systems, KPMG,
PricewaterhouseCoopers, Science Applications International Corporation and
Unisys; and
- Internet professional services providers.
8
<PAGE>
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address client needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the
services that we offer.
OUR BUSINESS WILL BE HARMED IF GOVERNMENT AGENCIES ARE UNWILLING TO REPLACE OR
SUPPLEMENT EXPENSIVE LEGACY SYSTEMS
Government agencies have spent substantial resources over an extended period
of time to develop computer systems and to train their personnel to use them.
These agencies may be reluctant to abandon or supplement these legacy systems
with Internet and other advanced technology systems because of the cost of
developing them or the additional cost of re-training their personnel. Such
reluctance would make it more difficult to acquire new engagements which would
harm our business prospects.
OUR GROWTH WILL BE HARMED IF A VIABLE MARKET FOR EGOVERNMENT SERVICES IS NOT
SUSTAINED
We cannot be certain that a viable government market for Internet and other
advanced technology services will be sustainable. If this market is not
sustained and we are unable to refocus our services on the private sector market
or other in-demand technologies, our growth would be negatively affected.
Although government agencies have recently increased focus on and funding for
technology initiatives, we cannot be certain that these initiatives will
continue in the future. Budget cutbacks or political changes could result in a
change of focus or reductions in funding for technology initiatives, which, in
turn, could seriously harm our revenues.
UNDISCOVERED YEAR 2000 PROBLEMS COULD NEGATIVELY AFFECT OUR CLIENTS' SYSTEMS,
WHICH COULD HARM OUR REVENUES AND OUR REPUTATION
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 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, any failure on
our part to provide Year 2000 compliant information systems solutions to our
clients could result in financial loss, harm to our reputation and liability to
others and could seriously harm our business, financial condition and operating
results.
RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK
OUR QUARTERLY REVENUES AND OPERATING RESULTS COULD BE VOLATILE AND MAY CAUSE
OUR STOCK PRICE TO FLUCTUATE
Our quarterly revenues and operating results may fluctuate significantly in
the future. In particular, if the Federal government does not adopt a budget for
its fiscal year beginning on October 1, Federal agencies may be forced to
suspend our contracts due to a lack of funding. Consequently, we may realize
lower revenues in the quarter ending December 31. Further, the rate at which the
Federal government procures technology may be negatively affected following
changes in Presidential administrations and in senior government officials. As a
result, our operating results could be volatile and difficult to predict and
period-to-period comparisons of our operating results may not be a good
indication of our future performance.
9
<PAGE>
A significant portion of our operating expenses, such as personnel and
facilities costs, are fixed in the short term. Therefore, any failure to
generate revenues according to our expectations in a particular quarter could
result in reduced income in the quarter. In addition, our quarterly operating
results may not meet the expectations of securities analysts or investors, which
in turn may have an adverse effect on the market price of our common stock.
OUR OFFICERS AND DIRECTORS WILL OWN 71.2% OF OUR STOCK AND COULD CONTROL
MATTERS SUBMITTED TO STOCKHOLDERS FOR THEIR APPROVAL
Upon completion of this offering, our directors and executive officers will
beneficially own, in the aggregate, 71.2% of our outstanding common stock, or
67.5% if the underwriters exercise their over-allotment option in full. As a
result, these stockholders will be able to exercise control over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control of PEC Solutions.
WE HAVE VARIOUS MECHANISMS IN PLACE THAT MAY PREVENT A CHANGE IN CONTROL THAT
STOCKHOLDERS MAY CONSIDER FAVORABLE
Our certificate of incorporation and bylaws may discourage, delay or prevent
a change in control of PEC Solutions that stockholders may consider favorable.
Our certificate of incorporation and bylaws:
- authorize the issuance of blank check capital stock that could be issued
by our board of directors to thwart a takeover attempt;
- classify the board of directors into staggered, three-year terms, which
may lengthen the time required to gain control of our board of directors;
- prohibit cumulative voting in the election of directors, which would
otherwise allow holders of less than a majority of the stock to elect some
directors;
- require super-majority voting to effect amendments to provisions of our
bylaws concerning the number of directors;
- limit who may call special meetings of stockholders;
- prohibit stockholder action by written consent, requiring all actions to
be taken at a meeting of the stockholders;
- establish advance notice requirements for nominating candidates for
election to the board of directors or for proposing matters that can be
acted upon by stockholders at stockholder meetings; and
- require that vacancies on the board of directors, including newly-created
directorships, be filled only by a majority vote of directors then in
office.
In addition, Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control by prohibiting PEC Solutions
from engaging in a business combination with an interested stockholder for a
period of three years after the person becomes an interested stockholder. See
"Description of Our Capital Stock--Anti-Takeover Effects of Our Certificate of
Incorporation and Bylaws and Delaware General Corporation Law."
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE DILUTION AS THE NET
TANGIBLE BOOK VALUE OF THE SHARES OF COMMON STOCK WILL BE SUBSTANTIALLY LOWER
THAN THE OFFERING PRICE
The initial public offering price of the shares of common stock is
substantially higher than the net tangible book value per share of the
outstanding common stock. As a result, if we were liquidated for book value
immediately following this offering, each stockholder purchasing in this
offering would
10
<PAGE>
experience immediate dilution of $9.34 per share of common stock. Dilution is
the difference between the offering price per share and the net tangible book
value per share of our common stock. See "Dilution" for a discussion about how
net tangible book value is calculated. Existing stockholders will have an
aggregate unrealized gain of $232.7 million and selling stockholders will have
an aggregate realized gain of $13.0 million with respect to the shares sold by
them in this offering.
EXISTING STOCKHOLDERS CAN SELL A SUBSTANTIAL AMOUNT OF THEIR SHARES IN THE
PUBLIC MARKET AFTER THIS OFFERING, WHICH COULD DEPRESS OUR STOCK PRICE AND
MAKE IT MORE DIFFICULT FOR US TO RAISE CAPITAL
Sales of a substantial number of shares of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
after this offering could cause the market price of our common stock to fall. A
decline in our stock price could impair our ability to raise capital through the
sale of additional equity securities. For a description of the shares of our
common stock that are available for future sale, see "Shares Eligible for Future
Sale."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. Forward-looking statements relate to future events
or our future financial performance. All projections contained in this
prospectus are forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
In some cases, you can identify forward-looking statements by terminology
like "may," "will," "should," "expects," "plans," "projects," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreoever, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results
and do not intend to do so.
11
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock being sold in this
offering. This prospectus constitutes a part of that registration statement.
This prospectus does not contain all the information set forth in the
registration statement and the exhibits and schedules to the registration
statement, because some parts have been omitted in accordance with the rules and
regulations of the Commission. For further information with respect to us and
our common stock being sold in this offering, you should refer to the
registration statement and the exhibits and schedules filed as part of the
registration statement. Statements contained in this prospectus regarding the
contents of any agreement, contract or other document referred to are not
necessarily complete; reference is made in each instance to the copy of the
contract or document filed as an exhibit to the registration statement. Each
statement is qualified by reference to the exhibit. You may inspect a copy of
the registration statement without charge at the Commission's principal office
in Washington, D.C. Copies of all or any part of the registration statement may
be obtained after payment of fees prescribed by the Commission from:
- the Commission's Public Reference Room at the Commission's principal
office, 450 Fifth Street, N.W., Washington, D.C. 20549;
- the Commission's regional offices in:
- New York, located at 7 World Trade Center, Suite 1300, New York, New York
10048; or
- Chicago, located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
You may obtain information regarding the operation of the Public Reference
Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an
Internet site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The Commission's World Wide Web address is www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. We intend to furnish such other reports as we may determine or as may be
required by law.
CORPORATE INFORMATION
We are a Delaware corporation that was originally incorporated in Virginia
in 1985 as Performance Engineering Corporation. On January 1, 2000, we
reincorporated into Delaware by merging the Virginia corporation into a
wholly-owned Delaware subsidiary, PEC Solutions, Inc. Concurrently with the
reincorporation, we effected a three-for-one stock split. On March 1, 2000, we
effected an additional two-for-one stock split. Our principal offices are
located at 12750 Fair Lakes Circle, Fairfax, Virginia 22033 and our telephone
number is (703) 679-4900. Our Internet web site is at www.pec.com. The
information on our web site does not constitute a part of this prospectus.
We have applied for trademarks for the following: PEC.com, PEC, PEC
Solutions, Web-enabling Government and the related symbols and designs. This
prospectus also contains trademarks and trade names of other companies.
12
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 6,000,000 shares of common stock
offered by us will be approximately $71.6 million, based on an assumed initial
public offering price of $13.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses. We will not receive
any proceeds from the sale of the 1,000,000 shares to be sold by the selling
stockholders or the 1,050,000 shares to be sold by the selling stockholders if
the underwriters exercise their over-allotment option.
The primary purposes of this offering are 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 will be invested in short-term,
investment grade, interest-bearing securities.
DIVIDEND POLICY
Prior to this offering, we have declared and paid annual cash dividends on
our capital stock. In January 1999 and January 2000, we paid dividends of $0.02
and $0.023 per share, respectively. After this offering, 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. Our board of directors will determine whether to pay dividends in the
future based on conditions then existing, including our earnings, financial
conditions and capital requirements, as well as economic and other conditions as
the board of directors may deem relevant.
13
<PAGE>
CAPITALIZATION
The following table sets forth our cash position and capitalization as of
December 31, 1999:
- on an actual basis; and
- on an as adjusted basis to give effect to the sale of 6,000,000 shares of
common stock offered by us at an assumed initial public offering price of
$13.00 per share in this offering, after deducting underwriting discounts
and commissions and estimated offering expenses.
You should read this information in conjunction with our financial
statements and the related notes beginning on page F-1 of this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 7,981 $ 79,621
=========== ===========
Long-term obligations:
Long-term debt............................................ $ -- $ --
Deferred compensation..................................... 281 281
----------- -----------
Total long-term obligations............................. 281 281
----------- -----------
Stockholders' equity:
Undesignated capital stock, $0.01 par value per share,
10,000,000 shares authorized............................ -- --
Common stock, $0.01 par value per share, 75,000,000 shares
authorized; 17,706,372 shares issued and outstanding
(actual); 23,706,372 shares issued and outstanding (as
adjusted)............................................... 177 237
Additional paid-in capital................................ 601 72,181
Retained earnings......................................... 14,505 14,505
----------- -----------
Total stockholders' equity.............................. 15,283 86,923
----------- -----------
Total capitalization.................................. $ 15,564 $ 87,204
=========== ===========
</TABLE>
14
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999, was $15.2 million or
$0.86 per share. Net tangible book value is the amount of total tangible assets
less total liabilities. Net tangible book value per share is net tangible book
value divided by the number of shares of common stock outstanding.
Dilution to new investors represents the difference between the amount per
share paid by purchasers of common stock in this offering and the net tangible
book value per share of common stock immediately after completion of this
offering. Following the sale of common stock in this offering at an assumed
initial public offering price of $13.00 per share, our net tangible book value
as of December 31, 1999, would have been $86.8 million, or $3.66 per share. This
represents an immediate increase in net tangible book value of $2.80 per share
to our existing stockholders, and an immediate dilution in net tangible book
value of $9.34 per share to purchasers of common stock in this offering. The
following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
------
Net tangible book value per share as of December 31,
1999.................................................... $ 0.86
Increase per share attributable to new investors.......... 2.80
------
Net tangible book value per share after this offering....... 3.66
------
Dilution per share to new investors......................... $ 9.34
======
</TABLE>
The following table summarizes as of December 31, 1999, the difference
between the number of shares of common stock purchased from us, the total
consideration paid to us and the average price paid by existing stockholders and
by the new investors purchasing shares of common stock in this offering, before
deduction of underwriting discounts and commissions and estimated offering
expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 17,706,372 74.7% $ 778,060 1.0% $ 0.04
New stockholders....................... 6,000,000 25.3 78,000,000 99.0 $13.00
---------- ----- ----------- -----
Total................................ 23,706,372 100.0% $78,778,060 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table excludes:
- options to purchase 5,668,890 shares of common stock that were outstanding
as of December 31, 1999, at a weighted average exercise price of $1.76 per
share; and
- 1,500,000 shares of common stock reserved for issuance upon exercise of
options that may be granted during 2000 and additional shares that may be
granted in the future under our 2000 stock incentive plan. See
"Management--2000 Stock Incentive Plan."
15
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements, the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this prospectus. The selected financial data as of December 31, 1998 and
1999, and for each of the three years in the period ended December 31, 1999,
have been derived from our audited financial statements included elsewhere in
this prospectus. The selected financial data as of December 31, 1995, 1996 and
1997 and for the years ended December 31, 1995 and 1996, have been derived from
audited financial statements not included in this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 11,146 $ 16,216 $ 24,630 $ 41,457 $ 53,202
Direct costs................................................ 6,176 9,309 13,876 23,515 30,409
---------- ---------- ---------- ---------- ----------
Gross profit (a)............................................ 4,970 6,907 10,754 17,942 22,793
---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
General and administrative expenses....................... 2,639 3,943 6,117 9,826 11,991
Sales and marketing expenses.............................. 776 761 1,022 1,226 1,826
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses...................... 3,415 4,704 7,139 11,052 13,817
---------- ---------- ---------- ---------- ----------
Operating income............................................ 1,555 2,203 3,615 6,891 8,975
Other income, net........................................... 155 125 135 199 259
---------- ---------- ---------- ---------- ----------
Income before income taxes.................................. 1,710 2,327 3,750 7,089 9,235
Provision for income taxes.................................. 617 876 1,445 2,634 3,595
---------- ---------- ---------- ---------- ----------
Net income.................................................. $ 1,093 $ 1,452 $ 2,305 $ 4,455 $ 5,639
========== ========== ========== ========== ==========
Net income per share, basic................................. $ 0.07 $ 0.08 $ 0.13 $ 0.26 $ 0.33
Net income per share, diluted............................... $ 0.06 $ 0.07 $ 0.10 $ 0.20 $ 0.24
Number of shares used in computing net income per share,
basic..................................................... 17,292,936 17,736,040 17,835,464 17,204,352 17,074,536
Number of shares used in computing net income per share,
diluted................................................... 19,405,252 20,647,720 22,015,814 22,306,044 23,457,756
Cash dividends declared per share........................... $ 0.012 $ 0.015 $ 0.017 $ 0.02 $ 0.023
</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.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,432 $ 1,708 $ 4,520 $ 5,367 $ 7,981
Working capital............................................. 2,998 4,504 6,762 9,309 13,311
Total assets................................................ 4,896 7,743 13,931 18,271 24,400
Long-term debt.............................................. -- -- -- -- --
Total long-term liabilities................................. -- -- -- 105 281
Stockholders' equity........................................ 4,942 6,011 7,962 10,677 15,283
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING SECTION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED
HISTORICAL FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND THE NOTES THERETO
INCLUDED ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION,
THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS, UNCERTAINTIES AND ASSUMPTIONS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM MANAGEMENT'S EXPECTATIONS. FACTORS THAT COULD CAUSE SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS."
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 1999, revenues from these contract types
were approximately 62%, 23% and 15%, 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 96% of our
revenues in 1999 and approximately 95% of our revenues in 1998. We have also
expanded our geographic presence by opening offices in Baltimore, Maryland and
Denver, Colorado. As of December 31, 1999, we had 429 employees.
In 1999, we derived approximately 40% 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,
17
<PAGE>
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.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... 100.0% 100.0% 100.0%
Direct costs................................................ 56.3 56.7 57.2
----- ----- -----
Gross profit (a)............................................ 43.7 43.3 42.8
----- ----- -----
Operating costs and expenses:
General and administrative expenses....................... 24.8 23.7 22.5
Sales and marketing expenses.............................. 4.1 3.0 3.4
----- ----- -----
Total operating costs and expenses...................... 29.0 26.7 26.0
----- ----- -----
Operating income............................................ 14.7 16.6 16.9
Other income, net........................................... 0.5 0.5 0.5
----- ----- -----
Income before income taxes.................................. 15.2 17.1 17.4
Provision for income taxes.................................. 5.9 6.4 6.8
----- ----- -----
Net income.................................................. 9.4% 10.7% 10.6%
===== ===== =====
</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.
1999 COMPARED WITH 1998
REVENUES. Revenues increased 28.3% to $53.2 million for 1999 from
$41.5 million for 1998. The increase in revenue primarily reflects an increase
in the amount of services to existing clients, $11.5 million, and new clients,
$0.2 million. Our individual tasks average six to ten months in length and are
continually replaced with new tasking from our clients.
DIRECT COSTS. Direct costs increased 27.3% to $30.4 million for 1999 from
$23.5 million for 1998. The increase was due primarily to an increase in project
personnel to 382 as of December 31, 1999, as compared with 312 as of
December 31, 1998. As a service provider, our direct costs increase in
conjunction with our increased revenues. Direct costs increased as a percentage
of revenues to 57.2% for 1999 from 56.7% for 1998. This increase was principally
related to normal fluctuations in labor and other direct costs.
GROSS PROFIT. Gross profit increased 27.0% to $22.8 million for 1999 from
$17.9 million for 1998. Gross profit as a percentage of revenues decreased to
42.8% for 1999 from 43.3% for 1998 because direct costs grew at a faster rate
than revenues. This resulted from normal fluctuations in labor and other direct
costs.
18
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 22.0% to $12.0 million for 1999 from $9.8 million for 1998. These
expenses grew at a rate less than the growth rate in revenues and direct costs.
These costs, such as rent and other facility costs, recruiting expenses and
depreciation of equipment purchased, were related to the increase in project
personnel. Our total general and administrative headcount increased to 47
employees as of December 31, 1999 compared to 34 employees as of December 31,
1998. Facilities costs also increased for 1999 due to the opening of our new
offices in Fairfax County, Virginia, Baltimore, Maryland and Denver, Colorado.
We expect to incur increased facilities costs in connection with opening our new
headquarters facility in Fairfax County. We expect general and administrative
expenses to increase in absolute dollars in part due to the costs associated
with being a public company.
SALES AND MARKETING. Sales and marketing expenses increased 49.0% to
$1.8 million for 1999 from $1.2 million for 1998. This increase was due to an
increase in our marketing staff and our marketing efforts. We expect to increase
marketing costs in order to increase our revenue stream.
OPERATING INCOME. Operating income increased 30.3% to $9.0 million for 1999
from $6.9 million for 1998.
1998 COMPARED WITH 1997
REVENUES. Revenues increased 68.3% to $41.5 million in 1998 from
$24.6 million in 1997. The increase in revenues primarily reflects an increase
in the volume of services to existing clients.
DIRECT COSTS. Direct costs increased 69.5% to $23.5 million in 1998 from
$13.9 million in 1997. The increase was due primarily to an increase in project
personnel to 312 as of December 31, 1998 as compared to 188 as of December 31,
1997. Direct costs increased as a percentage of revenues to 56.7% in 1998 from
56.3% in 1997 due to normal fluctuations in labor and other direct costs.
GROSS PROFIT. Gross profit increased 66.8% to $17.9 million in 1998 from
$10.8 million in 1997. Gross profit as a percentage of revenues decreased to
43.3% in 1998 from 43.7% in 1997 as direct costs grew at a faster rate than
revenues due to an increase in personnel costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 60.6% to $9.8 million in 1998 from $6.1 million in 1997. These
expenses grew at a rate less than the growth rate in revenues and direct costs.
Additionally, our total general and administrative headcount increased to 34
employees as of December 31, 1998 compared to 26 employees as of December 31,
1997.
SALES AND MARKETING. Sales and marketing expenses increased 20.0% to
$1.2 million in 1998 from $1.0 million in 1997. This increase was due to an
increase in our marketing efforts.
OPERATING INCOME. Operating income increased 90.6% to $6.9 million in 1998
from $3.6 million in 1997. This increase was due primarily to increased revenues
and decreased costs as a percent of revenues.
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $8,036 $9,895 $11,111 $12,415 $11,813 $13,386 $13,394 $14,609
Direct costs......................... 4,645 5,268 6,418 7,184 6,989 7,462 7,618 8,341
------ ------ ------- ------- ------- ------- ------- -------
Gross profit (a)..................... 3,391 4,627 4,693 5,231 4,824 5,924 5,776 6,268
------ ------ ------- ------- ------- ------- ------- -------
Operating costs and expenses:
General and administrative
expenses......................... 1,851 2,342 2,363 3,270 2,895 3,143 2,759 3,195
Sales and marketing expenses....... 200 290 420 316 475 432 549 370
------ ------ ------- ------- ------- ------- ------- -------
Total operating costs and
expenses....................... 2,051 2,632 2,783 3,586 3,370 3,575 3,308 3,565
------ ------ ------- ------- ------- ------- ------- -------
Operating income..................... 1,341 1,995 1,910 1,645 1,455 2,349 2,468 2,704
Other income, net.................... 41 32 55 71 47 31 63 118
------ ------ ------- ------- ------- ------- ------- -------
Income before income taxes........... 1,382 2,027 1,965 1,715 1,502 2,380 2,531 2,822
Provision for income taxes........... 514 753 730 637 570 905 962 1,158
------ ------ ------- ------- ------- ------- ------- -------
Net income........................... $ 869 $1,274 $ 1,235 $ 1,077 $ 932 $ 1,475 $ 1,569 $ 1,664
====== ====== ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF REVENUES:
Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs......................... 57.8 53.2 57.8 57.9 59.2 55.7 56.9 57.1
------ ------ ------- ------- ------- ------- ------- -------
Gross profit (a)..................... 42.2 46.8 42.2 42.1 40.8 44.3 43.1 42.9
------ ------ ------- ------- ------- ------- ------- -------
Operating costs and expenses:
General and administrative
expenses......................... 23.0 23.7 21.3 26.3 24.5 23.5 20.6 21.9
Sales and marketing expenses....... 2.5 2.9 3.8 2.5 4.0 3.2 4.1 2.5
------ ------ ------- ------- ------- ------- ------- -------
Total operating costs and
expenses....................... 25.5 26.6 25.0 28.9 28.5 26.7 24.7 24.4
------ ------ ------- ------- ------- ------- ------- -------
Operating income..................... 16.7 20.2 17.2 13.3 12.3 17.5 18.4 18.5
Other income, net.................... 0.5 0.3 0.5 0.6 0.4 0.2 0.5 0.8
------ ------ ------- ------- ------- ------- ------- -------
Income before income taxes........... 17.2 20.5 17.7 13.8 12.7 17.8 18.9 19.3
Provision for income taxes........... 6.4 7.6 6.6 5.1 4.8 6.8 7.2 7.9
------ ------ ------- ------- ------- ------- ------- -------
Net income........................... 10.8% 12.9% 11.1% 8.7% 7.9% 11.0% 11.7% 11.4%
====== ====== ======= ======= ======= ======= ======= =======
</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.
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
20
<PAGE>
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 $4.5 million for 1999, $2.9 million for
1998 and $3.2 million for 1997. Cash provided by operating activities for these
years was primarily from net income generated during those years.
Net cash used by investing activities was $0.8 million for 1999,
$0.4 million for 1998 and $0.1 million for 1997. During 1999, we purchased $0.8
million of property and equipment. During 1998, we purchased $0.9 million of
property and equipment and sold investments for approximately $0.5 million.
During 1997, we purchased $0.7 million of property and equipment and sold
investments for approximately $0.7 million.
Net cash used in financing activities was $1.0 million for 1999,
$1.7 million for 1998 and $0.3 million for 1997. During 1999, we sold $0.7
million of common stock and repurchased $1.3 million of common stock, while
paying $0.3 million in dividends. During 1998, we sold $0.3 million of common
stock and repurchased $1.7 million of common stock, while paying $0.3 million in
dividends. During 1997, we sold $0.2 million of common stock and repurchased
$0.2 million of common stock, while paying $0.3 million in dividends.
Although dividends have been paid in prior years, after the offering, 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 intend to terminate these terms and will no longer acquire shares
from terminating employees following the offering.
We maintain a 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 February 29, 2000, we had no borrowings
outstanding under the line of credit. We did have outstanding $1.25 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
fourth quarter of 1999, 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.
21
<PAGE>
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
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133, as
amended, is effective for quarters beginning after June 15, 2000. Currently, we
do not use derivative financial instruments. As a result, we do not expect
SFAS 133 to have a material impact on our results of operations or financial
position.
22
<PAGE>
BUSINESS
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.
Our clients have included every cabinet-level department of the federal
government as well as numerous additional entities at the federal, state and
local levels. This group includes a cross-section of civil, law enforcement,
intelligence and judicial government organizations. Our largest clients include
the Drug Enforcement Administration, the Immigration and Naturalization Service,
the Veterans Benefits Administration, the Internal Revenue Service, the Bureau
of Alcohol, Tobacco and Firearms and the intelligence community. Since 1995, we
have provided more than $145 million of services in the government market and
have increased revenues at approximately a 48% compound annual growth rate.
INDUSTRY BACKGROUND
The emergence and adoption of the Internet as a means of gathering,
communicating and managing information continues to open up new possibilities
for businesses and organizations to dramatically improve productivity and
effectiveness. Government has emerged in recent years as one of the leading
purchasers of Internet and other advanced technology solutions. With respect to
technology services, International Data Corporation estimates that government
spending will increase from $11.8 billion in 1997 to $17.3 billion in 2002.
Government spending on Internet professional technology services alone is
expected to grow at approximately a 56% compound annual growth rate, reaching
$2.8 billion in 2003.
GOVERNMENT REFORM IS DRIVING GROWTH IN ADVANCED TECHNOLOGY SPENDING
We believe that political pressures and budgetary constraints are forcing
government agencies at all levels to improve their processes and services and to
operate more like commercial enterprises. Organizations throughout the federal,
state and local governments are investing heavily in information technology to
improve effectiveness, enhance productivity and extend new services in order to
deliver increasingly responsive and cost-effective public services. We believe
that Internet technologies provide an ideal solution to meet government's needs.
Recent changes in federal government contract procurement and compliance
regulations have streamlined the government's buying practices, resulting in a
more commercial approach to the procurement and management of technologies and
services. As a result, procurement lead times have decreased and government
buyers now have greater flexibility to purchase services on the basis of
distinguishing corporate capabilities and successful past performance. Federal
government entities now are able to award contracts based on factors other than
price alone, if they judge that the government would receive a greater value. In
addition, the General Services Administration's extension of basic
government-wide contract vehicles for procuring technology components and
services, the GSA Schedules, makes purchasing technology services easier and
faster. Federal government buyers can now order services directly from
pre-approved providers instead of using a time-consuming bid solicitation
process. We believe that these changes have improved our ability to successfully
pursue business in the government market. There are currently no proposed
changes to government procurement regulations that we believe will materially
affect our business in the immediate future.
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<PAGE>
GOVERNMENT'S NEED TO OUTSOURCE TECHNOLOGY PROGRAMS
Government organizations rely heavily on outside contractors to provide
skilled resources to accomplish technology programs. In 1999 alone, according to
Electronics Industry Association estimates, the federal government outsourced
$26 billion of its $30 billion information technology budget. We believe that
this reliance will continue to intensify due to political and budgetary
pressures in many government agencies and due to the difficulties government
faces in recruiting and retaining highly skilled technology professionals in a
competitive labor market. In concert with its transition to more commercial
practices, government is increasingly outsourcing technology programs as a means
of simplifying the implementation and management of the technology, so that
government workers can focus on their mission.
TECHNOLOGY SERVICES PROVIDERS IN THE GOVERNMENT SECTOR
Engagements in the government market can be broadly classified into four
categories based on the type of services provided. Many companies provide a mix
of services across these categories.
First, at the low end, providing information technology staff augmentation
at low hourly rates typically involves placing staff in client facilities. These
engagements typically exhibit low operating margins and slow growth.
Second, large-scale systems integration and outsourcing engagements
typically involve assuming responsibility for acquiring, assembling and
operating large inventories of equipment and software. Major portions of these
engagements involve reselling commodity technologies at highly competitive fixed
unit prices. These engagements typically exhibit moderate growth, but low
operating margins.
Third, large-scale systems development engagements involve providing
full-service solutions that combine hardware, software development, system
engineering and operations. These engagements typically exhibit moderate growth
and operating margins.
Fourth, at the high end, engagements involving high-value management
consulting and development and integration of complex systems in core mission
areas use specialized or emerging technologies such as the Internet and advanced
security. These engagements typically exhibit strong growth and operating
margins.
CHALLENGES IN THE GOVERNMENT TECHNOLOGY SERVICES SECTOR
Technology services providers face a unique combination of challenges when
providing services to the government. These include:
- substantial government investments in legacy systems that are not readily
adaptable to evolving technologies;
- extremely large volumes of data collected and retained in government
databases;
- large and widely dispersed workforces, often consisting of tens of
thousands of knowledge workers located in hundreds of sites throughout the
United States and the world;
- heightened security concerns due to the need to protect individual privacy
and extraordinarily sensitive information; and
- complex management needs that require a combination of strategic planning
capabilities, government domain expertise, public sector procurement savvy
and cutting-edge technology skills.
24
<PAGE>
OUR SOLUTION
We are a high-end technology solutions provider that addresses the needs and
particular challenges of the evolving government market by combining the
following key elements in our eGovernment solutions:
TOTAL SOLUTIONS PROVIDER CAPABILITIES
As a total solutions provider, we address the full technology lifecycle
through our deep technical capabilities and extensive government domain
knowledge. We possess a wide range of the specialized skills needed for
eGovernment engagements including: strategic technology consulting; program
management; system architectural design; network engineering; applications
development; and systems integration, deployment and operational support. We
relieve our clients of the details of the application and management of
technologies so they can focus on their core competencies and mission. Our
mission-critical solutions integrate an organization's back-office processes and
legacy systems with customized applications, and enhance the interoperability
and accessibility of critical enterprise data.
EXTENSIVE GOVERNMENT DOMAIN EXPERIENCE
Our founders, who have worked together for more than 20 years in the
government marketplace, have substantial technical and management backgrounds.
Our management maintains close working relationships with our clients and an
active role in our projects, resulting in consistent contract performance and
broad recognition of our managers. Our consulting staff is knowledgeable in the
government sector application of technology management policy formulation,
acquisition strategy, business process re-engineering and best-value procurement
methods.
DEEP TECHNOLOGY EXPERTISE
We have expertise in the critical underlying infrastructure technologies
necessary to support fully web-based enterprises, including security, intranets,
applications development and enterprise management. We have direct experience
with the legacy automation architectures found in government agencies, allowing
us to craft solutions that take advantage of the substantial investments our
clients have in legacy systems. Our employees have experience in emerging
technologies and web-enabling tools from vendors such as Microsoft, Netscape,
Oracle, Cisco, IBM/Lotus, IBM/Tivoli and Entrust.
REUSABLE SOLUTION SETS
For portions of our business, we develop reusable solution sets that can be
reapplied to requirements commonly encountered in our markets. We develop the
software code and components comprising these reusable solution sets based on
our government domain expertise. These solutions enable us to give our clients
the benefit of our knowledge and experience in addressing complex mission
challenges and to develop and implement eGovernment solutions more quickly and
efficiently. We focus our efforts on customizing solutions to meet our clients'
specific needs and to deliver reliable solutions based on components that have
been tested and perfected through repeated use.
THE PEC PHILOSOPHY--FLEXIBILITY AND OBJECTIVITY
We retain the maximum possible flexibility in the systems and components
that we use in our solutions by maintaining both strong established product
credentials and substantial hands-on experience with emerging products. We focus
on providing strategic and high-end technical service contributions to large
programs, while assisting our clients to assemble, contract with and manage the
vendors of commodity program elements. By remaining independent of specific
vendors, we are able to work with providers that best serve the interests of our
clients.
25
<PAGE>
OUR STRATEGY
Our strategy is to continue to grow by capitalizing on our leadership
position in the eGovernment solutions market. Our strategies for obtaining this
objective include:
MAINTAINING OUR TECHNOLOGY LEADERSHIP POSITION
We will continue to focus on high-end engagements that require specialized
knowledge of emerging technologies. We intend to maintain our technology
leadership by recruiting employees who will add to our inventory of technology
skills and by refining the skills and capabilities of our existing staff through
training, certification and hands-on laboratory experimentation. We also intend
to work closely with our technology partners to share expertise and innovations
and to stay well ahead of competitors in the practical aspects of applying and
integrating emerging technologies.
INCREASING FEDERAL GOVERNMENT MARKET PENETRATION
We intend to capitalize on our long-term relationships with government
clients and our reputation within the government market to cross-sell our full
range of services to our existing client base and to expand into organizations
in the federal government for which we have not already performed services. We
intend to pursue these opportunities through a continued active sales and
marketing effort and by continuing to promote the success stories stemming from
our aggressive application of eGovernment solutions. We also intend to leverage
our relationships with our technology providers and their sales resources to
obtain new federal government clients.
ENHANCING THE PEC SOLUTIONS BRAND AND CULTURE
We are implementing an aggressive program to build the identity and
awareness of the PEC Solutions brand in order to improve our visibility in the
marketplace and to attract the best and brightest employees. We intend to hire
and retain outstanding professionals, provide incentives to achieve corporate
goals and maintain a culture that fosters innovation. We will continue to
emphasize professional development and training of our employees. We will
maintain an active internal communications program to promote a team culture and
foster high employee morale. We will also continue to emphasize our corporate
technology infrastructure to facilitate the sharing of knowledge among our
employees.
EXPANDING OUR PRESENCE IN STATE AND LOCAL GOVERNMENT AND SELECTED COMMERCIAL
MARKETS
We intend to leverage our domain expertise and deep technology skills for
providing services to state and local governments. We also intend to expand our
business of web-enabling private sector organizations that operate in highly
regulated industries and that have significant interactions with the government
agencies with which we work. We believe our existing solution sets, such as case
management systems, criminal suspect booking stations, and land and financial
records automation, are applicable to projects at the state and local level, as
well as at private sector organizations.
UNDERTAKING A DISCIPLINED ACQUISITION PROGRAM
We plan to broaden our capabilities and client base and extend our
geographic presence in state and local government markets by acquiring select
businesses. Acquired businesses will perform similar technical work for
organizations outside our current client base, will support solution sets that
are consistent with and extend our web-enabling strategy, or will be located in
geographic areas strategic to significant state and local governments and
programs.
26
<PAGE>
OUR SERVICES
As a provider of eGovernment solutions, we offer a variety of services
across the full technology lifecycle. These services include:
STRATEGY AND DESIGN
We help clients develop the operational vision for integrated mission
solutions, and formulate the business and execution plans for realizing
imaginative, integrated and aggressive technology solutions. We develop
sophisticated enterprise architectures--the technology blueprints and systematic
guidance that allow enterprises to incrementally develop, migrate to and operate
large-scale systems. By re-engineering government processes, we move
organizations to an eGovernment environment. We perform economic analyses to
weigh the costs of technology investment against the operational benefits
expected from such technology implementation. We provide support to
organizations that are executing programs to privatize large-scale information
systems operations, or are undertaking far-reaching changes in their business
models, such as migrating from appropriated to fee-for-service financial models.
SOLUTIONS DEVELOPMENT AND IMPLEMENTATION
We develop, engineer and integrate computer hardware, commercial software,
reusable solution sets, custom-built applications and networks to create
integrated business solutions for our clients. Our emphasis on Internet
technology allows us to combine leading-edge technologies with disciplined and
effective system development methodologies. Our methods are designed to ensure
that the technology fits with business processes and that users realize process
improvement. We distinguish ourselves by addressing the core technical and
business challenges in migrating large government enterprises to integrated
eGovernment solutions. We build:
- INTEGRATED MISSION APPLICATIONS. We integrate complex back-office
business applications and legacy systems with customized mission
applications using the information-sharing capabilities of open
architectures. We also design, develop and install complex custom
application systems that implement knowledge management repositories and
tera-byte data warehousing systems allowing government agencies to mine
the vast storehouses of records that they collect and maintain.
- LARGE-SCALE INTRANET INFRASTRUCTURES. We deploy and manage complex
international network infrastructures: intranets and extranets that
deliver the performance, reliability and flexibility needed to support the
diverse needs of web-enabled organizations with thousands of widely-
dispersed knowledge workers.
- LEADING-EDGE AUTHENTICATION AND ENCRYPTION SECURITY APPLICATIONS. We
apply advanced security technologies such as: public key infrastructure to
manage data encryption systems; biometric authentication to identify
individuals by their physical characteristics; and strong encryption to
protect sensitive information in highly decentralized systems against
unauthorized access and compromised integrity.
- AUTOMATED ENTERPRISE MANAGEMENT SYSTEMS. We develop and deploy processes
and automated tools for our clients to centrally manage and operate
complex national networks of workstations and servers at reduced cost.
ONGOING SYSTEMS MANAGEMENT AND ENHANCEMENT
We provide long-term, ongoing support for our solutions including the
operation, management and enhancement actions necessary to keep solutions
up-to-date with evolving business processes and technologies. We use
sophisticated tools to reduce the burden and costs of maintaining large complex
intranets, and to enhance whole systems without the need to deploy engineers and
field service technicians to the operating locations of an enterprise. We
operate highly automated enterprise technology management processes that support
integration, configuration management, software distribution and user support,
and allow clients to outsource the responsibilities for maintaining their
27
<PAGE>
technology infrastructures and applications. The results are reduced operating
costs for our clients and improved performance and reliability.
OUR CLIENTS
We generated significant revenue from each of the following departments or
agencies, either directly or through subcontracting relationships, in 1999:
<TABLE>
<S> <C>
Bureau of Alcohol, Tobacco & Firearms Drug Enforcement Administration (DEA)
Census Bureau Fairfax County, Virginia
Defense Medical Service Federal Judiciary
Department of Agriculture Health Care Financing Administration
Department of Interior Immigration & Naturalization Service
Department of Transportation Internal Revenue Service
Department of Veterans Affairs Justice Management Division
</TABLE>
We consider each office or division within an agency or department which
directly, or through a prime contractor, engages us as a separate client.
Although contained within a larger organization, each of these clients has
decision-making and contracting authority independent of the larger organization
and its other offices or divisions.
In 1999, our top five clients represented approximately 40% of our revenues
and our top ten clients represented approximately 60% of revenues. Our work for
the DEA Special Projects Division accounted for 14.2% of our revenues during
1999.
In 1999, we derived approximately 40% 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 with respect to the portions of the engagement
subcontracted to us and direct and manage the activities of our staff. Of our
prime contractors, only Unisys accounted for more than 10% of our revenues
during 1999.
In 1998, our work for the DEA Special Projects Division accounted for 16.5%
of our revenues. In 1997, our work for the DEA Special Projects Division
accounted for 11.2% of our revenues and our work for the Internal Revenue
Service accounted for 10.2% of our revenues.
28
<PAGE>
REPRESENTATIVE CLIENT SOLUTIONS
The following are representative case studies of our eGovernment solutions:
<TABLE>
<S> <C>
A MAJOR FEDERAL LAW ENFORCEMENT AGENCY
Challenge: Securely collect and provide access to investigative
information for law enforcement agents worldwide.
Solution: Design, implement, support and continually enhance an
encrypted, international law enforcement intranet that
stores and protects digital intelligence files for
government agents.
Features and Benefits: This intranet provides integrated administrative,
intelligence and case management applications for more than
11,000 agents and administrative staff around the world. Law
enforcement agents, using intranet services, spend less time
on administrative chores and have more time for
investigative and "on-the-street" activities. Preliminary
studies show a 31-day reduction in the time taken to
formally register an investigative report. We have
incorporated technology into this intranet well beyond that
employed on the public Internet. For example, by using
advanced enterprise management tools, our engineers in
Virginia install and troubleshoot software on personal
computers as far away as California. Using this technology,
we monitor and manage over 230 intranet servers and 7,800
personal computers at over 150 sites with a small team of
engineers in our Virginia offices. In addition, we have
integrated hardware encryption, public key encryption and
digital signature technologies to safeguard critical
investigative information on this intranet.
INTERNAL REVENUE SERVICE ("IRS")
Challenge: Enforce complex tax laws and identify tax return fraud.
Solution: Design, implement, and support a large-scale electronic
fraud detection system to automatically identify patterns of
illegal taxpayer behavior over multiple years.
Features and Benefits: Manual review can detect only a small percentage of
fraudulent returns. The IRS asked us to build what has
become one of the most successful processing systems of the
Tax System Modernization program. The Electronic Fraud
Detection System (EFDS) uses decision support software that
we developed in conjunction with Los Alamos National
Laboratories to process and review every electronic return
(approaching 32 million returns annually) and an increasing
number of manually-filed returns each year. EFDS supports
over 700 tax examiners nationwide. With three full years of
tax return data, comprising over 3.5 terabytes online, EFDS
is among the largest Oracle database systems. The EFDS is an
important part of the IRS plan to achieve the
Congressionally-mandated goal of processing 80% of tax
returns electronically by 2007.
</TABLE>
29
<PAGE>
<TABLE>
<S> <C>
IMMIGRATION AND NATURALIZATION SERVICE ("INS")
Challenge: Provide INS case examiners with an integrated picture of the
refugee, naturalization, criminal and asylum history for
immigrants and aliens, based on information stored in
independent legacy databases.
Solution: Design and build a system that connects an integrated web
browser front end to five legacy INS databases and presents
a complete immigrant/alien profile.
Features and Benefits: We designed and implemented a web-based system that queries
multiple INS mainframe databases and automatically provides
consolidated reports to the INS. INS caseworkers will use
their desktop browsers to connect to a web server that we
developed. Based on requests from the user, the server
automatically queries five different INS databases with
records on over 45 million immigrants and aliens.
Accordingly, INS caseworkers will get a more complete
picture of an immigrant's or alien's history and can gather
data and generate reports much more quickly. Our preliminary
tests indicate that this new system will reduce the time to
respond to a query by over 80%. The INS can realize savings
in user training and employee productivity without having to
abandon its large investment in legacy databases.
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS ("ATF")
Challenge: Provide ATF agents and law enforcement officials across the
country with rapid access to a large repository of
information regarding firearms, arson and explosives, and
other valuable criminal investigative case records,
previously contained in paper files.
Solution: Design, develop, deploy and continue to enhance an
integrated case information and management system that
enables agents to access ATF data stores within the bureau
and enables the ATF to publish crime statistics on the web.
Features and Benefits: ATF agents access and generate large amounts of valuable
intelligence information on firearms, arson, and explosives
in the process of conducting investigations. Prior to our
involvement, many ATF records were paper-based. ATF's
largely manual systems made it difficult and time consuming
to collect, record and correlate data while investigating a
crime. We designed and implemented an integrated knowledge
management system that provides access to seven different
case data repositories under a common framework. By using
our system, ATF agents need to enter case information only
once. The system categorizes the investigative information
and makes it accessible to 2,000 users in over 193 ATF
offices across the nation. Crime statistics derived from
this data are available to the public and local law
enforcement organizations through the ATF web site.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
THE CIRCUIT COURT OF FAIRFAX COUNTY, VIRGINIA
Challenge: Preserve and improve public access to over two centuries of
land and legal records for one of the largest local
governments (by revenue) in the United States.
Solution: Design and implement an e-commerce solution using a
web-enabled repository of county public records and
documents.
Features and Benefits: Fairfax County needed a way to preserve aging land records
dating back to 1742, to manage the rapidly increasing volume
of documents and to improve service to the County's
residents and businesses. The web-based land record system
that we designed puts the County's archive--over 14 million
images including deeds, plats, wills and financial
documents--on the Internet. The system has the capacity to
support 20,000 image retrievals per hour. Rather than
waiting in long lines, customers can access these public
documents electronically at a public retrieval station in
the County courthouse. Real estate attorneys and other
businesses that wish to gain access from their offices over
the Internet can do so by paying a subscription fee to the
County.
DRUG ENFORCEMENT ADMINISTRATION ("DEA"), OFFICE OF DIVERSION CONTROL
Challenge: Ensure that the rapid industry movement toward electronic
prescription processing does not result in an increase in
the amount of drugs diverted from legitimate use to the
black market.
Solution: Develop a strategy that employs encryption and digital
signature technology to safeguard prescription fulfillment
and develop a regulatory reporting process that integrates
with the business-to-business transactions between
pharmacies, distributors and drug manufacturers.
Features and Benefits: Three business interfaces are involved in the prescription
fulfillment process: physician-to-pharmacy,
pharmacy-to-distributor and distributor-to-manufacturer. The
pharmacies, distributors and manufacturers already use
electronic data interchange (EDI) technology to process drug
orders. The DEA has hired us to design processes that
integrate with the industry's electronic processes and guard
against diversion but that do not impede the efficiencies
gained by e-commerce. In contrast, physicians are only
beginning to send electronic prescriptions to pharmacies. In
this case, we will design processes using Internet security
technologies that increase the efficiency of prescription
fulfillment, prevent diversion and reduce the chance of
medical error. The DEA is using our skills and experience
with security technologies, including public key
infrastructure and digital signature, to help in this
effort. The conceptual design for this program must
accommodate one million physicians, pharmacies, drug
manufacturers and distributors. The Department of Veterans
Affairs (VA), which employs 4,000 pharmacists nationwide who
fill 68 million prescriptions a year, will conduct the pilot
program. We will work with the VA, our long-time client, to
test the automation and digital protection of prescription
flow and diversion prevention.
</TABLE>
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<PAGE>
SALES AND MARKETING
Our marketing efforts are focused on creating awareness of opportunities in
eGovernment innovation, establishing PEC Solutions as a leader in this new
category and building the PEC brand.
We market and sell our services through multiple channels by using our
business development staff, leveraging existing client relationships,
capitalizing on our task order contracts, responding to competitive
solicitations, attending marketing events and engaging in other public relations
activities. We employ marketing research services to identify and track
potential contract opportunities. We also cultivate relationships with
leading-edge technology vendors, such as Entrust Technologies and IBM, and prime
contractors, such as Unisys, to identify and obtain project leads consistent
with our capabilities.
We employ a team selling approach, whereby our business developers
collaborate with our service delivery professionals and management to identify
prospects, conduct sales and manage client relationships. Our Vice President of
Strategic Programs coordinates the activities of our business development staff.
We allocate business developers to each of our business units who pursue new
clients and programs across their market segments. Each current client is
assigned to a relationship manager who is responsible for ensuring client
satisfaction and successful project performance, and identifying new business
opportunities with the client.
CULTURE, PEOPLE AND RECRUITING
We have developed a corporate culture that promotes excellence in job
performance, respect for the ideas and judgment of our colleagues and
recognition of the value of the unique skills and capabilities of our
professional staff. We seek to attract highly qualified and ambitious staff. We
strive to establish an environment in which all employees can make their best
personal contribution and have the satisfaction of being part of a unique team.
We believe that we have successfully attracted and retained highly skilled
employees because of the quality of our work environment, the professional
challenge of our assignments, and the financial and career advancement
opportunities we make available to our staff.
We occupy state-of-the art facilities that are conducive to highly technical
and collaborative work, while providing individual privacy. In our solutions
centers, we configure large networks of leading-edge equipment and software, and
provide our engineers and developers with advanced tools to evaluate and apply
new technologies. We believe that the location, environment and amenities
provided by our new Fair Lakes campus facility will contribute to our ability to
attract and retain highly skilled employees.
As of December 31, 1999, we had 429 employees. Of our employees, 382 were
consulting and service delivery professionals, and 47 were management and
administrative personnel performing corporate marketing, human resources,
finance, accounting, legal, internal information systems and administrative
functions. None of our employees is represented by a collective bargaining unit.
In addition to standard company benefits, we provide:
- tuition reimbursement for employees pursuing advanced academic degrees;
- professional training programs;
- financial incentives for employees obtaining product competency
certifications;
- a bonus program;
- spot cash awards to reward specific employee accomplishments; and
- stock option grants based on job performance.
We invest heavily in technical staff recruiting resources and hiring
programs. Each of our business units is staffed with a dedicated recruiter, and
we aggressively use a variety of recruiting methods, including advertising, job
fairs, open houses and Internet-based career placement services. We also offer
substantial awards and recognition to our current employees for referrals, which
has been particularly effective in identifying and recruiting talented staff.
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We have developed an active and effective college recruiting program that
draws on management staff and recent college hires from across the company to
attract graduating students with strong academic backgrounds in our core
disciplines. We currently target colleges and universities in Washington, D.C.,
Maryland, and Virginia with this program, and perform on-campus recruiting
during the spring and fall recruiting seasons at five universities.
COMPETITION
Our current competitors include, and may in the future include, the
following:
- information technology services providers and large government contractors
such as American Management Systems, Andersen Consulting, Booz, Allen &
Hamilton, Computer Sciences Corporation, Electronic Data Systems, KPMG,
PricewaterhouseCoopers, Science Applications International Corporation and
Unisys; and
- Internet professional services providers.
Many of our competitors have long operating histories and strong client
relationships, greater financial, technical, marketing and public relations
resources, larger client bases and greater brand or name recognition than we
have.
We believe that the major competitive factors in our market relate to a
company's distinctive technical capabilities, successful past contract
performance, reputation for quality and key management and marketing staff.
Under best-value procurement methods, price is an important, but secondary,
factor in the selection of a technology service provider.
INTELLECTUAL PROPERTY RIGHTS
Our success is dependent, in part, upon our proprietary processes,
components and other intellectual property rights. We do not have any patents or
patent applications pending. We rely on a combination of trade secret,
nondisclosure and other contractual agreements, and copyright and trademark
laws, to protect our proprietary rights. Existing trade secret and copyright
laws afford us only limited protection. We enter into confidentiality agreements
with our employees and our contractors and limit access to and distribution of
our proprietary information. There can be no assurance that the steps we have
taken in this regard will be adequate to deter misappropriation of our
proprietary information or that we will be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights.
A portion of our business involves the development of software applications
for specific client engagements. Although ownership of client-specific software
is generally retained by the client, we retain some rights to the applications,
processes and intellectual property developed in connection with client
engagements.
FACILITIES
In January 2000, we moved our headquarters to a new 96,000 square foot
building in Fairfax, Virginia. We have a 14-year lease on this new facility with
two five-year options to extend. This building will be part of a corporate
campus facility being constructed on our behalf.
We have additional operating facilities throughout the metropolitan
Washington, D.C. area and the nation. In addition to our facilities in Fairfax
County, Virginia, we lease operating facilities in Baltimore, Maryland and
Denver, Colorado. We also have employees working at client sites throughout the
United States.
LEGAL PROCEEDINGS
Although we are not involved in any material legal proceedings, from time to
time we become a party to legal proceedings arising in the ordinary course of
business. Any such proceeding, even if the claims are without merit, could
result in us spending significant financial and managerial resources.
33
<PAGE>
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table shows information about our directors, executive
officers and certain key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
David C. Karlgaard, Ph.D.................... 53 Chief Executive Officer, President and
Chairman of the Board of Directors
Paul G. Rice................................ 46 Chief Operating Officer and Director
Alan H. Harbitter........................... 42 Chief Technology Officer and Director
Stuart R. Lloyd............................. 56 Chief Financial Officer, Senior Vice President
and Director
Christos Bratiotis.......................... 56 Senior Vice President
Charles E. Owlett........................... 46 Senior Vice President
William J. Scharf........................... 53 Senior Vice President
Sharon M. Owlett............................ 49 Director
Jesse Brown (a)(b).......................... 55 Director
Denis M. Crane (a)(b)....................... 66 Director
Alvin E. Nashman, Ph.D. (a)(b).............. 73 Director
</TABLE>
- ------------------------
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
DAVID C. KARLGAARD, PH.D. has been our Chief Executive Officer, President
and Chairman of the Board of Directors since October 1985 when he and
Messrs. Rice and Harbitter founded the company. From 1975 to 1984, he held
various management positions with Computer Sciences Corporation, where he worked
with Messrs. Rice and Harbitter. Dr. Karlgaard received his doctorate degree in
electrical engineering and computer science from The George Washington
University and an M.B.A. from the Wharton Business School. Dr. Karlgaard has
also lectured as a professor at The George Washington University School of
Business and Public Management since 1994.
PAUL G. RICE has been our Chief Operating Officer since January 1996 and a
Director since October 1985. From October 1985 until December 1995, he was our
Vice President and then Senior Vice President, Operations. Prior to the founding
of the company, Mr. Rice served in various technical management positions at
Computer Sciences Corporation from June 1975 to September 1985. Mr. Rice
received his B.S. in electrical engineering from the University of Virginia.
ALAN H. HARBITTER has been our Chief Technology Officer since May 1996 and a
Director since October 1985. He was our Senior Vice President, Engineering from
January 1991 until April 1996 and the Vice President, Engineering from
October 1985 to January 1991. From July 1978 to September 1985, Mr. Harbitter
served in various technical management positions at Computer Sciences
Corporation. Mr. Harbitter received his B.S. in electrical engineering from
Cornell University, an M.S. in computer science from the University of Maryland
and is currently pursuing a doctorate in information technology at George Mason
University.
STUART R. LLOYD has been our Senior Vice President and Chief Financial
Officer since December 1998 and a Director since May 1999. Mr. Lloyd was a
partner at Gelman, Rosenberg & Freedman, a certified public accounting firm,
from February 1993 until December 1998. From September 1981 until
February 1993, he was the principal at his own certified public accounting firm.
Mr. Lloyd is a certified public accountant and received his B.S. in business
administration from The American University.
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<PAGE>
CHRISTOS BRATIOTIS has been our Senior Vice President, Engineering
Operations since April 1999. Mr. Bratiotis was our Vice President, Engineering
Division from April 1996 to April 1999. Prior to that, he served as Vice
President, Information Systems for Synetics, a federal information technology
company, from January 1992 until April 1996. Mr. Bratiotis received a B.A. in
mathematics from Clark University and an M.B.A. from the University of Utah.
CHARLES E. OWLETT has served as our Senior Vice President, Development
Operations since April 1999. Mr. Owlett was our Vice President, Systems
Integration Division from January 1996 until March 1999 and our Vice President,
Systems Development Division from January 1990 until December 1995. Prior to
joining us, he served in various technical and management positions with
Computer Sciences Corporation from 1975 to 1988. He received his B.S. in
electrical engineering from the Florida Institute of Technology. Mr. Owlett is
the husband of Sharon Owlett.
WILLIAM J. SCHARF has been our Senior Vice President, Enterprise Resource
Operations since April 1999. Mr. Scharf was our Vice President, Information
Technology Management Division from January 1996 until March 1999 and our Vice
President, Applied Systems Division from January 1990 until December 1995. Prior
to joining us, he served as a program director with CACI International, a
technology consulting services company, from 1985 to 1987. Mr. Scharf received
his B.A. in mathematics from the University of Dayton and his M.S. in applied
statistics from Villanova University.
SHARON M. OWLETT has been a Director since January 1990. Since
December 1998, Ms. Owlett has served as a senior consultant. Prior to this
position, she was our Vice President, Corporate Affairs and General Counsel from
January 1994 until November 1998. Between 1988 and 1994, Ms. Owlett served as
our director of business and legal affairs and as our director of finance and
administration. She has a B.A. in political science from The American University
and a J.D. from the University of Virginia. Ms. Owlett is the wife of Charles
Owlett.
JESSE BROWN has been a Director since July 1998. Mr. Brown was Secretary of
the Department of Veterans Affairs from January 1993 until July 1997, and since
July 1997, has been Chief Executive Officer of Brown & Associates, a consulting
firm. Mr. Brown presently serves on the board of directors of Roy F.
Weston, Inc., a company providing infrastructure redevelopment services, and
MAXIMUS, Inc., a company providing program management and consulting services to
government agencies.
DENIS M. CRANE has been a Director since February 2000. Mr. Crane was Vice
President and Corporate Controller of Computer Sciences Corporation from January
1981 until he retired in December 1997. Mr. Crane is a certified public
accountant and received his B.S. in commerce from Santa Clara University.
ALVIN E. NASHMAN, PH.D. has been a Director since July 1998. Dr. Nashman
retired from Computer Sciences Corporation as President of the Systems Group in
1991 and served as member of Computer Science Corporation's board of directors
until 1996. He currently serves as a consultant for Trawick Associates and
Unitech Inc., both of which are technology consulting services companies.
Dr. Nashman also is a member of the board of directors of Halifax Corporation, a
technology services and facilities management company, and Micros to
Mainframes, Inc., a company that installs, sells, designs, and services
microcomputers and software.
CLASSIFIED BOARD OF DIRECTORS
Our certificate of incorporation and bylaws provide for a classified board
of directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to consummation
of the offering, two members of the board will be elected to one-year terms, two
will be elected to two-year terms and three will be elected to three-year terms.
Thereafter, directors will be elected for three-year terms. Messrs. Karlgaard
and Nashman will be Class I directors with terms expiring at the
35
<PAGE>
2000 annual meeting of stockholders, Messrs. Rice, Brown and Crane will be
Class II directors, with terms expiring at the 2001 annual meeting of
stockholders, and Messrs. Harbitter and Lloyd and Ms. Owlett will be Class III
directors, with terms expiring at the 2002 annual meeting of stockholders.
BOARD COMMITTEES
Our by-laws provide that our board of directors may designate one or more
board committees. We currently have an audit committee and a compensation
committee.
Our audit committee, currently comprised of Messrs. Brown and Crane and
Dr. Nashman, recommends to our board of directors the independent auditors to
conduct the annual audit of our books and records; reviews the proposed scope
and results of the audit; approves the audit fees to be paid; reviews accounting
and financial controls with the independent public accountants and our financial
and accounting staff; and reviews and approves transactions between us and our
directors, officers and affiliates.
Our compensation committee, currently comprised of Messrs. Brown and Crane
and Dr. Nashman, reviews and recommends the compensation arrangements for
management, including the compensation for our President and Chief Executive
Officer; establishes and reviews general compensation policies with the
objective to attract and retain superior talent, to reward individual
performance and to achieve our financial goals; and administers our stock option
plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, members of our compensation committee were Dr. Karlgaard and
Messrs. Rice and Harbitter. None of our executive officers served as a member of
the board of directors or compensation committee of any other entity that had
one or more executive officers serving as a member of our board of directors or
compensation committee. Dr. Karlgaard is our President and Chief Executive
Officer, Mr. Rice is our Chief Operating Officer and Mr. Harbitter is our Chief
Technology Officer.
COMPENSATION OF DIRECTORS
Our non-employee directors receive $1,000 for each board or committee
meeting attended. We also reimburse them for reasonable expenses they incur to
attend board and committee meetings. Our non-employee directors are eligible to
receive grants of options to acquire our common stock pursuant to our
nonqualified stock option plan. In addition, Ms. Owlett receives wages on an
hourly basis for part-time services she provides to us.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to our Chief Executive
Officer and the other four most highly paid executive officers for the year
ended December 31, 1999, whom we refer to as our named executive officers:
36
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION (A)
<S> <C> <C> <C> <C>
David C. Karlgaard......................... $261,019 $77,217 360,000 $36,799
Chief Executive Officer, President and
Chairman of the Board of Directors
Paul G. Rice............................... 191,610 77,217 360,000 36,820
Chief Operating Officer and Director
Alan H. Harbitter.......................... 167,378 77,217 180,000 36,166
Chief Technology Officer and Director
William J. Scharf.......................... 143,021 42,000 48,000 23,176
Senior Vice President
Stuart R. Lloyd............................ 140,005 40,051 30,000 18,357
Chief Financial Officer, Senior Vice
President and Director
</TABLE>
- --------------------------
(a) Represents (i) dollar value of life and health insurance premiums we paid of
$1,626 for Dr. Karlgaard, $1,647 for Mr. Rice, $993 for Mr. Harbitter,
$1,152 for Mr. Scharf and $1,800 for Mr. Lloyd; (ii) contributions we made
to the executive supplemental retirement plan in the amount of $23,723 for
each of Dr. Karlgaard and Messrs. Rice and Harbitter, $10,574 for
Mr. Scharf and $5,107 for Mr. Lloyd; and (iii) contributions we made under
our 401(k) plan for each named executive officer in the amount of $11,450.
OPTIONS GRANTS IN 1999
The following table sets forth information regarding options granted to the
named executive officers.
We recommend caution in interpreting the financial significance of the
figures representing the potential realizable value of the stock options. They
are calculated by multiplying the number of shares underlying the options
granted by the difference between a future hypothetical stock price and the
option exercise price and are shown pursuant to rules of the SEC. They assume
the market price of common stock appreciates 5% or 10% each year, compounded
annually, for the applicable term of the option. They are not intended to
forecast possible future appreciation, if any, of our stock price or to
establish a present value of options. Also, if appreciation does occur at the 5%
or 10% per year rate, the amounts shown would not be realized by the recipients
until the year 2003 or 2008. Depending on inflation rates, these amounts may be
worth significantly less in those years, in real terms, than their value today.
37
<PAGE>
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION TERM
----------------------------------------------------- ----------------------------------
PERCENT OF
NUMBER OF TOTAL BASED
SECURITIES OPTIONS ON
UNDERLYING GRANTED TO INITIAL
OPTIONS EMPLOYEES EXERCISE EXPIRATION OFFERING
NAME GRANTED (A) IN 1999 (B) PRICE (C) DATE 5% 10% PRICE
<S> <C> <C> <C> <C> <C> <C> <C>
David C. Karlgaard... 360,000 23.8% $3.12 (d) $669,948 $1,687,989 $3,556,800
Paul G. Rice......... 360,000 23.8 3.12 (d) 669,948 1,687,989 3,556,800
Alan H. Harbitter.... 180,000 11.9 3.12 (d) 317,935 796,371 1,778,400
William J. Scharf.... 18,000 1.2 2.84 12/31/03 14,099 31,154 182,880
William J. Scharf.... 30,000 2.0 3.05 (e) 40,205 97,496 298,500
Stuart R. Lloyd...... 30,000 2.0 3.05 4/20/04 25,240 55,769 298,500
</TABLE>
- ------------------------
(a) All options were granted under our stock option agreement and nonqualified
stock option plan. Options granted under the stock option agreement vest two
years from the date of grant. Options granted under the nonqualified stock
option plan vest on the date of grant.
(b) Based on options to purchase 1,511,550 shares of our common stock granted to
employees in 1999.
(c) The options were granted at an exercise price equal to the fair market value
of the underlying common stock on the respective dates of grant.
(d) Options to purchase 32,046 shares expire on December 31, 2003. Options to
purchase the remaining shares expire on December 31, 2008.
(e) Options to purchase 16,062 shares expire on April 20, 2004. Options to
purchase 13,938 shares expire on April 20, 2009.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The value of unexercised options at December 31, 1999, is calculated on the
basis of the initial public offering price of our common stock, less the
exercise price payable for those shares, multiplied by the number of shares
underlying the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS AT THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED (A) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
David C. Karlgaard... 159,150 $1,968,686 1,551,204 86,046 $17,668,927 $957,775
Paul G. Rice......... 159,150 1,968,686 1,551,204 86,046 17,668,927 957,775
Alan H. Harbitter.... 106,200 1,313,694 705,954 86,046 8,045,756 918,624
William J. Scharf.... 43,200 525,312 69,804 86,196 750,928 920,562
Stuart R. Lloyd...... 11,022 120,801 -- 78,978 -- 835,317
</TABLE>
- ------------------------
(a) Calculated on the basis of the initial public offering price of our common
stock, less the following exercise prices: $0.63 per share for
Dr. Karlgaard and Messrs. Rice and Harbitter; $0.57 per share with respect
to 12,000 shares, $0.78 per share with respect to 15,600 shares and $1.10
per share with respect to 15,600 shares for Mr. Scharf; and $2.04 per share
for Mr. Lloyd; multiplied by the number of shares acquired.
NONQUALIFIED EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN
In December 1998, we entered into a nonqualified executive supplemental
retirement program agreement with each of the named executive officers. Under
this plan, each named executive officer may defer a percentage of his salary
each year, which, with the amount he defers under our 401(k) plan, may not
exceed 15%. In addition, each executive officer may elect to defer any bonuses
awarded to him. Any deferred salary and bonus amounts vest immediately. We also
may make voluntary
38
<PAGE>
contributions to each executive officer's account, which will vest five years
from the date we make the contribution. We will invest or use deferred amounts
as we deem appropriate.
Upon reaching the age of 65, the executive officer may elect to receive the
deferred amount as adjusted for investment gains and losses. Each executive
officer also may elect to begin receiving payment from his deferred account upon
reaching the age of 55, if he retires from our company and agrees not to compete
against us for a period of five years. Deferred amounts will be paid in three
equal annual payments.
EMPLOYMENT ARRANGEMENTS
We have entered into employment agreements with Dr. Karlgaard and
Messrs. Rice and Harbitter. The agreements have initial terms of two years and
are automatically extended for additional one year terms. If Dr. Karlgaard,
Mr. Rice or Mr. Harbitter is terminated for any reason other than for cause or
terminates his agreement for good reason, the employment agreements provide that
he is entitled to receive severance payments over a period equal to the greater
of the remaining term of his agreement or one year. The employment agreements
restrict Dr. Karlgaard and Messrs. Rice and Harbitter from competing with us for
a period of two years following termination of employment.
On December 31, 1998, we entered into an employment agreement with Stuart
Lloyd. The agreement has an initial term of five years and is automatically
extended for additional one year terms unless we, by providing one year's
notice, elect not to renew the agreement. Mr. Lloyd, by providing 90 days
notice, can terminate the agreement before the end of the current term. Under
this agreement, Mr. Lloyd receives an initial annual base salary that will be
increased at specified rates through 2001 and will be subject to adjustment by
our board of directors and our compensation committee thereafter. He also may
receive an annual cash bonus of up to 20% of his then current salary under our
fall bonus plan, based upon performance objectives set by our senior management,
and another cash bonus under our spring bonus plan not to exceed our net income
margin as a percentage of his base salary. Mr. Lloyd, along with the other named
executive officers, also receives beneficial use of an automobile.
Upon signing his employment agreement, Mr. Lloyd was granted options to
purchase 60,000 shares of common stock at $2.04 per share. In the event that
Mr. Lloyd determines to exercise any of these options through the use of
proceeds borrowed from a third party lender, we have agreed that we will
guarantee the loan on the condition that we receive a collateral security
interest in the common stock acquired upon exercise. If, during the term of his
employment agreement, we terminate Mr. Lloyd's employment without cause, he will
be entitled to, in one lump sum, the base salary, bonus, all employee benefits
and stock options he would have received over the remainder of the term of the
agreement. In addition, if we terminate Mr. Lloyd's employment without good
reason following a change of control, he will be entitled to the compensation he
would have received had the agreement been fully performed. Mr. Lloyd has agreed
to a non-competition provision that will be in effect during the term of his
agreement and for two years after the agreement is terminated unless terminated
as a result of a breach by us of one of the agreement's provisions.
Each named executive officer has agreed to preserve the confidentiality and
the proprietary nature of all information relating to our business during and
after the term of his employment.
STOCK OPTION AGREEMENT AND NONQUALIFIED STOCK OPTION PLAN
We adopted our stock option agreement in February 1987 and our nonqualified
stock option plan in January 1995. The 1987 stock option agreement provides for
the grant of stock options to our employees, including executive officers, that
are intended to qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code. The 1995 nonqualified stock option
plan provides for the grant of stock options to employees and directors that are
not intended to qualify as incentive stock options. The exercisability of
options granted under the 1987 stock option agreement
39
<PAGE>
may in certain circumstances be accelerated in connection with an acquisition
event, as defined in the agreement.
As of December 31, 1999, we had outstanding options to purchase an aggregate
of 5,668,890 shares of common stock under the 1987 stock option agreement and
the 1995 nonqualified stock option plan. Options granted under the 1987 stock
option agreement generally vest two years from the date of grant. Options
granted under the 1995 nonqualified stock option plan vest immediately. No
further options will be granted under the 1987 stock option agreement or the
1995 nonqualified stock option plan. Options granted under the 1987 stock option
agreement or the 1995 nonqualified stock option plan will remain outstanding
according to their terms.
2000 STOCK INCENTIVE PLAN
We adopted our 2000 stock incentive plan in January 2000. This plan
authorizes the grant of:
- stock options;
- stock appreciation rights;
- stock awards;
- phantom stock;
- performance awards; and
- other stock-based awards.
The compensation committee of our board of directors administers our 2000
stock incentive plan. The committee has sole power and authority, consistent
with the provisions of this plan, to determine which eligible participants will
receive awards, the form of the awards and the number of shares of our common
stock covered by each award. The committee may impose terms, limits,
restrictions and conditions upon awards, and may modify, amend, extend or renew
awards, to accelerate or change the exercise timing of awards or to waive any
restrictions or conditions to an award.
The number of shares of common stock available for issuance under our 2000
stock incentive plan during 2000 is 1,500,000. Beginning in 2001, the number of
shares eligible for grant in each year will be equal to the sum of (i) 6.25% of
the number of outstanding shares on January 1 of that year plus (ii) the number
of shares eligible for grant in the prior year that were not granted. No more
than 15,000,000 shares may be issued pursuant to incentive stock options during
the 10-year term of the plan. At March 1, 2000, we granted options to purchase
212,193 shares of common stock at an exercise price of $12.00 per share under
this plan.
STOCK OPTIONS. Our 2000 stock incentive plan permits the granting of
options to purchase shares of our common stock intended to qualify as incentive
stock options under the Internal Revenue Code and stock options that do not
qualify as incentive options. The option exercise price of each option will be
determined by the committee. The term of each option will be fixed by the
committee. The committee will determine at what time or times each option may be
exercised and, the period of time, if any, after retirement, death, disability
or termination of employment during which options may be exercised.
STOCK APPRECIATION RIGHTS. The committee may grant a right to receive a
number of shares or, in the discretion of the committee, an amount in cash or a
combination of shares and cash, based on the increase in the fair market value
of the shares underlying the right during a stated period specified by the
committee.
STOCK AWARDS. The committee may award shares of our common stock, cash, or
a combination of shares of common stock and cash, to participants at no cost or
for a purchase price. These stock awards may be subject to restrictions or may
be free from any restrictions under our 2000 stock incentive plan. The committee
shall determine the applicable restrictions. The purchase price of the shares of
our common stock will be determined by the committee.
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<PAGE>
PHANTOM STOCK. The committee may grant stock equivalent rights, or phantom
stock, which entitle the recipient to receive credits which are ultimately
payable in the form of cash, shares of our common stock or a combination of
both. Phantom stock does not entitle the holder to any rights as a stockholder.
PERFORMANCE AWARDS. The committee may grant performance awards to
participants entitling the participants to receive cash, shares of our common
stock, or a combination of both, upon the achievement of performance goals and
other conditions determined by the committee. The performance goals may be based
on our operating income, or on one or more other business criteria selected by
the committee.
OTHER STOCK-BASED AWARDS. The committee may grant other stock-based awards.
These stock-based awards may be denominated in cash, in common stock, or other
securities, in stock-equivalent units, in stock appreciation units, in
securities or debentures convertible into common stock, or in any combination of
the foregoing and may be paid in common stock or other securities, in cash, or
in a combination of common stock or other securities and cash, all as determined
in the sole discretion of the committee.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our employee stock purchase plan, which we adopted in January 2000, provides
for the issuance of up to 2,000,000 shares of common stock. This plan, which is
intended to qualify under Section 423 of the Internal Revenue Code, provides our
employees with an opportunity to purchase shares of our common stock through
payroll deductions.
All of our employees, including directors who are employees, are eligible to
participate in the purchase plan. Options to purchase our common stock will
initially be granted to each eligible employee on the first trading day on or
after the date of this offering. Thereafter, options will be granted on the
first trading day after January 1 of each year, or such other date as determined
by the administrator. Each option will terminate on the last trading day of a
period specified by the administrator and no option period will be longer than
27 months in duration. Subsequent option periods of equal duration will
consecutively follow, unless the administrator determines otherwise.
Each option represents a right to purchase shares of our common stock. The
administrator determines the purchase price of each share of common stock,
provided that the purchase price will never be less than the lesser of 85% of
the fair market value of the common stock on the first trading day of the option
period or the date the shares of common stock are purchased.
Any employee who immediately after a grant owns 5% or more of the total
combined voting power or value of our capital stock may not be granted an option
to purchase common stock under the purchase plan. Participation may also be
limited where rights to purchase stock under all other purchase plans accrue at
a rate which exceeds $25,000 of the fair market value of our common stock for
each calendar year.
401(K) PLAN
We maintain a retirement savings and investment plan, or 401(k) plan,
covering all employees. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended, so that
contributions to the 401(k) plan by employees, and the investment earnings
thereon, are not taxable to employees until withdrawn from the 401(k) plan.
Under the 401(k) plan, employees may elect to reduce their current compensation
by up to the lesser of 15% of their annual compensation or the statutorily
prescribed annual limit ($10,500 in 2000) and to have the amount of the
reduction contributed to the 401(k) plan. We may make additional matching or
discretionary contributions, or both, to the 401(k) plan for the benefit of
participants in the plan. The participant's contribution is 100% vested
immediately upon contribution. Contributions made by us into the participant's
account vest 20% every year over a five year period beginning two years from the
initial date of employment with us.
41
<PAGE>
RELATED PARTY TRANSACTIONS
SALE OF STOCK
In September 1999, we issued 30,000 shares of common stock at a price of
$2.06 per share to Dr. Nashman upon the exercise of options held by him. See
also "Management--Option Exercises and Year-End Option Values" for option
exercises made by the named executive officers in 1999.
The following table sets forth the options exercised by our executive
officers and directors in 2000.
<TABLE>
<CAPTION>
RANGE OF AGGREGATE
NAME EXERCISE PRICE NUMBER OF SHARES
- ---- -------------- ----------------
(PER SHARE)
<S> <C> <C>
David C. Karlgaard.............................. $0.86-1.85 610,062
Paul G. Rice.................................... 0.86-1.85 253,314
Alan H. Harbitter............................... 0.86-1.85 253,314
William J. Scharf............................... 1.68-3.05 87,804
Charles E. Owlett............................... 1.68 18,000
</TABLE>
REPURCHASES OF STOCK
In 1997, we repurchased from Mr. Rice 138,240 shares of common stock at
prices ranging from $0.92 to $1.67 per share. In 1998, we repurchased from
Dr. Karlgaard and Messrs. Harbitter and Rice 373,128, 373,128 and 186,564 shares
of common stock, respectively, at prices ranging from $1.67 to $2.72 per share.
We repurchased from Ms. Owlett 81,588 shares of common stock at a price of $2.84
per share in March 1999. In each case, the share repurchase price was the fair
market value of the shares of common stock as determined on a quarterly basis by
the board of directors.
GUARANTY OF LOANS
Under the terms of Mr. Lloyd's employment agreement, we may be required to
guarantee loans made to Mr. Lloyd by third party lenders, the proceeds of which
are used by Mr. Lloyd to exercise certain of his options. As of the date of this
prospectus, no such loans have been made. See "Management--Employment
Arrangements."
STOCK OPTION GRANTS
In 1997, we granted options to purchase 12,000, 15,600, and 18,000 shares of
common stock to Messrs. Bratiotis and Owlett and Ms. Owlett, respectively, at an
exercise price of $1.10 per share. In 1998, we granted options to purchase
18,000, 18,000 and 14,400 shares to Messrs. Bratiotis and Owlett and
Ms. Owlett, respectively, at an exercise price of $1.69 per share. We also
granted options to purchase 90,000 shares to each of these individuals at an
exercise price of $2.04 per share and options to purchase 30,000 shares to each
of Mr. Brown and Dr. Nashman at an exercise price of $2.06 per share. In 1999,
we granted options to purchase 18,000, 18,000 and 12,000 shares to
Messrs. Bratiotis and Owlett and Ms. Owlett, respectively, at an exercise price
of $2.84 per share. We also granted options to purchase 30,000 shares to each of
Messrs. Bratiotis and Owlett at an exercise price of $3.05 per share. See also
"Management--Option Grants in 1999" for option grants we made to the named
executive officers in 1999. In February 2000, we granted options to purchase
10,000 shares of common stock to Mr. Crane at an exercise price of $12.00 per
share. In March 2000, we granted options to purchase 7,692 shares of common
stock to Messrs. Bratiotis and Lloyd, options to purchase 7,693 shares of common
stock to Messrs. Owlett and Scharf, and options to purchase 11,539 shares of
common stock to Messrs. Karlgaard, Rice and Harbitter, all at an exercise price
of $12.00 per share.
42
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets certain information regarding beneficial ownership
of our common stock as of March 1, 2000 and as adjusted to reflect the sale of
the shares offered hereby, by:
- each person who we know beneficially owns more that 5% of our common
stock;
- each member of our board of directors;
- each of our named executive officers; and
- all directors and executive officers as a group.
The term "beneficial ownership" includes shares over which the indicated
beneficial owner exercises voting and/or investment power. The rules also deem
common stock subject to options currently exercisable, or exercisable within
60 days, to be outstanding for purposes of computing the percentage ownership of
the person holding the options, but they do not deem such stock to be
outstanding for purposes of computing the percentage ownership of any other
person. The applicable percentage ownership before the offering for each
stockholder is based on 18,959,046 shares of common stock outstanding as of
March 1, 2000, together with options for that stockholder exercisable within
60 days of March 1, 2000. For purposes of calculating the percentage
beneficially owned after the offering, the number of shares deemed outstanding
includes: (a) all shares deemed to be outstanding before the offering and
(b) 6,000,000 additional shares being sold in this offering.
The address for each stockholder listed is c/o PEC Solutions, Inc. 12750
Fair Lakes Circle, Fairfax, Virginia 22033. Each of the persons named in this
table has sole voting and investment power with respect to all the shares
indicated. An asterisk indicates ownership of less than 1%.
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
---------------------- ----------------------
SHARES SHARES
BENEFICIALLY SHARES TO BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED PERCENT BE SOLD OWNED PERCENT
<S> <C> <C> <C> <C> <C>
David C. Karlgaard (a)................ 7,818,313 39.2% 400,000 7,418,313 28.6%
Paul G. Rice (b)...................... 7,960,105 39.2 400,000 7,560,105 28.7
Alan H. Harbitter (c)................. 4,042,429 20.8 200,000 3,842,429 15.1
William J. Scharf (d)................. 366,510 1.9 -- 366,510 1.5
Stuart R. Lloyd....................... 41,022 * -- 41,022 *
Sharon M. Owlett (e).................. 350,640 1.8 -- 350,640 1.4
Jesse Brown (f)....................... 30,000 * -- 30,000 *
Denis M. Crane (g).................... 10,000 * -- 10,000 *
Alvin E. Nashman...................... 30,000 * -- 30,000 *
All executive officers and directors
as a group (11 persons) (h)......... 21,019,483 95.1 1,000,000 20,019,483 71.2
</TABLE>
- ------------------------
(a) Includes 1,006,681 shares underlying exercisable options and 1,296,000
shares held in a trust for the benefit of Dr. Karlgaard. Does not include
335,040 shares held in an irrevocable trust for the benefit of
Dr. Karlgaard over which Dr. Karlgaard does not hold voting or investment
power. See note (5).
(b) Includes 1,363,429 shares underlying exercisable options and 864,000 shares
held in a trust for the benefit of Mr. Rice.
(c) Includes 518,179 shares underlying exercisable options and 554,000 shares
held in a trust for the benefit of Mr. Harbitter.
(d) Includes 16,062 shares underlying exercisable options.
(e) Includes 335,040 shares held in an irrevocable trust for the benefit of
Dr. Karlgaard for which Ms. Owlett is trustee. Ms. Owlett disclaims all
beneficial ownership of the shares held in the trust.
(f) Represents shares underlying exercisable options.
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<PAGE>
(g) Represents shares underlying exercisable options.
(h) Includes 3,150,145 shares underlying exercisable options.
If the underwriters exercise their overallotment option in full, the stock
ownership of Messrs. Karlgaard, Rice and Harbitter will be as follows:
<TABLE>
<CAPTION>
AFTER OFFERING
-----------------------
ADDITIONAL SHARES
SHARES TO BENEFICIALLY
BE SOLD OWNED PERCENT
---------- ------------ --------
<S> <C> <C> <C>
David C. Karlgaard.............................. 420,000 6,998,313 27.0%
Paul G. Rice.................................... 420,000 7,140,105 27.1
Alan H. Harbitter............................... 210,000 3,632,429 14.3
</TABLE>
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<PAGE>
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 75,000,000 shares of common stock,
with a par value of $0.01 per share, and 10,000,000 shares of undesignated
capital stock, with a par value of $0.01 per share. As of March 1, 2000, there
were 18,959,046 shares of our common stock outstanding, held of record by 78
stockholders. After this offering, we will have outstanding 24,959,046 shares of
common stock. No other classes of stock have been designated or issued.
The following is a description of our capital stock.
COMMON STOCK
Holders of common stock are entitled to one vote per share of record on all
matters to be voted upon by the stockholders. Subject to preferences of any
preferred stock that may be issued in the future, the holders of common stock
are entitled to receive any dividends that may be declared by the board of
directors. In the event of a liquidation, dissolution, or winding up of the
affairs of our company, the holders of common stock will be entitled to receive
pro rata all of our remaining assets available for distribution to stockholders.
Any pro rata distribution would be subject to the rights of the holders of any
outstanding shares of preferred stock. Our common stock has no preemptive,
redemption, conversion or subscription rights. Piper Marbury Rudnick & Wolfe
LLP, our counsel, will opine that the shares of common stock to be issued by us
in this offering, when issued and sold in the manner described in the prospectus
and in accordance with the resolutions adopted by the board of directors, will
be fully paid and non-assessable.
UNDESIGNATED CAPITAL STOCK
Our board has authority to designate and issue up to 10,000,000 shares of
capital stock, in one or more series. Our board can establish the preferences,
rights and privileges of each series, which may be superior to the rights of the
common stock.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE GENERAL CORPORATION LAW
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE GENERAL CORPORATION
LAW. Certain provisions of Delaware law and our certificate of incorporation
and bylaws could make the following more difficult:
- the acquisition of us by means of a tender offer;
- the acquisition of us by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
of the potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging such proposals because negotiation of such proposals could result
in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS. Our board of directors is classified
into three classes. The directors in each class serve for a three-year term, one
class being elected each year by our stockholders. This system of electing and
removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us because it generally makes
it more difficult for stockholders to replace a majority of the directors. In
addition, our by-laws provide that, except as otherwise provided by law or our
certificate of incorporation, newly created directorships
45
<PAGE>
resulting from an increase in the authorized number of directors or vacancies on
the board may be filled only by
- a majority of the directors then in office, though less than a quorum is
then in office; or
- by the sole remaining director.
STOCKHOLDER MEETINGS. Under our certificate of incorporation and bylaws,
only the chairman of the board, the president or a majority of the board of
directors may call special meetings of stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
DELAWARE ANTI-TAKEOVER LAW. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock. The existence of this provision may
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Our certificate of
incorporation and bylaws eliminate the right of stockholders to act by written
consent without a meeting, unless the consent is unanimous.
NO CUMULATIVE VOTING. Our certificate of incorporation and bylaws do not
provide for cumulative voting in the election of directors. As a result, the
holders of a majority of the shares of common stock can elect all of the members
of the board of directors.
UNDESIGNATED CAPITAL STOCK. The authorization of undesignated capital stock
will make it possible for our board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of PEC Solutions.
LIMITATION OF LIABILITY AND INDEMNIFICATION PROVISIONS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors shall not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption of
stock; or
- for any transaction from which the director derives an improper personal
benefit.
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<PAGE>
As a result of this provision, we and our stockholders may be unable to obtain
monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and bylaws provide for the indemnification
of our directors and officers to the fullest extent authorized by the Delaware
General Corporation Law. The indemnification provided under our certificate of
incorporation and bylaws includes the right to be paid expenses in advance of
any proceeding for which indemnification may be had, provided that the payment
of these expenses incurred by a director or officer in advance of the final
disposition of a proceeding may be made only upon delivery to us of an
undertaking by or on behalf of the director or officer to repay all amounts so
paid in advance if it is ultimately determined that the director or officer is
not entitled to be indemnified. If we do not pay a claim for indemnification
within 60 days after we have received a written claim, the claimant may at any
time thereafter bring an action to recover the unpaid amount of the claim and,
if successful, the director or officer will be entitled to be paid the expense
of prosecuting the action to recover these unpaid amounts.
Under our bylaws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against the person or incurred by the
person in any of these capacities, or arising out of the person's fulfilling one
of these capacities, and related expenses, whether or not we would have the
power to indemnify the person against the claim under the provisions of the
Delaware General Corporation Law. We intend to purchase director and officer
liability insurance on behalf of our directors and officers.
STOCK TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 24,959,046 shares of common stock
outstanding. All of the shares we sell in this offering will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares purchased by our affiliates, as that term is defined in
Rule 144, may generally only be sold in compliance with the limitations of
Rule 144, which is summarized below.
The remaining 17,959,046 shares, representing 71.2% of the common stock to
be outstanding after this offering, will be restricted shares under the terms of
the Securities Act. Restricted shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 or other applicable exemption promulgated under the
Securities Act, which rules are summarized below. Giving effect to the lock-up
agreements described below, these restricted shares will be available for resale
in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE OF FIRST AVAILABILITY FOR RESALE
<C> <S>
181,428 Immediately after the date of this prospectus
266,742 90 days after the date of this prospectus
17,510,876 After 180 days from the date of the prospectus subject, in
some cases, to volume limitations
</TABLE>
Before this offering, there has been no public market for our common stock,
and we cannot predict what effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from time to time. Sales
of substantial amounts of our common stock in the public market could adversely
affect prevailing market prices and could impair our future ability to raise
capital through the sale of our equity securities.
RULE 144
In general, under Rule 144, beginning 90 days after the effective date of
the offering, a stockholder who has owned restricted shares for at least one
year is entitled to sell, within any three-month period, a number of these
restricted shares that does not exceed the greater of:
- one percent of the then outstanding shares of our common stock, or
approximately 249,590 shares immediately after this offering; or
- the average weekly trading volume in our common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
In addition, our affiliates must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirement, to sell shares
of common stock that are not restricted securities.
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours who owns
restricted shares that have been outstanding for at least two years may resell
these restricted shares without compliance with the above requirements. The one-
and two-year holding periods described above do not begin to run until the full
purchase price is paid by the person acquiring the restricted shares from us or
an affiliate of ours.
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<PAGE>
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchase shares from us in
connection with a written compensatory stock or option plan is eligible to
resell such shares 90 days after the effective date of this offering in reliance
on Rule 144 but without compliance with some restrictions, including the holding
period, contained in Rule 144.
STOCK OPTIONS
We intend to file one or more registration statements under the Securities
Act 180 days after this offering to register an aggregate of 3,000,000 shares of
our common stock underlying outstanding stock options or reserved for issuance
under our 2000 stock incentive plan and our 2000 employee stock purchase plan.
We expect these registration statements will become effective upon filing, and
shares covered by these registration statements will be eligible for sale in the
public market immediately after the effective dates of these registration
statements, subject to the lock-up agreements described below.
LOCK-UP AGREEMENTS
Our officers and directors and certain other stockholders, who together will
hold 17,510,876 shares representing 70.2% of our outstanding capital stock after
this offering, have agreed that they will not, without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation, offer, sell, pledge or
otherwise dispose of any shares of our capital stock or any rights to acquire or
purchase, any of our capital stock or publicly announce an intention to effect
any of these transactions, for a period of 180 days from the date of this
prospectus.
Donaldson, Lufkin & Jenrette Securities Corporation currently has no plans
to release any portion of the securities subject to lock-up agreements. When
determining whether or not to release any portion of the securities subject to
lock-up agreements, Donaldson, Lufkin & Jenrette Securities Corporation will
consider, among other factors, the stockholder's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time.
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC, Legg
Mason Wood Walker, Incorporated and DLJDIRECT Inc., have severally agreed to
purchase from us and the selling stockholders the number of shares of common
stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS: SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.......
Chase Securities Inc......................................
Legg Mason Wood Walker, Incorporated......................
DLJDIRECT Inc.............................................
---------
Total................................................... 7,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of certain
legal matters and to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all the shares of common stock offered by this
prospectus, other than those shares covered by the over-allotment option
described below, if any are purchased.
The underwriters initially propose to offer the shares of our common stock
in part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers at the initial public
offering price less a concession not in excess of $ per share. The
underwriters may allow, and those dealers may re-allow, a concession not in
excess of $ per share on sales to other dealers. After the initial offering
of the common stock to the public, the representatives may change the public
offering price and concessions. The underwriters do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid by us in
connection with this offering:
<TABLE>
<CAPTION>
<S> <C> <C>
Per share............................................ $
Total................................................ $
</TABLE>
We will pay the offering expenses, estimated to be approximately $900,000.
We will pay to the underwriters underwriting discounts and commissions in an
amount equal to the public offering price per share of common stock less the
amount the underwriters pay to us for each share of common stock.
An electronic prospectus is available on the Web site maintained by
DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a representative of the underwriters. Other than the prospectus
in electronic format, the information on this Web site relating to the offering
is not part of this prospectus and has not been approved or endorsed by us or
the underwriters, and should not be relied on by prospective investors.
50
<PAGE>
David C. Karlgaard, Paul G. Rice and Alan H. Harbitter have granted to the
underwriters an option, exercisable for 30 days after the date of this
prospectus, to purchase up to 1,050,000 additional shares of common stock at the
initial public offering price less the underwriting discounts and commissions.
The underwriters may exercise this option solely to cover over-allotments, if
any, made in connection with this offering. To the extent the underwriters
exercise this option, each underwriter will be obligated, upon satisfaction of
certain conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitments.
We, together with David C. Karlgaard, Paul G. Rice and Alan H. Harbitter,
have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, or to contribute to payments that the
underwriters may be required to make for these liabilities.
For a period ending 180 days from the date of this prospectus, we, our
executive officers and directors and certain other stockholders have agreed that
we and they will not, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
Either of the foregoing transfer restrictions will apply regardless of
whether any such transaction described above is to be settled by delivery of
common stock or other securities, in cash, or otherwise. In addition, during
such lock-up period, we have also agreed not to file any registration statement
relating to, and each of our executive officers, directors and stockholders has
agreed not to make any demand for, or exercise any right relating to, the
registration of any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation.
Prior to this offering, no public market has existed for our common stock.
We will negotiate the initial public offering price for our common stock with
the representatives, but the price may not reflect the market price for our
common stock after this offering. The factors considered in determining the
initial public offering price include:
- the history of and prospects for our industry in which we compete;
- our past and present operations;
- our historical results of operations;
- our prospects for future operational results;
- the recent market prices of securities of generally comparable companies;
and
- the general conditions of the securities market at the time of this
offering.
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol "PECS."
Other than in the United States, no action has been taken by us, the selling
stockholders or the underwriters that would permit a public offering of the
shares of common stock included in this offering in any jurisdiction where
action for that purpose is required. The shares included in this offering may
not be offered or sold, directly or indirectly, nor may this prospectus or any
other offering material or advertisements in connection with the offer and sale
of any shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance
51
<PAGE>
with the applicable rules and regulations of such jurisdiction. We advise
persons who receive this prospectus to inform themselves about and to observe
any restrictions relating to this offering and the distribution of this
prospectus. This prospectus is not an offer to sell or a solicitation of an
offer to buy any shares of common stock in any jurisdiction where that would not
be permitted or legal.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
our shares of common stock in the open market to cover such syndicate short
positions or to stabilize the price of our common stock. In addition, the
underwriting syndicate may reclaim selling concessions from syndicate members
and selected dealers if they repurchase previously distributed common stock in
syndicate covering transactions, in stabilizing transactions or otherwise, or if
Donaldson, Lufkin & Jenrette Securities Corporation receives a report which
indicates that the clients of such syndicate members have "flipped" our common
stock. These activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares of common stock offered by this
prospectus for sale to our officers, directors, employees and their family
members and to business associates of PEC Solutions, Inc., including clients,
consultants and other friends. These persons must commit to purchase after the
registration statement has become effective but before the open of business on
the following business day. The number of shares available for sale to the
general public will be reduced to the extent these persons purchase the reserved
shares.
LEGAL MATTERS
Piper Marbury Rudnick & Wolfe LLP, Reston, Virginia, will pass upon the
validity of the shares of common stock on our behalf. Sachnoff & Weaver, Ltd.,
Chicago, Illinois, will pass upon legal matters for the underwriters.
EXPERTS
Our financial statements as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999, included in this
prospectus, have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority of
said firm as experts in accounting and auditing.
52
<PAGE>
PEC SOLUTIONS, INC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Income........................................ F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
PEC Solutions, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of PEC Solutions, Inc. (the "Company")
as of December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
McLean, VA
February 25, 2000, except for Note 1,
as to which the date is March 1, 2000
F-2
<PAGE>
PEC SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1998 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,366,651 $ 7,980,635
Accounts receivable, net.................................. 10,852,341 13,241,056
Other current assets...................................... 579,110 924,493
----------- -----------
Total current assets.................................... 16,798,102 22,146,184
Property and equipment, net................................. 1,177,662 1,506,731
Other assets................................................ 295,235 746,624
----------- -----------
Total assets............................................ $18,270,999 $24,399,539
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 1,559,574 $ 2,425,426
Advance payments on contracts............................. 560,976 1,473,235
Dividends payable......................................... 347,924 413,149
Retirement plan contribution payable...................... 1,224,673 --
Accrued payroll........................................... 2,757,890 3,248,532
Accrued vacation.......................................... 715,081 902,535
Other current liabilities................................. 322,715 372,782
----------- -----------
Total current liabilities............................... 7,488,833 8,835,659
Supplemental retirement program liability................... 105,446 280,849
----------- -----------
Total liabilities....................................... 7,594,279 9,116,508
----------- -----------
Commitments and contingencies
Stockholders' equity:
Undesignated capital stock, 10,000,000 shares
authorized.............................................. -- --
Common stock, $0.01 par value per share, 75,000,000 shares
authorized, 17,396,190 and 17,706,372 shares issued and
outstanding,
respectively............................................ 173,962 177,064
Additional paid-in capital................................ 616,912 600,996
Retained earnings......................................... 9,885,846 14,504,971
----------- -----------
Total stockholders' equity.............................. 10,676,720 15,283,031
----------- -----------
Total liabilities and stockholders' equity.............. $18,270,999 $24,399,539
=========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
PEC SOLUTIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Revenues.............................................. $24,629,706 $41,456,862 $53,202,162
----------- ----------- -----------
Operating costs and expenses:
Direct costs........................................ 13,876,126 23,514,605 30,409,402
General and administrative expenses................. 6,117,034 9,825,976 11,991,106
Sales and marketing expenses........................ 1,021,659 1,225,629 1,826,297
----------- ----------- -----------
Total operating costs and expenses................ 21,014,819 34,566,210 44,226,805
----------- ----------- -----------
Operating income...................................... 3,614,887 6,890,652 8,975,357
Other income, net..................................... 135,195 198,829 259,402
----------- ----------- -----------
Income before income taxes............................ 3,750,082 7,089,481 9,234,759
Provision for income taxes............................ 1,444,725 2,633,995 3,595,347
----------- ----------- -----------
Net income............................................ $ 2,305,357 $ 4,455,486 $ 5,639,412
=========== =========== ===========
Earnings per share:
Basic............................................... $ 0.13 $ 0.26 $ 0.33
=========== =========== ===========
Diluted............................................. $ 0.10 $ 0.20 $ 0.24
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
PEC SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL
PAR PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996.... 17,881,080 $178,811 $ 206,299 $ 5,625,419 $ 6,010,529
Issuance of common stock......... 285,540 2,855 165,611 -- 168,466
Common stock repurchased and
retired........................ (174,702) (1,747) (2,317) (218,691) (222,755)
Dividend declared ($.017 per
share)......................... -- -- -- (299,965) (299,965)
Net income....................... -- -- -- 2,305,357 2,305,357
---------- -------- --------- ----------- -----------
Balance as of December 31, 1997.... 17,991,918 179,919 369,593 7,412,120 7,961,632
Issuance of common stock......... 371,220 3,712 259,141 -- 262,853
Common stock repurchased and
retired........................ (966,948) (9,669) (11,822) (1,633,836) (1,655,327)
Dividend declared ($.02 per
share)......................... -- -- -- (347,924) (347,924)
Net income....................... -- -- -- 4,455,486 4,455,486
---------- -------- --------- ----------- -----------
Balance as of December 31, 1998.... 17,396,190 173,962 616,912 9,885,846 10,676,720
Issuance of common stock......... 793,080 7,931 663,775 -- 671,706
Common stock repurchased and
retired........................ (482,898) (4,829) (679,691) (607,138) (1,291,658)
Dividend declared ($.023 per
share)........................... -- -- -- (413,149) (413,149)
Net income....................... -- -- -- 5,639,412 5,639,412
---------- -------- --------- ----------- -----------
Balance as of December 31, 1999.... 17,706,372 $177,064 $ 600,996 $14,504,971 $15,283,031
========== ======== ========= =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
PEC SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,305,357 $ 4,455,486 $ 5,639,412
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 352,284 663,307 585,194
Amortization of bond premium............................ 12,643 5,593 --
Deferred income taxes................................... (76,860) (251,570) (326,091
Realized loss on sale of investments and other assets... 4,756 1,883 4,540
Changes in operating assets and liabilities:
Accounts receivable, net.............................. (1,581,775) (3,789,614) (2,388,715)
Other current assets.................................. (531,085) 232,521 (93,813)
Other assets.......................................... -- -- (74,125)
Accounts payable...................................... 231,237 769,194 744,402
Advance payments on contracts......................... 1,441,924 (1,291,945) 912,259
Retirement plan contribution payable.................. 177,320 641,643 (1,224,673)
Accrued payroll....................................... 618,228 847,386 490,642
Accrued vacation...................................... 188,742 237,227 187,454
Other current liabilities............................. 41,141 267,737 50,067
Supplemental retirement program liability............. -- 105,446 (29,410)
----------- ----------- -----------
Net cash provided by operating activities........... 3,183,912 2,894,294 4,477,143
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (719,160) (882,107) (797,353)
Proceeds from maturity of investments..................... 450,000 454,000 --
Proceeds from sale of investments......................... 254,653 73,267 --
Purchase of investments................................... (35,000) -- --
Cost of trademarks........................................ -- -- (20,364)
----------- ----------- -----------
Net cash used in investing activities............... (49,507) (354,840) (817,717)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid............................................ (268,216) (299,965) (347,924)
Proceeds from the issuance of common stock................ 168,466 262,853 671,706
Repurchase of common stock................................ (222,755) (1,655,327) (1,291,658)
Common stock offering costs............................... -- -- (77,566)
----------- ----------- -----------
Net cash used in financing activities............... (322,505) (1,692,439) (1,045,442)
----------- ----------- -----------
Net increase in cash........................................ 2,811,900 847,015 2,613,984
Cash and cash equivalents at beginning of period............ 1,707,736 4,519,636 5,366,651
----------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 4,519,636 $ 5,366,651 $ 7,980,635
=========== =========== ===========
Property and equipment included in accounts payable......... $ -- $ -- $ 121,450
=========== =========== ===========
Income taxes paid........................................... $ 1,525,822 $ 2,923,178 $ 4,117,808
=========== =========== ===========
Interest paid............................................... $ 1,273 $ -- $ 37,193
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
COMPANY
Performance Engineering Corporation ("PEC") was incorporated June 25, 1985,
under the laws of the Commonwealth of Virginia. On January 1, 2000, PEC was
reincorporated, under the laws of the state of Delaware, as PEC Solutions, Inc.
("PEC Solutions" or the "Company"). The Company provides professional technology
services that enable government entities to use the Internet and other advanced
technologies to enhance productivity and improve services to the public. The
Company's primary clients are executive agencies and departments of the federal
government, the federal Judiciary and prime contractors to the United States
government. Contracts and subcontracts with these clients for 1997 were time and
materials contracts (47%), fixed-price contracts (31%) and cost-reimbursable
contracts (22%). For 1998, these contracts and subcontracts were time and
materials contracts (66%), fixed-price contracts (19%) and cost-reimbursable
contracts (15%). For 1999, these contracts and subcontracts were time and
materials contracts (62%), fixed-price contracts (23%) and cost-reimbursable
contracts (15%).
REVENUE RECOGNITION
The Company's revenues are derived primarily from contracts with the federal
government. Revenues on time and materials contracts are recognized based on
actual hours delivered at the contracted billable hourly rate plus the cost of
materials incurred. Revenues on fixed-price contracts are recognized using the
percentage-of-completion method based on costs incurred in relation to total
estimated costs. Revenues on cost-type contracts are recognized to the extent of
costs incurred in providing services plus a proportionate amount of the fee
earned. The fees under certain government contracts may be increased or
decreased in accordance with cost or performance incentive provisions that
measure actual performance against established targets or other criteria. Such
incentive fee awards or penalties are included in revenues at the time the
amounts can be reasonably determined. Provisions for anticipated contract losses
are recognized at the time they become known and estimable.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks. The Company
also considers all highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents. As of December 31, 1998 and 1999,
cash equivalents included money market funds of approximately $5,009,662 and
$2,070,383, respectively.
CONCENTRATION OF CREDIT RISK
At times during the year, the Company maintains cash balances at financial
institutions in excess of Federal Deposit Insurance Corporation (FDIC) limits.
Management believes the risk in these situations to be minimal. In addition, the
Company had cash balances of $2,070,383 held in money market funds at local
financial institutions as of December 31, 1999. These funds are not insured by
the FDIC.
MARKETABLE SECURITIES
The Company determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. The Company's marketable securities are categorized as
available-for-sale and held-to-maturity. Available-for-sale securities are
stated at fair value.
F-7
<PAGE>
PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. For
additions prior to January 1, 1999, depreciation is computed on property and
equipment using the double declining balance method over the estimated useful
lives of the assets, generally 3 to 5 years. Effective January 1, 1999,
depreciation is computed on property and equipment using the straight-line
method. Depreciation is computed on leasehold improvements using the
straight-line method over the shorter of the lease term or the useful life of
the respective assets.
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, "ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF," (SFAS No. 121). SFAS No. 121 requires the recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted net cash flows attributable to such assets. Impairment, if
any, is recognized in the period of identification to the extent the carrying
amount of an asset exceeds discounted net cash flows attributable to such
assets. Based on its most recent analysis, the Company believes that there was
no impairment of its property and equipment as of December 31, 1999.
CONTRACT ADVANCE PAYMENTS
The Company invoices the federal government for some of its contracts based
on provisional indirect cost rates. These invoiced amounts are adjusted when the
actual rates have been determined by audit. Other Federal government contracts
are billed periodically independent of the percentage of the contract actually
completed which, in some situations, results in funds being advanced to the
Company in excess of revenues earned.
COMMON STOCK SPLITS
Effective December 22, 1997, the Company's common stock was split 2-for-1.
Effective January 1, 2000, in connection with its reincorporation, the Company's
common stock was split 3-for-1. Effective March 1, 2000, the Company's common
stock was split 2-for-1. All prior share and per share information in the
financial statements has been restated to give effect to these stock splits.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," (APB No. 25) and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," (SFAS No. 123).
INCOME TAXES
The Company accounts for deferred income taxes using the liability method,
under which the expected future tax consequences of timing differences between
the book and tax basis of assets and liabilities are recognized as deferred tax
assets and liabilities.
F-8
<PAGE>
PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
SEGMENT REPORTING
The Company operates as a single segment and will evaluate additional
disclosure requirements as it expands its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133, as
amended, is effective for quarters beginning after June 15, 2000. Currently, the
Company does not use derivative financial instruments, therefore the adoption of
SFAS 133 is not expected to have a material impact on the Company's results of
operations or financial position.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform to the 1999 presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
<S> <C> <C>
Billed accounts receivable......................... $ 9,685,535 $11,854,428
Unbilled accounts receivable....................... 1,505,136 2,255,115
Progress payments.................................. (263,863) (675,463)
----------- -----------
10,926,808 13,434,080
Allowance for doubtful accounts.................... (74,467) (193,024)
----------- -----------
Accounts receivable, net........................... $10,852,341 $13,241,056
=========== ===========
</TABLE>
Unbilled accounts receivable consist of 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 Federal government are subject
to adjustment upon audit by the federal government. All years subsequent to 1995
are subject to federal 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.
F-9
<PAGE>
PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -(Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
<S> <C> <C>
Leasehold improvements............................... $ 358,944 $ 455,480
Property and equipment............................... 2,861,622 3,134,027
Software............................................. 265,044 383,361
---------- ----------
3,485,610 3,972,868
Less: accumulated depreciation....................... (2,307,948) (2,466,137)
---------- ----------
$1,177,662 $1,506,731
========== ==========
</TABLE>
Depreciation expense was $352,284, $663,307, and $585,194 for the years
ended December 31, 1997, 1998 and 1999, respectively.
4. NOTE PAYABLE
The Company has a loan agreement with Bank of America which provides for a
line of credit with a limit of $2,700,000 at the prime rate charged by the bank
(7.75% and 8.5% as of December 31, 1998 and 1999). The note is collateralized by
the accounts receivable of the Company. As of December 31, 1998 and 1999 the
balance due on the note was zero. The agreement expires April 30, 2001.
5. STOCK OPTION PLANS
On February 1, 1987, the Company established an incentive stock option
agreement (the "agreement"), to attract, retain and reward employees and on
January 1, 1995 the Company established a nonqualified stock option plan (the
"plan", collectively "the plans") to attract, retain and reward key employees.
The plans are administered by the Board of Directors, which has the authority to
determine which officers and key employees are awarded options pursuant to the
plans and the related terms and option prices. The number of options available
for grant under the plans is limited to the number of Company common shares
authorized and available.
Each stock option granted pursuant to the plans has an exercise price equal
to the fair market value of the underlying common stock at the date of grant.
Each stock option granted under the agreement has a five-year term and a
two-year vesting period. Each stock option granted pursuant to the plan has a
ten-year term and no vesting period.
F-10
<PAGE>
PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -(Continued)
5. STOCK OPTION PLANS -(CONTINUED)
The following table summarizes the Company's activity for all of its stock
option awards granted under the plans:
<TABLE>
<CAPTION>
NUMBER RANGE OF EXERCISE WEIGHTED-AVERAGE
OF OPTIONS PRICES EXERCISE PRICE
<S> <C> <C> <C>
Balance, December 31, 1996.......................... 2,581,500 $ 0.23-0.86 $0.74
Granted........................................... 1,630,920 1.10-1.21 1.18
Exercised......................................... (285,540) 0.23-0.68 0.59
Canceled.......................................... (33,990) 0.57-1.10 1.03
--------- ------------------- -----
Balance, December 31, 1997.......................... 3,892,890 0.56-1.21 0.93
Granted........................................... 1,748,160 1.69-2.06 1.88
Exercised......................................... (371,220) 0.57-0.78 0.71
Canceled.......................................... (27,870) 0.57-1.69 1.37
--------- ------------------- -----
Balance, December 31, 1998.......................... 5,241,960 0.56-2.06 1.26
Granted........................................... 1,511,550 2.84-3.18 3.03
Exercised......................................... (793,080) 0.56-3.05 0.84
Canceled.......................................... (291,540) 0.57-2.84 1.85
--------- ------------------- -----
Balance, December 31, 1999.......................... 5,668,890 $0.63-$3.18 $1.76
========= =================== =====
</TABLE>
Options to purchase 2,641,578, 3,881,004 and 4,479,018 shares of the
Company's common stock were exercisable as of December 31, 1997, 1998 and 1999,
respectively, at weighted-average per share exercise prices of $0.90, $1.17 and
$1.60, respectively.
The following table summarizes additional information about stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ ----------------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE WEIGHTED-
NUMBER OF CONTRACTUAL EXERCISE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) PRICE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$0.63 to $0.86......................... 1,293,600 0.92 $ 0.83 1,293,600 $0.83
$0.92 to $1.21......................... 1,399,320 2.01 1.19 1,399,320 1.19
$1.69 to $2.06......................... 1,548,138 3.28 1.87 954,360 1.91
$2.67 to $3.18......................... 1,427,832 4.09 3.04 831,738 3.12
--------- ----- ------- --------- -----
5,668,890 2.63 $ 1.76 4,479,018 $1.60
========= ===== ======= ========= =====
</TABLE>
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation," effective for the Company's December 31, 1999
financial statements. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, compensation cost has
been recognized for its stock plans based on the intrinsic value of the stock
option at date of grant (i.e., the difference between the exercise price and the
fair value of the Company's common stock).
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the plans
in 1997, 1998 and 1999 consistent with
F-11
<PAGE>
PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -(Continued)
5. STOCK OPTION PLANS -(CONTINUED)
the method of SFAS No.123, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Net income, as reported.................................. $2,305,357 $4,455,486 $5,639,412
Pro forma compensation expense........................... (213,698) (353,600) (389,108)
---------- ---------- ----------
Pro forma net income..................................... $2,091,659 $4,101,886 $5,250,304
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
<S> <C> <C> <C>
Net income per common share--basic:
As reported............................................... $0.13 $0.26 $0.33
Pro forma................................................. 0.12 0.24 0.31
Net income per common share--diluted:
As reported............................................... $0.10 $0.20 $0.24
Pro forma................................................. 0.10 0.18 0.22
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. The following table shows the assumptions
used for the grants that occurred in each fiscal year.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
<S> <C> <C> <C>
Expected volatility......................................... 0.0% 0.0% 0.0%
Risk free interest rates.................................... 6.2% 5.4% 5.6%
Dividend yield.............................................. 3.9% 3.6% 2.7%
Expected lives (years)...................................... 5 5 5
</TABLE>
The weighted average fair value per share for stock option grants that were
awarded in fiscal years 1997, 1998 and 1999 was $0.23, $0.43, and $0.36,
respectively.
In January 2000, the Company established a stock incentive plan (the "2000
Plan"). Under the 2000 Plan, options to purchase 1,500,000 shares of common
stock are available for 2000. Beginning in 2001, the number of options eligible
for grant in each year will be equal to the sum of 6.25% of the number of
outstanding shares on January 1 of that year, plus the number of shares eligible
for grant in the prior year that were not granted. No more than 15,000,000
options may be granted during the 10-year term of the 2000 Plan.
In January 2000, the Company established an employee stock purchase plan
(the "Purchase Plan"). Under the Purchase Plan, employees, through payroll
deductions, are granted options to purchase shares of common stock at a price no
less than 85% of the fair market value of the common stock on the first trading
day of the option period or the date the shares of common stock are purchased.
There are 2,000,000 shares of common stock available for purchase under the
Purchase Plan.
F-12
<PAGE>
PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -(Continued)
6. BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE
Basic earnings per common share is computed on the basis of the
weighted-average number of common shares outstanding for the periods. Diluted
earnings per common share includes the weighted-average effect of dilutive
options outstanding during the periods. The weighted average number of shares
issuable upon the exercise of outstanding stock option assumes that the
applicable proceeds from such exercise are used to acquire treasury shares at
the average price during the periods.
Basic and diluted earnings per share for 1997, 1998, and 1999, were
determined as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------
NET INCOME SHARES PER SHARE
<S> <C> <C> <C>
Basic EPS................................................... $2,305,357 17,835,464 $0.13
Effect of dilutive options.................................. -- 4,180,350 (0.03)
---------- ---------- -----
Diluted EPS................................................. $2,305,357 22,015,814 $0.10
========== ========== =====
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------
NET INCOME SHARES PER SHARE
Basic EPS. $4,455,486 17,204,352 $ 0.26
<S> <C> <C> <C>
Effect of dilutive options.................................. -- 5,101,692 (0.06)
---------- ---------- -----
Diluted EPS................................................. $4,455,486 22,306,044 $0.20
========== ========== =====
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------
NET INCOME SHARES PER SHARE
Basic EPS. $5,639,412 17,074,536 $ 0.33
<S> <C> <C> <C>
Effect of dilutive options.................................. -- 6,383,220 (0.09)
---------- ---------- -----
Diluted EPS................................................. $5,639,412 23,457,756 $0.24
========== ========== =====
</TABLE>
7. EMPLOYEE BENEFIT PLAN
During 1985, the Company established a qualified profit sharing plan in
accordance with Section 401(k) of the Internal Revenue Service Code. Under the
plan, the Company makes contributions out of profits of the Company based on an
amount determined at the discretion of the Board of Directors of the Company.
All full-time employees and part-time employees working at least 20 hours a week
are eligible to participate in the plan. Eligibility is restricted for new
employees, whom are not permitted to participate until the first day of the
first quarter following date of hire. The Company contributed $583,030,
$1,224,673 and $1,226,316 for 1997, 1998 and 1999, respectively.
8. SUPPLEMENTAL RETIREMENT PROGRAM
In December 1998, the Company adopted a funded Executive Supplemental
Retirement Program for a select group of management or highly compensated
employees. The Program allows these employees to defer a portion of their salary
and bonus. The Company has the option of adding additional amounts of deferred
compensation at its sole discretion. The Company contributions are vested after
five years. No employee deferrals were made in 1998. In 1999, employee deferrals
were $60,093. The Company contributed $105,446 and $99,367 to the Program in
1998 and 1999, respectively.
F-13
<PAGE>
PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -(Continued)
9. DIVIDENDS
Common stock dividends of $0.023 per share were paid on January 6, 2000, to
stockholders of record on December 31, 1999.
10. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Current:
Federal................................................ $1,281,147 $2,429,361 $3,301,488
State.................................................. 240,438 456,204 619,950
---------- ---------- ----------
Total current............................................ 1,521,585 2,885,565 3,921,438
---------- ---------- ----------
Deferred:
Federal................................................ (64,710) (211,684) (304,732)
State.................................................. (12,150) (39,886) (21,359)
---------- ---------- ----------
Total deferred........................................... (76,860) (251,570) (326,091)
---------- ---------- ----------
Provision for income tax................................. $1,444,725 $2,633,995 $3,595,347
========== ========== ==========
</TABLE>
Deferred tax assets were comprised of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1997 1998 1999
<S> <C> <C> <C>
Deferred tax assets:
Accrued vacation.......................................... $ 86,164 $217,974 $298,974
Allowance for doubtful accounts........................... 27,398 25,079 76,206
Property and equipment.................................... 5,653 82,488 175,176
Intangibles............................................... 13,810 16,246 48,986
Capital loss carryforward................................. 7,556 8,734 8,021
Deferred compensation..................................... -- 41,630 110,879
-------- -------- --------
Total deferred tax assets............................... $140,581 $392,151 $718,242
======== ======== ========
</TABLE>
A reconciliation between the Company's statutory tax rate and the effective
tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
<S> <C> <C> <C>
Statutory federal rate...................................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefits................. 4.0 3.0 5.0
---- ---- ----
Effective tax rate.......................................... 38.0% 37.0% 39.0%
==== ==== ====
</TABLE>
F-14
<PAGE>
PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -(Continued)
11. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities and equipment under noncancelable
operating lease agreements which expire in various years through 2013. Future
minimum lease payments under operating leases that have noncancelable lease
terms in excess of one year as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
<S> <C>
2000........................................................ $ 4,074,899
2001........................................................ 4,267,364
2002........................................................ 4,100,872
2003........................................................ 3,083,476
2004........................................................ 3,154,003
Thereafter.................................................. 32,054,651
-----------
$50,735,265
===========
</TABLE>
The total rental expense under operating leases was $938,947, $1,333,455
$2,169,811 for the years ended December 31, 1997, 1998 and 1999, respectively.
In the ordinary course of business, the Company may be party to various
legal proceedings. In the opinion of management, the Company's liability, if
any, in all pending litigation or other legal proceedings will not have a
material effect upon the financial condition, results of operations or liquidity
of the Company.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
PEC SOLUTIONS, INC.
7,000,000 SHARES OF COMMON STOCK
--------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
CHASE H&Q
LEGG MASON WOOD WALKER
INCORPORATED
DLJDIRECTInc.
----------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF PEC
SOLUTIONS, INC. HAVE NOT CHANGED SINCE THE DATE HEREOF.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT
EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND
WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by us in
connection with the sale and distribution of the securities offered hereby,
other than underwriting discounts and commissions. All of the amounts shown are
estimated except the Securities and Exchange Commission registration fee, the
National Association Securities Dealers, Inc. filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 29,753
National Association of Securities Dealers, Inc. filing
fee....................................................... 12,000
Nasdaq National Market listing fee.......................... 94,000
Transfer agent's and registrar's fees....................... 3,000
Printing expenses........................................... 220,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 200,000
Blue Sky filing fees and expenses........................... 5,000
Miscellaneous expenses...................................... 36,247
--------
Total $900,000
========
</TABLE>
14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. Our
bylaws include provisions to require us to indemnify our directors and officers
to the fullest extent permitted by Section 145, including circumstances in which
indemnification is otherwise discretionary. Section 145 also empowers us to
purchase and maintain insurance that protects our officers, directors, employees
and agents against any liabilities incurred in connection with their service in
such positions.
At present, there is no pending litigation or proceeding involving any of
our directors or officers as to which indemnification is being sought nor are we
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
The form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification of our directors and officers by the
Underwriters, for certain liabilities arising under the Securities Act.
15. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, we have issued unregistered securities in the
transactions described below. These securities were offered and sold by us in
reliance upon the exemption provided for in Rule 701 of the Securities Act on
the basis that these options were offered and sold pursuant to a written
compensatory benefit plan. The sales were made without the use of an underwriter
and the certificates representing the securities sold contain a restrictive
legend that prohibits transfer without registration or an applicable exemption.
(1) Between January 1997 and February 2000, we have issued options to
our employees and directors exercisable for an aggregate of 4,890,630 shares
of common stock at exercise prices ranging from $1.10 to $3.18 per share
pursuant to our stock option agreement and our nonqualified stock option
plan. In February 2000 we issued options to purchase 10,000 shares at an
exercise price of $12.00 per share pursuant to our Stock Incentive Plan. On
March 1, 2000, we
II-1
<PAGE>
issued options to our employees to purchase an aggregate of 212,193 shares
of common stock at an exercise price of $12.00 per share.
(2) Between January 1997 and March 1 2000, we sold an aggregate of
2,663,094 shares of common stock at purchase prices ranging from $10.23 to
$3.05 per share, for an aggregate consideration of $2,492,261 upon exercise
of stock options granted under our stock option agreement and our
nonqualified stock option plan.
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 Bylaws
4.1* Specimen stock certificate for shares of common stock of the
Registrant
5.1* Opinion of Piper Marbury Rudnick & Wolfe LLP, regarding
legality of securities being registered
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 Plan
10.10 1987 Stock Option Agreement, as amended
10.11 Nonqualified Executive Supplemental Retirement Program
Agreement dated December 1998
10.12 2000 Employee Stock Purchase Plan
10.13 Amended and Restated Loan Agreement between the Registrant
and NationsBank, N.A., dated April 30, 1999
23.1* Consent of PricewaterhouseCoopers LLP
23.2* Consent of Piper Marbury Rudnick & Wolfe LLP (included as
part of Exhibit 5.1 hereto)
24.1 Power of Attorney (included in signature pages)
27* Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
II-2
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES:
17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Certificate of Incorporation or
Bylaws or the Delaware General Corporation Law or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted form the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Fairfax, Commonwealth
of Virginia, on the 8th day of March 2000.
<TABLE>
<S> <C> <C>
PEC SOLUTIONS, INC.
BY: /s/ DAVID C. KARLGAARD, PH.D.
--------------------------------------
DAVID C. KARLGAARD, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID C. KARLGAARD, PH.D. Chief Executive Officer, President
- -------------------------------------- and Chairman of the Board of
DAVID C. KARLGAARD, PH.D. Directors (Chief Executive Officer) March 8, 2000
/s/ PAUL G. RICE Chief Operating Officer and
- -------------------------------------- Director
PAUL G. RICE March 8, 2000
* Chief Technology Officer and
-------------------------------------- Director
ALAN H. HARBITTER March 8, 2000
/s/ STUART R. LLOYD Chief Financial Officer, Senior
- -------------------------------------- Vice President and Director (Chief
STUART R. LLOYD Accounting and Financial Officer) March 8, 2000
* Director
--------------------------------------
JESSE BROWN March 8, 2000
/s/ DENIS M. CRANE Director
- --------------------------------------
DENIS M. CRANE March 8, 2000
* Director
--------------------------------------
ALVIN E. NASHMAN, PH.D. March 8, 2000
* Director
--------------------------------------
SHARON M. OWLETT March 8, 2000
*By /s/ DAVID C. KARLGAARD
---------------------------------
DAVID C. KARLGAARD, PH.D.
Attorney-in-Fact March 8, 2000
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
<C> <S>
1.1 * Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 * Specimen stock certificate for shares of common stock of the
Registrant
5.1 * Opinion of Piper Marbury Rudnick & Wolfe LLP, regarding
legality of securities being registered
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 Plan
10.10 1987 Stock Option Agreement, as amended
10.11 Nonqualified Executive Supplemental Retirement Program
Agreement dated December 1998
10.12 2000 Employee Stock Purchase Plan
10.13 Amended and Restated Loan Agreement between the Registrant
and NationsBank, N.A., dated April 30, 1999
23.1 * Consent of PricewaterhouseCoopers LLP
23.2 * Consent of Piper Marbury Rudnick & Wolfe LLP (included as
part of Exhibit 5.1 hereto)
24.1 Power of Attorney (included in signature pages)
27 * Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
<PAGE>
Exhibit 1.1
__________ Shares
PEC SOLUTIONS, INC.
Common Stock
UNDERWRITING AGREEMENT
__________, 2000
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HAMBRECHT & QUIST LLC
LEGG MASON WOOD WALKER, INCORPORATED
DLJDIRECT INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
PEC Solutions, Inc., a Delaware corporation (the "COMPANY"), proposes
to issue and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"), and certain stockholders of the Company named in Schedule II
hereto (the "SELLING STOCKHOLDERS") severally propose to sell to the several
Underwriters, an aggregate of _______________ shares of the common stock, par
value $0.01 per share, of the Company (the "FIRM SHARES"), of which
_____________ shares are to be issued and sold by the Company and _____________
shares are to be sold by the Selling Stockholders, each Selling Stockholder
selling the amount set forth opposite such Selling Stockholder's name in
Schedule II hereto. The Selling Stockholders also severally propose to sell to
the several Underwriters not more than an additional _______ shares of the
Company's common stock, par value $0.01 per share (the "ADDITIONAL SHARES") if
requested by the Underwriters as provided in Section 2 hereof. The Firm Shares
and the Additional Shares are hereinafter referred to collectively as the
"SHARES". The shares of common stock of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "COMMON STOCK". The Company and the Selling Stockholders are hereinafter
sometimes referred to collectively as the "SELLERS."
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became
<PAGE>
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is hereinafter referred to as the "REGISTRATION STATEMENT"; and the
prospectus in the form first used to confirm sales of Shares is hereinafter
referred to as the "PROSPECTUS". If the Company has filed or is required
pursuant to the terms hereof to file a registration statement pursuant to Rule
462(b) under the Act registering additional shares of Common Stock (a "RULE
462(B) REGISTRATION STATEMENT"), then, unless otherwise specified, any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462(b) Registration Statement.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE AND LOCK-UP AGREEMENTS . On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
______________ Firm Shares, (ii) each Selling Stockholder agrees, severally and
not jointly, to sell the number of Firm Shares set forth in the middle column
opposite such Selling Stockholder's name in Schedule II hereto and (iii) each
Underwriter agrees, severally and not jointly, to purchase from each Seller at a
price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Firm Shares to
be sold by such Seller as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedules I hereto bears to the total number of Firm
Shares.
On the basis of the representations and warranties contained in this Agreement,
and subject to its terms and conditions, the Selling Stockholders agree,
severally and not jointly, to issue and sell the number of Additional Shares set
forth in the right column opposite such Selling Stockholder's name and the
Underwriters shall have the right to purchase, severally and not jointly, up to
_______ Additional Shares from the Company at the Purchase Price. Additional
Shares may be purchased solely for the purpose of covering over-allotments made
in connection with the offering of the Firm Shares. The Underwriters may
exercise their right to purchase Additional Shares in whole or in part from time
to time by giving written notice thereof to the Company within 30 days after the
date of this Agreement. You shall give any such notice on behalf of the
Underwriters and such notice shall specify the aggregate number of Additional
Shares to be purchased pursuant to such exercise and the date for payment and
delivery thereof, which date shall be a business day (i) no earlier than two
business days after such notice has been given (and, in any event, no earlier
than the Closing Date (as hereinafter defined)) and (ii) no later than ten
business days after such notice has been given. If any Additional Shares are to
be purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Selling Stockholders the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) which bears the
same proportion to the total number of Additional Shares to be purchased from
the Selling Stockholders as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I bears to the total number of Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
<PAGE>
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus (the "LOCK-UP PERIOD")
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Notwithstanding the foregoing, during such period (i) the Company
may grant stock options pursuant to the Company's existing stock option plan,
provided such options are, by their terms, not exercisable during the Lock-Up
Period and (ii) the Company may issue shares of Common Stock upon the exercise
of an option or warrant or the conversion of a security outstanding on the date
hereof. The Company also agrees not to file any registration statement with
respect to any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock during the Lock-Up Period without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. In addition, each Selling Stockholder agrees that, during the
Lock-Up Period without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, it will not make any demand for, or exercise any right
with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock. The
Company shall, prior to or concurrently with the execution of this Agreement,
deliver an agreement executed by (i) each Selling Stockholder, (ii) each of the
directors and officers of the Company who is not a Selling Stockholder and (iii)
each stockholder listed on Annex I hereto to the effect that such person will
not, during the period commencing on the date such person signs such agreement
and ending 180 days after the date of the Prospectus, without the prior written
consent of Donaldson, Lufkin & Jenrette Corporation, (A) engage in any of the
transactions described in the first sentence of this paragraph or (B) make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock.
SECTION 3. TERMS OF PUBLIC OFFERING. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. DELIVERY AND PAYMENT. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Sellers, with any transfer
taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin &
Jenrette Securities Corporation through the facilities of The Depository Trust
Company ("DTC"), for the respective accounts of the several Underwriters,
against payment to the Sellers of the Purchase Price therefore by wire transfer
of Federal or other funds immediately available in New York City. The
certificates representing the Shares shall be made available for inspection not
later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date (as defined below), as the
case may be, at the office of DTC or its designated custodian (the "DESIGNATED
OFFICE"). The time and date of delivery and payment for
<PAGE>
the Firm Shares shall be 9:00 A.M., New York City time, on ________, 2000 or
such other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and date
of delivery and payment for the Firm Shares are hereinafter referred to as the
"CLOSING DATE". The time and date of delivery and payment for any Additional
Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City
time, on the date specified in the applicable exercise notice given by you
pursuant to Section 2 or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree
in writing. The time and date of delivery and payment for any Additional Shares
are hereinafter referred to as the "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing Date on
behalf of the parties hereto pursuant to Section 9 of this Agreement shall be
delivered at the offices of Piper Marbury Rudnick & Wolfe LLP, and the Shares
shall be delivered at the Designated Office, all on the Closing Date or such
Option Closing Date, as the case may be.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with you:
a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
b) To furnish to you four (4) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration Statement as so filed
and of each amendment to it, without exhibits, as you may reasonably request.
c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the
<PAGE>
Registration Statement or amendment or supplement to the Prospectus which may be
necessary or advisable in connection with the distribution of the Shares by you,
and to use its best efforts to cause any such amendment to the Registration
Statement to become promptly effective.
d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; PROVIDED, HOWEVER, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period beginning
after the effective date of the Registration Statement that shall satisfy the
provisions of Section 11(a) of the Act, and to advise you in writing when such
statement has been so made available.
h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company as you may reasonably request.
<PAGE>
i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Stockholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the Shares on
the Nasdaq National Market, (vii) the cost of printing certificates representing
the Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, and (ix) all other costs and expenses incident to the performance of
the obligations of the Company and the Selling Stockholders hereunder for which
provision is not otherwise made in this Section. The provisions of this Section
shall not supersede or otherwise affect any agreement that the Company and the
Selling Stockholders may otherwise have for allocation of such expenses among
themselves.
j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
<PAGE>
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and has the corporate power and authority to carry on its business as described
in the Prospectus and to own, lease and operate its properties, and is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing
<PAGE>
of property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company.
e) Each of the parties to the Plan and Agreement of Merger, dated as of
December 14, 1999 (the "MIGRATORY MERGER AGREEMENT"), by and between the Company
and Performance Engineering Corporation, a Virginia corporation, had, at the
time of the execution and delivery of the Migratory Merger Agreement and at all
times through and including the consummation of the transactions contemplated
thereby, the corporate power and authority to enter into the Migratory Merger
Agreement and to consummate the transactions contemplated thereby. The Migratory
Merger Agreement was duly authorized by all necessary corporate action on the
part of each of the parties thereto and was duly executed and delivered by each
of the parties thereto. The performance of the Migratory Merger Agreement and
the consummation of the transactions therein contemplated did not (a) result in
any violation of the charter or bylaws of any of the parties thereto or (b)
result in a material breach or violation of any of the terms or provisions of,
or constitute a default under, or require the consent or approval of any person
or entity under, any bond, debenture, note or other evidence of indebtedness, or
any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which any party to the Migratory
Merger Agreement is or was a party or by which their respective properties are
or were bound, or any applicable statute, rule or regulation, or any order, writ
or decree of any court, government or governmental agency or body having
jurisdiction over any party to the Migratory Merger Agreement or over any of
their respective properties or operations, except for such consents or approvals
as have been duly and timely received or obtained. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body having jurisdiction over any party to the Migratory
Merger Agreement or over any of their respective properties or operations is or
was required for the execution and delivery of the Migratory Merger Agreement
and the consummation of the transactions contemplated thereby, except for such
consents, approvals, authorizations, orders or qualifications as have been duly
and timely received or obtained. The merger contemplated by the Migratory Merger
Agreement has been duly and validly consummated and has become effective under
applicable law.
f) The Company does not have any subsidiaries.
g) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company relating to or entitling any person to purchase or otherwise to
acquire any shares of the capital stock of the Company, except as otherwise
disclosed in the Registration Statement.
h) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
<PAGE>
i) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
j) The Company is not in violation of its charter or by-laws or in
default in the performance of any obligation, agreement, covenant or condition
contained in any indenture, loan agreement, mortgage, lease or other agreement
or instrument that is material to the Company, to which the Company is a party
or by which the Company or its property is bound.
k) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the
Company, to which the Company is a party or by which the Company or its property
is bound, (iii) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental body or
agency having jurisdiction over the Company or its property or (iv) result in
the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any other impairment of the rights of the holder of any
such Authorization.
l) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company is or could be a party or
to which any of its property is or could be subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.
m) The Company has not violated any foreign, federal, state or local
law or regulation relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), any provisions of the Employee Retirement
Income Security Act of 1974, as amended, or any provisions of the Foreign
Corrupt Practices Act or the rules and regulations promulgated thereunder,
except for such violations which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operation of the Company.
n) The Company has such permits, licenses, consents, exemptions,
franchises, authorizations and other approvals (each, an "AUTHORIZATION") of,
and has made all filings with and notices to, all governmental or regulatory
authorities and self-regulatory organizations and all courts and other
tribunals, including, without limitation, under any applicable Environmental
Laws, as are necessary to own, lease, license and operate its properties and to
conduct its business, except where the failure to have any such Authorization or
to make any such filing or notice would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company. Each such Authorization
<PAGE>
is valid and in full force and effect and the Company is in compliance with all
the terms and conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect thereto; and
no event has occurred (including, without limitation, the receipt of any notice
from any authority or governing body) which allows or, after notice or lapse of
time or both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would result
in any other impairment of the rights of the holder of any such Authorization;
and such Authorizations contain no restrictions that are burdensome to the
Company; except where such failure to be valid and in full force and effect or
to be in compliance, the occurrence of any such event or the presence of any
such restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company.
o) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company.
p) This Agreement has been duly authorized, executed and delivered by
the Company.
q) PricewaterhouseCoopers LLP are independent public accountants with
respect to the Company as required by the Act.
r) The financial statements included in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), together with related
schedules and notes, present fairly the financial position, results of
operations and changes in financial position of the Company on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; the supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the information
required to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) are, in all material respects,
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company.
s) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
t) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement
<PAGE>
under the Act with respect to any securities of the Company or to require the
Company to include such securities with the Shares registered pursuant to the
Registration Statement.
u) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company, (ii) there
has not been any material adverse change or any development involving a
prospective material adverse change in the capital stock or in the long-term
obligations of the Company and (iii) the Company has not incurred any material
liability or obligation, direct or contingent.
v) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.
Each Selling Stockholder represents and warrants to each Underwriter that:
a) Such Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
b) The Shares to be sold by such Selling Stockholder have been duly
authorized and are validly issued, fully paid and non-assessable.
c) Such Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement signed by
such Selling Stockholder and American Stock Transfer Co., as Custodian, relating
to the deposit of the Shares to be sold by such Selling Stockholder (the
"CUSTODY AGREEMENT") and the Power of Attorney of such Selling Stockholder
appointing certain individuals as such Selling Stockholder's attorneys-in-fact
(the "ATTORNEYS") to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement and the Custody Agreement
(the "POWER OF ATTORNEY") and to sell, assign, transfer and deliver the Shares
to be sold by such Selling Stockholder in the manner provided herein and
therein.
d) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder.
e) The Custody Agreement of such Selling Stockholder has been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms.
<PAGE>
f) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Stockholder's behalf this Agreement
and any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and thereby
and to deliver the Shares to be sold by such Selling Stockholder pursuant to
this Agreement.
g) Upon delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Stockholder by or on
behalf of such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any property of such Selling
Stockholder is bound or (iii) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling Stockholder or any property
of such Selling Stockholder.
i) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to such Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
j) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), such Selling
Stockholder will immediately notify you of such change.
k) Each certificate signed by or on behalf of such Selling Stockholder
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to the
Underwriters as to the matters covered thereby.
SECTION 8. INDEMNIFICATION.
<PAGE>
a) The Sellers, severally and not jointly, agree to indemnify and
hold harmless each Underwriter, its directors, its officers and each person,
if any, who controls any Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), from and against any and all losses, claims, damages,
liabilities and judgments (including, without limitation, any legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) (collectively "DAMAGES") caused by any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus, or caused by
any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such Damages are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished in writing to the Company by such
Underwriter through you expressly for use therein provided, HOWEVER, that the
foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter who failed to deliver a
Prospectus (as then amended or supplemented, provided by the Company to the
several Underwriters in the requisite quantity and on a timely basis to
permit proper delivery on or prior to the Closing Date) to the person
asserting any Damages caused by any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, if such material misstatement or omission or alleged material
misstatement or omission was cured in such Prospectus and such Prospectus was
required by law to be delivered at or prior to the written confirmation of
sale to such person. In no event, however, shall the aggregate liability of
any Selling Stockholder pursuant to this Section 8(a) shall be limited to an
amount equal to the net proceeds (before deducting underwriting discounts and
commissions and expenses) received by such Selling Stockholder from the
Underwriters for the sale of the Shares sold by such Selling Stockholder
hereunder. Notwithstanding the foregoing, the Selling Stockholders'
obligations to indemnify and hold harmless under this Section 8 shall be
limited to any loss, claim, liability, action or proceeding arising out of
information provided by such Selling Stockholder and included in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, who controls such Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Sellers to such Underwriter
but only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
<PAGE>
c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
Selling Stockholders and all persons, if any, who control any Selling
Stockholder within the meaning of either such Section, and all such fees and
expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters, their officers and directors and such
control persons of any Underwriters, such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such
separate firm for the Company and such directors, officers and control persons
of the Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Stockholders and such control
persons of any Selling Stockholders, such firm shall be designated in writing by
the Attorneys. The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all Damages by reason of any
settlement of any action (i) effected with its written consent or (ii) effected
without its written consent if the settlement is entered into more than twenty
business days after the indemnifying party shall have received a request from
the indemnified party for reimbursement for the fees and expenses of counsel (in
any case where such fees and expenses are at the expense of the
<PAGE>
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any Damages
referred to therein, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such Damages (i) in such proportion as is
appropriate to reflect the relative benefits received by the Sellers on the one
hand and the Underwriters on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause 8(d)(i) above is not permitted by
applicable law, then in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause 8(d)(i) above but also the relative
fault of the Sellers on the one hand and the Underwriters on the other hand in
connection with the statements or omissions which resulted in such Damages, as
well as any other relevant equitable considerations. The relative benefits
received by the Sellers on the one hand and the Underwriters on the other hand
shall be deemed to be in the same proportion as the total net proceeds from the
offering (after deducting underwriting discounts and commissions, but before
deducting expenses) received by the Sellers, and the total underwriting
discounts and commissions received by the Underwriters, bear to the total price
to the public of the Shares, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault of the Sellers on the one hand and
the Underwriters on the other hand shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Stockholders on the one hand
or the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Sellers and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this Section 8(d) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the Damages
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses incurred
by such indemnified party in connection with investigating or defending any
matter, including any action, that could have given rise to such Damages.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such
<PAGE>
untrue or alleged untrue statement or omission or alleged omission. No
Selling Stockholder shall be required to contribute any amount in excess of
the amount by which the net proceeds received by such Selling Stockholder
from the Underwriters in the offering exceeds the amount of any damages which
such Selling Stockholder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8(d) are several in proportion to the
respective numbers of Shares purchased by each of the Underwriters hereunder
and not joint.
e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
f) Each Selling Stockholder hereby designates [PEC Solutions, Inc.,
12750 Fair Lakes Circle, Fairfax, Virginia 22033], as its authorized agent, upon
which process may be served in any action which may be instituted in any state
or federal court in the State of New York by any Underwriter, any director or
officer of any Underwriter or any person controlling any Underwriter asserting a
claim for indemnification or contribution under or pursuant to this Section 8,
and each Selling Stockholder will accept the jurisdiction of such court in such
action, and waives, to the fullest extent permitted by applicable law, any
defense based upon lack of personal jurisdiction or venue. A copy of any such
process shall be sent or given to such Selling Stockholder, at the address for
notices specified in Section 12 hereof.
SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by David C. Karlgaard and Stuart R. Lloyd, in their
capacities as the Chief Executive Officer and Chief Financial Officer of the
Company, confirming the matters set forth in Sections 9(a) and 9(b) and that the
Company has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Company on or prior to the Closing Date.
<PAGE>
d) Since the respective dates as of which information is given in the
Prospectus, other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company, (ii) there shall not have
been any change or any development involving a prospective change in the capital
stock or in the long-term obligation of the Company and (iii) the Company shall
not have incurred any liability or obligation, direct or contingent, the effect
of which, in any such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii) in
your judgment, is material and adverse and, in your judgment, makes it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
e) All the representations and warranties of each Selling Stockholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received on the Closing Date a certificate dated the Closing Date from each
Selling Stockholder to such effect and to the effect that such Selling
Stockholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
such Selling Stockholder on or prior to the Closing Date.
f) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Piper
Marbury Rudnick & Wolfe LLP, counsel for the Company and the Selling
Stockholders, to the effect that:
i) the Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to carry on its
business as described in the Prospectus and to own, lease and operate
its properties;
ii) the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company;
iii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights;
iv) the Shares to be issued and sold by the Company hereunder have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights;
<PAGE>
v) this Agreement has been duly authorized, executed and
delivered by the Company and by or on behalf of each Selling
Stockholder;
vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
vii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before or contemplated by the
Commission;
viii) the statements under the captions "Shares Eligible for Future
Sale" and "Description of Capital Stock" in the Prospectus and Items 14
and 15 of Part II of the Registration Statement, insofar as such
statements constitute a fair summary of the matters referred to
therein;
ix) the Company is not in violation of its charter or by-laws and,
to the best of such counsel's knowledge after due inquiry, the Company
is not in default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to
the Company, to which the Company is a party or by which the Company or
its property is bound;
x) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not (A) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency (except such as may be required under the securities or Blue Sky
laws of the various states), (B) conflict with or constitute a breach
of any of the terms or provisions of, or a default under, the charter
or by-laws of the Company or any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company,
to which the Company is a party or by which the Company or its property
is bound, (C) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over the Company or its property or
(D) result in the suspension, termination or revocation of any
Authorization of the Company or any other impairment of the rights of
the holder of any such Authorization;
xi) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company is
or could be a party or to which any of its property is or could be
subject that are required to be described in the Registration Statement
or the Prospectus and are not so described, or of
<PAGE>
any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not so described or filed as required;
xii) To the best of such counsel's knowledge after due inquiry, the
Company has not violated any Environmental Law, any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any
provisions of the Foreign Corrupt Practices Act or the rules and
regulations promulgated thereunder, except for such violations which,
singly or in the aggregate, would not have a material adverse effect on
the business, prospects, financial condition or results of operation of
the Company;
xiii) To the best of such counsel's knowledge after due inquiry, the
Company has such Authorizations of, and has made all filings with and
notices to, all governmental or regulatory authorities and
self-regulatory organizations and all courts and other tribunals,
including, without limitation, under any applicable Environmental Laws,
as are necessary to own, lease, license and operate its properties and
to conduct its business, except where the failure to have any such
Authorization or to make any such filing or notice would not, singly or
in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company;
each such Authorization is valid and in full force and effect and the
Company is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies
having jurisdiction with respect thereto; and no event has occurred
(including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of
time or both, would allow, revocation, suspension or termination of any
such Authorization or results or, after notice or lapse of time or
both, would result in any other impairment of the rights of the holder
of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company; except where such
failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any
such restriction would not, singly or in the aggregate, have a material
adverse effect on the business, prospects, financial condition or
results of operations of the Company;
xiv) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended;
xv) to the best of such counsel's knowledge after due inquiry,
there are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement;
xvi) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements
and other financial data included therein as to which no opinion need
be expressed) comply as to form with the Act, (B)
<PAGE>
such counsel has no reason to believe that at the time the Registration
Statement became effective or on the date of this Agreement, the
Registration Statement and the prospectus included therein (except for
the financial statements and other financial data as to which such
counsel need not express any belief) contained any untrue statement of
a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (C) such counsel has no reason to believe that the
Prospectus, as amended or supplemented, if applicable (except for the
financial statements and other financial data, as aforesaid) contains
any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
xvii) each Selling Stockholder is the lawful owner of the Shares to
be sold by such Selling Stockholder pursuant to this Agreement and has
good and clear title to such Shares, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever;
xviii) each Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and the Power of Attorney
of such Selling Stockholder and to sell, assign, transfer and deliver
the Shares to be sold by such Selling Stockholder in the manner
provided herein and therein;
xix) the Custody Agreement of each Selling Stockholder has been
duly authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms;
xx) the Power of Attorney of each Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder and
is a valid and binding instrument of such Selling Stockholder,
enforceable in accordance with its terms, and, pursuant to such Power
of Attorney, such Selling Stockholder has, among other things,
authorized the Attorneys, or any one of them, to execute and deliver on
such Selling Stockholder's behalf this Agreement and any other document
they, or any one of them, may deem necessary or desirable in connection
with the transactions contemplated hereby and thereby and to deliver
the Shares to be sold by such Selling Stockholder pursuant to this
Agreement;
xxi) upon delivery of and payment for the Shares to be sold by each
Selling Stockholder pursuant to this Agreement, good and clear title to
such Shares will pass to the Underwriters, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever;
xxii) the execution, delivery and performance of this Agreement and
the Custody Agreement and Power of Attorney of each Selling Stockholder
by such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby
<PAGE>
will not (A) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency (except such as may be required under the securities or Blue Sky
laws of the various states), (B) conflict with or constitute a breach
of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement,
mortgage, lease or other agreement or instrument to which such Selling
Stockholder is a party or by which any property of such Selling
Stockholder is bound or (C) violate or conflict with any applicable law
or any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over such Selling
Stockholder or any property of such Selling Stockholder; and
xxiii) each of the parties to the Migratory Merger Agreement, by and
between the Company and Performance Engineering Corporation, a Virginia
corporation, had, at the time of the execution and delivery of the
Migratory Merger Agreement and at all times through and including the
consummation of the transactions contemplated thereby, the corporate
power and authority to enter into the Migratory Merger Agreement and to
consummate the transactions contemplated thereby. The Migratory Merger
Agreement was duly authorized by all necessary corporate action on the
part of each of the parties thereto and was duly executed and delivered
by each of the parties thereto. The performance of the Migratory Merger
Agreement and the consummation of the transactions therein contemplated
did not (a) result in any violation of the charter or bylaws of any of
the parties thereto or (b) result in a material breach or violation of
any of the terms or provisions of, or constitute a default under, or
require the consent or approval of any person or entity under, any
bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which any party to the
Migratory Merger Agreement is or was a party or by which their
respective properties are or were bound, or any applicable statute,
rule or regulation, or any order, writ or decree of any court,
government or governmental agency or body having jurisdiction over any
party to the Migratory Merger Agreement or over any of their respective
properties or operations, except for such consents or approvals as have
been duly and timely received or obtained. No consent, approval,
authorization or order of or qualification with any court, government
or governmental agency or body having jurisdiction over any party to
the Migratory Merger Agreement or over any of their respective
properties or operations is or was required for the execution and
delivery of the Migratory Merger Agreement and the consummation of the
transactions contemplated thereby, except for such consents, approvals,
authorizations, orders or qualifications as have been duly and timely
received or obtained. The merger contemplated by the Migratory Merger
Agreement has been duly and validly consummated and has become
effective under applicable law.
The opinion of Piper Marbury Rudnick & Wolfe LLP described in Section 9(f) above
shall be rendered to you at the request of the Company and the Selling
Stockholders and shall so state therein.
<PAGE>
g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Sachnoff & Weaver, Ltd., counsel for the Underwriters, as to
the matters referred to in Sections 9(f)(iv), 9(f)(vi), 9(f)(viii) (but only
with respect to the statements under the caption "Description of Capital Stock"
and "Underwriting") and 9(f)(xvi).
In giving such opinions with respect to the matters covered by Section
9(f)(xvi), Piper Marbury Rudnick & Wolfe LLP and Sachnoff & Weaver, Ltd. may
state that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but are
without independent check or verification except as specified.
h) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from PricewaterhouseCoopers LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
i) The Company shall have delivered to you the agreements specified in
Section 2 hereof, which agreements shall be in full force and effect on the
Closing Date.
j) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
k) The Company and the Selling Stockholders shall not have failed on or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Stockholders, as the case may be, on or prior to the Closing Date.
l) You shall have received on the Closing Date, a certificate of each
Selling Stockholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Stockholder is not a
U.S. Person, which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional Shares
hereunder are subject to the delivery to you on the applicable Option Closing
Date of such documents as you may reasonably request with respect to the good
standing of the Company and other matters related to the issuance of such
Additional Shares.
SECTION 10. CONDITIONS OF THE SELLERS' OBLIGATIONS. The obligations of
the Sellers to sell and deliver the portion of the Shares required to be
delivered as and when specified in this Agreement are subject to the conditions
that at the Closing Date or the Option Closing Date, as the case may be, no stop
order suspending the effectiveness of the Registration Statement shall have been
issued and in effect or proceedings therefor initiated or threatened.
<PAGE>
SECTION 11. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing Date by
you by written notice to the Sellers if any of the following has occurred: (a)
any outbreak or escalation of hostilities or other national or international
calamity or crisis or change in economic conditions or in the financial markets
of the United States or elsewhere that, in your judgment, is material and
adverse and, in your judgment, makes it impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus, (b) the suspension
or material limitation of trading in securities or other instruments on the New
York Stock Exchange, the American Stock Exchange, the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the
Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (c) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (d) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company, (e) the
declaration of a banking moratorium by either federal or New York State
authorities or (f) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may be, any one
or more of the Underwriters shall fail or refuse to purchase the Firm Shares or
Additional Shares, as the case may be, which it has or they have agreed to
purchase hereunder on such date and the aggregate number of Firm Shares or
Additional Shares, as the case may be, which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the total number of Firm Shares or Additional Shares, as the case may be, to
be purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters have agreed to purchase, or in
such other proportion as you may specify, to purchase the Firm Shares or
Additional Shares, as the case may be, which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; PROVIDED
that in no event shall the number of Firm Shares or Additional Shares, as the
case may be, which any Underwriter has agreed to purchase pursuant to Section 2
hereof be increased pursuant to this Section 10 by an amount in excess of
one-ninth of such number of Firm Shares or Additional Shares, as the case may
be, without the written consent of such Underwriter. If on the Closing Date any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the
aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares to be purchased by
all Underwriters and arrangements satisfactory to you, the Company and the
Selling Stockholders for purchase of such Firm Shares are not made within 48
hours after such default, this Agreement will terminate without liability on the
part of any non-defaulting Underwriter, the Company or the Selling Stockholders.
In any such case which does not result in termination of this Agreement, either
you or the Sellers shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required
<PAGE>
changes, if any, in the Registration Statement and the Prospectus or any other
documents or arrangements may be effected. If, on an Option Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Additional Shares
and the aggregate number of Additional Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Additional Shares to be
purchased on such date, the non-defaulting Underwriters shall have the option to
(i) terminate their obligation hereunder to purchase such Additional Shares or
(ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase on such date
in the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
SECTION 12. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each Selling
Stockholder agrees with you and the Company:
a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters; and
b) To do and perform all things to be done and performed by such
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by
such Selling Stockholder pursuant to this Agreement.
SECTION 13. MISCELLANEOUS. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to PEC
Solutions, Inc., 12750 Fair Lakes Circle, Fairfax, Virginia 22033, Attention:
David C. Karlgaard, (ii) if to the Selling Stockholders, to Nancy A. Spangler
c/o Piper Marbury Rudnick & Wolfe LLP, 1850 Centennial Park Drive, Suite 610,
Reston, VA 20191-1517 and (iii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations, warranties
and other statements of the Company, the Selling Stockholders and the several
Underwriters set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and payment
for the Shares, regardless of any investigation, or statement as to the results
thereof, made by or on behalf of any Underwriter, the officers or directors of
any Underwriter, any person controlling any Underwriter, the Company, the
officers or directors of the Company, any person controlling the Company, any
Selling Stockholder or any person controlling such Selling Stockholder,
acceptance of the Shares and payment for them hereunder and termination of this
Agreement.
If for any reason the Shares are not delivered by or on behalf of any Seller as
provided herein (other than as a result of any termination of this Agreement
pursuant to Section 10 or due to the default or omission of any Underwriter),
the Company agrees to reimburse the several Underwriters for reasonable
out-of-pocket expenses (including the fees and disbursements of counsel)
incurred by them in connection with
<PAGE>
investigating, marketing and proposing to market the Shares or in contemplation
of performing their obligations hereunder; but the Company shall not in any
event be liable to any of the several Underwriters for damages on account of
loss of anticipated profits from the sale by them of the Shares. Notwithstanding
any termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Company also
agrees to reimburse the several Underwriters, their directors and officers and
any persons controlling any of the Underwriters for any and all fees and
expenses (including, without limitation, the fees disbursements of counsel)
incurred by them in connection with enforcing their rights hereunder (including,
without limitation, pursuant to Section 8 hereof). The provisions of this
paragraph shall not supercede or otherwise affect any agreement that the Company
and the Selling Stockholders may otherwise have for allocation of such expenses
among themselves.
Except as otherwise provided, this Agreement has been and is made solely for the
benefit of and shall be binding upon the Company, the Selling Stockholders, the
Underwriters, the Underwriters' directors and officers, any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws of
the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among the
Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
PEC SOLUTIONS, INC.
By:
------------------------------
Title:
---------------------------
<PAGE>
THE SELLING STOCKHOLDERS NAMED IN SCHEDULE II HERETO, ACTING SEVERALLY
By:
------------------------------
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
HAMBRECHT & QUIST LLC
LEGG MASON WOOD WALKER, INCORPORATED
DLJDIRECT INC.
Acting severally on behalf of
themselves and the several
Underwriters named in Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
------------------------------
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Underwriters Number of Firm Shares
to be Purchased
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation
Hambrecht & Quist LLC
Legg Mason Wood Walker, Incorporated
DLJDIRECT Inc.
Total
</TABLE>
<PAGE>
SCHEDULE II
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Name Number of Firm
Shares Being Sold
<S> <C>
Total
</TABLE>
<PAGE>
ANNEX I
REQUIRED LOCK-UP SIGNATORIES
[To Be Completed]
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER [PEC LOGO] SHARES
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
PEC SOLUTIONS, INC.
CUSIP __________
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
PEC SOLUTIONS, INC.
(hereinafter called the Corporation), transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney
upon surrender of this Certificate properly endorsed.
This certificate is not valid until countersigned and registered by
the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
PEC SOLUTIONS, INC.
DELAWARE
[1999 SEAL]
/s/ David C. Karlgaard /s/ Paul G. Rice
Chief Executive Officer, President and Chief Operating Officer and
Chairman of the Board of Directors Director
COUNTERSIGNED AND REGISTERED:
American Stock Transfer & Trust Company /s/ Alan H. Harbitter
TRANSFER AGENT Chief Technology Officer,
AND REGISTRAR Director and Secretary
AUTHORIZED SIGNATURES
PEC SOLUTIONS, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<PAGE>
TEN COM- as tenants in common UNIF GIFT MIN ACT-
______________Custodian______________
TEN ENT- as tenants by the entireties (Cust) (Minor)
JT TEN- as joint tenants with
right of survivorship and under Uniform Gifts to Minors Act
not as tenants in common
----------------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value received, _________________________________hereby sell, assign
and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
- --------------------------------------------------------------------------------
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE
________________________________________________________________________________
__________________________________________________________________________Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint __________________________________Attorney to
transfer the said stock on the books of the within-named Corporation with full
power of substitution in the premises.
Dated,________________________ X________________________________________________
X________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE
WHATSOEVER.
SIGNATURE GUARANTEED:___________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 5.1
[PIPER MARBURY RUDNICK & WOLFE LLP LETTERHEAD]
March 8, 2000
PEC Solutions, Inc.
12750 Fair Lakes Circle
Fairfax, Virginia 22033
We have assisted in the preparation and filing with the Securities and
Exchange Commission of a Registration Statement on Form S-1, file No. 333-95331
(the "Registration Statement"), relating to 8,050,000 shares of Common Stock
(including 1,050,000 shares to cover over-allotments, if any), $.01 par value
per share, of PEC Solutions, Inc., a Delaware corporation (the "Company"), to be
offered to the public.
We have examined the Certificate of Incorporation and the Bylaws of the
Company, and have examined and relied upon the originals, or copies certified to
our satisfaction, of such records of meeting of the directors and stockholders
of the Company, documents and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinions expressed below.
In examining the foregoing documents, we have assumed the genuineness
of all signatures and the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified or photostatic copies, and the authenticity of the originals of
such latter documents.
Based on the foregoing, we are of the opinion that the shares of
Common Stock have been duly authorized for issuance and, after payment
therefor in advance and in accordance with the terms and provisions of the
Underwriting Agreement among the Company, Donaldson, Lufkin & Jenrette
Corporation, Chase Securities, Legg Mason Wood Walker Incorporated and DLJ
Direct Inc. and issuance of the certificates therefor by the Company, will be
duly and validly issued, fully paid and nonassessable.
We hereby consent to the use of our name in the Registration Statement
and under the caption "Legal Matters" in the related Prospectus and consent to
the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Piper Marbury Rudnick & Wolfe
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this registration statement on Amendment 1
to Form S-1 (File No. 333-95331) of our report dated February 25, 2000, except
for Note 1, as to which the date is March 1, 2000, relating to the financial
statements of PEC Solutions, Inc. as of December 31, 1998 and 1999, and for
each of the three years in the period ended December 31, 1999. We also
consent to the reference to us under the heading "Experts" in such
registration statement.
/s/ PricewaterhouseCoopers LLP
McLean, VA
March 8, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,980,635
<SECURITIES> 0
<RECEIVABLES> 13,434,080
<ALLOWANCES> (193,024)
<INVENTORY> 0
<CURRENT-ASSETS> 22,146,184
<PP&E> 3,972,868
<DEPRECIATION> (2,466,137)
<TOTAL-ASSETS> 24,399,539
<CURRENT-LIABILITIES> 8,835,659
<BONDS> 0
0
0
<COMMON> 177,064
<OTHER-SE> 15,283,031
<TOTAL-LIABILITY-AND-EQUITY> 24,399,539
<SALES> 53,202,162
<TOTAL-REVENUES> 53,202,162
<CGS> 30,409,402
<TOTAL-COSTS> 44,226,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,234,759
<INCOME-TAX> 3,595,347
<INCOME-CONTINUING> 5,639,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,639,412
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.24
</TABLE>
