**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549 - 0001**

 

**FORM 10-Q**

 

**(Mark One)**

 

| ý | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|-----------------------------------------------------------------------------------------------|

 

**FOR THEQUARTER ENDED SEPTEMBER 30, 2002**

 

**or**

 

| o | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|---|------------------------------------------------------------------------------------------------|

 

**COMMISSIONFILE NUMBER 000-30271**

** **

 

| **PEC SOLUTIONS, INC.**                                                     |
|-----------------------------------------------------------------------------|
| (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)                      |
|                                                                        |   |   |
| **DELAWARE**                                                                |   | **54-1339972** |
| (State or other jurisdiction of incorporation or organization)              |   | (I.R.S. Employer Identification No.) |
|                                                                        |   |   |
| **12750  FAIR LAKES CIRCLE, FAIRFAX, VA**                                   |   | **22033** |
| (Address of principal executive offices)                                    |   | (Zip Code) |
|                                                                        |   |   |
| Registrant’s telephone number, including area code: **(703) 679-4900** |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to the filing requirements for the past 90 days. Yes ý  No o

 

As of November 14, 2002,26,650,045 of the registrant’s Common Stock, par value $.01 per share, wereoutstanding.

 

 

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**PECSOLUTIONS, INC.**

**QUARTERLYREPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002**

 

**TABLE OFCONTENTS**

 
| PART I.  FINANCIAL INFORMATION                                                                 |
|-----------------------------------------------------------------------------------------------------|
| Item 1. Financial Statements:                                                                       |
| Consolidated Balance Sheets - September 30, 2002 and December 31,  2001                             |
| Consolidated Statements of Income - Three  and nine months ended September 30, 2002 and 2001        |
| Consolidated Statements of Cash Flows -  Nine months ended September 30, 2002 and 2001              |
| Notes to Consolidated Financial Statements                                                          |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
| Item 3. Qualitative and Quantitative  Disclosure about Market Risk                                  |
| Item 4.   Controls and Procedures                                                              |
| PART II. OTHER INFORMATION                                                                          |
| Items 1 - 6                                                                                         |
| Signatures                                                                                          |

 

2

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**PART I: FINANCIAL INFORMATION**

 

**ITEM 1: FINANCIAL STATEMENTS**

 

**PEC SOLUTIONS, INC.CONSOLIDATED BALANCE SHEETS(DOLLARS IN THOUSANDS)**

 
|                                                                                                                                |   | **AS OF  SEPTEMBER  30,  2002** |       | **AS OF  DECEMBER  31,  2001** |       |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|------------|--------------------------------|------------|
|                                                                                                                                |   | **(UNAUDITED)**                 |       |                           |       |
| ASSETS                                                                                                                              |   |                            | ** ** |                           | ** ** |
| Current assets:                                                                                                                     |   |                            | ** ** |                           | ** ** |
| Cash and cash equivalents                                                                                                           |   | $                               | 24,261     |                           | $          | 30,436 |   |
| Short-term investments                                                                                                              |   | 34,856                          |       | 31,105                         |       |
| Accounts receivable, net                                                                                                            |   | 50,539                          |       | 36,423                         |       |
| Other current assets                                                                                                                |   | 2,612                           |       | 4,134                          |       |
| Total current assets                                                                                                                |   | 112,268                         |       | 102,098                        |       |
|                                                                                                                                |   |                            | ** ** |                           | ** ** |
| Property and equipment, net                                                                                                         |   | 24,598                          |       | 6,497                          |       |
| Investments                                                                                                                         |   | 25,079                          |       | 13,762                         |       |
| Goodwill                                                                                                                            |   | 16,955                          |       | 12,565                         |       |
| Intangibles, net                                                                                                                    |   | 3,913                           |       | 2,969                          |       |
| Other assets                                                                                                                        |   | 3,049                           |       | 3,817                          |       |
| Total assets                                                                                                                        |   | $                               | 185,862    |                           | $          | 141,708 |   |
|                                                                                                                                |   |                            | ** ** |                           | ** ** |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                          |   |                            | ** ** |                           | ** ** |
|                                                                                                                                |   |                            | ** ** |                           | ** ** |
| Current liabilities:                                                                                                                |   |                            | ** ** |                           | ** ** |
| Accounts payable and accrued expenses                                                                                               |   | $                               | 12,331     |                           | $          | 4,020 |   |
| Advance payments on contracts                                                                                                       |   | 2,063                           |       | 1,290                          |       |
| Retirement plan contribution payable                                                                                                |   | 1,801                           |       | —                         |       |
| Accrued payroll                                                                                                                     |   | 3,662                           |       | 7,018                          |       |
| Accrued vacation                                                                                                                    |   | 2,849                           |       | 2,185                          |       |
| Other current liabilities                                                                                                           |   | 2,130                           |       | 3,958                          |       |
| Total current liabilities                                                                                                           |   | 24,836                          |       | 18,471                         |       |
|                                                                                                                                |   |                            | ** ** |                           | ** ** |
| Long-term liabilities:                                                                                                              |   |                            | ** ** |                           | ** ** |
| Supplemental retirement program liability                                                                                           |   | 914                             |       | 949                            |       |
| Deferred rent payable                                                                                                               |   | 1,217                           |       | 923                            |       |
| Long-term lease obligation                                                                                                          |   | 20,788                          |       | 2,883                          |       |
| Other long-term liabilities                                                                                                         |   | 4                               |       | 54                             |       |
| Total long-term liabilities                                                                                                         |   | 22,923                          |       | 4,809                          |       |
| Total liabilities                                                                                                                   |   | 47,759                          |       | 23,280                         |       |
| Commitments and contingencies                                                                                                       |   |                            | ** ** |                           | ** ** |
|                                                                                                                                |   |                            | ** ** |                           | ** ** |
| Stockholders’ equity:                                                                                                          |   |                            | ** ** |                           | ** ** |
| Undesignated capital stock, 10,000,000 shares authorized                                                                            |   | —                          |       | —                         |       |
| Common stock, $0.01 par value, 75,000,000 shares authorized, 26,480,507  and 26,109,649 shares issued and outstanding, respectively |   | 265                             |       | 261                            |       |
| Additional paid-in capital                                                                                                          |   | 87,477                          |       | 83,582                         |       |
| Retained earnings                                                                                                                   |   | 50,697                          |       | 34,585                         |       |
| Accumulated other comprehensive income (loss)                                                                                       |   | (336                            | )          | —                         |       |
| Total stockholders’ equity                                                                                                     |   | 138,103                         |       | 118,428                        |       |
| Total liabilities and stockholders’ equity                                                                                     |   | $                               | 185,862    |                           | $          | 141,708 |   |

 

Seenotes to consolidated financial statements.

 

3

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**PEC SOLUTIONS, INC.CONSOLIDATED STATEMENTS OF INCOME(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
|                                                          |   | **THREE MONTHS ENDED**   |   | **NINE MONTHS ENDED**    |   |
|---------------------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                          |   | **SEPTEMBER  30,  2002** |   | **SEPTEMBER  30,  2001** |   | **SEPTEMBER  30,  2002** |   | **SEPTEMBER  30,  2001** |   |
|                                                          |   | **(UNAUDITED)**          |   |
| Revenues                                                      |   | $                        | 52,844 |                     | $      | 28,833 |   | $ | 133,836 |   | $ | 77,887 |   |
| Operating costs and expenses:                                 |   |                     |   |                     |   |   |   |   |   |
| Direct costs                                                  |   | 30,359                   |   | 15,906                   |   | 78,789 |   | 41,964 |   |
| General and administrative expenses                           |   | 9,164                    |   | 6,164                    |   | 24,685 |   | 17,254 |   |
| Sales and marketing expenses                                  |   | 1,205                    |   | 1,087                    |   | 4,246 |   | 3,119 |   |
| Goodwill and intangible amortization                          |   | 175                      |   | 180                      |   | 556 |   | 541 |   |
| Total operating costs and expenses                            |   | 40,903                   |   | 23,337                   |   | 108,276 |   | 62,878 |   |
| Operating income                                              |   | 11,941                   |   | 5,496                    |   | 25,560 |   | 15,009 |   |
| Other income, net                                             |   | 204                      |   | 816                      |   | 1,172 |   | 1,725 |   |
| Income before income taxes                                    |   | 12,145                   |   | 6,312                    |   | 26,732 |   | 16,734 |   |
| Provision for income taxes                                    |   | 4,743                    |   | 2,600                    |   | 10,439 |   | 6,894 |   |
| Net income                                                    |   | $                        | 7,402  |                     | $      | 3,712 |   | $ | 16,293 |   | $ | 9,840 |   |
| Earnings per share:                                           |   |                     |   |                     |   |   |   |   |   |
| Basic                                                         |   | $                        | 0.28   |                     | $      | 0.14 |   | $ | 0.62 |   | $ | 0.42 |   |
| Diluted                                                       |   | $                        | 0.25   |                     | $      | 0.13 |   | $ | 0.56 |   | $ | 0.36 |   |
| Weighted average shares used in computing earnings per share: |   |                     |   |                     |   |   |   |   |   |
| Basic                                                         |   | 26,463                   |   | 25,840                   |   | 26,298 |   | 23,672 |   |
| Diluted                                                       |   | 29,566                   |   | 29,610                   |   | 29,176 |   | 27,277 |   |

 

Seenotes to consolidated financial statements.

 

4

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**PEC SOLUTIONS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(DOLLARS IN THOUSANDS)**

 
|                                                                               |   | **NINE MONTHS ENDING**   |       |
|------------------------------------------------------------------------------------|--------|--------------------------|------------|
|                                                                               |   | **SEPTEMBER  30,  2002** |       | **SEPTEMBER  30,  2001** |   |
|                                                                               |   | **(UNAUDITED)**          |       |
| Cash flows from operating activities:                                              |   |                     | ** ** |   | ** ** |
| Net income                                                                         |   | $                        | 16,293     |   | $ | 9,840 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                     |       |   |   |
| Depreciation and amortization                                                      |   | 1,094                    |       | 781 |   |
| Amortization of goodwill                                                           |   | —                   |       | 541 |   |
| Amortization of intangibles                                                        |   | 556                      |       | — |   |
| Write-off of capitalized software                                                  |   | 289                      |       | — |   |
| Deferred rent payable                                                              |   | 294                      |       | 347 |   |
| Deferred income taxes                                                              |   | (339                     | )          | (183 | ) |
| Loss from investment in building                                                   |   | 69                       |       | — |   |
| Changes in operating assets and liabilities:                                       |   |                     |       |   |   |
| Accounts receivable, net                                                           |   | (14,116                  | )          | (12,966 | ) |
| Other current assets                                                               |   | 1,690                    |       | (31 | ) |
| Other assets                                                                       |   | 258                      |       | (81 | ) |
| Accounts payable and accrued expenses                                              |   | 8,311                    |       | 1,704 |   |
| Advance payments on contracts                                                      |   | 773                      |       | (142 | ) |
| Retirement plan contribution payable                                               |   | 1,801                    |       | 849 |   |
| Accrued payroll                                                                    |   | (3,356                   | )          | 260 |   |
| Accrued vacation                                                                   |   | 664                      |       | 514 |   |
| Other current liabilities                                                          |   | (1,828                   | )          | 1,028 |   |
| Supplemental retirement program liability                                          |   | (35                      | )          | 99 |   |
| Other long-term liabilities                                                        |   | —                   |       | (9 | ) |
| Net cash provided by operating activities                                          |   | 12,418                   |       | 2,551 |   |
| Cash flows from investing activities:                                              |   |                     |       |   |   |
| Purchases of property and equipment                                                |   | (1,009                   | )          | (1,209 | ) |
| Net (purchases) sales of short-term investments                                    |   | (3,752                   | )          | 3,513 |   |
| Investment in affiliate                                                            |   | —                   |       | (1,500 | ) |
| Purchase of assets                                                                 |   | (5,890                   | )          | — |   |
| Capitalized software                                                               |   | (215                     | )          | (540 | ) |
| Purchases of long-term investments, net                                            |   | (11,391                  | )          | — |   |
| Net cash provided (used) by investing activities                                   |   | (22,257                  | )          | 264 |   |
| Cash flows from financing activities:                                              |   |                     |       |   |   |
| Proceeds from issuance of common stock                                             |   | 3,714                    |       | 49,251 |   |
| Common stock offering costs                                                        |   | —                   |       | (396 | ) |
| Payments on capital lease obligations                                              |   | (50                      | )          | — |   |
| Net cash provided by financing activities                                          |   | 3,664                    |       | 48,855 |   |
| Net increase (decrease) in cash                                                    |   | (6,175                   | )          | 51,670 |   |
| Cash and cash equivalents at beginning of period                                   |   | 30,436                   |       | 14,655 |   |
| Cash and cash equivalents at end of period                                         |   | $                        | 24,261     |   | $ | 66,325 |   |
| Income taxes paid                                                                  |   | $                        | 8,819      |   | $ | 6,625 |   |
| Interest paid                                                                      |   | $                        | 7          |   | $ | 3 |   |

 

Seenotes to consolidated financial statements.

 

5

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**PEC SOLUTIONS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTSSEPTEMBER 30, 2002(UNAUDITED)**

 

**1. Financial Statements**

 

The accompanying consolidatedfinancial statements, except for the December 31, 2001 balance sheet, areunaudited and have been prepared in accordance with accounting standardsgenerally accepted in the United States for interim financial information andthe instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been omitted. In the opinion of management, alladjustments, consisting of normally recurring accruals, considered necessaryfor a fair presentation, have been included. It is suggested that thesecondensed financial statements be read in conjunction with the Company’saudited financial statements for the years ended December 31, 2000 and 2001 andfor each of the three years in the period ended December 31, 2001 included onForm 10-K, as filed with the Securities and Exchange Commission. The results ofoperations for the nine months ended September 30, 2002, are not necessarilyindicative of the operating results to be expected for the full year.

 

**2. Accounts Receivable**

 

Accounts receivable consist ofthe following as of:

 
|                             |   | **SEPTEMBER 30, 2002**     |   | **DECEMBER 31, 2001** |   |
|----------------------------------|--------|----------------------------|--------|-----------------------|--------|
|                             |   | **(DOLLARS IN THOUSANDS)** |   |
| Billed accounts  receivable      |   | $                          | 44,903 |                  | $      | 33,337 |   |
| Unbilled accounts  receivable    |   | 8,020                      |   | 4,701                 |   |
| Progress payments                |   | (2,062                     | )      | (1,290                | )      |
|                             |   | 50,861                     |   | 36,748                |   |
| Allowance for doubtful  accounts |   | (322                       | )      | (325                  | )      |
| Accounts receivable, net         |   | $                          | 50,539 |                  | $      | 36,423 |   |

 

Unbilled accounts receivablecomprise recognized recoverable costs and accrued profits on contracts forwhich billings had not been presented to clients as of the balance sheet date.Management anticipates the collection of these amounts within 90 days of thebalance sheet date. Payments to the Company on contracts with agencies anddepartments of the U.S. Government are subject to adjustment upon audit by theU.S. Government. All years subsequent to 1997 are subject to U.S. Governmentaudit. Management believes the effect of audit adjustments, if any, on periodsnot yet audited, will not have a material effect on the financial statements.

 

**3. Net Income Per Share**

 

Basic and diluted earnings pershare for the three months and nine months ended September 30, 2002 and 2001were determined as follows:

 
|                       |   | **THREE MONTHS ENDED  SEPTEMBER 30, 2001**                |   | **NINE MONTHS ENDED  SEPTEMBER 30, 2001** |       |
|----------------------------|--------|-----------------------------------------------------------|--------|-------------------------------------------|------------|
|                       |   | **(DOLLARS IN THOUSANDS,  EXCEPT FOR PER SHARE AMOUNTS)** |   |
|                       |   | **NET  INCOME**                                           |   | **SHARES**                                |       | **PER SHARE** |   | **NET  INCOME** |   | **SHARES** |   | **PER SHARE** |   |
| Basic EPS                  |   | $                                                         | 3,712  |                                      | 25,839,536 |   | $ | 0.14 |   | $ | 9,840 |   | 23,672,101 |   | $ | 0.42 |   |
| Effect of dilutive options |   | —                                                    |   | 3,770,255                                 |       | (0.01 | ) | — |   | 3,604,826 |   | (0.06 | ) |
| Diluted EPS                |   | $                                                         | 3,712  |                                      | 29,609,791 |   | $ | 0.13 |   | $ | 9,840 |   | 27,276,927 |   | $ | 0.36 |   |

 
|                       |   | **THREE MONTHS ENDED  SEPTEMBER 30, 2002**                |   | **NINE MONTHS ENDED  SEPTEMBER 30, 2002** |       |
|----------------------------|--------|-----------------------------------------------------------|--------|-------------------------------------------|------------|
|                       |   | **(DOLLARS IN THOUSANDS,  EXCEPT FOR PER SHARE AMOUNTS)** |   |
|                       |   | **NET  INCOME**                                           |   | **SHARES**                                |       | **PER SHARE** |   | **NET  INCOME** |   | **SHARES** |   | **PER SHARE** |   |
| Basic EPS                  |   | $                                                         | 7,402  |                                      | 26,463,487 |   | $ | 0.28 |   | $ | 16,293 |   | 26,297,815 |   | $ | 0.62 |   |
| Effect of dilutive options |   | —                                                    |   | 3,102,952                                 |       | (0.03 | ) | — |   | 2,877,685 |   | (0.06 | ) |
| Diluted EPS                |   | $                                                         | 7,402  |                                      | 29,566,439 |   | $ | 0.25 |   | $ | 16,293 |   | 29,175,500 |   | $ | 0.56 |   |

 

6

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**4.****Acquisitions**

 

On June 14, 2002, the Company acquired thecontracts and employees of Vector Research, Inc. (“Vector”) for $5.7 millioncash plus the assumption of $0.1 million in accrued liabilities.  Vector was a provider of technologydevelopment and engineering services to the federal government.  The purchase price has been allocated asfollows, goodwill of $4.3 million and intangibles consisting of customercontracts and relationships of $1.5 million. Intangibles are being amortized over 8.4 years.  The operating results of Vector have beenincluded in the consolidated results of the Company from the date ofacquisition.

 

On November 20, 2001, the Company acquiredall of the outstanding common shares of Troy Systems, Inc. (“Troy”) for $15.3million of cash and common stock valued at $3.0 million in a businesscombination accounted for as a purchase. Troy derived revenue from system development, networking, engineering,integration services, and information systems security and its primary customerwas the federal government.  The excessof purchase price over the fair value of the net assets was approximately $9.9million.  The operating results of Troyhave been included in the consolidated results of the Company from the date ofacquisition.

 

The tablebelow reflects unaudited proforma combined results of the Company and Troy asif the acquisition had taken place as of January 1, 2001.

 

|                                                           |   | **Three Months Ended** |   | **Nine Months Ended**  |   |
|----------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                                           |   | **September 30, 2001** |   | **September 30, 2001** |   |
|                                                           |   |                   |   |                   |   |
| Revenues                                                       |   | $                      | 37,287 |                   | $      | 102,639 |   |
|                                                           |   |                   |   |                   |   |
| Net Income                                                     |   | $                      | 4,328  |                   | $      | 11,123 |   |
|                                                           |   |                   |   |                   |   |
| Earnings per share:                                            |   |                   |   |                   |   |
| Basic                                                          |   | $                      | 0.17   |                   | $      | 0.47 |   |
| Diluted                                                        |   | $                      | 0.15   |                   | $      | 0.41 |   |
|                                                           |   |                   |   |                   |   |
| Weighted average shares used in computing  earnings per share: |   |                   |   |                   |   |
| Basic                                                          |   | 25,943                 |   | 23,775                 |   |
| Diluted                                                        |   | 29,713                 |   | 27,380                 |   |

 

 

**5.****Goodwill and Intangible Assets**

 

In June 2001, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards (SFAS) No.141, *Business Combinations*and No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 requires all businesscombinations initiated after September 30, 2001 to be accounted for using thepurchase method.  Under SFAS No. 142,goodwill and intangible assets with indefinite lives will no longer beamortized but are reviewed annually (or more frequently if impairmentindicators arise) for impairment. Separable intangible assets that are notdeemed to have indefinite lives will continue to be amortized over their usefullives but with no maximum life.  TheCompany adopted the provisions of SFAS No. 142 effective January 1, 2002.

 

Upon the adoption of FAS 142, the Companydiscontinued the amortization of goodwill. In accordance with the provisions ofSFAS No. 142, the Company performed the appropriate transitional impairmenttests related to its stated goodwill and determined that there is notransitional impairment loss.  Also inaccordance with the provisions of SFAS No. 142, the Company reassessed theuseful lives of all intangible assets and determined that no adjustments werenecessary.

 

The following table presents a reconciliationof net income and earnings per share adjusted for the exclusion of goodwill:

 
|                                 |   | **Three Months Ended**                                    |   | **Nine Months Ended**   |   |
|--------------------------------------|--------|-----------------------------------------------------------|--------|-------------------------|--------|
|                                 |   | **(Dollars in thousands, except  for per share amounts)** |   |
|                                 |   | **September 30,  2002**                                   |   | **September 30,  2001** |   | **September 30,  2002** |   | **September 30,  2001** |   |
| Reported  net income                 |   | $                                                         | 7,402  |                    | $      | 3,712 |   | $ | 16,293 |   | $ | 9,840 |   |
| Add:  Goodwill amortization     |   | —                                                    |   | 180                     |   | — |   | 541 |   |
| Adjusted  net income                 |   | $                                                         | 7,402  |                    | $      | 3,892 |   | $ | 16,293 |   | $ | 10,381 |   |
|                                 |   |                                                      |   |                    |   |   |   |   |   |
| Reported  basic earnings per share   |   | $                                                         | 0.28   |                    | $      | 0.14 |   | $ | 0.62 |   | $ | 0.42 |   |
| Add:  Goodwill amortization     |   | —                                                    |   | 0.01                    |   | — |   | 0.02 |   |
| Adjusted  basic earnings per share   |   | $                                                         | 0.28   |                    | $      | 0.15 |   | $ | 0.62 |   | $ | 0.44 |   |
|                                 |   |                                                      |   |                    |   |   |   |   |   |
| Reported  diluted earnings per share |   | $                                                         | 0.25   |                    | $      | 0.13 |   | $ | 0.56 |   | $ | 0.36 |   |
| Add:  Goodwill amortization     |   | —                                                    |   | ——            |   | — |   | 0.02 |   |
| Adjusted  diluted earnings per share |   | $                                                         | 0.25   |                    | $      | 0.13 |   | $ | 0.56 |   | $ | 0.38 |   |

 

The Company only has one reporting unit.  Nonamortizable intangible assets atSeptember 30, 2002, consist only of goodwill of $16,955,454.  The Company’s amortizable intangible assetsinclude customer contracts and related relationships.  The gross carrying amount of the customer relationships atSeptember 30, 2002 was $4,500,000 with accumulated amortization of $590,392.  Goodwill increased by $2,842,454 during thequarter ended September 30, 2002 as it related to the asset purchase ofVector.  This amount had originally beenallocated to customer contracts and related relationships based upon apreliminary allocation of the purchase price.

 

Amortization expense for the three and nine months ended September 30,2002 was $175,000 and $556,000, respectively. Intangibles are amortized on a straight line basis.  Estimated amortization expense for each ofthe five succeeding calendar years based on the intangible assets as ofSeptember 30, 2002 is as follows:

 

7

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| **Year ending December 31,** |   | **Amount**                  |   |
|------------------------------|--------|-----------------------------|--------|
|                         |   | **(dollars in  thousands)** |   |
| 2002 (balance of year)       |   | $                           | 213    |   |
| 2003                         |   | 851                         |   |
| 2004                         |   | 851                         |   |
| 2005                         |   | 851                         |   |
| 2006 and after               |   | 1,147                       |   |
|                              |        |                             |        |  |

 

**6. Comprehensive Income**

 

Other comprehensive income (loss), consistingof unrealized gains  (losses) onsecurities was $5 thousand and $(121) thousand for the three months and ninemonths ended September 30, 2002, respectively, and $(58) thousand and $(74)thousand for the three and nine months ended September 30, 2001, respectively.

 

8

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

PEC Solutions is a professionalservices firm specializing in high-end solutions that help governmentorganizations capitalize on the Internet and other advanced technologies. Wemigrate paper-intensive procedures to web-enabled processes using eGovernmentsolutions that help our clients enhance their productivity and improve theservices they offer to the public. As a total solutions provider, we addressthe full technology lifecycle, including formulating technology strategies,creating business solutions, performing long-term operational management andcontinuing enhancement of the solution.

 

We derive substantially all ofour revenues from fees for consulting services. We generate these fees fromvarious types of contracts, including time and materials contracts, fixed-pricecontracts and cost-reimbursable contracts. During the three months and ninemonths ended September 30, 2002, revenues from these contract types wereapproximately 60%, 24% and 16%, and 60%, 22% and 18% respectively, of totalrevenues. We typically issue invoices monthly to manage outstanding accountsreceivable balances. We recognize revenues on time and materials contracts asthe services are provided. We recognize revenues on fixed-price contracts usingthe percentage of completion method as services are performed over the life ofthe contract, based on the costs we incur in relation to the total estimatedcosts. We recognize and make provisions for any anticipated contract losses atthe time we know and can estimate them. Fixed-price contracts are attractive toclients and, while subject to increased risks, provide opportunities forincreased margins. We recognize revenues on cost-reimbursable contracts asservices are provided. These revenues are equal to the costs incurred in  providing these services plus aproportionate amount of the fee earned. We have historically recovered all ofour costs on cost-reimbursable contracts, which means we have lower risk andour margins are lower on these contracts.

 

Our historical revenue growthis attributable to various factors, including an increase in the size andnumber of projects for existing and new clients. Existing clients from theprevious year generated approximately 75% and 88% of our revenues in the three monthsand nine months ended September 30, 2002. As of September 30, 2002, we had1,397 personnel.

 

In the three months and ninemonths ended September 30, 2002, we derived approximately 55% and 41%respectively, of our revenues through relationships with prime contractors, whocontract directly with the end-client and subcontract with us. In most of theseengagements, we retain full responsibility for the end-client relationship anddirect and manage the activities of our contract staff.

 

Our most significant expense isdirect costs, which consist primarily of project personnel salaries andbenefits, and direct expenses incurred to complete projects. Our direct costsas a percentage of revenues are also related to the utilization rate of ourconsulting personnel. We manage utilization by frequently monitoring projectrequirements and timetables. The number of consulting personnel assigned to aproject will vary according to the size, complexity, duration and demands ofthe project.

 

General and administrativeexpenses consist primarily of costs associated with our executive management,finance and administrative groups, human resources, unassigned consultingpersonnel, personnel training, occupancy costs, depreciation and amortization,travel and all other branch and corporate costs.

 

Sales and marketing expensesinclude the costs of sales and marketing personnel and costs associated withmarketing and bidding on future projects.

 

Other income consists primarilyof interest income earned on our cash, cash equivalents and marketablesecurities.

 

9

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**Results of Operations**

 

The following table sets forthcertain financial data as a percentage of revenues for the periods indicated.

 
|                                     |   | **THREE MONTHS ENDED**     |       | **NINE MONTHS ENDED**    |       |
|------------------------------------------|--------|----------------------------|------------|--------------------------|------------|
|                                     |   | **SEPTEMBER  30,  2002**   |       | **SEPTEMBER  30,  2001** |       | **SEPTEMBER  30,  2002** |   | **SEPTEMBER  30,  2001** |   |
|                                     |   | **(DOLLARS IN THOUSANDS)** |       |
| Statement of Income:                     |   |                       | ** ** |                     | ** ** |   | ** ** |   | ** ** |
| Revenues                                 |   | $                          | 52,844     |                     | $          | 28,833 |   | $ | 133,836 |   | $ | 77,887 |   |
| Direct costs                             |   | 30,359                     |       | 15,906                   |       | 78,789 |   | 41,964 |   |
| Gross profit (a)                         |   | 22,485                     |       | 12,927                   |       | 55,047 |   | 35,923 |   |
| Other operating costs and expenses:      |   |                       |       |                     |       |   |   |   |   |
| General and administrative expenses      |   | 9,164                      |       | 6,164                    |       | 24,685 |   | 17,254 |   |
| Sales and marketing expenses             |   | 1,205                      |       | 1,087                    |       | 4,246 |   | 3,119 |   |
| Goodwill and intangible amortization     |   | 175                        |       | 180                      |       | 556 |   | 541 |   |
| Total other operating costs and expenses |   | 10,544                     |       | 7,431                    |       | 29,487 |   | 20,914 |   |
| Operating income                         |   | 11,941                     |       | 5,496                    |       | 25,560 |   | 15,009 |   |
| Other income, net                        |   | 204                        |       | 816                      |       | 1,172 |   | 1,725 |   |
| Income before income taxes               |   | 12,145                     |       | 6,312                    |       | 26,732 |   | 16,734 |   |
| Provision for income taxes               |   | 4,743                      |       | 2,600                    |       | 10,439 |   | 6,894 |   |
| Net income                               |   | $                          | 7,402      |                     | $          | 3,712 |   | $ | 16,293 |   | $ | 9,840 |   |
| As a Percentage of Revenues:             |   |                       | ** ** |                     | ** ** |   | ** ** |   | ** ** |
|                                     |   |                       | ** ** |                     | ** ** |   | ** ** |   | ** ** |
| Revenues                                 |   | 100.0                      | %          | 100.0                    | %          | 100.0 | % | 100.0 | % |
| Direct costs                             |   | 57.4                       |       | 55.1                     |       | 58.9 |   | 53.9 |   |
| Gross profit (a)                         |   | 42.6                       |       | 44.9                     |       | 41.1 |   | 46.1 |   |
| Other operating costs and expenses:      |   |                       | ** ** |                     | ** ** |   | ** ** |   | ** ** |
| General and administrative expenses      |   | 17.3                       |       | 21.4                     |       | 18.4 |   | 22.1 |   |
| Sales and marketing expenses             |   | 2.3                        |       | 3.8                      |       | 3.2 |   | 4.0 |   |
| Goodwill and intangible amortization     |   | 0.3                        |       | 0.6                      |       | 0.4 |   | 0.7 |   |
|                                     |   |                       | ** ** |                     | ** ** |   | ** ** |   | ** ** |
| Total other operating costs and expenses |   | 19.9                       |       | 25.8                     |       | 22.0 |   | 26.8 |   |
| Operating income                         |   | 22.7                       |       | 19.1                     |       | 19.1 |   | 19.3 |   |
| Other income, net                        |   | 0.4                        |       | 2.8                      |       | 0.9 |   | 2.2 |   |
| Income before income taxes               |   | 23.0                       |       | 21.9                     |       | 20.0 |   | 21.5 |   |
| Provision for income taxes               |   | 9.0                        |       | 9.0                      |       | 7.8 |   | 8.9 |   |
| Net income                               |   | 14.0                       | %          | 12.9                     | %          | 12.2 | % | 12.6 | % |

 

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(a) Gross profit represents revenues lessdirect costs, which consist primarily of project personnel salaries and benefitsand direct expenses incurred to complete projects.

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHSENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30,2001**

 

REVENUES. For the three monthsended September 30, 2002, our total revenues increased by 83.3%, or $24.0million over the same period last year. The increase in revenues primarilyreflects an increase in the volume of services to existing clients and servicesto new clients.  Approximately 40% ofthe increase was related to the Troy and Vector acquisitions.  Services to new clients representapproximately 25% of revenues.

 

DIRECT COSTS. For the threemonths ended September 30, 2002, direct costs increased by 90.9%, or $14.5million, over the same period last year. The increase was due primarily to anincrease in project personnel to 1,271 as of September 30, 2002 as compared to769 as of September 30, 2001. Direct costs increased as a percentage ofrevenues for the period ended September 30, 2002, to 57.4% as compared to 55.1%in the same period last year, due to normal fluctuations in labor and otherdirect costs and the impact of the Troy and Vector acquisitions.

 

10

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GROSS PROFIT. Gross profitincreased by 73.9% to $22.5 million in the three months ended September 30,2002 from $12.9 million in the three months ended September 30, 2001. Grossprofit as a percentage of revenues decreased to 42.6% in the three months endedSeptember 30, 2002 from 44.9% in the three months ended September 30, 2001, asdirect costs grew at a faster rate than revenues due to normal fluctuations inlabor and other direct costs and the impact of the Troy and Vectoracquisitions.

 

GENERAL AND ADMINISTRATIVEEXPENSES. General and administrative expenses increased 48.7% to $9.2 millionin the three months ended September 30, 2002 from $6.2 million in the threemonths ended September 30, 2001. Facility costs increased in the currentquarter over last year due to the opening of new offices in Fairfax, Virginia.Our total general and administrative headcount increased to 126 employees as ofSeptember 30, 2002 compared to 102 employees as of September 30, 2001,consistent with our plans.

 

SALES AND MARKETING. Sales andmarketing expenses increased 10.9% to $1.2 million in the three months endedSeptember 30, 2002 from $1.1 million in the three months ended September 30,2001. This increase was due to an increase in our marketing efforts.

 

AMORTIZATION OF GOODWILL. As aresult of the adoption of FAS 142, effective January 1, 2002, we incurred nogoodwill amortization expense in the three months ended September 30,2002.  In the three months endedSeptember 30, 2001, we incurred $180 of amortization expense related to the $3.6million of goodwill we recorded in connection with the acquisition of Viking.

 

AMORTIZATION OFINTANGIBLES.  For the three months endedSeptember 30, 2002, we incurred $175 thousand of amortization of expenserelated to the $3.0 million of intangibles we recorded in connection with thevalue of contracts and customer relationships acquired in the November 2001acquisition of Troy, and $1.5 million of intangibles recorded in connectionwith the value of contracts and customer relationships acquired in the June2002 acquisition of Vector.  There wereno intangibles at September 30, 2001, and therefore, no amortization.

 

OPERATING INCOME. Operatingincome increased 117.3% to $11.9 million in the three months ended September30, 2002 from $5.5 million in the three months ended September 30, 2001. Thisincrease was due primarily to increased revenues and the impact of the Troy andVector acquisitions.

 

**RESULTS OF OPERATIONS FOR THE NINE MONTHSENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001**

 

REVENUES. For the nine monthsended September 30, 2002, our total revenues increased by 71.8%, or $55.9million over the same period last year. Approximately 44% of the increase wasrelated to the Troy and Vector acquisitions. The increase in revenues primarily reflects an increase in the volume ofservices to existing clients and services to new clients. Services to newclients represent approximately 12% of revenues.

 

DIRECT COSTS. For the ninemonths ended September 30, 2002, direct costs increased by 87.8%, or $36.8million, over the same period last year. The increase was due primarily to anincrease in project personnel to 1,271 as of September 30, 2002 as compared to769 as of September 30, 2001. Direct costs increased as a percentage ofrevenues for the period ended September 30, 2002, to 58.9% as compared to 53.9%in the same period last year, due to normal fluctuations in labor and otherdirect costs and the impact of the Troy and Vector acquisitions.

 

GROSS PROFIT. Gross profitincreased by 53.2% to $55.0 million in the nine months ended September 30, 2002from $35.9 million in the nine months ended September 30, 2001. Gross profit asa percentage of revenues decreased to 41.1% in the nine months ended September30, 2002 from 46.1% in the nine months ended September 30, 2001, as directcosts grew at a faster rate than revenues due to normal fluctuations in laborand other direct costs and the impact of the Troy and Vector acquisitions.

 

GENERAL AND ADMINISTRATIVEEXPENSES. General and administrative expenses increased 43.1% to $24.7 millionin the nine months ended September 30, 2002 from $17.3 million in the ninemonths ended September 30, 2001. Facility costs increased in the current periodover last year due to the opening of new offices in Fairfax, Virginia. Ourtotal general and administrative headcount increased to 126 employees as ofSeptember 30, 2002 compared to 102 employees as of September 30, 2001,consistent with our plans.

 

11

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SALES AND MARKETING. Sales andmarketing expenses increased 36.1% to $4.2 million in the nine months endedSeptember 30, 2002 from $3.1 million in the nine months ended September 30,2001. This increase was due to an increase in our marketing efforts.

 

AMORTIZATION OF GOODWILL. As aresult of the adoption of FAS 142, effective January 1, 2002, we incurred nogoodwill amortization expense in the nine months ended September 30, 2002.  In the nine months ended September 30, 2001,we incurred $541 thousand of amortization expense related to the $3.6 millionof goodwill we recorded in connection with the acquisition of Viking.

 

AMORTIZATION OFINTANGIBLES.  For the nine months endedSeptember 30, 2002, we incurred $556 thousand of amortization of expenserelated to the $3.0 million of intangibles we recorded in connection with thevalue of contracts and customer relationships acquired in the November 2001acquisition of Troy, and $1.5 million of intangibles recorded in connectionwith the value of contracts and customer relationships acquired in the June2002 acquisition of Vector.  There wereno intangibles at September 30, 2001, and therefore, no amortization.

 

OPERATING INCOME. Operatingincome increased 70.3% to $25.6 million in the nine months ended September 30,2002 from $15.0 million in the nine months ended September 30, 2001. Thisincrease was due primarily to increased revenues and the impact of the Troy andVector acquisitions.

 

Our revenues and operatingresults may be subject to significant variation from quarter to quarterdepending on a number of factors, including the progress of contracts, revenuesearned on contracts, the number of billable days in a quarter, the timing ofthe pass-through of other direct costs, the commencement and completion ofcontracts during any particular quarter, the schedule of the governmentagencies for awarding contracts, the term of each contract that we have beenawarded and general economic conditions. Because a significant portion of ourexpenses, such as personnel and facilities costs, are fixed in the short term,successful contract performance and variation in the volume of activity as wellas in the number of contracts commenced or completed during any quarter maycause significant variations in operating results from quarter to quarter.

 

The federal government’s fiscalyear ends September 30. If a budget for the next fiscal year has not beenapproved by that date, our clients may have to suspend engagements that we areworking on until a budget has been approved. Such suspensions may cause us torealize lower revenues in the fourth quarter of the year. Further, a change inPresidential administrations and in senior government officials may affect therate at which the federal government purchases technology, although we have notseen an impact with the 2001 change in administration.

 

As a result of the factorsabove, period to period comparisons of our revenues and operating results maynot be meaningful. You should not rely on these comparisons as indicators offuture performance as no assurances can be given that quarterly results willnot fluctuate, causing a material adverse effect on our operating results andfinancial condition.

 

**Liquidityand Capital Resources**

 

Prior to the IPO and follow-onoffering, we funded our operations primarily through cash generated fromoperations and the sale of common stock to employees. Net cash provided byoperating activities was $12.4 million for the nine months ended September 30,2002. Cash provided by operating activities was primarily from net income,adjusted for working capital changes, which were principally increases inaccounts receivable.

 

Net cash used by investingactivities was $22.3 million for the nine months ended September 30, 2002.During the nine months ended September 30, 2002, we purchased $1.0 million ofproperty and equipment. We had $3.8 million of net purchases of short-terminvestments, $11.4 million of net purchases of long-term investments, $0.2expenditures for capitalized software and invested $5.9 million in the assetsof Vector.

 

Net cash provided by financingactivities was $3.7 million from the sale of common stock to employees upon theexercise of their stock options or pursuant to the stock purchase plan for thenine months ended September 30, 2002.

 

12

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We expect to retain futureearnings, if any, for use in the operation and expansion of our business and donot anticipate paying any cash dividends in the foreseeable future. We believethat our current cash position is adequate for our short-term and long-termworking capital and capital expenditure needs.

 

We maintain a $6.0 million lineof credit with Bank of America, bearing interest at the LIBOR Rate plus 250basis points per annum, which expires on April 30, 2003. As of September 30,2002, we had no borrowings outstanding under the line of credit. As ofSeptember 30, 2002, we had outstanding $2.99 million in letters of credit inlieu of rent deposits.

 

Under some of our fixed-pricecontracts, we receive advance payments for work to be performed in futuremonths. If we do not perform the work, the unearned portion of these advanceswill be returned to our clients. At September 30, 2002, our accounts receivableturnover rate, net of advance payments on contracts, was approximately four timesa year.

 

We have invested $3.0 million in an affiliated company, which isbuilding our new office building in Fairfax, Virginia.  We are required to make an additional $1.5million investment at the time of occupancy of the facility.  We have a 48% minority interest in thiscompany and are not obligated to guarantee the non-recourse mortgageobligation, nor are we involved in the management of the construction of thebuilding or the management of the owner-lessor.  In accordance with Emerging Issues Task Force Issue No. 97-10 *The Effectof Lessee Involvement in Asset Construction*, the Company is considered to be the ownerof the property (for accounting purposes). Accordingly, the Company recorded construction costs incurred to date of$20.8 million as construction-in-process with an offsetting long-term leaseobligation as of September 30, 2002.  Itis anticipated that the total construction-in-process costs will beapproximately $25 to $30 million at the completion of construction, which isexpected to be December 1, 2002.

 

**RecentAccounting Pronouncements**

 

None

 

13

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**ITEM 4.Controls and Procedures**

 

Ourmanagement, under the supervision and with the participation of David D.Karlgaard, our Chief Executive Officer and Stuart R. Lloyd, our Chief FinancialOfficer, performed an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures within 90 days before thefiling date of this quarterly report. Based on that evaluation, Messrs. Karlgaard and Lloyd concluded that ourdisclosure controls and procedures were effective.  There have been no significant changes in our internal controlsor in other factors that could significantly affect internal controlssubsequent to their evaluation.

 

**SPECIALNOTE REGARDING FORWARD LOOKING STATEMENTS**

 

The matters discussed in thisForm 10-Q include forward-looking statements that involve risks oruncertainties. While forward-looking statements are sometimes presented withnumerical specificity, they are based on various assumptions made by managementregarding future circumstances over many of which we have little or no control.Forward-looking statements may be identified by words including “anticipate,”“believe,” “estimate,” “expect” and similar expressions. We caution readersthat forward-looking statements, including without limitation, those relatingto our future business prospects, revenues, working capital, liquidity, andincome, are subject to certain risks and uncertainties that would cause actualresults to differ materially from those indicated in the Forward-LookingStatements. Factors that could cause actual results to differ fromForward-Looking Statements include the concentration of our revenues fromgovernment clients, risks involved in contracting with the government,difficulties we may have in attracting, retaining and managing professional andadministrative staff, fluctuations in quarterly results, risks related toacquisitions, risks related to competition and our ability to continue to winand perform efficiently on contracts, and other risks and factors identifiedfrom time to time in our reports filed with the SEC, including those identifiedunder the section entitled “Risk Factors” in our Registration Statement on Form10-K (SEC File No. 000-30271) as amended which hereby is incorporated byreference. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results may varymaterially from those anticipated, estimated or projected.

 

**ITEM 3.QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK**

 

We invest our cash in a varietyof financial instruments, including U.S. Treasury and Agency obligations, moneymarket instruments of domestic and foreign issuers denominated in U.S. dollarsof commercial paper, bankers’ acceptances, certificates of deposit, euro-dollartime deposits and variable rate issues, corporate note and bonds, asset-backedsecurities, repurchase agreements, municipal notes and bonds and auction ratepreferred securities.

 

Investments in both fixed andfloating rate interest earning instruments carry a degree of interest raterisk. Fixed securities may have their fair market value adversely impactedbecause of a rise in interest rates, while floating rare securities may produceless income than expected if interest rates fall. Due in part to these factors,the Company’s future investment income may fall short of expectations becauseof changes in interest rates or the Company may suffer losses in principal ifforced to sell securities which have seen a decline in market value because ofchanges in interest rates.

 

Our investments are made inaccordance with an investment policy approved by the Board of Directors. Underthis policy, no investment securities can have maturities exceeding one yearand the average duration of the portfolio can not exceed six months.

 

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**PART II — OTHER INFORMATION**

 

**ITEM 1.****LEGAL PROCEEDINGS**

 

None

 

**ITEM 2. CHANGES IN SECURITIES AND USE OFPROCEEDS**

 

In April 2000, we commenced andcompleted a firm commitment underwritten initial public offering of 3,000,000shares of our common stock at a price of $9.50 per share. The shares wereregistered with the Securities and Exchange Commission pursuant to aregistration statement on Form S-1 (No. 333-95331), which was declaredeffective on April 19, 2000. The public offering was underwritten by asyndicate of underwriters led by Donaldson, Lufkin & Jenrette SecuritiesCorporation; Chase Securities Inc.; Legg Mason Wood Walker, Incorporated; andDLJDIRECT Inc. as their representatives. After deducting underwriting discountsand commissions of approximately $2 million and expenses of approximately $0.9million, we received net proceeds of $25.6 million.

 

The primary purposes of this offering were to create a public marketfor our common stock, to improve the incentive mechanism for our professionalsthrough stock options, to obtain additional equity capital and to facilitate futureaccess to public markets. We have used the net proceeds from this offering forgeneral corporate purposes, including working capital. We have also used aportion of the net proceeds to acquire three businesses that are complementaryto ours, and may use the remaining proceeds for this purpose.

 

On August 28, 2000, we acquired all of the outstanding capital stock ofViking for $2 million cash plus the assumption of debt in a businesscombination accounted for as a purchase. Viking is a provider of integratedsoftware and advanced technology solutions for state and local law enforcement,fire and emergency medical service agencies. On November 20, 2001, we acquiredall of the outstanding capital stock of Troy for $15.3 million cash plus commonstock valued at $3.0 million (103,065 shares). Troy derives revenue from system development, networking, engineering,integration services, and information systems security and its primary customeris the federal government.  On June 14,2002, we acquired the assets of Vector Security, Inc, which consisted of theircontracts with federal government agencies, for $5.7 million cash.  Vector provided technology development andengineering services to the federal government.

 

Management will have broad discretion in the allocation of theremaining net proceeds from the sale of stock. We have no current plans, agreements or commitments for, and are notcurrently engaged in any negotiations with respect to, any such transaction. Pendingtheir use, the proceeds of this offering have been invested in short-term,investment grade, interest-bearing securities.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM 4. SUBMISSION OF MATTERS TO VOTE OFSECURITY HOLDERS**

 

None

 

15

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**ITEM 5. OTHER INFORMATION**

 

None

 

16

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**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 
| **EXHIBIT  NUMBER** |   | **EXHIBIT DESCRIPTION**                                                                                              |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                 |
| 3.1*                |   | Certificate of Incorporation                                                                                         |
|                |   |                                                                                                                 |
| 3.2*                |   | By-Laws                                                                                                              |
|                |   |                                                                                                                 |
| 10.1*               |   | Office Lease Agreement between  Building IV Associates L.P. and the Registrant                                       |
|                |   |                                                                                                                 |
| 10.2*               |   | Amendment No. 1 to Office  Lease Agreement between Building IV Associates L.P. and the Registrant                    |
|                |   |                                                                                                                 |
| 10.3*               |   | Office Lease Agreement  between Building V Associates L.P. and the Registrant                                        |
|                |   |                                                                                                                 |
| 10.4*               |   | Employment Agreement between  the Registrant and David C. Karlgaard, dated January 1, 2000                           |
|                |   |                                                                                                                 |
| 10.5*               |   | Employment Agreement between  the Registrant and Paul G. Rice, dated January 1, 2000                                 |
|                |   |                                                                                                                 |
| 10.6*               |   | Employment Agreement between  the Registrant and Alan H. Harbitter, dated January 1, 2000                            |
|                |   |                                                                                                                 |
| 10.7*               |   | Employment Agreement between  the Registrant and Stuart R. Lloyd, dated December 31, 1998                            |
|                |   |                                                                                                                 |
| 10.8*               |   | 2000 Stock Incentive Plan                                                                                            |
|                |   |                                                                                                                 |
| 10.9*               |   | 1995 Nonqualified Stock  Option                                                                                      |
|                |   |                                                                                                                 |
| 10.10*              |   | 1987 Stock Option Agreement,  as amended                                                                             |
|                |   |                                                                                                                 |
| 10.11*              |   | Nonqualified Executive  Supplemental Retirement Program Agreement dated December 1998                                |
|                |   |                                                                                                                 |
| 10.12*              |   | 2000 Employee Stock Option  Plan                                                                                     |
|                |   |                                                                                                                 |
| 10.13*              |   | Amended and Restated Loan  Agreement between the Registrant and NationsBank, N.A.                                    |
|                |   |                                                                                                                 |
| 10.14**             |   | Amendment No. 2 to Office  Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc.               |
|                |   |                                                                                                                 |
| 10.15**             |   | Amendment No. 3 to Office  Lease Agreement between BuildingIV Associates L.P. and PEC Solutions, Inc.                |
|                |   |                                                                                                                 |
| 10.16**             |   | Office Lease Agreement  between Building VI L.C. and PEC Solutions, Inc.                                             |
|                |   |                                                                                                                 |
| 10.17***            |   | First Amendment to Lease  Agreement between Building VI L.C. and PEC Solutions, Inc.                                 |
|                |   |                                                                                                                 |
| 10.18***            |   | Second Amendment to Lease  Agreement between Building VI L.C. and PEC Solutions, Inc.                                |
|                |   |                                                                                                                 |
| 10.19***            |   | Operating Agreement between  Building VI Investment L.C. And PEC Solutions, Inc.                                     |
|                |   |                                                                                                                 |
| 10.20***            |   | First Amendment to Operating  Agreement between Building VI Investment L.C. and PEC Solutions, Inc.                  |
|                |   |                                                                                                                 |
| 10.21***            |   | Bank of America Financing and  Security Agreement                                                                    |
|                |   |                                                                                                                 |
| 10.22***            |   | Bank of America Promissory  Note                                                                                     |
|                |   |                                                                                                                 |
| 10.23***            |   | Bank of America Revolving  Note                                                                                      |
|                |   |                                                                                                                 |
| 21.1****            |   | Subsidiaries of PEC  Solutions, Inc.                                                                                 |
|                |   |                                                                                                                 |
| 99.1                |   | Quarterly Certifications of  the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |
|                |   |                                                                                                                 |
| 99.2                |   | Quarterly Certifications of  the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |

 

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*                                         Incorporatedherein by reference to the Company’s Registration Statement on Form S-1, No.333-95331.

 

**                                  Incorporatedherein by reference to the Company’s Annual Report on Form 10K/A filed on April19, 2001.

 

***                           Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Q for thequarter ended September 30, 2001, filed August 13, 2001.

 

****                    Incorporatedherein by reference to the Company’s Annual Report on Form 10-K filed on March29, 2002.

 

 

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(b)  None

 

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**SIGNATURES**

 

PURSUANT TO THE REQUIREMENTS OFTHE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORTTO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.

 
|                    | BY: /s/ STUART R. LLOYD                                                                                     |
|-------------------------|-------------------------------------------------------------------------------------------------------------|
| DATE: NOVEMBER 14, 2002 | STUART R. LLOYD                                                                                             |
|                    | CHIEF FINANCIAL OFFICER, SENIOR  VICE PRESIDENT AND DIRECTOR  (PRINCIPAL FINANCIAL AND  ACCOUNTING OFFICER) |

 

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**Certifications**

 

I, David D. Karlgaard, certifythat:

 

1.             I have reviewed this quarterly report on Form10-Q of PEC Solutions, Inc.;

 

2.             Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this quarterly report;

 

4.             The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)              Designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the fining date of this quarterly report (the “Evaluation Date”)’ and

 

c)              Presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresabased on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

 

a)              All significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weakness in internalcontrols; and

 

b)             Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| November 14, 2002 | By:    | /s/ David C.  Karlgaard                                                        |   |
|-------------------|--------|--------------------------------------------------------------------------------|--------|
|              | Name:  | David C. Karlgaard                                                             |
|              | Title: | President, Chief Executive Officer and Chairman  (Principal Executive Officer) |

 

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I, Stuart R. Lloyd, certifythat:

 

1.             I have reviewed thisquarterly report on Form 10-Q of PEC Solutions, Inc.;

 

2.             Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit to statea material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this quarterly report;

 

4.             The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)              Designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the fining date of this quarterly report (the “Evaluation Date”)’ and

 

c)              Presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresabased on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

 

a)              All significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weakness in internalcontrols; and

 

b)             Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| November 14, 2002 | By:    | /s/ Stuart  R. Lloyd                                                                                      |   |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------|--------|
|              | Name:  | Stuart R. Lloyd                                                                                           |
|              | Title: | Chief Financial Officer, Senior Vice President  And Director (Principal Financial and Accounting Officer) |

 

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