**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 
| **(Mark One)**                            |                                                                                          |
|-------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                      |                                                                                          |
| **x**                                     | **Quarterly Report Pursuant to Section 13 or 15(d) of The  Securities Exchange Act of 1934**  |
|                                      |                                                                                          |
| **For The Quarter Ended March 31,  2003** |
|                                      |
| **Or**                                    |
|                                      |
| **o**                                     | **Transition Report Pursuant to Section 13 or 15(d) of The  Securities Exchange Act of 1934** |
|                                           |                                                                                               |  |

 

**Commission File Number 000-30271**

 

 

**PEC SOLUTIONS, INC.**

(ExactName of Registrant as Specified in its Charter)

 
| **DELAWARE**                                                                       |   | **54-1339972**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization)                    |   | (I.R.S.  Employer Identification No.) |
|                                                                               |   |                                  |
| **12730 FAIR  LAKES CIRCLE, FAIRFAX, VA**                                          |   | **22033**                             |
| (Address  of principal executive offices)                                          |   | (Zip  Code)                           |
|                                                                               |
| Registrant’s telephone  number, including area code: ** (703) 679-4900** |

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to the filing requirements for the past 90 days. Yes  ý  No  o

 

Indicate by check mark whether the registrant is anacclelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý  No o

 

As of May 14, 2003, 27,043,423 of the registrant’sCommon Stock, par value $.01 per share, were outstanding.

 

 

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**PEC SOLUTIONS, INC.**

**QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDEDMARCH 31, 2003**

 

**TABLE OF CONTENTS**

 
| Item 1. Financial  Statements:                                                                             |
|------------------------------------------------------------------------------------------------------------|
| Consolidated Balance  Sheets — March 31, 2003 and December 31, 2002                                   |
| Consolidated  Statements of Income — Three months ended March 31, 2003 and 2002                       |
| Consolidated  Statements of Cash Flows — Three months ended March 31, 2003 and 2002                   |
| 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                                         |
| PART II. OTHER INFORMATION                                                                                 |
| Items  1 – 6                                                                                          |
| Signatures                                                                                                 |

 

2

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**PART I: FINANCIAL INFORMATION**

 

**ITEM1:         FINANCIAL STATEMENTS**

 

**PEC SOLUTIONS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(DOLLARS IN THOUSANDS)**

 
|                                                                                                                                 |   | **As of  March 31,  2003** |       | **As of  December 31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|------------|-------------------------------|------------|
|                                                                                                                                 |   | **(Unaudited)**            | ** ** |                          | ** ** |
| **ASSETS**                                                                                                                           |   |                       |       |                          |       |
| Current assets:                                                                                                                      |   |                       |       |                          |       |
| Cash and cash equivalents                                                                                                            |   | $                          | 26,366     |                          | $          | 21,176 |   |
| Short-term investments                                                                                                               |   | 32,120                     |       | 35,551                        |       |
| Accounts receivable, net                                                                                                             |   | 50,011                     |       | 52,974                        |       |
| Other current assets                                                                                                                 |   | 2,425                      |       | 3,452                         |       |
| Total current assets                                                                                                                 |   | 110,922                    |       | 113,153                       |       |
|                                                                                                                                 |   |                       |       |                          |       |
| Property and equipment, net                                                                                                          |   | 27,804                     |       | 27,967                        |       |
| Investments                                                                                                                          |   | 30,470                     |       | 26,790                        |       |
| Goodwill                                                                                                                             |   | 16,932                     |       | 16,932                        |       |
| Intangibles, net                                                                                                                     |   | 3,487                      |       | 3,700                         |       |
| Other assets                                                                                                                         |   | 3,811                      |       | 3,749                         |       |
| Total assets                                                                                                                         |   | $                          | 193,426    |                          | $          | 192,291 |   |
|                                                                                                                                 |   |                       |       |                          |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                        |   |                       |       |                          |       |
|                                                                                                                                 |   |                       |       |                          |       |
| Current liabilities:                                                                                                                 |   |                       |       |                          |       |
| Accounts payable and accrued expenses                                                                                                |   | $                          | 5,213      |                          | $          | 8,415 |   |
| Advance payments on contracts                                                                                                        |   | 1,766                      |       | 1,070                         |       |
| Retirement plan contribution payable                                                                                                 |   | 647                        |       | —                        |       |
| Accrued payroll                                                                                                                      |   | 3,485                      |       | 6,836                         |       |
| Accrued vacation                                                                                                                     |   | 3,198                      |       | 2,562                         |       |
| Other current liabilities                                                                                                            |   | 1,813                      |       | 935                           |       |
| Total current liabilities                                                                                                            |   | 16,122                     |       | 19,818                        |       |
| Long-term liabilities:                                                                                                               |   |                       |       |                          |       |
| Supplemental retirement program liability                                                                                            |   | 1,055                      |       | 966                           |       |
| Deferred rent payable                                                                                                                |   | 1,459                      |       | 1,341                         |       |
| Long-term lease obligation                                                                                                           |   | 22,886                     |       | 22,822                        |       |
| Total long-term liabilities                                                                                                          |   | 25,400                     |       | 25,129                        |       |
| Total liabilities                                                                                                                    |   | 41,522                     |       | 44,947                        |       |
|                                                                                                                                 |   |                       |       |                          |       |
| Commitments and contingencies                                                                                                        |   |                       |       |                          |       |
|                                                                                                                                 |   |                       |       |                          |       |
| Stockholders’ equity:                                                                                                           |   |                       |       |                          |       |
| Undesignated capital stock, 10,000,000 shares authorized                                                                             |   | —                     |       | —                        |       |
| Common stock, $0.01 par value, 75,000,000 shares authorized,  27,030,780 and 26,792,565 shares issued and  outstanding, respectively |   | 270                        |       | 268                           |       |
| Additional paid-in capital                                                                                                           |   | 92,390                     |       | 91,071                        |       |
| Retained earnings                                                                                                                    |   | 59,396                     |       | 56,046                        |       |
| Accumulated other comprehensive loss                                                                                                 |   | (152                       | )          | (41                           | )          |
| Total stockholders’ equity                                                                                                      |   | 151,904                    |       | 147,344                       |       |
| Total liabilities and stockholders’ equity                                                                                      |   | $                          | 193,426    |                          | $          | 192,291 |   |

 

See notes to consolidatedfinancial statements.

 

3

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**PEC SOLUTIONS, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
|                                                            |   | **Three Months Ended** |   |
|-----------------------------------------------------------------|--------|------------------------|--------|
|                                                            |   | **March 31,  2003**    |   | **March 31,  2002** |   |
|                                                            |   | **(Unaudited)**        |   |
| Revenues                                                        |   | $                      | 43,466 |   | $ | 38,231 |   |
| Operating costs and expenses:                                   |   |                   |   |   |   |
| Direct costs                                                    |   | 26,971                 |   | 22,918 |   |
| General and administrative expenses                             |   | 9,159                  |   | 7,431 |   |
| Sales and marketing expenses                                    |   | 1,447                  |   | 1,579 |   |
| Amortization of intangibles                                     |   | 213                    |   | 168 |   |
| Total operating costs and expenses                              |   | 37,790                 |   | 32,096 |   |
| Operating income                                                |   | 5,676                  |   | 6,135 |   |
| Other income (loss), net                                        |   | (23                    | )      | 503 |   |
| Income before income taxes                                      |   | 5,653                  |   | 6,638 |   |
| Provision for income taxes                                      |   | 2,162                  |   | 2,592 |   |
| Net income                                                      |   | $                      | 3,491  |   | $ | 4,046 |   |
| Earnings per share:                                             |   |                   |   |   |   |
| Basic                                                           |   | $                      | 0.13   |   | $ | 0.15 |   |
| Diluted                                                         |   | $                      | 0.12   |   | $ | 0.14 |   |
| Weighted average shares used  in  computing earnings per share: |   |                   |   |   |   |
| Basic                                                           |   | 26,935                 |   | 26,166 |   |
| Diluted                                                         |   | 29,925                 |   | 29,879 |   |

 

See notes to consolidatedfinancial statements.

 

4

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**PEC SOLUTIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOW****S**

**(DOLLARS IN THOUSANDS)**

 
|                                                                                               |   | **Three Months Ending** |    |
|----------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                               |   | **March 31,  2003**     |    | **March 31,****2002** |   |
|                                                                                               |   | **(Unaudited)**         |    |
| Cash  flows from operating activities:                                                             |   |                    |    |   |   |
| Net income                                                                                         |   | $                       | 3,491   |   | $ | 4,046 |   |
| Adjustments to reconcile net income to  net cash provided by operating activities:                 |   |                    |    |   |   |
| Depreciation and amortization                                                                      |   | 665                     |    | 299 |   |
| Amortization of intangibles                                                                        |   | 213                     |    | 168 |   |
| Amortization of bond premium and discounts, net                                                    |   | (79                     | )       | (69 | ) |
| Deferred rent                                                                                      |   | 118                     |    | 97 |   |
| Deferred income taxes                                                                              |   | (172                    | )       | (105 | ) |
| (Gain) loss from investment in building                                                            |   | (237                    | )  | 29 |   |
| Non-cash charge related to building                                                                |   | 64                      |    | — |   |
| Changes in operating assets and liabilities:                                                       |   |                    |    |   |   |
| Accounts receivable, net                                                                           |   | 2,962                   |    | (3,089 | ) |
| Other current assets                                                                               |   | 1,313                   |    | 439 |   |
| Other assets                                                                                       |   | (94                     | )       | (211 | ) |
| Accounts payable and accrued expenses                                                              |   | (3,202                  | )  | 1,378 |   |
| Advance payments on contracts                                                                      |   | 696                     |    | (352 | ) |
| Retirement plan contribution payable                                                               |   | 647                     |    | 402 |   |
| Accrued payroll                                                                                    |   | (3,351                  | )       | (3,884 | ) |
| Accrued vacation                                                                                   |   | 636                     |    | 581 |   |
| Other current liabilities                                                                          |   | 842                     |    | 1,524 |   |
| Supplemental retirement program liability                                                          |   | 86                      |    | 3 |   |
| Other long-term liabilities                                                                        |   | —                  |    | (25 | ) |
| Net cash provided by operating activities                                                          |   | 4,598                   |    | 1,231 |   |
| Cash flows from investing activities:                                                              |   |                    |    |   |   |
| Purchases of property and equipment                                                                |   | (420                    | )  | (202 | ) |
| Purchases of short-term investments                                                                |   | (8,035                  | )       | (18,398 | ) |
| Proceeds from sale of short-term investments                                                       |   | 11,414                  |    | 22,981 |   |
| Capitalized software                                                                               |   | —                  |    | (113 | ) |
| Purchase of long-term investments                                                                  |   | (5,000                  | )       | (5.400 | ) |
| Proceeds from sale of long-term investments                                                        |   | 1,271                   |    | 8 |   |
| Distribution from building investment                                                              |   | 310                     |    | — |   |
| Net cash used by investing activities                                                              |   | (460                    | )       | (1,124 | ) |
| Cash flows from financing activities:                                                              |   |                    |    |   |   |
| Proceeds from issuance of common stock                                                             |   | 1,052                   |    | 863 |   |
| Payments on note payable and capital lease obligations                                             |   | —                  |    | (23 | ) |
| Net cash provided by financing activities                                                          |   | 1,115                   |    | 840 |   |
| Net increase in cash                                                                               |   | 5,190                   |    | 947 |   |
| Cash and cash equivalents at beginning of period                                                   |   | 21,176                  |    | 30,436 |   |
| Cash and cash equivalents at end of period                                                         |   | $                       | 26,366  |   | $ | 31,383 |   |
|                                                                                               |   |                    |    |   |   |
| Income taxes paid                                                                                  |   | $                       | 2       |   | $ | 138 |   |
| Interest paid                                                                                      |   | $                       | 660     |   | $ | 1 |   |
| Non-cash transactions:                                                                             |   |                    |    |   |   |
| Common stock repurchased and retired in exchange for shares in cashless  exercise of stock options |   | $                       | 197     |   | $ | 7 |   |

 

See notes to consolidatedfinancial statements.

 

5

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**PEC SOLUTIONS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEME****NTS**

**MARCH 31, 2003**

**(UNAUDITED)**

 

**1. Financial Statements**

 

The accompanying consolidated financial statements,except for the December 31, 2002 balance sheet, are unaudited and have beenprepared in accordance with accounting standards generally accepted in theUnited States for interim financial information and the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally in the United States have beenomitted. In the opinion of management, all adjustments, consisting of normallyrecurring accruals, considered necessary for a fair presentation, have beenincluded. It is suggested that these financial statements be read inconjunction with the Company’s audited financial statements as of December 31,2001 and 2002 and for each of the three years in the period ended December 31,2002 included in the Company’s 2002 Form 10-K/A, as filed with the Securitiesand Exchange Commission. The results of operations for the three months endedMarch 31, 2003, are not necessarily indicative of the operating results to beexpected for the full year.

 

**2. Stock-based Compensation**

 

TheCompany has a Stock Option and Incentive Plan, which is described more fully inNote 8. FAS No. 123, “Accounting for Stock-Based Compensation,” asamended by FAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure, an Amendment of FASB StatementNo. 123,” requires companies to (i) recognize as expense the fairvalue of stock-based awards, or (ii) continue to apply the provisions ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuesto Employees” and related Interpretations (“APB 25”), and provide pro forma netincome and earnings per share disclosures for employee stock option grants asif the fair-value-based method defined in FAS No. 123 had been applied.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123.” SFAS No. 148 provides alternative methods oftransition for a voluntary change to the fair market value based method ofaccounting for stock-based compensation. The Company does not presently expectto make such a voluntary change. In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based employee compensation and the effect of the method used onreported results. These amended disclosure requirements are applicable forfinancial statements issued for interim periods beginning afterDecember 15, 2002.

 

The Company uses theBlack-Scholes option-pricing model to determine the pro forma impact under SFASNo. 123 to the Company’s net income and earnings per share. The modelutilizes certain information, such as the interest rate on a risk-free securitymaturing generally at the same time as the option being valued, and requirescertain assumptions, such as the expected amount of time an option will beoutstanding until it is exercised or it expires, to calculate the fair value ofstock options granted.

 

Thisinformation and the assumptions used for March 31, 2003 and 2002 for theCompany’s stock option plan are summarized as follows:

 

|                                                |   | **Stock Option Plan** |   |
|-----------------------------------------------------|--------|-----------------------|--------|
|                                                |   | **March 31,**         |   |
|                                                |   | **2003**              |   | **2002** |   |
| Volatility                                          |   | 47.94                 | %      | 56.63 | % |
| Risk-free interest rate                             |   | 3.83                  | %      | 5.42 | % |
| Dividend yield                                      |   | 0                     | %      | 0 | % |
| Expected lives                                      |   | 10 years              |   | 10 years |   |
| Weighted average fair value per share at grant date |   | $                     | 19.01  |   | $ | 27.21 |   |
|                                                     |        |                       |        |  |  |  |  |

 

The Company continues to apply the provisions of APB25 and provide the pro forma disclosures in accordance with the provisions ofFAS Nos. 123 and 148. Under APB 25, the Company has not recorded in net incomeany stock-based employee compensation cost associated with the Company’s stockoption plan, as all options granted under the plan had an exercise price equalto the market value of the underlying common stock on the date of grant.

 

Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFASNo. 123 to its stock option plan:

 

6

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|                                       |   | **Quarter Ended March 31,** |       |
|--------------------------------------------|--------|-----------------------------|------------|
|                                       |   | **2003**                    |       | **2002** |   |
|                                       |   | **(dollars  in thousands)** | ** ** |
| Net income, as reported                    |   | $                           | 3,491      |   | $ | 4,046 |   |
| Pro forma compensation expense, net of tax |   | (1,351                      | )          | (750 | ) |
| Pro forma net income                       |   | $                           | 2,140      |   | $ | 3,296 |   |
|                                       |   |                        |       |   |   |
| Net income (loss) per share:               |   |                        |       |   |   |
| Basic—as reported                     |   | $                           | 0.13       |   | $ | 0.15 |   |
| Basic—pro forma                       |   | $                           | 0.08       |   | $ | 0.13 |   |
| Diluted—as reported                   |   | $                           | 0.12       |   | $ | 0.14 |   |
| Diluted—pro forma                     |   | $                           | 0.07       |   | $ | 0.11 |   |

** **

**3. Accounts Receivable**

 

Accounts receivableconsist of the following as of:

 
|                                                     |   | **March 31,  2003**        |   | **December 31,  2002** |   |
|----------------------------------------------------------|--------|----------------------------|--------|------------------------|--------|
|                                                     |   | **(Dollars in thousands)** |   |
| Billed accounts receivable                               |   | $                          | 42,163 |                   | $      | 45,411 |   |
| Unbilled accounts receivable:                            |   |                       |   |                   |   |
| Amounts currently billable                               |   | 5,872                      |   | 5,856                  |   |
| Revenues recorded in excess of contract value or funding |   | 4,064                      |   | 3,099                  |   |
| Progress payments                                        |   | (1,766                     | )      | (1,070                 | )      |
|                                                     |   | 50,333                     |   | 53,296                 |   |
| Allowance for doubtful accounts                          |   | (322                       | )      | (322                   | )      |
| Accounts receivable, net                                 |   | $                          | 50,011 |                   | $      | 52,974 |   |

 

Unbilled accounts receivable comprise recognizedrecoverable costs and accrued profits on contracts for which billings had notbeen presented to clients as of the balance sheet date. Revenues recorded inexcess of contract value or funding are billable upon receipt of contractualamendments.  Management anticipates thecollection of these amounts within 90 days of the balance sheet date. Paymentsto the Company on contracts with agencies and departments of the U.S.Government are subject to adjustment upon audit by the U.S. Government. Allyears subsequent to 1998 are subject to U.S. Government audit. Managementbelieves the effect of audit adjustments, if any, on periods not yet audited,will not have a material effect on the financial statements.

 

During the quarter ended March 31, 2003, the Companyhad two customers that each accounted for more that 10% of revenue.  For the quarter EDS (Navy Marine CorpsIntranet) accounted for 13%, or $5.7 million, and from the Special ProjectDivision of the Drug Enforcement Agency accounted for 11%, or $4.7million.  At March 31, 2003, there was$5.0 million due from EDS and $3.7 million due from the Special ProjectDivision of the Drug Enforcement Agency. At March 31, 2003 there was $6.3 million due from a subcontract for theCompany’s biometric identification system. As discussed in the Company’s 2002 10-K/A filing, the prime contractorhas indicated that they would like to reduce the amount due by $3.7 million,but the Company believes there is no basis for a reduction and expects toreceive full payment.  During thequarter ended March 31, 2002, the Company had two customers that each accountedfor more than 10% of revenue.  For thequarter EDS (Navy Marine Corps Intranet) accounted for 20%, or $7.6 million,and from the Special Project Division of the Drug Enforcement Agency accountedfor 11%, or $4.0 million.  At March 31,2002 there was $6.2 million due from EDS and $2.7 million due form the SpecialProject Division of the Drug Enforcement Agency.

 

**4. Net Income Per Share**

 

Basic and diluted earnings per share for the threemonths ended March 31, 2003 and 2002 were determined as follows:

 
|                       |          | **Three Months Ended March 31, 2003**                    |          | **Three Months Ended March 31, 2002** |       |
|----------------------------|---------------|----------------------------------------------------------|---------------|---------------------------------------|------------|
|                       |          | **(Dollars in thousands, except for per share amounts)** |          |
|                       |          | **Net****Income**                                        |          |                                  |       |   |   | **Net  Income** |   |   |   |   |   |
| **Shares**                 | **Per Share** | **Shares**                                               | **Per Share** |
| Basic EPS                  |          | $                                                        | 3,491         |                                  | 26,934,667 |   | $ | 0.13 |   | $ | 4,046 |   | 26,166,351 |   | $ | 0.15 |   |
| Effect of dilutive options |          | —                                                   |          | 2,990,474                             |       | (0.01 | ) | — |   | 3,712,736 |   | (0.01 | ) |
| Diluted EPS                |          | $                                                        | 3,491         |                                  | 29,925,141 |   | $ | 0.12 |   | $ | 4,046 |   | 29,879,087 |   | $ | 0.14 |   |

 

7

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**5.  Goodwill and Intangible Assets**

 

The Company has recognized goodwill related to itsacquisitions of Viking Technology, Inc. (Viking), Troy Systems, Inc. (Troy) andVector Research, Inc. (Vector).  The Company only has one reporting unit.  Nonamortized intangible assets consist onlyof goodwill of $16.9 million.  TheCompany’s amortizable intangible assets include customer contracts and relatedrelationships purchased in the acquisitions of Troy on November 20, 2001 andVector on June 14, 2002.  Theintangibles related to the Troy acquisition totaled $3.0 million and areamortized on a straight-line basis over a 4.5-year period.  The intangibles on the Vector purchasetotaled $1.5 million and are being amortized on a straight-line basis over an8.4-year period.   Total accumulatedamortization as of March 31, 2003 was $1.0 million.  There have been no changes in the carrying amount of goodwill forthe quarter ended March 31, 2003.  Inaccordance with the provisions of SFAS No. 142, the Company performed theappropriate transitional impairment tests related to its stated goodwill anddetermined that there is no transitional impairment loss.  Also in accordance with the provisions ofSFAS No. 142, the Company reassessed the useful lives of all intangible assetsand determined that no adjustments were necessary.

 

Amortization expense for the three months ended March31, 2003 and 2002 was $213,000 and $168,000, respectively.  Estimated amortization expense for each ofthe five succeeding calendar years based on the intangible assets as of March31, 2003 is as follows:

 

| **Year ending December 31,** |   | **Amount**                  |   |
|------------------------------|--------|-----------------------------|--------|
|                         |   | **(dollars  in thousands)** |   |
| 2003                         |   | $                           | 638    |   |
| 2004                         |   | 851                         |   |
| 2005                         |   | 851                         |   |
| 2006                         |   | 851                         |   |
| 2007                         |   | 179                         |   |
|                              |        |                             |        |  |

 

**6. Investments**

 

The Company has an ownership interest in anunconsolidated and affiliated company that owns an office building that theCompany leases.  For the three monthsended March 31, 2003, the Company recorded income of $237,000 and received  cash distributions of $310,000 from the investment.  For the three months ended March 31, 2002,the Company recorded a loss of $29,000 and there were no cash distributions.

 

**7. Other Comprehensive Loss**

 

Other comprehensive loss, consisting of unrealizedgains (losses) on securities was $(111,000) for the three months ended March31, 2003 and $(164,000) for the three months ended March 31, 2002.

 

**8.  Contingencies**

 

On or after March 18, 2003, several purported classaction complaints were filed against us and certain of our officers in theUnited States District Court for the Eastern District of Virginia.  The complaints allege that between October22, 2002 and March 14, 2003, the defendants made, or were aware of false andmisleading statements which had the effect of inflating the market price of ourstock, in violation of Sections 10(b) and 20(a) of the Securities Exchange Actof 1934.  The complaints do not specifythe amount of damages sought.  Webelieve that the plaintiffs’ claims are without merit, and we intend to defendthe cases vigorously.  In addition, astockholder’s legal counsel sent a letter of demand that the Board investigatethe same charges addressed in the class action suites.

 

**9. Recent Pronouncements**

 

InNovember 2002, the FASB’s Emerging Issues Task Force, or EITF, finalizedEITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21addresses how to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting. It also addresses howarrangement consideration should be measured and allocated to the separateunits of accounting in an arrangement. EITF 00-21 does not apply todeliverables in arrangements to the extent the accounting for such deliverablesare within the scope of other existing higher-level authoritative accountingliterature. The Company must adopt the provisions of EITF 00-21 for newcontracts entered into on or after July 1, 2003. The Company has alreadyadopted the provisions of EITF 00-21 and the adoption has not had a material impacton the Company’s financial position, results of operations, or cash flows.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123.” SFAS No. 148 provides alternative methods oftransition for a voluntary change to

 

8

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the fair market value basedmethod of accounting for stock-based compensation. The Company does notpresently expect to make such a voluntary change. In addition, SFASNo. 148 amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results and have been reflected in Note 2, StockBased Compensation. These amended disclosure requirements are applicable forfinancial statements issued for interim periods beginning afterDecember 15, 2002.

 

InNovember 2002, FASB Interpretation No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, an Interpretation of FASB Statements No. 5, 57,and 107 and Rescission of FASB Interpretation No. 34,” (“FIN 45”) wasissued. FIN 45clarifies the requirements of SFAS No. 5, “Accounting forContingencies,” relating to guarantors’ accounting for, and disclosure of, theissuance of certain types of guarantees. The disclosure provisions of FIN 45are applicable to interim or annual periods that end after December 15,2002, and did not have an impact on the March 31, 2003 financialstatements. The provisions for initial recognition and measurement under FIN 45are effective on a prospective basis for guarantees that are issued or modifiedafter December 31, 2002. The initial recognition and measurementprovisions under FIN 45 did not have any impact on the Company’s financialstatements.

 

On January 17, 2003, theFinancial Accounting Standards Board (FASB or the “Board”) issued FASBInterpretation No. 46, (FIN 46), “Consolidation of Variable InterestEntities”*.* The provisions will bethe guidance that determines (1) whether consolidation is required underthe “controlling financial interest” model of Accounting Research BulletinNo. 51 (ARB 51), “Consolidated Financial Statements” 51 (or other existingauthoritative guidance) or, alternatively, (2) whether the variableinterest model under FIN 46 should be used to account for existing and newentities. At this time, the Company does not have any entities that would becovered under FIN 46.

 

** **

**ITEM2.          MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF****OPERATIONS**

 

**Overview**

 

PEC Solutions is a professional services firmspecializing in high-end solutions that help government organizationscapitalize on the Internet and other advanced technologies. We migratepaper-intensive procedures to web-enabled processes using eGovernment solutionsthat help our clients enhance their productivity and improve the services theyoffer to the public. As a total solutions provider, we address the fulltechnology lifecycle, including formulating technology strategies, creatingbusiness solutions, performing long-term operational management and continuingenhancement of the solution.

 

We derive substantially all of our revenues from feesfor consulting services. We generate these fees from contracts with variouspayment arrangements, including time and materials contracts, fixed-pricecontracts and cost-reimbursable contracts. During the three months ended March31, 2003, revenues from these contract types were approximately 57%, 23% and20%, respectively, of total revenues. During the three months ended March 31,2002, revenues from these contract types were approximately 59%, 20% and 21%,respectively, of total revenues. We typically issue invoices monthly to manageoutstanding accounts receivable balances. We recognize revenues on time andmaterials contracts as the services are provided. We recognize revenues onfixed-price contracts using the percentage of completion method as services areperformed over the life of the contract, based on the costs we incur inrelation to the total estimated costs. We recognize and make provisions for anyanticipated contract losses.  Fixed-pricecontracts are attractive to clients and, while subject to increased risks,provide opportunities for increased margins. We recognize revenues oncost-reimbursable contracts as services are provided. These revenues are equalto the costs incurred in providing these services plus a proportionate amountof the fee earned. We have historically recovered all of our costs oncost-reimbursable contracts, which means we have lower risk and our margins arelower on these contracts.

 

Our historical revenue growth is attributable tovarious factors, including an increase in the size and number of projects forexisting and new clients. Existing clients from the previous year generatedapproximately 95% of our revenues in the three months ended March 31 2003. Asof March 31, 2003, we had 1,315 personnel.

 

In the three months ended March 31, 2003, we derivedapproximately 27% of our revenues through relationships with prime contractors,which contract directly with the end-client and subcontract with us. In most ofthese engagements, with the exception of the EDS (NMCI) subcontract, we retainfull responsibility for the end-client relationship and direct and manage theactivities of our contract staff.

 

Our most significant expense is direct costs, whichconsist primarily of project personnel salaries and benefits, and directexpenses incurred to complete projects. Our direct costs as a percentage ofrevenues are also related to the utilization rate of our consulting personnel.We manage utilization by frequently monitoring project requirements andtimetables. The number of consulting personnel assigned to a project will varyaccording to the size, complexity, duration and demands of the project.

 

9

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General and administrative expenses consist primarilyof costs associated with our executive management, finance and administrativegroups, human resources, unassigned consulting personnel, personnel training,occupancy costs, depreciation and amortization, travel and all other branch andcorporate costs.

 

Sales and marketing expenses include the costs ofsales and marketing personnel and costs associated with marketing and biddingon future projects.

 

Other income (loss) consists primarily of interestincome earned on our cash, cash equivalents and marketable securities, andincome from our investment in the limited liability corporation that owns thecorporate headquarters office building and the interest expense associated withthat building.

 

**Results of Operations**

 

The following table sets forth certain financial dataand such data as a percentage of revenues for the periods indicated.

 
|                                     |   | **Three Months Ended**     |   |
|------------------------------------------|--------|----------------------------|--------|
|                                     |   | **March 31,  2002**        |   | **March 31,  2002** |   |
|                                     |   | **(Dollars in thousands)** |   |
| Statement of Income:                     |   |                       |   |   |   |
| Revenues                                 |   | $                          | 43,466 |   | $ | 38,231 |   |
| Direct costs                             |   | 26,971                     |   | 22,918 |   |
| Gross profit (a)                         |   | 16,495                     |   | 15,313 |   |
| Other operating costs and expenses:      |   |                       |   |   |   |
| General and administrative expenses      |   | 9,159                      |   | 7,431 |   |
| Sales and marketing expenses             |   | 1,447                      |   | 1,579 |   |
| Goodwill and intangible amortization     |   | 213                        |   | 168 |   |
| Total other operating costs and expenses |   | 10,819                     |   | 9,178 |   |
| Operating income                         |   | 5,676                      |   | 6,135 |   |
| Other income (loss), net                 |   | (23                        | )      | 503 |   |
| Income before income taxes               |   | 5,653                      |   | 6,638 |   |
| Provision for income taxes               |   | 2,162                      |   | 2,592 |   |
| Net income                               |   | $                          | 3,491  |   | $ | 4,046 |   |
|                                     |   |                       |   |   |   |
| As a Percentage of Revenues:             |   |                       |   |   |   |
|                                     |   |                       |   |   |   |
| Revenues                                 |   | 100.0                      | %      | 100.0 | % |
| Direct costs                             |   | 62.0                       |   | 60.0 |   |
| Gross profit (a)                         |   | 38.0                       |   | 40.0 |   |
| Other operating costs and expenses:      |   |                       |   |   |   |
| General and administrative expenses      |   | 21.1                       |   | 19.4 |   |
| Sales and marketing expenses             |   | 3.3                        |   | 4.1 |   |
| Amortization of goodwill                 |   | 0.5                        |   | 0.4 |   |
| Total other operating costs and expenses |   | 24.9                       |   | 23.9 |   |
| Operating income                         |   | 13.1                       |   | 16.1 |   |
| Other income, net                        |   | (0.1                       | )      | 1.3 |   |
| Income before income taxes               |   | 13.0                       |   | 17.4 |   |
| Provision for income taxes               |   | 5.0                        |   | 6.8 |   |
| Net income                               |   | 8.0                        | %      | 10.6 | % |

 

----

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

 

**Resultsof Operations for The Three Months Ended March 31, 2003 Compared with The ThreeMonths Ended March 31, 2002**

 

*Revenues*.  Our total revenues increased by 13.7%, or$5.2 million*,*for the three months ended March 31, 2003, over the same period lastyear. The increase in revenues primarily reflects an increase in the volume ofservices to existing clients and services to 

 

10

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new clients, which represents approximately 5% of revenues.

 

*DirectCosts.* Our direct costs increased by 17.7%, or 4.1 million,for the three months ended March 31, 2003, over the same period last year.  Direct costs increased as a percentage ofrevenues for the period ended March 31, 2003, to 62.0% as compared to 60.0% inthe same period last year.  Thisincrease was attributable primarily to the delays related to the passage andsigning of the Federal civilian budgets and the associated lack of new projectstartups during the quarter.  Newproject startups normally allow for the recovery of increases in labor costs,which for us go into effect January 1st of each year.

 

*GrossProfit*. Gross profit increased by 7.7% to $16.5 million inthe three months ended March 31, 2003 from $15.3 million in the three monthsended March 31, 2002. Gross profit as a percentage of revenues decreased to38.0% in the three months ended March 31, 2003 from 40.0% in the three monthsended March 31, 2002, as direct costs increased at a faster rate thanrevenues.  As previously indicatedrevenues were impacted by the late passage and signing of the Federal civilianbudgets.

 

*Generaland Administrative Expenses*. General and administrativeexpenses increased 23.3% to $9.2 million in the three months ended March 31,2003 from $7.4 million in the three months ended March 31, 2002. Facility costsincreased in the current quarter over last year due to the opening of our newheadquarters office in Fairfax, VA and an office in Washington, DC.  Our total general and administrativeheadcount decreased to 123 employees as of March 31, 2003 compared to 139employees as of March 31, 2002.

 

*Salesand Marketing*. Sales and marketing expenses decreased 8.4% to$1.4 million in the three months ended March 31, 2003, from $1.6 million in thethree months ended March 31, 2002. This decrease was due to a decrease in ourmarketing and proposal efforts during the quarter related to the delay in thepassage of the Federal civilian budgets in 2003.

 

*Amortizationof Intangibles*.  Forthe three months ended March 31, 2003, we incurred $213,000 of amortizationexpense related to the $4.5 million of intangibles we recorded in connectionwith the value of contracts and customer relationships acquired in the November2001 acquisition of Troy, and the June 2002 acquisition of Vector.   For the three months ended March 31, 2002,we incurred $168,000 of amortization expense related to the $3.0 million ofintangibles we recorded in connection with the value of contracts and customerrelationships acquired in the November 2001 acquisition of Troy.

 

*OperatingIncome*. Operating income decreased 7.5% to $5.7 million inthe three months ended March 31, 2003 from $6.1 million in the three monthsended March 31, 2002, due to the factors discussed above.

 

*Otherincome (loss).*  Otherincome (loss) decreased to a loss ($23,000) in the three months ended March 31,2003 from income of $503,000 in the three months ended March 31, 2002.  The decrease was principally related to the$660,000 interest expense created by the accounting treatment of the monthlylease payments on our headquarters building.

 

Our revenues and operating results may be subject tosignificant variation from quarter to quarter depending on a number of factors,including the progress of contracts, revenues earned on contracts, the numberof billable days in a quarter, the timing of the pass-through of other directcosts, the commencement and completion of contracts during any particularquarter, the schedule of the government agencies for awarding contracts, theterm of each contract that we have been awarded and general economicconditions. Because a significant portion of our expenses, such as personneland facilities costs, are fixed in the short term, successful contractperformance and variation in the volume of activity as well as in the number ofcontracts commenced or completed during any quarter may cause significantvariations in operating results from quarter to quarter.

 

The federal government’s fiscal year ends September30. 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 abudget has been approved. Such suspensions may cause us to realize lowerrevenues in the fourth quarter of the year. Further, a change in presidentialadministrations and in senior government officials may negatively affect therate at which the federal government purchases technology, although we have notseen a negative impact with the current change in administration.

 

As a result of the factors above, period–to-periodcomparisons of our revenues and operating results may not be meaningful. Youshould not rely on these comparisons as indicators of future performance as noassurances can be given that quarterly results will not fluctuate, causing amaterial adverse effect on our operating results and financial condition.

 

**Liquidity and Capital Resources**

 

Net cash provided by operating activities was $4.6million for the three months ended March 31, 2003. Cash provided by operatingactivities was primarily from net income, adjusted for working capital changes,principally a decrease in accounts receivable and a decreases in accountspayable, accrued expenses and accrued payroll.

 

Net cash used by investing activities was $0.5 millionfor the three months ended March 31, 2003. During the three months ended March31, 2003, we purchased $0.4 million of property and equipment and $3.7 millionof net long-term investments, while

 

11

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selling $3.4 million of net short-term investments and receiving $0.3million of distributions from the investment in our building joint venture.

 

Net cash provided by financing activities was $1.1million principally from the sale of common stock to employees upon theexercise of their stock options and purchase of stock through the employeestock purchase plan for the three months ended March 31, 2003.

 

We expect to retain future earnings, if any, for usein the operation and expansion of our business and do not anticipate paying anycash dividends in the foreseeable future.

 

We believe that our current cash position is adequatefor our short-term and long-term working capital and capital expenditure needs.

 

We maintain a $6.0 million line of credit with Bank ofAmerica, bearing interest at the one-month LIBOR rate plus 250 basis points perannum and expiring on June 30, 2003.  Weare in the process of renewing this line of credit.  As of March 31, 2003, we had no borrowings outstanding under theline of credit. We have $2.98 million outstanding in letters of credit in lieuof rent deposits.

 

Under some of our fixed-price contracts, we receiveadvance payments for work to be performed in future months. If we do notperform the work, the unearned portion of these advances will be returned toour clients. At March 31, 2003, our accounts receivable turnover rate, net ofadvance payments on contracts, was approximately four times a year.

 

**Recent Accounting Pronouncements**

 

InNovember 2002, the FASB’s Emerging Issues Task Force, or EITF, finalizedEITF Issue 00-21. “Revenue Arrangements with Multiple Deliverables.” EITF 00-21addresses how to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting. It also addresses howarrangement consideration should be measured and allocated to the separateunits of accounting in an arrangement. EITF 00-21 does not apply todeliverables in arrangements to the extent the accounting for such deliverablesare within the scope of other existing higher-level authoritative accountingliterature.  We must adopt theprovisions of EITF 00-21 for new contracts entered into on or afterJuly 1, 2003. We have already adopted the provisions of EITF 00-21 and theadoption has not had a material impact on our financial position, results ofoperations, or cash flows.

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure, an amendment of FASB Statement No. 123.” SFAS No. 148provides alternative methods of transition for a voluntary change to the fairmarket value based method of accounting for stock-based compensation. We do notpresently expect to make such a voluntary change. In addition, SFASNo. 148 amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. These amended disclosure requirements areapplicable for financial statements issued for interim periods beginning afterDecember 15, 2002, and reflected in the notes to the financial statements.

 

InNovember 2002, FASB Interpretation No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, an Interpretation of FASB Statements No. 5, 57,and 107 and Rescission of FASB Interpretation No. 34,” (“FIN 45”) wasissued. FIN 45 clarifies the requirements of SFAS No. 5, “Accounting forContingencies,” relating to guarantors’ accounting for, and disclosure of, theissuance of certain types of guarantees. The disclosure provisions of FIN 45are applicable to interim or annual periods that end after December 15,2002, and did not have an impact on the March 31, 2003 financial statements.The provisions for initial recognition and measurement under FIN 45 areeffective on a prospective basis for guarantees that are issued or modifiedafter December 31, 2002.  Theinitial recognition and measurement provisions under FIN 45 did not haveany  impact on our financial statements.

 

On January 17, 2003, theFinancial Accounting Standards Board (FASB or the “Board”) issued FASBInterpretation No. 46, (FIN 46), *Consolidationof Variable Interest Entities.* The provisions will be the guidancethat determines (1) whether consolidation is required under the“controlling financial interest” model of Accounting Research BulletinNo. 51 (ARB 51), *Consolidated FinancialStatements* 51 (or other existing authoritative guidance) or,alternatively, (2) whether the variable interest model under FIN 46 shouldbe used to account for existing and new entities. At this time, we do not haveany entities that would be covered under FIN 46.

 

**SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS**

 

The matters discussed in this Form 10-Q includeforward-looking statements that involve risks or uncertainties. Whileforward-looking statements are sometimes presented with numerical specificity,they are based on various assumptions made by management regarding futurecircumstances over many of which we have little or no control. Forward-lookingstatements may be identified by words including “anticipate,” “believe,”“estimate,” “expect” and similar expressions. We caution readers that forward-

 

12

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looking statements, including without limitation, those relating to ourfuture business prospects, revenues, working capital, liquidity, and income,are subject to certain risks and uncertainties that would cause actual resultsto differ materially from those indicated in the Forward-Looking Statements.Factors that could cause actual results to differ from Forward-LookingStatements include the concentration of our revenues from government clients,risks involved in contracting with the government, difficulties we may have inattracting, retaining and managing professional and administrative staff,fluctuations in quarterly results, risks related to acquisitions, risks relatedto competition and our ability to continue to win and perform efficiently oncontracts, and other risks and factors identified from time to time in ourreports filed with the SEC, including those identified under the sectionentitled “Risk Factors” in our Annual Report on Form 10-K/A (SEC File No.000-30271) which hereby is incorporated by reference. Should one or more ofthese risks or uncertainties materialize, or should underlying assumptionsprove incorrect, actual results may vary materially from those anticipated,estimated or projected.

 

 

**ITEM3.          QUALITATIVE AND QUANTITATIVEDISCLOSURE ABOUT MARKET RISK**

 

We invest our cash in a variety of financialinstruments, including U.S. Treasury and Agency obligations, money marketinstruments of domestic and foreign issuers denominated in U.S. dollarsconsisting of commercial paper, bankers’ acceptances, certificates of deposit,euro-dollar time deposits and variable rate issues, corporate notes and bonds,asset-backed securities, repurchase agreements, municipal notes and bonds andauction rate preferred securities.

 

Investments in both fixed and floating rate interestearning instruments carry a degree of interest rate risk. Fixed securities mayhave their fair market value adversely impacted because of a rise in interestrates, while floating rate securities may produce less income than expected ifinterest rates fall. Due in part to these factors, our future investment incomemay fall short of expectations because of changes in interest rates or we maysuffer losses in principal if we are forced to sell securities which have seena decline in market value because of changes in interest rates.  A 10% change in interest rates could haveapproximately a $150,000 impact on our interest income.

 

Our investments are made in accordance with aninvestment policy approved our Board of Directors. Under this policy, noinvestment securities can have maturities exceeding two years and the averageduration of the portfolio cannot exceed twelve months.

 

## **ITEM  4. Controls and Procedures**

 

Our management, under the supervision and with theparticipation of David C. Karlgaard, our Chief Executive Officer, and Stuart R.Lloyd, our Chief Financial Officer, performed an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures within 90 days before the filing date of this quarterly report.  Based on that evaluation, Messrs. Karlgaardand Lloyd concluded that our disclosure controls and procedures wereeffective.  There have been nosignificant changes in our internal controls or in other factors that could significantlyaffect internal controls subsequent to their evaluation.

 

13

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**PARTII — OTHER INFORMATION**

 

**ITEM1.          LEGAL PROCEEDINGS**

 

On or after March 18, 2003, several purported classaction complaints were filed against us and certain of our officers in theUnited States District Court for the Eastern District of Virginia.  The complaints allege that between October22, 2002 and March 14, 2003, the defendants made, or were aware of false andmisleading statements which had the effect of inflating the market price of ourstock, in violation of Sections 10(b) and 20(a) of the Securities Exchange Actof 1934.  The complaints do not specifythe amount of damages sought.  Webelieve that the plaintiffs’ claims are without merit, and we intend to defendthe cases vigorously.  In addition, astockholder’s legal counsel sent a letter of demand that the Board investigatethe same charges addressed in the class actions suits.

 

**ITEM2.          CHANGES IN SECURITIES AND USEOF PROCEEDS**

 

In April 2000, we commenced and completed a firmcommitment underwritten initial public offering of 3,000,000 shares of ourcommon stock at a price of $9.50 per share. The shares were registered with theSecurities and Exchange Commission pursuant to a registration statement on FormS-1 (No. 333-95331), which was declared effective on April 19, 2000. The publicoffering was underwritten by a syndicate of underwriters led by Donaldson,Lufkin & Jenrette Securities Corporation; Chase Securities Inc.; Legg MasonWood Walker, Incorporated; and DLJDIRECT Inc. as their representatives. Afterdeducting underwriting discounts and commissions of approximately $2 millionand expenses of approximately $0.9 million, we received net proceeds of $25.6million.

 

The primary purposes of this offering were to create apublic market for our common stock, to improve the incentive mechanism for ourprofessionals through stock options, to obtain additional equity capital and tofacilitate future access to public markets. We have used the net proceeds fromthis offering for general corporate purposes, including working capital. Wehave also used a portion of the net proceeds to acquire two businesses that arecomplementary to ours, and may use the remaining proceeds for this purpose.

 

On August 28, 2000, we acquired all of the outstandingcapital stock of Viking for $2 million cash plus the assumption of debt in abusiness combination accounted for as a purchase. Viking was a provider ofintegrated software and advanced technology solutions for state and local lawenforcement, fire and emergency medical service agencies. On November 20, 2001,we acquired all of the outstanding capital stock of Troy for $15.3 million cashplus common stock valued at $3.0 million (103,065 shares).  Troy derived revenue from systemdevelopment, networking, engineering, integration services, and informationsystems security and its primary customer is the Federal government.  On June 14, 2002, we acquired the assets ofVector, which consisted of their contracts with Federal government agencies,for $5.7 million cash.  Vector providedtechnology development and engineering services to the Federal government.

 

Management will have broad discretion in theallocation of the remaining net proceeds from the sale of stock.  We have no current plans, agreements orcommitments for, and are not currently engaged in any negotiations with respectto, any such transaction. Pending their use, the proceeds of this offering havebeen invested in short-term, investment grade, interest-bearing securities.

 

**ITEM3.          DEFAULTS UPON SENIORSECURITIES**

 

None

 

**ITEM4.          SUBMISSION OF MATTERS TO VOTEOF SECURITY HOLDERS**

 

None

 

**ITEM5.          OTHER INFORMATION**

 

None

 

14

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**ITEM 6           (A)EXHIBIT**

 
| **Number** |   | **Exhibit Description**                                                                                |
|------------|--------|--------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                   |
| 3.1*       |   | Certificate of Incorporation                                                                           |
|       |   |                                                                                                   |
| 3.2*       |   | By-Laws                                                                                                |
|       |   |                                                                                                   |
| 10.1*      |   | Office Lease Agreement between  Building IV Associates L.P. and the Registrant                         |
|       |   |                                                                                                   |
| 10.2*      |   | Amendment No. 1 to Office  Lease Agreement between Building IV Associates L.P. and the Registrant      |
|       |   |                                                                                                   |
| 10.3*      |   | Office Lease Agreement between  Building V Associates L.P. and the Registrant                          |
|       |   |                                                                                                   |
| 10.4*      |   | Employment Agreement between  the Registrant and David C. Karlgaard, dated January 1, 2000             |
|       |   |                                                                                                   |
| 10.5*      |   | Employment Agreement between  the Registrant and Paul G. Rice, dated January 1, 2000                   |
|       |   |                                                                                                   |
| 10.6*      |   | Employment Agreement between  the Registrant and Alan H. Harbitter, dated January 1, 2000              |
|       |   |                                                                                                   |
| 10.7*      |   | Employment Agreement between  the Registrant and Stuart R. Lloyd, dated December 31, 1998              |
|       |   |                                                                                                   |
| 10.8*      |   | 2000 Stock Incentive Plan                                                                              |
|       |   |                                                                                                   |
| 10.9*      |   | 1995 Nonqualified Stock Option                                                                         |
|       |   |                                                                                                   |
| 10.10*     |   | 1987 Stock Option Agreement,  as amended                                                               |
|       |   |                                                                                                   |
| 10.11*     |   | Nonqualified Executive  Supplemental Retirement Program Agreement dated December 1998                  |
|       |   |                                                                                                   |
| 10.12*     |   | 2000 Employee Stock Option  Plan                                                                       |
|       |   |                                                                                                   |
| 10.13*     |   | Amended and Restated Loan  Agreement between the Registrant and NationsBank, N.A.                      |
|       |   |                                                                                                   |
| 10.14**    |   | Amendment No. 2 to Office  Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc. |
|       |   |                                                                                                   |
| 10.15**    |   | Amendment No. 3 to Office  Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc. |
|       |   |                                                                                                   |
| 10.16**    |   | Office Lease Agreement between  Building VI L.C. and PEC Solutions, Inc.                               |
|       |   |                                                                                                   |
| 10.17***   |   | First Amendment to Lease  Agreement between Building VI L.C. and PEC Solutions, Inc.                   |
|       |   |                                                                                                   |
| 10.18***   |   | Second Amendment to Lease  Agreement between Building VI L.C. and PEC Solutions, Inc.                  |
|       |   |                                                                                                   |
| 10.19***   |   | Operating Agreement between  Building VI Investment L.C. and PEC Solutions, Inc.                       |
|       |   |                                                                                                   |
| 10.20***   |   | First Amendment to Operating  Agreement between Building VI L.C. and PEC Solutions, Inc.               |
|       |   |                                                                                                   |
| 10.21***   |   | Bank of America Promissory  Note                                                                       |
|       |   |                                                                                                   |
| 10.22***   |   | Bank of America Revolving Note                                                                         |
|       |   |                                                                                                   |
| 10.23      |   | Amendment to Bank of America  Promissory Note                                                          |
|       |   |                                                                                                   |
| 10.24      |   | Amendment to Bank of America  Revolving Note                                                           |
|       |   |                                                                                                   |
| 21.1****   |   | Subsidiaries of PEC Solutions,  Inc.                                                                   |
|       |   |                                                                                                   |
| 99.1       |   | Certification of Principal Executive Officer  Pursuant to 18 U.S.C. 1350                               |
|       |   |                                                                                                   |
| 99.2       |   | Certification of Principal Financial Officer  Pursuant to 18 U.S.C. 1350                               |

 

15

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| *      |   | Incorporated herein by reference to the Company’s  Registration Statement on Form S-1, No. 333-95331.    |
|--------|--------|---------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                          |
| **     |   | Incorporated herein by reference to the Company’s  Annual Report on Form 10-K/A filed on April 19, 2001. |
|   |   |                                                                                                          |
| ***    |   | Incorporated herein by reference to the Company’s  Quarterly Report on Form 10-Q for the quarter ended   |
|   |   | June 30, 2001, filed August 13, 2001                                                                          |
|   |   |                                                                                                          |
| ****   |   | Incorporated herein by reference to the Company’s  Annual Report on Form 10-K filed on March 29, 2002.   |

 

16

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(b)   None

 

**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Company has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized.

 
|   |   | **BY:** | **/s/ STUART R.  LLOYD**                                                                                       |
|--------|--------|---------|----------------------------------------------------------------------------------------------------------------|
|   |   |    | **Stuart R.  Lloyd**                                                                                           |
|   |   |    | **Chief  Financial Officer, Senior Vice President and  Director (Principal Financial and Accounting Officer)** |

 

May 14, 2003

 

17

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**Certifications**

 

**I, David C. Karlgaard, certify that:**

 

1.                                       I have reviewed this quarterly report onForm 10-Q of PEC Solutions, Inc.;

 

2.                                       Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.                                       Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial the financial condition, resultsof operations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.                                       The registrant’s other certifying officer and Iare 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 and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)                                     Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior tothe filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      Presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures abased on ourevaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officers and Ihave 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 design oroperation 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, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.                                       The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| May 14, 2003 | 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, certify that:**

 

1.                                       I have reviewed this quarterly report onForm 10-Q of PEC Solutions, Inc.;

 

2.                                       Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.                                       Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial the financial condition, resultsof operations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.                                       The registrant’s other certifying officer and Iare 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 and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b)                                     Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior tothe filing date of this quarterly report (the “Evaluation Date”); and

 

c)      Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures abased on our evaluation as of theEvaluation Date;

 

5.                                       The registrant’s other certifying officers and Ihave 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 design oroperation 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, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.                                       The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| May 14, 2003 | 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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