** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**Form 10-Q**

 
| **(Mark One)**                           |                                                                                          |
|------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                     |                                                                                          |
| **ý**                               | **Quarterly  Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934**  |
|                                     |                                                                                          |
| **For The Quarter Ended March 31, 2004** |
|                                     |
| **Or**                                   |
|                                     |
| **o**                                    | **Transition Report Pursuant to  Section 13 or 15(d) of The Securities Exchange Act of 1934** |
|                                          |                                                                                               |  |

 

**Commission FileNumber 000-30271**

 

**PEC SOLUTIONS, INC.**

(Exact Name of Registrant as Specified in itsCharter)

 
| **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 bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to the filingrequirements for the past 90 days. Yes  ý  No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes ý  No o

 

As of May 10,2004, 27,345,552 of the registrant’s Common Stock, par value $.01 per share,were outstanding.

 

 

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**PEC SOLUTIONS, INC.**

**QUARTERLY REPORT ONFORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2004**

 

**TABLE OF CONTENTS**

 
| Item 1.                    | Financial Statements:                                                                       |   |
|----------------------------|---------------------------------------------------------------------------------------------|--------|
|                       | Balance Sheets — March 31, 2004 and  December 31, 2003                                 |   |
|                       | Statements of Income — Three months ended  March 31, 2004 and 2003                     |   |
|                       | Statements of Cash Flows — Three months  ended March 31, 2004 and 2003                 |   |
|                       | Notes to 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 |                                                                                        |
| Item 1.                    | Legal Proceedings                                                                           |   |
| Items 2-5                  |                                                                                        |
| Item 6.                    | Exhibits and Reports on Form 8-K                                                            |   |
| Signatures                 |                                                                                        |   |

 

2

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**PART I - FINANCIALINFORMATION**

 

**Item 1.            FinancialStatements.**

 

**PEC SOLUTIONS, INC.**

### **BALANCE SHEETS**

(*Dollarsin thousands)*

 
|                                                                                                                                  |   | **As of  March 31,  2004** |    | **As of  December 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|-------------------------------|--------|
|                                                                                                                                  |   | **(Unaudited)**            |    |                          |   |
| **ASSETS**                                                                                                                            |   |                       |    |                          |   |
| Current assets:                                                                                                                       |   |                       |    |                          |   |
| Cash and cash equivalents                                                                                                             |   | $                          | 30,487  |                          | $      | 33,401 |   |
| Short-term investments                                                                                                                |   | 39,292                     |    | 38,274                        |   |
| Accounts receivable, net                                                                                                              |   | 52,125                     |    | 48,356                        |   |
| Other current assets                                                                                                                  |   | 1,994                      |    | 1,745                         |   |
| Total current assets                                                                                                                  |   | 123,898                    |    | 121,776                       |   |
|                                                                                                                                  |   |                       |    |                          |   |
| Property and equipment, net                                                                                                           |   | 26,317                     |    | 26,674                        |   |
| Investments                                                                                                                           |   | 39,681                     |    | 37,587                        |   |
| Goodwill                                                                                                                              |   | 16,932                     |    | 16,932                        |   |
| Intangibles, net                                                                                                                      |   | 2,637                      |    | 2,849                         |   |
| Other assets                                                                                                                          |   | 4,593                      |    | 4,553                         |   |
| Total assets                                                                                                                          |   | $                          | 214,058 |                          | $      | 210,371 |   |
|                                                                                                                                  |   |                       |    |                          |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                         |   |                       |    |                          |   |
|                                                                                                                                  |   |                       |    |                          |   |
| Current liabilities:                                                                                                                  |   |                       |    |                          |   |
| Accounts payable and accrued  expenses                                                                                                |   | $                          | 4,714   |                          | $      | 5,576 |   |
| Advance payments on contracts                                                                                                         |   | 686                        |    | 439                           |   |
| Accrued payroll                                                                                                                       |   | 3,055                      |    | 5,503                         |   |
| Accrued vacation                                                                                                                      |   | 3,407                      |    | 2,839                         |   |
| Other current liabilities                                                                                                             |   | 3,414                      |    | 1,163                         |   |
| Total current liabilities                                                                                                             |   | 15,276                     |    | 15,520                        |   |
| Long-term liabilities:                                                                                                                |   |                       |    |                          |   |
| Supplemental retirement program  liability                                                                                            |   | 1,466                      |    | 1,417                         |   |
| Deferred rent                                                                                                                         |   | 1,884                      |    | 1,790                         |   |
| Long-term lease obligation                                                                                                            |   | 23,111                     |    | 23,062                        |   |
| Total long-term liabilities                                                                                                           |   | 26,461                     |    | 26,269                        |   |
| Total liabilities                                                                                                                     |   | 41,737                     |    | 41,789                        |   |
|                                                                                                                                  |   |                       |    |                          |   |
| Commitments and contingencies                                                                                                         |   |                       |    |                          |   |
|                                                                                                                                  |   |                       |    |                          |   |
| Stockholders’ equity:                                                                                                            |   |                       |    |                          |   |
| Undesignated capital stock,  10,000,000 shares authorized                                                                             |   | —                     |    | —                        |   |
| Common stock, $0.01 par value,  75,000,000 shares authorized,  27,311,371 and 27,303,041 shares issued and  outstanding, respectively |   | 273                        |    | 273                           |   |
| Additional paid-in capital                                                                                                            |   | 95,314                     |    | 95,219                        |   |
| Retained earnings                                                                                                                     |   | 76,728                     |    | 73,140                        |   |
| Accumulated other comprehensive  income (loss)                                                                                        |   | 6                          |    | (50                           | )      |
| Total stockholders’ equity                                                                                                       |   | 172,321                    |    | 168,582                       |   |
| Total liabilities and  stockholders’ equity                                                                                      |   | $                          | 214,058 |                          | $      | 210,371 |   |

 

See notes to financial statements.

 

3

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**PEC SOLUTIONS, INC.**

**STATEMENTS OF INCOME**

(*Amountsin thousands, except per share data*)

 
|                                                           |   | **Three Months Ended** |   |
|----------------------------------------------------------------|--------|------------------------|--------|
|                                                           |   | **March 31, 2004**     |   | **March 31, 2003** |   |
|                                                           |   | **(Unaudited)**        |   |
| Revenues                                                       |   | $                      | 40,369 |   | $ | 43,466 |   |
| Operating costs and expenses:                                  |   |                   |   |   |   |
| Direct costs                                                   |   | 24,623                 |   | 26,971 |   |
| General and administrative  expenses                           |   | 8,495                  |   | 9,159 |   |
| Sales and marketing expenses                                   |   | 1,127                  |   | 1,447 |   |
| Amortization of intangibles                                    |   | 213                    |   | 213 |   |
| Total operating costs and  expenses                            |   | 34,458                 |   | 37,790 |   |
| Operating income                                               |   | 6,013                  |   | 5,676 |   |
| Investment and other income                                    |   | 499                    |   | 637 |   |
| Interest expense                                               |   | (667                   | )      | (660 | ) |
| Income before income taxes                                     |   | 5,743                  |   | 5,653 |   |
| Provision for income taxes                                     |   | 2,155                  |   | 2,162 |   |
| Net income                                                     |   | $                      | 3,588  |   | $ | 3,491 |   |
| Earnings per share:                                            |   |                   |   |   |   |
| Basic                                                          |   | $                      | 0.13   |   | $ | 0.13 |   |
| Diluted                                                        |   | $                      | 0.12   |   | $ | 0.12 |   |
| Weighted average shares used  in computing earnings per share: |   |                   |   |   |   |
| Basic                                                          |   | 27,307                 |   | 26,935 |   |
| Diluted                                                        |   | 29,799                 |   | 29,925 |   |

 

See notes to financial statements.

 

4

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**PEC SOLUTIONS, INC.**

**STATEMENTS OF CASHFLOWS**

(*Dollarsin thousands*)

 
|                                                                                                      |   | **Three Months Ending** |   |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                      |   | **March 31, 2004**      |   | **March 31,****2003** |   |
|                                                                                                      |   | **(Unaudited)**         |   |
| Cash flows from operating  activities:                                                                    |   |                    |   |   |   |
| Net income                                                                                                |   | $                       | 3,588  |   | $ | 3,491 |   |
| Adjustments to reconcile net  income to  net cash provided  by operating activities:                      |   |                    |   |   |   |
| Depreciation and amortization                                                                             |   | 713                     |   | 665 |   |
| Amortization of intangibles                                                                               |   | 213                     |   | 213 |   |
| Amortization of bond premium  and discounts, net                                                          |   | 88                      |   | (79 | ) |
| Gain on sale of assets                                                                                    |   | (4                      | )      | — |   |
| Deferred rent payable                                                                                     |   | 95                      |   | 118 |   |
| Deferred income taxes                                                                                     |   | (106                    | )      | (172 | ) |
| Bad debt expense                                                                                          |   | 102                     |   | — |   |
| Gain from investment in  building                                                                         |   | (245                    | )      | (237 | ) |
| Non-cash charge related to  building                                                                      |   | 49                      |   | 64 |   |
| Changes in operating assets and  liabilities:                                                             |   |                    |   |   |   |
| Accounts receivable, net                                                                                  |   | (3,872                  | )      | 2,962 |   |
| Other current assets                                                                                      |   | (149                    | )      | 1,313 |   |
| Other assets                                                                                              |   | (57                     | )      | (94 | ) |
| Accounts payable and accrued  expenses                                                                    |   | (862                    | )      | (3,202 | ) |
| Advance payments on contracts                                                                             |   | 248                     |   | 696 |   |
| Retirement plan contribution  payable                                                                     |   | —                  |   | 647 |   |
| Accrued payroll                                                                                           |   | (2,448                  | )      | (3,351 | ) |
| Accrued vacation                                                                                          |   | 568                     |   | 636 |   |
| Other current liabilities                                                                                 |   | 2,274                   |   | 842 |   |
| Supplemental retirement program  liability                                                                |   | 43                      |   | 86 |   |
| Net cash provided by operating  activities                                                                |   | 238                     |   | 4,598 |   |
| Cash flows from investing  activities:                                                                    |   |                    |   |   |   |
| Purchases of property and  equipment                                                                      |   | (293                    | )      | (420 | ) |
| Proceeds from sale of property  and equipment                                                             |   | 4                       |   | — |   |
| Purchases of short-term  investments                                                                      |   | (13,023                 | )      | (8,035 | ) |
| Proceeds from sale of  short-term investments                                                             |   | 12,006                  |   | 11,414 |   |
| Capitalized software                                                                                      |   | (43                     | )      | — |   |
| Purchase of long-term  investments                                                                        |   | (10,616                 | )      | (5,000 | ) |
| Proceeds from sale of long-term  investments                                                              |   | 8,641                   |   | 1,271 |   |
| Distribution from building  investment                                                                    |   | 101                     |   | 310 |   |
| Net cash used by investing  activities                                                                    |   | (3,223                  | )      | (460 | ) |
| Cash flows from financing  activities:                                                                    |   |                    |   |   |   |
| Proceeds from issuance of  common stock                                                                   |   | 71                      |   | 1,052 |   |
| Net cash provided by financing  activities                                                                |   | 71                      |   | 1,052 |   |
| Net (decrease) increase in cash                                                                           |   | (2,914                  | )      | 5,190 |   |
| Cash and cash equivalents at  beginning of period                                                         |   | 33,401                  |   | 21,176 |   |
| Cash and cash equivalents at  end of period                                                               |   | $                       | 30,487 |   | $ | 26,366 |   |
|                                                                                                      |   |                    |   |   |   |
| Income taxes paid                                                                                         |   | $                       | 12     |   | $ | 2 |   |
| Interest paid                                                                                             |   | $                       | 667    |   | $ | 660 |   |
| Non-cash transactions:                                                                                    |   |                    |   |   |   |
| Mature common stock repurchased  and retired in exchange for shares in cashless exercise of stock options |   | —                  |   | $ | 197 |   |

 

See notes to financial statements.

 

5

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**PEC SOLUTIONS, INC.**

**NOTESTO FINANCIAL STATEMENTS**

**MARCH 31, 2004**

(*Unaudited*)

 

**1.  Financial Statements**

 

Theaccompanying financial statements, except for the December 31, 2003 balancesheet, are unaudited and have been prepared in accordance with accountingstandards generally accepted in the United States for interim financialinformation and the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally in the United States have been omitted. In the opinion of management,all adjustments, consisting of normally recurring accruals, considerednecessary for a fair presentation, have been included. It is suggested thatthese financial statements be read in conjunction with the Company’s auditedfinancial statements as of December 31, 2002 and 2003 and for each of the threeyears in the period ended December 31, 2003 included in the Company’s Form10-K, as filed with the Securities and Exchange Commission on March 15, 2004.The results of operations for the three months ended March 31, 2004, are notnecessarily indicative of the operating results to be expected for the fullyear.

 

**2.  Stock-based Compensation**

 

In December 2002, the FASB issued SFASNo. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB StatementNo. 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 amendeddisclosure requirements have been included below.

 

The Company uses the Black-Scholes option-pricing model to determinethe pro forma impact under SFAS No. 123 to the Company’s net income andearnings per share. The model utilizes certain information, such as theinterest rate on a risk-free security maturing generally at the same time asthe option being valued, and requires certain assumptions, such as the expectedamount of time an option will be outstanding until it is exercised or itexpires, to calculate the fair value of stock options granted.

 

This information and the assumptions used forMarch 31, 2004 and 2003 for the Company’s stock option plan are summarized asfollows:

 

|                                                 |   | **Stock  Option Plan** |   |
|------------------------------------------------------|--------|------------------------|--------|
|                                                 |   | **March 31,**          |   |
|                                                 |   | **2004**               |   | **2003** |   |
| Volatility                                           |   | 44.64                  | %      | 47.94 | % |
| Risk-free interest rate                              |   | 3.86                   | %      | 3.83 | % |
| Dividend yield                                       |   | 0                      | %      | 0 | % |
| Expected lives                                       |   | 10 years               |   | 10 years |   |
| Weighted average fair value per share at  grant date |   | $                      | 10.47  |   | $ | 19.24 |   |
|                                                      |        |                        |        |  |  |  |  |

 

The Companycontinues to apply the provisions of APB 25 and provide the pro formadisclosures in accordance with the provisions of FAS Nos. 123 and 148. UnderAPB 25, the Company has not recorded in net income any stock-based employeecompensation cost associated with the Company’s stock option plan, as alloptions granted under the plan had an exercise price equal to the market valueof the underlying common stock on the date of grant.

 

6

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The following table illustrates the effect onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to its stock option plan:

 

|                                       |   | **Quarter  Ended March 31,** |   |
|--------------------------------------------|--------|------------------------------|--------|
|                                       |   | **2004**                     |   | **2003** |   |
|                                       |   | **(Dollars  in thousands)**  |   |
| Net income, as reported                    |   | $                            | 3,588  |   | $ | 3,491 |   |
| Pro forma compensation expense, net of tax |   | (1,009                       | )      | (1,351 | ) |
| Pro forma net income                       |   | $                            | 2,579  |   | $ | 2,140 |   |
|                                       |   |                         |   |   |   |
| Net income (loss) per share:               |   |                         |   |   |   |
| Basic—as reported                     |   | $                            | 0.13   |   | $ | 0.13 |   |
| Basic—pro forma                       |   | $                            | 0.09   |   | $ | 0.08 |   |
| Diluted—as reported                   |   | $                            | 0.12   |   | $ | 0.12 |   |
| Diluted—pro forma                     |   | $                            | 0.09   |   | $ | 0.07 |   |

 

**3.  Accounts Receivable**

 

Accounts receivable consist of the following as of:

 
|                                                      |   | **March 31,  2004**        |   | **December 31,  2003** |   |
|-----------------------------------------------------------|--------|----------------------------|--------|------------------------|--------|
|                                                      |   | **(Dollars in thousands)** |   |
| Billed accounts receivable                                |   | $                          | 38,696 |                   | $      | 32,100 |   |
| Unbilled accounts receivable:                             |   |                       |   |                   |   |
| Amounts currently billable                                |   | 13,729                     |   | 12,033                 |   |
| Revenues recorded in excess of  contract value or funding |   | 2,500                      |   | 4,776                  |   |
| Progress payments                                         |   | (686                       | )      | (439                   | )      |
|                                                      |   | 52,239                     |   | 48,470                 |   |
| Allowance for doubtful accounts                           |   | (114                       | )      | (114                   | )      |
| Accounts receivable, net                                  |   | $                          | 52,125 |                   | $      | 48,356 |   |

 

Unbilledaccounts receivable comprise recognized recoverable costs and accrued profitson contracts for which billings had not been presented to clients as of thebalance sheet date. Revenues recorded in excess of contract value or fundingare billable upon receipt of contractual amendments.  Management anticipates the collection of these amounts within 90days of the balance sheet date. Payments to the Company on contracts withagencies and departments of the U.S. Government are subject to adjustment uponaudit by the U.S. Government. All years subsequent to 2000 are subject to U.S.Government audit. Management believes the effect of audit adjustments, if any,on periods not yet audited, will not have a material effect on the financialstatements.

 

During thequarter ended March 31, 2004, the Company had one customer that accounted formore than 10% of revenue.  For thequarter, the Special Project Division of the Drug Enforcement Agency accountedfor 11%, or $4.6 million.  At March 31,2004, there was $4.4 million due from the Special Project Division of the DrugEnforcement Agency.  At March 31, 2004,there was $6.3 million due from a subcontract for the Company’s biometricidentification system.  The Companyfiled a lawsuit in Federal court against the prime contractor in September 2003to recover full payment on this receivable and expects to receive full payment.

 

During thequarter ended March 31, 2003, the Company had two customers that each accountedfor more than 10% of revenue.  For thequarter, EDS (Navy Marine Corps Intranet) accounted for 13%, or $5.7 million,and the Special Project Division of the Drug Enforcement Agency accounted for11%, or $4.7 million of revenue.  AtMarch 31, 2003 there was $5.0 million due from EDS and $3.7 million due fromthe Special Project Division of the Drug Enforcement Agency.

 

7

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**4.  Net Income Per Share**

 

Basic anddiluted earnings per share for the three months ended March 31, 2004 and 2003were determined as follows:

 
|                       |   | **Three Months Ended March 31, 2004**                    |   | **Three Months Ended March 31, 2003** |       |
|----------------------------|--------|----------------------------------------------------------|--------|---------------------------------------|------------|
|                       |   | **(Dollars in thousands, except for per share amounts)** |   |
|                       |   | **Net**                                                  |   |                                  |       |   |   | **Net** |   |   |   |   |   |
|                       |   | **Income**                                               |   | **Shares**                            |       | **Per Share** |   | **Income** |   | **Shares** |   | **Per Share** |   |
| Basic EPS                  |   | $                                                        | 3,588  |                                  | 27,306,837 |   | $ | 0.13 |   | $ | 3,491 |   | 26,934,667 |   | $ | 0.13 |   |
| Effect of dilutive options |   | —                                                   |   | 2,492,001                             |       | (0.01 | ) | — |   | 2,990,474 |   | (0.01 | ) |
| Diluted EPS                |   | $                                                        | 3,588  |                                  | 29,798,838 |   | $ | 0.12 |   | $ | 3,491 |   | 29,925,141 |   | $ | 0.12 |   |

 

For thequarters ended March 31, 2004 and 2003, 1,659,167 and 1,319,699 shares,respectively, attributable to outstanding stock options were excluded from thecalculation of diluted earnings per share because the effect was antidilutive.

 

**5. Goodwill and Intangible Assets**

 

The Companyhas recognized goodwill related to its acquisitions of Viking Technology, Inc.(“Viking”), Troy Systems, Inc. (“Troy”) and Vector Research, Inc.(“Vector”).  The Company only has one reporting unit. Non-amortized intangible assets consist only of goodwill in the amountof $16.9 million.  The Company’samortizable 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, 2004 was $1.9 million.  In accordance with the provisions of SFAS No. 142, the Companyperformed the appropriate annual impairment tests during the quarter endedMarch 31, 2004 related to its stated goodwill, and determined that there was noimpairment loss, and therefore no change was made to the carrying amount ofgoodwill.

 

Amortizationexpense for the three months ended March 31, 2004 and 2003 was $213,000 forboth periods.  Intangibles are amortizedon a straight-line basis.

 

Estimatedamortization expense for each of the five succeeding calendar years based onthe intangible assets as of December 31, 2003 is as follows in thousands:

 

| **Year  ending December 31,** |   | **Amount** |   |
|-------------------------------|--------|------------|--------|
| 2004                          |   | $          | 851    |   |
| 2005                          |   | 851        |   |
| 2006                          |   | 458        |   |
| 2007                          |   | 179        |   |
| 2008                          |   | 179        |   |
|                               |        |            |        |  |

 

**6.  Investments**

 

The Companyhas an ownership interest in an unconsolidated and affiliated company that ownsan office building that the Company leases. For the three months ended March 31, 2004, the Company recorded incomeof $245,000 for its share of the affiliated company’s earnings and received cashdistributions of $101,000 from the investment. For the three months ended March 31, 2003, the Company recorded incomeof $237,000 and cash distributions of $310,000.

 

**7.  Other Comprehensive Loss**

 

Othercomprehensive loss, consisting of unrealized gains (losses) on securities was$6,000 for the three months ended March 31, 2004 and $(111,000) for the threemonths ended March 31, 2003.

 

**8.  Contingencies**

 

In the ordinary course of business, the Company may be party to variouslegal proceedings.  In the opinion ofmanagement, the Company’s liability, if any, in all pending litigation or otherlegal proceedings will not have a material effect upon the financial condition,results of operations or liquidity of the Company.

 

8

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On or after March 18, 2003, several purportedclass action complaints were filed against the Company and certain of itsofficers in the United States District Court for the Eastern District ofVirginia.  The complaints allege thatbetween October 22, 2002 and March 14, 2003, the defendants made, or were awareof false and misleading statements which had the effect of inflating the marketprice of the Company’s stock, in violation of Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934.  Thecomplaints were consolidated into a single class action on June 13, 2003.  The class action was dismissed by the courton January 28, 2004.  Plaintiffs havefiled notice of appeal.  In addition, astockholder’s legal counsel sent a letter of demand that the Board of Directorsinvestigate the same charges addressed in the class action suit.  The Board concluded after its investigationand based on its business judgment to reject the demand letter.

 

On September 11, 2003, the Company instituteda lawsuit in the United States District Court for the District of Minnesotaagainst NCS Pearson, Inc. for improperly withholding the payment of funds owedto the Company under a subcontract.  TheCompany is seeking recovery of $6.3 million in unpaid receivables plus interestand costs.  The proceedings are movingaccording to schedule.

 

**Item 2.            Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

**Overview**

 

PEC Solutions,Inc. (www.pec.com) is a professional services firm specializing in high-endsolutions that help government clients harness the power of the Internet andother advanced technologies to improve mission performance. We specialize inWeb-Enabling Government® by providing secure, interoperable technologysolutions for clients in homeland security, law enforcement, intelligence,defense, and civilian agencies within the Federal Government and at state andlocal levels.  As a total solutionsprovider, we address the full technology lifecycle, including formulating technologystrategies, creating business solutions, performing long-term operationalmanagement and continuing enhancement of the solution.

 

We derivesubstantially all of our revenues from fees for consulting services, primarilyfrom contracts with the Federal Government. We generate these fees fromcontracts with various payment arrangements, including time and materialscontracts, fixed-price contracts and cost-reimbursable contracts. During thethree months ended March 31, 2004, revenues from these contract types wereapproximately 60%, 19% and 21%, respectively, of total revenues. During thethree months ended March 31, 2003, revenues from these contract types wereapproximately 57%, 23% and 20%, respectively, of total revenues. We typicallyissue invoices monthly to manage outstanding accounts receivable balances. Werecognize revenues on time and materials contracts based on actual hoursdelivered at the contracted billable hourly rate plus the cost of materialsincurred.  We recognize revenues onfixed-price contracts using the percentage-of-completion method based on costswe incurred in relation to total estimated costs. However, if the contract hasa service element, we recognize revenues on a straight-line basis over the termof the contract.  We recognize revenueson cost-type contracts to the extent of costs incurred plus a proportionateamount of fee earned.

 

On occasion,we enter into contracts that include the delivery of a combination of two ormore of our service offerings. Typically, such multiple-element arrangements incorporate the design,development or modification of systems and an ongoing obligation to manage,staff, maintain, host or otherwise run solutions and systems provided to theclient.  Such contracts are divided intoseparate units of accounting and the total arrangement fee is allocated to eachunit based on its relative fair value. Revenue is recognized separately, and in accordance with our revenuerecognition policy, for each element.

 

In certainlimited circumstances, revenues are recognized before contract amendments havebeen finalized.  Prior to agreeing tocommence work as directed by a customer and in advance of the receipt of thewritten modification or amendment to the existing contract, the Companyrequires the completion of an internal memo that assesses the probability ofthe modification or amendment being executed in a timely fashion and theCompany’s ability to subsequently collect payment from the customer.

 

The fees undercertain government contracts may be increased or decreased in accordance withcost or performance incentive provisions that measure actual performanceagainst established targets or other criteria. Such incentive fee awards or penalties are included in revenue at thetime the amounts can be reasonably determined. Provisions for anticipated contract losses are recognized at the timethey become known.

 

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 greater than 98% of our revenues in the three monthsended March 31 2004.

 

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In the threemonths ended March 31, 2004, we derived approximately 20% of our revenuesthrough relationships with prime contractors, which contract directly with theend-client and subcontract with us. In most of these engagements, with theexception of the EDS (NMCI) subcontract, we retain full responsibility for theend-client relationship and direct and manage the activities of our contractstaff.

 

Our mostsignificant expense is direct costs, which consist primarily of projectpersonnel salaries and benefits, and direct expenses incurred to completeprojects. Our direct costs as a percentage of revenues are also related to theutilization rate of our consulting personnel. We manage utilization byfrequently monitoring project requirements and timetables. The number ofconsulting personnel assigned to a project will vary according to the size,complexity, duration and demands of the project.   As of March 31, 2004, we had 1,215 personnel.

 

General andadministrative expenses consist primarily of costs associated with ourexecutive management, finance and administrative groups, human resources,unassigned consulting personnel, personnel training, occupancy costs,depreciation and amortization, travel and all other branch and corporate costs.

 

Sales andmarketing expenses include the costs of sales and marketing personnel and costsassociated with marketing and bidding on future projects.

 

Other income(loss) consists primarily of interest income earned on our cash, cashequivalents and marketable securities, and income from our investment in thelimited liability corporation that owns the corporate headquarters officebuilding and the interest expense associated with that building.

 

**Resultsof Operations**

 

The followingtable sets forth certain financial data and such data as a percentage ofrevenues for the periods indicated.

 
|                                      |   | **Three Months Ended**     |   |
|-------------------------------------------|--------|----------------------------|--------|
|                                      |   | **March 31,  2004**        |   | **March 31,  2003** |   |
|                                      |   | **(Dollars in thousands)** |   |
| Statements of Income:                     |   |                       |   |   |   |
| Revenues                                  |   | $                          | 40,369 |   | $ | 43,466 |   |
| Direct costs                              |   | 24,623                     |   | 26,971 |   |
| Gross profit(a)                           |   | 15,746                     |   | 16,495 |   |
| Other operating costs and  expenses:      |   |                       |   |   |   |
| General and administrative  expenses      |   | 8,495                      |   | 9,159 |   |
| Sales and marketing expenses              |   | 1,127                      |   | 1,447 |   |
| Amortization of intangibles               |   | 213                        |   | 213 |   |
| Total other operating costs and  expenses |   | 9,835                      |   | 10,819 |   |
| Operating income                          |   | 5,911                      |   | 5,676 |   |
| Investment and other income               |   | 499                        |   | 637 |   |
| Interest expense                          |   | (667                       | )      | (660 | ) |
| Income before income taxes                |   | 5,743                      |   | 5,653 |   |
| Provision for income taxes                |   | 2,155                      |   | 2,162 |   |
| Net income                                |   | $                          | 3,588  |   | $ | 3,491 |   |
|                                      |   |                       |   |   |   |
| As a Percentage of Revenues:              |   |                       |   |   |   |
|                                      |   |                       |   |   |   |
| Revenues                                  |   | 100.0                      | %      | 100.0 | % |
| Direct costs                              |   | 61.0                       |   | 62.0 |   |
| Gross profit (a)                          |   | 39.0                       |   | 38.0 |   |
| Other operating costs and  expenses:      |   |                       |   |   |   |
| General and administrative  expenses      |   | 21.0                       |   | 21.1 |   |
| Sales and marketing expenses              |   | 2.8                        |   | 3.3 |   |
| Amortization of intangibles               |   | 0.5                        |   | 0.5 |   |
| Total other operating costs and  expenses |   | 24.3                       |   | 24.9 |   |
| Operating income                          |   | 14.7                       |   | 13.1 |   |
| Investment and other income               |   | 1.2                        |   | 1.4 |   |
| Interest expense                          |   | (1.7                       | )      | (1.5 | ) |
| Income before income taxes                |   | 14.2                       |   | 13.0 |   |
| Provision for income taxes                |   | 5.3                        |   | 5.0 |   |
| Net income                                |   | 8.9                        | %      | 8.0 | % |

 

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(a)     Grossprofit represents revenues less direct costs, which consist primarily ofproject personnel salaries and benefits and direct expenses incurred tocomplete projects.

 

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**Results of Operations for the Three MonthsEnded March 31, 2004 Compared with the Three Months Ended March 31, 2003**

 

*Revenues*.  Revenues decreased by 7.1% to $40.4 million**forthe three months ended March 31, 2004 from $43.5 million for the three monthsended March 31, 2003.  Revenues wereadversely impacted by the approximate $700,000 reduction taken at the end ofthe quarter on one of our state and local contracts, based on the customer’sindication that they would be restructuring the contract.  Based on the current negotiations and undercontract accounting we made this reduction of revenue in the currentquarter.  We also saw a reduction inrevenue from the first quarter 2003 under the EDS (Navy Marine Corps Intranet)subcontract as the program continued to ramp down from its initial engineeringphase into a production phase.

 

*Direct Costs.* Directcosts decreased by 8.7% to $24.6 million for the three months ended March 31,2004 from $27.0 million for the three months ended March 31, 2003.  Direct costs decreased as a percentage ofrevenues to 61.0% for the period ended March 31, 2004 from 62.0% for the periodended March 31, 2003.  This decrease wasprimarily due to the change in our headcount of billable personnel, and lowerother direct costs.

 

*Gross Profit*. Grossprofit decreased by 4.5% to $15.7 million in the three months ended March 31,2004 from $16.5 million in the three months ended March 31, 2003. Gross profitas a percentage of revenues increased to 39.0 % in the three months ended March31, 2004 from 38.0% in the three months ended March 31, 2003, because directcosts decreased at a faster rate than revenue decreased.

 

*General and Administrative Expenses*.General and administrative expenses decreased 7.2% to $8.5 million in the threemonths ended March 31, 2004 from $9.2 million in the three months ended March31, 2003.  Our total general andadministrative headcount decreased to 118 employees as of March 31, 2004compared to 123 employees as of March 31, 2003.

 

*Sales and Marketing*.Sales and marketing expenses decreased 22.1% to $1.1 million in the threemonths ended March 31, 2004, from $1.4 million in the three months ended March31, 2003. This decrease was due to a decrease in our marketing and proposalefforts during the quarter, which was related to our clients budget actions.

 

*Amortization of Intangibles*.  For each of the three month periods endedMarch 31, 2004 and March 31, 2003,  weincurred $213,000 of amortization expense related to the $4.5 million ofintangibles we recorded in connection with the value of contracts and customerrelationships acquired in the November 2001 acquisition of Troy, and the June2002 acquisition of Vector.

 

*Operating Income*.Operating income increased 4.1% to $5.9 million in the three months ended March31, 2004 from $5.7 million in the three months ended March 31, 2003, due to thefactors discussed above.

 

*Investment and Other Income.*  For the three months ended March 31, 2004,we earned $254,000 of interest income, and had $245,000 of income from ourinvestment in our corporate headquarters building.   For the three months ended March 31, 2003, we had $400,000 ofinterest income and net losses on sales of securities.  We also had a $237,000 gain from theinvestment in our corporate headquarters building.

 

*Interest Expense. *For the three months ended March 31, 2004and 2003, we incurred interest expense of $667,000 and $660,000, respectively,principally related to our corporate headquarters building.

 

Our revenuesand operating results may be subject to significant variation from quarter toquarter depending on a number of factors, including the progress of contracts,revenues earned on contracts, the number of billable days in a quarter, thetiming of the pass-through of other direct costs, the commencement andcompletion of contracts during any particular quarter, the schedule of thegovernment agencies for awarding contracts, the term of each contract that wehave been awarded and general economic conditions. Because a significantportion of our expenses, such as personnel and facilities costs, are fixed in theshort term, successful contract performance and variation in the volume ofactivity as well as in the number of contracts commenced or completed duringany quarter may cause significant variations in operating results from quarterto quarter.

 

The FederalGovernment’s fiscal year ends September 30. If a budget for the next fiscalyear has not been approved by that date, our clients may have to suspendengagements that we are working on until a budget has been approved. Suchsuspensions may cause us to realize lower revenues in the fourth quarter of theyear. Further, a change in presidential administrations and in seniorgovernment officials may negatively affect the rate at which the FederalGovernment purchases technology.

 

As a result ofthe factors above, period-to-period comparisons of our revenues and operatingresults may not be meaningful. You should not rely on these comparisons asindicators of future performance as no assurances can be given that quarterlyresults will not fluctuate, causing a possible material adverse effect on ouroperating results and financial condition.

 

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**Liquidityand Capital Resources**

 

We currentlyexpect to meet our short-term and long-term cash requirements through funds generatedfrom operations.  Net cash provided byoperating activities was $238,000 for the three months ended March 31, 2004.Cash provided by operating activities is primarily driven by net income,adjusted for working capital changes, which are principally changes in accountsreceivable.

 

Net cash usedby investing activities was $3.2 million for the three months ended March 31,2004. During the three months ended March 31, 2004, we had $0.3 million of netpurchases of property and equipment, $1.0 million of net short-term investmentsand $2.0 million of net long-term investments and invested $0.04 million incapitalized software, while receiving $0.1 million of distributions from theinvestment in the entity that owns our headquarters building.  Investing activity is primarily driven byinvestments in short and long-term securities.

 

For the threemonths ended March 31, 2004, net cash provided by financing activities was$71,000 and is primarily derived from payments received from employees inconnection with the exercise of stock options.

 

We expect toretain future earnings, if any, for use in the operation and expansion of ourbusiness and at this time do not anticipate paying cash dividends.

 

We maintain a$10.0 million line of credit with Bank of America, bearing interest at theone-month LIBOR rate plus 250 basis points per annum, which expires on June 30,2005.  As of March 31, 2004, we had noborrowings outstanding under the line of credit. As of March 31, 2004, we hadoutstanding $2.6 million in letters of credit in lieu of rent deposits.

 

Under some ofour fixed-price contracts, we receive advance payments for work to be performedin future months. If we do not perform the work, the unearned portion of theseadvances will be returned to our clients. At March 31, 2004, our accountsreceivable turnover rate, net of advance payments on contracts, wasapproximately three times a year.

 

**SPECIAL NOTEREGARDING FORWARD LOOKING STATEMENTS**

 

The foregoingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations section of  this Form 10-Qincludes “forward-looking statements” within the meaning of the Federal PrivateSecurities Litigation Reform Act of 1995. While forward-looking statements aresometimes presented with numerical specificity, they are based on variousassumptions made by management regarding future circumstances over many ofwhich we have little or no control. Forward-looking statements may beidentified by words including “anticipate,” “believe,” “estimate,” “expect” andsimilar expressions. We caution readers that forward-looking statements,including without limitation, those relating to our future business prospects,revenues, working capital, liquidity, and income, are subject to certain risksand uncertainties that would cause actual results to differ materially fromthose indicated in the forward-looking statements. Factors that could causeactual results to differ from forward-looking statements include theconcentration of our revenues from government clients, risks involved incontracting with the U.S. Government and with state and local governments,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 Annual Report on Form 10-K forthe year ended December 31, 2003 which hereby is incorporated by reference.Should one or more of these risks or uncertainties materialize, or shouldunderlying assumptions prove incorrect, actual results may vary materially fromthose anticipated, estimated or projected.

 

**Item 3.            Qualitativeand Quantitative Disclosure About Market Risk.**

 

We invest ourcash in a variety of financial instruments, including U.S. Treasury and agencyobligations, money market instruments of domestic and foreign issuersdenominated in U.S. dollars consisting of commercial paper, bankers’acceptances, certificates of deposit, euro-dollar time deposits and variablerate issues, corporate notes and bonds, asset-backed securities, repurchaseagreements, municipal notes and bonds and auction rate preferred securities.

 

Investments inboth fixed and floating rate interest earning instruments carry a degree ofinterest rate risk. Fixed securities may have their fair market value adverselyimpacted because of a rise in interest rates, while floating rate securitiesmay produce less income than expected if interest rates fall. Due in part tothese factors, our future investment income may fall short of expectationsbecause of changes in interest rates or we may suffer losses in principal if weare forced to sell securities which have seen a decline in market value becauseof changes in interest rates.  A 10%change in interest rates could have approximately a $150,000 impact on ourinterest income.

 

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Ourinvestments are made in accordance with an investment policy approved by ourBoard of Directors. Under this policy, no investment securities can havematurities exceeding two years and the average duration of the portfolio cannotexceed twelve months.

 

## **Item  4.           Controlsand Procedures.**

 

Our managementunder the direction and with the participation of David C. Karlgaard, our ChiefExecutive Officer, and Stuart R. Lloyd, our Chief Financial Officer, performedan evaluation of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15 under the Securities Exchange Act of1934).  Based on that evaluation,Messrs. Karlgaard and Lloyd concluded that as of March 31, 2004, our disclosurecontrols and procedures are effective. There have been no changes in our internal controls or in other factorsthat could significantly affect internal controls subsequent to theirevaluation.

 

 

 

**PART II – OTHER INFORMATION**

 

**Item 1.            LegalProceedings.**

 

On or afterMarch 18, 2003, several purported class action complaints were filed against usand certain of our officers in the United States District Court for the EasternDistrict of Virginia.  The complaintsallege that between October 22, 2002 and March 14, 2003, the defendants made,or were aware of false and misleading statements which had the effect ofinflating the market price of our stock, in violation of Sections 10(b) and20(a) of the Securities Exchange Act of 1934. The complaints were consolidated into a single class action on June 13,2003.  The class action was dismissed bythe court on January 28, 2004. Plaintiffs have filed notice of appeal. In addition, a stockholder’s legal counsel sent a letter of demand thatthe Board of Directors investigate the same charges addressed in the classaction suit.  The Board concluded afterits investigation and based on its business judgment to reject the demandletter.

 

On September 11, 2003, weinstituted a lawsuit in the United States District Court for the District ofMinnesota against NCS Pearson, Inc. for improperly withholding the payment offunds owed to us under a subcontract. We are seeking recovery of $6.3 million in unpaid receivables plusinterest and costs.  The proceedings aremoving according to schedule.

 

 

**Item 2.            Changesin Securities and Use of Proceeds.**

 

None.

 

**Item 3.            DefaultsUpon Senior Securities.**

 

None.

 

**Item 4.            Submissionof Matters to a Vote of Security Holders.**

 

None.

 

**Item 5.            OtherInformation.**

 

None.

 

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**Item 6.            Exhibitsand Reports on Form 8-K.**

 

(a)     Exhibits.

 

| **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                            |
|          |   |                                                                                                                  |
| 10.4.1******  |   | Key Executive Severance Plan and Letter Agreement between the  Registrant and David C. Karlgaard, dated July 23, 2003 |
|          |   |                                                                                                                  |
| 10.5*         |   | Employment Agreement between the Registrant and Paul G. Rice, dated  January 1, 2000                                  |
|          |   |                                                                                                                  |
| 10.5.1******  |   | Key Executive Severance Plan and Letter Agreement between the  Registrant and Paul G. Rice, dated July 23, 2003       |
|          |   |                                                                                                                  |
| 10.6*         |   | Employment Agreement between the Registrant and Alan H. Harbitter,  dated January 1, 2000                             |
|          |   |                                                                                                                  |
| 10.6.1******  |   | Key Executive Severance Plan and Letter Agreement between the  Registrant and Alan H. Harbitter, dated July 23, 2003  |
|          |   |                                                                                                                  |
| 10.7*         |   | Employment Agreement between the Registrant and Stuart R. Lloyd,  dated December 31, 1998                             |
|          |   |                                                                                                                  |
| 10.7.1******* |   | Amendment to Employment Agreement between the Registrant and Stuart  R. Lloyd, dated September 30, 2003               |
|          |   |                                                                                                                  |
| 10.8*         |   | 2000 Stock Incentive Plan                                                                                             |
|          |   |                                                                                                                  |
| 10.9*         |   | 1995 Nonqualified Stock Option Plan                                                                                   |
|          |   |                                                                                                                  |
| 10.10*        |   | 1987 Stock Option Agreement, as amended                                                                               |
|          |   |                                                                                                                  |
| 10.11*        |   | Nonqualified Executive Supplemental Retirement Program Agreement  dated December 1998                                 |
|          |   |                                                                                                                  |
| 10.12*        |   | 2000 Employee Stock Purchase Plan                                                                                     |
|          |   |                                                                                                                  |
| 10.13*        |   | Amended and Restated Loan Agreement between the Registrant and  NationsBank, N.A.                                     |
|          |   |                                                                                                                  |
| 10.14**       |   | Amendment No. 2 to Office Lease Agreement between Building IV  Associates L.P. and the Registrant                     |
|          |   |                                                                                                                  |
| 10.15**       |   | Amendment No. 3 to Office Lease Agreement between Building IV  Associates L.P. and the Registrant                     |
|          |   |                                                                                                                  |
| 10.16**       |   | Office Lease Agreement between Building VI L.C. and the Registrant                                                    |
|          |   |                                                                                                                  |
| 10.17***      |   | First Amendment to Lease Agreement between Building VI L.C. and the  Registrant                                       |
|          |   |                                                                                                                  |
| 10.18***      |   | Second Amendment to Lease Agreement between Building VI L.C. and the  Registrant                                      |
|          |   |                                                                                                                  |
| 10.19***      |   | Operating Agreement between Building VI Investment L.C. and the  Registrant                                           |
|          |   |                                                                                                                  |
| 10.20***      |   | First Amendment to Operating Agreement between Building VI L.C. and  the Registrant                                   |
|          |   |                                                                                                                  |
| 10.21***      |   | Bank of America Financing and Security Agreement                                                                      |

 

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| 10.22***    |   | Bank of America Promissory Note                                                                                   |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                              |
| 10.23*****  |   | Amended and Restated Bank of America Revolving Credit Note                                                        |
|        |   |                                                                                                              |
| 10.24*****  |   | Amended and Restated Bank of America Financing and Security Agreement                                             |
|        |   |                                                                                                              |
| 10.25*****  |   | Key Executive Severance Plan and Letter Agreement between Registrant  and Christos Bratiotis, dated July 23, 2003 |
|        |   |                                                                                                              |
| 10.26*****  |   | Key Executive Severance Plan and Letter Agreement between Registrant  and John T. Forbus, dated July 23, 2003     |
|        |   |                                                                                                              |
| 10.27****** |   | Key Executive Severance Plan and Letter Agreement between Registrant  and Charles E. Owlett, dated July 23, 2003  |
|        |   |                                                                                                              |
| 31.1        |   | Section 302 Certification of Chief Executive Officer                                                              |
|        |   |                                                                                                              |
| 31.2        |   | Section 302 Certification of Chief Financial Officer                                                              |
|        |   |                                                                                                              |
| 32.1        |   | Section 906 Certification of Chief Executive Officer                                                              |
|        |   |                                                                                                              |
| 32.2        |   | Section 906 Certification of Chief Financial Officer                                                              |
|        |   |                                                                                                              |

 

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| *      |   | Incorporated  herein by reference to the Company’s Registration Statement on Form S-1(No.  333-95331), as amended.                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                         |
| **     |   | Incorporated  herein by reference to the Company’s Annual Report on Form 10-K/A for the  year ended December 31, 2000, 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 for the year  ended December 31, 2001, filed on March 29, 2002.           |
|   |   |                                                                                                                                                         |
| *****  |   | Incorporated  herein by reference to the Company’s Quarterly Report on Form 10-Q for the  quarter ended June 30, 2003, filed on August 14, 2003.        |
|   |   |                                                                                                                                                         |
| ****** |   | Incorporated  herein by reference to the Company’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2003, filed on November 14, 2003. |
|   |   |                                                                                                                                                         |

 

(b)     Reportson Form 8-K.

 

On January 22,2004, we filed a Current Report on Form 8-K accompanying a press releasepre-announcing certain financial results for the quarter and year endedDecember 31, 2003.

 

On February10, 2004, we filed a Current Report on Form 8-K accompanying a press releaseannouncing our financial results for the quarter and year ended December, 31,2003.

 

On February11, 2004, we filed  a Current Report onForm 8-K accompanying a transcript of the prepared remarks provided during theearnings conference call held at 5:30 pm (EST), February 10, 2004, with respectto the results for the quarter and year ended December 31, 2003.

 

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**Signatures**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Company has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

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

 

May 10, 2004

 

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