| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
FOR THE TRANSITION PERIOD FROM TO
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| Delaware | 82-3173473 | |||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||
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Title of each class | Trading Symbols | Name of each exchange on which registered | ||||||||||||
| Class A | PAE | Nasdaq Stock Market | ||||||||||||
| Warrants | PAEWW | Nasdaq Stock Market | ||||||||||||
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| Large accelerated filer | ☐ | Accelerated filer | ☒ | |||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||
| Emerging growth company | ||||||||||||||||
As of June 28, 2019, the
As of March 2, 2020, there 10-K (the “Form 10-K”) contains our audited consolidated financial statements for the year ended December 31, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and III of this Form10-K incorporate certain information by reference from the registrant’s definitive proxy statement filed on January 24, 2020 and its Current Report on Form8-K filed on February 14, 2020 (as amended on March 11, 2020).
EXPLANATORY NOTE
PAE Incorporated, formerly known as Gores Holdings III, Inc. (“Gores III”), was originally incorporated in Delaware on October 23, 2017 under the name “Gores Holdings III, Inc.” as a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. On September 11, 2018, we consummated our initial public offering (the “IPO”“IPO”), following which our shares began trading on the Nasdaq Stock Market (“Nasdaq”Nasdaq”).
In connection with the closing of the Business Combination on the Closing Date, the RegistrantAgreement) and its subsidiaries, changed itsour name from “Gores Holdings III, Inc.” to “PAE Incorporated”, and changed the trading symbols of itsour Class A Common Stock and warrantsPublic Warrants on Nasdaq from “GRSH,”“GRSH” and “GRSHW,” to “PAE” and “PAEWW,” respectively,respectively.
Unlessrecapitalization (the “Recapitalization”), in which Shay is considered the context indicates otherwise,accounting acquirer (and legal acquiree) and Gores III is considered the terms “we,” “us” and “our” refer to PAE Incorporated and its consolidated subsidiaries, references to the “Company” refer to the historical operations of Gores Holdings III, Inc. prior to the Closing and to the combined company and its subsidiaries following the Closing, and references to “PAE” refer to the historical operations of Shay Holding Corporation and its consolidated subsidiaries prior to the Closing and the business of the combined company and its subsidiaries following the Closing.
accounting acquiree (and legal acquirer). Additionally, unless otherwise stated or the context indicates otherwise, with respect to the consolidated financial statements and financial information contained in this Annual Report on Form10-K, including in “Item 6. Selected Financial Data” and “Item“Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,”Operations” and in “Part II, Item 8. Financial Statements and Supplementary Data” and the notes thereto, the financial information relating to the year ended December 31, 2019 are those of Gores IIIShay and its subsidiaries, and for the year ended December 31, 2020, the financial information includes the financial information of Shay and its subsidiaries for the period prior to the Closing and anythe financial information of PAE Incorporated and its subsidiaries for the Company as of any date following the Closing or of PAE priorperiod subsequent to the Closing is thatClosing. See Note 1 – “Description of PAE.
i
ii
SPECIAL
the benefits of the Business Combination;
the future financial performance of the post-combination company following the Business Combination;
•changes in the market for our services;
•our ability to collect receivables from the U.S. Government or other customers;
•our ability to comply with financial and non-financial covenants in our credit facilities;
You should not place undue reliance on these forward-looking statements in deciding whether to invest in our securities. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:
a loss of contracts with the U.S. federal government or its agencies or other state, local or foreign governments or agencies, including as a result of a reduction in government spending;
service failures or failures to properly manage projects;
issues that damage our professional reputation;
disruptions in or changes to prices of our supply chain, including from difficulties in the supplier qualification process;
failures on the part of our subcontractors or joint venture partners to perform their contractual obligations;
failures to maintain strong relationships with other contractors;
the impact of a negative audit or other investigation;
failure to comply with numerous laws and regulations regarding procurement, anti-bribery and organizational conflicts of interest;
inability to comply with the laws and other security requirements governing access to classified information;
inability to share information from classified contracts with investors;
impact of implementing various data privacy and cybersecurity laws;
costs and liabilities arising under various environmental laws and regulations;
various claims, litigation and other disputes that could be resolved against PAE;
delays, contract terminations or cancellations caused by competitors’ protests of major contract awards received by us;
risks from operating internationally;
disruptions caused by natural or environmental disasters, public health crises or other events outside our control;
issues arising from cybersecurity threats or intellectual property infringement claims;
the loss of members of senior management;
the inability to attract, train or retain employees with the requisite skills, experience and security clearances;
the impact of the expiration of our collective bargaining agreements;
the inability to recognize the anticipated benefits of the Business Combination, which may be affected by, among other things, competition, the ability to integrate PAE’s and the Company’s businesses, and the ability of the combined business to grow and manage growth profitably;
the inability to maintain the listing of our securities on Nasdaq following the Business Combination; and
other risks and uncertainties described in this Annual Report on Form10-K, including under the section entitled “Item 1A. Risk Factors,” and described in our other reports filed with the SEC.
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space development operations.
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GMS’s major programs include:
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•Logistics and Stability Operations – lifecycle logistics operations and humanitarian and stability operations, primarily in remote areas of the world where few companies have the scale, knowledge and workforce to provide these services.
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NSS’s major programs include:
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•Funded backlog: Represents the value on contracts for which funding is appropriated less revenues previously recognized on these contracts. 6 •Unfunded backlog: Represents the estimated future revenues to be earned from negotiated contracts for which funding has not been appropriated or authorized, and unexercised priced contract options. Unfunded backlog |
PAE does not include the ceiling amountany estimate of Indefinite Delivery, Indefinite Quantity (“IDIQ”) contracts in backlog. Only awarded IDIQfuture potential task orders are included in backlog. expected to be awarded under indefinite delivery, indefinite quantity (“IDIQ”), U.S. General Services Administration schedules or other master agreement contract vehicles. Unfunded backlog includes (i) unexercised option years, to the extent their issuance or exercise is probable, as well as (ii) contract awards, to the extent PAE believes contract execution and funding is probable.
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•The requirement for Truthful Cost or Pricing Data mandates that, when applicable, PAE provides current, accurate and complete cost or pricing data in connection with the negotiation of certain contracts, modifications or task orders, including those that are not subject to full and open competition (e.g., a sole-source procurement).
•The FCPA prohibits any U.S. individual or business from paying, offering or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. Other jurisdictions in which PAE does business have similar laws.
interested contractors.Protests. Protests. Disappointed bidders and firms excluded from competition for U.S. Government contracts and task orders can avail themselves of bid protest remedies by submitting a protest challenging the agency’s award decision to the agency, the Government Accountability Office, bid protest office, or the U.S. Court of Federal Claims within specified time limits. Contract performance can be suspended while a protest is pending, and an awarded contract can be terminated for convenience if found to have been improperly awarded, typically requiring the agency to make a new award decision. U.S. Government programs that are classified by the U.S. Government and is limited in its ability to provide information about such programs. The operating results ofFedBizOpps.govU.S. Government’s “Contract Opportunities” website. Interested contractors may submit information indicating their desire to performprovide the required products or services. The agency then solicits competitive offers from qualified contractors; in the case of negotiated procurements, it typically issues a formal request for a proposal (“RFP”RFP”). The RFP describes the desired goods or services and the terms and conditions that will form the final agency contract. In negotiated procurements, the RFP includes the evaluation criteria that the agency will use to determine which contractor will be selected for the contract. OfferorsInterested contractors then submit proposals in response to the RFP, and the agency evaluates all the proposals, and, in its discretion, may ask for clarifications and engage in discussions with offerors.agency’sagencies’ judgment, provide the greatest overall benefit in response to the requirement, includingconsidering technical merit, cost and relevant past performance considerations.performances. This process can sometimes take a year or more. Alternatively, the RFP may specify that the award decision will be made on the “lowest price technically acceptable” (“LPTA”) basis, which focuses more on price as the determining factor in an award decision. In the past decade, the LPTA basis was widely used by agencies, though in recent years, Congress has adopted some restrictions on its use.
A task order
From time to time, PAE is also party to multi-agency contracts or government-wide acquisition contracts, which are IDIQs that permit the aggregationnature of the requirementsprofit incentive offered to the contractor for achieving or exceeding specified standards or goals. We generate revenues under several types of multiple agencies—or acrosscontracts, including the entire federal government—infollowing:
For the proportionate amount of revenues derived from each type of contract for the last three fiscal years, see Note 4 - “Revenues - Disaggregated Revenues” of the notes to the consolidated financial statements.
has ongoing audits of its incurred indirect costs in relation to certain contracts. SeeFor further information refer to the sectionrisk factor entitled “Item 1A. Risk Factors—Risks Related to PAE’s Business—Risks Related to Performance and Operation—A“A negative audit or other investigations by the U.S. Government could adversely affect PAE’s ability to receive U.S. Government contracts and its future operating performance, and could result in financial or reputational harm, including disbarment from receiving government contracts” for additional information.
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PAE’s operations cover a wide range of types and geographies. Therefore, PAE has implemented a diverse approach to specialty coverage, including aviation, marine, cargo, professional liability, kidnap and ransom, pollution, medical malpractice and business travel. PAE’s business travel policy is comprehensive given the significant numbers of expatriate employees and the environments in which they work. In addition, PAE has corporate insurance coverages, including those for directors and officers, fiduciary, crime and employment practices liability.
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•In October 2011, PAE completed the acquisition of Defense Support Services LLC (“DS2”), a provider of aviation and base operation services to military services and other customers. The DS2 acquisition added platform, aviation systems and facility maintenance, repair and overhaul capabilities to PAE’s core offerings, as well as bolstered its base operations support and logistics capabilities.
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competitive position. The Company’s financial condition, results of operations, cash flows, and competitive position could be significantly affected by the risks below or additional risks not presently known to the Company or by risks that the Company presently deems immaterial. Certain factors may havematerial adverse effect on our business, financial conditionchanging global environment that involves numerous known and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained or incorporated by reference in this Annual Report, including our consolidated financial statements and related notes. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additionalunknown risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors thatcould materially adversely affect our business, financial condition, results of operations, cash flows, and operating results.risksrisk factors into fivefour categories for ease of reading, and without any reflection on the importance of, or likelihood of, any particular category.
Anyits operating results could be seriously harmed.
If a project experiences a performance problem, PAE may not be able to recover the additional costs it will incur, which could exceed revenues realized from a project. Finally, if PAE underestimates the resources or time it needs to complete a project with capped or fixed fees, its operating results could be seriously harmed.
In addition, PAE’s reputation could suffer serious harm if allegations of impropriety were made against it or its employees or agents. If PAE was suspended or prohibited from contracting with the U.S. Government, any significant U.S. Government agency, or foreign governmental entities, if PAE’s reputation or relationship with such entities was impaired, or if such entities otherwise ceased doing business with PAE, or significantly decreased the amount of business they do with PAE, its operating performance could be adversely affected and it may experience additional expenses and possible loss of revenue.
The failure of contractors with which PAE has entered into asub- or prime-contractor relationship to meet their obligations to PAE or its clients could have an adverse effect on PAE’s financial position, results of operations and/or cash flows.
When PAE is a prime contractor under a contract, it often relies on other companies to perform some of the work under the contract, and it expects to continue to depend on relationships with other contractors for portions of its delivery of services and revenue in the foreseeable future. If PAE’s subcontractors fail to perform their contractual obligations, its future revenues, profitability and growth prospects could be adversely affected. There is a risk that PAE may have disputes with its subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, client concerns about the subcontractor, PAE’s failure to extend existing task orders or issue new task orders under a subcontract, or PAE’s hiring of a subcontractor’s personnel. During contract performance, failure by a subcontractor to deliver agreed-upon supplies or services, violation of applicable federal government procurement rules (such as, but not limited to, Combatting Trafficking in Persons laws), or failure to pay lower tier subcontractors in a timely fashion may result in early termination of the agreement with that subcontractor. Government decisions to remove elements of work from a contract due to dissatisfaction with performance, funding limitations, or changes in contracting practices and priorities may also result in a need to terminate subcontract agreements. As an example, on a base operation contract in the Bahamas, discrete portions of work were regularly added and removed as the needs of the base population changed, resulting in removal of contract services such as flights between the base and the mainland or addition of services such as watercraft storage facility operation. At the same location, PAE has been requested to add resources to deal with hurricane recovery efforts, and at other times reduce the number of medical facilities to be provided following reduction in base personnel. As a result of these fluctuations, PAE terminated subcontract agreements with subcontractors or materially decreased the scope of work they perform. This leads to a tension in working relationships and may in some cases result in litigation or difficulty in securing subcontractors for future work.
In addition, if any of PAE’s subcontractors fail to deliver the agreed-upon supplies or perform the agreed-upon services on a timely basis, PAE’s ability to fulfill its obligations as a prime contractor may be jeopardized. Material losses could arise in future periods and subcontractor performance deficiencies could result in a client terminating a contract for convenience or default. A termination for default could expose PAE to liability and have an adverse effect on PAE’s ability to compete for future contracts and orders. In the past, PAE has abandoned planned subcontractors prior to contract performance due to security concerns, at the direction of its government customer, or due to inability of the subcontractor to meet target pricing. During performance of a contract in Afghanistan, for example, PAE was compelled to release its planned physical security provider when the customer elected not to pay the higher price quoted by that subcontractor and instead retain the incumbent provider. While PAE’s contractual agreements are written to allow for termination in these cases, such action inevitably damages the working relationship between the two parties.
Conversely, PAE is often a subcontractor to third-party prime contractors. PAE estimates that revenue derived from contracts under which it acted as a subcontractor to other companies represented approximately 19% of its revenue for the year ended December 31, 2019. As a subcontractor, PAE often lacks control over fulfillment of a contract, and poor performance on the contract by the prime contractor or other subcontractors could tarnish PAE’s reputation, even when it performs as required, and could cause other contractors to choose not to hire PAE as a subcontractor in the future. If the U.S. Government terminates or reduces other prime contractors’ programs or does not award them new contracts, subcontracting opportunities available to PAE could decrease, which would have an adverse effect on PAE’s financial position, results of operations and/or cash flows. In addition, as a subcontractor, PAE may be unable to collect payments owed to it by the prime contractor, even if it has performed its obligations under the contract, as a result of, among other things, the prime contractor’s inability to fulfill the contact. PAE could also experience delays in
receiving payment if the prime contractor experiences payment delays, which could have an adverse effect on PAE’s financial position, results of operations and/or cash flows. For example, PAE has in the past and may in the future be required to accept contract payment terms that incorporate“pay-when-paid” provisions creating an inherent risk of delayed payment, particularly when the source of funds is a foreign government or corporation whose performance is difficult or impossible to compel through legal means. PAE performed under a subcontract in 2015 withpay-when-paid payment terms where the source of funds was the Governorate of Basrah in Iraq. When the Governorate failed to pay the prime contractor in a timely fashion, PAE’s corresponding payment was also delayed due to thepay-when-paid payment terms.
PAE’s failure to maintain strong relationships with other contractors could have an adverse effect on its business and results of operations.
•the Procurement Integrity Act;
•the Anti-Kickback Act;
•the CAS;
•the FAR and agency FAR supplements;
•the International Traffic in Arms Regulations promulgated under the Arms Export Control Act;
•the Close the Contractor Fraud Loophole Act;
•the FCPA;
the ServiceServices Contract Act;
•the FCA;
•federal and state employment laws and regulations (including equal opportunity and affirmative action requirements).
Additionally, PAE is subject to the FCA, which provides for substantial damages and penalties where, for example, a contractor presents a false or fraudulent claim to the government for payment or approval.
If PAE is found to have violated the law, or is found not to have acted responsibly as defined by the law, it may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. Government, any of which could have an adverse effect on its financial position, results of operations and/or cash flows.
federal level. It is possible that the CCPA or similar laws will be deemed applicable to some aspects of PAE’s business, which would impose new compliance obligations and require additional investment into data protection activities. The CCPA went into effect on January 1, 2020. Any obligations that may be imposed on PAE under the CCPA or similar laws may be different from or in addition to those required by the GDPR, which may cause additional expense for compliance across various jurisdictions. The GDPR, the CCPA, and the laws of other U.S. states also impose obligations to maintain a cybersecurity program at a certain level of quality, as well as obligations that may require giving notice to affected individuals and to certain regulators in the event of a data breach.
tax regulations, treaties and technical standards and changes in the foregoing; (iv) potential uncertainty with respect to laws and regulations due to a high degree of the difficulty of enforcing agreements and collecting receivables through some foreign legal systems; (v) discretion on the part of governmental authorities, which could result in arbitrary or selective actions against PAE, including suspension or termination of operating licenses; (vi) contract award and funding delays; (vii) potential restrictions on transfers of funds; (viii) import and export duties and value added taxes; (ix) transportation delays and interruptions; (x) uncertainties arising from foreign local business practices and cultural considerations; (xi) the adoption of regulations or enactment of other actions by certain governments that would have a direct or indirect adverse impact on PAE’s business and market opportunities, including nationalization of private enterprise; (xii) general economic conditions; and (xiii)(xii) potential military conflicts, civil strife, acts of terrorism and political risks. Similar to PAE’s U.S. Government contracts, many of its contracts with foreign governments are subject to
In addition, PAE is subject to the FCPA, which prohibits improper payments or offers of payments to foreign governments and their officials and political parties by business entities for the purpose of obtaining or retaining business. In addition, PAE may also be subject to anti-corruption laws in other jurisdictions, such as the U.K. Bribery Act of 2010. PAE has operations and deals with governmental personnel in countries known to experience, or that may be susceptible to, government corruption. PAE’s activities in these countries create the risk of unauthorized payments or offers of payments by its employees, consultants or contractors that could be in violation of various laws including the FCPA and other anti-corruption laws, even though these parties are not always subject to PAE’s control. PAE’s international operations also involve activities involving the transmittal of information, which may include personal data, that may expose PAE to data privacy laws in the jurisdictions in which it operates. If PAE’s data protection practices become subject to new or different restrictions, and to the extent such practices are not compliant with the laws of the countries in which PAE processes data, PAE could face increased compliance expenses and face penalties for violating such laws or be excluded from those markets altogether, in which case its operations could be adversely affected.
PAE’s overall success as a global business depends, in part, on its ability to anticipate and effectively manage these risks but there can be no assurance that PAE will be able to do so without incurring unexpected costs. If PAE is not able to manage the risks related to its international operations, it could have an adverse effect on PAE’s financial position, results of operations and/or cash flows.
Natural or environmental disasters or other events outside PAE’s control
PAE has significant
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Trends and Factors Affecting PAE’s subcontractors and suppliers are also subject to natural and environmental disasters, public health crises or other events outside their control that could affect their ability to perform. Future
Natural and environmental disasters or other events outside PAE’s control could also disrupt PAE’s workforce, electrical and other power distribution networks, including computer and internet operation and accessibility, and the critical infrastructure necessary for its normal business operations. These disruptions could have an adverse effect on its financial position, results of operations and/or cash flows.
Public health crises, such as the coronavirus, could disrupt PAE’s business and result in loss of revenue or higher expenses.
PAE’s operations may be adversely impacted by public health crises, such as pandemics and epidemics. For example, in December 2019, a strain of coronavirus (2019-nCoV) was identified in Wuhan, China, and has spread to other geographic locations. The World Health Organization has described the coronavirus outbreak as a “public health emergency of international concern.” PAE has operations on all seven continents and personnel, customers, and others serviced by the company travel from all over the world. The ability of PAE personnel to travel and PAE’s supply chains are likely to be adversely impacted by such aCOVID-19 pandemic. Operations have been and may be partially reduced or fully suspended due to health concerns, which may result in a decrease of revenue and PAE may have increased medical, housing or other costs due to the exposure of its personnel to the virus and any possible quarantine requirements. PAE may experience delays relating to such events outside of its control, which could have a material adverse impact on its business. At this point, the extent to which the coronavirus may impact PAE’s results is unknown.
PAE’s business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.
PAE faces various security threats, including cybersecurity threats to its information technology infrastructure and attempts to gain access to sensitive or classified information. Such threats can come from external as well as internal sources. The risk of a security breach or disruption, particularly through cyberattack or cyber intrusion, including by Advanced Persistent Threats such as organized computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Cybersecurity threats are significant and evolving and include, among others, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. In addition to security threats, PAE is also subject to other systems failures, including network, software or hardware failures, whether caused by PAE, third-party service providers (including operators of data centers and physical storage sites), natural disasters, power shortages, terrorist attacks or other events. PAE has been, and expects that it will be in the future, the target of Social Engineering Attacks, including attempts by cybercriminals to spoof company email accounts and impersonate company executives in order to gain access to PAE funds. Insurance may have specifiedsub-limits or exclusions in these cases that limit the recovery of lost funds. The unavailability of PAE’s information or communications systems, the failure of these systems to perform as anticipated or any significant breach of data security could cause loss of data, disrupt PAE’s operations, lead to financial losses from remedial actions, require significant management attention and resources, subject it to claims for breach of contract, damages, penalties or contract termination, negatively impact PAE’s reputation among its customers and the public and prevent PAE from being eligible for further work on sensitive or classified programs for U.S. Government customers, which could have an adverse effect on PAE’s financial position, results of operations and/or cash flows. PAE has experienced cybersecurity attacks and other systems interruptions in the past and may experience them in the future. PAE’s property and business interruption insurance may be inadequate to compensate it for all losses that may occur as a result of any such system or operational failure or disruption.
PAE may be harmed by intellectual property infringement claims and its failure to protect its intellectual property could enable competitors to market services with similar features.
PAE may become subject to claims from its employees or third parties who assert that software and other forms of intellectual property that it uses in delivering services and solutions to its clients infringe upon intellectual property rights of such employees or third parties. PAE’s employees develop some of the software and other forms of intellectual property that PAE uses to provide its services and solutions to its clients, but PAE also licenses technology from other vendors and is subject to vendor software audits. If PAE’s employees, vendors, or other third parties assert claims that it or its clients are infringing on their intellectual property rights, it could incur substantial costs to defend against those claims. If any of these infringement claims are ultimately successful, PAE could be required to cease selling or using services that incorporate the challenged software or technology, obtain a license or additional licenses from its employees, vendors, or other third parties, or redesign its services that rely on the challenged software or technology.
PAE attempts to protect its trade secrets and proprietary rights by entering into confidentiality and intellectual property assignment agreements with third parties, its employees and consultants. However, if these are breached, there may not be an adequate remedy available to it. In addition, others may independently discover PAE’s trade secrets and proprietary information and, in such cases, PAE may not be able to assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using PAE’s trade secret is difficult, expensive and time consuming, and the outcome is unpredictable. If PAE is unable to protect its intellectual property, its competitors could market services similar to PAE’s services, which could reduce demand for its offerings. Any litigation or other action to enforce PAE’s intellectual property rights, protect its trade secrets or determine the validity and scope of the proprietary rights of others could result in substantial costs and diversion of resources, with no assurance of success.
In addition, U.S. Government contracts typically contain provisions that allow the U.S. Government to claim rights, including intellectual property rights, in products and data developed and/or delivered under such agreements. PAE may not have the right to prohibit the U.S. Government from using or disclosing certain technologies developed by it, and it may not be able to prohibit third parties, including PAE’s competitors, from using those technologies commercially or in providing products and services to the U.S. Government. The U.S. Government generally takes the position that it has an unlimited right to royalty-free use of technologies that are developed under U.S. Government contracts.
business
.Additional factors that may cause PAE’s financial results to fluctuate fromquarter-to-quarter include those addressed elsewhere in these Risk Factors and the following factors, among others:
the terms of customer contracts that affect the timing of revenue recognition;
variability in demand for PAE’s services and solutions;
commencement, completion or termination of contracts during any particular quarter;
timing of shipments and product deliveries;
timing of award or performance incentive fee notices;
timing of significant bid and proposal costs;
variable purchasing patterns under blanket purchase agreements and other IDIQ contracts;
restrictions on and delays related to the export of defense articles and services;
costs related to government inquiries, audits and investigations;
strategic decisions by PAE or its competitors, such as acquisitions, divestitures, spin-offs and joint ventures;
strategic investments or changes in business strategy;
changes in the extent to which PAE uses subcontractors;
seasonal fluctuations in PAE’s staff utilization rates;
changes in PAE’s effective tax rate including changes in its judgment as to the necessity of the valuation allowance recorded against its deferred tax assets; and
the length of sales cycles.
Significant fluctuations in PAE’s operating results for a particular quarter could cause it to fall out of compliance with the financial covenants related to its debt, which if not waived, could restrict PAE’s access to capital and cause it to take extreme measures to pay down its debt under its existing revolving credit facility. In addition, fluctuations in PAE’s financial results could cause the trading price of the notes to decline.
PAE uses estimates when accounting for contracts and any changes in such estimates could have an adverse effect on PAE’s profitability and its overall financial performance.
Due
other technical contract requirements.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” for additional information.
PAE has recorded provisions in its consolidated financial statements for losses on its contracts, as required under U.S. generally accepted accounting principles, but PAE’s contract loss provisions may not be adequate to cover all actual losses that it may incur in the future. Actual losses could have an adverse effect on its financial position, results of operations and/or cash flows.
PAE’s IDIQ contracts are not firm orders for services, and it may never receive revenue from these contracts, which could adversely affect PAE’s operating performance and result in a loss of expected revenue.
Many
If PAE is unable to manage its growth, its business and financial results could suffer.
Sustaining
Furthermore, the costs of restructuring activities in some cases may not be reimbursable under government cost allowability regulations.
Recently enacted
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” for additional information on how PAE’s consolidated financial statements can be affected by pension plan accounting policies.
Finally,
recompetitions.
U.S. defense spending in fiscal years 2020 and 2021 currently remains subject to statutory spending limits established by the Budget Control Act of 2011 (the “Budget Control Act”). The Budget Control Act includes a sequester mechanism that would impose additional defense cuts. Continued budget uncertainty and the risk of future sequestration cuts remain unless the Budget Control Act is repealed or significantly modified.
Uncertain economic conditions and volatility in financial markets could impact PAE’s business.
PAE’s business may be adversely affected by factors that are beyond its control in the United States and other countries or in the various industries in which it operates, such as disruptions in financial markets or downturns in economic activity in specific countries or regions, adverse changes in the availability and cost of capital, interest rates, tax rates, or regulations in the jurisdictions in which PAE operates. If for any reason PAE loses access to its currently available lines of credit, or if PAE is required to raise additional capital or refinance its existing indebtedness, PAE may be unable to do so in the current credit and stock market environment, or it may be able to do so only on unfavorable terms, if at all. Adverse changes to financial conditions could jeopardize certain counterparty obligations, including those of PAE’s insurers and financial institutions. In particular, if the U.S. Government reduces funding for government initiatives in which PAE participates, it may have an adverse effect on PAE’s financial position, results of operations and/or cash flows.
PAE cannot guarantee that its current sources of liquidity will enable it to continue to perform under its existing contracts and further grow its business. A disruption in the credit markets could adversely affect PAE’s ability to obtain additional liquidity or refinance existing indebtedness on acceptable terms or at all, it may have an adverse effect on PAE’s financial position, results of operations and/or cash flows.
U.S
procurements
.A change in public policy could result in the termination or alteration of PAE’s contracts.
A change in any number of public policy objectives, including with respect to national security and foreign aid, could impact PAE’s business positively or negatively. For example, if the U.S. Government withdraws from Afghanistan or Iraq, PAE’s business could be materially impacted. The Agreement for Bringing Peace to Afghanistan was signed on February 29, 2020, and could impact PAE’s business in Afghanistan. Also, by way of example, changes in immigration policy and border protection in the United States could negatively impact PAE’s business.
•increase PAE’s vulnerability to adverse economic and industry conditions;
•limit PAE’s ability to obtain additional financing for future working capital, capital expenditures, strategic acquisitions and other general corporate requirements;
•require PAE to dedicate a substantial portion of its cash flow from operations to payments on its debt, thereby reducing the availability of its cash flow for operations and other purposes;
•make it more difficult for PAE to satisfy its obligations to its lenders, resulting in possible defaults on and acceleration of such indebtedness;
•limit PAE’s ability to refinance indebtedness or increase the associated costs;
•require PAE to sell assets to reduce debt or influence its decision about whether to do so;
•limit PAE’s flexibility in planning for, or reacting to, changes in its business and the industry in which it operates or prevent PAE from carrying out capital spending that is necessary or important to its growth strategy and efforts to improve operating margins; and
•place PAE at a competitive disadvantage compared to any competitors that have less debt or comparable debt at more favorable interest rates and that, as a result, may be better positioned to withstand economic downturns.
Despite substantial levels of indebtedness, PAE has the ability to incur substantially more indebtedness, which could further intensify the risks described above.
•pay dividends or other payments on capital stock;
•guarantee other obligations;
•grant liens on assets;
•make loans, acquisitions or other investments;
•transfer or dispose of assets;
•make optional payments or modify certain debt instruments;
•engage in transactions with affiliates;
•amend organizational documents;
•engage in mergers or consolidations;
•enter into arrangements that restrict the ability of PAE’s subsidiaries to pay dividends;
•engage in business activities that are materially different from existing business activities;
•change the nature of the business conducted by it; and
•designate subsidiaries as unrestricted subsidiaries.
IV. Risks Relatedoperations
phase-out of LIBOR.
Our debt agreement states that the LIBOR successor rate shall be forward-looking Term SOFR plus the related relevant adjustment. The LIBOR successor rate will be applied in a manner consistent with market practice. Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative floating borrowing rate, may adversely affect our borrowing costs. WeWe have incurred and expect to incur significant,non-recurring costs in connection with consummating the Business Combination and operating as a public company following the consummationeffect of the Business Combination. Wepotential changes to LIBOR or the establishment and use of alternative floating borrowing rates on our outstanding debt that is based on LIBOR. Transitioning to a different borrowing rate may also incur additional costs to retain key employees. Certain expenses incurredresult in connection with the Merger Agreementless favorable pricing on our debt instruments and the transactions contemplated thereby (including the Business Combination) have been or will be paid by the Company. The Company’s transaction expenses as a result of the Business Combination are currently estimated at approximately $33.0 million. The amount of the deferred underwriting commissions was not adjusted for any shares that were redeemed in connection with the Business Combination.
We may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negativean adverse effect on our financial condition, results of operations and our stock price, which could cause you to lose some or all of your investment.
Although Gores III conducted due diligence on PAE in connection with the Business Combination, this diligence may not have surfaced all material issues present in PAE’s business. Moreover, factors outside of PAE’s business and outside of our control may later arise. As a result of these factors, we may be forced to write down or write off assets, restructure operations, or incur impairment or other charges that could result in losses. Further, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our risk analysis. Even though these charges may benon-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. Accordingly, our securities could suffer a reduction in value. Our security holders are unlikely to have a remedy for such reduction in value, unless stockholders are able to successfully claim that the reduction in stock value was due to the breach by our officers or directors of a duty of care or other fiduciary duty owed to them, or if they are able to bring a private claim that the Proxy Statement relating to the Business Combination contained an actionable material misstatement or material omission.
The Company had no operating or financial history and our results of operations may differ significantly from the unaudited pro forma financial data included in the Super 8-K.
Prior to the Business Combination, the Company was a blank check company, and it had no operating history and no revenues. The unaudited pro forma condensed combined statement of operations of the post-combination company combines the historical audited results of operations of the Company for the year ended December 31, 2019, with the historical audited results of operations of Shay for the year ended December 31, 2019, and gives pro forma effect to the Business Combination as if it had been consummated on January 1, 2019. The unaudited pro forma condensed combined balance sheet of the post-combination company combines the historical balance sheets of the Company as of December 31, 2019 and of Shay as of December 31, 2019 and gives pro forma effect to the Business Combination as if it had been consummated on December 31, 2019.
The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only, are based on certain assumptions, address a hypothetical situation and reflect limited historical financial data. Therefore, the unaudited pro forma condensed combined financial statements are not necessarily indicative of the results of operations and financial position that would have been achieved had the Business Combination been consummated on the dates indicated above, or the future consolidated results of operations or financial position of the post-combination company. Accordingly, the post-combination company’s business, assets, cash flows, results of operations and financial condition may differ significantly from those indicated by the unaudited pro forma condensed combined financial statements included in the Super 8-K.
If the Business Combination’s benefits do not meet the expectations of investors or financial analysts, the market price of our securities may decline.
If the benefits of the Business Combination do not meet the expectations of investors or securities analysts, the market price of our securities may decline. Fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Immediately prior to the Business Combination, there was no public market for PAE’s stock and trading in the shares of our securities was not active. If an active market for our securities develops and continues, the trading price of our securities could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors affecting the trading price of our securities may include:
actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in the market’s expectations about our operating results;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
speculation in the press or investment community;
success of competitors;
our operating results failing to meet the expectation of securities analysts or investors in a particular period;
changes in financial estimates and recommendations by securities analysts concerning us or the market in general;
operating and stock price performance of other companies that investors deem comparable to us;
our ability to market new and enhanced services on a timely basis;
changes in laws and regulations affecting our business;
commencement of, or involvement in, litigation involving us following the Business Combination;
changes in our capital structure following the Business Combination, such as future issuances of securities or the incurrence of additional debt;
the volume of securities available for public sale;
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sales of substantial amounts of securities by our directors, officers or significant stockholders or the perception that such sales could occur;
the realization of any of the other risks described herein;
additions or departures of key personnel;
failure to comply with the requirements of Nasdaq;
failure to comply with the Sarbanes-Oxley Act of 2002 or other laws or regulations;
actual, potential or perceived control, accounting or reporting problems;
changes in accounting principles, policies and guidelines; and
general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for the stocks of other companies which investors perceive to be similar to the post-combination company could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
V.
us, including the contractual right to nominate certain directors.
transaction or matter which may be a corporate opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and
•a classified Board with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of the Board;
•the requirement that directors may only be removed from the Board for cause;
•the right of our Board to elect a director to fill a vacancy created by the expansion of our Board or the resignation, death or removal of a director in certain circumstances, which prevents stockholders from being able to fill vacancies on our Board;
•a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
•a prohibition on stockholders calling a special meeting and the requirement that a meeting of stockholders may only be called by members of our Board, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
•the requirement that changes or amendments to certain provisions of our certificate of incorporation or bylaws must be approved by holders of at leasttwo-thirds of our Class A Common Stock; and
•advance notice procedures that stockholders must comply with in order to nominate candidates to our Board or to propose matters to be acted upon at a meeting of stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
The exercise price for our Warrants is higher than in many similar blank check company offerings in the past, and, accordingly, the Warrants are more likely to expire worthless.
The exercise price of our Warrants (as defined below) is higher than is typical with many similar blank check companies in the past. Historically, with regard to units offered by blank check companies, the exercise price of a Warrant was generally a fraction of the purchase price of the units in the IPO. The exercise price for our Warrants is $11.50 per share, subject to adjustment as provided herein. As a result, the Warrants are less likely to ever be in the money and more likely to expire worthless.
The
Resales of the shares of our securities could depress the market price of our securities.
There may be a large number of our securities sold in the market in the near future. These sales, or the perception in the market that the holders of a large number of securities intend to sell securities, could reduce the market price of our securities. Our public stockholders (other than the Private Placement Investors) collectively hold approximately 43% of our outstanding Class A Common Stock. Such securities are freely tradeable. In addition, the Company’s Sponsor and Mr. Randall Bort, Mr. William Patton and Mr. Jeffrey Rea, the Company’s former independent directors prior to the Business Combination (the “Initial Stockholders”), own approximately 6.6% of our outstanding Class A Common Stock, including a portion of the 7,000,000 shares of Class A Common Stock that were converted from shares of the Company’s Class F Common Stock (“Founder Shares”) at the closing of the Business Combination (the “Conversion Shares”), the Shay Stockholders own approximately 23% of our outstanding Class A Common Stock and the Private Placement Investors own approximately 26% of our outstanding Class A Common Stock. All of the securities held by the Initial Stockholders, including the Sponsor, the Shay Stockholders and the Private Placement Investors are subject to registration rights and may be registered for resale under the Securities Act.
Pursuant to the terms of the Registration Rights Agreement, the Founder Shares (and the resulting Conversion Shares) are bound by restrictions on transfer until 180 days following the closing of the Business Combination, and the Shay Stockholders have each signed separate letters with the Company agreeing to be bound by restrictions on the transfer of their shares for 180 days after the completion of the Business Combination. However, upon the expiration of such restrictions on transfer, the Conversion Shares and the shares received by the Shay Stockholders as Stock Consideration may be sold in the public market.
In addition, pursuant to the terms of the Registration Rights Agreement, the Private Placement Warrants, and any shares of Class A Common Stock issuable upon exercise of the Private Placement Warrants, in each case, held by the initial purchasers of the Private Placement Warrants or certain permitted transferees, are bound by restrictions on transfer until 30 days following the closing of the Business Combination. Upon the expiration of such restrictions on transfer, the Private Placement Warrants and any shares of Class A Common Stock issuable upon exercise of the Private Placement Warrants, may be sold in the public market.
We also intend to register all shares of Class A Common Stock that we may issue under the PAE Incorporated 2020 Equity Incentive Plan (the “Incentive Plan”). Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates.
Any sales of our securities or the perception of such sales may depress the market price of our securities.
Our only significant asset is our ownership interest in our operating subsidiaries and such ownership may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our Class A Common Stock or satisfy our other financial obligations.
We have limited direct operations and no significant assets other than our ownership interest in our operating subsidiaries. We depend on our operating subsidiaries for distributions, loans and other payments to generate the funds necessary to meet our financial obligations, including our expenses as a publicly traded company, and to pay any dividends with respect to our Class A Common Stock. The financial condition and operating requirements of our operating subsidiaries may limit our ability to obtain cash from our operating subsidiaries. The earnings from, or other available assets of, our operating subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our Class A Common Stock or satisfy our other financial obligations.
The ability of our operating subsidiaries (other than subsidiaries which have been designated as unrestricted pursuant to our ability to do so in certain limited circumstances) to make distributions, loans and other payments to us for the purposes described above and for any other purpose are governed by the terms of the Existing Credit Agreements, and will be subject to the negative covenants set forth therein. Any loans or other extensions of credit will be subject to the investment covenants under the Existing Credit Agreements. Similarly, any dividends, distributions or similar payments will be permitted only to the extent there is an applicable exception to the dividends and distributions covenants under the Existing Credit Agreements.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and results of operations.
We are subject to income taxes in the United States and other jurisdictions, and our tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
changes in the valuation of our deferred tax assets and liabilities;
expected timing and amount of the release of any tax valuation allowances;
tax effects of stock-based compensation;
costs related to intercompany restructurings;
changes in tax laws, regulations or interpretations thereof; or
lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in jurisdictions where we have higher statutory tax rates.
In addition, we may be subject to audits of our income, sales and other transaction taxes by taxing authorities.
Outcomes from these audits could have an adverse effect on our financial condition and results of operations.
A market for our securities may not continue, which would adversely affect the liquidity and price of our securities.
The price of our securities may fluctuate significantly due to the market’s reaction to the Business Combination and general market and economic conditions. An active trading market for our securities may never develop or, if developed, it may not be sustained. In addition, the price of our securities may vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, if our securities become delisted from Nasdaq for any reason, and are quoted on the OTC Bulletin Board or OTC Pink Sheet Market, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on Nasdaq or another national securities exchange. You may be unable to sell your securities unless a market can be established or sustained.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
Our quarterly operating results may fluctuate significantly because of several factors, including:
labor availability and costs;
profitability of our service offerings, especially in new markets and due to seasonal fluctuations;
changes in interest rates;
impairment of long-lived assets;
macroeconomic conditions, both nationally and locally;
negative publicity;
changes in consumer preferences and competitive conditions; and
expansion to new markets.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our securities adversely, then the price and trading volume of our securities could decline.
The trading market for our securities will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. If any of the analysts that may cover us change their recommendation regarding our securities adversely, or provide more favorable relative recommendations about our competitors, the price of our securities would likely decline. If any analyst that may cover us ceases covering us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our securities to decline.
Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. To comply with the requirements of being a public company, we are required to provide attestation on
internal controls and we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. The standards required for a public company under Section 404 of the Sarbanes-Oxley Act of 2002 are significantly more stringent than those required of Shay as a privately-held company. Further, as an emerging growth company, our independent registered public accounting firm was not required to formally attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 until the date we were no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event that it is not satisfied with the level at which the controls of the post-combination company are documented, designed or operating.
Testing and maintaining these controls can divert our management’s attention from other matters that are important to the operation of our business. If we identify material weaknesses in the internal control over financial reporting of the post-combination company or are unable to comply with the requirements of Section 404 or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A Common Stock could be negatively affected, and we could become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.
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and Holders
Holders
As of March 2, 2020, there were approximately 59 holders of record of our shares of Class A Common StockBoard is not currently contemplating and approximately seven holders of record of our warrants. Because many of the shares of our Class A Common Stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 31, 2019, the Company had no securities authorized for issuance under equity compensation plans.
Recent Sales of Unregistered Securities
On November 3, 2017, our Sponsor purchased 10,781,250 Founder Shares for an aggregate purchase price of $25,000, or approximately $0.002 per share. Subsequently, our Sponsor transferred an aggregate of 75,000 Founder Shares to Messrs. Randall Bort, William Patton and Jeffrey Rea, our former independent directors. On October 22, 2018, following the expiration of the unexercised portion of the underwriter’s over-allotment option, our Sponsor forfeited 781,250 Founder Shares, so that the remaining Founder Shares held by the Initial Stockholders would represent 20.0% of the outstanding shares of capitaldoes not anticipate declaring any stock following the IPO Closing Date. Our IPO was consummated on September 11, 2018.
Prior to the IPO Closing Date, we completed the private sale of an aggregate of 6,666,666 Private Placement Warrants to our Sponsor at a price of $1.50 per Private Placement Warrant, generating total proceeds, before expenses, of $10,000,000. The Private Placement Warrants have terms and provisions that are identical to those of the Public Warrants sold as part of the unitsdividends in the IPO, except that the Private Placement Warrants may be physical (cash) or net share (cashless) settled and are not redeemable so long as they are held by the Sponsor or its permitted transferees. If the Private Placement Warrants are held by holders other than our Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by the holders on the same basis as the Warrants.
Information about additional unregistered salesforeseeable future.
The sales of the above securities by the Company were exempt from registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering without any form of general solicitation or general advertising.
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Consolidated Statements of Operations Data:
| Year ended December 31, 2019 | Year ended December 31, 2018 | For the Period from October 23, 2017 (inception) to December 31, 2017 | ||||||||||
Professional fees and other expenses | $ | (5,277,801 | ) | $ | (210,619 | ) | $ | (23,076 | ) | |||
State franchise taxes, other than income tax | (200,000 | ) | (200,050 | ) | (608 | ) | ||||||
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Loss from operations | (5,477,801 | ) | (410,669 | ) | (23,684 | ) | ||||||
Other income - interest income | 8,488,158 | 2,609,060 | — | |||||||||
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Net income/(loss) before income taxes | $ | 3,010,357 | $ | 2,198,391 | $ | (23,684 | ) | |||||
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Provision for income tax | (1,551,981 | ) | (461,662 | ) | — | |||||||
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Net income/(loss) attributable to common shares | $ | 1,458,376 | $ | 1,736,729 | $ | (23,684 | ) | |||||
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Per Share Data: | ||||||||||||
Net income/(loss) per ordinary share: | ||||||||||||
Class A ordinary shares - basic and diluted | $ | 0.07 | $ | 0.21 | $ | — | ||||||
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Class F ordinary shares - basic and diluted | $ | (0.14 | ) | $ | (0.05 | ) | $ | (0.00 | ) | |||
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Balance Sheet Data:
| December 31, 2019 | December 31, 2018 | |||||||
Working capital(1) | $ | (4,187,865 | ) | $ | 375,661 | |||
Total assets(2) | 408,957,362 | 403,668,983 | ||||||
Total liabilities | 18,517,373 | 14,687,370 | ||||||
Stockholders’ equity | 5,000,009 | 5,000,003 | ||||||
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As of December 31, 2019, the total assets amount includes $408,585,719 being held in the Trust Account, $394,585,719 of which was available to us for the purposes of consummating a Business Combination within the time period described in this Annual Report on Form10-K (with $14,000,000 in deferred underwriting fees payable upon consummation of a Business Combination) and the remaining $371,643 being available to us for general working capital purposes.
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Overview
Recent Developments
PAE Business Combination
On Unless otherwise noted, the Closing Date,MD&A compares the Company consummated the previously announced business combination pursuantyear ended December 31, 2020 to the Merger Agreement, which provided for the Business Combination. As a resultyear ended December 31, 2019.
Additional information regarding the Business Combination and related transactions is set forth in our Current Report on Form8-K filed with the SEC on February 14, 2020.
The Business Combination is a subsequent event that occurred after the periods for which the financial information herein is presented. However, an annual report onthis Form 10-K including consolidated financial statements of Gores Holdings III, Inc. for the periods presented herein, is required tocan be filed with the Securities and Exchange Commission (“SEC”). The Company’s financial statement presentation to be includedfound in quarterly and annual filings with the SEC on Forms 10-Q and 10-K with respect to periods subsequent to the Business Combination will include the consolidated financial statements of Shay and its subsidiaries for periods prior to the completion of the Business Combination and of PAE Incorporated for periods from and after the Closing Date. The financial information included in this “Management’s Discussion and Analysis of Financial Condition and Results ofor Operations” reflectsin the historical operations of Gores Holdings III, Inc.,Company’s Annual Report on Form 8-K/A filed with the legal acquirer,SEC on March 11, 2020. As used in this MD&A, unless the context indicates otherwise, noted.
Results of Operations
For the calendar yearsfinancial information relating to the year ended December 31, 2019, are those of Shay and 2018,its subsidiaries, and the period from October 23, 2017 (inception) tofinancial information and data for the year ended December 31, 2017, we2020 includes the financial information and data of Shay and its subsidiaries for the period prior to the Closing and the financial information and data of PAE Incorporated for the period subsequent to the Closing. See Note 1 - “Description of Business” and Note 6 - “Business Combinations and Acquisitions” for additional information.
As indicated in the accompanying consolidated financial statements,2020, PAE’s overall contract backlog increased by 24.6% from $6,351.8 million to $7,915.4 million, of which $1,423.3 million was funded as of December 31, 2020. This increase was primarily due to the acquisitions of CENTRA and Metis, which added $1,150.5 million of acquired backlog at year end December 31, 2020. Backlog is an operational measure representing PAE’s estimate of the amount of revenue that it expects to realize over the remaining life of awarded contracts and task orders; the funded backlog refers to the value on contracts for which funding is appropriated less revenues previously recognized on these contracts. Unfunded backlog represents the estimated future revenues to be earned from negotiated contracts for which funding has not been appropriated or authorized, and unexercised priced contract options. The total backlog consists of remaining performance obligations plus unexercised options. PAE believes backlog is a useful metric for investors because it is an important measure of business development performance and revenue growth. This metric is used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. See Note 4 - “Revenues" of the notes to the consolidated financial statements for more information.
| As of | As of | ||||||||||
| December 31, | December 31, | ||||||||||
| 2020 | 2019 | ||||||||||
| Global Mission Services: | |||||||||||
| Funded GMS backlog | $ | 946,711 | $ | 1,173,196 | |||||||
| Unfunded GMS backlog | 4,445,442 | 3,393,081 | |||||||||
| Total GMS backlog | $ | 5,392,153 | $ | 4,566,277 | |||||||
| National Security Solutions: | |||||||||||
| Funded NSS backlog | $ | 476,618 | $ | 311,214 | |||||||
| Unfunded NSS backlog | 2,046,634 | 1,474,309 | |||||||||
| Total NSS backlog | $ | 2,523,252 | $ | 1,785,523 | |||||||
| Total: | |||||||||||
| Funded backlog | $ | 1,423,329 | $ | 1,484,410 | |||||||
| Unfunded backlog | 6,492,076 | 4,867,390 | |||||||||
| Total backlog | $ | 7,915,405 | $ | 6,351,800 | |||||||
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| December 31, | December 31, | Dollar Change | Percent Change | ||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Revenues | $ | 2,714,628 | $ | 2,763,893 | $ | (49,265) | (1.8) | % | |||||||||||||||
| Cost of revenues | 2,098,153 | 2,183,574 | (85,421) | (3.9) | |||||||||||||||||||
| Selling, general and administrative expenses | 498,827 | 530,080 | (31,253) | (5.9) | |||||||||||||||||||
| Amortization of intangible assets | 34,154 | 33,205 | 949 | 2.9 | |||||||||||||||||||
| Total operating expenses | 2,631,134 | 2,746,859 | (115,725) | (4.2) | |||||||||||||||||||
| Program profit | 83,494 | 17,034 | 66,460 | 390.2 | |||||||||||||||||||
| Other income, net | 7,272 | 9,785 | (2,513) | (25.7) | |||||||||||||||||||
| Operating income | 90,766 | 26,819 | 63,947 | 238.4 | |||||||||||||||||||
| Interest expense, net | (73,857) | (86,011) | 12,154 | (14.1) | |||||||||||||||||||
| Income (loss) before income taxes | 16,909 | (59,192) | 76,101 | (128.6) | |||||||||||||||||||
| Expense (benefit) from income taxes | 3,083 | (9,131) | 12,214 | (133.8) | |||||||||||||||||||
| Net income (loss) | 13,826 | (50,061) | 63,887 | (127.6) | |||||||||||||||||||
| Noncontrolling interest in earnings of ventures | (1,464) | (252) | (1,212) | 481.0 | |||||||||||||||||||
| Net income (loss) income attributed to PAE Incorporated | $ | 15,290 | $ | (49,809) | $ | 65,099 | (130.7) | % | |||||||||||||||
2019. This decrease was primarily driven by reduction in average debt balances year over year and lower interest rates.
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Revenues | % of Total Revenues | Revenues | % of Total Revenues | ||||||||||||||||||||
| GMS | $ | 2,080,474 | 76.6 | % | $ | 2,099,737 | 76.0 | % | |||||||||||||||
| NSS | 634,154 | 23.4 | 664,156 | 24.0 | |||||||||||||||||||
| Corporate | — | — | — | — | |||||||||||||||||||
| Consolidated revenues | $ | 2,714,628 | 100.0 | % | $ | 2,763,893 | 100.0 | % | |||||||||||||||
| Operating Income (Loss) | Profit Margin % | Operating Income (Loss) | Profit Margin % | ||||||||||||||||||||
| GMS | $ | 80,090 | 3.0 | % | $ | 92,386 | 3.3 | % | |||||||||||||||
| NSS | 22,073 | 0.8 | (36,940) | (1.3) | |||||||||||||||||||
| Corporate | (11,397) | (28,627) | |||||||||||||||||||||
| Consolidated operating income | $ | 90,766 | $ | 26,819 | |||||||||||||||||||
In November 2017, our Sponsor purchased an aggregate
| Year Ended | |||||||||||||||||
| December 31, | December 31, | Dollar Change | |||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Net cash provided by operating activities | $ | 100,862 | $ | 116,648 | $ | (15,786) | |||||||||||
| Net cash used in investing activities | (316,213) | (2,689) | (313,524) | ||||||||||||||
| Net cash provided by (used in) financing activities | 231,783 | (95,274) | 327,057 | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 1,441 | (1,747) | 3,188 | ||||||||||||||
| Net increase in cash and cash equivalents | $ | 17,873 | $ | 16,938 | $ | 935 | |||||||||||
| December 31, | December 31, | ||||||||||
| 2020 | 2019 | ||||||||||
| First Term Loan | $ | 890,000 | $ | 506,772 | |||||||
| Second Term Loan | — | 265,329 | |||||||||
| 2020 ABL Credit Agreement | — | — | |||||||||
| Total debt | 890,000 | 772,101 | |||||||||
| Unamortized discount and debt issuance costs | (23,733) | (22,164) | |||||||||
| Total debt, net of discount and debt issuance costs | 866,267 | 749,937 | |||||||||
| Less current maturities of long-term debt | (5,961) | (22,007) | |||||||||
| Total long-term debt, net of current | $ | 860,306 | $ | 727,930 | |||||||
| Calendar Years | |||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||||||||||||||
| Bank loan debt | $ | 8,900 | $ | 8,900 | $ | 8,900 | $ | 8,900 | $ | 8,900 | $ | 845,500 | $ | 890,000 | |||||||||||||||||||||||||||
| Operating leases | 48,547 | 42,234 | 37,212 | 29,009 | 22,558 | 54,509 | 234,069 | ||||||||||||||||||||||||||||||||||
| Total | $ | 57,447 | $ | 51,134 | $ | 46,112 | $ | 37,909 | $ | 31,458 | $ | 900,009 | $ | 1,124,069 | |||||||||||||||||||||||||||
On September 11, 2018, we consummated our IPOfair value of 40,000,000 Units at a price of $10.00 per Unit, including 2,500,000 Unitsreportable segment is less than its carrying amount. If, as a result of the underwriter’s partial exercisequalitative assessment, it is more likely than not that the fair value of their over-allotment option, generating gross proceedsa reportable segment is less than its carrying amount, PAE compares the fair value of $400,000,000. On the IPO Closing Date, we completed the private sale of an aggregate of 6,666,666 Private Placement Warrants, each exercisable to purchase one share of Common Stock at $11.50 per share, to our Sponsor, at a price of $1.50 per Private Placement Warrant, generating gross proceeds, before expenses, of $10,000,000. After deducting the underwriting discounts and commissions (excluding any deferred underwriting commissions (the “Deferred Discount”), which amount became payable upon consummation of the Business Combination) and the estimated offering expenses, the total net proceeds from our IPO and the sale of the Private Placement Warrants were 401,100,000, of which $400,000,000 (or $10.00 per share soldreportable segments using a discounted cash flow methodology, or other fair value measures as considered appropriate in the IPO) was placedcircumstances, to its net book value, including goodwill. If the net book value exceeds the fair value, PAE will measure impairment by comparing the derived fair value of goodwill to its carrying value, and any impairment is recorded in the Trust Account. Thecurrent period.
On November 3, 2017, our Sponsor loaned us an aggregatein the period that includes the enactment date. Estimates of $150,000 by the issuancerealizability of an unsecured promissory note for $150,000 to cover expenses related to the IPO, and on August 30, 2018, our Sponsor loaned us an additional $150,000 by the issuance of a second unsecured promissory note for $150,000 to cover expenses related to the IPO (collectively, the “Notes”). These Notes werenon-interest bearing and payabledeferred tax assets are based on the earlierscheduled reversal of November 30, 2018 or the completion of the IPO. These Notes were repaid in full upon the completion of the IPO.
As of December 31, 2019deferred tax liabilities, projected future taxable income, and 2018, we had cash held outside of the Trust Account of $244,960 and $856,182, respectively, which is available to fund our working capital requirements.
As of December 31, 2019 and 2018, the Company had current liabilities of $4,517,373 and $687,370, respectively and working capital of ($4,187,865) and $375,661, respectively, largelytax planning strategies.
Off-balance sheet financing arrangements
We have no obligations, assets or liabilities which would be consideredoff-balance sheet arrangements asestablishment of December 31, 2019 and 2018. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements.
We have not entered into anyoff-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into anynon-financial agreements involving assets as of December 31, 2019 and 2018.
Contractual obligations
We did not have any long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations or long-term liabilities at December 31, 2019 other than an administrative services agreement to pay a monthly recurring expense of $20,000 to The Gores Group for office space, utilities and secretarial support. The administrative services agreement terminated upon the completion of the Business Combination.
The underwriter is entitled to underwriting discounts and commissions of 5.5%, of which 2.0% ($8,000,000) was paid at the IPO Closing Date, and 3.5% ($14,000,000) was deferred. The Deferred Discount became payable to the underwriter from the amounts held in the Trust Account upon completion of the Business Combination, pursuant to the terms of the underwriting agreement. The underwriter was not entitled to any interest accruedvaluation allowance on the Deferred Discount.
|
Market
We haveas a result is affected by market price fluctuations. PAE has decided not engaged in any hedging activities since our inception on October 23, 2017 through December 31, 2019.
|
INDEX TO FINANCIAL STATEMENTS
Page | |||||||||
Consolidated | |||||||||
To
and Stockholders
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
| Revenue Recognition Related to Cost-based Input Method | ||||||||
| Description of the Matter | For the year ended December 31, 2020, the Company recorded revenue of $2,714.6 million. As described in Note 2 to the consolidated financial statements, for service type contracts, performance obligations are typically satisfied as services are rendered and the Company uses a contract cost-based input method to measure progress. The Company reviews the progress and execution of performance obligations under the estimate at completion process to determine changes in estimated revenues and costs. As part of this process, the Company reviews information including, but not limited to, key contract terms and conditions, program schedule, progress towards completion and identified risks and opportunities. The risks and opportunities include judgments about the ability and cost to achieve the contract milestones and other technical contract requirements. Auditing the Company’s revenue recognition for service type contracts based on the cost-based input method involved subjective auditor judgment to evaluate the Company’s estimates at completion. Management made assumptions regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the profitability of the Company’s contracts. | |||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over revenue recognition based on the cost-based input method. For example, we tested controls over management’s estimates at completion for the performance obligations. To test the Company’s recognition of revenue based on the cost-based input method, our audit procedures included, among others, evaluating the assumptions used to develop the estimates at completion and the completeness and accuracy of the underlying data used in management’s calculations. For example, we compared estimated costs to source documentation such as contractual agreements, subcontractor agreements, purchase orders and current labor and overhead rates. In addition, we obtained an understanding of the status of completion through discussions with program teams and review of any corroborating or contrary information. For example, our procedures included performing analyses to compare management’s estimates to historical results of similar completed contracts. | |||||||
| Valuation of Acquired Intangible Assets | ||||||||
| Description of the Matter | As described in Note 6 to the consolidated financial statements, during the year ended December 31, 2020, the Company completed the acquisition of CENTRA Technology, Inc. (“CENTRA”) for a consideration paid of $225.3 million, net. The Company’s accounting for the acquisition included determining the fair value of the acquired intangible assets including customer relationships of $71.8 million. The customer relationships intangible is comprised of contract backlog as of the acquisition date. The customer relationships intangible was valued using an income method approach in which the value is derived from an estimation of the after-tax cash flows specifically attributable to customer relationships. Auditing the accounting for the acquired intangible assets of CENTRA involved complex auditor judgment due to the estimation required in management’s determination of the fair value. The estimation was sensitive to the underlying assumptions, including projections of revenues and profit margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions. | |||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the accounting for acquired intangible assets. For example, we tested controls over management’s review of the valuation model and significant assumptions discussed above used in the valuation as well as controls over the completeness and accuracy of the data used in the model and assumptions. To test the fair value of these acquired intangible assets, our audit procedures included, among others, evaluating the Company's use of valuation methodologies, evaluating the significant assumptions, evaluating the prospective financial information and testing the completeness and accuracy of underlying data. We involved our valuation specialists to assist in testing certain significant assumptions used to value the acquired intangible assets. For example, we compared the significant assumptions to current industry and market trends, historical results of the acquired business and to other relevant factors. We also performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions. | |||||||
Denver, Colorado
2011.
formerly GORES HOLDINGS III, INC.
| December 31, 2019 | December 31, 2018 | |||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 244,960 | $ | 856,182 | ||||
Prepaid assets | 84,548 | 206,849 | ||||||
|
|
|
| |||||
Total current assets | 329,508 | 1,063,031 | ||||||
Deferred tax asset | 42,135 | — | ||||||
Investments and cash held in Trust Account | 408,585,719 | 402,605,952 | ||||||
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| |||||
Total assets | $ | 408,957,362 | $ | 403,668,983 | ||||
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| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accrued expenses | $ | 3,681,060 | $ | 25,658 | ||||
State franchise tax accrual | 40,000 | 200,050 | ||||||
Income tax payable | 796,313 | 461,662 | ||||||
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| |||||
Total current liabilities | 4,517,373 | 687,370 | ||||||
Deferred underwriting compensation | 14,000,000 | 14,000,000 | ||||||
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| |||||
Total liabilities | $ | 18,517,373 | $ | 14,687,370 | ||||
|
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| |||||
Commitments and Contingencies: | ||||||||
Class A subject to possible redemption, 38,543,998 and 38,398,161 shares at December 31, 2019 and December 31, 2018, respectively (at redemption value of $10 per share) | 385,439,980 | 383,981,610 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value; 1,000,000 shares authorized, none issued or outstanding | — | — | ||||||
Common stock | ||||||||
Class A common stock, $0.0001 par value; 200,000,000 shares authorized, 1,456,002 and 1,601,839 shares issued and outstanding (excluding 38,543,998 and 38,398,161 shares subject to possible redemption) at December 31, 2019 and December, 31, 2018, respectively | 146 | 160 | ||||||
Class F common stock, $0.0001 par value; 20,000,000 shares authorized, 10,000,000 shares issued and outstanding | 1,000 | 1,000 | ||||||
Additionalpaid-in-capital | 1,827,442 | 3,285,798 | ||||||
Retained earnings | 3,171,421 | 1,713,045 | ||||||
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Total stockholders’ equity | 5,000,009 | 5,000,003 | ||||||
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Total liabilities and stockholders’ equity | $ | 408,957,362 | $ | 403,668,983 | ||||
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Incorporated
| Year Ended | |||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Revenues | $ | 2,714,628 | $ | 2,763,893 | $ | 2,608,562 | |||||||||||||||||||||||
| Cost of revenues | 2,098,153 | 2,183,574 | 1,991,622 | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | 498,827 | 530,080 | 536,019 | ||||||||||||||||||||||||||
| Amortization of intangible assets | 34,154 | 33,205 | 35,780 | ||||||||||||||||||||||||||
| Total operating expenses | 2,631,134 | 2,746,859 | 2,563,421 | ||||||||||||||||||||||||||
| Program profit | 83,494 | 17,034 | 45,141 | ||||||||||||||||||||||||||
| Other income, net | 7,272 | 9,785 | 4,980 | ||||||||||||||||||||||||||
| Operating income | 90,766 | 26,819 | 50,121 | ||||||||||||||||||||||||||
| Interest expense, net | (73,857) | (86,011) | (84,360) | ||||||||||||||||||||||||||
| Income (loss) before income taxes | 16,909 | (59,192) | (34,239) | ||||||||||||||||||||||||||
| Expense (benefit) from income taxes | 3,083 | (9,131) | (2,661) | ||||||||||||||||||||||||||
| Net income (loss) | 13,826 | (50,061) | (31,578) | ||||||||||||||||||||||||||
| Noncontrolling interest in earnings of ventures | (1,464) | (252) | 2,881 | ||||||||||||||||||||||||||
| Net income (loss) attributed to PAE Incorporated | $ | 15,290 | $ | (49,809) | $ | (34,459) | |||||||||||||||||||||||
| Net income (loss) per share attributed to PAE Incorporated: | |||||||||||||||||||||||||||||
| Basic | $ | 0.18 | $ | (2.36) | $ | (1.63) | |||||||||||||||||||||||
| Diluted | $ | 0.18 | $ | (2.36) | $ | (1.63) | |||||||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||||||||
| Basic | 84,114,016 | 21,127,823 | 21,127,823 | ||||||||||||||||||||||||||
| Diluted | 85,369,328 | 21,127,823 | 21,127,823 | ||||||||||||||||||||||||||
formerly GORES HOLDINGS III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Period from | ||||||||||||
| Year ended | Year ended | October 23, 2017 | ||||||||||
| December 31, | December 31, | (inception) to | ||||||||||
| 2019 | 2018 | December 31, 2017 | ||||||||||
Professional fees and other expenses | $ | (5,277,801 | ) | $ | (210,619 | ) | $ | (23,076 | ) | |||
State franchise taxes, other than income tax | (200,000 | ) | (200,050 | ) | (608 | ) | ||||||
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Loss from operations | (5,477,801 | ) | (410,669 | ) | (23,684 | ) | ||||||
Other income - interest income | 8,488,158 | 2,609,060 | — | |||||||||
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Net income/(loss) before income taxes | $ | 3,010,357 | $ | 2,198,391 | $ | (23,684 | ) | |||||
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Provision for income tax | (1,551,981 | ) | (461,662 | ) | — | |||||||
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Net income/(loss) attributable to common shares | $ | 1,458,376 | $ | 1,736,729 | $ | (23,684 | ) | |||||
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| Per Share Data: | ||||||||||||
Net income/(loss) per ordinary share: | ||||||||||||
Class A ordinary shares - basic and diluted | $ | 0.07 | $ | 0.21 | $ | — | ||||||
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Class F ordinary shares - basic and diluted | $ | (0.14 | ) | $ | (0.05 | ) | $ | (0.00 | ) | |||
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Incorporated
| Year Ended | |||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Net income (loss) | $ | 13,826 | $ | (50,061) | $ | (31,578) | |||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Change in foreign currency translation adjustment, net of tax | 1,583 | 317 | (1,061) | ||||||||||||||||||||||||||
| Other, net | 427 | 1,687 | 1,686 | ||||||||||||||||||||||||||
| Other comprehensive income | 2,010 | 2,004 | 625 | ||||||||||||||||||||||||||
| Comprehensive income (loss) | 15,836 | (48,057) | (30,953) | ||||||||||||||||||||||||||
| Comprehensive (loss) income attributed to noncontrolling interests | (1,084) | (178) | 2,656 | ||||||||||||||||||||||||||
| Comprehensive income (loss) attributed to PAE Incorporated | $ | 16,920 | $ | (47,879) | $ | (33,609) | |||||||||||||||||||||||
formerly GORES HOLDINGS III, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2019Incorporated
October 23, 2017 (inception) to December 31, 2017
| Class A Ordinary Shares | Class F Ordinary Shares | Accumulated | ||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-In Capital | Deficit/Retained Earnings | Stockholders’ Equity | ||||||||||||||||||||||
Balance at October 23, 2017 (inception) | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Proceeds from sale of Class F common stock to Sponsor in November 2017 | — | — | 10,781,250 | 1,078 | 23,922 | — | 25,000 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (23,684 | ) | (23,684 | ) | |||||||||||||||||||
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Balance at December 31, 2017 | — | $ | — | 10,781,250 | $ | 1,078 | $ | 23,922 | $ | (23,684 | ) | $ | 1,316 | |||||||||||||||
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Forfeited Class F Common stock by Sponsor | — | — | (781,250 | ) | (78 | ) | 78 | — | — | |||||||||||||||||||
Proceeds from initial public offering of Units on | 40,000,000 | 4,000 | — | — | 399,996,000 | — | 400,000,000 | |||||||||||||||||||||
Sale of 6,666,666 Private Placement Warrants | — | — | — | — | 10,000,000 | — | 10,000,000 | |||||||||||||||||||||
Underwriter’s discounts | — | — | — | — | (8,000,000 | ) | — | (8,000,000 | ) | |||||||||||||||||||
Offering costs charged to additionalpaid-in capital | — | — | — | — | (756,432 | ) | — | (756,432 | ) | |||||||||||||||||||
Deferred underwriting compensation | — | — | — | — | (14,000,000 | ) | — | (14,000,000 | ) | |||||||||||||||||||
Class A common stock subject to possible redemption; | (38,398,161 | ) | (3,840 | ) | — | — | (383,977,770 | ) | — | (383,981,610 | ) | |||||||||||||||||
Net income | — | — | — | — | — | 1,736,729 | 1,736,729 | |||||||||||||||||||||
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Balance at December 31, 2018 | 1,601,839 | $ | 160 | 10,000,000 | $ | 1,000 | $ | 3,285,798 | $ | 1,713,045 | $ | 5,000,003 | ||||||||||||||||
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Change in proceeds subject to possible redemption to 38,543,998 shares at redemption value | (145,837 | ) | (14 | ) | — | — | (1,458,356 | ) | — | (1,458,370 | ) | |||||||||||||||||
Net income | — | — | — | — | — | 1,458,376 | 1,458,376 | |||||||||||||||||||||
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Balance at December 31, 2019 | 1,456,002 | $ | 146 | 10,000,000 | $ | 1,000 | $ | 1,827,442 | $ | 3,171,421 | $ | 5,000,009 | ||||||||||||||||
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par value amounts)
| December 31, | December 31, | ||||||||||
| 2020 | 2019 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 85,908 | $ | 68,035 | |||||||
| Accounts receivable, net | 585,511 | 442,180 | |||||||||
| Prepaid expenses and other current assets | 61,607 | 43,549 | |||||||||
| Total current assets | 733,026 | 553,764 | |||||||||
| Property and equipment, net | 27,615 | 30,404 | |||||||||
| Deferred income taxes, net | 0 | 3,212 | |||||||||
| Investments | 18,272 | 17,925 | |||||||||
| Goodwill | 590,668 | 409,588 | |||||||||
| Intangible assets, net | 258,210 | 180,464 | |||||||||
| Operating lease right-of-use assets, net | 191,370 | 162,184 | |||||||||
| Other noncurrent assets | 10,209 | 13,758 | |||||||||
| Total assets | $ | 1,829,370 | $ | 1,371,299 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 152,962 | $ | 124,661 | |||||||
| Accrued expenses | 114,222 | 102,315 | |||||||||
| Customer advances and billings in excess of costs | 106,475 | 51,439 | |||||||||
| Salaries, benefits and payroll taxes | 145,186 | 130,633 | |||||||||
| Accrued taxes | 15,582 | 18,488 | |||||||||
| Current portion of long-term debt, net | 5,961 | 22,007 | |||||||||
| Operating lease liabilities, current portion | 46,756 | 36,997 | |||||||||
| Other current liabilities | 45,037 | 30,893 | |||||||||
| Total current liabilities | 632,181 | 517,433 | |||||||||
| Deferred income taxes, net | 4,389 | 0 | |||||||||
| Long-term debt, net | 860,306 | 727,930 | |||||||||
| Long-term operating lease liabilities | 145,569 | 129,244 | |||||||||
| Other long-term liabilities | 30,273 | 8,601 | |||||||||
| Total liabilities | 1,672,718 | 1,383,208 | |||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $0.0001 par value per share, 1,000,000 shares authorized; 0 shares issued and outstanding | 0 | 0 | |||||||||
| Common stock, $0.0001 par value per share: 210,000,000 shares authorized; 92,040,654 and 21,127,823 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | 9 | 3 | |||||||||
| Additional paid-in capital | 252,612 | 101,742 | |||||||||
| Accumulated deficit | (130,081) | (145,371) | |||||||||
| Accumulated other comprehensive income (loss) | 1,876 | (134) | |||||||||
| Total PAE Incorporated stockholders' equity | 124,416 | (43,760) | |||||||||
| Noncontrolling interests | 32,236 | 31,851 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,829,370 | $ | 1,371,299 | |||||||
formerly GORES HOLDINGS III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Period from | ||||||||||||
| Year ended | Year Ended | October 23, 2017 | ||||||||||
| December 31, | December 31, | (inception) to | ||||||||||
| 2019 | 2018 | December 31, 2017 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income/(loss) | $ | 1,458,376 | $ | 1,736,729 | $ | (23,684 | ) | |||||
Changes in state franchise tax accrual | (160,050 | ) | 199,442 | 608 | ||||||||
Changes in prepaid assets | 122,301 | (206,849 | ) | — | ||||||||
Changes in deferred offering costs | — | 153,198 | (153,198 | ) | ||||||||
Changes in deferred income tax provision | (42,135 | ) | — | — | ||||||||
Changes in income taxes payable | 334,651 | 461,662 | — | |||||||||
Changes in accrued expenses, formation and offering costs | 3,655,402 | (85,353 | ) | 111,011 | ||||||||
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Net cash provided by/(used in) operating activities | 5,368,545 | 2,258,829 | (65,263 | ) | ||||||||
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Cash flows from investing activities: | ||||||||||||
Cash deposited in Trust Account | — | (400,000,000 | ) | — | ||||||||
Interest reinvested in Trust Account | (5,979,767 | ) | (2,605,952 | ) | — | |||||||
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Net cash used in investing activities | (5,979,767) | (402,605,952) | — | |||||||||
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Cash flows from financing activities: | ||||||||||||
Proceeds from sale of Units in initial public offering | — | 400,000,000 | — | |||||||||
Proceeds from sale of Private Placement Warrants to Sponsor | — | 10,000,000 | — | |||||||||
Proceeds from notes and advances payable - related party | — | — | 150,000 | |||||||||
Proceeds from sale of Class F common stock to Sponsor | — | — | 25,000 | |||||||||
Repayment of notes and advances payable – related party | — | (150,000 | ) | — | ||||||||
Payment of underwriter’s discounts and commissions | — | (8,000,000 | ) | — | ||||||||
Payment of accrued offering costs | — | (756,432 | ) | — | ||||||||
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Net cash provided by financing activities | — | 401,093,568 | 175,000 | |||||||||
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(Decrease) Increase in cash | (611,222 | ) | 746,445 | 109,737 | ||||||||
Cash at beginning of period | 856,182 | 109,737 | — | |||||||||
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Cash at end of period | $ | 244,960 | $ | 856,182 | $ | 109,737 | ||||||
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Supplemental disclosure ofnon-cash financing activities: | ||||||||||||
Deferred underwriting compensation | $ | — | $ | 14,000,000 | $ | — | ||||||
Offering costs included in accrued expenses | $ | — | $ | — | $ | 88,011 | ||||||
Cash paid for income and state franchise taxes | $ | 1,579,515 | $ | 608 | $ | — | ||||||
Incorporated
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive (Loss) / Income | Total PAE Incorporated Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 282,047 | $ | 3 | $ | 101,742 | $ | (61,248) | $ | (2,763) | $ | 37,734 | $ | 28,705 | $ | 66,439 | ||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | (34,459) | — | (34,459) | 2,881 | (31,578) | |||||||||||||||||||||||||||||||||||||||
| Cumulative effect due to adoption of new accounting standards | — | — | — | 145 | — | 145 | (1,340) | (1,195) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net | — | — | — | — | 625 | 625 | — | 625 | |||||||||||||||||||||||||||||||||||||||
| Distributions to venture partners and other | — | — | — | — | — | — | (2,806) | (2,806) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 282,047 | 3 | 101,742 | (95,562) | (2,138) | 4,045 | 27,440 | 31,485 | |||||||||||||||||||||||||||||||||||||||
| Retrospective application of the Recapitalization | 20,845,776 | (1) | 1 | — | — | — | 0 | ||||||||||||||||||||||||||||||||||||||||
| Adjusted balance at December 31, 2018 | 21,127,823 | 2 | 101,743 | (95,562) | (2,138) | 4,045 | 27,440 | 31,485 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (49,809) | — | (49,809) | (252) | (50,061) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net | — | — | — | — | 2,004 | 2,004 | — | 2,004 | |||||||||||||||||||||||||||||||||||||||
| Distributions to venture partners and other | — | — | — | — | — | — | (742) | (742) | |||||||||||||||||||||||||||||||||||||||
| Equity contributions from venture partners | — | 5,405 | 5,405 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 21,127,823 | 2 | $ | 101,743 | $ | (145,371) | $ | (134) | $ | (43,760) | $ | 31,851 | $ | (11,909) | |||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 15,290 | — | 15,290 | (1,464) | 13,826 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net | — | — | — | — | 2,010 | 2,010 | — | 2,010 | |||||||||||||||||||||||||||||||||||||||
| Distributions to venture partners and other | — | — | — | — | — | — | (291) | (291) | |||||||||||||||||||||||||||||||||||||||
| Equity contributions from venture partners | — | — | — | — | — | — | 2,140 | 2,140 | |||||||||||||||||||||||||||||||||||||||
| Private placement | 23,913,044 | 2 | 219,998 | — | — | 220,000 | — | 220,000 | |||||||||||||||||||||||||||||||||||||||
| Equity infusion from Gores | 46,999,787 | 5 | 364,773 | — | — | 364,778 | — | 364,778 | |||||||||||||||||||||||||||||||||||||||
| Payment to Shay Stockholders | — | — | (446,845) | — | — | (446,845) | — | (446,845) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 12,943 | — | — | 12,943 | — | 12,943 | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 92,040,654 | $ | 9 | $ | 252,612 | $ | (130,081) | $ | 1,876 | $ | 124,416 | $ | 32,236 | $ | 156,652 | ||||||||||||||||||||||||||||||||
Incorporated
| Year Ended | |||||||||||||||||
| December 31, | December 31, | December 31, | |||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating activities | |||||||||||||||||
| Net income (loss) | $ | 13,826 | $ | (50,061) | $ | (31,578) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||
| Depreciation of property and equipment | 9,484 | 12,875 | 14,459 | ||||||||||||||
| Amortization of intangible assets | 34,154 | 33,205 | 33,817 | ||||||||||||||
| Amortization of debt issuance cost | 6,690 | 8,092 | 8,382 | ||||||||||||||
| Loss on extinguishment of debt | 16,528 | 0 | 0 | ||||||||||||||
| Stock-based compensation | 12,943 | 0 | 0 | ||||||||||||||
| Net undistributed (loss) income from unconsolidated ventures | (6,504) | (2,680) | 180 | ||||||||||||||
| Deferred income taxes, net | (19,278) | (17,247) | (14,801) | ||||||||||||||
| Other non-cash activities, net | 383 | 36,942 | 380 | ||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||||||||
| Accounts receivable, net | (54,345) | 74,416 | (101,178) | ||||||||||||||
| Accounts payable | (4,529) | 618 | 35,404 | ||||||||||||||
| Accrued expenses | 9,529 | (5,629) | 12,058 | ||||||||||||||
| Customer advances and billings in excess of costs | 48,618 | 23,569 | (15,004) | ||||||||||||||
| Salaries, benefits and payroll taxes | 554 | 17,411 | 7,510 | ||||||||||||||
| Prepaid expenses and other current assets | (5,862) | 3,202 | 355 | ||||||||||||||
| Other current and noncurrent liabilities | 39,215 | (25,220) | (8,628) | ||||||||||||||
| Investments | 6,538 | 6,102 | 12,973 | ||||||||||||||
| Other noncurrent assets | (4,141) | 1,450 | (688) | ||||||||||||||
| Accrued taxes | (2,941) | (397) | (10,482) | ||||||||||||||
| Net cash provided by (used in) operating activities | 100,862 | 116,648 | (56,841) | ||||||||||||||
| Investing activities | |||||||||||||||||
| Expenditures for property and equipment | (3,835) | (9,436) | (5,702) | ||||||||||||||
| Acquisition of Metis Solutions Corporation, net of acquired cash | (90,271) | 0 | 0 | ||||||||||||||
| Acquisition of Centra Technology Inc, net of acquired cash | (222,124) | 0 | 0 | ||||||||||||||
| Other investing activities, net | 17 | 6,747 | (10,849) | ||||||||||||||
| Net cash used in investing activities | (316,213) | (2,689) | (16,551) | ||||||||||||||
| Financing activities | |||||||||||||||||
| Net contributions from noncontrolling interests | 2,095 | 5,405 | 0 | ||||||||||||||
| Borrowings on long-term debt | 961,030 | 267,375 | 107,099 | ||||||||||||||
| Repayments on short-term debt | 0 | 0 | (1,966) | ||||||||||||||
| Repayments on long-term debt | (843,131) | (367,312) | (69,480) | ||||||||||||||
| Payment of debt issuance costs | (26,646) | 0 | 0 | ||||||||||||||
| Recapitalization from merger with Gores III | 605,713 | 0 | 0 | ||||||||||||||
| Payment of underwriting and transaction costs | (27,267) | 0 | 0 | ||||||||||||||
| Distribution to selling stockholders | (439,719) | 0 | 0 | ||||||||||||||
| Other financing activities, net | (292) | (742) | (2,806) | ||||||||||||||
| Net cash provided by (used in) financing activities | 231,783 | (95,274) | 32,847 | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 1,441 | (1,747) | (1,940) | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 17,873 | 16,938 | (42,485) | ||||||||||||||
| Cash and cash equivalents at beginning of period | 68,035 | 51,097 | 93,582 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 85,908 | $ | 68,035 | $ | 51,097 | |||||||||||
| Supplemental cash flow information | |||||||||||||||||
| Cash paid for interest | $ | 45,247 | $ | 78,019 | $ | 74,579 | |||||||||||
| Cash paid for taxes | $ | 10,936 | $ | 9,552 | $ | 19,093 | |||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Organization and General
known as Gores Holdings III, Inc. (the “Company”(“Gores III”), was originally incorporated in Delaware on October 23, 2017. The Company was2017 as a special purpose acquisition company formed for the purpose of effecting a merger, Capital Stockcapital stock exchange, asset acquisition, stock purchase, reorganization, or other similar Business Combinationbusiness combination with one or more businessestarget businesses. On September 11, 2018, Gores III consummated its initial public offering (the “IPO”), following which our shares began trading on the Nasdaq Stock Market (“Nasdaq”). Unless the context otherwise indicates, references herein to the “Company" or “PAE” refer to PAE Incorporated and its consolidated subsidiaries.
As of December 31, 2019, the Company had not commenced any operations. All activity for the year ended December 31, 2019 relates to the Company’s formation and initial public offering (“Public Offering”) described below and efforts directed toward locating a suitable Business Combination. The Company completed the Public Offering on September 11, 2018 (the “IPO Closing Date”). The Company did not generate any operating revenues until after the completion of its Business Combination (as defined below). Subsequent to the Public Offering, the Company has generatednon-operating income in the form of interest income on cash and cash equivalents from the proceeds derived from the Public Offering and the sale of the Private Placement Warrants (as defined below) held in the Trust Account (as defined below).
PAE Business Combination
On November 1, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, EAP Merger Sub, Inc., a direct, wholly-owned subsidiary of the Company (“First Merger Sub”), EAP Merger Sub II, LLC, a direct, wholly-owned subsidiary of the Company (“Second Merger Sub”),which Shay Holding Corporation (“Shay”), the ultimate parent of Pacific Architects and Engineers, LLC (“PAE”), and Platinum Equity Advisors, LLC, was acquired by Gores III. The transaction was completed in its capacity as the stockholder representative (the “Stockholder Representative”),a multi-step process pursuant to which provides for, among other things, (i) the merger of First Merger SubShay ultimately merged with and into Shay,a wholly-owned subsidiary of Gores III, with Shaythe Gores III subsidiary continuing as the surviving corporation (the “First Merger”) and (ii) immediately following the First Merger and as part of the same overall transaction as the First Merger, the merger of Shay with and into Second Merger Sub with Second Merger Sub continuing as the surviving company (the “Second Merger” and, together with the First Merger, the “Mergers” and, together with the other transactions contemplated by the Merger Agreement, the “PAE Business Combination”).
The PAE Business Combination closed on February 10, 2020 (the “Closing”).company. As a result of the First Merger, the Company owns 100% of the outstanding common stock of Shay andBusiness Combination, each share of common stock of Shay was cancelled and converted into the right to receive a portion of the consideration payable in connection with the merger. As a result oftransaction and Gores III acquired Shay (as it existed immediately prior to the Second Merger, the Company owns 100% of the outstanding interestsas such term is defined in the Second Merger Sub. As a result of the completion of the PAE Business Combination, the Company owns, directly or indirectly, 100% of the stock of ShayAgreement) and its subsidiaries andsubsidiaries. Additionally, the stockholders of Shay as of immediately prior to the effective time of the First Merger (the “Shay Stockholders”)transaction hold a portion of the Class A Common Stock, par value $0.0001 per share,common stock of the Company (the “Class A Stock”). In connection with the Closing, the Company changed its name from Gores Holdings, III, Inc. to PAE Incorporated. For more information on the PAE Business Combination see Note 10.
Company.
The PAE Business Combination is a subsequent event which occurred after
Pursuant to the termsoperations of the Merger Agreement, the aggregate merger consideration paid for the PAE Business Combination was approximately $1.4 billion. The consideration paid to the Shay Stockholders consisted of a combination of cash and stock consideration. The aggregate cash consideration paid to the Shay Stockholders at the Closing was approximately $417 million, consisting of (a) approximately $408 million of cash available to the Company from the Trust Account, after giving effect to income and franchise taxes payable in respect of interest income earned in the Trust Account and redemptions that were elected by the Company’s public stockholders, plus (b) all of the Company’s other cash and cash equivalents, plus (c) gross proceeds of approximately $220.0 million from the Company’s Private Placement (as defined below), less (d) certain transaction fees and expenses, including the payment of deferred underwriting commissions agreed to at the time of the Public Offering, less (e) certain payments to participants in the Pacific Architects and Engineers Incorporated 2016 Participation Plan, less (f) approximately $138 million used to repay a portion of the indebtedness of Shay immediately prior to the Closing, less (g) approximately $33 million of transaction fees and expenses of Shay. The remainder of the consideration paid to the Shay Stockholders consisted of 21,127,823 newly issued shares of Class A Stock (the “Stock Consideration”).
In order to facilitate the PAE Business Combination, the Sponsor agreed to the cancellation of approximately 3,000,000 shares of the Company’s Class F common stock held by it, 1,086,956 shares of which were cancelled and reissued as Class A Stock on aone-for-one basis and issued to the Shay Stockholders as additional Stock Consideration and 1,913,044 shares of which were cancelled in respect of the Private Placement representing a portion of the total number of shares of Class A Stock that the Company sold to the participants in the Private Placement at a discounted price of $9.20 per share. The remaining shares of Class F Stock were automatically converted into shares of Class A Stock on aone-for-one basis at the Closing and will continue to be subject to the transfer restrictions applicable to such shares of Class F Stock.
In addition to the foregoing consideration paid at the Closing, Shay Stockholders will be entitled to receive additionalearn-out payments from the Company of up to an aggregate of four million shares of Company Class A common stock, if the price of Class A common stock trading on the Nasdaq exceeds certain thresholds during the five-year period following the completion of the Mergers.
On November 1, 2019, the Company entered into subscription agreements with certain investors, pursuant to which the investors agreed to purchase, at Closing, in the aggregate 23,913,044 shares of Class A common stock in a private placement for $9.20 per share (the “Private Placement”). On the February 10, 2020 Closing, the gross proceeds from the Private Placement of $220,000,000 were used to partially fund the cash consideration paid in connection with the PAE Business Combination.
Financing
Upon the September 11, 2018 closing of the Public Offering and the sale of the Private Placement Warrants, an aggregate of $400,000,000 was placed in a Trust Account with Continental Stock Transfer & Trust Company (the “Trust Account”) acting as trustee.
Trust Account
Prior to the PAE Business Combination, funds held in the Trust Account could be invested only in U.S. government treasury bills with a maturity of one hundred and eighty (180) days or less or in money market funds meeting certain conditions under Rule 2a 7 under the Investment Company Act of 1940, as amended, that invest only in direct U.S. government obligations. As of December 31, 2019, the Trust Account consisted of cash and treasury bills.
As of December 31, 2019, the Company’s amended and restated certificate of incorporation provided that, other than the withdrawal of interest to fund regulatory compliance requirements and other costs related thereto (a “Regulatory Withdrawal”), subject to an annual limit of $750,000 for a maximum 24 months and/or additional amounts necessary to pay franchise and income taxes, if any, none of the funds held in trust would be released until the earliest of: (i) the completion of the Business Combination; or (ii) the redemption of any public shares of common stock properly tendered in connection with a stockholder vote to amend the Company’s amended and restated certificate of incorporation to modify the substance or timing of the Company’s obligation to redeem 100% of such public shares of common stock if the Company did not complete the Business Combination within 24 months from the IPO Closing Date; or (iii) the redemption of 100% of the public shares of common stock if the Company was unable to complete a Business Combination within 24 months from the IPO Closing Date, subject to the requirements of law and stock exchange rules.
Business Combination
The Company’s management had broad discretion with respect to the specific application of the net proceeds of the Public Offering, although substantially all of the net proceeds of the Public Offering were intended to be generally applied toward consummating a Business Combination. The Business Combination was required to be with one or more target businesses that together have an aggregate fair market value of at least 80% of the assets held in the Trust Account (less any deferred underwriting commissions (the “Deferred Discount”) and taxes payable on interest income earned) at the time of the Company signing a definitive agreement in connection with the Business Combination.
The Company, after signing a definitive agreement for a Business Combination, was required to either (i) seek stockholder approval of the Business Combination at a meeting called for such purpose in connection with which stockholders may seek to redeem their shares, regardless of whether they vote for or against the Business Combination, for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the Business Combination, including interest income but less taxes payable, or (ii) provide stockholders with the opportunity to sell their shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote) for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the Business Combination, including interest income but less taxes payable.
On February 7, 2020, the Company held a special meeting of the Company’s stockholders (the “Special Meeting”), held in lieu of the 2020 annual meeting of the Company’s stockholders, at which stockholders representing a majority of the outstanding shares of common stock approved the PAE Business Combination. The actual redemptions of common stock by Company stockholders in conjunction with the stockholder vote was 213 shares.
As a result of the foregoing redemption provisions, the public shares of common stock subject to redemptionboth companies are recorded at redemption amount and classified as temporary equity, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”)included in the accompanying consolidated balance sheets.
financial statements for periods following the Closing Date. See Note 6 - “Business Combinations and Acquisitions” for additional information.
In the event of such distribution, it was possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) would be less than the initial public offering price per Unit in the Public Offering.
|
Basis of Presentation
Net Income/(Loss) Per Common Share
As
| For the period from | ||||||||||||||||||||||||
| October 23, 2017 | ||||||||||||||||||||||||
| Year Ended December 31, 2019 | Year Ended December 31, 2018 | (inception) to December 31, 2017 | ||||||||||||||||||||||
| Class A | Class F | Class A | Class F | Class A | Class F | |||||||||||||||||||
Basic and diluted net income/(loss) per share: | ||||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Allocation of net income/(loss) | $ | 2,861,626 | $ | (1,403,250 | ) | $ | 2,140,135 | $ | (403,406 | ) | $ | — | $ | (23,684 | ) | |||||||||
Denominator: | ||||||||||||||||||||||||
Weighted-average shares outstanding | 40,000,000 | 10,000,000 | 10,300,000 | 8,919,047 | — | 10,781,250 | ||||||||||||||||||
Basic and diluted net income/(loss) per share | $ | 0.07 | $ | (0.14 | ) | $ | 0.21 | $ | (0.05 | ) | $ | — | $ | (0.00 | ) | |||||||||
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institutionU.S. Government, as well as the Trust Account, whichcreditworthiness of the U.S. Government.
Financial Instruments
amortized, but instead is tested annually for impairment at the reporting unit level and tested more frequently if events or circumstances indicate that the carrying value may not be recoverable. The Company’s policy is to perform its annual goodwill impairment evaluation as of the first day of the fourth quarter of its fiscal year. The Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount or elect to bypass such assessment. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or the Company elects to bypass such assessment, the Company then determines the fair value of each reporting unit quantitatively. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying amount of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference. The results of the Company’s annual goodwill impairment test for 2020, 2019 and 2018 indicated that no impairment existed. See Note 9 - “Goodwill and Intangible Assets” for additional information.
| Customer relationships | 6-13 years | |||||||
| Technology | 3-5 years | |||||||
| Trade name | 5-10 years | |||||||
Offering Costs
Prior tostatements of operations based on their grant date fair value and straight-line over the IPO Closing Date, the Company complied with the requirementsvesting period of the ASC340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A — “Expensesawards. For stock-based awards that vest based on the achievement of Offering”. Offering costs, consisting principally of professional and registration fees related toperformance conditions, compensation expense is recognized based on the Public Offering, were recorded as assets as incurred until the Public Offering date, and were charged to stockholders’ equity upon the completionexpected achievement of the Public Offering. Accordingly, as of the IPO Closing Date, offering costs totaling $22,756,432, were charged to stockholders’ equity.
Redeemable Common Stock
As discussed in Note 3, all of the 40,000,000 shares of Common Stock sold as part of the Units in the Public Offering contained a redemption feature which allowed for the redemption of such public shares in connection with the Company’s liquidation, if there was a stockholder vote or tender offer in connection with the Business Combination and in connection with certain amendments to the Company’s amended and restated certificate of incorporation. In accordance with ASC 480, redemption provisions not solely within the control of the Company require common stock subject to redemption to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of ASC 480. Although the Company did not specify a maximum redemption threshold, as of December 31, 2019 and 2018, its amended and restated certificate of incorporation provided that the Company would not redeem its public shares in an amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001.
The Company recognized changes in redemption value immediately as they occur and adjusts the carrying value of redeemable common stock to equal the redemption valuerelated performance conditions at the end of each reporting period. Increases or decreases inperiod over the carrying amount of redeemable common stock are affected by charges against additional paid in capital.
Accordingly, as of December 31, 2019, 38,543,998vesting period of the 40,000,000 public shares are classified outside of permanent equity at their redemption value.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requiresaward. If the Company’s managementinitial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing may fluctuate from period to make estimatesperiod based on those estimates. If the performance conditions are not met, no stock-based compensation expense will be recognized, and assumptions that affect the reported amounts ofany previously recognized stock-based compensation expense will be reversed. Forfeitures are recognized in compensation costs when those occur.
The Company’s primary practice is to negotiate contracts in the same currency in which the predominant expenses are incurred, thereby mitigating the exposure to foreign currency fluctuations. The net translation gains and losses are not included in determining net income, but are accumulated as a separate component of equity. Foreign currency transaction gains and losses are included in other income, net in the accompanying consolidated statements of operations.
In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. If the Company determines that it will be able to realize its deferred income tax assets in the future in excess of their net recorded amount or will no longer be able to realize its deferred income tax assets in the future as currently recorded, the Company makes an adjustment to the valuation allowance that will decrease or increase, respectively the provision for income taxes.
The Company may be subject to potential examinationcommon stockholders by U.S. federal, states or foreign jurisdiction authorities in the areasweighted average number of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income amounts in various tax jurisdictions and compliance with U.S. federal, states or foreign tax laws.
The Company is incorporated in the State of Delaware and is required to pay franchise taxes to the State of Delaware on an annual basis.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with and the credit quality of the financial institutions with which it invests. As of the balance sheet dates, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits.
Investments and Cash Held in Trust Account
As of December 31, 2019, the Company had $408,585,719 in the Trust Account which could be utilized for Business Combinations. As of December 31, 2019, the Trust Account consisted of both cash and treasury bills.
As of December 31, 2019, the Company’s amended and restated certificate of incorporation provided that, other than the withdrawal of interest to pay taxes, if any, none of the funds held in trust would be released until the earlier of: (i) the completion of the Business Combination; (ii) the redemption of any public shares of common stock properly tenderedand common stock equivalents outstanding for the dilutive effect of common stock equivalents for the period.
Recently issued accounting pronouncements not yet adopted
cash flows.
|
Public Units
On September 11, 2018,statements and related disclosures.
| Year Ended December 31, 2020 | |||||||||||||||||
| GMS | NSS | Total | |||||||||||||||
| DoD | $ | 807,722 | $ | 277,134 | $ | 1,084,856 | |||||||||||
| Other U.S. government agencies | 1,079,345 | 264,185 | 1,343,530 | ||||||||||||||
| Commercial and non-U.S. customers | 193,407 | 92,835 | 286,242 | ||||||||||||||
| Total | $ | 2,080,474 | $ | 634,154 | $ | 2,714,628 | |||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||
| GMS | NSS | Total | |||||||||||||||
| DoD | $ | 858,623 | $ | 222,978 | $ | 1,081,601 | |||||||||||
| Other U.S. government agencies | 1,123,459 | 359,681 | 1,483,140 | ||||||||||||||
| Commercial and non-U.S. customers | 117,655 | 81,497 | 199,152 | ||||||||||||||
| Total | $ | 2,099,737 | $ | 664,156 | $ | 2,763,893 | |||||||||||
| Year Ended December 31, 2018 | |||||||||||||||||
| GMS | NSS | Total | |||||||||||||||
| DoD | $ | 784,532 | $ | 205,404 | $ | 989,936 | |||||||||||
| Other U.S. government agencies | 1,096,193 | 359,977 | 1,456,170 | ||||||||||||||
| Commercial and non-U.S. customers | 88,118 | 74,338 | 162,456 | ||||||||||||||
| Total | $ | 1,968,843 | $ | 639,719 | $ | 2,608,562 | |||||||||||
| Year Ended December 31, 2020 | |||||||||||||||||
| GMS | NSS | Total | |||||||||||||||
| Cost-reimbursable | $ | 1,182,865 | $ | 166,026 | $ | 1,348,891 | |||||||||||
| Fixed-price | 676,714 | 269,530 | 946,244 | ||||||||||||||
| Time and materials | 220,895 | 198,598 | 419,493 | ||||||||||||||
| Total | $ | 2,080,474 | $ | 634,154 | $ | 2,714,628 | |||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||
| GMS | NSS | Total | |||||||||||||||
| Cost-reimbursable | $ | 1,206,710 | $ | 105,360 | $ | 1,312,070 | |||||||||||
| Fixed-price | 717,595 | 286,366 | 1,003,961 | ||||||||||||||
| Time and materials | 175,432 | 272,430 | 447,862 | ||||||||||||||
| Total | $ | 2,099,737 | $ | 664,156 | $ | 2,763,893 | |||||||||||
| Year Ended December 31, 2018 | |||||||||||||||||
| GMS | NSS | Total | |||||||||||||||
| Cost-reimbursable | $ | 1,229,707 | $ | 90,061 | $ | 1,319,768 | |||||||||||
| Fixed-price | 595,127 | 281,859 | 876,986 | ||||||||||||||
| Time and materials | 144,009 | 267,799 | 411,808 | ||||||||||||||
| Total | $ | 1,968,843 | $ | 639,719 | $ | 2,608,562 | |||||||||||
| Year Ended December 31, 2020 | |||||||||||||||||
| GMS | NSS | Total | |||||||||||||||
| United States | $ | 1,104,536 | $ | 626,961 | $ | 1,731,497 | |||||||||||
| International | 975,938 | 7,193 | 983,131 | ||||||||||||||
| Total | $ | 2,080,474 | $ | 634,154 | $ | 2,714,628 | |||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||
| GMS | NSS | Total | |||||||||||||||
| United States | $ | 1,090,765 | $ | 657,706 | $ | 1,748,471 | |||||||||||
| International | 1,008,972 | 6,450 | 1,015,422 | ||||||||||||||
| Total | $ | 2,099,737 | $ | 664,156 | $ | 2,763,893 | |||||||||||
| Year Ended December 31, 2018 | |||||||||||||||||
| GMS | NSS | Total | |||||||||||||||
| United States | $ | 1,013,830 | $ | 635,158 | $ | 1,648,988 | |||||||||||
| International | 955,013 | 4,561 | 959,574 | ||||||||||||||
| Total | $ | 1,968,843 | $ | 639,719 | $ | 2,608,562 | |||||||||||
| December 31, | December 31, | ||||||||||
| 2020 | 2019 | ||||||||||
| Contract assets | $ | 360,552 | $ | 295,103 | |||||||
| Contract liabilities | $ | 106,475 | $ | 51,439 | |||||||
| (in thousands) | Fair Value | |||||||
| Cash and cash equivalents | $ | 3,202 | ||||||
| Accounts receivable | 72,636 | |||||||
| Prepaid expenses and other current assets | 3,454 | |||||||
| Property and equipment | 2,848 | |||||||
| Operating lease right-of-use assets | 21,137 | |||||||
| Intangible assets | 74,100 | |||||||
| Total assets acquired | 177,377 | |||||||
| Accounts payable | 30,212 | |||||||
| Accrued expenses | 1,159 | |||||||
| Customer advances and billings in excess of costs | 2,965 | |||||||
| Salaries, benefits and payroll taxes | 7,969 | |||||||
| Deferred income taxes | 12,402 | |||||||
| Operating lease liabilities, current portion | 2,996 | |||||||
| Other current liabilities | 1,423 | |||||||
| Long-term operating lease liabilities | 18,038 | |||||||
Total liabilities assumed | 77,164 | |||||||
| Net identifiable assets acquired | 100,213 | |||||||
| Goodwill | 125,113 | |||||||
| Total estimated consideration transferred | $ | 225,326 | ||||||
| (in thousands, except years) | Weighted-average Amortization Period | Fair Value | |||||||||
| Customer Relationships | 10 | $ | 71,800 | ||||||||
| Trade Name & Trademarks | 7 | 2,300 | |||||||||
| Total intangible assets | 10 | $ | 74,100 | ||||||||
| (in thousands) | Fair Value | |||||||
| Cash and cash equivalents | $ | 5,469 | ||||||
| Accounts receivable | 15,905 | |||||||
| Prepaid expenses and other current assets | 621 | |||||||
| Property and equipment | 27 | |||||||
| Operating lease right-of-use assets | 599 | |||||||
| Intangible assets | 37,800 | |||||||
| Other noncurrent assets | 63 | |||||||
| Total assets acquired | 60,484 | |||||||
| Accounts payable | 2,454 | |||||||
| Accrued expenses | 1,056 | |||||||
| Customer advances and billings in excess of costs | 3,420 | |||||||
| Salaries, benefits and payroll taxes | 5,486 | |||||||
| Deferred income taxes | 7,700 | |||||||
| Operating lease liabilities, current portion | 355 | |||||||
| Long-term operating lease liabilities | 240 | |||||||
Total liabilities assumed | 20,711 | |||||||
| Net identifiable assets acquired | 39,773 | |||||||
| Goodwill | 55,967 | |||||||
| Total estimated consideration transferred | $ | 95,740 | ||||||
| (in thousands, except years) | Weighted-average Amortization Period | Fair Value | |||||||||
| Customer Relationships | 11 | $ | 32,200 | ||||||||
| Trade Name & Trademarks | 7 | 5,600 | |||||||||
| Total intangible assets | 10 | $ | 37,800 | ||||||||
| December 31, | December 31, | ||||||||||
| 2020 | 2019 | ||||||||||
| Billed receivables | $ | 227,787 | $ | 148,747 | |||||||
| Unbilled receivables | 360,552 | 295,103 | |||||||||
| Less allowance for credit losses | (2,828) | (1,670) | |||||||||
| Total accounts receivables, net | $ | 585,511 | $ | 442,180 | |||||||
| December 31, | December 31, | |||||||||||||
| 2020 | 2019 | |||||||||||||
| Assets not yet in service | $ | 2,111 | $ | 301 | ||||||||||
| Leasehold improvements | 11,906 | 9,823 | ||||||||||||
| Machinery and equipment | 12,839 | 12,094 | ||||||||||||
| Computer and equipment | 36,119 | 34,894 | ||||||||||||
| Transportation equipment | 13,519 | 14,043 | ||||||||||||
| Furniture and fixtures | 2,353 | 2,797 | ||||||||||||
| Property and equipment, gross | 78,847 | 73,952 | ||||||||||||
| Less accumulated depreciation and amortization | (51,232) | (43,548) | ||||||||||||
| Total property and equipment, net | $ | 27,615 | $ | 30,404 | ||||||||||
| GMS | NSS | Total | |||||||||||||||
| Balance as of December 31, 2018 | $ | 208,593 | $ | 199,432 | $ | 408,025 | |||||||||||
| Acquisitions | 0 | 0 | 0 | ||||||||||||||
| Other | 0 | 1,563 | 1,563 | ||||||||||||||
| Balance as of December 31, 2019 | $ | 208,593 | $ | 200,995 | $ | 409,588 | |||||||||||
| Acquisitions | 0 | 181,080 | 181,080 | ||||||||||||||
| Other | 0 | 0 | 0 | ||||||||||||||
| Balance as of December 31, 2020 | $ | 208,593 | $ | 382,075 | $ | 590,668 | |||||||||||
| December 31, 2020 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Customer relationships | $ | 390,900 | $ | (149,163) | $ | 241,737 | |||||||||||
| Technology | 1,700 | (1,700) | 0 | ||||||||||||||
| Trade name | 24,800 | (8,327) | 16,473 | ||||||||||||||
| Total | $ | 417,400 | $ | (159,190) | $ | 258,210 | |||||||||||
| December 31, 2019 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Customer relationships | $ | 286,900 | $ | (116,923) | $ | 169,977 | |||||||||||
| Technology | 1,700 | (1,700) | 0 | ||||||||||||||
| Trade name | 16,900 | (6,413) | 10,487 | ||||||||||||||
| Total | $ | 305,500 | $ | (125,036) | $ | 180,464 | |||||||||||
| As of | |||||
| December 31, 2020 | |||||
| 2021 | $ | 50,106 | |||
| 2022 | 50,089 | ||||
| 2023 | 40,666 | ||||
| 2024 | 33,782 | ||||
| 2025 | 28,015 | ||||
| Thereafter | 55,552 | ||||
| Total | $ | 258,210 | |||
| December 31, | December 31, | ||||||||||
| 2020 | 2019 | ||||||||||
| Assets | |||||||||||
| Total assets | $ | 145,664 | $ | 127,742 | |||||||
| Liabilities and equity | |||||||||||
| Total liabilities | $ | 96,318 | $ | 80,151 | |||||||
| Total equity | 49,346 | 47,591 | |||||||||
| Total liabilities and equity | $ | 145,664 | $ | 127,742 | |||||||
| Year Ended | |||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Income statements | |||||||||||||||||||||||||||||
| Revenues | $ | 369,966 | $ | 340,063 | $ | 259,386 | |||||||||||||||||||||||
| Cost of revenues | 301,345 | 311,310 | 205,730 | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | 73,400 | 80,942 | 84,473 | ||||||||||||||||||||||||||
| Total operating expenses | 374,745 | 392,252 | 290,203 | ||||||||||||||||||||||||||
| Program loss | (4,779) | (52,189) | (30,817) | ||||||||||||||||||||||||||
| Other income (loss), net | 908 | (1,697) | (1,093) | ||||||||||||||||||||||||||
| Net loss | $ | (3,871) | $ | (53,886) | $ | (31,910) | |||||||||||||||||||||||
| December 31, | December 31, | ||||||||||
| 2020 | 2019 | ||||||||||
| Reserves | $ | 13,617 | $ | 11,659 | |||||||
| Accrued foreign taxes | 13,227 | 6,053 | |||||||||
| Accrued losses on contracts | 11,455 | 11,352 | |||||||||
| Other | 6,738 | 1,829 | |||||||||
| Total current liabilities | $ | 45,037 | $ | 30,893 | |||||||
| December 31, | December 31, | ||||||||||
| 2020 | 2019 | ||||||||||
| First Term Loan | $ | 890,000 | $ | 506,772 | |||||||
| Second Term Loan | 0 | 265,329 | |||||||||
| 2020 ABL Credit Agreement | 0 | 0 | |||||||||
| Total debt | 890,000 | 772,101 | |||||||||
| Unamortized discount and debt issuance costs | (23,733) | (22,164) | |||||||||
| Total debt, net of discount and debt issuance costs | 866,267 | 749,937 | |||||||||
| Less current maturities of long-term debt | (5,961) | (22,007) | |||||||||
| Total long-term debt, net of current | $ | 860,306 | $ | 727,930 | |||||||
| As of | |||||
| December 31, 2020 | |||||
| 2021 | $ | 8,900 | |||
| 2022 | 8,900 | ||||
| 2023 | 8,900 | ||||
| 2024 | 8,900 | ||||
| 2025 | 8,900 | ||||
| Thereafter | 845,500 | ||||
| Total | $ | 890,000 | |||
|
Founder Shares
On November 3, 2017, the Sponsor purchased 10,781,250 Founder Shares for an aggregate purchase price of $25,000,current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBO Rate will be discontinued or approximately $0.002 per share. Subsequently, the Sponsor transferred an aggregate of 75,000 Founder Shares to the Company’s independent directors (together with the Sponsor, the “Initial Stockholders”). On October 22, 2018, the Sponsor forfeited 781,250 Founder Shares following the expirationmodified. The consequences of the unexercised portion of underwriter’s over-allotment option, so that the Founder Shares held by the Initial Stockholders would represent 20.0%discontinuance of the outstanding shares of common stock following completion of the Public Offering. The Founder Shares are identical to the common stock includedLIBO Rate benchmark cannot be entirely predicted but could include an increase in the Units sold in the Public Offering except that the Founder Shares automatically converted into sharescost of Commonour variable rate indebtedness.
Private Placement Warrants
The Sponsor purchased from the Company an aggregate of 6,666,666 warrants at a price of $1.50 per warrant (a purchase price of $10,000,000) in a private placement that occurred simultaneously with the Public Offering (the “Private Placement Warrants”). Each Private Placement Warrant entitles the holder to purchase one share of Common Stock at $11.50 per share. A portion of the purchase price of the Private Placement Warrants was added to the proceeds from the Public Offering to be held in the Trust Account pending completion of the Business Combination.
The Private Placement Warrants have terms and provisions that are identical to those of the Warrants sold as part of the Units in the Public Offering, except that the Private Placement Warrants may be physical (cash) or net share (cashless) settled and are not redeemable so long as they are held by the Sponsor or its permitted transferees.
Registration Rights
The holders of Founder Shares, Private Placement Warrants and Warrants issued upon conversion of working capital loans, if any, have registration rights (in the case of the Founder Shares, only after conversion of such shares to common shares) pursuant to a registration rights agreement entered into by the Company, the Sponsor and the other security holders named therein on September 6, 2018, as amended and restated on the Closing in connection with the terms of the Merger Agreement. The holders will have certain demand and “piggy back” registration rights. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Sponsor Loan
On November 3, 2017, the Sponsor loaned the Company an aggregate of $150,000 byincorporation authorizes the issuance of an unsecured promissory note for $150,000 to cover expenses related to the Public Offering, and on August 30, 2018, the Sponsor loaned the Company an additional $150,000 by the issuance of a second unsecured promissory note for $150,000 to cover expenses related to the Public Offering. These Notes werenon-interest bearing and payable on the earlier of November 30, 2018 or the completion of the Public Offering. These Notes were repaid in full upon the completion of the Public Offering.
Administrative Services Agreement
The Company entered into an administrative services agreement on September 6, 2018, pursuant to which it agreed to pay to an affiliate of the Sponsor $20,000 a month for office space, utilities, and secretarial support. Services commenced on the date the securities were first listed on the NASDAQ Capital Market. Pursuant to the agreement, the services terminated upon the consummation of the PAE Business Combination.
|
The Company paid a deferred underwriting discount totaling $14,000,000 or 3.50% of the gross offering proceeds of the Public Offering, to the underwriter on February 10, 2020 upon the Company’s consummation of the PAE Business Combination. The underwriter was not entitled to any interest accrued on the Deferred Discount.
|
Effective Tax Rate Reconciliation
A reconciliation of the statutory federal income tax expense to the income tax expense from continuing operations provided for the years ended December 31, 2019 and 2018 and for the period from October 23, 2017 (inception) to December 23, 2017 is as follows:
| For the period from | ||||||||||||
| Year Ended | Year Ended | October 23, 2017 | ||||||||||
| December 31, | December 31, | (inception) to | ||||||||||
| 2019 | 2018 | December 31, 2017 | ||||||||||
Income tax expense at the federal statutory rate | $ | 632,301 | $ | 461,662 | $ | (4,846 | ) | |||||
Non-deductible transaction expenses | 924,126 | — | — | |||||||||
State income taxes - net of federal income tax benefits | (38,884 | ) | (14,907 | ) | (844 | ) | ||||||
Other reconciling differences | 400 | — | — | |||||||||
Change in valuation allowance | 34,038 | 14,907 | 5,690 | |||||||||
|
|
|
|
|
| |||||||
Total income tax expense | $ | 1,551,981 | $ | 461,662 | $ | — | ||||||
|
|
|
|
|
| |||||||
Current/Deferred Taxes
The provision for income taxes consisted of the following for the years ended December 31, 2019 and 2018 and for the period from October 23, 2017 (inception) to December 23, 2017:
| For the period from | ||||||||||||
| Year Ended | Year Ended | October 23, 2017 | ||||||||||
| December 31, | December 31, | (inception) to | ||||||||||
| 2019 | 2018 | December 31, 2017 | ||||||||||
Current income tax expense | ||||||||||||
Federal | $ | 1,599,090 | $ | 461,662 | $ | — | ||||||
State | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total current income tax expense | $ | 1,599,090 | $ | 461,662 | $ | — | ||||||
|
|
|
|
|
| |||||||
Deferred income tax expense | ||||||||||||
Federal | $ | (47,109 | ) | $ | — | $ | — | |||||
State | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total deferred income tax expense | $ | (47,109 | ) | $ | — | $ | — | |||||
|
|
|
|
|
| |||||||
Provision for income taxes | $ | 1,551,981 | $ | 461,662 | $ | — | ||||||
|
|
|
|
|
| |||||||
Deferred Tax Assets and Liabilities
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows:
| Year Ended | Year Ended | |||||||
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
Deferred Tax Assets (Liabilities): | ||||||||
Accrued expenses | $ | 49.474 | $ | — | ||||
Tax Attribute Carryovers | 47,296 | 20,597 | ||||||
|
|
|
| |||||
Total Deferred Tax Assets | 96,770 | 20,597 | ||||||
|
|
|
| |||||
Valuation Allowance | (54,635 | ) | (20,597 | ) | ||||
|
|
|
| |||||
Net Deferred Tax Asset | $ | 42,135 | $ | — | ||||
|
|
|
| |||||
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. The Act contains reform to the corporate tax law including reducing the corporate tax rate to 21%, eliminating the2-year carryback for net operating losses, and creating an indefinite carryforward period for the net operating losses limited to 80% of taxable income.
|
As of December 31, 2019, investment securities in the Company’s Trust Account consist of $408,585,719 in United States Treasury Bills and $0 in cash.
|
The Company complies with FASB ASC 820,Fair Value Measurements, for its financial assets and liabilities that arere-measured and reported at fair value at each reporting period, andnon-financial assets and liabilities that arere-measured and reported at fair value at least annually. ASC 820 determines fair value to be the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date.
The following table presents information about the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2019, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:
| Significant | Significant | |||||||||||||||
| Other | Other | |||||||||||||||
| Quoted Prices in | Observable | Unobservable | ||||||||||||||
| December 31, | Active Markets | Inputs | Inputs | |||||||||||||
| Description | 2019 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Investments and cash held in Trust Account | $ | 408,585,719 | $ | 408,585,719 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 408,585,719 | $ | 408,585,719 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
|
Common Stock
As of December 31, 2019, the Company was authorized to issue 220,000,000 shares of common stock, consisting of 200,000,000 shares of Class A Common Stock, par value $0.0001 per share and 20,000,000 of Class F Common Stock, par value $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share of common stock and vote together as a single class. At December 31, 2019, there were 40,000,000 shares of Class A common stock (inclusive of the 38,543,998 shares subject to redemption) and 10,000,000 shares of Class F Common Stock issued and outstanding.
Preferred Stock
As of December 31, 2019, the Company was authorized to issue 1,000,000 shares of preferred stock, par value $0.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At December 31, 2019, there were no shares of preferred stock issued and outstanding.
PAE Business Combination
In connection with the PAE Business Combination, the Company amended and restated its certificate of incorporation on February 10, 2020. Pursuant to the terms of the amended and restated certificate of incorporation, the Company has authorized 211,000,000 shares of capital stock, par value of $0.0001 per share, consisting of (a) 210,000,000 shares of common stock, all of which are Class A Stock,common stock, and (b) 1,000,000 shares of preferred stock.
|
PAE
the shares issued to Shay Stockholders are reflected as if they were issued and outstanding as of the earliest reported period to reflect the new capital structure.
| As of December 31, 2020 | |||||||||||
| Restricted Stock Unit | Shares | Weighted-Average Grant Date Fair Value | |||||||||
| Balance at December 31, 2019 | 0 | $ | 0 | ||||||||
| Granted | 2,639,920 | 7.45 | |||||||||
| Vested | (34,366) | 8.33 | |||||||||
| Forfeited | (44,721) | 7.56 | |||||||||
| Balance at December 31, 2020 | 2,560,833 | $ | 7.92 | ||||||||
| As of December 31, 2020 | |||||||||||
| Performance-based Restricted Stock Unit | Shares | Weighted-Average Grant Date Fair Value | |||||||||
| Balance at December 31, 2019 | 0 | $ | 0 | ||||||||
| Granted | 631,219 | 8.63 | |||||||||
| Vested | 0 | 0 | |||||||||
| Forfeited | (22,082) | 9.26 | |||||||||
| Balance at December 31, 2020 | 609,137 | $ | 9.28 | ||||||||
| Year Ended | |||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||||||||
| Net income (loss) attributed to PAE Incorporated | $ | 15,290 | $ | (49,809) | $ | (34,459) | |||||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||||||||
| Basic weighted average shares | 84,114,016 | 21,127,823 | 21,127,823 | ||||||||||||||||||||||||||
| Diluted weighted average shares | 85,369,328 | 21,127,823 | 21,127,823 | ||||||||||||||||||||||||||
| Basic income (loss) per share | $ | 0.18 | $ | (2.36) | $ | (1.63) | |||||||||||||||||||||||
| Diluted income (loss) per share | $ | 0.18 | $ | (2.36) | $ | (1.63) | |||||||||||||||||||||||
| December 31, 2020 | |||||
| 2021 | $ | 48,547 | |||
| 2022 | 42,234 | ||||
| 2023 | 37,212 | ||||
| 2024 | 29,009 | ||||
| 2025 | 22,558 | ||||
| Thereafter | 54,509 | ||||
| Total future minimum lease payments | 234,069 | ||||
| Less imputed interest | 41,720 | ||||
| Present value of minimum lease payments | 192,349 | ||||
| Less current maturities of lease liabilities | 46,756 | ||||
| Long-term lease liabilities | $ | 145,593 | |||
| Year Ended | |||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| GMS | $ | 2,080,474 | $ | 2,099,737 | $ | 1,968,843 | |||||||||||||||||||||||
| NSS | 634,154 | 664,156 | 639,719 | ||||||||||||||||||||||||||
| Corporate | 0 | 0 | 0 | ||||||||||||||||||||||||||
| Total revenues | $ | 2,714,628 | $ | 2,763,893 | $ | 2,608,562 | |||||||||||||||||||||||
| Operating income (loss) | |||||||||||||||||||||||||||||
| GMS | $ | 80,090 | $ | 92,386 | $ | 89,141 | |||||||||||||||||||||||
| NSS | 22,073 | (36,940) | (12,556) | ||||||||||||||||||||||||||
| Corporate | (11,397) | (28,627) | (26,464) | ||||||||||||||||||||||||||
| Total operating income | $ | 90,766 | $ | 26,819 | $ | 50,121 | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||||||||
| GMS | $ | 16,461 | $ | 16,679 | $ | 18,492 | |||||||||||||||||||||||
| NSS | 17,693 | 16,526 | 17,288 | ||||||||||||||||||||||||||
| Corporate | 0 | 0 | 0 | ||||||||||||||||||||||||||
| Total amortization of intangible assets | $ | 34,154 | $ | 33,205 | $ | 35,780 | |||||||||||||||||||||||
| Year Ended | |||||||||||||||||
| December 31, | December 31, | December 31, | |||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net earnings (loss) of equity method investments | $ | 6,082 | $ | 2,454 | $ | (180) | |||||||||||
| Gain on sale of fixed assets and other | 1,190 | 7,331 | 5,160 | ||||||||||||||
| Total | $ | 7,272 | $ | 9,785 | $ | 4,980 | |||||||||||
| Year Ended | |||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | |||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Domestic | $ | (80,255) | $ | (141,068) | $ | (94,924) | |||||||||||||||||||||||
| Foreign | 97,164 | 81,876 | 60,685 | ||||||||||||||||||||||||||
| Income (loss) before income taxes | $ | 16,909 | $ | (59,192) | $ | (34,239) | |||||||||||||||||||||||
| Year Ended | ||||||||||||||||||||
| December 31, | December 31, | December 31, | ||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Current | ||||||||||||||||||||
| Federal | $ | 1,414 | $ | 0 | $ | 0 | ||||||||||||||
| State | 0 | 0 | 0 | |||||||||||||||||
| Foreign | 9,035 | 6,507 | 6,991 | |||||||||||||||||
| Total current expense (benefit) | 10,449 | 6,507 | 6,991 | |||||||||||||||||
| Deferred | ||||||||||||||||||||
| Federal | (7,366) | (15,638) | (9,652) | |||||||||||||||||
| State | 0 | 0 | 0 | |||||||||||||||||
| Foreign | 0 | 0 | 0 | |||||||||||||||||
| Total deferred (benefit) expense | (7,366) | (15,638) | (9,652) | |||||||||||||||||
| Provision for income taxes | $ | 3,083 | $ | (9,131) | $ | (2,661) | ||||||||||||||
| Year Ended | ||||||||||||||||||||
| December 31, | December 31, | December 31, | ||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Amount computed at statutory federal income tax rate | $ | 3,785 | $ | (12,452) | $ | (7,471) | ||||||||||||||
| Increases (decreases) in tax resulting from: | ||||||||||||||||||||
| CARES Act adjustment | (2,435) | 0 | 0 | |||||||||||||||||
| Section 250 Deduction | (2,834) | (2,682) | (743) | |||||||||||||||||
| Non taxable income | (2,868) | (1,071) | (1,049) | |||||||||||||||||
| Non deductible compensation | 1,735 | 0 | 0 | |||||||||||||||||
| Change in valuation allowance | 4,180 | 5,601 | 7,026 | |||||||||||||||||
| Effect of foreign operations | 87 | 135 | 505 | |||||||||||||||||
| Change in Uncertain tax position | 2,272 | 237 | 553 | |||||||||||||||||
| Minority Interest | 748 | 552 | (29) | |||||||||||||||||
| Transaction costs | (865) | 0 | 0 | |||||||||||||||||
| Other permanent differences, net | (722) | 549 | (1,453) | |||||||||||||||||
| Provision for income taxes | $ | 3,083 | $ | (9,131) | $ | (2,661) | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Deferred tax assets | ||||||||||||||
| Accrued compensation benefits | $ | 14,416 | $ | 8,204 | ||||||||||
| Reserves | 5,171 | 4,670 | ||||||||||||
| Net operating loss and credit carryover | 4,877 | 3,202 | ||||||||||||
| Foreign tax credit carryover | 35,981 | 35,629 | ||||||||||||
| Tax reserve benefit | 5,409 | 3,916 | ||||||||||||
| Interest carryover | 2,080 | 16,438 | ||||||||||||
| Operating lease liability | 43,280 | 39,283 | ||||||||||||
| Other | 4,722 | 4,846 | ||||||||||||
| Total deferred tax assets | 115,936 | 116,188 | ||||||||||||
| Valuation allowance | (12,050) | (13,784) | ||||||||||||
| Net deferred tax assets | 103,886 | 102,404 | ||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Depreciation | (4,087) | (4,384) | ||||||||||||
| Prepaid expenses | (3,341) | (1,779) | ||||||||||||
| Unbilled receivables | (2,178) | (22,958) | ||||||||||||
| Intangible assets | (54,908) | (31,480) | ||||||||||||
| Operating lease right-of-use assets | (43,034) | (37,540) | ||||||||||||
| Investment in unconsolidated foreign subsidiary | (727) | (1,051) | ||||||||||||
| Total deferred tax liabilities | (108,275) | (99,192) | ||||||||||||
| Net deferred tax assets (liabilities) | $ | (4,389) | $ | 3,212 | ||||||||||
| Year Ended | ||||||||||||||||||||
| December 31, | December 31, | December 31, | ||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Beginning of the year | $ | 1,958 | $ | 2,262 | $ | 3,614 | ||||||||||||||
| Additions and (subtractions) on position taken during current year | 3,799 | (304) | 0 | |||||||||||||||||
| Additions and (subtractions) on position taken in prior periods | 1,478 | 0 | 0 | |||||||||||||||||
| Reductions due to settlements | 0 | 0 | (1,352) | |||||||||||||||||
| End of the year | $ | 7,235 | $ | 1,958 | $ | 2,262 | ||||||||||||||
| December 31, | September 27, | June 28, | March 29, | |||||||||||||||||||||||
| 2020 | 2020 | 2020 | 2020 | |||||||||||||||||||||||
| Revenues | $ | 787,833 | $ | 666,240 | $ | 643,303 | $ | 617,253 | ||||||||||||||||||
| Costs of revenues | 623,390 | 512,877 | 496,678 | 465,208 | ||||||||||||||||||||||
| Operating income | 20,482 | 28,532 | 34,295 | 7,457 | ||||||||||||||||||||||
| Net (loss) income | $ | (8,913) | $ | 10,731 | $ | 16,786 | $ | (4,777) | ||||||||||||||||||
| December 31, | September 29, | June 30, | March 31, | |||||||||||||||||||||||
| 2019 | 2019 | 2019 | 2019 | |||||||||||||||||||||||
| Revenues | $ | 697,085 | $ | 697,717 | $ | 695,607 | $ | 673,484 | ||||||||||||||||||
| Costs of revenues | 559,940 | 565,703 | 540,772 | 517,159 | ||||||||||||||||||||||
| Operating (loss) income | (3,167) | (10,525) | 26,158 | 14,353 | ||||||||||||||||||||||
| Net (loss) income | $ | (16,664) | $ | (31,625) | $ | 3,388 | $ | (5,160) | ||||||||||||||||||
| Year Ended | Year Ended | |||||||
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
Revenue | $ | 2,763,334 | $ | 2,607,622 | ||||
Income from operations | 74,682 | 80,540 | ||||||
Net income before income taxes | 6,231 | 12,917 | ||||||
Net (loss) income | (795 | ) | 4,596 | |||||
(Loss) Earnings per share – basic and diluted | $ | (0.01 | ) | $ | 0.02 | |||
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Information required by this item is set forth under Item 4.01 of our Current Report on Form8-K filed with the SEC on February 14, 2020, which information is incorporated herein by reference.
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effective, subject to the limitation described below relating to the Company’s acquisitions of CENTRA and Metis.
Management
Management assessed for assessing the effectiveness of the Company’s internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and the Board of Directors regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles.
This Annual Reporteffective as of December 31, 2020.
Duringintegration of CENTRA and Metis into the most recently completed fiscal year,post-acquisition combined company, there hashave been no changechanges in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, that hasoccurred in the fourth fiscal quarter of the period covered by this Annual Report that materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
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John E. Heller
Mr. Heller has served as the ChiefNominee for Director,” “Information About Our Executive Officer of PAE and a Director of PAE since 2013. Prior to joining PAE, Mr. Heller served as Senior Vice President and Chief Operating Officer of Engility Corporation, a provider of engineering and logistics services to the U.S. military, from July 2012 to December 2013, after it wasspun-off fromL-3 Communications. Before this role, Mr. Heller served as President of the Professional Support Services Division ofL-3 Communications, a provider of communication and electronic systems and products to the U.S. military, from April 2012 to July 2012, a position he accepted to support Engility’s transition to operating as an independent and publicly traded company. Before joiningL-3 Communications, Mr. Heller held several leadership positions at Harris Corporation, a technology and defense contractor and information technology services provider, including President of Harris IT Services and Vice PresidentOfficers Who Are Not Directors,” “Corporate Governance and General ManagerInformation Concerning the Board of the division’s Department of Defense programs. He also served as CEO of Netco, Inc.Directors and presidentIts Committees,” and chief operating officer of Multimax, Inc., a Cerberus Capital Management portfolio company. He led its sale to Harris Corporation in 2007. Mr. Heller started his career“Board Committees” in the U.S. Army. He served five years in various leadership positions as a logistics officer. Following several years in the consulting field at Deloitte Consulting, Mr. Heller attained his first CEO position at Rentport, Inc., a portfolio company of Catterton Partners (now L Catterton), a venture capital and private equity firm.
Mr. Heller earned a Master’s degree in business administration from the University of Pittsburgh, and is a graduate of the U.S. Military Academy at West Point. He serves on the Business Alumni Association board of directorsdefinitive Proxy Statement for the Joseph M. Katz Graduate School of Business and College of Business Administration at the University of Pittsburgh. In addition to serving his alma mater, Mr. Heller more recently joined the advisory council for American University’s Kogod School of Business and was elected to the Professional Services Council board of directors.
Charles D. Peiffer
Mr. Peiffer has served as the Executive Vice President and Chief Financial Officer of PAE since 2014. Prior to being named to this position, Mr. Peiffer served as the Senior Vice President and CFO at IAP Worldwide Services Inc. from 2009 to 2014, a leading provider of facility management, contingency support, power solutions and technical services. Prior to his position at IAP, Mr. Peiffer served as Vice President of Finance and CFO from 2003 to 2009 at Fluid Technologies, an operating segment of ITT, Inc., a specialty component producer for the aerospace, transportation, energy and industrial markets. In addition, Mr. Peiffer has held financial leadership roles at Avaya Communications, Lucent Technologies, AlliedSignal, Lockheed Martin, Martin Marietta and General Electric. Mr. Peiffer earned his Master’s degree in Banking and Finance from Saint Joseph’s University and his Bachelor’s degree in Business and Accounting from Philadelphia University.
Paul W. Cobb, Jr.
Mr. Cobb has served as the Executive Vice President and General Counsel of PAE since 2012. Prior to joining PAE, Mr. Cobb served as the Deputy General Counsel of BAE Systems, Inc. between 2004 and 2012, and as the Deputy General Counsel (Legal Counsel) of the Department of Defense between 2001 and 2004. Before his service with the Department of Defense, Mr. Cobb was a partner in the Washington, D.C. office of Jenner & Block LLP, an international law firm. Mr. Cobb was the Judicial Fellow at the Administrative Office of the United States Courts from 1995 to 1996. Between 1991 and 1995, he served on active duty in the United States Army as an attorney in the Army General Counsel’s office. Mr. Cobb began his legal career as a law clerk for the Hon. Thomas A. Clark of the United States Court of Appeals for the Eleventh Circuit in Atlanta, Georgia. Mr. Cobb graduated from Yale Law School and is a summa cum laude graduate of Duke University, which he attended on an Army R.O.T.C. scholarship. He is a member of the board of directors of Blue Star Families, Inc., anon-profit corporation that provides support to families of U.S. military personnel.
Patricia M.C. Munchel
Mrs. Munchel joined PAE in September 2014 as the Vice President of Talent Management and Human Resources, a position she held until December 2014. She currently serves as PAE’s Executive Vice President and Chief Human Resources Officer, a position she’s held since January 2015. Prior to joining PAE, Mrs. Munchel served as an executive human resources leader at Harris Corporation, a technology and defense contractor and information technology services provider, from 2007 to 2014. During her tenure at Harris Corporation, Mrs. Munchel also served as the division human resources leader for Harris IT Services and the Department of Defense business unit. Mrs. Munchel joined Harris Corporation in 2007 through the acquisition of Multimax, Inc., a computer software and packaging services company, where she was the Director of Human Resources from 2004 to 2007. Prior to that, Mrs. Munchel held senior human resources leadership roles for eight years with SAIC, MCI WorldCom and UUNET. Mrs. Munchel earned her Bachelor’s degree from James Madison University with continued graduate studies at the University of Virginia. She currently serves on the board of advisors for James Madison University’s School of Liberal Arts and Social Sciences.
Rene Moline
Rene (Chico) Moline joined PAE in June 2017 and has served as the President of PAE’s National Security Solutions business unit since January 2018. Prior to joining PAE, Mr. Moline served as Senior Vice President of Information Technology and Network Communication Services of Vectrus, Inc., a global government services company. Prior to his role at Vectrus, Inc., Mr. Moline served as Vice President and General Manager of the Department of Defense programs of the Harris IT Services division at Harris Corporation. He joined Harris Corporation through the acquisition of Multimax, Inc. in 2007 as the executive leader of the Navy and U.S. Marine Corps programs. Mr. Moline graduated from the University of Richmond with a Bachelor’s degree in economics and holds a Master of Business Administration degree from Virginia Polytechnic Institute and State University.
Charles D. Anderson
Charles (Chuck) Anderson has served as the President of PAE’s Global Mission Services business unit since January 2018. Mr. Anderson also served as the President of PAE’s Technical Services business unit in 2017. Before joining PAE, Mr. Anderson served as the Senior Vice President of Facility and Logistics Services at Vectrus, Inc., a global government services company. Prior to this role at Vectrus, Inc., Mr. Anderson served as the Vice President and General Manager in the Mission Systems division of Exelis, Inc., a global aerospace, defense, information and services company. Mr. Anderson retired from the United States Army in February 2012 at the rank of Major General after 32 years of service. In his last active duty role, he served as the Commanding General of Division West at Fort Hood, Texas. Mr. Anderson earned a Bachelor’s degree from the U.S. Military Academy at West Point, as well as Master’s degrees in Strategic Studies from the U.S. Army War College, business administration from Long Island University, physical education from Indiana University and systems management from the University of Southern California.
Marshall Heinberg
Marshall Heinberg is the founder of, and since 2012 has served as Managing Director of, MAH Associates, LLC, which provides strategic advisory and consulting services to various companies. Since 2015 he has served as a Senior Advisor to Burford Capital, a litigation finance company. He has served as Chairman of the board of directors and compensation committee of Ecology and Environment, Inc. (“EEI”), a subsidiary of WSP Global, Inc. (“WSP”), since April 2017, and served as Executive Chairman from September 2018 until WSP completed its acquisition of EEI on December 31, 2019. Mr. Heinberg began his investment banking career in 1987 in the Corporate Finance Division of Oppenheimer & Co. Inc., which was acquired by the Canadian Imperial Bank of Commerce, or CIBC, in 1997. He served as Head of the Investment Banking Department and as a Senior Managing Director of Oppenheimer from 2008 until July 2012, and as the Head of U.S. Investment Banking at CIBC World Markets from 2001 until 2008. Mr. Heinberg currently serves on the board of directors of the publicly traded companies ChannelAdvisor Corporation and Galmed Pharmaceuticals Ltd. and as a director and member of the audit committee of Universal Biosensors, Inc. He also serves on the board of directors of Union Carbide Corporation, a subsidiary of The Dow Chemical Company. Mr. Heinberg received a B.S. in Economics from the Wharton School of Business at the University of Pennsylvania and a J.D. from Fordham Law School. Mr. Heinberg is qualified to serve as a director due to his significant experience serving on the boards of public companies and knowledge of global capital markets.
Paul T. Bader
Paul T. Bader has served as an adjunct professor at the Leventhal School of Accounting at the University of Southern California since January 2018. He was a partner in the New York office of Ernst & Young LLP until his retirement in 2016. Mr. Bader held several roles at Ernst & Young over the course of his career, including Partner in Charge of the NY International Tax Practice, Managing Partner of the NY Tax Practice, Managing Partner of Metro NY area, Vice Chair of the Americas M&A practice, Americas Private Equity practice and the Americas Director of Strategy. Mr. Bader spent the last seven years of his career at Ernst & Young consulting with digital media companies on their global operations. Mr. Bader currently serves on the board of directors and as a member of the nominating and governance committee and the audit committee chair of Key Energy Services, Inc. He has also served on the boards of Carnegie Hall, the Citizens Budget Commission and the American Red Cross. Mr. Bader received his B.S. in accounting and his M.A. in taxation from the University of Southern California. Mr. Bader is qualified to serve as a director due to his accounting expertise and significant experience advising public companies on accounting and financial reporting matters.
John P. Hendrickson
John P. Hendrickson is a retired partner of McDermott Will & Emery where he practiced in the areas of employee benefits and executive compensation for 37 years. While at McDermott, Mr. Hendrickson also served as the head of the Employee Benefit and European Practice Group, served on the Management, Executive and Compensation Committees and chaired the Compensation Committee from 2008 through 2016. He is a graduate of South Dakota State University and Notre Dame Law School and serves on the Notre Dame Law School Advisory Counsel. Mr. Hendrickson is qualified to serve as a director based on his extensive experience counseling public companies on executive compensation and other employment matters.
Louis Samson
Louis Samson is a Partner at Platinum Equity, where he leads its New York, Greenwich and London-based investment teams, manages the operations of those offices and is a member of Platinum Equity’s Investment Committee. Mr. Samson joined Platinum Equity in 2007. He oversees M&A transactions executed by his teams and, together with Platinum Equity’s Operations Team, also provides oversight to portfolio companies following their acquisition. Prior to joining Platinum Equity, Mr. Samson was a Managing Director in the Mergers & Acquisitions Group at CIBC World Markets, the investment banking subsidiary of the Canadian Imperial Bank of Commerce. Prior to his role at CIBC World Markets, Mr. Samson was a Mergers & Acquisitions attorney at Stikeman Elliot LLP, a Canadian law firm. Mr. Samson is a graduate of Ottawa University Law School and Le Petit Seminaire de Quebec College. Mr. Samson has been nominated to serve on the Company’s board of directors by Platinum Equity pursuant to the terms of the Merger Agreement, and is qualified to serve as a director due to his extensive corporate finance, banking and private equity experience.
Number and Terms of Office of Officers and Directors
Our Board consists of five directors. Our Board is divided into three classes with only one class of directors being elected in each year and each class (except for the Class I and Class II directors elected by the Company’s stockholders at the Special Meeting) serving a three-year term. Each of Messrs. Paul T. Bader, Marshall Heinberg, John E. Heller, John P. Hendrickson and Louis Samson were elected by the Company’s stockholders at the Special Meeting to serve as directors of the Company, which election became effective upon consummation of the Business Combination. Mr. Hendrickson was elected to serve as a Class I director with a term expiring at the Company’s 2021 annual meetingAnnual Meeting of stockholders; Messrs. Heller and Bader were electedStockholders (the “2021 Proxy Statement”) is hereby incorporated by reference in answer to serve as Class II directors with a term expiring at the Company’s 2022 annual meeting of stockholders; and Messrs. Heinberg and Samson were elected to serve as Class III directors with a term expiring at the Company’s 2023 annual meeting of stockholders. Mr. Heinberg was appointed to serve as the chairman of the Board.
Our officers are appointed by the Board and serve at the discretion of the Board, rather than for specific terms of office. Our Board is authorized to appoint persons to the offices set forth in our bylaws as it deems appropriate. Our bylaws provide that our officers may consist of a Chief Executive Officer, President, Chief Financial Officer, Vice Presidents, Secretary, Treasurer and such other offices as may be determined by the Board. In connection with the consummation of the Business Combination, on the Closing Date, John E. Heller was appointed to serve as the Company’s President & Chief Executive Officer, Charles D. Peiffer was appointed to serve as the Company’s Executive Vice President & Chief Financial Officer, Paul W. Cobb, Jr. was appointed to serve as the Company’s Executive Vice President, General Counsel & Secretary, Patricia M.C. Munchel was appointed to serve as the Company’s Executive Vice President & Chief Human Resources Officer, Rene Moline was appointed to serve as the Company’s President, National Security Solutions, and Charles A. Anderson was appointed to serve as the Company’s President, Global Mission Services.
In connection with the Closing, each of the Company’s executive officers prior to the Closing resigned from his respective position as an executive officer of the Company, in each case effective as of the effective time of the First Merger.
Committees of the Board of Directors
Our Board has three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The rules of Nasdaq and Rule10A-3 of the Exchange Act require that the audit committee of a listed company be comprised solely of independent directors, and the rules of Nasdaq require that the compensation committee and nominating and corporate governance committee of a listed company be comprised solely of independent directors.
Audit Committee
Our Board has established an audit committee of the Board. Audit committee members include Messrs. Bader, Heinberg and Hendrickson. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least three members of the audit committee, all of whom must be independent. Messrs. Bader, Heinberg and Hendrickson qualify as independent directors under applicable rules.
Each member of the audit committee is financially literate and our Board has determined that Mr. Bader qualifies as an “audit committee financial expert” as defined in applicable SEC rules.
We have adopted an audit committee charter, which details the principal functions of the audit committee, including:
the appointment, compensation, retention and oversight of the work of our independent auditors and any other independent registered public accounting firm engaged by us;
pre-approving all audit and permittednon-audit services to be provided by the independent auditors or any other registered public accounting firm engaged by us;
reviewing and discussing with the independent auditors all relationships the auditors have with us in order to evaluate their continued independence;
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in accordance with our Related Transactions Policy, reviewing and approving any related party transaction required to be disclosed pursuant tothis Item 404 of RegulationS-K promulgated by the SEC prior to us entering into such transaction; and
periodically reviewing with management, the independent auditors, and/or our legal advisors, as appropriate:
(i) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect our ability to record, process, summarize and report financial information; and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the our internal control over financial reporting.
Compensation Committee
Our Board has established a compensation committee of the Board. Compensation committee members include Messrs. Bader, Heinberg and Hendrickson. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least two members of the compensation committee, all of whom must be independent. Messrs. Bader, Heinberg and Hendrickson are independent.
We have adopted a compensation committee charter which details the principal functions of the compensation committee, including:
reviewing and approving, on an annual basis, the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, evaluating our Chief Executive Officer’s performance in light of such goals and objectives, and determining and approving the remuneration (if any) of our Chief Executive Officer based on such evaluation;
reviewing and approving, on an annual basis, the compensation of all of our other executive officers;
reviewing, on an annual basis, our executive compensation plans;
overseeing our incentive compensation equity-based remuneration plans;
reviewing and discussing with management, the Company’s compensation discussion and analysis to be included in the Company’s annual proxy statement or annual report on Form10-K filed with the SEC;
preparing the Compensation Committee Report as required by the rules of the SEC; and
reviewing perquisites or other personal benefits to the Company’s executive officers and directors and recommending any changes to the Board.
The charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence of such advisers in accordance with Nasdaq and SEC requirements.
Nominating and Corporate Governance Committee
Our Board has established a nominating and corporate governance committee of the Board. Nominating and corporate governance committee members include Messrs. Bader, Heinberg and Hendrickson. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least two members of the nominating and corporate governance committee, all of whom must be independent. Messrs. Bader, Heinberg and Hendrickson are independent.
We have adopted a nominating and corporate governance committee charter which details the principal functions of the nominating and corporate governance committee, including:
identifying individuals qualified to become members of the Board and its committees, including those individuals recommended by the Company’s stockholders;
identifying or recommending the director nominees to the Board;
periodically reviewing the management development and succession plans relating to positions held by executive officers, direct reports of executive officers and such other officers and employees as the committee may determine is advisable;
overseeing the self-evaluations of the Board;
periodically reviewing and recommending to the Board any amendments to the Company’s corporate governance guidelines and the committee’s charter;
identifying corporate governance best practices and reviewing and recommending to the Board any changes to the Company’s corporate governance guidelines;
evaluating its performance and submitting any recommended changes to the Board for its consideration.
The nominating and corporate governance committee has the authority to retain advisors to assist with the execution of its duties and responsibilities as the committee deems appropriate.
Director Nominations
Candidates for nomination to our Board are selected by our Board based on the recommendation of our nominating and corporate governance committee in accordance with the committee’s charter, our policies, our certificate of incorporation and bylaws, our corporate governance guidelines, and the criteria adopted by our Board regarding director candidate qualifications. In recommending candidates for nomination, our nominating and corporate governance committee considers candidates recommended by directors, officers, and employees, as well as candidates that are properly submitted by stockholders in accordance with our policies and bylaws, using the same criteria to evaluate all such candidates. Evaluations of candidates generally involve a review of background materials, internal discussions and interviews with selected candidates as appropriate and, in addition, our nominating and corporate governance committee may engage consultants or third-party search firms to assist in identifying and evaluating potential nominees.
The Board will consider director candidates recommended for nomination by our stockholders during such times as they are seeking proposed nominees to stand for election at the next annual meeting of stockholders (or, if applicable, a special meeting of stockholders). Our stockholders that wish to nominate a director for election to the Board should follow the procedures set forth in our bylaws.
We have not formally established any specific, minimum qualifications that must be met or skills that are necessary for directors to possess. In general, in identifying and evaluating nominees for director, the Board considers educational background, diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and the ability to represent the best interests of our stockholders.
Compensation Committee Interlocks and Insider Participation
None of our executive officers currently serves, nor in the past year has served, as a member of the Board or compensation committee of any entity that has one or more executive officers serving on our Board.
Code of Ethics
We have adopted an Ethics and Compliance Code of Conduct applicable to all of our directors, officers (including our principal executive officer, principal financial officer and principal accounting officer) and employees. Our Ethics and Compliance Code of Conduct is available on our investor relations website(http://investors.pae.com/corporate-governance/documents-and-charters) in the “Documents & Charters” section. In the event that we amend or waive certain provisions of our Ethics and Compliance Code of Conduct applicable to our principal executive officer, principal financial officer or principal accounting officer that require disclosure under applicable SEC rules, we will disclose the same on our website.
Limitation on Liability and Indemnification of Officers and Directors
Our certificate of incorporation provides that our officers and directors will be indemnified by us to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended. In addition, our certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, except to the extent such exemption from liability or limitation thereof is not permitted by the DGCL.
We have entered into agreements with each of our directors and executive officers and certain other of our officers to provide contractual indemnification in addition to the indemnification provided for in our certificate of incorporation. Our bylaws also permit us to maintain insurance on behalf of any officer, director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit such indemnification. We have obtained a policy of directors’ and officers’ liability insurance that insures our officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to indemnify our officers and directors.
These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against officers and directors, even though such an action, if successful, might otherwise benefit us and our stockholders.
Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant to these indemnification provisions.
We believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced officers and directors.
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None of the Company’s officers or directors during the year ended December 31, 2019 has received any cash compensation for services rendered to Gores III. Commencing on September 6, 2018, we agreed to pay monthly recurring expenses of $20,000 to
In connection with the Business Combination, each of the Company’s executive officers prior to the Business Combination resigned from his respective position as an executive officer of the Company, in each case effective as of the effective time of the First Merger. We are not party to any agreements with the Company’s officers and directors that provided for benefits upon termination of employment.
Information regarding PAE’s executive compensation for the year ended December 31, 2019 is set forth“Director Compensation” in the Company’s definitive proxy statement filed with the SEC on January 24, 2020 and under2021 Proxy Statement is hereby incorporated by reference in answer to this Item 2.01 of our Current Report on Form8-K filed with the SEC on February 14, 2020, which information is incorporated herein by reference.
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As of December 31, 2019, we had no compensation plans
The following table sets forth information availablereference in answer to us as of March 2, 2020 with respect to the beneficial ownership of our Class A Common Stock held by:
each person known by us to be the beneficial owner of more than 5% of our outstanding Class A Common Stock;
each of our executive officers and directors that beneficially own shares of our Class A Common Stock; and
all executive officers and directors as a group.
Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options, warrants and certain other derivative securities that are currently exercisable or will become exercisable within 60 days.
The percentage of beneficial ownership is based on 92,040,654 shares of Company common stock issued and outstanding as of March 2, 2020, which calculation includes all shares of Class A Common Stock issued and outstanding as of March 2, 2020, the only outstanding class of the Company’s common stock following the Business Combination. All shares of Class F Stock were converted into shares of Class A Common Stock or cancelled in connection with the Closing.
Unless otherwise indicated, the business address of each of the entities, directors and executives in this table is 7799 Leesburg Pike, Suite 300 North, Falls Church, Virginia 22043. Unless otherwise indicated and subject to community property laws and similar laws, the Company believes that all parties named in the table below have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Shares of | ||||||
Gores Sponsor III LLC (1)(2) | 11,487,167 | 11.8 | ||||||
Alec Gores (1)(2) | 14,598,420 | 15.0 | ||||||
Platinum Equity Investors (3) | 20,919,578 | 22.7 | ||||||
Platinum Equity, LLC (3)(4)(5) | 23,424,398 | 25.2 | ||||||
PVM Pinnacle Holdings, LLC (6) | 7,608,695 | 8.3 | ||||||
Integrated Core Strategies (7) | 7,184,067 | 7.7 | ||||||
John Heller | 112,663 | * | ||||||
Charles Peiffer | 26,892 | * | ||||||
Paul W. Cobb, Jr. | 19,326 | * | ||||||
Charles Anderson | — | — | ||||||
Rene Moline | — | — | ||||||
Patricia M.C. Munchel | — | — | ||||||
Paul T. Bader | — | — | ||||||
Marshall Heinberg | — | — | ||||||
John P. Hendrickson | — | — | ||||||
Louis Samson (8) | 371,085 | * | ||||||
All directors and executive officers as a group (10 individuals) | 529,966 | * | ||||||
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Founder Shares
On November 3, 2017, our Sponsor purchased 10,781,250 Founder Shares for an aggregate purchase price
The Founder Shares are identical to shares of our Common Stock includedIts Committees” and “Certain Relationships and Related Party Transactions” in the Units sold2021 Proxy Statement is hereby incorporated by reference in the IPO except that the Founder Shares are subject to certain transfer restrictions and are automatically convertible into shares of our Common Stock at the time of a Business Combination on aone-for-one basis, subject to adjustment pursuant to the anti-dilution provisions contained in our amended and restated certificate of incorporation. Immediately prior to the completion of the Business Combination, each outstanding Founder Share automatically converted into one share of Class A Common Stock and the number of authorized Founder Shares was automatically reduced to zero.
The Initial Stockholders have agreed not to transfer, assign or sell any Founder Shares until 180 days after our Business Combination (the “Founder SharesLock-Up Period”).
Private Placement Warrants
On the IPO Closing Date, our Sponsor purchased 6,666,666 Private Placement Warrants at a price of $1.50 per warrant, or $10,000,000. Each Private Placement Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $11.50 per share of Common Stock. The Private Placement Warrants may not be redeemed by the Company so long as they are held by our Sponsor or its permitted transferees. If any Private Placement Warrants are transferred to holders other than our Sponsor or its permitted transferees, such Private Placement Warrants will be redeemable by the Company and exercisable by the holders on the same basis as the Warrants included in the Units sold in the IPO. Our Sponsor and its permitted transferees have the option to exercise the Private Placement Warrants on a physical (cash) or net share (cashless) basis.
The Initial Stockholders have agreed, subject to certain limited exceptions, not to transfer, assign or sell any Private Placement Warrants and the Common Stock underlying such Private Placement Warrants until 30 days after the completion of our Business Combination (such period, together with the Founder SharesLock-Up Period, the “Lock-Up Periods”).
Related Party Notes
On November 3, 2017, our Sponsor loaned us an aggregate of $150,000 by the issuance of an unsecured promissory note for $150,000 to cover expenses related to the IPO, and on August 30, 2018, the Sponsor loaned the Company an additional $150,000 by the issuance of a second unsecured promissory note for $150,000 to cover expenses related to the IPO. These Notes werenon-interest bearing and payable on the earlier of November 30, 2018 or the completion of the IPO. These Notes were repaid in full upon the IPO Closing Date.
We have also paid certain transaction fees and reimbursed the Sponsor and certain of ourpre-Business Combination officers, directors and their affiliates forout-of-pocket expenses incurred in connection with activities on our behalf in connection with the Business Combination in an aggregate amount of approximately $1.1 million. Ourpre-Business Combination audit committee has reviewed on a quarterly basis all such payments that were made and determined which fees and expenses and the amount of expenses that have been reimbursed.
Administrative Services Agreement
On September 6, 2018, the Company entered into an agreement to pay monthly recurring expenses to The Gores Group of $20,000 for office space, utilities and secretarial support. The agreement terminated upon the completion of the Business Combination.
Registration Rights Agreement
On the Closing Date, pursuant to the terms of the Merger Agreement, the Company entered into that certain Amended and Restated Registration Rights Agreement (the “Registration Rights Agreement”) with the Sponsor, the Shay Stockholders (as defined below), Mr. Randall Bort, Mr. William Patton and Mr. Jeffrey Rea. Messrs. Bort, Patton and Rea were the Company’s independent directors prior to the Business Combination and, together with the Sponsor, are collectively referred to herein as the “Gores Stockholders.”
Pursuant to the terms of the Registration Rights Agreement, (a) any outstanding share of Class A Common Stock or any other equity security of the Company (including (i) the Private Placement Warrants and (ii) shares of Class A Common Stock issued or issuable upon the exercise of any other equity security) held by a party to the Registration Rights Agreement as of the Closing Date or thereafter acquired thereby (including the shares of Class A Common Stock issued upon conversion of the Class F Stock and upon exercise of any Private Placement Warrants and shares of Class A Common Stock issued or issuable asearn-out shares to the Shay Stockholders pursuant to the terms of the Merger Agreement) and (b) any other equity security of the Company issued or issuable with respect to any such share of Class A Common Stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, will be entitled to registration rights.
The Registration Rights Agreement provides that the Company will, within 30 days after the Closing Date, file with the SEC a shelf registration statement registering the resale of the shares of Class A Common Stock held by the parties to the Registration Rights Agreement and will use its reasonable best efforts to have such registration statement declared effective as soon as practicable after the filing thereof, but in no event later than 60 days following the initial filing thereof. The Gores Stockholders and the Shay Stockholders are each entitled to make up to six demands, excluding short form demands, that the Company register shares of Class A Common Stock held by these parties. In addition, the parties to the Registration Rights Agreement have certain “piggy-back” registration rights with respect to other offerings by the Company or other stockholders exercising a demand right. The Company will bear the expenses incurred in connection with the filing of any registration statements filed pursuant to the terms of the Registration Rights Agreement. The Company and the parties to the Registration Rights Agreement agree in the Registration Rights Agreement to provide customary indemnification in connection with offerings of the registrable securities effected pursuant to the terms of the Registration Rights Agreement.
Investor Rights Agreement
On the Closing Date, pursuant to the terms of the Merger Agreement, the Company and the Platinum Stockholder entered into that certain Investor Rights Agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, the Platinum Stockholder has the right to nominate up to two directors to the Company’s Board. Initially, one of the two nominees will be the Company’s Chief Executive Officer, who will be nominated as a Class II director, and the other nominee will be a representative of the Platinum Stockholder, who will be nominated as a Class III director. The remaining three directors will be independent directors initially nominated by the Platinum Stockholder and reasonably acceptable to the Company. In addition, for so long as the Platinum Stockholder has the right to nominate a director, it will also have the right to: (a) designate the chairman of the Board (who need not be a nominee of the Platinum Stockholder); (b) appoint one representative to each committee of the Board other than the audit committee; (c) subject to applicable law and stock exchange requirements, appoint one observer to each committee of the Board; and (d) subject to applicable law and stock exchange requirements, require that the Board does not exceed five directors.
The Platinum Shareholder’s right to designate directors to the Board is subject to its ownership percentage of the total outstanding shares of Class A Common Stock. If the Platinum Shareholder holds: (i) 10% or greater of the outstanding Class A Common Stock, it will have the right to appoint two directors; (ii) less than 10% but greater than or equal to 5% of the outstanding Class A Common Stock, it will have the right to appoint one director; and (iii) less than 5% of the outstanding Class A Common Stock, it will not have the right to appoint any directors.
Earn-Out Shares
Under the Merger Agreement, we will be required to issue up to an aggregate of 4,000,000 additional shares of Class A Common Stock (the “Earn-Out Shares”) to the Shay Stockholders if either (i) the volume weighted average closing sale price of one share of Class A Common Stock on the Nasdaq exceeds certain thresholds for a period of at least 10 days out of 20 consecutive trading days (the “Common Share Price”) or (ii) there is a change in control (as described in the Merger Agreement) in which the holders of Class A Common Stock receive a per share price in respect of their Class A Common Stock that is equal to or greater than any such Common Share Price threshold, in each case, at any time during the five-year period following the completion of the Business Combination.
We will be required to issue theEarn-Out Shares to the Shay Stockholders as follows: (i) aone-time issuance of 1,000,000 shares if the Common Share Price is greater than $13.00; (ii) aone-time issuance of 1,000,000 shares if the Common Share Price is greater than $15.50; (iii) aone-time issuance of 1,000,000 shares if the Common Share Price is greater than $18.00; and (iv) aone-time issuance of 1,000,000 shares if the Common Share Price is greater than $20.50.
Corporate Advisory Services Agreement
Shay and Platinum Equity Advisors, LLC (“Platinum Advisors”) were parties to a Corporate Advisory Services Agreement, dated March 14, 2016, entered into in connection with Platinum’s acquisition of PAE pursuant to which Platinum Advisors provided certain advisory, consulting, management, administrative and strategic services to PAE. Platinum Advisors received certain management fees in return for such services rendered. Pursuant to such agreement, Shay paid Platinum Advisors an aggregate of $5.0 million in fees and related expenses during the year ended December 31, 2019. Platinum Advisors also provided PAE with additional transaction-related financial advisory services in connection with the Business Combination for which Shay paid Platinum Advisors $15.0 million. The Corporate Advisory Services Agreement was terminated in connection with the closing of the Business Combination.
Shay Stockholders Agreement
Each of: (i) Shay; (ii) certain affiliates of Platinum Equity that held shares of common stock of Shay (the “Platinum Shay Stockholders”); and (iii) John Heller, Charles Peiffer, Paul W. Cobb, Jr., Michael Fox and Karl E. Williams, Trustee of the Karl E. Williams Revocable Trust dated May 1, 2012, were parties to a Stockholders Agreement, dated as of March 14, 2016, pursuant to which certain Shay Stockholders hadtag-along rights, drag-along rights and registration rights. The Platinum Shay Stockholders (together with certain of their affiliates) also had certain repurchase rights and drag-along rights pursuantanswer to this agreement. The Stockholders Agreement was terminated in connection with the closing of the Business Combination and in connection with the execution of the Registration Rights Agreement.
Director Independence
Nasdaq listing standards require that a majority of our Board be independent. An “independent director” is defined generally as a person other than an officer or employee of the Company or its subsidiaries or any other individual having a relationship which in the opinion of the Company’s Board, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our Board has determined that Messrs. Bader, Heinberg and Hendrickson are “independent directors” as defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors have regularly scheduled meetings at which only independent directors are present.
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Fees for professional services provided
| Year Ended December 31, | Year Ended December 31, 2018 | |||||||
Audit Fees(1) | $ | 263,104 | $ | 140,500 | ||||
Audit-Related Fees(2) | — | — | ||||||
Tax Fees(3) | — | — | ||||||
All Other Fees(4) | 930,467 | — | ||||||
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Total | $ | 1,193,571 | $ | 140,500 | ||||
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Policy on BoardPre-Approval of Audit and PermissibleNon-Audit Services of the Independent Auditors
The audit committee2021 Proxy Statement is responsible for appointing, setting compensation and overseeing the work of the independent auditors. In recognition of this responsibility, the audit committee shall review and, in its sole discretion,pre-approve all audit and permittednon-audit services to be provided by the independent auditors as provided under the audit committee charter.
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(a) The following documents are filed as part of this Annual Report on Form10-K:
Financial Statements: The consolidated financial statements listed in “Index to Consolidated Financial Statements” at “Item 8. Financial Statements and Supplementary Data” are filed as part of this Annual Report on Form10-K.
(b) Exhibits: The exhibits listed below are filed orhereby incorporated by reference as part ofin answer to this Annual Report on Form10-K.
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Merger Agreement, dated as of November1, 2019, by and among Gores Holdings III, Inc., EAP Merger Sub, Inc., EAP Merger Sub II, LLC, Shay Holding Corporation and Platinum Equity Advisors, LLC, in its capacity as the Stockholder Representative (filed as Exhibit 2.1 to the Current Report on Form8-K of the Company on November 1, 2019 and incorporated herein by reference). | ||||||||
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| Inline XBRL Instance Document | ||||||||
| Inline XBRL Taxonomy Extension Schema Document | ||||||||
| Inline XBRL Taxonomy Extension | ||||||||
| Inline XBRL Taxonomy Extension | ||||||||
| Inline XBRL Taxonomy Extension | ||||||||
| Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
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None.
| Dated: March 16, 2021 | PAE | |||||||||||||
| By: | /s/ John E. Heller | |||||||||||||
| John E. Heller | ||||||||||||||
| President and Chief Executive Officer | ||||||||||||||
| (Principal Executive Officer) | ||||||||||||||
Name | Title | Date | ||||||||||||
/s/ John E. Heller | Director, President and Chief Executive Officer (Principal Executive Officer) | March | ||||||||||||
| John E. Heller | ||||||||||||||
/s/ Charles D. Peiffer | Executive Vice President and Chief | March | ||||||||||||
| Charles D. Peiffer | Financial Officer (Principal Financial Officer) | |||||||||||||
/s/ Mark C. Monroe | Vice President, Finance, Corporate Controller | March | ||||||||||||
| Mark C. Monroe | Treasurer (Principal Accounting Officer) | |||||||||||||
/s/ Marshall Heinberg | Chairman of the Board | March | ||||||||||||
| Marshall Heinberg | ||||||||||||||
/s/ Paul T. Bader | Director | March | ||||||||||||
| Paul T. Bader | ||||||||||||||
/s/ John P. Hendrickson | Director | March | ||||||||||||
| John P. Hendrickson | ||||||||||||||
/s/ Louis Samson | Director | March | ||||||||||||
| Louis Samson | ||||||||||||||
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