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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
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X Quarterly Report Pursuant to Section 13 or 15(d) of the
- ----- Securities Exchange Act of 1934 for the quarterly period
and nine months ended September 30, 1997 or
Transition Report Pursuant to Section 13 or 15(d) of the
- ------ Securities Exchange Act of 1934 for the transition period
from ______ to ______.
Commission File Number: 0-22001
DELTEK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Virginia 54-1252625
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8280 Greensboro Drive, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (703) 734-8606
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at September 30, 1997
Common Stock, $.001 par value 17,087,545
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DELTEK SYSTEMS, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
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<CAPTION>
PAGE NO.
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Balance Sheets as of September 30, 1997 and December 31, 1996 3
Statements of Income for the Three and Nine Months 4
Ended September 30, 1997 and September 30, 1996
Statements of Cash Flows for the Nine Months 6
Ended September 30, 1997 and September 30, 1996
Unaudited Notes to Condensed Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 18
ITEM 2 - Changes in Securities and Use of Proceeds 18
ITEM 3 - Defaults upon Senior Securities 18
ITEM 4 - Submission of Matters to a Vote of Security Holder 18
ITEM 5 - Other Information 18
ITEM 6 - Exhibits and Reports on Form 8 - K 18
SIGNATURES 19
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DELTEK SYSTEMS, INC.
BALANCE SHEETS
(in thousands, except share data)
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<CAPTION>
September 30, December 31,
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1997 1996
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,749 $ 8,333
Marketable securities 17,732 ---
Accounts receivable, net of allowance for doubtful
accounts of $472 and $396, respectively 7,911 5,995
Inventories 143 209
Prepaid income taxes 1,002 ---
Prepaid expenses and other current assets 1,014 1,058
----- -----
Total current assets 31,551 15,595
------ ------
Furniture, equipment, and leasehold improvements, at
cost, net of accumulated depreciation and amortization
of $2,643 and $2,168, respectively 2,226 1,878
Computer software development costs, at cost, net of
accumulated amortization of $2,267 and $ 1,810,
respectively 2,593 2,591
Other assets 129 138
--- ---
Total assets $36,499 $20,202
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $3,904 $1,908
Accrued dividends payable 400 -----
Deferred revenue 9,943 6,808
----- -----
Total current liabilities 14,247 8,716
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Commitments
Shareholders' equity:
Preferred stock, $0.001 par value per share, 2,000,000
shares authorized, none issued or outstanding --- ---
Common stock, $0.001 par value per share, 45,000,000
shares authorized, 17,087,545 and 15,167,250 shares
issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 17 15
Paid in capital 18,736 2,226
Retained earnings 4,018 9,965
----- -----
22,771 12,206
Less unearned compensation 519 720
--- ---
Total shareholders' equity 22,252 11,486
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Total liabilities and shareholders' equity $36,499 $20,202
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</TABLE>
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DELTEK SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
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<CAPTION>
Three months ended Sept. 30,
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1997 1996
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Statement of Operations Data: (in thousands, except per share data)
<S> <C> <C>
Revenues:
License fees $4,507 $3,217
Services 7,787 5,234
Third party equipment and software 286 752
--- ---
12,580 9,203
------ -----
Operating expenses:
Cost of software 495 336
Cost of services 3,326 1,894
Cost of third-party equipment
and software 241 638
Software development 2,320 1,732
Sales and marketing 1,186 878
General and administrative 666 579
Stock option compensation --- ---
Purchased in-process research & development --- 394
Acquisitions costs 320 ---
--- ---
Total operating expenses 8,554 6,451
----- -----
Income from operations 4,026 2,752
Interest income, net 222 81
--- --
Income before income taxes 4,248 2,833
Provision for income taxes 1,610 18
----- --
Net income $2,638 $2,815
------ ------
Pro forma Statement of Operations Data:
Income before provision for income
taxes, as reported $4,248 $2,833
Provision for income taxes 1,610 1,105
----- -----
Net income $2,638 $1,728
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Net income per share $0.15 $0.11
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Weighted average shares outstanding 17,552 15,577
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</TABLE>
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DELTEK SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
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1997 1996
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Statement of Operations Data: (in thousands, except per share data)
<S> <C> <C>
Revenues:
License fees $11,947 $8,422
Services 21,138 14,548
Third party equipment and software 1,487 1,401
----- -----
34,572 24,371
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Operating expenses:
Cost of software 1,277 1,047
Cost of services 8,602 5,995
Cost of third-party equipment
and software 1,247 1,147
Software development 6,950 4,658
Sales and marketing 3,152 2,467
General and administrative 1,906 1,721
Stock option compensation --- 867
Purchased in-process research & development --- 394
Acquisitions costs 320 -----
--- -----
Total operating expenses 23,454 18,296
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Income from operations 11,118 6,075
Interest income, net 518 287
--- ---
Income before income taxes 11,636 6,362
Provision for income taxes 3,566 75
----- --
Net income $8,070 $6,287
------ ------
Pro forma Statement of Operations Data:
Income before provision for income
taxes, as reported $11,636 $6,362
Provision for income taxes 4,448 2,483
----- -----
Net income $7,188 $3,879
------ ------
Net income per share $0.42 $0.25
----- -----
Weighted average shares outstanding 17,095 15,555
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</TABLE>
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DELTEK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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<CAPTION>
Nine months ended Sept. 30,
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1997 1996
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Cash flow from operating activities:
Net Income $8,070 $6,287
Adjustments to reconcile net income provided by
operating activities:
Depreciation and amortization 965 797
Compensation, noncash 201 926
Purchased in-process research & development --- 394
Accreted interest on marketable securities (159) 61
Change in accounts receivable, net (1,916) (2,395)
Change in prepaid income taxes (1,002) ---
Change in prepaid expenses, inventories and other assets 110 (167)
Change in accounts payable and accrued expenses 1,996 1,186
Change in deferred revenue 3,135 3,223
----- -----
Net cash provided by operating activities 11,400 10,312
------ ------
Cash flows from investing activities:
Purchase of marketable securities (17,573) 3,068
Purchase of property and equipment (833) (769)
Capitalization of computer development costs (462) (452)
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Net cash (used in) provided by investing activities (18,868) 1,847
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Cash flow from financing activities:
Cash proceeds from issuance of common shares 498 5
Cash proceeds from initial public offering 16,429 ---
Cash dividends paid to stockholders (13,617) (11,859)
Treasury stock acquired (426) ---
----- ---
Net cash (used in) provided by financing activities 2,884 (11,854)
----- --------
Net increase (decrease) in cash and equivalents (4,584) 305
Cash and equivalents, beginning of period 8,333 4,393
----- -----
Cash and equivalents, end of period $3,749 $4,698
------ ------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $4,568 $75
------ ---
</TABLE>
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DELTEK SYSTEMS, INC.
UNAUDITED NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate
to make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 1996, included in the Company's
Form S-1 Registration Statement (No. 333-18247).
2. INITIAL PUBLIC OFFERING
In the initial public offering effected by the Form S-1 Registration Statement
dated February 24, 1997, the Company sold 1.7 million shares of its Common
Stock, par value $0.001 per share at $11.00 per share. The Company realized
$16.4 million from the offering (after deducting the expenses of the offering
of approximately $2.3 million).
3. TERMINATION OF S-CORPORATION ELECTION
Just prior to the initial public offering, the Company terminated its
S-Corporation election for federal income tax purposes. The provision for
income taxes prior to this termination related to certain states that do not
recognize S-Corporation status. Provision for income taxes after the
revocation reflects the estimated current provision for federal and state
income taxes and deferred income taxes. The Company has recorded $13.6 million
in distributions to S-Corporation shareholders during the nine months ended
September 30, 1997, of which $400,000 was payable at September 30, 1997.
Pro forma net income is based on the assumption that the Company's
S-Corporation status was terminated at the beginning of each year and reflects
a pro forma income tax provision based on applicable tax rates as if the
Company had not elected S-Corporation status for the periods indicated.
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4. PRO FORMA NET INCOME PER COMMON SHARE
Pro forma net income per common share was computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares are calculated using the treasury stock
method and represent incremental shares issuable upon the exercise of
outstanding stock options. In accordance with SEC Staff Accounting Bulletin
No. 83, weighted average shares for all periods prior to the initial public
offering also include those options which were granted within one year of the
initial public offering date.
Statement of Financial Accounting Standards No. 128. Earnings per Share
changes the reporting requirements for earnings per share (EPS) for publicly
traded companies by replacing primary EPS with basic EPS and changing the
disclosures associated with this change. The Company is required to adopt this
standard for its December 31, 1997 year-end and is currently evaluating the
impact of this standard.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
unaudited Financial Statements and Notes included in Item 1 of this Quarterly
Report. The following information should also be read in conjunction with the
audited Financial Statements and Notes, and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1996 as contained in the Company's Registration Statement on Form
S-1 (No. 333-18247) dated February 24, 1997.
Except for historical information, certain statements in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking. These forward-looking statements are subject
to various risks and uncertainties, including the demand for products, the size
and timing of specific sales, the level of product and price competition, the
length of sales cycles, economic conditions and the Company's ability to
develop and market new products and control costs. The Company undertakes no
obligation and does not intend to update, revise or otherwise publicly release
the result of any revisions to these forward-looking statements that may be
made to reflect future events or circumstances.
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Results of Operations
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total revenues:
Statement of Operations Data (Unaudited) as a percentage of revenues
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<CAPTION>
Three months ended Nine months ended
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9/30/97 9/30/96 9/30/97 9/30/96
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Revenues:
License fees 35.8 % 35.0 % 34.6 % 34.6 %
Services 61.9 56.9 61.1 59.7
Third party equipment and 2.3 8.1 4.3 5.7
--- --- --- ---
software
Total Revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of software 3.9 3.7 3.7 4.3
Cost of services 26.5 20.6 24.9 24.6
Cost of third-party equipment
and software 1.9 6.9 3.6 4.7
Software development 18.5 18.8 20.1 19.1
Sales and marketing 9.4 9.5 9.1 10.1
General and administrative 5.3 6.3 5.5 7.1
Purchased in-process R&D ----- 4.3 ----- 1.6
Acquisitions costs 2.5 ----- 0.9 -----
Stock option compensation ----- ---- ----- 3.6
----- ---- ----- ---
Total operating expenses 68.0 70.1 67.8 75.1
---- ---- ---- ----
Income from operations 32.0 29.9 32.2 24.9
Interest income, net 1.8 0.9 1.5 1.2
--- --- --- ---
Income before income taxes 33.8 30.8 33.7 26.1
Provision for income taxes 12.8 0.2 10.4 0.3
---- --- ---- ---
Net income 21.0 % 30.6 % 23.3 % 25.8 %
---- ---- ---- ----
Pro forma Statement of Operations
- ---------------------------------
Data:
- -----
Income before income taxes 33.8 % 30.8 % 33.7 % 26.1 %
Provision for income taxes 12.8 12.0 12.9 10.2
---- ---- ---- ----
Net income 21.0 % 18.8 % 20.8 % 15.9 %
---- ---- ---- ----
</TABLE>
Three months ended September 30, 1997 as compared with September 30, 1996
License Fees. License fees for the three month period ending
September 30, 1997 increased by 40% to $4.5 million from $3.2 million for the
same period in 1996. License
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fees comprised 35.8% of the Company's total revenues for the three month period
ending September 30, 1997, compared to 35.0% for 1996. The increase in license
fees was principally attributable to Costpoint license fees which increased
56.0% to $3.0 million for the third quarter of 1997 from $1.9 million for the
comparable quarter in 1996, reflecting increases in the number of modules
licensed and the average size of new system installations, offset somewhat by
discounts granted to System 1 users migrating to Costpoint systems. License
fees from System 1 products was approximately $0.8 million and $1.0 million for
the third quarter of 1997 and 1996, respectively. License fees for Electronic
Timesheet increased by 147.6% to $572,000 from $231,000 in the third quarter of
1996.
Services. Service revenues for the three month period ending
September 30, 1997 increased by 48.8% to $7.8 million from $5.2 million for the
same period in 1996. Service revenues comprised 61.9% of the Company's total
revenues for the third quarter of 1997, compared to 56.9% for the same period
in 1996. The increase in service revenues was principally attributable to
increased consulting services related to new implementations of Costpoint
systems. Consulting service revenues increased by 73.6% to $2.5 million for
the three month period ending September 30, 1997 from $1.4 million for the same
period in 1996. The national user conference revenues were $483,000 for the
third quarter of 1997, with no corresponding revenues for the third quarter of
1996. Maintenance, support, and other service revenues increased by 26.7% to
$4.8 million from $3.8 million, principally as a result of the addition of new
customers and the sale of additional software products to existing customers
and, to a lesser extent, increases in service rates.
Third-Party Equipment and Software. Revenue from third-party
equipment and software for the three month period ending September 30, 1997 and
September 30, 1996 was approximately $286,000 and $752,000, respectively.
These revenues comprised 2.3% of total revenues for the third quarter of 1997
and 8.2% for the comparable period in 1996. Third-party Equipment and Software
sales are not a core emphasis of the company, but rather an accommodation to
customers that require system integration during the implementation of their
accounting system. As a result the level of these sales fluctuates
significantly from quarter to quarter.
Cost of Software. Cost of software is comprised primarily of
royalties and maintenance payments to third parties, amortization of software
development costs, and the cost of production and distribution of software and
user manuals. Cost of software for the three month period ending September 30,
1997 was approximately $0.5 million, a slight increase from the $0.3 million
for the same period in 1996. This change was due to an increase in royalty and
support expenses based on the mix of software revenue.
Cost of Services. Cost of services is comprised primarily of
personnel costs for implementation and consulting services, user training and
ongoing maintenance and support. Cost of services for the three month period
ending September 30, 1997 increased by 75.6% to $3.3 million from $1.9 million
for the same period in 1996. The
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increase in cost of services was primarily due to the national user conference,
and increases in personnel costs to support the Costpoint product line. Cost
of services represented 42.7% and 36.2% of service revenues for the three month
period ending September 30, 1997 and 1996, respectively. The increase in cost
of services as a percentage of service revenues as compared to the third
quarter of 1996 reflects the impact of the national user conference and an
increase in the consulting and support staff to support the continued growth of
Costpoint implementations. Cost of services, exclusive of the impact of the
national user conference, represented 37.8% of service revenues.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of the purchased costs of computer and
peripheral equipment and license fees and royalties for third-party software.
Costs of third-party equipment and software for the three month period ending
September 30, 1997 and September 30, 1996 were $0.2 million and $0.6 million,
respectively. As a percentage of related revenues, cost of third-party
equipment and software products represented 84.3% and 84.8% of revenue from
third-party equipment and software for the three month period ending September
30, 1997 and 1996, respectively. The decrease in these costs as a percentage
of related revenue was the result of changes in the product mix of equipment
and software sold.
Software Development. Software development costs consists primarily
of the personnel costs of analysts and programmers to research, develop,
support and maintain the Company's existing software product lines, enhance
existing products and develop new products. Software development costs for the
three month period ending September 30, 1997 increased by 33.9% to $2.3 million
from $1.7 million for the same period in 1996. This increase was due primarily
to increased personnel costs and related benefits and facilities costs.
Software development costs represented 18.5% and 18.8% of total revenues for
the three month period ending September 30, 1997 and 1996, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily
of the personnel costs of the Company's sales and marketing organizations as
well as the costs of advertising, direct mail and other sales and marketing
activities. Sales and marketing expenses for the three month period ending
September 30, 1997 increased by 35.1% to $1.2 million from $0.9 million for
the same period in 1996. This increase was due primarily to increased
personnel and marketing activities. Sales and marketing expenses represented
9.4% of the Company's total revenues for the three month period ending
September 30, 1997, compared to 9.5% for the same period in 1996.
General and Administrative. General and administrative expenses
consist primarily of the personnel costs of the Company's management,
administrative and finance staffs as well as the costs of insurance programs,
bad debt expenses, professional fees and other infrastructure costs. General
and administrative expenses for the three month period ending September 30,
1997 increased by 15.0% to $0.7 million from $0.6 million for the same period
in 1996. This $87,000 increase was due primarily to the
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company's overall growth. General and administrative expenses represented 5.3%
of the Company's total revenue for the three month period ending September 30,
1997, compared to 6.3% for the same period in 1996.
Nonrecurring charges. Included in operating expenses for the three
months ending September 30, 1997 are acquisition costs of $320,000 relating to
a major acquisition of another software company on which negotiations were
terminated in the third quarter. Operating expenses for the three months
ending September 30, 1996 include $394,000 for the purchased in-process
research and development expenses from the acquisition of the Allegro in
September 1996.
Interest Income. Interest income results from investments, and to a
lesser extent, from installment financing. Interest income for the three month
period ending September 30, 1997 increased by 174.1% to $222,000 from $81,000
for the same period in 1996. The change is due to the increased investments as
a result of the February 1997 initial public offering, and the timing and
amount of dividend distributions related to the termination of the
S-Corporation status.
Income Tax Provision. The Company's effective tax rate for the three
month period ending September 30, 1997 was 37.9%, as compared to a 39.0% pro
forma effective tax rate for the same period in 1996. The provision for income
taxes for the three month period ended September 30, 1997 is based upon the
Company's estimate of the effective tax rate for fiscal 1997. Just prior to
the initial public offering, the Company terminated its S-Corporation election
for federal income tax purposes. The provision for income taxes prior to this
termination related to certain states that do not recognize the S-Corporation
status. Provision for income taxes after the termination reflects the
estimated current provision for federal and state income taxes and deferred
taxes.
Nine months ended September 30, 1997 as compared with September 30, 1996
License Fees. License fees for the nine month period ending September
30, 1997 increased by 41.9% to $11.9 million from $8.4 million for the same
period in 1996. License fees comprised 34.6% of the Company's total revenues
for both the nine month period ending September 30, 1997 and September 30,
1996. The increase in license fees was principally attributable to Costpoint
license fees which increased 65.4% to $7.9 million for the first nine months of
1997 from $4.8 million for 1996, reflecting increases in the number of modules
licensed and the average size of new system installations, offset somewhat by
discounts granted to System 1 users migrating to Costpoint systems. License
fees from System 1 products was approximately $2.7 million for the first nine
months of 1997 and $2.9 million for the first nine months of 1996. License
fees for Electronic Timesheet increased by 76.3% to $1.2 million from $701,000
in 1996.
Services. Service revenues for the nine month period ending September
30, 1997 increased by 45.3% to $21.1 million from $14.5 million for the same
period in 1996. Service revenues comprised 61.1% of the Company's total
revenues for the first nine
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months of 1997, compared to 59.7% for the same period in 1996. The increase in
service revenues was principally attributable to increased consulting services
related to new implementations of Costpoint systems. The national user
conference revenues for the nine months ending September 30, 1997 and 1996 were
$483,000 and $345,000, respectively. Consulting service revenues increased by
77.4% to $7.0 million for the nine month period ending September 30, 1997 from
$4.0 million for the same period in 1996. Maintenance, support, and other
service revenues increased by 33.1% to $13.6 million from $10.2 million,
principally as a result of the addition of new customers and the sale of
additional software products to existing customers and, to a lesser extent,
increases in service rates.
Third-Party Equipment and Software. Revenue from third-party
equipment and software for the nine month period ending September 30, 1997 and
September 30, 1996 was approximately $1.5 million and $1.4 million,
respectively. These revenues comprised 4.3% and 5.7% of total revenues for the
first nine months of 1997 and 1996, respectively. The increase of $86,000 was
primarily attributable to increased sales of third party database software and
equipment.
Cost of Software. Cost of software for the nine month period ending
September 30, 1997 was approximately $1.3 million, a slight increase from the
$1.0 million for the same period in 1996. This change was due to an increase
in royalty and support expenses based on the mix of software revenue.
Cost of Services. Cost of services for the nine month period ending
September 30, 1997 increased by 43.5% to $8.6 million from $6.0 million for the
same period in 1996. The increase in cost of services was primarily due to
increases in personnel costs to support the Costpoint product line. Cost of
services represented 40.7% and 41.2% of service revenues for the nine month
period ending September 30, 1997 and 1996, respectively. Cost of services,
exclusive of the impact of the national user conference, for the nine months
ending September 30, 1997 and 1996 were 38.9% and 40.2%, respectively. The
decrease in cost of services as a percentage of service revenues reflected
improved utilization and billing of consultants as compared to the first nine
months of 1996. During the first six months of 1996, the Company experienced
higher service costs due to the investment in the initial implementations of
Costpoint systems by providing consulting services to a number of customers at
reduced fees or no charge and also reflected the increased reimbursed travel
expenses which were billed with no mark-up.
Cost of Third-Party Equipment and Software. Costs of third-party
equipment and software for the nine month period ending September 30, 1997 and
September 30, 1996 were $1.2 million and $1.1 million, respectively. As a
percentage of related revenues, cost of third-party equipment and software
products represented 83.9% and 81.9% of revenue from third-party equipment and
software for the nine month period ending September 30, 1997 and 1996,
respectively. The increase in these costs as a percentage of related revenue
was the result of changes in the product mix of equipment and software sold as
well as competitive pressures on pricing.
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Software Development. Software development costs for the nine month
period ending September 30, 1997 increased by 49.2% to $6.9 million from $4.7
million for the same period in 1996. This increase was due primarily to
increased personnel costs and related benefits and facilities costs. Software
development costs represented 20.1% and 19.1% of total revenues for the nine
month period ending September 30, 1997 and 1996, respectively.
Sales and Marketing. Sales and marketing expenses for the nine month
period ending September 30, 1997 increased by 27.8% to $3.2 million from $2.5
million for the same period in 1996. This increase was due primarily to
increased personnel and marketing activities. Sales and marketing expenses
represented 9.1% of the Company's total revenues for the nine month period
ending September 30, 1997, compared to 10.1% for the same period in 1996.
General and Administrative. General and administrative expenses for
the nine month period ending September 30, 1997 increased by 10.7% to $1.9
million from $1.7 million for the same period in 1996. This $185,000 increase
was due primarily to the Company's overall growth. General and administrative
expenses represented 5.5% of the Company's total revenue for the nine month
period ending September 30, 1997, compared to 7.1% for the same period in 1996.
Nonrecurring charges. Included in operating expenses for the nine
months ending September 30, 1997 are acquisition costs of $320,000 relating to
a major acquisition of another software company on which negotiations were
terminated in the third quarter. Operating expenses for the nine months ending
September 30, 1996 include $394,000 for the purchased in-process research and
development expenses from the acquisition of the Allegro in September 1996, and
an additional $867,000 charge in June 1996 relating to stock option
compensation.
Interest Income. Interest income for the nine month period ending
September 30, 1997 increased by 80.5% to $518,000 from $287,000 for the same
period in 1996. The change is due to the increased investments as a result of
the February 1997 initial public offering, and the timing and amount of
dividend distributions related to the termination of the S-Corporation status,
which included the interest expense related to the shareholder promissory notes
issued and paid in the first quarter of 1997.
Income Tax Provision. The Company's pro forma effective tax rate for
the nine month period ending September 30, 1997 was 38.2%, as compared to 39.0%
for the same period in 1996. The provision for income taxes for the nine month
period ended September 30, 1997 is based upon the Company's estimate of the
effective tax rate for fiscal 1997. Just prior to the initial public offering,
the Company terminated its S-Corporation election for federal income tax
purposes. The provision for income taxes prior to this termination related to
certain states that do not recognize the S-Corporation
14
<PAGE> 15
status. Provision for income taxes after the termination reflects the
estimated current provision for federal and state income taxes and deferred
taxes.
Liquidity and Capital Resources
The Company has financed its operations almost exclusively from cash
flow from its operations. As of September 30, 1997, the Company had cash, cash
equivalents of $3.7 million and investments in marketable securities of $17.7
million, with working capital of $17.3 million. On March 3, 1997, the Company
received proceeds of $16.4 million, net of offering costs, related to the
closing of the Company's initial public offering and sale of 1,700,000 common
shares.
For the nine month period ending September 30, 1997, the Company's
operating activities provided net cash of $11.4 million, primarily as a result
of income before depreciation and amortization. In addition, the increase in
accounts receivable was offset by a greater increase in accounts payable and
accrued expenses and deferred revenue. Accounts receivable, net of the
allowance for doubtful accounts, were $7.9 million as of September 30, 1997,
compared to $8.4 million as of September 30, 1996. Accounts receivable days
sales outstanding was 55 days as of September 30, 1997, compared to 83 days as
of September 30, 1996. The increase in deferred revenue reflects increased
Costpoint license fees, for which revenue is recognized upon the expiration of
the refund period. Exclusive of unbilled receivables which were recorded as
deferred revenue, days sales outstanding was 35 days as of September 30, 1997,
compared to 55 days as of September 30, 1996. While the Company believes that
its allowance for doubtful accounts as of September 30, 1997 remains adequate,
there can be no assurance that such allowance will be sufficient to cover
receivables which are later determined to be uncollectible.
Cash used in investing activities was $18.9 million for the nine
months ended September 30, 1997. This amount included $17.6 million for the
purchase of marketable securities and other investments, offset by $833,000 in
purchased property and equipment and $462,000 of capitalized software
production costs for new Costpoint product modules.
Financing activities for the nine month period ended September 30,
1997 consisted primarily of the net proceeds of $16.4 million from the initial
public offering of 1,700,000 common shares of the Company stock, the payment of
$13.6 million in dividend and tax distributions to the Company's subchapter "S"
Corporation shareholders, the payment of $426,000 for the repurchase of
treasury shares, and $498,000 in proceeds from the issuance of common stock
upon the exercise of stock options. The Company historically has distributed
most of its profits as S-Corporation dividends, but terminated its
S-Corporation status in February, 1997. The Company has approximately $400,000
recorded as a dividend payable to its former S-Corporation shareholders at
September 30, 1997, pending completion of the S-Corporation tax returns.
15
<PAGE> 16
The Company has established a credit facility with a bank for $1
million operating capital line of credit. The Company believes that existing
sources of liquidity and anticipated cash flow from operations, and proceeds
from the public offering, will satisfy the Company's anticipated working
capital and capital expenditure requirements for the next twelve months.
However, depending on its rate of growth and profitability, the Company may
require additional equity or debt financing to meet its working capital
requirements or capital expenditure needs in the future. There can be no
assurance that additional financing will be available when required or, if
available, will be on terms satisfactory to the Company.
Factors That May Affect Future Results
The Company has experienced, and expects to continue to experience,
significant fluctuations in quarterly operating results. The Company's future
operating results will depend upon a number of factors, including the demand
for its products, the size and timing of specific sales, the delay or deferral
of customer implementations, the level of product and price competition that it
encounters, the length of its sales cycles, the successful expansion of its
direct sales force and customer support organization, the timing of new
products and services sold, the activities of and acquisitions by its
competitors, the timing of new hires and its ability to develop and market new
products and control costs. The Company's operating results could also be
affected by general economic conditions. In addition, the decision to license
and implement an enterprise- level business software system is usually
discretionary, involves a significant commitment of customer resources and is
subject to delays, and to budget cycles and internal authorization procedures
of the Company's customers. The loss or delay of individual orders could have
a significant impact on the Company's operating results, particularly on a
quarterly basis. Furthermore, while the Company's revenue from license fees is
difficult to predict because of the length and variability of the Company's
sales cycles, the Company's operating expenses are based on anticipated revenue
trends. Because a high percentage of these expenses are relatively fixed, a
delay in the recognition of revenue from a limited number of sales could cause
significant variations in operating results from quarter to quarter. To the
extent such expenses precede, or are not subsequently followed by, anticipated
revenues, the Company's operating results could be materially and adversely
affected.
The Company typically grants its customers the right to return its
software products for a refund of the license fee during a refund period which
is generally 60 to 90 days from the date of the license agreement, although the
Company occasionally has provided, and may in the future provide, longer refund
periods for larger, more complex Costpoint installations. The Company
recognizes license fees from its System 1 and Electronic Timesheet products
upon delivery, whereas Costpoint license fees are recognized upon the
expiration of the applicable refund period and are recorded as deferred revenue
until recognized. Because of its customers' refund rights and the varying
length of applicable refund periods, deferred revenue at the end of a quarter
does
16
<PAGE> 17
not necessarily reflect revenue which the Company will recognize in the
succeeding quarter.
The Company derives substantially greater profit margins from license
fees than from service revenues or from third-party equipment and software.
The mix of revenues among these three components can fluctuate materially from
quarter to quarter, and such fluctuations can have a significant effect on
margins. Over the past five years, the percentage of the Company's total
revenues represented by service revenues has increased, although such
percentage has remained relatively stable over the past three years. Should
lower margin service revenues or revenue from third-party equipment and
software increase in the future as a percentage of total revenues, the
Company's margins and income from operations could be adversely affected.
Over the last several years, the Company has experienced seasonal
variations in its operating results, partly due to customers' desire to have
their systems operational at the beginning of a calendar year. Accordingly,
these customers typically order their systems in the middle of the preceding
year in order to allow adequate time for implementation, resulting in a
seasonally high level of revenue being recognized in the fourth quarter upon
the expiration of refund periods.
As a result of these and other factors, the Company's operating
results for any quarter are subject to significant variation, and the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. It is likely that the Company's future quarterly operating
results from time to time will not meet the expectations of market analysts or
investors. In such event, the price of the Company's Common Stock would likely
be materially and adversely affected.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not party to any legal proceeding which would have a
material impact on the Company, its operations or financial results.
Item 2. Changes in Securities and Use of Proceeds
(a-b) Not applicable
(c) None other than pursuant to employee benefit plans.
(d) The net proceeds of the initial public offering (see Note 2 to
the Financial Statements) remain temporarily invested and available for future
working capital or other uses. The managing underwriter for the initial public
offering was Montgomery Securities.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed on September 8, 1997 relating to the cessation of
discussions involving a major acquisition of a private software company on
September 5, 1997.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 7, 1997
DELTEK SYSTEMS, INC.
By: /s/ Kenneth E. deLaski
---------------------------
Kenneth E. deLaski
President and Chief Executive Officer
By: /s/ Alan R. Stewart
------------------------
Alan R. Stewart
Chief Financial Officer
(Principal Financial and Accounting officer)
19
<PAGE> 20
DELTEK SYSTEMS, INC.
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
27 Financial Data Schedule
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELTEK
SYSTEMS, INC. FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S STATEMENT ON FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
AND NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 3,749 0
<SECURITIES> 17,732 0
<RECEIVABLES> 8,383 0
<ALLOWANCES> (472) 0
<INVENTORY> 143 0
<CURRENT-ASSETS> 31,551<F1> 0
<PP&E> 24,869 0
<DEPRECIATION> (2,643) 0
<TOTAL-ASSETS> 36,499<F2> 0
<CURRENT-LIABILITIES> 14,247 0
<BONDS> 0 0
0 0
0 0
<COMMON> 17 0
<OTHER-SE> 22,235 0
<TOTAL-LIABILITY-AND-EQUITY> 36,499 0
<SALES> 12,580 34,572
<TOTAL-REVENUES> 12,580 34,572
<CGS> 0 0
<TOTAL-COSTS> 8,554 23,454
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 4,248<F3> 11,636<F4>
<INCOME-TAX> 1,610 3,566<F5>
<INCOME-CONTINUING> 4,026 11,118
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,638 8,070<F5>
<EPS-PRIMARY> 0.15 0<F5>
<EPS-DILUTED> 0 0
<FN>
<F1>INCLUDES PREPAID EXPENSES AND OTHER CURRENT ASSETS OF 2,016.
<F2>INCLUDES COMPUTER SOFTWARE COSTS-NET OF 2,593. ALSO EXCLUDES OTHER ASSETS OF
129.
<F3>INCLUDES INTEREST INCOME OF 222.
<F4>INCLUDES INTEREST INCOME OF 518.
<F5>AS A SUBCHAPTER "S" CORPORATION PRIOR TO THE PUBLIC OFFERING, THE PROFORMA
INCOME TAX PROVISION, PROFORMA NET INCOME AND PROFORMA NET INCOME PER SHARE
WAS 4,448, 7,188, AND $0.42 PER SHARE.
</FN>
</TABLE>
