<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1997.
REGISTRATION NO. 333-18247
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DELTEK SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
VIRGINIA 7371 54-1252625
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CODE CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
8280 GREENSBORO DRIVE
MCLEAN, VIRGINIA 22102
(703) 734-8606
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KENNETH E. DELASKI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DELTEK SYSTEMS, INC.
8280 GREENSBORO DRIVE
MCLEAN, VIRGINIA 22102
(703) 734-8606
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
DENNIS C. SULLIVAN, ESQ. ROBERT E. GREGG, ESQ. THOMAS A. BEVILACQUA, ESQ.
CHRISTOPHER J. HURLEY, ESQ. BENTON BURROUGHS, JR., ESQ. NORA L. GIBSON. ESQ.
GRAY CARY WARE & FREIDENRICH HAZEL & THOMAS, P.C. BROBECK, PHLEGER & HARRISON, LLP
A PROFESSIONAL CORPORATION 3110 FAIRVIEW PARK DRIVE TWO EMBARCADERO PLAZA
400 HAMILTON AVENUE SUITE 1400 2200 GENG ROAD
PALO ALTO, CA 94301 FALLS CHURCH, VA 22042 PALO ALTO, CA 94303
(415) 328-6561 (703) 641-4200 (415) 424-0160
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 28, 1997
2,900,000 SHARES
LOGO
COMMON STOCK
Of the 2,900,000 shares of Common Stock offered hereby, 1,700,000 are being
sold by Deltek Systems, Inc. ("Deltek" or the "Company") and 1,200,000 are being
sold by the Selling Shareholders. See "Principal and Selling Shareholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders.
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $11.00 and $13.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied for quotation of the Common Stock on the
Nasdaq National Market under the symbol "DLTK."
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Shareholders(2)
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<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
Total (3)...................... $ $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $800,000 and
expenses payable by the Selling Shareholders estimated at $25,000.
(3) Certain of the Selling Shareholders have granted to the Underwriters a
30-day option to purchase up to an aggregate of 435,000 additional shares of
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the Price to Public will total $ ,
the Underwriting Discount will total $ and the Proceeds to the
Selling Shareholders will total $ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the office of
Montgomery Securities on or about , 1997.
------------------------
MONTGOMERY SECURITIES WILLIAM BLAIR & COMPANY
, 1997
<PAGE> 3
[ARTWORK TO BE ADDED]
------------------------
Deltek, Costpoint and Allegro are registered trademarks of the Company, and
Electronic Timesheet and Web E.T. are trademarks of the Company. This Prospectus
also contains trade names and trademarks of other companies that are the
property of their respective holders.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included
elsewhere in this Prospectus. Except as otherwise indicated, all information in
this Prospectus (i) gives effect to a three-for-one stock split of the Company's
Common Stock effected by means of a stock dividend in December 1996 and (ii)
assumes that the Underwriters' over-allotment option is not exercised. The
discussion in this Prospectus contains forward-looking statements which include
risks and uncertainties. The Company's actual results could differ materially
from those discussed in this Prospectus. Factors that could cause or contribute
to such differences include those discussed in the sections entitled "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as those discussed elsewhere in
this Prospectus.
THE COMPANY
Deltek designs, develops, sells and supports a family of integrated
software products that provide project-oriented businesses with tools to more
effectively manage, operate and grow their operations. Deltek's products address
the enterprise-level needs of project-oriented businesses and allow these
organizations to manage financial and project accounting, compute costs and
revenues on a project-by-project basis, submit accurate and detailed bills,
comply with complex industry-specific and regulatory requirements, administer
employee time collection, labor costing and payroll, automate materials
management functions, and empower their managers with timely and pertinent
information. Deltek also provides a full range of consulting and maintenance
services to assist its customers with system implementation and integration and
to provide training and ongoing support for the Company's software products.
The increasingly competitive business environment has created pressure for
business organizations to better utilize information technologies to improve
their efficiency, reduce their costs and provide their employees and management
with more timely and pertinent information. As a result, many organizations are
implementing a new generation of enterprise-level business systems, based on
open, client/server architectures, to automate their operations, including
finance, accounting, manufacturing and human resource management functions. Most
client/server enterprise-level business systems are general-purpose and fail to
address many of the specific requirements of businesses engaged primarily in
providing goods and services to customers under project-specific contracts and
engagements. These project-oriented businesses include a wide variety of
professional and technical service providers, including engineering and
environmental firms, research and development firms and contract service
organizations, as well as not-for-profit organizations, make-to-order
manufacturers and construction companies. Many of these project-oriented
businesses provide goods and services under government contracts.
Deltek's family of software products consists of Costpoint, the Company's
advanced client/server, enterprise-level business software system designed for
project-oriented organizations; System 1, a DOS-based accounting and management
system designed primarily for organizations providing goods and services under
contracts with the federal government; Electronic Timesheet, an employee
timekeeping system; and Allegro, a project and resource management tool. These
products include modules spanning financial accounting, project accounting and
management, human resources and payroll administration, time and labor
collection, materials management and reporting tools. Application modules within
each Deltek product are integrated and utilize a common user interface and
database structure, allowing project-oriented organizations to configure and
implement a fully-integrated system solution.
An integral part of Deltek's solution is to provide superior services and
support directly to its customers. The Company believes that its implementation
expertise, together with its focus on the unique requirements of
project-oriented organizations, result in a faster and more cost-effective
system implementation than is typically achieved by companies which choose to
adapt general-purpose business systems to the needs of their project-oriented
organizations. After a customer's implementation is completed, Deltek provides
ongoing support services to assist the customer in maintaining and updating its
system, training its employees and adding functionality as the customer's
business grows and its requirements change.
Deltek sells its products and services through its direct sales force.
Since its inception, the Company has installed more than 1,950 systems for a
wide range of project-oriented organizations of all sizes, predominantly in the
United States. Deltek's customers include Bell Atlantic Federal Integrated
Systems, Inc., Computer Sciences Corporation, Coopers & Lybrand, LLP, Lockheed
Martin Corp., Northrop Grumman Corporation and Raytheon Service Co., Inc.
Deltek's objective is to strengthen its position as a leading supplier of
enterprise-level software systems for project-oriented organizations. Deltek
intends to continue to differentiate itself from providers of general-purpose
business application software by focusing exclusively on providing
cost-effective solutions that meet the unique and changing demands of
project-oriented businesses. Key elements of Deltek's strategy include targeting
additional project-oriented markets and leveraging its large installed customer
base to generate additional licensing and consulting revenues as these companies
grow and their requirements change.
Deltek was incorporated in Virginia in 1983. Deltek's executive offices are
located at 8280 Greensboro Drive, McLean, Virginia 22102, and its telephone
number at that address is (703) 734-8606.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company............................................ 1,700,000 shares
Selling Shareholders................................... 1,200,000 shares
Common Stock to be outstanding after the offering........ 16,867,250 shares(1)
Use of proceeds.......................................... For working capital and other general corporate
purposes, including potential acquisitions. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol................... DLTK
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................................... $17,794 $19,417 $21,356 $26,849 $34,780
Operating expenses before non-recurring charges................... 11,735 12,328 13,313 17,176 23,314
Non-recurring charges............................................. -- -- -- -- 1,261(2)
Income from operations............................................ 6,059 7,089 8,043 9,673 10,205
Income before state income taxes.................................. 6,299 7,331 8,300 10,066 10,587
Net income........................................................ 6,240 7,280 8,235 10,021 10,494
PRO FORMA STATEMENT OF OPERATIONS DATA(3):
Income tax provision.............................................. $ 2,395 $ 2,787 $ 3,156 $ 3,827 $ 4,131
Net income........................................................ 3,904 4,544 5,144 6,239 6,456
Net income per share(4)........................................... $ 0.25 $ 0.29 $ 0.33 $ 0.40 $ 0.41
Weighted average shares outstanding (4)........................... 15,485 15,424 15,368 15,552 15,560
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
PRO FORMA AS
ACTUAL ADJUSTED(5)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......................................... $ 8,333 $ 26,505
Working capital........................................................................... 6,879 15,951
Total assets.............................................................................. 20,202 38,374
Short-term notes payable to shareholders.................................................. -- 4,000
Total shareholders' equity................................................................ 11,486 20,558
</TABLE>
- ---------------
(1) Excludes (i) 1,959,000 shares reserved for issuance under the Company's
stock option plans, of which 1,059,000 shares were subject to outstanding
options as of December 31, 1996, at a weighted average exercise price of
$2.71 per share, and 109,000 additional shares are subject to options
granted between January 1, 1997 and the date of this Prospectus, at an
exercise price of $11.00 per share; and (ii) 400,000 shares reserved for
issuance under the Company's 1996 Employee Stock Purchase Plan. See
"Management -- Stock Plans" and Note 7 of Notes to Financial Statements.
(2) Represents non-recurring, non-cash charges of $867,000 for stock option
compensation and $394,000 for purchased in-process research and development.
Exclusive of these charges, income from operations, net income, pro forma
net income and pro forma net income per share would have been $11.5 million,
$11.8 million, $7.2 million and $0.46, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Notes 2 and 7 of Notes to Financial Statements.
(3) For all periods indicated, the Company elected to be treated as an S
Corporation and was not subject to federal and certain state income taxes.
The pro forma statement of operations data reflects federal and state income
taxes based on applicable tax rates as if the Company had not elected S
Corporation status for the periods indicated. See "Prior S Corporation
Status" and Note 1 of Notes to Financial Statements.
(4) See Note 1 of Notes to Financial Statements for a description of the
computation of weighted average shares outstanding and pro forma net income
per share.
(5) Gives pro forma effect to (i) a distribution of $9.1 million to the
Company's current shareholders, representing the estimated undistributed
previously taxed S Corporation earnings as of December 31, 1996, $4.0
million of which is represented by short-term notes and $5.1 million of
which is reflected as accrued dividends payable; and (ii) the sale of the
1,700,000 shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $12.00 per share and after
deducting the estimated underwriting discount and offering expenses). The
deferred tax liability that would have been recorded if the Company had
terminated its S Corporation status at December 31, 1996 would not have been
material. See "Prior S Corporation Status" and "Capitalization."
4
<PAGE> 6
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered hereby. This Prospectus contains forward-looking
statements, and actual results could differ materially from those projected in
the forward-looking statements as a result of numerous factors, including the
factors set forth below and elsewhere in this Prospectus.
FLUCTUATIONS IN QUARTERLY OPERATING 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 product
introductions and product enhancements by the Company and its competitors, the
mix of 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 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 revenues 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
5
<PAGE> 7
analysts or investors. In such event, the price of the Company's Common Stock
would likely be materially and adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON COSTPOINT PRODUCT LINE; PRODUCT MIGRATION
Prior to 1995, substantially all of the Company's revenues were derived
from licenses of its DOS-based System 1 business software products and from
services related to the implementation, support and maintenance of System 1. In
June 1995, the Company introduced its Costpoint client/server-based,
enterprise-level business software. In 1995, the Company derived 26.6% of its
total revenues from licenses of Costpoint software and services related to the
implementation, support and maintenance of Costpoint systems. In 1996,
Costpoint-related license fees and service revenue accounted for 45.2% of total
revenues. The Company expects its Costpoint product line to account for an
increasingly significant percentage of the Company's future revenues. In
addition, the Company is dependent upon the continued satisfaction of its
existing customers and the acceptance of Costpoint by future customers in order
to establish and maintain relationships that will result in ongoing revenue from
support and maintenance services and the licensing of additional products and
upgrades. Accordingly, factors adversely affecting the pricing of or the demand
for Costpoint, such as the success of competitive products or technological
change, or the Company's inability to continue to enhance the Costpoint product
line to meet the evolving needs of its customers, would have a material adverse
effect on the Company's business, operating results and financial condition.
An important element of the Company's strategy is to license Costpoint to
existing System 1 users as those customers reengineer their information systems
and migrate to new client/server business software solutions. As of December 31,
1996, approximately 40 of the Company's former System 1 customers, representing
approximately 3% of the installed base of System 1 users, had migrated to or
were in the process of migrating to Costpoint systems. There can be no assurance
that a significant percentage of current System 1 customers will migrate to
Costpoint. In particular, smaller System 1 customers are less likely to migrate
to Costpoint because the cost of migrating to a client/server environment is
high relative to their size and because in many cases System 1 adequately meets
their present needs. If a significant number of the Company's current System 1
customers elect not to migrate to Costpoint, or purchase competitive products or
encounter problems in implementing Costpoint systems, the Company's business,
operating results and financial condition would be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Industry Background," "-- Strategy" and
"-- Products."
COMPETITION
The business application software market, including the market for
client/server-based business software systems, is intensely competitive and
rapidly changing. The Company's products are targeted toward a wide range of
project-oriented organizations, and the competition that the Company encounters
varies depending upon the customer's size, industry and specific system
requirements. For larger Costpoint implementations, the Company's principal
competitors include Oracle Systems Corporation ("Oracle"), PeopleSoft, Inc.
("PeopleSoft") and SAP America, Inc. ("SAP"). For smaller and medium-size
Costpoint and System 1 implementations, the Company's principal competitors
include Great Plains Software, Inc., Harper and Shuman, Inc., Maxwell Business
Systems, Inc., Platinum Software Corporation, Solomon Software, State of the
Art, Inc. and Timberline Software Corporation, some of which offer
industry-specific products. Electronic Timesheet competes with electronic
timekeeping systems offered by vendors including TIMESLIPS Corporation and
Kronos, Inc. The Company also faces indirect competition from systems developed
by the internal MIS departments of large organizations.
Many of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. In addition, certain
competitors, particularly Oracle, PeopleSoft and SAP, have well-established
relationships with the Company's current and prospective customers and with
major accounting and consulting firms that may have an incentive to recommend
such competitors over the Company. Further, because the Company's products run
on relational database management systems ("RDBMS"), and Oracle has the largest
share of the RDBMS software market, Oracle may have a
6
<PAGE> 8
competitive advantage in selling its application products to its installed RDBMS
customer base. Furthermore, as the client/server computing market develops,
companies with significantly greater resources than the Company could attempt to
increase their presence in this market by acquiring or forming strategic
alliances with competitors of the Company. In addition, as the Company attempts
to penetrate other strategic vertical markets, it will likely encounter
competitors with substantially more experience in those markets.
There can be no assurance that the Company's products will continue to
compete favorably or that the Company will be successful in the face of
increasing competition from new products and enhancements introduced by existing
or new competitors. In addition, increased competition may result in price
reductions, reduced margins and loss of market share, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Competition."
LENGTHY SALES CYCLES
The licensing and implementation of the Company's business software
products is often a decision with significant enterprise-wide implications
involving a substantial commitment of the customer's management attention and
resources. The period between initial customer contact and the customer's
purchase commitment typically ranges from 3 to 18 months. Accordingly, the
Company's sales process is subject to delays associated with a lengthy
evaluation and approval process that typically accompanies major initiatives or
capital expenditures, including delays over which the Company has little or no
control. The loss of individual orders due to the lengthy sales and evaluation
cycle, or delays in the sale of even a limited number of systems could have a
material adverse effect on the Company's business, operating results and
financial condition and, in particular, could contribute to significant
fluctuations in operating results on a quarterly basis. See "Business -- Sales
and Marketing."
DEPENDENCE ON DIRECT SALES AND SUPPORT ORGANIZATIONS
To date, the Company has sold its products exclusively through its direct
sales force and has supported its customers with its internal staff of system
consultants and technical support and maintenance personnel. The Company intends
to continue to differentiate itself from its competitors by relying,
principally, on its direct sales and support model. The Company's ability to
achieve significant revenue growth in the future will, therefore, depend in
large part on its success in recruiting, training and retaining additional
direct sales, technical and support personnel. Although the Company is currently
investing, and plans to continue to invest, significant resources to expand its
direct sales force and its technical and customer support staff, the Company has
at times experienced difficulties in recruiting qualified personnel. There can
be no assurance that the Company will be successful in expanding its direct
sales and support organizations as needed to achieve future revenue growth, and
its failure to do so would have a material adverse effect on the Company's
business, operating results and financial condition. In the future, the Company
may seek to develop third-party distribution channels and use third-party
consultants to provide consulting and support services. There can be no
assurance that the Company would be successful in establishing such third party
arrangements, that any such expansion of the Company's sales and support
capabilities would result in increased revenues, or that the resulting reduction
in the Company's direct involvement with its customers would not adversely
affect its competitive position. See "Business -- Sales and Marketing" and
"-- Competition."
DEPENDENCE UPON ORGANIZATIONS WITH FEDERAL GOVERNMENT CONTRACTS
Most of the Company's current customers are organizations that provide a
portion of their goods and services under federal government contracts. The
Company believes that, at least in the near term, such organizations will
continue to represent a large percentage of its customers and account for a
large percentage of its revenues. While such organizations are subject to the
same general economic conditions as other businesses, demand for their products
and services also is dependent upon the availability of funds appropriated
therefor. Budget reductions or reallocations could result in such organizations
downsizing, consolidating or liquidating, which, in turn could result in lost
revenue from the Company's existing customers and adversely affect the Company's
ability to add new customers in this market.
7
<PAGE> 9
UNCERTAINTY OF EXPANSION INTO NEW MARKETS
As a part of its strategy, the Company is broadening its product and
marketing focus beyond its traditional base of customers providing goods and
services under government contracts. For example, the Company has targeted
professional and technical service providers, including engineering and
environmental firms, research and development firms and contract service
organizations, as well as not-for-profit organizations and make-to-order
manufacturers, and intends to target additional project-oriented markets such as
architectural and design firms, construction companies, governmental agencies
and organizations managing large internal projects. The Company believes that
its future success is dependent, in part, on its ability to successfully
penetrate new project-oriented markets. The Company's success in generating
sales in these markets will depend upon its ability to educate potential
customers about the benefits of the Company's project-oriented business
solutions. The Company's limited resources may restrict its ability to track
developments in these diverse markets and to effectively pursue marketing
activities in multiple markets simultaneously. There can be no assurance that
the Company's products will be widely accepted in these new markets. The
inability of the Company to successfully expand the markets for its products
could have a material adverse effect on its business, operating results and
financial condition. See "Business -- Strategy" and "-- Sales and Marketing."
LACK OF LONG-TERM SUPPORT AND MAINTENANCE AGREEMENTS
The Company derives a substantial portion of its revenues from ongoing
support and maintenance services, particularly from its System 1 customers.
These services are billed in advance on a quarterly basis. Historically, a high
percentage of the Company's customers have chosen to renew their support and
maintenance program by continuing to pay for such services from quarter to
quarter. However, there can be no assurance that any customer will continue to
pay its quarterly support and maintenance fees, and the failure of a significant
number of customers to do so would have a material adverse affect on the
Company's business, operating results and financial condition. See
"Business -- Customer Service and Support."
DIFFICULTY IN FORECASTING DEMAND FOR CONSULTING SERVICES
The Company also derives a substantial portion of its revenues from
consulting services. Initial consulting services are typically performed in
connection with a customer's implementation of a new Deltek system. Ongoing
consulting services are performed, on a project-by-project basis, as the
Company's customers grow and their requirements change. The nature, extent and
duration of consulting services required in connection with system
implementations and the amount of customers' post-implementation consulting
needs vary widely from customer to customer and are difficult to predict.
Furthermore, none of these services are provided under long-term contracts. As a
result, it is difficult for the Company to forecast accurately the demands for
its consulting services in order to have available an appropriate number of
qualified and trained personnel. The Company's failure to hire and train an
adequate number of consulting personnel could result in customer dissatisfaction
and the loss of potential revenues. On the other hand, excess staffing could
result in disproportionately high personnel expenses which could have a material
adverse affect on the Company's business, operating results and financial
condition. See "Business -- Customer Service and Support."
RAPID TECHNOLOGICAL CHANGE; RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT
The business application software market is characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. The Company's future success will
depend to a substantial degree upon its ability to enhance its existing products
and to develop and introduce, on a timely and cost-effective basis, new products
and features that meet changing customer requirements and emerging and evolving
industry standards. The Company introduced Costpoint in June 1995, and Costpoint
currently represents more than half of the Company's license fee revenues.
Despite the recent growth in license fees and service revenues from the
Costpoint product line, there can be no assurance that the market for
client/server-based software will not be adversely affected by changing
technologies. The Company allocates resources for research and development
projects based on planned product introductions and enhancements; however,
actual expenditures may significantly differ from amounts
8
<PAGE> 10
allocated. Inherent in the product development process are a number of risks.
The development of new, technologically advanced software products is a complex
and uncertain process requiring high levels of innovation, as well as the
accurate anticipation of technological and market trends. The introduction of
new or enhanced products also requires the Company to manage the transition from
older products in order to minimize disruption in customer ordering patterns and
to ensure that new products can be delivered to meet customer demand. There can
be no assurance that the Company will successfully develop, introduce or manage
the transition to new products. The Company has experienced, and may in the
future experience, delays in the introduction of its products, due to factors
internal and external to the Company. Any future delays in the introduction or
shipment of new or enhanced products, the inability of such products to gain
market acceptance or problems associated with new product transitions could
adversely affect the Company's business, operating results and financial
condition. See "Business -- Product Development."
PRODUCT AND SERVICE ERRORS; POTENTIAL LIABILITY
Software products as complex as those offered by the Company typically
contain undetected errors or failures when first introduced or as new versions
are released. Testing of the Company's products is particularly challenging
because it is difficult to simulate the wide variety of computing environments
in which the Company's customers may deploy these products. Accordingly, there
can be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found after commencement of commercial
shipments, resulting in loss of or delay in market acceptance, which, in turn,
could have a material adverse effect upon the Company's business, operating
results and financial condition. Although the Company has not experienced any
material product liability claims to date, the sale and support of software
products by the Company entails the risk of such claims. In addition, the
failure to perform services to a client's expectations may result in the Company
not being paid for services rendered, may damage the Company's reputation and
may result in a claim being brought against the Company. The Company maintains
errors and omissions insurance; however, a successful claim for product or
service liability brought against the Company could have a material adverse
effect upon the Company's business, operating results and financial condition.
DEPENDENCE ON KEY EMPLOYEES
The Company's success will depend in part on the continued services of its
key employees, particularly its senior management personnel. The Company does
not have employment agreements with any of its key employees and does not
maintain any key person life insurance. The loss of Kenneth E. deLaski, the
Company's President and Chief Executive Officer, Eric F. Brown, its Executive
Vice President, Technical Operations, or Dien Hoang Do, its Vice President,
Technology, could have a material adverse effect on the Company's business,
operating results or financial condition. The loss of several other key
employees simultaneously or within a relatively short period of time also could
have such an effect. In addition, if one or more key employees were to join a
competitor or form a competing company, any resulting loss of existing or
potential business to any such competitor could have a material adverse effect
on the Company's business, operating results and financial condition. In the
event of the loss of any such employee(s), there can be no assurance that the
Company would be able to prevent the unauthorized disclosure or use of the
Company's or its customers' technical knowledge, practices or procedures by such
employee(s), or that such disclosure or use would not have a material adverse
effect on the Company's business, operating results and financial condition. See
"Management."
MANAGEMENT OF GROWTH
The Company is currently experiencing growth and expansion, which has
placed, and will continue to place, a strain on its administrative, operational
and financial resources and increased demands on its systems and controls. This
growth has resulted in a continuing increase in the level of responsibility for
the Company's management personnel. The Company anticipates that its continued
growth will require it to recruit, hire, train and retain a substantial number
of new engineering, managerial, sales and marketing personnel. The Company's
ability to manage its growth successfully will also require the Company to
continue to expand and improve its operational, management and financial systems
and controls on a timely basis. If the Company's
9
<PAGE> 11
management is unable to manage growth effectively, the Company's business,
operating results and financial condition will be materially and adversely
affected. See "Management."
RELIANCE ON THIRD-PARTY SOFTWARE
The Company licenses from third parties certain software development tools
that the Company utilizes in the development of its products and certain
application software that the Company incorporates into its products. Third
parties also license to the Company or its customers certain relational database
software used in conjunction with the Company's products. Accordingly, the
Company is dependent upon such third parties' abilities to deliver quality
products, to correct errors, to support their current products, to develop new
and enhanced products on a timely and cost-effective basis and to respond to
emerging industry standards and other technological changes. Should these
third-party development tools or software products become unavailable, or should
their developers fail to adequately support or enhance them, the Company would
be required to rewrite its products using different development tools or replace
the functionality provided by the third-party software currently used in and
licensed with its products. Although the Company believes that other development
tools and application and database software with comparable functionality are
currently available from other third parties, there can be no assurance that
replacement products could be obtained when needed. In addition, there can be no
assurance that the Company could successfully rewrite its products using
different development tools or that it would not encounter substantial delays in
doing so. The inability to rewrite its products using different development
tools on a timely and cost-effective basis or the loss of, or any significant
delay in the replacement of, the functionality provided by the third-party
software could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Products,"
"-- Proprietary Rights and Licenses" and "-- Product Development."
PROPRIETARY RIGHTS, RISKS OF INFRINGEMENT
The Company's success and ability to compete is dependent in part upon its
proprietary software. The Company relies on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to establish and protect its rights in its software. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy, design around or reverse engineer aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Furthermore, the Company has no patents, and existing copyright law
affords only limited protection. In addition, the laws of some countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. Accordingly, there can be no assurance that the Company will
be able to protect its proprietary software against unauthorized third party
copying or use, which could adversely affect the Company's competitive position.
There are currently no claims pending against the Company relating to the
infringement of any proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim infringement by the
Company of their intellectual property rights. The Company expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources or cause delays
in the delivery or implementation of the Company's products. In addition, such
claims could require the Company to discontinue the use of certain software
codes or processes, cease the manufacture, use and sale of infringing products,
and develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that the Company would be able
to develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially acceptable to the Company.
In the event of a successful claim of product infringement against the Company
and failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
could be materially and adversely affected. See "Business -- Proprietary Rights
and Licenses."
10
<PAGE> 12
CONTROL BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS
Upon completion of this offering, the Company's principal shareholders,
Kenneth E. deLaski, its President and Chief Executive Officer, and Donald
deLaski, its Chairman, will, in the aggregate, beneficially own approximately
9,992,800 of the Company's outstanding shares of Common Stock (9,567,800 if the
Underwriters' overallotment option is exercised in full). As a result, these
shareholders, acting together, would be able to control substantially all
matters requiring approval by the shareholders of the Company including the
election of the Board of Directors and significant corporate transactions. The
control by such shareholders could delay or prevent a change in control of the
Company, impede a merger, consolidation, takeover or other business combination
involving the Company, or discourage a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company. See "Principal
and Selling Shareholders."
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF NET PROCEEDS
The primary purposes of this offering are to establish a public market for
the Company's Common Stock, to facilitate the Company's future access to public
equity markets and to obtain additional working capital. The Company intends to
use the net proceeds of this offering for general corporate purposes, including
product development and working capital. The Company may use a portion of the
net proceeds of the offering to acquire or invest in businesses, technologies or
products complementary to the Company's business. As of the date of this
Prospectus, the Company has no other specific plans to use the net proceeds of
this offering. Accordingly, the Company will retain broad discretion to allocate
the net proceeds of this offering. Pending any such uses, the Company plans to
invest the net proceeds in investment-grade, interest-bearing securities. See
"Use of Proceeds."
S CORPORATION NOTES AND S CORPORATION DISTRIBUTION
In connection with the January 1997 distribution of estimated undistributed
taxable S Corporation earnings, the Company issued short-term promissory notes
in the aggregate principal amount of $4.0 million to its current shareholders.
Such notes are payable on or before December 31, 1997. The Company will declare
a further dividend to its current shareholders in the amount of the Company's
undistributed taxable earnings at the time of the termination of the Company's S
Corporation status prior to the closing of this offering, which the Company
currently estimates will be approximately $2.0 million. Such amounts will be
payable only out of cash flow from operations, and none of the proceeds of this
offering will be used to pay such short-term notes or such dividend.
Nevertheless, the payment of such amounts to the current shareholders of the
Company will reduce the amount of cash that would otherwise be available to the
Company for other corporate purposes. The actual amount of such undistributed
taxable S Corporation earnings will depend upon a number of factors, including
actual cash receipts prior to the termination of the Company's S Corporation
status. Any increase in such undistributed taxable S Corporation earnings over
the amount currently estimated will increase the amount of the distribution to
the Company's current shareholders. See "Prior S Corporation Status."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering. The initial public offering price
will be determined through negotiations among the Company, the Selling
Shareholders and the Representatives of the Underwriters and may not be
indicative of the market price of the Common Stock after this offering. The
trading price of the Common Stock is likely to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations, new
products or new contracts by the Company or its competitors, developments with
respect to patents, copyrights or proprietary rights, conditions and trends in
the software industry, changes in financial estimates by securities analysts,
general market conditions and other factors. In addition, the public equity
markets have from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the stocks of
technology companies. These broad market fluctuations, as well as shortfalls in
sales or earnings as compared with public market analysts'
11
<PAGE> 13
expectations, changes in such analysts' recommendations or projections and
general economic and market conditions, may materially and adversely affect the
market price of the Company's Common Stock. See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS
Purchasers of the Common Stock offered hereby will incur immediate,
substantial dilution in net tangible book value of $10.79 per share. To the
extent outstanding options to purchase the Company's Common Stock are exercised,
there will be further dilution to the new public investors. See "Dilution."
POTENTIAL ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS
The Board of Directors has the authority, without further action by the
shareholders, to issue up to 2,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
such shares. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of the Preferred Stock
could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights, senior to the
Common Stock, and as a result, the issuance of such stock could have a material
adverse effect on the market value of the Common Stock. The Company has no
present plans to issue shares of Preferred Stock. The Company may in the future
adopt other measures that may have the effect of delaying, deferring or
preventing a change in control of the Company. Certain of such measures may be
adopted without any further vote or action by the shareholders, although the
Company has no present plans to adopt any such measures. The Company is also
afforded the protections of certain provisions of the Virginia Stock Corporation
Act, which could delay or prevent a change in control of the Company, impede a
merger, consolidation or other business combination involving the Company or
discourage a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company. See "Description of Capital
Stock -- Preferred Stock" and "Description of Capital Stock -- Anti-Takeover
Effects of Virginia Law and Articles of Incorporation."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock in the public
market after this offering could adversely affect prevailing market prices for
the Common Stock. Upon completion of this offering, the Company will have
outstanding 16,867,250 shares of Common Stock. Of these shares, the 2,900,000
shares offered hereby will be freely tradeable without restriction in the public
market. Taking into account restrictions imposed by the Securities Act of 1933,
as amended (the "Securities Act"), rules promulgated by the Securities and
Exchange Commission thereunder and "lock-up" agreements between certain
shareholders and the Underwriters, (i) approximately 170,250 additional shares
will be eligible for immediate sale as of the date of this Prospectus, (ii)
approximately 93,000 additional shares will be eligible for sale beginning 90
days after the date of this Prospectus, and (iii) approximately 13,279,500
additional shares will be eligible for sale beginning 180 days after the date of
this Prospectus. Montgomery Securities may, in its sole discretion and at any
time without notice, release all or any portion of the shares subject to such
lock-up agreements. In addition, the Company intends to file registration
statements on Form S-8 under the Securities Act approximately 90 days after the
date of this Prospectus to register an aggregate of 1,300,000 shares of Common
Stock issued or reserved for issuance under its 1996 Stock Option Plan and its
1996 Employee Stock Purchase Plan. See "Shares Eligible for Future Sale."
12
<PAGE> 14
PRIOR S CORPORATION STATUS
Since 1987, the Company has elected to be treated for federal and certain
state income tax purposes as an S Corporation under Subchapter S of the Internal
Revenue Code of 1986 (the "Code"). As a result, the Company's earnings for prior
tax years and through the day preceding the date of termination of the Company's
S Corporation status (the "Termination Date") have been or will be, as the case
may be, taxed, with certain exceptions, for federal and certain state income tax
purposes directly to the Company's shareholders, rather than to the Company. The
Termination Date will occur prior to the date of the closing of this offering.
The Company and the current shareholders have entered into an agreement which
provides for income taxes attributable to periods prior to the Termination Date
to be borne by the current shareholders and for income taxes attributable to
periods beginning on and after the Termination Date to be borne by the Company.
See "Certain Transactions."
Shareholder Distributions. Since its election to be treated as an S
Corporation, the Company has made quarterly cash distributions to its
shareholders. During 1994, 1995 and 1996, the Company declared cash dividends
totalling $7.2 million, $8.0 million and $9.3 million, respectively. In January
1997, the Company declared a dividend of $10.0 million, of which $6.0 million
was paid in cash and $4.0 million was paid by the issuance of short-term notes
(the "S Corporation Notes"). The S Corporation Notes bear interest at the rate
of 5.63% per annum and are payable on or before December 31, 1997 out of cash
flow from operations. To the extent that such cash flow is not adequate to fund
such payment, any remaining balance shall be payable thereafter as and when cash
flow from operations permits. Prior to the consummation of this offering, the
Company will declare a further dividend payable to its current shareholders in
the amount of all undistributed taxable S Corporation earnings accruing through
the Termination Date (the "S Corporation Distribution"). At December 31, 1996,
undistributed previously taxed S Corporation earnings were estimated at $9.1
million, all of which was distributed as a part of the January 1997 dividend.
The Company currently estimates that additional taxable S Corporation earnings
accruing between January 1, 1997 and the Termination Date will total
approximately $2.9 million, of which $900,000 was covered by the January
dividend, leaving approximately $2.0 million to be distributed in the S
Corporation Distribution, which will be paid out of cash flow from operations.
The actual amount of such undistributed taxable S Corporation earnings will
depend upon a number of factors, including actual cash receipts prior to the
Termination Date. Any increase in such undistributed taxable S Corporation
earnings over the amount currently estimated will increase the amount of the S
Corporation Distribution. None of the proceeds from this offering will be used
to pay the S Corporation Notes or the S Corporation Distribution. See "Certain
Transactions."
Accounting Effect. The termination of the Company's S Corporation status on
the Termination Date will result in a deferred tax liability which will be
recorded as a non-recurring charge. Had the Company terminated its S Corporation
status as of December 31, 1996, the deferred tax liability and related charge
would not have been material. The amount of the actual deferred tax liability
and related charge will depend upon a number of factors, including factors
affecting revenues and related accounts receivable and the amounts and timing of
payments of various operating expenses. There can be no assurance that the
actual amount of the deferred tax liability charge will not be material or that
the related charge will not have a material adverse effect on the Company's net
income for the first quarter of 1997 or for the full year. See "Use of Proceeds"
and Note 1 of Notes to Financial Statements.
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,700,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$18.2 million (assuming an initial public offering price of $12.00 per share and
after deducting the estimated underwriting discount and offering expenses). The
principal purposes of this offering are to establish a public market for the
Company's Common Stock, to facilitate future access by the Company to public
equity markets and to obtain additional working capital. The Company will not
receive any proceeds from the sale of the shares by the Selling Shareholders.
The Company intends to use the net proceeds for general corporate purposes,
including product development and working capital. The Company may use a portion
of the net proceeds to acquire or invest in businesses, technologies or products
complementary to the Company's business. The Company has no present
understandings, commitments or agreements with respect to any such transaction
nor is it currently engaged in any discussions or negotiations with respect to
any such transaction. Pending such uses, the Company intends to invest the net
proceeds from the offering in investment-grade, interest-bearing securities.
DIVIDEND POLICY
As an S Corporation, the Company has historically made substantial cash
distributions to its shareholders and intends to make additional distributions
to its current shareholders in connection with the termination of the Company's
S Corporation status. Following the termination of the Company's S Corporation
status, the Company intends to repay the S Corporation Notes, in the aggregate
principal amount of $4.0 million, and to pay the S Corporation Distribution, in
the aggregate amount of approximately $2.0 million, representing undistributed
taxable earnings accruing through the Termination Date. See "Prior S Corporation
Status." Thereafter, the Company intends to retain future earnings, if any, to
finance the development and expansion of its business and, therefore, does not
anticipate paying any further cash dividends on its Common Stock in the
foreseeable future. The decision whether to pay dividends will be made by the
Board of Directors of the Company, from time to time, in light of conditions
then existing, including, among other things, the Company's results of
operations, financial condition and requirements, business conditions and such
other factors as the Board of Directors deems relevant.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth, as of December 31, 1996, the short-term
debt and capitalization of the Company on an actual and pro forma basis.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Short-term notes payable to shareholders............................ $ -- $ 4,000
====== ======
Shareholders' equity:
Preferred Stock, $0.001 par value per share; 2,000,000 shares
authorized, none issued and outstanding, actual and pro forma
as adjusted.................................................... $ -- $ --
Common Stock, $0.001 par value per share; 45,000,000 shares
authorized, 15,167,250 shares issued and outstanding, actual;
45,000,000 shares authorized, 16,867,250 shares issued and
outstanding, pro forma
as adjusted(2)................................................. 15 17
Paid-in capital................................................... 2,226 20,396
Retained earnings (deficit)....................................... 9,965 865
Less unearned compensation(3)..................................... 720 720
------ ------
Total shareholders' equity..................................... 11,486 20,558
------ ------
Total capitalization...................................... $11,486 $ 20,558
====== ======
</TABLE>
- ---------------
(1) Gives pro forma effect to (i) a distribution of $9.1 million to the
Company's current shareholders, representing the estimated undistributed
previously taxed S Corporation earnings as of December 31, 1996, $4.0
million of which is represented by short-term notes and $5.1 million of
which is reflected as accrued dividends payable, and (ii) the sale of the
1,700,000 shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $12.00 per share and after
deducting the estimated underwriting discount and offering expenses). The
deferred tax liability that would have been recorded if the Company had
terminated its S Corporation status at December 31, 1996 would not have been
material. See "Prior S Corporation Status" and Note 1 of Notes to Financial
Statements.
(2) Excludes (i) 1,959,000 shares reserved for issuance under the Company's
stock option plans, of which 1,059,000 shares were subject to outstanding
options as of December 31, 1996, at a weighted average exercise price of
$2.71 per share, and 109,000 additional shares are subject to options
granted between January 1, 1997 and the date of this Prospectus, at an
exercise price of $11.00 per share; and (ii) 400,000 shares reserved for
issuance under the Company's 1996 Employee Stock Purchase Plan. See
"Management -- Stock Plans" and Note 7 of Notes to Financial Statements.
(3) Represents the difference between the exercise price of certain outstanding
unvested options and the appraised market value of the underlying stock,
which will be recorded as compensation charges, as such options vest through
December 31, 1998.
15
<PAGE> 17
DILUTION
The net tangible book value of the Company as of December 31, 1996 was
$11.4 million, or $0.75 per share of Common Stock. Net tangible book value per
share (total tangible assets less total liabilities) is determined by dividing
the net tangible book value of the Company by the number of shares of Common
Stock outstanding at that date. After giving pro forma effect to (i) the sale of
the 1,700,000 shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $12.00 per share and after deducting
the estimated underwriting discount and offering expenses) and (ii) the
distribution of $9.1 million to the Company's current shareholders (representing
the estimated undistributed previously taxed S Corporation earnings as of
December 31, 1996), the pro forma net tangible book value of the Company as of
December 31, 1996 would have been $20.4 million, or $1.21 per share,
representing an immediate increase in such net tangible book value of $1.06 per
share to existing shareholders and an immediate dilution of $10.79 per share to
the new public investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $12.00
Net tangible book value per share as of December 31, 1996........... $0.75
Decrease attributable to distribution of previously taxed S
Corporation earnings............................................. (0.60)
Increase in net tangible book value attributable to new public
investors........................................................ 1.06
-----
Pro forma net tangible book value per share after the offering........ 1.21
------
Dilution per share to new public investors............................ $10.79
------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, the differences between the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by existing stockholders and by the new public investors purchasing shares
of Common Stock in this offering (at an assumed initial public offering price of
$12.00 per share and before deducting the estimated underwriting discount and
offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)......... 15,167,250 89.9% $ 97,000 0.5% $ 0.01
New investors(1)................. 1,700,000 10.1 20,400,000 99.5 12.00
---------- ----- ----------- ---
Total.................. 16,867,250 100.0% $20,497,000 100.0%
========== ===== =========== ===
</TABLE>
- ---------------
(1) Sales by the Selling Shareholders in this offering will reduce the number of
shares held by existing shareholders to 13,967,250 or 82.8% of the total
number of shares of Common Stock to be outstanding after this offering, and
will increase the number of shares to be purchased by the new public
investors to 2,900,000 or 17.2% of the total number of shares of Common
Stock to be outstanding after the offering. See "Principal and Selling
Shareholders."
The foregoing tables assume no exercise of stock options after December 31,
1996. As of December 31, 1996, there were outstanding options to purchase an
aggregate of 1,959,000 shares of Common Stock under the Company's stock option
plans, at a weighted average exercise price of $2.71 per share. Options to
purchase an additional 109,000 shares of Common Stock, at an exercise price of
$11.00 per share, were granted between January 1, 1997 and the date of this
Prospectus. To the extent these options are exercised, there will be further
dilution to the new public investors. See "Capitalization," "Management -- Stock
Plans" and Note 7 of Notes to Financial Statements.
16
<PAGE> 18
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes thereto included elsewhere herein. The
statement of operations data set forth below with respect to the years ended
December 31, 1994, 1995 and 1996 and the balance sheet data as of December 31,
1995 and 1996 are derived from, and are qualified by reference to, the audited
financial statements of the Company included elsewhere in this Prospectus. The
statement of operations data set forth below with respect to the years ended
December 31, 1992 and 1993 and the balance sheet data as of December 31, 1992,
1993 and 1994 are derived from audited financial statements not included in this
Prospectus. The pro forma statement of operations data set forth below do not
purport to be indicative of the results of operations that would have occurred
had the termination of the Company's S Corporation status occurred at December
31, 1991. See "Prior S Corporation Status."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996(1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees.......................................................... $ 7,176 $ 7,551 $ 7,360 $ 9,720 $12,545
Services.............................................................. 8,820 10,093 12,545 15,154 20,362
Third-party equipment and software.................................... 1,798 1,773 1,451 1,975 1,873
------- ------- ------- ------- -------
Total revenues.................................................. 17,794 19,417 21,356 26,849 34,780
------- ------- ------- ------- -------
Operating Expenses:
Cost of software...................................................... 660 665 766 893 1,318
Cost of services...................................................... 3,579 3,611 4,171 5,151 8,043
Cost of third-party equipment and software............................ 1,341 1,298 1,054 1,580 1,536
Software development.................................................. 3,344 3,931 3,877 4,934 6,674
Sales and marketing................................................... 1,518 1,538 1,852 2,743 3,460
General and administrative............................................ 1,293 1,285 1,593 1,875 2,283
Stock option compensation............................................. -- -- -- -- 867
Purchased in-process research and development......................... -- -- -- -- 394
------- ------- ------- ------- -------
Total operating expenses........................................ 11,735 12,328 13,313 17,176 24,575
------- ------- ------- ------- -------
Income from operations.................................................. 6,059 7,089 8,043 9,673 10,205
Interest income......................................................... 240 242 257 393 382
------- ------- ------- ------- -------
Income before state income taxes........................................ 6,299 7,331 8,300 10,066 10,587
Provision for state income taxes........................................ 59 51 65 45 93
------- ------- ------- ------- -------
Net income.............................................................. $ 6,240 $ 7,280 $ 8,235 $10,021 $10,494
======= ======= ======= ======= =======
PRO FORMA STATEMENT OF OPERATIONS DATA (UNAUDITED)(2):
Income tax provision.................................................... $ 2,395 $ 2,787 $ 3,156 $ 3,827 $ 4,131
Net income.............................................................. 3,904 4,544 5,144 6,239 6,456
Net income per share(3)................................................. $ 0.25 $ 0.29 $ 0.33 $ 0.40 $ 0.41
Weighted average shares outstanding(3).................................. 15,485 15,424 15,368 15,552 15,560
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......................... $4,250 $3,364 $ 3,915 $ 7,521 $ 8,333
Working capital........................................................... 4,672 4,115 4,024 5,003 6,879
Total assets.............................................................. 8,321 8,483 11,506 18,083 20,202
Total shareholders' equity................................................ 6,017 5,765 6,803 8,849 11,486
Cash dividends declared................................................... 6,033 6,647 7,186 8,011 9,265
</TABLE>
- ---------------
(1) Exclusive of the non-recurring, non-cash charges for stock option
compensation and purchased in-process research and development, income from
operations, net income, pro forma net income and pro forma net income per
share would have been $11.5 million, $11.8 million, $7.2 million and $0.46,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 2 and 7 of Notes to Financial
Statements.
(2) For all periods indicated, the Company elected to be treated as an S
Corporation and was not subject to federal and certain state income taxes.
The pro forma statement of operations data reflects federal and state income
taxes based on applicable tax rates as if the Company had not elected S
Corporation status for the periods indicated. See "Prior S Corporation
Status" and Note 1 of Notes to Financial Statements.
(3) See Note 1 of Notes to Financial Statements for a description of the
computation of weighted average shares outstanding and pro forma income per
share.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements are
subject to various risks and uncertainties, including the factors described
under "Risk Factors" and elsewhere in this Prospectus, that could cause actual
results to differ materially from historical results or those currently
anticipated.
OVERVIEW
Deltek designs, develops, sells and supports a family of integrated
software products that provide project-oriented businesses with tools to more
effectively manage, operate and grow their operations. From 1985 through 1994,
substantially all of the Company's revenues were derived from licenses of its
DOS-based System 1 business software, designed specifically for use by
organizations having contracts with the federal government, and services related
to the implementation, support and maintenance of System 1. As of December 31,
1996, approximately 1,500 project-oriented organizations were using System 1 as
their primary accounting system. In 1992, the Company began development of its
current flagship product, Costpoint, which was commercially released in June
1995. Costpoint is a client/server-based, enterprise-level business software
system, consisting of over 25 integrated module applications which span
financial accounting, project accounting, human resource and payroll
administration, materials management and reporting. Through December 31, 1996,
the Company had licensed approximately 200 Costpoint systems that had been
implemented or were in the process of being implemented. Deltek also provides a
full range of consulting and maintenance services to assist its customers with
system implementation and integration and to provide training and ongoing
support for the Company's software products.
The Company's revenues consist of fees derived from the licensing of its
software products, service revenues from consulting and support services, and
revenue from the resale of third-party equipment and the sublicensing of
third-party software. 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 not
necessarily reflect revenue which the Company will recognize in the succeeding
quarter. Licensing of the Company's software results in revenues from related
consulting services and ongoing support. Implementation and other consulting
services are provided on a time and materials basis, billed monthly or
semi-monthly and recognized as the services are performed. Telephone support and
periodic enhancements and updates are provided for maintenance fees that are
payable quarterly and initially represent between 15% and 20% of the related
software license fee on an annual basis. Revenue from quarterly maintenance and
support service is recognized over the term of the support. Revenue from
third-party equipment and software is derived from the resale and sublicensing
of third-party hardware and software products in connection with the license and
installation of the Company's systems and is generally recognized on delivery.
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 the 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 revenues 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.
During 1994 and 1995, the Company capitalized a greater amount of its
software development expenses than it had in previous years due to the
development of Costpoint. Upon the commercial release of Costpoint
18
<PAGE> 20
in June, 1995, the Company ceased capitalizing costs related to the development
of core Costpoint modules and began amortizing previously capitalized costs
related to such development. Since June, 1995, the Company has only capitalized
software development costs related to the development of new Costpoint modules
and Web E.T.
In June 1996, the Company amended its 1987 Employee Stock Option Plan to
change the exercise price of future options to be granted thereunder from a
formula price based on book value to the fair market value of the underlying
Common Stock. As a result, the Company recorded a non-recurring, non-cash charge
to operations in the amount of $867,000, representing the aggregate difference
between the exercise price of outstanding vested options and the appraised
market value of the underlying Common Stock at June 30, 1996. Additional
compensation charges of $113,000 were recorded during the six months ended
December 31, 1996, and up to an additional $468,000 of such charges will be
recorded through December 31, 1998, as outstanding options continue to vest
under this plan. See Note 7 of Notes to Financial Statements.
In September 1996, the Company acquired substantially all of the assets of
The Allegro Group, Inc. in exchange for 102,000 shares of the Company's Common
Stock. A portion of the acquired assets represented research and development
that was in process at the time of the acquisition. The Company is performing
additional development work to integrate the Allegro product with the Costpoint
product line. The Company allocated $394,000 to this in-process research and
development, resulting in a non-recurring, non-cash charge to operations in the
third quarter of 1996. See Note 2 of Notes to Financial Statements.
Since 1987, the Company has elected to be treated for federal and certain
state income tax purposes as an S Corporation under Subchapter S of the Code. As
a result, the Company's earnings for prior tax years have been taxed, with
certain exceptions, for federal and certain state income tax purposes directly
to the Company's shareholders rather than to the Company. The Company will
terminate its S Corporation status on the Termination Date, prior to the date of
the closing of this offering. The Company and the current shareholders have
entered into an agreement which provides for income taxes attributable to
periods prior to the Termination Date to be borne by the current shareholders
and for income taxes attributable to periods beginning on and after the
Termination Date to be borne by the Company. See "Certain Transactions." In
connection with the distribution of previously taxed S Corporation earnings, the
Company will make the S Corporation Distribution in an aggregate amount of
approximately $2.0 million and pay the S Corporation Notes in the aggregate
principal amounts of $4.0 million. The S Corporation Distribution and the S
Corporation Notes will be payable only out of cash flow from operations. None of
the proceeds of this offering will be used to pay the S Corporation Distribution
or the S Corporation Notes. The termination of the Company's S Corporation
status on the Termination Date will result in a deferred tax liability which
will be recorded as a non-recurring charge. Had the Company terminated its S
Corporation status as of December 31, 1996, the deferred tax liability and
related charge would not have been material. The amount of the actual deferred
tax liability and related charge will depend upon a number of factors, including
factors affecting revenues and related accounts receivable and the amounts and
timing of payments of various operating expenses. There can be no assurance that
such charge will not be material or that the related charge will not have a
material adverse affect on the Company's net income for the first quarter of
1997 or for the full year. See "Prior S Corporation Status."
19
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth certain historical and pro forma statements
of operations data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996(1)
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees...................................................... 34.5% 36.2% 36.1%
Services.......................................................... 58.7 56.4 58.5
Third-party equipment and software................................ 6.8 7.4 5.4
----- ----- -----
Total revenues............................................ 100.0 100.0 100.0
----- ----- -----
Operating Expenses:
Cost of software.................................................. 3.6 3.3 3.8
Cost of services.................................................. 19.5 19.2 23.1
Cost of third-party equipment and software........................ 4.9 5.9 4.4
Software development.............................................. 18.2 18.4 19.2
Sales and marketing............................................... 8.7 10.2 9.9
General and administrative........................................ 7.4 7.0 6.7
Stock option compensation......................................... -- -- 2.5
Purchased in-process research and development..................... -- -- 1.1
----- ----- -----
Total operating expenses.................................. 62.3 64.0 70.7
----- ----- -----
Income from operations.............................................. 37.7 36.0 29.3
Interest income..................................................... 1.2 1.5 1.1
----- ----- -----
Income before state income taxes.................................... 38.9 37.5 30.4
Provision for state income taxes.................................... 0.3 0.2 0.3
----- ----- -----
Net income.......................................................... 38.6% 37.3% 30.1%
===== ===== =====
PRO FORMA STATEMENT OF OPERATIONS DATA:
Income tax provision................................................ 14.8% 14.3% 11.8%
Net income.......................................................... 24.1 23.2 18.6
</TABLE>
- ---------------
(1) Exclusive of the non-recurring charges for stock option compensation and
purchased in-process research and development, income from operations, net
income and pro forma net income would have been 33.0%, 33.8% and 20.8%,
respectively, of total revenues.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
License Fees. License fees for 1996 increased by 29.1% to $12.5 million
from $9.7 million for 1995. License fees comprised 36.1% of the Company's total
revenues for 1996, compared to 36.2% for 1995. The increase in license fees was
principally attributable to Costpoint which was commercially released in June
1995. Costpoint license fees increased by 86.4% to $7.7 million for 1996 from
$4.1 million for 1995, 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. The increase in
Costpoint license fees was partially offset by a 21.5% decrease in license fees
for System 1 products to $3.8 million from $4.8 million in 1995, as both the
number of systems licensed and the average system size declined. License fees
for Electronic Timesheet increased by 21.5% to $1.0 million from $833,000 in
1995.
Services. Service revenues for 1996 increased by 34.4% to $20.4 million
from $15.2 million for 1995. Service revenues comprised 58.5% of the Company's
total revenues in 1996, compared to 56.4% for 1995. The increase in service
revenues was principally attributable to increased consulting services related
to new implementations of Costpoint systems. Consulting service revenues
increased by 82.3% to $5.7 million for 1996 from $3.1 million for 1995.
Maintenance, support and other service revenues increased by 21.2% to
20
<PAGE> 22
$14.7 million from $12.1 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 1996 decreased by 5.2% to $1.9 million from $2.0 million for 1995.
Revenue from third-party equipment and software comprised 5.4% of the Company's
total revenues in 1996, compared to 7.4% in 1995. This decline was due to the
increases in license fees and service revenues in 1996.
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 1996 increased by 45.6% to $1.3 million from $893,000 for
1995. This increase was attributable to increased amortization and to increased
sales of Costpoint resulting in higher royalty and maintenance payments to third
parties. Amortization of software development for 1996, increased to $579,000
from $276,000 for 1995. This increase reflects 12 full months of amortization of
Costpoint software development costs during 1996, compared to four months in
1995.
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 1996 increased by 56.1% to $8.0
million from $5.2 million for 1995. The increase in cost of services was
primarily due to increases in personnel costs to support the Costpoint product
line. In addition, reimbursed travel expenses increased by $609,000 from the
prior year due primarily to consulting activity related to Costpoint
implementations. Costs for 1996 also included $283,000 related to the Company's
national user conference in April 1996. Cost of services represented 39.5% and
34.0% of service revenues for 1996 and 1995, respectively. The increase in cost
of services as a percentage of service revenues reflected the Company's
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 and the national user conference for which customer billings
approximated cost.
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 1996 decreased by 2.8% to $1.5 million
from $1.6 million for 1995. Cost of third-party equipment and software products
represented 82.0% and 80.0% of revenue from third-party equipment and software
for 1996 and 1995, respectively. The increase in these costs as a percentage of
related revenue was the result of several large sales of third-party equipment
at volume discounts in connection with complex Costpoint implementations
performed in early 1996.
Software Development. Software development costs consist 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 1996 increased
by 35.3% to $6.7 million from $4.9 million for 1995. This increase was due
primarily to increased personnel costs and related benefits and facilities
costs, and a decline in capitalized software production costs, which occurred
after the commercial release of Costpoint in June 1995. Software development
costs represented 18.4% and 19.2% of total revenues for 1995 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 1996 increased by 26.1% to $3.5 million from
$2.7 million for 1995. This increase was due primarily to increased personnel,
advertising and trade show expenses. Sales and marketing expenses represented
9.9% of the Company's total revenues for 1996, compared to 10.2% for 1995.
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 1996 increased by 21.8% to $2.3 million from $1.9 million for 1995.
This increase was due primarily to a $245,000 increase in bad debt expense as a
result of the insolvency of a new customer. General and administrative expenses
represented 6.7% of the Company's total revenues for 1996, compared to 7.0% for
1995.
21
<PAGE> 23
Stock Option Compensation. In June 1996, the Company recorded a
non-recurring charge to operations in the amount of $867,000 relating to stock
option compensation. See "-- Overview."
Purchased In-Process Research and Development. In September 1996, the
Company recorded a non-recurring charge of $394,000 representing the value of
in-process research and development acquired in connection with its acquisition
of The Allegro Group, Inc. See "-- Overview."
Interest Income. Interest income results from investments and, to a lesser
extent, from installment financing. Interest income for 1996 decreased by 2.8%
to $382,000 from $393,000 for 1995. The reduction was due to lower average cash
balances related to the timing and amount of S Corporation dividend
distributions.
Pro Forma Income Tax Provision. The Company's pro forma effective tax rate
for 1996 was 39.0%, compared to 38.0% for 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
License Fees. License fees for 1995 increased by 32.1% to $9.7 million from
$7.4 million for 1994. License fees comprised 36.2% of the Company's total
revenues for 1995, compared to 34.5% for 1994. The increase in license fees was
principally attributable to Costpoint, which was commercially released in June
1995 and accounted for license fees of $4.1 million in 1995. The increase
attributable to Costpoint license fees was partially offset by a 30.2% decrease
in license fees for System 1 products to $4.8 million from $6.9 million.
Services. Service revenues for 1995 increased by 20.8% to $15.2 million
from $12.5 million for 1994. Service revenues comprised 56.4% of the Company's
total revenues in 1995, compared to 58.7% for 1994. The increase in service
revenues was principally attributable to increased consulting services related
to new implementations of Costpoint systems. Consulting service revenues
increased by 89.9% to $3.1 million for 1995 from $1.6 million for 1994.
Maintenance, support and other service revenues increased by 10.1% to $12.1
million from $10.9 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 1995 increased by 36.1% to $2.0 million from $1.5 million for 1994.
Revenue from third-party equipment and software comprised 7.4% of the Company's
total revenues in 1995, compared to 6.8% in 1994.
Cost of Software. Cost of software for 1995 increased by 16.6% to $893,000
from $766,000 for 1994. This increase was attributable to sales of Costpoint,
which was commercially released in June 1995 and resulted in higher royalty and
maintenance payments to third parties, and was partially offset by a decrease in
amortization of software development to $276,000 from $406,000 in 1994. Due to
the decline in sales of the System 1 product line, the Company accelerated the
amortization of all remaining System 1 software development costs in 1994.
Amortization of Costpoint software development costs did not begin until after
the commercial release of Costpoint in June 1995.
Cost of Services. Cost of services for 1995 increased by 23.5% to $5.2
million from $4.2 million in 1994. The increase in cost of services was
primarily due to increases in personnel costs to support the Costpoint product
line. In addition, reimbursed travel expenses increased by $242,000 from 1994
due primarily to consulting activity related to Costpoint implementations. These
increases were offset in part by $236,000 in costs related to the Company's
national user conference in September 1994. Cost of services represented 34.0%
and 33.2% of service revenues for 1995 and 1994, respectively.
Cost of Third-Party Equipment and Software. Cost of third-party equipment
and software for 1995 increased by 49.9% to $1.6 million from $1.1 million for
1994. Cost of third-party equipment and software products represented 80.0% and
72.6% of revenue from third-party equipment and software for 1995 and 1994,
respectively. The increase in these costs as a percentage of related revenue was
the result of several large sales of third-party equipment at volume discounts
in connection with complex Costpoint installations.
Software Development. Software development costs for 1995 increased by
27.3% to $4.9 million from $3.9 million for 1994. This increase was due
primarily to increased personnel costs and related benefits and facilities
costs, and a decline in capitalized software production costs, which occurred
after the commercial
22
<PAGE> 24
release of Costpoint in June 1995. Software development costs represented 18.4%
and 18.2% of the Company's total revenues in 1995 and 1994, respectively.
Sales and Marketing. Sales and marketing expenses for 1995 increased by
48.1% to $2.7 million from $1.9 million in 1994. This increase was due primarily
to increased personnel, advertising and marketing expenses related to the
introduction of Costpoint. Sales and marketing expenses represented 10.2% of the
Company's total revenues for 1995, compared to 8.7% for 1994.
General and Administrative. General and administrative expenses for 1995
increased by 17.7% to $1.9 million from $1.6 million for 1994. General and
administrative expenses represented 7.0% of the Company's total revenues for
1995, compared to 7.4% for 1994, as the Company was able to leverage its fixed
expenses over increased revenues.
Interest Income. Interest income for 1995 increased by 52.9% to $393,000
from $257,000 for 1994. The increase was due primarily to larger average cash
balances attributable to increased profits and the timing and amount of S
Corporation dividend distributions.
Pro Forma Income Tax Provision. The Company's pro forma effective tax rate
was 38.0% for both 1995 and 1994.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited historical and pro forma
statement of operations data for the eight quarters ended December 31, 1996, and
such data expressed as a percentage of total revenues for such quarters. This
data has been derived from the Company's unaudited quarterly financial
statements. In management's opinion these quarterly financial statements have
been prepared on a basis consistent with the audited financial statement
contained elsewhere herein, and include all adjustments, consisting only of
normal recurring adjustments, which the Company considers necessary for a fair
presentation of the information presented, when read in conjunction with the
Company's audited financial statements and notes thereto appearing elsewhere in
the Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees.......................... $1,582 $1,749 $ 2,733 $3,656 $2,880 $2,325 $ 3,217 $ 4,123
Services.............................. 3,531 3,648 3,684 4,291 4,363 4,951 5,234 5,814
Third-party equipment and software.... 695 344 552 384 358 291 752 472
------ ------ ------ ------ ------ ------ ------ -------
Total revenues.................. 5,808 5,741 6,969 8,331 7,601 7,567 9,203 10,409
------ ------ ------ ------ ------ ------ ------ -------
Operating Expenses:
Cost of software...................... 112 180 292 309 364 347 336 271
Cost of services...................... 1,170 1,144 1,156 1,681 1,885 2,216 1,894 2,048
Cost of third-party equipment and
software............................ 539 278 430 333 271 238 638 389
Software development.................. 933 1,045 1,458 1,498 1,440 1,486 1,732 2,016
Sales and marketing................... 603 671 721 748 783 806 878 993
General and administrative............ 413 386 538 538 516 626 579 562
Stock option compensation............. -- -- -- -- -- 867 -- --
Purchased in-process research and
development......................... -- -- -- -- -- -- 394 --
------ ------ ------ ------ ------ ------ ------ -------
Total operating expenses........ 3,770 3,704 4,595 5,107 5,259 6,586 6,451 6,279
------ ------ ------ ------ ------ ------ ------ -------
Income from operations.................. 2,038 2,037 2,374 3,224 2,342 981 2,752 4,130
Interest income......................... 100 96 99 98 104 102 81 95
------ ------ ------ ------ ------ ------ ------ -------
Income before state income taxes........ 2,138 2,133 2,473 3,322 2,446 1,083 2,833 4,225
Provision for state income taxes ....... 9 13 12 11 45 12 18 18
------ ------ ------ ------ ------ ------ ------ -------
Net income.............................. $2,129 $2,120 $ 2,461 $3,311 $2,401 $1,071 $ 2,815 $ 4,207
====== ====== ====== ====== ====== ====== ====== =======
PRO FORMA STATEMENT OF OPERATIONS DATA:
Income tax provision.................... $ 813 $ 811 $ 940 $1,262 $ 954 $ 422 $ 1,105 $ 1,650
Net income.............................. 1,325 1,322 1,533 2,060 1,492 661 1,728 2,575
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
QUARTER ENDED
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
------ ------ ------ ------ ------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees.......................... 27.2% 30.5% 39.2% 43.9% 37.9% 30.7% 35.0% 39.6%
Services.............................. 60.8 63.5 52.9 51.5 57.4 65.4 56.9 55.9
Third-party equipment and software.... 12.0 6.0 7.9 4.6 4.7 3.9 8.1 4.5
------ ------ ------ ------ ------ ------ ------ -------
Total revenues.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------ ------ -------
Operating Expenses:
Cost of software...................... 1.9 3.1 4.2 3.7 4.8 4.6 3.7 2.6
Cost of services...................... 20.1 19.9 16.6 20.2 24.8 29.3 20.6 19.7
Cost of third-party equipment and
software............................ 9.3 4.8 6.2 4.0 3.6 3.1 6.9 3.7
Software development.................. 16.1 18.2 20.9 18.0 18.9 19.6 18.8 19.4
Sales and marketing................... 10.4 11.7 10.3 9.0 10.3 10.7 9.5 9.5
General and administrative ........... 7.1 6.8 7.7 6.4 6.8 8.2 6.3 5.4
Stock option compensation............. -- -- -- -- -- 11.5 -- --
Purchased in-process research and
development......................... -- -- -- -- -- -- 4.3 --
------ ------ ------ ------ ------ ------ ------ -------
Total costs and expenses........ 64.9 64.5 65.9 61.3 69.2 87.0 70.1 60.3
------ ------ ------ ------ ------ ------ ------ -------
Income from operations.................. 35.1 35.5 34.1 38.7 30.8 13.0 29.9 39.7
Interest income......................... 1.7 1.7 1.4 1.2 1.4 1.3 0.9 0.9
------ ------ ------ ------ ------ ------ ------ -------
Income before state income taxes ....... 36.8 37.2 35.5 39.9 32.2 14.3 30.8 40.6
Provision for state income taxes ....... 0.2 0.2 0.2 0.1 0.6 0.2 0.2 0.2
------ ------ ------ ------ ------ ------ ------ -------
Net income.............................. 36.6% 37.0% 35.3% 39.8% 31.6% 14.1% 30.6% 40.4%
====== ====== ====== ====== ====== ====== ====== =======
PRO FORMA STATEMENT OF OPERATIONS DATA:
Income tax provision.................... 14.0% 14.2% 13.5% 15.2% 12.6% 5.6% 12.0% 15.9%
Net income.............................. 22.8 23.0 22.0 24.7 19.6 8.7 18.8 24.7
</TABLE>
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<PAGE> 26
The Company experienced significant fluctuations in quarterly operating
results in 1995 and 1996 as a result of a number of factors. Increased revenues
in the last six months of 1995 were primarily attributable to increased
Costpoint license fees and related consulting services associated with initial
Costpoint implementations. Over the last several years, the Company has
experienced seasonal variations in 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 license fees being recognized in the fourth quarter
upon the expiration of refund periods and, to a lesser extent, increased
revenues in the fourth quarter from consulting services related to these
implementations.
Increases in cost of services in the fourth quarter of 1995 and the first
two quarters of 1996 were primarily due to increases in personnel costs to
support the Costpoint product line. In addition, reimbursed travel expenses
increased during this period due primarily to consulting activity related to
Costpoint implementations. Cost of services for the second quarter of 1996 also
included $283,000 related to the Company's national user conference in April
1996. The increase in cost of services as a percentage of service revenues
during this period reflected the Company's 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 and the
national user conference for which customer billings approximated cost. Cost of
services as a percentage of service revenues declined in the third and fourth
quarters of 1996 due to greater utilization of the Company's consulting staff,
as the number of Costpoint implementations increased and the implementation
process became more efficient.
In June 1996, the Company recorded a non-recurring charge to operations in
the amount of $867,000 related to stock option compensation. In September 1996,
the Company recorded a non-recurring charge of $394,000 representing the value
of in-process research and development acquired in connection with its
acquisition of The Allegro Group, Inc. See "-- Overview". Exclusive of these
non-recurring charges, income from operations, net income and pro forma net
income would have been $1.8 million, $1.9 million and $1.1 million,
respectively, for the quarter ended June 30, 1996 and $3.1 million, $3.2 million
and $1.9 million, in the quarter ended September 30, 1996.
The Company expects that it will 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 product
introductions and product enhancements by the Company and its competitors, the
mix of 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 license
transactions could cause significant variations in operating results from
quarter to quarter. To the extent such expenses precede, or are not subsequently
followed by, anticipated revenue, the Company's operating results could be
materially and adversely affected.
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
25
<PAGE> 27
revenues or revenues 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively from cash flow
from its operations. As of December 31, 1996, the Company had cash and cash
equivalents of $8.3 million and working capital of $6.9 million.
For the year ended December 31, 1996, the Company's operating activities
provided net cash of $14.5 million, primarily as a result of income before
depreciation and amortization, after including the non-cash charges for stock
option compensation and the purchase of in-process research and development. In
addition, the increase in accounts receivable was offset by a greater increase
in deferred revenue and accounts payable and other accrued expenses. Accounts
receivable, net of the allowance for doubtful accounts, were $6.0 million as of
December 31, 1996, compared to $6.0 million as of December 31, 1995. Accounts
receivable days sales outstanding was 52 days as of December 31, 1996, compared
to 65 days as of December 31, 1995. The increase in deferred revenue reflects
increased Costpoint license fees, for which revenue is recognized upon the
expiration of the refund period. Exclusive of receivables which were recorded as
deferred revenue, days sales outstanding was 36 days as of December 31, 1996,
compared to 49 days as of December 31, 1995. The Company's allowance for
doubtful accounts decreased during 1996 due to a write-off of $245,000 as a
result of the insolvency of a significant customer. While the Company believes
that its allowance for doubtful accounts as of December 31, 1996 remains
adequate, there can be no assurance that such allowance will be sufficient to
cover receivables which are later determined to be uncollectible.
Investing activities provided $1.3 million for the year ended December 31,
1996. This amount included $3.1 million from the maturity of treasury and other
investments, offset by $1.1 million in purchased property and equipment and
$622,000 of capitalized software production costs for new Costpoint product
modules.
Financing activities for the year ended December 31, 1996 consisted
primarily of $11.9 million in dividend and tax distributions to the Company's
shareholders. The Company historically has distributed most of its profits as S
Corporation dividends. See "Prior S Corporation Status."
The Company has a commitment from a bank to establish a credit facility
upon the closing of this offering that will provide for a $1.0 million operating
capital line of credit. Loans under this facility will be secured by
substantially all of the Company's assets and will bear interest at the lender's
prime rate.
The Company believes that the net proceeds from this offering, together
with existing sources of liquidity and anticipated cash flow from operations,
will satisfy the Company's anticipated working capital and capital expenditure
requirements through at least 1997. 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 the terms satisfactory to the
Company.
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<PAGE> 28
BUSINESS
Deltek designs, develops, sells and supports a family of integrated
software products that provide project-oriented businesses with tools to more
effectively manage, operate and grow their operations. Deltek's products address
the enterprise-level needs of project-oriented businesses and allow these
organizations to manage financial and project accounting, compute costs and
revenues on a project-by-project basis, submit accurate and detailed bills,
comply with complex industry-specific and regulatory requirements, administer
employee time collection, labor costing and payroll, automate materials
management functions, and empower their managers with timely and pertinent
information. Deltek also provides a full range of consulting and maintenance
services to assist its customers with system implementation and integration and
to provide training and ongoing support for the Company's software products.
Deltek sells its products and services, through its direct sales force, to
project-oriented businesses, such as professional and technical service
providers, including engineering and environmental firms, research and
development firms and contract service organizations, as well as not-for profit
organizations and make-to-order manufacturers. Since its inception, the Company
has installed more than 1,950 systems for a wide range of project-oriented
organizations of all sizes, predominantly in the United States. Deltek's
customers include Bell Atlantic Federal Integrated Systems, Inc., Computer
Sciences Corporation, Coopers & Lybrand, LLP, Lockheed Martin Corp., Northrop
Grumman Corporation and Raytheon Service Co., Inc.
INDUSTRY BACKGROUND
The increasingly competitive business environment has created pressure for
business organizations to better utilize information technologies to improve
their efficiency, reduce their costs and provide their employees and management
with more timely and pertinent information. As a result, many organizations are
implementing a new generation of enterprise-level business systems, based on
open, client/server architectures, to automate their operations, including
finance, accounting, manufacturing and human resource management functions.
According to International Data Corporation, the market for client/server
enterprise-level applications exceeded $3.8 billion in 1995, and is projected to
grow at a compound annual growth rate of 37% through 2000.
While organizations are increasing their use of client/server
enterprise-level business systems, most of these systems are general purpose and
fail to address many of the specific requirements of businesses engaged
primarily in providing goods and services to customers under project-specific
contracts and engagements. These project-oriented businesses include a wide
variety of professional and technical service providers, including engineering
and environmental firms, research and development firms and contract service
organizations, as well as not-for-profit organizations, make-to-order
manufacturers and construction companies. Many of these project-oriented
businesses provide goods and services under government contracts.
Project-oriented businesses have many project-specific requirements, including
the need to track costs and profitability on a project-by-project basis, provide
timely project information to managers and customers and submit accurate and
detailed bills, often in compliance with complex industry-specific and
regulatory requirements. Project accounting for these organizations often
requires the use of sophisticated methodologies for allocating and computing
project costs and revenues.
The use of project-oriented business systems is expanding as a result of a
number of trends prevalent throughout the economy. Traditionally, service
organizations have been more prone to utilize project accounting due to their
need to customize their services for each client and properly allocate the
associated costs. Therefore, as the shift from a manufacturing-based economy to
a service-based economy continues, the market for project-oriented businesses is
expanding. Furthermore, the trend toward outsourcing an increasing range of
activities broadens the market for project-oriented businesses as both customers
and vendors need to track the costs associated with their projects. Finally,
many organizations with significant internal development activities can benefit
from the use of project accounting systems to closely monitor their progress and
cost.
As the number and type of project-oriented businesses increase, they also
are demanding increasingly sophisticated tools to address their core information
and accounting needs, including project accounting,
27
<PAGE> 29
employee time collection, project budgeting and project reporting. At the same
time, these organizations are recognizing that, because most aspects of their
business revolve around their project orientation, they can achieve efficiencies
in a number of other accounting and business functions, such as general ledger,
accounts payable, accounts receivable, materials management and human resources,
through the use of software applications designed with the special needs of
project-oriented businesses in mind. Like other businesses, project-oriented
organizations are also demanding solutions that allow them to combine their
business software applications into a single integrated, enterprise-level
system.
The recent emergence of client/server software and computing environments
and other new information technologies offer organizations a powerful and open
data architecture through the use of relational databases that allow for
scalability and growth. Larger project-oriented businesses are reengineering
their legacy business information and management systems to meet the pressures
of increased competition, smaller project-oriented businesses are upgrading from
PC-based systems to client/server environments, and other enterprises are
adopting a more project-oriented approach to their businesses. As a result, such
organizations are seeking integrated, enterprise-level software solutions that
are specifically designed to address the core information and accounting needs
of project-oriented businesses and that will provide their managers with timely
and pertinent information. Project-oriented businesses are also demanding a full
range of implementation, training and support services provided by organizations
experienced in dealing with the needs of project-oriented businesses.
THE DELTEK SOLUTION
Deltek designs, develops, sells and supports a family of integrated
software products that provide project-oriented businesses with tools to more
effectively manage, operate and grow their operations. Deltek's products address
the enterprise-level needs of project-oriented businesses and allow these
organizations to manage financial and project accounting, compute costs and
revenues on a project-by project basis, maintain employee timekeeping systems,
submit accurate and detailed bills, comply with complex industry-specific and
regulatory requirements, administer employee time collection, labor costing and
payroll, automate materials management functions, and empower their managers
with timely and pertinent information. Deltek also provides a full range of
consulting and maintenance services to assist its customers with system
implementation and integration and to provide training and ongoing support for
the Company's software products.
Deltek's family of software products consists of Costpoint, the Company's
advanced client/server, enterprise-level business software system; System 1, a
DOS-based accounting and management system designed primarily for organizations
providing goods and services under contracts with the federal government;
Electronic Timesheet, an employee timekeeping system; and Allegro, a project and
resource management tool. These products include modules spanning financial
accounting, project accounting and management, human resources and payroll
administration, time and labor collection, materials management and reporting
tools. Application modules within each Deltek product are integrated and utilize
a common user interface and database structure, allowing project-oriented
organizations to configure and implement a fully-integrated system solution.
Costpoint, Deltek's current flagship product, is a client/server based business
software system incorporating an open, relational database architecture, an
object-oriented development approach, Microsoft Windows client operating
systems, on-line analytical processing ("OLAP") tools, drill down data
exploration, workflow management and popular network operating systems,
including Windows NT, UNIX and Netware.
An integral part of Deltek's solution is to provide superior services and
support directly to its customers. These services include comprehensive
implementation and consulting services, user training and ongoing product
maintenance and support. The Company believes that its implementation expertise,
together with its focus on the unique requirements of project-oriented
organizations, result in a faster and more cost-effective system implementation
than is typically achieved by companies which choose to adapt general-purpose
business systems to the needs of their project-oriented organizations. After a
customer's implementation is completed, Deltek provides ongoing support services
to assist the customer in maintaining and updating its system, training its
employees and adding functionality as the customer's business grows and its
requirements change.
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<PAGE> 30
STRATEGY
Deltek's objective is to strengthen its position as a leading supplier of
enterprise-level software systems for project-oriented organizations. Deltek
intends to continue to differentiate itself from providers of general-purpose
business application software by focusing exclusively on providing
cost-effective solutions that meet the unique and changing demands of
project-oriented businesses. Deltek's strategy includes the following key
elements:
Target Additional Project-Oriented Markets. Deltek's expertise in
project accounting and information systems is the result of its years of
experience in addressing the complex requirements of project-oriented
businesses having government contracts. Over time, Deltek has broadened its
product and marketing focus to target a wide range of project-oriented
industries, such as professional and technical service providers, including
engineering and environmental firms, research and development firms and
contract service organizations, as well as not-for-profit organizations and
make-to-order manufacturers. Deltek intends to continue to target
additional project-oriented markets such as architectural and design firms,
construction companies, governmental agencies as well as organizations
managing large internal projects.
Leverage Large Installed Customer Base. Deltek's installed base of
approximately 1,700 active customers enables it to generate revenues from
support and maintenance services provided to these customers. Deltek's
strategy is to maintain and strengthen relationships with its existing
customers through the provision of these services and to derive additional
software licensing and consulting revenues as these companies grow and
their requirements change. An important element of the Company's strategy
is to license its Costpoint products to existing System 1 users as these
customers reengineer their information systems and migrate to new
client/server business software solutions.
Expand and Enhance Product Line. Deltek intends to continue to develop
or acquire additional products and modules in order to provide more
comprehensive enterprise solutions to address the changing requirements of
its existing and prospective customers. For example, Deltek has recently
expanded its product line by adding a comprehensive human resources module
and by acquiring the Allegro resource management product. Deltek also has
an ongoing commitment to enhance the existing capabilities of its
Costpoint, Electronic Timesheet and Allegro products. For example, the
Company is currently adding functionality that will enable its Costpoint
modules to perform additional materials management functions as well as to
handle foreign currencies and international transactions.
Maintain Technological Leadership. Deltek plans to continue to invest
in research and development and to incorporate into its products
advancements in information technologies as they become accepted. Deltek
maintains an in-house research and testing facility where new technologies,
operating systems, hardware platforms and Internet capabilities are
developed and tested. Deltek is currently modifying its products to support
the Microsoft SQLServer database and electronic data interchange ("EDI")
and developing enhanced user interfaces and Internet applications,
including a Web-enabled timesheet product.
Differentiate Through Superior Service. Deltek believes that its
reputation for providing high quality implementation and consulting
services, user training and ongoing support and maintenance and its ability
to work directly with its customers, rather than through third-party
resellers and system implementors, are significant competitive advantages.
Deltek intends to differentiate itself from its competitors by continuing
to build customer loyalty through the delivery of superior service.
PRODUCTS
Deltek designs, develops, sells and supports a family of integrated
software products that provide project-oriented businesses with tools to more
effectively manage accounting, projects, people, materials and reporting
requirements in order to operate and grow their businesses. Deltek's family of
software products consists of Costpoint, System 1, Electronic Timesheet and
Allegro.
29
<PAGE> 31
COSTPOINT
Costpoint, the Company's current flagship product, is a
client/server-based, enterprise-level business software system, consisting of
over 25 integrated module applications which span financial accounting, project
accounting, human resource and payroll administration, materials management and
reporting tools.
Costpoint utilizes an open, relational database architecture on the server
and Microsoft Windows operating systems on the desktop client PC. Costpoint can
be operated on a variety of network operating systems, including Windows NT,
UNIX and Novell Netware and currently supports Oracle, Sybase Inc. ("Sybase")
and Centura Corporation ("Centura") relational databases. Deltek also expects to
introduce support for the Microsoft SQLServer database in the first half of
1997. Costpoint was developed with extensive use of object-oriented programming
techniques utilizing a fourth generation language together with C++ and
database-specific stored procedures to maximize performance.
The Company began development of Costpoint in 1992 in response to the
maturation of Deltek's DOS-based business software system, System 1. Costpoint
differs from System 1 primarily in its inherent design that allows it to handle
a broader range of project-oriented businesses, its ability to utilize advanced
technologies and operating systems, its enhanced reporting capabilities, and its
ability to provide more complete and flexible functionality in project
accounting and other business system areas to allow for business change and
growth.
Costpoint is designed to meet the specialized needs of project-oriented
businesses, including project costing, indirect cost allocation, revenue
recognition, project budgeting and project reporting. Costpoint also meets the
regulatory and reporting requirements of businesses having contracts with the
United States government. Costpoint combines these capabilities with
applications in other business system areas that are designed for the special
needs of project-oriented businesses. Through its open data architecture and the
use of drill-down inquiries, OLAP tools and standard reports, Costpoint is also
designed to provide managers with timely, pertinent and empowering information.
Costpoint was commercially released in June 1995. Through December 31,
1996, the Company had licensed approximately 220 Costpoint systems that had been
implemented or were in the process of being implemented. License fees for
Costpoint systems vary depending on the number of users and sites and the number
and type of modules licensed. For new customers, license fees for an initial
Costpoint installation typically range from $20,000 to $500,000, exclusive of
consulting services. For the year ended December 31, 1996, the average fee for
an initial Costpoint license was approximately $86,000.
The following table describes the principal Costpoint application modules:
30
<PAGE> 32
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
FINANCIAL ACCOUNTING
General Ledger............................ Provides flexible account and organization structures and extensive
audit trails; delivers numerous financial reports and responds to
user inquiries.
Accounts Payable.......................... Allows for flexible payment (checks, EFT) and vouchering of invoices
which can also be matched to purchase orders.
Accounts Receivable....................... Tracks customer receivables and cash receipts, provides reporting on
billed and unbilled receivables and simplifies collections.
Travel.................................... Automates all travel transactions from per diems to travel advances
and account reconciliations.
Fixed Assets.............................. Collects acquisition data for company-owned and government-furnished
property. Computes and tracks depreciation and disposal data and
posts to general ledger.
- ------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
PROJECT ACCOUNTING
Project Setup............................. Sets up and tracks information on every project or activity,
including work breakdown structures, modifications, labor categories,
dollars, hours and unit usage.
Project Cost and Revenue Processing....... Allocates indirect costs to projects using various formulas, and
automatically calculates and posts project revenues based on many
different project types.
Project Budgeting and ETC................. Tracks budgets at virtually any level or aspect of the project;
calculates, revises and reports on estimates-to-complete.
Project Billing........................... Allows companies to produce numerous types of bills to satisfy the
requests of each customer. The posting of bills automatically updates
the general ledger and accounts receivables.
Project Reporting......................... Provides numerous standard reports and responds to user inquiries
with flexible formatting options.
- ------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
PEOPLE MANAGEMENT AND ADMINISTRATION
Labor..................................... Manages the collection and proper account and cost distribution of
timesheet hours and dollars.
Payroll................................... Handles payroll processing by calculations from timesheets, updates
information affecting general ledger and earnings tables, tracks
employee labor data and computes and creates checks.
Human Resources*.......................... Includes compensation administration, personnel administration,
affirmative action, 401(k) reporting and forecasting, and COBRA.
Labor/Payroll Interfaces.................. Interfaces for uploading timesheet data as well as interfaces to ADP
and Ceridian payroll services.
- ------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
MATERIALS MANAGEMENT
Product Definition........................ Defines and tracks the parts, goods and services companies will buy
or sell for project specific items; tracks billing and shipping data.
Purchasing................................ Allows businesses to administer the procurement of company-owned or
project-specific parts, goods or services through tracking of
purchase orders, buyer authorizations and commitments.
Procurement Planning...................... On-line entry of requisitions, approvals, requests for quotes and
actual vendor quotes with the automatic creation of purchase orders.
Inventory................................. On-line, real time inventory tracking and control for use by any
company which has project-specific, company-owned, and
government-furnished materials.
Bill of Materials*........................ Defines saleable products in terms of the raw materials, purchased
parts and assemblies which comprise them.
Sales Order Entry*........................ Supports and monitors the sales order process, including procurement,
issuing, shipping and invoicing.
- ------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
REPORTING TOOLS
CP Reports**.............................. Ad-hoc report writing tool which provides for simple queries of data
as well as more advanced and complex formatted reports.
CP Scope**................................ Data analysis tool which provides the ability to view summarized data
from multiple perspectives and drill down to different levels of
detail in the data; provides extensive business graphics
capabilities.
</TABLE>
- --------------------------------------------------------------------------------
- ---------------
* Currently in Beta testing.
** Software licensed from third parties and sublicensed to Deltek customers.
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<PAGE> 33
SYSTEM 1
System 1, formerly known as the Government Contractors Software Series, is
Deltek's original business software system. System 1 was designed specifically
for use by organizations having contracts with the federal government and helps
these organizations comply with stringent federal regulations applicable to such
contractors, including the requirements of the Defense Contract Audit Agency.
System 1 is DOS-based, operates on Novell Netware, UNIX and DEC VAX/VMS network
operating systems and utilizes a character-based user interface and a
proprietary COBOL data structure. System 1 consists of 23 application modules
spanning financial accounting, labor and payroll administration, materials
management and reporting tools.
System 1 was commercially released in 1985. As of December 31, 1996,
approximately 1,500 project-oriented organizations were using System 1 as their
primary accounting system. License fees for System 1 vary depending upon the
number of users or facilities and the number and type of modules licensed. Prior
to the introduction of Costpoint in June 1995, license fees for an initial
System 1 installation typically ranged from $10,000 to $200,000, exclusive of
consulting services. Since the introduction of Costpoint, the majority of new
customers have licensed Costpoint systems, and new System 1 sales have decreased
in number and system size. For the year ended December 31, 1996, typical license
fees for an initial System 1 installation ranged from $10,000 to $50,000, and
the average license fee was approximately $15,000.
An important element of the Company's strategy is to license Costpoint to
existing System 1 users as those customers reengineer their information systems
and migrate to new client/server business software solutions. In an effort to
influence the migration of its System 1 customers to Costpoint, the Company
offers substantial discounts to existing System 1 users and provides automated
data conversion programs which provide significant assistance in the Costpoint
upgrade/implementation process. As of December 31, 1996, approximately 40 of the
Company's System 1 customers, representing approximately 3% of the installed
base of System 1 users, had migrated to or were in the process of migrating to
Costpoint systems. There can be no assurance that a significant percentage of
current System 1 customers will migrate to Costpoint. In particular, smaller
System 1 customers are less likely to migrate to Costpoint because the cost of
migrating to a client/ server environment is high relative to their size and
because in many cases System 1 adequately meets their present needs. The Company
intends to provide support services and product maintenance for System 1 for the
foreseeable future although it does not currently intend to develop significant
new enhancements to the System 1 product line.
ELECTRONIC TIMESHEET
Electronic Timesheet is a comprehensive timesheet software application
which allows employees to enter their timesheets on a daily basis on their
desktop PC. Electronic Timesheet utilizes either Windows or DOS operating
systems on the desktop PC and provides a graphical, point and click interface.
Using this graphical interface, the employee may select from a list of
authorized charges rather than having to enter complicated account and project
numbers. This feature serves to greatly reduce costly and time-consuming errors.
After the employee electronically signs his or her timesheet, the timesheet then
is forwarded through the network for manager approval. Timesheets and the
appropriate labor charges can then be automatically accumulated and integrated
with the accounting system, completely eliminating the paper timesheet.
Electronic Timesheet also allows managers to view information about employees'
activities and helps them to better manage their employees.
Electronic Timesheet may be licensed together with Costpoint or System 1 or
as a stand-alone application that can be integrated with other accounting
systems. The Company is currently developing a Web-enabled timesheet product and
expects to begin beta testing in the first half of 1997, although there can be
no assurance that development of this product will be successfully completed.
Electronic Timesheet was commercially released in January 1995. As of
December 31, 1996, Electronic Timesheet had been licensed to over 170 customers.
License fees for Electronic Timesheet typically range from $2,500 to $100,000.
For the year ended December 31, 1996, the average license fee for Electronic
Timesheet was approximately $12,000.
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<PAGE> 34
ALLEGRO
Allegro is a software application that enables project managers to plan and
monitor project resources. Using a user interface similar to a spreadsheet,
Allegro allows project managers to create budgets and estimates-to-complete,
plan and schedule employees and other resources, forecast revenue and profits,
and receive timely status on each project from the accounting system interface.
The Company believes that Allegro's principal advantage is its user-friendly,
spreadsheet-like interface and its ability to view and manage resources across
multiple projects in an organization. Allegro is a client/server based system
running on a variety of databases and utilizing Microsoft Windows operating
systems.
The Company acquired the Allegro product through the acquisition of The
Allegro Group, Inc., in September 1996. Prior to the acquisition, The Allegro
Group, Inc. had licensed a limited number of Allegro products, and since the
acquisition the Company has also licensed a limited number of these products on
a stand-alone basis. The Company is in the process of making further
improvements and refinements to Allegro and developing data interfaces that will
allow it to be fully-integrated with its Costpoint and System 1 products. The
Company believes that its ability to market Allegro, particularly to its
existing customer base, will be dependent upon the successful completion of
these improvements and interfaces, of which there can be no assurance. The
Company expects license fees for new Allegro customers to range from $10,000 to
$100,000.
THIRD-PARTY PRODUCTS
Deltek incorporates into its software products certain application software
licensed from third parties. The Costpoint reporting tools, CP Reports and CP
Scope, are both licensed from Cognos Corporation under an OEM agreement, and
System 1 utilizes a report-writer, Intelligent Query, licensed from a third
party. In order to support the Oracle, Sybase and Centura relational databases,
Costpoint contains certain native "router" software licensed from Centura. Also,
the Company's Costpoint and Allegro customers must license applicable database
software from Oracle, Sybase, Centura, or Microsoft, either directly or through
the Company. Because some customers desire a "turnkey" solution, the Company
will purchase servers, network software and other software and hardware
products, which the Company resells or sublicenses to its customers and installs
together with Deltek products to provide a fully operational system.
CUSTOMER SERVICE AND SUPPORT
An integral part of Deltek's solution is to provide superior services and
support directly to its customers. These services include comprehensive
implementation and consulting services, user training and ongoing maintenance
and support. The Company believes that its reputation for providing high quality
services and its ability to work directly with its customers, rather than
through third-party resellers and system implementors, are significant
competitive advantages. Deltek's implementation management and other consulting
services are generally charged on a time and materials basis. Classroom
education and training is charged on a per class basis. Telephone support and
periodic product enhancements and updates are provided for maintenance fees that
are payable quarterly and initially represent between 15% and 20% of the related
software license fee on an annual basis.
Implementation and Consulting Services. Deltek provides a full range of
consulting, training and technical services to customers both during and after
implementation of Deltek software. Since its inception, the Company's staff of
system consultants has been directly involved with over 1,950 installations.
Deltek's system consultants are involved in the important early planning and
design stages of each implementation, participate in user training, and work
closely with the customer during the two to six-month period just before and
after the "going live" date. After the implementation is completed, Deltek's
consultants typically maintain an ongoing relationship with the customer and
assist the customer in refining its systems and adding functionality as its
business grows and its requirements change.
Telephone Support. Deltek provides comprehensive telephone support during
business hours as well as supplemental emergency support after hours and on
weekends. Deltek maintains a "one-hour call-back policy" under which customers
leave a message with a description of their problem and a Deltek support
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<PAGE> 35
representative who is qualified to handle the specific problem returns the call
within one hour. Deltek utilizes a sophisticated in-house support tracking
system which enables call, problem and resolution tracking. Deltek also
maintains an "open phone" policy whereby customers are encouraged to contact any
supervisor or senior manager at Deltek for any reason. Deltek typically handles
between 250 and 450 support calls per day.
Training Classes. Deltek operates training facilities at its McLean,
Virginia headquarters and at its offices in San Jose, where it provides
regularly scheduled training classes on over 25 topics related to the Company's
products to supplement training that its customers receive in connection with
their initial system installation. Deltek maintains system laboratories at its
training facilities which are available for customer use for testing,
benchmarking and troubleshooting. Deltek also offers custom, on-site training
classes.
Product Updates and Enhancements. Since its inception, Deltek has provided
periodic updates and enhancements to each of its software products. Typically,
the Company provides several minor updates per year, which include system error
corrections, tax table updates and other minor enhancements, and new version
releases periodically, which include major enhancements and changes to the
database design. These product updates and enhancements are provided at no
additional charge for customers who purchase support and maintenance services.
Client/Server Technical Services. To address the challenges that many
companies face when implementing a client/server system, Deltek provides
client/server and database consulting services together with turnkey hardware
and third-party database and operating system software. Deltek believes these
services provide a significant benefit to its customers by streamlining their
system implementation and providing a complete, turnkey solution.
Custom Solutions. From time to time, customers require custom modifications
to the Company's software or a custom interface to an in-house application.
Deltek provides custom programming services through its Custom Solutions Group
to assist customers with these needs.
Web Site Services. Deltek has recently begun to provide several other
support services in conjunction with its Web site. Customers may utilize the Web
site to download revised software programs and documentation, to communicate
with other customers and Deltek's employees, and to join Deltek user groups.
These services are provided at no additional charge, as a part of the Company's
support and maintenance program.
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<PAGE> 36
CUSTOMERS
Since its inception, the Company has installed more than 1,950 systems for
a wide range of project-oriented organizations of all sizes, predominately in
the United States. Today, more than 1,750 of these customers, or approximately
90%, remain active users of the Company's products. No customer accounted for
more than 10% of the Company's total revenues in 1994, 1995 or 1996. The
following is a representative list of the Company's customers who purchased at
least $100,000 of the Company's products and services from January 1, 1992
through December 31, 1996, in some cases for use by a division of the customer,
and who are currently receiving support and maintenance services:
AEL Industries, Inc.
Alcone Marketing Group
AlliedSignal Technical Services Corp.
American Institute for Research in the Behavioral
Sciences
Anteon Corporation
Ball Aerospace & Technologies Corp.
Bell & Howell Postal Systems, Inc.
Bell Atlantic Federal Integrated Systems, Inc.
Boeing Information Services, Inc.
BTG, Inc.
Capitol Multimedia, Inc.
Chem-Nuclear Systems, Inc.
Coleman Research Corp.
Comsat RSI Inc.
Computer Sciences Corporation
Concurrent Technologies, Corp.
Continuous Electron Beam Research Accelerator
Facility
Coopers & Lybrand, LLP
Cortez III Service Corp.
DynCorp
EA Engineering Science & Technology, Inc.
EDO Corporation
EG&G Defense Materials, Inc.
Frontier Engineering, Inc.
GEC Marconi Avionics, Inc.
Hughes STX Corp.
Institute for Defense Analyses Inc.
Johnson Controls World Services, Inc.
KPMG Peat Marwick LLP
Kuwait Dynamics Limited
Lear Astronics Corp.
Lockheed Martin Corp.
Los Alamos Technical Associates Inc.
Lovelace Institutes
Mantech International Corp.
Market Facts, Inc.
Microcraft Inc.
Monterey Bay Aquarium Research Institute
National Opinion Research Center
Nichols Research Corp.
Northrop Grumman Corporation
Nortel Federal Systems, Inc.
Norton Diamond Film, Inc.
Orbital Sciences Corporation
Pacific Architects & Engineers, Inc.
Porter Novelli, Inc.
RAPP Collins Worldwide, Inc.
Raytheon E-Systems, Falls Church Division
Raytheon Service Co., Inc.
Research Triangle Institute, Inc.
Southern Research Institute, Inc.
Space Telescope Institute
Telephonics Corp.
Titan Systems Corp.
TRW Environmental Safety Systems, Inc.
UNC Aviation Services, Inc.
US Generating Company
Universities Space Research Association
VSE Corporation
Wyle Laboratories, Inc.
Xerox Corporation
SALES AND MARKETING
The Company sells its products and services through its direct sales force.
As of December 31, 1996, the Company's sales organization consisted of 24
full-time sales personnel, based at the Company's corporate headquarters in
McLean, Virginia and at its offices in Denver, Colorado and San Jose,
California.
The Company's sales cycle begins with the generation of a sales lead or the
receipt of a request for proposal. Sales leads are generated by direct mailing
to potential customers in selected markets, as well as through advertising,
seminars and trade shows. The Company's sales personnel work closely with
prospective customers to understand their reasons for undertaking a system
change and to identify their specific business and system requirements. They
then provide prospective customers with information regarding the capabilities
and benefits of the Company's products and to assist in planning for the system
implementation. The licensing
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<PAGE> 37
and implementation of the Company's business software products is often a
decision with significant enterprise-wide implications involving a substantial
commitment of the customer's management attention and resources. The period
between initial customer contact and the customer's purchase commitment is often
lengthy and typically ranges from 3 to 18 months. Accordingly, the Company's
sales process is subject to delays associated with a lengthy evaluation and
approval process that typically accompanies major initiatives or capital
expenditures, including delays over which the Company has little or no control.
Deltek's installed base of approximately 1,750 active customers enables it
to generate revenues from support and maintenance services provided to these
customers. Deltek's strategy is to maintain and strengthen relationships with
its existing customers through the provision of these services and to derive
additional software licensing and consulting revenues as these companies grow
and their requirements change. An important element of the Company's strategy is
to license its Costpoint products to existing System 1 users as these customers
reengineer their information systems and migrate to new client/server business
software solutions. In support of its efforts to market additional products and
services to its existing customer base, the Company conducts on-going customer
communications programs and national user conferences every 18 to 24 months.
The Company's strategy is to expand its sales and marketing activities to
target project-oriented organizations in additional markets. Deltek's ability to
achieve significant revenue growth in the future will depend in large part on
its success in recruiting, training and retaining additional sales, sales
support and marketing personnel. In the future, the Company may seek to develop
third-party distribution channels and use third-party consultants to provide
implementation consulting services. There can be no assurance that the Company
would be successful in establishing such third party arrangements, that any such
expansion of the Company's sales and support capabilities would result in
increased revenues, or that the resulting reduction in the Company's direct
involvement with its customers would not adversely affect its competitive
position.
PRODUCT DEVELOPMENT
The Company utilizes a team approach to product development. Deltek's
product development is generally organized into teams of 6 to 12 developers who
handle a particular product area, a group of programs or functions, or a new
development area. Each development team includes one or more subject matter
experts who are instrumental in the design of each new module and capability.
Following the completion of high-level design, the development team receives
assistance from Deltek's database design team which helps with the important
step of designing or making changes to the relational database architecture.
Throughout the development process, and particularly when the initial
programming has been completed, quality assurance team members provide testing
and analysis to ensure that the application has been developed using standards
and functions appropriate to its design and purpose. Deltek's Object, Class, and
Technology group supports each development group and focuses on development,
enhancement and maintenance of the object-oriented product development tools
used throughout the development process. Deltek utilizes a sophisticated
in-house system for tracking the development process, for program check-in and
check-out, for version control, and for system error and bug tracking.
A significant portion of the development related to the Costpoint product
line is conducted using a fourth generation client/server development tool
called SQLWindows which the Company licenses from Centura. See "Proprietary
Rights and Licenses." Using this tool, the Company has developed a number of
reusable objects and classes to better facilitate development. In order to
optimize performance for process intensive functions in Costpoint, such as
project costing and billing applications, the Company makes extensive use of
database stored procedures which enable specific applications to operate much
faster with considerably less network traffic. C++ programming is also used
throughout Costpoint in various situations to improve performance and
functionality.
The Company's product development groups are currently focused on
enhancements and customary error corrections to existing versions, and
development of future versions of Costpoint, Electronic Timesheet and Allegro.
New capabilities currently under development for Costpoint include full support
for Windows NT on the client PC, support for the Microsoft SQL Server database,
foreign currency handling, enhanced Internet
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capabilities, additional material management modules, and enhanced functionality
for specific project-oriented industries. Development efforts relating to
Electronic Timesheet are currently focused on development of a
client/server-based version of the software and the further expansion of
Internet and intranet timekeeping capabilities. Allegro development is currently
focused on developing interfaces that will allow Allegro to be fully integrated
with the Company's Costpoint and System 1 products and additional interfaces to
products such as Microsoft Project and Primavera. There can be no assurance that
the Company will be successful in completing the development of these or other
new products and enhancements or that any new product or enhancement that it may
introduce will achieve market acceptance.
The Company intends to continue making substantial investments in product
development to address advancements in technology, respond to changing customer
requirements, extend the functionality of its current products and expand its
product line.
The Company's software development expenses, exclusive of certain
development costs which have been capitalized, were $3.9 million, $4.9 million
and $6.7 million in 1994, 1995 and 1996, respectively. As of December 31, 1996,
the Company had 128 employees engaged in product development and quality
assurance activities.
COMPETITION
The business application software market, including the market for
client/server-based business software systems, is intensely competitive and
rapidly changing. Deltek's products are targeted toward a wide range of
project-oriented organizations, and the competition that the Company encounters
varies depending upon the customer's size, industry and specific system
requirements. For larger Costpoint implementations, the Company's principal
competitors include Oracle, PeopleSoft and SAP. For smaller and medium-size
Costpoint and System 1 implementations, the Company's competitors include Great
Plains Software, Inc., Harper and Shuman, Inc., Maxwell Business Systems, Inc.,
Platinum Software Corporation, Solomon Software, State of the Art, Inc. and
Timberline Software Corporation, some of which offer industry-specific products.
Electronic Timesheet competes with electronic timekeeping systems offered by
vendors including TIMESLIPS Corporation and Kronos, Inc. The Company also faces
indirect competition from systems developed by the internal MIS departments of
large organizations.
Deltek believes that competition in the rapidly evolving markets for
business application software is based primarily on product features and
functions, product architecture, ease of implementation, vendor and product name
recognition and reputation, customer service and support, and price. Deltek
believes that it has competed effectively to date on the basis of these factors,
and, particularly that its product and marketing focus on the unique needs of
project-oriented organizations and its reputation for high quality service and
support, its ability to work directly with its customers (rather than through
third-party resellers and system implementors) and its ability to provide rapid
implementations have constituted competitive advantages.
Many of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. In addition, certain
competitors, particularly Oracle, PeopleSoft and SAP, have well-established
relationships with the Company's current and prospective customers and with
major accounting and consulting firms that may have an incentive to recommend
such competitors over the Company. Further, because the Company's products run
on RDBMS and Oracle has the largest market share for RDBMS software, Oracle may
have a competitive advantage in selling its application products to its
installed RDBMS customer base. Furthermore, as the client/server computing
market develops, companies with significantly greater resources than the Company
could attempt to increase their presence in this market by acquiring or forming
strategic alliances with competitors of the Company. In addition, as the Company
attempts to penetrate other strategic vertical markets, it will likely encounter
competitors with substantially more experience in those markets.
There can be no assurance that the Company's products will continue to
compete favorably or that the Company will be successful in the face of
increasing competition from new products and enhancements introduced by existing
or new competitors entering the markets for its products. In addition, increased
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<PAGE> 39
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.
PROPRIETARY RIGHTS AND LICENSES
The Company's success and ability to compete is dependent in part upon its
proprietary software. Deltek relies on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
establish and protect its rights in its software. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy,
design around or reverse engineer aspects of the Company's products or to obtain
and use information that the Company regards as proprietary. Furthermore, the
Company has no patents, and existing copyright laws afford only limited
protection. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, there can be no assurance that the Company will be able to
protect its proprietary software against unauthorized third party copying or
use, which could adversely affect the Company's competitive position. Deltek
believes, however, that because of the rapid rate of technological change in the
software industry, trade secret and copyright protection are less significant
than factors such as the knowledge, ability and experience of the Company's
employees, frequent product enhancements and the timeliness and quality of
support services.
The Company licenses its products to customers under license agreements
which are generally in standard form, although each license is individually
negotiated and may contain variations. Deltek's standard license agreement
allows the customer to use the Company's products solely on the customer's
computer equipment for the customer's internal purposes, and the customer is
generally prohibited from sublicensing or transferring the products. The license
agreements generally provide that the Company's warranty for its products is
limited to correction or replacement of the affected product and that the
Company will refund the applicable license fee if the customer is not satisfied
with the product for any reason, sets forth the reasons for dissatisfaction,
requests the refund prior to the end of the applicable refund period (normally
60 to 90 days) and returns all copies of the product to the Company. Deltek's
standard license agreement also includes a confidentiality provision protecting
proprietary information relating to the Company's products.
The Company's products are generally provided to customers in object code
(machine-readable) format only. From time to time, in limited circumstances, the
Company has licensed certain of its products in source code (human-readable)
form, subject to customary protections such as use restrictions and
confidentiality agreements. In addition, customers can be beneficiaries of a
master source code escrow, pursuant to which the source code for Costpoint and
System 1 products will be released to end users in the event the Company or its
assignee is unable or unwilling to continue to support these products. The
provision of source code to the Company's customers may increase the likelihood
of misappropriation or other misuse of the Company's intellectual property.
The Company licenses from third parties, generally on a nonexclusive basis,
certain software development tools that the Company utilizes in the development
of its products and certain application software that the Company incorporates
into its products. Third parties also license to the Company or its customers
certain relational database software used in conjunction with the Company's
products. See "Business -- Products -- Third-Party Products." Accordingly, the
Company is dependent upon such third parties' abilities to deliver quality
products, to correct errors, to support their current products, to develop new
and enhanced products on a timely and cost-effective basis and to respond to
emerging industry standards and other technological changes. Should these
third-party development tools or software products become unavailable, or should
their developers fail to adequately support or enhance them, the Company would
be required to rewrite its products using different development tools or replace
the functionality provided by the third-party software currently used in and
licensed with its products. Although the Company believes that other development
tools and application and database software with comparable functionality are
currently available from other third parties, there can be no assurance that
replacement products could be obtained when needed. In addition, there can be no
assurance that the Company could successfully rewrite its products using
different development tools or that it would not encounter substantial delays in
doing so. The inability to rewrite its products using different development
tools on a timely and cost-effective basis or the loss of, or any significant
38
<PAGE> 40
delay in the replacement of, the functionality provided by the third-party
software could have a material adverse effect on the Company's business,
operating results and financial condition. While it may be necessary or
desirable in the future to obtain other licenses relating to one or more of the
Company's products or relating to current or future technologies, there can be
no assurance that the Company will be able to do so on commercially reasonable
terms or at all.
There are currently no claims pending against the Company relating to the
infringement of any proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim infringement by the
Company of their intellectual property rights. Deltek expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources or cause delays
in the delivery or implementation of the Company's products. In addition, such
claims could require the Company to discontinue the use of certain software
codes or processes, to cease the manufacture, use and sale of infringing
products, to incur significant litigation costs and expenses and to develop
non-infringing technology or to obtain licenses to the alleged infringing
technology. There can be no assurance that the Company would be able to develop
alternative technologies or to obtain such licenses or, if a license were
obtainable, that the terms would be commercially acceptable to the Company. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
could be materially adversely affected.
EMPLOYEES
As of December 31 1996, the Company had 260 full-time employees, including
128 employees primarily engaged in product development and quality assurance, 91
in customer support and training activities, 24 in sales and marketing, and 17
in finance and administration. None of the Company's employees is represented by
a labor union or is subject to a collective bargaining agreement. Deltek has
never experienced a work stoppage and believes its employee relations are good.
The success of the Company depends in large part upon its ability to
recruit and retain exceptional employees, particularly highly skilled product
developers and system consultants. Deltek will likely experience significant
competition and difficulties in recruiting such personnel.
FACILITIES
Deltek's corporate headquarters, its principal administrative, product
development, sales and marketing operations and its principal customer training
center are located in 60,329 square feet of office space in a building in
McLean, Virginia which the Company occupies under leases expiring in March 2002,
subject to the Company's right to extend the lease term by one or three years.
The Company has agreed to lease an additional 3,638 square feet beginning in
September 1997 and an additional 9,296 square feet or 11,927 or 13,901 square
feet (at the option of the landlord) beginning in approximately April 1998. The
annual lease rate until April 1997, is $19.67 per square foot. The annual lease
rate increases to $20.02 per square foot in April 1997 and by 2.75% each year
thereafter. Deltek also leases approximately 4,000 square feet in Denver,
Colorado, at an annual lease rate of $15.00 per square foot, under a lease
expiring in January 1998 and 2,200 square feet in San Jose, California, at an
annual lease rate of $20.91 per square foot, under a lease expiring in February
1997. As of December 31, 1996 the Company's aggregate annual rental expense for
its facilities was $990,000. In February 1997, the Company will relocate its San
Jose office to a different building, in which the Company will lease 4,855
square feet at an annual lease rate of $23.45 per square foot, under a lease
expiring in January 2002. Deltek believes that its existing facilities and
offices are adequate to meet its current needs and that, should it be needed,
suitable additional or alternative space will be available in the future on
commercially reasonable terms.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- ---------------------------------------------
<S> <C> <C>
Kenneth E. deLaski....... 38 President, Chief Executive Officer and
Director
Donald deLaski........... 64 Chairman of the Board of Directors and
Treasurer
Eric F. Brown............ 32 Executive Vice President, Technical
Operations
Johnny C. Cheng.......... 38 Vice President, Materials Management Product
Group
Donald G. Craft.......... 44 Vice President, Client Services
Dien Hoang Do............ 44 Vice President, Technology
Thomas W. Dudenhoefer.... 49 Vice President, Sales
Alan R. Stewart.......... 42 Chief Financial Officer and Secretary
Robert E. Gregg.......... 49 Director
Darrell J. Oyer.......... 56 Director Nominee
</TABLE>
Kenneth E. deLaski was a co-founder of the Company in November 1983 and has
served as a director since its inception. Mr. deLaski also has served as the
Company's President since May 1990 and as its Chief Executive Officer since
February 1996. From May 1990 to February 1996, he served as the Company's Chief
Operating Officer. Mr. deLaski is a certified public accountant. Kenneth E.
deLaski is the son of Donald deLaski, Chairman of the Board of Directors and
Treasurer of the Company.
Donald deLaski was a co-founder of the Company in November 1983 and has
served as Chairman of the Board of Directors and Treasurer since its inception.
Mr. deLaski also served as the Company's Chief Executive Officer from its
inception until February 1996. Mr. deLaski is a certified public accountant.
Donald deLaski is the father of Kenneth E. deLaski, President and Chief
Executive Officer of the Company.
Eric F. Brown was a co-founder of the Company in November 1983. He has
served as the Company's Vice President, Technical Operations since May 1990, and
as Executive Vice President since January 1997. Prior to May 1990, Mr. Brown
held various technical and management positions with the Company, including
management of the Company's Technical Services Division, which provides custom
programming services to the Company's customers, and various of the Company's
product groups responsible for development and maintenance of the Company's core
software products.
Johnny C. Cheng joined the Company in December 1987. He has served as the
Company's Vice President, Materials Management Product Group since May 1994, and
is responsible for the design, development and support of the Company's
materials management software products. From December 1987 to May 1994, Mr.
Cheng was employed as a senior system consultant responsible for implementing
the Company's software systems at customer facilities. Mr. Cheng is a certified
public accountant.
Donald G. Craft joined the Company in September 1986. He has served as the
Company's Vice President, Client Services since October 1994, and is responsible
for all of the Company's accounting consultants and telephone support personnel.
From January 1991 to October 1994, Mr. Craft served as the Company's Director of
Client Services. Mr. Craft successfully completed the National Uniform Certified
Public Accountant Examination.
Dien Hoang Do joined the Company in October 1987. He has served as the
Company's Vice President, Technology since January 1995, and is responsible for
the Company's research and development. From October 1987 to January 1995, Mr.
Do held various technical positions with the Company.
Thomas W. Dudenhoefer joined the Company in April 1988. He has served as
the Company's Vice President, Sales since January 1997. From April 1988 to March
1992, Mr. Dudenhoefer was employed as an account manager. From March 1992 to
January 1997, he served as Sales Manager.
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Alan R. Stewart joined the Company in July 1992 as Chief Financial Officer
and has served as its Secretary since February 1996. From March 1991 until July
1992, he was employed as Director of Accounting at BTG, Inc., a government
contractor. Prior to March 1991, Mr. Stewart held positions as a senior
accountant with Touche Ross and Co., as assistant Controller of C3, Inc. and as
Controller and Treasurer of Tempest Technologies, Inc. Mr. Stewart is a
certified public accountant.
Robert E. Gregg has served as a Director of the Company since September
1986. He has been a shareholder in Hazel & Thomas, P.C., counsel to the Company,
since Hazel & Thomas' inception in 1987.
Darrell J. Oyer has agreed to become a director of the Company immediately
following the closing of this offering. Since June 1991, Mr. Oyer has served as
President of Darrell J. Oyer and Company, a consulting company. Mr. Oyer is a
certified public accountant.
As of the date of this Prospectus, there are two vacancies on the Board of
Directors, one of which will be filled by Mr. Oyer promptly following the
closing of this offering and the other of which the Company intends to fill
within 90 days following the date of this Prospectus.
Deltek's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full-time
employee of the Company. Other than the relationship between Donald deLaski and
Kenneth E. deLaski, there are no family relationships between any director or
executive officer of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors intends to establish an Audit Committee
and a Compensation Committee. The Audit Committee will be responsible for
reviewing with management the financial controls, accounting, credit and
reporting activities of the Company. The Audit Committee will review the
qualifications of the Company's independent auditors, will make recommendations
to the Board of Directors regarding the selection of independent auditors, will
review the scope, fees and results of any audit and will review non-audit
services and related fees provided by the independent auditors. The members of
the Audit Committee have not yet been appointed. A majority of the members of
the Audit Committee will be independent directors. The Compensation Committee
will be responsible for the administration of all salary and incentive
compensation plans for the officers and key employees of the Company, including
bonuses. The Compensation Committee will also administer the Company's 1996
Stock Option Plan and 1996 Employee Stock Purchase Plan. The members of the
Compensation Committee have not been appointed. A majority of the members of the
Compensation Committee will be independent directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee prior to this offering.
Accordingly, the Board of Directors made all decisions concerning executive
officer compensation.
DIRECTOR COMPENSATION
To date, directors have not received any cash compensation for their
services as members of the Board of Directors. Effective upon the completion of
this offering, directors who are not employees of the Company will receive
$1,000 for each board or committee meeting attended in person and $750 for each
such meeting attended telephonically and will be reimbursed for travel expenses
incurred in connection with attending such meetings. Each of the directors who
are not employees of the Company will be granted a nonqualified option to
purchase 5,000 shares of the Company's Common Stock at the initial public
offering price under the Company's 1996 Stock Option Plan. Directors who are
employees of the Company will receive no additional cash compensation for their
services as members of the Board of Directors or committees thereof other than
reimbursement for travel expenses incurred in connection with attending board
and committee meetings.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth information concerning the compensation
earned during the year ended December 31, 1996 by the Company's Chief Executive
Officer and each of the Company's other four most highly compensated executive
officers (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ---------------
-------------- OPTIONS GRANTED ALL OTHER
NAME AND PRINCIPAL POSITION SALARY (SHARES) COMPENSATION(1)
- ------------------------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Kenneth E. deLaski......................... $156,667 -- $ 7,493(2)
President and Chief Executive Officer
Dien Hoang Do.............................. 136,696 6,000 4,000(3)
Vice President, Technology
Donald deLaski............................. 135,013 -- 6,607(4)
Chairman and Treasurer
Eric F. Brown.............................. 126,667 30,000 12,011(5)
Vice President, Technical Operations
Johnny C. Cheng............................ 119,118 6,000 4,000(3)
Vice President, Materials Management
Product Group
</TABLE>
- ---------------
(1) Does not include pro rata distributions of S Corporation dividends to the
individual as a shareholder. See "Prior S Corporation Status" and "Dividend
Policy."
(2) Represents premiums and benefits of $3,493 paid under medical insurance and
benefit plans and a 401(k) plan profit sharing contribution of $4,000.
(3) Represents a 401(k) plan profit sharing contribution.
(4) Represents premiums and benefits of $2,607 paid under medical insurance and
benefit plans and a 401(k) plan profit sharing contribution of $4,000.
(5) Represents premiums and benefits of $8,011 paid under medical insurance and
benefit plans and a 401(k) plan profit sharing contribution of $4,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning grants of options to
purchase the Company's Common Stock made during the year ended December 31, 1996
to the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES OF
NUMBER OF STOCK PRICE
SHARES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(2)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR SHARE(1) DATE 5% 10%
- --------------------- ---------- --------------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Kenneth E. deLaski... -- -- -- -- -- --
Dien Hoang Do........ 6,000 0.9% $ 4.00 4/1/06 $15,093 $ 38,250
Donald deLaski....... -- -- -- -- -- --
Eric F. Brown........ 30,000 4.3 4.00 4/1/06 75,467 191,249
Johnny C. Cheng...... 6,000 0.9 4.00 4/1/06 15,093 38,250
</TABLE>
- ---------------
(1) The Company granted options to purchase an aggregate of 693,000 shares of
the Company's Common Stock to employees during the year ended December 31,
1996.
42
<PAGE> 44
(2) The potential realizable value is based on the term of the option at the
time of grant (ten years). Potential gains are net of the exercise price but
before taxes associated with the exercise. Amounts represent hypothetical
gains that could be achieved for the respective options if exercised at the
end of the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of the future Common Stock price. Actual gains, if any, on stock
option exercises are dependant on the future financial performance of the
Company, overall market conditions and the option holders' continued
employment through the vesting period. This table does not take into account
any appreciation in the price of the Common Stock from the date of grant to
the date of this Prospectus.
OPTION EXERCISES AND 1996 YEAR END OPTION VALUES
The following table sets forth information concerning the exercise of stock
options during the year ended December 31, 1996 and the value of options held as
of such date by the Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT DECEMBER 31, 1996 DECEMBER 31, 1996(2)
UPON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- --------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth E. deLaski.... -- -- -- -- -- --
Dien Hoang Do......... 4,500 $47,363 -- 16,500 -- $ 152,394
Donald deLaski........ -- -- -- -- -- --
Eric F. Brown......... -- -- -- 30,000 -- 210,000
Johnny C. Cheng....... 3,000 31,450 -- 15,000 -- 136,350
</TABLE>
- ---------------
(1) "Value Realized" represents the fair market value of the underlying Common
Stock on the exercise date minus the aggregate exercise price of such
options. For purposes of this calculation, the fair market value of the
Company's Common Stock as of December 31, 1996 of $11.00 per share, as
determined by the Board of Directors, was used.
(2) Based upon the fair market value of the Company's Common Stock as of
December 31, 1996 of $11.00 per share, as determined by the Board of
Directors, minus the aggregate exercise price of such options.
STOCK PLANS
1996 STOCK OPTION PLAN
Deltek's 1996 Stock Option Plan (the "1996 Option Plan") was adopted by the
Company's Board of Directors in November 1996 and approved by the Company's
shareholders in December 1996. A total of 900,000 shares of Common Stock have
been reserved for issuance under the 1996 Option Plan. The 1996 Option Plan will
be administered by the Board of Directors or a committee thereof. The 1996
Option Plan provides for grants of "incentive stock options," within the meaning
of Section 422 of the Code, to employees (including officers and employee
directors), and for grants of nonstatutory options to employees, non-employee
directors and consultants. The 1996 Option Plan will terminate in December 2006,
unless terminated sooner by the Board of Directors.
The exercise price of stock options granted under the 1996 Option Plan must
be not less than the fair market value of the Common Stock on the date of grant.
With respect to any optionee who owns stock representing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option must be equal to at least 110% of
the fair market value of the Common Stock on the date of grant, and the term of
the option must not exceed five years. The terms of all other options may not
exceed ten years. The aggregate fair market value of Common Stock (determined as
of the date of the option grant) for which an incentive stock option may for the
first time become exercisable in any calendar year may not exceed $100,000. The
Board of Directors or any committee administering the 1996 Option Plan has
discretion to determine exercise schedules and vesting requirements, if any, of
all option grants under the 1996 Option Plan.
43
<PAGE> 45
As of December 31, 1996, no options had been granted under the 1996 Option
Plan, and all 900,000 shares remained available for future grants. Between
January 1, 1997 and the date of this Prospectus, options to purchase 109,000
shares were granted under the 1996 Option Plan, at an exercise price of $11.00
per share.
EMPLOYEE TIME ACCELERATED STOCK OPTION PLAN
Deltek's Time Accelerated Stock Option Plan (the "Accelerated Plan") was
adopted by the Company's Board of Directors and approved by its shareholders in
April 1996. A total of 1,500,000 shares of Common Stock originally were reserved
for issuance under the Accelerated Plan. In December 1996, the Company's Board
of Directors reduced the number of shares of Common Stock reserved for issuance
under the Accelerated Plan to 679,500, the number of shares of Common Stock
issuable upon the exercise of options then outstanding. The Accelerated Plan
provides for grants of nonstatutory options to key employees of the Company. The
Accelerated Plan was discontinued at the time of the adoption of the 1996 Option
Plan, and no additional options will be granted under the Accelerated Plan.
Options previously granted under the Accelerated Plan will continue to be
governed by the terms of the Accelerated Plan, which will be administered by the
Board of Directors.
The exercise price of options granted under the Accelerated Plan must be
not less than the fair market value of the Common Stock on the date of grant.
The term of options granted under the Accelerated Plan is ten years, subject to
certain exceptions. All of the options granted under the Accelerated Plan become
exercisable on January 1, 2004. However, upon the occurrence of certain events,
including a public offering of the Company's Common Stock, such options will
thereafter become exercisable pursuant to a five-year vesting schedule beginning
on the date of grant. Any options that are fully vested at the time an
optionee's employment with the Company terminates for any reason (other than
death, disability or retirement) terminate three months after the date of
termination unless earlier exercised.
As of December 31, 1996, options to purchase 679,500 shares of Common
Stock, at a weighted average exercise price of $4.00 per share, were outstanding
under the Accelerated Plan. None of such outstanding options were vested.
1987 EMPLOYEE STOCK OPTION PLAN
Deltek's 1987 Employee Stock Option Plan (the "1987 Option Plan") was
adopted by the Company's Board of Directors and approved by its shareholders in
December 1987. A total of 900,000 shares of Common Stock originally were
reserved for issuance under the 1987 Option Plan. In December 1996, the
Company's Board of Directors reduced the number shares of Common Stock reserved
for issuance under the 1987 Option Plan to 388,500, the number of shares of
Common Stock issuable upon the exercise of options outstanding as of September
30, 1996. The 1987 Option Plan provides for grants of nonstatutory options to
key employees of the Company. The 1987 Option Plan was discontinued at the time
of the adoption of the 1996 Option Plan, and no additional options will be
granted under the 1987 Option Plan. Options previously granted under the 1987
Option Plan will continue to be governed by the terms of the 1987 Option Plan,
which will be administered by the Board of Directors.
The exercise price of options granted under the 1987 Option Plan is based
on the book value of the Common Stock at the end of the fiscal year immediately
prior to the year in which the option is granted, as reflected in the Company's
audited financial statements, reduced by any dividend declared by the Company
with respect to the previous fiscal year. The term of options granted under the
1987 Option Plan is ten years, subject to certain exceptions. Generally, options
granted under the 1987 Option Plan become exercisable pursuant to a five-year
vesting schedule provided the optionee remains employed full time by the Company
and are subject to a right of repurchase by the Company upon the termination of
the optionee's employment.
As of December 31, 1996, options to purchase 379,500 shares of Common
Stock, at a weighted average exercise price of $0.40 per share, were outstanding
under the 1987 Option Plan. Options to purchase 259,200 of such shares were
fully vested as of December 31, 1996. Assuming all of the optionees remain
continually employed by the Company, the remaining unvested options will become
fully vested by December 31, 1998.
44
<PAGE> 46
1996 EMPLOYEE STOCK PURCHASE PLAN
Deltek's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in November 1996 and approved by its
shareholders in December 1996. A total of 400,000 shares of Common Stock are
reserved for issuance under the Purchase Plan. The Purchase Plan, which is
intended to qualify under Section 423 of the Code, will be administered by the
Compensation Committee of the Board of Directors. Employees (including officers
and employee directors of the Company) are eligible to participate in the
Purchase Plan if they are customarily employed for more than 20 hours per week
five months per year. The Purchase Plan will be implemented during sequential
six-month offering periods. Deltek has not yet offered or sold shares of Common
Stock to employees pursuant to the Purchase Plan, but intends to initiate the
first offering under the Purchase Plan on the date of this offering. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of an employee's compensation. The
price at which stock may be purchased under the Purchase Plan is equal to 85% of
the lower of the fair market value of the Common Stock on the first day of the
offering period or the last day of the offering period. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of a participant's employment
with the Company. In addition, participants may not purchase shares of Common
Stock having a value (measured at the beginning of the offering period) greater
than $25,000 in any calendar year.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Article 9 of the Virginia Stock Corporation Act (the "VSCA") provides
limitations on damages payable by officers and directors, except in cases of
willful misconduct or knowing violation of criminal law or any federal or state
securities law. Article 10 of the VSCA allows, in general, for indemnification
in certain circumstances, by a corporation of any person threatened with or made
a party to any action, suit or proceeding by reason of the fact that he or she
is, or was, a director, officer, employee or agent of such corporation.
As allowed by Article 9 of the VSCA the Company's Articles of Incorporation
eliminate the liability of the officers and directors of the Company for
monetary damages in any proceeding brought by or in the right of the Company or
brought by or on behalf of shareholders of the Company except in cases of
willful misconduct or a knowing violation of criminal law or any federal or
state securities law. As allowed by Article 10 of the VSCA, the Company's
Articles of Incorporation also provide for mandatory indemnification of any
director or officer of the Company who is, was, or is threatened to be made a
party to a proceeding (including a proceeding by or in the right of the Company)
because (i) he or she is or was a director or officer of the Company or (ii) he
or she is or was serving the Company or other legal entity in any capacity at
the request of the Company while a director or officer of the Company, against
all liabilities and expenses incurred in connection with such proceeding, except
such liabilities as are incurred because of such individual's willful misconduct
or knowing violation of the criminal law. In addition the Company's Articles of
Incorporation expressly authorize the Company to enter into agreements to
indemnify its officers and directors to the fullest extent permitted by the
Articles of Incorporation and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified. The Company
intends to enter into agreements setting forth certain procedures and other
conditions applicable to claims for indemnification pursuant to the Company's
Articles of Incorporation and agreeing, subject to certain limitations, to
obtain and maintain directors' and officers' liability insurance coverage for
its directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employer or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a demand for such indemnification.
45
<PAGE> 47
CERTAIN TRANSACTIONS
Deltek and all of its current shareholders intend to enter into a Tax
Indemnification Agreement relating to their respective income tax liabilities
prior to the offering. The Tax Indemnification Agreement generally provides
that, subject to certain exceptions, the current shareholders will be
responsible for any federal and state income taxes imposed upon the Company for
all taxable periods ending prior to the Termination Date (other than state
income taxes in states where the Company has not elected S Corporation status)
and the Company will be responsible for all federal and state income taxes
arising on or after the Termination Date. Because the Company will be fully
subject to corporate income taxation on and after the Termination Date the
reallocation of income and deductions between the period during which the
Company was treated as an S Corporation and the period during which the Company
will be subject to corporate income taxation may increase the taxable income of
one party while decreasing that of another party. Accordingly, subject to
certain limitations, the Tax Indemnification Agreement generally provides that
the current shareholders will be indemnified by the Company with respect to
federal and state income taxes shifted from a Company taxable year subsequent to
the Termination Date to a taxable year in which the Company was an S
Corporation, and the Company will be indemnified by the current shareholders
with respect to federal and state income taxes shifted from an S Corporation
taxable year to a Company taxable year subsequent to the Termination Date. See
"Prior S Corporation Status."
Robert E. Gregg, a director of the Company, is a shareholder in Hazel &
Thomas, P.C., a law firm that the Company has retained. The legal fees paid to
Hazel & Thomas by the Company did not exceed 5% of Hazel & Thomas' gross
revenues during the firm's last full fiscal year.
Deltek intends to enter into indemnification agreements with each of its
executive officers and directors. See "-- Limitation of Liability and
Indemnification."
Deltek believes that all of the foregoing transactions were on terms no
less favorable to the Company than would be obtained from unrelated third
parties. Any future transactions between the Company and its executive officers,
directors and affiliates will be on terms no less favorable to the Company than
can be obtained from unaffiliated third parties, and any material transactions
with any such person will be approved by a majority of the members of the
Company's Board of Directors and by a majority of the disinterested members of
the Company's Board of Directors.
46
<PAGE> 48
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1996, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by: (i) each
of the Named Executive Officers; (ii) each of the Company's directors; (iii) all
directors and executive officers as a group; (iv) each other person known by the
Company to own beneficially more than 5% of the Company's Common Stock; and (v)
each Selling Shareholder.
<TABLE>
<CAPTION>
SHARE BENEFICIALLY SHARES BENEFICIALLY OWNED
OWNED PRIOR AFTER
TO THE OFFERING (1) THE OFFERING(1)(2)
-------------------- NUMBER OF SHARES --------------------------
BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ----------------------------------------- ---------- ------- ---------------- ---------------- -------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Kenneth E. deLaski(3).................. 5,550,000 36.6% 330,000 5,220,000 30.9%
Donald deLaski(3)...................... 5,100,000 33.6 327,200 4,772,800 28.3
Eric F. Brown(3)....................... 525,000 3.5 33,000 492,000 2.9
Johnny C. and Emily Cheng.............. 36,000 * -- 36,000 *
Donald G. and Monique H. Craft(4)...... 36,000 * 3,300 32,700 *
Dien Hoang and Thanh Hoang Do.......... 34,500 * -- 34,500 *
Robert E. Gregg........................ -- -- -- -- --
Darrell J. Oyer........................ -- -- -- -- --
All directors, director nominees and
executive officers as a group (9
persons)(5)......................... 11,293,500 74.5 693,500 10,600,000 62.8
OTHER 5% SHAREHOLDERS:
Onae Trust, R.A. Jacobs, Trustee....... 1,515,000 10.0% 200,000 1,315,000 7.8%
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, NY 10005-1413
OTHER SELLING SHAREHOLDERS:
Peter S. Novick........................ 735,000 4.8% 73,500 661,500 3.9%
David L. deLaski....................... 225,000 1.5 22,500 202,500 1.2
Edward R. and Kathleen Grubb........... 225,000 1.5 22,500 202,500 1.2
Nancy A. Drake......................... 150,000 * 120,000 30,000 *
Gerard L. Kelleher..................... 150,000 * 15,000 135,000 *
Mary B. Moore.......................... 135,000 * 13,500 121,500 *
Ellen Martin........................... 127,500 * 12,750 114,750 *
Dennis P. Barrow....................... 127,500 * 12,750 114,750 *
Joseph F. Bozovich..................... 102,000 * 8,000 94,000 *
Richard A. Darr........................ 30,000 * 3,000 27,000 *
Thomas W. Dudenhoefer.................. 30,000 * 3,000 27,000 *
</TABLE>
- ---------------
* Represents less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable, or will become exercisable within 60 days after
December 31, 1996, are deemed outstanding. Such shares, however, are not
deemed outstanding for purposes of computing the percentage ownership of any
other person. Unless otherwise indicated in the footnotes to this table, the
persons and entities named in the table have sole voting and sole investment
power with respect to all shares
47
<PAGE> 49
beneficially owned, subject to community property laws where applicable.
Unless otherwise indicated, the address of each of the individuals listed in
the table is: c/o Deltek Systems, Inc., 8280 Greensboro Drive, McLean,
Virginia 22102.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Should the Underwriters' over-allotment option be exercised in full, (i) the
number of shares being offered would be 450,000 for Kenneth E. deLaski,
632,200 for Donald deLaski and 43,000 for Eric F. Brown (ii) the number of
shares beneficially owned after the offering would be 5,100,000 for Kenneth
E. deLaski, 4,467,800 for Donald deLaski and 482,000 for Eric F. Brown and
(iii) the percentage of shares beneficially owned after the offering would
be 29.5% for Kenneth E. deLaski, 25.8% for Donald deLaski and 2.8% for Eric
Brown.
(4) Includes 3,000 shares issuable upon exercise of stock options which are
exercisable and fully vested within 60 days of December 31, 1996.
(5) Includes 15,000 shares issuable upon exercise of stock options which are
exercisable and fully vested within 60 days of December 31, 1996.
48
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 45,000,000 shares
of Common Stock, $.001 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Articles of Incorporation,
as amended, which is included as an exhibit to the Registration Statement of
which this Prospectus is a part.
COMMON STOCK
As of December 31, 1996, there were 15,167,250 shares of Common Stock
outstanding held of record by 35 shareholders. The holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of shareholders. Accordingly, holders of a majority of the shares of Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any outstanding Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in the assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, conversion or redemption rights. All
of the outstanding shares of Common Stock are, and the shares to be sold in this
offering when issued and paid for will be, fully paid and non-assessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of 2,000,000
shares of undesignated Preferred Stock. Deltek's Board of Directors has the
authority, without further action by the shareholders, to issue such Preferred
Stock in one or more series and to fix the designations, powers, preferences,
privileges and relative participating, optional or special rights and the
qualifications, limitations or restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation
preferences of each such series, any or all of which may be greater than the
rights of the Common Stock. It is impossible to state the actual effect of the
issuance of any shares of preferred stock upon the rights of holders. Preferred
Stock could thus be issued quickly with terms calculated to delay or prevent a
change in control of the Company or make removal of management more difficult.
Additionally, the issuance of Preferred Stock may have the effect of decreasing
the market price of the Common Stock. At present, the Company has no plans to
issue any of the Preferred Stock.
ANTI-TAKEOVER EFFECTS OF VIRGINIA LAW AND ARTICLES OF INCORPORATION
The Company is a Virginia corporation and subject to the VSCA, which
contains certain anti-takeover provisions regulating affiliated transactions and
control share acquisitions and validating the adoption of shareholder rights
plans. In general, the affiliated transactions provisions prevent a Virginia
corporation from engaging in an "affiliated transaction" (as defined) with an
"interested shareholder" (generally defined as a person owning more than 10% of
any voting securities of the corporation) unless approved by a majority of the
"disinterested directors" (as defined) and the holders of at least two-thirds of
the outstanding voting stock not owned by the interested shareholder, subject to
certain exceptions. Under the control share acquisitions provisions of the VSCA,
shares acquired in a "control share acquisition" (defined generally as
transactions that increase the voting strength of the person acquiring such
shares above certain thresholds in director elections) generally have no voting
rights unless granted by a majority of the outstanding voting stock not owned by
the such acquiring person. If such voting rights are granted and the acquiring
person controls 50% or more of the voting power, all shareholders, other than
the acquiring person, are entitled to receive "fair value" (as defined) for
their shares. If such voting rights are not granted, the corporation may, if
authorized by its articles of incorporation or bylaws, purchase the acquiring
person's shares at their cost to the acquiring person. Deltek's Bylaws authorize
such a purchase. Finally, the shareholder rights plan provisions of the VSCA
permit
49
<PAGE> 51
the Board of Directors to adopt a shareholder rights plan that could render a
hostile takeover prohibitively expensive if the Board determines that such a
takeover is not in the best interests of the corporation. The Board of Directors
has no present plan for the adoption of any shareholder rights plan and does not
intend to adopt any such plan except on terms that the Board of Directors deems
to be in the best interests of the Company and its shareholders. The existence
of the shareholder rights plan provision of the VSCA, as well as the affiliated
transactions and control share acquisition provisions could delay or prevent a
change in control of the Company, impede a merger, consolidation or other
business combination involving the Company or discourage a potential acquiror
from making a tender offer or otherwise attempting to obtain control of the
Company.
Deltek's Articles of Incorporation provides that its Board of Directors are
divided into three classes, with each class serving a staggered three-year term.
The classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
the Company and may maintain the incumbency of the Board of Directors, as it
generally makes it more difficult for shareholders to replace a majority of the
directors. The Company's Article of Incorporation also does not provide for
cumulative voting rights in the election of directors. These and other
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of the Company. The amendment of any of these
provisions would require approval by holders of 66 2/3% or more of the
outstanding shares of the Company's stock entitled to vote thereon.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is The
First National Bank of Boston.
LISTING
Deltek has applied to have its Common Stock approved for quotation on The
Nasdaq National Market under the trading symbol "DLTK."
50
<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the Common
Stock of the Company, and there can be no assurance that a significant public
market for the Common Stock will be developed or sustained after the offering.
Sales of substantial amounts of Common Stock in the public market after this
offering could adversely affect the trading price of the Common Stock.
Upon completion of this offering, the Company will have outstanding
16,867,250 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options subsequent to
December 31, 1996. Of these shares, the 2,900,000 shares offered hereby will be
freely tradeable in the public market without restriction under the Securities
Act, unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act.
The remaining 13,967,250 shares of Common Stock outstanding upon completion
of this offering will be "restricted securities" as that term is defined in Rule
144 ("Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144 or 701 under the Securities Act, which are summarized below. Sales of
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock.
Pursuant to certain "lock-up" agreements, all of the officers, directors
and certain other holders of Common Stock, who collectively hold approximately
13,279,500 shares, have agreed not to offer, sell, contract to sell or grant any
option to purchase or otherwise dispose of such shares for a period of 180 days
from the date of this Prospectus without the prior written consent of Montgomery
Securities. Taking into account these lock-up agreements, the number of
Restricted Shares that will be available for sale in the public market, subject
in some cases to the volume and other restrictions of Rule 144, will be as
follows: (i) approximately 170,250 shares will be eligible for immediate sale as
of the date of this Prospectus, (ii) approximately 93,000 additional shares will
be eligible for sale beginning 90 days after the date of this Prospectus
pursuant to Rules 144 and 701, and (iii) approximately 13,279,500 additional
shares will be eligible for sale beginning 180 days after the date of this
Prospectus. Approximately 424,500 remaining Restricted Shares will not be
eligible for sale pursuant to Rule 144 until the expiration of their applicable
two-year holding periods, which will expire between January 1, 1998 and
September 15, 1998.
Subject to lock-up agreements, certain shares issued upon exercise of
options granted by the Company prior to the date of this Prospectus will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of such shares in reliance upon Rule
144 but without compliance with certain restrictions, including the holding
period requirement, imposed under Rule 144. In general, under Rule 144 as
currently in effect, beginning 90 days after the date of this Prospectus, a
person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least two years (including the holding period of any
prior owner except an affiliate) would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock (approximately 168,673
shares immediately after this offering) or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain manner-of-sale and notice requirements and to the availability of
current public information about the Company. Under Rule 144(k), a person who is
not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale and who has beneficially owned the shares proposed to be
sold for at least three years (including the holding period of any prior owner
except an affiliate of the Company) is entitled to sell such shares without
complying with the manner-of-sale, public information, volume limitation or
notice provisions of Rule 144.
51
<PAGE> 53
Deltek has reserved an aggregate of 2,336,500 shares of Common Stock for
issuance pursuant to the Company's stock option and purchase plans. As of
December 31, 1996, options to purchase a total of 1,059,000 shares of Common
Stock were outstanding under the Company's stock option plans. The Company
intends to file registration statements on Form S-8 under the Securities Act
approximately 90 days after the date of this Prospectus to register an aggregate
of 1,300,000 shares of Common Stock issued or reserved for issuance under the
1996 Option Plan and the Purchase Plan. Shares of Common Stock issued under the
foregoing plans after the filing of such registration statements will be freely
tradeable in the public market, subject in the case of certain holders to the
Rule 144 limitations applicable to affiliates, the above-referenced lock-up
agreements with the Underwriters and vesting restrictions imposed by the
Company.
52
<PAGE> 54
UNDERWRITING
Montgomery Securities and William Blair & Company, L.L.P. (the
"Underwriters") have severally agreed, subject to the terms and conditions set
forth in the Underwriting Agreement, to purchase from the Company and the
Selling Shareholders the number of shares of Common Stock indicated below
opposite their respective names at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities.....................................................
William Blair & Company, L.L.P. ..........................................
Total........................................................... 2,900,000
</TABLE>
The Underwriters have advised the Company that they initially propose to
offer the Common Stock to the public on the terms set forth on the cover page of
this Prospectus. The Underwriters may allow to selected dealers a concession of
not more than $ per share, and the Underwriters may allow, and such
dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the public offering, the offering price and other
selling terms may be changed by the Underwriters. The Common Stock is offered
subject to receipt and acceptance by the Underwriters and to certain other
conditions, including the right to reject orders in whole or in part. The
Underwriters may offer the shares of Common Stock through a selling group.
Certain of the Selling Shareholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 435,000 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial 2,900,000 shares to be purchased by the Underwriters. To the extent the
Underwriters exercise this option, each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
53
<PAGE> 55
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
Deltek's officers and directors, the Selling Shareholders and certain other
holders of Common Stock, who collectively hold approximately 13,279,500 shares
of Common Stock, have agreed not to offer, sell, contract to sell or grant any
option to purchase or otherwise dispose of any shares of Common Stock of the
Company, any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock for a
period of 180 days from the date of this Prospectus without the prior written
consent of Montgomery Securities. Montgomery Securities may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to agreements not to sell. In addition, the Company has
agreed that, without the prior written consent of Montgomery Securities, for a
period of 180 days from the date of this Prospectus, the Company will not, other
than pursuant to the stock option plans and the Purchase Plan described in this
Prospectus, issue, offer, pledge, sell, grant options to purchase or otherwise
dispose of, directly or indirectly, any of the Company's equity securities or
any other securities convertible into or exchangeable with its Common Stock or
other equity securities.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gray Cary Ware & Freidenrich, A Professional Corporation, Palo Alto,
California. Certain legal matters relating to the offering will be passed upon
for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
Gray Cary Ware & Freidenrich, A Professional Corporation and Brobeck, Phleger &
Harrison LLP, will rely as to all matters of Virginia law on Hazel & Thomas,
P.C., Falls Church, Virginia, counsel to the Company.
EXPERTS
The audited financial statements of the Company for the three years ended
December 31, 1996 included in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report, and
are included herein in reliance upon the authority of said firm as experts in
giving such reports.
54
<PAGE> 56
ADDITIONAL INFORMATION
Deltek has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such reports
and other information filed with the Commission, may be inspected without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
Such reports and other information may also be inspected without charge at a Web
site maintained by the Commission. The address of such site is
http://www.sec.gov.
Deltek will furnish its stockholders with annual reports containing
financial statements audited by independent accountants and quarterly reports
for the first three quarters of each year containing unaudited financial
statements. This Prospectus includes trademarks, tradenames and service marks of
other companies.
55
<PAGE> 57
DELTEK SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1995 and 1996....................................... F-3
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996......... F-4
Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1994,
1995 and 1996....................................................................... F-5
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996......... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Deltek Systems, Inc.:
We have audited the accompanying balance sheets of Deltek Systems, Inc. (a
Virginia corporation), as of December 31, 1995 and 1996, and the related
statements of operations, changes in shareholders' equity, and cash flows for
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Deltek Systems, Inc., as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 21, 1997
F-2
<PAGE> 59
DELTEK SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
------------------- ------------
1995 1996 1996
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 4,393 $ 8,333 $ 8,333
Marketable securities.................................... 3,128 -- --
Accounts receivable, net of allowance for doubtful
accounts of $343 and $396, respectively............... 6,042 5,995 5,995
Inventories.............................................. 100 209 209
Prepaid expenses and other current assets................ 574 1,058 1,058
------ ------ ------
Total current assets............................. 14,237 15,595 15,595
------ ------ ------
Furniture, equipment, and leasehold improvements, at cost,
net of accumulated depreciation and amortization of
$1,630 and $2,168, respectively.......................... 1,299 1,878 1,878
------ ------ ------
Computer software development costs, at cost, net of
accumulated amortization of $1,232 and $1,810,
respectively............................................. 2,547 2,591 2,591
Other assets............................................... -- 138 138
------ ------ ------
Total assets..................................... $18,083 $20,202 $ 20,202
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................... $ 1,724 $ 1,908 $ 1,908
Accrued dividends payable................................ 2,594 -- 5,100
Short-term notes payable to shareholders................. -- -- 4,000
Deferred revenue......................................... 4,916 6,808 6,808
Deferred income taxes.................................... -- -- --
------ ------ ------
Total current liabilities........................ 9,234 8,716 17,816
------ ------ ------
Commitments (Note 6)
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; 45,000,000 shares
authorized; 15,050,250 and 15,167,250 shares issued
and outstanding at December 31, 1995 and 1996,
respectively.......................................... 15 15 15
Paid-in capital.......................................... 75 2,226 2,226
Retained earnings........................................ 8,736 9,965 865
Unrealized gain on marketable securities................. 23 -- --
------ ------ ------
8,849 12,206 3,106
------ ------ ------
Less -- Unearned compensation............................ -- 720 720
------ ------ ------
Total shareholders' equity....................... 8,849 11,486 2,386
------ ------ ------
Total liabilities and shareholders' equity....... $18,083 $20,202 $ 20,202
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 60
DELTEK SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
License fees.................................................... $ 7,360 $ 9,720 $12,545
Services........................................................ 12,545 15,154 20,362
Third-party equipment and software.............................. 1,451 1,975 1,873
------- ------- -------
21,356 26,849 34,780
------- ------- -------
Operating expenses:
Cost of software................................................ 766 893 1,318
Cost of services................................................ 4,171 5,151 8,043
Cost of third-party equipment and software...................... 1,054 1,580 1,536
Software development............................................ 3,877 4,934 6,674
Sales and marketing............................................. 1,852 2,743 3,460
General and administrative...................................... 1,593 1,875 2,283
Stock option compensation....................................... -- -- 867
Purchased in-process research and development................... -- -- 394
------- ------- -------
Total operating expenses................................ 13,313 17,176 24,575
------- ------- -------
Income from operations............................................ 8,043 9,673 10,205
Interest income................................................... 257 393 382
------- ------- -------
Income before state income taxes.................................. 8,300 10,066 10,587
Provision for state income taxes.................................. 65 45 93
------- ------- -------
Net income........................................................ $ 8,235 $10,021 $10,494
======= ======= =======
Pro forma statement of operations data (unaudited):
Income before provision for income taxes, as reported........... $ 8,300 $10,066 $10,587
Income tax provision............................................ 3,156 3,827 4,131
------- ------- -------
Net income...................................................... $ 5,144 $ 6,239 $ 6,456
======= ======= =======
Net income per share............................................ $ 0.33 $ 0.40 $ .41
======= ======= =======
Weighted average shares outstanding............................. 15,368 15,552 15,560
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 61
DELTEK SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
---------------------- GAIN ON TOTAL
PAR PAID-IN RETAINED MARKETABLE UNEARNED SHAREHOLDERS'
SHARES VALUE CAPITAL EARNINGS SECURITIES COMPENSATION EQUITY
---------- --------- ------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993...... 14,999,250 $15 $ 42 $ 5,709 $ -- $ -- $ 5,766
Cash dividends................ -- -- -- (7,186) -- -- (7,186)
Exercise of stock options..... 87,000 -- 20 -- -- -- 20
Common stock purchased and
retired.................... (67,500) -- -- (32) -- -- (32)
Net income.................... -- -- -- 8,235 -- -- 8,235
--
---------- ------ ------- ---- ----- -------
Balance, December 31, 1994...... 15,018,750 15 62 6,726 -- -- 6,803
Cash dividends................ -- -- -- (5,417) -- -- (5,417)
Accrued dividends payable..... -- -- -- (2,594) -- -- (2,594)
Exercise of stock options..... 31,500 -- 13 -- -- -- 13
Unrealized holding gain on
marketable securities...... -- -- -- -- 23 -- 23
Net income.................... -- -- -- 10,021 -- -- 10,021
--
---------- ------ ------- ---- ----- -------
Balance, December 31, 1995...... 15,050,250 15 75 8,736 23 -- 8,849
Cash dividends................ -- -- -- (9,265) -- -- (9,265)
Exercise of stock options..... 15,000 -- 7 -- -- -- 7
Acquisition of the Allegro
Group, Inc................. 102,000 -- 408 -- -- -- 408
Unrealized holding gain on
marketable securities...... -- -- -- -- (23) -- (23)
Conversion of book value plan
to fair value plan (Note
7)......................... -- -- 1,484 -- -- (468) 1,016
Issuance of stock options..... -- -- 252 -- -- (252) --
Net income.................... -- -- -- 10,494 -- -- 10,494
--
---------- ------ ------- ---- ----- -------
Balance, December 31, 1996...... 15,167,250 $15 $ 2,226 $ 9,965 $ -- $ (720) $11,486
========== == ====== ======= ==== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 62
DELTEK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 8,235 $ 10,021 $ 10,494
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization.............................. 768 665 1,116
Compensation, noncash...................................... -- -- 980
Purchased research and development, noncash charge......... -- -- 394
(Gain) loss on disposal of fixed assets.................... (7) 13 (13)
Accreted interest on marketable securities................. (30) (61) 61
Change in accounts receivable, net......................... (1,114) (1,889) 47
Change in prepaid expenses, inventories, and other current
assets................................................... (204) (15) (593)
Change in accounts payable and accrued expenses............ (157) 618 184
Change in deferred revenue................................. 2,142 1,319 1,794
------- ------- -------
Net cash provided by operating
activities.......................................... 9,633 10,671 14,464
------- ------- -------
Cash flows from investing activities:
Sale (purchase) of marketable securities...................... (2,006) (993) 3,067
Purchase of property and equipment............................ (516) (642) (1,117)
Capitalization of computer software development costs......... (1,411) (1,105) (622)
------- ------- -------
Net cash (used in) provided by investing activities... (3,933) (2,740) 1,328
------- ------- -------
Cash flows from financing activities:
Cash dividends paid to stockholders........................... (7,186) (5,417) (11,859)
Cash proceeds from exercise of stock options.................. 20 13 7
Common stock purchased and retired............................ (32) -- --
------- ------- -------
Net cash used in financing
activities.......................................... (7,198) (5,404) (11,852)
------- ------- -------
Net increase (decrease) in cash and cash equivalents............ (1,498) 2,527 3,940
Cash and cash equivalents, beginning
of year....................................................... 3,364 1,866 4,393
------- ------- -------
Cash and cash equivalents, end of year.......................... $ 1,866 $ 4,393 $ 8,333
======= ======= =======
Supplemental disclosure of cash flow information:
Allegro acquisition (Note 2).................................. -- -- --
Cash paid during the year for income taxes.................... $ 65 $ 45 $ 75
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 63
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENT
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Deltek Systems, Inc. (the "Company"), was incorporated in 1983 under the
laws of the Commonwealth of Virginia. The Company designs, develops, sells and
supports a family of integrated software products that provide project-oriented
businesses with tools to manage, operate and grow their operations. The
Company's family of software products consists of Costpoint, the Company's
advanced client/server, enterprise-level business software system designed for
project-oriented organizations; System 1, a DOS-based accounting and management
system designed primarily for organizations providing goods and services under
contracts with the federal government; Electronic Timesheet, an employee
timekeeping system; and Allegro, a project and resource management tool.
Recapitalization and Stock Split
On December 10, 1996, the Company amended its Articles of Incorporation to
increase the number of authorized shares of common stock to 45,000,000 and to
authorize 2,000,000 shares of undesignated preferred stock. The Company's Board
of Directors has the authority, without further action by the shareholders, to
issue such preferred stock in one or more series and to fix the terms and rights
of the preferred stock. Such actions by the Board of Directors could adversely
affect the voting power and other rights of the holders of common stock.
Preferred stock could thus be issued quickly with terms that could delay or
prevent a change in control of the Company or make removal of management more
difficult. At present, the Company has no plans to issue any of the preferred
stock.
On December 17, 1996, the Board of Directors effected a three-for-one stock
split by means of a stock dividend. The stock split has been reflected
retroactively in the financial statements for all periods presented.
Pro Forma Financial Information (Unaudited)
The pro forma financial information gives effect to a $9.1 million
distribution to the Company's shareholders, representing estimated undistributed
previously taxed S Corporation earnings as of December 31, 1996, assuming the
Company had terminated its S Corporation status as of that date. On a pro forma
basis, this amount is recorded as $5.1 million in accrued dividends payable and
$4.0 million in short-term notes payable. The deferred tax liability that would
have been recorded if the Company had terminated its S Corporation status as of
December 31, 1996 would not have been material. Pro forma net income is based on
the assumption that the Company's S Corporation status was terminated at the
beginning of each year.
Pro Forma Net Income Per Common Share
Net income per common and equivalent shares is based on the weighted
average equivalent shares outstanding during the period and assumes the dilutive
effect of all options as if they were outstanding for all periods presented
prior to the offering (using the treasury stock method and assuming a per share
price of $12.00). In accordance with SEC Staff Accounting Bulletin No. 83,
weighted average shares for periods prior to 1996 also include those options
which were granted within one year of the initial public offering date.
Primary earnings per share are not presented because the difference between
these amounts and the amounts presented is not material.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 64
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company grants perpetual licenses under a standard license agreement.
The Company historically has granted 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
(Note 5). For contracts that involve significant installment payments, the
Company also evaluates whether fees are fixed and determinable. If the fees are
not fixed and determinable, the Company defers the recognition of revenue until
the payments become due. Implementation and other consulting services are
provided on a time and materials basis, billed monthly or semi-monthly and
recognized as the services are performed. Telephone support and periodic
enhancements and updates are provided for maintenance fees that are payable
quarterly and initially represent between 15% and 20% of the related software
license fee on an annual basis. Revenue from quarterly maintenance and support
service is recognized over the term of the support agreement, which is generally
three months. Revenue from third-party equipment and software is derived from
the resale and sublicensing of third-party hardware and software products in
connection with the license and installation of the Company's systems and is
generally recognized upon delivery.
The American Institute of Certified Public Accountants (the "AICPA")
recently approved for exposure a draft Statement of Position (the "Exposure
Draft") that would supersede SOP 91-1, Software Revenue Recognition. The
Exposure Draft provides additional guidance to multiple elements: returns,
exchanges, and platform transfer rights; resellers; services; funded
software-development arrangements; and contract accounting. If approved, the
Exposure Draft would need to be implemented for years beginning after December
15, 1996. While the Company is still analyzing the Exposure Draft, it believes
that the proposed changes will not have a material adverse financial impact on
the Company.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Furniture, Equipment and Leasehold Improvements
Furniture and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, which are
generally three to five years. Leasehold improvements are amortized over the
shorter of the useful life of the asset or the lease term.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories consist principally of equipment purchased for resale and
software user manuals.
Capitalized Computer Software Development Costs
Computer software development costs for products are capitalized subsequent
to the establishment of technological feasibility, as evidenced by detailed
program designs. Capitalization ceases when the products are available for
general release to customers, at which time amortization of the capitalized
costs begins on a straight-line basis over the estimated lives of the products,
which are generally five years. Amortization expense of approximately $406,000,
$276,000, and $579,000 was recorded related to these costs during 1994, 1995,
and 1996, respectively, and is included in cost of software.
F-8
<PAGE> 65
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Marketable Securities
Effective January 1, 1994, the Company adopted the fair value method of
accounting for certain investments in debt and equity securities under Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The adoption of SFAS No. 115 had no
effect on the Company's financial position or results of operations in the year
ended December 31, 1994. At acquisition, debt and equity securities are
classified into three categories: held-to-maturity, available-for-sale, or
trading. At each reporting date, the appropriateness of the classifications is
reassessed.
Included in the balance sheet at December 31, 1995 are marketable
securities of approximately $3,103,000 that are U.S. Treasury securities
classified as available-for-sale and recorded at fair value. As of December 31,
1995, the Company recorded an unrealized gain of approximately $23,000 as a
separate component of shareholders' equity. No marketable securities were held
by the Company at December 31, 1996.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
marketable securities, and accounts receivable. The Company maintains cash and
cash equivalents with high credit quality financial institutions. Marketable
securities consist primarily of U.S. Treasury securities with original
maturities at date of purchase beyond three months. The credit risk with respect
to accounts receivable is generally diversified due to the large number of
entities comprising the Company's customer base. The Company performs ongoing
credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses. Actual losses and allowances have been
within management's expectations.
Fair Value of Financial Instruments
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes an obligation to deliver cash
or other financial instruments to a second party. The carrying amounts of
current assets and current liabilities in the accompanying financial statements
approximate fair value due to the short maturity of these instruments.
Income Taxes
The Company has elected to be treated as an S Corporation for federal
income tax purposes. Accordingly, income or loss is prorated among the
stockholders and reported on their individual income tax returns. The
accompanying statements include a provision for state income taxes related to
certain states that do not recognize S Corporation status for state income tax
purposes.
Income taxes are accounted for in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
computed based on the difference between the financial statement and tax basis
of assets and liabilities are measured by applying enacted tax rates and laws
for the taxable years in which those differences are expected to reverse. As of
December 31, 1995 and 1996, differences between the financial statement and tax
basis of assets and liabilities in states not recognizing S Corporation status
were insignificant. On a pro forma basis, the deferred tax liability that would
have been recorded if the Company had terminated its S Corporation status as of
December 31, 1996 would not have been material.
Impairment of Long-Lived Assets
The Company complies with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company
reviews its long-lived assets, including software development costs; property,
plant, and equipment; identifiable intangibles; and goodwill, for impairment
F-9
<PAGE> 66
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. To determine recoverability of its
long-lived assets, the Company evaluates the probability that future
undiscounted net cash flows, without interest charges, will be less than the
carrying amount of the assets. Impairment is measured at fair value.
2. ALLEGRO ACQUISITION:
On September 18, 1996, the Company acquired, in a tax-free exchange, from
The Allegro Group, Inc. ("Allegro"), substantially all of the assets relating
solely to Allegro's software business, and assumed certain related liabilities,
in exchange for 102,000 shares of the Company's common stock, valued at $4.00
per share. The Company recorded the acquisition using the purchase method of
accounting.
Upon evaluation, the Company assigned approximately $130,000 to intangible
assets and is amortizing this amount over five years. The Company assigned
$394,000 to in-process research and development and expensed this amount. In the
opinion of management, the acquired in-process research and development had not
yet reached technological feasibility and had no alternative future uses. The
Company recorded approximately $140,000 in assumed liabilities of Allegro,
primarily related to deferred consulting revenue.
In addition, the Company entered into a three-year employment agreement
beginning October 1, 1996, with the two principals of Allegro for a base salary
and incentive compensation based upon revenue and profit growth of the Allegro
division of the Company.
3. ACCOUNTS RECEIVABLE:
The Company periodically licenses its software to certain customers under
monthly installment plans. Unbilled accounts receivable that relate primarily to
installment sales were approximately $1,490,000 and $1,837,000 at December 31,
1995 and 1996, respectively. Installment plans extending longer than four months
are generally interest-bearing.
The Company holds a note receivable from a shareholder in the principal
amount of $100,000 which is due on September 17,1997 and bears interest at the
rate of 8.0% per annum, payable semi-monthly. Shares of the Company's common
stock serve as collateral for the note.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued wages and other employee benefits............................ $ 942 $1,045
Deferred rent credit................................................. 70 47
Accounts payable and other accrued expenses.......................... 712 816
------
$1,724 $1,908
======
</TABLE>
5. DEFERRED REVENUE:
The Company had deferred revenue of approximately $2,786,000 and $3,196,000
as of December 31, 1995 and 1996, respectively, attributable to the sales of
licenses of Costpoint software. The revenue related to Costpoint will be
recognized upon the expiration of the refund period, right of return, generally
60 to 90 days from the date of sale, and the fulfillment of any significant
vendor obligations (Note 1). Also included in deferred revenue is ongoing
software support and consulting and training services.
F-10
<PAGE> 67
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS:
Office Space Lease
The Company leases office space under noncancelable operating leases.
Minimum rental expense is recognized on a straight-line basis over the term of
the lease, regardless of when payments are due. Rent expense was approximately
$809,000 and $990,000 for the years ended December 31, 1995 and 1996,
respectively. The Company's primary lease expires in March, 2002.
As of December 31, 1996, the future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1997........................................................... $1,371
1998........................................................... 1,352
1999........................................................... 1,381
2000........................................................... 1,415
2001........................................................... 1,451
Thereafter..................................................... 346
------
$7,316
======
</TABLE>
Profit-Sharing Plan
The Company has a 401(k) profit-sharing plan covering all eligible
employees. Employees are eligible to participate in the plan after they have
completed six months of service. Once the eligibility requirement is satisfied,
employees may become participants on the earlier of the first day of the plan
year or the first day of the seventh month of the plan year coinciding with the
employees' eligibility. Company contributions vest ratably over five years. The
Board of Directors approved a contribution of 5% and 4% of eligible compensation
for 1995 and 1996, respectively. The Company's contribution for 1995 and 1996
was approximately $438,000 and $418,000, respectively.
7. EMPLOYEE STOCK OPTION PLANS:
1987 Employee Stock Option Plan
Prior to April 1, 1996, the Company's sole stock option plan was the 1987
Employee Stock Option Plan (the "Book Value Plan"), a nonqualified plan under
which 900,000 shares of common stock were originally reserved for issuance. In
December 1996, the Board of Directors reduced the number of shares of common
stock reserved for issuance under the Plan to equal the number of shares
issuable upon the exercise of options outstanding at September 30, 1996. Until
June 1996, the exercise price of options granted under the Book Value Plan was
based on the book value per share at the end of the fiscal year immediately
preceding the grant, reduced by any dividends declared by the Company related to
the previous year and the Company recorded compensation expense each year based
on the change in the formula price per share. Options are exercisable over ten
years, subject to a five-year vesting period.
Options granted pursuant to the Book Value Plan are generally
nontransferable. Under the provisions of the Book Value Plan, the Company may
decline to accept a notice of exercise of vested options if such action is
necessary to maintain compliance with the limitation on the number of
shareholders prescribed in the IRS regulations pertaining to S Corporations. The
transfer of shares issued pursuant to options granted under the Book Value Plan
is subject to the Company's right of first refusal. In addition, the Company has
the right, but not the obligation, to repurchase shares and vested options from
employees upon the termination of their employment. The Company's right to
prohibit the exercise of options, right of first refusal and repurchase right
terminate upon a sale of the Company or upon the initial public offering of the
Company's common stock.
F-11
<PAGE> 68
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1996, the Company amended the Book Value Plan to change the
exercise price of future options to be granted thereunder from a formula price
based on book value to the appraised fair market value of the underlying common
stock. This amendment requires the Company to pay the holder of a vested option
the difference between the then appraised fair value of the common stock and the
exercise price if the Company declines to permit the exercise of the option in
order to maintain its S Corporation status. This amendment also resulted in
changing the price paid for shares purchased by the Company upon the exercise of
its right of first refusal or its repurchase right to the appraised fair market
value of the common stock. As a result of these changes, the Company recorded a
non-recurring, non-cash charge to operations in the amount of $867,000,
representing the aggregate difference between the exercise price of outstanding
vested options and $4.00 per share, the appraised market value of the underlying
common stock at June 30, 1996. Additional compensation charges of $113,000 were
recorded during the six months ended December 31, 1996, and up to an additional
$468,000 of such charges will be recorded through December 31, 1998, as
outstanding options continue to vest under this plan.
Employee Time Accelerated Stock Option Plan
On April 1, 1996, the Company created the Employee Time Accelerated Stock
Option Plan (the "Accelerated Plan"), under which 1,500,000 shares of common
stock are reserved for issuance, and granted options thereunder to purchase
648,000 shares at an exercise price of $4.00 per share, the appraised value of
the common stock on the date of grant. Since the exercise price of these options
is equal to the appraised fair value of the common stock on the date of grant,
the Company recorded no compensation expense in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. These options vest 100% on January 1, 2004. However, in the event of
an acquisition or an initial public offering of the Company's common stock,
these options will vest ratably over a five year period from the date of grant.
Other provisions of the Accelerated Plan are consistent with the Book Value Plan
described above. The Company granted options to purchase 36,000 shares of the
Company's common stock, at an exercise price of $4.00 per share, on December 1,
1996. As the options vest, the Company will record up to $252,000 in
compensation expense, representing the aggregate difference between the $4.00
per share exercise price and $11.00, the low end of the range of the estimated
offering price in the Company's planned initial public offering. In December
1996, the Board of Directors reduced the number of shares of common stock
reserved for issuance under the Accelerated Plan to equal the number of shares
issuable upon the exercise of options outstanding at December 10, 1996.
1996 Stock Option Plan
The Company's Board of Directors and the shareholders of the Company
adopted a new 1996 Stock Option Plan (the "1996 Option Plan") in December 1996.
A total of 900,000 shares of common stock have been reserved for issuance under
the 1996 Option Plan. No options have been granted. The 1996 Option Plan
provides for grants of incentive stock options to employees (including officers
and employee directors) and for grants of nonstatutory options to employees,
nonemployee directors and consultants.
The exercise price of incentive stock options granted under the 1996 Option
Plan must not be less than the fair market value of the common stock on the date
of the grant, and the exercise price of nonstatutory options must not be less
than 85% of the fair market value of the common stock on the date of the grant.
With respect to any optionee who owns stock representing more than 10% of the
voting power of all classes of the Company's outstanding common stock, the
exercise price of any incentive stock option must be equal to at least 110% of
the fair market value of the common stock on the date of the grant, and the term
of the option must not exceed five years. The terms of all other options may not
exceed 10 years.
F-12
<PAGE> 69
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors and approved by the shareholders of
the Company in December 1996. A total of 400,000 shares of common stock have
been reserved for issuance under the Purchase Plan. The Purchase Plan permits
eligible employees to purchase common stock through payroll deductions at a
price equal to 85% percent of the lower of fair market value of the common stock
on the first day of the offering period or the last day of the offering period.
Summary Activity
The following table summarizes the activity of all the Company's stock
option plans:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Shares under option, December 31, 1993................. 435,000 $0.075 -- $0.392
Options granted...................................... 33,000 0.443
Options canceled..................................... (61,500) --
Options exercised.................................... (87,000) 0.075 -- 0.392
---------
Shares under option, December 31, 1994................. 319,500 0.249 -- 0.443
---------
Options granted...................................... 144,000 0.517
Options canceled..................................... (24,000) 0.304 -- 0.392
Options exercised.................................... (31,500) 0.249 -- 0.517
---------
Shares under option, December 31, 1995................. 408,000 0.249 -- 0.517
---------
Options granted...................................... 693,000 4.000
Options canceled..................................... (27,000) 0.517 -- 4.000
Options exercised.................................... (15,000) 0.392 -- 4.000
---------
Shares under option, December 31, 1996................. 1,059,000 0.249 -- 4.000
=========
</TABLE>
Of the options outstanding under the Book Value Plan at December 31, 1996,
options to purchase 259,200 shares are immediately exercisable at exercise
prices ranging from $0.249 to $0.517 per share.
The Company adopted the disclosure requirements of SFAS No. 123, Accounting
for Stock-Based Compensation, effective for the Company's December 31, 1996
financial statements. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, compensation cost has
been recognized for its stock plans based on the intrinsic value of the stock
option at date of grant (i.e. the difference between the exercise price and the
fair value of the Company's stock). Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net income before taxes, as reported........................... $10,066 $10,587
Pro forma income tax provision................................. 3,824 4,068
Pro forma compensation expense................................. 9 162
------ ------
Pro forma net income........................................... $ 6,233 $ 6,357
====== ======
Earnings per share, as reported................................ $ 0.40 $ 0.41
Earnings per share, pro forma.................................. $ 0.40 $ 0.41
</TABLE>
F-13
<PAGE> 70
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1995 and 1996, respectively; no dividend yield, expected volatility of
50%, risk-free interest rates of approximately 6.6% and 6.0%, respectively, and
expected lives of seven years. The volatility was based on the volatility
percentage of comparable publicly traded companies since the Company, as a
private company, does not have a sufficient history of stock transactions.
Income taxes represent the assumed effective rate which the Company would pay if
it had terminated its election as an S Corporation, net of any tax benefit for
the incremental increase in pro forma compensation expense.
In 1996, the Company remeasured the fair value of the Book Value Plan
options due to the significant changes in the plan discussed above. Based on the
Black-Scholes option-pricing model, at the remeasurement date, the 379,500 Book
Value Plan options had a fair value of $3.73 per option in 1996, rather than a
previous value of $0.31 per option. The incremental effect of this change on a
pro forma basis was minimal as the cumulative pro forma compensation expense for
the vested options was consistent with the $980,000 of compensation expense
recorded by the Company in accordance with APB No. 25.
Other than the remeasurement of the Book Value Plan, the only other pro
forma compensation expense in 1996 related to the options issued under the
Accelerated Plan which are expected to vest over five years. Based on the
Black-Scholes option-pricing model, at the grant date the 679,500 options
outstanding had a fair value of $2.43 per option.
8. SUBSEQUENT EVENTS
On January 2, 1997, the Board of Directors declared a dividend payable to
all shareholders of date. The Company distributed the dividends totaling
$10,000,000 on January 10, 1997.
On January 24, 1997, options to purchase 109,000 shares were granted under
the 1996 Option Plan, at an exercise price of $11.00 per share.
F-14
<PAGE> 71
[A schematic diagram, accompanied by the Company's logo and entitled "Software
Solutions for Project-Oriented Businesses," will be provided on the first two
pages of a tri-fold on the inside front cover that contains icons graphically
illustrating eight representative project-oriented business (engineering and
environmental firms, research and development organizations, not-for-profit
organizations, make-to-order manufacturers, systems integrators, professional
service providers, construction companies and technical service providers)
surrounding the names of the Company's products. The following text will
accompany the diagram:
Since 1983, Deltek Systems has been helping project-oriented
organizations manager their unique business requirements through its
family of enterprise-level software products: System 1, Costpoint,
Electronic Timesheet and Allegro. Deltek's products address the core
needs of project-orineted businesses and allow these organizations to
manage financial and project accounting, compute costs and revenue on a
project-by-project basis; submit accurate and detailed bills, comply
with complex industry-specific and regulatory requirements, administer
employee time collection, labor costing and payroll, automate materials
management functions and empower their managers with timely and
pertinent information. Deltek also provides a full range of consulting
and maintenance services to assist its customers with system
implementation and integration and to provide training and ongoing
support for the Company's software products.
On the third page of the tri-fold on the inside front cover, a schematic
diagram, accompanied by the registered trademark for the Company's Costpoint
software product, will be provided that graphically illustrates the product's
five major groups of modules (project accounting; human resources and payroll
administration; reporting tools; materials management; and financial
accounting). The following text will accompany the diagram:
Costpoint, the Company's current flagship product, is a
client/server-based, enterprise-level business software system,
consisting of over 25 integrated module applications which span
financial accounting, project accounting, human resources and payroll
administration, materials management and reporting tools. Costpoint is
designed to meeting the specialized needs of project-oriented
businesses, including project costing, indirect cost allocation, revenue
recognition, project budgeting and project reporting. Costpoint
combines these capabilities with applications in other business system
areas that are designed for the special needs of project-oriented
businesses.]
<PAGE> 72
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company, any Selling Shareholder or the Underwriters. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof or that there has been no
change in the affairs of the Company since such date.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Prior S Corporation Status............ 13
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 27
Management............................ 40
Certain Transactions.................. 46
Principal and Selling Shareholders.... 47
Description of Capital Stock.......... 49
Shares Eligible for Future Sale....... 51
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54
Additional Information................ 55
Index to Financial Statements......... F-1
</TABLE>
----------------------------
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,900,000 SHARES
LOGO
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
MONTGOMERY SECURITIES
WILLIAM BLAIR & COMPANY
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 73
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant and the
Selling Shareholders in connection with the sale and distribution of the
securities being registered. All amounts shown are estimates except the
Securities and Exchange Commission registration fee, the NASD filing fee and The
Nasdaq National Market application fee.
<TABLE>
<CAPTION>
TO BE PAID BY TO BE PAID BY
THE THE SELLING
REGISTRANT SHAREHOLDERS TOTAL
------------- ------------- --------
<S> <C> <C> <C>
Securities and Exchange Commission registration fee........ $ 6,697 $ 6,441 $ 13,138
NASD filing fee............................................ 2,710 2,126 4,836
Nasdaq National Market application fee..................... 56,867 -- 56,867
Accounting fees and expenses............................... 150,000 -- 150,000
Legal fees and expenses.................................... 260,000 15,000 275,000
Printing and engraving fees and expenses................... 125,000 -- 125,000
Transfer agent and registrar fees.......................... 15,000 -- 15,000
Blue Sky qualification fees and expenses................... 5,000 -- 5,000
Directors' and officers' liability insurance............... 140,000 -- 140,000
Miscellaneous expenses..................................... 38,726 1,433 40,159
-------- -------- --------
Total............................................ $ 800,000 $ 25,000 $825,000
======== ======== ========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 10 of the Virginia Stock Corporation Act (the "VSCA") allows for
indemnification, in certain circumstances, by a corporation of any person
threatened with or made a party to any action, suit or proceeding by reason of
the fact that he or she is, or was, a director, officer, employee or agent of
such corporation. The Registrant's Articles of Incorporation (Exhibit 3.1)
provide for mandatory indemnification of its directors and officers and for
discretionary indemnification of any employee or agent to the full extent
permitted by the VSCA, including in circumstances in which indemnification is
otherwise discretionary under the VSCA. In addition, the Registrant intends to
enter into separate indemnification agreements (Exhibit 10.10) with its
directors and officers setting forth certain procedures and other conditions
applicable to claims for indemnification pursuant to the Company's Articles of
Incorporation and agreeing, subject to certain limitations, to obtain and
maintain directors' and officers' liability insurance coverage for its directors
and officers. These indemnification provisions may be sufficiently broad to
permit indemnification of the Registrant's officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act of 1933, as amended (the "Securities Act").
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Since December 31, 1993, the Registrant has sold and issued the
following securities, as adjusted to give effect to the three-for-one stock
split effected by means of a stock dividend in December 1996:
(i) The Company issued 102,000 shares of its Common Stock in
connection with its acquisition of The Allegro Group, Inc., which was
consummated on September 15, 1996.
II-1
<PAGE> 74
(ii) The Company has granted options to purchase an aggregate of
870,000 shares of its Common Stock to employees pursuant to its option
plans.
(iii) The Company has issued an aggregate of 133,500 shares of its
Common Stock upon exercise of employee stock options.
(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth in Item 15(a).
(c) The issuance described in Item 15(a)(i) was deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as a
transaction not involving any public offering. The issuances described in Item
15(a)(ii) and (iii) were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ --------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement (draft dated January 15, 1997).
3.1 Amended and Restated Articles of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
*4.1 Specimen Common Stock certificate of the Registrant.
*5.1 Opinion and Consent of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1 1987 Employee Stock Option Plan.
*10.2 Employee Time Accelerated Stock Option Plan (revised).
10.3 1996 Stock Option Plan.
10.4 1996 Employee Stock Purchase Plan.
+10.5 OEM Software License Agreement by and between the Company and Centura Software
Corporation dated as of March 1, 1993, as amended.
+10.6 Cognos Desktop OEM Agreement by and between the Company and Cognos Corporation
dated as of February 28, 1994, as amended.
+10.7 Micro Focus OSX Application Vendor License Agreement by and between the Company
and Micro Focus Incorporated dated as of June 10, 1993, as amended.
10.8 Agreement of Lease by and between the Company and Tysons Corner Limited
Partnership, dated as of November 12, 1991, as amended.
10.9 Agreement of Lease by and between the Company and Tysons Corner Limited
Partnership, dated as of November 12, 1992, as amended.
*10.10 Form of Indemnity Agreement for officers and directors.
*10.11 Form of Tax Indemnification Agreement.
*10.12 Seventh Amendment to Agreements of Lease by and between the Company and Tysons
Corner Limited Partnership, dated as of December 17, 1997.
11.1 Computation of per share earnings.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Gray Cary Ware & Freidenrich, A Professional Corporation. Reference
is made to Exhibit 5.1.
*23.3 Consent of Hazel & Thomas, P.C.
23.4 Consent of Darrell J. Oyer.
24.1 Power of Attorney. Reference is made to Page II-4.
*27.1 Financial Data Schedule (revised) (filed in EDGAR format only).
</TABLE>
- ---------------
* Filed with Amendment No. 1. All other Exhibits have previously been filed.
+ Confidential treatment has been requested as to a portion of this Exhibit.
(b) Financial Statement Schedules:
Report of Independent Public Accountants on Schedules
Schedule II -- Valuation and Qualifying Accounts
II-2
<PAGE> 75
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this Registration
Statement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrant pursuant to Rule 424 (b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each posteffective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"Securities Act") the Registrant has duly caused this Amendment to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of McLean, State of Virginia, on the 28th day of January
1997.
DELTEK SYSTEMS, INC.
By: /s/ KENNETH E. DELASKI
------------------------------------
Kenneth E. deLaski
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- -------------------------- ------------------
<C> <S> <C>
/s/ KENNETH E. President, Chief Executive January 28, 1997
DELASKI Officer and Director
- ----------------------------------------------- (Principal Executive
(Kenneth E. deLaski) Officer
/s/ ALAN R. Chief Financial Officer January 28, 1997
STEWART (Principal Financial and
- ----------------------------------------------- Accounting Officer)
(Alan R. Stewart)
DONALD Chairman of the Board of January 28, 1997
DELASKI* Directors
- -----------------------------------------------
(Donald deLaski)
ROBERT E. Director January 28, 1997
GREGG*
- -----------------------------------------------
(Robert E. Gregg)
*By: /s/ KENNETH E. DELASKI
- -----------------------------------------------
Kenneth E. deLaski
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Deltek Systems, Inc.:
We have audited in accordance with generally accepted auditing standards
the financial statements of Deltek Systems, Inc., included in this registration
statement and have issued our report thereon dated January 21, 1997. Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 21, 1997
S-1
<PAGE> 78
SCHEDULE II
DELTEK SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BEGINNING AMOUNTS CHARGED TO ENDING
BALANCE WRITTEN-OFF EXPENSE BALANCE
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994:
Bad-debt reserves............................. 133 (370) 493 256
DECEMBER 31, 1995:
Bad-debt reserves............................. 256 (503) 590 343
DECEMBER 31, 1996:
Bad-debt reserves............................. 343 (447) 500 396
</TABLE>
S-2
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
------ -------------------------------------------------------------------------- ----
<C> <S> <C>
*1.1 Form of Underwriting Agreement (draft dated January 15, 1997). ...........
3.1 Amended and Restated Articles of Incorporation of the Registrant. ........
3.2 Amended and Restated Bylaws of the Registrant. ...........................
*4.1 Specimen Common Stock certificate of the Registrant. .....................
*5.1 Opinion and Consent of Gray Cary Ware & Freidenrich, A Professional
Corporation. .............................................................
10.1 1987 Employee Stock Option Plan. .........................................
*10.2 Employee Time Accelerated Stock Option Plan (revised). ...................
10.3 1996 Stock Option Plan. ..................................................
10.4 1996 Employee Stock Purchase Plan. .......................................
+10.5 OEM Software License Agreement by and between the Company and Centura
Software Corporation dated as of March 1, 1993, as amended. ..............
+10.6 Cognos Desktop OEM Agreement by and between the Company and Cognos
Corporation dated as of February 28, 1994, as amended. ...................
+10.7 Micro Focus OSX Application Vendor License Agreement by and between the
Company and Micro Focus Incorporated dated as of June 10, 1993, as
amended. .................................................................
10.8 Agreement of Lease by and between the Company and Tysons Corner Limited
Partnership, dated as of November 12, 1991, as amended. ..................
10.9 Agreement of Lease by and between the Company and Tysons Corner Limited
Partnership, dated as of November 12, 1992, as amended. ..................
*10.10 Form of Indemnity Agreement for officers and directors.
*10.11 Form of Tax Indemnification Agreement. ...................................
*10.12 Seventh Amendment to Agreements of Lease by and between the Company and
Tysons Corner Limited Partnership, dated as of December 17, 1997. ........
11.1 Computation of per share earnings. .......................................
*23.1 Consent of Arthur Andersen LLP. ..........................................
*23.2 Consent of Gray Cary Ware & Freidenrich, A Professional Corporation.
Reference is made to Exhibit 5.1. ........................................
*23.3 Consent of Hazel & Thomas, P.C. ..........................................
23.4 Consent of Darrell J. Oyer. ..............................................
24.1 Power of Attorney. Reference is made to Page II-4. .......................
*27.1 Financial Data Schedule (revised) (filed in EDGAR format only). ..........
</TABLE>
- ---------------
* Filed with Amendment No. 1. All other Exhibits have previously been filed.
+ Confidential treatment has been requested as to a portion of this Exhibit.
<PAGE> 1
DRAFT 01/15/97
2,900,000 Shares(*)
DELTEK SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
, 1997
MONTGOMERY SECURITIES
WILLIAM BLAIR & COMPANY, L.L.P.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
SECTION 1. Introductory. Deltek Systems, Inc., a Virginia
corporation (the "Company"), proposes to issue and sell 1,700,000 shares of its
authorized but unissued Common Stock, par value $0.001 per share (the "Common
Stock"), the principal shareholders named in Schedule B annexed hereto (the
"Principal Selling Shareholders"), and certain other shareholders of the Company
named in Schedule B annexed hereto (the "Other Selling Shareholders" and
together with the Principal Selling Shareholders, the "Selling Shareholders")
propose to sell an aggregate of 1,200,000 shares of the Company's issued and
outstanding Common Stock to the several underwriters named in Schedule A annexed
hereto (the "Underwriters"), for whom you are acting as Representatives. Said
aggregate of 2,900,000 shares are herein called the "Firm Common Shares." In
addition, the Principal Selling Shareholders and the Other Selling Shareholder
identified in Schedule B propose to grant to the Underwriters an option to
purchase up to 435,000 additional shares of Common Stock (the "Optional
- --------
* Plus an option to purchase from the Company up to 435,000 additional
shares of Common Stock to cover over-allotments, if any.
1.
<PAGE> 2
Common Shares"), as provided in Section 5 hereof. The Firm Common Shares and, to
the extent such option is exercised, the Optional Common Shares are hereinafter
collectively referred to as the "Common Shares."
The Company has entered into a Tax Indemnification Agreement dated ,
1997 (the "Tax Agreement") with the Company's shareholders that provides for
income taxes attributable to periods prior to the date (the "Termination Date")
that the Company terminates its status as an S Corporation under Subchapter S of
the Internal Revenue Code, as amended, to be borne by such shareholders and for
income taxes attributable to periods beginning on and after the Termination Date
to be borne by the Company. The Tax Agreement will become effective on the First
Closing Date (as hereinafter defined).
You have advised the Company and the Selling Shareholders that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
The Company and each of the Selling Shareholders hereby confirm
their respective agreements with respect to the purchase of the Common Shares by
the Underwriters as follows:
SECTION 2. Representations and Warranties of the Company and the
Principal Selling Shareholders. The Company and each of the Principal Selling
Shareholders represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-18247)
with respect to the Common Shares has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder,
and has been filed with the Commission. The Company has prepared and has
filed or proposes to file prior to the effective date of such registration
statement an amendment or amendments to such registration statement, which
amendment or amendments have been or will be similarly prepared. There
have been delivered to you two signed copies of such registration
statement and amendments, together with two copies of each exhibit filed
therewith. Conformed copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for
each of the Underwriters. The Company will next file with the Commission
one of the following: (i) prior to effectiveness of such registration
statement, a further amendment thereto, including the form of final
prospectus, (ii) a final prospectus in accordance with Rules 430A and
424(b) of the Rules and Regulations, or (iii) a term sheet (the "Term
Sheet") as described
2.
<PAGE> 3
in and in accordance with Rules 434 and 424(b) of the Rules and
Regulations. As filed, the final prospectus, if one is used, or the Term
Sheet and Preliminary Prospectus (as hereinafter defined), if a final
prospectus is not used, shall include all Rule 430A Information (as
hereinafter defined) and, except to the extent that you shall agree in
writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the date and time that this Agreement was
executed and delivered by the parties hereto, or, to the extent not
completed at such date and time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus (as hereinafter defined)) as the Company
shall have previously advised you in writing would be included or made
therein.
The term "Registration Statement" as used in this Agreement
shall mean such registration statement at the time such registration
statement becomes effective and, in the event any post-effective amendment
thereto becomes effective prior to the First Closing Date (as hereinafter
defined), shall also mean such registration statement as so amended;
provided, however, that such term shall also include (i) all Rule 430A
Information deemed to be included in such registration statement at the
time such registration statement becomes effective as provided by Rule
430A of the Rules and Regulations and (ii) a registration statement, if
any, filed pursuant to Rule 462(b) of the Rules and Regulations relating
to the Common Shares. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time
it becomes effective that omits Rule 430A Information. The term
"Prospectus" as used in this Agreement shall mean either (i) the
prospectus relating to the Common Shares in the form in which it is first
filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations, or (ii) if a Term Sheet is not used and no filing pursuant to
Rule 424(b) of the Rules and Regulations is required, the form of final
prospectus included in the Registration Statement at the time such
registration statement becomes effective, or (iii) if a Term Sheet is
used, the Term Sheet in the form in which it is first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations, together
with the Preliminary Prospectus included in the Registration Statement at
the time it becomes effective. The term "Rule 430A Information" means
information with respect to the Common Shares and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements of
the Act and the Rules and Regulations and, as of its date, has not
included any untrue statement of a material fact or omitted to state a
material fact necessary to make
3.
<PAGE> 4
the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement
becomes effective, and at all times subsequent thereto up to and including
each Closing Date hereinafter mentioned, the Registration Statement and
the Prospectus, and any amendments or supplements thereto, will contain
all material statements and information required to be included therein by
the Act and the Rules and Regulations and will in all material respects
conform to the requirements of the Act and the Rules and Regulations, and
neither the Registration Statement nor the Prospectus, nor any amendment
or supplement thereto, will include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, no representation or warranty contained in this subsection 2(b)
shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any
such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any
Underwriter, directly or through the Representatives, specifically for use
in the preparation thereof.
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity. The Company has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of the State of Virginia, with full power and
authority (corporate and other) to own and lease its properties and
conduct its business as described in the Prospectus; the Company is in
possession of and operating in compliance with all authorizations,
licenses, permits, consents, certificates and orders material to the
conduct of its business, all of which are valid and in full force and
effect; the Company is duly qualified to do business and in good standing
as a foreign corporation in each jurisdiction in which the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to so qualify
would not have a material adverse effect upon the Company; and no
proceeding has been instituted in any such jurisdiction, revoking,
limiting or curtailing, or seeking to revoke, limit or curtail, such power
and authority or qualification.
(d) The Company has authorized and outstanding capital stock
as set forth under the heading "Capitalization" in the Prospectus; the
issued and outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and conform to the description
thereof contained in the Prospectus. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, the
Company does not have outstanding any options to purchase, or any
preemptive rights or
4.
<PAGE> 5
other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's stock option
and other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in the Prospectus accurately
and fairly presents the information required to be shown with respect to
such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set
forth in this Agreement, will be duly authorized, validly issued, fully
paid and nonassessable, and will conform to the description thereof
contained in the Prospectus. No preemptive rights or other rights to
subscribe for or purchase exist with respect to the issuance and sale of
the Common Shares by the Company pursuant to this Agreement. No
shareholder of the Company has any right which has not been waived to
require the Company to register the sale of any shares owned by such
shareholder under the Act in the public offering contemplated by this
Agreement. No further approval or authority of the shareholders or the
Board of Directors of the Company will be required for the transfer and
sale of the Common Shares to be sold by the Selling Shareholders or the
issuance and sale of the Common Shares to be sold by the Company as
contemplated herein.
(f) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding obligation of the Company
in accordance with its terms. The making and performance of this Agreement
by the Company and the consummation of the transactions herein
contemplated will not violate any provisions of the certificate of
incorporation or bylaws, or other organizational documents, of the
Company, and will not conflict with, result in the breach or violation of,
or constitute, either by itself or upon notice or the passage of time or
both, a default under any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the
Company is a party or by which the Company or any of its properties may be
bound or affected, any statute or any authorization, judgment, decree,
order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body applicable to the Company
or any of its properties. No consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of this
Agreement or the consummation of the transactions contemplated by this
Agreement, except for compliance with the Act, the Blue Sky laws
applicable to the public offering of the Common Shares by the several
Underwriters and the clearance of such offering with the National
Association of Securities Dealers, Inc. (the "NASD").
5.
<PAGE> 6
(g) To the best knowledge of the Company and the Principal
Selling Shareholders, Arthur Andersen LLP, who have expressed their
opinion with respect to the financial statements filed with the Commission
as a part of the Registration Statement and included in the Prospectus and
in the Registration Statement, are independent accountants as required by
the Act and the Rules and Regulations.
(h) The financial statements of the Company, and the related
notes thereto, included in the Registration Statement and the Prospectus
present fairly the financial position of the Company as of the respective
dates of such financial statements, and the results of operations and
changes in financial position of the Company for the respective periods
covered thereby. Such statements and related notes have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis as certified by the independent accountants named in
subsection 2(g). No other financial statements or schedules are required
to be included in the Registration Statement. The selected financial data
set forth in the Prospectus under the captions "Capitalization" and
"Selected Financial Data" fairly present the information set forth therein
on the basis stated in the Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to
defaults which individually or in the aggregate would not be material to
the Company, the Company is not in violation or default of any provision
of its certificate of incorporation or bylaws, or other organizational
documents, or in breach of or default with respect to any provision of any
agreement, judgment, decree, order, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which it is a
party or by which it or any of its properties are bound; and there does
not exist any state of facts which constitutes an event of default on the
part of the Company or which, with notice or lapse of time or both, would
constitute such an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been described or filed as required. The contracts so described
in the Prospectus are in full force and effect on the date hereof; and the
Company, and to the best of the Company's knowledge, no other party is, in
breach of or default under any of such contracts.
(k) There are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge, threatened
to which the Company is or may be a party or of which property owned or
leased by the Company is or may be the subject, or related to
environmental or discrimination matters, which actions, suits or
proceedings might, individually or in
6.
<PAGE> 7
the aggregate, prevent or adversely affect the transactions contemplated
by this Agreement or which could reasonably be expected to result in a
material adverse change in the condition (financial or otherwise),
properties, business, results of operations or prospects of the Company;
and no labor disturbance by the employees of the Company exists or is
imminent which could reasonably be expected to affect adversely such
condition, properties, business, results of operations or prospects. The
Company is not a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body.
(l) The Company has good and marketable title to all the
properties and assets reflected as owned in the financial statements
hereinabove described (or elsewhere in the Prospectus), subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except (i)
those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount and do not
adversely affect the use made and proposed to be made of such property by
the Company. The Company holds its leased properties under valid and
binding leases, with such exceptions as are not materially significant in
relation to the business of the Company. Except as disclosed in the
Prospectus, the Company owns or leases all such properties as are
necessary to its operations as now conducted or as proposed to be
conducted.
(m) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
described in or specifically contemplated by the Prospectus: (i) the
Company has not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction which is not in the ordinary course
of business or which could result in a material reduction in the future
earnings of the Company; (ii) the Company has not sustained any material
loss or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by
insurance; (iii) other than described in the Prospectus, the Company has
not paid or declared any dividends or other distributions with respect to
its capital stock and the Company is not in default in the payment of
principal or interest on any outstanding debt obligations; (iv) there has
not been any change in the capital stock (other than upon the sale of the
Common Shares hereunder and upon the exercise of options described in the
Registration Statement) or indebtedness material to the Company (other
than in the ordinary course of business); and (v) there has not been any
material adverse change in the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company has sufficient trademarks, trade names, patent
rights, mask works, copyrights, licenses, approvals and governmental
authorizations to
7.
<PAGE> 8
conduct its businesses as now conducted; the expiration of any trademarks,
trade names, patent rights, mask works, copyrights, licenses, approvals or
governmental authorizations would not have a material adverse effect on
the condition (financial or otherwise), business, results of operations or
prospects of the Company; and the Company has no knowledge of any material
infringement by it of trademark, trade name rights, patent rights, mask
works, copyrights, licenses, trade secret or other similar rights of
others, and there is no claim being made against the Company regarding
trademark, trade name, patent, mask work, copyright, license, trade secret
or other infringement which could be reasonably be expected to have a
material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company.
(o) The Company has not been advised, and has no reason to
believe, that it is not conducting business in compliance with all
applicable laws, rules and regulations of the jurisdictions in which it is
conducting business, including, without limitation, all applicable local,
state and federal environmental laws and regulations; except where failure
to be so in compliance would not materially adversely affect the condition
(financial or otherwise), business, results of operations or prospects of
the Company.
(p) The Company has filed all necessary federal, state and
foreign income and franchise tax returns and have paid all taxes shown as
due thereon; and the Company has no knowledge of any tax deficiency which
has been or might be asserted or threatened against the Company which
could materially and adversely affect the business, operations or
properties of the Company.
(q) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute
prior to the First Closing Date any offering material in connection with
the offering and sale of the Common Shares other than the Prospectus, the
Registration Statement and the other materials permitted by the Act.
(s) The Company maintains insurance of the types and in the
amounts generally deemed adequate for its business, including, but not
limited to, insurance covering real and personal property owned or leased
by the Company against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against, all of which insurance is in
full force and effect.
(t) The Company has not at any time during the last five years
(i) made any unlawful contribution to any candidate for foreign office, or
failed to disclose fully any contribution in violation of law, or (ii)
made any payment to any federal or state governmental officer or official,
or other person charged with
8.
<PAGE> 9
similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States of any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Common Shares.
(v) The Common Stock has been approved for quotation as a
national market system security on The Nasdaq Stock Market upon notice of
issuance.
(w) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba in violation of Section 517.075 of the Florida Statutes.
(x) The Company and the Principal Shareholders and, to the
best knowledge of the Company and the Principal Shareholders, each other
shareholder of the Company has the full legal right, power and authority
to enter into the Tax Agreement and to perform the transactions
contemplated thereby. The Tax Agreement has been duly authorized and
executed by the Company and each of the shareholders of the Company
(including the Principal Shareholders) and constitutes a valid and binding
obligation of each of the Company and the Principal Shareholders,
enforceable in accordance with its terms, except as enforcement may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or other similar laws relating to or affecting creditor's
rights generally or by general equitable principles. The making and
performance of the Tax Agreement by the Company and the shareholders of
the Company (including the Principal Shareholders) and the consummation of
the transactions therein contemplated will not violate any provision of
the certificate of incorporation or bylaws, or other organization
documents, of the Company, and will not conflict with, result in the
breach or violation or, or constitute, either by itself or upon notice or
the passage of time or both, a default under any agreement, mortgage, deed
of trust, lease, franchise, license, indenture, permit or other instrument
to which the Company or the Principal Shareholders is a party or by which
the Company or its properties or the Principal Shareholders may be bound
or affected, any statute or any authorization, judgment, decree, order,
rule or regulation of any court or any regulatory body, administrative
agency or other governmental body applicable to the Company it any of its
properties or the Principal Shareholders. No consent, approval or
authorization or order of any court, regulatory body, administrative
agency or other governmental body is required for the delivery by the
Company or the Principal Shareholders of the Tax Agreement or the
consummation of the transactions contemplated thereby.
9.
<PAGE> 10
SECTION 3. Representations, Warranties and Covenants of the Selling
Shareholders.
(a) Each of the Selling Shareholders represents and warrants
to, and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has, and on the First
Closing Date hereinafter mentioned will have, good and marketable
title to the Common Shares proposed to be sold by such Selling
Shareholder hereunder on such Closing Date and full right, power and
authority to enter into this Agreement and to sell, assign, transfer
and deliver such Common Shares hereunder, free and clear of all
voting trust arrangements, liens, encumbrances, equities, security
interests, restrictions and claims whatsoever; and upon delivery of
and payment for such Common Shares hereunder, the Underwriters will
acquire good and marketable title thereto, free and clear of all
liens, encumbrances, equities, claims, restrictions, security
interests, voting trusts or other defects of title whatsoever.
(ii) Such Selling Shareholder has executed and delivered
a Custody Agreement and Power of Attorney (the "Shareholders
Agreement") and in connection herewith such Selling Shareholder
further represents, warrants and agrees that such Selling
Shareholder has deposited in custody, under the Shareholders
Agreement, with the agent named therein (the "Agent") as custodian,
certificates in negotiable form for the Common Shares to be sold
hereunder by such Selling Shareholder, for the purpose of further
delivery pursuant to this Agreement. Such Selling Shareholder agrees
that the Common Shares to be sold by such Selling Shareholder on
deposit with the Agent are subject to the interests of the Company
and the Underwriters, that the arrangements made for such custody
are to that extent irrevocable, and that the obligations of such
Selling Shareholder hereunder shall not be terminated, except as
provided in this Agreement or in the Shareholders Agreement, by any
act of such Selling Shareholder, by operation of law, by the death
or incapacity of such Selling Shareholder or by the occurrence of
any other event. If such Selling Shareholder should die or become
incapacitated, or if any other event should occur, before the
delivery of the Common Shares hereunder, the documents evidencing
Common Shares then on deposit with the Agent shall be delivered by
the Agent in accordance with the terms and conditions of this
Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Agent shall have received
notice thereof. This Agreement and the Shareholders Agreement have
been duly executed and delivered by or on behalf of such Selling
10.
<PAGE> 11
Shareholder and the form of such Shareholders Agreement has been
delivered to you.
(iii) The performance of this Agreement and the
Shareholders Agreement and the consummation of the transactions
contemplated hereby and by the Shareholders Agreement will not
result in a breach or violation by such Selling Shareholder of any
of the terms or provisions of, or constitute a default by such
Selling Shareholder under, any indenture, mortgage, deed of trust,
trust (constructive or other), loan agreement, lease, franchise,
license or other agreement or instrument to which such Selling
Shareholder is a party or by which such Selling Shareholder or any
of its properties is bound, any statute, or any judgment, decree,
order, rule or regulation of any court or governmental agency or
body applicable to such Selling Shareholder or any of its
properties.
(iv) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Common Shares.
(v) Each Preliminary Prospectus and the Prospectus,
insofar as it has related to such Selling Shareholder, has conformed
in all material respects to the requirements of the Act and the
Rules and Regulations and has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make
the statements therein not misleading in light of the circumstances
under which they were made; and neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, as it
relates to such Selling Shareholder, will include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading.
(vi) Such Selling Shareholder is not aware that any of
the representations and warranties set forth in Section 2 above is
untrue or inaccurate in any material respect.
(b) Each of the Selling Shareholders agrees with the Company
and the Underwriters not, for a period from the date of filing of the
Registration Statement through the date 180 days following the date of the
final Prospectus relating to the public offering of the Common Stock, sell
(including, without limitation, any short sale), offer to sell, contract
to sell, pledge or otherwise dispose of any of the Common Stock, or any
options or warrants to purchase any of the Common Stock, or any securities
convertible into or exchangeable for any
11.
<PAGE> 12
of the Common Stock, owned directly by the undersigned or with respect to
which the undersigned has the power of disposition, in any such case
whether now owned or hereafter acquired, other than (i) pursuant to the
Underwriting Agreement, (ii) as a bona fide gift or gifts, provided that
the undersigned provides prior written notice of such gift or gifts to the
Representatives and the donee or donees thereof agree to be bound by the
restrictions set forth herein or (iii) with the prior written consent of
Montgomery Securities, which consent may be withheld at the sole
discretion of Montgomery Securities.
SECTION 4. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company and to the Selling Shareholders that the information set forth (i)
on the cover page of the Prospectus with respect to price, underwriting
discounts and commissions and terms of offering and (ii) under "Underwriting" in
the Prospectus was furnished to the Company by and on behalf of the Underwriters
for use in connection with the preparation of the Registration Statement and the
Prospectus and is correct in all material respects. The Representatives
represent and warrant that they have been authorized by each of the other
Underwriters as the Representatives to enter into this Agreement on its behalf
and to act for it in the manner herein provided.
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, (i) the Company agrees to
issue and sell to the Underwriters 1,700,000 of the Firm Common Shares, and (ii)
the Selling Shareholders agree, severally and not jointly, to sell to the
Underwriters in the respective amounts set forth in Schedule B hereto, an
aggregate of 1,200,000 of the Firm Common Shares. The Underwriters agree,
severally and not jointly, to purchase from the Company and the Selling
Shareholders, respectively, the number of Firm Common Shares described below.
The purchase price per share to be paid by the several Underwriters to the
Company and to the Selling Shareholders, respectively, shall be $_________ per
share.
The obligation of each Underwriter to the Company shall be to
purchase from the Company that number of full shares which (as nearly as
practicable, as determined by you) bears to 1,700,000 the same proportion as the
number of shares set forth opposite the name of such Underwriter in Schedule A
hereto bears to the total number of Firm Common Shares. The obligation of each
Underwriter to the Selling Shareholders shall be to purchase from the Selling
Shareholders that number of full shares which (as nearly as practicable, as
determined by you) bears to 1,200,000 the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased
by the Underwriters and payment therefor shall be made at the offices of
Montgomery Securities, 600 Montgomery Street, San Francisco, California (or such
other place as may
12.
<PAGE> 13
be agreed upon by the Company and the Representatives) at such time and date,
not later than the third (or, if the Firm Common Shares are priced, as
contemplated by Rule 15c6-1(c) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after 4:30 P.M. Washington D.C. Time, the fourth)
full business day following the first date that any of the Common Shares are
released by you for sale to the public, as you shall designate by at least 48
hours' prior notice to the Company (or at such other time and date, not later
than one week after such third or fourth, as the case may be, full business day
as may be agreed upon by the Company and the Representatives) (the "First
Closing Date"); provided, however, that if the Prospectus is at any time prior
to the First Closing Date recirculated to the public, the First Closing Date
shall occur upon the later of the third or fourth, as the case may be, full
business day following the first date that any of the Common Shares are released
by you for sale to the public (as set forth above) or the date that is 48 hours
after the date that the Prospectus has been so recirculated. If the
Representatives so elect, delivery of the Firm Common Shares sold by the Company
may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company and the Selling Shareholders to you, for the
respective accounts of the Underwriters with respect to the Firm Common Shares
to be sold by the Company and by the Selling Shareholders against payment by
you, for the accounts of the several Underwriters, of the purchase price
therefor by wire transfer payable to the order of the Company and of the Agent
in proportion to the number of Firm Common Shares to be sold by the Company and
the Selling Shareholders, respectively. The certificates for the Firm Common
Shares shall be registered in such names and denominations as you shall have
requested at least two full business days prior to the First Closing Date, and
shall be made available for checking and packaging on the business day preceding
the First Closing Date at a location in New York, New York, as may be designated
by you. Time shall be of the essence, and delivery at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriters. If the Representatives so elect, delivery of the Firm Common
Shares sold by the Selling Shareholders may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Principal Selling Shareholders and the Other Selling Shareholder
identified in Schedule B hereby grant an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 435,000 Optional
Common Shares at the purchase price per share to be paid for the Firm Common
Shares, for use solely in covering any over-allotments made by you for the
account of the Underwriters in the sale and distribution of the Firm Common
Shares. The option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the first date that any of the Common Shares are
released by you for sale to the public, upon notice by you to the Principal
Selling
13.
<PAGE> 14
Shareholders and the Other Selling Shareholder identified in Schedule B setting
forth the aggregate number of Optional Common Shares as to which the
Underwriters are exercising the option, the names and denominations in which the
certificates for such shares are to be registered and the time and place at
which such certificates will be delivered. Such time of delivery (which may not
be earlier than the First Closing Date), being herein referred to as the "Second
Closing Date," shall be determined by you, but if at any time other than the
First Closing Date shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. The number of Optional
Common Shares to be purchased by each Underwriter shall be determined by
multiplying the number of Optional Common Shares to be sold by the Principal
Selling Shareholders and the Other Selling Shareholder identified in Schedule B
pursuant to such notice of exercise by a fraction, the numerator of which is the
number of Firm Common Shares to be purchased by such Underwriter as set forth
opposite its name in Schedule A and the denominator of which is 2,900,000
(subject to such adjustments to eliminate any fractional share purchases as you
in your discretion may make). The number of Optional Common Shares to be sold by
each Principal Selling Shareholder and the Other Selling Shareholder identified
in Schedule B shall be determined by multiplying the total number of Optional
Common Shares to be sold by all such persons by a fraction, the numerator of
which is the number of Firm Common Shares to be sold by such person as set forth
opposite his name in Schedule B and the denominator of which is 1,200,000
(subject to such adjustments to eliminate any fractional share purchases as you
in your discretion may make). Certificates for the Optional Common Shares will
be made available for checking and packaging on the business day preceding the
Second Closing Date at a location in New York, New York, as may be designated by
you. The manner of payment for and delivery of the Optional Common Shares shall
be the same as for the Firm Common Shares purchased from the Principal Selling
Shareholders and the Other Selling Shareholder identified in Schedule B as
specified in the two preceding paragraphs. At any time before lapse of the
option, you may cancel such option by giving written notice of such cancellation
to the Company. If the option is cancelled or expires unexercised in whole or in
part, the Company will deregister under the Act the number of Optional Common
Shares as to which the option has not been exercised. Notwithstanding the
foregoing, in the event that the Registration Statement is amended or the
Prospectus is supplemented between the date hereof and any Closing Date, the
Underwriters shall have the right to delay the Closing Date to a date which will
allow the Underwriters the time necessary to distribute the Prospectus as
amended or supplemented. If the Representatives so elect, delivery of the
Optional Common Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representatives.
You have advised the Company and the Selling Shareholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to receipt therefor. You, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by
14.
<PAGE> 15
the First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the judgment
of the Representatives is advisable and at the public offering price set forth
on the cover page of and on the terms set forth in the Prospectus.
SECTION 6. Covenants of the Company. The Company covenants and
agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the
time and date that this Agreement is executed and delivered by the parties
hereto, to become effective. If the Registration Statement has become or
becomes effective pursuant to Rule 430A of the Rules and Regulations, or
the filing of the Prospectus is otherwise required under Rule 424(b) of
the Rules and Regulations, the Company will file the Prospectus, properly
completed, pursuant to the applicable paragraph of Rule 424(b) of the
Rules and Regulations within the time period prescribed and will provide
evidence satisfactory to you of such timely filing. The Company will
promptly advise you in writing (i) of the receipt of any comments of the
Commission, (ii) of any request of the Commission for amendment of or
supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have
become effective and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of the
institution of any proceedings for that purpose. If the Commission shall
enter any such stop order at any time, the Company will use its best
efforts to obtain the lifting of such order at the earliest possible
moment. The Company will not file any amendment or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus of which you have not been
furnished with a copy a reasonable time prior to such filing or to which
you reasonably object or which is not in compliance with the Act and the
Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or the Prospectus which in your judgment may be
necessary or advisable to enable the several Underwriters to continue the
distribution of the Common Shares and will use its best efforts to cause
the same to become effective as promptly as possible. The Company will
fully and completely comply
15.
<PAGE> 16
with the provisions of Rule 430A of the Rules and Regulations with respect
to information omitted from the Registration Statement in reliance upon
such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the
Common Shares is required to be delivered under the Act any event occurs,
as a result of which the Prospectus, including any amendments or
supplements, would include an untrue statement of a material fact, or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or if it is necessary at any
time to amend the Prospectus, including any amendments or supplements, to
comply with the Act or the Rules and Regulations, the Company will
promptly advise you thereof and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment or supplement which
will effect such compliance and will use its best efforts to cause the
same to become effective as soon as possible; and, in case any Underwriter
is required to deliver a prospectus after such nine-month period, the
Company upon request, but at the expense of such Underwriter, will
promptly prepare such amendment or amendments to the Registration
Statement and such Prospectus or Prospectuses as may be necessary to
permit compliance with the requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after
the end of the first quarter ending after one year following the effective
date of the Registration Statement (as defined in Rule 158(c) of the Rules
and Regulations, the "Effective Date"), the Company will make generally
available to its security holders an earnings statement (which need not be
audited) covering a period of 12 consecutive months beginning after the
effective date of the Registration Statement which will satisfy the
provisions of the last paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to
be delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred to in
Section 10(a)(3) of the Act, will furnish to you and the Selling
Shareholders or mail to your order copies of the Registration Statement,
the Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents in each case as soon as available and in
such quantities as you and the Selling Shareholders may request, for the
purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or obtain
exemptions from the application of) the Blue Sky laws of such
jurisdictions as you designate, will comply with such laws and will
continue such qualifications,
16.
<PAGE> 17
registrations and exemptions in effect so long as reasonably required for
the distribution of the Common Shares. The Company shall not be required
to qualify as a foreign corporation or to file a general consent to
service of process in any such jurisdiction where it is not presently
qualified or where it would be subject to taxation as a foreign
corporation. The Company will advise you promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company, with your cooperation, will use
its best efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company
will furnish to the Representatives and, upon request of any
Representative, to each of the other Underwriters: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report
of the Company containing the balance sheet of the Company as of the close
of such fiscal year and statements of income, shareholders' equity and
cash flows for the year then ended and the opinion thereon of the
Company's independent public accountants; (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on
Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or
other report filed by the Company with the Commission, the NASD or any
securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its Common
Stock.
(h) During the period of 180 days after the first date that
any of the Common Shares are released by you for sale to the public,
without the prior written consent of Montgomery Securities (which consent
may be withheld at the sole discretion of Montgomery Securities), the
Company will not, other than pursuant to the stock option plans and stock
purchase plan disclosed in the Prospectus, issue, offer, pledge, sell,
grant options to purchase or otherwise dispose of, directly or indirectly,
any of the Company's equity securities or any other securities convertible
into or exchangeable with its Common Stock or other equity security.
(i) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements
under the caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or
register its Common Stock for sale in non-issuer transactions under (or
obtain exemptions from the application of) the Blue Sky laws of the State
of California (and thereby permit market making transactions and secondary
trading in the Company's Common Stock in California), will comply with
such Blue Sky laws and will
17.
<PAGE> 18
continue such qualifications, registrations and exemptions in effect for a
period of five years after the date hereof.
(k) The Company will use its best efforts to maintain the
Common Stock as a national market system security on The Nasdaq Stock
Market.
(l) The Company will not amend, modify or terminate the Tax
Agreement without the prior written consent of the Representatives.
You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
SECTION 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company and, unless otherwise paid by the Company, the Selling
Shareholders agree to pay in such proportions as they may agree upon among
themselves all costs, fees and expenses incurred in connection with the
performance of their obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the generality of
the foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel and the Company's independent accountants, (v) all costs
and expenses incurred in connection with the preparation, printing, filing,
shipping and distribution of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial statements)
and all amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the Blue Sky laws, (vii) the filing fee
of the National Association of Securities Dealers, Inc., and (viii) all other
fees, costs and expenses referred to in Item 13 of the Registration Statement.
The Underwriters may deem the Company to be the primary obligor with respect to
all costs, fees and expenses to be paid by the Company and by the Selling
Shareholders. Except as provided in this Section 7, Section 9 and Section 11
hereof, the Underwriters shall pay all of their own expenses, including the fees
and disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws and the Blue Sky memorandum
referred to above). This Section 7 shall not affect
18.
<PAGE> 19
any agreements relating to the payment of expenses between the Company and the
Selling Shareholders.
SECTION 8. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Shareholders herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Shareholders made pursuant to the provisions hereof, to
the performance by the Company and the Selling Shareholders of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. (or, in the case of a registration statement filed
pursuant to Rule 462(b) of the Rules and Regulations relating to the
Common Shares, not later than 10:00 P.M.), Washington, D.C. Time, on the
date of this Agreement, or at such later time as shall have been consented
to by you; if the filing of the Prospectus, or any supplement thereto, is
required pursuant to Rule 424(b) of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) of the Rules and Regulations; and prior to such
Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the
knowledge of the Company, the Selling Shareholders or you, shall be
contemplated by the Commission; and any request of the Commission for
inclusion of additional information in the Registration Statement, or
otherwise, shall have been complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as
of which information is given in the Registration Statement and
Prospectus, (i) there shall not have been any change in the capital stock
other than pursuant to the issuance or exercise of options under the stock
option plans disclosed in the Prospectus of the Company or any material
change in the indebtedness (other than in the ordinary course of business)
of the Company, (ii) except as set forth or contemplated by the
Registration Statement or the Prospectus, no material oral or written
agreement or other transaction shall have been entered into by the
Company, which is not in the ordinary course of business or which could
reasonably be expected to result in a material reduction in the future
earnings of the Company, (iii) no loss or damage (whether or not insured)
to the property of the Company shall have been sustained which materially
and adversely affects the condition (financial or otherwise), business,
results of operations or prospects of the Company, (iv) no legal or
governmental action, suit or proceeding affecting
19.
<PAGE> 20
the Company which is material to the Company or which affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened and (v) there shall not have been any material
change in the condition (financial or otherwise), business, management,
results of operations or prospects of the Company which makes it
impractical or inadvisable in the judgment of the Representatives to
proceed with the public offering or purchase the Common Shares as
contemplated hereby.
(c) There shall have been furnished to you, as Representatives
of the Underwriters, on each Closing Date, in form and substance
satisfactory to you, except as otherwise expressly provided below:
(i)Opinion of Gray Cary Ware & Freidenrich, a
professional corporation, securities counsel for the Company and the
Selling Shareholders, addressed to the Underwriters and dated the
First Closing Date, or the Second Closing Date (in the latter case
with respect to the Company and the Principal Shareholders only), as
the case may be, to the effect that:
(1) (a) The Registration Statement has become
effective under the Act, and, to the best of such counsel's
knowledge, no stop order proceeding suspending the
effectiveness of the Registration Statement or preventing the
use of the Prospectus has been issued and no proceedings for
that purpose have been instituted or are pending or
contemplated by the Commission; any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b)
of the Rules and Regulations has been made in the manner and
within the time period required by such Rule 424(b); and
(b) The Registration Statement, the
Prospectus and each amendment or supplement thereto (except
for the financial statements and schedules included therein
and other financial data derived therefrom as to which such
counsel need express no opinion) comply as to form in all
material respects with the requirements of the Act and the
Rules and Regulations;
(2) To the best of such counsel's knowledge, this
Agreement and the Shareholders Agreement have been duly
authorized, executed and delivered by or on behalf of each of
the Selling Shareholders; the Agent has been duly and validly
authorized to act as the custodian of the Common Shares to be
sold by each such Selling Shareholder; and the performance of
this Agreement and the Shareholders Agreement and the
consummation
20.
<PAGE> 21
of the transactions herein contemplated by the Selling
Shareholders will not result in a breach of, or constitute a
default under, any indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement, lease, franchise,
license or other agreement or instrument to which any of the
Selling Shareholders is a party or by which any of the Selling
Shareholders or any of their properties may be bound, or
violate any statute, judgment, decree, order, rule or
regulation known to such counsel of any court or governmental
body having jurisdiction over any of the Selling Shareholders
or any of their properties; and to the best of such counsel's
knowledge, no approval, authorization, order or consent of any
court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery
of this Agreement or the Shareholders Agreement or the
consummation by the Selling Shareholders of the transactions
contemplated by this Agreement, except such as have been
obtained and are in full force and effect under the Act and
such as may be required under the rules of the NASD and
applicable Blue Sky laws;
(3) To the best of such counsel's knowledge, the
Selling Shareholders have full right, power and authority to
enter into this Agreement and the Shareholders Agreement and
to sell, transfer and deliver the Common Shares to be sold on
such Closing Date by such Selling Shareholders hereunder and
good and marketable title to such Common Shares so sold, free
and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts, or other
defects of title whatsoever, has been transferred to the
Underwriters (whom counsel may assume to be bona fide
purchasers) who have purchased such Common Shares hereunder;
and
(4) To the best of such counsel's knowledge, this
Agreement and the Shareholders Agreement are valid and binding
agreements of each of the Selling Shareholders in accordance
with their terms except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors'
rights generally and except with respect to those provisions
relating to indemnities or contributions for liabilities under
the Act, as to which no opinion need be expressed.
In rendering such opinion, such counsel may rely as to matters
of local law, on opinions of local counsel, and as to matters of fact, on
certificates of the Selling Shareholders and of officers of the Company
and of governmental
21.
<PAGE> 22
officials, in which case their opinion is to state that they are so doing
and that, in their opinion, the Underwriters are justified in relying on
such opinions or certificates and copies of said opinions or certificates
are to be attached to the opinion. Such counsel shall also include a
statement to the effect that nothing has come to such counsel's attention
that would lead such counsel to believe that either at the effective date
of the Registration Statement or at the applicable Closing Date the
Registration Statement or the Prospectus contains any untrue statement of
a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
(ii) Opinion of Hazel & Thomas, P.C., counsel for the
Company and the Selling Shareholders, addressed to the Underwriters
and dated the First Closing Date, or the Second Closing Date (in the
latter case with respect to the Company and the Principal
Shareholders only), as the case may be, to the effect that:
(1) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Virginia, is duly qualified to do
business as a foreign corporation and is in good standing in
all other jurisdictions where the ownership or leasing of
properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure
to so qualify would not have a material adverse effect on the
Company, and has full corporate power and authority to own its
properties and conduct its business as described in the
Registration Statement;
(2) The authorized, issued and outstanding capital
stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus and conforms as to legal
matters in all material respects to the description thereof
contained in the Registration Statement and the Prospectus
under the caption "Description of Capital Stock"; all
necessary and proper corporate proceedings have been taken in
order to authorize validly such authorized Common Stock; all
outstanding shares of Common Stock (including the Firm Common
Shares and any Optional Common Shares) have been duly and
validly issued, are fully paid and nonassessable, have been
issued in compliance with federal and state securities laws,
were not issued in violation of or subject to any preemptive
rights provided by law or by the Company's Articles of
Incorporation or Bylaws or, to the best of such counsel's
knowledge, any other rights to subscribe for or purchase any
securities and conform to the description thereof contained in
the Prospectus; without limiting the foregoing, there are no
preemptive rights
22.
<PAGE> 23
provided by law or by the Company's Articles of Incorporation
or Bylaws or, to the best of such counsel's knowledge, any
other rights to subscribe for or purchase any of the Common
Shares to be sold by the Company hereunder;
(3) The Company does not own or control, directly
or indirectly, any corporation, association or other entity;
(4) The certificates evidencing the Common Shares
to be delivered hereunder are in due and proper form under
Virginia law, and when duly countersigned by the Company's
transfer agent and registrar, and delivered to you or upon
your order against payment of the agreed consideration
therefor in accordance with the provisions of this Agreement,
the Common Shares represented thereby will be duly authorized
and validly issued, fully paid and nonassessable, will not
have been issued in violation of or subject to any preemptive
rights provided by law or by the Company's Articles of
Incorporation or Bylaws or, to the best of such counsel's
knowledge, any other rights to subscribe for or purchase
securities and will conform in all respects to the description
thereof contained in the Prospectus;
(5) Except as disclosed in or specifically
contemplated by the Prospectus, to the best of such counsel's
knowledge, there are no outstanding options, warrants or other
rights calling for the issuance of, and no commitments, plans
or arrangements to issue, any shares of capital stock of the
Company or any security convertible into or exchangeable for
capital stock of the Company;
(6) (a) To the best of such counsel's knowledge,
there are no franchises, leases, contracts, agreements or
documents of a character required to be disclosed in the
Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not disclosed
or filed, as required; and
(b) To the best of such counsel's knowledge,
there are no legal or governmental actions, suits or
proceedings pending or threatened against the Company which
are required to be described in the Prospectus which are not
described as required;
(7) The Company has full right, power and
authority to enter into this Agreement and to sell and deliver
the Common Shares to be sold by it to the several
Underwriters; this
23.
<PAGE> 24
Agreement has been duly and validly authorized by all
necessary corporate action by the Company, has been duly and
validly executed and delivered by and on behalf of the
Company, and is a valid and binding agreement of the Company
in accordance with its terms, except as enforceability may be
limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally and except as to those provisions
relating to indemnity or contribution for liabilities arising
under the Act as to which no opinion need be expressed; and no
approval, authorization, order, consent, registration, filing,
qualification, license or permit of or with any court,
regulatory, administrative or other governmental body or
agency is required for the execution and delivery of this
Agreement by the Company or the consummation of the
transactions contemplated by this Agreement, except such as
have been obtained and are in full force and effect under the
Act and such as may be required under applicable Blue Sky laws
in connection with the purchase and distribution of the Common
Shares by the Underwriters and the clearance of such offering
with the NASD;
(8) The execution and performance of this
Agreement and the Tax Agreement by the Company and the
consummation of the transactions herein contemplated will not
conflict with, result in the breach of, or constitute, either
by itself or upon notice or the passage of time or both, a
default under, any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument
known to such counsel to which the Company or the Principal
Shareholders is a party or by which the Company or any of its
or their property may be bound or affected which is material
to the Company or the Principal Shareholders, or violate any
of the provisions of the certificate of incorporation or
bylaws, or other organizational documents, of the Company or,
to the best of such counsel's knowledge, violate any statute,
judgment, decree, order, rule or regulation of any court or
governmental body having jurisdiction over the Company or the
Principal Shareholders or any of its or their property;
(9) The Company is not in violation of its
certificate of incorporation or bylaws, or other
organizational documents, or to the best of such counsel's
knowledge, in breach of or default with respect to any
provision of any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument
known to such counsel to which the Company is a party or by
which it or any of its properties may be bound or affected,
24.
<PAGE> 25
except where such default would not materially adversely
affect the Company; and, to the best of such counsel's
knowledge, the Company is in compliance with all laws, rules,
regulations, judgments, decrees, orders and statutes of any
court or jurisdiction to which they are subject, except where
noncompliance would not materially adversely affect the
Company;
(10) To the best of such counsel's knowledge, no
holders of securities of the Company have rights which have
not been waived to the registration of shares of Common Stock
or other securities, because of the filing of the Registration
Statement by the Company or the offering contemplated hereby;
(11) Each of the Company and the Principal
Shareholders has full right, power and authority to enter into
the Tax Agreement; the Tax Agreement has been duly and validly
authorized by all necessary corporate action by the Company
and the Principal Shareholders, has been duly and validly
executed and delivered by and on behalf of the Company and the
Principal Shareholders, and is a valid and binding agreement
of each of the Company and the Principal Shareholders in
accordance with its terms, except as enforceability may be
limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally; and no approval, authorization,
order, consent, registration, filing, qualification, license
or permit of or with any court, regulatory, administrative or
other governmental body is required for the execution and
delivery of the Tax Agreement by the Company or the Principal
Shareholders or the consummation of the transactions
contemplated by the Tax Agreement; and
(12) No transfer taxes are required to be paid in
connection with the sale and delivery of the Common Shares to
the Underwriters hereunder.
In rendering such opinion, such counsel may rely as to matters
of local law, on opinions of local counsel, and as to matters of fact, on
certificates of the Selling Shareholders and of officers of the Company
and of governmental officials, in which case their opinion is to state
that they are so doing and that, in their opinion, the Underwriters are
justified in relying on such opinions or certificates and copies of said
opinions or certificates are to be attached to the opinion. Such counsel
shall also include a statement to the effect that nothing has come to such
counsel's attention that would lead such counsel to believe that either at
the effective date of the Registration Statement or at the applicable
25.
<PAGE> 26
Closing Date the Registration Statement or the Prospectus contains any
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading.
(iii) Such opinion or opinions of Brobeck, Phleger &
Harrison LLP, counsel for the Underwriters dated the First Closing
Date or the Second Closing Date, as the case may be, with respect to
the incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require,
and the Company and the Selling Shareholders shall have furnished to
such counsel such documents and shall have exhibited to them such
papers and records as they may reasonably request for the purpose of
enabling them to pass upon such matters. In connection with such
opinions, such counsel may rely on representations or certificates
of officers of the Company and governmental officials.
(iv) A certificate of the Company executed by the
Chairman of the Board or President and the chief financial or
accounting officer of the Company, dated the First Closing Date or
the Second Closing Date, as the case may be, to the effect that:
(1) The representations and warranties of the
Company set forth in Section 2 of this Agreement are true and
correct as of the date of this Agreement and as of the First
Closing Date or the Second Closing Date, as the case may be,
and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied on or prior to such Closing Date;
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or any
Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending
the effectiveness of the Registration Statement has been
issued; and to the best of the knowledge of the respective
signers, no proceedings for that purpose have been instituted
or are pending or contemplated under the Act;
(3) Each of the respective signers of the
certificate has carefully examined the Registration Statement
and the Prospectus; in his opinion and to the best of his
knowledge, the Registration Statement and the Prospectus and
any amendments or
26.
<PAGE> 27
supplements thereto contain all statements required to be
stated therein regarding the Company and neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading;
(4) To the best of his knowledge, since the
initial date on which the Registration Statement was filed, no
agreement, written or oral, transaction or event has occurred
which should have been set forth in an amendment to the
Registration Statement or in a supplement to or amendment of
any prospectus which has not been disclosed in such a
supplement or amendment;
(5) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as disclosed in or contemplated by the
Prospectus, to the best of his knowledge, there has not been
any material adverse change or a development involving a
material adverse change in the condition (financial or
otherwise), business, properties, results of operations,
management or prospects of the Company; and no legal or
governmental action, suit or proceeding is pending or, to the
best of his knowledge, threatened against the Company which is
material to the Company, whether or not arising from
transactions in the ordinary course of business, or which may
adversely affect the transactions contemplated by this
Agreement; since such dates and except as so disclosed, to the
best of his knowledge, the Company has not entered into any
oral or written agreement or other transaction which is not in
the ordinary course of business or which could reasonably be
expected to result in a material reduction in the future
earnings of the Company or incurred any material liability or
obligation, direct, contingent or indirect, made any change in
its capital stock, made any material change in its short-term
debt or funded debt or repurchased or otherwise acquired any
of the Company's capital stock; and other than as described in
the Prospectus the Company has not declared or paid any
dividend, or made any other distribution, upon its outstanding
capital stock payable to shareholders of record on a date
prior to the First Closing Date or Second Closing Date; and
(6) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus and except as disclosed in or contemplated by the
Prospectus, the Company has not sustained a material loss or
27.
<PAGE> 28
damage by strike, fire, flood, windstorm, accident or other
calamity (whether or not insured).
(v) On the First Closing Date, a certificate, dated such
Closing Date and addressed to you, signed by or on behalf of each of
the Selling Shareholders to the effect that the representations and
warranties of such Selling Shareholder in this Agreement are true
and correct, as if made at and as of the First Closing Date and such
Selling Shareholder has complied with all the agreements and
satisfied all the conditions on his part to be performed or
satisfied prior to the First Closing Date.
(vi) On the date before this Agreement is executed and
also on the First Closing Date and the Second Closing Date, a letter
addressed to you, as Representatives of the Underwriters, from
Arthur Andersen LLP, independent accountants, the first one to be
dated the date of this Agreement, the second one to be dated the
First Closing Date and the third one (in the event of a Second
Closing) to be dated the Second Closing Date, in form and substance
satisfactory to you.
(vii) On or before the First Closing Date, letters from
each of the Selling Shareholders, each holder of 30,000 shares or
more of the Company's Common Stock and each director and officer of
the Company, in form and substance satisfactory to you, confirming
that for a period of 180 days after the first date that any of the
Common Shares are released by you for sale to the public, such
person will not directly or indirectly offer to sell, pledge, sell
or contract to sell or otherwise dispose of any shares of Common
Stock or any right to acquire such shares or securities convertible
into or exchangeable for any shares of Common Stock without the
prior written consent of Montgomery Securities, which consent may be
withheld at the sole discretion of Montgomery Securities.
(viii) The Common Stock shall have been approved for
quotation as a national market system security on The Nasdaq Stock
Market upon notice of issuance.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Brobeck, Phleger & Harrison LLP, counsel for the Underwriters. The Company
shall furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you request. Any certificate
signed by any officer of the Company and delivered to the Representatives or to
counsel for the Underwriters shall be deemed to be a representation and warranty
by the Company to the Underwriters as to the statements made therein.
28.
<PAGE> 29
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company and the Selling Shareholders without liability on
the part of any Underwriter, the Company or the Selling Shareholders except for
the expenses to be paid or reimbursed by the Company and by the Selling
Shareholders pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding
any other provisions hereof, if this Agreement shall be terminated by you
pursuant to Section 8, or if the sale to the Underwriters of the Common Shares
at the First Closing is not consummated because of any refusal, inability or
failure on the part of the Company or the Selling Shareholders to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse you and the other Underwriters upon demand for all out-of-pocket
expenses that shall have been reasonably incurred by you and them in connection
with the proposed purchase and the sale of the Common Shares, including but not
limited to fees and disbursements of counsel, printing expenses, travel
expenses, postage, telegraph charges and telephone charges relating directly to
the offering contemplated by the Prospectus. Any such termination shall be
without liability of any party to any other party except that the provisions of
this Section , Section 7 and Section 11 shall at all times be effective and
shall apply.
SECTION 10. Effectiveness of Registration Statement. You, the
Company and the Selling Shareholders will use your, its and their best efforts
to cause the Registration Statement to become effective, to prevent the issuance
of any stop order suspending the effectiveness of the Registration Statement
and, if such stop order be issued, to obtain as soon as possible the lifting
thereof.
SECTION 11. Indemnification.
(a)(1) The Company and each of the Principal Selling
Shareholders, jointly and severally, agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act against any losses,
claims, damages, liabilities or expenses, joint or several, to which
such Underwriter or such controlling person may become subject,
under the Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with
the written consent of the Company), insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of
or are based upon the
29.
<PAGE> 30
omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make the statements in
any of them not misleading, or arise out of or are based in whole or
in part on any inaccuracy in the representations and warranties of
the Company or the Principal Selling Shareholders contained herein
or any failure of the Company or the Principal Selling Shareholders
to perform their respective obligations hereunder or under law; and
will reimburse each Underwriter and each such controlling person for
any legal and other expenses as such expenses are reasonably
incurred by such Underwriter or such controlling person in
connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action;
provided, however, that neither the Company nor the Principal
Selling Shareholders will be liable in any such case to the extent
that any such loss, claim, damage, liability or expense arises out
of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 4 hereof.
The indemnity agreement provided in this Section 11(a)(1) with
respect to any Preliminary Prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any such losses,
claims, damages, liabilities or expenses based upon any untrue
statement or alleged untrue statement of any material fact or any
omission or alleged omission to state therein a material fact
purchased Common Shares if a copy of the Prospectus in which such
untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been delivered to such person within
the time required by the Act and the Rules and Regulations
thereunder, unless such failure is the result of noncompliance by
the Company with Section 6(e) hereof. The Company and the Principal
Selling Shareholders may agree, as among themselves and without
limiting the rights of the Underwriters under this Agreement, as to
their respective amounts of such liability for which they each shall
be responsible. In addition to its other obligations under this
Section 11(a)(1), the Company and the Principal Selling Shareholders
agree that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or
omission, or any inaccuracy in the representations and warranties of
the Company or the Principal Selling Shareholders herein or failure
to perform its obligations hereunder, all as described in this
Section 11(a)(1), it will reimburse each Underwriter on a quarterly
basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and
enforceability of
30.
<PAGE> 31
the Company's or the Principal Selling Shareholders' obligation to
reimburse each Underwriter for such expenses and the possibility
that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each
Underwriter shall promptly return it to the Company together with
interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest
credit standing) announced from time to time by Bank of America
NT&SA, San Francisco, California (the "Prime Rate"). Any such
interim reimbursement payments which are not made to an Underwriter
within 30 days of a request for reimbursement, shall bear interest
at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which the Company or
the Principal Selling Shareholders may otherwise have.
(2)Each of the Other Selling Shareholders, jointly and
severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning
of the Act against any losses, claims, damages, liabilities or
expenses, joint or several, to which such Underwriter or such
controlling person may become subject, under the Act, the Exchange
Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation,
if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof as contemplated below) arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state in any of them a material
fact required to be stated therein or necessary to make the
statements in any of them not misleading. In addition, each of the
Other Selling Shareholders, severally and not jointly, agree to
indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, to
which such Underwriter or such controlling person may become
subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such
losses, claims, damages, liabilities or expenses (or actions in
respect thereof as contemplated below) arise out of or are based in
whole or in part on any inaccuracy in the representations and
warranties of the Other Selling Shareholders contained herein or any
failure of the Other Selling Shareholders to perform their
respective obligations hereunder or under
31.
<PAGE> 32
law; and will reimburse each Underwriter and each such controlling
person for any legal and other expenses as such expenses are
reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising
or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the Other Selling Shareholders will
not be liable in any such case to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon
an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with the information furnished to
the Company pursuant to Section 4 hereof. The indemnity agreement
provided in this Section 11(a)(2) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages,
liabilities or expenses based upon any untrue statement or alleged
untrue statement of any material fact or any omission or alleged
omission to state therein a material fact purchased Common Shares if
a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had
not been delivered to such person within the time required by the
Act and the Rules and Regulations thereunder, unless such failure is
the result of noncompliance by the Company with Section 6(e) hereof.
The Other Selling Shareholders may agree, as among themselves and
without limiting the rights of the Underwriters under this
Agreement, as to their respective amounts of such liability for
which they each shall be responsible. In addition to its other
obligations under this Section 11(a)(2), the Other Selling
Shareholders agree that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any
alleged statement or omission, or any inaccuracy in the
representations and warranties of the Other Selling Shareholders
herein or failure to perform its obligations hereunder, all as
described in this Section 11(a)(2), they will reimburse each
Underwriter on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Other Selling Shareholders'
obligation to reimburse each Underwriter for such expenses and the
possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that
any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the Other
Selling Shareholders together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to an Underwriter within
30
32.
<PAGE> 33
days of a request for reimbursement, shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement
will be in addition to any liability which the Other Selling
Shareholders may otherwise have. Notwithstanding anything else
herein, in no event shall the liability of any Other Selling
Shareholder for indemnification under this Section 11(a)(2) or for
breach of representations or warranties under this Agreement exceed
the proceeds received by such Other Selling Shareholder from the
Underwriters in the offering.
(b) Each Underwriter will severally indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Selling Shareholders and each
person, if any, who controls the Company or any Selling Shareholder within
the meaning of the Act, against any losses, claims, damages, liabilities
or expenses to which the Company, or any such director, officer, Selling
Shareholder or controlling person may become subject, under the Act, the
Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if
such settlement is effected with the written consent of such Underwriter),
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are
based upon any untrue or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with the information furnished
to the Company pursuant to Section 4 hereof; and will reimburse the
Company, or any such director, officer, Selling Shareholder or controlling
person for any legal and other expense reasonably incurred by the Company,
or any such director, officer, Selling Shareholder or controlling person
in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. In
addition to its other obligations under this Section 11(b), each
Underwriter severally agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged
statement or omission, described in this Section 11(b) which relates to
information furnished to the Company pursuant to Section 4 hereof, it will
reimburse the Company (and, to the extent applicable, each officer,
director, controlling person or Selling Shareholder) on a quarterly basis
for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a
33.
<PAGE> 34
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director, controlling person or Selling
Shareholder) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is
so held to have been improper, the Company (and, to the extent applicable,
each officer, director, controlling person or Selling Shareholder) shall
promptly return it to the Underwriters together with interest, compounded
daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within 30 days of
a request for reimbursement, shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement will be in addition to
any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an
indemnifying party under this Section , notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may
have to any indemnified party for contribution or otherwise than under the
indemnity agreement contained in this Section or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action
is brought against any indemnified party and such indemnified party seeks
or intends to seek indemnity from an indemnifying party, the indemnifying
party will be entitled to participate in, and, to the extent that it may
wish, jointly with all other indemnifying parties similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a
conflict between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or that
there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right
to select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified
party or parties. Upon receipt of notice from the indemnifying party to
such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying
party will not be liable to such indemnified party under this Section for
any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof unless (i) the indemnified
party shall have employed such counsel in connection with the assumption
of legal defenses in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall
not be liable for the expenses of more
34.
<PAGE> 35
than one separate counsel, approved by the Representatives in the case of
paragraph (a)(1) or (a)(2), representing the indemnified parties who are
parties to such action) or (ii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and expenses
of counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under
paragraphs (a)(1), (a)(2), (b) or (c) in respect of any losses, claims,
damages, liabilities or expenses referred to herein, then each applicable
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of any losses, claims, damages, liabilities
or expenses referred to herein (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, the Selling
Shareholders and the Underwriters from the offering of the Common Shares
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the
relative fault of the Company, the Selling Shareholders and the
Underwriters in connection with the statements or omissions or
inaccuracies in the representations and warranties herein which resulted
in such losses, claims, damages, liabilities or expenses, as well as any
other relevant equitable considerations. The respective relative benefits
received by the Company, the Selling Shareholders and the Underwriters
shall be deemed to be in the same proportion, in the case of the Company
and the Selling Shareholders as the total price paid to the Company and to
the Selling Shareholders, respectively, for the Common Shares sold by them
to the Underwriters (net of underwriting commissions but before deducting
expenses), and in the case of the Underwriters as the underwriting
commissions received by them bears to the total of such amounts paid to
the Company and to the Selling Shareholders and received by the
Underwriters as underwriting commissions. The relative fault of the
Company, the Selling Shareholders and the Underwriters shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state
a material fact or the inaccurate or the alleged inaccurate representation
and/or warranty relates to information supplied by the Company, the
Selling Shareholders or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred
to above shall be deemed to include, subject to the limitations set forth
in subparagraph (c) of this Section 11, any legal or other fees or
expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth
in
35.
<PAGE> 36
subparagraph (c) of this Section 11 with respect to notice of commencement
of any action shall apply if a claim for contribution is to be made under
this subparagraph (d); provided, however, that no additional notice shall
be required with respect to any action for which notice has been given
under subparagraph (c) for purposes of indemnification. The Company, the
Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 11 were determined
solely by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which
does not take account of the equitable considerations referred to in this
subparagraph (d). Notwithstanding the provisions of this Section 11, no
Underwriter shall be required to contribute any amount in excess of the
amount of the total underwriting commissions received by such Underwriter
in connection with the Common Shares underwritten by it and distributed to
the public. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
The Underwriters' obligations to contribute pursuant to this Section 11
are several in proportion to their respective underwriting commitments and
not joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
11(a)(1), 11(a)(2) and 11(b) hereof, including the amounts of any
requested reimbursement payments and the method of determining such
amounts, shall be settled by arbitration conducted under the provisions of
the Constitution and Rules of the Board of Governors of the New York Stock
Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the
NASD. Any such arbitration must be commenced by service of a written
demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said
demand or notice is authorized to do so. Such an arbitration would be
limited to the operation of the interim reimbursement provisions contained
in Sections 11(a)(1), 11(a)(2) and 11(b) hereof and would not resolve the
ultimate propriety or enforceability of the obligation to reimburse
expenses which is created by the provisions of such Sections 11(a)(1),
11(a)(2) and 11(b) hereof.
SECTION 12. Default of Underwriters. It shall be a condition to this
Agreement and the obligation of the Company and the Selling Shareholders to sell
and deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for all
the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Representatives of all such shares in accordance with the terms
hereof. If any Underwriter or Underwriters default in their obligations to
purchase Common Shares
36.
<PAGE> 37
hereunder on either the First or Second Closing Date and the aggregate number of
Common Shares which such defaulting Underwriter or Underwriters agreed but
failed to purchase on such Closing Date does not exceed 10% of the total number
of Common Shares which the Underwriters are obligated to purchase on such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Common
Shares which such defaulting Underwriters agreed but failed to purchase on such
Closing Date. If any Underwriter or Underwriters so default and the aggregate
number of Common Shares with respect to which such default occurs is more than
the above percentage and arrangements satisfactory to the Representatives and
the Company for the purchase of such Common Shares by other persons are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company or the
Selling Shareholders except for the expenses to be paid by the Company and the
Selling Shareholders pursuant to Section 7 hereof and except to the extent
provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected. As used
in this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section . Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective
immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California Time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California Time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
or by release of any of the Common Shares for sale to the public. For the
purposes of this Section 13, the Common Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising Underwriters that the Common Shares are released for public offering,
or (ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 14. Termination. Without limiting the right to terminate
this Agreement pursuant to any other provision hereof:
37.
<PAGE> 38
(a) This Agreement may be terminated by the Company by notice
to you and the Selling Shareholders or by you by notice to the Company and
the Selling Shareholders at any time prior to the time this Agreement
shall become effective as to all its provisions, and any such termination
shall be without liability on the part of the Company or the Selling
Shareholders to any Underwriter (except for the expenses to be paid or
reimbursed by the Company and the Selling Shareholders pursuant to
Sections 7 and 9 hereof and except to the extent provided in Section 11
hereof) or of any Underwriter to the Company or the Selling Shareholders
(except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the
First Closing Date by notice to the Company (i) if additional material
governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum or
maximum prices shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been
suspended on either such Exchange or in the over the counter market by the
NASD, or a general banking moratorium shall have been established by
federal, New York or California authorities, (ii) if an outbreak of major
hostilities or other national or international calamity or any substantial
change in political, financial or economic conditions shall have occurred
or shall have accelerated or escalated to such an extent, as, in the
judgment of the Representatives, to affect adversely the marketability of
the Common Shares, (iii) if any adverse event shall have occurred or shall
exist which makes untrue or incorrect in any material respect any
statement or information contained in the Registration Statement or
Prospectus or which is not reflected in the Registration Statement or
Prospectus but should be reflected therein in order to make the statements
or information contained therein not misleading in any material respect,
or (iv) if there shall be any action, suit or proceeding pending or
threatened, or there shall have been any development or prospective
development involving particularly the business or properties or
securities of the Company or the transactions contemplated by this
Agreement, which, in the reasonable judgment of the Representatives, may
materially and adversely affect the Company's business or earnings and
makes it impracticable or inadvisable to offer or sell the Common Shares.
Any termination pursuant to this subsection (b) shall be without liability
on the part of any Underwriter to the Company or the Selling Shareholders
or on the part of the Company or the Selling Shareholders to any
Underwriter (except for expenses to be paid or reimbursed by the Company
and the Selling Shareholders pursuant to Sections 7 and 9 hereof and
except to the extent provided in Section 11 hereof).
(c) This Agreement shall also terminate at 5:00 P.M., California
Time, on the tenth full business day after the Registration Statement
shall have become effective if the initial public offering price of the
Common Shares shall not then
38.
<PAGE> 39
as yet have been determined as provided in Section 5 hereof. Any
termination pursuant to this subsection (c) shall without liability on the
part of any Underwriter to the Company or the Selling Shareholders or on
the part of the Company or the Selling Shareholders to any Underwriter
(except for expenses to be paid or reimbursed by the Company and the
Selling Shareholders pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof).
SECTION 15. Failure of the Selling Shareholders to Sell and Deliver.
If one or more of the Selling Shareholders shall fail to sell and deliver to the
Underwriters the Common Shares to be sold and delivered by such Selling
Shareholders at the First Closing Date under the terms of this Agreement, then
the Underwriters may at their option, by written notice from you to the Company
and the Selling Shareholders, either (i) terminate this Agreement without any
liability on the part of any Underwriter or, except as provided in Sections 7, 9
and 11 hereof, the Company or the Selling Shareholders, or (ii) purchase the
shares which the Company and other Selling Shareholders have agreed to sell and
deliver in accordance with the terms hereof. In the event of a failure by one or
more of the Selling Shareholders to sell and deliver as referred to in this
Section , either you or the Company shall have the right to postpone the Closing
Date for a period not exceeding seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected.
SECTION 16. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Shareholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 17. Notices. All communications hereunder shall be in
writing and, if sent to the Representatives shall be mailed, delivered or
telegraphed and confirmed to you at 600 Montgomery Street, San Francisco,
California 94111, Attention: David Ketsdever, with a copy to Brobeck, Phleger &
Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California
94303, Attention: Thomas A. Bevilacqua, Esq.; and if sent to the Company or the
Selling Shareholders shall be mailed, delivered or telegraphed and confirmed to
the Company at Deltek Systems, Inc., 8280 Greensboro Drive, McLean, Virginia
22102, Attention: Kenneth E. de Laski, with a copy to Gray Cary Ware &
Freidenrich, a Professional Corporation, 400 Hamilton Avenue, Palo Alto,
California 94301, Attention: Dennis C. Sullivan, Esq. and Hazel & Thomas, P.C.,
3110 Fairview Park Drive, Suite 1400, Falls Church, Virginia 22042, Attention:
Robert E. Gregg, Esq. The Company, the Selling Shareholders or you may change
the address for receipt of communications hereunder by giving notice to the
others.
39.
<PAGE> 40
SECTION 18. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 12 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 11, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 19. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you
jointly or by Montgomery Securities, as Representatives, will be binding upon
all the Underwriters.
SECTION 20. Partial Unenforceability. The invalidity or
unenforceability of any Section , paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section , paragraph or
provision hereof. If any Section , paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 21. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 22. General. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Shareholders and you.
Any person executing and delivering this Agreement as
Attorney-in-fact for the Selling Shareholders represents by so doing that he has
been duly appointed as Attorney-in-fact by such Selling Shareholder pursuant to
a validly existing and binding Power of Attorney which authorizes such
Attorney-in-fact to take such action. Any
40.
<PAGE> 41
action taken under this Agreement by any of the Attorneys-in-fact will be
binding on all the Selling Shareholders.
41.
<PAGE> 42
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company, the Selling Shareholders and
the several Underwriters including you, all in accordance with its terms.
Very truly yours,
DELTEK SYSTEMS, INC.
By:_______________________________
Kenneth E. de Laski
President and Chief Executive
Officer
SELLING SHAREHOLDERS
By:_______________________________
(Attorney-in-fact)
By:_______________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
WILLIAM BLAIR & COMPANY, L.L.P.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By MONTGOMERY SECURITIES
By:_______________________________
Managing Director
42.
<PAGE> 43
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Montgomery Securities.......................................
William Blair & Company, L.L.P. ............................
TOTAL......................... 2,900,000
=========
</TABLE>
A-1
<PAGE> 44
SCHEDULE B
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Principal Selling Shareholder to be Sold
- ------------------------------------- ----------
<S> <C>
Donald de Laski ............................................
Kenneth E. de Laski ........................................
---------
TOTAL......................... =========
Name of Other Selling Shareholder
---------
TOTAL ........................ =========
</TABLE>
- -----------
* Indicates an Other Selling Shareholder who has granted the Underwriters an
option to purchase Optional Common Shares.
B-1
<PAGE> 1
EXHIBIT 4.1
FRONT OF THE CERTIFICATE:
COMMON STOCK COMMON STOCK
NUMBER DELTEK SHARES
DLTK__________ _____________
DELTEK SYSTEMS, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF VIRGINIA
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN BOSTON, MA OR IN NEW YORK, NY CUSIP 24785A 10 8
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.001 PER
SHARE, OF
DELTEK SYSTEMS, INC.
Certificate of stock transferable only on the books of the Corporation by the
holder hereof, in person or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
Alan R. Stewart /s/ [SEAL] Donald deLaski /s/
Chief Financial Officer Chairman
and Secretary
COUNTERSIGNED AND REGISTERED:
THE FIRST NATION BANK OF BOSTON
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
REVERSE SIDE OF THE CERTIFICATE:
DELTEK SYSTEMS, INC.
This Certificate and the shares represented hereby are subject to the laws
of the Commonwealth of Virginia and to the provisions of the Articles of
Incorporation of the Corporation as amended from time to time. The Corporation
shall furnish to any shareholder upon request and without charge a written
statement of the designations, relative rights, preferences and limitations
applicable to each class of shares and the variations in rights, preferences
and limitations determined for each series within a class (and the authority of
the Board of Directors of the Corporation to determine variations for future
series). Such requests shall be made to the Corporation's Secretary at the
principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<PAGE> 2
TEN COM as tenants in common UNIF GIFT MIN ACT -- ________(Custodian)
TEN ENT as tenants by the entireties _____________ (Minor)
JT TEN as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as Act ____________ (State)
tenants in common UNIF TRF MIN ACT -- ________ (Custodian)
(until age _____________)
____________ (Minor)
under Uniform Transfers to
Minors Act ____________
(State)
Additional abbreviations may also be used though not on the above list.
FOR VALUE RECEIVED, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(_________________________________)
______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
______________________________________________________________________________
______________________________________________________________________________
_______________________________________________________________________Shares of
the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _____________________________________
X ____________________________________
X_____________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
--------------------------------
The signature(s) should be guaranteed by an eligible guarantor institution
banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program, pursuant to
SEC Rule 17Ad-15.
<PAGE> 1
February , 1997
1040745-900100
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Deltek Systems, Inc.
Registration Statement on Form S-1
Registration No. 333-18247
Ladies and Gentlemen:
As counsel to Deltek Systems, Inc., a Virginia corporation (the
"Company"), we are rendering this opinion in connection with a proposed sale by
the Company of up to 3,335,000 shares of its common stock, $0.001 par value
("Common Stock"), pursuant to the above-referenced Registration Statement.
We have examined all instruments, documents and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity
to the originals of all documents submitted to us as copies. As to our opinion
that the shares to be sold by the selling shareholders are fully paid, we have
relied solely upon representations by officers of the Company concerning
receipt by the Company of consideration for such shares.
Based on such examination, we are of the opinion that the 3,335,000
shares of Common Stock to be issued and sold by the Company (of which up to
435,000 shares are to be issued to cover over-allotments, if any) are duly
authorized shares of Common Stock and, when issued against payment of the
purchase price therefor, will be validly issued, fully paid and nonassessable.
<PAGE> 2
Securities and Exchange Commission
February __, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
GRAY CARY WARE & FREIDENRICH
A Professional Corporation
<PAGE> 1
EXHIBIT 10.2
DELTEK SYSTEMS, INC.
EMPLOYEE TIME ACCELERATED STOCK OPTION PLAN
1. Name and Purpose
(a) This plan shall be known as the Deltek Systems, Inc.
Employee Time Accelerated Stock Option Plan (the "Plan").
(b) The purpose of the Plan is to promote the growth of
Deltek Systems, Inc. (the "Company") by attracting, retaining
and motivating its key employees and encouraging them to own
stock.
2. Administration
(a) The Plan shall be administered by the Company's Board of Directors
(the "Board"). The Board shall have the power, subject to the express
provisions of the Plan:
(1) To determine the recipients of stock options under the Plan, the
time of grant of the options, the number of shares covered by the
grant and the option price.
(2) To prescribe the terms and provisions of each Option Agreement
and each Notice of Exercise.
(3) To construe and interpret the Plan; to establish, amend, and
revoke rules and regulations for the Plan's Administration; and to
make all other determinations necessary or advisable for the
administration of the Plan.
(b) No member of the Board shall be liable for any action or determination
made in good faith with respect to the Plan or to any option.
(c) The Board may grant options from time to time pursuant to the Plan.
Options granted pursuant to the Plan shall be evidenced by agreements
("Stock Option Agreement") specifying the number of shares covered thereby
(sometimes hereinafter referred to as the "Option Shares"), in such form
as the Board shall from time to time establish, which Stock Option
Agreement may incorporate all or any of the terms of the Plan by reference
and shall comply with and be subject to the terms and conditions of the
Plan.
<PAGE> 2
3. Participation
Officers and other key employees of the Company shall be eligible to
receive stock options under the Plan. The Board shall designate the
recipients of the stock options.
4. Shares Subject to the Plan
Subject to the provisions of Paragraph 11 (relating to changes in the
Stock), the shares that may be sold pursuant to options granted pursuant
to the Plan shall not exceed in the aggregate 500,000 shares of common
stock of the Company, par value $0.001 ("Common Stock"). If any option
granted hereunder shall lapse or be cancelled or terminated without being
exercised, the unpurchased shares subject thereto shall again be available
for the purposes of the Plan. Any shares previously issued on account of
the exercise of all or part of such options but which have been
repurchased by the Company shall also be available for the purposes of the
Plan. The Company shall not be required upon the exercise of any option,
to issue or deliver any shares prior to the completion of such
registration or other qualification of such shares under any state or
Federal law, rule or regulation as the Company shall determine to be
necessary or desirable.
5. Option Price
(a) The option price for each Option Share shall not be less than the fair
market value of a share of the Common Stock on the date the option is
granted.
(b) Shares of the Company's Common Stock are not currently listed upon an
established stock exchange or traded in the over-the-counter market.
Accordingly, until such time as the shares are listed upon an established
stock exchange or traded in the over-the-counter market, the fair market
value of the shares shall be determined in good faith by the Board of
Directors, assuming (i) the full exercise of all then outstanding options
and rights to acquire Common Stock and (ii) the full conversion of all
then outstanding securities convertible into Common Stock.
(c) When and if shares of the Company's Common Stock are listed upon an
established stock exchange or exchanges, the fair market value of the
shares as of the date of valuation hereunder shall be deemed to be the
closing price on that date of the shares on the largest such stock
exchange upon which such shares are listed or if no sale of such shares
shall have been made on such stock exchange on that date, on the next
2
<PAGE> 3
preceding day on which there was a sale of such shares on such
stock exchange.
(d) When and if shares of the Company's Common Stock are traded in the
over-the-counter market but not on an established exchange or exchanges,
the fair market value per share as of the date of valuation hereunder
shall be the mean between dealer "bid" and "asked" prices of the shares as
reported on that date by the National Association of Security Dealers,
Inc.
6. Term of Option.
(a) No option may be exercisable after the expiration of ten (10) years
from the date such option is granted; provided however, if, thirty (30)
days prior to the expiration of an option, the Common Stock of the Company
is not listed upon an established stock exchange or traded in the
over-the-counter market, the Company shall, at its sole option, either
extend the ten-year option term by an additional five (5) years or waive
the Company's right of first refusal in paragraph 11.
(b) Any options, which are vested at the date an optionee's employment by
the Company terminates, whether with or without cause, shall terminate
three months following the effective date of termination. Notwithstanding
the foregoing, the provisions of this subparagraph shall be subject to
subparagraph (a) above and Paragraph 13 which may earlier terminate the
option.
7. Vesting Period for Options
(a) The Board shall have the right to set the time or times within which
each option shall be exercisable, and to accelerate the time or times of
exercise. Unless the Option Agreement executed by the optionee expressly
otherwise provides, the option shall be exercisable as set forth in this
paragraph.
(b) Unless the vesting schedule in subparagraph (c) below applies, stock
options granted pursuant to the Plan shall vest and be exercisable as to
all Option Shares at the later of (i) five (5) years from date the option
was granted or (ii) 5:00 p.m. eastern time on January 1, 2004.
(c) The following vesting schedule shall apply (retroactively and
prospectively) if, prior to January 1, 2004, (i) the Company has issued
stock to the public in an underwritten public offering, (ii) the Company
has been acquired (whether
3
<PAGE> 4
by merger or the sale of all or substantially all of the company's assets
or a majority of the Company's outstanding Common Stock) or (iii) the
Company no longer qualifies to be taxed as an "S Corporation" under
Subchapter S of the Internal Revenue Code of 1986, as amended:
(1) The stock options granted pursuant to the Plan shall vest and be
exercisable on a cumulative basis at the rate of 20% of the Option
Shares per year of continuous full-time employment as described
herein. An initial 20% of the Option Shares shall vest on the first
one year anniversary following the date of grant, as long as the
optionee is still employed full-time throughout the year and has
been continuously employed throughout the year. An additional 20% of
the Option Shares shall vest each year thereafter on the optionee's
anniversary of the date of grant as long as the optionee is still
employed full-time and has been continuously employed throughout the
year.
(2) The vesting schedule set forth in subparagraph (c)(1) above
shall not apply during any years (measured from the date of grant)
when an optionee is not continuously employed full-time. During any
such year, his or her stock options under the Plan shall vest and be
exercisable at a rate equal to 20% of the Option Shares multiplied
by the ratio of (i) the number of hours the optionee actually worked
during the year to (ii) 1,896 hours.
8. Exercise of Options
(a) Each option may be exercisable in installments (which need not be
equal) except as limited in the Option Agreement.
(b) To the extent the right to purchase shares has accrued under a Stock
Option Agreement, options may be exercised from time to time by written
"Notice of Exercise" to the Company stating the number of shares being
purchased and rights being exercised, accompanied by the payment in full
for the shares being purchased and execution of such other documents as
the Company may reasonably require or as are required by the Stock Option
Agreement. If the shares of Common Stock issuable upon exercise are not
registered under the Securities Act of 1933, the Company at the time of
exercise may require that the registered owner deliver an investment
representation in form acceptable to the Company and its counsel.
4
<PAGE> 5
(c) The full purchase price of shares sold pursuant to the option shall be
tendered with the Notice of Exercise and may be made (i) in cash, (ii) in
shares of the outstanding Common Stock of the Company, (iii) only if
specifically approved by the Board at the time of grant or exercise, on a
deferred payment basis the terms of which will be determined by the Board,
or (iv) in a combination of the methods described in (i) and (ii) and, if
approved by the Board, (iii).
(d) If shares of Common Stock are used as part or full payment upon
exercise of the option, such shares shall be valued for the purpose of
such exchange at fair market value as of the date of exercise of the
option in accordance with the provisions of Paragraph 5(b), (c) and (d)
above, but the optionee shall state in the Notice of Exercise the value
which the optionee believes is appropriate. If such shares finally are
valued at an amount less than that stated in the Notice of Exercise, the
optionee may (i) withdraw the Notice of Exercise and the tendered payment,
or (ii) pay to the Company any shortfall in such payment in cash or by a
Board approved deferred payment method as provided above. Any certificates
for Common Stock tendered to pay the option price shall be accompanied by
stock powers duly endorsed in blank by the registered holder thereof (with
the signature thereon guaranteed).
(e) Within thirty (30) days after receipt of the Notice of Exercise,
payment in full and any other required documents, the Company will deliver
to the optionee (or to such other person) at the principal office of the
Company, or such other place as shall be mutually agreed upon, a
certificate or certificates for the shares being acquired pursuant to the
exercise; provided, however, that the time of delivery may be postponed by
the Company for such period as may be required for it with reasonable
diligence to comply with any requirements of law. If optionee (or other
person entitled to exercise the option) fails to accept delivery, the
optionee's payment shall be returned, and the right to exercise the option
with respect to such undelivered shares shall be terminated.
9. Restrictions on Transferability
(a) For the purposes of the Plan, "Transfer" means (i) to sell, exchange,
deliver or assign, dispose of by bequeath or gift, pledge, mortgage,
hypothecate or otherwise encumber, or otherwise transfer, whether
voluntarily, involuntarily or by operation of law (including, without
limitation, the laws of
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bankruptcy, insolvency, intestacy, descent and distribution and
succession) or (ii) the act of Transferring.
(b) No option granted pursuant to the Plan and no share issued pursuant to
the exercise of any such option shall or may be Transferred except as
provided in the Plan, without the prior written consent of the Company.
(c) Options granted pursuant to the Plan are nontransferable except
pursuant to laws of descent and distribution.
(d) In the event that at any time or from time to time, any options
granted pursuant to the Plan or any shares issued pursuant to the exercise
of any such options are Transferred to any party (other than the Company)
pursuant to any provision hereof, the transferee shall take such options
or shares pursuant to all provisions, conditions and covenants of the
Plan, and, as a condition precedent to the Transfer of such options or
shares, the transferee shall agree in writing to be bound by all
provisions of the Plan as a party hereto, including, without limitation,
all restrictions on Transfer.
(e) Certificates for shares issued pursuant to the exercise of options
granted pursuant to the Plan shall bear appropriate reference to the
restrictions on Transfer contained in the Plan and such other restrictions
as may be required under applicable securities laws.
(f) The Company will not, nor be compelled to, recognize any Transfer of
any options granted pursuant to the Plan or any shares issued pursuant to
the exercise of any options granted pursuant to the Plan made other than
in accordance with the terms of the Plan. Nor will the Company issue any
certificate representing any shares issued pursuant to the exercise of any
options granted pursuant to the Plan to any person who has received such
shares in a Transfer made other than in accordance with the provisions of
the Plan. No Transfer of any options granted pursuant to the Plan or any
shares issued pursuant to the exercise of any options granted pursuant to
the Plan in violation of the provisions of the Plan shall be valid.
Options granted pursuant to the Plan shall be exercisable only by
recipient and transferees to whom such options have been Transferred in
accordance with the provisions of the Plan.
(g) Strict compliance shall be required with each and every provision of
the Plan and particularly with the procedures set forth in the provisions
of Paragraphs 9 and 10 hereof, it being understood and agreed that no
recipient of any options
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granted pursuant to the Plan and no holder of shares issued pursuant to
the exercise of any options granted pursuant to the Plan shall have the
right or power to Transfer any of such options or shares except in strict
compliance with the procedures set forth in the provisions of Paragraphs 9
and 10 hereof. The parties hereto agree that such options and shares are
unique, that failure to perform the obligations provided by the Plan shall
result in irreparable damage and that specific performance of these
obligations may be obtained by suit in equity.
10. Right of First Refusal by Company
(a) Prior to Transferring any shares issued pursuant to the exercise of
options granted pursuant to the Plan, the holder of such shares or the
personal representative of the estate of the holder, if deceased,
("Offeror") shall first offer to sell such shares (the "Offered Shares")
to the Company pursuant to this paragraph by giving written notice of the
proposed Transfer to the Secretary of the Company. Such notice shall
designate the proposed transferee, the number of Offered Shares, the
proposed purchase price and the address of the Offeror.
(b) For a period of sixty (60) days from its receipt of such notice, the
Corporation shall have the first right and option to accept the offer with
respect to all, but not less than all, of the Offered Shares at a price
equal to the lower of the fair market value of the Offered Shares as
determined in good faith by the Board of Directors or the proposed
purchase price. Upon written notification by the Corporation to the
Offeror of such acceptance by the Corporation, prior to 5:00 p.m. EST on
the last day of such sixty-day period, the Offeror shall be bound to sell
all of the Offered Shares to the Corporation at such price.
(c) If the Corporation accepts the offer to purchase the Offered Shares,
the closing on the purchase shall occur no later than thirty (30) days
after the date that the Corporation gives the Offeror notice thereof. At
the closing of the sale of the Offered Shares to the Corporation, the
Offeror shall deliver to the Corporation all certificates evidencing the
ownership of the Offered Shares, duly endorsed in blank. The Corporation
shall pay to the Offeror at the closing the purchase price in cash, notes
providing for principal payments amortized over not more than five (5)
years with interest at the applicable federal rate as determined under
section 1274 of the Internal Revenue Code, or a combination thereof.
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(d) Should the Offeror fail to deliver to the Corporation the certificates
at closing as aforesaid, the Offeror hereby appoints the Secretary of the
Corporation to act as his or her attorney-in-fact in regard to all matters
relating to the transfer of the Offered Shares, including placing the
funds to be used for the purchase in a separate bank account on the
Offeror's behalf, and authorizes the Secretary of the Corporation to make
such entries upon the corporate records to reflect the transfer of the
Offered Shares to the Corporation as if the Offered Shares had been
tendered and duly endorsed as provided herein.
(e) If the Corporation shall not accept the offer to purchase the Offered
Shares within the sixty-day period referenced in (b), above, then the
Offeror shall be free to carry out the proposed Transfer to the transferee
specified in the notice from the Offeror, but only if the sale is fully
consummated within a period of thirty (30) days, commencing on the earlier
to occur of (i) the Corporation's express refusal to purchase the Offered
Shares, or (ii) the expiration of such sixty-day period. If the Offeror
does not carry out the proposed Transfer within this thirty-day period but
wishes to make a later Transfer, the Offeror shall again comply with the
terms of this paragraph.
(f) This paragraph shall become inapplicable if the stock of the Company
is publicly traded in a stock exchange or in the over-the-counter market.
11. Effect of Changes in Common Stock
If the Company shall combine, subdivide or reclassify the shares of Common
Stock which have been or may be optioned, or shall declare thereon any
dividend payable in shares of Common Stock, or shall reclassify or take
any other action of a similar nature affecting the Common Stock, then the
number and class of shares of stock which may thereafter be optioned (in
the aggregate and to any recipient) shall be adjusted accordingly and, in
the case of options outstanding at the time of any such action, the number
and class of shares which may thereafter be purchased pursuant to such
options and the option price per share shall be adjusted to such extent as
the Board may determine is necessary to preserve unimpaired the rights of
the recipients; provided, however, that any options to purchase fractional
shares resulting from any such adjustment shall be eliminated. Each and
every such determination by the Board shall be conclusive and binding upon
such recipient.
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12. Reorganization
(a) If the Company shall at any time merge or consolidate with or into
another corporation and (1) the Company is not with the surviving entity
or (2) the Company is the surviving entity and the shareholders of the
Company's Common Stock are required to exchange their shares for property
and/or securities, the holder of each option will thereafter receive, upon
the exercise thereof, the securities and/or property to which a holder of
the number of shares of Common Stock then deliverable upon the exercise of
such option would have been entitled upon such merger or consolidation,
and the Company shall take such steps in connection with such merger or
consolidation as may be necessary to assure that the provisions of the
Plan shall thereafter be applicable, as nearly as reasonably may be, in
relation to any securities or property thereafter deliverable upon the
exercise of such option; provided, however, that under no circumstances
shall any option exercise date be accelerated in contemplation of such
action. A sale of all or substantially all the assets of the Company for
consideration (apart from the assumption of obligations) consisting
primarily of securities shall be deemed a merger or consolidation for the
foregoing purposes. Notwithstanding the foregoing purposes, the provisions
of this paragraph shall be subject to paragraph 6.
(b) The surviving entity following any reorganization may at any time, in
its sole discretion, tender substitute options as it may deem appropriate.
However, in no event may the substitute options entitle the optionee to
any fewer shares (or at any greater aggregate price) or any less other
property than the optionee would be entitled to under the immediately
preceding paragraph upon an exercise of the options held prior to the
substitution of the new option.
13. Dissolution of Issuer
In the event of the proposed dissolution or liquidation of the Company,
the options granted hereunder shall terminate as of a date to be fixed by
the Board, provided that not less than thirty (30) days' prior written
notice of the date so fixed shall be given to the optionee, and the
optionee shall have the right, during the period of thirty (30) days
preceding such termination, to exercise his option. Notwithstanding the
foregoing, the provisions of this paragraph shall be subject to paragraph
6.
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14. Rights as a Stockholder or Employee.
(a) An optionee or a transferee of an option shall have no rights as a
stockholder with respect to any shares of Common Stock covered by the
optionee's option until the date of the issuance of a stock certificate to
the optionee for such shares. No adjustment shall be made for dividends
(ordinary or extraordinary whether in cash, securities, or other property)
or distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as provided in paragraph 11
hereof.
(b) Nothing in the Plan or an option granted hereunder shall govern the
employment rights and duties between the optionee and the Company. Neither
the Plan, nor any grant or exercise pursuant thereto, shall constitute an
employment agreement among such parties. Nothing in the Plan or in any
options granted hereunder shall confer upon any employee any right to
continue in the employ of the Company or of any of its subsidiaries or
interfere in any way with the right of the Company or any such subsidiary
to terminate such employee's employment at any time.
15. Withholding of Tax.
If any governmental entity requires that a tax be paid with respect to the
exercise of an option or any distribution under the Plan, the amount of
that tax may be withheld from salary and other amounts otherwise payable
to the optionee and paid over by the Company to such governmental
authority for the account of the optionee. Alternatively, the Company may
require the option holder or other person exercising the option or
receiving the distribution to pay such sums directly to the Company.
16. Alternation, Termination, Discontinuance, Suspension or
Amendment
The Board reserves the right to alter, terminate, discontinue, suspend or
amend the Plan upon at least thirty (30) days advance written notice to
all the recipients. The Board may not, however, alter or impair any option
previously granted to the recipients under the Plan without their consent.
17. Compliance with Laws and Regulations
No option shall be granted or exercised if the grant of such option, or
the exercise and the issuance of shares pursuant
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thereto, would be contrary to the laws or regulations of any duly
constituted authority having jurisdiction.
18. Effective Date of the Plan
(a) The effective date of the Plan is January 1, 1996.
(b) The Plan shall terminate on January 1, 2006; but the Board of
Directors may terminate the Plan at any time prior to ten (10) years from
the effective date of the Plan.
(c) Termination of the Plan shall not alter or impair, without the consent
of the optionee, any of the rights or obligations and any option
theretofore granted under the Plan.
<PAGE> 1
EXHIBIT 10.10
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of________________________ , 199_, is
made by and between Deltek Systems, Inc., a Virginia corporation (the
"Company"), and ______________________(the "Indemnitee").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors or officers of corporations unless
they are protected by comprehensive liability insurance or indemnification, due
to increased exposure to litigation costs and risks resulting from their service
to such corporations, and due to the fact that the exposure frequently bears no
reasonable relationship to the compensation of such directors and officers.
B. The Company's Articles of Incorporation provide for mandatory
indemnification of any director or officer of the Company who is, was or is
threatened to be made a party to a proceeding (including a proceeding by or in
the right of the Company) because (i) he or she is or was a director or officer
of the Company or (ii) he or she is or was serving the Company or other legal
entity in any capacity at the request of the Company while a director or officer
of the Company, against all liabilities and expenses incurred in connection with
such proceeding, except such liabilities as are incurred because of such
individual's willful misconduct or knowing violation of criminal law.
C. The Company's Articles of Incorporation authorize the Company to enter
into agreements to indemnify its officers and directors to the fullest extent
permitted by the Articles of Incorporation and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.
D. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director or officer of the Company free from undue
concern for claims for damages arising out of or related to such services to the
Company.
E. Indemnitee is willing to serve, or to continue to serve, the Company so
long as he is furnished the indemnity provided for in the Company's Articles of
Incorporation.
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F. The parties hereto desire to set forth certain understandings regarding
the Company's obligation to indemnify and advance expenses as provided in the
Company's Articles of Incorporation.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions.
(a) Agent. For the purposes of this Agreement, "agent" of the
Company means any person who is or was a director or officer of the Company.
(b) Articles of Incorporation. For the purposes of this Agreement,
"Articles of Incorporation" means the Company's Articles of Incorporation as
amended and in effect on the date of this Agreement, a copy of which is attached
hereto as Exhibit A and incorporated by reference herein.
(c) Expenses. For purposes of this Agreement, "expenses" include
counsel fees, expert witness fees, and costs actually and reasonably incurred by
the Indemnitee in connection with either the investigation, litigation or appeal
of a proceeding, as well as any amounts expended in asserting a claim for
indemnification.
(d) Proceeding. For the purposes of this Agreement, "proceeding"
means any threatened, pending, or completed action, suit, proceeding or appeal,
whether civil, criminal, administrative, or investigative and whether formal or
informal.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or until
such time as he tenders his resignation in writing; provided, however, that
nothing contained in this Agreement is intended to create any right to continued
employment by Indemnitee.
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3. Liability Insurance.
(a) Maintenance of D&O Insurance. The Company hereby covenants and
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer.
(c) Limitation on Required Maintenance of D&O Insurance.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided or the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit.
4. Mandatory Advancement of Expenses.
(a) Unless a determination is made pursuant to Section 8.3(f) of the
Company's Articles of Incorporation that indemnification is not permissible and
subject to Section 4(b) below, the Company shall advance all expenses incurred
by the Indemnitee in connection with the investigation, defense, settlement or
appeal of any proceeding to which the Indemnitee is a party or is threatened to
be made a party by reason of the fact that the Indemnitee is or was an agent of
the Company. Indemnitee hereby undertakes to repay such amounts advanced only
if, and to the extent that, it shall be determined ultimately that the
Indemnitee is not entitled to be indemnified by the Company. The advances to be
made hereunder shall be paid by the Company to the Indemnitee within twenty (20)
days following delivery of a written request therefor by the Indemnitee to the
Company.
(b) The Company shall not be obligated to indemnify
the Indemnitee for any amounts paid in settlement of a proceeding
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unless the Company consents to such settlement, which consent shall not be
unreasonably withheld.
5. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company pursuant to Article 8 of the Company's Articles of
Incorporation, notify the Company of the commencement or threat of commencement
thereof.
(b) If, at the time of the receipt of a notice of the commencement
of a proceeding pursuant to Section 5(a) hereof, the Company has D&O Insurance
in effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
6. Subrogation. In the event of payment under this Agreement or pursuant
to Article 8 of the Company's Articles of Incorporation, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of
Indemnitee, who shall execute all documents required and shall do all acts that
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may be necessary to secure such rights and to enable the Company effectively to
bring suit to enforce such rights.
7. Survival of Rights.
(a) No amendment, modification or repeal of Article 8 of the
Company's Articles of Incorporation shall diminish or have any effect on the
rights provided hereunder or thereunder to any person arising from conduct or
events occurring before the adoption of such amendment, modification or repeal.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement and the Company's obligations under Article
8 of the Company's Articles of Incorporation in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place.
8. Severability. If any provision of provisions of this Agreement shall be
held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the
validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable.
9. Modification and Waiver. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
10. Notice. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
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after the mailing date. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written notice.
11. Governing Law. This Agreement shall be governed exclusively by and
construed according to the laws of the Commonwealth of Virginia without regard
to its conflicts of laws principles.
12. Consent to Jurisdiction. The Company and the Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the Commonwealth of
Virginia for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any action instituted
under this Agreement shall be brought only in the state courts of the
Commonwealth of Virginia.
The parties hereto have entered into this Agreement effective as of the
date first above written.
COMPANY:
DELTEK SYSTEMS, INC.
By ___________________________
Title ________________________
Address: 8280 Greenboro Drive
McLean, Virginia 22102
INDEMNITEE:
____________________________________
[Indemnitee's Printed Name]
Address: ____________________________________
____________________________________
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Exhibit A
Articles of Incorporation
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<PAGE> 1
EXHIBIT 10.11
TAX INDEMNIFICATION AGREEMENT
This TAX INDEMNIFICATION AGREEMENT (the "Agreement") is entered into
effective the ___day of _____, 1997, between Deltek Systems, Inc., a Virginia
corporation (the "Company") and the stockholders of the Company listed on
Exhibit A attached hereto (the "Stockholders") (the Company and each Stockholder
are hereinafter referred to individually as a "party" and collectively as the
"parties").
WHEREAS, the Company is undertaking a public offering of its stock
in order to raise additional equity capital for the expansion of the Company's
business operations (the "Public Offering");
WHEREAS, the Company and the Stockholders have entered into this
Agreement as a condition to the closing of the Public Offering;
WHEREAS, the Company was classified as an S corporation until _____,
1997, after which it will be classified as a C corporation;
WHEREAS, the Stockholders are stockholders of the
Company; and
WHEREAS, the Company and the Stockholders wish to provide for a tax
indemnification agreement in connection with the Company's termination as an S
corporation.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
TERMINATION OF S STATUS
The Company is revoking its status as an S corporation under Section
1362 of the Internal Revenue Code of 1986, as amended (the "Code"), effective as
of _____, 1997 (the "Termination Date"). The Company is also revoking its status
as an S corporation in all states in which it is a qualifying S corporation
effective as of such date. The Company also intends to elect to allocate its
income for its current taxable year prior to the Termination Date using its
normal tax accounting method (rather than the pro rata allocation method) in
accordance with Treasury Regulation Section 1.1362-3(b) ("Accounting Election").
The Stockholders hereby approve such revocation and Accounting Election and
agree to take all necessary steps to effect such revocation and Accounting
Election.
<PAGE> 2
ARTICLE II
TAXES
2.1 Liability for Taxes Incurred for Taxable Periods Prior to the
Termination Date. The Stockholders covenant and agree that: (a) the Stockholders
have duly included, or will duly include, in their own federal and state income
tax returns all items of income, gain, loss, deduction, or credit of the Company
for any taxable period ending prior to the Termination Date (including the short
taxable period ending the day before the Termination Date) during which the
Company was an S corporation, and (b) the Stockholders shall pay or reimburse
the Company for any and all taxes the Company is required to pay for all such
taxable periods ending prior to the Termination Date; provided that the Company
shall be responsible for (i) the deferred tax liability arising out of the
revocation of the Company's S corporation status that will be recorded as a
charge to income tax provision on the Company's financial statements in the
quarter during which the Termination Date occurs and (ii) any taxes for such
taxable periods in any states where the Company had either not made a comparable
election or was not otherwise entitled to be treated as a S corporation or other
pass-thru entity.
2.2 Filing of Tax Returns. The Company covenants and agrees that: (a) the
Company shall be responsible for and shall effect the filing of all federal,
state, foreign and local returns for the Company (and all composite state income
returns on behalf of the Stockholders) with respect to any and all taxable
periods; and (b) the Company shall pay any and all taxes required to be paid by
the Company for all periods covered by the returns as required by applicable
law, subject to reimbursement by the Stockholders to the extent prescribed
herein.
2.3 Company's Indemnification for Tax Liabilities. The Company hereby
indemnifies and agrees to hold the Stockholders harmless from, against and in
respect of any federal and state income tax liability incurred by the
Stockholder resulting from a final determination of an adjustment (by reason of
an amended return, claim for refund, audit or otherwise) to the Company's or its
consolidated subsidiaries' taxable income resulting in a decrease in the
Company's (or its consolidated subsidiaries') taxable income for any period
commencing on or after the Termination Date and a corresponding increase in the
federal or state taxable income of the Stockholders with respect to taxable
periods ending prior to the Termination Date (including the short taxable period
ending the day before the Termination Date).
2.4 Stockholders' Indemnification for Tax Liabilities. The
Stockholders hereby indemnify and agree to hold the Company
harmless from, against and in respect of any federal and state
income tax liability incurred by the Company resulting from a
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final determination (after all time limitations for appeals has run) of an
adjustment (by reason of an amended return, claim for refund, audit or
otherwise) to the Stockholders' income resulting in a decrease in the
Stockholders' taxable income for a taxable period ending prior to the
Termination Date (including the short taxable period ending the day before the
Termination Date) and a corresponding increase in the federal or state income
tax liability of the Company (or its consolidated subsidiaries) for a taxable
period commencing on or after the Termination Date; provided that the Company
shall be responsible for (i) the deferred tax liability arising out of the
revocation of the Company's S corporation status that will be recorded as a
charge to income tax provision on the Company's financial statements in the
quarter during which the Termination Date occurs and (ii) any taxes for such
taxable periods in any states where the Company had either not made a comparable
election or was not otherwise entitled to be treated as a S corporation or other
pass-thru entity.
2.5 Payments. The Stockholders or the Company, as the case may be, shall
make any payment required under this Agreement within seven days after receipt
of notice from the other party that a payment is due by such party to the
appropriate taxing authority, which notice shall be accomplished by appropriate
documentation demonstrating that such payment is due.
2.6 Respective Liability. Each of the Stockholders shall be liable to the
Company for his, her or its allocable share of the total liabilities of the
Stockholders under this Agreement. Such allocable share shall be based on the
Stockholders' relative percentage interests in the Company as of _________,
1997.
ARTICLE III
MISCELLANEOUS
3.1 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which counterparts
collectively shall constitute an instrument representing the Agreement between
the parties hereto.
3.2 Construction of Terms. Nothing herein expressed or implied is
intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties hereto or their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
3.3 Governing Law. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the
substantive laws of the Commonwealth of Virginia without regard to Virginia
choice of law rules.
3
<PAGE> 4
3.4 Amendment and Modification. This Agreement may be amended, modified or
supplemented only by a written agreement executed by the parties.
3.5 Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties, nor is
this Agreement intended to confer upon any other person except the parties any
rights or remedies hereunder.
3.6 Interpretation. The title, article and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
3.7 Severability. In the event that any one or more of the provisions of
this Agreement shall be held to be illegal, invalid or unenforceable in any
respect, the same shall not in any respect affect the validity, legality or
enforceability of the remainder of this Agreement, and the parties shall use
their best efforts to replace such illegal, invalid or unenforceable provisions
with an enforceable provision approximating, to the extent possible, the
original intent of the parties.
3.8 Entire Agreement. This Agreement embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no representations, promises, warranties, covenants, or
undertakings, other than those expressly set forth or referred to herein. This
Agreement supersedes all prior agreements and the understandings between the
parties with respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
DELTEK SYSTEMS, INC.
By:____________________________
Title:_________________________
STOCKHOLDERS:
By:____________________________
4
<PAGE> 5
By:____________________________
By:____________________________
By:____________________________
By:____________________________
By:____________________________
By_____________________________
By_____________________________
By_____________________________
By_____________________________
5
<PAGE> 6
EXHIBIT A
Stockholders of Deltek Systems, Inc.
6
<PAGE> 1
EXHIBIT 10.12
SEVENTH AMENDMENT TO LEASE
THIS SEVENTH AMENDMENT (the "Agreement") is made and entered into this 17 day of
December, 1996 by and between TYSONS CORNER LIMITED PARTNERSHIP ("Landlord") and
DELTEK SYSTEMS, INC. ("Tenant").
WHEREAS, Landlord and Tenant have previously entered into a Lease Agreement
dated November 12, 1991, (the "Initial Lease") as amended by the First Amendment
to Lease dated July 31, 1992, as amended by the Second Amendment to Lease dated
July 1, 1994, as amended by the Third Amendment to Lease dated September 30,
1994, as amended by the Fourth Amendment to Lease dated October 18, 1994, as
amended by the Fifth Amendment to Lease dated June 30, 1995, and as further
amended by the Sixth Amendment to Lease dated August 2, 1996 (collectively, the
"Lease") for the use and occupancy of certain premises by Tenant commonly known
as Suites 210, 220, 250, 300, 410, 430, 440, 600, 710, 750, 760 and 790,
consisting of a total of approximately of 54,377 rentable square feet
(collectively, the "Demised Premises") in the building located at 8280
Greensboro Drive in McLean, Virginia (the "Building").
WHEREAS Landlord and Tenant do hereby intend to amend and modify the Lease as
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Consolidation of Leases. Effective as of the Extended Term Commencement
Date (as defined hereinafter) that certain Lease Agreement dated November
11, 1992, as amended by the First Amendment to Lease dated June 30, 1995,
for the occupancy of Suite 420 in the Building, consisting of
approximately 5,952 rentable square feet, as shown on the area indicated
on Exhibit "A" attached hereto, and made a part hereof, shall be
terminated and of no further force or effect, and Suite 420 shall be added
to the "Demised Premises" as defined hereinabove, and Tenant shall
continue to occupy Suite 420 in accordance with the terms of the Lease.
Therefore, effective as of the Extended Term Commencement Date, the
Demised Premises shall consist of approximately 60,329 rentable square
feet. Further, effective as of the Extended Term Commencement Date, the
Amendments and the Lease Rider attached to the Initial Lease shall be
deleted in their entirety and shall be of no further force or effect.
2. Extended Term. The Term of the Lease shall be modified and extended
commencing on April 1, 1997 (the "Extended Term Commencement Date") and
terminating on March 31, 2002 (the "Extended Term").
<PAGE> 2
3. Rental. Effective as of the Extended Term Commencement, the total Basic
Rental for the Demised Premises during the Extended Term shall be
increased to $6,380,332.80, such amount to be payable in advance, in
accordance with the provisions of the Lease, in monthly installments as
follows:
<TABLE>
<CAPTION>
Lease Period Monthly Basic Rental
------------ --------------------
<S> <C>
April 1, 1997-March 31, 1998 $100,648.87
April 1, 1998-March 31, 1999 $103,416.71
April 1, 1999-March 31, 2000 $106,260.66
April 1, 2000-March 31, 2001 $109,182.82
April 1, 2001-March 31, 2002 $112,185.34
</TABLE>
Further, effective as of the Extended Term Commencement Date, Article 2.1
(a) of the Initial Lease shall be deleted in its entirety, and Article
2.2(c)(ii) shall be deleted, and in lieu thereof, the following shall be
inserted:
"the greater of (1) $7.85 per net rentable square foot of space in
the Building per year and (2) Annual Operating Costs incurred in
1997 on a net rentable square footage basis for the Building." and
the following shall be added following Article 2.2(c)(ii) as
amended: "Effective as of January 1, 1999, Tenant shall pay to
Landlord as Additional Rent, calculated on the basis of the square
footage of the Demised Premises, the Amount of Annual Operating
Costs incurred in 1998 on a square footage basis for the Building."
The calculation of Tenant's Annual Operating Costs shall at all times be
based upon the total square footage of the Demised Premises, as same shall
change throughout the Extended Term, as such term may be extended,
modified or renewed.
4. Tenant Improvements. Landlord agrees to contribute One Hundred Eighty-Six
Thousand Dollars ($186,000.00) (the "Tenant Allowance") towards the cost
of constructing certain tenant improvements (the "Tenant Improvements")
for the Demised Premises in accordance with one or more space plans (the
"Plans") to be approved by both Landlord and Tenant subject to the
limitations set forth hereinafter in this Article 4. It is understood and
agreed that Landlord's contractors shall perform the work in connection
with the Tenant Improvements. If the cost to construct the Tenant
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<PAGE> 3
Improvements pursuant to the Plans exceeds the Tenant Allowance, then
within ten (10) days of Tenant's receipt of an invoice from Landlord,
Tenant shall pay Landlord, as additional rent, by certified or cashier's
check, an amount equal to the difference between the cost to construct the
Tenant Improvements and the Tenant Allowance. Tenant agrees it shall not
make any changes to the Plans without obtaining the prior written consent
of Landlord. In the event Tenant shall make changes to the Plans that are
approved by Landlord and which result in an additional cost to Landlord of
completing the Tenant Improvements in excess of the Tenant Allowance,
Tenant shall pay to Landlord prior to construction of such changes, as
additional rent, any increase in the cost of completing the Tenant
Improvements in excess of the Tenant Allowance resulting from such changes
in the Plans.
In the event Tenant, its employees or agents, causes any delays or is
otherwise responsible, in whole or in part, for any additional costs in
excess of the Tenant Allowance incurred by Landlord in constructing the
Tenant Improvements (other than additional costs arising due to changes to
the Plans as described above), Tenant shall pay to Landlord within ten
(10) business days of receipt of written notice from Landlord, as
additional rent, any such additional costs in excess of the Tenant
Allowance incurred by Landlord. Tenant's failure to timely pay any such
amounts to be paid by Tenant as set forth in this Article, at the time and
in the manner set forth in this Article, shall be an event of default.
Landlord shall provide $55,000.00 of the Tenant Allowance upon the full
execution of this Agreement, for Tenant Improvements to be made to the
Demised Premises in accordance with the provisions set forth above. The
remaining $131,000.00 of the Tenant Allowance shall be made available to
Tenant (i) in full, in the event that Tenant shall not exercise its early
termination right set forth in Article 7 of this Agreement and (ii) in the
event Tenant does exercise such early termination right, in the amount of
$3,639.00 for each month of the then-remaining Lease Term that Tenant has
elected to occupy the Demised Premises beyond April 1, 1999.
Landlord shall apply the remaining tenant allowance from the First
Amendment to Lease in the amount of $11,904.00, as well as the remaining
tenant allowance from the Fifth Amendment to Lease in the amount of
$64,584.00, (such amounts to be calculated and modified, if necessary, to
reflect the actual amounts remaining from such tenant allowances, as of
the effective date of this Agreement), to the excess tenant improvement
costs previously incurred but
3
<PAGE> 4
remaining unpaid by Tenant pursuant to the tenant improvement
specifications outlined in the Sixth Amendment to Lease.
5. Suite 780 Expansion Space.
A. Effective upon the earlier to occur of (i) Tenant's occupancy of
Suite 780 and (ii) the substantial completion of the Suite 780 Tenant
Improvements (as defined hereinafter) (the "Suite 780 Commencement Date")
(which is currently estimated as September 1, 1997), Suite 780, comprising
approximately 3,638 rentable square feet in the Building, on the area
indicated on the site plan as shown on Exhibit B, which is attached hereto
and incorporated herein, shall be added to the Demised Premises so that as
of the Suite 780 Commencement Date, the Demised Premises shall consist of
approximately 63,967 rentable square feet. For purposes of this Agreement,
"substantial completion" shall mean the date upon which the Suite 780
Tenant Improvements to be constructed by Landlord shall be completed
subject only to the completion of minor or insignificant details of finish
construction, decoration or mechanical adjustments which do not materially
interfere with Tenant's conduct of business. Tenant's occupancy of Suite
780 shall be subject to all of the general terms and conditions contained
in the Lease, as amended hereby.
B. Rental. Effective as of the Suite 780 Commencement Date, the
Basic Rental for the Demised Premises, including Suite 780 shall be
payable in advance, in accordance with the provisions of the Lease, in
equal monthly installments as follows:
<TABLE>
<CAPTION>
Lease Period Monthly Basic Rental
------------ --------------------
<S> <C>
Suite 780 Commencement Date $106,718.27
- Mar. 31, 1998
April 1, 1998 - March 31, 1999 $109,653.02
April 1, 1999 - March 31, 2000 $112,668.47
April 1, 2000 - March 31, 2001 $115,766.85
April 1, 2001 - March 31, 2002 $118,950.43
</TABLE>
C. Tenant Improvements. Landlord agrees to contribute $0.20 per
rentable square foot of Suite 780 for each month then remaining in the
Term of the Lease as of the Suite 780 Commencement Date (the "Suite 780
Tenant Allowance") towards the cost of constructing certain tenant
improvements (the "Suite 780 Tenant Improvements") for Suite
4
<PAGE> 5
780 in accordance with the space plan (the "Suite 780 Plan") to be
approved by both Landlord and Tenant within thirty (30) days following
Landlord's notice to Tenant of its intended date of delivery of Suite 780.
It is understood and agreed that Landlord's contractors shall perform the
work in connection with the Suite 780 Tenant Improvements. If the cost to
construct the Suite 780 Tenant Improvements pursuant to the Suite 780 Plan
exceeds the Suite 780 Tenant Allowance, then within ten (10) days of
Tenant's receipt of an invoice from Landlord, Tenant shall pay Landlord,
as additional rent, by certified or cashier's check, an amount equal to
the difference between the cost to construct the Suite 780 Tenant
Improvements and the Suite 780 Tenant Allowance. Tenant agrees it shall
not make any changes to the Suite 780 Plan without obtaining the prior
written consent of Landlord. In the event Tenant shall make changes to the
Suite 780 Plan that are approved by Landlord and which result in an
additional cost to Landlord of completing the Suite 780 Tenant
Improvements in excess of the Suite 780 Tenant Allowance, Tenant shall pay
to Landlord prior to construction of such changes, as additional rent, any
increase in the cost of completing the Suite 780 Tenant Improvements in
excess of the Suite 780 Tenant Allowance resulting from such changes in
the Suite 780 Plan.
In the event Tenant, its employees or agents, causes any delays or is
otherwise responsible, in whole or in part, for any additional costs in
excess of the Suite 780 Tenant Allowance incurred by Landlord in
constructing the Suite 780 Tenant Improvements (other than additional
costs arising due to changes to the Suite 780 Plan as described above),
Tenant shall pay to Landlord within ten (10) business days of receipt of
written notice from Landlord, as additional rent, any such additional
costs in excess of the Suite 780 Tenant Allowance incurred by Landlord.
Tenant's failure to timely pay any such amounts to be paid by Tenant as
set forth in this Article, at the time and in the manner set forth in this
Article, shall be an event of default. All claims for damages arising out
of any delay in connection with the delivery of Suite 780 to Tenant are
hereby waived and released by Tenant.
6. Expansion Space. Tenant shall occupy additional space in the Building,
which space shall either be Suite 700 or Suite 601, notice of which shall
be given in writing by Landlord to Tenant, the occupancy of such
additional space in accordance with the following provisions under either
Option A or Option B:
Option A. Suite 700.
1. Occupancy. Tenant shall occupy Suite 700 in the
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<PAGE> 6
Building, consisting of approximately 9,296 rentable square feet, on
the area indicated on Exhibit "C" which is attached hereto and
incorporated herein, as of the date that is the earlier to occur of
(i) Tenant's occupancy of Suite 700 and (ii) the substantial
completion of the Suite 700 Tenant Improvements (the "Suite 700
Commencement Date"). As of the Suite 700 Commencement Date, the
Demised Premises shall consist of approximately 73,263 rentable
square feet of space. Tenant's occupancy of Suite 700 shall be
subject to all of the terms and conditions contained in the Lease.
2. Rental. Effective as of the Suite 700 Commencement Date, the Basic
Rental for the Demised Premises, including Suite 700, shall be
payable in advance in accordance with the provisions of the Lease,
in equal monthly installments as follows:
<TABLE>
<CAPTION>
Lease Period Monthly Basic Rental
------------ --------------------
<S> <C>
Suite 700 Commencement $125,584.99
Date - March 31, 1999
April 1, 1999 - March 31, 2000 $129,038.57
April 1, 2000 - March 31, 2001 $132,587.13
April 1, 2001 - March 31, 2002 $136,233.27
</TABLE>
3. Tenant Improvements. Landlord agrees to contribute $0.20 per
rentable square foot of Suite 700 for each month then remaining in
the Term of the Lease as of the Suite 700 Commencement Date (the
"Suite 700 Tenant Allowance") towards the cost of constructing
certain tenant improvements (the "Suite 700 Tenant Improvements")
for Suite 700 in accordance with the space plan (the "Suite 700
Plan") to be approved by both Landlord and Tenant within thirty (30)
days following Landlord's notice which shall not occur prior to
February 1, 1998, to Tenant of its intended delivery date of Suite
700. It is understood and agreed that Landlord's contractors shall
perform the work in connection with the Suite 700 Tenant
Improvements. If the cost to construct the Suite 700 Tenant
Improvements pursuant to the Suite 700 Plan exceeds the Suite 700
Tenant Allowance, then within ten (10) days of Tenant's receipt of
an invoice from Landlord, Tenant shall pay Landlord, as additional
rent, by certified or cashier's check, an amount equal to the
difference between the cost to construct the Suite 700 Tenant
Improvements and the Suite 700 Tenant Allowance. Tenant agrees it
shall
6
<PAGE> 7
not make any changes to the Suite 700 Plan without obtaining the
prior written consent of Landlord. In the event Tenant shall make
changes to the Suite 700 Plan that are approved by Landlord and
which result in an additional cost to Landlord of completing the
Suite 700 Tenant Improvements in excess of the Suite 700 Tenant
Allowance, Tenant shall pay to Landlord prior to construction of
such changes, as additional rent, any increase in the cost of
completing the Suite 700 Tenant Improvements in excess of the Suite
700 Tenant Allowance resulting from such changes in the Suite 700
Plan.
In the event Tenant, its employees or agents, causes any delays or
is otherwise responsible, in whole or in part, for any additional
costs in excess of the Suite 700 Tenant Allowance incurred by
Landlord in constructing the Suite 700 Tenant Improvements (other
than additional costs arising due to changes to the Suite 700 Plan
as described above), Tenant shall pay to Landlord within ten (10)
business days of receipt of written notice from Landlord, as
additional rent, any such additional costs in excess of the Suite
700 Tenant Allowance incurred by Landlord. Tenant's failure to
timely pay any such amounts to be paid by Tenant as set forth in
this Article, at the time and in the manner set forth in this
Article, shall be an event of default. All claims for damages
arising out of any delay in connection with the delivery of Suite
700 to Tenant are hereby waived and released by Tenant.
Option B. Suite 601.
1. Occupancy. a. Suite 601. Tenant shall occupy Suite 601 in the
Building, consisting of approximately 11,927 rentable square feet of
space, on the area indicated on Exhibit "D", which is attached
hereto and incorporated herein, as of the date that is the earlier
to occur of (i) Tenant's occupancy of Suite 601 and (ii) the
substantial completion of the Suite 601 Tenant Improvements (as
defined hereinafter) (the "Suite 601 Commencement Date"). As of the
Suite 601 Commencement Date, the Demised Premises shall consist of
approximately 75,894 rentable square feet of space (as same may be
amended, as set forth hereinafter). Tenant's occupancy of Suite 601
shall be subject to all of the terms and conditions contained in the
Lease, as amended hereby.
b. Suite 605. Additionally, at the election of Landlord,
exercised in its sole and absolute discretion, Tenant shall also
occupy Suite 605 in the
7
<PAGE> 8
Building, consisting of approximately 1,974 rentable square feet of
space, on the area indicated on Exhibit D. In the event that
Landlord elects that Tenant shall occupy Suite 605, Landlord shall,
in its sole discretion, require Tenant to occupy Suite 605 on either
(i) the Suite 601 Commencement Date or (ii) the date following the
natural expiration of the lease of the existing tenant currently
occupying Suite 605 (the "605 Lease"). In the event that Landlord
elects that Tenant shall occupy Suite 605, the Demised Premises
shall consist of approximately 77,868 rentable square feet of space
as of the commencement date of Tenant's occupancy of Suite 605.
Tenant shall occupy Suite 605 in accordance with the terms and
provisions of the Lease, as amended hereby.
2. Rental. Effective as of the Suite 601 Commencement
Date, the Basic Rental for the Demised Premises shall
be payable in advance in accordance with the provisions
of the Lease in monthly installments as follows:
(i) In the event that Landlord elects that Tenant shall occupy Suite
605 on the Suite 601 Commencement Date (i.e. based on 77,868
rentable square feet of space):
<TABLE>
<CAPTION>
Lease Period Monthly Basic Rental
------------ --------------------
<S> <C>
Suite 601 Commencement
Date - March 31, 1998 $129,909.77
April 1, 1998 - March 31, 1999 $133,482.28
April 1, 1999 - March 31, 2000 $137,153.04
April 1, 2000 - March 31, 2001 $140,924.74
April 1, 2001 - March 31, 2002 $144,800.17
</TABLE>
(ii) In the event that Landlord elects that Tenant shall occupy
Suite 605 following the natural expiration of the 605 Lease (i.e.
initially based on rentable square footage of 75,894, with an
increase on October 1, 1999 (as such date may be modified to reflect
the date of completion of the tenant improvements in Suite 605) to
77,868 rentable square feet):
<TABLE>
<CAPTION>
Lease Period Monthly Basic Rental
------------ --------------------
<S> <C>
Suite 601 Commencement
Date - March 31, 1998 $126,616.48
April 1, 1998 - March 31, 1999 $130,098.43
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C>
April 1, 1999 - September 30, 1999 $133,676.13
October 1, 1999 - March 31, 2000 $137,151.50
April 1, 2000 - March 31, 2001 $140,923.16
April 1, 2001 - March 31, 2002 $144,798.54
</TABLE>
(iii) In the event Landlord does not elect to require Tenant to
occupy Suite 605 at any time during the Term of the Lease (i.e.
based on 75,894 rentable square feet of space):
<TABLE>
<CAPTION>
Lease Period Monthly Basic Rental
------------ --------------------
<S> <C>
Suite 601 Commencement
Date - March 31, 1998 $126,616.48
April 1, 1998 - March 31, 1999 $130,098.43
April 1, 1999 - March 31, 2000 $133,676.13
April 1, 2000 - March 31, 2001 $137,352.22
April 1, 2001 - March 31, 2002 $141,129.40
</TABLE>
3. Tenant Improvements. Landlord agrees to contribute $0.30 per
rentable square foot of Suite 601 (as well as $0.30 per rentable
square foot of Suite 605, if and when Landlord elects that Tenant
shall occupy Suite 605) for each month then remaining in the Term of
the Lease as of the Suite 601 Commencement Date as to Suite 601, and
as to the commencement date for Suite 605 as set forth hereinabove,
as the tenant allowance for Suite 605 (the "Sixth Floor Tenant
Allowance") towards the cost of constructing certain tenant
improvements (the "Sixth Floor Tenant Improvements") in accordance
with the space plan (the "Sixth Floor Plan") to be approved by both
Landlord and Tenant within thirty (30) days following Landlord's
notice, which shall not occur prior to Oct. 1, 1997, to Tenant of
its intended delivery of Suite 601 and Suite 605, respectively (as
applicable in the case of Suite 605). It is understood and agreed
that Landlord's contractors shall perform the work in connection
with the Sixth Floor Tenant Improvements. If the cost to construct
the Sixth Floor Tenant Improvements pursuant to the Sixth Floor
Plans exceeds the Sixth Floor Tenant Allowance, then within ten (10)
days of Tenant's receipt of an invoice from Landlord, Tenant shall
pay Landlord, as additional rent, by certified or cashier's check,
an amount equal to the difference between the cost to construct the
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<PAGE> 10
Sixth Floor Tenant Improvements and the Sixth Floor Tenant
Allowance. Tenant agrees it shall not make any changes to the Sixth
Floor Plans without obtaining the prior written consent of Landlord.
In the event Tenant shall make changes to the Sixth Floor Plans that
are approved by Landlord and which result in an additional cost to
Landlord of completing the Sixth Floor Tenant Improvements in excess
of the Sixth Floor Tenant Allowance, Tenant shall pay to Landlord
prior to construction of such changes, as additional rent, any
increase in the cost of completing the Sixth Floor Tenant
Improvements in excess of the Sixth Floor Tenant Allowance resulting
from such changes in the Sixth Floor Plans.
In the event Tenant, its employees or agents, causes any delays or
is otherwise responsible, in whole or in part, for any additional
costs in excess of the Sixth Floor Tenant Allowance incurred by
Landlord in constructing the Sixth Floor Tenant Improvements (other
than additional costs arising due to changes to the Sixth Floor
Plans as described above), Tenant shall pay to Landlord within ten
(10) business days of receipt of written notice from Landlord, as
additional rent, any such additional costs incurred by Landlord.
Tenant's failure to timely pay any such amounts to be paid by Tenant
as set forth in this Article, at the time and in the manner set
forth herein, shall be an event of default. All claims for damages
arising out of any delay in connection with the delivery of either
Suite 601 or Suite 605 are hereby waived and released by Tenant.
4. Rent Modifications.
a. Rental Abatement. Notwithstanding the foregoing to the
contrary, in the event that Landlord elects that Tenant shall occupy
Suite 605, no Basic Rental due for Suite 605 shall be paid by Tenant
for the first six (6) months of Tenant's occupancy of Suite 605, and
any such Basic Rental due for said period shall abate (the "605
Rental Abatement"). Further, Basic Rental in the amount of $26,636
due for Suite 601 shall be abated commencing on the Suite 601
Commencement Date, as same becomes due under the terms of the Lease,
as amended hereby, until such amount is extinguished (the "601
Rental Abatement", the 605 Rental Abatement and the 601 Rental
Abatement referred to collectively as the "Rental Abatement"). The
Rental Abatement is for Basic Rental only and does not affect
Tenant's obligation to pay additional rent or other sums otherwise
due and payable under the terms of the
10
<PAGE> 11
Lease during the period of the Rental Abatement. In the event that
Tenant defaults under the terms of the Lease, which default is not
timely cured, Tenant shall promptly pay to Landlord, in addition to
any and all other charges or damages for which Landlord is entitled
to recover, the Basic Rental for the Rental Abatement period.
b. Rental Credit. In the event that Suite 605 is not delivered
to Tenant on the Suite 601 Commencement Date, Landlord shall grant
Tenant a rent credit in the amount of $30,000, to be used against
Basic Rental payable by Tenant for Suite 601, as same becomes due,
until such rent credit is extinguished.
7. Early Termination. As long as the Lease is in full force and effect and
Tenant:
(i) is occupying and doing business from the Demised Premises at the
time the election described in this Section is exercised; and
(ii) is not in default under the Lease either at the time of the
election described in this Section or at the time of the effective
date thereof; and
(iii) has maintained a history of payments within the applicable
grace period, if any, provided under the Lease; and
(iv) Landlord is unable to deliver Suite 700 ready for construction
on or prior to March 31, 1998 due to the tenant currently occupying
Suite 700 exercising its renewal option under its existing lease
with Landlord; and
(v) Landlord is unable to deliver Suite 601 ready for construction
on or prior to March 31, 1998 due to the tenant currently occupying
Suite 601 exercising its renewal option under its existing lease
with Landlord, then
Tenant shall have the right to cancel the Lease, as it applies to all of
the Demised Premises except that space occupied by Tenant in connection
with the provisions of Article 8 of this Agreement, by giving Landlord
prior written notice of its intention to cancel, such notice to be
delivered to Landlord on or prior to April 30, 1998. To be effective, such
notice must be sent to Landlord by a nationally recognized overnight
courier or by registered or certified mail, return receipt requested. The
effective date of the termination shall occur on the date specified by
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<PAGE> 12
Tenant in its notice to Landlord, such date to be no earlier than December
31, 1999 and no later than December 31, 2000 (the "Termination Date").
No later than sixty (60) days prior to the Termination Date, Tenant shall
pay to Landlord by a certified or cashier's check, all monies due or to
become due under the terms of the Lease through and including the
Termination Date. Such monies shall include but are not necessarily
limited to, Basic Rental, Annual Operating Costs, additional rent and
additional charges or late fees through the Termination Date. When
necessary, Landlord will estimate the amount of such monies due and there
shall be a subsequent adjustment between Landlord and Tenant, with payment
to or reimbursement by Landlord, as the case may require, pursuant to the
terms of the Lease, to the end that Landlord shall receive the entire
amount of monies due from Tenant under the Lease through the Termination
Date. The security deposit held by Landlord under the Lease may, in
Landlord's sole discretion, be applied to the amount owed. Failure to
timely pay this amount shall render any notice of termination or
cancellation null and void and the Lease shall continue in full force and
effect as if no such notice of Tenant was given.
In addition to the amounts required to be paid above, Tenant agrees to pay
Landlord by a certified or cashier's check, a sum equal to the then
unamortized total tenant improvement allowance provided in connection with
Suite 780, such total amount to be calculated on a straight-line basis and
calculated as of the Termination Date and the then unamortized brokerage
commissions calculated at the sum of $1,826.00 multiplied by the number of
months then remaining in the Extended Term as of the Termination Date for
which Tenant has elected not to occupy the Demised Premises. All of the
payments set forth in this paragraph shall be paid to Landlord no later
than sixty (60) days prior to the Termination Date.
8. Right of First Refusal. So long as the Lease is in full force and effect
and Tenant:
(i) is occupying and doing business from the Demised Premises at the
time the election described in this Paragraph is exercised; and
(ii) is not in default under the Lease either at the time of the
election described in this Paragraph or at the effective date
thereof; and
(iii) has maintained a history of payments within the applicable
grace period, if any, provided under the
12
<PAGE> 13
Lease; and
subject to the rights of any current tenants in the Building, or any of
their assignees, sublessees, transferees or successors in interest, which
rights may supersede the rights granted to Tenant pursuant to this
Paragraph, Landlord agrees that prior to renting space on the second (2nd)
through seventh (7th) floors of the Building (collectively, the "First
Refusal Space") to any third party, Landlord will submit to Tenant a copy
of the unexecuted proposed lease or a summary of the business and economic
terms of the proposed lease which Landlord is willing to accept from the
third party (the "Offered Lease") for the respective spaces in the First
Refusal Space on each occasion when such individual First Refusal Space
becomes available. On or before the third (3rd) business day after
Tenant's receipt of such notice, Tenant shall have the right (the "First
Refusal Right") to send Landlord a notice stating that Tenant elects to
rent the respective individual First Refusal Space upon the identical
terms and conditions set forth in the Offered Lease for such space.
Notwithstanding the foregoing to the contrary, (i) the termination date
for the occupancy of such space will be co-terminous with the termination
date of the Lease, as same may be renewed, modified or extended and (ii)
any tenant improvement allowance under the Offered Lease shall be prorated
to reflect the then-remaining term of the Lease, as of the commencement
date of Tenant's occupancy of any First Refusal Space. To be timely, such
notice must be postmarked within the three (3) business day period.
Provided that Tenant exercises the Option to Renew as set forth in Article
9 of this Agreement, Landlord shall reimburse Tenant on the commencement
date of the renewal term for its Refusal Space Tenant Improvements at the
rate per square foot of such First Refusal Space, calculated on a monthly
basis, established in connection with this paragraph for the additional
number of months which Tenant would have received if such tenant allowance
had not been prorated in accordance with the foregoing parameters set
forth herein. For illustration purposes only, if Tenant would have
received $6.00 per square foot of space, based on a five (5) year term
(i.e., $0.10 per square foot per month of occupancy of the First Refusal
Space) and Tenant commenced occupancy of an individual suite of First
Refusal Space when there were twelve (12) months remaining in the Extended
Term, Tenant would then receive $1.20 per square foot of the First Refusal
Space as a tenant allowance. If Tenant then exercised its Option to Renew
for a three (3) year term, Tenant would receive an additional $3.60 per
square foot of the First Refusal Space for a tenant allowance for such
space as of the commencement date of the Option Period.
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<PAGE> 14
If Tenant timely exercises the First Refusal Right, Landlord and Tenant
will promptly enter into a lease amendment agreement prepared by Landlord
for the First Refusal Space (the "Lease Amendment") on the Offered Lease
terms. Tenant shall accept the First Refusal Space in its then "as is"
condition. If for any reason Tenant fails to timely exercise the First
Refusal Right, or if Tenant properly exercises the First Refusal Right but
thereafter for any reason (except for delays caused by Landlord) does not
enter into the Lease Amendment within five (5) business days after its
submission to Tenant, Landlord will be free to rent the First Refusal
Space to any other prospective tenant and the First Refusal Right will be
null and void and without further force or effect throughout the remainder
of the Term of the Lease, or any amendments thereto, or any extensions or
modifications thereof. Additionally, if Tenant exercises the First Refusal
Right, but then fails to timely execute the Lease Amendment, and should
the previously interested third party tenant no longer be willing to sign
the Offered Lease, then Tenant shall be deemed in default of this Lease
and shall be liable for any and all rental obligations due Landlord under
the terms of the Lease Amendment.
Notwithstanding any contrary provision hereof: (a) the Lease Amendment(s)
must stipulate that any default by Tenant under the Lease Amendment(s)
will be deemed to constitute a default under the Lease; (b) Tenant agrees
that any default by it under the Lease will be deemed to constitute a
default under the Lease Amendment(s); and (c) this First Refusal Right is
personal and unique to Tenant and is not transferable to any assignee,
sublessee or other successor in interest to the initial Tenant under the
Lease.
9. Option to Renew Based on Market Value. So long as the Lease is in full
force and effect and Tenant either:
(i) is occupying and doing business from the Demised Premises at the
time the Option to Renew described in this Paragraph is exercised;
and
(ii) is not in default under the Lease either at the time of the
exercise of the Option to Renew described in this Paragraph or at
the time of the commencement of the following described Option
Period; and
(iii) has maintained a history of payments within the applicable
grace period, if any, provided under the Lease;
Tenant is hereby granted an option to renew the Lease for the entirety of
the Demised Premises (the "Option to Renew") for one (1) renewal term (the
"Option Period"), commencing
14
<PAGE> 15
upon the day next following the expiration of the initial Term of the
Lease. The Option Period shall be for a term of either one (1) year or
three (3) years, at Tenant's option, in its sole discretion, such election
to be specified in Tenant's notice to Landlord of the exercise of this
Option to Renew. The terms of the Lease during the Option Period shall be
the same as during the Extended Term except as provided below. The Option
to Renew must be exercised no less than one (1) year prior to the
expiration of the Extended Term by written notice to Landlord sent by
registered or certified mail, return receipt requested. In the event
Tenant fails to notify Landlord, in the manner herein specified, this
Option to Renew shall be of no further force and effect.
The Basic Rental for the Option Period shall be the then current market
rate for the Demised Premises fixed as of the date of commencement of the
Option Period. Landlord's determination of the market rate shall be
conclusive on Tenant. This Option to Renew shall be deleted from the Lease
during the Option Period and no further options to renew shall be in
effect. Unless expressly set forth herein, any tenant concessions
initially provided for in the Lease shall not be deemed applicable to any
Option Period.
In no event shall the Basic Rental during the Option Period decrease below
the Basic Rental then paid by Tenant at the expiration of the Extended
Term. Further, this Option to Renew is personal and unique to Tenant and
is not transferable to any assignee, sublessee or any other successor in
interest to the initial Tenant under the Lease. Effective as of the date
hereof, all other options to renew the Term of the Lease which are
contained in the Lease shall be deleted in their entirety and shall be of
no further force or effect.
In addition, in the event that Tenant shall exercise this Option to Renew,
Landlord shall reimburse Tenant on the commencement of the renewal term
for its Tenant Improvements for the spaces occupied by Tenant pursuant to
the terms of Articles 5 and 6 of this Agreement, at the rate per square
foot of such space, calculated on a monthly basis, established in
connection therewith for the additional number of months which Tenant
would have received if such tenant allowance had not been prorated in
accordance with the provisions of this Agreement, similar to the manner
set forth in Article 8 of this Agreement.
10. Right of First Offer. As long as the Lease is in full force and effect and
Tenant:
(i) is occupying and doing business from the Demised
15
<PAGE> 16
Premises at the time the election described in this Paragraph is
exercised; and
(ii) is not in default under the Lease either at the time of the
election described in this Paragraph or at the effective date
thereof, and
(iii) has maintained a history of payments within the applicable
grace period, if any, provided under the Lease;
subject to the terms of this Paragraph, Tenant shall have the right to
expand into Suite 440 in the Building, consisting of approximately 1,673
rentable square feet of space, during the period of occupancy by Manpower
International, Inc. who currently occupies Suite 440 under a separate
agreement with Landlord, upon seven (7) months' prior written notice to
Landlord.
Tenant shall pay Basic Rental for Suite 440 at the rates then in effect
for the Demised Premises, payable in accordance with the provisions of the
Lease, commencing on the date of Tenant's occupancy of Suite 440, through
the remainder of the Extended Term, as same may be modified, extended or
renewed. Further, Tenant's occupancy of Suite 440 shall be in accordance
with all other terms of the Lease as amended hereby. Landlord shall also
provide Tenant with a tenant allowance for tenant improvements therein, at
the same rate and in the same manner as set forth in Article 5.C. of this
Agreement.
11. Signage. Tenant shall have the right to install signage bearing Tenant's
name (the "Sign") on the exterior of the Building, at a location to be
mutually agreed upon by and between Landlord and Tenant. Landlord and
Tenant agree that the aesthetics of the Sign shall be in conformity with
the size and appearance of other commercial signage on other office
buildings in the Tysons Corner market. Tenant shall be responsible for any
and all costs and expenses associated with the design, manufacture and
installation of the Sign. Tenant shall not install or affix any the Sign
until all plans and specifications have been approved in writing by
Landlord. Tenant shall be solely responsible for the maintenance, repair
and replacement of the Sign, in first-class condition at all times during
the Extended Term, as such term may be extended, modified or renewed. All
signage shall comply with all applicable local and municipal rules,
regulations and ordinances, and all rules and regulations set forth by
Landlord, and Tenant shall obtain at its sole cost and expense any permits
necessary to maintain the Sign. Tenant shall also insure the Sign with an
insurance company reasonably satisfactory to Landlord, and shall indemnify
and
16
<PAGE> 17
hold Landlord harmless from any claims for damage or injury in connection
with the installation, maintenance, use and replacement of the Sign in
accordance with the provisions of the Lease. Tenant shall remove all
signage and apparatus in connection therewith upon the expiration or
earlier termination of the Extended Term, and Tenant shall repair any and
all damage from the removal thereof at Tenant's sole cost and expense
simultaneously with the removal of the Sign.
12. Parking. Landlord shall continue to provide parking spaces to Tenant in
accordance with the provisions of the Lease. Further, Tenant acknowledges
that Landlord currently has no standard policy to apportion reserved
parking spaces to lease to tenants of the Building. However, in the event
that Landlord does institute such a policy, it shall apportion reserved
parking spaces to tenants of the Building in a non-discriminatory fashion
without favoring one tenant over Tenant.
13. Brokers. Tenant warrants that it has had no dealings with any real estate
broker or agent in connection with the negotiation of this Agreement other
than Insignia Commercial Group, Inc. and that Tenant knows of no other
real estate broker or agent who is or might be entitled to a commission in
connection with this Agreement. Tenant agrees to indemnify and hold
Landlord harmless from and against all claims made by any broker or finder
for a commission in connection with this Agreement provided that Landlord
has not retained such broker.
(The remainder of this page intentionally left blank)
17
<PAGE> 18
14. Conflict of Terms. Except as expressly amended herein, all terms and
conditions in the Lease shall remain unchanged and in full force and
effect, and all capitalized terms not otherwise defined herein shall have
the meaning set forth in the Lease. In the event of any conflict between
the terms and conditions of the Lease and the terms and conditions of this
Agreement, the terms and conditions of this Agreement shall control.
LANDLORD: TENANT:
TYSONS CORNER LIMITED DELTEK SYSTEMS, INC.
PARTNERSHIP, an Illinois
limited partnership
By: Tysons Corner Partners, Inc.
an Illinois corporation,
its general partner
By: /s/ Tom Molina By: /s/ Donald deLaski
Its: VP Its: Chairman
Witness: /s/ Cindy Asinson Witness: /s/ Babette J. Aller
Dated: 12/17/96 Dated: Dec. 13, 1996
18
<PAGE> 19
EXHIBIT "A"
8280 Greensboro Drive
McLean, Virginia
Floor 4
<PAGE> 20
EXHIBIT "B"
8280 Greensboro Drive
McLean, Virginia
Floor 7
<PAGE> 21
EXHIBIT "C"
8280 Greensboro Drive
McLean, Virginia
Floor 7
<PAGE> 22
EXHIBIT "D"
8280 Greensboro Drive
McLean, Virginia
Floor 6
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Washington, D.C.
January 27, 1997
<PAGE> 1
EXHIBIT 23.3
[LETTERHEAD OF HAZEL & THOMAS, P.C.]
January 28, 1997
Re: Deltek Systems, Inc.
Registration Statement on Form S-1
Registration No. 333-18247
We hereby consent to the use of our name wherever it appears in the
above-referenced Registration Statement, including the Prospectus constituting
a part thereof, as originally filed or as subsequently amended.
/s/ Hazel & Thomas, P.C.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELTEK
SYSTEMS, INC. FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S REGISTRATION
STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<EXCHANGE-RATE> 1 1 1
<CASH> 8,333 4,393 0<F5>
<SECURITIES> 0 3,128 0<F5>
<RECEIVABLES> 6,391 6,385 0<F5>
<ALLOWANCES> (396) (343) 0<F5>
<INVENTORY> 209 100 0<F5>
<CURRENT-ASSETS> 15,595<F1> 14,237<F6> 0<F5>
<PP&E> 4,046 2,929 0<F5>
<DEPRECIATION> (2,168) (1,630) 0<F5>
<TOTAL-ASSETS> 20,202<F2> 18,083<F7> 0<F5>
<CURRENT-LIABILITIES> 8,716 9,234 0<F5>
<BONDS> 0 0 0<F5>
0 0 0<F5>
0 0 0<F5>
<COMMON> 15 15 0<F5>
<OTHER-SE> 11,471 8,834 0<F5>
<TOTAL-LIABILITY-AND-EQUITY> 20,202 18,083 0<F5>
<SALES> 34,780 26,849 21,356
<TOTAL-REVENUES> 34,780 26,849 21,356
<CGS> 0 0 0
<TOTAL-COSTS> 24,575 17,176 13,313
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 10,587<F3> 10,066<F8> 8,300<F10>
<INCOME-TAX> 93 45 65
<INCOME-CONTINUING> 10,205 9,673 8,043
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 10,494 10,021 8,235
<EPS-PRIMARY> 0<F4> 0<F9> 0<F11>
<EPS-DILUTED> 0 0 0
<FN>
<F1>INCLUDES PREPAID EXPENSES AND OTHER CURRENT ASSETS OF 1,058.
<F2>INCLUDES COMPUTER SOFTWARE DEVELOPMENT COSTS - NET 2,591. ALSO INCLUDES
OTHER ASSETS OF 138.
<F3>INCLUDES INCOME OF $382.
<F4>AS A SUBCHAPTER "S" CORPORATION, THE PROFORMA INCOME TAX PROVISION, PROFORMA
NET INCOME AND PROFORMA NET INCOME PER SHARE WAS 4,131, 6,456 AND $0.41 PER
SHARE.
<F5>THE BALANCE SHEET WAS NOT REQUIRED FOR THE YEAR ENDED DECEMBER 31, 1994.
<F6>INCLUDES PREPAID EXPENSES AND OTHER CURRENT ASSETS OF 574.
<F7>INCLUDES COMPUTER SOFTWARE DEVELOPMENT COSTS - NET 2,547.
<F8>INCLUDES INTEREST INCOME OF 393.
<F9>AS A SUBCHAPTER "S" CORPORATION, THE PROFORMA INCOME TAX PROVISION, PROFORMA
NET INCOME AND PROFORMA NET INCOME PER SHARE WAS 3,827, 6,239 AND $0.40 PER
SHARE FOR THE YEAR ENDED 12/31/95.
<F10>INCLUDES INTEREST INCOME OF 257.
<F11>AS A SUBCHAPTER "S" CORPORATION THE PROFORMA INCOME TAX PROVISION,
PROFORMA NET INCOME AND PROFORMA NET INCOME PER SHARE WAS 3,156, 5, 144 AND $0.33
PER SHARE.
</FN>
</TABLE>
