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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934 for the quarterly period and six months ended
June 30, 1998 or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- -------- Exchange Act of 1934 for the transition period
from ______ to ______.
Commission File Number: 0-22001
DELTEK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Virginia 54-1252625
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8280 Greensboro Drive, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (703) 734-8606
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
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Class Outstanding at June 30, 1998
Common Stock, $.001 par value 17,840,613
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DELTEK SYSTEMS, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Balance Sheets as of June 30, 1998 and December 31, 1997 3
Statements of Income for the Three and Six Months 5
Ended June 30, 1998 and June 30, 1997
Statements of Cash Flows for the Six Months 6
Ended June 30, 1998 and June 30, 1997
Unaudited Notes to Condensed Financial Statements 8
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings
ITEM 2 - Changes in Securities and Use of Proceeds
ITEM 3 - Defaults upon Senior Securities
ITEM 4 - Submission of Matters to a Vote of Security Holders
ITEM 5 - Other Information
ITEM 6 - Exhibits and Reports on Form 8 - K
SIGNATURES 18
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DELTEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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June 30, 1998 December 31,
------------- ------------
(Unaudited) 1997
----
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ASSETS
Current assets:
Cash and cash equivalents $ 4,202 $ 10,883
Marketable securities 20,482 14,949
Accounts receivable, net of allowance for doubtful
accounts of $589 and $573, respectively 12,930 9,929
Inventories 36 95
Prepaid income taxes 1,916 ---
Deferred income taxes 1,030 1,158
Prepaid expenses and other current assets 1,415 1,345
----- -----
Total current assets 42,011 38,359
------ ------
Furniture, equipment, and leasehold improvements, at
cost, net of accumulated depreciation and amortization
of $5,907 and $5,349 respectively 3,834 2,976
Computer software development costs, at cost, net of
accumulated amortization of $2,868 and $2,509,
respectively 2,658 2,597
Deferred income taxes 1,628 ---
Other assets 788 109
--- ---
Total assets $ 50,919 $ 44,041
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,773 $ 4,985
Accrued dividends payable ---- 400
Income taxes payable ---- 543
Deferred income taxes ---- 1,223
Deferred revenue 14,186 11,076
------ ------
Total current liabilities 20,959 18,227
------ ------
Commitments
Shareholders' equity:
Preferred stock, $0.001 par value per share, 2,000,000
shares authorized, none issued or outstanding
Common stock, $0.001 par value per share, 45,000,000
shares authorized, 17,840,613 and 17,704,933 shares
issued and outstanding at June 30, 1998 and December
31, 1997, respectively 18 18
Paid in capital 20,656 18,044
Retained earnings 9,604 8,204
Less unearned compensation (318) (452)
----- -----
Total shareholders' equity 29,960 25,814
------ ------
Total liabilities and shareholders' equity $ 50,919 $ 44,041
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DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three months ended June 30,
---------------------------
1998 1997
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Statement of Operations Data: (in thousands, except per share data)
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Revenues:
License fees $ 6,807 $4,809
Services 12,129 7,688
Third party equipment and software 1,013 1,106
----- -----
19,949 13,603
------ ------
Operating expenses:
Cost of software 602 511
Cost of services 5,899 3,276
Cost of third-party equipment
and software 779 894
Software development 3,876 2,783
Sales and marketing 2,625 1,581
General and administrative 861 880
Acquisition costs 1,096 ----
Purchased in process research & development 6,810 ----
----- ----
Total operating expenses 22,548 9,925
------ -----
Income (loss) from operations (2,599) 3,678
Interest income, net 250 253
--- ---
Income (loss) before income taxes (2,349) 3,931
Provision (benefit) for income taxes (613) 1,473
----- -----
Net income (loss) $ (1,736) $2,458
---------- ------
Basic net income (loss) per share $ (0.10) $ 0.14
--------- -------
Diluted net income (loss) per share $ (0.10) $ 0.14
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Weighted average shares outstanding 17,808 17,623
------ ------
Weighted average shares outstanding, including dilutive effect
of stock options 18,323 18,095
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DELTEK SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
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Six months ended June 30,
-------------------------
1998 1997
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Statement of Operations Data: (in thousands, except per share data)
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Revenues:
License fees $ 12,690 $ 9,515
Services 23,222 15,211
Third party equipment and software 1,790 1,640
----- -----
37,702 26,366
------ ------
Operating expenses:
Cost of software 1,133 923
Cost of services 11,038 6,363
Cost of third-party equipment
and software 1,382 1,311
Software development 7,210 5,388
Sales and marketing 4,882 3,008
General and administrative 1,927 1,798
Acquisition costs 1,096 ----
Purchased in process research & development 6,810 ------
----- ------
Total operating expenses 35,478 18,791
------ ------
Income from operations 2,224 7,575
Interest income, net 500 314
--- ---
Income before income taxes 2,724 7,889
Provision for income taxes 1,354 2,157
----- -----
Net income $ 1,370 $5,732
---------- ------
Basic net income per share $ 0.08 $ 0.34
------- -------
Diluted net income per share $ 0.07 $ 0.33
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Weighted average shares outstanding 17,770 17,076
------ ------
Weighted average shares outstanding, including the dilutive
effect of stock options 18,293 17,539
------ ------
Pro forma Statement of Operations Data:
Income before provision for income taxes, as reported 7,389
Provision for income taxes 3,039
-----
Net income $4,850
------
Pro forma basic net income per share $0.28
-----
Pro forma diluted net income per share $0.28
-----
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DELTEK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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Six months ended June 30,
-------------------------
1998 1997
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Cash flow from operating activities:
Net Income $ 1,370 $ 5,732
Adjustments to reconcile net income provided by
operating activities:
Depreciation and amortization 933 688
Purchased research and development, noncash charge 6,810 ---
Other noncash charges 384 120
Accreted interest on marketable securities --- (134)
Change in accounts receivable, net (2,766) 54
Change in prepaid expenses, inventories and other assets (146) 330
Change in prepaid income taxes (1,916) (1,560)
Change in accounts payable and accrued expenses 1,396 1,476
Changes in deferred income taxes, net (2,723) 104
Changes in income taxes payable 296 168
Change in deferred revenue 2,663 1,195
----- -----
Net cash provided by operating activities 6,301 8,173
----- -----
Cash flows from investing activities:
Purchase of marketable securities (5,533) (9,174)
Purchase of property and equipment (1,194) (599)
Acquisition of SalesKit Corporation (6,054) ---
Capitalization of computer software development costs (420) (294)
----- -----
Net cash (used in) investing activities (13,201) (10,067)
-------- --------
Cash flow from financing activities:
Cash proceeds from initial public offering, net --- 16,392
Cash proceeds from issuance of stock for employee purchase plan 285 147
Cash proceeds from exercise of stock options 304 ---
Cash dividends paid to stockholders (370) (11,017)
Common stock purchased and retired ---- (426)
---- -----
Net cash provided by financing activities 219 5,096
--- -----
Net increase (decrease) in cash and equivalents (6,681) 3,202
Cash and equivalents, beginning of period 10,883 9,381
------ -----
Cash and equivalents, end of period $ 4,202 $ 12,583
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Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 5,631 $ 1,548
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DELTEK SYSTEMS, INC.
UNAUDITED NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by Deltek
Systems, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended December 31,
1997, included in the Company's Annual Report on Form 10-K.
2. BUSINESS COMBINATIONS
Harper & Shuman Acquisition
In May 1998, the Company completed the acquisition of Harper & Shuman, Inc.
("H&S") by exchanging 686,000 shares of its common stock for all of the common
stock of H&S. Each share of H&S was exchanged for 5.64 shares of Deltek common
stock. In addition, outstanding H&S stock options were converted at the same
exchange factor into options to purchase approximately 4,000 shares of Deltek
common stock.
The acquisition constituted a tax-free reorganization and has been accounted
for as a pooling-of-interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of H&S as though it had always been a part of Deltek.
Acquisition costs expensed at closing of $1,096,000 consisted primarily of fees
for investment bankers, attorneys, accountants and other related charges.
SalesKit Acquisition
In April 1998, the Company acquired substantially all of the assets of
SalesKit Software Corporation ("SalesKit"), and assumed certain related
liabilities. The purchase price consisted of $6,054,000 in cash and stock
warrants with an estimated fair value of $932,000. The stock warrants allow the
holder to purchase 130,000 shares of Deltek common stock at an exercise price
of $22 per share, exercisable over a three year period.
Upon evaluation, the Company assigned approximately $644,000 to intangible
assets and existing technology and is amortizing this amount over five years.
The Company assigned $6,810,000 to in-process research and development and
expensed this amount.
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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 $468,000 in assumed liabilities of
SalesKit, primarily related to accrued liabilities and deferred revenue.
3. TERMINATION OF S-CORPORATION ELECTION
Just prior to the February 24, 1997, initial public offering, the Company
terminated its S-Corporation election for federal income tax purposes. The
provision for income taxes prior to this termination related to certain states
that do not recognize S-Corporation status. Provision for income taxes after
the revocation reflects the estimated current provision for federal and state
income taxes and deferred income taxes.
Pro forma net income is based on the assumption that the Company's
S-Corporation status was terminated at the beginning of 1997 and reflects a pro
forma income tax provision based on applicable tax rates as if the Company had
not elected S-Corporation status.
4. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share for the three and six months ended June 30,
1998 and 1997 were calculated in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share". No reconciling items
existed between the net income used for basic and diluted net income per share.
The only reconciling item between the shares used for basic and diluted net
income per share related to outstanding stock options. The warrants issued in
April 1998 were not dilutive for all periods presented. Stock options were not
dilutive for the three months ended June 30, 1998 due to the Company recording
a net loss for that period.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
unaudited Financial Statements and Notes included in Item 1 of this Quarterly
Report. The following information should also be read in conjunction with the
audited Financial Statements and Notes, and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1997 as contained in the Company's Annual Report on Form 10-K.
Except for historical information, certain statements in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking. These forward-looking statements are subject
to various risks and uncertainties, including the demand for products, the size
and timing of specific sales, the level of product and price competition, the
length of sales cycles, economic conditions and the Company's ability to
develop and market new products and control costs. The Company undertakes no
obligation and does not intend to update, revise or otherwise publicly release
the result of any revisions to these forward-looking statements that may be
made to reflect future events or circumstances.
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Results of Operations
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total revenues:
Statement of Operations Data (Unaudited) as a percentage of revenues
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Three months ended Six months ended
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6/30/98 6/30/97 6/30/98 6/30/97
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Revenues:
License fees 34.1 % 35.4 % 33.7 % 36.1 %
Services 60.8 56.5 61.6 57.7
Third party equipment and
software 5.1 8.1 4.7 6.2
--- --- --- ---
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of software 3.0 3.8 3.0 3.5
Cost of services 29.6 24.1 29.3 24.1
Cost of third-party equipment
and software 3.9 6.6 3.7 5.0
Software development 19.4 20.4 19.1 20.5
Sales and marketing 13.2 11.6 12.9 11.4
General and administrative 4.3 6.5 5.1 6.8
Acquisition costs 5.5 ---- 2.9 ----
Purchased in-process research
and development 34.1 ---- 18.1 ---
---- ---- ---- ---
Total operating expenses 113.0 73.0 94.1 71.3
----- ----- ---- ----
Income (loss) from operations (13.0) 27.0 5.9 28.7
Interest income, net 1.2 1.9 1.3 1.2
--- --- --- ---
Income (loss) before income taxes (11.8) 28.9 7.2 29.9
Provision (benefit) for income taxes (3.1) 10.8 3.6 8.2
----- ---- --- ---
Net income (loss) (8.7) % 18.1 % 3.6 % 21.7 %
----- ---- --- ----
Pro forma Statement of Operations Data:
- ---------------------------------------
Income before income taxes 29.9 %
----
Income tax provision 11.5
----
Net income 18.4 %
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Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
License Fees. License fees for the three months ended June 30, 1998
increased by 41.5% to $6.8 million from $4.8 million for the same period in
1997. The increase in license fees was principally attributable to Costpoint
license fees which increased by 42.5% to $3.8 million for the three months
ended June 30, 1998 from $2.7 million for the same period in 1997, 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. Advantage license fees increased by 32.9% to $1.2
million for the three months ended June 30, 1998 as compared to $0.9 million
for the same period in 1997. License fees from System 1 products were $748,000
for the three months ended June 30, 1998 compared to $772,000 for the three
months ended June 30, 1997, a decrease of 3.0%. License fees for Electronic
Timesheet increased by 112.2% to $698,000 for the three months ended June 30,
1998, from $329,000 in the same period in 1997. License fees comprised 34.1%
of the Company's total revenues for the three months ended June 30, 1998,
compared to 35.4% for the comparable prior year period.
Services. Service revenues for the three months ended June 30, 1998
increased by 57.8% to $12.1 million from $7.7 million for the same period in
1997. The increase in service revenues was principally attributable to
increased consulting services related to new implementations of Costpoint
systems. Consulting service revenues increased by 104.9% to $5.3 million for
the three months ended June 30, 1998 from $2.6 million for the same period in
1997. Other service revenues increased by 33.8% to $6.8 million for the three
months ended June 30, 1998, from $5.1 million for the same period in the prior
year, principally as a result of the addition of new customers and the license
of additional software products to existing customers and, to a lesser extent,
increases in service rates. Service revenues comprised 60.8% of the Company's
total revenues for the three months ended June 30, 1998, compared to 56.5% for
the same period in 1997.
Third-Party Equipment and Software. Revenue from third-party
equipment and software for the three months ended June 30, 1998 decreased by 8%
to $1.0 million from $1.1 million for the three months ended June 30, 1997.
These revenues comprised 5.1% and 8.1% of total revenues for the three months
ended June 30, 1998 and 1997, respectively.
Cost of Software. Cost of software is comprised primarily of
royalties and maintenance payments to third parties, amortization of software
development costs, and the cost of production and distribution of software and
user manuals. Cost of software for the three months ended June 30, 1998 was
$0.6 million, a slight increase from the $0.5 million for the same period in
1997. This change was due to an increase in licensing activity.
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Cost of Services. Cost of services is comprised primarily of
personnel costs for implementation and consulting services, user training and
ongoing maintenance and support. Cost of services for the three months ended
June 30, 1998 increased by 80.1% to $5.9 million from $3.3 million for the same
period in 1997. The increase in cost of services was primarily due to
increases in personnel costs to support the Costpoint product line. Cost of
services represented 48.6% and 42.6% of service revenues for the three months
ended June 30, 1998 and 1997, respectively. The increase in cost of services
as a percentage of service revenues primarily reflected the increase in
consulting revenues as a percentage of service revenues. The Company earns a
lower margin on its consulting revenues than on its ongoing support services
revenues. To a lesser extent, cost of services as a percentage of service
revenues increased due to hiring of additional telephone support personnel to
service the Company's growing customer base.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of computer and peripheral equipment and
license fees and royalties for third-party software. Costs of third-party
equipment and software for the three months ended June 30, 1998 decreased to
$0.8 million from $0.9 million in the comparable year period. As a percentage
of related revenues, cost of third-party equipment and software products
represented 76.9% and 80.8% of revenue from third-party equipment and software
for the three months ended June 30, 1998 and 1997, respectively. The decrease
in these costs as a percentage of related revenue was the result of changes in
the product mix of equipment and software sold.
Software Development. Software development costs consists primarily
of the personnel costs of analysts and programmers who research,
develop, maintain and enhance the Company's existing software product lines,
and develop new products. Software development costs for the three months
ended June 30, 1998 increased by 39.3% to $3.9 million from $2.8 million for
the same period in 1997. This increase was due primarily to hiring additional
personnel. Software development costs represented 19.4% and 20.4% of total
revenues for the three months ended June 30, 1998 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily
of the costs of the Company's sales and marketing personnel as well as the
costs of advertising, direct mail and other sales and marketing activities.
Sales and marketing expenses for the three months ended June 30, 1998 increased
by 66.0% to $2.6 million from $1.6 million for the same period in 1997. This
increase was due primarily to hiring additional personnel, and increased
marketing activities. The Company expects sales and marketing expenses to
continue to increase in the foreseeable future as the Company pursues its
growth strategy. Sales and marketing expenses represented 13.2% of the
Company's total revenues for the three months ended June 30, 1998, compared to
11.6% for the same period in 1997.
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
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fees and other infrastructure costs. General and administrative expenses for
the three months ended June 30, 1998 decreased by 2.2% to $0.8 million from
$0.9 million for the same period in 1997. This decline is attributable to
increased efficiencies from the existing staff and favorable bad debt
experience in recent quarters. General and administrative expenses represented
4.3% of the Company's total revenue for the three months ended June 30, 1998,
compared to 6.5% for the same period in 1997.
Acquisition costs. A charge of $1.1 million was recorded for the
three months ended June 30, 1998 for the transaction costs related to the
acquisition of Harper and Shuman, Inc. The acquisition was accounted for as a
pooling of interests.
Purchased In-process Research and Development. A charge of $6.8
million was recorded during the three months ended June 30, 1998, for the
appraised valuation of the purchased in-process research and development costs
acquired from SalesKit Software Corporation.
Interest Income. Interest income results from investments, and to a
lesser extent, from installment financing. Interest income for the three
months ended June 30, 1998 decreased by 1.2% to $250,000 from $253,000 for the
same period in 1997. The change is due to the cash utilized for the
acquisition of SalesKit Software Corporation in April 1998, offset by increased
cash from operations.
Income Tax Provision. The Company's effective tax rate for the three
months ended June 30, 1998 was 26.1%, as compared to 37.5% for the same
period in 1997. The tax rate for the quarter ended June 30, 1998 was affected
by the nondeductible nature of a majority of the transaction costs for the
acquisition of Harper and Shuman, Inc. The provision for income taxes for the
three months ended June 30, 1998 is based upon the Company's estimate of the
effective tax rate for fiscal 1998.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
License Fees. License fees for the six months ended June 30, 1998
increased by 33.4% to $12.7 million from $9.5 million for the same period in
1997. The increase in license fees was principally attributable to Costpoint
license fees which increased by 51.5% to $7.3 million for the six months ended
June 30, 1998 from $4.8 million for the same period in 1997, 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. Advantage license fees increased by 5.5% to $2.2 million
for the six months ended June 30, 1998 as compared to $2.1 million for the same
period in 1997. License fees from System 1 products were $1.3 million for the
six months ended June 30, 1998 compared to $1.8 million for the six months
ended June 30, 1997, a decrease of 30.0%. The decline in System 1 license fees
was the result of increased licenses of the Company's advanced client/server
system, Costpoint, to new customers. License fees for Electronic Timesheet
increased by 127.4% to $1.5 million for the six months ended June 30, 1998,
from $665,000 in the same period in 1997.
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License fees comprised 33.7% of the Company's total revenues for the six months
ended June 30, 1998, compared to 36.1% for the comparable prior year period.
Services. Service revenues for the six-months ended June 30, 1998
increased by 52.7% to $23.2 million from $15.2 million for the same period in
1997. The increase in service revenues was principally attributable to
increased consulting services related to new implementations of Costpoint
systems. Consulting service revenues increased by 96.6% to $10.1 million for
the six months ended June 30, 1998 from $5.2 million for the same period in
1997. Other service revenues increased by 30.1% to $13.1 million for the six
months ended June 30, 1998, from $10.1 million for the same period in the prior
year, principally as a result of the addition of new customers and the license
of additional software products to existing customers and, to a lesser extent,
increases in service rates. Service revenues comprised 61.6% of the Company's
total revenues for the six months ended June 30, 1998, compared to 57.7% for
the same period in 1997.
Third-Party Equipment and Software. Revenues from third-party
equipment and software for the six months ended June 30, 1998 increased by 9.1%
to $1.8 million from $1.6 million for the six months ended June 30, 1997. These
revenues comprised 4.7% and 6.2% of total revenues for the first six months
ended June 30, 1998 and 1997, respectively.
Cost of Software. Cost of software is comprised primarily of
royalties and maintenance payments to third parties, amortization of software
development costs, and the cost of production and distribution of software and
user manuals. Cost of software for the six months ended June 30, 1998 was
$1.1 million, a slight increase from the $923,000 for the same period in 1997.
This change was due to an increase in licensing activity.
Cost of Services. Cost of services is comprised primarily of
personnel costs for implementation and consulting services, user training and
ongoing maintenance and support. Cost of services for the six months ended
June 30, 1998 increased by 73.5% to $11.0 million from $6.4 million for the
same period in 1997. The increase in cost of services was primarily due to
increases in services personnel. Cost of services represented 47.5% and 41.8%
of service revenues for the six months ended June 30, 1998 and 1997,
respectively. The increase in cost of services as a percentage of service
revenues primarily reflected the increase in consulting revenues as a
percentage of services revenues. The Company earned a lower margin on its
consulting revenues than on its ongoing support services revenues. To a lesser
extent, cost of services as a percentage of services revenues increased due to
hiring of additional telephone support personnel to service the Company's
growing customer base.
Cost of Third-Party Equipment and Software. Costs of third-party
equipment and software consists of the cost of computer and peripheral
equipment and license fees and royalties for third-party software. Cost of
third-party equipment and software for the six months ended June 30, 1998
increased to $1.4 million from $1.3 million in the
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comparable prior period. As a percentage of related revenues, cost of
third-party equipment and software products represented 77.2% and 79.9% for the
six months ended June 30, 1998 and 1997, respectively. The decrease in these
costs as a percentage of related revenues was the result of changes in the
product mix of equipment and software sold.
Software Development. Software development costs for the six months
ended June 30, 1998 increased by 33.8% to $7.2 million from $5.4 million for
the same period in 1997. This increase was due primarily to hiring additional
personnel. Software development costs represented 19.1% and 20.4% of total
revenues for the six months ended June 30, 1998 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily
of the cost of the Company's sales and marketing personnel as well as the costs
of advertising, direct mail and other sales and marketing activities. Sales
and marketing expenses for the six months ended June 30, 1998 increased by
62.3% to $4.9 million from $3.0 million for the same period in 1997. This
increase was due primarily to hiring additional personnel and increased
marketing activities. The Company expects sales and marketing expenses to
continue to increase for the foreseeable future as the Company pursues its
strategy. Sales and marketing expenses represented 12.9% of the Company's
total revenues for the six months ended June 30, 1998, compared to 11.4% for
the same period in 1997.
General and Administrative. General and administrative expenses
consist primarily of the personnel costs of the Company's management,
administrative and finance staffs as well as the costs of insurance programs,
bad debt expenses, professional fees and other infrastructure costs. General
and administrative expenses for the six months ended June 30, 1998 increased by
7.2% to $1.9 million from $1.8 million for the same period in 1997. This
increase was due primarily to the Company's overall growth. General and
administrative expenses represented 5.1% of the Company's total revenues for
the six months ended June 30, 1998, compared to 6.8% for the same period in
1997.
Acquisition costs. A charge of $1.1 million was recorded for the
six-months ended June 30, 1998 for the transaction costs related to the
acquisition of Harper and Shuman, Inc. The acquisition was accounted for as a
pooling of interests.
Purchased In-Process Research and Development. A charge of $6.8
million was recorded during the six-months ended June 30, 1998, for the
appraised valuation of the purchased in-process research and development costs
acquired from SalesKit Software Corporation.
Interest Income. Interest income results from investment and, to a
lesser extent, from installment financing. Interest income for the six months
ended June 30, 1998 increased by 59.2% to $500,000 from $314,000 for the same
period in 1997. This increase is due to the higher level of cash balances
available for investment.
16
<PAGE> 17
Income Tax Provision. The Company's effective tax rate for the six
months ended June 30, 1998 was 49.7%, as compared to the pro forma effective
tax rate of 38.5% for the same period in 1997. The tax rate for the six months
ended June 30, 1998 was affected by the nondeductible nature of a majority of
the transaction costs for the acquisition of Harper and Shuman, Inc. The
provision for income taxes for the six months ended June 30, 1998 is based upon
the Company's estimate of the effective tax rate for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively from cash flow
from its operations. As of June 30, 1998, the Company had cash and cash
equivalents of $4.2 million, marketable securities of $20.5 million and working
capital of $21.1 million.
For the six months ended June 30, 1998, the Company's net cash provided by
operating activities was $6.3 million. Accounts receivable, net of the
allowance for doubtful accounts, were $12.9 million as of June 30, 1998,
compared to $9.9 million as of December 31, 1997. Accounts receivable days
sales outstanding was 55 days as of June 30, 1998, compared to 54 days as of
December 31, 1997. The increase in deferred revenue reflects increased
Costpoint license fees, for which revenues are recognized upon the expiration
of the refund period. Exclusive of unbilled receivables, which were recorded as
deferred revenue, days sales outstanding w|ere 39 days as of June 30, 1998,
compared to 37 days as of December 31, 1997. While the Company believes that
its allowance for doubtful accounts as of June 30, 1998, 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 utilized $13.2 million for the six months ended June
30, 1998. This amount included $6.0 million for the assets acquired from
SalesKit, $5.5 million in acquired marketable securities, $1.2 million in
purchased property and equipment and $420,000 of capitalized software production
costs.
Financing activities for the six months ended June 30, 1998 consisted
primarily of $304,000 in proceeds from the exercise of stock options and
$285,000 from the issuance of stock under the Company's employee stock purchase
plan. This was offset by $370,000 in a final distribution to the Company's S
Corporation shareholders.
The Company has a $1.0 million Bank line of credit which will be secured by
substantially all of the Company's assets and will bear interest at the lender's
prime rate. To date, no amounts have been drawn under the line of credit.
17
<PAGE> 18
The Company believes that its current liquidity, together with anticipated
cash flow from operations and proceeds of this offering, will satisfy the
Company's anticipated working capital and capital expenditure requirements
through the foreseeable future. However, depending on its rate of growth,
profitability and other factors, some of which are not in the Company's control,
the Company believes additional financing may be required to meet its working
capital requirements or capital expenditure needs, including acquisitions, in
the future. There can be no assurance that additional financing will be
available when required or, if available, that any such financing will be on
terms satisfactory to the Company.
Year 2000 Compliance. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. As a
result, such systems, applications and devices could fail or create erroneous
results unless they are modified in some fashion to distinguish 21st century
dates from 20th century dates (i.e., to be year 2000 compliant). Management
believes that the growth in demand for the Company's products over the past
several years is due in part to its customers' need to update their computer
systems in preparation for the year 2000. As the year 2000 approaches and the
number of upgrades driven primarily by the need to achieve year 2000 compliance
diminishes, there can be no assurance that the Company's business, operating
results and financial condition will not be adversely impacted.
Although the software products that the Company currently actively markets
either are, or are being redesigned to be, year 2000 compliant, many of the
Company's customers are still using non-compliant versions of its products. The
Company intends to provide the year 2000 compliant versions of its products as
normal product upgrades to all licensees that are using non-compliant versions
and are currently receiving ongoing support services from the Company. The
Company is attempting to identify those licensees, which are currently using a
non-compliant version of its products but are not receiving ongoing support
services, in order to determine whether those licensees intend to continue using
the Company's products and, if so, how the Company can assist them in
converting to a year 2000 compliant version. Although the Company does not
anticipate that the impact of these conversions will be significant, there can
be no assurance that the Company will be able to identify and satisfactorily
resolve year 2000 issues with such licensees in a manner that will not have a
material adverse effect on the Company's business, operating results and
financial condition. Although the Company's year 2000 compliant products have,
or will have, undergone the Company's normal quality testing procedures, there
can be no assurance that these products contain all necessary date code
changes. Any system malfunctions due to the onset of the year 2000 and any
disputes with customers relating to year 2000 compliance, including licensees
of non-compliant products that the Company is unable to locate, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Products."
The Company's internal business information systems are primarily comprised
of the commercial application software products offered for license by the
Company to its customers. These products are designed to be year 2000 compliant.
The Company does, however, utilize some third-party vendor network equipment,
telecommunication products and other products which may or may not be year 2000
compliant. The Company also relies, directly and indirectly, on external systems
of customers, suppliers, creditors, financial organizations and governmental
entities for accurate exchange of data. The Company is evaluating its
information technology infrastructure for year 2000 compliance to determine what
actions are required to make all internal systems year 2000 compliant and what
actions are needed to mitigate vulnerability to problems related to enterprises
with which the Company interacts. While the Company has not fully identified the
impact of the year 2000 issue on its internal systems or whether any problems
can be resolved without disrupting its business and incurring significant
expense, the Company's current estimate is that the costs associated with the
year 2000 issue, and the consequences of incomplete or untimely resolution of
the year 2000 issue, will not have a material adverse effect on the Company's
business, operating results or financial condition. There can be no assurance
that the Company will not be affected by year 2000 disruption in the operation
of the enterprises with which the Company interacts. Accordingly, year 2000
problems could have a material adverse effect upon the Company's business,
operating results and financial condition.
18
<PAGE> 19
Factors That May Affect Future Results
The Company's future operating results may vary from quarter to quarter
depending 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, its ability to attract and retain personnel, the
timing of new hires, 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 the Company's national user conference, general economic conditions and its
ability to develop and market new software products and enhancements and control
costs. 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 revenues from license fees are difficult to predict because
of the length and variability of the Company's sales cycles (typically 3 to 18
months), 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 adversely
affected.
For certain of its software products, the Company typically grants its
customers a right of return for a full or partial refund of the license fee
during a refund period which is generally 60 to 90 days from the date of the
initial software delivery. The Company occasionally has provided, and may in the
future provide, longer refund periods for larger, more complex Costpoint
installations. Costpoint and Allegro license fees are recognized upon the
expiration of the applicable refund periods and are recorded as deferred
revenues until recognized. Because of customers' refund rights and the varying
length of applicable refund periods, deferred revenues at the end of a quarter
do not necessarily reflect revenues that the Company will recognize in a
succeeding quarter. The Company generally recognizes license fees from its
Advantage, System 1 and Electronic Timesheet products upon delivery.
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.
The Company's future quarterly operating results from time to time may not meet
the expectations of market analysts or investors. In such event, the price of
the Common Stock would likely be materially adversely affected.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not party to any legal proceeding which would have a
material impact on the Company, its operations or financial results.
Item 2. Changes in Securities and Use of Proceeds
(a)-(b) Not applicable.
(c) On April 30, 1998, the Company issued to SalesKit Software
Corporation ("SalesKit") warrants to purchase 130,000 shares
of its Common Stock in connection with the Company's
acquisitions of certain assets of SalesKit. The warrants are
exercisable at any time until April 30, 2001 at an exercise
price of $22 per share. The warrants were issued pursuant to
an exemption from registration under Section 4(2) of the
Securities Act of 1933 (the "Act").
On May 29, 1998 the Company issued to the shareholders of
Harper & Shuman, Inc. ("H&S") an aggregate of 685,765 shares
of Common Stock and options to purchase 4,230 shares of Common
Stock in exchange for the outstanding common shares and
options of H&S. The options are exercisable at any time until
December 31, 1999 at a per share price of $0.31. The
securities were issued in accordance with Regulation D under
the Act.
(d) On April 30, 1998, the Company released from escrow the
approximate sum of $5.6 million, placed in escrow with the
Company's bank during the quarter ended March 31, 1998 upon
closing of the acquisition of assets of SalesKit. Such sums
represented a portion of the net proceeds of the Company's
initial public offering in February 1997. The balance of the
net proceeds of the offering remain temporarily invested and
available for future working capital or other uses.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 28, 1998, the Company held its Annual Meeting of Shareholders.
As reported in the Company's Current Report on Form 8-K dated June 12, 1998
(File No. 0-22001), Charles W. Stein was reelected as a Class I director and
Arthur Andersen LLP was ratified as the Company's auditors.
20
<PAGE> 21
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On May 12, 1998, the Company's filed its Current Report on Form 8-K
dated May 12, 1998, reporting the acquisition of certain assets of
SalesKit. Financial statements for SalesKit as of and for the fiscal
year ended December 31, 1998, and unaudited pro forma financial
information as of and for the year ended December 31, 1997 giving
effect to the acquisition as if it occurred on January 1, 1997 were
included.
One June 1, 1998, the Company filed its Current Report on Form 8-K
dated June 1, 1998, reporting the issuance of a press release
announcing the execution of a definitive agreement relating to the
contemplated acquisition of H&S and a press release announcing the
closing of the acquisition. No financial statements were included.
On June 12, 1998, the Company filed its Current Report on Form 8-K
dated June 12, 1998, reporting the acquisition of H&S and the results
of its annual meeting of shareholders held on May 28, 1998. No
financial statements were included with the report but the Company
reported that it expected to file such financial information by
amendment no later than August 12, 1998.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: July 31, 1998
DELTEK SYSTEMS, INC.
By: /s/ Alan R. Stewart
------------------------
Alan R. Stewart
Chief Financial Officer
(Principal Financial and Accounting Officer)
22
<PAGE> 23
DELTEK SYSTEMS, INC.
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
27 Financial Data Schedule
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1997 DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1997 JUN-30-1998 JUN-30-1997 JUN-30-1998 DEC-31-1997
<CASH> 0 4,202 0 0 10,883
<SECURITIES> 0 20,482 0 0 14,949
<RECEIVABLES> 0 13,519 0 0 10,502
<ALLOWANCES> 0 (589) 0 0 (573)
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 0 42,011 0 0 38,359
<PP&E> 0 9,741 0 0 8,325
<DEPRECIATION> 0 (5,907) 0 0 (5,349)
<TOTAL-ASSETS> 0 50,919 0 0 44,041
<CURRENT-LIABILITIES> 0 20,959 0 0 18,227
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 18 0 0 18
<OTHER-SE> 0 29,942 0 0 25,796
<TOTAL-LIABILITY-AND-EQUITY> 0 50,919 0 0 44,041
<SALES> 13,603 19,949 26,366 37,702 0
<TOTAL-REVENUES> 13,603 19,949 26,366 37,702 0
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 9,925 22,548 18,791 35,478 0
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0 0
<INCOME-PRETAX> 3,931<F1> (2,349)<F2> 7,889<F3> 2,724<F6> 0
<INCOME-TAX> 0 0 0 0 0
<INCOME-CONTINUING> 3,678 (2,599) 7,575 2,224 0
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 2,458 (1,736) 5,732<F4> 1,370 0
<EPS-PRIMARY> 0.14 (0.10) 0.34<F5> 0.08 0
<EPS-DILUTED> 0 0 0 0 0
<FN>
<F1>INCLUDES INTEREST INCOME OF $253.
<F2>INCLUDES INTEREST INCOME OF $250.
<F3>INCLUDES INTEREST INCOME OF $314.
<F4>THE PRO FORMA INCOME TAX PROVISION AND NET INCOME, AFTER TAKING EFFECT FOR A
PROFORMA INCOME TAX PROVISION, WOULD BE $3,039 AND $4,850, RESPECTIVELY.
<F5>THE PRO FORMA NET INCOME PER SHARE OF A FULLY DILUTED BASIS WOULD HAVE BEEN
$0.28.
<F6>INCLUDES INTEREST INCOME OF $500.
</FN>
</TABLE>
