<PAGE> 1
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 nine months ended
September 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 September 30, 1998
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Common Stock, $.001 par value 17,876,257
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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 September 30, 1998 and December 31, 1997 3
Statements of Income for the Three and Nine Months 4
Ended September 30, 1998 and September 30, 1997
Statements of Cash Flows for the Nine Months 6
Ended September 30, 1998 and September 30, 1997
Unaudited Notes to Condensed Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 18
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 19
ITEM 2 - Changes in Securities and Use of Proceeds 19
ITEM 3 - Defaults upon Senior Securities 19
ITEM 4 - Submission of Matters to a Vote of Security Holders 19
ITEM 5 - Other Information 19
ITEM 6 - Exhibits and Reports on Form 8 - K 19
SIGNATURES 20
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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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September 30, December 31,
------------- ------------
1998 1997
----- -----
(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 1,229 $ 10,883
Marketable securities 27,268 14,949
Accounts receivable, net of allowance for doubtful
accounts of $589 and $573, respectively 15,439 9,929
Deferred income taxes 903 1,158
Prepaid expenses and other current assets 1,815 1,440
------- -------
Total current assets 46,654 38,359
------ ------
Furniture, equipment, and leasehold improvements, at
cost, net of accumulated depreciation and amortization
of $6,223 and $5,349 respectively 3,898 2,976
Computer software development costs, at cost, net of
accumulated amortization of $3,112 and $2,509,
respectively 2,693 2,597
Deferred income taxes 1,621 ---
Other assets 748 109
---------- ----------
Total assets $ 55,614 $ 44,041
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,133 $ 4,985
Accrued dividends payable ---- 400
Income taxes payable 236 543
Deferred income taxes ---- 1,223
Deferred revenue 15,005 11,076
---------- ----------
Total current liabilities 21,374 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, 17,876,57 and 17,704,933 shares issued
and outstanding at Sept. 30, 1998 and December 31, 1997,
respectively
18
Paid in capital 21,024 18,044
Retained earnings 13,450 8,204
Less unearned compensation (252) (452)
---------- ----------
Total shareholders' equity 34,240 25,814
---------- ----------
Total liabilities and shareholders' equity $ 55,614 $ 44,041
---------- ----------
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DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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<CAPTION>
Three months ended September 30,
--------------------------------
1998 1997
---- ----
Statement of Operations Data: (in thousands, except per share data)
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Revenues:
License fees $ 7,356 $ 5,141
Services 13,425 8,736
Third party equipment and software 823 624
---------- ----------
21,604 14,501
---------- ----------
Operating expenses:
Cost of software 707 567
Cost of services 6,692 3,928
Cost of third-party equipment
and software 635 479
Software development 3,989 2,683
Sales and marketing 2,583 1,551
General and administrative 975 887
Acquisition costs ---- 320
---------- ----------
Total operating expenses 15,581 10,415
---------- ----------
Income from operations 6,023 4,086
Interest income, net 272 236
---------- ----------
Income before income taxes 6,295 4,322
Provision for income taxes 2,450 1,640
---------- ----------
Net income $ 3,845 $ 2,682
---------- ----------
Basic net income per share $ 0.22 $ 0.15
---------- ----------
Diluted net income per share $ 0.21 $ 0.15
---------- ----------
Weighted average shares outstanding 17,864 17,694
---------- ----------
Weighted average shares outstanding, including dilutive
effect of stock options 18,280 18,257
---------- ----------
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DELTEK SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
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Nine months ended September 30,
-------------------------------
1998 1997
---- ----
Statement of Operations Data: (in thousands, except per share data)
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Revenues:
License fees $ 20,046 $ 14,656
Services 36,647 23,947
Third party equipment and software 2,613 2,264
---------- ----------
59,306 40,867
---------- ----------
Operating expenses:
Cost of software 1,840 1,490
Cost of services 17,730 10,291
Cost of third-party equipment and software 2,017 1,790
Software development 11,199 8,071
Sales and marketing 7,465 4,559
General and administrative 2,902 2,685
Acquisition costs 1,096 320
Purchased in process research & development 6,810 ----
---------- ----------
Total operating expenses 51,059 29,206
---------- ----------
Income from operations 8,247 11,661
Interest income, net 772 550
---------- ----------
Income before income taxes 9,019 12,211
Provision for income taxes 3,804 3,797
---------- ----------
Net income $ 5,215 $ 8,414
---------- ----------
Basic net income per share $ 0.29 $ 0.48
---------- ----------
Diluted net income per share $ 0.29 $ 0.47
---------- ----------
Weighted average shares outstanding 17,802 17,390
---------- ----------
Weighted average shares outstanding, including the dilutive
effect of stock options 18,243 17,879
---------- ----------
Pro forma Statement of Operations Data:
Income before provision for income taxes, as reported $ 12,211
Provision for income taxes 4,679
----------
Net income $ 7,532
----------
Pro forma basic net income per share $ 0.43
----------
Pro forma fully diluted net income per share $ 0.42
----------
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5
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DELTEK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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Nine months ended Sept.30,
--------------------------
1998 1997
---- ----
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Cash flow from operating activities:
Net Income $ 5,215 $ 8,414
Adjustments to reconcile net income provided by
Operating activities:
Depreciation and amortization 1,571 1,085
Purchased research and development, noncash charge 6,810 ----
Other noncash charges 754 289
Accreted interest on marketable securities (233) (159)
Change in accounts receivable, net (5,510) 2,013
Change in prepaid expenses, inventories and other assets (375) 131
Change in prepaid income taxes ---- (1,106)
Change in accounts payable and accrued expenses 1,118 2,289
Changes in deferred income taxes, net (2,589) 104
Changes in income taxes payable (307) ----
Change in deferred revenue 3,929 2,226
---------- ----------
Net cash provided by operating activities 10,383 11,259
---------- ----------
Cash flows from investing activities:
Purchase of marketable securities (12,086) (17,803)
Purchase of property and equipment (1,810) (1,007)
Acquisition of SalesKit Corporation (6,054) ----
Capitalization of computer development costs (705) (462)
---------- ----------
Net cash (used in) provided by investing activities (20,655) (19,272)
---------- ----------
Cash flow from financing activities:
Cash proceeds from initial public offering ---- 16,388
Cash proceeds from issuance of stock for employee
Purchase plan and option plans 988 539
Cash dividends paid to stockholders (370) (13,617)
Common stock purchased and retired ---- (426)
---------- ----------
Net cash (used in) provided by financing activities 618 2,884
---------- ----------
Net increase (decrease) in cash and equivalents (9,654) (5,129)
Cash and equivalents, beginning of period 10,883 9,381
---------- ----------
Cash and equivalents, end of period 1,229 4,252
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 9,177 $ 4,737
---------- ----------
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6
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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 Registration Statement on Form S-3 as amended
(No. 333-60457).
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 warrants
with an estimated fair value of $932,000. The 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. 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.
7
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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 nine months ended
September 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.
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 Registration Statement on Form
S-3 as amended (No. 333-60457).
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.
8
<PAGE> 9
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 Nine months ended
------------------ -----------------
9/30/98 9/30/97 9/30/98 9/30/97
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Revenues:
License fees 34.0 % 35.5 % 33.8 % 35.9 %
Services 62.2 60.2 61.8 58.6
Third party equipment and
software 3.8 4.3 4.4 5.5
------ ------ ------ ------
Total Revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Cost of software 3.3 3.9 3.1 3.6
Cost of services 31.0 27.1 29.9 25.2
Cost of third-party equipment
and software 2.9 3.3 3.4 4.4
Software development 18.5 18.5 18.9 19.7
Sales and marketing 12.0 10.7 12.6 11.2
General and administrative 4.4 6.1 4.9 6.6
Acquisition costs ---- 2.2 1.8 0.8
Purchased in-process research
and development ---- ---- 11.5 ---
------ ------ ------ ------
Total operating expenses 72.1 71.8 86.1 71.5
------ ------ ------ ------
Income from operations 27.9 28.2 13.9 28.5
Interest income, net 1.2 1.6 1.3 1.4
------ ------ ------ ------
Income before income taxes 29.1 29.8 15.2 29.9
Provision for income taxes 11.3 11.3 6.4 9.3
------ ------ ------ ------
Net income 17.8 % 18.5 % 8.8 % 20.6 %
------ ------ ------ ------
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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<PAGE> 10
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
License Fees. License fees for the nine months ended September 30,
1998 increased by 36.8% to $20.0 million from $14.7 million for the same period
in 1997. The increase in license fees was principally attributable to Costpoint
license fees, which increased by 51.4% to $11.9 million for the nine months
ended September 30, 1998 from $7.9 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 37.2%
to $3.7 million for the nine months ended September 30, 1998 as compared to
$2.7 million for the same period in 1997. License fees from System 1 products
were $1.8 million for the nine months ended September 30, 1998 compared to $2.7
million for the nine months ended September 30, 1997, a decrease of 32.8%. 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 67.8% to $2.1 million for the nine
months ended September 30, 1998 from $1.2 million for the same period in 1997.
License fees comprised 33.8% of the Company's total revenues for the nine
months ended September 30, 1998, compared to 35.9% for the comparable prior
year period.
Services. Service revenues for the nine months ended September 30,
1998 increased by 53.0% to $36.6 million from $23.9 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 101.9% to $15.4 million for
the nine months ended September 30, 1998 from $7.6 million for the same period
in 1997. Other service revenues increased by 30.1% to $21.2 million for the
nine months ended September 30, 1998 from $16.3 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 61.8% of
the Company's total revenues for the nine months ended September 30, 1998,
compared to 58.6% for the same period in 1997.
Third-Party Equipment and Software. Revenues from third-party
equipment and software for the nine months ended September 30, 1998 increased
by 15.4% to $2.6 million from $2.3 million for the nine months ended September
30, 1997. These revenues comprised 4.4% and 5.5% of total revenues for the nine
months ended September 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 nine months ended September 30, 1998 was
$1.8 million, a slight increase from $1.5 million 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 nine months ended
September 30, 1998 increased by 72.3% to $17.7 million from $10.3 million for
the same period in 1997. The increase in cost of services was primarily due to
increases in service personnel. Cost of services represented 48.4% and 43.0% of
service revenues for the nine months ended September 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, and to a lessor extent the cost of the Users
Conference. Cost of services, exclusive of the direct costs of the
International User
10
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Conference, represented 47.3% and 41.9% of service revenues for the nine months
ended September 30, 1998 and 1997, respectively. The Company earns a lower
margin on its consulting revenues than on its ongoing support service 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 the costs of computer and peripheral
equipment and license fees and royalties for third-party software. Cost of
third-party equipment and software for the nine months ended September 30, 1998
increased to $2.0 million from $1.8 million for the same period in the prior
year. As a percentage of related revenues, cost of third-party equipment and
software products represented 77.2% and 79.1% for the nine months ended
September 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 consist 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 nine months ended September 30,
1998 increased by 38.8% to $11.2 million from $8.1 million for the same period
in 1997. This increase was due primarily to hiring additional personnel.
Software development costs represented 18.9% and 19.7% of total revenues for
the nine months ended September 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 nine months ended September 30, 1998
increased by 63.7% to $7.5 million from $4.6 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 for the foreseeable future as the Company
pursues its strategy. Sales and marketing expenses represented 12.6% of the
Company's total revenues for the nine months ended September 30, 1998, compared
to 11.2% 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 nine months ended September 30, 1998
increased by 8.1% to $2.9 million from $2.7 million for the same period in
1997. This increase was due primarily to the Company's overall growth. General
and administrative expenses represented 4.9% of the Company's total revenues
for the nine months ended September 30, 1998, compared to 6.6% for the same
period in 1997.
Acquisition Costs. A charge of $1.1 million was recorded for the nine
months ended September 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 nine months ended September 30, 1998 for the
appraised valuation of the purchased in-process research and development costs
acquired from SalesKit.
11
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Interest Income. Interest income results from investment and, to a
lesser extent, from installment financing. Interest income for the nine months
ended September 30, 1998 increased by 40.4% to $772,000 from $550,000 for the
same period in 1997. This increase is due to the higher level of cash balances
available for investment.
Income Tax Provision. The Company's effective tax rate for the nine
months ended September 30, 1998 was 42.2%, as compared to the pro forma
effective tax rate of 38.3% for the same period in 1997. The tax rate for the
nine months ended September 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 nine months ended September
30, 1998 is based upon the Company's estimate of the effective tax rate for
fiscal 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
License Fees. License fees for the three months ended September 30,
1998 increased by 43.1% to $7.4 million from $5.1 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 $4.6 million for the three
months ended September 30, 1998 from $3.0 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
145.6% to $1.6 million for the three months ended September 30, 1998 as
compared to $0.6 million for the same period in 1997. License fees from System
1 products were $508,000 for the three months ended September 30, 1998 compared
to $831,000 for the three months ended September 30, 1997, a decrease of 38.9%.
License fees for Electronic Timesheet decreased by 1.7% to $562,000 for the
three months ended June 30, 1998, from $572,000 in the same period in 1997.
License fees comprised 34.0% of the Company's total revenues for the three
months ended September 30, 1998, compared to 35.5% for the comparable prior
year period.
Services. Service revenues for the three months ended September 30,
1998 increased by 53.7% to $13.4 million from $8.7 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 106.3% to $5.6 million for
the three months ended September 30, 1998 from $2.7 million for the same period
in 1997. Other service revenues increased by 29.8% to $7.8 million for the
three months ended September 30, 1998, from $6.0 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 62.2% of
the Company's total revenues for the three months ended September 30, 1998,
compared to 60.2% for the same period in 1997.
Third-Party Equipment and Software. Revenue from third-party
equipment and software for the three months ended September 30, 1998 increased
by 31.9% to $823,000 from $624,000 for the three months ended September 30,
1997. These revenues comprised 3.8% and 4.3% of total revenues for the three
months ended September 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
12
<PAGE> 13
September 30, 1998 was $0.7 million, a slight increase from the $0.6 million
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 three months ended
September 30, 1998 increased by 70.4% to $6.7 million from $3.9 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 49.8% and 45.0% of service revenues for the three months
ended September 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. Exclusive of the
Company's International User Conference, Cost of services represented 46.8% and
41.9% of service revenues for the three months ended September 30, 1998 and
1997, respectively. The Company earns a lower margin on its consulting revenues
than on its ongoing support services revenues. To a lessor 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 September 30, 1998 increased
to $0.6 million from $0.5 million in the comparable year period. As a
percentage of related revenues, cost of third-party equipment and software
products represented 77.2% and 76.8% of revenue from third-party equipment and
software for the three months ended September 30, 1998 and 1997, respectively.
The increase in these costs as a percentage of related revenue was the result
of changes in the product mix of equipment and software sold.
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 September
30, 1998 increased by 48.7% to $4.0 million from $2.7 million for the same
period in 1997. This increase was due primarily to hiring additional
personnel. Software development costs represented 18.5% and 18.5% of total
revenues for the three months ended September 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 September 30, 1998
increased by 66.5% 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 12.0% of
the Company's total revenues for the three months ended September 30, 1998,
compared to 10.7% 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 three months ended September 30, 1998
increased by 9.9% to $1.0 million from $0.9 million for the same period in
1997. This slight
13
<PAGE> 14
increase is attributable to increased efficiencies from the existing staff and
favorable bad debt experience in recent quarters. General and administrative
expenses represented 4.4% of the Company's total revenue for the three months
ended September 30, 1998, compared to 6.1% for the same period in 1997.
Interest Income. Interest income results from investments, and to a
lesser extent, from installment financing. Interest income for the three
months ended September 30, 1998 increased by 15.3% to $272,000 from $236,000
for the same period in 1997. The change is due to increased cash from
operations, offset by lower interest rates.
Income Tax Provision. The Company's effective tax rate for the three
months ended September 30, 1998 was 38.9%, as compared to a 37.9% for the same
period in 1997. The provision for income taxes for the three months ended
September 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 September 30, 1998, the Company had cash and
cash equivalents of $1.2 million, marketable securities of $27.3 million and
working capital of $25.3 million.
For the nine months ended September 30, 1998, the Company's net cash
provided by operating activities was $10.4 million. Accounts receivable, net
of the allowance for doubtful accounts, were $15.4 million as of September 30,
1998, compared to $9.9 million as of December 31, 1997. Accounts receivable
days sales outstanding was 58 days as of September 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, day's sales outstanding were 46 days as of September 30,
1998, compared to 37 days as of December 31, 1997. While the Company believes
that its allowance for doubtful accounts as of September 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 $20.7 million for the nine months ended
September 30, 1998. This amount included $6.1 million for the assets acquired
from SalesKit, $4.1 million in acquired marketable securities, $1.8 million in
purchased property and equipment and $705,000 of capitalized software
production costs.
Financing activities for the nine months ended September 30, 1998
consisted primarily of $368,000 in proceeds from the exercise of stock options
and $620,000 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 bear interest at the
lender's prime rate. To date, no amounts have been drawn under the line of
credit.
The costs associated with the Registration Statement, which was
declared effective by the Securities and Exchange Commission in October 1998,
to register shares and warrants issued in connection with the acquisition of
Harper and Shuman, Inc. and certain assets and liabilities of SalesKit Software
Corporation, will be reflected as a charge to earnings in the quarter ended
December 31, 1998.
14
<PAGE> 15
The Company believes that its current liquidity, together with
anticipated cash flow from operations, 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
The Year 2000 Challenge. Many existing information technology ("IT")
systems and applications, and other non-IT 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). The year 2000 challenge creates potential risks for the
Company from unforeseen problems in the software products that the Company
licenses to others and in the IT and non-IT systems that the Company uses in
its own business operations. The Company may also be exposed to risks from
third parties with whom the Company interacts who fail to address their own
year 2000 issues.
The Company's Status of Readiness. The Company began addressing the
year 2000 challenge in 1993 when it started developing all of its new products
to be year 2000 compliant. Year 2000 compliant versions of Costpoint,
Advantage, Allegro and Electronic Timesheet have been commercially available
for some time, and the year 2000 compliant version of System 1 was released in
September 1998. The Company's older-generation CFMS products include CFMS/RD,
for which a year 2000 compliant version is available, and CFMS and Micro/CFMS,
for which no year 2000 compliant versions are available. Licensees that are
using a non-compliant version or product and are participating in one of the
Company's comprehensive annual or quarterly support plans will be provided an
upgrade or conversion to a year 2000 compliant version or product at no cost.
Licensees that are using a non-compliant version or product but are not
participating in one of the Company's comprehensive annual or quarterly support
plans have the option of upgrading or converting to a year 2000 compliant
version or product for an additional license fee. The Company is, or will be,
attempting to locate these licensees to determine how the Company can assist
them in upgrading or converting to a compliant version or product.
During 1998, the Company formed a year 2000 project team and developed
a project plan with goals and target dates to help assure that the Company's
internal IT and non-IT systems and its interfaces with third parties are
prepared for the year 2000. The Company's internal IT systems are primarily
comprised of the same commercial application software products licensed by the
Company to its customers, which are year 2000 compliant. However, the Company
also utilizes third party vendor IT and non-IT systems, including application
and operating system software, network equipment, telecommunication products,
electronic key entry systems, elevators and other third party products, which
may or may not be year 2000 compliant. The Company has begun its assessment of
all mission critical third party vendor application software systems.
Remediation of those systems is scheduled to be completed by the end of the
second quarter of 1999. The Company has begun its inventory of all third party
computer and network hardware and operating systems used by the Company.
Assessment and remediation of these
15
<PAGE> 16
third party IT systems is planned to be completed by the end of the third
quarter of 1999. The Company's goal is to have completed its inventory and
assessment of all non-IT systems with embedded chips by December 31, 1998 and
its remediation of those systems by the end of the second quarter of 1999.
Finally, the Company is in the process of contacting governmental entities,
financial organizations and other business enterprises on whom the Company
relies, directly and indirectly, for accurate exchange of data to determine
their year 2000 plans and readiness. The Company expects that by the end of
1998 it will have contacted substantially all of these parties and determined
what actions may be needed to mitigate vulnerability to those parties' failure
to address their own year 2000 issues.
Costs to Address Year 2000 Issues. The Company's current estimate is
that the costs of remediation associated with the year 2000 issue will not have
a material adverse effect on the Company's business, operating results or
financial condition. The costs of developing the Company's year 2000 compliant
products were incurred as part of the Company's normal product development
process. The costs of contacting licensees currently using a non-compliant
version or product and assisting those licensees in upgrading or converting to
a compliant version or product also is not estimated to be significant. Based
upon the Company's assessment to date of its internal IT and non-IT systems,
the costs associated with making those systems compliant is not anticipated to
be significant.
Risks Associated with the Company's Year 2000 Issues. Management
believes that the growth in demand for the Company's products over the past
several years is due in part to its customers' needs to update their IT 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. Moreover,
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 calendar 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, operating results and financial condition. Finally, despite
the Company's efforts to address the year 2000 impact on its internal IT and
non-IT systems and the operation of the enterprises with which the Company
interacts, the Company may not be able to fully identify such impact or to
resolve it without disruption of the Company's business and without incurring
significant expense. Accordingly, if the year 2000 issues are not adequately
addressed by the Company and third parties, there can be no assurance that the
Company's business, operating results and financial condition will not be
materially adversely affected.
The Company's Contingency Plans. Any significant interruption in the
supply of electric power or telephone service to the Company's facilities as a
result of the failure of utilities or telecommunications companies to
adequately address year 2000 issues would disrupt the Company's ability to
conduct its business, including providing telephone support to its customers.
The Company is developing contingency plans for implementation in the event
that electric power or telephone service to one or more of the Company's
facilities is interrupted. Such plans involve relocating portions of the
Company's operations to other facilities or locations where power and telephone
service are available and taking other similar actions to work around any
interruption. Depending upon the nature of the interruption and the geographic
areas affected, the Company may be unable to execute some or even all of its
contingency plans. The Company also is developing plans to coordinate the
efforts of its personnel and resources in addressing any unforeseen year 2000
problems as they arise. The Company expects to have its
16
<PAGE> 17
contingency plans in place by the second quarter of 1999. There can be no
assurance that any contingency plans will fully mitigate the impact of any
interruption in the supply of electric power or telephone service to the
Company's facilities or other year 2000 problems.
Forward-Looking Statements. The foregoing year 2000 discussion
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements, including without
limitation, anticipated costs and the dates by which the Company expects to
complete certain actions, are based on management's best current estimates,
which were derived utilizing numerous assumptions about future events,
including the continued availability of certain resources, representations
received from third parties and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those anticipated. Specific factors that might cause
such material differences include, but are not limited to, the ability to
identify and remediate all relevant IT and non-IT systems, results of Year 2000
testing, adequate resolution of year 2000 issues by governmental agencies,
businesses and other third parties who are service providers, suppliers,
borrowers or customers of the Company, unanticipated system costs, the adequacy
of and ability to implement contingency plans and similar uncertainties. The
"forward-looking statements" made in the foregoing year 2000 discussion speak
only as of the date on which such statements are made, and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
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<PAGE> 18
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 time 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 form 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
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a 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)-(c)-(d) Not applicable.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 24, 1998, the Company filed its Form 8-K/A #1 to its
Current Report on Form 8-K dated May 29, 1998 to amend Item 7
to include the required financial statements of Harper and
Shuman, Inc. and the required pro forma financial information
relating to the business combination between the Company and
Harper and Shuman, Inc.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 12, 1998
DELTEK SYSTEMS, INC.
By: /s/ Alan R. Stewart
------------------------
Alan R. Stewart
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE> 21
DELTEK SYSTEMS, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLE
<S> <C>
27 Financial Data Schedule
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1997 DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1998 SEP-30-1997 SEP-30-1998 DEC-31-1997
<CASH> 0 1,229 0 1,229 10,883
<SECURITIES> 0 27,268 0 27,268 14,949
<RECEIVABLES> 0 16,028 0 16,028 10,502
<ALLOWANCES> 0 (589) 0 (589) (573
)
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 0 46,654 0 46,654 38,359
<PP&E> 0 10,121 0 10,121 8,325
<DEPRECIATION> 0 6,223 0 6,223 5,349
<TOTAL-ASSETS> 0 55,614 0 55,614 44,041
<CURRENT-LIABILITIES> 0 21,374 0 21,374 18,227
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 18 0 18 18
<OTHER-SE> 0 34,222 0 34,222 25,796
<TOTAL-LIABILITY-AND-EQUITY> 0 55,614 0 55,614 44,041
<SALES> 14,501 21,604 40,867 59,306 0
<TOTAL-REVENUES> 14,501 21,604 40,867 59,306 0
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 10,415 15,581 29,206 51,059 0
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0 0
<INCOME-PRETAX> 4,322<F1> 6,295<F2> 12,211<F3> 9,019<F6> 0
<INCOME-TAX> 0 0 0 0 0
<INCOME-CONTINUING> 4,086 6,023 11,661 8,247 0
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 2,682 3,845 8,414<F4> 5,215 0
<EPS-PRIMARY> 0.15 0.22 0.48<F5> 0.29 0
<EPS-DILUTED> 0.15 0.21 0.47 0.29 0
<FN>
<F1>INCLUDES INTEREST INCOME OF $236.
<F2>INCLUDES INTEREST INCOME OF $272.
<F3>INCLUDES INTEREST INCOME OF $550.
<F4>THE PRO FORMA INCOME TAX PROVISION AND NET INCOME, AFTER TAKING EFFECT FOR A
PROFORMA INCOME TAX PROVISION, WOULD BE $4,679 AND $7,532, RESPECTIVELY.
<F5>THE PRO FORMA NET INCOME PER SHARE ON A FULLY DILUTED BASIS WOULD HAVE BEEN
$0.43.
<F6>INCLUDES INTEREST INCOME OF $772.
</FN>
</TABLE>
