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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22001
Deltek Systems, Inc.
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(Exact name of registrant as specified in its charter)
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Virginia 54-1252625
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8280 Greensboro Drive, McLean, Virginia 22102
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (703) 734-8606
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
Common Stock, $.001 par value Nasdaq National Market
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Securities registered pursuant to Section 12(g) of the Act: None
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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ x ]
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The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 16, 1998, was $150,392,897, based on a total of
7,812,618 shares held by non-affiliates on that date and computed by reference
to the closing price reported on the Nasdaq National Market on that date, which
was $19.25 per share.
The Company had 17,143,168 shares of Common Stock, $.001 par value,
outstanding as of March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information to be contained in the registrant's proxy
statement for the 1998 annual meeting of the registrant's shareholders, which
is to be filed pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this Form 10-K, is incorporated into Part III of this
report by reference to such proxy statement.
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TABLE OF CONTENTS
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PART 1
Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation 18
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 28
Item 8 Financial Statements and Supplementary Data 28
Item 9. Changes in Disagreements on Accounting and
Financial Disclosure 28
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners
And Management 29
Item 13. Certain Relationships and Related Transactions 29
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
On Form 8-K 29
FINANCIAL STATEMENTS F-1
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PART I
ITEM 1. BUSINESS
Deltek Systems, Inc. ("Deltek" or the "Company") designs, develops,
sells and supports a family of integrated software products that provide
project-oriented businesses with tools to more effectively manage, operate and
grow their operations. Deltek's products address the enterprise-level needs of
project-oriented businesses and allow these organizations to manage financial
and project accounting, compute costs and revenues on a project-by-project
basis, submit accurate and detailed bills, comply with complex
industry-specific and regulatory requirements, administer employee time
collection, labor costing and payroll, automate materials management functions,
and empower their managers with timely and pertinent information. Deltek also
provides a full range of consulting and maintenance services to assist its
customers with system implementation and integration and to provide training
and ongoing support for the Company's software products.
Deltek sells its products and services, through its direct sales
force, to project-oriented businesses, such as professional and technical
service providers, including engineering and environmental firms, research and
development firms and contract service organizations, as well as not-for-profit
organizations and make-to-order manufacturers. Since its inception, the Company
has installed more than 2,300 systems for a wide range of project-oriented
organizations of all sizes, predominantly in the United States. Deltek's
customers include Bell Atlantic Federal Integrated Systems, Inc., Computer
Sciences Corporation, Coopers & Lybrand, LLP, Lockheed Martin Corp., Northrop
Grumman Corporation and Raytheon Service Co., Inc.
INDUSTRY BACKGROUND
The increasingly competitive business environment has created pressure
for business organizations to better utilize information technologies to
improve their efficiency, reduce their costs and provide their employees and
management with more timely and pertinent information. As a result, many
organizations are implementing a new generation of enterprise-level business
systems, based on open, client/server architectures, to automate their
operations, including finance, accounting, manufacturing and human resource
management functions.
While organizations are increasing their use of client/server
enterprise-level business systems, most of these systems are general purpose
and fail to address many of the specific requirements of businesses engaged
primarily in providing goods and services to customers under project-specific
contracts and engagements. These project-oriented businesses include a wide
variety of professional and technical service providers, including engineering
and environmental firms, research and development firms and contract service
organizations, as well as not-for-profit organizations, make-to-order
manufacturers and construction companies. Many of these project-oriented
businesses provide goods and services under government contracts.
Project-oriented businesses have many project-specific requirements, including
the need to track costs and profitability on a project-by-project basis,
provide timely project information to managers and customers and submit
accurate and detailed bills, often in compliance with complex industry-specific
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and regulatory requirements. Project accounting for these organizations often
requires the use of sophisticated methodologies for allocating and computing
project costs and revenues.
The use of project-oriented business systems is expanding as a result
of a number of trends prevalent throughout the economy. Traditionally, service
organizations have been more prone to utilize project accounting due to their
need to customize their services for each client and properly allocate the
associated costs. Therefore, as the shift from a manufacturing-based economy to
a service-based economy continues, the market for project-oriented businesses
is expanding. Furthermore, the trend toward outsourcing an increasing range of
activities broadens the market for project-oriented businesses as both
customers and vendors need to track the costs associated with their projects.
Finally, many organizations with significant internal development activities
can benefit from the use of project accounting systems to closely monitor their
progress and cost.
As the number and type of project-oriented businesses increase, they
also are demanding increasingly sophisticated tools to address their core
information and accounting needs, including project accounting, employee time
collection, project budgeting and project reporting. At the same time, these
organizations are recognizing that, because most aspects of their business
revolve around their project orientation, they can achieve efficiencies in a
number of other accounting and business functions, such as general ledger,
accounts payable, accounts receivable, materials management and human
resources, through the use of software applications designed with the special
needs of project-oriented businesses in mind. Like other businesses,
project-oriented organizations are also demanding solutions that allow them to
combine their business software applications into a single integrated,
enterprise-level system.
The recent emergence of client/server software and computing
environments and other new information technologies offer organizations a
powerful and open data architecture through the use of relational databases
that allow for scalability and growth. Larger project-oriented businesses are
reengineering their legacy business information and management systems to meet
the pressures of increased competition, smaller project-oriented businesses are
upgrading from PC-based systems to client/server environments, and other
enterprises are adopting a more project-oriented approach to their businesses.
As a result, such organizations are seeking integrated, enterprise-level
software solutions that are specifically designed to address the core
information and accounting needs of project-oriented businesses and that will
provide their managers with timely and pertinent information. Project-oriented
businesses are also demanding a full range of implementation, training and
support services provided by organizations experienced in dealing with the
needs of project-oriented businesses.
THE DELTEK SOLUTION
Deltek designs, develops, sells and supports a family of integrated
software products that provide project-oriented businesses with tools to more
effectively manage, operate and grow their operations. Deltek's products
address the enterprise-level needs of project-oriented businesses and allow
these organizations to manage financial and project accounting, compute costs
and revenues on a project-by project basis, maintain employee timekeeping
systems, submit accurate and detailed bills, comply with complex
industry-specific and regulatory requirements, administer employee time
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collection, labor costing and payroll, automate materials management functions,
and empower their managers with timely and pertinent information. Deltek also
provides a full range of consulting and maintenance services to assist its
customers with system implementation and integration and to provide training
and ongoing support for the Company's software products.
Deltek's family of software products consists of Costpoint, the
Company's advanced client/server, enterprise-level business software system;
System 1, a DOS-based accounting and management system designed primarily for
organizations providing goods and services under contracts with the federal
government which is currently being reengineered to operate as a Microsoft
Windows application; Electronic Timesheet, an employee timekeeping system; and
Allegro, a project and resource management tool. These products include modules
spanning financial accounting, project accounting and management, human
resources and payroll administration, time and labor collection, materials
management and reporting tools. Application modules within each Deltek product
are integrated and utilize a common user interface and database structure,
allowing project-oriented organizations to configure and implement a
fully-integrated system solution. Costpoint, Deltek's current flagship product,
is a client/server based business software system incorporating an open,
relational database architecture, an object-oriented development approach,
Microsoft Windows client operating systems, on-line analytical processing
("OLAP") tools, drill down data exploration, workflow management and popular
network operating systems, including Windows NT, UNIX and Netware.
An integral part of Deltek's solution is to provide superior services
and support directly to its customers. These services include comprehensive
implementation and consulting services, user training and ongoing product
maintenance and support. The Company believes that its implementation
expertise, together with its focus on the unique requirements of
project-oriented organizations, result in a faster and more cost-effective
system implementation than is typically achieved by companies which choose to
adapt general-purpose business systems to the needs of their project-oriented
organizations. After a customer's implementation is completed, Deltek provides
ongoing support services to assist the customer in maintaining and updating its
system, training its employees and adding functionality as the customer's
business grows and its requirements change.
The Company designs its products to be year 2000 compliant. Year 2000
compliant versions of Costpoint, Allegro and Electronic Timesheet have been
commercially available for many years. The year 2000 compliant version of
System 1 has been substantially completed and is expected to be commercially
available in Beta form by the end of April 1998 and in production release by
the Fall of 1998.
STRATEGY
Deltek's objective is to strengthen its position as a leading supplier
of enterprise-level software systems for project-oriented organizations. Deltek
intends to continue to differentiate itself from providers of general-purpose
business application software by focusing exclusively on providing
cost-effective solutions that meet the unique and changing demands of
project-oriented businesses. Deltek's strategy includes the following key
elements:
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Target Additional Project-Oriented Markets. Deltek's expertise in
project accounting and information systems is the result of its years of
experience in addressing the complex requirements of project-oriented
businesses having government contracts. Over time, Deltek has broadened its
product and marketing focus to target a wide range of project-oriented
industries, such as professional and technical service providers, including
engineering and environmental firms, research and development firms and
contract service organizations, as well as not-for-profit organizations and
make-to-order manufacturers. Deltek intends to continue to target additional
project-oriented markets such as architectural and design firms, construction
companies, governmental agencies as well as organizations managing large
internal projects.
Leverage Large Installed Customer Base. Deltek's installed base of
approximately 2,000 active customers enables it to generate revenues from
support and maintenance services provided to these customers. Deltek's strategy
is to maintain and strengthen relationships with its existing customers through
the provision of these services and to derive additional software licensing and
consulting revenues as these companies grow and their requirements change. An
important element of the Company's strategy is to license its Costpoint
products to existing System 1 users as these customers reengineer their
information systems and migrate to new client/server business software
solutions.
Expand and Enhance Product Line. Deltek intends to continue to
develop or acquire additional products and modules in order to provide more
comprehensive enterprise solutions to address the changing requirements of its
existing and prospective customers. For example, Deltek has expanded its
product line by adding a comprehensive human resources module and by acquiring
the Allegro resource management product. Deltek also has an ongoing commitment
to enhance the existing capabilities of its Costpoint, Electronic Timesheet and
Allegro products. For example, the Company is currently adding functionality
that will enable its Costpoint modules to perform additional materials
management functions as well as to handle foreign currencies and international
transactions.
Maintain Technological Leadership. Deltek plans to continue to invest
in research and development and to incorporate into its products advancements
in information technologies as they become accepted. During 1997 the Company
introduced a Costpoint version which supports the Microsoft SQL Server database
and introduced electronic data interchange ("EDI") capability to Costpoint. In
addition Deltek has introduced a Web-enabled timesheet product and enhanced
user interfaces.
Differentiate Through Superior Service. Deltek believes that its
reputation for providing high quality implementation and consulting services,
user training and ongoing support and maintenance and its ability to work
directly with its customers, rather than through third-party resellers and
system implementors, are significant competitive advantages. Deltek intends to
differentiate itself from its competitors by continuing to build customer
loyalty through the delivery of superior service.
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PRODUCTS
Deltek designs, develops, sells and supports a family of integrated
software products that provide project-oriented businesses with tools to more
effectively manage accounting, projects, people, materials and reporting
requirements in order to operate and grow their businesses. Deltek's family of
software products consists of Costpoint, System 1, Electronic Timesheet and
Allegro.
Costpoint. Costpoint, the Company's current flagship product, is a
client/server-based, enterprise-level business software system, consisting of
over 25 integrated module applications which span financial accounting, project
accounting, human resource and payroll administration, materials management and
reporting tools.
Costpoint utilizes an open, relational database architecture on the
server and Microsoft Windows operating systems on the desktop client PC.
Costpoint can be operated on a variety of network operating systems, including
Windows NT, UNIX and Novell Netware and currently supports Oracle, Microsoft
SQLServer, Sybase Inc. ("Sybase") and Centura Corporation ("Centura")
relational databases. Costpoint was developed with extensive use of
object-oriented programming techniques utilizing a fourth generation language
together with C++ and database-specific stored procedures to maximize
performance.
The Company began development of Costpoint in 1992 in response to the
maturation of Deltek's DOS-based business software system, System 1. Costpoint
differs from System 1 primarily in its inherent design that allows it to handle
a broader range of project-oriented businesses, its ability to utilize advanced
technologies and operating systems, its enhanced reporting capabilities, and
its ability to provide more complete and flexible functionality in project
accounting and other business system areas to allow for business change and
growth.
Costpoint is designed to meet the specialized needs of
project-oriented businesses, including project costing, indirect cost
allocation, revenue recognition, project budgeting and project reporting.
Costpoint also meets the regulatory and reporting requirements of businesses
having contracts with the United States government. Costpoint combines these
capabilities with applications in other business system areas that are designed
for the special needs of project-oriented businesses. Through its open data
architecture and the use of drill-down inquiries, OLAP tools and standard
reports, Costpoint is also designed to provide managers with timely, pertinent
and empowering information.
Costpoint was commercially released in June 1995. Through December 31,
1997, the Company had licensed approximately 362 Costpoint systems that had
been implemented or were in the process of being implemented. License fees for
Costpoint systems vary depending on the number of users and sites and the
number and type of modules licensed. For new customers, license fees for an
initial Costpoint installation typically range from $20,000 to $500,000,
exclusive of consulting services. For the year ended December 31, 1997, the
average fee for an initial Costpoint license was approximately $75,000.
The following table describes the principal Costpoint application
modules:
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FINANCIAL ACCOUNTING
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General Ledger . . . . . . . . . . . . . . . Provides flexible account and organization structures and extensive audit trails;
delivers numerous financial reports and responds to user inquiries.
Accounts Payable . . . . . . . . . . . . . . Allows for flexible payment (checks, EFT) and vouchering of invoices which can also
be matched to purchase orders.
Accounts Receivable. . . . . . . . . . . . . Tracks customer receivables and cash receipts, provides reporting on billed and
unbilled receivables and simplifies collections.
Travel . . . . . . . . . . . . . . . . . . . Automates all travel transactions from per diems to travel advances and account
reconciliations.
Fixed Assets . . . . . . . . . . . . . . . . Collects acquisition data for company-owned and government-furnished property.
Computes and tracks depreciation and disposal data and posts to general ledger.
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PROJECT ACCOUNTING
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Project Setup. . . . . . . . . . . . . . . . Sets up and tracks information on every project or activity, including work
breakdown structures, modifications, labor categories, dollars, hours and unit
usage.
Project Cost and Revenue Processing. . . . . Allocates indirect costs to projects using various formulas, and automatically
calculates and posts project revenues based on many different project types.
Project Budgeting and ETC. . . . . . . . . . Tracks budgets at virtually any level or aspect of the project; calculates, revises
and reports on estimates-to-complete.
Project Billing. . . . . . . . . . . . . . . Allows companies to produce numerous types of bills to satisfy the requests of each
customer. The posting of bills automatically updates the general ledger and
accounts receivables.
Project Reporting. . . . . . . . . . . . . . Provides numerous standard reports and responds to user inquiries with flexible
formatting options.
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PEOPLE MANAGEMENT AND ADMINISTRATION
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Labor. . . . . . . . . . . . . . . . . . . . Manages the collection and proper account and cost distribution of timesheet hours
and dollars.
Payroll. . . . . . . . . . . . . . . . . . . Handles payroll processing by calculations from timesheets, updates information
affecting general ledger and earnings tables, tracks employee labor data and
computes and creates checks.
Human Resources . . . . . . . . . . . . . . . Includes compensation administration, personnel administration, affirmative action,
401(k) reporting and forecasting, and COBRA.
Labor/Payroll Interfaces . . . . . . . . . . Interfaces for uploading timesheet data as well as interfaces to ADP and Ceridian
payroll services.
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MATERIALS MANAGEMENT
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Product Definition . . . . . . . . . . . . . Defines and tracks the parts, goods and services companies will buy or sell for
project specific items; tracks billing and shipping data.
Purchasing . . . . . . . . . . . . . . . . . Allows businesses to administer the procurement of company-owned or
project-specific parts, goods or services through tracking of purchase orders,
buyer authorizations and commitments.
Procurement Planning . . . . . . . . . . . . On-line entry of requisitions, approvals, requests for quotes and actual vendor
quotes with the automatic creation of purchase orders.
Inventory. . . . . . . . . . . . . . . . . . On-line, real time inventory tracking and control for use by any company which has
project-specific, company-owned, and government-furnished materials.
Bill of Materials . . . . . . . . . . . . . . Defines saleable products in terms of the raw materials, purchased parts and
assemblies which comprise them.
Sales Order Entry . . . . . . . . . . . . . . Supports and monitors the sales order process, including procurement, issuing,
shipping and invoicing.
Production Control . . . . . . . . . . . . . Generates the processes manufacturing orders to build specified parts. It also
includes automatic generation of requisitions and manufacturing orders.
Routings . . . . . . . . . . . . . . . . . . Generates the necessary process steps required to manufacture a given part. Routing
operations can be allocated both with internal work centers and outside
subcontractors.
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REPORTING TOOLS
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CP Reports** . . . . . . . . . . . . . . . . Ad-hoc report writing tool which provides for simple queries of data as well as
more advanced and complex formatted reports.
CP Scope** . . . . . . . . . . . . . . . . . Data analysis tool which provides the ability to view summarized data from multiple
perspectives and drill down to different levels of detail in the data; provides
extensive business graphics capabilities.
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** Software licensed from third parties and sublicensed to Deltek customers.
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System 1. System 1, formerly known as the Government Contractors
Software Series, is Deltek's original business software system. System 1 was
designed specifically for use by organizations having contracts with the
federal government and helps these organizations comply with stringent federal
regulations applicable to such contractors, including the requirements of the
Defense Contract Audit Agency. System 1 is DOS-based, operates on Novell
Netware, UNIX and DEC VAX/VMS network operating systems and utilizes a
character-based user interface and a proprietary COBOL data structure. System 1
consists of 23 application modules spanning financial accounting, labor and
payroll administration, materials management and reporting tools.
System 1 was commercially released in 1985. As of December 31, 1997,
approximately 1,600 project-oriented organizations were using System 1 as their
primary accounting system. License fees for System 1 vary depending upon the
number of users or facilities and the number and type of modules licensed.
Prior to the introduction of Costpoint in June 1995, license fees for an
initial System 1 installation typically ranged from $10,000 to $200,000,
exclusive of consulting services. Since the introduction of Costpoint, the
majority of new customers have licensed Costpoint systems, and new System 1
sales have decreased in number and system size. For the year ended December 31,
1997, typical license fees for an initial System 1 installation ranged from
$10,000 to $50,000, and the average license fee was approximately $19,000.
An important element of the Company's strategy is to license Costpoint
to existing System 1 users as those customers reengineer their information
systems and migrate to new client/server business software solutions. In an
effort to influence the migration of its System 1 customers to Costpoint, the
Company offers substantial discounts to existing System 1 users and provides
automated data conversion programs which provide significant assistance in the
Costpoint upgrade/implementation process. As of December 31, 1997,
approximately 106 of the Company's System 1 customers, representing
approximately 7% of the installed base of System 1 users, had migrated to or
were in the process of migrating to Costpoint systems. There can be no
assurance that a significant percentage of current System 1 customers will
migrate to Costpoint. In particular, smaller System 1 customers are less likely
to migrate to Costpoint because the cost of migrating to a client/server
environment is high relative to their size and because in many cases System 1
adequately meets their present needs. The Company intends to provide support
services and product maintenance for System 1 for the foreseeable future. The
Company is currently reengineering a new version of System 1 to operate as a
Microsoft Windows application.
Electronic Timesheet. Electronic Timesheet is a comprehensive
timesheet software application which allows employees to enter their timesheets
on a daily basis on their desktop PC. Electronic Timesheet utilizes either
Windows or DOS operating systems on the desktop PC and provides a graphical,
point and click interface. Using this graphical interface, the employee may
select from a list of authorized charges rather than having to enter
complicated account and project numbers. This feature serves to greatly reduce
costly and time-consuming errors. After the employee electronically signs his
or her timesheet, the timesheet then is forwarded through the network for
manager approval. Timesheets and the appropriate labor charges can then be
automatically accumulated and integrated with the accounting system, completely
eliminating the paper timesheet. Electronic Timesheet also allows managers to
view information about employees' activities and helps them to better manage
their employees.
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Electronic Timesheet may be licensed together with Costpoint or System
1 or as a stand-alone application that can be integrated with other accounting
systems. During 1997 the Company developed a client/server-based version and
further expanded Internet and Intranet timekeeping capabilities and shipped the
Beta version of ET Version 3.0 in January 1998, with general release planned
for the second quarter of 1998.
Electronic Timesheet was commercially released in January 1995. As of
December 31, 1997, Electronic Timesheet had been licensed to over 269
customers. License fees for Electronic Timesheet typically range from $2,500 to
$100,000. For the year ended December 31, 1997, the average license fee for
Electronic Timesheet was approximately $16,000.
Allegro. Allegro is a software application that enables project
managers to plan and monitor project resources. Using a user interface similar
to a spreadsheet, Allegro allows project managers to create budgets and
estimates-to-complete, plan and schedule employees and other resources,
forecast revenue and profits, and receive timely status on each project from
the accounting system interface. The Company believes that Allegro's principal
advantage is its user-friendly, spreadsheet-like interface and its ability to
view and manage resources across multiple projects in an organization. Allegro
is a client/server based system running on a variety of databases and utilizing
Microsoft Windows operating systems.
The Company acquired the Allegro product through the acquisition of
The Allegro Group, Inc., in September 1996. Prior to the acquisition, The
Allegro Group, Inc. had licensed a limited number of Allegro products, and
since the acquisition the Company has also licensed a limited number of these
products on a stand-alone basis. The Company is in the process of making
further improvements and refinements to Allegro and developing data interfaces
that will allow it to be fully-integrated with its Costpoint and System 1
products. The Company believes that its ability to market Allegro, particularly
to its existing customer base, will be dependent upon the successful completion
of these improvements and interfaces, of which there can be no assurance.
License revenues were nominal for the year ending December 31, 1997 for Allegro
products. The Company expects license fees for new Allegro customers to range
from $10,000 to $100,000.
Third-party Products. Deltek incorporates into its software products
certain application software licensed from third parties. The Costpoint
reporting tools, CP Reports and CP Scope, are both licensed from Cognos
Corporation under an OEM agreement, and System 1 utilizes a report-writer,
Intelligent Query, licensed from a third party. In order to support the Oracle,
Sybase and Centura relational databases, Costpoint contains certain native
"router" software licensed from Centura. Also, the Company's Costpoint and
Allegro customers must license applicable database software from Oracle,
Sybase, Centura, or Microsoft, either directly or through the Company. Because
some customers desire a "turnkey" solution, the Company will purchase servers,
network software and other software and hardware products, which the Company
resells or sublicenses to its customers and installs together with Deltek
products to provide a fully operational system.
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CUSTOMER SERVICE AND SUPPORT
An integral part of Deltek's solution is to provide superior services
and support directly to its customers. These services include comprehensive
implementation and consulting services, user training and ongoing maintenance
and support. The Company believes that its reputation for providing high
quality services and its ability to work directly with its customers, rather
than through third-party resellers and system implementors, are significant
competitive advantages. Deltek's implementation management and other consulting
services are generally charged on a time and materials basis. Classroom
education and training is charged on a per class basis. Telephone support and
periodic product enhancements and updates are provided for maintenance fees
that are payable quarterly.
Implementation and Consulting Services. Deltek provides a full range
of consulting, training and technical services to customers both during and
after implementation of Deltek software. Since its inception, the Company's
staff of system consultants has been directly involved with over 2,300
installations. Deltek's system consultants are involved in the important early
planning and design stages of each implementation, participate in user
training, and work closely with the customer during the two to six-month period
just before and after the "going live" date. After the implementation is
completed, Deltek's consultants typically maintain an ongoing relationship with
the customer and assist the customer in refining its systems and adding
functionality as its business grows and its requirements change.
Telephone Support. Deltek provides comprehensive telephone support
during business hours as well as supplemental emergency support after hours and
on weekends. Deltek utilizes a sophisticated in-house support tracking system
which enables call, problem and resolution tracking. Deltek also maintains an
"open phone" policy whereby customers are encouraged to contact any supervisor
or senior manager at Deltek for any reason. Deltek typically handles between
250 and 450 support calls per day.
Training Classes. Deltek operates training facilities at its McLean,
Virginia headquarters and at its offices in San Jose, where it provides
regularly scheduled training classes on over 25 topics related to the Company's
products to supplement training that its customers receive in connection with
their initial system installation. Deltek maintains system laboratories at its
training facilities which are available for customer use for testing,
benchmarking and troubleshooting. Deltek also offers custom, on-site training
classes.
Product Updates and Enhancements. Since its inception, Deltek has
provided periodic updates and enhancements to each of its software products.
Typically, the Company provides several minor updates per year, which include
system error corrections, tax table updates and other minor enhancements, and
new version releases periodically, which include major enhancements and changes
to the database design. These product updates and enhancements are provided at
no additional charge for customers who purchase support and maintenance
services.
Client/Server Technical Services. To address the challenges that many
companies face when implementing a client/server system, Deltek provides
client/server and database consulting services
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together with turnkey hardware and third-party database and operating system
software. Deltek believes these services provide a significant benefit to its
customers by streamlining their system implementation and providing a complete,
turnkey solution.
Custom Solutions. From time to time, customers require custom
modifications to the Company's software or a custom interface to an in-house
application. Deltek provides custom programming services through its Custom
Solutions Group to assist customers with these needs.
Web Site Services. Deltek provides several other support services in
conjunction with its Web site. Customers may utilize the Web site to download
revised software programs and documentation, to communicate with other
customers and Deltek's employees, and to join Deltek user groups. These
services are provided at no additional charge, as a part of the Company's
support and maintenance program.
CUSTOMERS
Since its inception, the Company has approximately 2,000 customers
representing a wide range of project-oriented organizations of all sizes,
predominately in the United States. No customer accounted for more than 10% of
the Company's total revenues in 1995, 1996 or 1997. The following is a
representative list of the Company's customers over the last three years who
are currently receiving support and maintenance services: Boeing Information
Services, Inc., Computer Sciences Corporation, Coopers & Lybrand, LLP, DynCorp,
KPMG Peat Marwick LLP, Lear Astronics Corp., Lockheed Martin Corp., Monterey
Bay Aquarium Research Institute, Orbital Sciences Corporation, TRW
Environmental Safety Systems, Inc., VSE Corporation and Xerox Corporation.
SALES AND MARKETING
The Company sells its products and services through its direct sales
force. As of December 31, 1997, the Company's sales organization consisted of
29 full-time sales personnel, based at the Company's corporate headquarters in
McLean, Virginia and at its offices in Denver, Colorado and San Jose,
California.
The Company's sales cycle begins with the generation of a sales lead
or the receipt of a request for proposal. Sales leads are generated by direct
mailing to potential customers in selected markets, as well as through
advertising, seminars and trade shows. The Company's sales personnel work
closely with prospective customers to understand their reasons for undertaking
a system change and to identify their specific business and system
requirements. They then provide prospective customers with information
regarding the capabilities and benefits of the Company's products and to assist
in planning for the system implementation. The licensing and implementation of
the Company's business software products is often a decision with significant
enterprise-wide implications involving a substantial commitment of the
customer's management attention and resources. The period between initial
customer contact and the customer's purchase commitment is often lengthy and
typically ranges from 3 to 18 months. Accordingly, the Company's sales process
is subject to delays associated with a lengthy evaluation and approval process
that typically
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<PAGE> 14
accompanies major initiatives or capital expenditures, including delays over
which the Company has little or no control.
Deltek's strategy is to maintain and strengthen relationships with its
existing customers through the provision of these services and to derive
additional software licensing and consulting revenues as these companies grow
and their requirements change. An important element of the Company's strategy
is to license its Costpoint products to existing System 1 users as these
customers reengineer their information systems and migrate to new client/server
business software solutions. In support of its efforts to market additional
products and services to its existing customer base, the Company conducts
on-going customer communications programs and national user conferences every
18 to 24 months.
The Company's strategy is to expand its sales and marketing activities
to target project-oriented organizations in additional markets. Deltek's
ability to achieve significant revenue growth in the future will depend in
large part on its success in recruiting, training and retaining additional
sales, sales support and marketing personnel. In the future, the Company may
seek to develop third-party distribution channels and use third-party
consultants to provide implementation consulting services. There can be no
assurance that the Company would be successful in establishing such third party
arrangements, that any such expansion of the Company's sales and support
capabilities would result in increased revenues, or that the resulting
reduction in the Company's direct involvement with its customers would not
adversely affect its competitive position.
PRODUCT DEVELOPMENT
The Company utilizes a team approach to product development. Deltek's
product development is generally organized into teams of 6 to 12 developers who
handle a particular product area, a group of programs or functions, or a new
development area. Each development team includes one or more subject matter
experts who are instrumental in the design of each new module and capability.
Following the completion of high-level design, the development team receives
assistance from Deltek's database design team which helps with the important
step of designing or making changes to the relational database architecture.
Throughout the development process, and particularly when the initial
programming has been completed, quality assurance team members provide testing
and analysis to ensure that the application has been developed using standards
and functions appropriate to its design and purpose. Deltek's Object, Class,
and Technology group supports each development group and focuses on
development, enhancement and maintenance of the object-oriented product
development tools used throughout the development process. Deltek utilizes a
sophisticated in-house system for tracking the development process, for program
check-in and check-out, for version control, and for system error and bug
tracking.
A significant portion of the development related to the Costpoint
product line is conducted using a fourth generation client/server development
tool called SQLWindows which the Company licenses from Centura. See
"Proprietary Rights and Licenses." Using this tool, the Company has developed a
number of reusable objects and classes to better facilitate development. In
order to optimize performance for process intensive functions in Costpoint,
such as project costing and billing applications, the Company makes extensive
use of database stored procedures which enable
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<PAGE> 15
specific applications to operate much faster with considerably less network
traffic. C++ programming is also used throughout Costpoint in various
situations to improve performance and functionality.
The Company's product development groups are currently focused on
enhancements and customary error corrections to existing versions, and
development of future versions of Costpoint, Electronic Timesheet and Allegro
and a Windows-based version of System 1. During 1997 full support for Windows
NT on the client PC, Support for the Microsoft SQL Server database, additional
material management modules, enhanced functionality for specific
project-oriented industries and the capacity to handle a single foreign
currency were developed for Costpoint. Development efforts relating to
Electronic Timesheet for a client/server-based version and further expansion of
Internet and intranet timekeeping capabilities resulted in the Beta version of
ET Version 3.0 shipped in January 1998, with general release planned for the
second quarter of 1998. Allegro development is currently focused on developing
interfaces that will allow Allegro to be fully integrated with the Company's
Costpoint and System 1 products. There can be no assurance that the Company
will be successful in completing the development of these or other new products
and enhancements or that any new product or enhancement that it may introduce
will achieve market acceptance.
The Company intends to continue making substantial investments in
product development to address advancements in technology, respond to changing
customer requirements, extend the functionality of its current products and
expand its product line.
The Company's software development expenses, exclusive of certain
development costs which have been capitalized, were $4.9 million, $6.7 million
and $9.5 million in 1995, 1996 and 1997, respectively. As of December 31, 1997,
the Company had 138 employees engaged in product development and quality
assurance activities.
COMPETITION
The business application software market, including the market for
client/server-based business software systems, is intensely competitive and
rapidly changing. Deltek's products are targeted toward a wide range of
project-oriented organizations, and the competition that the Company encounters
varies depending upon the customer's size, industry and specific system
requirements. For larger Costpoint implementations, the Company's principal
competitors include Oracle, PeopleSoft and SAP. For smaller and medium-size
Costpoint and System 1 implementations, the Company's competitors include Great
Plains Software, Inc., Harper and Shuman, Inc., Maxwell Business Systems, Inc.,
Platinum Software Corporation, Solomon Software, State of the Art, Inc. and
Timberline Software Corporation, some of which offer industry-specific
products. Electronic Timesheet competes with electronic timekeeping systems
offered by vendors including TIMESLIPS Corporation and Kronos, Inc. The Company
also faces indirect competition from systems developed by the internal MIS
departments of large organizations.
Deltek believes that competition in the rapidly evolving markets for
business application software is based primarily on product features and
functions, product architecture, ease of
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<PAGE> 16
implementation, vendor and product name recognition and reputation, customer
service and support, and price. Deltek believes that it has competed
effectively to date on the basis of these factors, and, particularly that its
product and marketing focus on the unique needs of project-oriented
organizations and its reputation for high quality service and support, its
ability to work directly with its customers (rather than through third-party
resellers and system implementors) and its ability to provide rapid
implementations have constituted competitive advantages.
Many of the Company's competitors have significantly greater
financial, technical, marketing and other resources than the Company. In
addition, certain competitors, particularly Oracle, PeopleSoft and SAP, have
well-established relationships with the Company's current and prospective
customers and with major accounting and consulting firms that may have an
incentive to recommend such competitors over the Company. Further, because the
Company's products run on RDBMS and Oracle has the largest market share for
RDBMS software, Oracle may have a competitive advantage in selling its
application products to its installed RDBMS customer base. Furthermore, as the
client/server computing market develops, companies with significantly greater
resources than the Company could attempt to increase their presence in this
market by acquiring or forming strategic alliances with competitors of the
Company. In addition, as the Company attempts to penetrate other strategic
vertical markets, it will likely encounter competitors with substantially more
experience in those markets.
There can be no assurance that the Company's products will continue to
compete favorably or that the Company will be successful in the face of
increasing competition from new products and enhancements introduced by
existing or new competitors entering the markets for its products. In addition,
increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse effect on the
Company's business, operating results and financial condition.
PROPRIETARY RIGHTS AND LICENSES
The Company's success and ability to compete is dependent in part upon
its proprietary software. Deltek relies on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to establish and protect its rights in its software. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy, design around or reverse engineer aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Furthermore, the Company has no patents, and existing copyright
laws afford only limited protection. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. Accordingly, there can be no assurance that
the Company will be able to protect its proprietary software against
unauthorized third party copying or use, which could adversely affect the
Company's competitive position. Deltek believes, however, that because of the
rapid rate of technological change in the software industry, trade secret and
copyright protection are less significant than factors such as the knowledge,
ability and experience of the Company's employees, frequent product
enhancements and the timeliness and quality of support services.
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<PAGE> 17
The Company licenses its products to customers under license
agreements which are generally in standard form, although each license is
individually negotiated and may contain variations. Deltek's standard license
agreement allows the customer to use the Company's products solely on the
customer's computer equipment for the customer's internal purposes, and the
customer is generally prohibited from sublicensing or transferring the
products. The license agreements generally provide that the Company's warranty
for its products is limited to correction or replacement of the affected
product and that the Company will refund the applicable license fee if the
customer is not satisfied with the product for any reason, sets forth the
reasons for dissatisfaction, requests the refund prior to the end of the
applicable refund period (normally 60 to 90 days) and returns all copies of the
product to the Company. Deltek's standard license agreement also includes a
confidentiality provision protecting proprietary information relating to the
Company's products.
The Company's products are generally provided to customers in object
code (machine-readable) format only. From time to time, in limited
circumstances, the Company has licensed certain of its products in source code
(human-readable) form, subject to customary protections such as use
restrictions and confidentiality agreements. In addition, customers can be
beneficiaries of a master source code escrow, pursuant to which the source code
for Costpoint and System 1 products will be released to end users in the event
the Company or its assignee is unable or unwilling to continue to support these
products. The provision of source code to the Company's customers may increase
the likelihood of misappropriation or other misuse of the Company's
intellectual property.
The Company licenses from third parties, generally on a nonexclusive
basis, certain software development tools that the Company utilizes in the
development of its products and certain application software that the Company
incorporates into its products. Third parties also license to the Company or
its customers certain relational database software used in conjunction with the
Company's products. See "Business -- Products -- Third-Party Products."
Accordingly, the Company is dependent upon such third parties' abilities to
deliver quality products, to correct errors, to support their current products,
to develop new and enhanced products on a timely and cost-effective basis and
to respond to emerging industry standards and other technological changes.
Should these third-party development tools or software products become
unavailable, or should their developers fail to adequately support or enhance
them, the Company would be required to rewrite its products using different
development tools or replace the functionality provided by the third-party
software currently used in and licensed with its products. Although the Company
believes that other development tools and application and database software
with comparable functionality are currently available from other third parties,
there can be no assurance that replacement products could be obtained when
needed. In addition, there can be no assurance that the Company could
successfully rewrite its products using different development tools or that it
would not encounter substantial delays in doing so. The inability to rewrite
its products using different development tools on a timely and cost-effective
basis or the loss of, or any significant delay in the replacement of, the
functionality provided by the third-party software could have a material
adverse effect on the Company's business, operating results and financial
condition. While it may be necessary or desirable in the future to obtain other
licenses relating to one or more of the Company's products or relating to
current or future technologies, there can be no assurance that the Company will
be able to do so on commercially reasonable terms or at all.
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<PAGE> 18
There are currently no claims pending against the Company relating to
the infringement of any proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim infringement by the
Company of their intellectual property rights. Deltek expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources or cause delays
in the delivery or implementation of the Company's products. In addition, such
claims could require the Company to discontinue the use of certain software
codes or processes, to cease the manufacture, use and sale of infringing
products, to incur significant litigation costs and expenses and to develop
non-infringing technology or to obtain licenses to the alleged infringing
technology. There can be no assurance that the Company would be able to develop
alternative technologies or to obtain such licenses or, if a license were
obtainable, that the terms would be commercially acceptable to the Company. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
could be materially adversely affected.
EMPLOYEES
As of December 31, 1997, the Company had 353 full-time employees,
including 138 employees primarily engaged in product development and quality
assurance, 160 in customer support and training activities, 36 in sales and
marketing, and 19 in finance and administration. None of the Company's
employees is represented by a labor union or is subject to a collective
bargaining agreement. Deltek has never experienced a work stoppage and
believes its employee relations are good.
The success of the Company depends in large part upon its ability to
recruit and retain exceptional employees, particularly highly skilled product
developers and system consultants. Deltek will likely experience significant
competition and difficulties in recruiting such personnel.
ITEM 2. PROPERTIES
Deltek's corporate headquarters, its principal administrative, product
development, sales and marketing operations and its principal customer training
center are located in 71,747 square feet of office space in a building in
McLean, Virginia which the Company occupies under leases expiring in March
2002, subject to the Company's right to extend the lease term by one or three
years. The annual lease rate on 60,329 square feet increased to $20.57 per
square foot in April 1998 and 2.75% each year thereafter. The additional space
of 11,418 square feet taken over during 1997 and the first quarter of 1998 have
annual lease rates ranging from $20.02 to $27.00 per square foot. The Company
has an option to lease an additional 16,493 square feet of space at an annual
lease rate of $26.50 beginning after January 1, 1999. Deltek also leases
approximately 4,124 square feet in Denver, Colorado, at an annual lease rate of
$19.50 per square foot, under a lease expiring on January 31, 2001 and 4,855
square feet in San Jose, California, at an annual lease rate of $23.45 per
square foot, under a lease expiring in January 2002. Deltek believes that its
existing facilities and
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<PAGE> 19
offices are adequate to meet its current needs and that, should it be needed,
suitable additional or alternative space will be available in the future on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal
proceedings, other than ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since February 25, 1997, the Company's Common Stock has been traded on
the Nasdaq National Market under the symbol "DLTK." The high and low per share
sales prices for the Company's Common Stock, as reported on the Nasdaq National
Market, are as follows:
<TABLE>
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
First Quarter (1) $11.13 $8.75
Second Quarter 17.875 7.25
Third Quarter 22.50 14.00
Fourth Quarter 21.00 14.00
</TABLE>
- ---------------------
(1) The First Quarter 1997 figure is from February 25, 1997.
On March 16, 1998, the closing price for the Company's Common Stock
was $19.25 per share and the Company had approximately 75 shareholders of
record. Management believes there are approximately 1600 beneficial holders of
the Company's Common Stock and has been advised that there are 101 individual
participants holding approximately 36% of the outstanding Common Stock pursuant
to security position listings furnished by Cede & Co., New York, New York,
registered clearing agency and depository.
As a former S Corporation, the Company had historically made
substantial cash distributions to its shareholders, including in connection
with the termination of the Company's S Corporation status in February 1997.
Currently, however, the Company intends to retain future earnings, if any, to
finance the development and expansion of its business and, therefore, does not
anticipate paying any further cash dividends on its Common Stock in the
foreseeable future. The decision whether to pay dividends will be made by the
Board of Directors of the Company, from time to time, in light of conditions
then existing, including, among other things, the Company's results of
operations,
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<PAGE> 20
financial condition and requirements, business conditions and such other
factors as the Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with Item 7 of this report ("Management's Discussion and Analysis of Financial
Condition and Results of Operations") and the financial statements and the
notes thereto included elsewhere herein. The statement of operations data set
forth below with respect to the years ended December 31, 1995, 1996 and 1997
and the balance sheet data as of December 31, 1996 and 1997 are derived from,
and are qualified by reference to, the audited financial statements of the
Company included elsewhere in this report. The statement of operations data set
forth below with respect to the years ended December 31, 1993 and 1994 and the
balance sheet data as of December 31, 1993, 1994 and 1995 are derived from
audited financial statements not included in this report. The pro forma
statement of operations data set forth below do not purport to be indicative of
the results of operations that would have occurred had the termination of the
Company's S Corporation status occurred at December 31, 1992.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995 1996(1) 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees . . . . . . . . . . . . . . . . . . . . . . . $7,551 $7,360 $9,720 $12,545 $17,415
Services . . . . . . . . . . . . . . . . . . . . . . . . . 10,093 12,545 15,154 20,362 29,316
Third-party equipment and software . . . . . . . . . . . . . 1,773 1,451 1,975 1,873 2,051
----- ----- ----- ----- -----
Total revenues . . . . . . . . . . . . . . . . . . . 19,417 21,356 26,849 34,780 48,782
Operating Expenses:
Cost of software . . . . . . . . . . . . . . . . . . . . . . 665 766 893 1,318 1,764
Cost of services . . . . . . . . . . . . . . . . . . . . . . 3,611 4,171 5,151 8,043 11,980
Cost of third-party equipment and software . . . . . . . . . 1,298 1,054 1,580 1,536 1,690
Software development . . . . . . . . . . . . . . . . . . . . 3,931 3,877 4,934 6,674 9,539
Sales and marketing. . . . . . . . . . . . . . . . . . . . . 1,538 1,852 2,743 3,460 4,767
General and administrative . . . . . . . . . . . . . . . . . 1,285 1,593 1,875 2,283 2,522
Acquisition costs. . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 320
Stock option compensation. . . . . . . . . . . . . . . . . . -- -- -- 867 --
Purchased in-process research and development. . . . . . . . -- -- -- 394 --
-- -- -- --- --
Total operating expenses . . . . . . . . . . . . . . 12,328 13,313 17,176 24,575 32,582
Income from operations . . . . . . . . . . . . . . . . . . . 7,089 8,043 9,673 10,205 16,200
Interest income. . . . . . . . . . . . . . . . . . . . . . . 242 257 393 382 746
--- --- --- --- ---
Income before income taxes . . . . . . . . . . . . . . . . . 7,331 8,300 10,066 10,587 16,946
Provision for income taxes . . . . . . . . . . . . . . . . . 51 65 45 93 5,634
-- -- -- -- -----
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $7,280 $8,235 $10,021 $10,494 $11,312
====== ====== ======= ======= =======
PRO FORMA STATEMENT OF OPERATIONS DATA (UNAUDITED)(2):
Income tax provision . . . . . . . . . . . . . . . . . . . . $2,787 $3,156 $3,827 $4,131 $6,516
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 4,544 5,144 6,239 6,456 10,430
Net income per share(3). . . . . . . . . . . . . . . . . . . $0.29 $0.33 $0.40 $0.41 $0.61
Weighted average shares outstanding(3) . . . . . . . . . . . 15,424 15,368 15,552 15,560 17,177
</TABLE>
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<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities . . . . . . $3,364 $3,915 $7,521 $8,333 $25.221
Working capital. . . . . . . . . . . . . . . . . . . . . . . 4,115 4,024 5,003 6,879 19,428
Total assets . . . . . . . . . . . . . . . . . . . . . . . . 8,483 11,506 18,083 20,202 42,724
Total shareholders' equity . . . . . . . . . . . . . . . . . 5,765 6,803 8,849 11,486 24,752
Cash dividends declared. . . . . . . . . . . . . . . . . . . 6,647 7,186 8,011 9,265 14,014
</TABLE>
- ----------------
(1) Exclusive of the non-recurring, non-cash charges for stock option
compensation and purchased in-process research and development, income from
operations, net income, pro forma net income and pro forma net income per share
would have been $11.5 million, $11.8 million, $7.2 million and $0.46,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes 2 and 9 of Notes to Financial Statements.
(2) Prior to February 1997, the Company elected to be treated as an S
Corporation and was not subject to federal and certain state income taxes. The
pro forma statement of operations data reflects federal and state income taxes
based on applicable tax rates as if the Company had not elected S Corporation
status for the periods indicated. See "Prior S Corporation Status" and Note 1
of Notes to Financial Statements.
(3) See Note 1 of Notes to Financial Statements for a description of the
computation of weighted average shares outstanding and pro forma income per
share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following information should be read in conjunction with the
financial statements and the notes thereto included elsewhere herein. 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.
OVERVIEW
Deltek designs, develops, sells and supports a family of integrated
software products that provide project-oriented businesses with tools to more
effectively manage, operate and grow their operations. From 1985 through 1994,
substantially all of the Company's revenues were derived from licenses of its
DOS-based System 1 business software, designed specifically for use by
organizations having contracts with the federal government, and services
related to the implementation, support and maintenance of System 1. In 1992,
the Company began development of its current flagship product, Costpoint, which
was commercially released in June 1995. Costpoint is a client/server-based,
enterprise-level business software system, consisting of over 25 integrated
module applications which span financial accounting, project accounting, human
resource and payroll administration, materials management and reporting.
Through December 31, 1997, the Company
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<PAGE> 22
had licensed approximately 362 Costpoint systems that had been implemented or
were in the process of being implemented. Deltek also provides a full range of
consulting and maintenance services to assist its customers with system
implementation and integration and to provide training and ongoing support for
the Company's software products.
The Company's revenues consist of fees derived from the licensing of
its software products, service revenues from consulting and support services,
and revenue from the resale of third-party equipment and the sublicensing of
third-party software. The Company typically grants its customers the right to
return its software products for a refund of the license fee during a refund
period which is generally 60 to 90 days from the date of the license agreement,
although the Company occasionally has provided, and may in the future provide,
longer refund periods for larger, more complex Costpoint installations. The
Company recognizes license fees from its System 1 and Electronic Timesheet
products upon delivery, whereas Costpoint license fees are recognized upon the
expiration of the applicable refund period and are recorded as deferred revenue
until recognized. Because of its customers' refund rights and the varying
length of applicable refund periods, deferred revenue at the end of a quarter
does not necessarily reflect revenue which the Company will recognize in the
succeeding quarter. Licensing of the Company's software results in revenues
from related consulting services and ongoing support. Implementation and other
consulting services are provided on a time and materials basis, billed monthly
or semi-monthly and recognized as the services are performed. Telephone support
and periodic enhancements and updates are provided for maintenance fees that
are payable quarterly and initially represent between 15% and 20% of the
related software license fee on an annual basis. Revenue from quarterly
maintenance and support service is recognized over the term of the support.
Revenue from third-party equipment and software is derived from the resale and
sublicensing of third-party hardware and software products in connection with
the license and installation of the Company's systems and is generally
recognized on delivery. The Company derives substantially greater profit
margins from license fees than from service revenues or from third-party
equipment and software. The mix of revenues among the three components can
fluctuate materially from quarter to quarter, and such fluctuations can have a
significant effect on margins. Over the past five years, the percentage of the
Company's total revenues represented by service revenues has increased, and
anticipates that it will continue to do so. Should lower margin service
revenues or revenues from third-party equipment and software increase in the
future as a percentage of total revenues, the Company's margins and income from
operations could be adversely affected.
During 1994 and 1995, the Company capitalized a greater amount of its
software development expenses than it had in previous years due to the
development of Costpoint. Upon the commercial release of Costpoint in June
1995, the Company ceased capitalizing costs related to the development of core
Costpoint modules and began amortizing previously capitalized costs related to
such development. Since June 1995, the Company has only capitalized software
development costs related to the development of new Costpoint modules and Web
E.T.
In June 1996, the Company amended its 1987 Employee Stock Option Plan
to change the exercise price of future options to be granted thereunder from a
formula price based on book value to the fair market value of the underlying
Common Stock. As a result, the Company recorded a non-recurring, non-cash
charge to operations in the amount of $867,000, representing the aggregate
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<PAGE> 23
difference between the exercise price of outstanding vested options and the
appraised market value of the underlying Common Stock at June 30, 1996. In
December 1996 the Company granted options to purchase common stock under the
Employee Time Accelerated Option Plan at an exercise price below fair market
value. Additional compensation charges of $268,000 have been recorded for the
year ended December 31, 1997, and an additional $452,000 will be recorded in
the future periods, as outstanding options continue to vest under these plans.
See Note 9 of Notes to Financial Statements.
In September 1996, the Company acquired substantially all of the
assets of The Allegro Group, Inc. in exchange for 102,000 shares of the
Company's Common Stock. A portion of the acquired assets represented research
and development that was in process at the time of the acquisition. The Company
is performing additional development work to integrate the Allegro product with
the Costpoint product line. The Company allocated $394,000 to this in-process
research and development, resulting in a non-recurring, non-cash charge to
operations in the third quarter of 1996. See Note 2 of Notes to Financial
Statements.
Since 1987, the Company has elected to be treated for federal and
certain state income tax purposes as an S Corporation under Subchapter S of the
Code. As a result, the Company's earnings for prior tax years and through
February 24, 1997 have been taxed, with certain exceptions, for federal and
certain state income tax purposes directly to the Company's shareholders rather
than to the Company. The Company terminated its S Corporation status on
February 25, 1997 (the "Termination Date"). The Company and the Subchapter S
shareholders have entered into an agreement which provides for income taxes
attributable to periods prior to the Termination Date to be borne by the
Subchapter S shareholders and for income taxes attributable to periods
beginning on and after the Termination Date to be borne by the Company. See
"Certain Transactions." In connection with the distribution of previously taxed
S Corporation earnings in the form of a dividend (the "S Corporation
Distribution"), the Company has paid from cash flow from operations S
Corporation Distribution in an aggregate amount of approximately $13.6 million
in 1997 with an additional amount of approximately $400,000 to be paid in 1998.
None of the proceeds of the initial public offering have been used to pay the S
Corporation Distribution. The termination of the Company's S Corporation status
on the Termination Date has resulted in current deferred tax assets and
liabilities which are recorded in the financial statements for the year ended
December 31, 1997. Had the Company terminated its S Corporation status as of
December 31, 1996, the deferred tax liability and related charge would not have
been material.
RESULTS OF OPERATIONS
The following table sets forth certain historical and pro forma
statements of operations data as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996(1) 1997
---- ----- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.2% 36.1% 35.7%
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56.4 58.5 60.1
Third-party equipment and software . . . . . . . . . . . . . . . . . . . 7.4 5.4 4.2
--- --- ---
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0
</TABLE>
20
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996(1) 1997
---- ----- ----
<S> <C> <C> <C>
Operating Expenses:
Cost of software . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 3.8 3.6
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.2 23.1 24.6
Cost of third-party equipment and software . . . . . . . . . . . . . . . 5.9 4.4 3.5
Software development . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4 19.2 19.6
Sales and marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 9.9 9.8
General and administrative . . . . . . . . . . . . . . . . . . . . . . . 7.0 6.7 5.0
Acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 0.7
Stock option compensation. . . . . . . . . . . . . . . . . . . . . . . . -- 2.5 --
Purchased in-process research and development. . . . . . . . . . . . . . -- 1.1 --
-- --- --
Total operating expenses . . . . . . . . . . . . . . . . . . . 64.0 70.7 66.8
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . 36.0 29.3 33.2
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.1 1.5
--- --- ---
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . 37.5 30.4 34.7
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.3 11.5
--- --- ----
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.3% 30.1% 23.2%
===== ===== =====
PRO FORMA STATEMENT OF OPERATIONS DATA:
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3% 11.8% 13.4%
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.2 18.6 21.4
</TABLE>
- ---------------------------
(1) Exclusive of the non-recurring charges for stock option compensation and
purchased in-process research and development, income from operations, net
income and pro forma net income for 1996 would have been 33.0%, 33.8% and
20.8%, respectively, of total revenues.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
License Fees. License fees for 1997 increased by 38.8% to $17.4
million from $12.5 million for 1996. License fees comprised 35.7% of the
Company's total revenues for 1997, compared to 36.1% for 1996. The increase in
license fees was principally attributable to Costpoint which was commercially
released in June 1995. Costpoint license fees increased by 51.9% to $11.7
million for 1997 from $7.7 million for 1996, reflecting increases in the number
of modules licensed and the average size of new system installations, offset
somewhat by discounts granted to System 1 users migrating to Costpoint systems.
The increase in Costpoint license fees was partially offset by a 7.5% decrease
in license fees for System 1 products to $3.5 million from $3.8 million in
1996, as both the number of systems licensed and the average system size
declined. License fees for Electronic Timesheet increased by 82.8% to $1.8
million from $1.0 million in 1996.
Services. Service revenues for 1997 increased by 44.0% to $29.3
million from $20.4 million for 1996. Service revenues comprised 60.1% of the
Company's total revenues in 1997, compared to 58.5% for 1996. The increase in
service revenues was principally attributable to increased consulting services
related to new implementations of Costpoint systems. Consulting service
revenues increased by 77.9% to $10.1 million for 1997 from $5.7 million for
1996. Maintenance, support and other service revenues increased by 30.7% to
$19.2 million from $14.7 million, principally as a result of the addition of
new customers and the sale of additional software products to existing
customers and, to a lesser extent, increases in service rates.
Third-Party Equipment and Software. Revenue from third-party
equipment and software for 1997 increased by 9.5% to $2.0 million from $1.9
million for 1996. Revenue from third-party equipment and software comprised
4.2% of the Company's total revenues in 1997, compared to 5.4%
21
<PAGE> 25
in 1996. This decline in the percentage of total revenues was due primarily to
the increases in license fees and service revenues in 1997.
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 1997 increased by 33.8% to $1.8 million from
$1.3 million for 1996. This increase was attributable to increased amortization
of software development and to increased sales of Costpoint resulting in higher
royalty and maintenance payments to third parties. Amortization of software
development for 1997 increased to $689,000 from $579,000 for 1996. This
increase reflects the impact of additional amortization related to software
modules that were released for sale during 1997.
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 1997 increased by 48.9%
to $12.0 million from $8.0 million for 1996. The increase in cost of services
was primarily due to increases in personnel costs to support the Costpoint
product line. In addition, reimbursed travel expenses increased by $934,000
from the prior year due primarily to consulting activity related to Costpoint
implementations. Also included in Cost of services for 1997 and 1996 were
$566,000 and $283,000, respectively, related to the Company's national user
conference. Cost of services represented 40.9% and 39.5% of service revenues
for 1997 and 1996, respectively. The increase in cost of services as a
percentage of service revenues reflected the Company's continued investment in
implementation consultants and support personnel for servicing the increase in
Costpoint clients.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of the purchased costs of computer and
peripheral equipment and license fees and royalties for third-party software.
Costs of third-party equipment and software for 1997 increased by 10.0% to $1.7
million from $1.5 million for 1996. Cost of third-party equipment and software
products represented 82.4% and 82.0% of revenue from third-party equipment and
software for 1997 and 1996, respectively. The increase in these costs as a
percentage of related revenue was the result of continued competitive pressures
on the sales prices for third party products.
Software Development. Software development costs consist primarily of
the personnel costs of analysts and programmers to research, develop, support
and maintain the Company's existing software product lines, enhance existing
products and develop new products. Software development costs for 1997
increased by 42.9% to $9.5 million from $6.7 million for 1996. This increase
was due primarily to increased personnel costs and related benefits and
facilities costs. Software development costs represented 19.6% and 19.2% of
total revenues for 1997 and 1996, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily
of the personnel costs of the Company's sales and marketing organizations as
well as the costs of advertising, direct mail and other sales and marketing
activities. Sales and marketing expenses for 1997 increased by 37.8% to $4.8
million from $3.5 million for 1996. This increase was due primarily to
increased personnel, advertising and trade show expenses. Sales and marketing
expenses represented 9.8% of the Company's total revenues for 1997, compared to
9.9% for 1996.
22
<PAGE> 26
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 1997 increased by 10.5% to $2.5 million from
$2.3 million for 1996. This increase was due primarily to additional
professional fees and expenses related to the Company's first year as a public
company. General and administrative expenses represented 5.2% of the Company's
total revenues for 1997, compared to 6.6% for 1996.
Acquisition Costs. In September 1997, the Company recorded a
non-recurring charge of $320,000 representing the cost associated with the
acquisition of a private software company that was not consummated.
Stock Option Compensation. In June 1996 the Company recorded a
non-recurring charge to operations in the amount of $867,000 relating to stock
option compensation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation-- Overview."
Purchased In-Process Research and Development. In September 1996, the
Company recorded a non-recurring charge of $394,000 representing the value of
in-process research and development acquired in connection with its acquisition
of The Allegro Group, Inc. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation-- Overview."
Interest Income. Interest income results from investments and, to a
lesser extent, from installment financing. Interest income for 1997 increased
by 95.3% to $746,000 from $382,000 for 1996. The increase was due to higher
average cash balances related to the Company's initial public offering and
cessation of S Corporation dividend distributions as a result of going public.
Pro Forma Income Tax Provision. The Company's pro forma effective tax
rate for 1997 was 38.5%, compared to 39.0% for 1996. The reduction is
primarily attributed to the amount of tax-exempt interest income earned in
1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
License Fees. License fees for 1996 increased by 29.1% to $12.5
million from $9.7 million for 1995. License fees comprised 36.1% of the
Company's total revenues for 1996, compared to 36.2% for 1995. The increase in
license fees was principally attributable to Costpoint which was commercially
released in June 1995. Costpoint license fees increased by 86.4% to $7.7
million for 1996 from $4.1 million for 1995, reflecting increases in the number
of modules licensed and the average size of new system installations, offset
somewhat by discounts granted to System 1 users migrating to Costpoint systems.
The increase in Costpoint license fees was partially offset by a 21.5% decrease
in license fees for System 1 products to $3.8 million from $4.8 million in
1995, as both the number of systems licensed and the average system size
declined. License fees for Electronic Timesheet increased by 21.5% to $1.0
million from $833,000 in 1995.
23
<PAGE> 27
Services. Service revenues for 1996 increased by 34.4% to $20.4
million from $15.2 million for 1995. Service revenues comprised 58.5% of the
Company's total revenues in 1996, compared to 56.4% for 1995. The increase in
service revenues was principally attributable to increased consulting services
related to new implementations of Costpoint systems. Consulting service
revenues increased by 82.3% to $5.7 million for 1996 from $3.1 million for
1995. Maintenance, support and other service revenues increased by 21.2% to
$14.7 million from $12.1 million, principally as a result of the addition of
new customers and the sale of additional software products to existing
customers and, to a lesser extent, increases in service rates.
Third-Party Equipment and Software. Revenue from third-party
equipment and software for 1996 decreased by 5.2% to $1.9 million from $2.0
million for 1995. Revenue from third-party equipment and software comprised
5.4% of the Company's total revenues in 1996, compared to 7.4% in 1995. This
decline was due to the increases in license fees and service revenues in 1996.
Cost of Software. Cost of software is comprised primarily of
royalties and maintenance payments to third parties, amortization of software
development costs, and the cost of production and distribution of software and
user manuals. Cost of software for 1996 increased by 45.6% to $1.3 million from
$893,000 for 1995. This increase was attributable to increased amortization and
to increased sales of Costpoint resulting in higher royalty and maintenance
payments to third parties. Amortization of software development for 1996
increased to $579,000 from $276,000 for 1995. This increase reflects 12 full
months of amortization of Costpoint software development costs during 1996,
compared to four months in 1995.
Cost of Services. Cost of services is comprised primarily of
personnel costs for implementation and consulting services, user training and
ongoing maintenance and support. Cost of services for 1996 increased by 56.1%
to $8.0 million from $5.2 million for 1995. The increase in cost of services
was primarily due to increases in personnel costs to support the Costpoint
product line. In addition, reimbursed travel expenses increased by $609,000
from the prior year due primarily to consulting activity related to Costpoint
implementations. Costs for 1996 also included $283,000 related to the Company's
national user conference in April 1996. Cost of services represented 39.5% and
34.0% of service revenues for 1996 and 1995, respectively. The increase in cost
of services as a percentage of service revenues reflected the Company's
investment in the initial implementations of Costpoint systems by providing
consulting services to a number of customers at reduced fees or no charge and
also reflected the increased reimbursed travel expenses which were billed with
no mark-up and the national user conference for which customer billings
approximated cost.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of the purchased costs of computer and
peripheral equipment and license fees and royalties for third-party software.
Costs of third-party equipment and software for 1996 decreased by 2.8% to $1.5
million from $1.6 million for 1995. Cost of third-party equipment and software
products represented 82.0% and 80.0% of revenue from third-party equipment and
software for 1996 and 1995, respectively. The increase in these costs as a
percentage of related revenue was the result of several large sales of
third-party equipment at volume discounts in connection with complex Costpoint
implementations performed in early 1996.
24
<PAGE> 28
Software Development. Software development costs consist primarily of
the personnel costs of analysts and programmers to research, develop, support
and maintain the Company's existing software product lines, enhance existing
products and develop new products. Software development costs for 1996
increased by 35.3% to $6.7 million from $4.9 million for 1995. This increase
was due primarily to increased personnel costs and related benefits and
facilities costs, and a decline in capitalized software production costs, which
occurred after the commercial release of Costpoint in June 1995. Software
development costs represented 18.4% and 19.2% of total revenues for 1995 and
1996, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily
of the personnel costs of the Company's sales and marketing organizations as
well as the costs of advertising, direct mail and other sales and marketing
activities. Sales and marketing expenses for 1996 increased by 26.1% to $3.5
million from $2.7 million for 1995. This increase was due primarily to
increased personnel, advertising and trade show expenses. Sales and marketing
expenses represented 9.9% of the Company's total revenues for 1996, compared to
10.2% for 1995.
General and Administrative. General and administrative expenses
consist primarily of the personnel costs of the Company's management,
administrative and finance staffs as well as the costs of insurance programs,
bad debt expenses, professional fees and other infrastructure costs. General
and administrative expenses for 1996 increased by 21.8% to $2.3 million from
$1.9 million for 1995. This increase was due primarily to a $245,000 increase
in bad debt expense as a result of the insolvency of a new customer. General
and administrative expenses represented 6.7% of the Company's total revenues
for 1996, compared to 7.0% for 1995.
Stock Option Compensation. In June 1996, the Company recorded a
non-recurring charge to operations in the amount of $867,000 relating to stock
option compensation. See "-- Overview."
Purchased In-Process Research and Development. In September 1996, the
Company recorded a non-recurring charge of $394,000 representing the value of
in-process research and development acquired in connection with its acquisition
of The Allegro Group, Inc. See "-- Overview."
Interest Income. Interest income results from investments and, to a
lesser extent, from installment financing. Interest income for 1996 decreased
by 2.8% to $382,000 from $393,000 for 1995. The reduction was due to lower
average cash balances related to the timing and amount of S Corporation
dividend distributions.
Pro Forma Income Tax Provision. The Company's pro forma effective tax
rate for 1996 was 39.0%, compared to 38.0% for 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively from cash
flow from its operations. As of December 31, 1997, the Company had cash and
cash equivalents of $10.3 million and working capital of $19.4 million.
25
<PAGE> 29
For the year ended December 31, 1997, the Company's operating
activities provided net cash of $16.7 million, primarily as a result of income
before depreciation and amortization, after including the non-cash charges for
stock option compensation. In addition, the increase in accounts receivable was
offset by a greater increase in deferred revenue and accounts payable and other
accrued expenses. Accounts receivable, net of the allowance for doubtful
accounts, were $8.8 million as of December 31, 1997, compared to $6.0 million
as of December 31, 1996. Accounts receivable days sales outstanding was 55 days
as of December 31, 1997, compared to 52 days as of December 31, 1996. The
increase in deferred revenue reflects increased Costpoint license fees, for
which revenue is recognized upon the expiration of the refund period. Exclusive
of unbilled receivables which were recorded as deferred revenue, days sales
outstanding was 36 days as of December 31, 1997, compared to 36 days as of
December 31, 1996. While the Company believes that its allowance for doubtful
accounts as of December 31, 1997 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 $16.9 million for the year ended
December 31, 1997. This amount included $14.8 million in acquired marketable
securities, $1.4 million in purchased property and equipment and $677,000 of
capitalized software production costs for new Costpoint product modules.
Financing activities for the year ended December 31, 1997 consisted
primarily of $16.4 net proceeds from the Company's initial public offering,
offset by $13.6 million in dividend and tax distributions to the Company's
shareholders, and $1.2 million in common stock purchased and retired. The
Company historically has distributed most of its profits as S Corporation
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
The Company has a credit facility with a bank that will provide for a
$1.0 million operating capital line of credit. To date no amounts have been
drawn under the line of credit. Loans under this facility will be secured by
substantially all of the Company's assets and will bear interest at the
lender's prime rate.
The Company believes that the net proceeds from its initial public
offering completed in March 1997, together with existing sources of liquidity
and anticipated cash flow from operations, will satisfy the Company's
anticipated working capital and capital expenditure requirements, as well as
capital requirements for acquisitions, through at least 1998. However,
depending on its rate of growth and profitability, the Company may require
additional equity or debt financing to meet its working capital requirements or
capital expenditure needs in the future. There can be no assurance that
additional financing will be available when required or, if available, will be
on the terms satisfactory to the Company.
SalesKit Acquisition. In February 1998 the Company agreed to
acquire the assets of SalesKit Software Corporation ("SalesKit"), a provider of
sales force automation and customer management software solutions. The
purchase price consists of approximately $6 million in cash and stock warrants
to purchase 130,000 shares of Deltek common stock at an exercise price of $22
per share, exercisable over a three year period. The acquisition, which is
expected to close in the second
26
<PAGE> 30
quarter of 1998, will be accounted for as an asset purchase and is subject to
customary closing conditions. The Company expects to write off a substantial
portion of the acquisition costs relating to SalesKit's in process research and
development costs in the second quarter of 1998.
Year 2000 Compliance. The Company's internal business information
systems are primarily comprised of the same commercial application software
products generally offered for license by the Company to end user customers
which are designed to be year 2000 compliant. However, the Company utilizes
other third party vendor network equipment, telecommunication products and
other third party software products which may or may not be year 2000
compliant. The Company is actively engaged in researching any issues
presented by the year 2000 that may impact the Company and does not anticipate
that year 2000 issues will materially impact its operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those described in the forward-looking statements as a result
of the factors set forth below and elsewhere in this document.
The Company has experienced, and expects to continue to experience,
significant fluctuations in quarterly operating results. The Company's future
operating results will depend upon a number of factors, including the demand
for its products, the size and timing of specific sales, the delay or deferral
of customer implementations, the level of product and price competition that it
encounters, the length of its sales cycles, the successful expansion of its
direct sales force and customer support organization, the timing of new
products and services sold, the activities of and acquisitions by its
competitors, the timing of new hires and its ability to develop and market new
products and control costs. The Company's operating results could also be
affected by general economic conditions. In addition, the decision to license
and implement an enterprise-level business software system is usually
discretionary, involves a significant commitment of customer resources and is
subject to delays, and to budget cycles and internal authorization procedures
of the Company's customers. The loss or delay of individual orders could have a
significant impact on the Company's operating results, particularly on a
quarterly basis. Furthermore, while the Company's revenue from license fees is
difficult to predict because of the length and variability of the Company's
sales cycles, the Company's operating expenses are based on anticipated revenue
trends. Because a high percentage of these expenses are relatively fixed, a
delay in the recognition of revenue from a limited number of sales could cause
significant variations in operating results from quarter to quarter. To the
extent such expenses precede, or are not subsequently followed by, anticipated
revenues, the Company's operating results could be materially and adversely
affected.
The Company typically grants its customers the right to return its
software products for a refund of the license fee during a refund period which
is generally 60 to 90 days from the date of the license agreement, although the
Company occasionally has provided, and may in the future provide, longer refund
periods for larger, more complex Costpoint installations. The Company
recognizes license fees from its System 1 and Electronic Timesheet products
upon delivery, whereas Costpoint license fees are recognized upon the
expiration of the applicable refund period and are recorded as
27
<PAGE> 31
deferred revenue until recognized. Because of its customers' refund rights and
the varying length of applicable refund periods, deferred revenue at the end of
a quarter does not necessarily reflect revenue which the Company will recognize
in the succeeding quarter.
The Company derives substantially greater profit margins from license
fees than from service revenues or from third-party equipment and software. The
mix of revenues among these three components can fluctuate materially from
quarter to quarter, and such fluctuations can have a significant effect on
margins. Over the past five years, the percentage of the Company's total
revenues represented by service revenues has increased, although such
percentage has remained relatively stable over the past three years. Should
lower margin service revenues or revenue from third-party equipment and
software increase in the future as a percentage of total revenues, the
Company's margins and income from operations could be adversely affected.
Over the last several years, the Company has experienced seasonal
variations in its operating results, partly due to customers' desire to have
their systems operational at the beginning of a calendar year. Accordingly,
these customers typically order their systems in the middle of the preceding
year in order to allow adequate time for implementation, resulting in a
seasonally high level of revenue being recognized in the fourth quarter upon
the expiration of refund periods.
As a result of these and other factors, the Company's operating
results for any quarter are subject to significant variation, and the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. It is likely that the Company's future quarterly operating
results from time to time will not meet the expectations of market analysts or
investors. In such event, the price of the Company's Common Stock would likely
be materially and adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable. The Company is a non-bank and non-thrift registrant
with market capitalization on January 28, 1997 of less than $2.5 billion, and
this report does not include financial statements for any fiscal year ending
after June 15, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is set forth below beginning on page
F-1, and is incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
28
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. Financial Statements: The financial statements listed in the
accompanying Index to Financial Statements and Schedule are
filed as part of this report and incorporated herein by
reference.
2. Financial Statement Schedules: The financial statement
schedules listed in the accompanying Index to Financial
Statements and Schedules are filed as part of this report and
incorporated herein by reference.
3. Exhibits: The exhibits listed in the following Exhibit Index
are incorporated herein by reference.
29
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
3.1(1) Amended and Restated Articles of Incorporation of the Registrant.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1(2) Specimen Common Stock certificate of the Registrant.
10.1(1) 1987 Employee Stock Option Plan.
10.2(1) Employee Time Accelerated Stock Option Plan (revised).
10.3(1) 1996 Stock Option Plan.
10.4(1) 1996 Employee Stock Purchase Plan.
*10.5(3) OEM Software License Agreement by and between the Company and
Centura Software Corporation dated as of March 1, 1993, as
amended.
*10.6(3) Cognos Desktop OEM Agreement by and between the Company and
Cognos Corporation dated as of February 28, 1994, as amended.
*10.7(3) Micro Focus OSX Application Vendor License Agreement by and
between the Company and Micro Focus Incorporated dated as of
June 10, 1993, as amended.
10.8(1) Agreement of Lease by and between the Company and Tysons
Corner Limited Partnership, dated as of November 12, 1991, as
amended.
10.9(1) Agreement of Lease by and between the Company and Tysons
Corner Limited Partnership, dated as of November 12, 1992, as
amended.
10.10(2) Form of Indemnity Agreement for officers and directors.
10.11(2) Form of Tax Indemnification Agreement.
10.12(2) Seventh Amendment to Agreements of Lease by and between the
Company and Tysons Corner Limited Partnership, dated as of
December 17, 1997.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
- ------------
(1) Incorporated by reference to the Company's Form S-1 filed on December 19,
1996, File No. 333-18247.
(2) Incorporated by reference to the Company's Amendment No. 1 to Form S-1
filed on January 28, 1997, File No. 333-18247.
(3) Incorporated by reference to the Company's Amendment No. 2 to Form S-1
filed on February 24, 1997, File No. 333-18247.
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
30
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Deltek Systems, Inc.
(Registrant)
March 30, 1998 By: /s/ Kenneth E. deLaski
---------------------------------------------
Kenneth E. deLaski, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 30, 1998 By: /s/ Kenneth E. deLaski
---------------------------------------------
Kenneth E. deLaski, President, Chief Executive
Officer, and Director
March 30, 1998 By: /s/ Donald deLaski
---------------------------------------------
Donald deLaski, Chairman of the Board of
Directors and Treasurer
March 30, 1998 By: /s/ Alan R. Stewart
---------------------------------------------
Alan R. Stewart, Chief Financial Officer
and Secretary
By:
---------------------------------------------
Darrell J. Oyer, Director
March 30, 1998 By: /s/ Charles W. Stein
---------------------------------------------
Charles W. Stein, Director
March 30, 1998 By: /s/ Robert E. Gregg
---------------------------------------------
Robert E. Gregg, Director
31
<PAGE> 35
DELTEK SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1996 and 1997 F-3
Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 F-4
Statements of Changes in Shareholders' Equity for the Years Ended December
31, 1995, 1996 and 1997 F-5
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 F-6
Notes to Financial Statements F-7
Report of Independent Public Accountants on Schedule S-1
Schedule I - Valuation and Qualifying Accounts S-2
</TABLE>
F-1
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Deltek Systems, Inc.:
We have audited the accompanying balance sheets of Deltek Systems,
Inc. (a Virginia corporation), as of December 31, 1996 and 1997, and the
related statements of operations, changes in shareholders' equity, and cash
flows for the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Deltek Systems,
Inc., as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 27, 1998
F-2
<PAGE> 37
DELTEK SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,333 $10,272
Marketable securities - 14,949
Accounts receivable, net of allowance for doubtful
accounts of $396 and $422, respectively 5,995 8,825
Inventories 209 95
Deferred income taxes -- 1,992
Prepaid expenses and other current assets 1,058 1,267
---------- ---------
Total current assets 15,595 37,400
---------- ---------
Furniture, equipment, and leasehold improvements, at cost,
net of accumulated depreciation and amortization of
$2,168 and $2,839, respectively 1,878 2,635
Computer software development costs, at cost, net of
accumulated amortization of $1,810 and $2,500,
respectively 2,591 2,579
Other assets 138 110
---------- ---------
Total assets $20,202 $42,724
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,908 $ 4,043
Accrued dividends payable - 400
Income taxes payable - 573
Deferred income taxes -- 2,177
Deferred revenue 6,808 10,779
---------- ---------
Total current liabilities 8,716 17,972
---------- ---------
Commitments (Note 7)
Shareholders' equity:
Preferred stock, $0.001 par value per share; 2,000,000
shares authorized; none issued or outstanding - -
Common stock, $0.001 par value; 45,000,000 shares
authorized; 15,167,250 and 17,019,162 shares issued
and outstanding at December 31, 1996 and 1997,
respectively 15 17
Paid-in capital 2,226 17,924
Retained earnings 9,965 7,263
---------- ---------
Less - Unearned compensation 720 452
---------- ---------
Total shareholders' equity 11,486 24,752
---------- ---------
Total liabilities and shareholders' equity $20,202 $42,724
========== =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 38
DELTEK SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
---------- --------- ---------
<S> <C> <C> <C>
Revenues:
License fees $ 9,720 $12,545 $17,415
Services 15,154 20,362 29,316
Third-party equipment and software 1,975 1,873 2,051
-------- -------- --------
26,849 34,780 48,782
-------- -------- --------
Operating expenses:
Cost of software 893 1,318 1,764
Cost of services 5,151 8,043 11,980
Cost of third-party equipment and software 1,580 1,536 1,690
Software development 4,934 6,674 9,539
Sales and marketing 2,743 3,460 4,767
General and administrative 1,875 2,283 2,522
Stock option compensation - 867 -
Acquisition costs - - 320
Purchased in-process research and development - 394 -
-------- -------- --------
Total operating expenses 17,176 24,575 32,582
-------- -------- --------
Income from operations 9,673 10,205 16,200
Interest income 393 382 746
-------- -------- --------
Income before income taxes 10,066 10,587 16,946
Provision for income taxes 45 93 5,634
-------- -------- --------
Net income $10,021 $10,494 $11,312
======== ======== ========
Basic net income per share $ 0.67 $ 0.70 $ 0.68
======== ======== ========
Diluted net income per share $ 0.64 $ 0.67 $ 0.66
======== ======== ========
Weighted average shares outstanding 15,037 15,061 16,699
======== ======== ========
Weighted average shares outstanding, including
dilutive effect of stock options 15,552 15,560 17,177
======== ======== ========
Pro forma statement of operations data (unaudited):
Income before provision for income taxes, as $10,066 $10,587 $16,946
reported
Income tax provision 3,827 4,131 6,516
-------- -------- --------
Net income $ 6,239 $ 6,456 $10,430
======== ======== ========
Pro forma basic net income per share $ 0.41 $ 0.43 $ 0.62
======== ======== ========
Pro forma diluted net income per share $ 0.40 $ 0.41 $ 0.61
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 39
DELTEK SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
COMMON GAIN ON TOTAL
STOCK PAID-IN RETAINED MARKETABLE UNEARNED SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS SECURITIES COMPENSATION EQUITY
------------ ----------- --------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 15,018,750 $15 $ 62 $ 6,726 $ - $ - $ 6,803
Cash dividends - - - (5,417) - - (5,417)
Accrued dividends payable - - - (2,594) - - (2,594)
Exercise of stock options 31,500 - 13 - - - 13
Unrealized holding gain on
Marketable securities - - - - 23 - 23
Net income - - - 10,021 - - 10,021
------------ ---- ------------ ----------- ----------- -------------- --------------
Balance, December 31, 1995 15,050,250 15 75 8,736 23 - 8,849
Cash dividends - - - (9,265) - - (9,265)
Exercise of stock options 15,000 - 7 - - - 7
Acquisition of the Allegro
Group, Inc. 102,000 - 408 - - - 408
Unrealized holding gain on
Marketable securities - - - - (23) - (23)
Conversion of book value
Plan to fair value plan
(Note 8) - - 1,484 - - (468) 1,016
Issuance of stock options - - 252 - - (252) -
Net income - - - 10,494 - - 10,494
------------ ---- ------------ ----------- ----------- -------------- --------------
Balance, December 31, 1996 15,167,250 15 2,226 9,965 - (720) 11,486
Cash dividends - - - (13,614) - - (13,614)
Accrued dividends payable - - - (400) - - (400)
Net proceeds from initial
Public offering 1,700,000 2 16,386 - - - 16,388
Exercise of stock options 202,717 - 250 - - - 250
Issuance of shares for
Employee Stock Purchase
Plan 29,195 - 273 - - - 273
Amortization of unearned
Compensation - - - - - 268 268
Net income - - - 11,312 - - 11,312
Purchase and retirement of
stock (80,000) - (1,211) - - - (1,211)
------------ ---- ------------ ----------- ----------- -------------- -------------
Balance, December 31, 1997 17,019,162 $17 $17,924 $ 7,263 $ - $(452) $24,752
============ ==== ============ =========== =========== ============== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 40
DELTEK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $10,021 $10,494 $11,312
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 665 1,116 1,399
Compensation, noncash - 980 268
Purchased research and development, noncash charge - 394 -
Loss (gain) on disposal of fixed assets 13 (13) -
Accreted interest on marketable securities (61) 61 (186)
Change in accounts receivable, net (1,889) 47 (2,830)
Change in prepaid expenses, inventories, and other
current assets (15) (593) (95)
Change in accounts payable and accrued expenses 618 184 2,135
Change in income taxes payable - - 573
Change in deferred income taxes, net -- -- 185
Change in deferred revenue 1,319 1,794 3,971
--------- --------- ---------
Net cash provided by operating activities 10,671 14,464 16,732
--------- --------- ---------
Cash flows from investing activities:
(Purchase) sale of marketable securities (993) 3,067 (14,764)
Purchase of property and equipment (642) (1,117) (1,438)
Capitalization of computer software development costs (1,105) (622) (677)
--------- --------- ---------
Net cash (used in) provided by investing activities (2,740) 1,328 (16,879)
--------- --------- ---------
Cash flows from financing activities:
Cash proceeds from initial public offering, net of offering
costs - - 16,388
Cash dividends paid to stockholders (5,417) (11,859) (13,614)
Cash proceeds from exercise of stock options 13 7 250
Cash proceeds from issuance of stock for employee - - 273
purchase plan
Common stock purchased and retired - - (1,211)
--------- --------- ---------
Net cash used in financing activities (5,404) (11,852) 2,086
--------- --------- ---------
Net increase in cash and cash equivalents 2,527 3,940 1,939
Cash and cash equivalents, beginning of year 1,866 4,393 8,333
--------- --------- ---------
Cash and cash equivalents, end of year $4,393 $8,333 $10,272
========= ========= =========
Cash paid during the year for income taxes $ 45 $ 75 $ 4,876
========= ========= =========
Supplemental Disclosure
Allegro acquisition (Note 2)
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 41
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Deltek Systems, Inc. (the "Company"), was incorporated in 1983 under
the laws of the Commonwealth of Virginia. The Company designs, develops, sells
and supports a family of integrated software products that provide
project-oriented businesses with tools to manage, operate and grow their
operations. The Company's family of software products consists of Costpoint,
the Company's advanced client/server, enterprise-level business software system
designed for project-oriented organizations; System 1, a DOS-based accounting
and management system designed primarily for organizations providing goods and
services under contracts with the federal government; Electronic Timesheet, an
employee timekeeping system; and Allegro, a project and resource management
tool.
Net Income Per Common Share
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
statement replaces the previously reported primary and fully diluted net income
per share with basic and diluted net income per share. Unlike primary net
income per share, basic net income per share excludes any dilutive effects of
stock options. Diluted net income per share is very similar to the previously
reported fully diluted net income per share. All net income per share amounts
have been restated to conform to SFAS No. 128. 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
related to outstanding stock options.
Pro forma net income is based on the assumption that the Company's S
Corporation status was terminated at the beginning of each year. Dilutive net
income per share is based on the weighted average equivalent shares outstanding
during the period and assumes the dilutive effect of all options using the
treasury stock method.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company grants perpetual licenses under a standard license
agreement. The Company historically has granted its customers the right to
return its software products for a refund of the license fee during a refund
period which is generally 60 to 90 days from the date of the license agreement,
although the Company occasionally has provided, and may in the future provide,
longer refund periods for larger, more complex Costpoint installations. The
Company recognizes license fees from its System 1 and Electronic Timesheet
products upon delivery, whereas Costpoint license fees are recognized upon the
expiration of the applicable refund period and are recorded as deferred revenue
until recognized (Note 6). For contracts that involve significant installment
payments, the Company also evaluates
F-7
<PAGE> 42
whether fees are fixed and determinable. If the fees are not fixed and
determinable, the Company defers the recognition of revenue until the payments
become due. Implementation and other consulting services are provided on a time
and materials basis, billed monthly or semi-monthly and recognized as the
services are performed. Telephone support and periodic enhancements and updates
are provided for maintenance fees that are payable quarterly and initially
represent between 15% and 20% of the related software license fee on an annual
basis. Revenue from quarterly maintenance and support service is recognized
over the term of the support agreement, which is generally three months.
Revenue from third-party equipment and software is derived from the resale and
sublicensing of third-party hardware and software products in connection with
the license and installation of the Company's systems and is generally
recognized upon delivery.
The American Institute of Certified Public Accountants (the "AICPA")
recently issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, that supersedes SOP 91-1, Software Revenue Recognition. SOP 97-2
provides additional guidance to multiple elements: returns, exchanges, and
platform transfer rights; resellers; services; funded software-development
arrangements; and contract accounting. Implementation of SOP 97-2 is required
for transactions entered into beginning after December 15, 1997. Management
believes that SOP 97-2 will not have a material adverse financial impact on the
Company.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Furniture, Equipment and Leasehold Improvements
Furniture and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets, which
are generally three to five years. Leasehold improvements are amortized over
the shorter of the useful life of the asset or the lease term.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories consist principally of equipment purchased for resale and
software user manuals.
Capitalized Computer Software Development Costs
Computer software development costs for products are capitalized
subsequent to the establishment of technological feasibility, as evidenced by
detailed program designs. Capitalization ceases when the products are available
for general release to customers, at which time amortization of the capitalized
costs begins on a straight-line basis over the estimated lives of the products,
which are generally five years. Amortization expense of approximately $276,000,
$579,000, and $689,000 was recorded related to these costs during 1995, 1996,
and 1997, respectively, and is included in cost of software.
Marketable Securities
The Company accounts for its debt and equity securities under SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. At
acquisition, debt and equity securities are
F-8
<PAGE> 43
classified into three categories: held-to-maturity, available-for-sale, or
trading. At each reporting date, the appropriateness of the classifications is
reassessed.
Included in the balance sheet at December 31, 1997 are marketable
securities of approximately $14,949,000 that consist of investments in
municipal bonds, money market accounts and floating rate bonds and are
classified as available-for-sale and recorded at fair value. No unrealized
gains or losses were incurred in 1997. No marketable securities were held by
the Company at December 31, 1996.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and cash
equivalents, marketable securities, and accounts receivable. The Company
maintains cash and cash equivalents with high credit quality financial
institutions. Marketable securities consist primarily of investments in
municipal bonds, money market accounts and floating rate bonds with original
maturities at date of purchase beyond three months. The credit risk with
respect to accounts receivable is generally diversified due to the large number
of entities comprising the Company's customer base. The Company performs
ongoing credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses. Actual losses and allowances have been
within management's expectations.
Fair Value of Financial Instruments
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes an obligation to deliver cash
or other financial instruments to a second party. The carrying amounts of
current assets and current liabilities in the accompanying financial statements
approximate fair value due to the short maturity of these instruments.
Income Taxes
Prior to February 1997, the Company had elected to be treated as an S
Corporation for federal income tax purposes. Accordingly, income or loss was
prorated among the stockholders and reported on their individual income tax
returns. The accompanying statements include a provision for state income taxes
prior to February 1997 related to certain states that do not recognize S
Corporation status for state income tax purposes. Upon the Company's initial
public offering, the Company became a C Corporation for federal and state
income tax purposes.
Income taxes are accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and
liabilities are computed based on the difference between the financial
statement and tax basis of assets and liabilities and are measured by applying
enacted tax rates and laws for the taxable years in which those differences are
expected to reverse.
Impairment of Long-Lived Assets
The Company complies with SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company
reviews its long-lived assets, including software development costs; property,
plant, and equipment; identifiable intangibles; and goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be fully recoverable. To determine recoverability of its
long-lived assets, the
F-9
<PAGE> 44
Company evaluates the probability that future undiscounted net cash flows,
without interest charges, will be less than the carrying amount of the assets.
Impairment is measured at fair value.
2. ALLEGRO ACQUISITION:
On September 18, 1996, the Company acquired, in a tax-free exchange,
from The Allegro Group, Inc. ("Allegro"), substantially all of the assets
relating solely to Allegro's software business, and assumed certain related
liabilities, in exchange for 102,000 shares of the Company's common stock,
valued at $4.00 per share. The Company recorded the acquisition using the
purchase method of accounting.
Upon evaluation, the Company assigned approximately $130,000 to
intangible assets and is amortizing this amount over five years. The Company
assigned $394,000 to in-process research and development and expensed this
amount. In the opinion of management, the acquired in-process research and
development had not yet reached technological feasibility and had no
alternative future uses. The Company recorded approximately $140,000 in
assumed liabilities of Allegro, primarily related to deferred consulting
revenue.
In addition, the Company entered into a three-year employment
agreement beginning October 1, 1996, with the two principals of Allegro for a
base salary and incentive compensation based upon revenue and profit growth of
the Allegro division of the Company.
3. ACCOUNTS RECEIVABLE:
The Company periodically licenses its software to certain customers
under monthly installment plans. Unbilled accounts receivable that relate
primarily to installment sales were approximately $1,837,000 and $3,470,000 at
December 31, 1996 and 1997, respectively. Installment plans extending longer
than four months are generally interest-bearing.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued wages and other employee benefits $1,045 $2,081
Deferred rent credits 47 110
Accounts payable and other accrued expenses 816 1,852
------- --------
$1,908 $4,043
======= ========
</TABLE>
5. INCOME TAXES:
In conjunction with the Company's initial public offering in February
1997, the Company changed from an S Corporation to a C Corporation for federal
and state income tax purposes. As of December 31, 1995 and 1996, differences
between the financial statement and tax basis of assets and liabilities in
states not recognizing S Corporation status were insignificant. The provision
for income taxes is summarized as follows:
F-10
<PAGE> 45
<TABLE>
<CAPTION>
1997
----------
<S> <C> <C>
Current:
Federal $4,688
State 761
----------
5,449
----------
Deferred:
Federal 158
State 27
----------
185
----------
Tax provision $5,634
==========
</TABLE>
The income tax provision for continuing operations differs from that
computed using the statutory federal income tax rate of 35% in 1997 for the
following reasons:
<TABLE>
<S> <C>
Computed Statutory Amount $5,931
Tax Exempt Income (187)
State Income Taxes, net of federal tax benefit 495
Non-taxable income during S Corporation status (644)
Other 39
--------
$5,634
========
</TABLE>
The following table is a summary of the significant components of the Company's
deferred tax assets and liabilities, and deferred provision for 1997.
<TABLE>
<CAPTION>
1997
DEFERRED
DECEMBER 31, (PROVISION)
1997 BENEFIT
---------------- ----------------
<S> <C> <C>
Deferred tax asset:
Deferred revenue $1,085 $1,085
Employee compensation & benefits 226 226
Inventory 300 300
Accrued expenses 150 150
Non- cash compensation 181 181
Other 50 50
------------ ------------
Total deferred tax asset 1,992 1,992
------------ ------------
Deferred tax liabilities:
Depreciation (162) (162)
Cash to accrual change in tax accounting method (961) (961)
Computer software development costs (1,032) (1,032)
Other (22) (22)
------------ ------------
Total deferred tax liabilities (2,177) (2,177)
------------ ------------
Net deferred tax liability $ (185) $ (185)
============ ============
</TABLE>
6. DEFERRED REVENUE:
The Company had deferred revenue of approximately $3,196,000 and
$6,222,000 as of December 31, 1996 and 1997, respectively, attributable to the
sales of licenses of Costpoint, related Electronic Timesheet and Allegro
software. The revenue related to Costpoint will be recognized upon the
expiration of the refund period, right of return, generally 60 to 90 days from
the date of delivery, and the fulfillment of any significant vendor obligations
(Note 1). Also included in deferred revenue is ongoing software support and
consulting and training services.
F-11
<PAGE> 46
7. COMMITMENTS:
Office Space Lease
The Company leases office space under noncancellable operating leases.
Minimum rental expense is recognized on a straight-line basis over the term of
the lease, regardless of when payments are due. Rent expense was approximately
$990,000 and $1,480,000 for the years ended December 31, 1996 and 1997,
respectively. The Company's primary lease expires in March, 2002.
As of December 31, 1997, the future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ------
(IN THOUSANDS)
<S> <C>
1998 $1,615
1999 1,820
2000 2,232
2001 2,163
2002 525
Thereafter -
----------
$8,355
==========
</TABLE>
Profit-Sharing Plan
The Company has a 401(k) profit-sharing plan covering all eligible
employees. Employees are eligible to participate in the plan after they have
completed six months of service. Once the eligibility requirement is satisfied,
employees may become participants on the earlier of the first day of the plan
year or the first day of the seventh month of the plan year coinciding with the
employees' eligibility. Company contributions vest ratably over five years. The
Board of Directors approved a contribution of 4% of eligible compensation for
1996 and 1997, respectively. The Company's contribution for 1996 was
approximately $418,000. As of December 31, 1997, the Company had accrued
$454,000 for the 1997 profit-sharing contribution.
8. PREFERRED STOCK:
The Company's Board of Directors has the authority, without further
action by the shareholders, to issue preferred stock in one or more series and
to fix the terms and rights of the preferred stock. Such actions by the Board
of Directors could adversely affect the voting power and other rights of the
holders of common stock. Preferred stock could thus be issued quickly with
terms that could delay or prevent a change in control of the Company or make
removal of management more difficult. At present, the Company has no plans to
issue any of the preferred stock.
9. EMPLOYEE STOCK OPTION PLANS:
1987 Employee Stock Option Plan
Prior to April 1, 1996, the Company's sole stock option plan was the
1987 Employee Stock Option Plan (the "Book Value Plan"), a nonqualified plan.
Until June 1996, the exercise price of options granted under the Book Value
Plan was based on the book value per share at the end of the fiscal year
immediately preceding the grant, reduced by any dividends declared by the
Company related to the previous year and the Company recorded compensation
expense each year based on the change in the
F-12
<PAGE> 47
formula price per share. Options are exercisable over ten years, subject to a
five-year vesting period. Options granted pursuant to the Book Value Plan are
generally nontransferable.
In June 1996, the Company amended the Book Value Plan to change the
exercise price of future options to be granted thereunder from a formula price
based on book value to the appraised fair market value of the underlying common
stock. This amendment required the Company to pay the holder of a vested option
the difference between the then appraised fair value of the common stock and
the exercise price if the Company declined to permit the exercise of the option
in order to maintain its S Corporation status. This amendment also resulted in
changing the price paid for shares purchased by the Company upon the exercise
of its right of first refusal or its repurchase right to the appraised fair
market value of the common stock. As a result of these changes, the Company
recorded a non-recurring, non-cash charge to operations in the amount of
$867,000, representing the aggregate difference between the exercise price of
outstanding vested options and $4.00 per share, the appraised market value of
the underlying common stock at June 30, 1996. Additional compensation charges
of $113,000 were recorded during the six months ended December 31, 1996,
$217,000 during the year ended December 31, 1997, and up to an additional
$251,000 of such charges will be recorded in future periods, as outstanding
options continue to vest under this plan.
Employee Time Accelerated Stock Option Plan
On April 1, 1996, the Company created the Employee Time Accelerated
Stock Option Plan (the "Accelerated Plan"), under which 1,500,000 shares of
common stock were reserved for issuance, and granted options thereunder to
purchase 648,000 shares at an exercise price of $4.00 per share, the appraised
value of the common stock on the date of grant. Since the exercise price of
these options was equal to the appraised fair value of the common stock on the
date of grant, the Company recorded no compensation expense in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. Originally these options vested 100% on January 1, 2004.
However, upon the initial public offering of the Company's common stock, these
options began vesting ratably over a five year period from the date of grant.
The Company granted options to purchase 36,000 shares of the Company's common
stock, at an exercise price of $4.00 per share, on December 1, 1996. As the
options vest, the Company will record up to $252,000 in compensation expense,
representing the aggregate difference between the $4.00 per share exercise
price and $11.00, the offering price in the Company's initial public offering.
The Company recorded $51,000 in compensation charges during 1997. In December
1996, the Board of Directors reduced the number of shares of common stock
reserved for issuance under the Accelerated Plan to equal the number of shares
issuable upon the exercise of options outstanding at December 10, 1996. At
December 31, 1997, 571,084 options were outstanding and 106,684 options were
exercisable under the Accelerated Plan.
1996 Stock Option Plan
The Company's Board of Directors and the shareholders of the Company
adopted a new 1996 Stock Option Plan (the "1996 Option Plan") in December 1996.
A total of 900,000 shares of common stock have been reserved for issuance under
the 1996 Option Plan. No options were granted under the 1996 Option Plan during
the 1996 fiscal year. At December 31, 1997, 340,000 options were outstanding
and no options were exercisable. The 1996 Option Plan provides for grants of
incentive stock options to employees (including officers and employee
directors) and for grants of nonstatutory options to employees, nonemployee
directors and consultants.
F-13
<PAGE> 48
The exercise price of incentive stock options granted under the 1996
Option Plan must not be less than the fair market value of the common stock on
the date of the grant, and the exercise price of nonstatutory options must not
be less than 85% of the fair market value of the common stock on the date of
the grant. With respect to any optionee who owns stock representing more than
10% of the voting power of all classes of the Company's outstanding common
stock, the exercise price of any incentive stock option must be equal to at
least 110% of the fair market value of the common stock on the date of the
grant, and the term of the option must not exceed five years. The terms of all
other options may not exceed 10 years.
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Company's Board of Directors and approved by the
shareholders of the Company in December 1996. A total of 400,000 shares of
common stock have been reserved for issuance under the Purchase Plan. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions at a price equal to 85% percent of the lower of fair market
value of the common stock on the first day of the offering period or the last
day of the offering period. At December 31, 1997, 29,195 shares of common
stock have been issued under the Purchase Plan.
Summary Activity
The following table summarizes the activity of all the Company's stock
option plans:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- ---------
<S> <C> <C>
Shares under option, December 31, 1994 319,500 0.249 - 0.443
Options granted 144,000 0.517
Options canceled (24,000) 0.304 - 0.392
Options exercised (31,500) 0.249 - 0.517
-------
Shares under option, December 31, 1995 408,000 0.249 - 0.517
-------
Options granted 693,000 4.000
Options canceled (27,000) 0.517 - 4.000
Options exercised (15,000) 0.392 - 4.000
-------
Shares under option, December 31, 1996 1,059,000 0.249 - 4.000
Options granted 347,000 8.00 - 22.500
Options canceled (74,800) 0.392 - 11.000
Options exercised (202,716) 0.304 - 4.000
--------
Shares under option, December 31, 1997 1,128,484 0.249 - 22.500
=========
</TABLE>
Of the options outstanding under the Book Value Plan at December 31,
1997, options to purchase 156,200 shares are immediately exercisable at
exercise prices ranging from $0.249 to $0.517 per share.
The Company adopted the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, effective for the Company's December
31, 1996 financial statements. The
F-14
<PAGE> 49
Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Accordingly, compensation cost has been recognized for its stock
plans based on the intrinsic value of the stock option at date of grant (i.e.
the difference between the exercise price and the fair value of the Company's
stock). Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1995 1996 1997
------------ -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income before taxes, as reported $10,066 $10,587 $16,946
Pro forma income tax provision 3,824 4,068 6,513
Pro forma compensation expense 9 162 896
---------- ----------- ----------
Pro forma net income $ 6,233 $ 6,357 $ 9,537
========== =========== ==========
Diluted earnings per share, as reported $0.40 $0.41 $0.61
Diluted earnings per share, pro forma $0.40 $0.41 $ 0.56
</TABLE>
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1995, 1996, and 1997, respectively; no dividend yield, expected
volatility of 50%, 50% and 70%, risk-free interest rates of approximately 6.6%,
6.0% and 5.9%, respectively, and expected lives of seven years. The volatility
was based on the volatility percentage of Deltek and comparable publicly traded
companies since the Company does not have a sufficient history of stock
transactions. Income taxes represent the assumed effective rate which the
Company would pay if it had terminated its election as an S Corporation, net of
any tax benefit for the incremental increase in pro forma compensation expense.
In 1996, the Company remeasured the fair value of the Book Value Plan
options due to the significant changes in the plan discussed above. Based on
the Black-Scholes option-pricing model, at the remeasurement date, the 379,500
Book Value Plan options had a fair value of $3.73 per option in 1996, rather
than a previous value of $0.31 per option. The incremental effect of this
change on a pro forma basis was minimal as the cumulative pro forma
compensation expense for the vested options was consistent with the $980,000 of
compensation expense recorded by the Company in accordance with APB No. 25.
Other than the remeasurement of the Book Value Plan, the only other
pro forma compensation expense in 1996 related to the options issued under the
Accelerated Plan which are expected to vest over five years. Based on the
Black-Scholes option-pricing model, at the grant date the 679,500 options
outstanding had a fair value of $2.43 per option.
10. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following unaudited quarterly data has been prepared from the
financial records of the Company without audit, and reflects all adjustments
which, in the opinion of management, were of a normal recurring nature and
necessary for a fair presentation of the results of operations for the interim
periods presented.
F-15
<PAGE> 50
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $7,601 $7,567 $9,203 $10,409
Gross profit 5,081 4,766 6,335 7,701
Net income 2,401 1,071 2,815 4,207
Pro forma net income 1,492 661 1,728 2,575
Pro forma basic net income per common share $ 0.10 $ 0.04 $ 0.11 $ 0.17
Pro forma diluted net income per common share $ 0.10 $ 0.04 $ 0.11 $ 0.16
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $10,538 $11,454 $12,580 $14,210
Gross profit 7,305 7,623 8,518 9,902
Net income 3,068 2,364 2,638 3,242
Pro forma net income 2,186 2,364 2,638 3,242
Pro forma basic net income per common share $ 0.14 $ 0.14 $ 0.15 $ 0.19
Pro forma diluted net income per common share $ 0.13 $ 0.14 $ 0.15 $ 0.19
</TABLE>
F-16
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Deltek Systems, Inc.:
We have audited in accordance with generally accepted auditing
standards the financial statements of Deltek Systems, Inc. included in this
Form 10-K and have issued our report thereon dated January 27, 1998. Our audit
was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states, in all material respects, the financial
data required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 27, 1998
S-1
<PAGE> 52
SCHEDULE I
DELTEK SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged
Beginning Amounts To Ending
Balance Written Off Expense Balance
--------- ----------- -------- -------
<S> <C> <C> <C> <C>
December 31, 1995:
Bad-debt reserves......... 256 (503) 590 343
December 31, 1996:
Bad-debt reserves......... 343 (447) 500 396
December 31, 1997:
Bad-debt reserves......... 396 (174) 200 422
</TABLE>
S-2
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
23.1 Consent of Arthur Andersen LLP, Independent Auditors
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 27, 1998, with respect to the consolidated financial
statements of Deltek Systems, Inc. included in this Form 10-K into the
previously filed Registration Statements on Form S-8, File No. 333-30717, and
Form S-8 File No. 333-29989.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATI0N EXTRACTED FROM DELTEK
SYSTEMS, INC. FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S STATEMENT ON FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
AND NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 0<F1> 8,338 10,272
<SECURITIES> 0<F1> 0 14,949
<RECEIVABLES> 0<F1> 6,417 9,247
<ALLOWANCES> 0<F1> (396) (422)
<INVENTORY> 0<F1> 209 95
<CURRENT-ASSETS> 0<F1> 15,595<F4> 37,400<F8>
<PP&E> 0<F1> 4,046 5,474
<DEPRECIATION> 0<F1> (2,168) (2,839)
<TOTAL-ASSETS> 0<F1> 20,202<F5> 42,724<F9>
<CURRENT-LIABILITIES> 0<F1> 8,716 17,972
<BONDS> 0<F1> 0 0
0<F1> 0 0
0<F1> 0 0
<COMMON> 0<F1> 15 17
<OTHER-SE> 0<F1> 11,486 24,735
<TOTAL-LIABILITY-AND-EQUITY> 0<F1> 20,202 42,724
<SALES> 26,349 34,780 48,782
<TOTAL-REVENUES> 26,849 34,780 34,572
<CGS> 0 0 0
<TOTAL-COSTS> 17,176 24,575 32,582
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 10,066<F2> 10,587<F6> 16,946<F10>
<INCOME-TAX> 45 93 5,634
<INCOME-CONTINUING> 10,021 10,205 16,200
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 10,021<F3> 10,494<F7> 11,312<F11>
<EPS-PRIMARY> $0.67 $0.70 $0.68
<EPS-DILUTED> $0.64 $0.67 $0.66
<FN>
<F1>BALANCE SHEET WAS NOT REQUIRED FOR THE YEAR ENDING DEC. 31, 1995
<F2>INCLUDES INTEREST INCOME OF $393.
<F3>AS A SUBCHAPTER "S" CORPORATION PRIOR TO THE PUBLIC OFFERING THE PROFROMA
INCOME TAX PROVISION, PROFORMA NET INCOME AND PROFORMA DILUTED NET INCOME PER
SHARE WAS 3,827, 8,239 AND $0.40 PER SHARE.
<F4>INCLUDES PREPAID EXPENSES OF $1,058.
<F5>INCLUDES COMPUTER SOFTWARE COSTS-NET OF $2,581. ALSO INCLUDES OTHER ASSETS OF
$138.
<F6>INCLUDES INTEREST INCOME OF $382.
<F7>AS A SUBCHAPTER "S" CORPORATION PRIOR TO THE PUBLIC OFFERING. THE PROFROMA
INCOME TAX PROVISION, PROFORMA NET INCOME AND PROFORMA DILUTED NET INCOME PER
SHARE WAS 4,131, 6,456 AND $0.41 PER SHARE.
<F8>INCLUDES PREPAID EXPENSES OF $3,259.
<F9>INCLUDES COMPUTER SOFTWARE COSTS-NET OF $2,579. ALSO INCLUDES OTHER ASSETS OF
$110.
<F10>INCLUDES INTEREST INCOME OF $746.
<F11>AS A SUBCHAPTER "S" CORPORATION PRIOR TO THE PUBLIC OFFERING. THE PROFROMA
INCOME TAX PROVISION, PROFORMA NET INCOME AND PROFORMA DILUTED NET INCOME PER
SHARE WAS 6,516, 10,430 AND $0.61 PER SHARE.
</FN>
</TABLE>
