<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934 for the quarterly period ended June 30,
1999 or
Transition Report Pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934 for the transition period from ______
to ______.
Commission File Number: 0-22001
DELTEK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1252625
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8280 Greensboro Drive, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 734-8606
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at June 30, 1999
Common Stock, $.001 par value 16,907,469
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<TABLE>
<CAPTION>
DELTEK SYSTEMS, INC.
TABLE OF CONTENTS
PAGE NO.
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PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 3
Consolidated Statements of Income for the Three Months 4
Ended June 30, 1999 and June 30, 1998
Consolidated Statements of Income for the Six Months 5
Ended June 30, 1999 and June 30, 1998
Consolidated Statements of Cash Flows for the Six Months 6
Ended June 30, 1999 and June 30, 1998
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 20
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 21
ITEM 2 - Changes in Securities and Use of Proceeds 21
ITEM 3 - Defaults upon Senior Securities 21
ITEM 4 - Submission of Matters to a Vote of Security Holders 21
ITEM 5 - Other Information 22
ITEM 6 - Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DELTEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, 1999 December 31,
------------- ------------
(Unaudited) 1998
----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,601 $ 9,515
Marketable securities 23,816 23,861
Accounts receivable, net of allowance for doubtful
accounts of $975 and $689, respectively 18,545 17,351
Prepaid income taxes 1,782 ---
Deferred income taxes 1,805 1,678
Prepaid expenses and other current assets 1,840 2,159
-------- --------
Total current assets 50,389 54,564
-------- --------
Furniture, equipment, and leasehold improvements, at
cost, net of accumulated depreciation and amortization
of $7,308 and $6,556 respectively 5,222 4,312
Computer software development costs, at cost, net of
accumulated amortization of $2,689 and $2,239,
respectively 3,929 3,025
Purchased intangibles, net of amortization 3,794 4,349
Other assets 93 58
-------- --------
Total assets $ 63,427 $ 66,308
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,154 $ 7,711
Income taxes payable --- ---
Deferred revenue 14,681 17,191
-------- --------
Total current liabilities 21,835 24,902
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.001 par value per share, 2,000,000
shares authorized, none issued or outstanding --- ---
Common stock, $0.001 par value per share, 45,000,000
shares authorized, 16,907,469 and 17,854,151 shares
issued and outstanding at June 30, 1999 and December
31, 1998, respectively 17 18
Paid in capital 13,172 21,568
Retained earnings 28,403 19,990
Less unearned compensation --- (170)
-------- --------
Total shareholders' equity 41,592 41,406
-------- --------
Total liabilities and shareholders' equity $ 63,427 $ 66,308
-------- --------
</TABLE>
See Notes to Consolidated Financial Statements
3
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<TABLE>
<CAPTION>
DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30,
1999 1998
------------------------
(in thousands, except per share data)
<S> <C> <C>
Revenues:
License fees $ 7,539 $ 6,807
Services 15,722 12,129
Third party equipment and software 575 1,013
------- -------
23,836 19,949
------- -------
Operating expenses:
Cost of software 590 575
Cost of services 7,136 5,899
Cost of third-party equipment
and software 522 779
Software development 3,923 3,876
Sales and marketing 2,999 2,624
General and administrative 1,479 861
Purchased in-process research and development --- 2,500
Acquisition costs --- 1,096
Amortization of purchased intangibles 277 171
------- -------
Total operating expenses 16,926 18,381
------- -------
Income from operations 6,910 1,568
Interest income, net 282 250
------- -------
Income before income taxes 7,192 1,818
Provision for income taxes 2,825 1,042
------- -------
Net income $ 4,367 $ 776
======= =======
Basic net income per share $ 0.25 $ 0.04
======= =======
Diluted net income per share $ 0.25 $ 0.04
======= =======
Weighted average shares outstanding 17,387 17,808
======= =======
Weighted average shares outstanding, including dilutive effect of
stock options 17,612 18,323
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
4
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<TABLE>
<CAPTION>
DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended June 30,
1999 1998
----------------------------
(in thousands, except per share data)
<S> <C> <C>
Revenues:
License fees $ 14,200 $ 12,690
Services 31,580 23,222
Third party equipment and software 1,563 1,790
----- -----
47,343 37,702
------ ------
Operating expenses:
Cost of software 1,333 1,099
Cost of services 14,265 11,038
Cost of third-party equipment
and software 1,319 1,382
Software development 8,014 7,210
Sales and marketing 5,670 4,881
General and administrative 2,996 1,927
Purchased in-process research and development --- 2,500
Acquisition costs --- 1,096
Amortization of purchased intangibles 555 178
--- ---
Total operating expenses 34,152 31,311
------ ------
Income from operations 13,191 6,391
Interest income, net 608 500
--- ---
Income before income taxes 13,799 6,891
Provision for income taxes 5,391 3,009
----- -----
Net income $ 8,408 $ 3,882
======== ========
Basic net income per share $ 0.48 $ 0.22
====== ======
Diluted net income per share $ 0.47 $ 0.21
====== ======
Weighted average shares outstanding 17,635 17,770
====== ======
Weighted average shares outstanding, including dilutive effect of
stock options 17,901 18,293
====== ======
</TABLE>
See Notes to Consolidated Financial Statements
5
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<TABLE>
<CAPTION>
DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended June 30,
1999 1998
--------------------------
<S> <C> <C>
Cash flow from operating activities:
Net Income $ 8,408 $ 3,882
Adjustments to reconcile net income provided by
operating activities:
Depreciation and amortization 1,757 1,077
Purchased research and development, noncash charge --- 2,500
Other noncash charges 170 383
Change in accounts receivable, net (1,194) (2,766)
Change in prepaid expenses, inventories and other assets 319 (146)
Change in prepaid income taxes (1,782) (1,916)
Change in accounts payable and accrued expenses (557) 1,396
Changes in deferred income taxes, net (127) (2,723)
Changes in income taxes payable --- 1,951
Change in deferred revenue (2,510) 2,663
-------- --------
Net cash provided by operating activities 4,484 6,301
-------- --------
Cash flows from investing activities:
Net Sales (Purchase) of marketable securities 45 (5,533)
Purchase of property and equipment (1,692) (1,194)
Acquisition of SalesKit Corporation --- (6,054)
Capitalization of computer development costs (1,354) (420)
-------- --------
Net cash (used in) provided by investing activities (3,001) (13,201)
-------- --------
Cash flow from financing activities:
Cash proceeds from issuance of stock for employee
purchase plan 465 285
Cash proceeds from exercise of stock options 27 304
Cash dividends paid to stockholders --- (370)
Common stock purchased and retired (8,889) ----
-------- --------
Net cash (used in) provided by financing activities (8,397) 219
-------- --------
Net increase (decrease) in cash and equivalents (6,914) (6,681)
Cash and equivalents, beginning of period 9,515 10,883
-------- --------
Cash and equivalents, end of period $ 2,601 $ 4,202
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 6,905 $ 5,631
-------- --------
</TABLE>
See Notes to Consolidated Financial Statements
6
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DELTEK SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Deltek designs, develops, and supports enterprise resource planning systems
for project-based businesses. Deltek enterprise-level solutions encompass
financial and project accounting, materials management, human resource and
payroll administration, employee timekeeping and expense reporting, project
and resource management, and information dissemination. Deltek offers a full
range of related services including implementation consulting, training,
software maintenance, and telephone support.
Basis of Presentation
The consolidated financial statements included herein have been prepared by
Deltek Systems, Inc. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate
to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1998, included
in the Company's Annual Report on Form 10-K.
2. HARPER & SHUMAN ACQUISITION
In May 1998, the Company completed the acquisition of Harper & Shuman, Inc.
("H&S") by exchanging 686,000 shares of its common stock for all of the
common stock of H&S. Each share of H&S was exchanged for 5.64 shares of
Deltek common stock. The acquisition constituted a tax-free reorganization
and has been accounted for as a pooling-of-interests under Accounting
Principles Board Opinion No. 16. Accordingly, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows of H&S as though it
had always been a part of Deltek.
3. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share for the three months ended March 31, 1999
and 1998 were calculated in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share". No reconciling items existed
between the net income used for basic and diluted net income per share. The
only reconciling item between the shares used for basic and diluted net
income per share related to outstanding stock options. The warrants issued
to acquire Sales Kit in April 1998 were not dilutive for all periods
presented.
7
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4. COMMON STOCK PURCHASED AND RETURNED
On January 27, 1999, Deltek announced the purchase of up to 1,000,000 shares
of its common stock through open market and private purchases. As of June
30, 1999, Deltek had acquired 1,000,000 shares and retired them in accordance
with state law. Purchases were paid for out of the Company's general
corporate funds.
5. ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company must adopt
this statement no later than January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value. The Company does not expect SFAS No. 133 to materially
impact its financial condition or results of operations.
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions" ("SOP 98-9"), extended the deferral on the
application of certain passages of SOP 97-2 through fiscal years beginning on
or before March 15, 1999. Once effective, SOP 98-9 requires recognition of
revenue using the "residual method" under very specific circumstances. The
Company does not expect this SOP to materially impact its financial condition
or results of operations.
6. COMMITMENTS AND CONTINGENCIES
The Company's continuing operations are involved in various claims incidental
to its business. The Company is contesting these matters and in the opinion
of management, the ultimate resolution of the legal proceedings will not have
a material adverse effect on the financial condition or the future operating
results of the Company.
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
unaudited Financial Statements and Notes included in Item 1 of this Quarterly
Report. The following information should also be read in conjunction with
the audited Financial Statements and Notes, and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1998 as contained in the Company's Annual Report on Form 10-K
(No. 0-22001).
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
Statement of Operations Data (Unaudited) as a percentage of revenues
- --------------------------------------------------------------------
Three months ended Six months ended
------------------ ----------------
6/30/99 6/30/98 6/30/99 6/30/98
<S> <C> <C> <C> <C>
Revenues:
License fees 31.6 % 34.1 % 30.0 % 33.7 %
Services 66.0 60.8 66.7 61.6
Third party equipment and
Software 2.4 5.1 3.3 4.7
--- --- --- ---
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of software 2.5 2.9 2.8 2.9
Cost of services 29.9 29.6 30.1 29.3
Cost of third-party
equipment
And software 2.2 3.9 2.8 3.7
Software development 16.5 19.4 16.9 19.1
Sales and marketing 12.6 13.2 12.0 12.9
General and administrative 6.2 4.3 6.3 5.1
Purchase in-process r&d --- 12.5 --- 6.6
Acquisition costs --- 5.5 --- 2.9
Amortization of
intangibles 1.1 0.8 1.2 0.5
--- --- --- ---
</TABLE>
9
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<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
6/30/99 6/30/98 6/30/99 6/30/98
<S> <C> <C> <C> <C>
Total operating expenses 71.0 92.1 72.1 83.0
---- ---- ---- ----
Income from operations 29.0 7.9 27.9 17.0
Interest income, net 1.2 1.2 1.2 1.3
--- --- --- ---
Income before income taxes 30.2 9.1 29.1 18.3
Provision for income taxes 11.9 5.2 11.4 8.0
---- --- ---- ---
Net income 18.3 % 3.9 % 17.7 % 10.3 %
---- --- ---- ----
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
License Fees. License fees for the three months ended June 30, 1999
increased by 10.7% to $7.5 million from $6.8 million for the same period in
1998. The increase was primarily due to Advantage license fees, which
increased by 90.0% to $2.4 million for the three months ended June 30, 1999
as compared to $1.3 million for the same period in 1998. License fees from
System 1 products were $661,000 for the three months ended June 30, 1999
compared to $748,000 for the three months ended March 31, 1998, a decrease of
11.6%. License fees for Electronic Timesheet were $812,000 for the three
months ended June 30, 1999, compared to $698,000 in the same period in 1998.
Costpoint license fees were $3.6 million for the second quarter ending June
30, 1999 compared with $3.8 million for the second quarter of 1998. License
fees comprised 31.6% of the Company's total revenues for the three months
ended June 30, 1999, compared to 34.1% for the comparable prior year period.
Services. Service revenues for the three months ended June 30, 1999
increased by 29.6% to $15.7 million from $12.1 million for the same period in
1998. The increase in service revenues was principally attributable to
increased consulting services related to new implementations of Costpoint and
Advantage systems. Consulting service revenues increased by 42.6% to $7.6
million for the three months ended June 30, 1999 from $5.3 million for the
same period in 1998. Other service revenues increased by 19.6% to $8.2
million for the three months ended June 30, 1999 from $6.8 million for the
same period in the prior year, principally as a result of the addition of new
customers and the license of additional software products to existing
customers and, to a lesser extent, increases in service rates. Service
revenues comprised 65.9% of the Company's total revenues for the three months
ended June 30, 1999, compared to 60.8% for the same period in 1998.
Third-Party Equipment and Software. Revenue from third-party equipment
and software for the three months ended June 30, 1999 decreased by 43.2% to
$575,000 from $1,013,000 for the three months ended June 30, 1998. These
revenues comprised 2.4% and 5.1% of total revenues for the three months ended
June 30, 1999 and 1998, respectively.
Cost of Software. Cost of software is comprised primarily of royalties
and maintenance payments to third parties, amortization of software
development costs, and the cost of production and distribution of software
and user manuals. Cost of software for the three months ended June 30, 1999
and June 30, 1998 was $0.6 million
10
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Cost of Services. Cost of services is comprised primarily of personnel
costs for implementation and consulting services, user training and ongoing
maintenance and support. Cost of services for the three months ended June
30, 1999 increased by 20.9% to $7.2 million from $5.9 million for the same
period in 1998. The increase in cost of services was primarily due to
increases in personnel costs to support the Costpoint product line. Cost of
services represented 45.4% and 48.6% of service revenues for the three months
ended March 31, 1999 and 1998, respectively. The decrease in cost of
services as a percentage of service revenues primarily reflected increased
utilization of consulting services for the second quarter of 1999. Exclusive
of reimbursed travel expenses, cost of services represented 40.5% and 42.9%
of service revenues for the three months ended June 30, 1999 and 1998,
respectively.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of computer and peripheral equipment and
license fees and royalties for third-party software. Costs of third-party
equipment and software for the three months ended June 30, 1999 decreased to
$0.5 million from $0.8 million in the comparable year period. As a
percentage of related revenues, cost of third-party equipment and software
products represented 90.7% and 76.9% of revenue from third-party equipment
and software for the three months ended June 30, 1999 and 1998,
respectively. The increase in these costs as a percentage of related revenue
was the result of changes in the product mix of equipment and software sold.
Software Development. Software development costs consists primarily of
the personnel costs of analysts and programmers who research, develop,
maintain and enhance the Company's existing software product lines and
develop new products. Software development costs for the three months ended
June 30, 1999 were $3.9 million, an increase of 1.2% from the same period in
1998. This increase was due primarily to hiring additional personnel to work
on Deltek's expanding development projects. Software development costs
represented 16.5% and 19.4% of total revenues for the three months ended June
30, 1999 and 1998, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily of
the costs of the Company's sales and marketing personnel as well as the costs
of advertising, direct mail and other sales and marketing activities. Sales
and marketing expenses for the three months ended June 30, 1999 increased by
14.3% to $3.0 million from $2.6 million for the same period in 1998. This
increase was due primarily to hiring additional personnel, and increased
marketing activities. The Company expects sales and marketing expenses to
continue to increase in the foreseeable future as the Company pursues its
growth strategy. Sales and marketing expenses represented 12.6% of the
Company's total revenues for the three months ended June 30, 1999, compared
to 13.2% for the same period in 1998.
General and Administrative. General and administrative expenses
consist primarily of the personnel costs of the Company's management,
administrative and finance staffs as well as the costs of insurance programs,
bad debt expenses, professional fees and other infrastructure costs. General
and administrative expenses for the three months ended June 30, 1999
increased by 71.8% to $1.5 million from $0.9 million for the same period in
1998. This increase is attributable to an increase in the bad debt reserve
and general insurance, tax and accounting
11
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accruals. General and administrative expenses represented 6.2% of the Company's
total revenue for the three months ended June 30, 1999, compared to 4.3% for the
same period in 1998.
Acquisition costs. A charge of $1.1 million was recorded for the three
months ended June 30, 1998 for the transaction costs related to the
acquisition of Harper and Shuman, Inc. The acquisition was accounted for as
a pooling of interests.
Purchased In-process Research and Development. A charge of $2.5
million was recorded during the three months ended June 30, 1998, for the
appraised valuation of the purchased in-process research and development
costs acquired from SalesKit Software Corporation.
Amortization of intangibles. The charge of $277,000 for the three
months ended June 30, 1999, as compared to the $171,000 charge for the three
months ended June 30, 1998, relates primarily to the amortization of goodwill
and purchased intangibles of the SalesKit Software Corporation, which was
purchased in April 1998, and to a lesser extent to the intangibles acquired
in the September 1996 acquisition of Allegro.
Interest Income. Interest income results primarily from investments.
Interest income for the three months ended June 30, 1999 increased by 12.8%
to $282,000 from $250,000 for the same period in 1998. The change is due to
increased cash from operations.
Income Tax Provision. The Company's effective tax rate for the three
months ended June 30, 1999 was 39.3%. The Company's effective tax rate for
the three months ended June 30, 1998 was 57.3%. The tax rate for the quarter
ended June 30, 1998 was impacted by the nondeductible nature of a majority of
the transaction costs for the acquisition of Harper and Shuman, Inc. The
provision for income taxes for the three months ended June 30, 1999 is based
upon the Company's estimate of the effective tax rate for fiscal 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
License Fees. License fees for the six months ended June 30, 1999
increased by 11.9% to $14.2 million from $12.7 million for the same period in
1998. The increase was primarily due to Advantage license fees, which
increased by 75.7% to $3.8 million for the six months ended June 30, 1999 as
compared to $2.2 million for the same period in 1998. License fees from
System 1 products were $1.5 million for the six months ended June 30, 1999
compared to $1.3 million for the six months ended June 30, 1998, an increase
of 16.8%. License fees for Electronic Timesheet were $1.6 million for the
six months ended June 30, 1999, compared to $1.5 million in the same period
in 1998. Costpoint license fees were $7.1 million for the six months ending
June 30, 1999 $7.3 million for the same period in 1998. License fees
comprised 30.0% of the Company's total revenues for the six months ended June
30, 1999, compared to 33.7% for the comparable prior year period.
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<PAGE> 13
Services. Service revenues for the six months ended June 30, 1999
increased by 36.0% to $31.6 million from $23.2 million for the same period in
1998. The increase in service revenues was principally attributable to increased
consulting services related to new implementations of Costpoint systems.
Consulting service revenues increased by 51.0% to $15.3 million for the six
months ended June 30, 1999 from $10.1 million for the same period in 1998. Other
service revenues increased by 22.7% to $16.1 million for the six months ended
June 30, 1999 from $13.1 million for the same period in the prior year,
principally as a result of the addition of new customers and the license of
additional software products to existing customers and, to a lesser extent,
increases in service rates. Service revenues comprised 66.7% of the Company's
total revenues for the six months ended June 30, 1999, compared to 60.8% for the
same period in 1998.
Third-Party Equipment and Software. Revenue from third-party equipment
and software for the six months ended June 30, 1999 decreased by 12.7% to
$1.6 million from $1.8 million for the six months ended June 30, 1998.
These revenues comprised 3.3% and 4.7% of total revenues for the six months
ended June 30, 1999 and 1998, respectively.
Cost of Software. Cost of software is comprised primarily of royalties
and maintenance payments to third parties, amortization of software
development costs, and the cost of production and distribution of software
and user manuals. Cost of software for the six months ended June 30, 1999
was $1.3 million, a slight increase from the $1.1 million for the same period
in 1998. This change was due to an increase in licensing activity.
Cost of Services. Cost of services is comprised primarily of personnel
costs for implementation and consulting services, user training and ongoing
maintenance and support. Cost of services for the six months ended June 30,
1999 increased by 29.2% to $14.3 million from $11.0 million for the same
period in 1998. The increase in cost of services was primarily due to
increases in personnel costs to support the Costpoint product line. Cost of
services represented 45.2% and 47.5% of service revenues for the six months
ended June 30, 1999 and 1998, respectively. The decrease in cost of services
as a percentage of service revenues primarily reflected increased utilization
of consulting services for the first six months of 1999. Exclusive of
reimbursed travel expenses, cost of services represented 40.2% and 42.2% of
service revenues for the six months ended June 30, 1999 and 1998,
respectively.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of computer and peripheral equipment and
license fees and royalties for third-party software. Costs of third-party
equipment and software for the six months ended June 30, 1999 decreased
slightly to $1.3 million from $1.4 million in the comparable year period. As
a percentage of related revenues, cost of third-party equipment and software
products represented 84.4% and 77.2% of revenue from third-party equipment
and software for the six months ended June 30, 1999 and 1998, respectively.
The increase in these costs as a percentage of related revenue was the result
of changes in the product mix of equipment and software sold.
Software Development. Software development costs consists primarily of
the personnel costs of analysts and programmers who research, develop,
maintain and enhance the Company's
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<PAGE> 14
existing software product lines and develop new products. Software development
costs for the six months ended June 30, 1999 increased by 11.2% to $8.0 million
from $7.2 million for the same period in 1998. This increase was due primarily
to hiring additional personnel. Software development costs represented 16.9% and
19.1% of total revenues for the six months ended June 30, 1999 and 1998,
respectively.
Sales and Marketing. Sales and marketing expenses consist primarily of
the costs of the Company's sales and marketing personnel as well as the costs
of advertising, direct mail and other sales and marketing activities. Sales
and marketing expenses for the six months ended June 30, 1999 increased by
16.2% to $5.7 million from $4.9 million for the same period in 1998. This
increase was due primarily to hiring additional personnel, and increased
marketing activities. The Company expects sales and marketing expenses to
continue to increase in the foreseeable future as the Company pursues its
growth strategy. Sales and marketing expenses represented 12.0% of the
Company's total revenues for the six months ended June 30, 1999, compared to
12.9% for the same period in 1998.
General and Administrative. General and administrative expenses
consist primarily of the personnel costs of the Company's management,
administrative and finance staffs as well as the costs of insurance programs,
bad debt expenses, professional fees and other infrastructure costs. General
and administrative expenses for the six months ended June 30, 1999 increased
by 55.5% to $3.0 million from $1.9 million for the same period in 1998. This
increase is attributable to an increase in the bad debt reserve and general
insurance, tax and accounting accruals. General and administrative expenses
represented 6.3% of the Company's total revenue for the six months ended June
30, 1999, compared to 5.1% for the same period in 1998.
Acquisition costs. A charge of $1.1 million was recorded for the six
months ended June 30, 1998 for the transaction costs related to the
acquisition of Harper and Shuman, Inc. The acquisition was accounted for as
a pooling of interests.
Purchased In-process Research and Development. A charge of $2.5
million was recorded during the six months ended June 30, 1998, for the
appraised valuation of the purchased in-process research and development
costs acquired from SalesKit Software Corporation.
Amortization of Intangibles. Amortization charges were $555,000 and
$178,000 for the six months ended June 30, 1999 and 1998, respectively.
These charges relate primarily to the amortization of goodwill and purchased
intangibles of the SalesKit Software Corporation, which was purchased in
April 1998, and to a lesser extent to the intangibles acquired in the
September 1996 acquisition of Allegro.
Interest Income. Interest income results from investments, and to a
lesser extent, from installment financing. Interest income for the six
months ended June 30, 1999 increased by 21.6% to $608,000 from $500,000 for
the same period in 1998. The change is due to increased cash from operations.
14
<PAGE> 15
Income Tax Provision. The Company's effective tax rate for the six
months ended June 30, 1999 was 39.0%. The Company's effective tax rate for the
six months ended June 30, 1998 was 43.7%. The tax rate for the six months ended
June 30, 1998 was impacted by the nondeductible nature of a majority of the
transaction costs for the acquisition of Harper and Shuman, Inc. The provision
for income taxes for the six months ended June 30, 1999 is based upon the
Company's estimate of the effective tax rate for fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively from cash
flow from its operations. As of June 30, 1999, the Company had cash and cash
equivalents of $8.8 million, marketable securities of $17.5 million and
working capital of $28.6 million.
For the six months ended June 30, 1999, the Company's net cash provided
by operating activities was $4.5 million. Accounts receivable, net of the
allowance for doubtful accounts, were $18.5 million as of June 30, 1999,
compared to $17.4 million as of December 31, 1998. Accounts receivable days
sales outstanding was 71 days as of June 30, 1999 compared to 58 days as of
December 31, 1998. Exclusive of unbilled receivables, which were recorded as
deferred revenue, day's sales outstanding were 58 days as of June 30, 1999,
compared to 41 days as of December 31, 1998. While the Company believes that
its allowance for doubtful accounts as of June 30, 1999, 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 $3.0 million for the six months ended
June 30, 1999. This amount included $1.7 million in purchased property and
equipment and $1.3 million of capitalized software production costs.
Financing activities for the six months ended June 30, 1999 utilized
$8.4 million. This consisted primarily of $8,889,000 for the repurchase of
Company common stock, net of $27,000 in proceeds from the exercise of stock
options and from the issuance of stock under the Company's employee stock
purchase plan.
The Company has a $1.0 million bank line of credit, which is secured by
substantially all of the Company's assets and bear interest at the lender's
prime rate. To date, no amounts have been drawn under the line of credit.
The Company believes that its current liquidity, together with
anticipated cash flow from operations, will satisfy the Company's anticipated
working capital and capital expenditure requirements through the foreseeable
future. However, depending on its rate of growth, profitability and other
factors, some of which are not in the Company's control, the Company believes
additional financing may be required to meet its working capital requirements
or capital expenditure needs, including acquisitions, in the future. There
can be no assurance that additional financing will be available when required
or, if available, that any such financing will be on terms satisfactory to
the Company.
15
<PAGE> 16
YEAR 2000
The Year 2000 Challenge. Many existing information technology ("IT")
systems and applications, and other non-IT control devices, use only two
digits to identify a year in the date field, without considering the impact
of the upcoming change in the century. As a result, such systems,
applications and devices could fail or create erroneous results unless they
are modified in some fashion to distinguish 21st century dates from 20th
century dates (i.e., to be year 2000 compliant). The year 2000 challenge
creates potential risks for the Company from unforeseen problems in the
software products that the Company licenses to others and in the IT and
non-IT systems that the Company uses in its own business operations. The
Company may also be exposed to risks if its mission critical vendors fail to
address their own year 2000 issues.
The Company's Status of Readiness. The Company began addressing the
year 2000 challenge in 1993 when it started developing all of its new
products to be year 2000 compliant. Year 2000 compliant versions of
Costpoint, Advantage, Allegro and Electronic Timesheet have been commercially
available for some time, and the year 2000 compliant version of System1 was
released in September 1998. Because the Company's compliant products operate
on a variety of network operating systems and support several relational
databases, the Company has been conducting additional testing of its
compliant products with different combinations of compliant operating systems
and databases. Most testing is complete, and the Company expects to complete
the remaining testing by the end of the third quarter of 1999. Any year 2000
related issues disclosed by the testing are being corrected in all year 2000
compliant product versions pursuant to the Company's standard process for
developing and disseminating program fixes.
The Company's older-generation CFMS products include CFMS/RD, for which
a year 2000 compliant version is available, and CFMS and Micro/CFMS, for
which no year 2000 compliant versions are available. Licensees that are
using a non-compliant version or product and are participating in one of the
Company's comprehensive annual or quarterly support plans have been offered
an upgrade or conversion to a year 2000 compliant version or product for no
additional license fee. Licensees that are using a non-compliant version or
product but are not participating in one of the Company's comprehensive
annual or quarterly support plans have the option of upgrading or converting
to a year 2000 compliant version or product for an additional fee. The
Company has contacted all CFMS licensees. With one exception, these
licensees have upgraded, or are scheduled to upgrade, to year 2000 compliant
software. The Company has been in regular contact with those licensees that
have not yet upgraded and has encouraged them to complete their upgrades
before the end of the third quarter of 1999. Although the Company suspects
that most, if not all, Micro/CFMS licensees that have not responded to the
Company's previous year 2000 communications are no longer using Micro/CFMS,
the Company intends to make another effort to contact them during the third
quarter in case that they are still using a non-compliant product.
During 1998, the Company formed a year 2000 project team and developed
a project plan with goals and target dates to help assure that the Company's
internal IT and non-IT systems and its mission critical vendors are prepared
for the year 2000. The Company's internal IT systems are primarily comprised
of the same commercial application software products licensed by the
16
<PAGE> 17
Company to its customers, which are year 2000 compliant. However, the Company
also utilizes third party vendor IT and non-IT systems, including application
and operating system software, network equipment, telecommunication products,
electronic key entry systems, elevators and other third party products, which
may or may not be year 2000 compliant. The Company has largely completed its
assessment of all mission critical third party vendor application software
systems. Final assessment, testing and remediation of those systems is scheduled
to be completed by the end of the third quarter of 1999. With the exception of
its smallest office, the Company has completed assessment and testing of all
third party computer and network hardware and operating (IT) systems. Assessment
and testing of these systems in the remaining office is scheduled to be
completed by the end of the third quarter of 1999. Most non-year 2000 compliant
IT system components have been replaced or discontinued. All remaining non-year
2000 compliant IT system components are scheduled to be replaced or discontinued
by the end of the third quarter of 1999. The Company has completed its
inventory, assessment and most of the testing of all non-IT systems with
embedded chips. Final testing of these systems and any required remediation is
scheduled to be complete by the end of the third quarter of 1999. Finally, the
Company has identified external organizations that are providing mission
critical services on which the Company relies. The Company has sent letters to
these organizations to determine their year 2000 plans and readiness. The
Company is tracking responses from these organizations in order to verify their
year 2000 readiness and, if needed, to replace them by the end of the third
quarter of 1999 with vendors that are year 2000 ready.
Costs to Address Year 2000 Issues. The costs incurred to date and
estimated costs for replacing and upgrading the Company's non-compliant
internal IT and non-IT systems and for engaging outside consultants to assist
the Company in addressing year 2000 issues have not been and are not
anticipated to be material. The Company does not separately track the
internal costs associated with its year 2000 readiness efforts, including
developing and testing the Company's year 2000 compliant products, contacting
licensees currently using a non-compliant version or product, assessing and
testing the Company's internal IT and non-IT systems and verifying the year
2000 readiness of its mission critical vendors. These costs are principally
the related payroll costs for the Company's product development, customer
support and internal IT groups. The Company's current estimate is that the
costs of addressing its year 2000 issues will not have a material adverse
effect on the Company's business, operating results or financial condition.
Risks Associated with the Company's Year 2000 Issues. Management
believes that the growth in demand for the Company's products over the past
several years was due in part to its customers' needs to update their IT
systems in preparation for the year 2000. Most project oriented companies
that needed to convert to year 2000 compliant systems (and thus were
potential customers for the Company's products) have purchased year 2000
compliant systems. Accordingly, the need to update IT systems to achieve
year 2000 readiness no longer will generate any significant demand for the
Company's products. Management believes that the future growth in demand for
the Company's products will depend in part upon the Company's ability to
offset the loss of any growth attributable to its customers' needs to update
their IT systems in preparation for the year 2000. There can be no assurance
that the growth in demand for the Company's products experienced over the
past several years can be sustained. If such growth is not sustainable, the
Company's business, operating results and financial condition
17
<PAGE> 18
could be materially adversely impacted. Moreover, as the year 2000 approaches,
the Company's current or future customers may need to divert technology
expenditures that were reserved for the purchase of enterprise software products
such as the Company sells to address year 2000 compliance problems. Accordingly,
the Company's business, operating results and financial condition could be
materially adversely impacted if purchases of the Company's products are thereby
delayed or lost.
The Company has made or intends to make available to its customers year
2000 compliant versions of its products. There can, however, be no assurance
that its customers will request and install the compliant versions or operate
them only with year 2000 compliant operating systems, relational databases
and other IT systems. Moreover, although the Company's year 2000 compliant
products have or will have undergone the Company's normal quality assurance
procedures and some additional year 2000 testing, there can be no assurance
that these products do not contain undetected errors or defects associated
with the year 2000 date functions. Because IT systems incorporate hardware
and software products from different vendors, it may be difficult to
determine which product has caused a year 2000 problem, and thus the Company
may be subjected to year 2000-related lawsuits even if the Company's products
are year 2000 compliant. Any system malfunctions due to the onset of
calendar year 2000 and any disputes with customers relating to year 2000
compliance could have a material adverse effect on the Company's business,
operating results and financial condition. Finally, despite the Company's
efforts to address the year 2000 impact on its internal IT and non-IT systems
and on the operations of its mission critical vendors, the Company may not be
able to fully identify such impact or to resolve it without disruption of the
Company's business and without incurring significant expense. Accordingly,
if the year 2000 issues are not adequately addressed by the Company and third
parties, there can be no assurance that the Company's business, operating
results and financial condition will not be materially adversely affected.
The Company's Contingency Plans. The Company's most reasonably likely
worst case year 2000 scenarios include (i) failure of electric power and
telephone services provided by third parties and (ii) failure of hardware and
third party vendor software used in the Company's internal IT system. Any
significant interruption in the supply of electric power or telephone service
to the Company's facilities as a result of the failure of utilities or
telecommunications companies to adequately address year 2000 issues would
disrupt the Company's ability to conduct its business, including providing
telephone support to its customers. The Company is developing contingency
plans for implementation in the event that electric power or telephone
service to one or more of the Company's facilities is interrupted. Such
plans will involve relocating portions of the Company's operations to other
facilities or locations where power and telephone service are available and
taking other similar actions to work around any interruption. Depending upon
the nature of the interruption and the geographic areas affected, the Company
may be unable to execute some or even all of its contingency plans. The
Company also is developing contingency plans to deal with any internal IT
hardware and software system failures, which also would disrupt the Company's
ability to conduct its business. Such plans will include, among other
things, manual "work arounds." Finally, the Company also is developing plans
to coordinate the efforts of its personnel and resources in addressing any
unforeseen year 2000 problems as they arise. The Company expects to have its
contingency plans in place by the end
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<PAGE> 19
of the third quarter of 1999. There can be no assurance that any contingency
plans will fully mitigate the impact of any year 2000 problems that the Company
may experience.
Forward-Looking Statements. The foregoing year 2000 discussion
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements, including without
limitation, anticipated costs and the dates by which the Company expects to
complete certain actions, are based on management's best current estimates,
which were derived utilizing numerous assumptions about future events,
including the continued availability of certain resources, representations
received from third parties and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those anticipated. Specific factors that might cause
such material differences include, but are not limited to, the ability to
identify and remediate all relevant IT and non-IT systems, results of year
2000 testing, adequate resolution of year 2000 issues by governmental
agencies, businesses and other third parties who are service providers,
suppliers, borrowers or customers of the Company, unanticipated system costs,
the adequacy of and ability to implement contingency plans and similar
uncertainties. The "forward-looking statements" made in the foregoing year
2000 discussion speak only as of the date on which such statements are made,
and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Quarterly Variations. Our future operating results may vary from
quarter to quarter depending upon a number of factors including the following:
- the demand for our products;
- the size and timing of specific sales;
- the delay or deferral of customer implementations;
- the level of product and price competition that we encounter;
- the length of our sales cycles;
- our ability to attract and retain personnel;
- the timing of new hires;
- the timing of our new product introductions and product
enhancements and of our competitors;
- the mix of products and services we sell;
- the activities of and acquisitions by our competitors;
- the timing of our national user conference;
- general economic conditions;
- our ability to develop and market new software products and
enhancements; and
- our ability to control costs.
Our operating results, particularly our quarterly results could be
significantly affected by the loss or delay of individual orders. Our
revenues from license fees are difficult to predict because of
19
<PAGE> 20
the length and variability of our sales cycles (typically 3 to 18 months). Our
operating expenses, on the other hand, are based on anticipated revenue trends.
A high percentage of our operating 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 we incur
expenses before obtaining anticipated revenues, our operating results could be
materially adversely affected.
For certain of our software products, we typically grant customers a
right of return for a full or partial refund of the license fee during the
refund period. Refund periods generally range from 60 to 90 days from the
date of the initial software delivery. Sometimes we have provided and may in
the future provide longer refund periods for larger, more complex Costpoint
installations. We recognize Costpoint and Allegro license fees upon the
expiration of the applicable refund periods. The license fees are recorded
as deferred revenues until recognized as revenue. Deferred revenues at the
end of a quarter do not necessarily reflect revenues that the Company will
recognize in a succeeding quarter. This is because customers sometimes have
refund rights and the length of refund periods vary from customer to
customer. We generally recognize license fees from Advantage, System1 and
Electronic Timesheet products upon their delivery.
Our operating results for any quarter are subject to significant
variation, and we believe that period-to-period comparisons of our operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance. Our future quarterly operating results
from time to time may not meet the expectations of market analysts or
investors. In that event, the price of our common stock would likely be
materially adversely affected.
Other Factors. For a discussion of additional factors that may affect
future results, see "Factors That May Affect Future Results and Market Price
of Stock" in the Company's Annual Report on Form 10-K (File No. 000-22001)
which discussion is incorporated herein by reference.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No changes since year end.
20
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding which would have a
material impact on the Company, its operations or financial results.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a)-(b)-(c)-(d) Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1999, the Company held its Annual Meeting of Shareholders.
At the meeting the following actions were taken.
(a) Two Class II Directors, Donald deLaski and Darrell J. Oyer, were
elected to serve for three years or until their successors have been
duly elected and shall qualify. The votes cast and withheld for each
such director were as follows:
Donald deLaski FOR 16,972,960 WITHHELD 125,161
Darrell J. Oyer FOR 16,962,274 WITHHELD 135,847
(b) The amendment of the 1996 Stock Option Plan to increase the maximum
number of shares issuable from 900,000 shares to 2,100,000 shares was
approved with the following votes:
FOR 11,076,869 AGAINST 2,298,781 ABSTAIN 3,506 NON-VOTES 3,506
(c) The appointment of Arthur Andersen LLP as the Company's independent
auditors for its current fiscal year was ratified with the following
vote:
FOR 17,077,900 AGAINST 16,378 ABSTAIN 3,848
ITEM 5 - OTHER INFORMATION
In March 1999 the Company's Board of Directors approved a stock
repurchase program for up to one million shares of its common stock. As of
June 30, 1999, the Company has repurchased one million shares under this
program.
21
<PAGE> 22
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 13, 1999
DELTEK SYSTEMS, INC.
By: /s/ Bryan Fleming
--------------------------------------------
Bryan Fleming
Controller and Treasurer
(Principal Financial and Accounting Officer)
23
<PAGE> 24
DELTEK SYSTEMS, INC.
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
27 Financial Data Schedule
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS OTHER
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1999 JUN-30-1998 JUN-30-1999 JUN-30-1998
<CASH> 0 0 0 2,601 9,515
<SECURITIES> 0 0 0 23,816 23,861
<RECEIVABLES> 0 0 0 19,520 18,040
<ALLOWANCES> 0 0 0 (975) (689)
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 0 0 0 50,389 54,564
<PP&E> 0 0 0 12,530 10,868
<DEPRECIATION> 0 0 0 (7,308) (6,556)
<TOTAL-ASSETS> 0 0 0 63,427 66,308
<CURRENT-LIABILITIES> 0 0 0 21,835 24,802
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 0 0 17 18
<OTHER-SE> 0 0 0 41,575 41,388
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0 63,427 66,308
<SALES> 19,949 23,836 37,702 47,343 0
<TOTAL-REVENUES> 19,949 23,836 37,702 47,343 0
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 18,381 16,926 31,311 34,152 0
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0 0
<INCOME-PRETAX> 1,818<F1> 7,192<F2> 6,891<F3> 13,799<F4> 0
<INCOME-TAX> 0 0 0 0 0
<INCOME-CONTINUING> 1,568 6,910 6,391 13,191 0
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 776 4,367 3,882 8,408 0
<EPS-BASIC> 0.04 0.25 0.22 0.48 0
<EPS-DILUTED> 0 0 0 0 0
<FN>
<F1>INCLUDES INTEREST INCOME OF $250
<F2>INCLUDES INTEREST INCOME $282
<F3>INCLUDES INTEREST INCOME OF $500
<F4>INCLUDES INTEREST INCOME OF $608
</FN>
</TABLE>
