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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number 0-22001
Deltek Systems, Inc.
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(Exact name of registrant as specified in its charter)
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)
Registrant's telephone number, including area code (703) 734-8606
Securities registered pursuant to Section 12(b) of the Act:
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 February 19, 1999, was $167,810,843, based on a total of
9,454,132 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 $17.75 per share.
The Company had 17,864,551 shares of Common Stock, $.001 par value,
outstanding as of February 19, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information to be contained in the registrant's proxy statement
for the 1999 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 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation 16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 35
Item 8 Financial Statements and Supplementary Data 35
Item 9. Changes in Disagreements on Accounting and
Financial Disclosure 35
Part III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners
And Management 36
Item 13. Certain Relationships and Related Transactions 36
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
On Form 8-K 36
FINANCIAL STATEMENTS F-1
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report includes
certain "forward-looking statements." The words "anticipates," "believes,"
"estimates," "expects," "plans," "intends" and other similar expressions are
intended to identify these forward-looking statements, but are not the exclusive
means of identifying them. Readers are cautioned not to place undue reliance on
these forward-looking statements as these forward-looking statements reflect the
current view of the Company or its management and are subject to certain risks,
uncertainties and contingencies which could cause the Company's actual results,
performance or achievements to differ materially from those expressed in or
implied by these statements. These risks, uncertainties and contingencies
include, but are not limited to, the factors discussed under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors that May Affect Future Results and
Market Price" and elsewhere in this Annual Report. Deltek 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.
PART I
ITEM 1. BUSINESS
Deltek Systems, Inc. ("Deltek" or the "Company") is a leading provider of
enterprise software products that enable project-oriented organizations to more
effectively manage, operate and grow their operations. The Company's software
products address the needs specific to such organizations through a wide range
of functionality, such as financial and project accounting, human resources
management and administration, materials management and project reporting. The
Company also provides a full range of services, including implementation and
consulting, training and ongoing support. In the year ended December 31, 1998,
33.9% of the Company's total revenues was derived from software license fees and
61.2% of its total revenues was generated from services. Since its inception,
the Company has licensed its products to over 5,000 project-oriented
organizations across a spectrum of industries, including architecture and
engineering, environmental, systems integration, research and development,
contract services and construction, as well as make-to-order manufacturers and
not-for-profit organizations. Many of these project-oriented businesses provide
products and services under federal government contracts. The Company's
customers include Bell Atlantic Federal Integrated Systems, Inc., Computer
Sciences Corporation, Lockheed Martin Corp., Northrup Grumman Corporation and
Raytheon Service Co., Inc.
From 1994 through 1998, total revenues increased from $28.8 million to
$83.1 million, representing compound annual growth of 30.3%, and income from
operations, exclusive of non-recurring charges, increased from $8.4 million to
$22.5 million, representing compound annual growth of 27.9%. For the year ended
December 31, 1998, total revenues increased 44.1% from the
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comparable prior year period to $83.1 million, and income from operations,
excluding non-recurring charges, increased 30.9% from the comparable prior year
period to $22.5 million.
The Company completed two transactions in 1998 to broaden its product
line and extend its technical capabilities. In April 1998, the Company purchased
certain assets of SalesKit in order to support its initiative to develop
customer and sales opportunity management software for project-oriented
businesses. In May 1998, Deltek acquired Harper and Shuman, Inc. ("Harper and
Shuman"), the leading provider of project accounting software to architecture
and engineering firms.
INDUSTRY BACKGROUND
Increasing competition has created pressure for organizations to better
utilize information technologies to manage their businesses, improve efficiency,
reduce costs and provide employees and management with more timely and pertinent
information. Information technology is now viewed as a strategic and tactical
tool, as well as a means of facilitating information processing and reducing
costs. As a result, many organizations are implementing enterprise-wide business
systems to automate their operations, including finance, accounting,
manufacturing, human resources, reporting and customer management functions.
Most enterprise-wide business systems are general purpose in design and,
without significant customization, do not address many of the unique
requirements of businesses engaged primarily in providing products and services
under project-specific contracts and engagements. Project-oriented businesses,
including architecture and engineering, environmental, systems integration,
research and development, contract services, and construction firms,
make-to-order manufacturers and not-for-profit organizations, have many
project-specific requirements. Such requirements include the need to track costs
and profitability on a project-by-project basis, provide timely project
information to managers and customers and submit accurate and detailed bills,
often in compliance with complex industry-specific and regulatory requirements.
Many project-oriented businesses provide products and services under government
contracts. 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 application software systems is
expanding as a result of a number of economic trends. Service organizations
traditionally have utilized project accounting more than manufacturing firms due
to the need to customize their services for each client and to properly allocate
the associated revenues and 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 towards
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.
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As the number and type of project-oriented businesses increase, such
businesses are demanding increasingly sophisticated tools to address their core
information and accounting needs, including project accounting, employee time
collection, project budgeting, project reporting and customer management. At the
same time, these organizations are recognizing that, because most aspects of
their businesses 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 to address
the special needs of project-oriented businesses. Like other businesses,
project-oriented organizations are also demanding solutions that allow them to
combine their business software applications into a single integrated,
enterprise-wide system.
THE DELTEK SOLUTION
Deltek is a leading provider of enterprise software products that enable
project-oriented organizations to more effectively manage, operate and grow
their operations. The Company's software products address the needs specific to
such organizations through a wide range of functionality, such as financial and
project accounting, human resources management and administration, materials
management and project reporting. The Company also provides a full range of
services, including implementation and consulting, training and ongoing support.
Since its inception, Deltek has focused exclusively on developing and
providing products and services designed to meet the needs of project-oriented
organizations. The Company believes that this focus is a competitive advantage
in serving project-oriented markets relative to companies that offer more
general-purpose enterprise software. Deltek believes that its solutions
generally are better-suited, require shorter implementation times and cost less
to install and maintain than general-purpose enterprise solutions. Deltek's
enterprise-wide products consist of Costpoint, an advanced client/server-based
business software system designed for all types of project-oriented
organizations; Advantage, an integrated, project-focused accounting system
designed for professional services firms; System 1, a character-based accounting
system designed primarily for organizations providing products or services under
contracts with the federal government; and CFMS, a family of older-generation
project-based accounting systems used primarily by architecture and engineering
firms. Deltek's stand-alone application software product, which also can be
integrated with the Company's enterprise-wide systems, Electronic Timesheet, is
an advanced employee timekeeping system.
Deltek also provides implementation and consulting, training and ongoing
support services as an integral part of its solution. In contrast to
general-purpose software vendors that often rely on third-party providers,
Deltek has a staff of over 130 experienced system consultants who directly
assist Deltek's customers with system implementation. Beyond implementation, the
Company provides training either on site or at one of its three training
centers. The Company also provides to its customers ongoing product maintenance
and technical support, which is a significant source of recurring revenues.
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STRATEGY
The Company's objective is to strengthen its position as a leading
provider of enterprise software products to project-oriented organizations by
pursuing a strategy that includes the following elements:
Maintain Focus on Project-Oriented Markets. Since its inception, the
Company has focused on addressing the unique business needs of project-oriented
organizations. The Company believes that its exclusive focus on developing
applications for project-oriented organizations is a competitive advantage in
serving these markets relative to companies that offer more general-purpose
enterprise software. Deltek believes that its solutions generally are
better-suited for project-oriented businesses, require shorter implementation
times and cost less to install and maintain than general-purpose enterprise
solutions. Deltek intends to capitalize on the expertise that it has developed
by continuing to market to project-oriented businesses, including those
operating under federal government contracts, architecture and engineering firms
and other professional and technical organizations. The Company plans to develop
specific expertise in certain vertical markets, such as construction and
make-to-order manufacturing, that it believes offer particular opportunities for
application of its project-oriented product line.
Expand Comprehensive, Technologically Advanced Product Line. The Company
has developed a family of complementary products with broad-based functionality,
usable in a variety of technology environments, that it offers to
project-oriented businesses. Deltek intends to continue to expand the breadth of
its product offering and to enhance the features and functionality of its
applications. The Company's current technology initiatives include development
of a Microsoft Windows version of System 1, development of a customer management
and sales force automation application, and development of a new n-tier, "thin"
client architecture, which will allow the Company's products to be used over an
Internet connection.
Provide Superior Services. An integral part of Deltek's solution is to
provide superior services, including implementation and consulting, training and
ongoing support, directly to its customers. Services represented 61.2% of the
Company's total revenues in the year ended December 31, 1998. The Company
believes that its reputation for providing high quality services and its
approach of working directly with customers are significant competitive
advantages that result in a high level of customer loyalty.
Leverage Large Installed Customer Base. Deltek's large installed customer
base enables the Company to generate revenues from ongoing services and product
enhancements provided to these customers. The Company's strategy is to (i)
maintain and strengthen relationships with its existing customers by providing
ongoing support services; and (ii) derive additional revenues by migrating
clients to more advanced products within the Company's product line, licensing
add-on application software products and offering its customers additional
consulting and training services. An important element of the Company's strategy
is to license its Costpoint, Advantage and new System
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1 for Windows applications to existing System 1 and CFMS users as these
customers migrate to client/server environments or otherwise update their
technology systems.
Expand Sales and Marketing Efforts. With an established product line and
a substantial market opportunity, the Company intends to continue the recent
expansion of its sales and marketing activities. Between December 31, 1996 and
December 31, 1998, the Company increased the number of its sales and marketing
professionals, all of whom are in-house, from 23 to 60. The Company's sales and
marketing growth plans include continuing to add to its in-house capabilities,
utilizing resellers for certain of its products and extending its sales and
marketing efforts to international markets.
PRODUCTS
Deltek's enterprise-wide products consist of Costpoint, Advantage, System
1 and CFMS, and its application software product is Electronic Timesheet.
Costpoint. Costpoint is an advanced client/server-based, enterprise-wide
business software system, consisting of over 25 integrated module applications,
including financial accounting, project accounting, human resource and payroll
administration, materials management and project reporting. 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 with federal government contracts.
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, on-line
analytical processing ("OLAP") tools and standard reports, Costpoint provides
managers with timely and pertinent information.
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 Systems
Corporation ("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. As a result of this architecture, Costpoint is scaleable
and can be utilized in organizations with 3 to 300 concurrent users.
The Company began development of Costpoint in 1992 and commercially
released the product in June 1995. Through December 31, 1998, the Company had
licensed approximately 580 Costpoint systems. License fees for Costpoint systems
vary depending on the number of users and sites and the number and types of
modules licensed.
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The following table lists the principal Costpoint application modules:
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MODULE APPLICATIONS
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Financial Accounting General Ledger Travel
Accounts Payable Fixed Assets
Accounts Receivable Workflow
Consolidations Multicurrency
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Project Accounting Project Setup Project Billing
Project Reporting Project Cost and Revenue Processing
Project Budgeting Project Management Interfaces
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Human Resources and Labor Benefits
Administration Payroll Labor/Payroll Interfaces
Human Resources
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Materials Management Product Definition Sales Order Entry
Purchasing and Receiving Production Control
Procurement Planning Routings
Inventory Engineering Change Notice*
Bills of Material Material Requirements Planning*
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Reporting Tools CP Reports**
CP Scope**
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* Under development.
** Software licensed from third parties and sublicensed to Deltek customers.
Advantage. Advantage, an integrated, project-focused accounting system
for professional services firms, was designed and developed by Harper and
Shuman, which was acquired by the Company in May 1998. The Advantage product
currently includes comprehensive modules for financial accounting, project
control, accounts payable, billing, payroll, and time and expense keeping.
Advantage employs 32-bit technology, provides a superior user interface
utilizing current Microsoft Windows platforms, and utilizes either Microsoft
SQLServer or Access database platforms. Advantage can operate on a stand-alone
PC or within a local or wide area network environment.
Advantage has fewer modules, is generally less complex and easier to
implement and results in a lower cost of ownership than Costpoint. Accordingly,
the Company markets Advantage primarily to small and mid-sized professional
services firms with relatively less complex requirements.
The Company began development of Advantage in 1995 in response to the
technical maturation of the CFMS product line. Advantage was commercially
released in December 1996. Through December 31, 1998, it has been licensed to
approximately 2,000 organizations, primarily architecture and engineering firms.
These include 1,467 customers who have migrated from the older CFMS product
line. License fees for Advantage systems vary depending on the number of the
customer's employees and sites and the number and types of modules licensed.
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System 1. System 1, Deltek's original accounting system, was designed
specifically for use by organizations with federal government contracts and
helps these organizations comply with federal regulations. System 1 is
character-based, operates on Novell Netware, UNIX and Digital VAX/VMS network
operating systems and utilizes a proprietary COBOL data structure. System 1
consists of 23 application modules, including financial accounting, labor and
payroll administration, materials management and project reporting. The Company
intends to provide support services and product maintenance for the
character-based version of System 1 for the foreseeable future.
The Company estimates that approximately 1,800 companies have licensed
System 1 since it was commercially released in 1985. As of December 31, 1998,
approximately 1,100 licensees were continuing to pay for ongoing support
services related to System 1. License fees for System 1 vary depending upon the
number of users and sites and the number and types of modules licensed. Since
the Company's introduction of its more advanced Costpoint system, the majority
of its new customers have licensed Costpoint systems, and new System 1 sales
have decreased in number and system size.
An important element of the Company's strategy is to license Costpoint to
larger and more complex System 1 customers as those customers reengineer their
information systems and migrate to new client/server business software
solutions. Smaller System 1 customers are less likely to migrate to Costpoint
because the cost of migrating to a client/server environment may be relatively
high and because System 1 adequately meets their needs. The Company estimates
that larger and more complex customers comprise approximately one-third of its
System 1 customers. To encourage these System 1 customers to migrate 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. Deltek estimates
that approximately one-third of the Costpoint clients had converted from System
1. The Company is also developing a Windows-based version of System 1 which is
targeted for release in the second half of 1999 and which will be directed
towards the smaller and less-complex System 1 users.
CFMS. The CFMS product line includes three older-generation accounting
systems designed and developed for architecture and engineering firms by Harper
and Shuman, which was acquired by the Company in May 1998. Through December 31,
1998, CFMS systems have been licensed to over 2,700 organizations. The Company
intends to seek to migrate CFMS users to Advantage or Costpoint. To date,
1,467 CFMS users have migrated to the Advantage product. The Company plans to
continue to offer telephone support services to CFMS users for the foreseeable
future but does not plan to make significant software enhancements to these
products.
Electronic Timesheet. Electronic Timesheet is a comprehensive timesheet
software application that 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. Electronic Timesheet enables employees to select from a list of
authorized charges rather than having to enter complicated account and project
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numbers. This feature serves to greatly reduce costly and time-consuming errors.
After the employee electronically signs his or her timesheet, the timesheet is
then 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 allows managers to view information about employees'
activities and helps them to better manage their employees. In May 1998, the
Company introduced ET Enterprise, a client/server version of Electronic
Timesheet, which is highly scaleable and operates on various relational database
management systems platforms. The Company also provides an optional
browser-based timesheet screen called Web E.T.
Electronic Timesheet was introduced in January 1995. The majority of the
Company's Electronic Timesheet licensees are also licensees of Costpoint, System
1, or Advantage, although the product is also sold on a stand-alone basis to
users of other accounting systems. As of December 31, 1998, Electronic Timesheet
had been licensed to 472 customers. License fees for Electronic Timesheet vary
depending on the number of employees.
Allegro Product Line. The Company acquired the Allegro product, a
software application that enables project managers to plan and monitor project
resources, through the acquisition of The Allegro Group, Inc., in September
1996. In January 1999 the Company decided to terminate further development,
sales and marketing of the Allegro product line. The Company's long-term plan
will be to include the Allegro product functionality into a new product
architecture. The Company does not anticipate a material adverse impact from
this decision.
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, and the System 1 report-writer, Intelligent Query, is also licensed
from a third party. In order to support Oracle, Sybase and Centura relational
databases, Costpoint contains certain native "router" software licensed from
Centura. Also, the Company's Costpoint 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 occasionally purchases servers, network software and other software and
hardware products, which the Company resells or sublicenses to its customers and
installs with Deltek products to provide a fully operational system.
CUSTOMER SERVICE AND SUPPORT
An integral part of Deltek's solution is to provide superior services and
support directly to its customers. These services include comprehensive
implementation and consulting, training and ongoing 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.
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Implementation and Consulting Services. Deltek typically provides a full
range of consulting and technical services to customers both during and after
implementation of Deltek software. The Company's system consultants are involved
in the important early planning and design stages of an implementation,
participate in user training, and work closely with the customer during the 2 to
12 month period just before and after the "going live" date. After the
implementation is completed, the Company'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 requirements change.
Deltek's implementation and consulting services are generally charged on a time
and materials basis.
Ongoing Support Services. 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
that enables call, problem and resolution tracking. The Company also maintains
an "open phone" policy whereby customers are encouraged to contact any
supervisor or senior manager at Deltek for any reason. The Company typically
handles between 250 and 450 support calls per day. Deltek provides 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. Telephone support and periodic product enhancements and updates
are provided for fees that are payable quarterly and initially represent, on an
annual basis, between 15% and 20% of the related software license fee.
Training Services. The Company operates training facilities at its
McLean, Virginia headquarters and at its offices in San Jose, California and
Boston, Massachusetts, where it provides regularly scheduled training classes on
approximately 40 topics related to the Company's products. Deltek maintains
system laboratories at its training facilities which are available for customer
testing, benchmarking and troubleshooting. The Company also offers custom,
on-site training classes. Training is billed hourly or on a per class basis.
CUSTOMERS
Since inception, the Company has licensed its products to over 5,000
project-oriented organizations, predominantly in the United States, across a
spectrum of industries. Costpoint and System 1 have been installed in more than
2,000 project-oriented organizations. Advantage and CFMS have been installed at
over 3,000 organizations, predominantly architecture and engineering firms.
Other project-oriented industries that the Company currently serves include
environmental, systems integration, research and development, contract services
and construction, as well as make-to-order manufacturers and not-for-profit
organizations. Many project-oriented businesses within these industries provide
products and services under government contracts. No customer accounted for more
than 10% of the Company's total revenues in 1996, 1997, or 1998. The Company's
clients include Bell Atlantic Federal Integrated Systems, Inc., Computer
Sciences Corporation, Lockheed Martin Corp., Northrup Grumman Corporation and
Raytheon Service Co., Inc.
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SALES AND MARKETING
The Company sells its products and services primarily through its direct
sales force. As of December 31, 1998, the Company had 49 full-time sales
personnel and 11 full-time marketing personnel at its offices in McLean,
Virginia; Denver, Colorado and San Jose, California. In January 1999 the Company
established a sales and marketing office in London, England, and a development
office in Manila, the Philippines.
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.
Increasingly, the Company targets project managers in addition to accounting
managers. When the prospective customer is ready for a product demonstration,
the Company utilizes specially-trained and industry-experienced professionals to
provide the product presentation. The Company provides prospective customers
with information to explain 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
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,
including delays over which the Company has little or no control.
The Company's strategy is to expand its sales and marketing activities by
targeting organizations in additional project-oriented industries and
international markets and by developing a value-added reseller distribution
channel for certain of its products. Additionally, a significant source of
business for the Company is migrating existing customers to other systems. In
support of its marketing efforts for existing customers, the Company conducts
ongoing customer communications programs and an annual user conference.
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
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Technology Group supports all of the Company's product development groups 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,
program check-in and check-out, version control and system error and bug
tracking.
A significant portion of the development related to the Costpoint product
line is conducted using two fourth generation client/server development tools,
SQLWindows and Team Developer, which the Company licenses from Centura. Using
these tools, 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-specific stored
procedures which enable specific applications to operate much faster with
considerably less network traffic. C and C++ programming is also used throughout
Costpoint in various situations to improve performance and functionality. The
Company also makes extensive use of Microsoft Visual Basic 5.0 as the primary
development tool for many of its new software products.
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, Advantage, Electronic Timesheet and
a Windows-based version of System 1. During 1997, full support for Windows NT on
the client PC, support for the Microsoft SQLServer 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 a new release of Electronic Timesheet
called ET Enterprise in May 1998. The Company currently is developing a new
n-tier, "thin" client technical architecture for its future products, which the
Company expects will enable such products to utilize fewer client resources in
order to operate effectively using an Internet connection. The first product
being developed to utilize this new architecture is a "front-office"
sales force automation and customer management software product to meet the
needs of project-oriented businesses. The new product, which will be sold as a
stand-alone application or integrated with the Company's enterprise-wide
systems, is based upon the user interface and database designs acquired from
SalesKit in April 1998, and is being developed by the former SalesKit employees
who have extensive experience in the development of, and knowledge of the
functional requirements for, sales force automation and customer management
applications. The Company expects that the first modules of this new "front
office" product will be available in beta by the end of the second quarter of
1999 and expects the general release of the initial modules to occur by the end
of 1999.
The Company's software development expenses, exclusive of certain
development costs which have been capitalized, were $6.7 million, $9.5 million
and $15.0 million in 1996, 1997 and 1998, respectively. As of December 31, 1998,
the Company had 220 employees engaged in product development and quality
assurance activities.
11
<PAGE> 15
COMPETITION
The market for client/server-based business application software 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 implementations of the Company's
enterprise-wide products, the Company's principal competitors include Oracle,
PeopleSoft, Inc., J.D. Edwards, SAP AG and The Baan Company. For smaller
implementations of the Company's enterprise-wide products, the Company's
competitors include Great Plains Software, Inc., Maxwell Business Systems, Inc.,
Platinum Software Corporation, Solomon Software, State of the Art, Inc.,
Timberline Software Corporation, and Semaphore Corporation, some of which offer
industry-specific products. Electronic Timesheet competes with electronic
timekeeping systems offered by vendors including Executive Partners Software,
Automatic Data Processing, Inc. and Oracle. The Company also faces indirect
competition from the internal MIS departments of its potential customers.
Deltek believes that competition in the rapidly evolving markets for
business application software is based primarily on product features and
functions, product architecture, ease of implementation, vendor and product name
recognition and reputation, customer service and support, and price. Deltek
believes that it has competed effectively to date by developing products and
services that meet the unique needs of project-oriented organizations. The
Company also believes that its reputation for high quality service and support,
its ability to work directly with its customers 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. As the Company's
larger competitors, such as Oracle and Baan, begin to experience a deceleration
in their core business and refocus their marketing and sales efforts to the
middle market in which the Company actively markets its products, the Company
expects such competitors to implement increasingly aggressive pricing programs.
In addition, certain competitors, particularly Oracle and PeopleSoft, have
well-established relationships with many of 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. Moreover,
as the Company attempts to penetrate other strategic vertical markets, it will
likely encounter competitors with substantially more experience in those
markets.
EMPLOYEES
As of December 31, 1998, the Company had 555 full-time employees,
including 220 employees primarily engaged in product development and quality
assurance, 115 in customer support and training activities, 133 in consulting,
60 in sales and marketing, and 27 in finance and administration. None of the
Company's employees is represented by a labor union or is subject to a
collective bargaining agreement.
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<PAGE> 16
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. The Company leases approximately 16,000 square
feet in Cambridge, Massachusetts at an annual lease rate of approximately
$25,600 under leases expiring in 2002. Deltek believes that its existing
facilities and offices are adequate to meet its current needs and that, should
it be needed, suitable additional or alternative space will be available in the
future on commercially reasonable terms.
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.
13
<PAGE> 17
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 for each period indicated, as
reported on the Nasdaq National Market, are as follows:
<TABLE>
<CAPTION>
Price
-------------------
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1997
First Quarter (1) $ 11.13 $ 8.50
Second Quarter 18.00 7.25
Third Quarter 23.13 13.63
Fourth Quarter 22.50 14.00
Year Ended December 31, 1998
First Quarter $ 21.13 $ 15.75
Second Quarter 25.25 16.50
Third Quarter 24.50 14.25
Fourth Quarter 19.00 14.25
</TABLE>
- ---------------
(1) The First Quarter 1997 figure is from February 25, 1997.
On February 19, 1999, the closing price for the Company's Common Stock
was $17.75 per share and the Company had approximately 73 shareholders of
record. Management believes there are approximately 1600 beneficial holders of
the Company's Common Stock and has been advised that there are 114 individual
participants holding approximately 47% 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 made cash distributions to its
shareholders, including in connection with the termination of the Company's S
Corporation status in February 1997. In 1996, 1997 and 1998, the Company paid
$11.9 million, $13.6 million and $369,000, respectively, in such cash
distributions to the S Corporation shareholders. The Company does not intend to
pay cash dividends in the future as it intends to retain all earnings to support
planned growth.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the consolidated financial statements and the notes thereto included elsewhere
herein or incorporated herein by
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<PAGE> 18
reference. The statement of operations data set forth below with respect to the
years ended December 31, 1996, 1997 and 1998 and the balance sheet data as of
December 31, 1997 and 1998 are derived from, and are qualified by reference to,
the audited financial statements of the Company included elsewhere in this
Annual Report. The statement of operations data set forth below with respect to
the years ended December 31, 1994 and 1995 and the balance sheet data as of
December 31, 1994 and 1995 are derived from unaudited financial statements not
included in this Annual Report. All amounts for all periods have been restated
to reflect the acquisition of Harper and Shuman in May 1998, which was
accounted for using the pooling-of-interests method of accounting. The
unaudited 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,
1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1994 1995 1996(1) 1997(2) 1998
-------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees.................................. $ 8,965 $ 11,656 $ 14,114 $ 21,043 $ 28,162
Services...................................... 16,421 19,076 24,343 33,216 50,867
Third-party equipment and software............ 3,428 3,574 3,254 3,387 4,040
----------- ----------- ----------- ----------- -----------
Total revenues....................... 28,814 34,306 41,711 57,646 83,069
Operating expenses:
Cost of software.............................. 1,092 1,230 1,577 2,053 2,491
Cost of services.............................. 6,060 6,937 9,844 14,375 24,763
Cost of third-party equipment and software.... 2,538 2,750 2,516 2,631 3,146
Software development.......................... 5,212 6,577 8,380 11,214 15,014
Sales and marketing........................... 3,149 4,178 5,000 6,643 10,353
General and administrative.................... 2,344 2,790 3,018 3,558 4,163
Amortization of intangibles................... -- -- -- 26 687
Stock option compensation..................... -- -- 867 -- --
Acquisition and offering costs............... -- -- -- 320 1,475
Purchased in-process research and
development................................. -- -- 394 -- 2,500
----------- ----------- ----------- ----------- -----------
Total operating expenses............ 20,395 24,462 31,596 40,820 64,592
----------- ----------- ----------- ----------- -----------
Income from operations........................... 8,419 9,844 10,115 16,826 18,477
Interest income, net............................. 262 384 392 781 1,066
----------- ----------- ----------- ----------- -----------
Income before income taxes....................... 8,681 10,228 10,507 17,607 19,543
Provision for income taxes....................... 228 102 54 5,898 7,788
----------- ----------- ----------- ----------- -----------
Net income....................................... $ 8,453 $ 10,126 $ 10,453 $ 11,709 $ 11,755
=========== =========== =========== =========== ===========
PRO FORMA STATEMENT OF OPERATIONS DATA
(UNAUDITED)(3):
Provision for income taxes....................... $ 3,319 $ 3,884 $ 4,092 $ 6,780 $ --
Net income....................................... 5,362 6,344 6,415 10,827 --
Diluted net income per share..................... $ 0.33 $ 0.39 $ 0.39 $ 0.61 $ 0.64
Weighted average shares, diluted................. 16,107 16,279 16,282 17,882 18,235
</TABLE>
15
<PAGE> 19
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.............................. $ 4,627 $ 8,118 $ 9,381 $ 25,832 $33,376
Working capital........................... 4,649 5,641 7,309 20,132 29,662
Total assets.............................. 13,466 19,895 22,966 44,041 66,308
Total shareholders' equity................ 7,545 9,671 12,233 25,814 41,406
</TABLE>
- ---------------
(1) In 1996, the Company incurred non-recurring, non-cash charges of $867,000
for stock option compensation and $394,000 for purchased in-process
research and development. Exclusive of these charges, income from
operations, net income, pro forma net income and pro forma diluted net
income per share for 1996 would have been $11.4 million, $11.7 million,
$7.2 million and $0.44, respectively.
(2) In 1997, the Company incurred a non-recurring, non-cash charge of
$320,000 for acquisition costs. Exclusive of this charge, income from
operations, net income, pro forma net income and pro forma diluted net
income per share for 1997 would have been $17.1 million, $12.0 million,
$11.1 million and $0.62, respectively.
(3) Prior to February 25, 1997, Deltek (excluding Harper and Shuman) 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 Deltek had not elected S Corporation status for the periods indicated.
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 is a leading provider of enterprise software products that enable
project-oriented organizations to more effectively manage, operate and grow
their operations. From 1985 through 1994, without considering revenues from the
Company's 1998 acquisition of Harper and Shuman, substantially all of the
Company's revenues were derived from licenses of its System 1 business software,
designed primarily for organizations providing products or services under
contracts with the federal government, and services related to System 1. In
1992, the Company began development of Costpoint, an advanced
client/server-based, enterprise-wide business software system, which was
commercially released in June 1995 and which represented approximately 59.1% of
the Company's license fees for the year ended December 31, 1998. The Company's
other enterprise software products are Advantage, an integrated, project-focused
accounting system designed for professional services firms, and CFMS, a family
of older-generation project-based accounting systems used
16
<PAGE> 20
primarily by architecture and engineering firms. Deltek's stand-alone
application software product, which also can be integrated with the Company's
enterprise-wide systems, Electronic Timesheet, is an advanced employee
timekeeping system. Deltek also provides a full range of services, including
implementation and consulting, 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 other services, and
revenues from the resale of third-party equipment and the sublicensing of
third-party software. For certain of its software products, the Company
typically grants its customers a right of return for a full or partial refund of
the license fee during a refund period, which is generally 60 to 90 days from
the date of the initial software delivery. The Company occasionally has
provided, and may in the future provide, longer refund periods for larger, more
complex Costpoint installations. Costpoint license fees are recognized upon the
expiration of the applicable refund period and are recorded as deferred revenues
until recognized. Because of customers' refund rights and the varying length of
applicable refund periods, deferred revenues at the end of a quarter do not
necessarily reflect revenues that the Company will recognize in a succeeding
quarter. The Company generally recognizes license fees from its Advantage,
System 1 and Electronic Timesheet products upon delivery. 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. Ongoing
support services are provided for fees that are payable quarterly and initially
represent between 15% and 20% of the related software license fee on an annual
basis. Revenues from ongoing support services are recognized over the quarter in
which the services are provided. Training is billed by the hour or per class and
recognized as the services are provided. Revenues from third-party equipment and
software are 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 are generally recognized on delivery. The Company derives
substantially greater profit margins from license fees than from service
revenues or third-party equipment and software revenues. The mix of revenues can
fluctuate from quarter to quarter, and such fluctuations can have a material
effect on margins. Over the past five years, the percentage of the Company's
total revenues represented by service revenues has increased, and the Company
anticipates that it will continue to do so.
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, the
Windows version of System 1 and a browser-based Electronic Timesheet product.
In April 1998, the Company acquired substantially all of the assets of
SalesKit and assumed certain related liabilities. The purchase price consisted
of $6.1 million of cash in addition to three-year warrants with an estimated
fair value of $932,000. The warrants are exercisable for 130,000
17
<PAGE> 21
shares of Common Stock at an exercise price of $22.00 per share. The acquisition
has been accounted for as an asset purchase. The Company assigned $2.5 million
of the SalesKit purchase price to in-process research and development based upon
an independent appraisal and expensed this amount in 1998. In the opinion of
management, the acquired in-process research and development had not yet reached
technological feasibility and had no alternative future uses.
In May 1998, the Company completed its acquisition of Harper and Shuman
by exchanging approximately 686,000 shares of its Common Stock for all of the
common stock of Harper and Shuman. The acquisition constituted a tax-free
reorganization and has been accounted for as a pooling-of-interests.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of Harper and Shuman as though it had always been a part of
Deltek.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the consolidated statements of operations of the Company expressed
as a percentage of total revenues, and the percentage change in such items
compared to the same period in the prior year. There can be no assurance that
the trends in revenue growth or operating results will continue in the future.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
YEAR ENDED DECEMBER 31,
1996(1) 1997(2) 1998
------- ------- ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(4):
Revenues:
License fees............................................ 33.8% 36.5% 33.9%
Services................................................ 58.4 57.6 61.2
Third-party equipment and software...................... 7.8 5.9 4.9
----- ----- -----
Total revenues........................................ 100.0 100.0 100.0
Operating expenses:
Cost of software........................................ 3.8 3.6 3.0
Cost of services........................................ 23.6 24.9 29.8
Cost of third-party equipment and software.............. 6.0 4.6 3.8
Software development.................................... 20.1 19.4 18.1
Sales and marketing..................................... 12.0 11.5 12.5
General and administrative.............................. 7.2 6.2 5.0
Amortization of intangibles............................. -- -- 0.8
Stock option compensation............................... 2.1 -- --
Acquisition costs....................................... -- 0.6 1.8
Purchased in-process research and development........... 0.9 -- 3.0
----- ----- -----
Total operating expenses.............................. 75.7 70.8 77.8
Income from operations.................................... 24.3 29.2 22.2
Interest income........................................... 0.9 1.3 1.3
----- ----- -----
Income before income taxes................................ 25.2 30.5 23.5
Provision for income taxes................................ 0.1 10.2 9.4
----- ----- -----
Net income................................................ 25.1% 20.3% 14.1%
===== ===== =====
PRO FORMA STATEMENT OF OPERATIONS DATA (UNAUDITED) (5):
Provision for income taxes................................ 9.8% 11.8% --%
Net income................................................ 15.4 18.8 --
</TABLE>
18
<PAGE> 22
- ---------------
(1) In 1996, the Company incurred non-recurring, non-cash charges for stock
option compensation and purchased in-process research and development.
Exclusive of these charges, income from operations, net income and pro
forma net income for 1996 would have been 27.3%, 28.1% and 17.2%,
respectively, of total revenues.
(2) In 1997, the Company incurred a non-recurring, non-cash charge for
acquisition costs. Exclusive of this charge, income from operations, net
income and pro forma net income for 1997 would have been 29.7%, 20.9% and
19.3%, respectively, of total revenues.
(3) In 1998, the Company incurred non-recurring, non-cash charges for
acquisition costs and purchased in-process research and development.
Exclusive of these charges, income from operations and net income for
1998, would have been 27.0% and 17.4%, respectively, of total revenues.
(4) All amounts have been restated to reflect the acquisition of Harper and
Shuman in May 1998, which was accounted for using the
pooling-of-interests method of accounting. See Note 1 of Notes to
Consolidated Financial Statements.
(5) Prior to February 25, 1997, Deltek (excluding Harper and Shuman) 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 Deltek had not elected S Corporation status for the periods indicated.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
License Fees. License fees for the year ended December 31, 1998 increased
by 33.8% to $28.2 million from $21.0 million for the same period in 1997. The
increase in license fees was principally attributable to Costpoint license fees,
which increased by 41.4% to $16.7 million for the year ended December 31, 1998
from $11.7 million for the same period in 1997, reflecting increases in the
number of modules licensed and the average size of new system installations,
offset somewhat by discounts granted to System 1 users migrating to Costpoint
systems. Advantage license fees increased by 51.1% to $5.5 million for the year
ended December 31, 1998 as compared to $3.6 million for the same period in 1997.
License fees from System 1 products were $2.4 million for the year ended
December 31, 1998 compared to $3.5 million for the year ended December 31, 1997,
a decrease of 31.3%. The decline in System 1 license fees was the result of
increased licenses of the Company's advanced client/server system, Costpoint, to
new customers. License fees for Electronic Timesheet increased by 61.2% to $3.0
million for the year ended December 31, 1998 from $1.8 million for the same
period in 1997. License fees comprised 33.9% of the Company's total revenues for
1998, compared to 36.5% for the comparable prior year period.
Services. Service revenues for the year ended December 31, 1998 increased
by 53.1% to $50.9 million from $33.2 million for the same period in 1997. The
increase in service revenues was principally attributable to increased
consulting services related to new implementations of Costpoint systems.
Consulting service revenues increased by 102.3% to $22.9 million for the year
ended December 31, 1998 from $11.3 million for the same period in 1997. Other
service revenues increased by 27.7% to $28.0 million for the year ended December
31, 1998 from $21.9 million for the same period in the prior year, principally
as a result of the addition of new customers and the license of additional
software products to existing customers and, to a lesser extent, increases in
service rates. Service revenues comprised 61.2% of the Company's total revenues
for 1998, compared to 57.6% for the same period in 1997.
Third-Party Equipment and Software. Revenues from third-party equipment
and software for the year ended December 31, 1998 increased by 19.3% to $4.0
million from $3.4 million for the comparable period in 1997. These revenues
comprised 4.9% and 5.9% of total revenues for 1998 and 1997, respectively.
19
<PAGE> 23
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 year ended December 31, 1998 was $2.5 million, an
increase of 21.3% from $2.1 million for the same period in 1997. This change was
due to an increase in licensing activity.
Cost of Services. Cost of services is comprised primarily of personnel
costs for implementation and consulting services, user training and ongoing
maintenance and support. Cost of services for the year ended December 31, 1998
increased by 72.3% to $24.8 million from $14.4 million for the same period in
1997. The increase in cost of services was primarily due to increases in
services personnel. Cost of services represented 48.7% and 43.3% of service
revenues for the year ended December 31, 1998 and 1997, respectively. The
increase in cost of services as a percentage of service revenues primarily
reflected the increase in consulting revenues as a percentage of service
revenues. The Company earns a lower margin on its consulting revenues than on
its ongoing support service revenues. To a lesser extent, cost of services as a
percentage of service revenues increased due to hiring of additional telephone
support personnel to service the Company's growing customer base. Exclusive of
the users conference and reimbursable travel expenses which are billed at cost,
cost of services represented 42.3% and 37.3% of related service revenue for the
years ended December 31, 1998 and 1997, respectively.
Cost of Third-Party Equipment and Software. Cost of third-party equipment
and software consists of the costs of computer and peripheral equipment and
license fees and royalties for third-party software. Cost of third-party
equipment and software for the year ended December 31, 1998 increased to $3.1
million from $2.6 million for the same period in the prior year. As a percentage
of related revenues, cost of third-party equipment and software products
represented 77.9% and 77.7% for the year ended December 31, 1998 and 1997,
respectively. The slight increase in these costs as a percentage of related
revenues was the result of changes in the product mix of equipment and software
sold.
Software Development. Software development costs consist primarily of the
personnel costs of analysts and programmers who research, develop, maintain and
enhance the Company's existing software product lines and develop new products.
Software development costs for the year ended December 31, 1998 increased by
33.9% to $15.0 million from $11.2 million for the same period in 1997. This
increase was due primarily to hiring additional personnel. Software development
costs represented 18.1% and 19.5% of total revenues for the year ended December
31, 1998 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily of
the costs of the Company's sales and marketing personnel as well as the costs of
advertising, direct mail and other sales and marketing activities. Sales and
marketing expenses for the year ended December 31, 1998 increased by 55.8% to
$10.4 million from $6.6 million for the same period in 1997. This increase was
due primarily to hiring additional personnel and increased marketing activities.
The Company expects sales and marketing expenses to continue to increase for the
foreseeable future as the Company pursues its strategy. Sales and marketing
expenses represented 12.5% of the Company's total revenues for the year ended
December 31, 1998, compared to 11.5% for the same period in 1997. See "Business
- -- Strategy."
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<PAGE> 24
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 year ended December 31, 1998 increased by 17.0% to $4.2 million
from $3.6 million for the same period in 1997. This increase was due primarily
to the Company's overall growth. General and administrative expenses represented
5.0% of the Company's total revenues for the year ended December 31, 1998,
compared to 6.2% for the same period in 1997.
Acquisition & Offering Costs. A charge of $1.5 million was recorded for
the year ended December 31, 1998 for the transaction costs related to the
acquisition of Harper and Shuman and the offering costs to register the shares
and warrants for the acquisition of Harper and Shuman and SalesKit Software
Corporation. The acquisition of Harper and Shuman was accounted for as a
pooling-of-interests. See "-- Overview."
Purchased In-Process Research and Development. A charge of $2.5 million
was recorded during the year ended December 31, 1998 for the appraised valuation
of the purchased in-process research and development costs acquired from
SalesKit. See "-- Overview."
Interest Income. Interest income results from investment and, to a lesser
extent, from installment financing. Interest income for the year ended December
31, 1998 increased by 36.5% to $1,066,000 from $781,000 for the same period in
1997. This increase is due to the higher level of cash balances available for
investment.
Income Tax Provision. The Company's effective tax rate for the year ended
December 31, 1998 was 39.9%, as compared to the pro forma effective tax rate of
38.5% for the same period in 1997. The tax rate for the year ended December 31,
1998 was affected by the nondeductible nature of a majority of the transaction
costs for the acquisition of Harper and Shuman.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
License Fees. License fees for 1997 increased by 49.1% to $21.0 million
from $14.1 million for 1996. Costpoint license fees increased by 52.0% 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 7.4% 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. Advantage and CFMS license fees increased by 131.2% to
$3.6 million for 1997, compared to $1.6 million in 1996. License fees comprised
36.5% of the Company's total revenues for 1997, compared to 33.8% for 1996.
Services. Service revenues for 1997 increased by 36.4% to $33.2 million
from $24.3 million for 1996. The increase in service revenues was principally
attributable to increased consulting services related to implementations of new
Costpoint systems. Consulting service revenues increased by 66.4% to $11.3
million for 1997 from $6.8 million for 1996. Other service revenues increased by
24.8% to $21.9 million for 1997 from $17.5 million for 1996, principally as a
result of
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<PAGE> 25
the addition of new customers and the sale of additional software products to
existing customers and, to a lesser extent, increases in service rates. Service
revenues comprised 57.6% of the Company's total revenues in 1997, compared to
58.4% for 1996.
Third-Party Equipment and Software. Revenues from third-party equipment
and software for 1997 increased by 4.1% to $3.4 million from $3.3 million for
1996. Revenues from third-party equipment and software comprised 5.9% of the
Company's total revenues in 1997, compared to 7.8% in 1996.
Cost of Software. Cost of software for 1997 increased by 31.8% to $2.1
million from $1.6 million for 1996. This increase was attributable to an
increase in licensing activity.
Cost of Services. Cost of services for 1997 increased by 46.0% to $14.4
million from $9.8 million for 1996. The increase in cost of services was
primarily due to hiring additional services personnel to support the Costpoint
product line. In addition, reimbursed travel expenses increased by $1.0 million
from the prior year due primarily to consulting activity related to Costpoint
implementations. Expenses related to the Company's national user conference,
which totaled $566,000 and $283,000 in 1997 and 1996, respectively, are also
included in cost of services. Cost of services represented 43.3% and 40.4% of
service revenues for 1997 and 1996, respectively. The increase in cost of
services as a percentage of service revenues primarily reflected the increase in
consulting revenues as a percentage of service revenues.
Cost of Third-Party Equipment and Software. Cost of third-party equipment
and software for 1997 increased by 4.6% to $2.6 million from $2.5 million for
1996. As a percentage of related revenues, cost of third-party equipment and
software products represented 77.7% and 77.3% for 1997 and 1996, respectively.
The increase in these costs as a percentage of related revenues was the result
of continued competitive pressures on the sales prices for third-party products.
Software Development. Software development costs for 1997 increased by
33.8% to $11.2 million from $8.4 million for 1996. This increase was due
primarily to hiring additional personnel. Software development costs represented
19.5% and 20.1% of total revenues for 1997 and 1996, respectively.
Sales and Marketing. Sales and marketing expenses for 1997 increased by
32.9% to $6.6 million from $5.0 million for 1996. This increase was due
primarily to increased personnel, advertising and trade show expenses. Sales and
marketing expenses represented 11.5% of the Company's total revenues for 1997
compared to 12.0% for 1996.
General and Administrative. General and administrative expenses for 1997
increased by 17.9% to $3.6 million from $3.0 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 6.2% of the Company's total revenues for 1997, compared to 7.2% for
1996.
Acquisition Costs. In September 1997, the Company recorded a
non-recurring charge of $320,000 representing the costs associated with a
potential acquisition that was not consummated.
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<PAGE> 26
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.
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.
Interest Income. Interest income results from investments and, to a
lesser extent, from installment financing. Interest income for 1997 increased by
99.2% to $781,000 from $392,000 for 1996. The increase was due to the higher
level of cash balances available for investment.
Pro Forma Income Tax Provision. The Company's pro forma effective tax
rate for 1997 was 38.5%, compared to 38.9% for 1996. The reduction is primarily
attributed to the amount of tax-exempt interest income earned in 1997.
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<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited historical and pro forma
consolidated statement of operations data of the Company for the eight quarters
ended December 31, 1998. These data have been derived from the Company's
unaudited quarterly consolidated financial statements. In management's opinion,
these quarterly consolidated financial statements have been prepared on a basis
consistent with the audited Consolidated Financial Statements contained in this
Annual Report or incorporated by reference herein, and include all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the information presented, when read in
conjunction with the Company's audited Consolidated Financial Statements,
including the Notes thereto, appearing elsewhere in this Annual Report or
incorporated by reference herein.
<TABLE>
<CAPTION>
1997 QUARTERS ENDED 1998 QUARTERS ENDED
--------------------------------------------- -----------------------------------------
MAR. 31 JUNE 30 SEPT. 30(2) DEC. 31 MAR. 31 JUNE 30(3) SEPT. 30 DEC. 31
------- ------- ----------- ------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(4):
Revenues:
License fees........................... $ 4,706 $ 4,809 $ 5,141 $ 6,387 $ 5,883 $ 6,807 $ 7,356 $ 8,116
Services............................... 7,523 7,688 8,736 9,269 11,093 12,129 13,425 14,220
Third-party equipment and software..... 534 1,106 624 1,123 777 1,013 823 1,427
--------- --------- --------- --------- ---------- --------- -------- ---------
Total revenues......................... 12,763 13,603 14,501 16,779 17,753 19,949 21,604 23,763
Operating expenses:
Cost of software....................... 412 511 567 589 524 575 668 724
Cost of services....................... 3,087 3,276 3,928 4,084 5,139 5,899 6,692 7,033
Cost of third-party equipment and
software.............................. 417 894 479 841 603 779 635 1,129
Software development................... 2,605 2,783 2,683 3,143 3,334 3,876 3,989 3,815
Sales and marketing.................... 1,427 1,581 1,551 2,084 2,257 2,624 2,583 2,889
General and administrative............. 918 880 887 873 1,066 861 975 1,261
Amortization of intangibles............ -- -- -- -- 7 171 254 255
Acquisition & offering costs........... -- -- 320 -- -- 1,096 -- 379
Purchased in-process research and
development........................... -- -- -- -- -- 2,500 -- --
--------- --------- --------- --------- ---------- --------- -------- ---------
Total operating expenses............... 8,866 9,925 10,415 11,614 12,930 18,381 15,796 17,485
--------- --------- --------- --------- ---------- --------- -------- ---------
Income (loss) from operations.......... 3,897 3,678 4,086 5,165 4,823 1,568 5,808 6,278
Interest income, net................... 61 253 236 231 250 250 273 293
--------- --------- --------- --------- ---------- --------- -------- ---------
Income (loss) before income taxes...... 3,958 3,931 4,322 5,396 5,073 1,818 6,081 6,571
Provision (benefit) for income taxes... 684 1,473 1,640 2,101 1,967 1,042 2,365 2,414
--------- --------- --------- --------- ---------- --------- -------- ---------
Net (loss) income...................... $ 3,274 $ 2,458 $ 2,682 $ 3,295 $ 3,106 $ 776 $ 3,716 $ 4,157
========= ========= ========= ========= ========== ========= ======== =========
Diluted net income (loss) per share.... $ 0.19 $ 0.14 $ 0.15 $ 0.18 $ 0.17 $ 0.04 $ 0.20 $ 0.23
Weighted average shares, diluted....... 17,002 18,097 18,257 18,157 18,205 18,323 18,280 18,191
PRO FORMA STATEMENT OF
OPERATIONS DATA(5):
Provision for income taxes............. $ 1,566
Net income............................. 2,392
Diluted net income per share........... $ 0.14
</TABLE>
- ---------------
(1) In the three months ended September 30, 1996, the Company incurred a
non-recurring, non-cash charge of $394,000 for purchased in-process
research and development. Exclusive of this charge, income from
operations, net income, pro forma net income and pro forma diluted net
income per share for the three months ended September 30, 1996 would have
been $3.0 million, $3.1 million, $1.9 million and $0.11, respectively.
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<PAGE> 28
(2) In the three months ended September 30, 1997, the Company incurred a
non-recurring, non-cash charge of $320,000 for acquisition costs.
Exclusive of this charge, income from operations, net income and diluted
net income per share for the three months ended September 30, 1997 would
have been $4.4 million, $3.0 million and $0.16, respectively.
(3) In the three months ended June 30, 1998, the Company incurred
non-recurring, non-cash charges of $1.1 million for acquisition costs and
$2.5 million for purchased in-process research and development. Exclusive
of these charges, income from operations, net income and diluted net
income per share for the three months ended June 30, 1998 would have been
$5.2 million, $3.2 million and $0.18, respectively.
(4) All amounts have been restated to reflect the acquisition of Harper and
Shuman in May 1998, which was accounted for using the
pooling-of-interests method of accounting. See Note 1 of Notes to
Consolidated Financial Statements.
(5) Prior to February 25, 1997, Deltek (excluding Harper and Shuman) 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 Deltek had not elected S Corporation status for the periods indicated.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively from cash flow
from its operations. As of December 31, 1998, the Company had cash and cash
equivalents of $9.5 million, marketable securities of $23.9 million and working
capital of $29.7 million.
For the year ended December 31, 1998, the Company's net cash provided by
operating activities was $17.5 million. Accounts receivable, net of the
allowance for doubtful accounts, were $17.4 million as of December 31, 1998,
compared to $9.9 million as of December 31, 1997. Accounts receivable days sales
outstanding was 60 days as of December 31, 1998, compared to 54 days as of
December 31, 1997. The increase in deferred revenue reflects increased Costpoint
license fees, for which revenues are recognized upon the expiration of the
refund period. Exclusive of unbilled receivables, which were recorded as
deferred revenue, days sales outstanding were 41 days as of December 31, 1998,
compared to 37 days as of December 31, 1997. While the Company believes that its
allowance for doubtful accounts as of December 31, 1998, remains adequate, there
can be no assurance that such allowance will be sufficient to cover receivables
which are later determined to be uncollectible.
Investing activities utilized $18.8 million for the year ended December
31, 1998. This amount included $6.1 million for the assets acquired from
SalesKit, $8.9 million in acquired marketable securities, $2.5 million in
purchased property and equipment and $1.3 million of capitalized software
production costs.
Financing activities for the year ended December 31, 1998 consisted
primarily of $431,000 in proceeds from the exercise of stock options and
$620,000 from the issuance of stock under the Company's employee stock purchase
plan. This was offset by $369,000 in a final distribution to the Company's S
Corporation shareholders, and $806,000 for 50,000 common shares of Deltek
repurchased during the year under the Company's stock repurchase program..
The Company has a $1.0 million bank line of credit which will be secured
by substantially all of the Company's assets and bear interest at the lender's
prime rate. To date, no amounts have been drawn under the line of credit.
The costs associated with the Registration Statement filed by the Company
with the Securities and Exchange Commission to register the securities issued in
connection with the
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<PAGE> 29
Company's acquisition of Harper and Shuman and SalesKit Software Corporation has
been reflected as a charge to earnings in the quarter ended December 31, 1998.
The Company believes that its current liquidity, together with
anticipated cash flow from operations, will satisfy the Company's anticipated
working capital and capital expenditure requirements through the foreseeable
future. However, depending on its rate of growth, profitability and other
factors, some of which are not in the Company's control, the Company believes
additional financing may be required to meet its working capital requirements or
capital expenditure needs, including acquisitions, in the future. There can be
no assurance that additional financing will be available when required or, if
available, that any such financing will be on terms satisfactory to the Company.
YEAR 2000
The Year 2000 Challenge. Many existing information technology ("IT")
systems and applications, and other non-IT control devices, use only two digits
to identify a year in the date field, without considering the impact of the
upcoming change in the century. As a result, such systems, applications and
devices could fail or create erroneous results unless they are modified in some
fashion to distinguish 21st century dates from 20th century dates (i.e., to be
year 2000 compliant). The year 2000 challenge creates potential risks for the
Company from unforeseen problems in the software products that the Company
licenses to others and in the IT and non-IT systems that the Company uses in its
own business operations. The Company may also be exposed to risks 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 System 1 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 plans to
conduct additional testing of its compliant products with different combinations
of compliant operating systems and databases. It is anticipated that this
additional testing will be completed by the end of the second quarter. 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 are being provided 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
substantially all of these licensees and has begun to assist those that intend
to continue using the Company's products in upgrading or converting to a
compliant version or product. It is anticipated that all of these licensees will
have been provided a compliant version or product by the end of the second
quarter of 1999.
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<PAGE> 30
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 Company to its
customers, which are year 2000 compliant. However, the Company also utilizes
third party vendor IT and non-IT systems, including application and operating
system software, network equipment, telecommunication products, electronic key
entry systems, elevators and other third party products, which may or may not be
year 2000 compliant. The Company has begun its assessment of all mission
critical third party vendor application software systems. Assessment of those
systems is scheduled to be completed by the end of the first quarter of 1999,
with remediation scheduled to be completed by the end of the second quarter of
1999. The Company has begun its inventory of all third party computer and
network hardware and operating systems used by the Company. Assessment and
remediation of these third party IT systems is planned to be completed by the
end of the second quarter of 1999. The Company's goal is to have completed its
inventory and assessment of all non-IT systems with embedded chips by end of
the first quarter of 1999 and its remediation of those systems by the end of
the third quarter of 1999. Finally, the Company is in the process of
identifying third parties that are providing mission critical services on which
the Company relies. The Company expects that it will have contacted
substantially all of these parties by the end of the second quarter of 1999 to
determine their year 2000 plans and readiness and will have verified their year
2000 readiness or replaced them with vendors that are year 2000 ready by the
end of the third quarter of 1999.
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. See "--Factors That
May Affect Future Results and Market Price of Stock -- Year 2000 Impact on
Revenues" and "--Year 2000 Readiness."
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
27
<PAGE> 31
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 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 AND MARKET PRICE OF STOCK
Year 2000 Impact on Revenues. 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. By the end of 1998 most project oriented companies that needed to convert
to year 2000 compliant systems (and thus were potential customers for the
Company's products) likely had 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 could be materially adversely impacted. Moreover, as the
year 2000
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<PAGE> 32
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.
Potential Fluctuations in Quarterly Operating Results. The Company's
future operating results may vary from quarter to quarter depending upon a
number of factors, including the demand for its products, the size and timing of
specific sales, the delay or deferral of customer implementations, the level of
product and price competition that it encounters, the length of its sales
cycles, its ability to attract and retain personnel, the timing of new hires,
the timing of new product introductions and product enhancements by the Company
and its competitors, the mix of products and services sold, the activities of
and acquisitions by its competitors, the timing of the Company's national user
conference, general economic conditions and its ability to develop and market
new software products and enhancements and control costs. The loss or delay of
individual orders could have a significant impact on the Company's operating
results, particularly on a quarterly basis. Furthermore, while the Company's
revenues from license fees are difficult to predict because of the length and
variability of the Company's sales cycles (typically 3 to 18 months), the
Company's operating expenses are based on anticipated revenue trends. Because a
high percentage of these expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of sales could cause significant
variations in operating results from quarter to quarter. To the extent such
expenses precede, or are not subsequently followed by, anticipated revenues, the
Company's operating results could be materially adversely affected.
For certain of its software products, the Company typically grants its
customers a right of return for a full or partial refund of the license fee
during a refund period which is generally 60 to 90 days from the date of the
initial software delivery. The Company occasionally has provided, and may in the
future provide, longer refund periods for larger, more complex Costpoint
installations. Costpoint license fees are recognized upon the expiration of the
applicable refund periods and are recorded as deferred revenues until
recognized. Because of customers' refund rights and the varying length of
applicable refund periods, deferred revenues at the end of a quarter do not
necessarily reflect revenues that the Company will recognize in a succeeding
quarter. The Company generally recognizes license fees from its Advantage,
System 1 and Electronic Timesheet products upon delivery.
As a result of these and other factors, the Company's operating results
for any quarter are subject to significant variation, and the Company believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company's future quarterly operating results from time to time may not meet
the expectations of market analysts or investors. In such event, the price of
the Common Stock would likely be materially adversely affected.
Year 2000 Readiness. 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
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<PAGE> 33
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 testing procedures, 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.
Competition. The market for client/server-based business application
software is intensely competitive and rapidly changing. The Company competes
with a number of companies, many of which have significantly greater financial,
technical, marketing and other resources than the Company. As the Company's
larger competitors, such as Oracle, Peoplesoft and SAP, begin to experience a
deceleration in their core business and refocus their marketing and sales
efforts to the middle market in which the Company actively markets its products,
the Company expects such competitors to implement increasingly aggressive
pricing programs. In addition, certain competitors such as 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. The Company
also faces indirect competition from the internal MIS departments of its
potential customers.
There can be no assurance that the Company's products will continue to
compete favorably or that the Company will be successful in the face of
increasing competition from new products and enhancements introduced by existing
or new competitors. In addition, increased competition may result in price
reductions, reduced margins and loss of market share, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Competition."
Hiring and Retention of Employees; Dependence on Key Employees. The
Company's success is dependent upon its ability to attract and retain highly
skilled managerial, research and development, consulting, customer service,
sales and marketing personnel. Although the Company currently is investing, and
plans to continue to invest, significant resources to expand its direct sales
force and its technical and customer support staff, the Company has at times
experienced difficulties in recruiting qualified personnel. The Company could be
adversely affected if it is unable to recruit qualified personnel or if senior
managers or other such personnel were to leave the Company and qualified
replacements were not available. Competition for skilled personnel in the
software industry is intense. There can be no assurance that the Company will
continue to be able to attract and retain
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<PAGE> 34
the personnel it requires to develop and market new and enhanced products or to
market and service its existing products and conduct its operations
successfully. Any inability to do so could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
Company may incur increased compensation costs in order to attract and retain
skilled employees.
The Company's success will also depend in part on the continued services
of its key employees, particularly its senior management personnel. The Company
does not have employment agreements with any of its key employees and does not
maintain any key person life insurance. The loss of Kenneth E. deLaski, the
Company's President and Chief Executive Officer, Eric F. Brown, its Executive
Vice President and Chief Operating Officer, or Dien Hoang Do, its Vice President
of Technology and Chief Technical Officer, could have a material adverse effect
on the Company's business, operating results and financial condition.
Dependence on Costpoint and Advantage Product Lines. For the years ended
December 31, 1997 and 1998, 71.3% and 78.6%, respectively, of the Company's
software revenues were derived from licenses of its Costpoint and Advantage
software products. In addition, the Company generates service revenues related
to its Costpoint and Advantage products. An important element of the Company's
strategy is to license Costpoint to existing System 1 users and to
license Costpoint or Advantage to existing CFMS users as those customers
reengineer their information systems and migrate to client/server solutions;
however, there can be no assurance that the remaining System 1 or CFMS users
will license either Costpoint or Advantage. Nevertheless, the Company expects
its Costpoint and Advantage product lines to continue to account for a
significant percentage of the Company's future revenues. Accordingly, factors
adversely affecting the pricing of, or the demand for Costpoint and Advantage,
such as the success of competitive products or technological change, or the
Company's inability to continue to enhance the Costpoint and Advantage product
lines to meet the evolving needs of its customers, would have a material
adverse effect on the Company's business, operating results and financial
condition.
Rapid Technological Change; Risks Associated with New Product
Development; Potential Liability. The business application software market is
characterized by rapidly changing technologies, evolving industry standards,
frequent new product introductions and short product life cycles. The Company's
future success will depend, to a substantial degree, upon its ability to enhance
its existing products and to develop and introduce, on a timely and
cost-effective basis, new products and features that meet changing customer
requirements and emerging and evolving industry standards. In particular, the
degree of market acceptance of the Company's new, stand alone "front office"
sales force automation and customer management software product that is
currently under development, the first modules of which are expected to be
available in beta by the end of the second quarter of 1999 with general release
of the initial modules expected to occur by the end of 1999, likely will be a
significant factor in the Company's success. 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. There can be
no assurance that the Company will be successful in completing the development
of new products and enhancements or that any new product or enhancement it may
introduce will achieve market acceptance.
31
<PAGE> 35
The development of new, technologically advanced software products is a
complex and uncertain process requiring high levels of innovation, as well as
the accurate anticipation of technological and market trends. The introduction
of new or enhanced products also requires the Company to manage the transition
from or integration with older products in order to minimize disruption in sales
of existing products. There can be no assurance that the Company's development
efforts will progress satisfactorily or keep pace with industry developments.
The Company allocates resources for research and development projects based on
planned product introductions and enhancements; however, actual expenditures may
significantly differ from amounts allocated. The Company has experienced, and
may experience in the future, delays in the introduction of its products, due to
factors internal and external to the Company. Additionally, because the
Company's software products are complex, there can be no assurance that, despite
testing, errors will not be found after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Any future delays in the
introduction or shipment of new or enhanced products, the inability of such
products to gain market acceptance or problems associated with new product
transitions could adversely affect the Company's business, operating results and
financial condition. The sale and support of software products by the Company
entails the risk of product liability claims. In addition, the failure to
perform services to a customer's expectations may result in the Company not
being paid for services rendered, may damage the Company's reputation and may
result in a claim being brought against the Company. The Company maintains
errors and omissions insurance; however, a successful claim for product or
service liability brought against the Company could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business -- Products" and "-- Product Development."
Risks Related to Acquisition Activities. As part of its growth strategy,
the Company has acquired or invested in, and from time to time may acquire or
invest in, complementary businesses, technologies and product lines. In April
1998, the Company acquired certain assets of SalesKit and in May 1998, the
Company completed the acquisition of Harper and Shuman. In order to achieve the
anticipated benefits of these acquisitions and any future acquisitions, the
Company must successfully assimilate the operations of the acquired business,
and integrate and market its acquired products and technologies in a timely
manner. In order to successfully integrate acquired products into the Company's
sales and marketing channels, the Company must train its sales force on acquired
products and integrate employees of the acquired companies with respect to sales
commission, territories, product positioning and training. In addition, certain
of such acquired assets, licenses or technology may require significant
additional development, such as the completion of product functionality, before
the commercial release of products. Although the Company currently has no
understandings, commitments or agreements with respect to any additional
acquisitions, any such acquisitions may be accompanied by the risks commonly
encountered in such transactions. Such risks include, among others, disruption
of the Company's ongoing business; diversion of management from day-to-day
operations; amortization of acquired intangible assets; impairment of
relationships with customers, employees and strategic partners; loss of
personnel; difficulty of maintaining uniform standards, controls, procedures and
policies; and potential liabilities arising from any acquisition. The Company's
inability to address such risks or fulfill expectations regarding revenues from
acquired businesses, products and technologies could have a material adverse
effect on the Company's business, operating results and financial condition.
32
<PAGE> 36
Management of Growth. The Company is currently experiencing growth and
expansion, internally and through acquisitions, which have placed, and will
continue to place, a strain on its administrative, operational and financial
resources and demands on its systems and controls. This growth has resulted in
an increasing level of responsibility for the Company's management personnel.
The Company's ability to manage its growth successfully will also require the
Company to continue to expand and improve its operational, management and
financial systems and controls on a timely basis. If the Company's management is
unable to manage growth effectively, the Company's business, operating results
and financial condition could be materially adversely affected.
Uncertainty of Expansion into New Markets. The Company believes that its
future success is dependent, in part, on its ability to successfully penetrate
new project-oriented markets and expand internationally. Although the Company
has an ongoing program to further customize and add functionality to its
products in order to address the specific needs of customers in new markets, the
Company's limited resources may restrict its ability to track developments in
these markets, to develop appropriate products, and to effectively pursue
marketing activities in multiple markets simultaneously. There can be no
assurance that the Company's products will be accepted in new markets. The
inability of the Company to successfully expand the markets for its products
could have a material adverse effect on its business, operating results and
financial condition. See "Business -- Strategy" and "-- Sales and Marketing."
Dependence upon Organizations with Federal Government Contracts. A
significant portion of the Company's total revenues is derived from customers
that provide products and services under federal government contracts. The
Company believes that, at least in the near term, such organizations will
continue to represent a large percentage of its customers and account for a
significant percentage of its total revenues. While such organizations are
subject to the same general economic conditions as other businesses, demand for
their products and services is also dependent upon applicable procurement
policies and the availability of appropriated funds. Any significant downsizing,
consolidation or liquidation of such organizations as a result of changes in
procurement policies, budget reductions or reallocations or other causes could
adversely affect the Company's business, operating results and financial
condition.
Reliance on Third-Party Software Development Tools. The Company licenses
from third parties certain software development tools that the Company utilizes
in the development of its products. Accordingly, the Company is dependent upon
such third parties' abilities to deliver quality products, correct errors,
ensure year 2000 functionality, support their current products, develop new and
enhanced products on a timely and cost-effective basis and respond to emerging
industry standards and other technological changes. Should these third-party
development tools 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. Although the Company believes that
other development tools with comparable functionality are currently available
from other third parties, there can be no assurance that, if needed, replacement
products could be obtained on reasonable terms. 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 Company's inability to rewrite its products using different
development tools
33
<PAGE> 37
on a timely and cost-effective basis could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business --
Products" and "-- Product Development."
Proprietary Rights; Risks of Infringement. The Company's success and
ability to compete is dependent in part upon its proprietary software. The
Company relies on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to establish and protect
its rights in its software. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy, design around or
reverse engineer aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Furthermore, the Company
has no patents, and existing copyright law affords only limited protection. In
addition, the laws of some countries do not protect the Company's proprietary
rights to the same extent as do the laws of the United States. Accordingly,
there can be no assurance that the Company will be able to protect its
proprietary software against unauthorized third-party copying or use, which
could adversely affect the Company's competitive position.
There are currently no claims pending against the Company relating to the
infringement of any proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim infringement by the
Company of their intellectual property rights. The Company expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources from day-to-day
operations or cause delays in the delivery or implementation of the Company's
products. In addition, such claims could require the Company to discontinue the
use of certain software codes or processes, cease the manufacture, use and sale
of infringing products, and develop non-infringing technology or to obtain
licenses to the alleged infringing technology. There can be no assurance that
the Company would be able to develop alternative technologies or to obtain such
licenses or, if a license were obtainable, that the terms would be commercially
acceptable to the Company. In the event of a successful claim of product
infringement against the Company and failure or inability of the Company to
license the infringed or similar technology, the Company's business, operating
results and financial condition could be materially adversely affected.
Control by Principal Shareholders; Shares Eligible for Future Sale;
Registration Rights. The Company's principal shareholders, Kenneth E. deLaski,
its President and Chief Executive Officer, and Donald deLaski, its Chairman,
together with their affiliates, in the aggregate own approximately 51% of the
outstanding shares of the Common Stock as of February 19, 1999. As a result,
these shareholders, acting together, are able to effectively control
substantially all matters requiring approval by the shareholders of the Company
including the election of the Board of Directors and significant corporate
transactions. Such influence by such shareholders could delay or prevent a
change in control of the Company, impede a merger, consolidation, takeover or
other business combination involving the Company, or discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control of
the Company. Substantially all of the Company's restricted securities are
available for resale pursuant to Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act") including the shares owned by the principal
shareholders. In October 1998, pursuant to contractual obligations to do so, the
Company registered an aggregate
34
<PAGE> 38
of 516,751 shares of Common Stock and 130,000 shares of Common Stock issuable
pursuant to outstanding warrants under the Securities Act. Sales of substantial
amounts of such restricted or registered securities could adversely affect
prevailing market prices for the Common Stock.
Volatility of the Market Price of the Common Stock. The market price of
the Common Stock has historically been volatile. The Company believes factors
such as quarterly fluctuations in results of operations, announcements of new
products and acquisitions by the Company or by its competitors, changes in
earnings estimates by analysts, changes in accounting treatments or principles
and other factors may cause the market price of the Common Stock to fluctuate,
perhaps substantially. The market price of the Common Stock also may be affected
by the Company's ability to meet market analysts' expectations, and any failure
to meet such expectations could have a material adverse effect on the market
price of the Common Stock. In addition, securities prices for many technology
companies fluctuate widely for reasons which may be unrelated to operating
results of such companies. These fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Common Stock in the future. In the past, following periods of volatility in the
market price of a company's securities, class action litigation has often been
instituted against such company. Any such litigation instigated against the
Company could result in substantial costs and a diversion of management's
attention and resources from day-to-day operations, which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Market for Registrant's Common Equity and Related Stockholder
Matters."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7 for discussion.
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.
35
<PAGE> 39
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.
36
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
2.1(1) Asset Purchase Agreement dated February 12, 1998 between SalesKit
Software Corporation, Arch Acquisition Corp. and the Company.
2.2(2) Agreement and Plan of Reorganization among Deltek Systems, Inc.,
Turtledove Acquisition Corp., Chester A. Shuman, the Harper and
Shuman, Inc. Employee Stock Ownership Plan and Trust and the other
shareholders of Harper and Shuman, Inc.
3.1(3) Amended and Restated Articles of Incorporation of the Registrant.
3.2(3) Amended and Restated Bylaws of the Registrant.
4.1(4) Specimen Common Stock certificate of the Registrant.
4.2(1) Form of Warrant issued to SalesKit Software Corporation
10.1(3) 1987 Employee Stock Option Plan.
10.2(3) Employee Time Accelerated Stock Option Plan (revised).
10.3(3) 1996 Stock Option Plan.
10.4(3) 1996 Employee Stock Purchase Plan.
*10.5(5) OEM Software License Agreement by and between the Company and
Centura Software Corporation dated as of March 1, 1993, as amended.
*10.6(5) Cognos Desktop OEM Agreement by and between the Company and Cognos
Corporation dated as of February 28, 1994, as amended.
*10.7(5) 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(3) Agreement of Lease by and between the Company and Tysons Corner
Limited Partnership, dated as of November 12, 1991, as amended.
10.9(3) Agreement of Lease by and between the Company and Tysons Corner
Limited Partnership, dated as of November 12, 1992, as amended.
10.10(4) Form of Indemnity Agreement for officers and directors.
10.11(4) Form of Tax Indemnification Agreement.
10.12(4) Seventh Amendment to Agreements of Lease by and between the Company
and Tysons Corner Limited Partnership, dated as of December 17,
1997.
21 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
---------------
* 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.
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 13, 1998 (File No. 0-22001).
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 12, 1998 (File No. 0-22001).
(3) Incorporated by reference to the Company's Form S-1 filed on December 19,
1996, File No. 333-18247.
(4) Incorporated by reference to the Company's Amendment No. 1 to Form S-1
filed on January 28, 1997 (File No. 333-18247).
(5) Incorporated by reference to the Company's Amendment No. 2 to Form S-1
filed on February 24, 1997 (File No. 333-18247).
37
<PAGE> 41
(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.
38
<PAGE> 42
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 2, 1999 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 2, 1999 /s/ Kenneth E. deLaski
----------------------------------
Kenneth E. deLaski, President,
Chief Executive Officer, and Director
March 2, 1999 /s/ Donald deLaski
----------------------------------
Donald deLaski, Chairman of the Board
of Directors and Treasurer
March 2, 1999 /s/ Alan R. Stewart
----------------------------------
Alan R. Stewart, Chief Financial
Officer and Secretary
March 2, 1999 /s/ Darrell J. Oyer
----------------------------------
Darrell J. Oyer, Director
March 2, 1999 /s/ Charles W. Stein
----------------------------------
Charles W. Stein, Director
March 2, 1999 /s/ Robert E. Gregg
----------------------------------
Robert E. Gregg, Director
39
<PAGE> 43
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, 1997 and 1998 F-3
Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 F-4
Statements of Changes in Shareholders' Equity for the Years Ended December 31,
1996, 1997 and 1998 F-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 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> 44
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, 1997 and 1998, and the related
statements of operations, changes in shareholders' equity, and cash flows for
the three years in the period ended December 31, 1998. 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, 1997 and 1998, and the results of its operations and
its cash flows for the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 22, 1999
F-2
<PAGE> 45
DELTEK SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $10,883 $ 9,515
Marketable securities 14,949 23,861
Accounts receivable, net of allowance for doubtful
accounts of $573 and $689, respectively 9,929 17,351
Deferred income taxes 1,158 1,678
Prepaid expenses and other current assets 1,440 2,159
-------- --------
Total current assets 38,359 54,564
-------- --------
Furniture, equipment, and leasehold improvements, at cost,
net of accumulated depreciation and amortization of
$5,349 and $6,556, respectively 2,976 4,312
Computer software development costs, at cost, net of
accumulated amortization of $1,391 and $2,239, respectively 2,597 3,025
Purchased intangibles, net 93 4,349
Other assets 16 58
-------- --------
Total assets $44,041 $66,308
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,985 $ 7,711
Accrued dividends payable 400 ---
Income taxes payable 543 ---
Deferred revenue 11,076 17,191
-------- --------
Total current liabilities 17,004 24,902
-------- --------
Deferred income taxes 1,223 ---
Commitments (Note 8)
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; 17,704,933 and 17,854,151 shares issued
and outstanding at December 31, 1997 and 1998, respectively 18 18
Paid-in capital 18,044 21,568
Retained earnings 8,204 19,990
-------- --------
Less - Unearned compensation (452) (170)
-------- --------
Total shareholders' equity 25,814 41,406
-------- --------
Total liabilities and shareholders' equity $44,041 $66,308
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 46
DELTEK SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
License fees $14,114 $21,043 $28,162
Services 24,343 33,216 50,867
Third-party equipment and software 3,254 3,387 4,040
-------- -------- --------
41,711 57,646 83,069
-------- -------- --------
Operating expenses:
Cost of software 1,577 2,053 2,491
Cost of services 9,844 14,375 24,763
Cost of third-party equipment and software 2,516 2,631 3,146
Software development 8,380 11,214 15,014
Sales and marketing 5,000 6,643 10,353
General and administrative 3,018 3,558 4,163
Amortization of purchased intangibles - 26 687
Stock option compensation 867 - -
Acquisition & failed offering costs - 320 1,475
Purchased in-process research and development 394 - 2,500
-------- -------- --------
Total operating expenses 31,596 40,820 64,592
-------- -------- --------
Income from operations 10,115 16,826 18,477
Interest income 392 781 1,066
-------- -------- --------
Income before income taxes 10,507 17,607 19,543
Provision for income taxes 54 5,898 7,788
-------- -------- --------
Net income $10,453 $11,709 $11,755
======== ======== ========
Basic net income per share $ 0.66 $ 0.67 $ 0.66
======== ======== ========
Diluted net income per share $ 0.64 $ 0.65 $ 0.64
======== ======== ========
Weighted average shares outstanding 15,777 17,398 17,814
======== ======== ========
Weighted average shares outstanding, including
dilutive effect of stock options 16,282 17,882 18,235
======== ======== ========
Pro forma statement of operations data (unaudited):
Income before provision for income taxes, as reported $10,507 $17,607
Income tax provision 4,092 6,780
-------- --------
Net income $6,415 $10,827
======== ========
Pro forma basic net income per share $0.41 $0.62
======== ========
Pro forma diluted net income per share $0.39 $0.61
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 47
DELTEK SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON ACCUMULATED TOTAL
STOCK PAID-IN RETAINED COMPREHENSIVE UNEARNED SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS INCOME COMPENSATION EQUITY
------------ ----------- --------- ----------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 15,770,205 $ 16 $ 230 $ 9,401 $ 23 $ - $ 9,670
Cash dividends - - - (9,265) - - (9,265)
Exercise of stock options 15,000 - 7 - - - 7
Purchase and retirement of
common stock from ESOP (10,038) - (30) (3) - - (33)
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 - - 1,484 - - (468) 1,016
Issuance of stock options - - 252 - - (252) -
Net income - - - 10,453 - - 10,453
----------- ----- ------- --------- ---------- --------- ----------
Balance, December 31, 1996 15,877,167 16 2,351 10,586 - (720) 12,233
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
Purchase and retirement of
common stock from ESOP (24,146) - (5) (77) - - (82)
Purchase and retirement of
common Stock (80,000) - (1,211) - - - (1,211)
Amortization of unearned
compensation - - - - - 268 268
Net income - - - 11,709 - - 11,709
----------- ----- ------- --------- ---------- --------- ----------
Balance, December 31, 1997 17,704,933 18 18,044 8,204 - (452) 25,814
Reversed dividend accrual - - - 31 - - 31
Exercise of stock options 160,261 - 431 - - - 431
Issuance of shares for
Employee Stock Purchase
Plan 38,957 - 620 - - - 620
Purchase and retirement of
common stock (50,000) - (806) - - - (806)
Tax benefit of options
exercised - - 2,097 - - - 2,097
Issuance of stock warrants for
acquisition of SalesKit
Software Corporation - - 932 - - - 932
Shareholder contribution - - 250 - - - 250
Amortization of unearned
compensation - - - - - 282 282
Net income - - - 11,755 - - 11,755
----------- ----- ------- --------- ---------- --------- ----------
Balance, December 31, 1998 17,854,151 $ 18 $ 21,568 $ 19,990 $ - $ (170) $ 41,406
=========== ===== ======= ========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 48
DELTEK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,453 $ 11,709 $ 11,755
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 1,244 1,548 2,787
Other noncash charges 980 268 1,575
Purchased research and development 394 - 2,500
Gain on disposal of fixed assets (23) - --
Accreted interest on marketable securities 61 (186) (34)
Change in accounts receivable, net (165) (2,866) (7,422)
Change in prepaid expenses and other current assets (902) 28 (523)
Change in prepaid income taxes 7 55 --
Change in accounts payable and accrued expenses 35 2,305 2,258
Change in income taxes payable - 543 (543)
Change in deferred income taxes, net (43) 159 (961)
Change in deferred revenue 3,107 3,033 6,115
--------- --------- ---------
Net cash provided by operating activities 15,148 16,596 17,507
--------- --------- ---------
Cash flows from investing activities:
(Purchase) sale of marketable securities 3,067 (14,763) (8,878)
Purchase of property and equipment (1,291) (1,656) (2,543)
Acquisition of SalesKit Software Corporation - - (6,054)
Capitalization of computer software development costs (648) (679) (1,276)
--------- --------- ---------
Net cash (used in) provided by investing activities 1,128 (17,098) (18,751)
--------- --------- ---------
Cash flows from financing activities:
Cash proceeds from initial public offering, net of offering
Costs - 16,388 -
Cash dividends paid to stockholders (11,859) (13,614) (369)
Cash proceeds from exercise of stock options 7 250 431
Cash proceeds from issuance of stock for employee
Purchase plan - 273 620
Common stock purchased and retired (33) (1,293) (806)
--------- --------- ---------
Net cash (used in) provided by financing activities (11,885) 2,004 (124)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 4,391 1,502 (1,368)
Cash and cash equivalents, beginning of year 4,990 9,381 10,883
--------- --------- ---------
Cash and cash equivalents, end of year $9,381 $ 10,883 $9,515
========= ========= =========
Cash paid during the year for income taxes $ 78 $ 5,157 $8,307
========= ========= =========
Supplemental Disclosure
Allegro and SalesKit acquisitions (Note 3)
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 49
DELTEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS COMBINATION WITH HARPER & SHUMAN, INC.:
In May 1998, Deltek Systems, Inc. completed its business combination with
Harper and 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 Systems, Inc. common stock. In addition, outstanding H&S stock
options were converted at the same exchange factor into options to purchase
approximately 4,000 shares of Deltek Systems, Inc. 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 as though H&S had always been a part of Deltek
Systems, Inc. (hereafter H&S and Deltek Systems, Inc. are collectively referred
to as the "Company" or "Deltek").
Acquisition costs of $1,096,000 consisted primarily of fees for
investment bankers, attorneys, accountants and other related charges and were
expensed at closing.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow.
<TABLE>
<CAPTION>
Three Months
Ended
(THOUSANDS OF DOLLARS) 1996 1997 March 31, 1998
<S> <C> <C> <C>
Revenues
Deltek $34,780 $48,782 $15,311
Harper & Shuman 6,931 8,864 2,442
-------- -------- ---------
Combined $41,711 $57,646 $17,753
Net Income (loss)
Deltek $10,494 $11,312 $ 3,005
Harper & Shuman (41) 397 101
-------- -------- ---------
Combined $10,453 $11,709 $ 3,106
</TABLE>
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Deltek is incorporated under the laws of the Commonwealth of Virginia.
The Company designs, develops, sells and supports a family of integrated
software that provide project-oriented businesses with tools to more effectively
manage, operate and grow their operations. The Company's software products have
been specifically designed to fulfill the needs of project-oriented companies
and include both enterprise-wide systems as well as application software
products that can be used either as a stand alone application or as an
integrated part of the Company's enterprise-wide systems. Deltek's
enterprise-wide products consist of Costpoint, an advanced client/server
business software system designed for all types of project-oriented
organizations; Advantage, an integrated, project-focused accounting system
designed for professional service firms; System 1, a character-based accounting
system designed primarily for organizations providing products or services under
contracts with the federal government; and CFMS, a family of older-generation
project-based accounting systems used primarily by architecture and engineering
firms. Deltek's stand-alone application software products, which also can be
integrated with the Company's enterprise-wide systems, consist of Electronic
Timesheet, an advanced employee timekeeping system, and Allegro, a project
budgeting and resource management tool.
F-7
<PAGE> 50
Consolidation Policy
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles and include the
accounts of the Company and its subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Net Income Per Common Share
The calculation of basic net income per share is based on the weighted
average number of Company shares outstanding in each period. Diluted net income
per share is based on the combined weighted average number of shares and share
equivalents outstanding, assuming dilution as calculated under the treasury
stock method. No reconciling items exist 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 relates 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 1996.
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.
For certain of its software products, the Company typically grants its customers
a right of return for a full or partial refund of the license fee during a
refund period which is generally 60 to 90 days from the date of the initial
software delivery, although the Company occasionally has provided, and may in
the future provide, longer refund periods for larger, more complex Costpoint
installations. The Company generally recognizes license fees from its System 1
Electronic Timesheet and Advantage products upon delivery, whereas Costpoint and
Allegro license fees are recognized upon the expiration of the applicable refund
period and are recorded as deferred revenue until recognized (Note 7). For
contracts that involve significant installment payments, the Company also
evaluates whether fees are fixed and determinable. If the fees are not fixed and
determinable, the Company defers the recognition of revenue until the payments
become due. Implementation and other consulting services are provided on a time
and materials basis billed monthly or semi-monthly and recognized as the
services are performed. Telephone support and periodic enhancements and updates
are provided for maintenance fees that are payable quarterly and initially
represent between 15% and 20% of the related software license fee on an annual
basis. Revenue from quarterly maintenance and support service is recognized over
the term of the support agreement. 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")
issued statement of Position ("SOP") 97-2, Software Revenue Recognition, which
superceded SOP 91-1, Software Revenue Recognition. SOP 97-2 provides additional
guidance to multiple elements; returns,
F-8
<PAGE> 51
exchanges, and platform transfer rights; resellers; services; funded
software-development arrangements; and contract accounting. Implementation of
SOP 97-2 was required for transactions entered into beginning after December 15,
1997 and did not have a material 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.
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 $579,000,
$698,000, and $876,000 was recorded related to these costs during 1996, 1997,
and 1998, 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 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, 1998 are marketable
securities of $23,861,000 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 material unrealized gains or losses were incurred
in 1998.
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.
F-9
<PAGE> 52
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
accounts receivable and accounts payable in the accompanying financial
statements approximate fair value due to the short maturity of these
instruments.
Income Taxes
Prior to February 1997, the majority of the Company's operations 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
and for Federal income taxes of H&S. Upon Deltek's initial public offering, the
entire 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 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.
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, 2000. 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.
Reclassifications
Certain amounts in prior years' financial statements have been
reclassified to conform to the 1998 presentation.
F-10
<PAGE> 53
3. ALLEGRO AND SALESKIT ACQUISITIONS :
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.
The Company assigned approximately $130,000 of the purchase price to
intangible assets and is amortizing this amount over five years. The Company
assigned $394,000 of the purchase price 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
revenues.
SalesKit Acquisition
In April 1998, the Company acquired substantially all of the assets of
Saleskit Software Corporation ("Saleskit"), and assumed certain related
liabilities. The purchase price consisted of cash of $6,054,000 and warrants
with an estimated fair value of $932,000. The warrants allow the holder to
purchase 130,000 shares of Deltek common stock at an exercise price of $22 per
share, exercisable over a three-year period.
The Company assigned $4,310,000 of the purchase price to intangible
assets and existing technology and is amortizing this amount over five years.
Based on the "stage of completion" valuation method, the Company assigned
$2,500,000 to in-process research and development and expensed this amount in
1998. In the opinion of management, the acquired in-process research and
development had not yet reached technological feasibility and had no alternative
future uses. At closing, the Company recorded approximately $468,000 in assumed
liabilities of SalesKit, primarily related to accrued liabilities and deferred
revenue.
4. ACCOUNTS RECEIVABLE:
The Company periodically licenses its software to certain customers under
monthly installment plans. Unbilled accounts receivable are generally due within
one year that relate primarily to installment sales were approximately
$3,470,000 and $5,597,000 at December 31, 1997 and 1998, respectively.
Installment plans extending longer than four months are generally
interest-bearing.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued wages and other employee benefits $2,249 $4,291
Deferred rent credits 110 315
Accounts payable and other accrued expenses 2,626 3,105
------- -------
$4,985 $7,711
======= =======
</TABLE>
F-11
<PAGE> 54
6. INCOME TAXES:
In conjunction with Deltek's initial public offering in February 1997,
the Company (prior to the combination of H&S) changed from an S Corporation to a
C Corporation for federal and state income tax purposes. H&S reported as a C
Corporation for all years presented. 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:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ - $4,919 $7,958
State 96 821 1,573
------ ------- -------
96 5,740 9,531
------ ------- -------
Deferred:
Federal (34) 136 (1,525)
State (8) 22 (218)
------ ------- -------
(42) 158 (1,743)
------ ------- -------
Tax provision 54 $5,898 $7,788
====== ======= =======
</TABLE>
The income tax provision for continuing operations differs from that
computed using the statutory federal income tax rate of 35% in 1998 and 1997 for
the following reasons:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Computed Statutory Amount $6,162 $6,840
Tax Exempt Income (187) (327)
State Income Taxes, net of federal tax benefit 534 880
Non-taxable income during S Corporation
Status (644) -
Non-deductible acquisition costs - 388
Other 33 7
-------- --------
$5,898 $7,788
======== ========
</TABLE>
The following table is a summary of the significant components of the
Company's deferred tax assets and liabilities for 1997 and 1998.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Cash to accrual change in tax accounting method $124 $132
Employee compensation & benefits 226 456
Reserves and other liabilities 577 914
Non-cash compensation 181 282
Purchased Intangibles - 1,148
Other 50 121
------- -------
Total deferred tax asset 1,158 3,053
------- -------
Deferred tax liabilities:
Depreciation (162) (259)
Computer software development costs (1,032) (1,100)
Other (29) (16)
------- -------
Total deferred tax liabilities (1,223) (1,375)
------- -------
Net deferred tax asset ( liability) $(65) $1,678
======= =======
</TABLE>
F-12
<PAGE> 55
7. DEFERRED REVENUE:
The Company had deferred revenue of approximately $6,222,000 and
$9,344,000 as of December 31, 1997 and 1998, respectively, attributable to the
sales of licenses of Costpoint, related Electronic Timesheet and Allegro
software. The revenues related to Costpoint will be recognized upon the
expiration of the refund period and right of return, generally 60 to 90 days
from the date of delivery, and the fulfillment of any significant vendor. Also
included in deferred revenue is ongoing software support and consulting and
training services.
8. 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
$1,810,000 and $2,389,000 for the years ended December 31, 1997 and 1998,
respectively. The Company's primary lease expires in March, 2002.
As of December 31, 1998, the future minimum operating lease payments are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ------
(IN THOUSANDS)
<S> <C>
1999 $2,762
2000 2,999
2001 3,446
2002 3,413
2003 1,621
Thereafter -
--------
$14,241
========
</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
both 1997 and 1998. The Company's accrued contribution for 1997 and 1998 was
approximately $454,000 and $936,000, respectively.
Other Matters
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.
F-13
<PAGE> 56
9. 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.
10. EMPLOYEE STOCK OPTION PLANS:
Employee Stock Ownership Plan
Prior to the business combination with H&S, H&S qualified employees could
participate in an Employee Stock Ownership Plan ("ESOP"). Under the plan, H&S
made annual contributions of cash at the discretion of the H&S Board of
Directors, except that the minimum amount must be sufficient to enable the
related trust to meet its current obligations. Compensation costs were $2,500
for 1996 and $10,500 for 1997. The ESOP had no outstanding borrowings and had no
unallocated shares as of December 31, 1996 and 1997. The ESOP was terminated in
1998.
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 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 $282,000 during the year ended December 31, 1998.
An additional $170,000 of such charges will be recorded in future periods, as
outstanding options continue to vest under this plan. At December 31, 1998,
136,250 options were outstanding and 111,050 options were exercisable under the
1987 Plan.
F-14
<PAGE> 57
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, 1998,
471,250 options were outstanding and 146,350 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, 1998, 866,600 options were outstanding and
61,800 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.
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.
Since the Purchase Plan's inception in 1997, 68,152 shares of common stock have
been issued.
F-15
<PAGE> 58
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, 1995 412,000 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 1,063,000 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 1,132,484 0.249 - 22.500
---------
Options granted 623,108 3.191 - 24.500
Options canceled (116,501) 0.517 - 24.500
Options exercised (160,261) 0.304 - 18.750
---------
Shares under option, December 31, 1998 1,478,830 0.249 - 18.687
=========
</TABLE>
Of the options outstanding under the Book Value Plan at December 31,
1998, options to purchase 156,200 shares are immediately exercisable at exercise
prices ranging from $0.249 to $0.517 per share.
On December 11, 1998, the Company repriced 383,050 options, which had
exercise prices between $18.75 and $24.50 per share to the then current market
price of $18.687 per share. This was Company's first repricing of options and
did not benefit executive officers, affiliates, or major shareholders.
F-16
<PAGE> 59
The Company adopted the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, effective for the Company's December
31, 1996 financial statements. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, compensation
cost has been recognized for its stock plans based on the intrinsic value of the
stock option at date of grant (i.e. the difference between the exercise price
and the fair value of the Company's stock). Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
FASB Statement 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income before taxes, as reported $10,507 $17,607 $19,543
Pro forma income tax provision 4,029 6,777 8,585
Pro forma compensation expense 162 896 1,317
-------- -------- --------
Pro forma net income $6,316 $ 9,934 9,641
======== ======== ========
Diluted earnings per share, as reported $0.39 $0.61 $.64
Diluted earnings per share, pro forma $0.39 $0.56 $.53
</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 1996, 1997, and 1998, respectively; no dividend yield, expected
volatility of 50%, 70% and 60%, risk-free interest rates of approximately 6.0%,
5.9% and 4.6%, 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.
F-17
<PAGE> 60
11. 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.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
------------ ------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $12,763 $13,603 $14,501 $16,779
Gross profit 8,847 8,922 9,527 11,265
Net income 3,274 2,458 2,682 3,295
Pro forma net income 2,392 2,458 2,682 3,295
Pro forma basic net income per common share $ 0.14 $ 0.14 $ 0.15 $ 0.19
Pro forma diluted net income per common share $ 0.14 $ 0.14 $ 0.15 $ 0.18
<CAPTION>
(RESTATED)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 (a) 1998 (a) 1998
------------ ------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 17,753 $ 19,949 $ 21,604 $ 23,763
Gross profit 11,487 12,696 13,609 14,877
Net income 3,106 776 3,716 4,157
Basic net income per common share $ 0.18 $ 0.04 $ 0.21 $ 0.23
Fully diluted net income per common share $ 0.17 $ 0.04 $ 0.20 $ 0.23
</TABLE>
(a) In January 1999, the Company learned that the Securities and Exchange
Commission has closely scrutinized purchase in-process research and
development charges and has expressed its views in comment letters to the
registrants and in a letter to the American Institute of Certified Public
Accountants. The Company believed its accounting for the SalesKit
Software Corporation acquisition in April 1998, which included an
in-process research and development charge of $6.8 million, was in
accordance with generally accepted accounting principles and industry
practice at that time. The Company and its appraiser have re-evaluated
the in-process research and development charge in light of the SEC's new
position on this topic. Consequently, in closing out the fourth quarter
of 1998 the Company reduced the purchase price allocation for the
in-process research and development charge to $2.5 million, and increased
goodwill by $4.3 million. The quarterly information above reflects the
impact of this adjustment.
F-18
<PAGE> 61
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 22, 1999. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. Schedule I, Valuation and Qualifying Accounts, is the responsibility of
the Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not 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 22, 1999
S-1
<PAGE> 62
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, 1996:
Bad-debt reserves ............ 413 (447) 500 466
December 31, 1997:
Bad-debt reserves ............ 466 (174) 281 573
December 31, 1998:
Bad-debt reserves ............ 573 ( 69) 185 689
</TABLE>
S-2
<PAGE> 63
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
No. Description
- --- -----------
<S> <C>
21 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name Jurisdiction
---- ------------
<S> <C>
Turtledove Acquisition Corp. Virginia
Harper and Shuman, Inc. Massachusetts
Arch Acquisition Corp. Virginia
Deltek Systems (Philippines), Ltd. Virginia
Deltek Systems (UK) Limited United Kingdom
</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 22, 1999, 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, Form
S-8 File No. 333-29989 and Form S-3 File No. 333-60457.
Washington, D.C.
February 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<CASH> 9,381 10,883 9,515
<SECURITIES> 0 0 0
<RECEIVABLES> 7,529 10,502 18,040
<ALLOWANCES> (466) (573) (689)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 18,042 38,359 54,564
<PP&E> 6,689 8,325 10,868
<DEPRECIATION> (4,500) (5,349) (6,556)
<TOTAL-ASSETS> 22,966 44,041 66,308
<CURRENT-LIABILITIES> 10,733 18,227 24,902
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 16 18 18
<OTHER-SE> 12,271 25,796 41,388
<TOTAL-LIABILITY-AND-EQUITY> 22,966 44,041 66,308
<SALES> 41,711 57,646 83,069
<TOTAL-REVENUES> 41,711 57,646 83,069
<CGS> 0 0 0
<TOTAL-COSTS> 31,596 40,820 64,592
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 10,507<F1> 17,607<F4> 19,543<F7>
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 10,115 16,826 18,477
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 10,453<F2> 11,709<F5> 11,755
<EPS-PRIMARY> 0.66<F3> 0.67<F6> 0.64
<EPS-DILUTED> 0 0 0
<FN>
<F1>INCLUDES INTREST INCOME OF $392.
<F2>THE PRO FORMA INCOME TAX PROVISION AND NET INCOME, AFTER TAKING EFFECT FOR A
PROFORMA INCOME TAX PROVISION WOULD BE $4,092 AND $6,415, RESPECTIVELY.
<F3>THE PRO FORMA NET INCOME PER SHARE ON A FULLY DILUTED BASIS WOULD HAVE BEEN
$0.39.
<F4>INCLUDES INTEREST INCOME OF $781.
<F5>THE PRO FORMA INCOME TAX PROVISION AND NET INCOME, AFTER TAKING EFFECT FOR A
PROFORMA INCOME TAX PROVISION WOULD BE $6,780 AND $10,827, RESPECTIVELY.
<F6>THE PRO FORMA NET INCOME PER SHARE ON A FULLY DILUTED BASIS WOULD HAVE BEEN
$0.61.
<F7>INCLUDES INTEREST INCOME OF $1,066.
</FN>
</TABLE>
