<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the quarterly period ended September 30, 1999
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number: 000-22001
DELTEK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1252625
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8280 Greensboro Drive, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 734-8606
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at September 30, 1999
Common Stock, $.001 par value 16,973,897
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DELTEK SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 3
Consolidated Statements of Income for the Three Months 4
Ended September 30, 1999 and September 30, 1998
Consolidated Statements of Income for the Nine Months 5
Ended September 30, 1999 and September 30, 1998
Consolidated Statements of Cash Flows for the Nine Months 6
Ended September 30, 1999 and September 30, 1998
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 21
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 22
ITEM 2 - Changes in Securities and Use of Proceeds 22
ITEM 3 - Defaults upon Senior Securities 22
ITEM 4 - Submission of Matters to a Vote of Security Holders 22
ITEM 5 - Other Information 22
ITEM 6 - Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DELTEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,489 $ 9,515
Marketable securities 21,782 23,861
Accounts receivable, net of allowance for doubtful
accounts of $1,131 and $689, respectively 18,677 17,351
Prepaid income taxes 1,353 --
Deferred income taxes 1,805 1,678
Prepaid expenses and other current assets 2,083 2,159
-------- --------
Total current assets 53,189 54,564
-------- --------
Furniture, equipment, and leasehold improvements, at
cost, net of accumulated depreciation and amortization
of $7,746 and $6,556 respectively 5,574 4,312
Computer software development costs, at cost, net of
accumulated amortization of $2,923 and $2,239,
respectively 4,470 3,025
Purchased intangibles, net of amortization 3,546 4,349
Other assets 95 58
-------- --------
Total assets $ 66,874 $ 66,308
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,055 $ 7,711
Deferred revenue 13,479 17,191
-------- --------
Total current liabilities 20,534 24,902
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.001 par value per share, 2,000,000
shares authorized, none issued or outstanding -- --
Common stock, $0.001 par value per share, 45,000,000
shares authorized, 16,973,897 and 17,854,151 shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 17 18
Paid in capital 13,620 21,568
Retained earnings 32,703 19,990
Less unearned compensation -- (170)
-------- --------
Total shareholders' equity 46,340 41,406
-------- --------
Total liabilities and shareholders' equity $ 66,874 $ 66,308
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</TABLE>
See Notes to Consolidated Financial Statements
3
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DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
------- -------
(In thousands, except per share data)
<S> <C> <C>
Revenues:
License fees $ 7,638 $ 7,356
Services 16,700 13,425
Third party equipment and software 801 823
------- -------
25,139 21,604
------- -------
Operating expenses:
Cost of software 632 668
Cost of services 8,303 6,692
Cost of third-party equipment
and software 720 635
Software development 4,208 3,989
Sales and marketing 2,789 2,583
General and administrative 1,353 975
Amortization of purchased intangibles 248 254
------- -------
Total operating expenses 18,253 15,796
------- -------
Income from operations 6,886 5,808
Interest income, net 285 273
------- -------
Income before income taxes 7,171 6,081
Provision for income taxes 2,867 2,365
------- -------
Net income $ 4,304 $ 3,716
======= =======
Basic net income per share $ 0.25 $ 0.21
======= =======
Diluted net income per share $ 0.25 $ 0.20
======= =======
Weighted average shares outstanding 16,949 17,864
======= =======
Weighted average shares outstanding, including dilutive
effect of stock options 17,430 18,280
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
4
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DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
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(In thousands, except per share data)
<S> <C> <C>
Revenues:
License fees $21,838 $20,046
Services 48,280 36,647
Third party equipment and software 2,364 2,613
------- -------
72,482 59,306
------- -------
Operating expenses:
Cost of software 1,965 1,767
Cost of services 22,568 17,730
Cost of third-party equipment
and software 2,039 2,017
Software development 12,222 11,199
Sales and marketing 8,459 7,464
General and administrative 4,349 2,902
Purchased in-process research and development -- 2,500
Acquisition costs -- 1,096
Amortization of purchased intangibles 803 432
------- -------
Total operating expenses 52,405 47,107
------- -------
Income from operations 20,077 12,199
Interest income, net 894 773
------- -------
Income before income taxes 20,971 12,972
Provision for income taxes 8,258 5,374
------- -------
Net income $12,713 $ 7,598
======= =======
Basic net income per share $ 0.73 $ 0.43
======= =======
Diluted net income per share $ 0.71 $ 0.42
======= =======
Weighted average shares outstanding 17,404 17,802
======= =======
Weighted average shares outstanding, including dilutive
effect of stock options 17,856 18,243
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
5
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DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
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<S> <C> <C>
Cash flow from operating activities:
Net Income $ 12,713 $ 7,598
Adjustments to reconcile net income provided by
operating activities:
Depreciation and amortization 2,938 1,930
Purchased research and development, noncash charge -- 2,500
Other noncash charges (128) 752
Accreted interest on marketable securities -- (233)
Change in accounts receivable, net (1,326) (5,510)
Change in prepaid expenses, inventories and other assets 76 (375)
Change in prepaid income taxes (1,353) --
Change in accounts payable and accrued expenses (656) 1,118
Changes in deferred income taxes, net (127) (2,589)
Changes in income taxes payable -- 1,263
Change in deferred revenue (3,712) 3,929
-------- --------
Net cash provided by operating activities 8,425 10,383
-------- --------
Cash flows from investing activities:
Net Sales (Purchase) of marketable securities 2,079 (12,086)
Purchase of property and equipment (2,452) (1,810)
Acquisition of SalesKit Corporation -- (6,054)
Capitalization of software development costs (2,129) (705)
-------- --------
Net cash (used in) investing activities (2,502) (20,655)
-------- --------
Cash flow from financing activities:
Cash proceeds from issuance of stock for employee
purchase plan and option plans 940 988
Cash dividends paid to stockholders -- (370)
Common stock purchased and retired (8,889) --
-------- --------
Net cash (used in) provided by financing activities (7,949) 618
-------- --------
Net increase (decrease) in cash and equivalents (2,026) (9,654)
Cash and equivalents, beginning of period 9,515 10,883
-------- --------
Cash and equivalents, end of period $ 7,489 $ 1,229
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 9,378 $ 9,177
-------- --------
</TABLE>
See Notes to Consolidated Financial Statements
6
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DELTEK SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Deltek designs, develops, and supports business software applications for
project-oriented organizations. These project-oriented organizations are ones in
which customer relationships revolve around contracts, projects, and business
engagements. Deltek software solutions for project businesses encompass
financial and project accounting, materials management, human resource and
payroll administration, employee timekeeping, and customer relationship
management. Deltek offers a full range of related services including
implementation consulting, training seminars, software maintenance, and
telephone support.
Basis of Presentation
The consolidated financial statements included herein have been prepared by
Deltek Systems, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 1998, included in the Company's Annual Report on Form 10-K.
2. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share for the three months and nine months ended
September 30, 1999 and 1998 were calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share". No reconciling
items existed between the net income used for basic and diluted net income per
share. The only reconciling item between the shares used for basic and diluted
net income per share related to outstanding stock options. The warrants issued
to acquire Sales Kit in April 1998 were not dilutive for all periods presented.
3. COMMON STOCK PURCHASED AND RETIRED
On January 27, 1999, Deltek announced the purchase of up to 1,000,000 shares of
its common stock through open market and private purchases. As of June 30, 1999,
Deltek had acquired 1,000,000 shares and retired them in accordance with state
law. Purchases were paid for out of the Company's general corporate funds. On
November 4, 1999, the Company announced its repurchase plan for up to 500,000
shares of its common stock through open market and private purchases.
7
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4. ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). The Company must adopt this statement
no later than January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Company
does not expect SFAS No. 133 to materially impact its financial condition or
results of operations.
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect
to Certain Transactions" ("SOP 98-9"), extended the deferral on the application
of certain passages of SOP 97-2 through fiscal years beginning on or before
March 15, 1999. Once effective, SOP 98-9 requires recognition of revenue using
the "residual method" under very specific circumstances. The Company does not
expect this SOP to materially impact its financial condition or results of
operations.
5. COMMITMENTS AND CONTINGENCIES
The Company's continuing operations are involved in various claims incidental to
its business. The Company is contesting these matters and in the opinion of
management, the ultimate resolution of the legal proceedings will not have a
material adverse effect on the financial condition or the future operating
results of the Company.
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
unaudited Financial Statements and Notes included in Item 1 of this Quarterly
Report. The following information should also be read in conjunction with the
audited Financial Statements and Notes, and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the year ended December 31,
1998 as contained in the Company's Annual Report on Form 10-K (No. 000-22001).
Except for historical information, certain statements in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking. These forward-looking statements are subject to
various risks and uncertainties, including the demand for products, the size and
timing of specific sales, the level of product and price competition, the length
of sales cycles, economic conditions and the Company's ability to develop and
market new products and control costs. The Company undertakes no obligation and
does not intend to update, revise or otherwise publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
future events or circumstances.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total revenues:
Statement of Operations Data (Unaudited) as a percentage of revenues
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------- ----------------------
9/30/99 9/30/98 9/30/99 9/30/98
<S> <C> <C> <C> <C>
Revenues:
License fees 30.4% 34.0% 30.0% 33.8%
Services 66.4 62.2 66.7 61.8
Third party equipment and
Software 3.2 3.8 3.3 4.4
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of software 2.5 3.1 2.7 3.0
Cost of services 33.0 31.0 31.1 29.9
Cost of third-party equipment
And software 2.9 2.9 2.8 3.4
Software development 16.7 18.5 16.9 18.9
Sales and marketing 11.1 12.0 11.7 12.5
General and administrative 5.4 4.4 6.0 4.9
Purchased in-process Research
& Development -- -- -- 4.2
Acquisition costs -- -- -- 1.8
</TABLE>
9
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<TABLE>
<S> <C> <C> <C> <C>
Amortization of intangibles 1.0 1.2 1.1 .7
----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------- ---------------------
9/30/99 9/30/98 9/30/99 9/30/98
<S> <C> <C> <C> <C>
Total operating expenses 72.6 73.1 72.3 79.3
---- ---- ---- ----
Income from operations 27.4 26.9 27.7 20.6
Interest income, net 1.1 1.2 1.2 1.3
---- ---- ---- ----
Income before income taxes 28.5 28.1 28.9 21.9
Provision for income taxes 11.4 10.9 11.4 9.1
---- ---- ---- ----
Net income 17.1% 17.2% 17.5% 12.8%
---- ---- ---- ----
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
License Fees. License fees for the three months ended September 30,
1999 increased by 2.7% to $7.6 million from $7.4 million for the same period in
1998. License fees for ET Enterprise were $1.2 for the three months ended
September 30, 1999, compared to $562,000 in the same period in 1998, an increase
of 117.4%. ET Enterprise's web functionality has been gaining popularity and has
contributed significantly to the increased sales figures. Costpoint license fees
were $4.5 million for the third quarter ending September 30, 1999 compared with
$4.6 million for the third quarter of 1998. License fees from System 1 products
were $470,000 for the three months ended September 30, 1999 compared to $508,000
for the three months ended September 30, 1998, a decrease of 7.5%. License fees
comprised 30.4% of the Company's total revenues for the three months ended
September 30, 1999, compared to 34.0% for the comparable prior year period.
Services. Service revenues for the three months ended September 30,
1999 increased by 24.6% to $16.7 million from $13.4 million for the same period
in 1998. The increase in service revenues was principally attributable to
increased consulting services related to new implementations of Costpoint and
Advantage systems. Consulting service revenues increased by 32.2% to $7.8
million for the three months ended September 30, 1999 from $5.9 million for the
same period in 1998. Other service revenues, which includes maintenance support,
training, travel and custom programming, increased by 18.7% to $8.9 million for
the three months ended September 30, 1999 from $7.5 million for the same period
in the prior year. This increase was due to the addition of new customers and
the license of additional software products to existing customers and, to a
lesser extent, due to an increase in service rates. Service revenues comprised
66.5% of the Company's total revenues for the three months ended September 30,
1999, compared to 62.2% for the same period in 1998.
Third-Party Equipment and Software. Revenue from third-party equipment
and software for the three months ended September 30, 1999 decreased by 2.7% to
$801,000 from $823,000 for the three months ended September 30, 1998. These
revenues comprised 3.2% and 3.8% of total revenues for the three months ended
September 30, 1999 and 1998, respectively.
10
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Cost of Software. Cost of software is comprised primarily of royalties
and maintenance payments to third parties, amortization of software development
costs, and the cost of production and distribution of software and user manuals.
Cost of software for the three months ended September 30, 1999 and September 30,
1998 was $632,000 and $668,000, respectively.
Cost of Services. Cost of services is comprised primarily of personnel
costs for implementation and consulting services, user training and ongoing
maintenance and support. Cost of services for the three months ended September
30, 1999 increased by 23.9% to $8.3 million from $6.7 million for the same
period in 1998. The increase in cost of services was primarily due to increases
in headcount to support the Costpoint product line. Cost of services represented
49.7% and 49.8% of service revenues for the three months ended September 30,
1999 and 1998, respectively. Exclusive of reimbursed travel expenses and the
Company's International User Conference expenses, cost of services represented
36.4% and 36.8% of service revenues for the three months ended September 30,
1999 and 1998, respectively.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of computer and peripheral equipment and license
fees and royalties for third-party software. Costs of third-party equipment and
software for the three months ended September 30, 1999 increased to $0.7 million
from $0.6 million in the comparable year period. As a percentage of related
revenues, cost of third-party equipment and software products represented 89.9%
and 77.2% of revenue from third-party equipment and software for the three
months ended September 30, 1999 and 1998, respectively. The increase in these
costs as a percentage of related revenue was the result of changes in the
product mix of equipment and software sold.
Software Development. Software development costs consists primarily of
the personnel costs of analysts and programmers who research, develop, maintain
and enhance the Company's existing software product lines and develop new
products. Software development costs for the three months ended September 30,
1999 were $4.2 million, an increase of 5.5% from the same period in 1998. This
increase was due primarily to hiring additional personnel to work on Deltek's
expanding development projects. Software development costs represented 16.7% and
18.5% of total revenues for the three months ended September 30, 1999 and 1998,
respectively.
Sales and Marketing. Sales and marketing expenses consist primarily of
the costs of the Company's sales and marketing personnel as well as the costs of
advertising, direct mail and other sales and marketing activities. Sales and
marketing expenses for the three months ended September 30, 1999 increased by
7.7% to $2.8 million from $2.6 million for the same period in 1998. This
increase was due primarily to hiring additional personnel, and increased
marketing activities. The Company expects sales and marketing expenses to
continue to increase in the foreseeable future as the Company pursues its growth
strategy. Sales and marketing expenses represented 11.1% of the Company's total
revenues for the three months ended September 30, 1999, compared to 12.0% for
the same period in 1998.
General and Administrative. General and administrative expenses consist
primarily of the personnel costs of the Company's management, administrative and
finance staffs as well as
11
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the costs of insurance programs, bad debt expenses, professional fees and other
infrastructure costs. General and administrative expenses for the three months
ended September 30, 1999 increased by 40.0% to $1.4 million from $1.0 million
for the same period in 1998. This increase is attributable to an increase in the
bad debt reserve and general insurance, tax and accounting accruals. General and
administrative expenses represented 5.4% of the Company's total revenue for the
three months ended September 30, 1999, compared to 4.4% for the same period in
1998.
Amortization of Intangibles. The charge of $248,000 for the three
months ended September 30, 1999, as compared to the $254,000 charge for the
three months ended September 30, 1998, relates primarily to the amortization of
goodwill and purchased intangibles of the SalesKit Software Corporation, which
was purchased in April 1998, and to a lesser extent to the intangibles acquired
in the September 1996 acquisition of Allegro.
Interest Income. Interest income results primarily from investments.
Interest income for the three months ended September 30, 1999 increased by 4.4%
to $285,000 from $273,000 for the same period in 1998. The change is due to
increased cash from operations.
Income Tax Provision. The Company's effective tax rate for the three
months ended September 30, 1999 was 40.0% and for the three months ended
September 30, 1998 was 38.9%. The provision for income taxes for the three
months ended September 30, 1999 is based upon the Company's estimate of the
effective tax rate for fiscal 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
License Fees. License fees for the nine months ended September 30, 1999
increased by 9.0% to $21.8 million from $20.0 million for the same period in
1998. The increase was primarily due to Advantage and Electronic Timesheet
license fees. Advantage license fees increased by 40.0% to $5.3 million for the
nine months ended September 30, 1999 as compared to $3.8 million for the same
period in 1998. License fees for Electronic Timesheet were $2.9 million for the
nine months ended September 30, 1999, compared to $2.1 million in the same
period in 1998. License fees from System 1 products were $2.0 million for the
nine months ended September 30, 1999 compared to $1.8 million for the nine
months ended September 30, 1998, an increase of 11.0%. Costpoint license fees
were $11.6 million for the nine months ending September 30, 1999 and $11.9
million for the same period in 1998. License fees comprised 30.1% of the
Company's total revenues for the nine months ended September 30, 1999, compared
to 33.8% for the comparable prior year period.
12
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Services. Service revenues for the nine months ended September 30, 1999
increased by 32.0% to $48.3 million from $36.6 million for the same period in
1998. The increase in service revenues was principally attributable to increased
consulting services related to new implementations of Costpoint systems.
Consulting service revenues increased by 49.0% to $24.0 million for the nine
months ended September 30, 1999 from $16.1 million for the same period in 1998.
Other service revenues increased by 15.2% to $24.2 million for the nine months
ended September 30, 1999 from $21.0 million for the same period in the prior
year, principally as a result of the addition of new customers and the license
of additional software products to existing customers and, to a lesser extent,
increases in service rates. Service revenues comprised 66.7% of the Company's
total revenues for the nine months ended September 30, 1999, compared to 61.8%
for the same period in 1998.
Third-Party Equipment and Software. Revenue from third-party equipment
and software for the nine months ended September 30, 1999 decreased by 7.7% to
$2.4 million from $2.6 million for the nine months ended September 30, 1998.
These revenues comprised 3.3% and 4.4% of total revenues for the nine months
ended September 30, 1999 and 1998, respectively.
Cost of Software. Cost of software is comprised primarily of royalties
and maintenance payments to third parties, amortization of software development
costs, and the cost of production and distribution of software and user manuals.
Cost of software for the nine months ended September 30, 1999 was $1.97 million,
an increase from the $1.78 million for the same period in 1998. This change was
due to an increase in research and development activity associated with Project
Workplace and Electronic Timesheet.
Cost of Services. Cost of services is comprised primarily of personnel
costs for implementation and consulting services, user training and ongoing
maintenance and support. Cost of services for the nine months ended September
30, 1999 increased by 27.7% to $22.6 million from $17.7 million for the same
period in 1998. The increase in cost of services was primarily due to increases
in personnel costs to support the Costpoint product line. Cost of services
represented 46.7% and 48.4% of service revenues for the nine months ended
September 30, 1999 and 1998, respectively. The decrease in cost of services as a
percentage of service revenues primarily reflected increased utilization of
consulting services for the first nine months of 1999. Exclusive of reimbursed
travel expenses and the National User's Conference expenses, cost of services
represented 36.7% and 38.8% of service revenues for the nine months ended
September 30, 1999 and 1998, respectively.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of computer and peripheral equipment and license
fees and royalties for third-party software. Costs of third-party equipment and
software for the nine months ended September 30, 1999 increased slightly to
$2.04 million from $2.02 million in the comparable year period. As a percentage
of related revenues, cost of third-party equipment and software products
represented 86.3% and 77.2% of revenue from third-party equipment and software
for the nine months ended September 30, 1999 and 1998, respectively.
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<PAGE> 14
Software Development. Software development costs consists primarily of
the personnel costs of analysts and programmers who research, develop, maintain
and enhance the Company's existing software product lines and develop new
products. Software development costs for the nine months ended September 30,
1999 increased by 8.9% to $12.2 million from $11.2 million for the same period
in 1998. This increase was due primarily to hiring additional personnel.
Software development costs represented 16.9% and 18.8% of total revenues for the
nine months ended September 30, 1999 and 1998, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily of
the costs of the Company's sales and marketing personnel as well as the costs of
advertising, direct mail and other sales and marketing activities. Sales and
marketing expenses for the nine months ended September 30, 1999 increased by
13.3% to $8.5 million from $7.5 million for the same period in 1998. This
increase was due primarily to hiring additional personnel, and increased
marketing activities. The Company expects sales and marketing expenses to
continue to increase in the foreseeable future as the Company pursues its growth
strategy. Sales and marketing expenses represented 11.7% of the Company's total
revenues for the nine months ended September 30, 1999, compared to 12.6% for the
same period in 1998.
General and Administrative. General and administrative expenses consist
primarily of the personnel costs of the Company's management, administrative and
finance staffs as well as the costs of insurance programs, bad debt expenses,
professional fees and other infrastructure costs. General and administrative
expenses for the nine months ended September 30, 1999 increased by 48.3% to $4.3
million from $2.9 million for the same period in 1998. This increase is
attributable to an increase in the bad debt reserve and general insurance, tax
and accounting accruals. General and administrative expenses represented 6.0% of
the Company's total revenue for the nine months ended September 30, 1999,
compared to 4.9% for the same period in 1998.
Acquisition costs. A charge of $1.1 million was recorded for the nine
months ended September 30, 1998 for the transaction costs related to the
acquisition of Harper and Shuman, Inc. The acquisition was accounted for as a
pooling of interests. For nine months ending September 30, 1999, we have no
acquisition activity.
Purchased In-process Research and Development. A charge of $2.5 million
was recorded during the nine months ended September 30, 1998, for the appraised
valuation of the purchased in-process research and development costs acquired
from SalesKit Software Corporation. For the nine months ending September 30,
1999, we have no purchased in-process research and development activity.
Amortization of Intangibles. Amortization charges were $803,000 and
$432,000 for the nine months ended September 30, 1999 and 1998, respectively.
These charges relate primarily to the amortization of goodwill and purchased
intangibles of the SalesKit Software Corporation, which was purchased in April
1998, and to a lesser extent to the intangibles acquired in the September 1996
acquisition of Allegro.
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<PAGE> 15
Interest Income. Interest income results from investments, and to a
lesser extent, from installment financing. Interest income for the nine months
ended September 30, 1999 increased by 15.7% to $894,000 from $773,000 for the
same period in 1998. The change is due to increased cash from operations.
Income Tax Provision. The Company's effective tax rate for the nine
months ended September 30, 1999 was 39.4%. The Company's effective tax rate for
the nine months ended September 30, 1998 was 41.4%. The tax rate for the nine
months ended September 30, 1998 was affected by the nondeductible nature of a
majority of the transaction costs for the acquisition of Harper and Shuman, Inc.
The provision for income taxes for the nine months ended September 30, 1999 is
based upon the Company's estimate of the effective tax rate for fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively from cash
flow from its operations. As of September 30, 1999, the Company had cash and
cash equivalents of $7.5 million, marketable securities of $21.8 million and
working capital of $32.7 million.
For the nine months ended September 30, 1999, the Company's net cash
provided by operating activities was $8.4 million. Accounts receivable, net of
the allowance for doubtful accounts, were $18.7 million as of September 30,
1999, compared to $17.4 million as of December 31, 1998. Accounts receivable
days sales outstanding was 67 days as of September 30, 1999 compared to 58 days
as of December 31, 1998. Exclusive of receivables, which were recorded as
deferred revenue, day's sales outstanding were 50 days as of September 30, 1999,
compared to 41 days as of December 31, 1998. This increase is primarily due to
an increase in receivables that are over ninety days past due. The percentage of
receivables over 90 days to total receivables as of September 30, 1999 is 17.8%.
In comparison, this percentage was 4.6% as of December 31, 1998. Management is
concerned with this increase and is taking measures to reduce the past due
amounts. While the Company believes that its allowance for doubtful accounts as
of September 30, 1999, remains adequate, there can be no assurance that such
allowance will be sufficient to cover receivables that are later determined to
be uncollectible.
Investing activities utilized $2.5 million for the nine months ended
September 30, 1999. This amount included $2.5 million in purchased property and
equipment, $2.1 million of capitalized software production costs and $2.1
million in purchased marketable securities.
Financing activities for the nine months ended September 30, 1999
utilized $8.0 million. This consisted primarily of $8.9 million for the
repurchase of Company common stock, net of $251,000 in proceeds from the
exercise of stock options and $689,000 from the issuance of stock under the
Company's employee stock purchase plan.
The Company has a $1.0 million bank line of credit, which is secured by
substantially all of the Company's assets and bears interest at the lender's
prime rate. To date, no amounts have been drawn under the line of credit.
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<PAGE> 16
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 older information technology ("IT")
systems and applications, and other non-IT control devices, use only two digits
to identify a year in the date field, without considering the impact of the
upcoming change in the century. As a result, such systems, applications and
devices could fail or create erroneous results unless they are modified in some
fashion to distinguish 21st century dates from 20th century dates (i.e., to be
year 2000 compliant). The year 2000 challenge creates potential risks for the
Company from unforeseen problems in the software products that the Company
licenses to others and in the IT and non-IT systems that the Company uses in its
own business operations. The Company may also be exposed to risks if its mission
critical vendors fail to address their own year 2000 issues.
The Company's Status of Readiness. The Company began addressing the
year 2000 challenge in 1993 when it started developing all of its new products
to be year 2000 compliant. Year 2000 compliant versions of Costpoint, Advantage,
Allegro and Electronic Timesheet have been commercially available for some time,
and the year 2000 compliant version of System1 was released in September 1998.
Because the Company's compliant products operate on a variety of network
operating systems and support several relational databases, the Company
conducted additional testing of its compliant products with different
combinations of compliant operating systems and databases. This testing is
complete, and the year 2000 related issues disclosed by the testing were
corrected in all year 2000 compliant product versions pursuant to the Company's
standard process for developing and disseminating program fixes.
The Company's older-generation CFMS products include CFMS/RD, for which
a year 2000 compliant version is available, and CFMS and Micro/CFMS, for which
no year 2000 compliant versions are available. Licensees that are using a
non-compliant version or product and are participating in one of the Company's
comprehensive annual or quarterly support plans have been offered an upgrade or
conversion to a year 2000 compliant version or product for no additional license
fee. Licensees that are using a non-compliant version or product but are not
participating in one of the Company's comprehensive annual or quarterly support
plans have the option of upgrading or converting to a year 2000 compliant
version or product for an additional fee. The Company has contacted all CFMS
licensees. With two exceptions, these licensees have upgraded, or are scheduled
to upgrade, to year 2000 compliant software. The Company has been in regular
contact with those licensees that have not yet upgraded and has encouraged them
to complete their upgrades before the end of the year. The Company has attempted
to contact all Micro/CFMS licensees via telephone and mail to determine whether
they are still using the
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<PAGE> 17
product. The Company will continue to attempt to contact these clients through
the fourth quarter.
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. Establishing year 2000 compliance has followed a five-step
process:
1) taking an inventory of all items;
2) assessing the relevance of establishing compliance for each item;
3) obtaining year 2000 compliance documentation from the vendor or
manufacturer of each item;
4) testing the items for year 2000 compliance; and
5) remediating, replacing or disposing of items that failed the
testing.
This process was applied to our software products; third-party commercial
software; internally-developed nonproduct software; computer, network and
telecommunication equipment; telephone systems; and microprocessor-based
equipment in the buildings occupied by the Company. External organizations have
been contacted that provide the Company with mission critical services. The year
2000 readiness of these organizations has been documented, and in some cases,
the Company has tested the compliance of the services. Substantially all of the
year 2000 work is complete, although the Company will continue to monitor
vigilantly the news of third-party software companies for year 2000 updates.
Aside from distribution of the final Contingency Plans, which should occur in
early December, all other work should be complete by the end of November.
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 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
have been principally the related payroll costs for the Company's product
development, customer support and internal IT groups. The Company believes that
the cost of addressing its year 2000 issues will not have a material adverse
effect on the Company's business, operating results or financial condition.
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<PAGE> 18
Risks Associated with the Company's Year 2000 Issues. Management
believes that the growth in demand for the Company's products over the past
several years was due in part to its customers' needs to upgrade their IT
systems in preparation for the year 2000. By the end of the second quarter of
1999, most project-oriented companies that needed to convert to year 2000
compliant systems (and thus were potential customers for the Company's
products) had already purchased year 2000 compliant systems. During 1999, we
believe that companies have been diverting technology expenditures that could
otherwise be used to purchase software products such as the Company sells to
address year 2000 compliance problems. Also, we believe that a significant
number of businesses are continuing to defer technology expenditures for the
addition of any new software applications in an attempt to maintain the year
2000 compliance of their IT computing environment and to minimize disruption of
new implementations if unforeseen year 2000 issues arise. As a result, the
Company, as well as the business application software industry in general, have
experienced significant deceleration from the strong annual growth rates in
product revenue experienced in recent years. We anticipate that resources
available to the Company's customers and potential customers for the purchase
of its products likely will continue to be depressed until the full impact, if
any, of year 2000 issues on their operations are known and have been addressed.
There can be no assurance when companies will have completed remediation of
their year 2000 issues and will have resources available for the software
products like ours. Even once customer resources are again available, it may
take some time for any increase in demand for business software applications to
translate into meaningful increased growth in our revenues and pretax profits
since our software has a relatively long sales cycle. Thus, there can be no
assurance when customer demand for our products will increase or that an
increase in demand will result in immediate benefits to Deltek. Accordingly,
current and future shifts in customer spending and purchasing behavior could
result in a material adverse effect on our business, financial condition, and
results of operations or cash flows.
The Company has made or intends to make available to its customers,
year 2000 compliant versions of its products. There can, however, be no
assurance that its customers will request and install the compliant versions or
operate them only with year 2000 compliant operating systems, relational
databases and other IT systems. Moreover, although the Company's year 2000
compliant products have undergone the Company's normal quality assurance
procedures and some additional year 2000 testing, there can be no assurance that
these products do not contain undetected errors or defects associated with the
year 2000 date functions. Because IT systems incorporate hardware and software
products from different vendors, it may be difficult to determine which product
has caused a year 2000 problem, and thus the Company may be subjected to year
2000-related lawsuits even if the Company's products are year 2000 compliant.
Any system malfunctions due to the onset of calendar year 2000 and any disputes
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<PAGE> 19
with customers relating to year 2000 compliance could have a material adverse
effect on the Company's business, operating results and financial condition.
Finally, despite the Company's efforts to address the year 2000 impact on its
internal IT and non-IT systems and on the operations of its mission critical
vendors, the Company may not be able to fully identify such impact or to resolve
it without disruption of the Company's business and without incurring
significant expense. Accordingly, if the year 2000 issues are not adequately
addressed by the Company and third parties, there can be no assurance that the
Company's business, operating results and financial condition will not be
materially adversely affected.
The Company's Contingency Plans. The Company's most reasonably likely
worst case year 2000 scenarios include (i) failure of electric power and
telephone services provided by third parties and (ii) failure of hardware and
third party vendor software used in the Company's internal IT system. Any
significant interruption in the supply of electric power or telephone service to
the Company's facilities as a result of the failure of utilities or
telecommunications companies to adequately address year 2000 issues would
disrupt the Company's ability to conduct its business, including providing
telephone support to its customers. The Company is developing contingency plans
for implementation in the event that electric power or telephone service to one
or more of the Company's facilities is interrupted. Depending upon the nature
and scope of the interruption and the geographic areas affected, the Company may
be unable to execute some or even all of its contingency plans. The plans call
for a backup system of wireless telephones to replace the Company's normal
telephone service, if it is not available. The contingency plans include
assessing the impact of the rollover into year 2000 on the internal IT hardware
and software systems and how to address failures, if they do occur. The absence
of the Company's internal IT system, whether due to electrical supply problems
or other failure, would disrupt the Company's ability to conduct its business.
In the event of such disruptions, the plans include the preparation for
employees to work at home, and the use of a manual system to log, troubleshoot
and close client support calls. Finally, the plans describe the use of a
telephone tree and a "year 2000 command post" to coordinate the efforts of its
personnel and resources in addressing any unforeseen year 2000 problems as they
arise. The contingency plans have been drafted and reviewed by key personnel,
and the final plans will be distributed in early December. The Company will be
actively supporting clients over the New Year's weekend. The support hours and
staffing patterns are included in the contingency plans. In early December, the
Company will send a final year 2000 mailing to our clients. It will provide a
final status of the year 2000 readiness of the Company's products and
organization. The second purpose of the mailing will be to emphasize client
support over the New Year's weekend and to publish critical telephone numbers
for support. The letter will include the after-hours support number and the
cell phone support numbers, to be called in the event that normal telephone
service is not available. The Company's year 2000 web page will be updated to
provide the same information. 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,
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<PAGE> 20
which were derived utilizing numerous assumptions about future events, including
the continued availability of certain resources, representations received from
third parties and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the ability to identify and remediate all
relevant IT and non-IT systems, results of year 2000 testing, adequate
resolution of year 2000 issues by governmental agencies, businesses and other
third parties who are service providers, suppliers, borrowers or customers of
the Company, unanticipated system costs, the adequacy of and ability to
implement contingency plans and similar uncertainties. The "forward-looking
statements" made in the foregoing year 2000 discussion speak only as of the date
on which such statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Quarterly Variations. Our future operating results may vary from
quarter to quarter depending upon a number of factors including the following:
- deferral of technology expenditures due to Year 2000 concerns
- demand for our products;
- the size and timing of specific sales;
- the delay or deferral of customer implementations;
- the level of product and price competition that we encounter;
- the length of our sales cycles;
- our ability to attract and retain personnel;
- the timing of new hires;
- the timing of our new product introductions and product
enhancements and of our competitors;
- the mix of products and services we sell;
- the activities of and acquisitions by our competitors;
- the timing of our national user conference;
- general economic conditions;
- our ability to develop and market new software products and
enhancements; and
- our ability to control costs;
- our ability to collect receivables.
Our operating results, particularly our quarterly results could be
significantly affected by the loss or delay of individual orders. Our revenues
from license fees are difficult to predict because of the length and variability
of our sales cycles (typically 3 to 18 months). Our operating expenses, on the
other hand, are based on anticipated revenue trends. A high percentage of our
operating expenses are relatively fixed. A delay in the recognition of revenue
from a limited number of sales could cause significant variations in operating
results from quarter to quarter. To the extent we incur expenses before
obtaining anticipated revenues, our operating results could be materially
adversely affected.
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For certain software products, we typically grant customers a right of
return for a full or partial refund of the license fee during the refund period.
Refund periods generally range from 60 to 90 days from the date of the initial
software delivery. Sometimes we have provided and may in the future provide
longer refund periods for larger, more complex system installations. We
recognize license fees upon the expiration of the applicable refund periods. The
license fees are recorded as deferred revenues until recognized as revenue.
Deferred revenues at the end of a quarter do not necessarily reflect revenues
that the Company will recognize in a succeeding quarter. This is because
customers sometimes have refund rights that will not terminate within the given
quarter and the length of refund periods varies from customer to customer.
Our operating results for any quarter are subject to significant
variation, and we believe that period-to-period comparisons of our operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance. We also believe that many of our potential
customers will continue to defer additional software expenditures during the
final quarter of 1999 and beyond and we cannot predict when customer resources
will again be available for the improvement of internal business systems. Our
future quarterly operating results from time to time may not meet the
expectations of market analysts or investors. In that event, the price of our
common stock would likely be materially adversely affected.
Introduction of Project Workplace. During 1999, we have continued
development on and have released Beta versions of Project Workplace, a
front-office, customer relationship management (CRM) software application
designed for project-oriented businesses. Our future revenue growth from
software sales is dependent, in part, on our ability to successfully launch this
and additional new products. CRM applications are, by their nature, difficult to
develop, implement and market and may require substantial customization at
customer sites. While we have targeted a general release of Project Workplace to
be available for shipment in the first quarter of 2000, we cannot be certain of
our ability to successfully ship the product on time and cannot predict the
impact this product will have on our revenue and growth.
Other Factors. For a discussion of additional factors that may affect
future results, see "Factors That May Affect Future Results and Market Price of
Stock" in the Company's Annual Report on Form 10-K (File No. 000-22001) which
discussion is incorporated herein by reference.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes since year-end.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding that would have a
material impact on the Company, its operations or financial results.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a)-(b)-(c)-(d) Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
STOCK REPURCHASE PROGRAM
In November 1999 the Company's Board of Directors approved a stock
repurchase program for up to 500,000 shares of its common stock. A copy of the
press release relating to the program is attached as an exhibit to this report.
UPDATED DESCRIPTION OF DELTEK'S PRODUCTS
An updated description of Deltek's products, including
Project Workplace, recently released in Beta form, and GCS Premier, unveiled at
our User Conference in August 1999, is set forth below:
Products
Our business software applications consist of Project Workplace,
Costpoint, Advantage, GCS Premier, System1, CFMS, and Electronic Timesheet.
Project Workplace. Project Workplace is a fully integrated,
web-enabled, employee-facing application designed to address critical customer
relationship management functions. It integrates a number of applications
including opportunity management, project administration, recruiting and project
financials. The applications are designed to promote teamwork and create
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a common synergy, to drive the focus of an entire organization toward customers
and create more productive sales, customer service, project deliveries, and
communication. Project Workplace extends the contact/opportunity management and
after sales functions such as customer service to the needs of project-oriented
companies.
Project Workplace Beta Version 1.1 now consists of the following
applications:
- FRONT OFFICE: An easy-to-use, Web-enabled application that
provides project-centric businesses with a total customer and
opportunity management system. Project managers, salespeople,
and marketing professionals will have the tools they need to
identify and win new and "add-on" project opportunities.
- TEAM PROJECTS: Organizes key project information across the
business by customer, employee assignment, project
communications, and other categories, and allows team members
to view project information when and how they need it. It also
features threaded collaboration to help identify issues,
develop action plans, and reach resolutions.
- PROJECT FINANCIALS: Integrates with back office financial
systems to provide key financial information to project
managers, and empowers project managers with high-level
accounting and financial information.
- TEAM RECRUITING: Streamlines the recruiting process by
providing a quick path for recruiting, hiring, and retaining
the right personnel for project needs. The centralized
database enables project managers, business development
managers, proposal personnel, and human resources staff to
access and track both internal and external applicants.
The following table lists the principal Project Workplace applications
and features:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
APPLICATION FEATURES
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Front Office Customer Data Lead Tracking Document Merge
Contact Profiles Access to Project Info. Client Communic. Tracking
Opportunity Management Document Management Hot Flag
Key Factors Search Capabilities
- ----------------------------------------------------------------------------------------------------------------------------------
Team Projects Project Profiles Document Management Document Merge
Project Communication References Track project Milestones
Threaded Collaboration Key Success Factors Myprojectworkplace.com
Project Workforce User-Defined Views
- ----------------------------------------------------------------------------------------------------------------------------------
Project Financials Back Office Appl. Interface Project Data Access
Multiple Views of Data Budget Performance
Analysis
- ----------------------------------------------------------------------------------------------------------------------------------
Team Recruiting Applicant Database Qualifications Database Back office Financial Integration
Communication Tool Recruitment Proc. Tracking Team Collaboration
Applicant Tracking Search Capabilities
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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Costpoint. Costpoint is an advanced client/server-based,
enterprise-wide business software system, consisting of over 25 integrated
module applications, including the following:
Financial Accounting
Project Accounting
Human Resource and Payroll Administration
Materials Management
Project Reporting
Costpoint is designed to meet the specialized needs of project-oriented
businesses, including:
Project Costing
Indirect Cost Allocation
Revenue Recognition
Project Budgeting
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. It 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.
We began development of Costpoint in 1992 and commercially released the
product in June 1995. Through September 30, 1999, we had licensed approximately
570 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MODULE APPLICATIONS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial Accounting General Ledger Travel
Accounts Payable Fixed Assets
Accounts Receivable Workflow
Consolidations Multicurrency
- ----------------------------------------------------------------------------------------------------------------------
Project Accounting Project Setup Project Billing
Project Reporting Project Cost and Revenue Processing
Project Budgeting Project Management Interfaces
- ----------------------------------------------------------------------------------------------------------------------
Human Resources and Labor Benefits
Administration Payroll Labor/Payroll Interfaces
Human Resources
- ----------------------------------------------------------------------------------------------------------------------
Materials Management Product Definition Sales Order Entry
Purchasing; Receiving Production Control
Procurement Planning Routings
Inventory Engineering Change Notices
Bills of Material Requirements Planning
- ----------------------------------------------------------------------------------------------------------------------
Reporting Tools CP Reports*
CP Scope*
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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 we acquired 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.
We 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 September 30, 1999, it has been licensed to approximately
2,460 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.
GCS Premier. GCS Premier is Deltek's new Windows-based enterprise
accounting solution for small to mid-sized businesses that earn revenue from
government contracts. The product was released in Beta form to select customers
in August 1999. In addition to its Windows-based interface, it features
flexible, state-of-the-art component based software construction achieved with
MS Visual Basic 6.0 and ActiveX controls. GCS Premier was
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designed specifically to ensure that our System1 customers could easily migrate
to GCS without the necessity of data conversion while preserving System1's
critical processing programs, complex reports and other time-tested legacy
programs. GCS Premier's Windows-based front end tightly integrates with its
process-oriented design. Its pull-down menus are workflow-like in their
functionality and provide an intelligent, intuitive capability that makes it
easy for users to learn the application by navigating from process to process.
System1. System1, Deltek's original accounting system, was designed
specifically for use by organizations with federal government contracts and
helps these organizations comply with federal regulations. System1 is
character-based, operates on Novell Netware, UNIX and Digital VAX/VMS network
operating systems and utilizes a proprietary COBOL data structure. System1
consists of 23 application modules, including financial accounting, labor and
payroll administration, materials management and project reporting. We intend to
provide support services and product maintenance for the character-based version
of System1 for the near future.
We estimate that approximately 1,960 companies have licensed System1
since it was commercially released in 1985. As of September 30, 1999,
approximately 1,300 licensees were continuing to pay for ongoing support
services related to System1. License fees for System1 vary depending upon the
number of users and sites and the number and types of modules licensed. Since
our introduction of our more advanced Costpoint system, the majority of our new
customers have licensed Costpoint systems, and new System1 sales have decreased
in number and system size.
An important element of our strategy is to license Costpoint to larger
and more complex System1 customers as those customers reengineer their
information systems and migrate to new client/server business software
solutions. Smaller System1 customers are less likely to migrate to Costpoint
because the cost of migrating to a client/server environment may be relatively
high and because System1 adequately meets their needs. We estimate that larger
and more complex customers comprise approximately one-third of our System1
customers. To encourage these System1 customers to migrate to Costpoint, we have
offered substantial discounts to existing System1 users and provided automated
data conversion programs, which provide significant assistance in the Costpoint
upgrade/implementation process. We estimate that approximately one-third of the
Costpoint clients had converted from System1.
CFMS. The CFMS product line includes three older-generation accounting
systems designed and developed for architecture and engineering firms by Harper
and Shuman, which we acquired in May 1998. Through September 30, 1999, CFMS
systems have been licensed to over 2,700 organizations. We intend to seek to
migrate CFMS users to Advantage or Costpoint. To date, 1,467 CFMS users have
migrated to the Advantage product. We plan to continue to offer telephone
support services to CFMS users for the foreseeable future but do 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
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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 numbers. This feature serves to 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, we introduced ET Enterprise, a client/server version of Electronic
Timesheet, which is highly scaleable and operates on various relational database
management systems platforms. We also provide an optional browser-based
timesheet screen called Web E.T.
We introduced Electronic Timesheet in January 1995. The majority of our
Electronic Timesheet licensees are also licensees of Costpoint, System1, or
Advantage, although the product is also sold on a stand-alone basis to users of
other accounting systems. As of September 30, 1999, Electronic Timesheet had
been licensed to approximately 415 customers. License fees for Electronic
Timesheet vary depending on the number of employees.
Allegro Product Line. We 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, we decided to terminate further development, sales and marketing
of the Allegro product line. Our long-term plan will be to include the Allegro
product functionality into a new product architecture. We do not anticipate a
material adverse impact from this decision.
Third-Party Products. We incorporate into our 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
System1 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. In addition,
our Costpoint customers must license applicable database software from Oracle,
Sybase, Centura, or Microsoft, either directly or through Deltek. Because some
customers desire a "turnkey" solution, we occasionally purchase servers, network
software and other software and hardware products, which we resell or sublicense
to our customers and install with Deltek products to provide a fully operational
system.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
99.1 Press Release dated November 4, 1999
(b) Reports on Form 8-K
None
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 10, 1999
DELTEK SYSTEMS, INC.
By: /s/ Bryan Fleming
-----------------------------------------
Bryan Fleming
Controller and Treasurer
(Principal Financial and Accounting Officer)
28
<PAGE> 29
DELTEK SYSTEMS, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLE
<S> <C>
27 Financial Data Schedule
99.1 Press Release dated November 4, 1999
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS OTHER
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1999 SEP-30-1998 SEP-30-1999 DEC-31-1998
<CASH> 0 0 0 7,489 9,515
<SECURITIES> 0 0 0 21,782 23,861
<RECEIVABLES> 0 0 0 19,808 18,040
<ALLOWANCES> 0 0 0 (1,131) (689
)
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 0 0 0 53,189 54,564
<PP&E> 0 0 0 13,320 10,868
<DEPRECIATION> 0 0 0 (7,746) (6,556
)
<TOTAL-ASSETS> 0 0 0 66,874 66,308
<CURRENT-LIABILITIES> 0 0 0 20,534 24,902
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 0 0 17 18
<OTHER-SE> 0 0 0 46,323 41,388
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0 66,874 66,308
<SALES> 21,604 25,139 59,306 72,482 0
<TOTAL-REVENUES> 21,604 25,139 59,306 72,482 0
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 15,796 18,253 47,107 52,405 0
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0 0
<INCOME-PRETAX> 6,081<F1> 7,171<F2> 12,972<F3> 20,971<F4> 0
<INCOME-TAX> 0 0 0 0 0
<INCOME-CONTINUING> 5,808 6,886 12,199 20,077 0
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 3,716 4,304 7,598 12,713 0
<EPS-BASIC> 0.21 0.25 0.43 0.73 0
<EPS-DILUTED> 0 0 0 0 0
<FN>
<F1>INCLUDES INTEREST INCOME OF $273
<F2>INCLUDES INTEREST INCOME OF $285
<F3>INCLUDES INTEREST INCOME OF $773
<F4>INCLUDES INTEREST INCOME OF $894
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
NEWS RELEASE
FOR IMMEDIATE RELEASE
DELTEK SYSTEMS, INC. ANNOUNCES STOCK REPURCHASE PROGRAM
MCLEAN, VIRGINIA, November 4, 1999 -- DELTEK SYSTEMS, INC. (Nasdaq: DLTK) a
leading provider of advanced software applications and related services for
project-based businesses, today announced that the Board of Directors had
approved the repurchase of up to 500,000 shares of its common stock through open
market and private purchases. The timing of the purchases and the exact number
of shares to be purchased will be dependent upon prevailing market conditions
and price levels. Any purchases will be paid for out of the Company's general
corporate funds. Shares acquired through the repurchase program will be retired.
The Company reserves the right to modify or terminate its repurchase activities
at any time.
Kenneth E. deLaski, the President and Chief Executive Officer of Deltek Systems,
stated, "The authorization of this buyback reflects our confidence in the
Company's underlying strengths and long-term growth potential. Management
believes that repurchasing our own shares is an excellent investment and an
appropriate use of a portion of our cash reserves."
About Deltek(R)
Deltek develops enterprise solutions that are especially designed for
organizations that follow "management by project" business practices. The
Company's solutions range from back office systems for project accounting and
financial management to front office systems for Web-enabled customer
relationship management and project management. These flexible and scalable
solutions serve the needs of diverse project-oriented industries, including
professional services firms; management consulting; architecture, engineering,
and design; government contracting; systems integration; make-to-order
manufacturing; and marketing.
Deltek supports its customers with extensive services for pre-sale consulting,
implementation consulting, software maintenance, technical support, and
telephone support. The Company also offers education and training at learning
centers in its offices in McLean, Virginia, St. Louis, Missouri, and San Jose,
California.
Deltek is headquartered in McLean, Virginia, with offices in Cambridge,
Massachusetts; Englewood, Colorado; San Jose, California; St. Louis, Missouri;
London, England; and Manila, Philippines. For more information, visit
www.deltek.com.
###
