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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A #1
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period and six months ended June 30, 1998 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number: 0-22001
DELTEK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1252625
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8280 Greensboro Drive, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 734-8606
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at June 30, 1998
Common Stock, $.001 par value 17,840,613
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DELTEK SYSTEMS, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Restatement of Financial Statements 3
Balance Sheets as of June 30, 1998 and December 31, 1997 4
Statements of Income for the Three and Six Months
Ended June 30, 1998 and June 30, 1997 5
Statements of Cash Flows for the Six Months
Ended June 30, 1998 and June 30, 1997 7
Unaudited Notes to Condensed Financial Statements 8
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 19
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 20
ITEM 2 - Changes in Securities and Use of Proceeds 20
ITEM 3 - Defaults upon Senior Securities 20
ITEM 4 - Submission of Matters to a Vote of Security Holders 20
ITEM 5 - Other Information 20
ITEM 6 - Exhibits and Reports on Form 8 - K 21
SIGNATURES 22
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
</TABLE>
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RESTATEMENT OF FINANCIAL RESULTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 1998
In January 1999, the Company learned that the Securities and Exchange Commission
has closely scrutinized purchased in-process research and development charges
and has expressed its views in comment letters to registrants and in a letter
dated September 9, 1998 to the American Institute of Certified Public
Accountants. The Company's acquisition of SalesKit Software Corporation in April
1998 included a charge for purchased in-process research and development costs
of $6.8 million which was based upon a valuation by an independent appraiser.
The Company believed its accounting 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 goodwill
increased by $4.3 million which will be amortized over five years. This revised
allocation has been reviewed by the Company's auditors. The financial
information for the quarter and six months ended June 30, 1998, and the quarter
and nine months ended September 30, 1998 included in the Amendment No. 1 to the
Form 10-Q's for these respective periods reflect these changes. The Company
believes this change has no economic impact on the Company's financial position
or liquidity and that the only effect on the results of operation will result
from increased amortization charges of approximately $215,000 per quarter before
taxes, which are related to the increased goodwill.
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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>
June 30, 1998 December 31,
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(Unaudited) 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 4,202 $ 10,883
Marketable securities 20,482 14,949
Accounts receivable, net of allowance for doubtful
accounts of $589 and $573, respectively 12,930 9,929
Prepaid income taxes 1,916 --
Deferred income taxes 1,030 1,158
Prepaid expenses and other current assets 1,451 1,440
-------- --------
Total current assets 42,011 38,359
-------- --------
Furniture, equipment, and leasehold improvements, at
cost, net of accumulated depreciation and amortization
of $5,907 and $5,349 respectively 3,834 2,976
Computer software development costs, at cost, net of
accumulated amortization of $2,868 and $2,509,
respectively 2,658 2,597
Deferred income taxes 1,628 --
Purchased intangibles, net of amortization 4,871 --
Other assets 84 109
-------- --------
Total assets $ 55,086 $ 44,041
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,773 $ 4,985
Accrued dividends payable -- 400
Income taxes payable 1,655 543
Deferred income taxes -- 1,223
Deferred revenue 14,186 11,076
-------- --------
Total current liabilities 22,614 18,227
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Commitments
Shareholders' equity:
Preferred stock, $0.001 par value per share, 2,000,000
shares authorized, none issued or outstanding
Common stock, $0.001 par value per share, 45,000,000 shares authorized,
17,840,613 and 17,704,933 shares issued and outstanding at June 30,
1998 and December 31, 1997, respectively 18 18
Paid in capital 20,656 18,044
Retained earnings 12,116 8,204
Less unearned compensation (318) (452)
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Total shareholders' equity 32,472 25,814
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Total liabilities and shareholders' equity $ 55,086 $ 44,041
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</TABLE>
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DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1998 1997
Statement of Operations Data: (in thousands, except
per share data)
<S> <C> <C>
Revenues:
License fees $ 6,807 $ 4,809
Services 12,129 7,688
Third party equipment and software 1,013 1,106
------- -------
19,949 13,603
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Operating expenses:
Cost of software 575 511
Cost of services 5,899 3,276
Cost of third-party equipment
and software 779 894
Software development 3,876 2,783
Sales and marketing 2,624 1,581
General and administrative 861 880
Amortization of purchased intangibles 171 --
Acquisition costs 1,096 --
Purchased in process research & development 2,500 --
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Total operating expenses 18,381 9,925
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Income from operations 1,568 3,678
Interest income, net 250 253
------- -------
Income before income taxes 1,818 3,931
Provision for income taxes 1,042 1,473
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Net income $ 776 $ 2,458
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Basic net income per share $ 0.04 $ 0.14
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Diluted net income per share $ 0.04 $ 0.14
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Weighted average shares outstanding 17,808 17,623
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Weighted average shares outstanding, including dilutive effect of
stock options 18,323 18,095
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</TABLE>
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DELTEK SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1998 1997
Statement of Operations Data: (in thousands, except
per share data)
<S> <C> <C>
Revenues:
License fees $12,690 $ 9,515
Services 23,222 15,211
Third party equipment and software 1,790 1,640
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37,702 26,366
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Operating expenses:
Cost of software 1,099 923
Cost of services 11,038 6,363
Cost of third-party equipment
and software 1,382 1,311
Software development 7,210 5,388
Sales and marketing 4,881 3,008
General and administrative 1,927 1,798
Amortization of purchased intangibles 178 --
Acquisition costs 1,096 --
Purchased in process research & development 2,500 --
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Total operating expenses 31,311 18,791
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Income from operations 6,391 7,575
Interest income, net 500 314
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Income before income taxes 6,891 7,889
Provision for income taxes 3,009 2,157
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Net income $ 3,882 $ 5,732
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Basic net income per share $ 0.22 $ 0.34
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Diluted net income per share $ 0.21 $ 0.33
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Weighted average shares outstanding 17,770 17,076
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Weighted average shares outstanding, including the dilutive effect
of stock options 18,293 17,539
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Pro forma Statement of Operations Data:
Income before provision for income taxes, as reported 7,389
Provision for income taxes 3,039
-------
Net income $ 4,850
-------
Pro forma basic net income per share $ 0.28
-------
Pro forma diluted net income per share $ 0.28
-------
</TABLE>
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DELTEK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1998 1997
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Cash flow from operating activities:
Net Income $ 3,882 $ 5,732
Adjustments to reconcile net income provided by
operating activities:
Depreciation and amortization 1,077 688
Purchased research and development, noncash charge 2,500 --
Other noncash charges 383 120
Accreted interest on marketable securities -- (134)
Change in accounts receivable, net (2,766) 54
Change in prepaid expenses, inventories and other assets (146) 330
Change in prepaid income taxes (1,916) (1,560)
Change in accounts payable and accrued expenses 1,396 1,476
Changes in deferred income taxes, net (2,723) 104
Changes in income taxes payable 1,951 168
Change in deferred revenue 2,663 1,195
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Net cash provided by operating activities 6,301 8,173
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Cash flows from investing activities:
Purchase of marketable securities (5,533) (9,174)
Purchase of property and equipment (1,194) (599)
Acquisition of SalesKit Corporation (6,054) --
Capitalization of computer development costs (420) (294)
-------- --------
Net cash (used in) provided by investing activities (13,201) (10,067)
-------- --------
Cash flow from financing activities:
Cash proceeds from initial public offering -- 16,392
Cash proceeds from issuance of stock for employee
purchase plan 285 147
Cash proceeds from exercise of stock options 304 --
Cash dividends paid to stockholders (370) (11,017)
Common stock purchased and retired -- (426)
-------- --------
Net cash (used in) provided by financing activities 219 5,096
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Net increase (decrease) in cash and equivalents (6,681) 3,202
Cash and equivalents, beginning of period 10,883 9,381
-------- --------
Cash and equivalents, end of period $ 4,202 $ 12,583
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 5,631 $ 1,548
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</TABLE>
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DELTEK SYSTEMS, INC.
UNAUDITED NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Basis of Presentation
The condensed financial statements included herein have been prepared by Deltek
Systems, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended December 31,
1997, included in the Company's Annual Report on Form 10-K.
Restatement of Financial Statements
Subsequent to the Securities and Exchange Commissions ("SEC") letter to the
American Institute of Certified Public Accountants ("AICPA") dated September 9,
1998 regarding the SEC's views on in-process research and development costs, the
Company and its independent appraisers have re-evaluated the computation of the
in-process research and development charge for the April 1998 acquisition of
SalesKit Software Corporation in light of the SEC's new position. Although the
Company believed its accounting was in accordance with generally accepted
accounting principles and industry practice at that time, the purchase price
allocation for in-process research and development has been reduced to $2.5
million, and goodwill increased by $4.3 million which will be amortized over
five years. This revised allocation has been reviewed by the Company's auditors,
and these financial statements reflect these revisions.
2. BUSINESS COMBINATIONS
Harper & Shuman Acquisition
In May 1998, the Company completed the acquisition of Harper & Shuman, Inc.
("H&S") by exchanging 686,000 shares of its common stock for all of the common
stock of H&S. Each share of H&S was exchanged for 5.64 shares of Deltek common
stock. In addition, outstanding H&S stock options were converted at the same
exchange factor into options to purchase approximately 4,000 shares of Deltek
common stock.
The acquisition constituted a tax-free reorganization and has been accounted for
as a pooling-of-interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of H&S as though it had always been a part of Deltek. Acquisition
costs expensed at closing of $1,096,000 consisted primarily of fees for
investment bankers, attorneys, accountants and other related charges.
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SalesKit Acquisition
In April 1998, the Company acquired substantially all of the assets of SalesKit
Software Corporation ("SalesKit"), and assumed certain related liabilities. The
purchase price consisted of $6,054,000 in cash and stock warrants with an
estimated fair value of $932,000. The stock warrants allow the holder to
purchase 130,000 shares of Deltek common stock at an exercise price of $22 per
share, exercisable over a three year period.
Upon evaluation, the Company assigned approximately $4,310,000 to intangible
assets and existing technology and is amortizing this amount over five years.
The Company assigned $2,500,000 to in-process research and development and
expensed this amount. In the opinion of management, the acquired in-process
research and development had not yet reached technological feasibility and had
no alternative future uses. The Company recorded approximately $468,000 in
assumed liabilities of SalesKit, primarily related to accrued liabilities and
deferred revenue.
3. TERMINATION OF S-CORPORATION ELECTION
Just prior to the February 24, 1997, initial public offering, the Company
terminated its S-Corporation election for federal income tax purposes. The
provision for income taxes prior to this termination related to certain states
that do not recognize S-Corporation status. Provision for income taxes after the
revocation reflects the estimated current provision for federal and state income
taxes and deferred income taxes.
Pro forma net income is based on the assumption that the Company's S-Corporation
status was terminated at the beginning of 1997 and reflects a pro forma income
tax provision based on applicable tax rates as if the Company had not elected
S-Corporation status.
4. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share for the three and six months ended June 30,
1998 and 1997 were calculated in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share". No reconciling items existed
between the net income used for basic and diluted net income per share. The only
reconciling item between the shares used for basic and diluted net income per
share related to outstanding stock options. The warrants issued in April 1998
were not dilutive for all periods presented. Stock options were not dilutive for
the three months ended June 30, 1998 due to the Company recording a net loss for
that period.
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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,
1997 as contained in the Company's Annual Report on Form 10-K.
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.
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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 Six months ended
------------------ ----------------
6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C>
Revenues:
License fees 34.1% 35.4% 33.7% 36.1%
Services 60.8 56.5 61.6 57.7
Third party equipment and
Software 5.1 8.1 4.7 6.2
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of software 2.9 3.8 2.9 3.5
Cost of services 29.6 24.1 29.3 24.1
Cost of third-party equipment
And software 3.9 6.6 3.7 5.0
Software development 19.4 20.4 19.1 20.5
Sales and marketing 13.2 11.6 12.9 11.4
General and administrative 4.3 6.5 5.1 6.8
Amortization of intangibles 0.8 -- 0.5 --
Acquisition costs 5.5 -- 2.9 --
Purchased in-process research
And development 12.5 -- 6.6 --
----- ----- ----- -----
Total operating expenses 92.1 73.0 83.0 71.3
----- ----- ----- -----
Income from operations 7.9 27.0 17.0 28.7
Interest income, net 1.2 1.9 1.3 1.2
----- ----- ----- -----
Income before income taxes 9.1 28.9 18.3 29.9
Provision for income taxes 5.2 10.8 8.0 8.2
----- ----- ----- -----
Net income 3.9% 18.1% 10.3% 21.7%
----- ----- ----- -----
Pro forma Statement of Operations Data:
Income before income taxes 29.9%
-----
Income tax provision 11.5
-----
Net income 18.4%
-----
</TABLE>
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THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
License Fees. License fees for the three months ended June 30, 1998
increased by 41.5% to $6.8 million from $4.8 million for the same period in
1997. The increase in license fees was principally attributable to Costpoint
license fees which increased by 42.5% to $3.8 million for the three months ended
June 30, 1998 from $2.7 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 32.9% to $1.2 million
for the three months ended June 30, 1998 as compared to $0.9 million for the
same period in 1997. License fees from System 1 products were $748,000 for the
three months ended June 30, 1998 compared to $772,000 for the three months ended
June 30, 1997, a decrease of 3.0%. License fees for Electronic Timesheet
increased by 112.2% to $698,000 for the three months ended June 30, 1998, from
$329,000 in the same period in 1997. License fees comprised 34.1% of the
Company's total revenues for the three months ended June 30, 1998, compared to
35.4% for the comparable prior year period.
Services. Service revenues for the three months ended June 30, 1998
increased by 57.8% to $12.1 million from $7.7 million for the same period in
1997. The increase in service revenues was principally attributable to increased
consulting services related to new implementations of Costpoint systems.
Consulting service revenues increased by 104.9% to $5.3 million for the three
months ended June 30, 1998 from $2.6 million for the same period in 1997. Other
service revenues increased by 33.8% to $6.8 million for the three months ended
June 30, 1998, from $5.1 million for the same period in the prior year,
principally as a result of the addition of new customers and the license of
additional software products to existing customers and, to a lesser extent,
increases in service rates. Service revenues comprised 60.8% of the Company's
total revenues for the three months ended June 30, 1998, compared to 56.5% for
the same period in 1997.
Third-Party Equipment and Software. Revenue from third-party equipment
and software for the three months ended June 30, 1998 decreased by 8% to $1.0
million from $1.1 million for the three months ended June 30, 1997. These
revenues comprised 5.1% and 8.1% of total revenues for the three months ended
June 30, 1998 and 1997, respectively.
Cost of Software. Cost of software is comprised primarily of royalties
and maintenance payments to third parties, amortization of software development
costs, and the cost of production and distribution of software and user manuals.
Cost of software for the three months ended June 30, 1998 was $0.6 million, a
slight increase from the $0.5 million for the same period in 1997. This change
was due to an increase in licensing activity.
Cost of Services. Cost of services is comprised primarily of personnel
costs for implementation and consulting services, user training and ongoing
maintenance and support. Cost of services for the three months ended June 30,
1998 increased by 80.1% to $5.9 million from $3.3 million for the same period in
1997. The increase in cost of services was primarily due to increases in
personnel costs to support the Costpoint product line. Cost of services
represented 48.6% and 42.6% of service revenues for the three months ended June
30, 1998 and 1997, respectively. The increase in cost of services as a
percentage of service revenues primarily reflected the increase in consulting
revenues as a percentage of service revenues. The Company
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earns a lower margin on its consulting revenues than on its ongoing support
services revenues. To a lessor extent, cost of services as a percentage of
service revenues increased due to hiring of additional telephone support
personnel to service the Company's growing customer base.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of computer and peripheral equipment and license
fees and royalties for third-party software. Costs of third-party equipment and
software for the three months ended June 30, 1998 decreased to $0.8 million from
$0.9 million in the comparable year period. As a percentage of related revenues,
cost of third-party equipment and software products represented 76.9% and 80.8%
of revenue from third-party equipment and software for the three months ended
June 30, 1998 and 1997, respectively. The decrease in these costs as a
percentage of related revenue was the result of changes in the product mix of
equipment and software sold.
Software Development. Software development costs consists primarily of
the personnel costs of analysts and programmers who research, develop, maintain
and enhance the Company's existing software product lines and develop new
products. Software development costs for the three months ended June 30, 1998
increased by 39.3% to $3.9 million from $2.8 million for the same period in
1997. This increase was due primarily to hiring additional personnel. Software
development costs represented 19.4% and 20.4% of total revenues for the three
months ended June 30, 1998 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily of
the costs of the Company's sales and marketing personnel as well as the costs of
advertising, direct mail and other sales and marketing activities. Sales and
marketing expenses for the three months ended June 30, 1998 increased by 66.0%
to $2.6 million from $1.6 million for the same period in 1997. This increase was
due primarily to hiring additional personnel, and increased marketing
activities. The Company expects sales and marketing expenses to continue to
increase in the foreseeable future as the Company pursues its growth strategy.
Sales and marketing expenses represented 13.2% of the Company's total revenues
for the three months ended June 30, 1998, compared to 11.6% for the same period
in 1997.
General and Administrative. General and administrative expenses consist
primarily of the personnel costs of the Company's management, administrative and
finance staffs as well as the costs of insurance programs, bad debt expenses,
professional fees and other infrastructure costs. General and administrative
expenses for the three months ended June 30, 1998 decreased by 2.2% to $0.8
million from $0.9 million for the same period in 1997. This decline is
attributable to increased efficiencies from the existing staff and favorable bad
debt experience in recent quarters. General and administrative expenses
represented 4.3% of the Company's total revenue for the three months ended June
30, 1998, compared to 6.5% for the same period in 1997.
Amortization of Intangibles. The charge of $171,000 for the three
months ended June 30, 1998 relate primarily to the amortization of goodwill and
other purchased intangibles of SalesKit Software Corporation, which was
purchased in April 1998.
Acquisition Costs. A charge of $1.1 million was recorded for the three
months ended June 30, 1998 for the transaction costs related to the acquisition
of Harper and Shuman, Inc. The acquisition was accounted for as a pooling of
interests.
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Purchased In-process Research and Development. A charge of $2.5 million
was recorded during the three months ended June 30, 1998, for the appraised
valuation of the purchased in-process research and development costs acquired
from SalesKit Software Corporation.
Interest Income. Interest income results from investments, and to a
lesser extent, from installment financing. Interest income for the three months
ended June 30, 1998 decreased by 1.2% to $250,000 from $253,000 for the same
period in 1997. The change is due to the cash utilized for the acquisition of
SalesKit Software Corporation in April 1998, offset by increased cash from
operations.
Income Tax Provision. The Company's effective tax rate for the three
months ended June 30, 1998 was 26.1%, as compared to a 37.5% for the same period
in 1997. The tax rate for the quarter ended June 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 three months
ended June 30, 1998 is based upon the Company's estimate of the effective tax
rate for fiscal 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
License Fees. License fees for the six months ended June 30, 1998
increased by 33.4% to $12.7 million from $9.5 million for the same period in
1997. The increase in license fees was principally attributable to Costpoint
license fees which increased by 51.5% to $7.3 million for the six months ended
June 30, 1998 from $4.8 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 5.5% to $2.2 million
for the six months ended June 30, 1998 as compared to $2.1 million for the same
period in 1997. License fees from System 1 products were $1.3 million for the
six months ended June 30, 1998 compared to $1.8 million for the six months ended
June 30, 1997, a decrease of 30.0%. 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
127.4% to $1.5 million for the six months ended June 30, 1998, from $665,000 in
the same period in 1997. License fees comprised 33.7% of the Company's total
revenues for the six months ended June 30, 1998, compared to 36.1% for the
comparable prior year period.
Services. Service revenues for the six-months ended June 30, 1998
increased by 52.7% to $23.2 million from $15.2 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 96.6% to $10.1 million for the six
months ended June 30, 1998 from $5.2 million for the same period in 1997. Other
service revenues increased by 30.1% to $13.1 million for the six months ended
June 30, 1998, from $10.1 million for the same period in the prior year,
principally as a result of the addition of new customers and the license of
additional software products to existing customers and, to a lesser extent,
increases in service rates. Service revenues comprised 61.6% of the Company's
total revenues for the six months ended June 30, 1998, compared to 57.7% for the
same period in 1997.
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Third-Party Equipment and Software. Revenues from third-party equipment
and software for the six months ended June 30, 1998 increased by 9.1% to $1.8
million from $1.6 million for the six months ended June 30, 1997. These revenues
comprised 4.7% and 6.2% of total revenues for the first six months ended June
30, 1998 and 1997, respectively.
Cost of Software. Cost of software is comprised primarily of royalties
and maintenance payments to third parties, amortization of software development
costs, and the cost of production and distribution of software and user manuals.
Cost of software for the six months ended June 30, 1998 was $1.1 million, a
slight increase from the $923,000 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 six months ended June 30, 1998
increased by 73.5% to $11.0 million from $6.4 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 47.5% and 41.8% of service
revenues for the six months ended June 30, 1998 and 1997, respectively. The
increase in cost of services as a percentage of service revenues primarily
reflected the increase in consulting revenues as a percentage of services
revenues. The Company earned a lower margin on its consulting revenues than on
its ongoing support services revenues. To a lesser extent, cost of services as a
percentage of services revenues increased due to hiring of additional telephone
support personnel to service the Company's growing customer base.
Cost of Third-Party Equipment and Software. Costs of third-party
equipment and software consists of the cost of computer and peripheral equipment
and license fees and royalties for third-party software. Cost of third-party
equipment and software for the six months ended June 30, 1998 increased to $1.4
million from $1.3 million in the comparable prior period. As a percentage of
related revenues, cost of third-party equipment and software products
represented 77.2% and 79.9% for the six months ended June 30, 1998 and 1997,
respectively. The decrease in these costs as a percentage of related revenues
was the result of changes in the product mix of equipment and software sold.
Software Development. Software development costs for the six months
ended June 30, 1998 increased by 33.8% to $7.2 million from $5.4 million for the
same period in 1997. This increase was due primarily to hiring additional
personnel. Software development costs represented 19.1% and 20.4% of total
revenues for the six months ended June 30, 1998 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily of
the cost of the Company's sales and marketing personnel as well as the costs of
advertising, direct mail and other sales and marketing activities. Sales and
marketing expenses for the six months ended June 30, 1998 increased by 62.3% to
$4.9 million from $3.0 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 12.9% of the Company's total revenues for the six months
ended June 30, 1998, compared to 11.4% for the same period in 1997.
15
<PAGE> 16
General and Administrative. General and administrative expenses consist
primarily of the personnel costs of the Company's management, administrative and
finance staffs as well as the costs of insurance programs, bad debt expenses,
professional fees and other infrastructure costs. General and administrative
expenses for the six months ended June 30, 1998 increased by 7.2% to $1.9
million from $1.8 million for the same period in 1997. This increase was due
primarily to the Company's overall growth. General and administrative expenses
represented 5.1% of the Company's total revenues for the six months ended June
30, 1998, compared to 6.8% for the same period in 1997.
Acquisition Costs. A charge of $1.1 million was recorded for the
six-months ended June 30, 1998 for the transaction costs related to the
acquisition of Harper and Shuman, Inc. The acquisition was accounted for as a
pooling of interests.
Amortization of Intangibles. The charge of $178,000 for the six months
ended June 30, 1998 relate primarily to the amortization of goodwill and other
purchased intangibles of SalesKit Software Corporation, which was purchased in
April 1998.
Purchased In-Process Research and Development. A charge of $2.5 million
was recorded during the six-months ended June 30, 1998, for the appraised
valuation of the purchased in-process research and development costs acquired
from SalesKit Software Corporation.
Interest Income. Interest income results from investment and, to a
lesser extent, from installment financing. Interest income for the six months
ended June 30, 1998 increased by 59.2% to $500,000 from $314,000 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 six
months ended June 30, 1998 was 49.7%, as compared to the pro forma effective tax
rate of 41.1% for the same period in 1997. The tax rate for the six months ended
June 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 six months ended June 30, 1998 is based upon the
Company's estimate of the effective tax rate for fiscal 1998.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively from cash
flow from its operations. As of June 30, 1998, the Company had cash and cash
equivalents of $4.2 million, marketable securities of $20.5 million and working
capital of $19.4 million.
For the six months ended June 30, 1998, the Company's net cash provided
by operating activities was $6.3 million. Accounts receivable, net of the
allowance for doubtful accounts, were $12.9 million as of June 30, 1998,
compared to $9.9 million as of December 31, 1997. Accounts receivable days sales
outstanding was 55 days as of June 30, 1998, compared to 54 days as of December
31, 1997. The increase in deferred revenue reflects increased Costpoint license
fees, for which revenues are recognized upon the expiration of the refund
period. Exclusive of unbilled receivables, which were recorded as deferred
revenue, days sales outstanding were 39 days as of June 30, 1998, compared to 37
days as of December 31, 1997. While the Company believes that its allowance for
doubtful accounts as of June 30, 1998, remains adequate, there can be no
assurance that such allowance will be sufficient to cover receivables which are
later determined to be uncollectible.
Investing activities utilized $13.2 million for the six months ended
June 30, 1998. This amount included $6.0 million for the assets acquired from
SalesKit, $5.5 million in acquired marketable securities, $1.2 million in
purchased property and equipment and $420,000 of capitalized software production
costs.
Financing activities for the six months ended June 30, 1998 consisted
primarily of $304,000 in proceeds from the exercise of stock options and
$285,000 from the issuance of stock under the Company's employee stock purchase
plan. This was offset by $370,000 in a final distribution to the Company's S
Corporation shareholders.
The Company has a $1.0 million Bank line of credit which will be
secured by substantially all of the Company's assets and will bear interest at
the lender's prime rate. To date, no amounts have been drawn under the line of
credit.
The Company believes that its current liquidity, together with
anticipated cash flow from operations and proceeds of this offering, 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.
17
<PAGE> 18
Year 2000 Compliance. Many existing computer systems and applications,
and other 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). Management
believes that the growth in demand for the Company's products over the past
several years is due in part to its customers' need to update their computer
systems in preparation for the year 2000. As the year 2000 approaches and the
number of upgrades driven primarily by the need to achieve year 2000 compliance
diminishes, there can be no assurance that the Company's business, operating
results and financial condition will not be adversely impacted.
Although the software products that the Company currently actively
markets either are, or are being redesigned to be, year 2000 compliant, many of
the Company's customers are still using non-compliant versions of its products.
The Company intends to provide the year 2000 compliant versions of its products
as normal product upgrades to all licensees that are using non-compliant
versions and are currently receiving ongoing support services from the Company.
The Company is attempting to identify those licensees, which are currently using
a non-compliant version of its products but are not receiving ongoing support
services, in order to determine whether those licensees intend to continue using
the Company's products and, if so, how the Company can assist them in converting
to a year 2000 compliant version. Although the Company does not anticipate that
the impact of these conversions will be significant, there can be no assurance
that the Company will be able to identify and satisfactorily resolve year 2000
issue with such licensee in a manner what will not have a material adverse
effect on the Company's business, operating results and financial condition.
Although the Company's year 2000 compliant products have, or will have,
undergone the Company's normal quality testing procedures, there can be no
assurance that these products contain all necessary date code changes. Any
system malfunctions due to the onset of the year 2000 and any disputes with
customers relating to year 2000 compliance, including licensees of non-compliant
products that the Company is unable to locate, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's internal business information systems are primarily
comprised of the commercial application software products offered for license by
the Company to its customers. These products are designed to be year 2000
compliant. The Company does, however, utilize some third-party vendor network
equipment, telecommunication products and other products which may or may not be
year 2000 compliant. The Company also relies, directly and indirectly, on
external systems of customers, suppliers, creditors, financial organizations and
governmental entities for accurate exchange of data. The Company is evaluating
its information technology infrastructure for year 2000 compliance to determine
what actions are required to make all internal systems year 2000 compliant and
what actions are needed to mitigate vulnerability to problems related to
enterprises with which the Company interacts. While the Company has not fully
identified the impact of the year 2000 issue on its internal systems or whether
any problems can be resolved without disrupting its business and incurring
significant expense, the Company's current estimate is that the costs associated
with the year 2000 issue, and the consequences of incomplete or untimely
resolution of the year 2000 issue, will not have a material adverse effect on
the Company's business, operating results or financial condition. There can be
no assurance that the Company will not be affected by year 2000 disruption in
the operation of the enterprises with which the Company interacts. Accordingly,
year 2000 problems could have a material adverse effect upon the Company's
business, operating results and financial condition.
18
<PAGE> 19
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results may vary from quarter to quarter
depending upon a number of factors, including the demand for its products, the
size and time of specific sales, the delay or deferral of customer
implementations, the level of product and price competition that it encounters,
the length of its sales cycles, its ability to attract and retain personnel, the
timing of new hires, the timing of new product introductions and product
enhancements by the Company and its competitors, the mix of products and
services sold, the activities of and acquisitions by its competitors, the timing
of the Company's national user conference, general economic conditions and its
ability to develop and market new software products and enhancements and control
costs. The loss or delay of individual orders could have a significant impact on
the Company's operating results, particularly on a quarterly basis. Furthermore,
while the Company's revenues from license fees are difficult to predict because
of the length and variability of the Company's sales cycles (typically 3 to 18
months), the Company's operating expenses are based on anticipated revenue
trends. Because a high percentage of these expenses are relatively fixed, a
delay in the recognition of revenue from a limited number of sales could cause
significant variations in operating results from quarter to quarter. To the
extent such expenses precede, or are not subsequently followed by, anticipated
revenues, the Company's operating results could be materially adversely
affected.
For certain of its software products, the Company typically grants its
customers a right of return for a full or partial refund of the license fee
during a refund period which is generally 60 to 90 days from the date of the
initial software delivery. The Company occasionally has provided, and may in the
future provide, longer refund periods for larger, more complex Costpoint
installations. Costpoint and Allegro license fees are recognized upon the
expiration of the applicable refund periods and are recorded as deferred
revenues until recognized. Because of customers' refund rights and the varying
length of applicable refund periods, deferred revenues at the end of a quarter
do not necessarily reflect revenues that the Company will recognize in a
succeeding quarter. The Company generally recognizes license fees from its
Advantage, System 1 and Electronic Timesheet products upon delivery.
As a result of these and other factors, the Company's operating results
for any quarter are subject to significant variation, and the Company believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company's future quarterly operating results form time to time may not meet
the expectations of market analysts or investors. In such event, the price of
the Common Stock would likely be materially adversely affected.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
19
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any legal proceeding which would have a
material impact on the Company, its operations or financial results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a)-(b) Not applicable.
(c) On April 30, 1998, the Company issued to SalesKit Software
Corporation ("SalesKit") warrants to purchase 130,000 shares
of its Common Stock in connection with the Company's
acquisitions of certain assets of SalesKit. The warrants are
exercisable at any time until April 30, 2001 at an exercise
price of $22 per share. The warrants were issued pursuant to
an exemption from registration under Section 4(2) of the
Securities Act of 1933 (the "Act").
On May 29, 1998 the Company issued to the shareholders of
Harper & Shuman, Inc. ("H&S") an aggregate of 685,765 shares
of Common Stock and options to purchase 4,230 shares of Common
Stock in exchange for the outstanding common shares and
options of H&S. The options are exercisable at any time until
December 31, 1999 at a per share price of $0.31. The
securities were issued in accordance with Regulation D under
the Act.
(d) On April 30, 1998, the Company released from escrow the
approximate sum of $5.6 million, placed in escrow during the
quarter ended March 31, 1998, with the Company's bank upon
closing of the acquisition of assets of SalesKit. Such sums
represented a portion of the net proceeds of the Company's
initial public offering in February 1997. The balance of the
net proceeds of the offering remain temporarily invested and
available for future working capital or other uses.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 1998, the Company held its Annual Meeting of Shareholders.
As reported in the Company's Current Report on Form 8-K dated June 12, 1998
(File No. 0-22001), Charles W. Stein was reelected as a Class I director and
Arthur Andersen LLP was ratified as the Company's auditors.
ITEM 5. OTHER INFORMATION
None
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On May 12, 1998, the Company's filed its Current Report on Form 8-K
dated May 12, 1998, reporting the acquisition of certain assets of
SalesKit. Financial statements for SalesKit as of and for the fiscal
year ended December 31, 1998, and unaudited pro forma financial
information as of and for the year ended December 31, 1997 giving
effect to the acquisition as if it occurred on January 1, 1997 were
included.
On June 1, 1998, the Company filed its Current Report on Form 8-K dated
June 1, 1998, reporting the issuance of a press release announcing the
execution of a definitive agreement relating to the contemplated
acquisition of H&S and a press release announcing the closing of the
acquisition. No financial statements were included.
On June 12, 1998, the Company filed its Current Report on Form 8-K
dated June 12, 1998, reporting the acquisition of H&S and the results
of its annual meeting of shareholders held on May 28, 1998. No
financial statements were included with the report but the Company
reported that it expected to file such financial information by
amendment no later than August 12, 1998.
21
<PAGE> 22
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: February 26, 1999
DELTEK SYSTEMS, INC.
By: /s/ Alan R. Stewart
---------------------------------------
Alan R. Stewart
Chief Financial Officer
(Principal Financial and Accounting Officer)
22
<PAGE> 23
DELTEK SYSTEMS, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLE
<S> <C>
27 Financial Data Schedule
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS OTHER
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1997 DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1997 JUN-30-1998 JUN-30-1997 JUN-30-1998 DEC-31-1997
<CASH> 0 4,202 0 0 10,883
<SECURITIES> 0 20,482 0 0 14,949
<RECEIVABLES> 0 13,519 0 0 10,502
<ALLOWANCES> 0 (589) 0 0 (573)
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 0 42,011 0 0 38,359
<PP&E> 0 9,741 0 0 8,325
<DEPRECIATION> 0 5,907 0 0 5,349
<TOTAL-ASSETS> 0 55,086 0 0 44,041
<CURRENT-LIABILITIES> 0 22,614 0 0 16,227
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 18 0 0 18
<OTHER-SE> 0 34,472 0 0 25,796
<TOTAL-LIABILITY-AND-EQUITY> 0 55,086 0 0 44,041
<SALES> 13,603 19,949 26,366 37,702 0
<TOTAL-REVENUES> 13,603 19,949 26,366 37,702 0
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 9,925 18,381 18,791 31,311 0
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0 0
<INCOME-PRETAX> 3,931<F1> 1,818<F2> 7,889<F3> 6,891<F6> 0
<INCOME-TAX> 0 0 0 0 0
<INCOME-CONTINUING> 3,678 1,568 7,575 6,391 0
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 2,458 776 5,732<F4> 3,882 0
<EPS-PRIMARY> 0.14 0.04 0.34<F5> 0.22 0
<EPS-DILUTED> 0 0 0 0 0
<FN>
<F1>Includes interest income of $253.
<F2>Includes interest income of $250.
<F3>Includes interest income of $314.
<F4>The pro forma income tax provision and net income, after taking effect for a
proforma income tax provision, would be $3,039 and $4,850, respectively.
<F5>The pro forma net income per share on a fully diluted basis would have been
$0.28.
<F6>Includes interest income of $500.
</FN>
</TABLE>
