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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECUIRITES
- ----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECUIRITES
- ----- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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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 INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER 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 SEPTEMBER 30, 2000
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Common Stock, $.001 par value 15,794,003
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DELTEK SYSTEMS, INC.
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999............................................................3
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2000 and September 30, 1999......................4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and September 30, 1999..................................5
Notes to Unaudited Consolidated Financial Statements.............................6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................8
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk......................14
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings...............................................................15
ITEM 2 - Changes in Securities and Use of Proceeds.......................................15
ITEM 3 - Defaults upon Senior Securities ................................................15
ITEM 4 - Submission of Matters to a Vote of Security Holders.............................15
ITEM 5 - Other Information...............................................................15
ITEM 6 - Exhibits and Reports on Form 8-K................................................15
SIGNATURES.................................................................................15
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DELTEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,079 $ 5,989
Marketable securities 9,440 23,256
Accounts receivable, net of allowance for doubtful
accounts of $1,037 and $1,404, respectively 17,381 13,427
Prepaid expenses, deferred income taxes and other current
assets 4,112 4,695
-------- --------
Total current assets 36,012 47,367
-------- --------
FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, NET
OF ACCUMULATED DEPRECIATION AND AMORTIZATION OF
$10,986 AND $8,289 RESPECTIVELY 7,228 6,516
COMPUTER SOFTWARE DEVELOPMENT COSTS, NET OF
ACCUMULATED AMORTIZATION OF $4,085 AND $3,166,
RESPECTIVELY 6,011 5,129
PURCHASED INTANGIBLES, NET OF ACCUMULATED AMORTIZATION
OF $3,123 AND $1,786, RESPECTIVELY 17,992 3,298
OTHER ASSETS 263 125
-------- --------
Total assets $ 67,506 $ 62,435
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,212 $ 6,567
Deferred revenue 10,419 8,626
-------- --------
Total current liabilities 19,631 15,193
-------- --------
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, 15,794,003 and 16,636,197 shares
issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 16 17
Paid - in capital 3,870 10,023
Retained earnings 44,023 37,202
Accumulated other comprehensive income (34) ---
-------- --------
Total shareholders' equity 47,875 47,242
-------- --------
Total liabilities and shareholders' equity $ 67,506 $ 62,435
======== ========
The accompanying notes are an integral part of these consolidated statements.
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DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
Software license fees $ 7,491 $ 7,638 $19,578 $21,838
Services 17,039 16,700 51,020 48,280
Third-party equipment and software 818 801 2,152 2,364
------- ------- ------- -------
Total revenues 25,348 25,139 72,750 72,482
OPERATING EXPENSES:
Cost of software license fees 978 632 2,624 1,965
Cost of services 9,288 8,303 27,410 22,568
Cost of third-party equipment
and software 823 720 2,027 2,039
Software development 4,373 4,208 13,059 12,222
Sales and marketing 4,110 2,789 10,223 8,459
General and administrative 1,758 1,353 5,152 4,349
Restructuring charge 410 - 410 -
Amortization of goodwill 840 248 1,441 803
------- ------- ------- -------
Total operating expenses 22,580 18,253 62,346 52,405
INCOME FROM OPERATIONS 2,768 6,886 10,404 20,077
INTEREST INCOME 218 285 725 894
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,986 7,171 11,129 20,971
PROVISION FOR INCOME TAXES 1,167 2,867 4,309 8,258
------- ------- ------- -------
NET INCOME $ 1,819 $ 4,304 $ 6,820 $12,713
======= ======= ======= =======
NET INCOME PER SHARE:
Basic $ 0.11 $ 0.25 $ 0.41 $ 0.73
Diluted $ 0.11 $ 0.25 $ 0.41 $ 0.71
SHARES USED TO COMPUTE PER SHARE AMOUNTS:
Basic 16,438 16,949 16,608 17,404
Diluted 16,554 17,430 16,806 17,856
The accompanying notes are an integral part of these consolidated statements.
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DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,820 $ 12,713
Adjustments to reconcile net income to net cash provided by
operating activities, net of effect of acquisitions:
Depreciation and amortization 4,953 2,938
Other noncash credits - (128)
Change in accounts receivable, net (3,954) (1,326)
Change in prepaid expenses and other assets 446 76
Change in prepaid income taxes - (1353)
Change in accounts payable and accrued expenses 2,645 (656)
Change in deferred income taxes, net - (127)
Change in deferred revenue 1,793 (3,712)
-------- --------
Net cash provided by operating activities 12,703 8,425
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of marketable securities 13,816 2,079
Purchases of property and equipment (3,409) (2,452)
Acquisition of Semaphore, Inc. and A/E Management, Inc. (16,031) -
Capitalization of software development costs (1,801) (2,129)
-------- --------
Net cash used in investing activities (7,425) (2,502)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from issuance of stock for employee
purchase plan and option plans 1,138 940
Common stock purchased and retired (7,284) (8,889)
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Net cash used by financing activities (6,146) (7,949)
-------- --------
Impact of foreign exchange (42) -
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS (910) (2,026)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,989 9,515
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,079 $ 7,489
======== ========
CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 7,647 $ 9,378
======== ========
The accompanying notes are an integral part of these consolidated statements.
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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 Systems, Inc. ("Deltek" or the "Company") is a leading provider of
business software, solutions and consulting to over 7,500 professional services
firms and project-based companies worldwide. Deltek's solutions encompass
project and financial accounting, customer relationship management, time
collection and employee expense, proposal automation, project and resource
management, human resources and payroll, business intelligence and e-Business.
The Company provides integrated services including customer support and software
maintenance, implementation and practice management consulting and classroom
training.
Basis of Presentation
The consolidated financial statements included herein have been prepared by 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, 1999, included in the Company's Annual
Report on Form 10-K.
2. NET INCOME PER COMMON SHARE
Net income per common share was 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 was related to outstanding stock options.
3. COMMON STOCK PURCHASED AND RETIRED
On June 28, 2000, the Company announced the purchase of up to 1,600,000 shares
of its common stock through open market and private purchases, of which
1,014,600 were acquired and retired as of September 30, 2000, with an additional
253,000 acquired and retired as of October 31, 2000.
On November 4, 1999, the Company announced the purchase of up to 500,000 shares
of its common stock through open market and private purchases, 402,500 of which
were acquired and retired as of December 31, 1999, and 97,500 of which were
acquired and retired as of August 15, 2000.
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, all of which were
acquired and retired in accordance with state law as of June 30, 1999.
Purchases were made out of the Company's general corporate funds.
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
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at its fair value. The Company does not expect SFAS No. 133 to materially impact
its financial condition or future results of operations.
In December 1999, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which summarizes certain of the SEC Staff views in applying U.S. GAAP to
revenue recognition in financial statements. SAB 101 is effective for the fourth
quarter ended December 31, 2000, and is not expected to have a material impact
on the financial statements of the Company.
5. COMMITMENTS AND CONTINGENCIES
The Company's continuing operations entail various claims incidental to its
business. The Company is contesting these matters, and in the opinion of
management, the ultimate resolution of any legal proceedings will not have a
material adverse effect on the financial condition or the future operating
results of the Company.
6. ACQUISITIONS
On August 9, 2000, the Company acquired all of the outstanding stock of
Semaphore, Inc. for a purchase price of $10 million (subject to certain working
capital adjustments) in cash. Net assets acquired were nominal and the majority
of the purchase price was allocated to purchased intangibles on a preliminary
basis. These intangibles are being amortized over five years. Semaphore, Inc.
provides advanced financial and project management software and services for
A/E/C (Architecture, Engineering and Construction) and other professional
services firms.
On April 14, 2000, Deltek acquired substantially all assets of A/E Management
Services, Inc., including its complete suite of RFP Proposal automation and
tracking software, for the cash purchase price of $3.5 million. Net assets
acquired were nominal and the entire purchase price was allocated to purchased
intangibles on a preliminary basis. These intangibles are being amortized over
five years. A/E Management's RFP front-office automation solution is designed to
help the A/E/C profession and other professional services organizations win more
contracts by automating the process of collecting, updating, researching and
retrieving data critical to achieving marketing and proposal automation success.
7. RESTRUCTURING CHARGE
Related to a reduction in force, the Company recorded $410,000 in severance
expense in the quarter ended September 30, 2000.
8. REVENUE RECOGNITION
The Company recognizes software revenue in accordance with Statement of Position
97-2 "Software Revenue Recognition," and Statement of Position 98-9
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions."
The Company grants perpetual licenses under a standard license agreement. For
certain of its software products (primarily Costpoint), the Company historically
granted, at the customer's discretion, a right of return for a full or partial
refund of the license fee during a refund period, which generally spanned 60 to
90 days from the date of the initial software delivery. Costpoint license fees
were therefore deferred until the expiration of the applicable refund period.
Beginning in the quarter ended September 30, 2000, license agreements were
amended to permit returns in the event of material defects only, as defined in
the license agreement. Accordingly, the Company is no longer required to defer
software license fee revenue as related to the refund 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,
1999 as contained in the Company's Annual Report on Form 10-K.
In addition to historical information, this Quarterly Report includes
certain "forward-looking statements." The words "anticipates," "believes,"
"estimates," "expects," "plans," "intends" and other similar expressions are
intended to identify these forward-looking statements, but are not the exclusive
means of identifying them. Readers are cautioned not to place undue reliance on
these forward-looking statements as these forward-looking statements reflect the
current view of the Company or its management and are subject to certain risks,
uncertainties and contingencies which could cause the Company's actual results,
performance or achievements to differ materially from those expressed in or
implied by these statements. These risks, uncertainties and contingencies
include, but are not limited to, the factors discussed under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors that May Affect Future Results" and elsewhere in
this Quarterly Report. Deltek undertakes no obligation and does not intend to
update, revise or otherwise publicly release the result of any revisions to
these forward-looking statements that may be made to reflect future events or
circumstances.
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)
Three months ended Nine months ended
------------------ -----------------
9/30/00 9/30/99 9/30/00 9/30/99
------- ------- ------- -------
Revenues:
Software license fees 29.6 % 30.4 % 26.9 % 30.0 %
Services 67.2 66.4 70.1 66.7
Third-party equipment and software 3.2 3.2 3.0 3.3
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Cost of software license fees 3.9 2.5 3.6 2.7
Cost of services 36.6 33.0 37.7 31.1
Cost of third-party equipment and software 3.2 2.9 2.8 2.8
Software development 17.3 16.7 17.9 16.9
Sales and marketing 16.2 11.1 14.1 11.7
General and administrative 7.0 5.4 7.0 6.0
Restructuring charge 1.6 - .6
Amortization of goodwill 3.3 1.0 2.0 1.1
------ ------ ------ ------
Total operating expenses 89.1 72.6 85.7 72.3
Income from operations 10.9 27.4 14.3 27.7
Interest income .86 1.1 1.0 1.2
------ ------ ------ ------
Income before income taxes 11.8 28.5 15.3 28.9
Provision for income taxes 4.6 11.4 5.9 11.4
------ ------ ------ ------
Net income 7.2 % 17.1 % 9.4 % 17.5 %
====== ====== ====== ======
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Summary. Net income for the three months ended September 30, 2000
amounted to $1.8 million, or $0.11 per diluted share, compared with $4.3
million, or $0.25 per diluted share for the third quarter of 1999. Excluding a
restructuring charge and amortization of goodwill, net income, as adjusted,
amounted to $2.7 million, or $0.16 per diluted share for the current quarter
compared with $4.5 million, or $0.26 per diluted share for the corresponding
period in 1999. Total revenue for the quarter ended September 30, 2000 increased
by 0.8% from the third quarter of 1999 attributed principally to an increase in
services revenue, as software revenue was 1.9% short of the corresponding 1999
total. Operating expenses increased 18.5% before the restructuring charge and
amortization of goodwill over the corresponding 1999 levels and accounted for
much of the contraction in the operating margin, which was 15.9% for the current
quarter compared with 28.4% for the third quarter of 1999.
Software License Fees. License fees for the quarter ended September 30,
2000 decreased by 1.3% to $7.5 million from $7.6 million for the same period in
1999, and represented 29.6% of total revenue in the current quarter compared
with 30.4% for the year earlier quarter. The most significant changes in
software revenue were related to: a decrease in Costpoint(R) sales to $3.4
million for the current quarter compared with $4.5 million for the corresponding
period last year; a decrease in Advantage sales to $1.1 million for the current
period compared with $1.4 million for the prior period; and a decrease in ET
Enterprise sales to $1.0 for the current quarter compared with $1.2 million for
the prior period. Lower software sales were related principally to the passing
of the Y2K rush to install compliant software by December 31, 1999 and, more
recently, to the growing competition for Web-based products. However, growth in
software revenue was achieved in sales of GCS Premier, to $1.4 million for the
current quarter, from $0.5 million for the corresponding quarter last year,
related to product upgrades and conversions from System1, the predecessor
product. As disclosed in Note 8, Revenue Recognition, the Company changed the
refund provisions in its license agreements, which had the effect of
accelerating $853 thousand of software license revenue into the quarter ended
September 30, 2000.
At September 30, 2000, deferred revenue included $865 thousand related to
software shipped in the first week of October 2000.
Services. Services revenue for the quarter ended September 30, 2000
increased by 1.8% to $17.0 million from $16.7 million for the corresponding
period in 1999, and represented 67.2% of total revenue for the current period
compared with 66.4% for the prior-year period. The increase was principally
attributed to improved Ongoing Support Plan (OSP) revenue for all product lines
and to increased training revenues. OSP revenue increased by 20.9% to $8.1
million for the current quarter compared with $6.7 million for the same quarter
last year. OSP revenue is subject to annual contractual increases and tends to
lag the trends in software sales. Training revenue increased by 108.0% to $703
thousand compared with $338 thousand for the third quarter of 1999, including
revenue attributed to the Semaphore acquisition completed in August 2000.
Consulting services revenue decreased by 7.8% to $7.1 million for the current
quarter compared with $7.7 million for the third quarter of 1999. Consulting
revenue responds quickly to decreases and increases in software sales.
Third-Party Equipment and Software. Revenue from third-party equipment
and software for the quarter ended September 30, 2000 increased by 2.1% to $818
thousand from $801 thousand for the year-earlier quarter and comprised 3.2% of
total revenues for each of the comparable periods.
Cost of Software License Fees. Cost of software license fees is composed
primarily of royalties and maintenance payments to third parties, amortization
of software development costs, and the cost of production and distribution of
software and related user manuals. Cost of software for the current and
corresponding quarters was $978 thousand and $632 thousand, respectively. The
increase was due to additional amortization expenses related to the general
release of GCS Premier and to the general release of PWP, the predecessor to
Deltek CRM and Deltek Proposals, late in the first quarter of 2000. Royalties
associated with certain software products currently under development by joint
business arrangements and charges associated with software products and
technologies acquired from various third party vendors may cause the cost of
software license fees, as a percentage of software license fees revenue, to
increase in future periods.
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Cost of Services. Cost of services is composed primarily of personnel
costs for consulting, customer training, and support. Cost of services for the
quarter ended September 30, 2000 increased by 12.0% to $9.3 million compared
with $8.3 million for the same period in 1999. The cost of services gross margin
decreased to 45.5% for the third quarter of 2000 from 50.3% a year earlier as a
result of a decline in consultant utilization rates in concert with declines in
software license sales and consulting services revenue. Higher indirect travel
costs also contributed to the margin decline. Cost of services as a percentage
of services revenue increased to 54.5% for the most recent quarter compared with
49.7% for the third quarter of 1999.
Cost of Third-Party Equipment and Software. Cost of third-party equipment
and software consists of computer and peripheral equipment, license fees and
royalties for third-party software and increased to $823 thousand for the recent
quarter from $720 thousand in the third quarter of 1999. The increase was due to
a significant increase in the cost of hardware.
Software Development. Software development costs are composed of
personnel expenses for analysts and programmers who research, develop, maintain
and enhance the Company's existing software products and who develop new
products. Amounting to $4.4 million for the current quarter compared with $4.2
million last year, the increase was due primarily to labor costs for
subcontractors and a lower amount of capitalized costs for software development.
Software development costs represented 17.3% and 16.7% of total revenue for the
quarters ended September 30, 2000 and 1999, respectively.
Sales and Marketing. Sales and marketing expenses are composed of
personnel costs, advertising, direct mail and other sales and marketing
activities. Sales and marketing expenses for the quarter ended September 30,
2000 increased to $4.1 million from $2.8 million for the corresponding period in
1999 was related to increased staff and current branding, sales and marketing
initiatives. Sales and marketing expenses represented 16.2% and 11.1% of the
Company's total revenue for the comparable quarters of 2000 and 1999,
respectively.
General and Administrative. General and administrative expenses consist
primarily of the costs for management and administrative personnel, and include
insurance expense, bad debt provisions, professional fees, and other operating
costs. General and administrative expenses for the quarter ended September 30,
2000 increased by 28.6% to $1.8 million, from $1.4 million for the same period
in 1999, and represented 7.0% of total revenue for the quarter ended September
30, 2000, compared with 5.4% for the same period in 1999.
Restructuring Charge. During the quarter ended September 30, 2000, the
Company incurred a restructuring charge of $410 thousand related to a reduction
in staff.
Amortization of Goodwill. Amortization expense of $840 thousand and $248
thousand for the quarters ended September 30, 2000 and September 30, 1999,
respectively, was related to SalesKit Software Corporation, A/E Management, Inc.
and Semaphore, Inc., acquired in April 1998, April 2000 and August 2000,
respectively.
Interest Income. Interest income is earned principally on short-term
investments in tax-exempt securities and amounted to $218 thousand for the
quarter ended September 30, 2000, a decrease of 23.5% from $285 thousand for the
same period in 1999 attributed to a decline in average invested funds used for
acquisitions and share repurchases.
Income Tax Provision. The Company's effective tax rate for the quarter
ended September 30, 2000 was 39.1% compared with 40.0% for the quarter ended
September 30, 1999.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER,
1999
Summary. Net income for the nine months ended September 30, 2000 amounted
to $6.8 million, or $0.41 per diluted share, compared with $12.7 million, or
$0.71 per diluted share for the nine months of 1999. Excluding a restructuring
charge and amortization of goodwill, net income, as adjusted, amounted to $8.1
million, or $0.48 per diluted share for the current period compared with $13.2
million, or $0.74 per diluted share for the corresponding period in 1999. Total
revenue for the three quarters ended September 30, 2000 increased by 0.4% from
the first nine months of 1999 attributed principally to a 5.7% increase in
services revenue, as software revenue was 10.3% short of the corresponding 1999
total. Operating expenses increased 17.2% before the restructuring charge and
amortization of goodwill over the corresponding 1999 levels and accounted for
much of the contraction in the operating margin, which was 16.8% for the current
nine-month period compared with 28.8% for the corresponding period in 1999.
Software License Fees. License fees for the nine months ended September
30, 2000 decreased by 10.1% to $19.6 million from $21.8 million for the same
period in 1999. License fees from sales of GCS Premier increased 120% to $4.4
million for the nine months ended September 30, 2000 compared with $2.0 million
for the comparable 1999 period. The increase was attributed to product upgrades
and conversions from System1, the predecessor product. Sales of new front office
products, Deltek CRM and Deltek Proposals, produced $708 thousand in software
revenue for the nine months ended September 30, 2000, with no comparable revenue
for 1999. Sales of ET Enterprise produced $2.6 million in fees for the nine
months ended September 30, 2000 compared with $2.9 million for the corresponding
period last year, a decrease of 10.3%. Costpoint license fees were $7.6 million
for the nine months ended September 30, 2000, a decrease of 32.9% for the same
period in 1999. As disclosed in Note 8, Revenue Recognition, the Company changed
the refund provisions in its license agreements, which had the effect of
accelerating $853 thousand of software license revenue into the nine months
ended September 30, 2000. Factors discussed in the preceding three-month
analysis are applicable to the nine-month periods as well.
At September 30, 2000, deferred revenue included $865 thousand related to
software shipped in the first week of October 2000.
Services. Services revenue for the current nine-month period increased by
5.6% to $51.0 million from $48.3 million for the same period in 1999 attributed
principally to increased Ongoing Support Plan (OSP) services revenue for all
product lines. OSP increased by 19.1% to $23.1 million for the nine months ended
September 30, 2000 compared with $19.4 million for the same period last year.
Consulting services revenue decreased slightly by 2.1% to $23.1 million for the
current period from $23.6 million for the nine months of 1999. Services revenue
comprised 70.1% of the Company's total revenue for the nine months ended
September 30, 2000, compared to 66.7% for the same period in 1999. Factors
discussed in the preceding three-month analysis are applicable to the nine-month
periods as well.
Third-Party Equipment and Software. Revenue from third-party equipment
and software for the nine months ended September 30, 2000 decreased by 8.3% to
$2.2 million from $2.4 million for the nine months ended September 30, 1999.
These revenues comprised 3.0% and 3.3% of total revenues for the nine months
ended September 30, 2000 and 1999, respectively.
Cost of Software License Fees. Cost of software license fees for the
comparable nine-month periods ended September 30 were $2.6 million, or 13.4% of
related software revenue, and $2.0 million, or 9.0% of related revenue,
respectively. The increase was due to amortization expense related to the
general release of GCS Premier and of PWP, the predecessor to Deltek's new
front-office products, late in the first quarter of 2000. In addition, the costs
associated with printing, shipping and software supplies increased. Royalties
associated with certain software products currently under development by joint
business arrangements and charges associated with software products and
technologies acquired from various third party vendors may cause the cost of
software license fees as a percentage of software license fees revenue to
increase in future periods.
Cost of Services. Cost of services for the current nine-month period
increased by 21.2% to $27.4 million, from $22.6 million for the same period in
1999. The cost of services gross margin of 46.3% for the current period declined
from 53.3% for the prior nine-month period due to a decrease in consultant
utilization rates related to the decline in software license fees. Indirect
travel and labor related expenses also contributed to the increase in cost of
services.
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Cost of Third-Party Equipment and Software. Costs for third-party
equipment and software were at $2.0 million for each of the comparable
nine-month periods ended September 30, 2000 and 1999. Costs increased as a
percentage of lower related revenue to 94.2% and 86.3% for the nine months ended
September 30, 2000 and 1999, respectively.
Software Development. Software development costs for the nine months
ended September 30, 2000 were $13.1 million, an increase of 7.4% from the same
period in 1999 due primarily to labor costs associated with subcontractors and
to a reduction in capitalized costs for software development. Software
development costs represented 17.9% and 16.9% of total revenues for the nine
months ended September 30, 2000 and 1999, respectively.
Sales and Marketing. Sales and marketing expenses for the nine months
ended September 30, increased to $10.2 million compared with $8.5 million for
the same period in 1999. Sales and marketing expenses represented 14.1% and
11.7% of the Company's total revenues for the comparable nine months of 2000 and
1999, respectively. Factors discussed in the preceding three-month analysis are
applicable to the nine-month periods as well.
General and Administrative. General and administrative expenses for the
nine months ended September 30, 2000 increased by 20.9% to $5.2 million from
$4.3 million for the same period in 1999. This increase was due to additional
professional fees and labor costs. General and administrative expenses
represented 7.0% of the Company's total revenue for the nine months ended
September 30, 2000, compared to 6.0 for the same period in 1999.
Restructuring Charge. During the quarter ended September 30, 2000, the
Company incurred a restructuring charge of $410 thousand related to a reduction
in staff.
Amortization of Goodwill. Amortization expense of $1.4 million and $803
thousand for the comparable nine-month periods, respectively, was related to
SalesKit Software Corporation, A/E Management, Inc. and Semaphore, Inc.,
acquired in April 1998, April 2000 and August 2000, respectively.
Interest Income. Interest income declined to $725 thousand for the nine
months ended September 30, 2000, a decrease of 18.9% from $894 thousand for the
same period in 1999 attributed to a decline in average invested funds used for
acquisitions and share repurchases. .
Income Tax Provision. The Company's effective tax rate for the nine
months ended September 30, 2000 was 38.7% compared with 39.4% for the nine
months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of funding is cash flow from operating
activities. At September 30, 2000, the Company had cash and cash equivalents of
$5.1 million, marketable securities of $9.4 million, and total working capital
of $16.4 million.
For the quarter ended September 30, 2000, the Company's net cash provided
by operating activities was $12.7 million compared with $8.4 million for the
comparable 1999 period. Accounts receivable, net of the allowance for doubtful
accounts, were $17.4 million at September 30, 2000, compared to $13.4 million at
December 31, 1999. Accounts receivable days sales outstanding (DSO) was 61 at
September 30, 2000 compared with 56 at December 31, 1999. While the Company
believes that its allowance for doubtful accounts at September 30, 2000, was
adequate, there can be no assurance that such allowance will be sufficient to
cover receivables that are later determined to be uncollectible.
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Net cash used for investing activities amounted to $7.4 million for the
nine months ended September 30, 2000 compared with $2.5 million for the
comparable 1999 period. Cash used for acquisitions amounted to $16.0 million,
while $3.4 million was used to purchase property and equipment, and $1.8 million
was used for capitalized software production costs. Cash provided by sales of
marketable securities amounted to $13.8 million for the nine months of 2000
compared with $2.1 million for the nine-month period in 1999.
Cash received from financing activities for the nine months ended
September 30, 2000 consisted of $1.1 million in proceeds from the exercise of
stock options and the issuance of stock under the Company's employee stock
purchase plan compared with $0.9 million for the nine months of 1999. Cash used
to purchase and retire Deltek Common Stock amounted to $7.3 million in the first
nine months of 2000 compared with $8.9 million for the comparable 1999 period.
On August 9, 2000, the Company acquired all of the outstanding stock of
Semaphore, Inc. for a purchase price of $10 million in cash from working
capital.
Deltek 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. Deltek may consider
additional appropriate acquisitions should such opportunities present
themselves. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We may experience fluctuations in quarterly operating results. Our future
results may vary from quarter to quarter depending upon a number of factors
including the following:
- the discretionary nature of our customers' purchase and budget
cycles;
- demand for our products;
- the size and timing of specific sales;
- the delay or deferral of customer implementations;
- our ability to integrate and market products and software acquired
by acquisition;
- the level of product and price competition 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;
- 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;
- our ability to control costs; and
- 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 three 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 realizing anticipated revenues, our operating results could be materially
adversely affected.
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Generally, for a period of 60 days following delivery, customers have a
right of return for a full or partial refund of the software license fee in the
event of a major product defect as defined in the related agreement. In the
unlikely event that such a defect were to exist, and/or be widespread, one or
more customers could exercise their right of return, which would require the
Company to reverse all, or a portion of, previously recognized software license
fee revenue.
Our operating results for any quarter are subject to significant
variation, and we believe that period-to-period comparisons of our operating
results 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 beyond the final quarter of 2000, 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.
Future revenue growth is dependent in part on our successful introduction
of new products. During the quarter ended September 30, 2000, we continued
development work on several products. Our future revenue growth from software
sales is dependent, in part, on our ability to launch new products successfully.
Internet-enabled products present unique risks. The increased commercial
use of the Internet could require substantial modification and customization of
our products and the introduction of new products. We may not be able to
effectively compete in the Internet-related products and services market. In
addition, critical issues concerning the commercial use of the Internet,
including security, demand, reliability, cost, ease of use, accessibility,
quality of service and potential tax or other government regulation, remain
unresolved and may affect the use of the Internet as a medium to support the
functionality of our products and distribution of our software. If these
critical issues are not favorably resolved, our business, operating results and
financial condition could be materially adversely affected.
Other Factors. For a discussion of additional factors that may affect
future results, see "Factors That May Affect Future Results and Market Price of
Stock" in the Company's Annual Report on Form 10-K 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
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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 14, 2000
DELTEK SYSTEMS, INC.
By: /s/ David L. Spilman
--------------------------
David L. Spilman
Chief Financial Officer
(Principal Accounting Officer)
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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 13, 2000
DELTEK SYSTEMS, INC.
By: /s/ David L. Spilman
--------------------------
David L. Spilman
Chief Financial Officer
(Principal Accounting Officer)
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DELTEK SYSTEMS, INC.
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
27 Financial Data Schedule
16