1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934 for the quarterly period and six months ended
June 30, 1997 or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number: 0-22001
DELTEK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1252625
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8280 Greensboro Drive, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 734-8606
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at June 30, 1997
Common Stock, $.001 par value 16,990,726
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DELTEK SYSTEMS, INC.
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Balance Sheets as of June 30, 1997 and December 31, 1996 3
Statements of Income for the Three and Six Months 4
Ended June 30, 1997 and June 30, 1996
Statements of Cash Flows for the Six Months 6
Ended June 30, 1997 and June 30, 1996
Unaudited Notes to Condensed Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 17
ITEM 2 - Changes in Securities 17
ITEM 3 - Defaults upon Senior Securities 17
ITEM 4 - Submission of Matters to a Vote of Security Holder 17
ITEM 5 - Other Information 17
ITEM 6 - Exhibits and Reports on Form 8 - K 17
SIGNATURES 18
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DELTEK SYSTEMS, INC.
BALANCE SHEETS
(in thousands, except share data)
June 30, 1997 December 31,
------------- ------------
(Unaudited) 1996
----
ASSETS
Current assets:
Cash and cash equivalents $ 12,335 $ 8,333
Marketable securities 8,689 ---
Accounts receivable, net of allowance for doubtful
accounts of $475 and $396, respectively 6,041 5,995
Inventories 199 209
Prepaid income taxes 1,456 ---
Prepaid expenses and other current assets 884 1,058
----- -----
Total current assets 29,604 15,595
------ ------
Furniture, equipment, and leasehold improvements, at
cost, net of accumulated depreciation and amortization
of $2,482 and $2,168, respectively 2,027 1,878
Computer software development costs, at cost, net of
accumulated amortization of $2,114 and $1,810,
respectively 2,581 2,591
Other assets 105 138
--- ---
Total assets $34,317 $20,202
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $3,223 $1,908
Accrued dividends payable 3,300 ---
Deferred revenue 8,960 6,808
----- -----
Total current liabilities 15,483 8,716
------ -----
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, 16,990,726 and 15,167,250 shares
issued and outstanding at June 30, 1997 and December
31, 1996, respectively 17 15
Paid in capital 18,337 2,226
Retained earnings 1,080 9,965
----- -----
19,434 12,206
Less unearned compensation 600 720
--- ---
Total shareholders' equity 18,834 11,486
------ ------
Total liabilities and shareholders' equity $34,317 $20,202
------- -------
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DELTEK SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
Three months ended June 30,
---------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------
Statement of Operations Data: (in thousands, except per share data)
Revenues:
License fees $3,889 $2,325
Services 6,776 4,951
Third party equipment and software 789 291
--- ---
11,454 7,567
------ -----
Operating expenses:
Cost of software 446 347
Cost of services 2,719 2,216
Cost of third-party equipment
and software 666 238
Software development 2,377 1,486
Sales and marketing 1,056 806
General and administrative 653 626
Stock option compensation --- 867
------ ---
Total operating expenses 7,917 6,586
----- -----
Income from operations 3,537 981
Interest income, net 237 102
--- ---
Income before income taxes 3,774 1,083
Provision for income taxes 1,410 12
----- --
Net income $2,364 $1,071
------ ------
Pro forma Statement of Operations Data:
Income before provision for income
taxes, as reported 3,774 1,083
Provision for income taxes 1,410 422
----- ---
Net income $2,364 $661
------ ----
Net income per share $0.14 $0.04
----- -----
Weighted average shares outstanding 17,392 15,549
------ ------
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DELTEK SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
Six months ended June 30,
-------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------
Statement of Operations Data: (in thousands, except per share data)
Revenues:
License fees $7,440 $5,205
Services 13,351 9,314
Third party equipment and software 1,201 649
----- ---
21,992 15,168
------ ------
Operating expenses:
Cost of software 782 711
Cost of services 5,276 4,101
Cost of third-party equipment
and software 1,006 509
Software development 4,630 2,926
Sales and marketing 1,966 1,589
General and administrative 1,240 1,142
Stock option compensation --- 867
------ ---
Total operating expenses 14,900 11,845
------ ------
Income from operations 7,092 3,323
Interest income, net 296 206
--- ---
Income before income taxes 7,388 3,529
Provision for income taxes 1,956 57
----- --
Net income $5,432 $3,472
------ ------
Pro forma Statement of Operations Data:
Income before provision for income
taxes, as reported 7,388 3,529
Provision for income taxes 2,838 1,376
----- -----
Net income $4,550 $2,153
------ ------
Net income per share $0.27 $0.14
----- -----
Weighted average shares outstanding 16,836 15,549
------ ------
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DELTEK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months ended June 30,
-------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net Income $5,432 $3,472
Adjustments to reconcile net income provided by
operating activities:
Depreciation and amortization 631 518
Compensation, noncash 120 867
Accreted interest on marketable securities (134) (32)
Change in accounts receivable, net (46) 530
Change in prepaid income taxes (1,456) ---
Change in prepaid expenses, inventories and other assets 184 51
Change in accounts payable and accrued expenses 1,315 491
Change in deferred revenue 2,152 635
----- ---
Net cash provided by operating activities 8,198 6,532
----- -----
Cash flows from investing activities:
Purchase of marketable securities (8,535) 1,064
Purchase of property and equipment (463) (407)
Capitalization of computer development costs (294) (302)
----- -----
Net cash (used in) provided by investing activities (9,292) 355
------- ---
Cash flow from financing activities:
Cash proceeds from issuance of common shares 147 ---
Cash proceeds from initial public offering 16,392 ---
Cash dividends paid to stockholders (11,017) (6,747)
Treasury stock acquired (426) ---
----- -----
Net cash (used in) provided by financing activities 5,096 (6,747)
----- -------
Net increase (decrease) in cash and equivalents 4,002 140
Cash and equivalents, beginning of period 8,333 4,393
----- -----
Cash and equivalents, end of period $12,335 $4,533
------- ------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $1,515 $57
------ ---
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DELTEK SYSTEMS, INC.
UNAUDITED NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed 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 condensed financial
statements should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 1996, included in the Company's
Form S-1 Registration Statement (No. 333-18247).
2. INITIAL PUBLIC OFFERING
In the initial public offering effected by the Form S-1 Registration Statement
dated February 24, 1997, the Company sold 1.7 million shares of its Common
Stock, par value $0.001 per share. The Company realized $16.4 million from the
offering (after deducting the expenses of the offering).
3. TERMINATION OF S-CORPORATION ELECTION
Just prior to the 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. The Company has recorded $14.3 million
in distributions to S-Corporation shareholders during the six months ended June
30, 1997, of which $3.3 million was payable at June 30, 1997.
Pro forma net income is based on the assumption that the Company's
S-Corporation status was terminated at the beginning of each year and reflects
a pro forma income tax provision based on applicable tax rates as if the
Company had not elected S-Corporation status for the periods indicated.
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4. PRO FORMA NET INCOME PER COMMON SHARE
Pro forma net income per common share was computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares are calculated using the treasury stock
method and represent incremental shares issuable upon the exercise of
outstanding stock options. In accordance with SEC Staff Accounting Bulletin
No. 83, weighted average shares for all periods prior to the initial public
offering also include those options which were granted within one year of the
initial public offering date.
Statement of Financial Accounting Standards No. 128. Earnings per Share
changes the reporting requirements for earnings per share (EPS) for publicly
traded companies by replacing primary EPS with basic EPS and changing the
disclosures associated with this change. The Company is required to adopt this
standard for its December 31, 1997 year-end and is currently evaluating the
impact of this standard.
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, 1996 as contained in the Company's Registration Statement on Form
S-1 (No. 333-18247) dated February 24, 1997.
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
Three months ended Six months ended
------------------ ----------------
6/30/97 6/30/96 6/30/97 6/30/96
Revenues:
License fees 33.9 % 30.7 % 33.8 % 34.3 %
Services 59.2 65.4 60.7 61.4
Third party equipment and
software 6.9 3.9 5.5 4.3
--- --- --- ---
Total Revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of software 3.9 4.6 3.6 4.7
Cost of services 23.7 29.3 24.0 27.0
Cost of third-party equipment
and software 5.8 3.1 4.6 3.4
Software development 20.8 19.6 21.1 19.3
Sales and marketing 9.2 10.7 8.9 10.5
General and administrative 5.7 8.3 5.6 7.5
Stock option compensation --- 11.4 --- 5.7
---- ---- ---- ---
Total operating expenses 69.1 87.0 67.8 78.1
---- ---- ---- ----
Income from operations 30.9 13.0 32.2 21.9
Interest income, net 2.0 1.3 1.4 1.4
--- --- --- ---
Income before income taxes 32.9 14.3 33.6 23.3
Provision for income taxes 12.3 0.1 8.9 0.4
---- --- --- ---
Net income 20.6 % 14.2 % 24.7 % 22.9 %
---- ---- ---- ----
Pro forma Statement of Operations
---------------------------------
Data:
-----
Income before income taxes 32.9 % 14.3 % 33.6 % 23.3 %
---- ---- ---- ----
Provision for income taxes 12.3 5.6 12.9 9.1
---- --- ---- ---
Net income 20.6 % 8.7 % 20.7 % 14.2 %
---- --- ---- ----
Three months ended June 30, 1997 as compared with June 30, 1996
License Fees. License fees for the three month period ending June 30,
1997 increased by 67.3% to $3.9 million from $2.3 million for the same period
in 1996. License fees comprised 33.9% of the Company's total revenues for the
three month period ending June 30, 1997, compared to 30.7% for 1996. The
increase in license fees
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was principally attributable to Costpoint license fees which increased 118% to
$2.7 million for the second quarter of 1997 from $1.2 million for the
comparable quarter in 1996, reflecting increases in the number of modules
licensed and the average size of new system installations, offset somewhat by
discounts granted to System 1 users migrating to Costpoint systems. License
fees from System 1 products was approximately $0.8 million and $0.9 million for
the second quarter of 1997 and 1996, respectively. License fees for Electronic
Timesheet increased by 19.2% to $329,000 from $276,000 in the second quarter of
1996.
Services. Service revenues for the three month period ending June 30,
1997 increased by 36.9% to $6.8 million from $4.9 million for the same period
in 1996. Service revenues comprised 59.2% of the Company's total revenues for
the second quarter of 1997, compared to 65.4% for the same period in 1996. The
increase in service revenues was principally attributable to increased
consulting services related to new implementations of Costpoint systems.
Consulting service revenues increased by 86.2% to $2.7 million for the three
month period ending June 30, 1997 from $1.4 million for the same period in
1996. Maintenance, support, and other service revenues increased by 16.7% to
$4.1 million from $3.5 million, principally as a result of the addition of new
customers and the sale of additional software products to existing customers
and, to a lesser extent, increases in service rates.
Third-Party Equipment and Software. Revenue from third-party
equipment and software for the three month period ending June 30, 1997 and June
30, 1996 was approximately $789,000 and $291,000, respectively. These revenues
comprised 6.9% of total revenues for the second quarter of 1997 and 3.9% for
the comparable period in 1996. The increase of $498,000 was attributable to
increased sales of third party database software and equipment.
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 month period ending June 30, 1997
was approximately $0.5 million, a slight increase from the $0.3 million for the
same period in 1996. This change was due to an increase in royalty and support
expenses based on the mix of software revenue.
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 month period
ending June 30, 1997 increased by 22.7% to $2.7 million from $2.2 million for
the same period in 1996. The increase in cost of services was primarily due to
increases in personnel costs to support the Costpoint product line. Cost of
services represented 23.7% and 29.3% of service revenues for the three month
period ending June 30, 1997 and 1996, respectively. The decrease in cost of
services as a percentage of service revenues reflected improved utilization and
billing of consultants as compared to the second quarter of 1996. During the
second quarter of 1996, the Company experienced higher service costs due to the
investment in the initial
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implementations of Costpoint systems by providing consulting services to a
number of customers at reduced fees or no charge and also reflected the
increased reimbursed travel expenses which were billed with no mark-up.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of the purchased costs of computer and
peripheral equipment and license fees and royalties for third-party software.
Costs of third-party equipment and software for the three month period ending
June 30, 1997 and June 30, 1996 were $0.7 million and $0.2 million,
respectively. As a percentage of related revenues, cost of third-party
equipment and software products represented 84.4% and 81.8% of revenue from
third-party equipment and software for the three month period ending June 30,
1997 and 1996, respectively. The increase in these costs as a percentage of
related revenue was the result of changes in the product mix of equipment and
software sold as well as competitive pressures on pricing.
Software Development. Software development costs consists primarily
of the personnel costs of analysts and programmers to research, develop,
support and maintain the Company's existing software product lines, enhance
existing products and develop new products. Software development costs for the
three month period ending June 30, 1997 increased by 59.9% to $2.4 million from
$1.5 million for the same period in 1996. This increase was due primarily to
increased personnel costs and related benefits and facilities costs. Software
development costs represented 20.8% and 19.6% of total revenues for the three
month period ending June 30, 1997 and 1996, respectively.
Sales and Marketing. Sales and marketing expenses consist primarily
of the personnel costs of the Company's sales and marketing organizations as
well as the costs of advertising, direct mail and other sales and marketing
activities. Sales and marketing expenses for the three month period ending
June 30, 1997 increased by 31.0% to $1.0 million from $0.8 million for the
same period in 1996. This increase was due primarily to increased personnel
and marketing activities. Sales and marketing expenses represented 9.2% of the
Company's total revenues for the three month period ending June 30, 1997,
compared to 10.7% for the same period in 1996.
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 month period ending June 30, 1997
increased by 4.3% to $0.7 million from $0.6 million for the same period in
1996. This $27,000 increase was due primarily to costs associated with the
Company's annual report and proxy. General and administrative expenses
represented 5.7% of the Company's total revenue for the three month period
ending June 30, 1997, compared to 8.3% for the same period in 1996.
Interest Income. Interest income results from investments, and to a
lesser extent, from installment financing. Interest income for the three month
period ending June 30,
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1997 increased by 132.4% to $237,000 from $102,000 for the same period in 1996.
The change is due to the increased investments as a result of the February 1997
initial public offering, and the timing and amount of dividend distributions
related to the termination of the S-Corporation status.
Income Tax Provision. The Company's pro forma effective tax rate for
the three month period ending June 30, 1997 was 37.4%, as compared to 39.0% for
the same period in 1996. The provision for income taxes for the three month
period ended June 30, 1997 is based upon the Company's estimate of the
effective tax rate for fiscal 1997. Just prior to the 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 the S-Corporation status. Provision for
income taxes after the termination reflects the estimated current provision for
federal and state income taxes and deferred taxes.
Six months ended June 30, 1997 as compared with June 30, 1996
License Fees. License fees for the six month period ending June 30,
1997 increased by 42.9% to $7.4 million from $5.2 million for the same period
in 1996. License fees comprised 33.8% of the Company's total revenues for the
six month period ending June 30, 1997, compared to 34.3% for 1996. The
increase in license fees was principally attributable to Costpoint license fees
which increased 61.7% to $4.8 million for the first six months of 1997 from
$3.0 million for 1996, reflecting increases in the number of modules licensed
and the average size of new system installations, offset somewhat by discounts
granted to System 1 users migrating to Costpoint systems. License fees from
System 1 products was approximately $1.8 million for the first six months of
1997 and $1.9 million for the first six months of 1996. License fees for
Electronic Timesheet increased by 41.4% to $664,000 from $470,000 in 1996.
Services. Service revenues for the six month period ending June 30,
1997 increased by 43.3% to $13.3 million from $9.3 million for the same period
in 1996. Service revenues comprised 60.7% of the Company's total revenues for
the first six months of 1997, compared to 61.4% for the same period in 1996.
The increase in service revenues was principally attributable to increased
consulting services related to new implementations of Costpoint systems.
Consulting service revenues increased by 74.2% to $5.3 million for the six
month period ending June 30, 1997 from $3.0 million for the same period in
1996. Maintenance, support, and other service revenues increased by 28.2% to
$8.0 million from $6.2 million, principally as a result of the addition of new
customers and the sale of additional software products to existing customers
and, to a lesser extent, increases in service rates.
Third-Party Equipment and Software. Revenue from third-party
equipment and software for the six month period ending June 30, 1997 and June
30, 1996 was approximately $1.2 and $649,000, respectively. These revenues
comprised 5.5% and 4.3% of total revenues for the first six months of 1997 and
1996, respectively. The
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increase of $552,000 was primarily attributable to increased sales of third
party database software and equipment.
Cost of Software. Cost of software for the six month period ending
June 30, 1997 was approximately $0.8 million, a slight increase from the $0.7
million for the same period in 1996. This change was due to an increase in
royalty and support expenses based on the mix of software revenue.
Cost of Services. Cost of services for the six month period ending
June 30, 1997 increased by 28.6% to $5.3 million from $4.1 million for the same
period in 1996. The increase in cost of services was primarily due to
increases in personnel costs to support the Costpoint product line. Cost of
services represented 39.5% and 44.0% of service revenues for the six month
period ending June 30, 1997 and 1996, respectively. The decrease in cost of
services as a percentage of service revenues reflected improved utilization and
billing of consultants as compared to the first six months of 1996. During the
first six months of 1996, the Company experienced higher service costs due to
the investment in the initial implementations of Costpoint systems by
providing consulting services to a number of customers at reduced fees or no
charge and also reflected the increased reimbursed travel expenses which were
billed with no mark-up.
Cost of Third-Party Equipment and Software. Costs of third-party
equipment and software for the six month period ending June 30, 1997 and June
30, 1996 were $1.0 million and $509,000, respectively. As a percentage of
related revenues, cost of third-party equipment and software products
represented 83.7% and 78.4% of revenue from third-party equipment and software
for the six month period ending June 30, 1997 and 1996, respectively. The
increase in these costs as a percentage of related revenue was the result of
changes in the product mix of equipment and software sold as well as
competitive pressures on pricing.
Software Development. Software development costs for the six month
period ending June 30, 1997 increased by 58.2% to $4.6 million from $2.9
million for the same period in 1996. This increase was due primarily to
increased personnel costs and related benefits and facilities costs. Software
development costs represented 21.1% and 19.3% of total revenues for the six
month period ending June 30, 1997 and 1996, respectively.
Sales and Marketing. Sales and marketing expenses for the six month
period ending June 30, 1997 increased by 23.7% to $2.0 million from $1.6
million for the same period in 1996. This increase was due primarily to
increased personnel and marketing activities. Sales and marketing expenses
represented 8.9% of the Company's total revenues for the six month period
ending June 30, 1997, compared to 10.5% for the same period in 1996.
General and Administrative. General and administrative expenses for
the six month period ending June 30, 1997 increased by 8.6% to $1.2 million
from $1.1 million for the same period in 1996. This $98,000 increase was due
primarily to the Company's
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annual report and proxy and overall growth. General and administrative
expenses represented 5.6% of the Company's total revenue for the six month
period ending June 30, 1997, compared to 7.5% for the same period in 1996.
Interest Income. Interest income for the six month period ending June
30, 1997 increased by 43.6% to $296,000 from $206,000 for the same period in
1996. The change is due to the increased investments as a result of the
February 1997 initial public offering, and the timing and amount of dividend
distributions related to the termination of the S-Corporation status, which
included the interest expense related to the shareholder promissory notes
issued and paid in the first quarter of 1997.
Income Tax Provision. The Company's pro forma effective tax rate for
the six month period ending June 30, 1997 was 38.4%, as compared to 39.0% for
the same period in 1996. The provision for income taxes for the six month
period ended June 30, 1997 is based upon the Company's estimate of the
effective tax rate for fiscal 1997. Just prior to the 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 the S-Corporation status. Provision for
income taxes after the termination reflects the estimated current provision for
federal and state income taxes and deferred taxes.
Liquidity and Capital Resources
The Company has financed its operations almost exclusively from cash
flow from its operations. As of June 30, 1997, the Company had cash, cash
equivalents of $12.3 million and investments in marketable securities of $8.7
million, with working capital of $14.1 million. On March 3, 1997, the Company
received proceeds of $16.4 million, net of offering costs, related to the
closing of the Company's initial public offering and sale of 1,700,000 common
shares.
For the six month period ending June 30, 1997, the Company's operating
activities provided net cash of $8.1 million, primarily as a result of income
before depreciation and amortization. In addition, the increase in accounts
receivable was offset by a greater increase in accounts payable and accrued
expenses and deferred revenue. Accounts receivable, net of the allowance for
doubtful accounts, were $6.0 million as of June 30, 1997, compared to $5.5
million as of June 30, 1996. Accounts receivable days sales outstanding was 49
days as of June 30, 1997, compared to 48 days as of June 30, 1996. The
increase in deferred revenue reflects increased Costpoint license fees, for
which revenue is recognized upon the expiration of the refund period.
Exclusive of unbilled receivables which were recorded as deferred revenue, days
sales outstanding was 34 days as of June 30, 1997, compared to 33 days as of
June 30, 1996. While the Company believes that its allowance for doubtful
accounts as of June 30, 1997 remains adequate, there can be no assurance that
such allowance will be sufficient to cover receivables which are later
determined to be uncollectible.
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Cash used in investing activities was $9.1 million for the six months
ended June 30, 1997. This amount included $8.4 million for the purchase of
marketable securities and other investments, offset by $463,000 in purchased
property and equipment and $294,000 of capitalized software production costs
for new Costpoint product modules.
Financing activities for the six month period ended June 30, 1997
consisted primarily of the net proceeds of $16.4 million from the initial
public offering of 1,700,000 common shares of the Company stock, the payment of
$11 million in dividend and tax distributions to the Company's subchapter "S"
Corporation shareholders, the payment of $426,000 for the repurchase of
treasury shares, and $110,000 for proceeds from the issuance of common stock
upon the exercise of stock options. The Company historically has distributed
most of its profits as S-Corporation dividends, but terminated its
S-Corporation status in February, 1997. The Company has recorded an additional
$3.3 million dividend payable to its former S-Corporation shareholders at June
30, 1997, pending completion of the S-Corporation tax returns.
The Company has established a credit facility with a bank for $1
million operating capital line of credit. The Company believes that existing
sources of liquidity and anticipated cash flow from operations, and proceeds
from the public offering, will satisfy the Company's anticipated working
capital and capital expenditure requirements for the next 12 months. However,
depending on its rate of growth and profitability, the Company may require
additional equity or debt financing to meet its working capital requirements or
capital expenditure needs in the future. There can be no assurance that
additional financing will be available when required or, if available, will be
on terms satisfactory to the Company.
Factors That May Affect Future Results
The Company has experienced, and expects to continue to experience,
significant fluctuations in quarterly operating results. The Company's future
operating results will depend upon a number of factors, including the demand
for its products, the size and timing of specific sales, the delay or deferral
of customer implementations, the level of product and price competition that it
encounters, the length of its sales cycles, the successful expansion of its
direct sales force and customer support organization, the timing of new
products and services sold, the activities of and acquisitions by its
competitors, the timing of new hires and its ability to develop and market new
products and control costs. The Company's operating results could also be
affected by general economic conditions. In addition, the decision to license
and implement an enterprise-level business software system is usually
discretionary, involves a significant commitment of customer resources and is
subject to delays, and to budget cycles and internal authorization procedures
of the Company's customers. 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 revenue from license fees is
difficult to predict because of the length and variability of the Company's
sales cycles, the Company's operating expenses are based on anticipated revenue
trends.
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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 and adversely
affected.
The Company typically grants its customers the right to return its
software products for a refund of the license fee during a refund period which
is generally 60 to 90 days from the date of the license agreement, although the
Company occasionally has provided, and may in the future provide, longer refund
periods for larger, more complex Costpoint installations. The Company
recognizes license fees from its System 1 and Electronic Timesheet products
upon delivery, whereas Costpoint license fees are recognized upon the
expiration of the applicable refund period and are recorded as deferred revenue
until recognized. Because of its customers' refund rights and the varying
length of applicable refund periods, deferred revenue at the end of a quarter
does not necessarily reflect revenue which the Company will recognize in the
succeeding quarter.
The Company derives substantially greater profit margins from license
fees than from service revenues or from third-party equipment and software.
The mix of revenues among these three components can fluctuate materially from
quarter to quarter, and such fluctuations can have a significant effect on
margins. Over the past five years, the percentage of the Company's total
revenues represented by service revenues has increased, although such
percentage has remained relatively stable over the past three years. Should
lower margin service revenues or revenue from third-party equipment and
software increase in the future as a percentage of total revenues, the
Company's margins and income from operations could be adversely affected.
Over the last several years, the Company has experienced seasonal
variations in its operating results, partly due to customers' desire to have
their systems operational at the beginning of a calendar year. Accordingly,
these customers typically order their systems in the middle of the preceding
year in order to allow adequate time for implementation, resulting in a
seasonally high level of revenue being recognized in the fourth quarter upon
the expiration of refund periods.
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. It is likely that the Company's future quarterly operating
results from time to time will not meet the expectations of market analysts or
investors. In such event, the price of the Company's Common Stock would likely
be materially and adversely affected.
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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
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 21, 1997, the Company held its Annual Meeting of Shareholders.
At the meeting each member of the Board of Directors was reelected to staggered
terms. The votes cast and withheld for each such director was as follows:
Donald deLaski FOR 15,433,796 WITHHELD 6,050
---------- -----
Ken deLaski FOR 15,433,796 WITHHELD 6,050
---------- -----
Robert E. Gregg FOR 15,433,796 WITHHELD 6,050
---------- -----
Charles W. Stein FOR 15,433,796 WITHHELD 6,050
---------- -----
Darrell J. Oyer FOR 15,433,796 WITHHELD 6,050
---------- -----
In addition, the Company's shareholders approved the ratification of the
appointment of Arthur Andersen LLP as independent accountants, as follows:
For 15,438,396 Against 450 Abstain 1,000 Broker Non-votes
------------ ------- --------- ------
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
No reports on Form 8-K were filed during the quarter ended June 30,
1997.
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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: August 14, 1997
DELTEK SYSTEMS, INC.
By: /s/ Kenneth E. deLaski
---------------------------
Kenneth E. deLaski
President and Chief Executive Officer
By: /s/ Alan R. Stewart
------------------------
Alan R. Stewart
Chief Financial Officer
(Principal Financial and Accounting officer)
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DELTEK SYSTEMS, INC.
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
27 Financial Data Schedule
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