1
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 nine months ended
September 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 Identification No.)
incorporation or organization)
8280 Greensboro Drive, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 734-8606
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at September 30, 1998
Common Stock, $.001 par value 17,876,257
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DELTEK SYSTEMS, INC.
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Restatement of Financial Statements 3
Balance Sheets as of September 30, 1998 and December 31, 1997 4
Statements of Income for the Three and Nine Months 5
Ended September 30, 1998 and September 30, 1997
Statements of Cash Flows for the Nine Months 7
Ended September 30, 1998 and September 30, 1997
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 20
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 21
ITEM 2 - Changes in Securities and Use of Proceeds 21
ITEM 3 - Defaults upon Senior Securities 21
ITEM 4 - Submission of Matters to a Vote of Security Holders 21
ITEM 5 - Other Information 21
ITEM 6 - Exhibits and Reports on Form 8 - K 21
SIGNATURES 22
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RESTATEMENT OF FINANCIAL RESULTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 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 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 operations 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)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,229 $ 10,883
Marketable securities 27,268 14,949
Accounts receivable, net of allowance for doubtful
accounts of $589 and $573, respectively 15,439 9,929
Deferred income taxes 903 1,158
Prepaid expenses and other current assets 1,815 1,440
-------- --------
Total current assets 46,654 38,359
-------- --------
Furniture, equipment, and leasehold improvements, at
cost, net of accumulated depreciation and amortization
of $6,223 and $5,349 respectively 3,898 2,976
Computer software development costs, at cost, net of
accumulated amortization of $3,112 and $2,509,
respectively 2,693 2,597
Deferred income taxes 1,621 --
Purchased intangibles, net of amortization 4,615 --
Other assets 86 109
-------- --------
Total assets $ 59,567 $ 44,041
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,133 $ 4,985
Accrued dividends payable -- 400
Income taxes payable 1,806 543
Deferred income taxes -- 1,223
Deferred revenue 15,005 11,076
-------- --------
Total current liabilities 22,944 18,227
-------- --------
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, 17,876,570 and 17,704,933 shares
issued and outstanding at Sept. 30, 1998 and December
31, 1997, respectively 18 18
Paid in capital 21,024 18,044
Retained earnings 15,833 8,204
Less unearned compensation (252) (452)
-------- --------
Total shareholders' equity 36,623 25,814
-------- --------
Total liabilities and shareholders' equity $ 59,567 $ 44,041
-------- --------
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DELTEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
--------------------
1998 1997
------- -------
(in thousands, except
per share data)
Revenues:
License fees $ 7,356 $ 5,141
Services 13,425 8,736
Third party equipment and software 823 624
------- -------
21,604 14,501
------- -------
Operating expenses:
Cost of software 668 567
Cost of services 6,692 3,928
Cost of third-party equipment
and software 635 479
Software development 3,989 2,683
Sales and marketing 2,583 1,551
General and administrative 975 887
Amortization of purchased intangibles 254 --
Acquisition costs -- 320
------- -------
Total operating expenses 15,796 10,415
------- -------
Income from operations 5,808 4,086
Interest income, net 273 236
------- -------
Income before income taxes 6,081 4,322
Provision for income taxes 2,365 1,640
------- -------
Net income $ 3,716 $ 2,682
------- -------
Basic net income per share $ 0.21 $ 0.15
------- -------
Diluted net income per share $ 0.20 $ 0.15
------- -------
Weighted average shares outstanding 17,864 17,694
------- -------
Weighted average shares outstanding, including dilutive
effect of stock options 18,280 18,257
------- -------
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DELTEK SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
September 30,
--------------------
1998 1997
------- -------
(in thousands, except
per share data)
Revenues:
License fees $20,046 $14,656
Services 36,647 23,947
Third party equipment and software 2,613 2,264
------- -------
59,306 40,867
------- -------
Operating expenses:
Cost of software 1,767 1,490
Cost of services 17,730 10,291
Cost of third-party equipment and software 2,017 1,790
Software development 11,199 8,071
Sales and marketing 7,464 4,559
General and administrative 2,902 2,685
Amortization of purchased intangibles 432 --
Acquisition costs 1,096 320
Purchased in process research & development 2,500 --
------- -------
Total operating expenses 47,107 29,206
------- -------
Income from operations 12,199 11,661
Interest income, net 773 550
------- -------
Income before income taxes 12,972 12,211
Provision for income taxes 5,374 3,797
------- -------
Net income $ 7,598 $ 8,414
------- -------
Basic net income per share $ 0.43 $ 0.48
------- -------
Diluted net income per share $ 0.42 $ 0.47
------- -------
Weighted average shares outstanding 17,802 17,390
------- -------
Weighted average shares outstanding, including the dilutive
effect of stock options 18,243 17,879
------- -------
Pro forma Statement of Operations Data:
Income before provision for income taxes, as reported $12,211
Provision for income taxes 4,679
-------
Net income $ 7,532
-------
Pro forma basic net income per share $ 0.43
-------
Pro forma fully diluted net income per share $ 0.42
-------
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DELTEK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine months ended
Sept.30,
-----------------------
1998 1997
-------- --------
Cash flow from operating activities:
Net Income $ 7,598 $ 8,414
Adjustments to reconcile net income provided by
Operating activities:
Depreciation and amortization 1,930 1,085
Purchased research and development, noncash charge 2,500
Other noncash charges 752 289
Accreted interest on marketable securities (233) (159)
Change in accounts receivable, net (5,510) (2,013)
Change in prepaid expenses, inventories and other assets (375) 131
Change in prepaid income taxes -- (1,106)
Change in accounts payable and accrued expenses 1,118 2,289
Changes in deferred income taxes, net (2,589) 104
Changes in income taxes payable 1,263 --
Change in deferred revenue 3,929 2,226
-------- --------
Net cash provided by operating activities 10,383 11,259
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (12,086) (17,803)
Purchase of property and equipment (1,810) (1,007)
Acquisition of SalesKit Corporation (6,054) --
Capitalization of computer development costs (705) (462)
-------- --------
Net cash (used in) provided by investing activities (20,655) (19,272)
-------- --------
Cash flow from financing activities:
Cash proceeds from initial public offering -- 16,388
Cash proceeds from issuance of stock for employee
Purchase plan and option plans 988 539
Cash dividends paid to stockholders (370) (13,617)
Common stock purchased and retired -- (426)
-------- --------
Net cash (used in) provided by financing activities 618 2,884
-------- --------
Net increase (decrease) in cash and equivalents (9,654) (5,129)
Cash and equivalents, beginning of period 10,883 9,381
-------- --------
Cash and equivalents, end of period 1,229 4,252
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 9,177 $ 4,737
-------- --------
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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 Registration Statement on Form S-3 as amended
(No. 333-60457).
Restatement of Financial Statements
Subsequent to the Securities and Exchange Commission's ("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 warrants with an estimated
fair value of $932,000. The warrants allow the holder to purchase 130,000 shares
of Deltek common stock at an exercise price of $22 per share, exercisable over a
three year period.
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 nine months ended September
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.
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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 Registration Statement on Form S-3 as amended
(No. 333-60457).
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 Nine months ended
-------------------- --------------------
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
Revenues:
License fees 34.0% 35.5% 33.8% 35.9%
Services 62.2 60.2 61.8 58.6
Third party equipment and
software 3.8 4.3 4.4 5.5
------ ------ ------ ------
Total Revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Cost of software 3.1 3.9 3.0 3.6
Cost of services 31.0 27.1 29.9 25.2
Cost of third-party equipment
and software 2.9 3.3 3.4 4.4
Software development 18.5 18.5 18.9 19.7
Sales and marketing 12.0 10.7 12.6 11.2
General and administrative 4.4 6.1 4.9 6.6
Amortization of intangibles 1.2 -- 0.7 --
Acquisition costs -- 2.2 1.8 0.8
Purchased in-process research
and development -- -- 4.2 --
------ ------ ------ ------
Total operating expenses 73.1 71.8 79.4 71.5
------ ------ ------ ------
Income from operations 26.9 28.2 20.6 28.5
Interest income, net 1.2 1.6 1.3 1.4
------ ------ ------ ------
Income before income taxes 28.1 29.8 21.9 29.9
Provision for income taxes 10.9 11.3 9.1 9.3
------ ------ ------ ------
Net income 17.2% 18.5% 12.8% 20.6%
------ ------ ------ ------
Pro forma Statement of
Operations Data:
Income before income taxes 29.9%
------
Income tax provision 11.5
------
Net income 18.4%
------
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
License Fees. License fees for the nine months ended September 30, 1998
increased by 36.8% to $20.0 million from $14.7 million for the same period in
1997. The increase in license fees was principally attributable to Costpoint
license fees, which increased by 51.4% to $11.9 million for the nine months
ended September 30, 1998 from $7.9 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 37.2% to
$3.7 million for the nine months ended September 30, 1998 as compared to $2.7
million for the same period in 1997. License fees from System 1 products were
$1.8 million for the nine months ended September 30, 1998 compared to $2.7
million for the nine months ended September 30, 1997, a decrease of 32.8%. 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 67.8% to $2.1 million for the nine
months ended September 30, 1998 from $1.2 million for the same period in 1997.
License fees comprised 33.8% of the Company's total revenues for the nine months
ended September 30, 1998, compared to 35.9% for the comparable prior year
period.
Services. Service revenues for the nine months ended September 30, 1998
increased by 53.0% to $36.6 million from $23.9 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 101.9% to $15.4 million for the nine
months ended September 30, 1998 from $7.6 million for the same period in 1997.
Other service revenues increased by 30.1% to $21.2 million for the nine months
ended September 30, 1998 from $16.3 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 61.8% of the Company's
total revenues for the nine months ended September 30, 1998, compared to 58.6%
for the same period in 1997.
Third-Party Equipment and Software. Revenues from third-party equipment
and software for the nine months ended September 30, 1998 increased by 15.4% to
$2.6 million from $2.3 million for the nine months ended September 30, 1997.
These revenues comprised 4.4% and 5.5% of total revenues for the nine months
ended September 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 nine months ended September 30, 1998 was $1.8 million,
a slight increase from $1.5 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 nine months ended September
30, 1998 increased by 72.3% to $17.7 million from $10.3 million for the same
period in 1997. The increase in cost of services was primarily due to increases
in service personnel. Cost of services represented 48.4% and 43.0% of service
revenues for the nine months ended September 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, and to a lessor extent the cost of the
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Users Conference. Cost of services, exclusive of the direct costs of the
International User Conference, represented 47.3% and 41.9% of service revenues
for the nine months ended September 30, 1998 and 1997, respectively. The Company
earns a lower margin on its consulting revenues than on its ongoing support
service revenues. To a lesser extent, cost of services as a percentage of
service revenues increased due to hiring of additional telephone support
personnel to service the Company's growing customer base.
Cost of Third-Party Equipment and Software. Cost of third-party
equipment and software consists of the costs of computer and peripheral
equipment and license fees and royalties for third-party software. Cost of
third-party equipment and software for the nine months ended September 30, 1998
increased to $2.0 million from $1.8 million for the same period in the prior
year. As a percentage of related revenues, cost of third-party equipment and
software products represented 77.2% and 79.1% for the nine months ended
September 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 consist primarily of
the personnel costs of analysts and programmers who research, develop, maintain
and enhance the Company's existing software product lines and develop new
products. Software development costs for the nine months ended September 30,
1998 increased by 38.8% to $11.2 million from $8.1 million for the same period
in 1997. This increase was due primarily to hiring additional personnel.
Software development costs represented 18.9% and 19.7% of total revenues for the
nine months ended September 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 nine months ended September 30, 1998 increased by
63.7% to $7.5 million from $4.6 million for the same period in 1997. This
increase was due primarily to hiring additional personnel and increased
marketing activities. The Company expects sales and marketing expenses to
continue to increase for the foreseeable future as the Company pursues its
strategy. Sales and marketing expenses represented 12.6% of the Company's total
revenues for the nine months ended September 30, 1998, compared to 11.2% 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 nine months ended September 30, 1998 increased by 8.1% to $2.9
million from $2.7 million for the same period in 1997. This increase was due
primarily to the Company's overall growth. General and administrative expenses
represented 4.9% of the Company's total revenues for the nine months ended
September 30, 1998, compared to 6.4% for the same period in 1997.
Amortization of Intangibles. The charge of $432,000 for the nine months
ended September 30, 1998 relate primarily to the amortization of goodwill and
purchased intangibles of the SalesKit Software Corporation, which was purchased
in April 1998, and to a lesser extent to the intangibles acquired in the
September 1996 acquisition of Allegro.
Acquisition Costs. A charge of $1.1 million was recorded for the nine
months ended September 30, 1998 for the transaction costs related to the
acquisition of Harper and Shuman, Inc. The acquisition was accounted for as a
pooling-of-interests.
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Purchased In-Process Research and Development. A charge of $2.5 million
was recorded during the nine months ended September 30, 1998 for the appraised
valuation of the purchased in-process research and development costs acquired
from SalesKit.
Interest Income. Interest income results from investment and, to a
lesser extent, from installment financing. Interest income for the nine months
ended September 30, 1998 increased by 40.4% to $772,000 from $550,000 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 nine
months ended September 30, 1998 was 41.4%, as compared to the pro forma
effective tax rate of 38.3% for the same period in 1997. The tax rate for the
nine months ended September 30, 1998 was affected by the nondeductible nature of
a majority of the transaction costs for the acquisition of Harper and Shuman,
Inc. The provision for income taxes for the nine months ended September 30, 1998
is based upon the Company's estimate of the effective tax rate for fiscal 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
License Fees. License fees for the three months ended September 30,
1998 increased by 43.1% to $7.4 million from $5.1 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 $4.6 million for the three months ended
September 30, 1998 from $3.0 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 145.6% to $1.6 million
for the three months ended September 30, 1998 as compared to $0.6 million for
the same period in 1997. License fees from System 1 products were $508,000 for
the three months ended September 30, 1998 compared to $831,000 for the three
months ended September 30, 1997, a decrease of 38.9%. License fees for
Electronic Timesheet decreased by 1.7% to $562,000 for the three months ended
June 30, 1998, from $572,000 in the same period in 1997. License fees comprised
34.0% of the Company's total revenues for the three months ended September 30,
1998, compared to 35.5% for the comparable prior year period.
Services. Service revenues for the three months ended September 30,
1998 increased by 53.7% to $13.4 million from $8.7 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 106.3% to $5.6 million for the
three months ended September 30, 1998 from $2.7 million for the same period in
1997. Other service revenues increased by 29.8% to $7.8 million for the three
months ended September 30, 1998, from $6.0 million for the same period in the
prior year, principally as a result of the addition of new customers and the
license of additional software products to existing customers and, to a lesser
extent, increases in service rates. Service revenues comprised 62.2% of the
Company's total revenues for the three months ended September 30, 1998, compared
to 60.2% for the same period in 1997.
Third-Party Equipment and Software. Revenue from third-party equipment
and software for the three months ended September 30, 1998 increased by 31.9% to
$823,000 from $624,000 for the three months ended September 30, 1997. These
revenues comprised 3.8% and 4.3% of total revenues for the three months ended
September 30, 1998 and 1997, respectively.
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Cost of Software. Cost of software is comprised primarily of royalties
and maintenance payments to third parties, amortization of software development
costs, and the cost of production and distribution of software and user manuals.
Cost of software for the three months ended September 30, 1998 was $0.7 million,
a slight increase from the $0.6 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 September
30, 1998 increased by 70.4% to $6.7 million from $3.9 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 49.8% and 45.0% of service revenues for the three months ended
September 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. Exclusive of the Company's
International User Conference, Cost of services represented 46.8% and 41.9% of
service revenues for the three months ended September 30, 1998 and 1997,
respectively. The Company 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 September 30, 1998 increased to $0.6 million
from $0.5 million in the comparable year period. As a percentage of related
revenues, cost of third-party equipment and software products represented 77.2%
and 76.8% of revenue from third-party equipment and software for the three
months ended September 30, 1998 and 1997, respectively. The increase in these
costs as a percentage of related revenue was the result of changes in the
product mix of equipment and software sold.
Software Development. Software development costs consists primarily of
the personnel costs of analysts and programmers who research, develop, maintain
and enhance the Company's existing software product lines and develop new
products. Software development costs for the three months ended September 30,
1998 increased by 48.7% to $4.0 million from $2.7 million for the same period in
1997. This increase was due primarily to hiring additional personnel. Software
development costs represented 18.5% and 18.5% of total revenues for the three
months ended September 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 September 30, 1998 increased by
66.5% 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 12.0% of the Company's total
revenues for the three months ended September 30, 1998, compared to 10.7% for
the same period in 1997.
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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 September 30, 1998 increased by 9.9% to $1.0
million from $0.9 million for the same period in 1997. This slight increase is
attributable to increased efficiencies from the existing staff and favorable bad
debt experience in recent quarters. General and administrative expenses
represented 4.4% of the Company's total revenue for the three months ended
September 30, 1998, compared to 6.6% for the same period in 1997.
Amortization of Intangibles. The charge of $254,000 for the nine months
ended September 30, 1998 relate primarily to the amortization of goodwill and
purchased intangibles of the SalesKit Software Corporation, which was purchased
in April 1998, and to a lesser extent to the intangibles acquired in the
September 1996 acquisition of Allegro.
Interest Income. Interest income results from investments, and to a
lesser extent, from installment financing. Interest income for the three months
ended September 30, 1998 increased by 15.3% to $272,000 from $236,000 for the
same period in 1997. The change is due to increased cash from operations, offset
by lower interest rates.
Income Tax Provision. The Company's effective tax rate for the three
months ended September 30, 1998 was 38.9%, as compared to a 37.9% for the same
period in 1997. The provision for income taxes for the three months ended
September 30, 1998 is based upon the Company's estimate of the effective tax
rate for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations almost exclusively from cash
flow from its operations. As of September 30, 1998, the Company had cash and
cash equivalents of $1.2 million, marketable securities of $27.3 million and
working capital of $23.7 million.
For the nine months ended September 30, 1998, the Company's net cash
provided by operating activities was $10.4 million. Accounts receivable, net of
the allowance for doubtful accounts, were $15.4 million as of September 30,
1998, compared to $9.9 million as of December 31, 1997. Accounts receivable days
sales outstanding was 58 days as of September 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, day's sales outstanding were 46 days as of September 30, 1998,
compared to 37 days as of December 31, 1997. While the Company believes that its
allowance for doubtful accounts as of September 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 $20.7 million for the nine months ended
September 30, 1998. This amount included $6.1 million for the assets acquired
from SalesKit, $12.1 million in acquired marketable securities, $1.8 million in
purchased property and equipment and $705,000 of capitalized software production
costs.
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Financing activities for the nine months ended September 30, 1998
consisted primarily of $368,000 in proceeds from the exercise of stock options
and $620,000 from the issuance of stock under the Company's employee stock
purchase plan. This was offset by $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 bear interest at the
lender's prime rate. To date, no amounts have been drawn under the line of
credit.
The costs associated with the Registration Statement, which was
declared effective by the Securities and Exchange Commission in October 1998, to
register shares and warrants issued in connection with the acquisition of Harper
and Shuman, Inc. and certain assets and liabilities of SalesKit Software
Corporation, will be reflected as a charge to earnings in the quarter ended
December 31, 1998.
The Company believes that its current liquidity, together with
anticipated cash flow from operations, will satisfy the Company's anticipated
working capital and capital expenditure requirements through the foreseeable
future. However, depending on its rate of growth, profitability and other
factors, some of which are not in the Company's control, the Company believes
additional financing may be required to meet its working capital requirements or
capital expenditure needs, including acquisitions, in the future. There can be
no assurance that additional financing will be available when required or, if
available, that any such financing will be on terms satisfactory to the Company.
YEAR 2000
The Year 2000 Challenge. Many existing information technology ("IT")
systems and applications, and other non-IT control devices, use only two digits
to identify a year in the date field, without considering the impact of the
upcoming change in the century. As a result, such systems, applications and
devices could fail or create erroneous results unless they are modified in some
fashion to distinguish 21st century dates from 20th century dates (i.e., to be
year 2000 compliant). The year 2000 challenge creates potential risks for the
Company from unforeseen problems in the software products that the Company
licenses to others and in the IT and non-IT systems that the Company uses in its
own business operations. The Company may also be exposed to risks from third
parties with whom the Company interacts who fail to address their own year 2000
issues.
The Company's Status of Readiness. The Company began addressing the
year 2000 challenge in 1993 when it started developing all of its new products
to be year 2000 compliant. Year 2000 compliant versions of Costpoint, Advantage,
Allegro and Electronic Timesheet have been commercially available for some time,
and the year 2000 compliant version of System 1 was released in September 1998.
The Company's older-generation CFMS products include CFMS/RD, for which a year
2000 compliant version is available, and CFMS and Micro/CFMS, for which no year
2000 compliant versions are available. Licensees that are using a non-compliant
version or product and are participating in one of the Company's comprehensive
annual or quarterly support plans will be provided an upgrade or conversion to a
year 2000 compliant version or product at no cost. Licensees that are using a
non-compliant version or product but are not participating in one of the
Company's comprehensive annual or quarterly support plans have the option of
upgrading or converting to a year 2000 compliant version or product for an
additional license fee. The Company is, or will be, attempting to locate these
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licensees to determine how the Company can assist them in upgrading or
converting to a compliant version or product.
During 1998, the Company formed a year 2000 project team and developed
a project plan with goals and target dates to help assure that the Company's
internal IT and non-IT systems and its interfaces with third parties are
prepared for the year 2000. The Company's internal IT systems are primarily
comprised of the same commercial application software products licensed by the
Company to its customers, which are year 2000 compliant. However, the Company
also utilizes third party vendor IT and non-IT systems, including application
and operating system software, network equipment, telecommunication products,
electronic key entry systems, elevators and other third party products, which
may or may not be year 2000 compliant. The Company has begun its assessment of
all mission critical third party vendor application software systems.
Remediation of those systems is scheduled to be completed by the end of the
second quarter of 1999. The Company has begun its inventory of all third party
computer and network hardware and operating systems used by the Company.
Assessment and remediation of these third party IT systems is planned to be
completed by the end of the third quarter of 1999. The Company's goal is to have
completed its inventory and assessment of all non-IT systems with embedded chips
by December 31, 1998 and its remediation of those systems by the end of the
second quarter of 1999. Finally, the Company is in the process of contacting
governmental entities, financial organizations and other business enterprises on
whom the Company relies, directly and indirectly, for accurate exchange of data
to determine their year 2000 plans and readiness. The Company expects that by
the end of 1998 it will have contacted substantially all of these parties and
determined what actions may be needed to mitigate vulnerability to those
parties' failure to address their own year 2000 issues.
Costs to Address Year 2000 Issues. The Company's current estimate is
that the costs of remediation associated with the year 2000 issue will not have
a material adverse effect on the Company's business, operating results or
financial condition. The costs of developing the Company's year 2000 compliant
products were incurred as part of the Company's normal product development
process. The costs of contacting licensees currently using a non-compliant
version or product and assisting those licensees in upgrading or converting to a
compliant version or product also is not estimated to be significant. Based upon
the Company's assessment to date of its internal IT and non-IT systems, the
costs associated with making those systems compliant is not anticipated to be
significant.
Risks Associated with the Company's Year 2000 Issues. Management
believes that the growth in demand for the Company's products over the past
several years is due in part to its customers' needs to update their IT 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. Moreover,
although the Company's year 2000 compliant products have or will have undergone
the Company's normal quality testing procedures, there can be no assurance that
these products contain all necessary date code changes. Any system malfunctions
due to the onset of calendar 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, operating results and financial condition. Finally, despite
the Company's efforts to address the year 2000 impact on its internal IT and
non-IT systems and the operation of the enterprises with which the Company
interacts, the Company may not be able to fully identify such impact or to
resolve it without disruption of the Company's business and without incurring
significant expense. Accordingly, if the year 2000 issues are not adequately
addressed by the
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Company and third parties, there can be no assurance that the Company's
business, operating results and financial condition will not be materially
adversely affected.
The Company's Contingency Plans. Any significant interruption in the
supply of electric power or telephone service to the Company's facilities as a
result of the failure of utilities or telecommunications companies to adequately
address year 2000 issues would disrupt the Company's ability to conduct its
business, including providing telephone support to its customers. The Company is
developing contingency plans for implementation in the event that electric power
or telephone service to one or more of the Company's facilities is interrupted.
Such plans involve relocating portions of the Company's operations to other
facilities or locations where power and telephone service are available and
taking other similar actions to work around any interruption. Depending upon the
nature of the interruption and the geographic areas affected, the Company may be
unable to execute some or even all of its contingency plans. The Company also is
developing plans to coordinate the efforts of its personnel and resources in
addressing any unforeseen year 2000 problems as they arise. The Company expects
to have its contingency plans in place by the second quarter of 1999. There can
be no assurance that any contingency plans will fully mitigate the impact of any
interruption in the supply of electric power or telephone service to the
Company's facilities or other year 2000 problems.
Forward-Looking Statements. The foregoing year 2000 discussion contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements, including without limitation,
anticipated costs and the dates by which the Company expects to complete certain
actions, are based on management's best current estimates, which were derived
utilizing numerous assumptions about future events, including the continued
availability of certain resources, representations received from third parties
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the ability to identify and remediate all relevant IT and non-IT
systems, results of Year 2000 testing, adequate resolution of year 2000 issues
by governmental agencies, businesses and other third parties who are service
providers, suppliers, borrowers or customers of the Company, unanticipated
system costs, the adequacy of and ability to implement contingency plans and
similar uncertainties. The "forward-looking statements" made in the foregoing
year 2000 discussion speak only as of the date on which such statements are
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
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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
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a 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)-(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
On July 24, 1998, the Company filed its Form 8-K/A #1 to its
Current Report on Form 8-K dated May 29, 1998 to amend Item 7
to include the required financial statements of Harper and
Shuman, Inc. and the required pro forma financial information
relating to the business combination between the Company and
Harper and Shuman, Inc.
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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: February 26, 1999
DELTEK SYSTEMS, INC.
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
s
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