DELTEK INC 10-K 2011
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2010
For the transition period from to
Commission File Number 001-33772
(Exact Name of Registrant as Specified in Its Charter)
Registrants Telephone Number, Including Area Code: (703) 734-8606
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the common stock of the registrant held by non-affiliates (based on the last reported sale price of the registrants common stock on June 30, 2010 on the Nasdaq Global Market) was approximately $168.2 million.
The number of shares of the registrants common stock and Class A common stock outstanding on March 9, 2011 was 69,381,450 and 100, respectively.
Documents incorporated by reference: Portions of the Proxy Statement for the 2011 Annual Meeting of Stockholders of the registrant to be filed subsequently with the Securities and Exchange Commission are incorporated by reference into Part III of this Annual Report of Form 10-K.
TABLE OF CONTENTS
All references in this Annual Report on Form 10-K to Deltek, Company, we, us and our refer to Deltek, Inc. and its consolidated subsidiaries (unless the context otherwise indicates).
This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Federal securities laws, about our business and prospects. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words outlook, believes, plans, intends, expects, goals, potential, continues, may, seeks, approximately, predicts, estimates, anticipates and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Our future results may differ materially from our past results and from those projected in the forward-looking statements due to various uncertainties and risks, including those described in Item 1A of Part I (Risk Factors). The forward-looking statements speak only as of the date of this Annual Report and undue reliance should not be placed on these statements. We disclaim any obligation to update any forward-looking statements after the date of this Annual Report. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the date hereof.
We are a leading provider of enterprise software and information solutions designed and developed specifically for project-focused organizations, including professional services firms, government contractors and government agencies. More than 14,000 organizations and more than 1.8 million users in approximately 80 countries around the world rely on Deltek to identify new opportunities, win new business, optimize resources, streamline operations, and deliver profitable projects. The Company is incorporated in Delaware and was founded in 1983.
In 2010, we acquired INPUT, Inc. (INPUT) to extend our existing products and solutions. More than 2,000 member organizations rely on INPUT for the latest and most comprehensive government market research and analysis. INPUT members use our solutions and services to find and track thousands of government contracts from pre-proposal to post-award, benchmark labor rates, monitor task orders, learn spending trends, find teaming partners and more.
In 2010, we also acquired Maconomy A/S (Maconomy) to create a leading global provider of enterprise applications software and solutions designed specifically for project-focused businesses. The combined organization has a broad geographic reach across the world in North America, Europe, and Asia, offering market-leading solutions to most segments within the broad professional services marketplace, with a shared mission to drive innovation for project-focused, service-based organizations globally.
Deltek solutions are purpose-built for businesses that plan, forecast and otherwise manage their business processes based on projects, as opposed to generic software solutions that are generally designed for repetitive, unit-production-style businesses. Our broad portfolio of software solutions includes:
See Item 7, Company Overview for additional information related to our business.
Project-Focused Software Solutions
Enterprise software solutions provide organizations with the ability to streamline, automate and integrate different business processes, including financial management, supply chain management, human capital management, project and resource management, customer relationship management, and business performance management. However, project-focused organizations require sophisticated, highly integrated software solutions that provide organizations with end-to-end business functionality across each stage of a projects lifecycle.
Project-focused software solutions are better able to effectively meet the needs of project-focused businesses than general purpose enterprise software solutions because they have been tailored to address the market-specific functionality required by project-focused professional services firms, government contractors and government agencies. These solutions recognize that project lifecycles vary significantly in length and complexity, can be difficult to forecast accurately and need to be managed within the context of an organizations complete portfolio of existing and potential future projects. Adapting and customizing general-purpose application software to meet the needs of project-focused businesses and organizations frequently results in significantly higher deployment costs and longer implementation times and can require increased levels of ongoing support. It can also result in missing or inaccurate metrics that are critical to driving better business performance.
Project-focused organizations also often operate in environments or industries that pose unique challenges for their managers, who are frequently required to maintain specific business processes and accounting methodologies to meet contract, audit or reporting requirements. For example, government contractors are subject to oversight by various U.S. federal government agencies, such as the Government Accountability Office (GAO) and the Defense Contract Audit Agency (DCAA), which have regulations requiring government contractors to be able to accurately maintain and audit specific project-based accounting records and to report on their compliance with government cost accounting requirements.
We believe that spending on software and technology related to the project-focused software solutions market will continue because of the increased regulatory environment that applies to government contractors and the large number of small and medium-sized businesses that require specialized software and technology. In addition, we believe more companies require software solutions that allow them to better plan, forecast and manage business processes.
Government-Focused Information Solutions
Government-focused information solutions provide the marketplace with the latest and most comprehensive information relating to government spending. This allows companies, including government contractors and new entrants to the public sector to identify market trends, more effectively manage their business development and marketing activities, discover partnership and teaming opportunities and solutions, and capture new revenue-generating opportunities.
These information solutions also allow federal, state and local governments to achieve their objectives by attracting private sector organizations that understand their needs and requirements. Comprehensive intelligence on opportunities, government procurement and government agencies increases the likelihood that customers will submit a bid that is the best solution for meeting their prospects needs. This makes the need for up-to-date and comprehensive information on the government marketplace all the more critical.
Our Competitive Advantages
Our key competitive strengths include the following:
Our Business Strategy and Growth Opportunities
We plan to continue to focus on the following objectives to enhance our position as a leading provider of enterprise applications software to project-focused organizations:
Our Software Solutions and Information Solutions and Services
We provide solutions and services that are designed to meet the evolving needs of project-focused organizations of various sizes and complexity. These organizations use our software and solutions to obtain information and to automate and monitor critical business processes across all phases of the project lifecycle,
including business development, project selection and prioritization, resource allocation, project planning and scheduling, team collaboration, risk mitigation, accounting, reporting and analysis. Our portfolio of applications and solutions is designed to provide the following benefits to our customers:
Our applications portfolio is comprised of the following product families and solutions, each designed to meet the specific functionality and scalability requirements of the project-focused industries and customers we serve.
We employ a services team that provides a full range of consulting and technical services relating to our software solutions, from the early planning and design stages of an implementation to end-user training and after-implementation consulting services. Our services team is comprised of application consultants, project managers and technical applications specialists who work closely with our customers to implement and maintain our software solutions. Our primary consulting services offerings may be categorized into the following activities:
Deltek INPUT provides a full range of consulting services to its members, allowing them to evaluate their corporate positioning within the marketplace and develop short-term and long-term plans for capturing business opportunities. The primary consulting services offered by Deltek INPUT include:
Maintenance and Support
We receive maintenance services fees from customers for product support, upgrades and other customer services. Our technical support organization focuses on answering questions, resolving issues and keeping our customers operations running efficiently. We offer technical support through in-person phone-based support and through 24x7 access to our web-based support tools. We offer varying levels of support depending on our clients requirements.
Our standard support offering, Deltek Customer Care, is focused on organizations requiring traditional support assistance, providing regular product updates and maintenance releases, 15 hours of telephone product support Monday through Friday, plus 24x7 access to online support resources and emergency support for severe situations.
Our premium support offerings are generally sold to mid-sized to large organizations with complex installations and infrastructures with more extensive needs, offering additional support services, including enhanced telephone support and response times, increased access to Deltek product engineers and dedicated support account managers who proactively manage a clients support services throughout its relationship with Deltek.
Our comprehensive support programs also include ongoing product development and software updates, which include minor enhancements, such as tax and other regulatory updates, as well as major updates such as new functionality and technology upgrades.
Our maintenance and support revenues are comprised of fees derived from new maintenance contracts associated with new software licenses and renewals of existing maintenance contracts. Initial annual maintenance fees are generally set as a fixed percentage of the software list or sales price at the time of the initial license sale and may vary depending on the product or solution. Maintenance services are generally billed annually and paid in advance. Revenues from maintenance and support services constituted approximately 48%, 47% and 40% of our total revenues in 2010, 2009 and 2008, respectively.
We consider a customer to be an organization that has licensed or licenses our software, obtains maintenance support or consulting services for those licenses or subscribes to our solutions, pursuant to a written agreement or a click-wrap license that is activated upon installation.
Our solutions are used by organizations of various sizes, from small businesses to large enterprises. As of December 31, 2010, more than 14,000 organizations and more than 1.8 million users in approximately 80 countries around the world, representing a wide range of industries, including professional services firms, government contractors and government agencies, rely on our software and solutions to identify new opportunities, win new business, optimize resources, streamline operations, and deliver profitable projects .
In 2008, 2009 and 2010, no single customer accounted for 10% or more of our total revenue. From 2008 to 2010, the percentage of our license revenue generated from international customers increased from less than 10% to approximately 12%, while the percentage of our total revenues generated internationally increased from less than 5% to approximately 11%.
See Note 18, Segment Information, of our consolidated financial statements contained elsewhere in this Annual Report for additional information related to our revenue derived from international customers. See Item 2, Properties for information related to our long-lived assets located in the United States and in foreign countries.
Sales and Marketing
We sell our products and services primarily through our own sales force. Our direct sales force consists of experienced software sales professionals located in our primary markets and is organized by market segment, product type or customer type (for example, new vs. existing). In 2010, our direct sales force generated approximately 89% of our software sales.
We complement our direct sales force with a network of alliance partners who resell certain of our products to specific customer segments and provide implementation services and support to our customers. These alliance partners primarily cover entry level markets or countries in which we do not have a direct sales force.
We engage in a variety of marketing activities, including market research, product promotion and participation at industry conferences and trade shows, in order to generate additional revenue within key markets, optimize our market position, enhance lead generation, increase overall brand awareness and promote our new and existing products.
Partners and Alliances
An integral component of our strategy is to develop partnerships and alliances that better enable us to build, market, sell and implement our software and solutions. Our existing alliances encompass a wide variety of technology companies, business services firms, value-added resellers, accounting firms, specialized consulting firms, software vendors, business process outsourcers and other service providers. These alliances enable us to:
Research and Development
Our research and development organization is structured to optimize our efforts around the design, development and release of our products. Specific disciplines within research and development include engineering, programming, quality assurance, product management, documentation, design and project management. Our research and development expenses were $52.6 million, $43.4 million, and $45.8 million in 2010, 2009 and 2008, respectively. As of December 31, 2010, we had approximately 440 employees in research and development, including 240 in the United States, 140 in the Philippines and Australia, and 60 in Denmark.
In the development of our software, we use broadly adopted, standards-based software technologies in order to create, maintain and enhance our project-focused solutions. Our developed solutions are generally both scalable and easily integrated into our customers existing information technology infrastructure. Our software design and engineering efforts are tailored to meet specific requirements of project-focused enterprises and provide the optimal experience for end-users who interact with our software to accomplish their job requirements.
The specific architecture and platform for our principal products and solutions is as follows:
Our products are designed for rapid deployment and integration with third-party technologies within a companys enterprise, including application servers, security systems and portals. Our products also provide web services interfaces and support for service-oriented architectures to facilitate enhanced integration within the enterprise.
The global enterprise applications market for project-focused organizations is competitive. When competing for large enterprise customers with over 1,000 employees, we face the greatest competition from much larger competitors such as Oracle and SAP. These larger vendors seek to influence customers purchase decisions by emphasizing their more comprehensive vertical product portfolios, greater global presence and more sophisticated and integrated product capabilities. In addition, these vendors commonly bundle their enterprise resource planning solutions with a broader set of software applications, including middleware and database applications, and often significantly discount their individual solutions as part of a potentially larger sale.
When competing for middle-market customers, ranging in size from 100 to 1,000 employees, we often face competition from vendors that provide industry-specific solutions. Middle-market customers are typically searching for industry specific functionality, ease of deployment and a lower total cost of ownership with the ability to add functionality over time as their businesses continue to grow. When competing in the small business segment, which consists of organizations with fewer than 100 employees, we face competition from certain providers of solutions aimed at smaller businesses. Customers in the small business segment typically are searching for solutions which provide out-of-the-box functionality that help automate business processes and improve operational efficiency. When competing in the market for government market information solutions, we face competition from a few vendors who also capture data and intelligence on federal, state and local government spending. However, we believe we differentiate ourselves based on our experience and understanding of the government contracting market and our ability to integrate our information solutions with other Deltek business development applications. Although some of our competitors are larger organizations, that have greater marketing resources and offer a broader range of applications and infrastructure, we believe that we compete effectively on the basis of our superior value proposition for project-focused organizations, built-in compliance functionality, domain expertise, leading market position and highly referenceable customer base.
We rely upon a combination of copyright, trade secret and trademark laws and non-disclosure and other contractual arrangements to protect our proprietary intellectual property rights under our license agreements.
These measures may afford only limited protection of our intellectual property and proprietary rights associated with our software. We also enter into confidentiality agreements with employees and consultants involved in product development. We routinely require our employees, customers and potential business partners to enter into confidentiality agreements before we disclose any sensitive aspects of our software, technology or business plans.
We also incorporate a number of third-party software products into our technology platform pursuant to relevant licenses. We use third-party software, in certain cases, to meet the business requirements of our customers. We are not materially dependent upon these third-party software licenses, and we believe the licensed software is generally replaceable, by either licensing or purchasing similar software from another vendor or building the software functions ourselves.
As of December 31, 2010, we had more than 1,600 employees worldwide, including approximately 300 in sales and marketing, 440 in research and development, 650 in customer services and support and 250 in general and administrative positions. Approximately 1,100 employees were located in the United States and 500 were located in other geographies. None of our employees is represented by a union or is a party to a collective bargaining agreement.
We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports available on our website (http://investor.deltek.com), free of charge, as soon as reasonably practicable after we have electronically filed or furnished such materials to the Securities and Exchange Commission. These filings are also available on the Securities and Exchange Commissions website (www.sec.gov).
Risks Related to Our Business
Our business is exposed to the risk that adverse economic or financial conditions may reduce or defer the demand for project-based enterprise applications software and solutions.
The demand for project-based enterprise applications software and solutions historically has fluctuated based upon a variety of factors, including the business and financial condition of our customers and on economic and financial conditions that affect the key sectors in which our customers operate.
Economic downturns or unfavorable changes in the financial and credit markets in both the United States and broader international markets, including economic recessions, could have an adverse effect on the operations, budgets and overall financial condition of our customers.
As a result, our customers may reduce their overall spending on information technology, purchase fewer of our products or solutions, lengthen sales cycles, or delay, defer or cancel purchases of our products or solutions. Furthermore, our customers may be less able to timely finance or pay for the products which they have purchased or could be forced into a bankruptcy or restructuring process, which could limit our ability to recover amounts owed to us. If any of our customers cease operations or file for bankruptcy protection, our ability to recover amounts owed to us for software license fees, consulting and implementation services or software maintenance may be severely impaired.
In addition, the financial and overall condition of third-party solutions providers and resellers of our products and solutions may be affected by adverse conditions in the economy and the financial and credit markets, which may adversely affect the sale of our products or solutions. For the twelve months ended December 31, 2010, resellers accounted for approximately 11% of our software license fee revenue.
We cannot predict the impact, timing, strength or duration of any economic slowdown or subsequent economic recovery, or of any disruption in the financial and credit markets. If the challenges in the financial and credit markets or the downturn in the economy or the markets in which we operate persist or worsen from present levels, our business, financial condition, cash flow, and results of operations could be materially adversely affected.
Our quarterly and annual operating results fluctuate, and as a result, we may fail to meet or exceed the expectations of securities analysts or investors, and our stock price could decline.
Historically, our operating results have varied from quarter to quarter and from year to year. Consequently, we believe that investors should not view our historical revenue and other operating results as an indicator of our future performance. A number of factors contribute to the variability in our revenue and other operating results, including the following:
As a result of these and other factors, our operating results may fluctuate significantly from period to period and may not meet or exceed the expectations of securities analysts or investors. In that event, the price of our common stock could be adversely affected.
Our expansion of licensing vehicles, including subscription and on-demand pricing for our software and information solutions, could delay the recognition of revenue into subsequent quarters, and our operating results in any particular quarter may not be reflective of our actual performance.
As we expand our business by providing additional licensing and subscription opportunities to our customers, the existing accounting rules may require us to delay the recognition of revenue into subsequent quarters. This could also be the case if, for example:
Deferral of software license fee revenue may result in significant timing differences between the completion of a sale and the actual recognition of the revenue related to that sale. In addition we generally recognize commission and other sales-related expenses associated with sales at the time they are incurred. As a result, our operating results in any particular quarter may not be reflective of our actual performance.
If we are unable to effectively respond to organizational challenges as our business evolves, our revenues, profitability and business reputation could be materially adversely affected.
Between 2007 and 2010 our worldwide headcount increased from more than 1,200 employees at the end of 2007 to more than 1,600 employees worldwide at the end of 2010, including our acquisitions of Maconomy and INPUT.
Continuing to expand and develop our business will place greater demands on our management, financial and accounting systems, information technology systems and other components of our infrastructure. To meet these demands, we continue to invest in enhanced or new systems, including enhancements to our accounting, billing and information technology systems. Although we continue to hire, train and retain employees with the specific skills needed to help address these demands, if we fail to adequately address the demands associated with the expansion and development of our business, our profitability and our business reputation could be materially adversely affected.
If we are unsuccessful in entering new market segments or further penetrating our existing market segments, our revenue or revenue growth could be materially adversely affected.
Our future results depend, in part, on our ability to successfully penetrate new markets, as well as to expand further into our existing markets. In order to grow our business, we may expand to other project-focused markets in which we may have less experience. Expanding into new markets requires both considerable investment and coordination of technical, support, sales, marketing and financial resources.
In July 2010, we announced the completion of our acquisition of Maconomy, a multi-national provider of software solutions to professional services firms, and as a result of this acquisition expanded our operations into Denmark, the Netherlands, Norway and Sweden and expanded our existing operations both in the United Kingdom and the U.S.
In October 2010, we announced the completion of our acquisition of INPUT, which added industry-leading opportunity intelligence and business development capabilities to our comprehensive portfolio of government contracting solutions thereby expanding our network of government contractor customers.
While we continually add functionality to our products and solutions and add additional solutions to our portfolio of solutions through acquisitions to address the specific needs of both existing customers and new customers, we may be unsuccessful in developing appropriate or complete products, devoting sufficient resources or pursuing effective strategies for product development and marketing.
Our current or future products, solutions and services may not appeal to potential customers in new or existing markets. If we are unable to execute upon this element of our business strategy and expand into new markets or maintain and increase our market share in our existing markets, our revenue or revenue growth may be materially adversely affected.
If our existing customers do not buy additional software or information solutions or services from us, our revenue and revenue growth could be materially adversely affected.
Our business model depends, in part, on the success of our efforts to maintain and increase sales to our existing customers. We have typically generated significant additional revenues from our installed customer base through the sale of additional new licenses or solutions, add-on applications, expansion of existing implementations and professional and maintenance services. We may be unsuccessful in maintaining or increasing sales to our existing customers for any number of reasons, including the failure of our customers to increase the size of their operations, our inability to deploy new applications and features for our existing products and solutions, or to introduce new products, solutions and services that are responsive to the business needs of our customers. If we fail to generate additional business from our customers, our revenue and profitability could be materially adversely affected.
If we do not successfully address the potential risks associated with our current or future global operations, we could experience increased costs or our operating results could be materially adversely affected.
As of December 31, 2010, we had customers in approximately 80 countries. Taking into account our acquisition of Maconomy, we have facilities in Denmark, the Philippines, the United Kingdom, Sweden, Norway, the Netherlands, Belgium and Australia.
Doing business internationally involves additional potential risks and challenges, including:
These risks could increase our costs or adversely affect our operating results.
If we are not successful in expanding our international business, our revenue growth could be materially adversely affected.
We have customers in approximately 80 countries and international markets that now account for approximately 12% of our total software license fee revenue. Nonetheless, our ability to accelerate our international expansion will require us to deliver additional product functionality and foreign language translations that are responsive to the needs of the international customers that we target. If we are unable to expand our qualified direct sales force, identify additional strategic alliance partners, or negotiate favorable alliance terms, our international growth may be hampered. Our ability to expand internationally also is dependent on our ability to raise brand recognition for our products and services in international markets and successfully integrate acquired businesses. If we are unable to further our expansion into international markets, or if we are unable to realize the benefits we expect to achieve from our recent acquisition of Maconomy or any future international operation that we acquire, our revenue and profitability could be materially adversely affected. In addition, our planned international expansion will require significant attention from our management as well as additional management and other resources in these markets.
We may be subject to integration and other risks from acquisition activities, which could materially impair our ability to realize the anticipated benefits of any acquisitions.
As part of our business strategy, we have acquired, and intend to continue to acquire, complementary businesses, technologies, product lines or services organizations. In July 2010, we announced the completion of
our acquisition of Maconomy, an international provider of software solutions to professional services firms and in October 2010, we announced the completion of our acquisition of INPUT, which added industry-leading opportunity intelligence and business development capabilities to our comprehensive portfolio of government contracting solutions. These acquisitions added approximately 450 employees to our existing employee base and expanded our operations into five new countriesDenmark, Norway, Sweden, Belgium and the Netherlands. We may not realize the anticipated strategic or financial benefits of past or potential future acquisitions due to a variety of factors, including the following:
If a significant number of our customers fail to renew or otherwise terminate their maintenance services agreements for our products, or if they are successful in renegotiating their agreements with us on terms that are unfavorable to us, our maintenance services revenues and our operating results could be materially harmed.
Our customers contract with us for ongoing product maintenance and support services. Historically, maintenance services revenues have represented a significant portion of our total revenue. Revenues from maintenance and support services constituted approximately 48% and 47% of our total revenue in 2010 and 2009, respectively.
Our maintenance and support services are generally billed and paid in advance. A customer may cancel its maintenance services agreement prior to the beginning of the next scheduled period. At the end of a contract term, or at the time a customer has cancellation rights, a customer could seek a modification of its maintenance services agreement terms, including modifications that could result in lower maintenance fees or our providing additional services without associated fee increases.
A customer may also elect to terminate its maintenance services agreement and rely on its own in-house technical staff or other third-party resources, or may replace our software with a competitors product. If our maintenance services business declines due to a significant number of contract terminations, or if we are forced to offer pricing or other maintenance terms that are unfavorable to us, our maintenance services revenues and operating results could be materially adversely affected.
If we fail to forecast the timing of our revenues or expenses accurately, our operating results could be materially different than we anticipated.
We use a variety of factors in our forecasting and planning processes, including historical trends, recent customer history, expectations of customer buying decisions, customer implementation schedules and plans, analyses by our sales and service teams, maintenance renewal rates, our assessment of economic or market conditions and many other factors. While these analyses may provide us with some guidance in business planning and expense management, these estimates are inherently imprecise and may not accurately predict the timing of our revenues or expenses. A variation in any or all of these factors, particularly in light of prevailing financial or economic conditions, could cause us to inaccurately forecast our revenues or expenses and could result in expenditures without corresponding revenue. As a result, our revenues and our operating results could be materially lower than anticipated.
To maintain our competitive position, we may be forced to reduce prices or limit price increases, which could result in materially reduced revenue, margins or net income.
We face significant competition across all of our product lines from a variety of sources, including larger multi-national software companies, smaller start-up organizations, point solution application providers, SaaS providers, specialized consulting organizations, systems integrators and internal information technology departments of existing or potential customers. Several competitors, such as Oracle and SAP, have significantly greater financial, technical and marketing resources than we have.
In addition, some of our competitors have well-established relationships with our current and prospective customers and with major accounting and consulting firms that may prefer to recommend those competitors over us. Our competitors may also seek to influence some customers purchase decisions by offering more comprehensive horizontal product portfolios, superior global presence and more sophisticated multi-national product capabilities.
To maintain our competitive position, we may be forced to reduce prices or limit price increases, which could materially reduce our revenue, margins or net income.
Our indebtedness or an inability to borrow additional amounts could adversely affect our results of operations and financial condition and prevent us from fulfilling our financial obligations and business objectives.
As of December 31, 2010, we had approximately $197.6 million of outstanding term loans under our existing credit facility at interest rates which are subject to market fluctuation. These term loans mature in November 2016. Our existing credit facility also provides for a $30.0 million revolving credit facility maturing in November 2015. Our indebtedness and related obligations could have important future consequences to us, such as:
Our ability to meet our existing debt service obligations will depend on many factors, including prevailing financial or economic conditions, our past performance and our financial and operational outlook. In addition, although we recently completed the extension and expansion of our credit facility, our ability to borrow additional funds or refinance our existing debt if desired or deemed necessary in light of then-existing business
conditions could also depend on such factors. If we do not have enough cash to satisfy our debt service obligations, we may be required to refinance all or part of our existing debt, modify our debt structure, sell assets or reduce our spending. At any given time, we may not be able to refinance our debt or sell assets on terms acceptable to us or at all. If we are unable to do so, our business could be materially adversely affected.
If we are unable to comply with the covenants or restrictions contained in our credit facility, our lenders could declare all amounts outstanding under the credit agreement to be due and payable, which could materially adversely affect our financial condition.
Since 2005, we have maintained a credit facility with a syndicate of lenders led by Credit Suisse. On November 3, 2010, we extended and expanded our credit facility. The credit facility is subject to covenants that, among other things, restrict both our and our subsidiaries ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, pay dividends, create liens on assets, enter into sale-leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by us and engage in certain transactions with affiliates.
Under our credit facility, we are also required to comply with certain financial covenants related to capital expenditures, interest coverage and leverage ratios. While we have historically complied with our financial ratio covenants, we may not be able to comply with these financial covenants in the future, which could cause all amounts outstanding under the credit facility to be due and payable, and which could limit our ability to meet ongoing or future capital needs. Our ability to comply with the covenants and restrictions under our credit facility may be adversely affected by economic, financial, industry or other conditions, some of which may be beyond our control.
The potential breach of any of the covenants or restrictions under our credit facility, unless cured within the applicable grace period, could result in a default that would permit the lenders to declare all amounts outstanding to be due and payable, together with accrued and unpaid interest, and foreclose on the assets that serve as security for our loans under our credit facility. In such an event, we may not have sufficient assets to repay such indebtedness. As a result, any default could have serious consequences to our financial condition.
If we fail to price or market our products appropriately, our revenue and cash flow could be materially reduced.
Our revenues are derived from the sale of licenses for our software products and information services. We generally sell our applications on a perpetual basis but we also have other types of licenses that provide our customers with exclusive use of our applications for a specific period of time. Our information services and research offerings are sold with access to our services and research for a fixed period of time, usually twelve months.
Going forward, we expect to increase our use of term license, subscription and service-based licensing models. As a result, we may incur additional costs in adapting our products and solutions to fit multiple licensing models and determining appropriate sales strategies to leverage these opportunities. If we do not successfully develop, price or market our products and solutions to fit multiple licensing models, our software license fee revenue and cash flows could be adversely affected.
If our investments in product development require greater resources than anticipated, our operating margins could be adversely affected.
We expect to continue to commit significant resources to maintain and improve our existing products, including acquired products and to develop new products. For example, our product development expenses were approximately $52.6 million, or 19% of revenue in 2010 and approximately $43.4 million, or 16% of revenue, in 2009. Our current and future product development efforts may require greater resources than we expect, or may not achieve the market acceptance that we expect and, as a result, we may not achieve margins we anticipate.
We may also be required to price our product enhancements, product features or new products at levels below those anticipated during the product development stage, which could result in lower revenues and margins for that product than we originally anticipated.
We also may experience unforeseen or unavoidable delays in delivering product enhancements, product features or new products due to factors within or outside of our control. We may encounter unforeseen or unavoidable defects or quality control issues when developing product enhancements, product features or new products, which may require additional expenditures to resolve such issues and may affect the reputation our products have for quality and reliability. If we incur greater expenditures than we expect for our product development efforts, or if our products do not succeed, our revenues or margins could be materially adversely affected.
If we fail to adapt to changing technological and market trends or changing customer requirements, our market share could decline and our sales and profitability could be materially adversely affected.
Historically, the business application software market has been characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product lifecycles. The development of new technologically advanced software products is a complex and uncertain process requiring high levels of innovation, as well as accurate anticipation of technological and market trends.
Our future success will largely depend upon our ability to develop and introduce timely new products and product features in order to maintain or enhance our competitive position. The introduction of enhanced or new products requires us to manage the transition from, or integration with, older products in order to minimize disruption in sales of existing products and to manage the overall process in a cost-effective manner. If we do not successfully anticipate changing technological and market trends or changing customer requirements, and we fail to enhance or develop products timely, effectively and in a cost-effective manner, our ability to retain or increase market share may be harmed, and our sales and profitability could be materially adversely affected.
If our existing or prospective customers prefer an application software architecture other than the standards-based technology and platforms upon which we build or support our products, or if we fail to develop our new product enhancements or products to be compatible with the application software architecture preferred by existing and prospective customers, we may not be able to compete effectively, and our software license fee revenue could be materially reduced.
Many of our customers operate their information technology infrastructure on standards-based application software platforms such as J2EE and .NET. A significant portion of our product development is devoted to enhancing our products that deploy these and other standards-based application software platforms.
If our products are not compatible with future technologies and platforms that achieve industry standard status, we will be required to spend material development resources to develop products or product enhancements that are deployable on these platforms. If we are unsuccessful in developing these products or product enhancements, we may lose existing customers or be unable to attract prospective customers.
In addition, our customers may choose competing products other than our offerings based upon their preference for new or different standards-based application software than the software or platforms on which our products operate or are supported. Any of these adverse developments could injure our competitive position and could cause our software license fee revenue to be materially adversely affected.
Our software products are built upon and depend upon operating platforms and software developed and supplied by third parties. As a result, changes in the availability, features and price of, or support for, any of these third-party platforms or software, including as a result of the platforms or software being acquired by a competitor, could materially increase our costs, divert resources and materially adversely affect our competitive position and software license fee revenue.
Our software products are built upon and depend upon operating platforms and software developed by third-party providers. We license from several software providers technologies that are incorporated into our products. Our software may also be integrated with third-party vendor products for the purpose of providing or enhancing necessary functionality.
If any of these operating platforms or software products ceases to be supported by its third-party provider, or if we lose any technology license for software that is incorporated into our products, including as a result of the platforms or software being acquired by a competitor, we may need to devote increased management and financial resources to migrate our software products to an alternative operating platform, identify and license equivalent technology or integrate our software products with an alternative third-party vendor product. In addition, if a provider enhances its product in a manner that prevents us from timely adapting our products to the enhancement, we may lose our competitive advantage, and our existing customers may migrate to a competitors product.
Third-party providers may also not remain in business, cooperate with us to support our software products or make their product available to us on commercially reasonable terms or provide an effective substitute product to us and our customers. Any of these adverse developments could materially increase our costs and materially adversely affect our competitive position and software license fee revenue.
If we lose access to, or fail to obtain, third-party software development tools on which our product development efforts depend, we may be unable to develop additional applications and functionality, and our ability to maintain our existing applications may be diminished, which may cause us to incur materially increased costs, reduced margins or lower revenue.
We license software development tools from third parties and use those tools in the development of our products. Consequently, we depend upon third parties abilities to deliver quality products, correct errors, support their current products, develop new and enhanced products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. If any of these third-party development tools become unavailable, if we are unable to maintain or renegotiate our licenses with third parties to use the required development tools, or if third-party developers fail to adequately support or enhance the tools, we may be forced to establish relationships with alternative third-party providers and to rewrite our products using different development tools.
We may be unable to obtain other development tools with comparable functionality from other third parties on reasonable terms or in a timely fashion. In addition, we may not be able to complete the development of our products using different development tools, or we may encounter substantial delays in doing so. If we do not adequately replace these software development tools in a timely manner, we may incur additional costs, which may materially reduce our margins or revenue.
If our products fail to perform properly due to undetected defects or similar problems, and if we fail to develop an enhancement to resolve any defect or other software problem, we could be subject to product liability, performance or warranty claims and incur material costs, which could damage our reputation, result in a potential loss of customer confidence and adversely impact our sales, revenue and operating results.
Our software applications are complex and, as a result, defects or other software problems may be found during development, product testing, implementation or deployment. In the past, we have encountered defects in our products as they are introduced or enhanced. If our software contains defects or other software problems:
Our customers use our software together with software and hardware applications and products from other companies. As a result, when problems occur, it may be difficult to determine the cause of the problem, and our software, even when not the ultimate cause of the problem, may be misidentified as the source of the problem. The existence of defects or other software problems, even when our software is not the source of the problem, might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts for a lengthy time period, require extensive consulting resources, harm our reputation and cause significant customer relations problems.
If our products fail to perform properly, we may face liability claims notwithstanding that our standard customer agreements contain limitations of liability provisions. A material claim or lawsuit against us could result in significant legal expense, harm our reputation, damage our customer relations, divert managements attention from our business and expose us to the payment of material damages or settlement amounts. In addition, interruption in the functionality of our products or other defects could cause us to lose new sales and materially adversely affect our license and maintenance services revenues and our operating results.
A breach in the security of our software could harm our reputation and subject us to material claims, which could materially harm our operating results and financial condition.
Fundamental to the use of enterprise application software, including our software, is the ability to securely process, collect, analyze, store and transmit information. Third parties may attempt to breach the security of our solutions, third party applications that our products interface with, as well as customer databases and actual data. In addition, cyber-attacks and similar acts could lead to interruptions and delays in customer processing or a loss or breach of a customers data.
We may be responsible, and liable, to our customers for certain breaches in the security of our software products. Any security breaches for which we are, or are perceived to be, responsible, in whole or in part, could subject us to claims, which could harm our reputation and result in significant litigation costs and damage awards or settlement amounts. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could materially harm our operating results and financial condition. We might be required to expend significant financial and other resources to protect further against security breaches or to rectify problems caused by any security breach.
If we are not able to retain existing employees or hire qualified new employees, our business could suffer, and we may not be able to execute our business strategy.
Our business strategy and future success depends, in part, upon our ability to attract, train and retain highly skilled managerial, professional service, sales, development, marketing, accounting, administrative and infrastructure-related personnel. The market for these highly skilled employees is generally competitive in the geographies in which we operate.
Our business could be adversely affected if we are unable to retain qualified employees or recruit qualified personnel in a timely fashion, or if we are required to incur unexpected increases in compensation costs to retain key employees or meet our hiring goals. If we are not able to retain and attract the personnel we require, it could be more difficult for us to sell and develop our products and services and execute our business strategy, which could lead to a material shortfall in our anticipated results. Furthermore, if we fail to manage these costs effectively, our operating results could be materially adversely affected.
The loss of key members of our senior management team could disrupt the management of our business and materially impair the success of our business.
We believe that our success depends on the continued contributions of the members of our senior management team. We rely on our executive officers and other key managers for the successful performance of our business. Although we have employment arrangements with several members of our senior management team, none of these arrangements prevents any of our employees from leaving us. The unanticipated loss of the services of one or more of our executive officers or key managers, or difficulties transitioning responsibilities following the departure of a key member of senior management, could have an adverse effect on our operating results and financial condition.
If we are not able to protect our intellectual property and other proprietary rights, we may not be able to compete effectively, and our software license fee revenue could be materially adversely affected.
Our success and ability to compete is dependent in significant degree on our intellectual property, particularly our proprietary software. We rely on a combination of copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions to establish and protect our rights in our software and other intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy, design around or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary.
Our competitors may independently develop software that is substantially equivalent or superior to our software. Furthermore, existing copyright law affords only limited protection for our software and may not protect such software in the event competitors independently develop products similar to ours.
We take significant measures to protect the secrecy of our proprietary source code. Despite these measures, unauthorized disclosure of some of or all of our source code could occur. Such unauthorized disclosure could potentially cause our source code to lose intellectual property protection and make it easier for third parties to compete with our products by copying their functionality, structure or operation.
In addition, the laws of some countries may not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, we may not be able to protect our proprietary software against unauthorized third-party copying or use, which could adversely affect our competitive position and our software license fee revenue. Any litigation to protect our proprietary rights could be time consuming and expensive to prosecute or resolve, result in substantial diversion of management attention and resources, and could be unsuccessful, which could result in the loss of material intellectual property and other proprietary rights.
Potential future claims that we infringe upon third parties intellectual property rights could be costly and time-consuming to defend or settle or result in the loss of significant products, any of which could materially adversely impact our revenue and operating results.
Third parties could claim that we have infringed upon their intellectual property rights. Such claims, whether or not they have merit, could be time consuming to defend, result in costly litigation, divert our managements attention and resources from day-to-day operations or cause significant delays in our delivery or implementation of our products.
We could also be required to cease to develop, use or market infringing or allegedly infringing products, to develop non-infringing products or to obtain licenses to use infringing or allegedly infringing technology. We may not be able to develop alternative software or to obtain such licenses or, if a license is obtainable, we cannot be certain that the terms of such license would be commercially acceptable.
If a claim of infringement were threatened or brought against us, and if we were unable to license the infringing or allegedly infringing product or develop or license substitute software, or were required to license such software at a high royalty, our revenue and operating results could be materially adversely affected.
In addition, we agree, from time to time, to indemnify our customers against certain claims that our software infringes upon the intellectual property rights of others. We could incur substantial costs in defending our customers against such claims.
Catastrophic events may disrupt our business and could result in materially increased expenses, reduced revenues and profitability and impaired customer relationships.
We are a highly automated business and rely on our network infrastructure, enterprise applications and internal and external technology and infrastructure systems for our development, sales, marketing, support and operational activities. A disruption or failure of any or all of these systems could result from catastrophic events, whether climate related or otherwise, including major telecommunications failures, cyber-attacks, terrorist attacks, fires, earthquakes, storms or other severe weather conditions. A disruption or failure of any or all of these systems could cause system interruptions to our operations, including product development, sales-cycle or product implementation delays, as well as loss of data or other disruptions to our relationships with current or potential customers.
The disaster recovery plans and backup systems that we have in place may not be effective in addressing a catastrophic event that results in the destruction or disruption of any of our critical business or information technology and infrastructure systems. As a result of any of these events, we may not be able to conduct normal business operations and may be required to incur significant expenses in order to resume normal business operations. As a result, our revenues and profitability may be materially adversely affected.
Our revenues are partially dependent upon federal government contractors and their need for compliance with Federal Government contract accounting and reporting standards, as well as data privacy and security requirements. Our failure to anticipate or adapt timely to changes in those standards could cause us to lose government contractor customers and materially adversely affect our revenue generated from these customers.
We derive a significant portion of our revenues from federal government contractors. In 2010, 2009 and 2008, over half of our software license fee revenue was generated from federal government contractor customers. In addition our acquisition of INPUT increases the importance of government contractor customers to our business. Our government contractor customers utilize our Deltek Costpoint, Deltek GCS Premier or our enterprise project management applications to manage their contracts and projects with the Federal Government in a manner that accounts for expenditures in accordance with the Federal Government contracting accounting standards. These customers also have a requirement to maintain stringent data privacy and security safeguards. In addition, our government contractor customers utilize our Deltek GovWin and Deltek INPUT solutions to obtain critical information about potential government contractor opportunities.
As an example, a key function of our Costpoint application is to enable government contractors to enter, review and organize accounting data in a manner that is compliant with applicable laws and regulations and to easily demonstrate compliance with those laws and regulations. If the Federal Government alters these compliance standards, or if there was any significant problem with the functionality of our software from a compliance or data security perspective, we may be required to modify or enhance our software products to satisfy any new or altered compliance standards. Our inability to effectively and efficiently modify our applications to resolve any compliance issue could result in the loss of government contract customers and materially adversely impact our revenue from these customers.
Significant reductions in the Federal Governments budget or changes in the spending priorities for that budget could materially reduce government contractors demand for our products and services.
The Federal Governments budget is subject to annual renewal and may be increased or decreased, whether on an overall basis or on a basis that could disproportionately injure our customers. Continued delays in government spending or budget approvals, or reductions or freezes in spending, could significantly impact our government contract customers business. Any significant downsizing, consolidation or insolvency of our Federal
Government contractor customers resulting from changes in procurement policies, budget reductions, loss of government contracts, delays in contract awards or other similar procurement obstacles could materially adversely impact our customers demand for our software products and related services and maintenance.
Changes in budgetary priorities of the federal government could affect our government contracting customers and could therefore affect our software revenues could therefore be materially adversely affected.
Because we derive a substantial majority of our revenue from customers who contract with the federal government, we believe that the success and development of our business will continue to be affected by our customers successful participation in federal government contract programs. Changes in federal government budgetary priorities could therefore affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs that our customers support or a change in federal government contracting policies could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise options to renew contracts. Any such actions could affect our government contracting customers, which could cause our actual results to differ materially and adversely from those anticipated. Among the factors that could seriously affect our federal government contracting customers are:
Impairment of our goodwill or intangible assets may adversely impact our results of operations.
We have acquired several businesses which, in aggregate, have resulted in goodwill valued at approximately $150.9 million and other purchased intangible assets valued at approximately $69.1 million as of December 31, 2010. This represents a significant portion of the assets recorded on our balance sheet. Goodwill and indefinite-lived intangible assets are reviewed periodically for impairment. Other intangible assets that are deemed to have finite useful lives will continue to be amortized over their useful lives but are also reviewed for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
We performed tests for impairment of goodwill and intangible assets as of December 31, 2010 and recognized an impairment loss of $1.5 million in connection with tradenames acquired from a prior acquisition whose carrying amount exceeded its fair value. There can be no assurances that additional charges to operations will not occur in the event of a future impairment. In addition, the decrease in the price of our stock that has occurred from time to time and may occur in the future may also affect whether we experience an impairment in future periods. If an impairment is deemed to exist in the future, we would be required to write down the recorded value of these intangible assets to their then current estimated fair values. If a write down were to occur, it could materially adversely impact our results of operations and our stock price.
If we were to identify material weaknesses in our internal controls in the future, these material weaknesses may impede our ability to produce timely and accurate financial statements, result in inaccurate financial reporting or restatements of our financial statements, subject our stock to delisting and materially harm our business reputation and stock price.
As a public company, we are required to file annual and quarterly periodic reports containing our financial statements with the Securities and Exchange Commission within prescribed time periods. As part of The NASDAQ Global Select Market listing requirements, we are also required to provide our periodic reports, or make them available, to our stockholders within prescribed time periods.
If we were to identify material weaknesses in our internal control in the future, including with respect to internal controls relating to companies that we have acquired or may acquire in the future, the required audit or review of our financial statements by our independent registered public accounting firm may be delayed. In addition, we may not be able to produce reliable financial statements, file our financial statements as part of a periodic report in a timely manner with the Securities and Exchange Commission or comply with The NASDAQ Global Select Market listing requirements. If we are required to restate our financial statements in the future, any specific adjustment may cause our operating results and financial condition, as restated, on an overall basis to be materially impacted.
If these events were to occur, our common stock listing on The NASDAQ Global Select Market could be suspended or terminated and, absent a waiver, we also would be in default under our credit agreement and our lenders could accelerate any obligation we have to them. We, or members of our management, could also be subject to investigation and sanction by the Securities and Exchange Commission and other regulatory authorities and to stockholder lawsuits. In addition, our stock price could decline, we could face significant unanticipated costs, managements attention could be diverted and our business reputation could be materially harmed.
Risks Related to Ownership of Our Common Stock
Our stock price has been volatile and could continue to remain volatile for a variety of reasons, resulting in a substantial loss on your investment.
The stock markets generally have experienced extreme and unpredictable volatility, often unrelated to the operating performance of the individual companies whose securities are traded publicly. Broad market fluctuations and general economic and financial conditions may materially adversely affect the trading price of our common stock.
Significant price fluctuations in our common stock also could result from a variety of other factors, including:
In addition, if the market value of our common stock falls below the book value of our assets, we could be forced to recognize an impairment of our goodwill or other assets. If this were to occur, our operating results would be adversely affected and the price of our common stock could be negatively impacted.
Future sales of our common stock by existing stockholders could cause our stock price to decline.
New Mountain Partners II, L.P., New Mountain Affiliated Investors II, L.P., and Allegheny New Mountain Partners, L.P. (collectively, the New Mountain Funds), our controlling stockholders, own approximately 60% of outstanding common stock. If the New Mountain Funds were to sell substantial amounts of our common stock in the public market or if the market perceives that our stockholders may sell shares of our common stock, the market price of our common stock could decrease significantly.
The New Mountain Funds have the right, subject to certain conditions, to require us to register the sale of their shares under the federal securities laws. If this right is exercised, holders of other shares and, in certain circumstances, stock options may sell their shares alongside the New Mountain Funds, which could cause the prevailing market price of our common stock to decline. The majority of our common stock (and all shares of common stock underlying options outstanding under our 2005 Stock Option Plan and certain shares of common stock underlying options and restricted stock outstanding under our 2007 Stock Award and Incentive Plan (the 2007 Plan) are, directly or indirectly, subject to a registration rights agreement.
We have also filed registration statements with the Securities and Exchange Commission covering shares subject to options and restricted stock outstanding under our 2005 Stock Option Plan and 2007 Plan and shares reserved for issuance under our 2007 Plan and our Employee Stock Purchase Plan.
A decline in the trading price of our common stock due to the occurrence of any future sales might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities and may cause stockholders to lose part or all of their investment in our shares of common stock.
Our largest stockholders and their affiliates have substantial control over us and this could limit other stockholders ability to influence the outcome of key transactions, including any change of control.
Our largest stockholders, the New Mountain Funds, own approximately 60% of our outstanding common stock and 100% of our Class A common stock. As a result of their significant ownership percentage, and as long as they own a majority of the outstanding shares of our Class A common stock and at least one-third of the outstanding shares of our common stock based on the rights conferred by an investor rights agreement, the New Mountain Funds are able to control all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. The New Mountain Funds will retain the right to elect a majority of our directors so long as they own our Class A common stock and at least one-third of our outstanding common stock.
The New Mountain Funds are also entitled to collect a transaction fee, unless waived by them, on a transaction by transaction basis, equal to 2% of the transaction value of each significant transaction exceeding $25 million in value directly or indirectly involving us or any of our controlled affiliates, including acquisitions, dispositions, mergers or other similar transactions, debt, equity or other financing transactions, public or private offerings of our securities and joint ventures, partnerships and minority investments. Although in 2009 the New Mountain Funds waived their right to collect a transaction fee in connection with our stock rights offering and the amendment of our Credit Agreement, their right to collect transaction fees otherwise remains in effect and continues until the New Mountain Funds cease to beneficially own at least 15% of our outstanding common stock or a change of control occurs. In 2010, New Mountain Capital, L.L.C. received transaction fees of $1.6 million in connection with our acquisition of Maconomy and $1.2 million in connection with our acquisition of INPUT.
The New Mountain Funds may have interests that differ from other stockholders interests, and they may vote in a way with which other stockholders disagree and that may be adverse to their interests. The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and may adversely affect the market price of our common stock.
If we issue additional shares of our common stock, stockholders could experience dilution.
Our authorized capital stock consists of 200,000,000 shares of common stock, of which there were 69,381,450 shares outstanding as of March 9, 2011. The issuance of additional shares of our common stock or securities convertible into shares of our common stock could result in dilution of other stockholders ownership interest in us. In addition, if we issue additional shares of our common stock at a price that is less than the fair value of our common stock, other stockholders could, depending on their participation in that issuance, also experience immediate dilution of the value of their shares relative to what their value would have been had our common stock been issued at fair value. This dilution could be substantial.
Our stockholders do not have the same protections available to other stockholders of NASDAQ-listed companies because we are a controlled company within the meaning of The NASDAQ Global Select Markets standards and, as a result, qualify for, and may rely on, exemptions from several corporate governance requirements.
Our controlling stockholders, the New Mountain Funds, control a majority of our outstanding common stock and have the ability to elect a majority of our board of directors. As a result, we are a controlled company within the meaning of the rules governing companies with stock quoted on The NASDAQ Global Select Market. Under these rules, a company as to which an individual, a group or another company holds more than 50% of the voting power is considered a controlled company and is exempt from several corporate governance requirements, including requirements that:
We have availed ourselves of these exemptions. Accordingly, our stockholders do not have the same protections afforded to stockholders of other companies that are subject to all of The NASDAQ Global Select Market corporate governance requirements as long as the New Mountain Funds own a majority of our outstanding common stock.
Anti-takeover provisions in our charter documents, Delaware law and our shareholders agreement could discourage, delay or prevent a change in control of our company and may adversely affect the trading price of our common stock.
We are a Delaware corporation, and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us (as a public company with common stock listed on The NASDAQ Global Select Market) from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our certificate of incorporation and bylaws:
In addition, certain provisions of our shareholders agreement require that certain covered persons (as defined in the shareholders agreement) vote their shares of our common stock in favor of certain transactions in which the New Mountain Funds propose to sell all or any portion of their shares of our common stock, or in which we propose to sell or otherwise transfer for value all or substantially all of the stock, assets or business of the company.
Our current corporate headquarters are located in Herndon, Virginia, where we lease approximately 133,000 square feet of space under leases and subleases that will expire in 2011 contemporaneously with the entry into our lease for a new corporate headquarters. We recently entered into a new lease agreement for our new corporate headquarters commencing in November 2011. The new lease will provide approximately 158,000 square feet of space in another location in Herndon, Virginia and will expire in 2022. In addition, we maintain domestic offices in California, Massachusetts, Oregon and in Reston, Virginia. Internationally, our offices are located in Australia, the Philippines, the United Kingdom, Denmark, Norway, Sweden, the Netherlands and Belgium. As of the years ended December 31, 2010, 2009, and 2008, $71.0 million, $4.0 million, and $3.0 million, respectively, of our total long-lived assets of $241.9 million, $99.2 million, and $97.4 million, respectively, were held outside of the United States.
Our business is generally not likely to be materially impacted by severe weather or climate-related events. However, a severe weather or other event could result in property damage and disruption to our operations, including disruption of our technology and communications systems.
We are involved in various legal proceedings from time to time that are incidental to the ordinary conduct of our business. Although the outcomes of legal proceedings are inherently difficult to predict, we are not currently involved in any legal proceeding in which the outcome, in our judgment based on information currently available, is likely to have a material adverse effect on our business or financial position.
We do not have any plan or program for the repurchase of our common stock and did not repurchase any shares of our common stock during the year ended December 31, 2010.
Recent Sales of Unregistered Securities
Common Stock Information
Our common stock is traded on The NASDAQ Global Select Market under the symbol PROJ.
The following table sets forth the high and low sales prices for our common stock for the periods indicated as reported by The NASDAQ Global Select Market:
There is no established public trading market for our Class A common stock. As of March 9, 2011, there were 87 stockholders of record of our common stock and three stockholders of record of our Class A common stock.
Our Class A common stock does not carry any general voting rights, dividend entitlement or liquidation preference, but it carries certain rights to designate up to a majority of the members of our board of directors. As a result of this stock ownership and other arrangements, we are deemed to be a controlled company under the rules established by The NASDAQ Global Select Market and qualify for, and rely on, the controlled company exception to the board of directors and committee composition requirements regarding independence under the rules of The NASDAQ Global Select Market.
We did not pay cash dividends in 2010 or 2009, and we currently do not intend to pay cash dividends. Our investor rights agreement requires the prior written consent of our controlling stockholders, the New Mountain Funds, if we wish to pay or declare any dividend on our capital stock. Our credit agreement also restricts our ability to pay cash dividends.
Stock Performance Graph
The following graph compares the change in the cumulative total stockholder return on our common stock during the period from November 1, 2007 (the date of our initial public offering) through December 31, 2010, with the cumulative total return on the NASDAQ Computer Index and the NASDAQ Composite Index. The comparison assumes that $100 was invested on November 1, 2007 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.
Assumes $100 invested on November 1, 2007
Assumes dividends reinvested
Fiscal year ended December 31, 2010, 2009, 2008 and 2007
The equity compensation plan information required under this Item is incorporated by reference to the information provided under the heading Equity Compensation Plan Information in our definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the fiscal year ended December 31, 2010.
The following selected consolidated financial data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements contained elsewhere in this Annual Report. The statement of operations data and the balance sheet data for the years presented in the table below are derived from, and are qualified by reference to, our audited consolidated financial statements.
During all the years presented in the table below, the Company made business acquisitions. These transactions could affect the comparability of the information presented.
This Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those discussed under Risk Factors and elsewhere in this Annual Report on Form 10-K. In addition, our actual results reported in this Annual Report on Form 10-K may differ immaterially from our unaudited results which we may have published prior to this report.
All dollar amounts expressed as numbers in tables (except per share amounts)
in this MD&A are in millions.
Certain tables may not calculate due to rounding.
We are a leading provider of enterprise software and information solutions designed and developed specifically for project-focused organizations, including professional services firms, government contractors and government agencies. More than 14,000 organizations and 1.8 million users in approximately 80 countries around the world rely on Deltek to research and identify opportunities, win new business, optimize resources, streamline operations, and deliver profitable projects. Using Deltek, our customers know more and do more.
In July 2010, we acquired Maconomy A/S (Maconomy), an international provider of software solutions to professional services firms.
In October 2010, we acquired INPUT, Inc. (INPUT), which enables companies to identify and develop new business opportunities with federal, state and local governments and other public sector organizations.
In November 2010, we extended and expanded our existing credit facility. The extended credit facility provides for $230 million in aggregate borrowings, consisting of $200 million in term loans maturing in November 2016 and a $30 million revolving credit facility maturing in 2015.
Our revenue is generated from sales of software licenses and related software maintenance and support, professional services to assist customers with the implementation of our products, as well as education, training and information solutions. Our continued growth depends, in part, on our ability to generate revenue from new customers and to continue to expand our presence by selling new products and solutions within our existing installed base of customers.
In our management decision making, we continuously balance our need to achieve short-term financial and operational goals with the equally critical need to continuously invest in our products, services, solutions and infrastructure to ensure our future success. In making decisions around spending levels in our various functional organizations, we consider many factors, including:
We have acquired companies to broaden the products, services and solutions we offer, expand our customer base and provide us with a future opportunity to migrate customers to newer applications we may develop and expand into new geographies. The products and solutions of the acquired companies provide our customers with core functionality that complements our own established products.
In evaluating our financial condition and operating performance, we consider a variety of factors including, but not limited to, the following:
Each of the factors may be evaluated individually or collectively by our senior management team in evaluating our performance as we balance our short-term quarterly objectives and our longer-term strategic goals and objectives.
Our total revenue for the year ended December 31, 2010 increased by $13.8 million to $279.6 million as compared to $265.8 million for the year ended December 31, 2009. We believe the increase in revenue was attributed to continuing confidence among our customers despite the economic uncertainty, as well as the recent acquisitions we completed.
Our license revenue and total revenue for the three months ended December 31, 2010 increased by $1.6 million and $15.8 million, respectively, to $20.8 million and $86.1 million, respectively, as compared to $19.2 million and $70.3 million, respectively, for the three months ended December 31, 2009. License revenue attributable to both our government contracting customers and our professional services customers increased during this period. We believe this was a result of the strength and diversity of our solutions portfolio, our strong competitive position and the positive market impact of our recent acquisitions. We believe that the products we have acquired, the new solutions we have offered and our expanded licensing models have given us a more compelling platform for expanding our business in a challenging economic environment.
Going forward, we believe that the continuing scrutiny and visibility of government contracting spending and the need to ensure that government projects are successfully completed on time and on budget are important factors driving many of our customers to use our earned value management and project scheduling applications across large segments of their organizations. Moreover, we believe that by combining INPUTs opportunity intelligence and market analysis with our project management, financial management and CRM solutions, we are now the only company in the industry that can deliver solutions across the broad spectrum of government contracting requirements and all facets of our customers businesses. As a result, we expect our Costpoint, GCS Premier and enterprise project management (EPM) products to continue to account for a significant percentage of our overall software license fee revenue.
At the same time, we expect our professional services solutions to account for a larger percentage of our overall license fee revenue as compared to recent periods. While the timing and extent of any economic recovery among professional services firms remains uncertain, we expect that our acquisition of Maconomy will enable our expansion into other parts of the broader professional services marketplace, both domestically and internationally.
In addition, we believe that our acquisition of Maconomy will positively impact our consulting services revenue over the course of 2011. We also expect the increase in revenue attributable to our government contracting customers in 2010 as compared to 2009 to positively impact our consulting services revenue.
In recent years, revenue from maintenance services has increased as a percentage of our total revenue. We expect this trend to continue as a result of additional sales of software licenses in the future, our high maintenance retention rates and the positive impact of our acquisition of Maconomy on software license and maintenance revenues. In addition, our 2010 maintenance revenue reflects purchase accounting fair value adjustments for the Maconomy acquisition. We expect the 2011 renewals of maintenance services will result in an increase in maintenance revenue in 2011 compared to 2010.
The Company recently reduced headcount in certain areas to realign its resources following the recent acquisitions of INPUT and Maconomy. The Company anticipates restructuring charges in 2011 as it continues to realign its cost structure and allow for increased investment in key strategic objectives. We have proactively managed, and will continue to proactively manage, our business to control operating expenses and realign resources in a way that will allow us to maximize near-term opportunities while maintaining the flexibility needed to achieve our longer-term strategic goals.
Critical Accounting Policies and Estimates
In presenting our financial statements in conformity with generally accepted accounting principles (GAAP) in the United States, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Our future estimates may change if the underlying assumptions change. Actual results may differ significantly from these estimates.
For further information on our critical and other significant accounting policies, see Note 1, Organization and Summary of Significant Accounting Policies, of our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K. We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our consolidated financial statements.
In June 2009, the FASB issued the FASB Accounting Standards Codification (the Codification or ASC), the authoritative guidance for GAAP. The Codification does not change how we account for
transactions or the nature of the related disclosures made. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective beginning July 1, 2009. In this Annual Report on Form 10-K, the references have been updated to reflect the new Codification references.
The Companys revenues are generated primarily from four sources: licensing of software products, providing maintenance and support for those products, providing consulting services for those products and memberships, including access to market intelligence, analysis and business development related services. The Company recognizes revenue in accordance with ASC 985-605, Software-Revenue Recognition (ASC 985-605), and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Where services are essential to the software functionality or the services carry a significant degree of risk or unique acceptance criteria, the Company recognizes the software and services revenue together in accordance with ASC 605-35, Revenue Recognition-Construction-Type and Certain Production-Type Contracts (ASC 605-35).
Under its standard perpetual software license agreements, the Company recognizes revenue from the license of software upon execution of a signed agreement and delivery of the software provided that the software license fees are fixed and determinable, collection of the resulting receivable is probable, and vendor specific objective evidence (VSOE) of fair value exists to allow the allocation of a portion of the total fee to any undelivered elements of the arrangement. If a right of return exists, revenue is recognized upon the expiration of that right. In the event that VSOE does not exist for any undelivered element, the entire arrangement fee is recognized over the longer of the services, subscription, or maintenance period.
If VSOE exists to allow the allocation of a portion of the total fee to undelivered elements of the arrangement, the residual amount in the arrangement allocated to software license fee is recognized as revenue when all of the following are met:
The Companys standard software license agreement does not include customer acceptance provisions; if acceptance provisions are provided, delivery is deemed to occur upon acceptance.
The Company also sells certain of its software products under term license agreements. Term licenses offer the customer rights to software bundled with maintenance and support for a fixed period of time, usually twelve months. In some cases implementation services are also included in the initial period fee. Hosting services may also be included in the fee. Under these arrangements revenue is recognized ratably over the contractual period.
Software license fee revenues from resellers are recognized using a sell-through model whereby the Company recognizes revenue when these channels complete the sale and delivers the software to the end-user.
The Companys standard payment terms for its software license agreements are generally within 180 days. The Company considers the software license fee to be fixed and determinable unless the fee is subject to refund or adjustment, or is not payable within 180 days. Revenue from arrangements with payment terms extending beyond 180 days is recognized as payments become due and payable.
Sales taxes and other taxes collected from customers and remitted to governmental authorities are presented on a net basis and, as such, are excluded from revenues.
Maintenance and support services include unspecified periodic software upgrades or enhancements, bug fixes and phone support for perpetual software licenses. Initial annual maintenance and support are sold as a consistent percentage of the software price. Customers generally prepay for maintenance, and these prepayments are recorded as deferred revenue and revenue is recognized ratably over the term of the maintenance period.
Delteks consulting services consist primarily of implementation services, training, and design services. Consulting services are also regularly sold separately from other elements, generally on a time-and-materials basis. Other revenue mainly includes fees collected for the Companys annual user conference, which is typically held in the second quarter.
Consulting services are generally not essential to the functionality of the Companys software and are usually completed in three to six months, though larger implementations may take longer. The Company generally recognizes revenues for these services as they are performed. In the case of software arrangements where services are essential to the software functionality or the services carry a significant degree of risk or unique acceptance criteria, the Company recognizes the software and services revenue together in accordance with ASC 605-35, Revenue Recognition-Construction-Type and Certain Production-Type Contracts (ASC 605-35). Direct costs related to these arrangements are deferred and expensed as the related revenue is recognized.
Implementation, installation and other consulting services are generally billed based upon hourly rates, plus reimbursable out-of-pocket expenses and related administrative fees. Revenue on these arrangements is recognized based on hours actually incurred at the contract billing rates, plus out-of-pocket expenses. Implementation, installation and other consulting services revenue under fixed-fee arrangements is generally recognized as the services are performed if the Company has the ability to demonstrate it can reasonably estimate percentage of completion.
The Company generally sells training services at a fixed rate for each specific training session at a per-attendee price, and revenue is recognized when the customer attends the training. The Company also sells training on a time-and-materials basis. In situations where customers pay for services in advance of the services being rendered, the related prepayment is recorded as deferred revenue and recognized as revenue when the services are performed.
Membership revenues, including access to market intelligence analysis and business development services generally provide customers with access to the govWin or INPUT networks for a fixed period of time, usually twelve months. Under these arrangements, revenue is recognized ratably over the membership period. Customers generally prepay for these subscription offerings, and these prepayments are recorded as deferred revenue and revenue is recognized over the term of the term license or membership.
For sales arrangements involving multiple elements, where software licenses are sold together with maintenance and support, consulting, training, or subscription offerings, the Company recognizes revenue using the residual method. The residual accounting method is used since VSOE has not been established for software as it is not typically sold on a standalone basis. Using this method, the Company first allocates revenue to the undelivered elements on the basis of VSOE. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue for the delivered elements, which is usually the software component. The Company has established VSOE for standard offerings of maintenance and support and consulting services based on the price charged when these elements are sold on a standalone basis.
For maintenance and support agreements, VSOE is generally based upon historical renewal rates.
For consulting services and training sold as part of a multiple element sales arrangement, VSOE is based upon the prices charged for those services when sold separately. For sales arrangements that require the Company to deliver future specified products or services for which VSOE of fair value is not available, the entire arrangement is deferred until VSOE is available or delivery has occurred. For income statement classification purposes revenue is allocated first to the undelivered element based on VSOE. Any remaining arrangement fee is then allocated to the software license.
In cases where software licenses and other elements are sold in combination with subscription offerings all revenue is recognized ratably over the longest period of performance for the undelivered elements. For income statement classification purposes revenue is allocated based on VSOE for maintenance, training, and consulting services. For subscription offerings, VSOE has not yet been established, and revenue is therefore allocated to the undelivered subscription offerings based on the contractually stated renewal rate. Under the residual method, any remaining arrangement fee is allocated to the software license.
ASC 718, Compensation-Stock Compensation (ASC 718), requires that the cost of awards of equity instruments offered in exchange for employee services, including employee stock options, restricted stock awards, and employee stock purchases under our Employee Stock Purchase Plan (ESPP), are measured based on the fair value of the award on the measurement date of grant. We determine the fair value of options granted and employee stock purchases using the Black-Scholes-Merton option pricing model and recognize the cost over the period during which an employee is required to provide service in exchange for the award, generally the vesting period in the case of options. The fair value of restricted stock awards is based on the closing price of our common stock on the date of grant and is recognized as expense over the requisite service period of the awards.
In accordance with ASC 718, we recorded $12.2 million, $10.6 million and $8.8 million in stock-based compensation expense for the years ended December 31, 2010, 2009 and 2008, respectively. The compensation expense recorded for the years ended December 31, 2010, 2009, and 2008 related to stock options, restricted stock awards and the ESPP.
The key assumptions used by management in the Black-Scholes-Merton option-pricing model include the fair value of our common stock at the grant date, which is also used to determine the option exercise price, the expected life of the option, the expected volatility of our common stock over the life of the option and the risk-free interest rate. In determining the amount of stock-based compensation to record, management must also estimate expected forfeitures of stock options over the expected life of the options.
Prior to our initial public offering in November 2007 and given the absence of an active market for our common stock, our board of directors or compensation committee (or its authorized member(s)) estimated the fair value of our common stock at the time of each grant. Numerous objective and subjective factors were considered in estimating the value of our common stock at each option grant date in accordance with the guidance in AICPA Practice Aid Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Because we do not have significant history associated with our stock options in order to determine the expected volatility of our options, we calculated expected volatility as of each grant date using an implied volatility method based in part on reported data for a peer group of publicly traded software companies for which historical information was available, as well as our volatility since the date of our initial public offering. We will continue to use peer group volatility information until sufficient historical volatility of our common stock is available to measure expected volatility for future option grants.
The average expected life of our stock options was determined according to the SEC simplified method as described in SAB No. 107, Share-Based Payment, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve rates with the remaining term equal to the expected life assumed at the date of grant. Forfeitures were estimated based on our historical analysis of actual stock option forfeitures and employee turnover. An increase or decrease by 5% in the forfeiture rate would not have a material effect on our financial statements.
We are required to estimate our income taxes in each of the jurisdictions in which we operate. We record this amount as a provision or benefit for taxes in accordance with ASC 740, Income Taxes (ASC 740). This process involves estimating our current tax exposure, including assessing the risks associated with tax audits and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our financial statements. Although we believe that our estimates are reasonable, the final tax outcome of these matters could be different from our estimates reflected in our income tax provision. As such, any potential difference could have a material effect on our effective tax rate and consequently affect our operating results for the period in which such determination is made.
We follow ASC 740-10 which requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition and measurement of tax positions can affect the estimate of the effective tax rate and consequently affect our operating results.
As of December 31, 2010, we had deferred tax assets of approximately $8.6 million, which were primarily related to differences in the timing of recognition of revenue and expenses for book and tax purposes. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe recovery is not likely, we establish a valuation allowance. As of December 31, 2010, we have valuation allowances totaling $1.9 million recorded on the Sweden, Netherlands and UK entities acquired during the Maconomy transaction, as we have determined it is more likely than not that the deferred tax assets would not be realized.
Our deferred tax assets and liabilities are recorded at the enacted tax rates in effect for the year in which the differences are expected to reverse. If a change to the expected tax rate is determined to be appropriate due to differences between our assumptions and actual results of operations or statutory tax rates, it will affect the provision for income taxes during the period that the determination is made.
Allowances for Doubtful Accounts Receivable
We maintain allowances for doubtful accounts and sales allowances to provide adequate provision for potential losses from collecting less than full payment on our accounts receivable. We record provisions for sales allowances, which generally result from credits issued to customers in conjunction with cancellations of maintenance agreements or billing adjustments, as a reduction to revenues. We record provisions for bad debt, or credit losses, as a general and administrative expense in our income statement. We base these provisions on a review of our accounts receivable aging, individual overdue accounts, historical write-offs and adjustments of customer accounts due to service or other issues and an assessment of the general economic environment.
Valuation of Purchased Intangible Assets and Acquired Deferred Revenue
We allocate the purchase price paid in a business combination to the assets acquired, including intangible assets, and liabilities assumed at their estimated fair values. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
Management makes estimates of fair value based upon assumptions and estimates we believe to be reasonable. These estimates are based upon a number of factors, including historical experience, market conditions and management projections. Critical estimates in valuing certain of the intangible assets include, but are not limited to, historical and projected customer retention rates, anticipated growth in revenue from the acquired customer and product base and the expected use of the acquired assets.
We amortize acquired intangible assets using either accelerated or straight-line methods depending upon which best approximates the proportion of future cash flows estimated to be generated in each period over the estimated useful life of the specific asset. Management must estimate the expected life and future cash flows from the acquired asset, both of which are inherently uncertain and unpredictable. Changes in the assumptions used in developing these estimates could have a material impact on the amortization expense recorded in our financial statements. Unanticipated events and circumstances may occur which may affect the accuracy or validity of our assumptions and estimates. As an example, for all of the acquisitions made during the years 2006 through 2010, we are amortizing the customer relationship intangible assets on an accelerated method using lives of four to ten years. The use of an accelerated method was based upon our estimates of the projected cash flows from the assets and the proportion of those cash flows received over the estimated life and evaluated on annual basis to ensure continued appropriateness.
Had we used a straight-line method of amortization, amortization expense for 2010 would have been approximately $1.4 million less than the amount recorded. If we were to continue to use the same accelerated method, but reduce the estimated useful lives of those assets by one year, total amortization expense would have been higher by $0.5 million for 2010. We amortize acquired technology from our acquisitions using either an accelerated or a straight-line method over three to five years. If the useful lives for those assets were reduced by one year, amortization expense for 2010 would have been approximately $3.6 million which is $0.6 million higher than the current year expense.
As a component of our acquisitions, we acquired maintenance and subscription obligations (and the associated deferred revenue) with our acquisitions. We valued acquired deferred revenue based on estimates of the cost of providing solution support services plus a reasonable profit margin. Upon each acquisition, the acquired deferred revenue balances were recorded at an average of 40% of their book value on the date of acquisition. This reduced deferred revenue amount is recognized as revenue over the remaining contractual period of the obligation, generally no more than one year from the date of acquisition. Changes in the estimates used in determining these valuations could result in more or less revenue being recorded.
Impairment of Identifiable Intangible and Other Long-Lived Assets and Goodwill
We review identifiable intangible and other long-lived assets for impairment in accordance with ASC 360, Property, Plant, and Equipment (ASC 360) whenever events or changes in circumstances indicate the carrying amount may be impaired or unrecoverable.
We assess the impairment of goodwill and indefinite-lived intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other (ASC 350). Accordingly, we test our goodwill and indefinite-lived intangible assets for impairment annually at December 31 or whenever events or changes in circumstances indicate an impairment may have occurred. The impairment test for goodwill compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, impairment is indicated. The impairment is measured as the excess of the recorded goodwill over its fair value.
The impairment test for indefinite-lived intangible assets compares the fair value of an indefinite-lived intangible asset with its carrying amount. If the fair value of the indefinite-lived intangible asset is less than its carrying amount, an impairment is measured as the excess of the carrying amount over the fair market value.
Factors that indicate the carrying amount of goodwill, identifiable intangible assets or other long-lived assets that may not be recoverable include under-performance relative to historical or projected operating results, significant changes or limitations in the manner of our use of the acquired assets, changes in our business strategy, adverse market conditions, changes in applicable laws or regulations and a variety of other factors and circumstances.
We determine the recoverability of our long-lived assets by comparing the carrying amount of the asset to our current estimates of net future undiscounted cash flows that the asset is expected to generate (or fair market value). If we determine that the carrying value of a long-lived asset may not be recoverable, an impairment charge is recognized, as an operating expense, equal to the amount by which the carrying amount exceeds the fair market value of the asset in the period the determination is made.
Results of Operations
The following table sets forth our statements of operations including dollar and percentage of change from the prior periods indicated:
Software License Fees
Our software applications are generally licensed to end-user customers under perpetual license agreements. We sell our software applications to end-user customers mainly through our direct sales force, as well as indirectly through our network of alliance partners and resellers. The timing of the sales cycle for our products varies in length based upon a variety of factors, including the size of the customer, the product being sold and whether the customer is a new or existing customer. While price is an important consideration, we primarily compete on product features, functionality and the needs of our customers within our served markets.
Software revenues increased $5.9 million, or 10%, to $64.8 million for the year ended December 31, 2010 compared to 2009. Our 2010 revenue included $4.8 million in revenue attributable to our Maconomy products, which we acquired in July 2010. In addition, for the year ended December 31, 2010, license fee revenues from our Costpoint, GCS Premier and EPM products increased $2.6 million compared to the prior year, while license fee revenues from our Vision products decreased by $1.5 million for the same period.
Software revenues decreased $18.5 million, or 24%, to $58.9 million for the year ended December 31, 2009 compared to 2008. For 2009, software revenues from our Costpoint, GCS Premier and EPM products decreased $4.4 million compared with the prior year, while license fee revenues from our Vision products decreased by $14.1 million for the same period. The decrease in revenues from sales of our Costpoint, GCS Premier and EPM products to government contractor customers was partially attributable to the impact of two larger deals in 2008 that were not replicated in 2009, and was also attributable to customers taking a more cautious approach with regard to purchasing and investment decisions in light of the general economic climate. We believe the decrease in revenues from sales of our Vision products was mainly attributable to customers deferring purchasing decisions, lengthening sales cycles and adopting more cautious investment policies during the economic downturn.
Subscription and Recurring Revenues
Our subscription and recurring revenues are comprised of fees derived from arrangements in which the Companys customers subscribe to information, products and services. In addition, there are subscription and recurring revenues related to other Deltek products. The revenue stream for the subscription and recurring revenues began in 2010.
Subscription and recurring revenues was $5.3 million for the year ended December 31, 2010. These revenues were primarily attributable to the products and services we added to our portfolio with the acquisition of INPUT, which occurred in October 2010.
Maintenance and Support Services
Our maintenance and support revenues are comprised of fees derived from new maintenance contracts associated with new software license sales and annual renewals of existing maintenance contracts. These contracts typically allow our customers to obtain online, telephone and internet-based support, as well as unspecified periodic upgrades or enhancements, bug fixes and phone support for perpetual software licenses.
In 2010, maintenance revenues increased $9.8 million, or 8%, to $135.3 million when compared to 2009. Maintenance revenues from our Costpoint, GCS Premier, and EPM products collectively increased $7.3 million year over year as a result of strong renewals and a higher install base. In addition, we recognized maintenance revenues of $3.1 million in 2010 from Maconomy maintenance contracts. In 2010, our maintenance revenues for our Vision products decreased by $0.7 million. We believe that this was a result of a limited number of smaller architecture and engineering customers not renewing maintenance in light of the challenging economic environment and our discontinuance of maintenance and support for certain legacy products. The sales allowance decreased slightly by $0.1 million. We expect that maintenance revenues will continue to be a significant source of revenue throughout 2011 given our high maintenance retention rate and our stable base of customers.
Maintenance revenues increased $9.8 million, or 9%, to $125.5 million for the year ended December 31, 2009 compared to 2008. Maintenance revenues from our Costpoint, GCS Premier, and EPM products collectively increased $9.0 million year over year, and maintenance revenues from our Vision products increased $0.5 million. In addition, the sales allowance decreased $0.3 million. These increases were due to sales of new software licenses, renewals of maintenance agreements by our installed base of customers, the annual price escalations for our maintenance services and the impact of our acquisition of the Deltek MPM application.
Consulting Services and Other Revenues
Our consulting services revenues are generated from software implementation and related project management and data conversions, as well as training, education and other consulting services associated with our software applications and have typically been provided on a time-and-materials basis. Our other revenues consist primarily of fees collected for our annual user conference, which is typically held in the second quarter of the year.
Consulting services and other revenues decreased $7.2 million, or 9%, to $74.2 million for the year ended December 31, 2010 compared to 2009. This was primarily a result of a $16.1 million decline in software implementation consulting services attributed to the impact of some large implementation projects coming to a successful conclusion early in 2010 that were not repeated. In addition, the decline was partially attributed to the lower software license sales in 2009. Also contributing to the decrease is $0.6 million in training revenue. These revenue decreases were offset by $9.3 million of consulting services revenues associated with our acquisition of Maconomy. Other revenues decreased $0.2 million from 2009.
We expect continued demand in 2011 for consulting services from customers due to additional purchases of our applications and the expansion of their use of our software and solutions.
Consulting services and other revenues decreased $14.9 million, or 16%, to $81.4 million for the year ended December 31, 2009 compared to 2008. This was a result of a $9.6 million decline in software implementation consulting services attributed to decreased software license fees. Also contributing to the decrease was a decline of $1.9 million in reimbursable revenues and a decline of $2.3 million in training and education related services. Other revenues decreased $1.1 million as a result of lower user conference revenues associated with lower conference attendance in 2009.
Cost of Revenues
Cost of Software License Fees
Our cost of software consists of third-party software royalties, costs of product fulfillment, amortization of acquired technology and amortization of capitalized software.
Cost of software increased by $0.3 million, or 6%, to $6.2 million for the year ended December 31, 2010 compared to 2009. This was primarily attributed to increases in the amortization of $0.9 million in purchased intangible assets offset by decreases in the amortization of capitalized software of $0.6 million.
Cost of software license fees decreased by $0.7 million, or 11%, to $5.9 million for the year ended December 31, 2009 compared to 2008 primarily due to lower amortization of capitalized software and purchased intangible assets.
Cost of Subscription and Recurring Revenues
Our cost of subscription and recurring revenues are comprised of compensation expenses, and facility and other expenses incurred in providing subscription services, as well as the amortization of acquired intangibles. There were no costs of subscription and recurring revenues prior to fiscal year 2010.
Cost of subscription and recurring revenues was $4.3 million for the year ended December 31, 2010 which was attributed to labor and related benefits of $1.6 million, amortization of purchased intangible assets of $1.4 million, facility expenses of $0.9 million and other expenses of $0.4 million.
Cost of Maintenance and Support Services
Our cost of maintenance and support services is primarily comprised of compensation expenses and third-party contractor expenses, as well as facilities and other expenses incurred in providing support to our customers.
Cost of maintenance services was $25.6 million for the year ended December 31, 2010, an increase of $3.1 million, or 14%, compared to 2009. This increase was attributed to increases in labor and related benefits of $1.4 million, facility expenses of $1.4 million, other expenses of $0.2 million and travel expenses of $0.1 million.
Cost of maintenance services was $22.5 million for the year ended December 31, 2009, an increase of $1.1 million, or 5%, compared to 2008. The increase was due to an increase in labor and related benefits of $0.9 million and an increase in royalties of $0.3 million for third-party products which are embedded or sold along with our products offerings. This was offset by decreases in travel of $0.1 million.
Cost of Consulting Services and Other Revenues
Our cost of consulting services is comprised of the compensation expenses for services-related employees as well as third-party contractor expenses, travel and reimbursable expenses and classroom rentals. Cost of consulting services also includes an allocation of our facilities and other costs incurred for providing implementation, training and other consulting services to our customers. Our cost of other revenues primarily includes costs associated with our annual user conference.
Cost of consulting services was $67 million for the year ended December 31, 2010, a decrease of $3.5 million, or 5%, compared to 2009. The key drivers were decreased labor and related benefits of $3.1 million, travel expenses of $1.0 million, facility expenses of $0.2 million and lower user conference costs of $0.4 million, offset by increased subcontractor expenses of $1.2 million.
Cost of consulting services was $70.5 million for the year ended December 31, 2009, a decrease of $10 million, or 12%, compared to 2008. The key drivers were decreased labor and related benefits of $5.5 million resulting from a reduction in headcount, travel expenses of $3.0 million, subcontractor expenses of $0.9 million and other expenses of $0.1 million. The cost reductions paralleled the decrease in consulting services revenues in 2009. In addition, we incurred lower user conference costs of $0.5 million associated with lower conference attendance in 2009 compared to 2008.
Research and Development
Our product development expenses consist primarily of compensation expenses, third-party contractor expenses, and other expenses associated with the design, development and testing of our software applications.
Research and development expenses increased by $9.2 million, or 21%, to $52.6 million for the year ended December 31, 2010 compared to 2009. The principal drivers of the year over year increase were higher labor costs and related benefits of $7.7 million resulting primarily from increased headcount attributable to the Maconomy and INPUT acquisitions, higher facility expenses of $1.4 million, and higher travel expenses of $0.5 million. Offsetting these increases were lower third-party contractor expenses of $0.4 million.
Research and development expenses decreased by $2.4 million, or 5%, to $43.4 million for the year ended December 31, 2009 compared to 2008. The drivers of the year over year decrease were lower labor costs and related benefits of $1.4 million resulting primarily from reduced headcount, lower travel expenses of $0.4 million, lower amortization of purchased intangibles of $0.3 million, and lower third-party contractor expenses of $0.3 million.
Sales and Marketing
Our sales and marketing expenses consist primarily of salaries and related costs, commissions paid to our sales team and the cost of marketing programs (including our demand generation efforts, advertising, events,
marketing and corporate communications, field marketing and product marketing), and other expenses associated with our sales and marketing activities. Sales and marketing expenses also include amortization expense for acquired intangible assets associated with customer relationships.
Sales and marketing expenses increased by $17.6 million, or 39%, to $62.4 million for the year ended December 31, 2010 compared to 2009. The increase was due to increased labor and related benefits of $9.7 million primarily from an increase in headcount attributable to the Maconomy and INPUT acquisitions, a $1.5 million increase in the amortization of purchased intangibles, a $1.5 million trade name impairment in 2010, increased facility expenses of $1.4 million, increased select marketing programs of $1.3 million, increased commissions of $0.6 million, increased travel expenses of $0.6 million, increased professional services fees of $0.6 million and an increase in other expenses of $0.4 million.
Sales and marketing expenses decreased by $9.0 million, or 17%, to $44.8 million for the year ended December 31, 2009 compared to 2008. The decrease was due to decreased labor and related benefits of $5.6 million primarily from a reduction in headcount, decreased commissions of $2.6 million resulting from lower license sales in 2009, a $1.1 million decrease in select marketing programs, and decreased travel and other expenses of $0.7 million. Partially offsetting these decreases were a $0.7 million increase in the amortization of purchased intangibles and a $0.3 million increase in third-party contractor expenses.
General and Administrative
Our general and administrative expenses consist primarily of salaries and related costs for general corporate functions, including executive, finance, accounting, legal and human resources. General and administrative costs also include New Mountain Capital advisory fees, insurance premiums, third-party legal fees, other professional services fees, facilities and other expenses associated with our administrative activities which include acquisition-related costs.
General and administrative expenses increased by $14.8 million, or 42%, to $50.3 million for the year ended December 31, 2010 compared to 2009. The increase resulted from acquisition related expenses of $7.8 million of which $2.8 million was a fee to New Mountain Capital, increased labor and related benefits of $5.1 million from an increase in temporary labor of $2.2 million, an increase in labor related to special projects of $0.6 million and the remaining increase is primarily attributable to an increase in headcount mainly from the Maconomy and INPUT acquisitions, increased facility expenses of $2.2 million, increased travel expenses of $0.6 million and increased other expenses of $0.2 million. These increases were offset by decreased bad debt expense of $1.1 million attributed to improved collections.
General and administrative expenses increased by $2.1 million, or 6%, to $35.5 million for the year ended December 31, 2009 compared to 2008. The increase resulted from increased legal fees of $1.5 million, labor and related benefits of $1.4 million, bad debt expense of $0.7 million, and professional fees of $0.4 million, and was partially offset by a reduction of $1.8 million in professional fees for external audit and SOX services.
Certain restructuring plans were implemented in 2010 to realign the Companys cost structure and to reduce redundancies associated with acquisitions. These plans included a reduction of headcount which resulted in $0.9 million in aggregate restructuring charges for severance and severance-related costs. In addition, the Company recorded a restructuring charge of $0.7 million for the consolidation of offices associated with the Maconomy acquisition.
Certain restructuring plans were implemented in 2009 to realign the Companys cost structure and to allow for increased investment in its key strategic objectives. These plans included a reduction of headcount which resulted in $3.1 million in aggregate restructuring charges for severance and severance- related costs. In addition, the Company recorded a restructuring charge of $0.7 million for the consolidation of one facility and for the closure of two office locations.
During the year ended December 31, 2008, management implemented a restructuring plan to eliminate certain positions to realign the Companys cost structure and for the elimination of excess office space. The charge taken in the second quarter of 2008 included $0.9 million for severance and severance-related costs. The charge also included $0.1 million for facilities-related expenses, associated with closure of one office location and a reduction in space at a second location, and was offset by a reduction in existing deferred rent liabilities.
The Company anticipates additional restructuring charges in 2011 as it realigns its cost structure and resources following the recent acquisitions of INPUT and Maconomy and to allow for increased investment in its key strategic objectives.
Interest income in all periods reflects interest earned on our invested cash balances. Interest income remained relatively flat at $0.1 million for the year ended December 31, 2010 compared to 2009.
Interest income decreased $0.5 million for the year ended December 31, 2009 compared to 2008. The principal drivers of this decrease were the change in the Companys investment election for its funds from a traditional money market fund to a U.S. Treasury securities money market fund as well as the overall decrease in interest rates paid on money market funds.
Interest expense increased $2.6 million for the year ended December 31, 2010 compared to 2009. The increase was attributed to an increase in the effective interest rate from 4.1% in 2009 to 6.1% in 2010.
We anticipate that interest expense will increase in 2011 due to the amendment and extension of the Credit Agreement in November 2010 (see discussion below in the Credit Agreement section), which increased the principal outstanding under the term loans offsetting the interest rate decrease to the LIBO rate plus 4.00% with a LIBO rate floor of 1.50% for both the term loans and revolving credit facility.
Interest expense decreased by $3.4 million for the year ended December 31, 2009 compared to 2008. The decreases resulted from an overall decrease in the British Bankers Association Interest Settlement Rates for dollar deposits (the LIBO rate) as well as from the prepayment of debt during the first half of 2009.
Loss on Extinguishment of Debt
A loss on extinguishment of debt of $1.8 million was recognized from the amendment and extension of the Companys Credit Agreement in November 2010.
Income tax expense for the year ended December 31, 2010 decreased $7.6 million to $2.8 million compared to $10.4 million for the twelve months ended December 31, 2009. As a percentage of pre-tax income, income tax expense was (123.8)% and 32.7% for the twelve months ended December 31, 2010 and 2009, respectively. The income tax expense for 2010 is lower than the income tax expense for 2009 due primarily to lower pre-tax income, and is offset by the non deductibility of certain transaction related costs of approximately $5.8 million.
Income tax expense decreased by $2.2 million for the year ended December 31, 2009 compared to the 2008. As a percentage of pre-tax income, income tax expense was 32.7% and 34.9% for the years ended December 31, 2009 and 2008, respectively. The decrease in the effective tax rate was primarily the result of lower pre-tax income as well as various implemented tax strategies including increased credits for qualified research and development activities, the utilization of foreign tax credits not scheduled to expire for ten years, and the deductibility of certain expenses.
During the twelve months ended December 31, 2010, the Company established an additional liability of approximately $0.6 million associated with the establishment of a reserve for foreign tax and research and development tax credits as well as certain permanent adjustments and associated interest on prior period ASC 740-10 adjustments. For the year ended December 31, 2009, the Company established an additional liability of approximately $0.7 million related to foreign tax and research and development tax credits as well as certain permanent adjustments. For further information, see Note 11, Income Taxes, of our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.
The Company has maintained a credit agreement with a syndicate of lenders led by Credit Suisse (the Credit Agreement) since 2005.
In November 2010, we amended and extended the Credit Agreement, providing for $230.0 million in aggregate borrowings, consisting of $200 million in secured term loans maturing in November 2016 and a $30.0 million secured revolving credit facility maturing in November 2015. The new revolving credit facility was undrawn at closing. All prior amounts outstanding under the Credit Agreement (approximately $146.8 million) were prepaid in full out of proceeds from the new term loans. The remaining proceeds of $48.1 million, less debt issuance costs of approximately $5.1 million, will be used for general corporate purposes. The amendment and extension included an original issuance debt discount of 1%, or $2.0 million, which, along with the deferred debt issuance costs, will be amortized over the term of the loan using the effective interest method. The original issue debt discount was included in the $5.1 million of debt issuance costs noted above.
Under the Credit Agreement for both the term loans and the revolving credit facility, we will pay an interest rate equal to the British Bankers Association Interest Settlement Rates for dollar deposits (the LIBO rate) plus 4.00%, with a LIBO rate floor of 1.50%. Interest rates prior to the amendment and extension were either 2.25% or 4.25% above the LIBO rate and contained a LIBO rate floor of 2.00% and the rate for the revolving credit facility was 2.50% or 1.50%, depending on the type of borrowing.
The Company will pay a fee equal to 0.75% of the undrawn portion on the revolving credit facility that expires in November 2015. The Credit Agreement requires the Company to make principal payments of $0.5 million per quarter through September 2016, with the remaining balance due in November 2016.
As of December 31, 2010 and December 31, 2009, the outstanding principal amount of the term loans was $199.5 million, excluding the reduction of the unamortized debt discount of $1.9 million, and $179.0 million, respectively, and there were no borrowings outstanding under the revolving credit facility, except for letters of credit totaling less than $1.0 million.
All loans under the Credit Agreement are collateralized by substantially all of our assets (including our domestic subsidiaries assets) and require us to comply with certain financial covenants. There were no material modifications to our debt covenants under the amendment to our Credit Agreement, except that the fixed charge coverage ratio covenant was replaced by a maximum capital expenditures covenant. Other covenants require us to maintain defined minimum levels of interest coverage and provide for a limitation on our leverage ratio.
The following table summarizes the significant financial covenants under the Credit Agreement (adjusted EBITDA below is based on the terms of the Credit Agreement):
The Credit Agreement also requires us to comply with non-financial covenants that restrict or limit certain corporate activities by us and our subsidiaries, including our ability to incur additional indebtedness, guarantee obligations, or create liens on our assets, enter into sale and leaseback transactions, engage in mergers or consolidations, or pay cash dividends.
Based on our current and expected performance, we believe we will continue to satisfy the financial covenants of our Credit Agreement for the foreseeable future.
As of December 31, 2010, we were in compliance with all covenants under our Credit Agreement.
We incurred approximately $3.1 million of debt issuance costs in connection with the Credit Agreement, of which $2.5 million will be amortized to interest expense over the term of the Credit Agreement using the effective interest method and $0.6 million was expensed as a loss on extinguishment of debt on the consolidated statements of operations. Of the approximately $1.9 million of previously deferred debt issuance costs as of November 3, 2010, $1.1 million was expensed as a loss on extinguishment of debt and the remaining amount will be amortized over the term of the Credit Agreement. In 2009, we paid $2.3 million of debt issuance costs in connection with the 2009 amendment to our Credit agreement, of which $2.1 million was being amortized to interest expense over the term of the modified debt and the previously deferred debt issuance costs of $1.0 million as of August 2009 were being amortized to interest expense over that same period. We incurred no debt issuance costs in 2008.
The Credit Agreement requires mandatory prepayments of the term loans from our annual excess cash flow, and from the net proceeds of certain asset sales or equity issuances. During the first quarter of 2010, we made a scheduled principal payment of $0.3 million and a contractually required principal prepayment of $26.7 million from our 2009 annual excess cash flow. We will not make an excess cash flow payment in 2011, under the Credit Agreement, due to the permitted acquisitions that occurred during 2010. The Credit Agreement also requires us to prepay a portion of the term loans from the net proceeds of certain equity issuances so that our leverage ratio (as defined in the Credit Agreement) is less than 3.00, if on or before December 31, 2011, or 2.75, if anytime thereafter.
See discussion below in Contractual Obligations and Commitments for our future scheduled principal payments under the Credit Agreement.
Liquidity and Capital Resources
Overview of Liquidity
Our primary operating cash requirements include the payment of salaries, incentive compensation and related benefits, and other headcount-related costs as well as the costs of office facilities and information technology systems. We fund these requirements through cash collections from our customers for the purchase of our software, subscriptions, consulting services and maintenance services. Amounts due from customers for software license, subscriptions and maintenance services are generally billed in advance of the contract period.
The cost of our acquisitions has been financed with available cash flow and, to the extent necessary, term loan and revolving credit facility borrowings.
We utilize our revolving credit facility for the additional purpose of providing the required guarantee related to certain letters of credit for our real estate leases. At December 31, 2010, the total amount of letters of credit guaranteed under the revolving credit facility was $0.8 million. As a result, available borrowings on the revolving credit facility at December 31, 2010 were $29.2 million.
Historically, our cash flows have been subject to variability from year-to-year, primarily as a result of one-time or infrequent events. These events have included acquisitions and the repayment of indebtedness. We expect that our future growth will continue to require additional working capital. Although such future working capital requirements are difficult to forecast based on our current estimates of revenues and expenses, we believe that anticipated cash flows from operations and available sources of funds (including available borrowings under our revolving credit facility) will provide sufficient liquidity for us to fund our business and meet our obligations for the next twelve months. In addition, our Credit Agreement provides for greater financial flexibility by extending our debt repayment requirements over a longer term.
We also believe that our aggregate cash balance of $76.6 million as of December 31, 2010, coupled with anticipated cash flows from operations and available sources of funds (including available borrowings under our revolving credit facility), is sufficient to cover the payments due over the near term under the Credit Agreement. In the future, however, we may require additional liquidity to fund our operations, strategic investments and acquisitions, and debt repayment obligations, which could entail raising additional funds or modifying the terms of our Credit Agreement.
In June 2009, we completed our common stock rights offering, which was fully subscribed by our stockholders, resulting in the issuance of 20 million shares of common stock. Net proceeds after deducting fees and offering expenses were approximately $58.2 million. We used approximately $3.1 million to prepay indebtedness under our credit agreement and used the remaining net proceeds from the rights offering for additional working capital, strategic investments and acquisitions, reduction of indebtedness or general corporate purposes.
Analysis of Cash Flows
For the year ended December 31, 2010, net cash provided by operating activities was $63.0 million, compared to $59.8 million in 2009. The increase of $3.2 million was attributed to an increase from deferred revenues of $22.8 million attributed to moving to annual maintenance billing in 2010 and the acquisitions of Maconomy and INPUT, an increase in non-cash operating activities of $5.7 million primarily attributed to the increase in depreciation and amortization due to the acquisitions of Maconomy and INPUT, a reduction in tax payments of $1.2 million and other items of $1.8 million. These increases were offset by a decrease in net income of $26.5 million and an increase in interest payments of $1.8 million.
For the year ended December 31, 2009, net cash provided by operating activities was $59.8 million, compared to $42.6 million in 2008. The $17.2 million increase was attributed to decreases of $5.1 million for tax
payments, $5.0 million in interest payments and $9.1 million in other operating costs, and was partially offset by an increase in cash payments for restructuring charges of $2.0 million. The increase in deferred revenue of $18.4 million was primarily attributed to the acceleration of our maintenance billing process.
Net cash used in investing activities was $136.7 million for the year ended December 31, 2010, compared to $7.9 million in 2009. In 2010, we used $131.8 million for the acquisitions of Maconomy, INPUT and S.I.R.A. and $4.9 million for the purchase of property and equipment. Net cash used in investing activities was $7.9 million for the year ended December 31, 2009, compared to $24.0 million in 2008. Our use of cash during the year ended December 31, 2009 for investment activities primarily included $5.4 million for the acquisition of mySBX, and $2.4 million for the purchase of property and equipment.
Net cash provided by financing activities was $16.5 million for the year ended December 31, 2010, compared to $44.9 million provided during the year ended December 31, 2009. Cash provided by financing activities during the year ended December 31, 2010 was primarily related to proceeds from the amendment and extension of our Credit Agreement of $198 million and proceeds received from issuance of stock under our employee stock purchase plan (ESPP) as well as stock option exercises of $2.6 million. This was offset by $179.5 million in debt repayments primarily attributed to the repayment of prior outstanding amounts under the Credit Agreement, payments for deferred financing costs of $3.1 million and $1.5 million for shares withheld for minimum tax withholding on vested restricted stock awards.
Net cash provided by financing activities was $44.9 million for the year ended December 31, 2009, compared to $0.3 million in 2008. Cash provided by financing activities during the year ended December 31, 2009 was primarily related to net proceeds received from our rights offering of $58.2 million, and proceeds from issuance of stock under our employee stock purchase plan (ESPP) as well as stock option exercises of $2.9 million. This was offset by $13.9 million in debt repayments and payments for deferred financing costs of $2.3 million. Debt repayments consisted of a scheduled cash repayment of $1.1 million and contractually required debt prepayments of $12.8 million.
Impact of Seasonality
Fluctuations in our quarterly software license fee revenues historically reflect, in part, seasonal fluctuations driven by our customers procurement cycles for enterprise software and other factors. These factors historically yield a peak in software license fee revenue in the fourth quarter due to increased spending by our customers during that time. However, as a result of the current economic environment, the seasonality of our business was impacted by our customers views of their economic outlook. Therefore, past seasonality may not be indicative of current or future seasonality.
Our consulting services revenues are impacted by software license sales, the availability of consulting resources to work on customer implementations, and the adequacy of our contracting activity to maintain full utilization of available resources. As a result, services revenues are much less subject to seasonal fluctuations.
Our maintenance and subscription revenues are not subject to significant seasonal fluctuations.
Contractual Obligations and Commitments
We have various contractual obligations and commercial commitments. Our material capital commitments consist of term loan related debt obligations and commitments under facilities and operating leases. We rarely enter into binding purchase commitments. The following table summarizes our existing contractual obligations and contractual commitments as of December 31, 2010:
Following the repayment of $0.5 million in the fourth quarter of 2010, our scheduled repayments on the outstanding amount of the term loans are $2.0 million per year for the years 2011 through 2015 and $189.5 million due in 2016 for a total of $199.5 million. However, the amount and timing of these scheduled payments could vary based on the required mandatory prepayments from our annual excess cash flow, and from the net proceeds of certain asset sales or equity issuances as defined in the Credit Agreement. The Credit Agreement included an original issuance debt discount of 1%, or $2.0 million which is a reduction to the face value of the term loans of $199.5 million, at December 31, 2010, which will be amortized over the term of the loan using the effective interest method. Therefore, the amount outstanding on the consolidated balance sheet at December 31, 2010 of $197.6 million is net of the unamortized debt discount of $1.9 million at December 31, 2010.
Currently, we pay an interest rate on the term loans equal to the LIBO rate plus 4.00%, with a LIBO rate floor of 1.50%. Based on the LIBO rate floor in place under the Credit Agreement and the prevailing LIBO interest rate being less than 1%, we have estimated the interest payments in the above table at a rate equal to the minimum rate of 5.5%.
The amount included in other long term liabilities represents the contingent consideration liability from our acquisition of S.I.R.A., Inc. in March 2010, which is based on meeting license sales over a three-year period not to exceed a maximum earn out amount of $3.3 million and Maconomys earn out payment obligation for People Planner of $0.5 million. Our current forecasts indicate that the earn out payments will be achieved.
The above table does not include approximately $2.6 million of long-term income tax liabilities recorded in accordance with ASC 740-10 because we are unable to reasonably estimate the timing of these potential future payments.
Off-Balance Sheet Arrangements
As of December 31, 2010, we had no off-balance sheet arrangements.
We provide limited indemnification to our customers against intellectual property infringement claims made by third parties arising from the use of our software products. Due to the established nature of our primary software products and the lack of intellectual property infringement claims in the past, we cannot estimate the fair value nor determine the total nominal amount of the indemnification, if any. Estimated losses for such
indemnification are evaluated under ASC 450, Contingencies, as interpreted by ASC 460, Guarantees. We have secured copyright and trademark registrations for our software products with the U.S. Patent and Trademark Office and with applicable European trademark offices. We also have intellectual property infringement indemnification from our third-party partners whose technology may be embedded or otherwise bundled with our software products. Therefore, we generally consider the probability of an unfavorable outcome in an intellectual property infringement case to be relatively low. We have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such indemnifications.
Recently Adopted Accounting Pronouncements
In April 2008, the FASB issued ASC 350-30-55, Intangibles-Goodwill and Other-General Intangibles Other than Goodwill. ASC 350-30-55 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350, Intangibles-Goodwill and Other. The objective is to improve the consistency between the useful life of a recognized intangible asset under ASC 350 and the period of expected cash flows used to measure the fair value of the asset under ASC 805. ASC 350-30-55 is effective for fiscal years beginning after December 15, 2008. The guidance in ASC 350-30-55 for useful life estimates is applied prospectively to intangible assets acquired after December 31, 2008. Beginning in 2009, we adopted ASC 350-30-55 which was applied to our 2009 acquisition and prospectively.
In November 2008, the FASB issued ASC 350-30-35, Intangibles-Goodwill and Other-General Intangibles Other than Goodwill. ASC 350-30-35 clarifies the accounting for acquired intangible assets in situations in which the acquirer does not intend to actively use the asset but intends to hold (lock up) the asset to prevent its competitors from obtaining access to the asset (a defensive intangible asset). Under ASC 350-30-35, defensive intangible assets will be treated as a separate asset recognized at fair value and assigned a useful life in accordance with ASC 350. ASC 350-30-35 is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, or January 1, 2009 for Deltek. During 2010 and 2009, we did not acquire any defensive intangible assets.
In April 2009, the FASB issued ASC 805-20, Business Combinations-Identifiable Assets and Liabilities, and Any Noncontrolling Interest. ASC 805-20 amends the guidance in ASC 805 regarding pre-acquisition contingencies. The guidance in ASC 805-20 requires the recognition at fair value of an asset or liability assumed in a business combination that arises from a contingency if the acquisition date fair value can be reasonably estimated during the measurement period. If the fair value cannot be reasonably estimated, the asset or liability would be recognized in accordance with ASC 450, Contingencies, if the criteria in ASC 450 were met at the acquisition date. Previously, ASC 805 required pre-acquisition contingencies to be measured at fair value at the date of acquisition. ASC 805-20 is effective for business combinations occurring after January 1, 2009. Beginning in 2009, we adopted ASC 805-20; however, we did not acquire any pre-acquisition contingencies in the acquisitions made during 2009 and 2010.
In April 2009, the FASB issued ASC 825-10-65, Financial Instruments-Transition, effective for interim periods ending after June 15, 2009. ASC 825-10-65 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements to improve the transparency and quality of financial reporting. ASC 825-10-65 amends ASC 270, Interim Reporting, to require those disclosures in summarized financial information at interim reporting periods. See Part II, Item 8, Note 1, Fair Value Measurements, for the related disclosures. The adoption of ASC 825-10-65 in the second quarter of 2009 did not have a material impact on our results of operations, financial position, or cash flows.
In April 2009, the FASB issued ASC 820-10-35, Fair Value Measurements and Disclosures-Subsequent Measurement. ASC 820-10-35 provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased. ASC 820-10-35 also provides guidance on identifying circumstances that indicate a transaction is not orderly. In addition, ASC
820-10-35 requires disclosure in interim and annual periods of the inputs and valuation methods used in determining fair value and a discussion of any changes in those valuation methods. ASC 820-10-35 is effective for annual and interim periods ending on or after June 15, 2009. During the second quarter of 2009, we adopted the provisions in ASC 820-10-35. The provisions adopted did not have an impact on our financial statements as our fair value measurements are Level 1 measurements in an active market with orderly transactions.
In May 2009, the FASB issued ASC 855, Subsequent Events, effective for interim and annual periods ending after June 15, 2009. ASC 855 establishes the accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of ASC 855 in the second quarter of 2009 did not have a material impact on our results of operations, financial position, or cash flows.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05 (ASU 2009-05), Fair Value Measurement and Disclosure: Measuring Liabilities at Fair Value, which amends ASC 820-10-35. The guidance in ASU 2009-05 provides clarification on measuring liabilities at fair value when a quoted price in an active market is not available. The ASU specifies that a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance such as a present value technique or a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The guidance also states that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustments to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period beginning after issuance, or October 1, 2009. The adoption of ASU 2009-05 did not have an impact on our financial statements as we currently do not have any liabilities measured at fair value.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires new disclosures concerning transfers into and out of Level 1 and Level 2 of the fair value measurement hierarchy and a roll forward of the activity of assets and liabilities measured in Level 3 of the hierarchy. In addition, ASU 2010-06 clarifies existing disclosure requirements to require fair value measurement disclosures for each class of assets and liabilities and disclosure regarding the valuation techniques and inputs used to measure Level 2 or Level 3 fair value measurements on a recurring and nonrecurring basis. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009 except for the roll forward of activity for Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 did not have a material impact on our consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29 (ASU 2010-29), Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. In a business combination ASC 805-10-50, Business Combinations, requires disclosure of supplemental pro forma information of the revenue and earnings of the combined entity for a business combination that occurred during the reporting period. ASU 2010-29 clarifies the time period in which the acquisition date occurred for pro forma purposes. Specifically for comparative financial statements, the pro forma revenue and earnings of the combined entity are presented as though the acquisition date for a business combination that occurred during the current reporting period had been at the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective prospectively for business combinations occurring in fiscal years beginning after December 15, 2010, with early adoption permitted. We applied this guidance in the current year in our pro forma disclosures for our acquisitions of Maconomy and INPUT.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements, and the FASB issued ASU 2009-14, Certain Revenue Arrangements That Include Software Elements, on revenue recognition that will become effective beginning January 1, 2011, with earlier adoption permitted. We do not anticipate that the adoption of these standards will have an impact on our consolidated financial statements.
In December 2010, the FASB issued ASU 2010-28, IntangiblesGoodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 addresses how to apply Step 1 of the goodwill impairment test when a reporting unit has a zero or negative carrying amount. ASU 2010-28 requires for those reporting units with a zero or negative carrying amount to perform Step 2 of the impairment test if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. ASU 2010-28 is effective for annual and interim periods beginning after December 15, 2010. We do not expect the adoption of ASU 2010-28 to have a material impact on our consolidated financial statements.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our outstanding debt and cash and cash equivalents consisting primarily of funds held in money market accounts on a short-term basis with no withdrawal restrictions. At December 31, 2010, we had $76.6 million in cash and cash equivalents. Our interest expense associated with our term loans and revolving credit facility can vary with market rates. As of December 31, 2010, we had approximately $199.5 million of the principal amount in debt outstanding, which was effectively set at a fixed rate at December 31, 2010, due to the LIBO rate floor established of 1.5% in the Credit Agreement and the LIBO rate at December 31, 2010 being below the established floor. However, an increase in the LIBO rate above the LIBO rate floor subsequent to December 31, 2010 could cause our fixed rate debt to become variable and our interest expense to vary.
We cannot predict market fluctuations in interest rates and their impact on our possible variable rate debt, or whether fixed-rate long-term debt will be available to us at favorable rates, if at all. Consequently, future results may differ materially from the hypothetical 1% increase discussed above.
Based on the investment interest rate and our cash and cash equivalents balance as of December 31, 2010, a hypothetical 1% decrease in interest rates would have an insignificant impact on our earnings and cash flows on an annual basis. We do not currently use derivative financial instruments in our investment portfolio.
Foreign Currency Exchange Risk
The majority of our operations are transacted in US Dollars. However, since a growing portion of our operations consists of activities outside of the US, we have transactions in other currencies, primarily in the Danish krone, the British pound, the Philippine peso, the Australian dollar, the Swedish krona, the Norwegian kroner and the Euro. As our international operations continue to grow, we may choose to use foreign currency forward and option contracts to manage our exposure to foreign currency exchange fluctuations. Currently, we do not have any such contracts in place, nor did we have any such contracts during 2010, 2009, or 2008. To date, the foreign currency exchange fluctuations have not had a significant impact on our operating results and cash flows given the scope of our international presence. A hypothetical 10% increase or decrease in foreign currency exchange rates from the rates used to translate our foreign operations financial statements would have impacted our net income by less than $2.0 million during the year ended December 31, 2010. Our net assets at December 31, 2010 would have been impacted by less than $10.0 million from a hypothetical 10% increase or decrease in the foreign currency exchange rates used to translate our financial position at December 31, 2010.
Our consolidated financial statements, together with the related notes and the report of independent registered public accounting firm, are set forth on the pages indicated in Item 15.
Evaluation of Disclosure Controls and Procedures
Our management maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, our Chief Financial Officer, and our Principal Accounting Officer, as appropriate, to allow for timely decisions regarding required financial disclosures.
Our management evaluated, with the participation of our Chief Executive Officer, our Chief Financial Officer and our Principal Accounting Officer, the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) or 15d-15(e) as of December 31, 2010. Based on this evaluation, our Chief Executive Officer, our Chief Financial Officer, and our Principal Accounting Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.
Our managements report on internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(e) or 15(d)-15(f)) and the independent registered public accounting firms related audit report on the effectiveness of our internal control over financial reporting are included in this Item 9A of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management is required to assess the effectiveness of our internal control over financial reporting as of the end of the fiscal year, and report, based on that assessment, whether our internal control over financial reporting is effective.
Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer, our Chief Financial Officer, and our Principal Accounting Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.
Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that
receipts and expenditures are being made only in accordance with authorizations of the Companys management and board of directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in any control system, internal control over financial reporting may not prevent or detect misstatements due to human error, or the improper circumvention or overriding of internal controls. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may change over time.
As of December 31, 2010, management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that our internal control over financial reporting as of December 31, 2010 was effective.
In accordance with guidelines established by the SEC, companies are allowed to exclude acquisitions from their first assessment of internal control over financial reporting following the date of acquisition. Managements assessment of and conclusion on the effectiveness of our internal control over financial reporting excluded Maconomy A/S and its subsidiaries, which we acquired on July 9, 2010, and INPUT, Inc., which we acquired on October 1, 2010.
Maconomy and its subsidiaries are included in our 2010 consolidated financial statements and constituted, in the aggregate, 23% of consolidated total assets, 6% of consolidated total revenues and a loss of 95% of consolidated income from operations.
INPUT is included in our 2010 consolidated financial statements and constituted, in the aggregate, 21% of consolidated total assets, 2% of consolidated total revenues and a loss of 32% of consolidated income from operations.
For further information on these acquisitions, see Note 2, Business Acquisitions, of our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.
The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, which also audited our consolidated financial statements included in this Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee and Stockholders of
We have audited the internal control over financial reporting of Deltek, Inc. and its subsidiaries (the Company) as of December 31, 2010, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
As described in Managements Assessment of Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Maconomy A/S and its subsidiaries, which was acquired on July 9, 2010 and whose financial statements constitute 23%, 6%, and 95% of consolidated total assets, consolidated total revenues and a loss of consolidated income from operations, respectively as of and for the year ended December 31, 2010. Accordingly, our audit did not include the internal control over financial reporting at Maconomy A/S and its subsidiaries.
As described in Managements Assessment of Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at INPUT, Inc., which was acquired on October 1, 2010 and whose financial statements constitute 21%, 2%, and 32% of consolidated total assets, consolidated total revenues and a loss of consolidated income from operations, respectively as of and for the year ended December 31, 2010. Accordingly, our audit did not include the internal control over financial reporting at INPUT, Inc.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated March 15, 2011 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
March 15, 2011
Certain information required by Part III is omitted from this Annual Report as we intend to file our definitive Proxy Statement for the 2011 Annual Meeting of Stockholders (the 2011 Proxy Statement), pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, no later than 120 days after the end of the fiscal year covered by this Annual Report and certain information included in the 2011 Proxy Statement is incorporated herein by reference.
The information required by this Item is incorporated herein by reference to the information provided under the headings Executive Officers of the Company, Election of Directors, Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance in the 2011 Proxy Statement.
The information required by this Item is incorporated herein by reference to the information provided under the headings Executive and Director Compensation, Executive and Director CompensationCompensation Committee Report and Corporate GovernanceBoard Meetings and CommitteesCompensation Committee Interlocks and Insider Participation in the 2011 Proxy Statement.
The information required by this Item is incorporated herein by reference to the information provided under the headings Ownership of Securities and Executive and Director Compensation in the 2011 Proxy Statement.
The information required by this Item is incorporated herein by reference to the information provided under the headings Related Party Transactions and Corporate Governance in the 2011 Proxy Statement.
The information required by this Item is incorporated herein by reference to the information provided under the heading Principal Accounting Fees and Services in the 2011 Proxy Statement.
All other schedules not listed in the accompanying index have been omitted as they are either not required or not applicable, or the required information is included in the consolidated financial statements or the notes thereto.
The exhibits listed in the Index to Exhibits are filed as part of this Annual Report on Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) 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: March 16, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Item 15 (a) 1INDEX TO CONSOLIDATED FINANCIAL INFORMATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee and Stockholders of
We have audited the accompanying consolidated balance sheets of Deltek, Inc. and its subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Deltek, Inc. and its subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2011 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
March 15, 2011
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(in thousands, except share data)