S-1 1 ds1.htm FORM S-1 FORM S-1
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As filed with the Securities and Exchange Commission on May 8, 2007

Registration No. 333—            

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


DELTEK, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   7372   54-1252625

(State or other jurisdiction of

incorporation)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 


13880 Dulles Corner Lane

Herndon, VA 20171

(703) 734-8606

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 


Kevin T. Parker

Chairman, President and Chief Executive Officer

Deltek, Inc.

13880 Dulles Corner Lane

Herndon, VA 20171

(703) 734-8606

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


Copies to:

 

Richard A. Steinwurtzel, Esq.   David R. Schwiesow   Kris F. Heinzelman, Esq.

Vasiliki B. Tsaganos, Esq.

Fried, Frank, Harris, Shriver &

Jacobson LLP

1001 Pennsylvania Avenue,

N.W., Suite 800

Washington, DC 20004

Tel: (202) 639-7000

Fax: (202) 639-7003

 

Senior Vice President, General Counsel and Secretary

Deltek, Inc.

13880 Dulles Corner Lane

Herndon, VA 20171

Tel: (703) 734-8606

Fax: (703) 880-0260

 

Damien R. Zoubek, Esq.

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, NY 10019

Tel: (212) 474-1000

Fax: (212) 474-3700

 


Approximate date of commencement of proposed sale to the public:  As soon as practicable after effectiveness of this registration statement.

 


If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, check the following box.  ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  

Proposed maximum

aggregate offering amount(1)

  

Amount of

registration fee

Common stock, par value $0.001 per share

   $ 200,000,000    $ 6,140
 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 



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The information in this prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 8, 2007

                     Shares

LOGO

Deltek, Inc.

Common Stock

 


Immediately prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $             and $             per share. We will apply to list our common stock on The Nasdaq Global Market under the symbol “PROJ.”

We are selling                  shares of common stock and the selling shareholders, including our senior management and directors, are selling                  shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling shareholders.

The underwriters have an option to purchase a maximum of              additional shares from the selling shareholders to cover over-allotments of shares.

Investing in our common stock involves risks. See “ Risk Factors” on page 8.

 

      

Price to Public

    

Underwriting
Discounts and
Commissions

    

Proceeds to
Deltek, Inc.

    

Proceeds to the
Selling

Shareholders

Per Share

     $          $          $          $    

Total

     $                  $                  $                  $            

Delivery of the shares of common stock will be made on or about                     , 2007.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

   Credit Suisse   
JPMorgan    Lehman Brothers    Merrill Lynch & Co.

Wachovia Securities

  

William Blair & Company

  

Montgomery & Co., LLC

The date of this prospectus is                     , 2007.


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TABLE OF CONTENTS

 



You should rely only on the information contained in this document or any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Dealer Prospectus Delivery Obligation

Until                     , 2007 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 



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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including the section describing the risks of investing in our common stock under “Risk Factors” and our financial statements contained elsewhere in this prospectus before making an investment decision. Some of the statements in this summary constitute forward-looking statements. See “Forward-Looking Statements.”

Unless the context otherwise indicates or requires, as used in this prospectus, references to “we,” “us,” “our” or the “company” refer to Deltek, Inc., its subsidiaries and predecessors.

Our Company

We are a leading provider of enterprise applications software and related services designed specifically for project-focused organizations. Project-focused organizations generate revenue from defined, discrete, customer-specific engagements or activities, rather than from mass-producing or distributing products. These organizations typically require specialized software to help them automate complex business processes around the engagement, execution and delivery of projects. Our software enables them to greatly enhance the visibility they have over all aspects of their operations by providing them increased control over their critical business processes, accurate project-specific financial information and real-time performance measurements. With our software applications, project-focused organizations can better measure business results, optimize performance and streamline operations, thereby enabling them to win new business. As of May 1, 2007, we had over 12,000 customers worldwide that spanned numerous industries and ranged in size from small organizations to large enterprises. We serve customers primarily in the following markets: architecture and engineering (A/E), government contracting, aerospace and defense, information technology services, consulting, discrete project manufacturing, grant-based not-for-profit organizations and government agencies. Since our founding in 1983, we have established a leading position within the applications software market designed specifically for project-focused organizations and created strong brand recognition and market share within our target markets. In the A/E market, as of December 2006, our products were deployed by over 80% of the top 500 A/E firms in the United States. In addition, as of May 2006, 67% of the top 100 federal information technology contractors were our customers, including nine of the top ten companies. For the year ended December 31, 2006, our total revenue increased 49% to $228.3 million, and our net income increased 75% to $15.3 million, in each case from the prior year.

Our Industry

We believe the potential market for enterprise applications software for project-focused organizations is large and growing. Project-focused firms span numerous industries and range in size from small- and medium-sized local and regional firms to Fortune 100 global organizations. A prominent industry research firm estimates the size of the worldwide enterprise software market for project-focused organizations at $17.4 billion in 2005 and projects it to grow to $22.9 billion by 2010. We believe that spending on software and technology in this market is increasing in large part due to strong growth in the services-based economy and the fact that enterprise applications software has generally become more affordable and accessible to small- and medium-sized businesses.

The unique characteristics of project-focused organizations create special requirements for their business applications that frequently exceed the capabilities of generic applications software packages (for example, those designed primarily for manufacturing or financial services firms). Project-focused organizations require sophisticated, highly integrated software applications that automate end-to-end business processes across each

 

 

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stage of the project lifecycle. Project lifecycles vary significantly in length and complexity and can be difficult to forecast accurately. These projects need to be managed within the context of a company’s complete portfolio of existing and potential future projects.

Project-focused organizations often operate in environments or industries that pose unique challenges for their managers, who are required to maintain specific business processes and accounting methodologies. For example, government contractors are subject to oversight by various U.S. federal government agencies, such as the General Accounting Office (GAO) and the Defense Contract Audit Agency (DCAA), which have regulations that require these companies to have the ability to audit specific project performance in detail and to accurately maintain and report compliance to their government agency customers.

Our Products and Services

We typically license our software either as a comprehensive solution or as individual stand-alone applications. Our software solutions are industry-specific and “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 applications includes:

 

   

Comprehensive financial management solutions that integrate project control, financial processing and accounting functions, providing business owners and project managers with real-time access to information needed to track the revenue, costs and profitability associated with the performance of any project or activity;

 

   

Business applications that enable employees across project-focused organizations to more effectively manage and streamline business processes, including resource management, sales generation, human resources, corporate governance and performance management; and

 

   

Enterprise project management solutions to manage project costs and schedules, measure earned value, evaluate, select and prioritize projects based on strategic business objectives and facilitate compliance with regulatory reporting requirements.

Our applications portfolio is comprised of four major product families, each designed to meet the specific functionality and scalability requirements of the project-focused industries and customers we serve:

 

   

Deltek Costpoint. Costpoint provides a comprehensive financial management solution that tracks, manages and reports on key aspects of a project: planning, estimating, proposals, budgets, expenses, indirect costs, purchasing, billing, regulatory compliance and materials management. Costpoint is designed for sophisticated, medium- and large-scale project-focused organizations such as government contractors and commercial project-focused organizations.

 

   

Deltek Vision. Vision is an integrated solution that incorporates critical business functions, including project accounting, customer relationship management, resource management, time and expense capture and billing. Vision is designed for professional services firms of all sizes, including A/E, information technology and management consulting firms.

 

   

Deltek GCS Premier. GCS Premier is a robust accounting and project management solution that provides a full view of project and financial information, enabling firms to respond quickly and accurately to variations in plans and profit projections. GCS Premier is designed for small and medium-sized government contractors.

 

   

Enterprise Project Management Solutions. Our enterprise project management solutions help firms select the right projects, allocate resources across projects, mitigate risks and ultimately complete projects on time and on budget. This software is designed for professional services firms of all sizes that manage complex project portfolios.

 

 

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In addition to our product offerings, we provide a full range of consulting and technical services, including solution architecture, applications implementation, technology architecture design and project team and end-user training.

Our Competitive Strengths

We believe our competitive strengths position us to take advantage of the under-penetrated and growing opportunities in the enterprise applications software market for project-focused organizations. These capabilities, in combination with our highly referenceable customer base, provide us with a strong competitive position. Our key competitive advantages include the following:

 

   

Superior Value Proposition. Our software applications offer built-in project functionality at their core, making them faster and less costly to deploy, use and maintain. Our modular software architecture also enables our products to be deployed as a comprehensive solution or as individual applications, which gives our customers the flexibility to select the applications that are relevant to them.

 

   

Built-In Processes and Compliance. Project-focused organizations are often challenged with tracking and complying with intricate accounting policies and procedures, auditing requirements, contract terms and customer expectations. Our software is designed to make it easy for project managers and business executives to accurately monitor and measure specific project performance in detail with consistent application of business processes. Our applications also enable our customers to maintain and report compliance with contract requirements to government agencies and their customers.

 

   

Deep Domain Expertise. For more than 20 years, our exclusive focus on meeting the complex needs of project-focused organizations has provided us with extensive knowledge and industry expertise. Our significant subject matter expertise enables us to develop, implement, sell and support applications that are tailored to the existing and future needs of our customers.

 

   

Leading Market Position. We are a leading provider of enterprise applications software designed specifically for project-focused organizations. As of May 1, 2007, we had over 12,000 customers, including over 80% of the top 500 A/E firms in the United States and 67% of the top 100 federal information technology contractors. This has helped us develop a widely recognized brand within our target markets. We also have leveraged our market position to foster a network of alliance partners to help us market, sell and implement our software and services.

Our Business Strategy and Growth Opportunities

We plan to focus on the following objectives to enhance our position as a leading provider of enterprise software applications to project-focused organizations:

 

   

Expanding Penetration of Established Markets. We believe that our strong brand recognition and leading market position within the project-focused software market, particularly among the A/E and government contracting industries, provide us with significant opportunities to expand our sales within these markets.

 

   

Expanding Within Existing Customer Base. We are continuously looking to increase our sales to our existing customers, both by increasing the number of our applications utilized by them and by offering upgrades from our legacy applications to our current portfolio.

 

   

Expanding Our Network of Alliance Partners. We plan to expand our ecosystem of alliance partners. Specifically, we anticipate expanding current relationships and establishing new partnerships with reseller, consulting and technology partners in the United States and international markets. This expanding network of alliance partners should enable us to enhance our penetration into new markets and increase our geographical sales force coverage.

 

 

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Growing Our Presence in New Markets. We are building upon our track record of customer successes outside our established markets in industries such as consulting, information technology services, discrete project manufacturing and grant-based not-for-profits. We continue to develop additional industry-specific product functionality and are investing in targeted sales and marketing activities for new markets.

 

   

Growing Internationally. We intend to further expand our presence outside the United States, initially targeting countries where English is the primary business language. We believe project-focused organizations in Canada, the United Kingdom, Europe and the Asia-Pacific region are currently underserved for the products we offer.

 

   

Making Strategic Acquisitions. We plan to continue to pursue acquisitions that present a strong strategic fit with our existing operations and are consistent with our overall growth strategy. We may also target future acquisitions to expand or add product functionality and capabilities to our existing product portfolio, add new products or solutions to our product portfolio or further expand our services team.

Our Principal Equity Investor

Our principal shareholders are New Mountain Partners II, L.P. (New Mountain Partners), New Mountain Affiliated Investors II, L.P. (New Mountain Affiliated Investors) and Allegheny New Mountain Partners, L.P. (Allegheny New Mountain), three private equity funds affiliated with New Mountain Capital, L.L.C. (New Mountain Capital). Three of the members of our board of directors were nominated by New Mountain Partners and Allegheny New Mountain. As of May 1, 2007, New Mountain Partners, New Mountain Affiliated Investors and Allegheny New Mountain collectively owned approximately 74% of our outstanding common stock and 100% of our outstanding Class A common stock. Following completion of this offering, these funds will own approximately             % of our common stock and 100% of our outstanding Class A common stock. Unless otherwise indicated, as used in this prospectus, “New Mountain Funds” refers collectively to New Mountain Partners, New Mountain Affiliated Investors and Allegheny New Mountain. See “Certain Relationships and Related Party Transactions.”

Company Information

We were initially incorporated in the Commonwealth of Virginia in December 1983 as Contract Data Systems, Inc. We changed our name to Deltek Systems, Inc. in August 1984. In 1985, we introduced our first product, System I. In 1997, we completed an initial public offering of our common stock, and in May 2002, we became a privately held company through a going private transaction. In April 2005, we completed a recapitalization in which the New Mountain Funds acquired their interest in our company. In April 2007, we reincorporated in the State of Delaware as Deltek, Inc.

Our principal executive office is located at 13880 Dulles Corner Lane, Herndon, Virginia 20171, and our telephone number at that address is (703) 734-8606. Our website address is www.deltek.com. The information contained on, or that may be accessed through, our website is not part of, and is not incorporated into, this prospectus.

 


The names Cobra®, Costpoint®, Deltek®, Deltek Vision®, Deltek wInsight, GCS Premier®, Open Plan®, Welcom®, Wind2®, wInsight® and our logo are trademarks, service marks or trade names owned by us. All other trademarks, service marks or trade names appearing in this prospectus are owned by their respective holders.

 

 

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The Offering

 

Common stock offered by us

                     shares

 

Common stock offered by the selling shareholders

                     shares

 

Total common stock offered

                     shares (or              shares if the underwriters                      exercise their over-allotment option in full)

 

Common stock outstanding after this offering

                     shares

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $              million (based on the midpoint of the range set forth on the cover page of this prospectus). We intend to use the net proceeds that we receive in this offering to repay indebtedness under our credit agreement, which had an aggregate principal amount outstanding of $229.5 million as of May 1, 2007. Affiliates of Credit Suisse Securities (USA) LLC, J.P. Morgan Securities Inc. and Wachovia Capital Markets, LLC, underwriters for this offering, are lenders, and will receive a portion of the net proceeds used to repay debt, under our credit agreement. We will pay New Mountain Capital a transaction fee in connection with this offering. We will not receive any of the proceeds from the sale of shares by the selling shareholders. The selling shareholders include our senior management and directors. See “Use of Proceeds.”

 

Dividend policy

We currently do not intend to pay cash dividends, and our investor rights agreement requires the prior written consent of the New Mountain Funds if we wish to pay or declare any dividend on our capital stock.

 

Risk factors

See “Risk Factors” on page 8 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed Nasdaq Global Market symbol

PROJ

The number of shares of common stock to be outstanding immediately after this offering is based on 39,447,102 shares of our common stock outstanding as of May 1, 2007 plus              shares of our common stock to be issued upon the exercise of options immediately prior to the closing of this offering. This number excludes:

 

   

                     shares of common stock issuable upon the exercise of options that were outstanding under our 2005 Stock Option Plan at May 1, 2007, with a weighted exercise price of $            per share and that will not be exercised prior to the closing of this offering;

 

   

1,840,000 shares of common stock reserved for future issuance under our 2007 Stock Incentive and Award Plan (2007 Plan); and

 

   

750,000 shares of common stock reserved for future issuance under our Employee Stock Purchase Plan (ESPP).

Unless otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their right to purchase up to                      shares of common stock from the selling shareholders to cover over-allotments.

 

 

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Summary Consolidated Financial Data

The following table provides a summary of our consolidated financial data for the periods indicated. The summary consolidated financial data for each of the years ended December 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements. This information should be read in conjunction with “Capitalization,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements contained elsewhere in this prospectus.

 

     Year Ended December 31,  
     2004     2005     2006  
     (dollars in thousands, except
per share data)
 

Statement of Operations Data:

      

REVENUES:

      

Software license fees

   $ 34,934     $ 45,923     $ 74,958  

Consulting services

     28,585       41,212       66,573  

Maintenance and support services

     54,178       63,709       83,172  

Other revenues

     3,516       2,112       3,565  
                        

Total revenues

     121,213       152,956       228,268  
                        

COST OF REVENUES:

      

Cost of software license fees

     4,860       4,591       6,867  

Cost of consulting services

     23,397       32,659       54,676  

Cost of maintenance and support services

     11,287       11,969       15,483  

Cost of other revenues

     4,114       2,002       4,634  
                        

Total cost of revenues

     43,658       51,221       81,660  
                        

GROSS PROFIT

     77,555       101,735       146,608  
                        

Research and development

     22,944       26,246       37,293  

Sales and marketing

     16,680       19,198       37,807  

General and administrative

     11,367       15,181       26,622  

Recapitalization expenses

     —         30,853       —    
                        

Total operating expenses

     50,991       91,478       101,722  
                        

INCOME FROM OPERATIONS

     26,564       10,257       44,886  

Interest and other income (expense), net

     202       (10,623 )     (19,619 )

Income tax (benefit) expense

     (1,117 )     (9,098 )     9,969  
                        

NET INCOME

   $ 27,883     $ 8,732     $ 15,298  
                        

DILUTED EARNINGS PER SHARE

   $ 0.33     $ 0.17     $ 0.38  
      

Unaudited Pro Forma Data:

      

Pro forma net income (loss) assuming C-corporation treatment(1)

   $ 15,707     $ (3,569 )   $ 15,298  

Pro forma earnings (loss) per share - diluted(1)

   $ 0.19     $ (0.07 )   $ 0.38  

Cash Flow Data:

      

Net cash provided by operating activities

   $ 40,625     $ 11,243     $ 18,442  

Depreciation and amortization

     4,413       3,944       8,097  

Stock-based compensation expense

     —         —         1,686  

Purchase of property and equipment

     1,218       1,511       4,671  

Cash paid during the year for interest

     74       5,249       22,352  

Balance Sheet Data (end of period):

      

Cash and cash equivalents

   $ 13,129     $ 17,679     $ 6,667  

Working capital (deficit)(2)

     3,511       (4,825 )     (22,562 )

Long-term debt

     —         213,275       210,375  

(1) Unaudited pro forma net income (loss) and diluted earnings (loss) per share reflects adjustments to 2004 and the portion of 2005 prior to the recapitalization in April 2005 to reflect what the income tax effects might have been had the company not been treated as an S corporation.
(2) Working capital (deficit) represents current assets minus current liabilities.

 

 

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Other Unaudited Financial Data:

     2004      2005      2006
                    

Adjusted EBITDA(3)

   $ 37,288    $ 49,015    $ 58,094

(3) We define adjusted EBITDA as net income before depreciation, amortization, interest expenses (net of interest income and other), provision for (benefit from) income taxes, stock-based compensation expenses, New Mountain Capital advisory and transaction fees, recapitalization expenses and retention payments associated with our recapitalization.

 

   We believe that the presentation of adjusted EBITDA provides useful information to investors and our lenders because these measures enhance their overall understanding of our financial performance and prospects for the future of our ongoing business operations. Specifically, we believe that by reporting adjusted EBITDA, we provide insight and consistency in our financial reporting and present a basis for comparison of our business operations between current, past and future periods. Adjusted EBITDA is used by our management team to plan and forecast our business because it removes the impact of our capital structure (interest expense), asset base (amortization and depreciation), stock-based compensation expenses and taxes from our results of operations. We also use adjusted EBITDA to assess our performance because it excludes certain non-cash items and advisory and transaction fees, which are only incurred in connection with significant acquisitions and financings. In addition, it is a metric our board considers in determining the fair value of our stock option grants and provides a basis for us to compare our financial results to those of other comparable publicly traded companies. Adjusted EBITDA also is required to determine compliance with our debt covenants and assess our ability to borrow additional funds to finance or expand our operations.

 

   Adjusted EBITDA should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with U.S. GAAP and may be different from non-GAAP financial measures used by other companies. Some of the limitations of using adjusted EBITDA as an analytical tool include:

 

   

it does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

   

it does not reflect changes in our cash requirements;

 

   

it does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

   

it does not reflect any income tax payments we may be required to make;

 

   

although depreciation and amortization are non-cash expenses in the period recorded, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect the cash requirements of such replacements; and

 

   

it does not adjust for all non-cash income or expense items that are reflected in our consolidated statements of cash flows.

 

   A reconciliation of our reported net income to adjusted EBITDA is as follows:

 

     Year Ended December 31,
     2004     2005     2006
    (dollars in thousands)

Net income

  $ 27,883     $ 8,732     $ 15,298

Interest expense (income), net

    (334 )     10,861       19,701

Income tax (benefit) expense

    (1,117 )     (9,098 )     9,969

Depreciation and amortization

    4,413       3,944       8,097

NMC advisory and transaction fees

    —         333       2,500

Recapitalization expense

    —         30,853       —  

Stock-based compensation expense

    6,443       2,721       1,686

Retention awards expense in connection with the recapitalization

    —         669       843
                     

Adjusted EBITDA

  $ 37,288     $ 49,015     $ 58,094
                     

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, in addition to the other information in this prospectus, including our consolidated financial statements, before making an investment decision. Our business, operating results and financial condition could be seriously harmed by any of the risks described below. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

Risks Related To Our Business

Our continued success depends upon our ability to manage our anticipated future growth successfully.

Managing our growth is one of our greatest challenges. Between 2004 and 2006, our total revenue increased from $121.2 million to $228.3 million, or approximately 88%, and our license revenue increased from $34.9 million to $75.0 million, or approximately 115%. During this same period, our total headcount has increased from 681 employees to 1,041 employees worldwide. Approximately one-third of our most senior employees (executive officers, vice presidents and managing directors) were hired during this period. Although some executive officers have been with us for a number of years, and our chief executive officer and chief financial officer have been with us since June 2005 and October 2005, respectively, a significant portion of our most senior managers have been with us for less than a full year. Past and future growth will continue to place significant demands on our management, financial and accounting systems, information technology systems and other components of our infrastructure. To meet our growth and related demands, we continue to invest in enhanced or new systems, including enhancements to our accounting, billing and information technology systems. We may also need to hire additional personnel, particularly in our sales, marketing, professional services, finance, administrative, legal and information technology groups. If we do not correctly anticipate our needs as we grow, if our senior managers are ineffective, if we fail to successfully implement our enhanced or new systems and other infrastructure improvements effectively and timely or if we encounter delays or unexpected costs in hiring, integrating, training and guiding our new employees, our operating results, financial condition and business reputation could be materially adversely affected.

Our quarterly and annual operating results may fluctuate in the future and we may fail to meet or exceed the expectations of securities analysts or investors, which could cause our stock price to 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 accurate indicators of our future performance. A number of factors contribute to the variability in our revenue and other operating results, including the following:

 

   

the number and timing of major customer contract wins, which tend to be unpredictable and which may disproportionately impact our operating results;

 

   

the higher concentration of our license sales in the last month of each quarter resulting in diminished predictability of our quarterly results;

 

   

varying demand for our products and services;

 

   

the discretionary nature of our customers’ purchases, varying budget cycles and amounts available to fund purchases;

 

   

delays or deferrals of customer implementations, including as a result of difficulties in hiring and retaining sufficient company personnel or obtaining sufficient external resources to complete these implementations;

 

   

the level of product and price competition;

 

   

the length of our sales cycles;

 

   

any change in the number of customers renewing or terminating maintenance agreements with us;

 

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our ability to develop and market new software enhancements and products;

 

   

announcements of technological innovations by us or our competitors;

 

   

introduction and success of new products;

 

   

the mix of products and services we sell;

 

   

developments with respect to our intellectual property rights or those of our competitors;

 

   

our ability to attract and retain personnel on a timely basis; and

 

   

global and domestic economic conditions.

As a result of these and other factors, our operating results may fluctuate significantly 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 revenues and related operating results are typically strongest in the fourth quarter, and, therefore, an adverse operating performance in the fourth quarter could have a disproportionate material adverse impact on our results for the entire year.

Historically, our revenues and operating results are strongest in the fourth quarter. As a result, our performance in the fourth quarter of any particular year should not be viewed as indicative of results that we will achieve in any other quarter. In addition, if we experience adverse results in the fourth quarter of any particular year, our operating results for the entire year could be disproportionately affected in a materially adverse manner.

Management has identified material weaknesses and other deficiencies in our internal controls which, if not remediated successfully, could cause investors to lose confidence in our financial reporting and our stock price to decline.

As described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Controls over Financial Reporting,” we have identified material weaknesses and other deficiencies in our internal controls. Also, during the course of the audit of our financial statements for the year ended December 31, 2006, which did not include an audit of our internal control over financial reporting, our independent registered public accounting firm communicated to our audit committee the existence of material weaknesses in our internal controls. While we have taken certain remedial actions and are taking further remedial actions, additional controls must be implemented and each newly designed control must be tested successfully before we can be reasonably assured that our internal controls and disclosure controls and procedures will be effective. In addition, remediating control deficiencies depends on several factors, including our success in hiring and training new personnel, retaining existing qualified personnel and implementing and testing new accounting or other software. Our implementation of changes to our internal controls in connection with our remediation plans also are expected to require substantial expenditures, could take a significant period of time to complete and could distract our officers and employees from the operation of our business. As a result, we cannot estimate at this time how long it will take to complete the necessary remedial actions or predict whether these actions will prevent us from having new or repeated material weaknesses or other deficiencies in our internal controls or ineffective disclosure controls and procedures. If we continue to experience material weaknesses and other control deficiencies in our internal controls or conclude that we have ineffective disclosure controls and procedures, investors could lose confidence in our financial reporting and our stock price could decline.

Material weaknesses in our internal controls may impede our ability to produce timely and accurate financial statements, which could cause us to fail to file our periodic reports timely, 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 will be 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

 

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Global Market listing requirements, we are also required to provide our periodic reports, or make them available, to our shareholders within prescribed time periods. In light of our existing material weaknesses and other deficiencies in our internal controls, and notwithstanding our ongoing efforts to remediate our control weaknesses, we may not be able to produce reliable financial statements or to file these financial statements as part of a periodic report in a timely manner with the Securities and Exchange Commission and to comply with The Nasdaq Global Market listing requirements. We have had to restate our financial statements in the past, in part due to inadequate internal controls, and we could face potential restatements in the future. The impact of our prior restatement is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Controls over Financial Reporting.” If we are required to restate our financial statements in the future, any specific adjustment may be adverse and may cause our operating results and financial condition, as restated, on an overall basis to be materially and adversely impacted. As a result, we or members of our management could be the subject of adverse publicity, investigations and sanctions by such regulatory authorities as the Securities and Exchange Commission and subject to shareholder lawsuits. Any of the above consequences could cause our stock price to decline materially and could impose significant unanticipated costs on us.

In our Form 10-K for the year ending December 31, 2007, our management will be required to evaluate our internal control over financial reporting and to furnish its assessment of our internal controls to our shareholders. In addition, as of each year end beginning with the year ending December 31, 2008, our registered independent public accounting firm will be required to evaluate and test our internal control over financial reporting, to report its own assessment of our controls and to attest as to management’s assessment of those controls. To the extent we have material weaknesses or other deficiencies in our internal controls, we may determine that we have ineffective internal controls as of December 31, 2007 or any subsequent year end and, as to 2008 and any subsequent year, we may receive an adverse assessment of our internal controls from our auditors. Moreover, any material weaknesses or other deficiencies in our internal controls may delay the conclusion of an annual audit, including the 2007 audit, or a review of our quarterly financial results.

If we are not able to issue our financial statements in a timely manner, or if we are not able to obtain the required audit or review of our financial statements by our registered independent public accounting firm in a timely manner, we will not be able to comply with the periodic reporting requirements of the Securities and Exchange Commission and the listing requirements of The Nasdaq Global Market. If these events occur, our common stock listing on The Nasdaq Global Market could be suspended or terminated and our stock price could materially suffer. Absent a waiver, we also would be in default under our credit agreement and our lenders could accelerate any obligation we have to them. In addition, we or members of our management could be subject to investigation and sanction by the Securities and Exchange Commission and other regulatory authorities and to shareholder lawsuits, which could impose significant additional costs on us, divert management attention and materially harm our operating results, financial condition, business reputation and stock price.

We may be unsuccessful in entering new markets or further penetrating our existing markets, which could have a material adverse effect on our revenue and financial condition.

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 expect to expand to other project-focused markets in which we have less experience, such as management consulting, information technology services, discrete project manufacturing and grant-based not-for-profits. Expanding into new markets requires both considerable investment of technical, financial and sales resources and coordinated management of the process. We also will continue to focus on maintaining and increasing our market share in our existing markets.

Although we strive to add functionality to our products to address the specific needs of both existing customers and new customers, we may be unable to track developments, develop appropriate products, devote sufficient resources to add all desirable functionality or to pursue product development and marketing activities and strategies effectively. Moreover, our products may not appeal to potential customers in new or existing markets. If we are unable to execute upon this element of our business strategy, our operating results and financial condition may be materially adversely impacted.

 

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Our existing customers may not buy additional software and services from us, which could materially adversely impact our revenue or revenue growth and our operating results and financial condition.

Our business model depends, in part, on the success of our efforts to increase sales to our existing customers. In 2006, approximately 65% of total license revenue was derived from sales to existing customers. Traditionally, our installed customer base has generated additional new license, professional service and maintenance revenue. We may be unsuccessful in increasing sales to our existing customers for any number of reasons, including our inability to deploy new applications and features for our existing products or to introduce new products and services that are responsive to the business needs of our customers. If we fail to generate additional business from our customers, our revenue could grow at a slower rate or even decrease in material amounts and our operating results could be materially adversely affected.

We may not be successful in expanding our international business.

While we currently have customers in approximately 40 countries, we generated less than 5% of our total license revenue in 2006 from international markets. Our ability to expand internationally will depend upon our ability to deliver product functionality and foreign language translations that are responsive to the needs of the international customers that we target. Additionally, we conduct our international business through our direct sales force and also through independent reseller partners. If we cannot identify beneficial strategic alliance partners, or are unable to negotiate favorable alliance terms, our international growth may be hampered. Our failure to expand successfully in international markets could have a material adverse effect on our operating results and financial condition.

We also are dependent upon our key offshore development operations in the Philippines and other resources in India. Our inability to maintain and grow those development capacities could seriously impede our business or increase our product development costs. Expansion internationally will require significant attention from our management and substantial financial resources and will require us to add additional management in these markets. If we are unable to grow our international operations in a cost-effective and timely manner, our operating results and financial condition could be materially adversely affected.

If we do not successfully address the risks inherent in our international operations, our operating results and financial condition could suffer materially.

We currently have customers in approximately 40 countries, including the United Kingdom and other countries in Europe and the Asia-Pacific region, and we intend to expand our international markets.

Doing business internationally involves additional risks or challenges that could adversely affect our operating results and financial condition in a significant manner, including:

 

   

our inexperience in international markets and managing international operations;

 

   

difficulties in staffing and effectively managing a global workforce;

 

   

conforming software to local business practices or standards, including developing multi-lingual compatible software;

 

   

potential difficulties in collecting accounts receivable and longer collection periods;

 

   

unstable political and economic conditions, including in those countries in which development operations occur;

 

   

higher operating costs due to local laws and regulations;

 

   

foreign currency controls and fluctuation;

 

   

potential adverse tax consequences;

 

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reduced protection for intellectual property rights in a number of countries;

 

   

dependence on local vendors;

 

   

trade restrictions;

 

   

compliance with multiple, conflicting and changing governmental laws and regulations;

 

   

seasonal reductions in business activity specific to various markets;

 

   

potentially longer sales cycles;

 

   

restrictions on repatriation of earnings;

 

   

restrictive privacy regulations; and

 

   

restrictions on the export of technologies such as data security and encryption.

We may be subject to integration and other risks from acquisition activities, which could impair our operating results and financial condition.

As part of our business strategy, we may acquire or invest in complementary businesses, technologies, product lines and services organizations. In the recent past, we acquired Wind2 Software, Inc. (Wind2) (October 2005), WST Corporation (Welcom) (March 2006), C/S Solutions, Inc. (CSSI) (July 2006) and assets of Applied Integration Management Corporation (AIM) (April 2007). We may not realize the anticipated benefits of past or future acquisitions, and consequently our operating results and financial condition could be materially adversely affected due to a variety of factors, including the following:

 

   

difficulty integrating acquired products and technology into our software applications and business strategy;

 

   

inability to achieve the desired or anticipated cost synergies and benefits;

 

   

difficulty in coordinating and integrating our sales, marketing, services, support and development activities, successfully cross selling products and managing the combined organizations;

 

   

retaining strategic alliance partners on attractive terms;

 

   

difficulty retaining, integrating and training key employees of the acquired business;

 

   

difficulty and cost of establishing and integrating controls, procedures and policies;

 

   

difficulty in predicting and responding to issues related to product transition, such as development, distribution and customer support;

 

   

the possibility that customers of the acquired business may dislike our new ownership, may transition to different technologies offered by our competitors, or may attempt to renegotiate contract terms or relationships, including maintenance agreements;

 

   

disruption of our ongoing business and diversion of management from day-to-day operations due to integration issues;

 

   

impairment of relationships with customers, employees and strategic alliance partners of the acquired business;

 

   

the possibility that goodwill or other intangible assets may become impaired and will need to be written off;

 

   

potential failure of the due diligence process to identify significant issues, including product quality, architecture and development issues or legal and financial contingencies (including ongoing maintenance or service contract concerns); and

 

   

claims by third parties relating to intellectual property.

 

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If our customers fail to renew or terminate their maintenance services agreements for our products, or if they successfully renegotiate terms that are not favorable to us, our operating results and financial condition 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, constituting approximately 45%, 42% and 36% of our total revenue in 2004, 2005 and 2006, respectively. Our maintenance services have generally increased year-to-year, contributing to the growth of our maintenance revenue in 2005 and 2006.

Our maintenance services are billed quarterly and paid in advance. A customer may cancel its maintenance services agreement on 30 days notice prior to the beginning of any quarter. At the end of a contract term, or at the time a customer has quarterly cancellation rights, any customer could insist on a modification of its maintenance services agreement terms, including modifications that result in lower maintenance fees or us providing additional services without associated fee increases.

A customer may also elect to terminate its maintenance services agreement and contract with another service provider or rely on its in-house technical staff. If our maintenance services business declines, or we are unsuccessful in increasing our maintenance fees, or we are forced to offer pricing or other maintenance terms that are unfavorable to us, our operating results and financial condition could be materially adversely affected.

We may be required to defer recognition of license revenue for a significant period of time after entering into a license agreement, which could increase the volatility of our operating results and could materially adversely affect our operating results in any particular quarter.

We may defer recognizing license revenue from a license agreement with a customer if, for example:

 

   

the software transactions include both currently deliverable software products and software products that are under development or require other undeliverable elements;

 

   

a particular customer requires services that include significant modifications, customizations or complex interfaces that could delay product delivery or acceptance;

 

   

the software transactions involve acceptance criteria that may preclude revenue recognition;

 

   

there are identified product-related issues, such as known defects;

 

   

the software transactions involve payment terms that are longer than our standard payment terms or fees that depend upon contingencies; or

 

   

we are no longer able to establish historical pricing and maintenance renewal rates to satisfy the applicable accounting rules allowing us to recognize revenue as planned.

Deferral of license revenue can result in significant timing differences between the completion of a sale and the actual recognition of the revenue related to that sale. However, we generally recognize commission and other sales-related expenses associated with sales at the time they are incurred. As a result, if we experience significant deferrals of revenue in accordance with our accounting policies, our operating results in any quarter could be materially adversely affected.

If we fail to forecast our revenues accurately, or if we fail to match our expenditures with corresponding revenues, our operating results could be materially adversely affected.

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 other factors. While these analyses may provide us with some guidance in business planning and

 

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expense management, these estimates are inherently imprecise and may not accurately predict our revenue in a particular quarter or over a longer period of time. A variation in any or all of these factors could cause us to inaccurately forecast our revenues and could result in expenditures without corresponding revenue. As a result, our operating results could be materially adversely affected.

To compete effectively against other software providers, we may be forced to reduce prices or limit price increases, which could result in reduced margins, net income or market share, any of which could have a material adverse effect on our operating results and financial condition.

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, specialized consulting organizations, systems integrators and internal information technology departments of existing or potential customers. Many competitors may have significantly greater financial, technical and marketing resources than we have. Our largest competitors include Oracle, SAP AG, Microsoft and Lawson Software.

Several of these competitors have refocused their marketing and sales efforts to the middle market in which we actively market our products. These competitors may implement increasingly aggressive marketing programs, product development plans and sales programs targeted toward our specific industry markets.

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.

If we do not compete effectively against these potential alternatives, we may experience price reductions, reduced margins and net income or loss of market share, any of which could have a material adverse effect on our operating results and financial condition.

Our existing and potential customers may prefer in the future to acquire software on a subscription basis, and if we are required to operate our business on a subscription fee basis to meet this customer preference, our operating results, cash flow and financial condition could be materially adversely affected.

Our license revenues are generally derived from the sale of perpetual licenses for software products. Each license fee generally is paid on a one-time basis either on a per-seat basis or as an enterprise license, and related revenue is generally recognized at the time the license is executed. Nearly all of our 2006 license fee revenue was generated from the sale of perpetual licenses.

Under our business model, our license fees are typically invoiced and recognized as revenue immediately upon delivery even though the customers’ use of the software product occurs over time. Some software providers operate under a different business model under which license fees are paid periodically over a defined contract term beginning on the date the customer commences use of the software. If our competitors offer software on a subscription basis, and if our customers prefer that purchasing model, we could be required to change our business model in whole or in part to a subscription business model, a model with which we have little experience. As a result, we may not successfully price, market or otherwise execute a subscription-based model. If we are required to operate our software business in whole or in part on a subscription fee basis, we could experience materially reduced revenues and cash flows, and our financial condition could be materially adversely affected.

We may not receive adequate return from our investments in product development, which could materially adversely affect our operating results and financial condition.

We expect to commit significant resources to maintain and improve our existing products and to develop new products. For example, in 2006 our product development expenses were approximately $37.3 million, or 16% of

 

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revenue. Our current and future product development efforts may not deliver product features or new products that achieve market acceptance and, as a result, we may not achieve the revenues we anticipate for our investments.

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 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. If we do not generate the anticipated future revenues and margins from our investment in product development, our operating results and financial condition could be materially adversely affected.

If we fail to adapt to changing technology, market demand for our applications may decline and our business and operating results could be materially adversely affected.

The business application software market is 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 new product features and enhancements that meet changing customer requirements, market competition and emerging and evolving industry standards and 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. Our failure to successfully anticipate changing technological and market trends and to enhance or develop products timely and effectively could materially adversely affect our business and operating results.

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 operating results and financial condition could suffer materially.

Many of our customers operate their information technology infrastructure on standards-based application software platforms such as Java 2 Platform, Enterprise Edition (J2EE) and Microsoft.NET (.NET). A significant portion of our product development is devoted to enhancing our products that deploy these and other standards-based application software platforms.

Although the standards and technologies that we have chosen for our products (J2EE and .NET) have been adopted by our customers, there may be existing or new technologies and platforms that achieve industry standard status that are not compatible with our products and that will require us to spend material development resources to develop products that are deployable on these platforms.

In addition, if our customers utilizing legacy products migrate to new products, they may choose competing products other than our offerings based upon their preference for a 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 operating results and financial condition to be materially adversely affected.

 

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Our software products depend upon operating platforms and software developed and supplied by third parties. As a result, changes in the availability of, support for or features of any of these third party platforms or software could materially adversely affect our operating results and financial condition.

Our software products depend upon operating platforms and software developed by third parties such as Microsoft, Oracle, Cognos, Actuate, BEA Systems and Sun Microsystems. Our software is built upon underlying operating systems and relational database management system platforms and our software also may 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 a provider enhances its product in a manner that prevents us from timely adapting our products to the enhancement, our existing customers may migrate to a new platform incompatible with our offerings and subsequently cease to utilize our products and new customers may seek alternative competitive solutions.

While we seek to anticipate these types of third party developments, we may not be successful in developing, marketing and selling our products to replace legacy products no longer desired by our customers. In addition, third parties may not remain in business, cooperate with us to support our software products or make their product available to us, commercially price their offerings or provide an effective substitute product to us and our customers. Any of these adverse developments could have a material adverse effect upon our operating results and financial condition.

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, and this may adversely impact our operating results and financial condition materially.

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. Although we believe that we could obtain other development tools with comparable functionality from other third parties, we may not be able to obtain them on reasonable terms or in a timely fashion. In addition, we may not be able to successfully rewrite 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, our operating results and financial condition could be adversely affected.

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 or incur significant costs, our reputation may be harmed and our operating results and financial condition could be materially adversely impacted.

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:

 

   

we may not be paid;

 

   

a customer may bring a warranty claim against us;

 

   

a customer may bring a claim for their losses caused by our product failure;

 

   

we may face a delay or loss in the market acceptance of our products;

 

   

our reputation and competitive position may be damaged; and

 

   

significant customer relations problems may result.

 

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Our customers may 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 problem. The existence of these 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, hurt our reputation and cause significant customer relations problems.

In addition, our customers deploy our applications and products in critical parts of their organizations’ business processes. 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 management’s 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 materially adversely affect future sales of licenses and services and our operating results.

A breach in the security of our software could subject us to claims and significant additional costs and could harm our reputation.

Fundamental to the use of our software is the ability to collect, secure, store and transmit confidential information. Third parties may attempt to breach the security of our applications, third party applications upon which our products are based or those of our customers and their databases. We may be responsible, including for liability purposes, 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 materially harm our operating results and our reputation. Computer viruses, physical or electronic break-ins and similar disruptions could lead to interruptions and delays in customer processing or a loss of data. 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.

Our future success depends upon our ability to retain and hire key employees.

Our future success depends, in part, upon our ability to retain and attract highly skilled managerial, professional service, sales, development, marketing, accounting, administrative and infrastructure-related personnel. The market for highly skilled employees is competitive in the labor markets in which we operate. Our business could be adversely affected if we are unable to retain key 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, or do so on a cost-effective basis, our operating results and financial condition 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 our operating results and financial condition.

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. The loss of the services of one or more of our executive officers or key managers could have an adverse effect on our operating results and financial condition. 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. We do not maintain key man life insurance on any of our members of senior management. The loss of any member of our senior management team could materially impair our ability to perform successfully, including achieving satisfactory operating results, maintaining our financial condition and maintaining our growth.

 

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We will incur significantly higher costs as a result of being a public company.

As a public company, we will incur significantly higher accounting, legal and other expenses than we did as a private company. The Sarbanes-Oxley Act of 2002, as well as similar or related rules adopted by the Securities and Exchange Commission and The Nasdaq Global Market, have imposed substantial requirements on public companies, including requiring changes in corporate governance practices and adding requirements relating to internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act. We expect these rules and regulations to increase our accounting, legal and other costs and to make some activities more time-consuming. In addition, we expect our directors’ and officers’ liability insurance to become more costly for us, and we may need to accept reduced policy limits and coverage unless we are prepared to expend greater amounts to maintain coverage similar to our coverage today. If we fail to predict these costs accurately or to manage these costs effectively, our operating results and financial condition could be materially adversely affected.

We may not be able to protect adequately our intellectual and other proprietary rights.

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, we have no patents and 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 trade secret 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, operating results and financial condition. 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.

Claims that we infringe upon third parties’ intellectual property rights could be costly to defend or settle.

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 management’s 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

 

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such software at a high royalty, our operating results and financial condition 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.

We are a highly automated business and rely on our network infrastructure and enterprise applications and internal technology systems for our development, marketing, operational, support and sales activities. A disruption or failure of any or all of these systems in the event of a major telecommunications failure, cyber-attack, terrorist attack, fire, earthquake, severe weather conditions or other catastrophic event could cause system interruptions, delays in our product development and loss of critical data, could prevent us from fulfilling our customer contracts, change customer purchasing intentions or expectations, create delays or postponements of scheduled implementations or other services engagements or otherwise disrupt our relationships with current or potential customers.

We have developed disaster recovery plans and backup systems to reduce the potentially adverse effect of catastrophic events, but these plans and systems 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 systems. As a result of any of these events, we may not be able to conduct normal business operations and our operating results and financial condition could be materially adversely affected.

Our business is partially dependent upon federal government contractors and the need for compliance with federal government contract accounting standards. Our failure to anticipate or adapt timely to changes in those standards could materially adversely affect our operating results and financial condition.

We derive a significant portion of our revenues from federal government contractors. In 2006, approximately half of our license revenue was generated from federal government contractor customers. Our government contractor customers utilize our Deltek Costpoint, Deltek GCS Premier or our enterprise project management applications to manage their contracts with the federal government in a manner that accounts for expenditures in accordance with the federal government contracting accounting standards.

A key function of our software is to enable government contractors to enter, review and organize accounting data in a compliant and auditable fashion. If the federal government alters these standards, or if there were any significant problem with our software from a compliance perspective, we may be required to enhance our software products to satisfy any new or altered standards. Our inability to effectively and efficiently modify our applications to resolve any compliance issue could materially adversely impact our operating results and our financial condition.

Changes in the federal government’s budget or spending priorities could materially reduce government contractors’ demand for our products and services.

The federal government’s 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. Any significant downsizing, consolidation or insolvency of our federal government contractor customers as the result of 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.

Restrictive covenants in our credit agreement may materially adversely affect our financial flexibility.

Our credit agreement governing our term loan and revolving credit facility contains covenants that, among other things, restrict our and our subsidiaries’ ability to dispose of assets, incur additional indebtedness, incur

 

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guarantee obligations, pay dividends, create liens on assets, enter into sale and 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. The credit agreement also requires us to comply with financial ratios related to fixed charge coverage, interest coverage and leverage ratios. Over time, the ratios become more restrictive. We may not be able to comply with these financial covenants, and the restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities.

Our ability to comply with the covenants and restrictions contained in our credit agreement may be affected by economic, financial, industry or other conditions, some of which may be beyond our control. For the year ended December 31, 2006, we did not comply with the covenant requiring us to submit audited annual financial statements by March 31, 2007, although we were able to provide the audited financial statements within the 30-day grace period provided under the credit agreement. The breach of any of the covenants or restrictions contained in our credit agreement, unless cured within the applicable grace period, could result in a default under the credit agreement that would permit the lenders to declare all amounts outstanding to be due and payable, together with accrued and unpaid interest. 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 and operating results.

Risks Related to this Offering and Ownership of Our Common Stock

There was no public market for our common stock immediately prior to this offering, and our stock price could be volatile and could decline for a variety of reasons following this offering, resulting in a substantial loss on your investment.

Our common stock has not been bought or sold publicly since 2002. We cannot predict the extent to which investor interest will lead to an active trading market for our common stock or the prices at which our common stock will trade following this offering. If an active trading market does not develop, you may have difficulty selling any common stock that you buy and the value of your shares may be impaired.

The initial public offering price for our shares of common stock will be determined by negotiations between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. You may be unable to resell the common stock you purchase at or above the initial public offering price.

The stock markets generally have experienced extreme volatility, often unrelated to the operating performance of the individual companies whose securities are traded publicly. Broad market fluctuations and general economic conditions may materially adversely affect the trading price of our common stock.

Significant price fluctuations in our common stock could result from a variety of other factors, including:

 

   

actual or anticipated fluctuations in our operating results or financial condition;

 

   

our competitors’ announcements of significant contracts, acquisitions or strategic investments;

 

   

changes in our growth rates or our competitors’ growth rates;

 

   

conditions of the project-focused software industry; and

 

   

any other factors described in this “Risk Factors” section of this prospectus.

If securities analysts do not publish research or reports about our company and our industry, or if they issue unfavorable commentary about us or our industry or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock will depend in part on the research and reports that securities analysts publish about our company and our industry. We do not control these analysts. One or more analysts

 

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could downgrade our stock or issue other negative commentary about our company or our industry. In addition, we may be unable or slow to attract research coverage, and the analysts who publish information about our common stock will have had relatively little recent experience with our company, which could affect their ability to accurately forecast our results or make it more likely that we fail to meet their estimates. Alternatively, if one or more of these analysts cease coverage of our company, we could lose visibility in the market. As a result of one or more of these factors, the trading price for our stock could decline.

Future sales of our common stock by existing shareholders could cause our stock price to decline.

Upon completion of this offering, we will have             shares of common stock outstanding, of which             shares will be held by our current shareholders, assuming no exercise of the underwriters’ over-allotment option. If our existing shareholders, including members of our executive team, sell substantial amounts of our common stock in the public market or if the market perceives that shareholders may sell shares of common stock, the market price of our common stock could decrease significantly. In connection with this offering, shareholders holding substantially all of our common stock have entered into lock-up agreements that prevent the sale of shares of our common stock for up to 180 days after the date of this prospectus, subject to an extension in certain circumstances as set forth in “Underwriting.”

Following the expiration of the lock-up period, the New Mountain Funds will 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, options may sell their shares along side the New Mountain Funds, which could cause the prevailing market price of our common stock to decline. Approximately              shares of our common stock will be, directly or indirectly, subject to a registration rights agreement upon completion of this offering.

We intend to file a registration statement with the Securities and Exchange Commission covering all of the shares subject to options outstanding under our 2005 Stock Option Plan, but not exercised, as of the closing of this offering and 2,590,000 shares reserved for issuance under our 2007 Plan and our ESPP.

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 you to lose part or all of your investment in our shares of common stock.

We do not expect to pay any cash dividends in the foreseeable future.

We do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. The terms of our credit agreement include provisions that restrict the payment of cash dividends on our common stock. In addition, we currently need the consent of the New Mountain Funds before we pay a dividend. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

Our largest shareholders and their affiliates will continue to have substantial control over us after this offering and could limit your ability to influence the outcome of key transactions, including any change of control.

Upon the completion of this offering, we anticipate that our largest shareholders, the New Mountain Funds, will own, in the aggregate,         % of our outstanding common stock and 100% of our Class A common stock. As a result, the New Mountain Funds would be able to control all matters requiring approval by our shareholders, 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 their Class A common stock and at least one-third of our outstanding common stock. In addition, the New Mountain Funds

 

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will have the benefit of the rights conferred by the investor rights agreement and New Mountain Capital will continue to have certain rights under the advisory agreement. See “Certain Relationships and Related Party Transactions—Recapitalization—Investor Rights Agreement” and “Certain Relationships and Related Party Transactions—Recapitalization—Advisory Agreement.” The New Mountain Funds may have interests that differ from your interests, and they may vote in a way with which you disagree and that may be adverse to your 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 shareholders 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.

You will experience immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering.

If you purchase shares of our common stock in this offering, you will experience immediate dilution of $            per share based on an assumed initial public offering price of $            , the midpoint of the range set forth on the cover of this prospectus, because the price that you pay will be substantially greater than the adjusted net tangible book value per share of common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the price of the shares being sold in this offering when they purchased their shares of our common stock. If outstanding options to purchase our common stock are exercised, you will experience additional dilution. See “Dilution.”

We are a “controlled company” within the meaning of The Nasdaq Global Market’s standards and, as a result, will qualify for, and may rely on, exemptions from several corporate governance requirements.

Upon completion of this offering, our controlling shareholders, the New Mountain Funds, are expected to control a majority of our outstanding common stock and will 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 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:

 

   

a majority of the board of directors consist of independent directors;

 

   

compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors; and

 

   

director nominees be selected or recommended for election by a majority of the independent directors or by a nominating committee that is composed entirely of independent directors.

Following this offering, we intend to avail ourselves of these exemptions. In addition, because we are listing our common stock in connection with an initial public offering, following this offering our audit committee will not consist entirely of independent directors. Accordingly, you will not have the same protections afforded to shareholders of other companies that are subject to all of The Nasdaq Global 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 Shareholder’s 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 Market) from engaging in a business combination with an interested shareholder for a period of three years after the person becomes an interested shareholder, even if a change in control would be beneficial to our existing shareholders. In addition, our certificate of incorporation and bylaws may discourage,

 

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delay or prevent a change in our management or control over us that shareholders may consider favorable. Our certificate of incorporation and bylaws:

 

   

authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;

 

   

provide the New Mountain Funds, through their stock ownership, with the ability to elect a majority of our directors if they beneficially own one-third or more of our common stock;

 

   

do not provide for cumulative voting;

 

   

provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office (subject to the rights of the Class A shareholders);

 

   

limit the calling of special meetings of shareholders;

 

   

permit shareholder action by written consent if the New Mountain Funds and its affiliates own one-third or more of our common stock;

 

   

require supermajority shareholder voting to effect certain amendments to our certificate of incorporation; and

 

   

require shareholders to provide advance notice of new business proposals and director nominations under specific procedures.

In addition, certain provisions of our shareholder’s agreement require that each shareholder party to the shareholder’s agreement vote its shares of our common stock in favor of certain transactions in which the New Mountain Funds propose to sell all or any of 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. See “Description of Capital Stock—Anti-takeover Effects of Provisions of Our Certificate of Incorporation and Bylaws, Delaware Law and Shareholder’s Agreement.”

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “would” or similar words. You should read statements that contain these words carefully because they discuss our plans, strategies, prospects and expectations concerning our business, operating results, financial condition and other similar matters. We believe that it is important to communicate our future expectations to our investors. There may be events in the future, however, that we are not able to predict accurately or control. The factors listed under “Risk Factors,” as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have a material adverse effect on our business, results of operation and financial position. Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock to be sold by us in this offering will be approximately $            million, assuming an initial public offering price of $            per share (the midpoint of the range set forth on the cover of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, including a transaction fee of $                 payable to New Mountain Capital. We will not receive any of the proceeds from the sale of common stock by the selling shareholders. The selling shareholder include our senior management and directors.

We expect to use the net proceeds to repay indebtedness outstanding under our revolving credit facility and to repay a portion of our indebtedness under the term loan of our credit agreement. As of May 1, 2007, we had $17.5 million of principal outstanding under our revolving credit facility and $212.0 million of principal outstanding on our term loan. The term loan was initially incurred on April 22, 2005 to finance our recapitalization. In 2006, we borrowed under our revolving credit facility primarily to repay a liability owed to the selling shareholders in the recapitalization and finance part of the CSSI acquisition. An additional term loan in the amount of $100 million was incurred on April 28, 2006 to finance the repayment of our 8% subordinated debentures due 2015. As of May 1, 2007, the interest rate was 7.6% for the term loan and 7.82% for the revolving credit facility. The term loan matures on April 22, 2011, and the revolving credit facility matures on April 22, 2010.

Affiliates of Credit Suisse Securities (USA) LLC, J.P. Morgan Securities Inc. and Wachovia Capital Markets, LLC, underwriters for this offering, are lenders, and will receive a portion of the net proceeds used to repay debt, under our credit agreement.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of the prospectus) would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. However, upon an increase in the assumed initial public offering price, we may determine to sell fewer shares in this offering, in which event the selling shareholders may sell more shares.

 

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DIVIDEND POLICY

We have never declared nor paid any cash dividends on our capital stock. The terms of our credit agreement include provisions that restrict the payment of cash dividends on our common stock. In addition, the terms of our investor rights agreement with the New Mountain Funds and certain other persons require the prior written consent of the New Mountain Funds if we wish to pay or declare any dividend on our capital stock until the New Mountain Funds and any assignee of the New Mountain Funds own less than 15% of our outstanding common stock. See “Certain Relationships and Related Party Transactions—Recapitalization—Investor Rights Agreement.” We currently intend to retain any future earnings, if any, for use in the operation and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable future.

Any future determination related to our dividend policy will be at the discretion of our board of directors and will depend on then-existing conditions, business prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

The following table presents cash and cash equivalents and our capitalization at December 31, 2006:

 

   

on an actual basis; and

 

   

on an adjusted basis to reflect:

 

   

our receipt of the estimated net proceeds from this offering based on an assumed initial public offering price of $            per share (the midpoint of the range set forth on the cover of this prospectus) after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us; and

 

   

our repayment of indebtedness with such net proceeds as described in “Use of Proceeds.”

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, each contained elsewhere in this prospectus.

 

      As of December 31, 2006
     Actual     As Adjusted(1)

Cash and cash equivalents

   $ 6,667     $               
              

Long-term debt, including current portion

   $ 230,525     $  
              

Shareholders’ deficit:

    

Preferred stock $0.001 par value—authorized, 2,000,000 shares; outstanding, 100 shares, actual and as adjusted

     —         —  

Common stock, $0.001 par value—authorized, 90,000,000 shares; outstanding, 39,405,993 shares actual,                      shares as adjusted

     39    

Additional paid-in-capital

     112,350    

Accumulated deficit

     (275,943 )  

Accumulated other comprehensive income

     (511 )  
              

Total shareholders’ equity

     (164,065 )  
              

Total capitalization

   $ 66,460     $  
              

(1) Each $1.00 increase or decrease in the assumed initial public offering price of $            per share (the midpoint of the range set forth on the cover of the prospectus) would increase or decrease, as applicable, the amount of additional paid-in capital and total shareholders equity by approximately $            million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. However, upon an increase in the assumed initial offering price, we may determine to sell fewer shares in this offering, in which event the selling shareholders may determine to sell more shares.

The outstanding share information is based on 39,447,102 shares of our common stock outstanding as of May 1, 2007 plus the issuance of              shares of our common stock upon the exercise of options immediately prior to the closing of this offering. This number excludes:

 

   

            shares of common stock issuable upon the exercise of options that were outstanding under our 2005 Stock Option Plan at May 1, 2007, with a weighted exercise price of $            per share and that will not be exercised prior to the closing of this offering;

 

   

1,840,000 shares of common stock reserved for future issuance under our 2007 Plan; and

 

   

750,000 shares of common stock reserved for future issuance under our ESPP.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. As of             , our as adjusted net tangible book value was approximately $              million, or $              per share of common stock. Our as adjusted net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of             , after giving effect to the exercise of options prior to completion of this offering to acquire shares of our common stock. After giving effect to our sale in this offering of              shares of our common stock at an assumed initial public offering of $              per share (the midpoint of the range set forth on the cover of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of              would have been approximately $              million, or $              per share of our common stock. This represents an immediate increase in as adjusted net tangible book value of $              per share to our existing shareholders and an immediate dilution of $              per share to investors purchasing shares in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $             

As adjusted net tangible book value per share as of             , before giving effect to this offering

   $                

Increase in as adjusted net tangible book value per share attributable to investors purchasing shares in this offering

     
         

As adjusted net tangible book value per share after giving effect to this offering

     
         

Dilution in as adjusted net tangible book value per share to investors in this offering

      $  
         

The following table summarizes, as of December 31, 2006, the differences between the number of shares of common stock purchased from us, after giving effect to the exercise of options immediately prior to completion of this offering to acquire shares of our common stock, the total cash consideration paid and the average price per share paid by our existing shareholders and by our new investors purchasing stock in this offering at an assumed initial public offering price of $             per share (the midpoint of the range set forth on the cover of the prospectus) before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration    

Average Price
Per Share

     Number    Percent     Amount    Percent    

Existing shareholders

                   %   $                              %   $             

New public investors

             $  
                          

Total

                   %   $                   %  
                          

The above discussion and table assume no exercise of stock options outstanding as of             , including              shares of common stock issuable upon exercise of options with a weighted-average exercise price of $              per share (other than those that will be exercised immediately prior to the completion of this offering). If all other options were exercised, then our existing shareholders, including the holders of these options, would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the closing of this offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $              per share (the midpoint of the range set forth on the cover of the prospectus) would increase or decrease, as applicable, our as adjusted net tangible book value after this offering by $              million and increase or decrease, as applicable, the dilution to new investors by $              per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The statement of operations data for the years ended December 31, 2004, 2005 and 2006 and the balance sheet data as of December 31, 2005 and 2006 are derived from and are qualified by reference to, our audited consolidated financial statements that have been audited by Deloitte & Touche LLP, independent registered public accountants, and are included in this prospectus. The statement of operations data for the years ended December 31, 2002 and 2003 and the balance sheet data as of December 31, 2002, 2003 and 2004 are derived from our unaudited consolidated financial statements that are not contained in this prospectus and, in the opinion of management, have been prepared in accordance with accounting principles generally accepted in the United States and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of results for these periods. Historical results are not necessarily indicative of the results to be expected in any future period. In addition, our historical results for each of the years presented in this table may not be comparable due to certain significant transactions that the company undertook in the periods presented, including the impact of the recapitalization in 2005 and the change to our C corporation tax status in 2005. The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements contained elsewhere in this prospectus.

    Year Ended December 31,  
    2002     2003     2004     2005     2006  
    (in thousands, except per share data)  

Statement of Operations Data:

         

REVENUES:

         

Software license fees

  $ 23,742     $ 36,636     $ 34,934     $ 45,923     $ 74,958  

Consulting services

    18,063       22,842       28,585       41,212       66,573  

Maintenance and support services

    43,987       47,778       54,178       63,709       83,172  

Other revenues

    4,512       2,091       3,516       2,112       3,565  
                                       

Total revenues

    90,304       109,347       121,213       152,956       228,268  
                                       

COST OF REVENUES:

         

Cost of software license fees

    7,032       4,269       4,860       4,591       6,867  

Cost of consulting services

    16,164       17,164       23,397       32,659       54,676  

Cost of maintenance and support services

    10,281       10,504       11,287       11,969       15,483  

Cost of other revenues

    3,075       1,972       4,114       2,002       4,634  
                                       

Total cost of revenues

    36,552       33,909       43,658       51,221       81,660  
                                       

GROSS PROFIT

    53,752       75,438       77,555       101,735       146,608  
                                       

Research and development

    22,521       22,305       22,944       26,246       37,293  

Sales and marketing

    14,819       15,108       16,680       19,198       37,807  

General and administrative

    11,061       10,416       11,367       15,181       26,622  

Recapitalization expenses

    —         —         —         30,853       —    
                                       

Operating expenses

    48,401       47,829       50,991       91,478       101,722  
                                       

INCOME FROM OPERATIONS

    5,351       27,609       26,564       10,257       44,886  

Interest income

    443       438       408       436       397  

Interest expense

    (635 )     (632 )     (74 )     (11,297 )     (20,098 )

Other (expense) income, net

    17       954       (132 )     238       82  
                                       

INCOME (LOSS) BEFORE INCOME TAXES

    5,176       28,369       26,766       (366 )     25,267  

Income tax (benefit) expense

    3,156       3,594       (1,117 )     (9,098 )     9,969  
                                       

NET INCOME

  $ 2,020     $ 24,775     $ 27,883     $ 8,732     $ 15,298  
                                       

EARNINGS PER SHARE:

         

Basic

  $ 0.02     $ 0.29     $ 0.33     $ 0.17     $ 0.39  
                                       

Diluted

  $ 0.02     $ 0.29     $ 0.33     $ 0.17     $ 0.38  
                                       

Unaudited Pro Forma Data:

         

Pro forma net income (loss) assuming C corporation treatment(1)

      $ 15,707     $ (3,569 )   $ 15,298  

Pro forma diluted earnings (loss) per share—diluted(1)

      $ 0.19     $ (0.07 )   $ 0.38  

COMMON SHARES AND EQUIVALENTS OUTSTANDING:

         

Basic weighted average shares

    112,989       84,741       84,741       52,910       39,332  
                                       

Diluted weighted average shares

    113,989       84,741       84,741       52,910       40,262  
                                       
    At December 31,  
    2002     2003     2004     2005     2006  
    (in thousands)  

Balance Sheet Data:

         

Cash and cash equivalents

  $ 6,417     $ 16,613     $ 13,129     $ 17,679     $ 6,667  

Working capital (deficit)(2)

    (7,405 )     5,100       3,511       (4,825 )     (22,562 )

Total assets

    53,793       59,930       56,331       95,650       134,488  

Deferred revenue

    23,732       16,835       22,541       27,253       26,612  

Long-term debt, net of current portion

    12,069       3,319       —         213,275       210,375  

Total shareholders’ equity (deficit)

    966       20,003       14,044       (183,109 )     (164,065 )

(1) Unaudited pro forma net income (loss) and diluted earnings (loss) per share reflects adjustments to 2004 and the portion of 2005 prior to the recapitalization in April 2005 to reflect what the income tax effects might have been had the company not been treated as an S corporation.
(2) Working capital (deficit) represents current assets minus current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our financial statements contained elsewhere in this prospectus. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business, operations and financial position. 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 we discuss under “Risk Factors” and elsewhere in this prospectus.

Company Overview

We are a leading provider of enterprise applications software and related services designed specifically for project-focused organizations. These organizations include A/E firms, government contractors, aerospace and defense contractors, information technology services firms, consulting companies, discrete project manufacturing companies, grant-based not-for-profit organizations and government agencies, among others. Project-focused organizations generate revenue from defined, discrete, customer-specific engagements or activities, rather than from mass-producing or distributing products. Project-focused organizations typically require specialized software to help them automate complex business processes around the engagement, execution and delivery of projects. Our software enables them to greatly enhance the visibility they have over all aspects of their operations by providing them increased control over their critical business processes, accurate, project-specific financial information and real-time performance measurements. With our software applications, project-focused organizations can better measure business results, optimize performance and streamline operations, thereby enabling them to win new business.

We have experienced significant growth in recent years. Our future success depends, in part, on many factors, including:

 

   

Our ability to expand our presence and penetration of existing markets in which we already have a leading position.

 

   

The extent to which we can sell new products to existing customers and sell upgrades to applications from legacy products in our current portfolio.

 

   

Our success in expanding our ecosystem of alliance partners.

 

   

Our ability to broaden our reach geographically with project-focused organizations.

 

   

Our ability to expand our presence in new markets.

 

   

The pursuit and successful integration of strategic acquisitions.

In 2005, we increased our investments in product development, sales and marketing to increase our presence in our targeted markets and compete more aggressively. We believe that these additional investments have been instrumental in further improving our competitive position and driving our revenue growth from 2005 to 2006. Consistent with our growth plans, we expect to continue to increase our spending on sales, marketing and product development in the future. Our international expansion plans, in particular, will require significant investment in local marketing initiatives and translation of our products and related user documentation into local languages. We may acquire businesses in foreign countries to facilitate our international growth objectives in those locations or to provide capabilities in adapting our products to local markets.

History

We were founded in 1983 to develop and sell accounting software solutions for organizations and firms that contract with the U.S. federal government. Since our founding, we have continued our focus on providing solutions to federal contractors as well as to other project-focused organizations, and at the same time we have

 

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broadened our product offerings by developing new software products, selectively acquiring businesses with attractive project-focused applications and services and partnering with third parties. Our two founders were Donald and Kenneth deLaski.

In April 2005, the New Mountain Funds purchased the majority ownership of our company from the deLaski shareholders through a recapitalization. Immediately after this transaction, we implemented a strategy to recruit additional management talent and significantly improve our competitive position and growth prospects through increased investments in sales, marketing and product development initiatives, complemented by strategic acquisitions aimed at broadening our customer base and our product offerings.

In October 2005, we acquired Wind2, an enterprise software provider serving project-focused A/E and other professional services firms. The acquisition of Wind2 enabled us to expand our presence in the A/E market with the addition of over 2,500 customers, primarily small- and medium-sized engineering firms, to our existing installed base of more than 8,000.

In March 2006, we acquired Welcom, a leading provider of project portfolio management solutions, focused on earned value management, planning and scheduling, portfolio analysis, risk management and project collaboration products. The acquisition of Welcom increased our presence among a number of multinational aerospace, defense and government clients, augmenting our existing installed base of customers. This acquisition complemented our core product offerings and created opportunities for additional sales to our existing customer base.

In July 2006, we acquired CSSI, a leading provider of business intelligence tools for the earned value management marketplace. The acquisition of CSSI built upon our leadership position in the enterprise project management sector by incorporating collaborative earned value management analytics delivered by CSSI’s wInsight software with our own earned value management engine, Cobra, and Costpoint, our enterprise resource planning solution for mid- to large-size government contractors.

In addition, in April 2007, we acquired the business assets of AIM, a provider of project management consulting services. This acquisition supplemented our existing project portfolio management systems implementation expertise and capabilities and allowed us to provide additional project portfolio management consulting, training and implementation services.

Our 2005 and 2006 revenue growth was driven primarily by the investments we made in product development, sales and marketing and our strengthened management team. In 2006, we experienced license revenue growth of $29.0 million or 69% over 2005. Approximately 27% of the total $29.0 million increase was attributable to acquisitions and 73% to organic growth. We believe these investments will continue to position us well for the future.

In April 2007, we reincorporated in the State of Delaware as Deltek, Inc.

Critical Accounting Policies and Estimates

In presenting our financial statements in conformity with accounting principles generally accepted 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. Actual results may differ significantly from these estimates. Future results may differ from our estimates under different assumptions or conditions.

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.

 

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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 elsewhere in this prospectus.

Revenue Recognition

We recognize revenue in accordance with the provisions of The American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modifications of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, as well as Technical Practice Aids issued from time to time by the AICPA, and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition.

We derive revenues from three primary sources, or elements: software license fees for our products; maintenance and support for those products; and consulting services, including training, related to those products. A typical sales agreement includes both software licenses and maintenance and may also include consulting services, including training.

Software License Fee Revenues: For sales arrangements involving multiple elements where the software does not require significant modification or customization, we recognize software license revenues using the residual method as described in SOP 98-9 because to date we have not established vendor specific objective evidence (VSOE) of fair value for the license element. Under the residual method, we allocate revenue to, and defer recognition of, undelivered elements based on their VSOE of fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue for the delivered elements. The objectively determined fair value of the undelivered elements in multiple element arrangements is based on the price charged when such elements are sold separately. Our typical undelivered elements (maintenance and consulting services) are priced consistently at stated amounts in a high percentage of our arrangements.

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:

 

   

Persuasive evidence of an arrangement exists. It is our practice to require a contract signed by both the customer and Deltek or an accepted purchase order for existing customers.

 

   

Delivery has occurred. We deliver software by both physical and secure electronic means. Both means of delivery transfer title and risk to the customer. Shipping terms are generally FOB shipping point.

 

   

The license fee is fixed and determinable. We recognize revenue for the license component of multiple element arrangements only when the fair value of any undelivered elements is known, any uncertainties surrounding customer acceptance are resolved and there are no refund, return or cancellation rights associated with the delivered elements. License fees are generally considered fixed and determinable when payment terms are less than six months.

 

   

Collectibility is probable. Amounts receivable must be collectible. For license arrangements that do not meet our collectibility standards, revenue is recognized as cash is received.

Consulting Services Revenues: Our consulting services revenues, which include software implementation, training and other consulting services, are generally billed based on hourly rates plus reimbursable out-of-pocket expenses.

These services are generally not essential to the functionality of our software and are usually completed in three to six months, though larger implementations may take longer. We generally recognize revenues for these services as they are performed. In rare situations in which the services are deemed essential to the functionality of our software in the customer’s environment, we recognize the software and services revenue together in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1).

 

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We sell training at a fixed rate for each specific class, at a per attendee price, or at a packaged price for several attendees, and revenue is recognized only when the customer attends and completes the training. To the extent that our customers pay for the training services in advance of delivery, the amounts are recorded in deferred revenue until such time as the training is provided.

Maintenance and Support Services Revenues: Maintenance revenues include fees for software updates on a when-and-if-available basis, telephone, online and web-based support and software defect fixes or patches. Maintenance revenues are recognized ratably over the term of the customer maintenance and support agreement.

The significant judgments and estimates for revenue recognition typically relate to the timing of and amount recognized for software license revenue, including whether collectibility is deemed probable, fees are fixed and determinable and services are essential to the functionality of the software. Changes to these assumptions would generally impact the timing and amount of revenue recognized for software license fee revenues versus other revenue categories.

Stock-Based Compensation

Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options generally was measured as the excess, if any, of the estimated fair value of our common stock over the amount an employee must pay to acquire the common stock (exercise price) on the date that both the exercise price and the number of shares to be acquired pursuant to the option were fixed (the date of grant). Accordingly, because the exercise price for our grants was equal to the estimated fair market value of our common stock on the date of grant, we recorded no compensation cost in our income statement for stock options. We did, however, disclose in our financial statements what the resultant expense would have been had we elected to account for stock options in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which required the fair value method of valuing stock options.

Prior to the recapitalization in April 2005, we granted stock appreciation rights (SARs). Because the SARs were to be settled in cash and not equity, we recorded SAR compensation expense for all exercisable and vested SARs in accordance with APB Opinion No. 25 and related interpretations. To determine the amount of expense to record, a SAR valuation was calculated quarterly based upon a model that utilized an eight-quarter rolling financial history. Accordingly, we recorded $6.4 million and $25.3 million in 2004 and 2005 related to SAR-based compensation expense. Of the $25.3 million recorded in 2005, $22.6 million was directly related to payments associated with vested SARs at the time of the recapitalization. All remaining SARs were cancelled at the time of the recapitalization.

On January 1, 2006, we adopted SFAS No. 123R, Share-Based Payments. SFAS No. 123R is a revision of SFAS No. 123 and supersedes APB Opinion No. 25 and its related implementation guide. SFAS No. 123R requires the measurement of the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the measurement date of grant. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award.

Effective January 1, 2006, we began recognizing stock-based compensation expense in our income statement using the modified prospective transition method. The modified prospective method for transitioning from our prior accounting practice does not require restatement of prior periods to recognize compensation cost for amounts previously reported only in pro forma note disclosures to the financial statements. Under this transition method, stock-based compensation costs recorded in the income statement include the portion related to stock options vesting in the period for all options granted prior to, but not vested as of, January 1, 2006,

 

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based upon the grant date fair value previously estimated in accordance with SFAS 123 and all options granted subsequent to January 1, 2006, based on the grant date fair value in accordance with SFAS 123R. We determined the fair value of options granted using the Black-Scholes option-pricing model.

In accordance with SFAS 123R, we recorded $1.7 million in stock-based compensation expense for options vesting during 2006. Because we had primarily issued SARs to employees instead of stock options prior to January 1, 2006, and we therefore had recorded stock-based compensation expense associated with vesting of SARs for those periods, we did not experience a significant increase in stock-based compensation expense from the adoption of SFAS 123R as compared to prior periods. Had we adopted SFAS 123R for the periods 2004 and 2005, net income would have been lower in those periods by $0.1 million and $0.4 million, respectively.

The key assumptions used by management in the Black-Scholes 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.

Given the absence of an active market for our common stock, our board of directors was required to estimate the fair value of our common stock at the time of each option grant. Our board of directors considered numerous objective and subjective factors in estimating the value of our common stock at each option grant date, including valuations performed by a third-party valuation firm which, in certain circumstances during 2006, were received subsequent to the granting of options.

Based on these factors, our board of directors granted employee stock options during 2006 at exercise prices ranging from $7.22 to $11.48. In addition, based, in part, upon subsequently received independent valuations, the board of directors and compensation committee reassessed the fair value of our common stock for awards granted during the first ten months of 2006. As a result, awards granted to 24 employees and directors were deemed to have been made at exercise prices below fair value on the date of grant and were modified to increase the exercise price to be equal to the revised assessment of the fair value on the date of grant. As a result, the option prices for those grants were adjusted upward from prices ranging from $7.22 to $10.19 to prices ranging from $7.91 to $11.48. No incremental compensation cost resulted from the modifications since the exercise prices were increased. The weighted average intrinsic value of all stock options at the modification date, where applicable, was zero.

The following table represents all stock option grants made in 2006, their exercise prices and weighted average fair values:

 

Grant Date   Number of
Options Granted
  Weighted
Average
Exercise
Price at
Grant Date
 

Modification

Date

  Weighted
Average
Exercise
Price at
Modification
Date
 

Weighted
Average

Common Stock

Fair Value

per Share

January 26, 2006     62,330   $  7.22   December 4, 2006   $  7.91   $  7.91
March 9, 2006   302,500   $  7.22   December 4, 2006   $  7.91   $  7.91
April 26, 2006     22,000   $  7.22   December 4, 2006   $  8.41   $  8.41
May 30, 2006   125,000   $  7.22   December 4, 2006   $  9.00   $  9.00
June 2, 2006   113,100   $  7.22   December 4, 2006   $  9.00   $  9.00
October 23, 2006   200,000   $10.19   December 4, 2006   $11.48   $11.48
November 20, 2006   494,100   $11.48   N/A   N/A   $11.48
November 21, 2006   170,000   $11.48   N/A   N/A   $11.48
December 4, 2006   150,666   $11.48   N/A   N/A   $11.48

 

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Valuation Methodology

The valuation method that we used with the assistance of our third-party appraiser to estimate the fair value of our common stock utilized a combination of a market multiple methodology and a comparable transaction methodology.

The market multiple methodology considered market valuation multiples of enterprise application software firms. We applied those multiples to comparable values for our cumulative earnings before interest, taxes, depreciation, amortization, recapitalization expenses and stock-based compensation expense (adjusted EBITDA) for the four quarters ended prior to the valuation date, our estimated adjusted EBITDA for 2006, determined as of the valuation date based on management’s estimates and for periods beginning in October 2006, management’s estimated adjusted EBITDA for 2007. The result of this calculation was an estimate of our enterprise value using market multiples of comparable software firms.

The comparable transaction methodology considered market valuation multiples of over 20 acquisition transactions announced since early 2003 involving software companies. The factors considered in our comparable transaction methodology analysis were the target company’s enterprise value to revenue multiple and the target company’s enterprise value to adjusted EBITDA ratio. After analysis of the range of values of those comparable transactions as well as their mean and median values, a range of comparable enterprise value multiples was applied to our revenue and adjusted EBITDA levels that considered our growth rate and adjusted EBITDA margin levels. We further adjusted this value to remove the impact of the control premium from the market multiples used. The result of this calculation was an estimate of our enterprise value using comparable transaction multiples of other software firms.

The average of the application of the market multiple methodology and the comparable transaction methodology yielded an estimated enterprise value which we adjusted for cash and debt balances to determine the aggregate value of our common stock, as if it were publicly traded. We then adjusted that valuation for a marketability discount to reflect the fact that our shares were not publicly tradable. The resulting amount was used to determine the fair value of our common stock at the valuation date.

Because we did 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 under both SFAS 123 and SFAS 123R using an implied volatility method based on reported data for a peer group of publicly traded software companies for which historical information was available. 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 Payments, which is the mid-point 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.

Determining the value of our common stock and other inputs to the Black-Scholes option-pricing model required our board of directors and management to make subjective judgments, assumptions and estimates. A 10% increase in the estimated fair value of our common stock or the expected volatility or a 10% change in the expected option term, which represents the most sensitive and judgmental assumptions, would not have a material effect on our financial statements.

Income Taxes

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 SFAS No. 109, Accounting for Income Taxes. This process involves estimating our actual 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.

 

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These temporary differences result in deferred tax assets and liabilities. As of December 31, 2006, we had deferred tax assets of approximately $9.9 million, which were primarily related to differences in the timing of recognition of revenue and expenses for book and tax purposes, and the value of foreign net operating loss carry-forwards. 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, 2006, we maintained a valuation allowance equal to the $0.6 million of deferred tax assets related to foreign net operating loss carryforwards as there is not sufficient evidence to enable us to conclude that it is more likely than not that the deferred tax assets will be realized.

Prior to our recapitalization in April 2005, we were organized as an S corporation under the Internal Revenue Code of 1986, as amended (the Code) and as a result were not subject to federal income taxes. As an S corporation, we made periodic distributions to our shareholders that covered the shareholders’ anticipated tax liability. In connection with the recapitalization in April 2005, we converted our U.S. taxable status from an S corporation to a C corporation as defined by the Code. Consequently, since April 2005 we have been subject to federal and state income taxes. Upon the conversion, we recorded a one-time benefit of $8.9 million to establish a deferred tax asset relating to differences between the book and tax basis of certain operating assets and liabilities and the acquired tax net operating loss carryforwards of Semaphore, Inc., which we acquired in August 2000.

Under the terms of the April 2005 recapitalization agreement, the tax benefit portion of the recapitalization expenses attributable to the settlement of certain stock appreciation rights held by employees is payable to the selling shareholder group in the recapitalization. The liability to the selling shareholder group is reflected as “Accrued liability for redemption of stock in recapitalization” in the accompanying balance sheet and is included in “Redemption of stock in recapitalization” in the statement of changes in shareholders’ deficit.

Our deferred tax assets and liabilities are recorded at an amount based upon a U.S. federal income tax rate of 35%. 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. To assist us in this effort, we engage independent third party appraisal firms.

Management, with the assistance of the independent appraiser, 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 information obtained from the management of the acquired company. 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.

 

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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 of 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 2005 and 2006, we are amortizing the customer relationship intangible assets on an accelerated method using lives of seven to nine 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. Had we used a straight-line method of amortization, amortization expense for 2006 would have been approximately $1.0 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 $0.3 million for 2006. We amortize acquired technology from our acquisitions using a straight-line method over three to four years. If the useful lives for those assets were reduced by one year, amortization expense for 2006 would have been $0.4 million higher.

In addition, during 2005 and 2006, we acquired maintenance obligations (and the associated deferred revenue) with our acquisitions. Emerging Issues Task Force (EITF) Issue No. 01-3 and EITF Issue No. 04-11 clarified different methods to determine the fair value of deferred revenue in a business combination. In accordance with EITF guidance, we valued acquired deferred revenue based on estimates of the cost of providing solution support services and software error corrections plus a reasonable profit margin. The impact of our valuation was a write down of the acquired deferred revenue balances to an average of 50% of their book value on the date of acquisition, from a total of $5.9 million to $2.9 million. This reduced amount will be 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 SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate the carrying amount may be impaired or unrecoverable.

We assess the impairment of goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Accordingly, we test our goodwill for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate an impairment may have occurred by comparing its fair value to its carrying value.

Factors that indicate the carrying amount of goodwill, identifiable intangible assets or other long-lived assets 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.

If we determine that the carrying value of a long-lived asset may not be recoverable, we determine the recoverability 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). We recognize an impairment charge, 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.

Internal Controls over Financial Reporting

Effective internal controls over financial reporting are necessary for us to provide reliable annual and interim financial reports and to prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results and financial condition could be materially misstated and our reputation could be significantly harmed. As a

 

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private company, we were not subject to the same standards applicable to a public company. As a public company, we will be subject to requirements and standards set by the Securities and Exchange Commission and the Public Company Accounting Oversight Board. Under current standards, a “material weakness” in internal controls is defined as a single deficiency, or a combination of deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Since August 2006, we have been engaged in a program to evaluate our system of internal controls over financial reporting with the assistance of a third-party consulting firm. This program has consisted of a detailed review of current processes and controls, identification of deficiencies and evaluation of the deficiencies’ effect on our financial statements. A number of material weaknesses and deficiencies identified were exacerbated by inadequately trained staff and limited resources, particularly in the financial close and reporting area. As of March 2007, and through our own assessment of our internal controls over financial reporting, we believe we have the following material weaknesses:

Financial Close and Reporting

 

   

Lack of formal financial policies and procedures

We did not have formally documented and communicated policies and procedures in areas that have an affect on our financial statements, such as the recording of time and expenses, journal entry review and approval and the preparation and review of balance sheet reconciliations.

 

   

Inadequate account reconciliation and analysis process

We did not have adequate review procedures and monitoring controls to ensure the timely and accurate completion of balance sheet reconciliations and other critical accounting analyses, thereby adversely impacting our ability to produce accurate financial statements in a timely manner.

 

   

Lack of spreadsheet controls

We relied on a large number of spreadsheets and reports to prepare our financial statements. We did not have adequate procedures and controls regarding the accuracy and completeness of, and access to, these spreadsheets and reports.

Revenue

 

   

Inadequate controls around accuracy of billing and revenue recognition

We did not have adequate controls or monitoring procedures related to the accuracy of maintenance and consulting services invoices and related revenue recognition. These processes were manual and sometimes were performed by individuals recently hired by us.

 

   

Inadequate documentation and review of software revenue recognition decisions

Software revenue recognition decisions were not adequately documented and reviewed. As a result, material adjustments were not identified in a timely manner by management but were identified by our independent registered public accounting firm in connection with their audit of our financial statements.

Information Technology

 

   

Inadequate systems access and change management controls

Our information technology environment had design and operating effectiveness deficiencies. Due to informal policies and procedures over the granting and modification of user access, we had excessive or inappropriate access rights to, and insufficient segregation of duties within, our financial system. Many user accounts on the financial system had access rights that were not commensurate with the user’s job requirements. We also had inadequate procedures and controls over systems change management and program development.

For 2006, we were not required to have, nor was our independent registered public accounting firm engaged to perform, an audit of our internal control over financial reporting. Our independent registered public accounting firm’s audit included consideration of internal control over financial reporting as a basis for designing audit

 

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procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of our internal control over financial reporting. Accordingly, no such opinion was expressed. However, in connection with the audit of our financial statements for 2006, our independent registered public accounting firm informed our audit committee and management that there were material weaknesses during 2006 in our accounting for complex transactions and our design of internal controls over financial reporting. We believe that the conclusions of our independent registered public accounting firm are consistent with management’s findings.

Errors identified in testing software revenue during the 2006 audit resulted in the restatement of our 2005 financial statements. The resulting restatement increased revenue previously reported in 2005 by $1.3 million and increased net income by $0.8 million. This error did not impact the 2004 consolidated financial statements. The restatement related to an interpretation of SOP 97-2 in 2005 whereby we inappropriately deferred software revenue for extended warranties included in software revenue arrangements. Previously, revenue related to software arrangements with warranties in excess of our normal three-month warranty period was deferred until the warranty period expired. However, for the items associated with the restatement, these warranties were routine, short-term and relatively minor, and therefore the related revenue should have been recognized upon delivery of the software since all other criteria of SOP 97-2 had been met.

We have outlined a detailed plan to improve the effectiveness of our internal controls and processes related to the weaknesses described above. Some of the actions taken or expected to be taken in accordance with this plan are as follows:

Overall

 

   

Beginning in the first quarter of 2006 and into 2007, we have increased the size and improved the skill base of our finance and accounting organization. Throughout 2006, we hired additional experienced, senior level accounting personnel. Most of these individuals are certified public accountants and possess significant experience with publicly traded companies. Several of the individuals also have significant experience applying generally accepted accounting principles related to software revenue recognition. We are continuing to augment our finance and accounting staff during 2007 and will continue to hire the necessary skilled resources needed.

Financial Close and Reporting

 

   

We are developing and communicating a comprehensive list of detailed accounting policies and procedures, including those related to balance sheet reconciliation and review processes, so that all policies are adequately documented and communicated and serve as a basis for reviewing and monitoring our accounting processes.

 

   

We are in the process of identifying all financially significant spreadsheets and reports used in the preparation of our financial statements, after which we will develop appropriate controls related to those spreadsheets.

Revenue

 

   

We are in the process of implementing a new software and maintenance billing system that will reduce our reliance on manual processes and spreadsheets for maintenance billing and revenue recognition.

 

   

We are developing new processes to ensure adequate documentation and review of software revenue recognition decisions.

Information Technology

 

   

We have established and implemented program development and change management policies and procedures to prevent unauthorized changes to systems and related technology.

 

   

We are performing a comprehensive review of system access rights and establishing appropriate access to assure proper segregation of duties by functional area.

 

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We believe that each of these actions will strengthen our internal controls over financial reporting. Although underway, our plan to improve the effectiveness of our internal controls and processes is not yet complete. While we have designed new controls to address certain of our identified material weaknesses, we have not yet implemented new controls for all the weaknesses we have identified.

Under current requirements, our independent registered public accounting firm is not required to evaluate our internal controls over financial reporting or management’s assessment of those controls until its audit of our 2008 financial statements. Consequently, we will not be evaluated independently in respect of our controls for a substantial period of time after this offering is completed. As a result, we may not become aware of other material weaknesses or significant deficiencies in our internal controls that may be identified by our independent registered public accounting firm as part of the evaluation.

The measures or activities we have taken to date, or any future measures or activities we will take, may not remediate the material weaknesses we have identified. See “Risk Factors—Management has identified material weaknesses and other deficiencies in our internal controls which, if not remediated successfully, could cause investors to lose confidence in our financial reporting and our stock price to decline” and “Risk Factors—Material weaknesses in our internal controls may impede our ability to produce timely and accurate financial statements, which could cause us to fail to file our periodic reports timely, result in inaccurate financial reporting or restatements of our financial statements, subject our stock to delisting and materially harm our business reputation and our stock price.”

Results of Operations

The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated:

 

     Year Ended December 31,  
         2004             2005             2006      

Revenues

      

Software license fees

   28.8 %   30.0 %   32.8 %

Consulting services

   23.6     26.9     29.2  

Maintenance and support services

   44.7     41.7     36.4  

Other revenues

   2.9     1.4     1.6  
                  

Total revenues

   100.0     100.0     100.0  
                  

Cost of revenues

      

Cost of software license fees

   4.0     3.0     3.0  

Cost of consulting services

   19.3     21.4     24.0  

Cost of maintenance and support services

   9.3     7.8     6.8  

Cost of other revenues

   3.4     1.3     2.0  
                  

Total cost of revenues

   36.0     33.5     35.8  
                  

Gross profit

   64.0     66.5     64.2  
                  

Research and development

   18.9     17.2     16.3  

Sales and marketing

   13.8     12.5     16.6  

General and administrative

   9.4     9.9     11.7  

Recapitalization expenses

   0.0     20.2     0.0  
                  

Total operating expenses

   42.1     59.8     44.6  
                  

Income from operations

   21.9     6.7     19.7  

Interest income

   0.3     0.3     0.2  

Interest expense

   0.0     (7.4 )   (8.8 )

Other (expense) income, net

   (0.1 )   0.2     0.0  
                  

Income (loss) before income taxes

   22.1     (0.2 )   11.1  

Income tax (benefit) expense

   (0.9 )   (5.9 )   4.4  
                  

Net income

   23.0 %   5.7 %   6.7 %
                  

 

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Revenues

 

     2004    2005    2006    2004 versus 2005     2005 versus 2006  
              $ Change     % Change     $ Change    % Change  
     (dollars in millions)  

Revenues

                  

Software license fees

   $ 34.9    $ 45.9    $ 75.0    $ 11.0     31 %   $ 29.1    63 %

Consulting services

     28.6      41.2      66.6      12.6     44       25.4    62  

Maintenance and support services

     54.2      63.7      83.2      9.5     18       19.5    31  

Other revenues

     3.5      2.1      3.5      (1.4 )   (40 )     1.4    67  
                                        

Total revenues

   $ 121.2    $ 152.9    $ 228.3    $ 31.7     26     $ 75.4    49  
                                        

Software License Fees

Our software applications are offered on a stand-alone basis and 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.

License fees revenue increased 31% to $45.9 million from 2004 to 2005 and 63% to $75.0 million from 2005 to 2006. The increase in license fees in both years was primarily the result of increased sales of our new version 5.1 of our Costpoint product introduced in July 2004, as well as increased sales of our Deltek Vision applications. The $29.1 million increase in 2006 also reflected $6.1 million of license fee growth from our project portfolio management products obtained with the Welcom and CSSI acquisitions.

Consulting Services

Our consulting services revenues are generated from implementation, training, education and other consulting services associated with our software applications and are typically provided on a time-and-materials basis.

Consulting services revenue increased 44% to $41.2 million from 2004 to 2005 and 62% to $66.6 million from 2005 to 2006. The increases in services revenues were the result of increased sales of Costpoint and Vision licenses, which drove increased demand for consulting services. Over 50% of the increase in 2005 and 2006 was attributable to Costpoint implementation services. Of the 2006 increase in Costpoint services, 40%, or $5.1 million, related to the recognition of services revenue previously deferred during 2005 due to undelivered elements in software arrangements. The remaining increases in 2005 and 2006 were attributable to Vision and other product implementation and training services.

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 updates, enhancements and upgrades to our software, as well as online, telephone and internet-based support. Maintenance services are typically billed on a quarterly basis and generally represent between 15% and 25% of the list price of the underlying software applications at the time of sale. Maintenance fees are generally subject to contractually permitted annual rate increases.

Maintenance revenues increased 18% to $63.7 million from 2004 to 2005 and 31% to $83.2 million from 2005 to 2006. The increase in maintenance revenues was the direct result of increasing license sales during the same period resulting in an increase in the installed base of customers paying for support, plus increases in maintenance rates charged to customers on their annual support contract renewals. In addition, approximately $7.4 million, or 37%, of the $19.5 million increase from 2005 to 2006 was from products or customers acquired through our acquisitions of Wind2 in late 2005 and Welcom and CSSI in 2006.

 

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Other Revenues

Our other revenues consist of reimbursements for third party equipment and software purchased for customers as well as fees collected for our annual user conference. The decrease in other revenues from 2004 to 2005 of $1.4 million was due to a decrease in user conference revenues as we held a smaller conference in 2005. The $1.4 million increase from 2005 to 2006 is the result of an increase in user conference revenues associated with a larger conference in 2006.

Cost of Revenues

 

     2004    2005    2006    2004 versus 2005     2005 versus 2006  
              $ Change     % Change     $ Change    % Change  
     (dollars in millions)  

Cost of revenues

                  

Cost of software license fees

   $ 4.9    $ 4.6    $ 6.9    $ (0.3 )   (6 )%   $ 2.3    50 %

Cost of consulting services

     23.4      32.6      54.7      9.2     39       22.1    68  

Cost of maintenance and support services

     11.3      12.0      15.5      0.7     6       3.5    29  

Cost of other revenues

     4.1      2.0      4.6      (2.1 )   (51 )     2.6    130  
                                        

Total cost of revenues

   $ 43.7    $ 51.2    $ 81.7    $ 7.5     17     $ 30.5    59  
                                        

Cost of Software License Fees

Our cost of software license fees consists of third-party software royalties, costs of product fulfillment, amortization of acquired technology and amortization of capitalized software.

Cost of software license fees decreased 6% to $4.6 million from 2004 to 2005 and increased 50% to $6.9 million from 2005 to 2006. Cost of license fees in 2005 remained relatively unchanged compared to 2004, but declined as a percentage of license fee revenue, because the effective royalty rates paid on products resold or embedded with our products decreased in 2005 over 2004 based upon newly negotiated royalty agreements.

Over 40% of the $2.3 million increase in the cost of software license fees during 2006 was the result of the amortization of technology acquired in connection with our acquisitions of Welcom and CSSI, with the remainder attributable to increased royalties on third-party software products embedded or resold with our own products based on increased product sales. These royalties remained unchanged as a percentage of software license fees revenues in both 2005 and 2006.

Cost of Consulting Services

Our cost of consulting services is comprised of the salaries, benefits, incentive compensation and stock-based compensation expense of services-related employees as well as third-party contractor expenses, travel and reimbursable expenses and classroom rentals. Cost of services also includes an allocation of our facilities and other costs incurred for providing implementation, training and other consulting services to our customers.

Cost of consulting services increased 39% to $32.6 million from 2004 to 2005 and 68% to $54.7 million from 2005 to 2006. The increase in the cost of services in each year was the result of increased costs for salaries, benefits, incentive compensation and travel as staffing levels were increased to meet increasing customer demand for our implementation services. This increase in demand was driven by the increase in license sales in both 2005 and 2006, as well as an increase in the number of larger, more complex project implementations in which we were engaged. Approximately 50% of the 2006 increase was associated with salaries, benefits and incentive compensation for implementation services personnel and over 20% was for travel costs for those engagements. Gross margins on services revenues were 18% during 2004, 21% during 2005 and 18% during 2006. The increase in margin on services revenues from 2004 to 2005 was particularly impacted by a decrease in stock-

 

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based compensation expense for SARs of $0.8 million. The decrease in margin on services revenues during 2006 was due to an increase in non-billable costs of $3.0 million, or 5% of 2006 services revenues. These non-billable costs were associated with training time for newly hired staff to meet the increase in demand. During 2006, $2.3 million of costs were recognized which had previously been deferred during 2005. These costs were deferred as the corresponding $5.1 million of revenues were also deferred due to undelivered elements in software revenue arrangements. The favorable gross margin on these services partially offset the increase in non-billable time.

Cost of Maintenance and Support Services

Our cost of maintenance and support services is primarily comprised of salaries, benefits, stock-based compensation, incentive compensation and third-party contractor expenses, as well as facilities and other expenses incurred in providing support to our customers.

Cost of maintenance services increased 6% to $12.0 million from 2004 to 2005 and 29% to $15.5 million from 2005 to 2006. The increase in the cost of maintenance services during 2005 and 2006 was primarily the result of increased costs for salaries and related benefits as we increased our maintenance staff to meet greater demand for these services. Over 50% of the 2006 increase in cost of maintenance services was the result of increased headcount to meet demand and 28% of the increase was associated with increased costs due to acquisitions made during the current year. Cost of maintenance services as a percentage of maintenance revenue remained flat at 19% for both 2005 and 2006 and represented a slight decrease from 21% in 2004.

Cost of Other Revenues

Our cost of other revenues includes the cost of third-party equipment and software purchased for customers as well as the cost associated with our annual users conference. The decrease from 2004 to 2005 of $2.1 million was due to a decrease in user conference expenses as we held a smaller conference in 2005. The $2.6 million increase from 2005 to 2006 is the result of an increase in user conference expenses associated with a larger conference in 2006.

Operating Expenses

 

    

2004

  

2005

  

2006

   2004 versus 2005     2005 versus 2006  
              $ Change    % Change     $ Change     % Change  
     (dollars in millions)  

Operating expenses

                  

Research and development

   $ 22.9    $ 26.2    $ 37.3    $ 3.3    14 %   $ 11.1     42 %

Sales and marketing

     16.7      19.2      37.8      2.5    15       18.6     97  

General and administrative

     11.4      15.2      26.6      3.8    33       11.4     75  

Recapitalization expenses

     —        30.9      —        30.9    —         (30.9 )   —    
                                        

Total operating expenses

   $ 51.0    $ 91.5    $ 101.7    $ 40.5    79     $ 10.2     11  
                                        

Research and Development

Our product development expenses consist primarily of salaries, benefits, stock-based compensation, incentive compensation and related expenses, including third-party contractor expenses, and other expenses associated with the design, development and testing of our software applications.

Research and development expenses increased 14% to $26.2 million from 2004 to 2005 and 42% to $37.3 million from 2005 to 2006. The increase in 2005 was primarily driven by increased investment levels for our Costpoint Web initiative and by costs to deliver our new release of Vision. The increase in 2006 was due to significant hiring to deliver additional product features and functionality requested by our larger customers. This increased investment was across all of our product lines.

 

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Sales and Marketing

Our sales and marketing expenses consist primarily of salaries, benefits, and related expenses, including stock-based compensation, incentive compensation, facilities allocation, sales commissions and commissions paid to resellers and consulting partners. Sales and marketing expenses also include amortization expense for acquired intangible assets associated with customer relationships. In addition, our sales and marketing expenses include the cost of marketing programs (including our demand generation efforts, advertising, events, marketing and corporate communications, field marketing and product marketing) as well as facilities and other expenses associated with our sales and marketing activities.

Sales and marketing expenses increased 15% to $19.2 million from 2004 to 2005 and 97% to $37.8 million from 2005 to 2006. The increase in both 2005 and 2006 was due to increased salaries, benefits and support costs for additional sales and marketing personnel and additional commissions paid on increased license sales. The increase in 2006 was also due to increased spending in marketing for specific lead generation and corporate branding programs aimed at further stimulating our revenue growth. As a percentage of total revenues, sales and marketing expense increased from 13% during 2005 to 17% during 2006. Over 2% of the increase as a percentage of revenues was associated with increased spending for marketing efforts as well as amortization for acquired customer relationship intangible assets.

General and Administrative

Our general and administrative expenses consist primarily of salaries, benefits, stock-based compensation, incentive compensation, facilities allocation and other 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 and third-party legal and other professional services fees, facilities and other expenses associated with our administrative activities.

General and administrative expenses increased 33% to $15.2 million from 2004 to 2005 and 75% to $26.6 million from 2005 to 2006. General and administrative expenses remained flat at 9% and 10% during 2004 and 2005 as a percentage of revenues, and increased to 12% during 2006. Twenty-four percent of the overall increase in expenses in 2005 over 2004 was due to increased salaries and benefits for key management and other administrative employees that we hired during 2005. In addition, 8% of the increase was due to advisory fees incurred for New Mountain Capital, 13% was professional fees including outside recruiting fees paid for key hires made during 2005 and 8% for increased insurance premiums. Of the total increase from 2005 to 2006, 20% was associated with increased salary costs in the finance, accounting and legal functions to prepare us for operating as a public company, 19% was associated with consulting costs incurred to begin identification and remediation of control weaknesses, and 19% was associated with advisory fees paid to New Mountain Capital in connection with the refinancing of our shareholder notes in April 2006. Also contributing to the increase were incremental increases in facilities related expenses and new hires in senior management and other general and administrative cost increases.

Recapitalization Expenses

The recapitalization costs in 2005 relate to the settlement of outstanding stock appreciation rights in connection with our April 2005 recapitalization, plus the related legal, due diligence and other professional services costs incurred in the recapitalization.

Interest Income

Interest income in all periods reflects interest earned on our invested cash balances. Prior to the recapitalization, excess cash from operations was generally disbursed to the shareholders. Since the recapitalization, cash flow from operations has been used for investment in acquisitions, capital expenditures and mandatory reductions in the principal outstanding on our term loan. Interest income did not fluctuate significantly from 2004 to 2006.

 

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Interest Expense

 

     2004    2005    2006    2004 versus 2005     2005 versus 2006  
              $ Change    % Change     $ Change    % Change  
     (dollars in millions)  

Interest expense

   $ 0.1    $ 11.3    $ 20.1    $ 11.2    15,166 %   $ 8.8    78 %

Interest expense increased $11.2 million from 2004 to 2005 to 11.3 million and 78% to $20.1 million from 2005 to 2006. The increase in 2005 was primarily due to interest expense on our term loan facility that we entered into in connection with our recapitalization in April 2005. The increase in 2006 included $5.1 million due to the inclusion of a full year of interest expense on our term loan and shareholder debentures, $2.3 million for the write-off of previously deferred debt issuance costs and $1.4 million related to incremental borrowings on our credit facility, used to finance the purchase of CSSI and for other purposes. The write-off of debt issuance costs resulted from the refinancing in April 2006 of $100 million of notes issued to shareholders with incremental borrowings on our credit facility.

Income Taxes

 

     2004     2005     2006  

Income tax expense (benefit) (dollars in millions)

   $ (1.1 )   $ (9.1 )   $ 10.0  

Change from prior year

       715 %     (210 )%

Our income tax expense increased $19.1 million from 2005 to 2006 from a tax benefit of $9.1 million to an income tax expense of $10.0 million.

During 2004, we reached a favorable settlement with respect to the audit of its 2001 federal income tax return. In addition, during 2004, the U.S. Treasury issued additional guidance on accounting for deferred revenue. As a result of these two developments, we determined that a $1.3 million accrual for C corporation income taxes was no longer required, which created an income tax benefit for 2004 when we relieved the liability.

Effective with the recapitalization, on April 22, 2005, we were no longer eligible for Subchapter S treatment, and we converted to a C corporation for federal and state income tax purposes. The recapitalization expenses incurred as of April 22, 2005, were not available for deduction for an S corporation and therefore resulted in a permanent difference. Our tax benefit increased $8.0 million, from $1.1 million in 2004 to $9.1 million in 2005. The increase was primarily due to the tax benefit of the deferred tax asset we realized upon conversion from an S corporation to a C corporation for federal income tax purposes and the net operating loss created by the deductibility of the recapitalization expenses in the C corporation period. The recapitalization expenses primarily include SAR-related compensation expense (see Note 2 to our consolidated financial statements). Our tax rate in 2006 reflects a full year of C corporation status. We expect our effective tax rate to remain relatively constant in 2007 at 39.5%.

Recapitalization

In April 2005, we underwent a recapitalization in which we issued 29,079,580 shares of common stock to the New Mountain Funds for $105.0 million. We also sold $75.0 million of subordinated debentures to the New Mountain Funds and $25.0 million of subordinated debentures to one of the selling shareholders (collectively, the subordinated debentures or the debentures). In addition, we secured a $115.0 million term loan as part of the recapitalization. See Note 2, “Recapitalization” and Note 10, “Debt” of our consolidated financial statements contained elsewhere in this prospectus.

The $320.0 million total proceeds from the term loan and the issuance of the common stock and subordinated debentures were primarily used to repurchase common stock from the selling shareholders to

 

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reduce their aggregate holdings to 25% of the outstanding shares, to make payments of approximately $31 million to holders of stock appreciation rights issued under our stock appreciation rights plan (SAR Plan) and to pay for the costs of the recapitalization, totaling approximately $8.2 million, and to pay $5.8 million for debt issuance costs.

 

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In connection with the recapitalization, we issued to the New Mountain Funds 100 shares of Series A preferred stock, par value $0.001 per share, as to which the holders had no voting rights, but were entitled to elect a majority of the members of our board of directors until such time that the common stock owned by the New Mountain Funds constituted less than one-third of our outstanding common stock. After such time, the holders of Series A preferred stock had the right to elect one or more directors, declining in number as the holder’s common stock ownership declines. In connection with our reincorporation in Delaware, our Series A preferred stock was converted into Class A common stock with the same substantive terms. The Series A preferred stock carried no other voting rights, no dividend entitlement and no liquidation preferences.

Pursuant to the recapitalization, we became obligated to make a payment to the selling shareholders equal to the amount of income taxes that we would be required to pay, but for the availability of deductions related to the SAR payments made in connection with the recapitalization. The amount and timing of the additional payments to the selling shareholders was contingent on the use and timing of the SAR deductions to offset cash tax payments that we would otherwise have made. In March 2007, we paid $4.8 million of the remaining balance of our obligations, which was $5.3 million at December 31, 2006.

In addition to the $31.0 million in SAR payments, we agreed to vest $1.8 million associated with the value of unvested SARs for certain executives that are payable in varying increments through January 2008. This entire amount was expensed as part of “Recapitalization Expenses” in 2005. We also agreed to convert employee unvested SARs into retention bonuses totaling $4.1 million, which are earned and are being expensed over the four-year period beginning May 2005. The retention amounts are paid in equal installments annually in April of each year through 2009. After taking into account reductions for terminated employees, $2.6 million remained to be paid at December 31, 2006.

Credit Agreement

In connection with the recapitalization, we entered into a credit agreement with a syndicate of lenders led by Credit Suisse that provided for a $115 million term loan and a $30 million revolving credit facility. In April 2006, we added $100 million to the term loan to repay the outstanding debentures. The term loan matures on April 22, 2011, and the revolving credit facility terminates on April 22, 2010.

All the loans under the credit agreement accrue interest at 2.25% above the British Banker’s Association Interest Settlement Rates for dollar deposits (the LIBO Rate). The revolving credit facility can accrue interest at 1.25% above the LIBO rate depending on the type of borrowing. The spread above the LIBO Rate decreases as our leverage ratio, as defined in the credit agreement, decreases. The credit agreement also provides for mandatory prepayments of the term loan based on annual cash flow and leverage levels, as well as scheduled principal repayments of $0.5 million each quarter through June 30, 2010. At the end of each of the quarters ending September 30, 2010, December 31, 2010, March 31, 2011 and at April 22, 2011, a scheduled principal payment of $51.3 million is due.

All the loans under the credit agreement are collateralized by substantially all of our assets (including our subsidiaries’ assets) and require us to comply with financial covenants, including a maximum leverage ratio, minimum interest coverage and minimum fixed charges coverage. In addition, the credit agreement requires us to comply with non-financial covenants.

One such covenant requires us to submit audited annual financial statements by March 31 of each year, for the preceding calendar year, together with certain certifications as to our compliance with the financial covenants described above. For the year ended December 31, 2006, we did not comply with that requirement, but we provided the audited financial statements and related certifications on April 23, 2007, which was within the 30-day grace period provided under the credit agreement.

Costs incurred in connection with securing the credit agreement and the debentures were approximately $5.8 million in 2005, and costs incurred in connection with securing the 2006 addition to the term loan were $1.3

 

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million in 2006. The debt issuance costs are being amortized and reflected in interest expense over the respective lives of the loans. At December 31, 2005 and 2006, $0.8 million and $0.9 million of the unamortized debt issuance costs are reflected in “prepaid expenses and other current assets” in the balance sheets and $4.4 million and $2.7 million were reflected in “other assets.” During 2005 and 2006, $0.6 million and $3.1 million of costs were amortized and recorded in interest expense. Included in the $3.1 million of costs amortized in 2006 were costs of $2.3 million associated with shareholder debt issuance costs that were accelerated upon repayment of the debentures in April 2006. We intend to use net proceeds from the sale of shares by us in this offering to repay all indebtedness outstanding under our revolving credit facility and to use the balance to repay indebtedness under the term loan. For every $1.0 million we repay under the term loan, we will accelerate the amortization of $14,000 of the deferred debt issuance costs to interest expense in the period in which we make the repayment.

Liquidity and Capital Resources

Historically, we have financed our activities and capital expenditures primarily from net cash provided by operating activities. Cash required to complete our recent acquisitions has been funded through a combination of borrowings on our revolving credit facility and cash provided by operating activities. We use cash provided by operating activities to reduce borrowings under our revolving credit facility to the extent not required for near-term operating needs. At December 31, 2006, we had $6.7 million in cash and cash equivalents and $12.0 million available for borrowing under our revolving credit facility.

Our largest source of operating cash flows is cash collections from our customers for the purchase of our software, consulting services and maintenance services. Amounts due from customers for software license and maintenance services are generally billed at the beginning of the contract term. Our primary uses of cash from operating activities are for personnel-related expenditures, payment of taxes and facilities-related costs.

Net cash provided by operating activities was $40.6 million, $11.2 million and $18.4 million in 2004, 2005 and 2006, respectively. In 2005, cash generated from operating activities decreased from 2004 primarily due to the costs of the recapitalization. Net cash provided by operating activities increased in 2006 over 2005 primarily due to a significant increase in payments from customers ($58.2 million higher) offset in part by increased payments to employees and vendors for salaries, costs of revenues as well as higher overall operating expenses ($27.4 million), increased interest payments ($17.1 million higher in 2006) and increased tax payments ($7.4 million higher). The increase in tax payments reflects higher levels of taxable income in 2006 plus the impact of the change in 2005 from taxation as an S Corporation to a C Corporation.

Net cash used in investing activities was $2.4 million, $13.5 million and $38.3 million in 2004, 2005 and 2006, respectively. Cash used in investing activities was primarily due to the acquisitions of Wind2 in 2005 and Welcom and CSSI in 2006. In addition, cash used in investing activities includes $1.2 million, $1.5 million, and $4.7 million for 2004, 2005 and 2006 for purchases of property and equipment. These capital expenditures are primarily related to internal information technology infrastructure costs.

Net cash used in financing activities was $41.7 million in 2004. In 2005 and 2006, net cash provided by financing activities was $7.2 million and $8.8 million, respectively. In 2004, $34.1 million of cash used in financing activities was for shareholder distributions and $7.6 million was for repayment of debt. In 2005, cash generated by financing activities was primarily due to the net impact of the recapitalization.

In 2006, we retired our subordinated debentures with $100 million of additional borrowings under our credit agreement. We also incurred $18 million of net borrowings under our revolving credit facility and received $1.0 million in proceeds from the sale of common stock. These borrowings financed the payment of a $7.0 million liability to certain of the selling shareholders arising from the 2005 recapitalization, and the payment of $1.9 million in principal reductions on the term loan and $1.3 million in debt issuance costs. The net cash provided by these borrowings was also used to finance part of the cost of the CSSI acquisition. As of May 1, 2007, we had $12.5 million available for use under our revolving credit facility. After the repayment of outstanding borrowings under the revolving credit facility upon consummation of this offering, we expect to have $30 million available for borrowing.

 

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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 12 months and the forseeable future.

We may not be able to generate sufficient cash flow from operations to fund our business and our assumptions regarding revenues and expenses may not be accurate. We may need to raise additional funds in the future, including funds for acquisitions or investments in complementary businesses or technologies or if we decide to retire or further decrease existing debt obligations. If additional financing is required, we may not be able to obtain it on acceptable terms or at all. Additional sources may include equity and debt financing and other financing arrangements. If we raise additional funds through the issuance of equity or convertible securities, our shareholders may experience dilution of their ownership interest. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility and would also require us to fund additional interest expense. Any inability to generate or obtain the funds that we may require could limit our ability to develop or enhance our products and services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operation.

Impact of Seasonality

Fluctuations in our quarterly license fee revenues reflect in part, seasonal fluctuations driven by our customers’ procurement cycles for enterprise software and other factors. These factors typically yield a peak in license revenue in the fourth quarter due to increased spending by our customers during that time. In 2006, our fourth quarter license revenues were higher than the next highest quarter in 2006 by 21%.

Our consulting services revenues are largely driven by the availability of our consulting resources to work on customer implementations and the adequacy of our contracting activity to maintain full utilization of our available resources. As a result, services revenues are less subject to seasonal fluctuations.

Our maintenance revenues are not subject to seasonal fluctuations.

Contractual Obligations and Commitments

We have various contractual obligations and commercial commitments. Our material capital commitments consist of debt obligations and commitments under facilities and operating leases. We generally do not enter into binding purchase commitments. The following table summarizes our existing contractual obligations and contractual commitments as of December 31, 2006:

 

    Payments Due By December 31,

Contractual Obligations

  Total   2007   2008   2009   2010   2011   Thereafter
    (dollars in thousands)

Term loan

  $ 212,525   $ 2,150   $ 2,150   $ 2,150   $ 103,575   $ 102,500   —  

Revolving credit facility

    18,000     —       —       —       18,000     —     —  

Operating leases

    27,994     6,266     5,919     5,668     5,393     3,849   899

Liability for redemption of stock in recapitalization

    5,349     5,349     —       —       —       —     —  

The table above does not include interest payments with respect to outstanding loans, which are variable and therefore fluctuate with interest rate fluctuations. Based on the variable rate debt outstanding as of December 31, 2006, a hypothetical 1% increase in interest rates would increase interest expense by approximately $2.3 million on an annual basis.

 

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We anticipate that we will experience an increase in our capital expenditures and lease commitments consistent with our anticipated growth in operations, infrastructure and personnel during 2007.

Off-Balance Sheet Arrangements

As of December 31, 2006, we had no off-balance sheet arrangements.

Indemnification

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 SFAS No. 5, Accounting for Contingencies, as interpreted by FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others. We have secured copyright and trademark registrations for our software products with the U.S. Patent and Trademark Office, and we 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.

Newly Adopted and Recently Issued Accounting Standards

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We are required to adopt the provisions of FIN 48 in 2007. We believe that the impact of FIN 48 on our consolidated results of operations and financial position will be immaterial.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We currently are evaluating the potential impact of SFAS 157 on our consolidated results of operations and financial condition.

Qualitative and Quantitative Disclosures about Market Risk

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. At December 31, 2006, we had $6.7 million in cash and cash equivalents. Our interest expense associated with our term loan and revolving credit facility will vary with market rates. As of December 31, 2006, we had approximately $230.5 million in variable rate debt outstanding. Based upon the variable rate debt outstanding as of December 31, 2006, a hypothetical 1% increase in interest rates would increase interest expense by approximately $2.3 million on an annual basis, and likewise decrease our earnings and cash flows.

 

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We cannot predict market fluctuations in interest rates and their impact on our 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.

In order to provide us with protection against significant increases in market interest rates, in June 2005 we entered into an interest rate cap covering $60 million of principal outstanding under our credit agreement. The agreement provides for payment to us equal to the excess, if any, of the LIBO Rate over 6.25% times $60 million. At December 31, 2006, the fair value of the interest rate cap was reduced to a nominal amount. This agreement expires on December 31, 2007.

Based on the investment interest rate and our cash and cash equivalents balance as of December 31, 2006, a hypothetical 1% decrease in interest rates would decrease interest income by approximately $60,000 on an annual basis, and likewise decrease our earnings and cash flows. We do not use derivative financial instruments in our investment portfolio.

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound and the Philippine peso. As our international operations continue to grow, we may choose to use foreign currency forward and option contracts to manage currency exposures. We do not currently have any such contracts in place, nor did we have any such contracts during 2004, 2005 or 2006. To date, exchange rate fluctuations have had little impact on our operating results and cash flows given our limited international presence.

 

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BUSINESS

Company Overview

We are a leading provider of enterprise applications software and related services designed specifically for project-focused organizations. Project-focused organizations generate revenue from defined, discrete, customer-specific engagements or activities, rather than from mass-producing or distributing products. These organizations typically require specialized software to help them automate complex business processes around the engagement, execution and delivery of projects. Our software enables them to greatly enhance the visibility they have over all aspects of their operations by providing them increased control over their critical business processes, accurate project-specific financial information and real-time performance measurements. With our software applications, project-focused organizations can better measure business results, optimize performance and streamline operations, thereby enabling them to win new business.

We believe the potential market for enterprise applications software for project-focused organizations is large and growing. Project-focused firms span numerous industries and range in size from small- and medium-sized local and regional firms to Fortune 100 global organizations. A prominent industry research firm estimates the size of the worldwide enterprise software market for project-focused organizations at $17.4 billion in 2005 and projects it to grow to $22.9 billion by 2010. We believe that spending on software and technology in this market is increasing in large part due to strong growth in the services-based economy and the fact that enterprise applications software has generally become more affordable and accessible to small- and medium-sized businesses.

Our enterprise applications software products provide end-to-end business process functionality designed to streamline and manage the complex business processes of project-focused organizations. Our software solutions are industry-specific and “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 applications includes:

 

   

Comprehensive financial management solutions that integrate project control, financial processing and accounting functions, providing business owners and project managers with real-time access to information needed to track the revenue, costs and profitability associated with the performance of any project or activity;

 

   

Business applications that enable employees across project-focused organizations to more effectively manage and streamline business processes, including resource management, sales generation, human resources, corporate governance and performance management; and

 

   

Enterprise project management solutions to manage project costs and schedules, measure earned value, evaluate, select and prioritize projects based on strategic business objectives and facilitate compliance with regulatory reporting requirements.

As of May 1, 2007, we had over 12,000 customers worldwide that spanned numerous industries and ranged in size from small organizations to large enterprises. We serve customers primarily in the following markets:

A/E, government contracting, aerospace and defense, information technology services, consulting, discrete project manufacturing, grant-based not-for-profit organizations and government agencies. In many of these markets, we have established strong brand recognition and market share. In the A/E market, as of December 2006, our products were deployed by over 80% of the top 500 A/E firms in the United States. In addition, as of May 2006, 67% of the top 100 federal information technology contractors were our customers, including nine of the top ten companies. In 2006, our total revenue increased 49% to $228.3 million and our net income increased 75% to $15.3 million, in each case from the prior year.

Industry Overview

Enterprise applications software provides organizations with the ability to streamline, automate and integrate a variety of business processes, including financial management, supply chain management, human capital management, project and resource management, customer relationship management, manufacturing and business performance management.

 

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General purpose enterprise application vendors often are not able to meet the needs of project-focused businesses because they lack project-focused capabilities and market functionality. Adapting general purpose 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.

In 2007, Forrester Research, a leading industry research firm, identified the project-focused business software market as a separate category of enterprise applications software. Their findings indicated that project-focused organizations are inadequately served by existing generic enterprise software applications developed for the manufacturing world. According to Forrester Research, business process and applications professionals seeking a project-focused solution remain frustrated with many project management, enterprise resource planning and/or customer relationship management solutions that are ill-equipped to address the project needs of an industry. Forrester also observed that business process and applications professionals will continue to seek solutions that align interactive processes and streamline how users can deliver on engagements, projects and programs. Forrester Research concluded that project-focused organizations require highly specialized applications software that automates and streamlines project-focused engagements, projects and programs.

The unique characteristics of project-focused organizations create special requirements for their business applications that frequently surpass the capabilities of generic applications software packages (for example, those designed primarily for manufacturing or financial services firms). Project-focused organizations require sophisticated, highly integrated software applications that automate end-to-end business processes across each stage of the project lifecycle. Project lifecycles vary significantly in length and complexity and can be difficult to forecast accurately. These projects need to be managed within the context of a company’s complete portfolio of existing and potential future projects.

Project-focused organizations often operate in environments or industries that pose unique challenges for their managers, who are required to maintain specific business processes and accounting methodologies. For example, government contractors are subject to oversight by various U.S. federal government agencies, such as the GAO and the DCAA, which have regulations that require these companies to have the ability to audit specific project performance in detail and to accurately maintain and report compliance to their government agency customers.

Our Competitive Strengths

Our key competitive strengths include the following:

 

   

Superior Value Proposition. Our software applications offer built-in project functionality at their core, making them faster and less costly to deploy, use and maintain. Our modular software architecture also enables our products to be deployed as a comprehensive solution or as individual applications, which provides our customers with the flexibility to select the applications that are relevant to them. Conversely, generic “one-size fits all” applications software often requires extensive customization to add the specific functionality needed to manage complex project-focused organizations. This customization often requires significantly more time and expense for the customer to install, operate and maintain the software.

 

   

Built-In Processes and Compliance. Project-focused organizations are often challenged with tracking and complying with intricate accounting policies and procedures, auditing requirements, contract terms and customer expectations. Our software is designed to make it easy for project managers and business executives to accurately monitor and measure specific project performance in detail with consistent application of business processes. Our applications also enable our customers to maintain and report compliance with contract requirements to government agencies and their customers.

 

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Deep Domain Expertise. For more than 20 years, our exclusive focus on meeting the complex needs of project-focused organizations has provided us with extensive knowledge and industry expertise. Our significant subject matter expertise enables us to develop, implement, sell and support applications that are tailored to the existing and future needs of our customers.

 

   

Leading Market Position. We are a leading provider of enterprise applications software designed specifically for project-focused organizations. As of May 1, 2007, we had over 12,000 customers, including over 80% of the top 500 A/E firms in the United States and 67% of the top 100 federal information technology contractors. We believe our strong market position has helped us develop a widely recognized brand within our target markets. We also have leveraged our market position to foster a network of alliance partners to help us market, sell and implement our software and services.

Our Business Strategy and Growth Opportunities

We plan to focus on the following objectives to enhance our position as a leading provider of enterprise software applications to project-focused organizations:

 

   

Expanding Penetration of Established Markets. We believe that our strong brand recognition and leading market position within the project-focused software market, particularly among the A/E and government contracting industries, provide us with significant opportunities to expand our sales within these markets. For example, while we currently have approximately 7,000 A/E customers as of December 31, 2006, we estimate that there are an additional 42,000 U.S.-based A/E firms with greater than 10 employees that are potential new business prospects for us. According to the DCAA, during the federal government’s fiscal years 2005 and 2006, approximately 5,100 new government contractors became subject to audit by the federal government for the first time, providing us with a significant growth opportunity. This primarily has occurred as a result of the changing needs of the federal government for goods and services, and the federal government’s desire to encourage and foster small organizations to do business with the federal government.

 

   

Expanding Within Existing Customer Base. As of May 1, 2007, we had an installed base of over 12,000 customers, each utilizing at least one of our applications. We are continuously looking to increase our sales to our existing customers, both by increasing the number of our applications utilized by them and by offering upgrades from our legacy applications to our current portfolio. We offer a broad range of project-focused software applications addressing a variety of business processes and regularly introduce additional functionality to further expand the capabilities of our applications as well as simplify and accelerate deployment of our existing products. We also introduce new products through internal development, acquisitions and partnering with third parties. We believe that customers experiencing the benefits afforded by our applications will look to us as they expand the scope of business processes that they seek to automate.

 

   

Expanding Our Network of Alliance Partners. We currently have an established network of alliance partners which provides us with assistance in marketing, selling and implementing our applications. In order to meet the diverse solution requirements of our customers and to reach new markets and penetrate further into existing markets, we plan to expand our ecosystem of alliance partners. We anticipate expanding current relationships and establishing new partnerships with reseller, consulting and technology partners in the United States and international markets. This expanding network of alliance partners should enable us to enhance our penetration into new markets and increase our geographical sales force coverage.

 

   

Growing Our Presence in New Markets. We believe that our experience and success in attaining leadership in a number of key project-focused industries provides us with the opportunity to penetrate additional project-focused markets. We are building upon our track record of customer successes outside our established markets in industries such as consulting, information technology services,

 

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discrete project manufacturing and grant-based not-for-profits. We continue to develop additional industry-specific product functionality and are investing in targeted sales and marketing activities for new markets.

 

   

Growing Internationally. We intend to further expand our presence outside the United States, initially targeting countries where English is the primary business language. We believe project-focused organizations in Canada, the United Kingdom, Europe and the Asia-Pacific region are currently underserved for the products we offer. We are increasing the size of our international sales, consulting, support and marketing organizations, as well as modifying existing products to meet the needs of our existing and future international customers.

 

   

Making Strategic Acquisitions. Since October 2005, we have acquired three companies to broaden our product portfolio and expand our customer base. In addition, in April 2007, we acquired certain assets of a fourth company to expand our services team. We plan to continue to pursue acquisitions that present a strong strategic fit with our existing operations and are consistent with our overall growth strategy. We may also target future acquisitions to expand or add product functionality and capabilities to our existing product portfolio, add new products or solutions to our product portfolio or further expand our services team.

Our Products and Services

Products

We provide integrated solutions that are designed to meet the evolving needs of project-focused organizations of various sizes and complexity. These organizations use our software to automate 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 are designed to provide the following benefits to our customers:

 

   

Improving Business Decisions. Our applications enable decision makers to analyze multiple facets of their businesses in real-time and improve decision-making by providing reporting, business intelligence, planning and analytical capabilities.

 

   

Optimizing Resources. Our applications enable automation of scheduling, allocation, budgeting and forecasting of resources dispersed across projects based on skills, location, availability and other attributes. As a result, resource planners can determine whether proposed fees are accurate, appropriate staff is available and utilized effectively, and projects are completed on time and on budget.

 

   

Winning New Business. Our customer relationship management applications enable our customers’ sales and marketing groups to generate demand for their services, build stronger customer relationships, manage their project pipeline, more accurately forecast revenue, automate proposals and create accurate estimates for proposed services.

 

   

Streamlining Business Operations. Our applications help organizations lower their transaction processing costs, improve billing processes, improve cash flow and reduce administrative burdens on employees through automation of a variety of key business processes, including time collection, expense management and employee self-service.

 

   

Facilitating Compliance and Governance. Our applications help organizations comply with complex accounting and auditing requirements and report compliance to government agencies and their customers and maintain standardized controls around key business processes.

 

   

Managing, Evaluating and Prioritizing Projects. Our applications enable our customers to efficiently manage project profitability, monitor project schedule and progress and evaluate, select and prioritize projects based on strategic business objectives. In addition, our earned value management applications enable organizations to plan and monitor the complex relationships between actual and forecasted project costs, schedules, physical progress and earned revenue.

 

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Our applications portfolio is comprised of four major product families, each designed to meet the specific functionality and scalability requirements of the project-focused industries and customers we serve. The following table outlines our major product families:

 

Product Family

  

Targeted Customers and

Value Proposition

  

Features and Functionality

Deltek Costpoint   

•   Sophisticated, medium- and large-scale project-focused organizations such as government contractors and commercial project-focused organizations.

 

•   Customers purchase Costpoint to manage complex project portfolios, and to facilitate compliance with detailed, regulatory requirements. The Costpoint product family includes a broad set of scalable, integrated applications that streamline project-focused business processes across multiple disciplines and geographic locations.

  

•   Provides a comprehensive financial management solution that tracks, manages and reports on key aspects of a project: planning, estimating, proposals, budgets, expenses, indirect costs, purchasing, billing, regulatory compliance and materials management.

 

•   Includes a portfolio of business applications which deliver specialized functionality such as time collection, expense management, employee self-service, business performance management and human capital management.

 

•   Scales to support complex business processes and large numbers of concurrent users.

Deltek Vision   

•   Professional services firms of all sizes, including A/E, information technology and management consulting firms.

 

•   Customers purchase Vision for its ability to automate end-to-end business processes for project-focused firms, its intuitive Web-based interface and its innovative capabilities such as mobile device support and executive dashboards.

  

•   An integrated solution that incorporates critical business functions, including project accounting, customer relationship management, resource management, time and expense capture and billing.

 

•   Provides decision makers with real-time information across all business processes, allowing them to identify project trends and risks to facilitate decision making, improve business performance and align users around common goals.

 

•   Highlights key performance indicators to determine project health and provides “one-click” access to project details needed to pinpoint and quickly resolve root causes of issues.

Deltek GCS Premier   

•   Small and medium-sized government contractors who find that the limitations of spreadsheets and traditional small-business accounting packages prevent them from meeting government audit requirements in a cost effective way.

 

•   Customers purchase GCS for its ease of installation, built-in functionality and compliance with government regulations and reporting requirements and proven track record of customer success.

  

•   Provides a robust accounting and project management solution that is cost effective, easy to use and helps firms comply with DCAA and other regulatory requirements.

 

•   Provides a full view of project and financial information, enabling firms to respond quickly and accurately to variations in plans and profit projections.

 

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Product Family

  

Targeted Customers and

Value Proposition

  

Features and Functionality

Enterprise Project Management Solutions   

•   Professional services firms of all sizes that manage complex project portfolios. Our enterprise project management solutions help firms select the right projects, allocate resources across projects, mitigate risks and ultimately complete projects on time and on budget.

 

•   Customers purchase our enterprise project management software for its ability to offer an end-to-end project selection, planning, risk assessment, resource balancing and earned value management reporting.

  

•   Provides a comprehensive solution for enterprise project management.

 

•   Includes Deltek Cobra, the market-leading system for managing project costs, measuring earned value and analyzing budgets, actuals and forecasts. With Cobra, businesses can measure the health and performance of projects and satisfy government-mandated regulations.

 

•   Includes Deltek Open Plan, an enterprise-grade project management system and Deltek wInsight, a leading tool for calculating, analyzing, sharing, consolidating and reporting on earned value data.

 

•   Our enterprise project management solutions offer risk management and reporting tools and support many industry-standard third party project scheduling tools.

Consulting Services

We employ a dedicated services team that provides a full range of consulting and technical services, from the early planning and design stages of an implementation to end user training. 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 can be categorized into the following activities:

 

   

Solution architecture services that align our applications and software solutions with our customers’ business processes.

 

   

Application implementation services for our products, including business process design, software installation and configuration, application security, data conversion, integration with legacy applications and project management.

 

   

Technology architecture design and optimization of our applications and related third party software and hardware configuration in our customers’ specific technology environments.

 

   

Project team and end-user training for our customers and partners in the functionality, configuration, administration and use of our products, including classroom training at various internal facilities, which we refer to as Deltek University; classroom training at customer sites; public seminars and webinars; and self-paced, self-study e-learning modules.

Technical Maintenance and Support

We receive maintenance services fees from customers for product support, upgrades and other customer services. Our technical support organization is aimed at answering questions, resolving issues and keeping our customers’ operations running efficiently. We offer technical support through in-person unlimited phone-based support six days a week, and also provide 24x7 access to our web support system. Our comprehensive support program also includes on-going product development and software updates, which includes minor enhancements, such as tax and other regulatory updates, as well as major updates such as new functionality and technology upgrades.

Our maintenance services revenues have been growing given the contractual nature of this revenue stream, strong customer satisfaction with our products, low customer turnover, low voluntary termination of maintenance

 

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and our customers’ need to purchase additional licenses as their businesses grow. In 2006, we experienced nearly a 100% maintenance attachment rate, with each license sale, whether to a new or existing customer, providing incremental maintenance revenue. In 2006, we experienced a retention rate in excess of 90% in our maintenance customer base. Initial annual maintenance fees are set as a percentage of the software list price at the time of the initial license sale. Maintenance services are billed quarterly and paid in advance.

Customers

We consider a customer to be an organization that purchases a software license, or licenses, for the right to use one or more of our products. As of May 1, 2007, we had over 12,000 customers worldwide representing a wide range of industries including A/E firms, government contractors, aerospace and defense contractors, information technology services firms, consulting companies, discrete project manufacturing companies, grant-based not-for-profit organizations and government agencies, among others. Our software is used by organizations of various sizes, from small businesses to large enterprises. In 2004, 2005 and 2006, no single customer accounted for five percent or more of our total revenue. The following table provides a sample cross section of customers as of December 31, 2006 by primary markets:

 

Aerospace & Defense

  

Architecture &

Engineering

  

Consulting Companies

  

Discrete Project
Manufacturing

•   Concurrent Technologies

 

•   L-3 Communications

 

•   Orbital Sciences

 

•   BAE Systems

  

•   ARCADIS

 

•   HOK

 

•   TKDA

 

•   URS Corporation

  

•   The Durant Group

 

•   Fuld & Company

 

•   Garver Engineers

 

•   The Pragma Corporation

  

•   Applied Geo Technology

 

•   Northrop Grumman

 

•   Teledyne Brown Engineering

 

•   Telephonics

Government Agencies

  

Government Contractors

  

Grant-Based

Not-for-Profit

  

Information Technology
Services

•   U.S. Air Force

 

•   U.S. Army

 

•   U.S. Department of Health and Human Services

 

•   U.S. Navy

  

•   CACI

 

•   CSC

 

•   General Physics Corporation

 

•   SRA International

  

•   The Brookings Institution

 

•   National Democratic Institute

 

•   National Fish and Wildlife Federation

 

•   Research Triangle Institute

 

  

•   Optimation Technology

 

•   Perot Systems

 

•   SM Consulting

 

•   Triton Services

Customer Case Studies

The following case studies illustrate how various customers use our four product lines to more efficiently manage their project-focused organizations.

HOK Group, Inc. (HOK)

Vision: With over 2,100 employees in 24 offices on four continents, HOK is a large A/E firm. In 2003, HOK implemented Deltek Vision to streamline its operations to maintain its market position while expanding globally. HOK needed to gain better understanding of how its global resources were being utilized to optimize staffing across numerous projects, thereby increasing profitability. Before implementing Vision, HOK’s resource utilization reporting was a time-consuming, manually intensive effort that utilized a variety of legacy systems. With its implementation of Vision, most of its manual processes have been automated, allowing project

 

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managers to better identify and mitigate project cost and scheduling issues. HOK executives now have up-to-date, accurate visibility into their global workforce, which they have stated is contributing to greater firm profitability. Today, HOK’s entire portfolio of projects, including some of the largest and most high-profile projects in the world, such as Dubai Marina City in the United Arab Emirates, LAC USC Hospital in Los Angeles, OMNI Hotel in Dallas, and the Barts and the London Hospital in the United Kingdom, is managed with Deltek Vision.

Orbital Sciences Corporation (Orbital)

Costpoint: Orbital Sciences Corporation has been a Deltek Costpoint customer since 2001. Orbital develops and manufactures small rockets and space systems for commercial, military and civil government customers and other U.S. government agencies. Orbital’s primary products are satellites and launch vehicles, including low-orbit, geosynchronous-orbit and planetary spacecraft for communications, remote sensing, scientific and defense missions; ground- and air-launched rockets that deliver satellites into orbit; and missile defense systems that are used as interceptor and target vehicles. Orbital also offers space-related technical services to government agencies and develops and builds software-based transportation management systems for public transit agencies and private vehicle fleet operators.

Orbital uses our products as an accounting system to assist with automating, collecting and analyzing project data and complying with mandated regulatory reporting requirements. Orbital also uses our products to assist with streamlining financial reporting, bidding on future projects with greater consistency and accuracy, and improving operational efficiency across its organization.

Applied Geo Technologies, Inc. (AGT)

GCS Premier: As a premier, tribally owned provider of aerospace and defense services, AGT was looking to further diversify its business. AGT, which is certified by the U.S. Small Business Administration as a tribally owned 8(a), HUBZone and Small Disadvantaged Business, was seeking a software solution that would enable it to make the transition into the prime federal government contracting market, as well as a partner that would help it navigate the complex requirements of that market. In order to achieve this goal, AGT chose us to assist it through the beginning stages of competing for its first DOD prime contract to implementing an accounting system that provided out-of-the-box functionality to manage its project-focused organization. Through the use of our software products and consulting expertise, AGT has stated that it has been able to win new business, improve data accuracy and increase project cash flow and profitability.

Sales and Marketing

We sell our products primarily through a combination of our own sales force complemented by an established network of indirect sales partners. Our direct sales force consists of experienced software sales professionals organized by customer type (for example, new vs. existing) under common leadership. The sales teams all operate under a common sales methodology that focuses on the individual markets and customers we serve. Our network of alliance partners complements our direct sales efforts by selling our products and providing implementation services and support to our customers. These alliance partners primarily serve our Vision product family, support our international sales activity and provide sales and implementation support for our products sold to the entry level government contracting and A/E markets. Our indirect sales channel is comprised of approximately 30 independent reseller partners who primarily cover entry level markets. In 2006, our sales force directly generated approximately 90% of our license revenue sales and our indirect channel was responsible for the remaining 10%.

In 2005 and 2006, more than 95% of our total revenue was generated from customers inside the United States and less than 5% of our revenue was generated from international customers. For 2004, we did not record international revenue separately.

 

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We engage in a variety of marketing activities in order to optimize our market position, enhance lead generation, increase overall brand awareness, increase our revenues within key markets and promote our new and existing products. Our specific marketing activities include demand generation, market research and development of our market strategy, advertising, participation at industry conferences and trade-shows, promoting our product capabilities to industry analysts and the press, publication of corporate brochures, white papers and other marketing collateral, field marketing campaigns and managing our annual and periodic customer conferences.

Strategic Alliances

A significant component of our business strategy is to maintain and form alliances to assist us in marketing, selling and implementing our software and services. 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. The following table outlines our various types of strategic alliances and is a cross-section of our strategic alliance partners as of December 31, 2006:

 

Type of Alliance

  

Role

  

Examples

Technology Infrastructure Partners   

•   Provide infrastructure technologies on which our products operate, including database, hardware and platform solutions.

 

•   Enable us to provide applications that leverage our customers’ existing information technology infrastructure.

  

•   BEA Systems

 

•   Hewlett-Packard

 

•   Microsoft

 

•   Oracle

Independent Software Vendors   

•   Provide applications that complement and integrate with our products.

 

•   Enable us to provide our customers with additional point solution functionality complementing their Deltek applications.

  

•   Actuate

 

•   Applimation

 

•   Cognos

Resellers   

•   Provide sales, implementation, consulting, support, training and customization services.

 

•   Assist us in selling our products into new markets and geographies.

  

•   Central Consulting Group

 

•   Innovative Solutions Group

 

•   SilverEdge Systems Software

Consulting   

•   Offer implementation, consulting, support, training and customization services and refer potential customers.

 

•   Promote wider acceptance and adoption of our solutions.

  

•   Beason & Nalley

 

•   Beers & Cutler

 

•   MorganFranklin

 

•   ZweigWhite

CPA Accountant Network   

•   Recommend and refer our solutions when providing accounting, tax and related advisory services.

  

•   Aronson & Company

 

•   Cherry, Bekaert & Holland

 

•   Watkins, Meegan, Drury & Company

 

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Type of Alliance

  

Role

  

Examples

Hosting & Business Process Outsourcing   

•   Provide off-site hosting and/or managed infrastructure services.

 

•   Offer an alternative to our customers that would rather outsource systems administration and information technology management.

  

•   Compass Connections

 

•   Green Kelly

 

•   NeoSystems

 

•   Technology & Business Solutions

Business Service   

•   Provide products and business services that complement back-office systems, such as forms and checks.

 

•   Allow us to offer additional products and features to our customer base.

  

•   Deluxe Corporation

 

•   Foremost

 

•   Visibility Software

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 control, product management, documentation, design and project management/software quality assurance. Our research and development expenses were $22.9 million, $26.2 million and $37.3 million in 2004, 2005 and 2006, respectively. The increased spending in 2006 is primarily related to investments for future applications to drive growth across our business. As of December 31, 2006, we had approximately 350 employees in research and development, of which approximately 230 were in the United States and approximately 120 were in Manila, Philippines. In addition, there are approximately 55 software and product developers in Bangalore, India trained on our products and available on an outsourced basis. As we continue to expand our development efforts, we anticipate that we will add both domestic and international resources in order to leverage technical expertise available around the world.

Technology

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 solutions are both scalable and are 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 each of our major product families is as follows:

Vision offers a full range of highly integrated applications, which incorporate critical business functions, including project accounting, customer relationship management, resource management, time and expense capture and billing. Vision is a completely web-native software application based on the latest Microsoft platform technologies, including .NET, Microsoft SQL Server and the Microsoft Office System. Designed for small- and medium-sized businesses, Vision is intended to minimize the technology burden on firms with limited information technology staff.

Costpoint is designed to automate and manage complex project-focused business processes. Built using J2EE technology, Costpoint is highly configurable and modular, allowing our customers the ability to support project-centric business processes and large workloads. Costpoint’s modular architecture supports seamless integration of business applications which deliver specialized functionality such as time collection, expense management, business performance management, employee self-service and human capital management.

GCS Premier is a turnkey Windows application designed for small government contracting organizations. The software is designed to be easy to install, learn and maintain with minimal information technology support.

 

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Our enterprise project management product line provides a comprehensive solution for enterprise project management, including earned value management throughout the project lifecycle. Built using .NET and Web-based technologies, these solutions integrate with our own applications, as well as third party applications such as Microsoft Project and Primavera P3/SureTrak. This product line also includes a secure, web-based collaboration portal that provides the ability for distributed team members to collaborate on a project.

Our products are designed for easy deployment and integration with third party technologies within a company’s enterprise, including application servers, security systems and portals. Costpoint and Vision also provide web services interfaces and support for Service-Oriented Architectures to facilitate enhanced integration within the enterprise.

Competition

The global enterprise applications market for project-focused organizations is competitive and fragmented. When competing for large enterprise customers with over 1,000 employees, we face the greatest competition from large, well-capitalized competitors such as Oracle, SAP and Lawson Software. These companies have recently refocused their marketing and sales efforts to the middle market, in which we have a substantial market position. These vendors seek to influence customers’ purchase decisions by emphasizing their more comprehensive horizontal product portfolios, greater global presence and more sophisticated multi-national product capabilities. In addition, these vendors commonly bundle their ERP 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, which range in size from 100 to 1,000 employees, we often compete with vendors such as Epicor, Lawson Software and Primavera. Mid-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 fewer competitors, including JAMIS, BST Global and Microsoft. Customers in the small business segment typically are searching for solutions which provide out-of-the-box functionality that help them automate all of their business processes and improve operational efficiency.

Although some of our competitors are larger organizations, 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, built-in compliance functionality, domain expertise, leading market position and highly referenceable customer base.

Intellectual Property

We rely upon a combination of copyright, trade secret and trademark laws and non-disclosure and other contractual arrangements to protect our proprietary rights. We provide our software to customers pursuant to license agreements, including shrink-wrap and click-wrap licenses. 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.

 

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Employees

As of December 31, 2006, we had 1,041 employees worldwide, including 152 in sales and marketing, 350 in product development, 408 in customer services and support and 131 in general and administrative positions. Of our 1,041 worldwide employees, 908 were located in the United States and 133 were located internationally. None of our employees is represented by a union or party to a collective bargaining agreement.

Facilities

Our corporate headquarters is located in Herndon, Virginia, where we lease approximately 108,000 square feet of space under two leases expiring in 2012. In addition, we have offices in California, Colorado, Florida, Massachusetts, Minnesota, Oregon and Texas. Internationally, our offices are located in Canada, Hong Kong, the Philippines and the United Kingdom. As of the years ended December 31, 2004, 2005 and 2006, $0.3 million, $0.5 million and $0.6 million of our total long-lived assets of $20.1 million, $38.0 million and $76.1 million, respectively, were held outside of the United States.

Legal Proceedings

On August 31, 2006, C.H. Fenstermaker & Associates, Inc. (Fenstermaker) filed suit in the 15th Judicial District Court for the Parish of Lafayette, State of Louisiana, alleging that we converted certain visualization technology, allegedly created by Fenstermaker and referred to as the “BLINK technology.” Fenstermaker seeks unspecified damages stemming from alleged injuries caused by our supposed conversion of the BLINK technology. Fenstermaker asserts these claims under Louisiana tort law and the Louisiana Unfair Trade Practices and Consumer Protect Law. Following our removal of the case to federal court, the action is currently pending in the U.S. District Court for the Western District of Louisiana (Civil Action No. 6:06-CV-1801 W.D. La.).

We are involved in various legal proceedings from time to time that are incidental to the ordinary conduct of our business. We are not currently involved in any legal proceeding in which the ultimate outcome, in our judgment based on information currently available, is likely to have a material adverse effect on our business, financial condition or results of operations.

 

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MANAGEMENT

Executive Officers and Directors

Set forth below is information concerning our executive officers and directors as of May 1, 2007.

 

Name

   Age   

Position(s)

Kevin T. Parker

   47    Chairman, President and Chief Executive Officer

Eric J. Brehm

   48    Executive Vice President of Product Development

William D. Clark

   47    Executive Vice President and Chief Marketing Officer

Richard M. Lowenstein

   44    Executive Vice President of Professional Services

Richard P. Lowrey

   47    Executive Vice President of Products and Strategy

Carolyn J. Parent

   41    Executive Vice President of Worldwide Sales

James C. Reagan

   48    Executive Vice President, Chief Financial Officer and Treasurer

Holly C. Kortright

   40    Senior Vice President of Human Resources

David R. Schwiesow

   56    Senior Vice President, General Counsel and Secretary

Alok Singh (1)

   53    Lead Director

Michael B. Ajouz

   33    Director

Nanci E. Caldwell (1)(2)

   49    Director

Kathleen deLaski (1)

   47    Director

Joseph M. Kampf (1)

   62    Director

Steven B. Klinsky

   50    Director

Albert A. Notini (2)

   50    Director

Janet R. Perna (2)

   58    Director

(1) Member of our compensation committee.
(2) Member of our audit committee.

Kevin T. Parker has served as our President and Chief Executive Officer since June 2005 and as Chairman of the board since April 2006. Prior to joining Deltek, Mr. Parker served as Co-President of PeopleSoft, Inc., an enterprise applications software company, from October 2004 to December 2004, and as the Executive Vice President of Finance and Administration and Chief Financial Officer of PeopleSoft from January 2002 to October 2004. Prior to January 2002, Mr. Parker has held various positions, including as the Senior Vice President and Chief Financial Officer of PeopleSoft, the Senior Vice President and Chief Financial Officer of Aspect Communications Corporation, a customer relationship management software company, and the Senior Vice President of Finance and Administration at Fujitsu Computer Products of America. He currently serves on the board of directors of Polycom, Inc. Mr. Parker received his B.S. in Accounting from Clarkson University, where he serves on the board of trustees.

Eric J. Brehm has served as our Executive Vice President of Product Development since June 2006. From November 2001 to June 2006, Mr. Brehm served as our Executive Vice President and General Manager of the Professional Services Market Group. Previously, Mr. Brehm served as the Vice President of Development for Harper and Shuman, Inc., a software company that we acquired in 1998. Mr. Brehm received his B.A. in Economics from Brandeis University and his Master of Information Sciences from Northeastern University in Massachusetts.

William D. Clark has served as our Executive Vice President and Chief Marketing Officer since October 2005. From February 2005 to October 2005, Mr. Clark served as Vice President of Global Product Marketing at Novell, Inc., an enterprise applications software developer. Prior to joining Novell, from May 2003 to September 2004, Mr. Clark served as Executive Vice President and Chief Marketing Officer of Mantas, Inc., a financial services software developer, and, from December 2001 to May 2003, he served as Vice President of Marketing of Bang Networks, Inc., a computer technology and service firm. Mr. Clark also has held various positions at IBM Corporation and JP Morgan & Co. Mr. Clark received his B.S. in Business Administration from Drexel University.

 

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Richard M. Lowenstein has served as our Executive Vice President of Professional Services since June 2006. From August 2003 to March 2006, Mr. Lowenstein served as Vice President of Professional Services of Agile Software Corporation, a product lifecycle management software developer. From September 2002 to July 2003, Mr. Lowenstein served as Managing Director of Alberdale Capital, a private equity firm. Prior to joining Alberdale Capital, Mr. Lowenstein held various management positions at PeopleSoft, Workscape, Inc., Sybase, Inc. and Accenture Ltd. Mr. Lowenstein received his B.S. in Industrial and Systems Engineering from the University of Florida.

Richard P. Lowrey has served as our Executive Vice President of Products and Strategy since June 2006. Mr. Lowrey joined us as a systems consultant in 1995 and has since served as Managing Consultant, Director of Training, Director of Time Collection Product Group, Business Development Director, Vice President of Strategy and Business Development and, most recently, as Executive Vice President and General Manager of Enterprise Solutions Group for the company. Prior to joining our company Mr. Lowrey held financial positions at Titan Corporation, Digicon Corporation and SRA International. Mr. Lowrey received his B.S. in Public Administration from George Mason University.

Carolyn J. Parent has served as our Executive Vice President of Worldwide Sales since March 2006. From March 2004 to March 2006, Ms. Parent served as National Sales Director at BearingPoint, Inc., a management and technology consulting firm. From January 2002 to March 2004, Ms. Parent served as Executive Vice President of Sales at Sequation, Inc., a software company. Prior to joining Sequation, Ms. Parent held various executive positions at Enterworks, Inc. and Xacta Corporation, a division of Telos Corporation, a software company. Ms. Parent received her B.A. in English from Villanova University.

James C. Reagan has served as our Executive Vice President, Chief Financial Officer and Treasurer since October 2005. From December 2004 to September 2005, Mr. Reagan served as Executive Vice President and Chief Financial Officer of Aspect Communications Corporation, a customer relationship management software company. Prior to joining Aspect, from May 2002 to May 2004, Mr. Reagan held various senior financial positions at American Management Systems, Inc. Prior to May 2002, Mr. Reagan served as Vice President, Finance and Administration at Nextel Communications. Mr. Reagan received his B.B.A. from the College of William and Mary and his M.B.A. from Loyola College in Baltimore. Mr. Reagan is a Certified Public Accountant in the Commonwealth of Virginia.

Holly C. Kortright has served as our Senior Vice President of Human Resources since October 2006. From March 2006 to October 2006, Ms. Kortright was Vice President of Human Resources for Capital One Financial Corporation, a global diversified financial services provider. From August 1999 through March 2006, she held various positions at Capital One, including Director of Human Resources, Director of Leadership Development and Senior Management Development Consultant. Ms. Kortright received her B.S. in Industrial Engineering from Lehigh University and her M.B.A. from Indiana University.

David R. Schwiesow has served as our Senior Vice President and General Counsel since May 2006. From December 2000 to May 2006, Mr. Schwiesow, at different times, served as Deputy General Counsel, Managing Director and Vice President of BearingPoint, Inc., a management and technology consulting firm. Prior to December 2000, Mr. Schwiesow served as Vice President and Associate General Counsel for The Rouse Company. He received his B.S. in Economics from The Wharton School of the University of Pennsylvania and his J.D. from Stanford Law School.

Alok Singh has served as a director since April 2005, and as lead director since April 2006. Mr. Singh’s duties as lead director are to assist the chairman in establishing the agenda for meetings of the board of directors, to preside, in the absence of the chairman, at meetings consisting solely of the non-executive members of the board of directors and to act as a liaison between the board and shareholders or other third parties who request direct communications with the board. Mr. Singh is a Managing Director of New Mountain Capital, a private equity investment firm based in New York. Prior to joining New Mountain Capital in September 2002, Mr. Singh

 

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served as a Partner and Managing Director of Bankers Trust and established and led the Corporate Financial Advisory Group for the Americas for Barclays Capital. Mr. Singh is non-executive Chairman of Overland Solutions, Inc. and serves on the boards of directors of Apptis, Inc., Ikaria Holdings, Inc. and Validus Holdings, Ltd. He also serves on the advisory board of investment bank Sonenshine Partners. Mr. Singh received both his B.A. in Economics and History and his M.B.A. in Finance from New York University.

Michael B. Ajouz has served as a director since April 2005. Mr. Ajouz joined New Mountain Capital in 2000 as an Associate and is currently a Managing Director of New Mountain Capital. Prior to 2000, Mr. Ajouz served as an Associate at the private equity firm of Kohlberg Kravis Roberts & Co., where he conducted analytical evaluations in various industries and in various analyst positions at Goldman, Sachs & Co. and Cornerstone Research. Mr. Ajouz serves as a director of Connextions, Inc., Apptis, Inc. and National Medical Health Card Systems, Inc. Mr. Ajouz received his B.S. in Economics from The Wharton School of the University of Pennsylvania.

Nanci E. Caldwell has served as a director since August 2005. Ms. Caldwell has been a technology consultant since January 2005. From April 2001 to December 2004, Ms. Caldwell worked at PeopleSoft, serving as Senior Vice President and Chief Marketing Officer from April 2001 to January 2002, and as Executive Vice President and Chief Marketing Officer from January 2002 to December 2004. Prior to joining PeopleSoft in 2001, Ms. Caldwell held various senior management positions at Hewlett-Packard Company. Ms. Caldwell serves on the boards of directors of Live Ops, Inc. and Network General Central Corporation. Ms. Caldwell received her B.A. in Psychology from Queen’s University, Kingston, Canada and completed the University of Western Ontario’s Executive Marketing Management Program.

Kathleen deLaski has served as a director since April 2006. She is also currently President of The Sallie Mae Fund, a charitable organization sponsored by SLM Corporation (generally known as Sallie Mae), aimed at increasing access to higher education. From April 2001 to February 2005, Ms. deLaski held various other positions at Sallie Mae, including Senior Vice President, Chief Communications Officer and Senior Vice President of Consumer Marketing. Prior to April 2001, Ms. deLaski served as AOL Group Director for America Online, Inc. Ms. deLaski received her B.A. degree in political science and English from Duke University and her Masters of Public Administration from the J.F. Kennedy School of Government of Harvard University. Ms. deLaski is the sister of Kenneth E. deLaski and daughter of Donald deLaski, our co-founders.

Joseph M. Kampf has served as a director since April 2006. Mr. Kampf has served as Chairman and Chief Executive Officer of Covant Management, Inc., a technology investment company, since July 2006. From 1996 until June 2006, Mr. Kampf served as President and Chief Executive Officer of Anteon International Corporation, an information technology and engineering service company. Prior to 1996, Mr. Kampf served as a senior partner of Avenac Corporation, a consulting firm providing management and strategic planning advice to middle market companies. He served as Chairman of the Professional Services Council from 2003 to 2004 and as a member of its Executive Committee. Mr. Kampf serves on the board of directors of the Wolf Trap Foundation for the Performing Arts. He received his B.A. in Economics from the University of North Carolina, Chapel Hill.

Steven B. Klinsky has served as a director since April 2005. Mr. Klinsky is a Managing Director of New Mountain Capital and has served as its Founder and Chief Executive Officer since its inception in 1999. Prior to 1999, Mr. Klinsky served as a General Partner and an Associate Partner with Forstmann Little & Co. and co-founded Goldman, Sachs & Co.’s Leveraged Buyout Group. He serves on the boards of directors of MailSouth, Inc., Ikaria Holdings, Inc., Overland Solutions, Inc., Apptis, Inc. and National Medical Health Card Systems, Inc. Mr. Klinsky received his B.A. in economics and political philosophy from the University of Michigan. He received his M.B.A. from Harvard Business School and his J.D. from Harvard Law School.

Albert A. Notini has served as a director since August 2005. Mr. Notini has served as President and Chief Operating Officer of Sonus Networks, Inc., a voice infrastructure product provider, since April 2004. From May 2000 to March 2004, Mr. Notini served as the Chief Financial Officer and a member of the board of directors of Manufacturers’ Services Limited, a global electronics and supply chain services company. Prior to May 2000,

 

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Mr. Notini served as Executive Vice President of information technology services provider Getronics NV, following its acquisition of technology services provider Wang Global, Inc., where Mr. Notini had served as Executive Vice President of Corporate Development and Administration and General Counsel. Mr. Notini serves on the boards of directors of Sonus Networks, ePresence, Inc., Apptis, Inc. and Saints Memorial Hospital. He received his A.B. in 1983 from Boston College, his M.A. in 1980 from Boston University and his J.D. from Boston College Law School.

Janet R. Perna has served as a director since June 2006. Ms. Perna served as General Manager of Information Management for IBM’s Software Group from November 1996 until her retirement on January 2006. Prior to November 1996, she held various other system programming and management positions at IBM. Ms. Perna serves on the board of directors for Cognos Incorporated. Ms. Perna received her B.S. degree in Mathematics from the State University of New York at Oneonta.

Composition of the Board of Directors

Our board of directors currently consists of nine members, eight of whom are non-management members. Each director holds office until the election and qualification of his or her successor, or his or her earlier death, resignation or removal.

Messrs. Ajouz, Klinsky and Singh, each a Managing Director of New Mountain Capital, were appointed to our board of directors pursuant to an investor rights agreement under which New Mountain Partners has a right to designate a certain number of the members of our board of directors (ranging from a majority of the board of directors to one director, depending on the collective stock ownership percentage of the New Mountain Funds). Ms. deLaski was appointed to our board of directors pursuant to the investor rights agreement under which the deLaski shareholders, who include Kenneth E. deLaski and Donald deLaski, have a right to designate a certain number of the members of our board of directors (either two directors or one director, depending on their stock ownership percentage). See “Certain Relationships and Related Party Transactions—Recapitalization—Investor Rights Agreement.”

We will be deemed to be a “controlled company” under the rules established by The Nasdaq Global Market, and we will qualify for, and intend to rely on, the “controlled company” exception to the board of directors and committee composition requirements under the rules of The Nasdaq Global Market. Pursuant to this exception, we will be exempt from the rule that requires our board of directors to be comprised of a majority of “independent directors” and our compensation committee to be comprised solely of “independent directors,” as defined under the rules of The Nasdaq Global Market. The “controlled company” exception does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of the Sarbanes-Oxley Act and The Nasdaq Global Market rules, which require that our audit committee be composed of at least three members, each of whom will be independent within one year from the date of this prospectus.

Committees of the Board of Directors

Our board of directors has established an audit committee and a compensation committee. The members of each committee are appointed by the board of directors and serve until their successor is elected and qualified, unless they are earlier removed or resign.

Audit Committee

We have an audit committee consisting of Ms. Caldwell, Ms. Perna and Mr. Notini. Mr. Notini chairs the committee. We believe that Ms. Caldwell and Ms. Perna currently meet the independence requirements under the applicable listing standards of The Nasdaq Global Market. The audit committee assists our board of directors in fulfilling its responsibility to shareholders, the investment community and governmental agencies that regulate our activities in its oversight of:

 

   

the integrity of our financial reporting process and financial statements and systems of internal controls;

 

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our compliance with legal and regulatory requirements;

 

   

the independent registered public accountants qualifications and independence and performance; and

 

   

when we establish an internal audit function, the performance of our internal audit function.

The audit committee may study or investigate any matter of interest or concern that the committee determines is appropriate and may retain outside legal, accounting or other advisors for this purpose.

Compensation Committee

We have a compensation committee consisting of Ms. Caldwell, Ms. deLaski and Messrs. Kampf and Singh. Mr. Singh chairs the committee. We believe that Ms. Caldwell and Mr. Kampf currently meet the independence requirements under the applicable listing standards of The Nasdaq Global Market. The purpose of the compensation committee is to:

 

   

discharge the responsibilities of our board relating to compensation of our officers and employees, including our incentive compensation and equity-based plans, policies and programs; and

 

   

review the compensation discussion and analysis to be included in our filings with the Securities and Exchange Commission, discuss the compensation discussion and analysis with management and approve a report of the committee for inclusion in our annual report or annual proxy statement.

Our compensation committee is expected to have a subcommittee consisting of Ms. Caldwell and Mr. Kampf for purposes of complying with the requirements of Section 162(m) of the Code and Section 16 of the Securities Exchange Act of 1934, as amended (Exchange Act).

Compensation Committee Interlocks and Insider Participation

During 2006, our board of directors or our compensation committee that was formed in July 2006 determined the compensation of our executive officers. Messrs. Ajouz, Klinsky and Singh each served as officers of our company in 2006 but received no compensation from us for service in that capacity. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board or compensation committee.

Director Compensation for Year Ended December 31, 2006

The following table summarizes the compensation of each member of our board of directors in 2006:

 

Name

  

Fees Earned or
Paid in Cash

($)

   

Option Awards

($)

   

Total

($)

Michael B. Ajouz

     —         —         —  

Nanci E. Caldwell

   $ 28,000 (1)   $ 9,702 (5)   $ 37,702

Kathleen deLaski

   $ 20,000     $ 31,098 (5)   $ 51,098

Kenneth E. deLaski

   $ 18,750 (2)     —       $ 18,750

Joseph M. Kampf

   $ 20,000 (3)   $ 31,098 (5)   $ 51,093

Steven B. Klinsky

     —         —         —  

Albert A. Notini

   $ 33,000 (4)   $ 9,702 (5)   $ 42,703

Janet R. Perna

   $ 20,000     $ 31,098 (5)   $ 51,098

Alok Singh

     —         —         —  

(1) Ms. Caldwell received $8,000 in meeting fees, in addition to the $20,000 annual retainer.
(2) Mr. deLaski was paid a prorated portion of his annual fee for the portion of the year that he served on our board.

 

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(3) Mr. Kampf elected to receive the $20,000 annual retainer in common stock. He received 2,222 shares and cash in lieu of a fractional share.
(4) Mr. Notini received $5,000 for serving as chair of the audit committee, plus $8,000 in meeting fees, in addition to the $20,000 annual retainer.
(5) At December 31, 2006, Ms. Caldwell and Mr. Notini each had 27,700 options outstanding, and Ms. deLaski, Mr. Kampf and Ms. Perna each had 48,235 options outstanding. The grant date fair value of the options held by Ms. Caldwell and Mr. Notini is $38,808, and the grant date fair value of the options held by Ms. deLaski, Mr. Kampf and Ms. Perna is $269,835. See Note 1 to our Consolidated Financial Statements for the assumptions made in the valuation of the options.

In 2006, non-employee directors, other than those who are affiliated with New Mountain Capital, received an annual retainer of $20,000 for service on our board, payable at their election 100% in cash or 100% in shares of our common stock. All of our directors, except Mr. Kampf, elected to receive this retainer, as well as any other board or committee fees, in cash. Non-employee directors, other than those who are affiliated with New Mountain Capital, also received $2,000 for each board meeting attended, beginning with the fifth meeting attended. Mr. Notini, who serves as the chairman of our audit committee, received an additional annual cash retainer of $5,000 for his service on the committee. Directors who are employees of New Mountain Capital did not receive any fees for their services as either directors or committee members. All directors were entitled to reimbursement for reasonable travel and other business expenses incurred in connection with attending meetings of the board of directors or committees of the board of directors.

All of our non-employee directors, other than those who are affiliated with New Mountain Capital, received a grant of stock options upon commencement of their board service. All options were granted under our 2005 Stock Option Plan and have a term of ten years. All options granted have a per share exercise price equal to the fair value of a share of our common stock underlying the options at the time of grant. Certain options, however, were granted in 2006 at a price below the fair value of a share of our common stock, and the exercise price of these options was subsequently adjusted in December 2006 to reflect the fair value of a share of our common stock on the date of grant. In December 2006, additional options at fair value were granted to these directors to compensate them for the loss in value resulting from this adjustment. See “Certain Relationships and Related Party Transactions—Other Related Party Transactions—Option Grants to Executive Officers and Directors.” Options vest in equal annual installments over four years, subject to the director’s continued service on our board.

During 2005 and 2006, our non-employee directors were provided with the opportunity to purchase shares of our common stock at a per share price equal to the fair value of a share of our common stock on the date of purchase as part of their compensation package, in addition to receiving the annual retainer and board meeting fees. Certain share purchases made by directors in June 2006, or acquired upon election to receive the director’s annual retainer in stock, however, were determined, in light of independent valuations, to have been made at a per share price below the fair value of a share of our common stock at the time of these purchases or acquisition of shares. In December 2006, the affected directors returned the excess shares to us in light of this valuation difference. See “Certain Relationships and Related Party Transactions—Other Related Party Transactions—Stock Purchase by Executive Officers and Directors.”

Mr. deLaski, our former chairman of the board, received a fee at an annual rate of $50,000 in cash for his service on the board. Mr. deLaski received this fee totaling $46,112 from July 21, 2005 until April 26, 2006, the date on which Mr. deLaski resigned from the board.

2007 Director Compensation

On February 21, 2007, our board of directors modified the director compensation program so that our directors are compensated in a manner consistent with directors of comparable companies.

Effective January 1, 2007, each director who is neither an officer nor an employee of us nor affiliated with New Mountain Capital will receive an annual retainer of $50,000, an annual retainer of $5,000 for service on

 

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each committee and in lieu of the $5,000 committee fee, an annual retainer of $10,000 for the compensation committee chair and $15,000 for the audit committee chair. All retainers are paid quarterly and in cash.

In addition, directors will receive a grant of 20,000 options that vest 25% per year upon initial election as a director and an annual stock option grant of 7,500 options that vest 100% on the first anniversary of the date of grant. A special grant of 20,000 options each to Mr. Notini and Ms. Caldwell was approved at the February 21, 2007 compensation committee meeting. This grant was made so that their equity interests would be comparable to those of the other non-employee directors. The per share exercise price of these stock options is $13.10 per share. These stock options have a four-year vesting period.

Compensation Discussion and Analysis

Overview

The compensation committee of our board of directors has overall responsibility for the compensation program for our executive officers. Members of the committee are appointed by the board. Currently, the committee consists of four members of the board, none of whom are executive officers of the company.

Our executive compensation program is designed to encourage our executives to think and act like owners of the company, focusing on increasing shareholder value in the short and long term by thinking strategically and maximizing bottom line results, while mitigating risks.

Our objective is to provide a competitive total compensation package to attract and retain key personnel and drive effective results. Our executive compensation program provides for the following elements:

 

   

base salaries, which are designed to allow us to attract and retain qualified candidates in the geographic market where the job is being performed;

 

   

variable compensation, which provides additional cash compensation and is designed to support our pay-for-performance philosophy;

 

   

equity compensation, principally in the form of stock options, which are granted to incentivize executive behavior that results in increased shareholder value; and

 

   

a benefits package that is available to all of our employees.

A detailed description of these components is provided below.

Our named executive officers as of December 31, 2006 are Kevin T. Parker (Chairman, President and Chief Executive Officer), James C. Reagan (Executive Vice President, Chief Financial Officer and Treasurer), Richard P. Lowrey (Executive Vice President of Products and Strategy), Carolyn J. Parent (Executive Vice President of Worldwide Sales) and Eric J. Brehm (Executive Vice President of Product Development).

2006 Executive Compensation

In 2006, benchmark and market compensation information was provided from two external sources. First, we received compensation information from a survey of executive compensation by Culpepper and Associates. Second, we engaged an international search firm (Heidrick and Struggles) for the purpose of identifying candidates to fill certain executive positions within the company. As a component of the hiring process, compensation packages were established for our executive officers when they were initially hired. The only exceptions were Messrs. Lowrey and Brehm, who had been employees of the company prior to the recapitalization.

 

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In December 2006, Frederic W. Cook & Co., Inc. (Frederic Cook) was retained to independently advise the compensation committee and to assist management regarding executive compensation matters. We supplement the information provided to the compensation committee by Frederic Cook with data we obtain from participation in market surveys that target the high technology, software and consulting industries and provide other market information.

Compensation Philosophy

The compensation committee has determined that our executive compensation program is to achieve the following objectives:

 

   

establish a framework for executive compensation that matches the strategic needs of our business (i.e., executive pay is aligned with company goals);

 

   

assure that the components of our pay system are working concertedly to influence executive behavior in support of our organization’s imperatives (i.e., individual components are linked together); and

 

   

have the mechanics of our executive compensation structure reinforce the corporate culture and management style of the organization (i.e., provide compensation consistent with our culture).

The overall goal of our compensation philosophy is to provide a clear linkage between compensation and contributions, so as to keep our executives engaged and motivated. The company’s elements of compensation, and its decisions regarding those elements, are intended to provide an appropriate balance between fixed and variable compensation, short- and long-term performance horizons, and cash and equity compensation.

We expect our compensation programs to allow us to attract, retain and motivate executives who:

 

   

think and act like owners;

 

   

focus on strategic objectives;

 

   

achieve bottom line results;

 

   

mitigate risks; and

 

   

create shareholder value.

We use a combination of base salary, bonus and equity working together to determine total compensation for each of our named executives.

 

   

Base salary is utilized to provide financial stability, recognize immediate contributions, compensate for significant responsibility and provide an interim bridge until equity has value.

 

   

Bonus is leveraged to ensure that executives deliver on short-term financial and operating goals and to ensure that we pay for performance.

 

   

Equity is utilized to balance executives’ short-term thinking with long-term perspective, reward for innovation and risk-taking, ensure alignment with shareholder interests and attract and retain key talent.

We expect our executives’ performance to exceed that of our peer group (as described in greater detail below), and our compensation philosophy reflects that expectation. As a result, our total cash compensation (base salary and bonus) is targeted to be above average relative to the identified peer group and our understanding of the market. Essentially, we are willing to pay at an above average level for top performance.

 

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Base Salaries

We utilize base salary as a principal means of providing compensation for performing the essential elements of an executive officer’s job. We believe our base salaries are set at levels that allow us to attract and retain executives in the markets where we compete for talent. We believe that base salaries for our named executive officers are competitive with companies of a similar size in the software/technology industry.

Our benchmarking process consists of direct comparisons between the 50th and 75th percentiles of our peer companies’ base salaries, cash bonuses and equity compensation with those of our executives, as well as comparisons of the financial performance of our peer companies with our performance. The following is our current list of peer companies: TIBCO Software, Ansys, MicroStrategy, Quest Software, Lawson Software, Blackbaud, Blackboard, Manhattan Associates, Altiris, Witness Systems, Concur Technologies, RightNow Technologies, Equinix, Neustar, Digital River, WebEx, J2 Global and Websense. The final peer group analysis was completed by Frederic Cook and was reviewed and accepted by our compensation committee.

Incentive Compensation

The company’s named executive officers participate in our Employee Incentive Compensation Program (EICP), along with all employees not covered by another plan (Sales or Consulting).

The EICP is designed to reward executives for the achievement of our financial and strategic goals. This program links executive rewards to activities that drive measurable success and progress. This program provides a direct and measurable way to align the executive’s goals with our corporate objectives of increasing revenue and profit and creating long-term shareholder value. Achievement of the goals requires a high level of performance.

The EICP provides monetary compensation when quarterly financial and individual objectives are achieved. That compensation is generally a pre-established percentage of an executive’s base salary. Our chief executive officer reviews each quarter’s financial results with the compensation committee and the board of directors and provides a recommendation for payout based on company performance against the established quarterly objectives. The board approves the final payout percentage for the EICP program. The individual payment to our chief executive officer is recommended by the chairman of the compensation committee and approved by the compensation committee. The individual payments to our executive officers, other than our chief executive officer, are reviewed by our chief executive officer and approved by the chairman of the compensation committee.

Payout of the EICP is based on the following components:

Plan Structure

The 2006 EICP target ranged between 50 – 60% of annual base salary for each of our named executive officers. The EICP amounts are earned and paid quarterly based on quarterly performance against our financial goals and individual objectives. Quarterly EICP payments are earned ratably, with a target ranging between 12% and 15% of an executive’s annual base salary.

The quarterly EICP payout is calculated based on two components: company performance against specific financial targets and personal performance against identified quarterly goals and objectives. In addition, as an incentive to join the company, certain executive officers were guaranteed that their quarterly payout for the first two quarters after their start date would be a minimum of 100% of their target.

In 2006, Mr. Parker approved the individual goals and objectives for each named executive officer. Mr. Parker’s goals are set annually and reviewed by the board of directors.

Company Performance: The EICP is funded based on achievement of quarterly financial goals relating to revenue, EBITDA and our EBITDA margin performance as a percentage of revenue.

 

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EBITDA for purposes of the EICP calculation is earnings before interest, taxes, depreciation, amortization, severance costs, stock-based compensation expense and costs associated with our initial public offering and compliance with the Sarbanes-Oxley Act.

The quarterly achievement is measured against our annual budget, forecast and other pre-established objectives. These financial metrics were specifically selected to focus participants across the company on achieving profitable growth of the company.

Personal Performance: Performance against individual goals is used in determining the individual quarterly EICP payout. For example, an executive with 90% personal performance against his or her goals would have a multiplier of 90% of his or her individual EICP target compensation opportunity.

We believe that the achievement of our EICP financial targets (based on our corporate revenue, EBITDA and EBITDA margin performance as a percentage of revenue) as supplemented by quarterly individual goals identified by our executives and approved by our chief executive officer requires significant effort on the part of each of our executives. For 2007, we believe that the EICP goals and the individual performance goals will be at least partially achieved, thus making a payout likely.

In addition, it is possible under the plan for an executive to receive a partial payment because the executive has reached his or her individual objectives even though the company as a whole has failed to meet its financial objectives (or vice versa). Furthermore, our compensation committee and chief executive officer retain the discretion to increase or decrease any payouts under the EICP in connection with the review of performance of an executive against the company’s financial goals and his or her personal goals.

Quarterly EICP Payout Calculation: As indicated above, the calculation of an executive’s quarterly bonus is based on the product of both company performance against objectives and individual performance against quarterly goals.

The quarterly EICP calculation is as follows:

 

Quarterly    X    Company    X    Personal    =    Quarterly Payout
Target       Performance       Performance      
   

Quarterly Target = EICP quarterly target opportunity for each executive

 

   

Company Performance = The company’s achievement against revenue, EBITDA and EBITDA margin goals

 

   

Personal Performance = Achievement of executive’s individual quarterly goals

As illustrated in the above calculation, the amount of payout may increase or decrease based on the Board’s assessment of our EBITDA margin performance and other financial results as well as individual performance.

Timeline

The EICP is a calendar-year program.

Code Section 162(m)

Section 162(m) of the Code was not applicable to us in 2006 because we are not a public company. When we become a public company, we intend to rely on an exemption from Section 162(m) for a plan adopted prior to the time a company becomes a public company. This pre-initial public offering exemption will no longer be available to us after the date of our annual meeting that occurs after the third calendar year following the year of our initial public offering, or if we materially modify the plan before such time.

 

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Equity

We use equity awards in the form of stock options as a means of incentivizing behavior that results in increased shareholder value, to foster a long-term commitment to us and our shareholders and as a means of attracting and retaining executives. A number of factors are considered when determining the size of all grants, including competitive market intelligence, internal comparisons and a review of the executive’s overall compensation package. The initial grants are designed to attract experienced executives with established records of success and significant public company experience.

In 2006, the size and terms of the stock options that were awarded to our executive officers were determined by the compensation committee, upon recommendation from our chief executive officer, and approved by the board of directors.

In April 2007, we implemented our 2007 Plan that provides for the potential award of various equity instruments, including stock options, restricted stock, stock appreciation rights and dividend equivalent rights. Our 2007 Plan was approved by the compensation committee and our shareholders. Our 2007 Plan will replace our 2005 Stock Option Plan pursuant to which the equity awards described in this section were made.

All of our option awards to our named executive officers vest ratably at 25% per year and have a 10-year maximum term. Vesting occurs on each anniversary date of the grant, except for the initial grant, which vests on each anniversary date of employment. The portion of an option that is vested must be exercised within 180 days after the date of termination of an executive.

Share Purchase

Upon hire, each of our executive officers was given the opportunity to purchase shares for cash at the then-current fair value of the company’s stock. This opportunity was intended to encourage the executives to make a personal investment in company stock. See “Certain Relationships and Related Party Transactions—Other Related Party Transactions—Stock Purchases by Executive Officers and Directors.”

Valuation

Until September 2006, the stock option exercise prices and share purchase prices were based on our board’s internal estimates of the fair value of the company’s common stock at the time of each option grant or share purchase.

In November 2006, the board of directors determined our common stock’s estimated fair value after considering the valuation performed by our independent third-party valuation firm. A third party valuation firm was retained to perform independent valuations of our stock’s estimated fair value. As part of the valuation process, we asked the valuation firm to review the internally prepared valuations of fair value that we had originally prepared. The independent valuations determined that the internally prepared valuations understated the estimated fair value of our stock at several points in the period from January 1, 2006 through October 31, 2006.

As a result, all individuals (including one executive officer) who had purchased stock in 2006 voluntarily returned a number of shares so that the resulting final number of shares held by the affected individuals had a per share purchase price that equated to the estimated fair value per share as reflected in the independent valuations. In addition, in light of the independent valuations, our board of directors reassessed the fair value of our common stock underlying stock options granted during the first ten months of 2006. Our board determined that options awarded to certain executive officers (including one named executive officer) had been granted at exercise prices below the fair value of the underlying stock on the dates of grant, and the exercise prices of these options subsequently were increased to be equal to the fair value of our stock on the dates of grant. Secondary grants of options were separately provided as a means of compensating the affected executive officers for the value lost due to the increase in the exercise price. In total, executive officers received options with respect to 76,891 shares to offset the impact of the modification of exercise prices of the stock options.

 

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See “Certain Relationships and Related Party Transactions—Other Related Party Transactions.”

Stock Appreciation Rights

Our SAR Plan was in effect prior to the acquisition of 75% of our common stock by the New Mountain Funds in April 2005. This plan was discontinued at that time, though fixed payments under the plan pertaining to Mr. Lowrey will continue until January 2008. The payments are made in installments and are based on the share price as of the acquisition date. The value of the SARs was fixed on April 22, 2005, the recapitalization date, with payments occurring according to the terms of the initial SAR grant.

Mr. Lowrey is the last executive officer receiving payments under this plan. He received a payment in January 2007 and is scheduled to receive payments in July 2007 and January 2008. See “Management—Executive Compensation—Employment Agreements and Arrangements.”

Benefits

Our executives participate in our standard benefit plans, which are offered to all U.S.-based employees and include our 401(k) plan. We currently provide a matching contribution to our 401(k) plan of 4% of an employee’s salary up to a maximum of $4,000 per calendar year. Our contribution is made on a quarterly basis and cannot exceed $1,000 per quarter per employee.

Our executives have the opportunity to participate in our health and welfare benefit programs which include a group medical program, a group dental program, a vision program, life insurance, disability insurance and flexible spending accounts. These benefits are the same as those offered to all other U.S.-based employees. Through our benefit programs, each of our named executive officers received group term life insurance equivalent to 100% of their annual base salary. While provided as a benefit, the cost of the group term life insurance is included in the “All Other Compensation” column of the Summary Compensation Table.

Employment Agreements and Arrangements

We have entered into employment agreements or arrangements with Messrs. Parker and Reagan and Ms. Parent. These employment agreements or arrangements are currently in effect. The employment agreements or arrangements are intended to establish the key employment terms (including reporting responsibilities, base salary and annual bonus, the initial stock option grant and other benefits), to provide for severance benefits and to establish a Non-Competition Agreement. See “Executive Compensation—Employment Agreements and Arrangements.”

Additional Compensation Actions taken in 2007

Based upon a successful 2006, and in preparation for this offering, the compensation committee undertook a review of the compensation of the executive management team, including the named executive officers, in March 2007. This review included a detailed examination of our executive compensation compared to a peer group as well as surveys that cover the high-technology software industry, and review and comment by Frederic Cook. The peer group is comprised of 13 software and four high technology companies, all of which are public companies. The peer group was established by identifying other companies that have similar financial parameters to Deltek based on revenue, net income, market capitalization and number of employees. The peer group will be re-evaluated by the compensation committee on an annual basis to ensure that we are using the appropriate companies for benchmarking purposes.

 

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As a result of its review, the compensation committee confirmed that the various components of compensation that were provided in 2006 continued to be appropriate. The compensation committee, however, approved changes to compensation to recalibrate the various components to market levels for each executive officer. Specifically, the following base salary and bonus adjustments went into effect as of April 1, 2007.

 

Executive

   Previous Annual Salary   

Annual Salary effective

April 1, 2007

Kevin Parker

   $ 450,000    $ 490,000

James Reagan

   $ 275,000    $ 285,000

Richard Lowrey

   $ 275,000    $ 300,000

Carolyn Parent

   $ 275,000    $ 300,000

Eric Brehm

   $ 250,000    $ 275,000

Executive

   Previous Annual
Bonus Opportunity
  

Annual Bonus Opportunity

effective April 1, 2007

Kevin Parker

   $ 300,000    $ 441,000

James Reagan

   $ 160,000    $ 175,000

Richard Lowrey

   $ 160,000    $ 200,000

Carolyn Parent

   $ 200,000    $ 225,000

Eric Brehm

   $ 125,000    $ 165,000

The compensation committee also reviewed the equity holdings of each executive officer and provided an additional grant of stock options as appropriate. This grant was made to ensure that the executive officers held sufficient equity, as well as to provide an internal calibration of equity positions. The equity was granted effective March 15, 2007 with an exercise price of $13.10 per share, the then-current fair value of the company’s common stock as determined by an independent valuation.

 

Executive

   Stock Options Granted
March 15, 2007

Kevin Parker

   160,000

James Reagan

   40,000

Richard Lowrey

   100,000

Carolyn Parent

   100,000

Eric Brehm

   75,000

Change in Control Provisions

Prior to April 2007, we had several different change in control provisions for our executive officers. As part of the maturation and refinement of our compensation programs, we recalibrated our change in control program to ensure external market competitiveness and internal equity among our executive officers. We benchmarked our change in control program against other companies and had Frederic Cook analyze the costs associated with the new change in control provisions.

In April 2007, the compensation committee established new change in control provisions for each of our named executive officers. See “Potential Payments Upon Termination or Change in Control.”

Executive Compensation

The following tables and narrative set forth information concerning the compensation paid to, awarded to or earned by our chief executive officer, our chief financial officer and the three other most highly compensated executive officers who served in such capacities as of December 31, 2006. We refer to these officers collectively as our “named executive officers.” The information contained in the following tables and the related descriptions regarding the compensation of our named executive officers has been adjusted to reflect our 9:1 stock dividend on January 26, 2006 on the outstanding shares of our common stock.

 

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Summary Compensation Table for Year Ended December 31, 2006

The following table sets forth information regarding compensation earned by our named executive officers during 2006:

 

Name and

Principal Position

  Year  

Salary

($)

 

Bonus

($)

   

Option
Awards (2)

($)

 

Non-Equity
Incentive Plan
Compensation

($)

 

All Other
Compensation (3)

($)

   

Total

($)

Kevin T. Parker

Chairman, President and Chief Executive Officer

  2006   $ 450,000         $ 301,608   $ 400,000   $ 629,328 (4)   $ 1,780,936

James C. Reagan

Executive Vice President, Chief Financial Officer and Treasurer

  2006   $ 275,000   $ 40,000 (1)   $ 96,698   $ 107,140   $ 4,356     $ 523,194

Richard P. Lowrey

Executive Vice President of Products and Strategy

  2006   $ 271,250         $ 96,698   $ 181,260   $ 246,799 (5)   $ 796,007

Carolyn J. Parent

Executive Vice President of Worldwide Sales

  2006   $ 217,708   $ 100,000 (1)   $ 126,149   $ 123,033   $ 4,215     $ 571,105

Eric J. Brehm

Executive Vice President of Product Development

  2006   $ 251,517         $ 62,130   $ 121,053   $ 4,317     $ 439,017

(1) The amounts shown reflect a minimum EICP payment that was guaranteed at time of hire, per the offer of employment.
(2) See Note 1 to our Consolidated Financial Statements for the assumptions made in the valuation of the options.
(3) Includes our matching contributions to our 401(k) plan up to $1,000 per quarter and group life contributions on behalf of the named executive officers.
(4) This amount includes $4,000 of 401(k) plan matching contributions, $632 of group life contributions, $363,006 for reimbursement of relocation expenses (based on the actual value of expenses incurred by Mr. Parker) and $261,690 for a tax gross-up related to the reimbursement of the relocation expenses.
(5) The compensation for Mr. Lowrey includes $242,443 as a result of SAR payments of $134,488 on January 1, 2006 and $107,954 on July 1, 2006, $4,000 of 401(k) matching contributions and $356 of group life contributions. The amounts and timing of these payments were fixed in April 2005 when our SAR Plan was terminated. We have not issued SARs since then. See “Management—Executive Compensation—Employment Agreements and Arrangements.”

Grants of Plan-Based Awards for Year Ended December 31, 2006

The following table sets forth each grant of plan-based awards to our named executive officers during 2006. No equity incentive plan awards were made to our named executive officers in 2006.

 

Name

   Grant Date   

Estimated Possible Payouts

Under Non-Equity Incentive

Plan Awards (1)

   All Other
Option Awards:
Number of
Securities
Underlying
Options
(#)
   Exercise or
Base Price
of Option
Awards
($/Sh)
   Grant Date
Fair Value
of Stock
and Option
Awards
(2)
     

Target

($)

        

Kevin T. Parker

   N/A    $ 250,000    —        N/A      N/A

James C. Reagan

   N/A    $ 160,000    —        N/A      N/A

Richard P. Lowrey

   N/A    $ 160,000    —        N/A      N/A

Carolyn J. Parent

   3/9/2006
12/4/2006
   $ 200,000    135,000
14,623
   $
$
7.91
11.48
   $
$
606,624
90,464

Eric J. Brehm

   N/A    $ 125,000    —        N/A      N/A

(1) There are no thresholds or maximum payouts under the EICP. The information provided relates to the targets that were in effect during 2006 and for the first quarter of 2007. Effective April 1, 2007, the target cash bonus for each of the named executive officers changed. See “Management—Compensation Discussion and Analysis—Additional Compensation Actions taken in 2007.”
(2) See “Certain Relationships and Related Party Transactions—Other Related Party Transactions—Option Grants to Executive Officers and Directors.”

 

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Employment Agreements and Arrangements

The following is a description of the material terms of the employment agreements and arrangements with our named executive officers during 2006 and of the plans under which awards were granted to our named executive officers in 2006. This description is being provided to explain the quantitative data disclosed above in the Summary Compensation Table for Year Ended December 31, 2006 and the Grants of Plan-Based Awards Table for Year Ended December 31, 2006. This summary is not a complete description of all the terms and conditions of the employment agreements and arrangements or the plans under which awards were granted and is qualified in its entirety by reference to the actual agreements and plans.

Kevin T. Parker

In June 2005, we entered into an employment agreement with Kevin T. Parker, our Chairman, President and Chief Executive Officer. We amended Mr. Parker’s agreement on May 7, 2007. The term of the agreement, as amended, ends on June 27, 2009. At the end of the term, the agreement automatically extends for additional one-year periods unless either party gives notice of non-renewal to the other at least six months prior to the expiration of the relevant period. Under the original agreement, Mr. Parker’s annual base salary was set at a rate of $450,000. As amended, the agreement provides that for the period beginning on April 1, 2007 and ending on March 31, 2008, Mr. Parker’s annual base salary will be $490,000. For any period beginning after March 31, 2008, our compensation committee will review Mr. Parker’s annual base salary and may adjust it upwards but not downwards. Mr. Parker’s target bonus under his original employment agreement was $250,000 for 2006, and his actual bonus was $400,000, paid in various quarterly amounts, on account of our achievement of the performance targets set for such year. The employment agreement, as amended, provides that for the period beginning on April 1, 2007 and thereafter, Mr. Parker is entitled to receive a bonus of not less than 90% of his annual base salary if we meet the performance targets set by our board of directors for the respective year. See “Management—Compensation Discussion and Analysis—Incentive Compensation.” Mr. Parker also is eligible to receive additional bonuses, in the board of directors’ discretion, based upon the achievement of other company and individual performance goals established by our board of directors. On March 15, 2007, our compensation committee reviewed and adjusted Mr. Parker’s base salary and 2007 bonus target to $490,000 and $441,000, respectively.

In connection with his employment, Mr. Parker purchased 138,500 shares of our common stock at an aggregate purchase price of $499,985 (or $3.61 per share). See “Certain Relationships and Related Party Transactions—Other Related Party Transactions—Stock Purchases by Executive Officers and Directors.” Under his agreement, when our common stock becomes publicly traded, we are required to maintain an effective registration statement covering the resale of shares purchased by Mr. Parker or ensure that we satisfy the requirements of Rule 144 of the Securities Act so that Rule 144 is available for Mr. Parker to sell his shares. We are also required to file and maintain an effective registration statement covering the issuance and resale of all shares of our common stock underlying Mr. Parker’s stock options. Information regarding these options is set forth in the Outstanding Equity Awards table below. Any shares of our common stock or options held by Mr. Parker, however, remain subject to the contractual and legal restrictions on resale set forth in our shareholder’s agreement. See “Certain Relationships and Related Party Transactions—Shareholder’s Agreement and Director Shareholder’s Agreement.”

James C. Reagan and Carolyn J. Parent

Between October 2005 and February 2006, we entered into employment letter agreements with each of:

 

   

James C. Reagan, our Executive Vice President, Chief Financial Officer and Treasurer; and

 

   

Carolyn J. Parent, our Executive Vice President of Worldwide Sales.

The letter agreements have no set term, and employment under them is at will. The letter agreements provide for an annual base salary of $275,000 for both Ms. Parent and Mr. Reagan. In addition, each executive is

 

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eligible to receive performance-based bonuses, to be paid quarterly, based on the satisfaction of agreed-upon targets. Ms. Parent’s annual bonus target is $200,000, and she was guaranteed a minimum payment of $100,000 in the aggregate for the first two quarterly bonus payments in 2006. For more information regarding the 2006 financial targets, see “Management—Compensation Discussion and Analysis—Incentive Compensation.” On March 15, 2007, our compensation committee reviewed and adjusted Ms. Parent’s target annual bonus opportunity for 2007 to $225,000. Mr. Reagan’s employment letter agreement does not generally set forth the annual bonus to be received by him upon satisfaction of the agreed-upon targets. Pursuant to his employment letter agreement, however, for the first two quarters of his employment, Mr. Reagan received guaranteed bonuses of $80,000 in the aggregate as part of a total bonus of $96,660 that was paid for these quarters. On March 15, 2007, our compensation committee reviewed and adjusted Mr. Reagan’s target annual bonus opportunity for 2007 to $175,000.

Richard P. Lowrey and Eric J. Brehm

Messrs. Lowrey and Brehm have not entered into written employment agreements with us. In 2006, we paid Messrs. Lowrey and Brehm a base salary of $271,250 and $251,517, respectively, and, based on the satisfaction of agreed-upon targets, they received bonuses of $181,260 and $121,053, respectively. For more information regarding the 2006 financial targets, see “Management—Compensation Discussion and Analysis—Incentive Compensation.” On March 15, 2007, our compensation committee reviewed and adjusted Messrs. Lowrey’s and Brehm’s target annual bonus opportunities for 2007 to $200,000 and $165,000, respectively.

Prior to the recapitalization in April 2005, Mr. Lowrey was a participant under our SAR Plan. In connection with the recapitalization, all outstanding SARs were cancelled, and SARs holders became entitled to receive cash payments, payable in accordance with the original vesting schedules of the applicable SARs. Pursuant to this arrangement, Mr. Lowrey received $242,442 in the aggregate during 2006, and he will receive payments totaling $242,443 and $134,489 in 2007 and 2008, respectively.

2005 Stock Option Plan

Our board of directors adopted our 2005 Stock Option Plan on July 20, 2005. In connection with the reincorporation and name change of Deltek Systems, Inc., a Virginia corporation, to Deltek, Inc., a Delaware corporation, which occurred on April 10, 2007, the options to acquire Deltek Systems, Inc. common stock became options to acquire Deltek, Inc. common stock on the same terms, for the same number of shares and at the same exercise price as applied to the options prior to the reincorporation. The converted options are subject to our 2005 Stock Option Plan (as amended and restated in connection with the reincorporation) and to the related stock option agreements.

The plan provides for the grant of options to purchase shares of our common stock to employees, directors and consultants of the company or our subsidiaries. These options are not intended to qualify as incentive stock options. Prior to the establishment of our compensation committee, the plan was administered by our board of directors. The plan is now administered by the compensation committee of our board of directors, and the committee sets the terms and conditions of the options.

The plan provides that the compensation committee has the authority to adjust the maximum number of shares of common stock issuable under the plan, the number of shares covered by outstanding options, the applicable exercise price of an existing option and any other terms of an outstanding option as a result of any change in the number of shares of common stock resulting from a merger, consolidation, reorganization, recapitalization, stock dividend, stock split-up or other similar transaction.

The plan also gives our board the right to amend or terminate the plan, except that, to the extent necessary under any applicable law, no amendment will be effective unless approved by our shareholders. In addition, no amendment may adversely affect the rights of any optionee without the optionee’s consent. Notwithstanding the foregoing sentence, an amendment to increase the number of shares of common stock available for issuance under the plan will not be deemed to adversely affect any optionee. The plan was approved by our shareholders.

 

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Each option granted under the plan has a per share exercise price equal to the fair value of one share of our common stock underlying the option on the date of grant. The exercise prices of certain options granted in 2006 at a price below the fair value of a share of our common stock were subsequently changed in December 2006 to reflect the fair value of a share of our common stock on the dates of grant. See “Certain Relationships and Related Party Transactions—Other Related Party Transactions—Option Grants to Executive Officers and Directors.”

The form of stock option agreement provides that options generally vest and become exercisable in equal installments on each of the first four anniversaries of the grant date. Options granted under the plan have a maximum term of ten years from the date of grant, unless terminated earlier. For a discussion regarding vesting of options upon a change of control and the effect of a termination of an optionee’s employment, see “Management—Potential Payments upon Termination or Change in Control—2005 Stock Option Plan.”

Under the plan, each optionee is required to execute a shareholder’s agreement, among other conditions, prior to being deemed the holder of, or having any rights with respect to, any shares of our common stock. In accordance with the shareholder’s agreement, shareholders which are party to the agreement are entitled to participate proportionately in an offering of common stock by the New Mountain Funds. If the number of shares of our common stock which the optionee is entitled to sell in this offering exceeds the number of shares of common stock held by the optionee, any options held by the optionee (including unvested options) may be exercised to the extent of the excess. A shareholder may choose any combination of shares and options (if vested) in determining the securities the shareholder will sell in the public or private offering. Any unvested options may only be exercised to the extent there is an amount of securities that such shareholder may sell that has not been covered by shares or vested options. See “Certain Relationships and Related Party Transactions—Shareholder’s Agreement and Director Shareholder’s Agreement.”

Prior to the adoption of our 2007 Plan (described in more detail below), a total of 6,310,000 shares of common stock issuable upon exercise of options were authorized under the plan. As of April 11, 2007, options to purchase a total of 5,788,756 shares of common stock had been granted under the plan. No further grants will be made under this plan after April 11, 2007. Future equity grants will be made under our 2007 Plan.

Employee Incentive Compensation Program

The company’s named executive officers participate in our EICP. The EICP provides monetary compensation that is generally a pre-established percentage of an executive’s base salary. The 2006 EICP ranged between 50-60% of annual base salary for each of our named executive officers. The EICP amounts are earned and paid quarterly and are calculated based on two components: company performance against specific targets and personal performance against identified quarterly goals and objectives. As an incentive to join our company, certain named executive officers were guaranteed that their quarterly payout for the first two quarters after their start date would be a minimum of 100% of their target. We have adopted a similar bonus structure for 2007. See “Management—Compensation Discussion and Analysis—Incentive Compensation.”

 

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Outstanding Equity Awards at December 31, 2006

The following table sets forth outstanding equity awards for each of our named executive officers at December 31, 2006. No stock awards were held by our named executive officers as of December 31, 2006.

Option Awards

 

Name

  

Number of
Securities
Underlying
Unexercised
Options

(#)

Exercisable(1)

  

Number of
Securities
Underlying
Unexercised
Options

(#)

Unexercisable(1)

  

Option

Exercise Price

($)

   Option
Expiration
Date

Kevin T. Parker

   207,755
17,312
   623,265
51,938
   $
$
3.61
7.22
   7/19/2015
7/19/2015

James C. Reagan

   62,500
15,000
   187,500
45,000
   $
$
3.61
7.22
   11/2/2015
11/2/2015

Richard P. Lowrey

   62,500
15,000
   187,500
45,000
   $
$
3.61
7.22
   11/2/2015
11/2/2015

Carolyn J. Parent

   —  
—  
   135,000
14,623
   $
$
7.91
11.48
   3/8/2016
12/3/2016

Eric J. Brehm

   40,000
10,000
   120,000
30,000
   $
$
3.61
7.22
   11/2/2015
11/2/2015

(1) With respect to Ms. Parent and Messrs. Parker and Reagan, their options vest 25% on each anniversary of their hire dates. Ms. Parent’s hire date is March 1, 2006. Mr. Parker’s hire date is June 27, 2005, and Mr. Reagan’s hire date is October 6, 2005. With respect to Messrs. Brehm and Lowrey, their options vest 25% beginning on May 1, 2006 and each anniversary thereof.

Potential Payments Upon Termination or Change in Control

Change in Control Arrangements

Overview

In April 2007, our compensation committee approved a change in control policy that supersedes all prior change in control arrangements that had been in place during 2006, including the change in control provisions contained in employment agreements and/or stock option agreements. For purposes of our policy, a “change in control” will occur if:

 

   

any third party not affiliated with the New Mountain Funds or any of their affiliates, but excluding Kenneth E. deLaski and persons and entities related to him, owns, directly or indirectly, more of our voting capital stock than the New Mountain Funds or any of their affiliates own, or

 

   

a third party not affiliated with the New Mountain Funds or any of their affiliates has or obtains the right to elect a majority of the board.

Kevin T. Parker

Upon a termination of his employment, Mr. Parker is entitled to certain severance payments pursuant to his employment agreement with us, regardless of whether a change in control occurs. For more information concerning these severance payments, see “Management—Potential Payments Upon a Termination or Change in Control—Employment Agreements and Arrangements.” Under our change in control policy, the options held by Mr. Parker will immediately be accelerated and deemed to be vested and exercisable in full upon a change in control. If any payments or distributions due to Mr. Parker in connection with a change in control of us, including by reason of his termination of employment, would be subject to the excise tax imposed by Section 4999 of the Code, we will provide Mr. Parker with a gross-up payment so that he will be made whole for any excise tax imposed on the payments or distributions resulting from the change in control.

 

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James C. Reagan

Under our change in control policy, if Mr. Reagan’s employment is terminated prior to a change in control either by us without “cause” or by Mr. Reagan for “good reason” (as such terms are defined below), Mr. Reagan will receive as severance six months’ salary continuation at the executive’s then-current base salary rate and continuation of medical benefits for twelve months at active-employee rates.

If Mr. Reagan’s employment is terminated either by us or our successor without “cause” or by Mr. Reagan for “good reason” on the date of or within eighteen months following a change in control, Mr. Reagan will receive as severance eighteen months’ salary continuation at his then-current base salary rate, a lump sum payment equal to one and one-half times his target annual bonus for the year in which termination occurs and continuation of medical benefits for eighteen months at active-employee rates.

The options held by Mr. Reagan that were granted to him upon commencement of his employment will immediately be accelerated and deemed to be vested and exercisable in full upon a change in control. With respect to options that were subsequently granted to Mr. Reagan, if Mr. Reagan’s employment is terminated either by us or our successor without “cause” or by Mr. Reagan for “good reason” on the date of or within eighteen months following a change in control, the options will be accelerated and deemed to be vested and exercisable in full. For purposes of our change in control policy, and with respect to Mr. Reagan, “cause” is defined as:

 

   

a conviction for a felony;

 

   

fraud or gross misconduct on Mr. Reagan’s part that causes material damage to us;

 

   

a material violation by Mr. Reagan of his non-competition agreement; or

 

   

a breach by Mr. Reagan of a material term of his employment letter agreement that is not cured within thirty days after written notice to him.

“Good reason” is defined as:

 

   

a material reduction in the nature and scope of Mr. Reagan’s authorities, powers, functions or duties (which reduction will be assumed if Mr. Reagan no longer serves as our sole chief financial officer or if we become a subsidiary of an operating company);

 

   

a reduction in Mr. Reagan’s compensation (including base salary or target bonus opportunity);

 

   

an office relocation resulting in a commute that is more than seventy-five miles from Mr. Reagan’s residence or more than 120% (in miles) of Mr. Reagan’s prior commute, whichever is greater; or

 

   

our material breach of Mr. Reagan’s employment letter agreement.

If any payments or distributions due to Mr. Reagan in connection with a change in control of us would be subject to the excise tax imposed by Section 4999 of the Code, we will provide Mr. Reagan with a gross-up payment so that he will be made whole for the excise tax imposed on the payments or distributions resulting from the change in control.

Richard P. Lowrey, Carolyn J. Parent and Eric J. Brehm

Under our change in control policy, if the employment of any one of Messrs. Lowrey and Brehm and Ms. Parent is terminated prior to a change in control either by us without “cause” or by the executive for “good reason” (as such terms are defined below), the executive will receive as severance six months’ salary continuation at the executive’s then-current base salary rate and continuation of medical benefits for twelve months at active-employee rates.

If, on the date of or within eighteen months following a change in control, the employment of any one of Messrs. Lowrey and Brehm and Ms. Parent is terminated either by us or our successor without “cause” or by the

 

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executive for “good reason” the executive will receive as severance eighteen months’ salary continuation at the executive’s then-current base salary rate, a lump sum payment equal to one and one-half times the executive’s target annual bonus for the year in which termination occurs and continuation of medical benefits for eighteen months at active-employee rates.

In addition, under our change in control policy, if the employment of any of Messrs. Lowrey and Brehm and Ms. Parent is terminated either by us or our successor without “cause” or by the executive for “good reason” on the date of or within eighteen months following a change in control, the options held by the executive will immediately be accelerated and deemed to be vested and exercisable in full. For purposes of our change in control policy, and with respect to each of Messrs. Lowrey and Brehm and Ms. Parent, “cause” is defined as:

 

   

a conviction for a felony;

 

   

fraud or gross misconduct on the executive’s part that causes material damage to us;

 

   

the executive’s material violation of the executive’s non-competition agreement; or

 

   

the executive’s breach of a material term of the executive’s employment letter agreement that is not cured within thirty days after written notice to the executive.

“Good reason” is defined as:

 

   

a material reduction in the nature and scope of the executive’s authorities, powers, functions or duties (provided, however, that neither a change in the executive’s reporting responsibilities nor our ceasing to be a publicly registered company will automatically constitute “good reason” unless, as a result thereof, there is a material reduction, without the executive’s consent, of the nature and scope of the executive’s authorities, powers, functions or duties);

 

   

a reduction in the executive’s compensation (including base salary or target bonus opportunity);

 

   

an office relocation resulting in a commute that is more than seventy-five miles from the executive’s residence or more than 120% (in miles) of the executive’s prior commute, whichever is greater; or

 

   

our material breach of the executive’s employment letter agreement.

If any payments or distributions due to any of the executives in connection with a change in control of us would be subject to the excise tax imposed by Section 4999 of the Code, the executive will receive either the full amount of the severance payments or a reduced amount such that no excise tax is payable, whichever is more favorable to the executive.

Employment Agreements and Arrangements

Kevin T. Parker

Under Mr. Parker’s amended employment agreement, if we terminate Mr. Parker’s employment without “cause” or give a notice of non-renewal of the agreement or if Mr. Parker terminates his employment for “good reason” (as such terms are defined below) (collectively, a “qualifying termination”), Mr. Parker will be entitled to receive as severance two years’ salary continuation at his then-current base salary rate, a lump sum payment equal to two times his target annual bonus for the year in which termination occurs and continuation of medical benefits for eighteen months at active-employee rates. If Mr. Parker’s employment is terminated due to his death or disability, he will receive as severance salary continuation at his then-current base salary rate for twelve months, a lump sum payment equal to two times his target annual bonus for the year in which termination occurs and continuation of medical benefits for eighteen months at active-employee rates. If we terminate Mr. Parker’s employment for “cause,” Mr. Parker will be entitled to receive only accrued base salary and benefits as of the date of termination.

Upon a “qualifying termination,” the options held by Mr. Parker will become exercisable as to those portions that would have become exercisable had Mr. Parker been employed during the entirety of the one-year period following termination.

 

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For purposes of Mr. Parker’s amended employment agreement, “cause” is defined as:

 

   

a conviction for a felony;

 

   

fraud or gross misconduct on Mr. Parker’s part that causes material damage to us; or

 

   

Mr. Parker’s breach of a material term of his employment agreement that is not cured within thirty days after written notice to him.

“Good reason” is defined as:

 

   

a reduction in the nature and scope of Mr. Parker’s authorities, powers, functions or duties (which reduction will be assumed if Mr. Parker no longer serves as our sole chief executive officer and a voting member of our board of directors);

 

   

a reduction in Mr. Parker’s compensation (including base salary or target bonus opportunity);

 

   

an office relocation resulting in a commute that is more than seventy-five miles from Mr. Parker’s residence or more than 120% (in miles) of Mr. Parker’s prior commute, whichever is greater; or

 

   

our material breach of Mr. Parker’s employment agreement.

Mr. Parker is bound by obligations of confidentiality during the term of his employment and thereafter. The agreement contains non-solicitation provisions that apply during the term of Mr. Parker’s employment and for a period of twelve months following termination of his employment for any reason. A restrictive covenant relating to non-competition applies during the term of Mr. Parker’s employment and for a period of twelve months thereafter, if Mr. Parker is terminated for any reason prior to a change in control, or for six months thereafter, if Mr. Parker is terminated for any reason on or after a change in control. For a definition of a “change in control,” see “Management—Potential Payments Upon Termination or Change in Control—Change in Control Arrangements.”

James C. Reagan and Carolyn J. Parent

Under the employment letter agreements with Mr. Reagan and Ms. Parent, if we terminate the covered executive’s employment for “cause,” the executive will be entitled to receive only accrued base salary and benefits as of the date of termination. For a definition of “cause” and information concerning the severance payments due to either Mr. Reagan or Ms. Parent upon a termination of their employment before or after a change in control, see “Management—Potential Payments Upon Termination or Change in Control—Change in Control Arrangements.”

Pursuant to their employment letter agreements, both Mr. Reagan and Ms. Parent were required to enter into a non-competition agreement with us as a condition to their employment. Under the non-competition agreements, the executives are bound by obligations of confidentiality during the term of their employment and thereafter. The non-competition agreements also require each of the executives to abide by restrictive covenants relating to non-solicitation and non-competition during the term their employment and for a period of twelve months following termination of their employment.

2005 Stock Option Plan

Unless otherwise set forth in a stock option agreement, our 2005 Stock Option Plan (as amended and restated) and the form of stock option agreement state that all unvested options will terminate upon the termination of an optionee’s employment for any reason. In addition, the form of stock option agreement provides that vested options may be exercised during the 180-day period following termination, but in no event after the expiration of the term of the options. Any portion of vested options not exercised during this 180-day period will terminate and be of no further force and effect. If an optionee’s employment is terminated by us for cause, the options held by the optionee will immediately terminate, regardless of vesting.

 

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The plan provides that in the event of the liquidation or dissolution of our company or a merger or consolidation of our company, and unless otherwise provided in a stock option agreement, all options issued under the plan will continue in effect in accordance with their respective terms, except that following such transactions:

 

   

each outstanding option will be treated as provided for in the operative plan or agreement; or

 

   

if not so provided in the plan or agreement, each optionee will be entitled to receive upon exercise of any outstanding option, the same number and kind of stock, securities, cash, property or other consideration that each holder of our common stock was entitled to receive in the transaction. Any consideration received will remain subject to all of the conditions applicable to the options prior to the transaction.

In addition, the plan provides that upon the merger or consolidation of our company, liquidation of our company, the sale to a third party of all or substantially all of our assets or the sale to a third party of our common stock (other than through a public offering) that results in the New Mountain Funds ceasing to beneficially own any of our voting securities, the unexercised portion of any outstanding options will terminate, unless otherwise provided in writing.

In the case of a sale by the New Mountain Funds of any of their shares of our common stock to a third party, the form stock option agreement provides that any options held by an optionee may be exercised to the extent of the excess, if any, of:

 

   

the number of shares with respect to which the optionee is entitled to, or is being required to, participate in the sale; over

 

   

the number of shares previously issued to the optionee upon exercise of any options held by the optionee that have not been previously disposed of.

If the sale is not consummated, any options held by the optionee will be exercisable thereafter only to the extent they would have been exercisable if notice of the sale had not been given.

The form of stock option agreement currently in use under the 2005 Stock Option Plan prohibits each optionee from:

 

   

disclosing or furnishing to any other person any confidential or proprietary information about us or any of our affiliates;

 

   

directly or indirectly soliciting for employment any of our employees or any employee of any of our affiliates at any time before the second anniversary of the optionee’s termination of employment; and

 

   

selling, transferring, assigning, exchanging, pledging, encumbering or otherwise disposing of any option.

The form of stock option agreement also provides that, at our discretion, we will be entitled to terminate the options, or any unexercised portion of the options, held by the optionee if any optionee:

 

   

engages in any prohibited disclosure (or breaches the holder’s obligations under any non-disclosure or non-use of confidential information provision contained in any employment agreement to which the optionee is a party), prohibited solicitation (or breaches any non-solicitation obligations under any employment agreement to which the optionee is a party) or prohibited transfer of the holder’s options;

 

   

owns, manages or is employed by any of our competitors or is a competitor of the company in an individual capacity; or

 

   

is convicted of a felony against us or our affiliates.

With respect to the treatment of outstanding options upon an optionee’s termination of employment or a change in control of us, the options held by our named executive officers are subject to additional or different terms than those summarized above. See “Management—Payments Upon Termination or Change in Control—Change in Control Arrangements” and “Management—Payments Upon Termination or Change in Control—Employment Agreements and Arrangements.”

 

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Payments Upon Termination or Change in Control

The following table sets forth information concerning the payments that would be received by each named executive officer upon a termination of employment (including by reason of death or disability) or a change in control. The table assumes:

 

   

the termination and/or change in control took place on December 31, 2006; and

 

   

all options were cancelled in exchange for the right to receive, for each share subject to the option, the excess of $12.24 (the fair market value of our common stock on December 31, 2006) over the exercise price of the option.

 

Name

 

Benefit

 

Termination

Without
Cause or for
Good Reason

 

Termination

Upon

Death or
Disability

 

Termination

for Cause

 

Termination

Immediately
Following a
Change in
Control
Without Cause
or for Good
Reason

  Change in
Control

Kevin T. Parker

  Severance Payment   $ 1,500,000   $ 1,050,000   $   —     $ 1,500,000   $ —  
  Payment for Options          
 

—Vested Options

    1,879,834     1,879,834     —       1,879,834     1,879,834
 

—Unvested Options

    5,639,503     1,879,834     —       5,639,503     5,639,503
  Continued Medical     18,081     18,081     —       18,081     —  
                               
  Total   $ 9,037,418   $ 4,827,749   $   —     $ 9,037,418   $ 7,519,337
                               

James C. Reagan

  Severance Payment   $ 137,500   $ —     $   —     $ 652,500   $ —  
  Payment for Options          
 

—Vested Options

    614,675     614,675     —       614,675     614,675
 

—Unvested Options

    —       —       —       1,844,025     1,844,025
  Continued Medical     12,054     —       —       18,081     —  
  Excise Tax Gross Up     —       —       —       396,449     —  
                               
  Total   $ 764,229   $ 614,675   $   —     $ 3,525,730   $ 2,458,700
                               

Richard P. Lowrey

  Severance Payment   $ 137,500   $ —     $ —     $ 652,000   $ —  
  Payment for Options          
 

—Vested Options

    614,675     614,675     —       614,675     614,675
 

—Unvested Options

    —       —       —       1,844,025     —  
  Continued Medical     12,054     —       —       18,081     —  
                               
  Total   $ 764,229   $ 614,675   $   —     $ 3,128,781   $ 614,675
                               

Carolyn J. Parent

  Severance Payment   $ 137,500   $ —     $   —     $ 712,500   $ —  
  Payment for Options          
 

—Vested Options

    —       —       —       —       —  
 

—Unvested Options

    —       —       —       595,663     —  
  Continued Medical     12,054     —       —       18,081     —  
                               
  Total   $ 149,554   $ —     $   —     $ 1,326,244   $ —  
                               

 

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Name

 

Benefit

 

Termination

Without
Cause or for
Good Reason

 

Termination

Upon

Death or
Disability

 

Termination

for Cause

 

Termination

Immediately
Following a
Change in
Control
Without Cause
or for Good
Reason

  Change in
Control

Eric J. Brehm

  Severance Payment   $ 125,000   $ —     $   —     $ 562,500   $ —  
  Payment for Options          
 

—Vested Options

    395,400     395,400     —       395,400     395,400
 

—Unvested Options

    —       —       —       1,186,200     —  
  Continued Medical     12,054     —       —       18,081     —  
                               
  Total   $ 532,454   $ 395,400   $   —     $ 2,162,181   $ 395,400
                               

In addition, Mr. Parker would be entitled to the payments set forth above in the column “Termination Without Cause or for Good Reason” if his employment were terminated by us upon expiration of his term of employment after giving notice that his term would not be extended.

Incentive and Benefit Plans

2007 Stock Incentive and Award Plan

Our board of directors adopted our 2007 Plan in April 2007, and our shareholders have approved it. Holders of stock options or other awards under the plan are not subject to the shareholder’s agreement applicable to optionees under our 2005 Stock Option Plan. The plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Code and stock options which do not so qualify, stock appreciation rights, dividend equivalent rights, restricted stock and performance-based restricted stock, performance units and performance shares, cash incentive awards, phantom stock awards and share awards. Directors, officers, employees, including future employees who have received written offers of employment, and consultants and advisors of us and our subsidiaries (each an eligible individual) may receive grants under the plan. The plan is designed to comply with the requirements for “performance-based compensation” under Section 162(m) of the Code as currently in effect, and the conditions for exemptions from short-swing profit recovery rules under Rule 16b-3 under the Exchange Act.

The plan requires that a committee of at least two board members administer the plan. The committee may consist of the entire board, but from and after the effective date of this registration statement:

 

   

if the committee consists of less than the entire board, then with respect to any option or award granted to an eligible individual who is subject to Section 16 of the Exchange Act, the committee must consist of at least two directors, each of whom must be “non-employee directors” for purposes of Section 16 of the Exchange Act; and

 

   

if needed for any option or award to qualify as performance-based compensation following the period beginning with the effective date of this registration statement and ending on the earlier of the date of our annual meeting in 2011 and the expiration of the “reliance period” under Treasury Regulation Section 1.162-27(f)(2) (the “transition period”), the committee must consist of at least two directors, each of whom must be an outside director for purposes of Section 162(m) of the Code.

The compensation committee currently administers the plan and has appointed a subcommittee to satisfy the requirements of Section 16 of the Exchange Act and Section 162(m) of the Code described above. Generally, the committee (and if appropriate, the subcommittee) has the right to grant options and other awards to eligible individuals and to determine the terms and conditions of options and awards, including the vesting schedule and exercise price of options and awards.

 

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The plan authorizes the initial issuance of 1,840,000 shares of our common stock. Until the termination of the plan, the number of shares available for issuance will be increased annually on January 1st of each year, commencing on January 1, 2008, in an amount equal to 3% of the total number of our shares of common stock issued and outstanding as of December 31st of the immediately preceding calendar year. Our board of directors has the discretion to reduce the amount of the annual increase in any particular year. Both the initial share reserve and/or the increased number of shares available for issuance under the plan are subject to adjustment in the event of any change in capitalization affecting our outstanding common stock. No more than 1,840,000 shares may be made the subject of incentive stock options under the plan. Following a transition period permitted under Section 162(m) of the Code, the number of shares that may be subject to options and stock appreciation rights granted to an eligible individual in any calendar year may not exceed 1,500,000 shares, and the number of shares that may be subject to performance shares or performance-based restricted stock granted to an eligible individual in any calendar year may not exceed 1,500,000 shares (with such limit to be applied separately to each type of award). The dollar amount of cash that may be the subject of performance units or cash incentive awards granted to an eligible individual in any calendar year may not exceed $1,500,000 and $2,000,000, respectively.

In the event of certain transactions involving our common stock, including a merger or consolidation, the plan and the options and awards issued under the plan will continue in effect in accordance with their respective terms, except that following these transactions either:

 

   

each outstanding option or award will be treated as provided for in the agreement entered into in connection with the transaction; or

 

   

if not so provided in the agreement, each optionee or grantee will be entitled to receive in respect of each share of common stock subject to any outstanding option or award, upon exercise of an option or payment or transfer in respect of any award, the same consideration that each holder of a share of common stock was entitled to receive in the transaction, provided, however, that unless otherwise determined by the committee, the consideration shall remain subject to all of the conditions, restrictions and performance criteria which were applicable to the options and awards prior to the transaction. In addition, in the event of a change in ownership or effective control of us, the committee may provide, in an agreement evidencing the grant of an option or award or at any time thereafter, that options or awards may become vested and/or exercisable and may become free of restrictions, to the extent of all or any portion of the option or award.

The plan will automatically terminate on the day preceding the tenth anniversary of its approval by our board of directors, unless terminated sooner by our board. Generally, our board of directors may terminate, amend, modify or suspend the plan at any time, except that no such action may impair and adversely affect the rights under any award previously granted to a participant without the participant’s consent, and no material modification to performance goals and targets under the plan may be made without shareholder approval.

Employee Stock Purchase Plan

In connection with this offering, we have established our ESPP, which is designed to enable eligible employees to periodically purchase shares of our common stock at a discount from the fair market value of our common stock on the date of purchase. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. Our board of directors adopted our ESPP in April 2007, and our shareholders have approved the plan. Participants in our ESPP are not subject to any shareholder’s agreement with respect to shares issued pursuant to the ESPP.

The maximum number of shares of our common stock that may be issued under our ESPP, subject to certain adjustments reflecting changes in our capitalization, is 750,000 shares. The ESPP is administered by our compensation committee. If our board of directors determines otherwise, however, the ESPP may be administered by the board itself or by those directors that are appointed to a committee by the board to administer the ESPP. All of our employees, other than officers, generally are eligible to participate in the ESPP if they are

 

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employed by us or by any participating subsidiary for more than twenty hours per week and for more than five months in any calendar year. Any employee who is a 5% shareholder or who would become a 5% shareholder as a result of his or her participation in the ESPP, however, will not be eligible to participate. In addition, no employee will have the right to purchase shares of our common stock under the ESPP if the employee’s rights to purchase stock under all of our employee stock purchase plans would accrue at a rate that exceeds $25,000 of the fair market value of our common stock for each calendar year as determined under Section 423 of the Code.

Other than the first offering period, our ESPP provides for consecutive six-month offering periods that commence on March 1st and September 1st of each year and end on August 31st and February 28th (or February 29th, in the case of a leap year) of each year, respectively. The first offering period will begin on the effective date of this offering and will end on February 29, 2008.

Our ESPP permits participants to purchase shares of our common stock through payroll deductions and personal contributions. Participants may elect to deduct either a percentage or a fixed dollar amount of their compensation (including fringe benefits, overtime and bonuses) for each pay period that ends during an offering period. The total amount that participants may deduct from their compensation or contribute from personal funds in any calendar year, however, cannot exceed their compensation for that year. The committee (or our board of directors) has the discretion to decrease the amount of any participant’s payroll deductions or personal contributions to the extent necessary to comply with the requirements of Section 423 of the Code.

Amounts deducted or contributed by participants are used to purchase shares of our common stock at the end of each offering period. The purchase price has been set at 90% of the fair market value of a share of common stock on the first day of an offering period or the date of purchase (i.e., the last day of the offering period), whichever is lower. Participants may generally end their participation in the ESPP at any time prior to the last five days of an offering period, and any accumulated payroll deductions and/or personal contributions will be refunded to withdrawing participants. Participation in our ESPP ends automatically upon a termination of employment for any reason.

In the event of a change in control transaction or a dissolution or liquidation of the company, the committee has the discretion, with respect to the offering period then in progress, to accelerate the purchase date to the last payroll date immediately preceding the change in control, dissolution or liquidation or to terminate the offering period immediately prior to the consummation of the change in control, dissolution or liquidation. In each case, any remaining balance in a participant’s account will be refunded to the participant. Our ESPP may be terminated by our board of directors at any time.

Limitations of Liability and Indemnification Matters

Our certificate of incorporation provides that our directors will not be personally liable for monetary damages to us or our shareholders for breach of fiduciary duty as a director, except for liabilities arising:

 

   

from any breach of the director’s duty of loyalty to us or our shareholders;

 

   

from acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of any law;

 

   

from authorizing illegal dividends or redemptions; and

 

   

from any transaction from which the director derived an improper personal benefit.

In addition, our bylaws provide that we will fully indemnify any person who was or is a party, or is threatened to be made a party, or is involved in any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that the person is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney’s fees), judgments, fines and amounts

 

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paid in settlement actually and reasonably incurred or suffered by the person in connection with the action, suit or proceeding. Delaware law also provides that indemnification permitted under law is not to be deemed exclusive of any other rights to which the directors and officers may be entitled under a corporation’s bylaws, any agreement, a vote of shareholders or otherwise.

We are authorized to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his actions, regardless of whether Delaware law would permit indemnification. We have obtained liability insurance for our officers and directors.

At present, we are not the subject of any pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification or advancement of expenses will be required or permitted under our bylaws.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Relationship with New Mountain Capital and the deLaski Shareholders

The New Mountain Funds

The New Mountain Funds became our principal shareholders in connection with our recapitalization. In the recapitalization, they invested an aggregate amount of $180 million in us through the purchase of:

 

   

$75 million in aggregate principal amount of our 8% subordinated debentures due 2015;

 

   

29,079,580 shares of our common stock representing approximately 75% of the equity and voting power of the company; and

 

   

our Series A preferred stock (which became our Class A common stock in our 2007 reincorporation).

Under our certificate of incorporation, holders of our Class A common stock are entitled to elect a majority of the members of the board of directors until the New Mountain Funds beneficially own less than one-third of the outstanding shares of our common stock. The director voting right of the holders of our Class A common stock is subject to reduction and elimination as the common stock ownership percentages of the New Mountain Funds declines, as described in more detail below.

As described in more detail below, three of our directors were nominated by New Mountain Partners and Allegheny New Mountain and are Managing Directors of New Mountain Capital.

deLaski Shareholders

We were founded in November 1983 by Kenneth E. deLaski and Donald deLaski to develop accounting solutions for government contractors. Prior to the recapitalization, Messrs. deLaski and certain of their family members (collectively, the deLaski shareholders) were our principal shareholders. In connection with the recapitalization, we repurchased a portion of the shares of common stock owned by the deLaski shareholders for cash. In addition, we also sold $25 million in aggregate principal amount of our 8% subordinated debentures due 2015 to Kenneth E. deLaski. As of May 1, 2007, the deLaski shareholders owned an aggregate of 8,291,375 shares of our common stock (approximately 21% of the issued and outstanding common stock). As described in more detail below, one of our directors was nominated by the deLaski shareholders.

Recapitalization

Recapitalization Agreement

We entered into the recapitalization agreement with the New Mountain Funds, the deLaski shareholders and certain management shareholders on December 23, 2004. The recapitalization closed on April 22, 2005. We used proceeds from the recapitalization and from borrowings under our credit agreements to repurchase from the deLaski shareholders and certain members of our management (and other employees) an amount of common stock resulting in these persons collectively owning an aggregate of approximately 25% of our equity and voting power (other than for the election of directors). In connection with the recapitalization, we reimbursed New Mountain Capital for certain expenses associated with the recapitalization. The total amount of these reimbursements was $77,125. In addition, we paid to the New Mountain Funds’ legal counsel fees incurred by them in connection with the recapitalization. The total amount of these fees was $1,075,000.

Pursuant to the recapitalization agreement, 70,533,180 shares of our common stock held by the deLaski shareholders were repurchased, including 47,728,920 shares held by Kenneth E. deLaski and 22,104,020 shares held by Donald deLaski directly or indirectly through trusts for the benefit of certain family members of Kenneth E. deLaski and Donald deLaski. We made payments in the amount of $172,338,542 and $79,812,713, respectively, for the repurchase of the shares held by Kenneth E. deLaski and his family members and by Donald

 

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deLaski and his family members. In addition, we paid $2,528,411 to a trust for the benefit of Kathleen and Edward Grubb, sister and brother-in-law of Kenneth E. deLaski, and daughter and son-in-law of Donald deLaski, for the repurchase of shares held by them.

The proceeds were also used to make payments to holders under our SAR Plan for SARs that were vested as follows to executive officers at that time:

 

   

$415,687 to Lori L. Becker;

 

   

$1,622,217 to Eric J. Brehm;

 

   

$320,482 to Mary R. Burden;

 

   

$1,009,163 to Richard P. Lowrey; and

 

   

$538,876 to Susan H. O’Dea.

In addition, we accelerated the vesting of the remaining SARs and have made or are committed to make additional payments as follows:

   

$373,827 to Lori L. Becker;

 

   

$60,457 to Eric J. Brehm;

 

   

$129,712 to Mary R. Burden;

 

   

$753,907 to Richard P. Lowrey; and

 

   

$74,949 to Susan H. O’Dea.

Under the recapitalization agreement, the shareholders party to the agreement were also entitled to receive from us the amount of income taxes that we would otherwise have been required to pay if we did not take the deductions that resulted from our payments to the holders of our stock appreciation rights (the contingent payments). In October 2006 and March 2007, we paid Kenneth E. deLaski an aggregate amount of $11.8 million as contingent payments on behalf of all deLaski shareholders.

The shareholders party to the recapitalization agreement agreed to indemnify the New Mountain Funds and their affiliates against all losses arising out of, among other things, breaches of representations and warranties and breaches of covenants and agreements by the shareholders or us. In connection with the recapitalization, the parties to the recapitalization agreement entered into an escrow agreement, dated April 22, 2005, under which $40 million was placed into escrow as partial security for any indemnification claims arising under the recapitalization agreement. No claims were made against the escrow account, and in 2006 all amounts in escrow were released to be paid to the shareholders.

Shareholder’s Agreement and Director Shareholder’s Agreement

Each of our current shareholders (including shareholders that are employees, executive officers or directors of the company) are party to a shareholder’s agreement or individual director shareholder’s agreements (collectively, the shareholder’s agreement) that generally prohibit the sale, transfer, assignment or other disposition of the stock held by the shareholder, except certain permitted transfers to family members and entities related to the shareholder or family member. On April 22, 2005, we entered into a shareholder’s agreement with those employees who continued as shareholders after the recapitalization, the deLaski shareholders, The Onae Trust and the New Mountain Funds. Our directors, executive officers and other employees who have purchased our shares after the recapitalization also became parties to the shareholder’s agreement through the execution of joinder agreements to the shareholder’s agreement or the execution of individual director shareholder agreements. The joinder agreement entered into by Kevin T. Parker in connection with his purchase of shares of our common stock, however, provides for certain rights and obligations not shared by other shareholders that are

 

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party to the shareholder’s agreement, as described in more detail below. In addition, each holder of options under our 2005 Stock Option Plan is also required to execute the shareholder’s agreement (or any other shareholder’s agreement in use by us from time to time), among other conditions, prior to being deemed the holder of, or having any rights with respect to, any shares of our common stock. Holders of options or other awards received pursuant to our 2007 Plan and holders of our common stock issued pursuant to our ESPP are not subject to the shareholder’s agreement.

Under the shareholder’s agreement, each shareholder party to the agreement may participate proportionately in any private sale or public offering of common stock by the New Mountain Funds of their shares of our common stock. Each shareholder may sell in the private sale or public offering the same percentage of the shareholder’s shares of our common stock as the New Mountain Funds sell in the private sale or public offering, determined based on the aggregate number of shares of common stock owned and the aggregate number of shares of common stock being sold by the New Mountain Funds (assuming conversion, exchange or exercise of all convertible securities held by the New Mountain Funds and the shareholders, including vested and unvested options). If the number of shares of which a shareholder is entitled to sell exceeds the number of shares of common stock held by the shareholder, any options held by the shareholder (including unvested options) may be exercised to the extent of the excess. A shareholder may choose any combination of shares and options (if vested) in determining the securities the shareholder will sell in the public or private offering. Any unvested options may only be exercised to the extent there is an amount of securities that such shareholder may sell that has not been covered by shares or vested options. In lieu of permitting the shareholder to exercise any vested or unvested options to enable a shareholder to participate in the public offering of shares owned by the New Mountain Funds, we may, at our option, cause the options and the shares underlying the options to be registered, thereby permitting the shareholder to sell these shares at a later date. The option agreement does not limit the ability of a shareholder to participate in a public offering of shares by the New Mountain Funds to the extent that the shareholder holds shares of our common stock.

The shareholder’s agreement also provides that if the New Mountain Funds propose to sell all or any portion of their shares of common stock in a bona fide arm’s-length transaction (by merger or otherwise) or if we propose to sell or otherwise transfer for value all or substantially all of our stock, assets or business:

 

   

the New Mountain Funds, at their option, may require in the case of a sale of stock by them, that each shareholder party to the agreement sell their shares proportionate to the New Mountain Funds and waive any appraisal rights in connection with the sale transaction; and

 

   

if shareholder approval of the transaction is required and our shareholders are entitled to vote on the transaction, each shareholder party to the agreement is required to vote all of its shares in favor of the transaction.

The sale of shares of our common stock by the shareholders party to the shareholder’s agreement upon exercise by the New Mountain Funds of these rights will be for the same per share consideration and on substantially the same terms and conditions as the sale of shares owned by the New Mountain Funds. The consideration may be adjusted, as needed, if the shareholders and the New Mountain Funds are selling different types of capital stock, except that there will be no adjustment in the consideration per share if the New Mountain Funds are also selling their shares of Class A common stock. If the consideration consists of securities and the sale would require either a registration statement under the Securities Act or the preparation of a disclosure statement pursuant to Regulation D under the Securities Act (or similar provision under state securities laws) and the registration statement or disclosure statement is not otherwise being prepared, then, at the option of the New Mountain Funds, the shareholder may receive, in lieu of securities, the fair market value of the securities in cash.

The shareholder’s agreement (other than those agreements entered into by our directors) provides that, upon termination of an employee shareholder’s employment (other than Mr. Parker’s employment, whose rights under his joinder agreement are described below), we have the right to purchase for a period of six months all or any portion of the shares of common stock of the company held by the employee or acquired by the employee after the date of termination upon the exercise of any stock options held by the employee. If the employee is terminated by us for cause, the purchase price per share of the employee’s common stock will be equal to the

 

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lesser of 90% of the shareholder’s cost of their shares of common stock and the fair market value of the shareholder’s common stock. If an employee is terminated by us for any reason other than cause or if the employee’s employment with us terminates by reason of death, permanent disability or adjudicated incompetency, the purchase price per share of the employee’s common stock will be equal to the fair market value of the shareholder’s common stock. The fair market value of any shares repurchased by us will equal the average of the daily closing prices of our common stock on the 20 consecutive trading days immediately prior to the employee’s termination or, if the shares are not publicly listed or traded, will be determined by our board of directors in good faith.

The shareholder’s agreement, moreover, prohibits shareholders party to the agreement (other than those agreements entered into by our directors) from engaging in certain prohibited activities. Under the agreement, these shareholders may not:

 

   

disclose or furnish to any other person confidential or proprietary information, defined as any non-public information acquired in the course of the shareholder’s employment with us, if applicable, that is reasonably likely to have competitive value to us, any of our affiliates or any competitor, excluding information that has become public other than as a result of breach by the shareholder of the shareholder’s agreement;

 

   

directly or indirectly solicit for employment any of our employees or employees of any of our affiliates (in the case of employee shareholders only); or

 

   

make a prohibited transfer of the shareholder’s shares of our common stock.

We have the right to purchase all or any portion of the shares of our common stock then held by a shareholder who is party to the shareholder’s agreement if:

 

   

a shareholder engages in any of the prohibited activities described above;

 

   

an employee shareholder at any time prior to the second anniversary of the employee’s termination, owns, manages or is employed by any of our competitors or is a competitor of the company in an individual capacity or engages in any other competitive activity (including breaching any non-competition obligations under any non-competition agreement or employee agreement to which the shareholder is a party); or

 

   

a shareholder is convicted of a felony against us or any of our affiliates.

If we exercise this right, the purchase price per share of the shareholder’s common stock will be equal to the lesser of 90% of the shareholder’s cost of their shares of common stock and the fair market value of the shareholder’s common stock.

Under the shareholder’s agreement, from and after the date the New Mountain Funds and any assignee of the New Mountain Funds ceases to beneficially own shares of our common stock representing at least 15% of the total number of votes that may be cast in the general election of directors of the company:

 

   

all other provisions of the agreement regarding the rights and restrictions on our common stock terminate, including the repurchase provisions upon termination of employment or in the event of certain prohibited activities (applicable to all shareholders party to the agreement other than director shareholders);

 

   

any shares of common stock owned by the shareholders party to the agreement may be sold, transferred or assigned free of the restrictions contained in the agreement; and

 

   

the shareholders party to the agreement will not be entitled to any of the rights contained in the shareholder’s agreement, except for those rights relating to their participation in private sales and public offerings by the New Mountain Funds.

 

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Kevin T. Parker Joinder Agreement to Shareholder’s Agreement

Each executive officer who has purchased shares of our common stock entered into joinder agreements to the shareholder’s agreement dated as of the date of purchase of the shares. With the exception of Mr. Parker, each executive officer has the same rights and obligations as all other employees under the shareholder’s agreement.

Under Mr. Parker’s joinder agreement, if Mr. Parker’s employment is terminated, the period in which we are able to purchase shares of common stock owned by him is limited to two months after his termination (as opposed to six months for all other employees). In addition, in determining the purchase price for the shares of common stock owned by Mr. Parker, the fair market value of the shares of common stock owned by him will equal the average of the daily closing prices of our common stock on the 20 consecutive trading days immediately prior to his termination or, if the shares are not publicly listed or traded, will be determined by the mutual agreement of us and Mr. Parker or, in the absence of mutual agreement, by an investment banker or other third party valuation firm (or, in the absence of mutual agreement, by the American Arbitration Association). Under Mr. Parker’s employment agreement, when our common stock becomes publicly traded, we are required to maintain an effective registration statement covering the resale of shares purchased by Mr. Parker or ensure that we satisfy the requirements of Rule 144 of the Securities Act so that Rule 144 is available for Mr. Parker to sell his shares. Mr. Parker, however, will remain subject to the contractual and legal restrictions on resale applicable to him under the shareholder’s agreement.

As in the shareholder’s agreement applicable to other shareholders which are parties to the shareholder’s agreement, Mr. Parker is prohibited from engaging in certain activities. His joinder agreement, however, alters the prohibition against disclosing or furnishing to any other person confidential or proprietary information otherwise applicable under the shareholder’s agreement by extending the prohibition only to non-public information acquired during Mr. Parker’s employment with us that has or is reasonably likely to have a material competitive value on us, any of our affiliates or any competitor, excluding information that has become public other than as a result of breach by Mr. Parker of his employment agreement. In addition, under Mr. Parker’s employment agreement, the prohibition contained in his employment agreement against engaging in any competitive activity also applies to his joinder agreement and, thus, limits the types of competitive activities that would trigger our right to purchase all or any portion of the shares of common stock held by Mr. Parker under the shareholder’s agreement. Specifically, for purposes of determining whether Mr. Parker is engaging in a competitive activity that would trigger our right to repurchase his shares, the joinder agreement:

 

   

limits our market area to the United States and any country or territory other than the United States which accounted for at least 2.5% of our software license revenue during the 12 months immediately prior to Mr. Parker’s termination (rather than each country or territory in which we market or have plans to market any of our services and products which is otherwise applicable to all other shareholders);

 

   

limits the definition of a company product to only those project-focused business management and/or sales management software and/or other products that we are developing, implementing, marketing and/or selling (instead of also including any products that we have plans to develop, implement, market and/or sell as is the case for all other shareholders);

 

   

limits the definition of a competing product to those products that directly compete with any of our products and limits the definition of competitor to any person that is directly engaging in a competing business in our market area (rather than including products or competitors that indirectly compete with us);

 

   

provides that ownership of 5% or less (instead of 2% or less for all other shareholders) of the outstanding securities of any issuer will not be considered a competing activity so long as Mr. Parker does not have or exercise any rights to manage the business of the issuer; and

 

   

provides that being employed by a licensee of any of our products and providing competing services to the licensee, standing alone, will not be considered a competing product.

 

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Management Rights Letters

On April 22, 2005, we entered into management rights letters with New Mountain Partners and Allegheny New Mountain pursuant to which they are entitled to routinely consult with, and advise, management regarding our operations and have the right to inspect our books and records. We are also required to deliver financial statements to New Mountain Partners and Allegheny New Mountain within 45 days after the end of each of the first three quarters of each year and 120 days after the end of each year. Each management rights letter terminates on the date New Mountain Partners or Allegheny New Mountain, as applicable, no longer holds any of our securities. Certain rights granted in the management rights letters are also granted under the investor rights agreement (described below), such as the right of New Mountain Partners and Allegheny New Mountain to elect members of our board of directors. These rights terminate in accordance with the terms of the investor rights agreement, instead of on the date New Mountain Partners or Allegheny New Mountain no longer holds any of our securities.

Investor Rights Agreement

On April 22, 2005, we entered into an investor rights agreement with the New Mountain Funds and certain other persons, including the deLaski shareholders. The investor rights agreement contains a voting agreement that provides, among other things, that New Mountain Partners, Allegheny New Mountain and the deLaski shareholders will be entitled to designate a certain number of members of the board of directors and that we are required to take all necessary and desirable action to ensure that the designated individuals are elected as members of our board of directors. Further, at each shareholder meeting at which directors are to be elected, the New Mountain Funds, and any assignee of the New Mountain Funds, and the deLaski shareholders are required to take all necessary and desirable action to effect the terms of the voting agreement, including with respect to the election of directors.

Three of our current directors, Messrs. Ajouz, Klinsky and Singh, were appointed by New Mountain Partners and Allegheny New Mountain and one of our current directors, Ms. deLaski, was appointed by the deLaski shareholders pursuant to the investor rights agreement. The rights granted in the investor rights agreement to New Mountain Partners, Allegheny New Mountain and the deLaski shareholders to appoint directors is subject to reduction and elimination as the stock ownership percentages of the New Mountain Funds or the deLaski shareholders, as applicable, decline. So long as New Mountain Partners owns a majority of the outstanding shares of our Class A common stock and beneficially owns one-third or more of the outstanding shares of our common stock, it has the right to designate at a least a majority of our board of directors; provided that:

 

   

if the New Mountain Funds (including any transferee of the New Mountain Funds) beneficially own less than one-third, but at least 15% of the outstanding shares of our common stock, New Mountain Partners will be entitled to elect three of the members of our board of directors;

 

   

if the Ne