S-1/A 1 ds1a.htm FORM S-1/A AMENDMENT #6 Form S-1/A Amendment #6
Table of Contents

As filed with the Securities and Exchange Commission on October 16, 2007

Registration No. 333-142737

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


AMENDMENT NO. 6

TO

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)

 


David R. Schwiesow

Senior Vice President, General Counsel and Secretary

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.   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

 

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)(2)

  

Amount of

registration fee

 

Common stock, par value $0.001 per share

   $ 196,608,580    $ 6,035.88 (3)
   

 

(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.
(2) Including shares of common stock which may be purchased by the Underwriters to cover over-allotments, if any, and proceeds from the sale of shares of common stock by the selling stockholders.
(3) Previously paid.

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 OCTOBER 16, 2007

9,000,000 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 $17.00 and $19.00 per share. Our common stock has been approved for listing on The Nasdaq Global Select Market under the symbol “PROJ.”

We are selling 3,009,475 shares of common stock and the selling shareholders, including our senior management and directors, are selling 5,990,525 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 1,347,820 additional shares from the selling shareholders to cover over-allotments of shares.

Investing in our common stock involves risks. See “ Risk Factors” on page 11.

 

      

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.

The date of this prospectus is                     , 2007.


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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 and developed specifically for project-focused organizations. We believe our leading market position is evidenced by our customer base. As of September 1, 2007, our customers included 90 of the 100 leading federal information technology contractors, including the 10 largest (based on 2006 revenue derived from federal government contracts), and approximately 76% of the 500 largest architectural and engineering firms, including 15 of the top 20 (based on design services revenue for 2006). In addition, our software offerings were used by the seven largest information technology services companies and by six of the seven largest aerospace and defense companies (as identified in the Fortune 500 list of America’s largest companies based on 2006 revenue) as of September 1, 2007.

These project-focused organizations generate revenue from defined, discrete, customer-specific engagements or activities, rather than from mass-producing or distributing products, and they 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 September 1, 2007, we had over 12,000 customers worldwide that spanned numerous project-focused industries and ranged in size from small organizations to large enterprises. We serve customers primarily in the following markets: architecture and engineering, government contracting, aerospace and defense, information technology services, consulting, discrete project manufacturing, grant-based not-for-profit organizations and government agencies.

For the six months ended June 30, 2007, our total revenue increased 23.3% to $130.8 million, and our net income increased 47.6% to $9.6 million, in each case compared to the six months ended June 30, 2006.

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. International Data Corporation (IDC), a third-party industry research firm, recently estimated the size of the worldwide enterprise software market for project-focused organizations at $17.4 billion in 2005 and projected 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.

 

 

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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 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 Government Accountability 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.

 

 

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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.

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. We believe our leading market position is evidenced by our customer base. As of September 1, 2007, our customers included 90 of the 100 leading federal information technology contractors, including the 10 largest (based on 2006 revenue derived from federal government contracts), and approximately 76% of the 500 largest A/E firms, including 15 of the top 20 (based on design service revenue for 2006). This has helped us develop a widely recognized brand across numerous project-focused industries. 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.

 

 

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Expanding Our Network of Alliance Partners. We have established a network of alliance partners to assist our marketing, sales and product implementation efforts in the United States and in international markets. This network includes various market participants in the enterprise applications software industry, such as software resellers, industry-specific vendors, software consultants, complementary technology providers, accounting and tax advisors and data and server infrastructure service providers. For the six months ended June 30, 2007, these partners generated approximately 8% of our license revenue. We plan to expand this network of alliance partners to help penetrate new markets, increase our geographical sales force coverage and develop and maintain attractive software products.

 

   

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 of varying sizes 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.

Recent Developments

Although our financial statements for the nine months ended September 30, 2007 are not yet complete, the following financial information reflects our estimate of those results based on currently available information. For the quarter ended September 30, 2007, we estimate our license revenues will be approximately $20.8 million to $21.5 million, compared to $16.6 million for the quarter ended September 30, 2006, and our total revenues will be approximately $69.5 million to $70.9 million, compared to $55.1 million for the quarter ended September 30, 2006.

For the nine month period ended September 30, 2007, we estimate our license revenues will be approximately $59.4 million to $60.1 million, compared to $51.4 million for the nine month period ended September 30, 2006, and our total revenues will be approximately $200.3 million to $201.7 million, compared to $161.1 million for the nine month period ended September 30, 2006.

The foregoing financial information is not a comprehensive statement of our financial results for the quarter ended September 30, 2007 or the nine months ended September 30, 2007 and has not been reviewed or audited by our independent registered public accounting firm. Our consolidated financial statements for the quarter ended September 30, 2007 and the nine months ended September 30, 2007 will not be available until after this offering is completed, and, consequently, will not be available to you prior to investing in this offering. The final financial results for the quarter ended September 30, 2007 and the nine months ended September 30, 2007 may vary from our expectations and may be materially different from the preliminary financial results we are providing above due to completion of quarterly close procedures, final adjustments and other developments that may arise between now and the time the financial results for these periods are finalized. Accordingly, you should not place undue reliance on the foregoing financial information.

 

 

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The estimates for any interim period are not necessarily indicative of our operating results for a full year or any future period and should be read together with “Risk Factors,” “Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Summary Consolidated Financial Data,” “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

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) (collectively, the “New Mountain Funds”), three private equity funds affiliated with New Mountain Capital, L.L.C. (New Mountain Capital). The New Mountain Funds became our principal shareholders in our April 2005 recapitalization through which they invested an aggregate amount of $180 million in us through the following purchases:

 

   

$75 million in aggregate principal amount of our 8% subordinated debentures;

 

   

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).

The shares of our common stock were purchased by the New Mountain Funds for an aggregate purchase price of $104,999,900, or $3.61 per share. Using proceeds from our recapitalization and borrowings under our credit agreement, we repurchased 70,533,180 shares of common stock held by our co-founders, Kenneth E. deLaski and Donald deLaski, and certain of their family members for an aggregate amount of $254,679,666. We also repurchased shares of our common stock held by certain members of our management and other employees. Using proceeds received from a $100 million borrowing under our credit facility in April 2006, we repaid the outstanding principal amount of all of our debentures that were originally due in 2015, including those held by the New Mountain Funds, in full, plus all accrued and unpaid interest.

Assuming an initial public offering price of $18.00 per share (based on the midpoint of the range set forth on the cover page of this prospectus), the implied value of the shares of our common stock purchased by the New Mountain Funds in our recapitalization (without taking into account any shares sold by them in this offering) is $523,432,440.

In connection with our recapitalization, we entered into various agreements with the New Mountain Funds and their affiliate, New Mountain Capital, which, among other things, provide for certain registration, voting and consent rights. Three members of our board of directors were nominated by New Mountain Partners and Allegheny New Mountain pursuant to one of these agreements.

As of October 1, 2007, the New Mountain Funds collectively owned approximately 74% of our outstanding common stock and 100% of our outstanding Class A common stock. Following the completion of this offering, these funds will own approximately 59% of our common stock (or approximately 56% if the underwriters exercise their over-allotment option in full) and 100% of our outstanding Class A common stock and, together with agreements with other shareholders, will be entitled to elect a majority of the members of the board of directors and will be able to control all matters requiring shareholder approval, including any transaction subject to shareholder approval (such as a merger or a sale of substantially all of our assets), as long as they collectively own a majority of the outstanding shares of our Class A common stock and at least one-third of the outstanding shares of our common stock.

 

 

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The Class A common stock does not carry any general voting rights, dividend entitlement or liquidation preference, but it carries certain rights to designate up to a majority of the members of our board of directors. As a result of this stock ownership and other arrangements, we will be deemed to be a “controlled company” under the rules established by The Nasdaq Global Select Market and will qualify for, and intend to rely on, the “controlled company” exception to the board of directors and committee composition requirements regarding independence under the rules of The Nasdaq Global Select Market.

In connection with this offering, we will pay a transaction fee of $1,083,411 to New Mountain Capital, assuming an initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover of this prospectus).

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 initiated primarily by our founders, Kenneth E. deLaski and Donald deLaski, and with participation by other deLaski family members, another unaffiliated shareholder and executive and non-executive employees. In April 2005, we completed a recapitalization in which the New Mountain Funds acquired a majority 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

3,009,475 shares

 

Common stock offered by the selling shareholders

5,990,525 shares*

 

Total common stock offered

9,000,000 shares*

 

Common stock outstanding after this offering

43,034,042 shares

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $42.6 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 $235.9 million as of October 15, 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. However, we expect to receive approximately $3.8 million in proceeds from the selling shareholders in connection with their planned exercise of options in connection with this offering. 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 11 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed Nasdaq Select Global Market symbol

PROJ


* Pursuant to existing agreements with our shareholders and option holders under our 2005 Stock Option Plan, these holders are entitled to participate proportionately in the offering of common stock by the New Mountain Funds of their shares of our common stock under this prospectus. In accordance with notices that we received from the selling shareholders included in this prospectus, the shares of common stock to be offered by them include shares to be issued upon the exercise of options in connection with this offering.

 

 

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The number of shares of common stock to be outstanding immediately after this offering is based on 39,450,217 shares of our common stock outstanding as of October 6, 2007 plus 574,350 shares of our common stock to be issued upon the planned exercise of options in connection with this offering. This number excludes:

 

   

5,117,418 shares of our common stock issuable upon the exercise of options that were outstanding under our 2005 Stock Option Plan at October 6, 2007, with a weighted exercise price of $7.80 per share and that will not be exercised in connection with this offering;

 

   

1,164,100 shares of our common stock issuable upon the exercise of options that were outstanding under our 2007 Stock Incentive and Award Plan (2007 Plan) at October 6, 2007, with a weighted average exercise price of $17.20 per share and that will not be exercised in connection with this offering;

 

   

675,900 shares of our common stock reserved for future issuance under our 2007 Plan at October 6, 2007; and

 

   

750,000 shares of our 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 1,347,820 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 included elsewhere in this prospectus. Our summary consolidated financial data for the six months ended June 30, 2006 and 2007 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. 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,    

Six Months Ended

June 30,

 
     2004     2005     2006     2006     2007  
     (dollars in thousands, except per share data)  

Statement of Operations Data:

          

REVENUES:

          

Software license fees

   $ 34,934     $ 45,923     $ 74,958     $ 34,768     $ 38,649  

Consulting services

     28,585       41,212       66,573       28,868       38,270  

Maintenance and support services

     54,178       63,709       83,172       39,456       49,375  

Other revenues

     3,516       2,112       3,565       2,976       4,529  
                                        

Total revenues

     121,213       152,956       228,268       106,068       130,823  
                                        

COST OF REVENUES:

          

Cost of software license fees

     4,860       4,591       6,867       3,290       4,230  

Cost of consulting services

     23,397       32,659       54,676       24,655       33,416  

Cost of maintenance and support services

     11,287       11,969       15,483       7,359       7,749  

Cost of other revenues

     4,114       2,002       4,634       4,110       5,012  
                                        

Total cost of revenues

     43,658       51,221       81,660       39,414       50,407  
                                        

GROSS PROFIT

     77,555       101,735       146,608       66,654       80,416  
                                        

Research and development

     22,944       26,246       37,293       17,096       20,693  

Sales and marketing

     16,680       19,198       37,807       16,163       20,597  

General and administrative

     11,367       15,181       26,622       12,066       14,343  

Recapitalization expenses

     —         30,853       —         —         —    
                                        

Total operating expenses

     50,991       91,478       101,722       45,325       55,633  
                                        

INCOME FROM OPERATIONS

     26,564       10,257       44,886       21,329       24,783  

Interest and other income (expense), net

     202       (10,623 )     (19,619 )     (10,548 )     (9,030 )

Income tax (benefit) expense

     (1,117 )     (9,098 )     9,969       4,296       6,183  
                                        

NET INCOME

   $ 27,883     $ 8,732     $ 15,298     $ 6,485     $ 9,570  
                                        

DILUTED EARNINGS PER SHARE

   $ 0.33     $ 0.17     $ 0.38     $ 0.16     $ 0.23  
          

Unaudited Pro Forma Data:

          

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

   $ 15,707     $ (3,569 )   $ 15,298     $ 10,781     $ 15,753  

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

   $ 0.19     $ (0.07 )   $ 0.38     $ 0.16     $ 0.23  

Cash Flow Data:

          

Net cash provided by operating activities

   $ 40,625     $ 11,243     $ 18,442     $ 6,946     $ 13,175  

Depreciation and amortization

     4,413       3,944       8,097       3,794       4,468  

Stock-based compensation expense

     —         —         1,686       666       2,256  

Purchase of property and equipment

     1,218       1,511       4,671       2,407       3,458  

Cash paid during the year for interest

     74       5,249       22,352       6,172       8,760  

Balance Sheet Data (end of period):

          

Cash and cash equivalents

   $ 13,129     $ 17,679     $ 6,667       $ 2,292  

Working capital (deficit)(2)

     3,511       (4,825 )     (22,562 )       (18,077 )

Long-term debt

     —         213,275       210,375         209,300  

Other Unaudited Financial Data:

          

Adjusted EBITDA(3)

   $ 37,288     $ 49,015     $ 58,094     $ 28,466     $ 32,200  

(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.

 

 

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(2) Working capital (deficit) represents current assets minus current liabilities.
(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. In addition, we believe that removing these impacts is important for several reasons:

 

   

Our recapitalization in 2005 generated a significant one-time charge that makes direct comparison of our income from operations or net income more difficult;

 

   

Our change from S-corporation status to C-corporation status for Federal income tax purposes has resulted in fluctuations in our tax expense or benefit which do not relate to our results of operations;

 

   

Our stock-based compensation expense has fluctuated significantly due to changes in both the type of stock-based compensation issued and the accounting requirements. Throughout 2004-2006, stock-based compensation has decreased significantly for reasons unrelated to our operations. Prior to our April 2005 recapitalization, stock-based compensation consisted of stock appreciation rights (SARs) granted to replace stock options cancelled when we became a private company in May 2002. Settlement of these SARs required use of cash and therefore we recorded expense for the SARs during 2004 and through our recapitalization in 2005. In conjunction with our recapitalization, we accelerated the payout of the vested SARs and began issuing stock options. In accordance with the then applicable accounting rules, we did not record an expense for stock options from the time of the recapitalization through the end of 2005. Beginning in 2006, we recorded expense associated with our stock option grants. The change in our compensation philosophy from granting SARs to granting stock options and the applicable accounting rules drove variability in the reported expense and, therefore, operating income. Excluding stock-based compensation expense from adjusted EBITDA removes the impact of this inconsistency;

 

   

As part of our April 2005 recapitalization, we converted unvested SARs into employee retention bonuses. Because these awards were one-time awards incurred specifically as a result of our recapitalization and are payable through April 2009, we do not consider them to be a cost related to our core operations, and we have consistently excluded them when calculating adjusted EBITDA for management reporting purposes; and

 

   

Advisory fees paid to New Mountain Capital are being discontinued effective July 1, 2007. In addition, certain transaction fees in connection with financing transaction fees are unusual in nature, making direct comparisons of our operating results less clear.

 

   Adjusted EBITDA is the primary metric considered 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. Our calculation of adjusted EBITDA is also the basis for our calculations to determine compliance with our debt covenants and assess our ability to borrow additional funds to finance or expand our operations. For purposes of assessing compliance with our debt covenants, and assessing our ability to borrow additional funds, our credit facility provides for calculating adjusted EBITDA as described above, except that the calculation does not add back the cost of retention awards expense in connection with the recapitalization.

 

   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,
  Six Months Ended
June 30,
     2004     2005     2006   2006   2007
    (dollars in thousands)

Net income

  $ 27,883     $ 8,732     $ 15,298   $ 6,485   $ 9,570

Interest expense (income), net

    (334 )     10,861       19,701     10,556     9,065

Income tax (benefit) expense

    (1,117 )     (9,098 )     9,969     4,296     6,183

Depreciation and amortization

    4,413       3,944       8,097     3,794     4,468

NMC advisory and transaction fees

    —         333       2,500     2,250     250

Recapitalization expense

    —         30,853       —       —       —  

Stock-based compensation expense

    6,443       2,721       1,686     666    
2,256

Retention awards expense in connection with the recapitalization

    —         669       843     419     408
                                 

Adjusted EBITDA

  $ 37,288     $ 49,015     $ 58,094   $ 28,466   $ 32,200
                                 

 

 

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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 materially 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

If we are not able to manage our anticipated future growth successfully, we may not be able to maintain or increase our revenues and profitability and our business reputation could be materially adversely affected.

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%. Our total revenue for the six months ended June 30, 2007 was $130.8 million, an increase of $24.7 million, or 23% over the same period of 2006. During this same period, our total worldwide headcount has increased from 682 employees at the end of 2004 to 1,194 employees worldwide at June 30, 2007.

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 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, we may be unable to maintain or increase our revenues and profitability and our business reputation could be materially adversely affected.

If our quarterly and annual operating results fluctuate in the future, or if we fail to meet or exceed the expectations of securities analysts or investors, our stock price could decline.

Historically, our operating results have varied from quarter to quarter and from year to year. Consequently, we believe that investors should not view our historical revenue and other operating results as 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;

 

   

the effect of recognition of deferred revenue;

 

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

 

   

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 generally, and with respect to individual products, are expected to fluctuate significantly from period to period and may not meet or exceed the expectations of securities analysts or investors. In that event, the price of our common stock could be adversely affected.

If we experience diminished operating performance in the fourth quarter, our results for the entire year may be materially adversely affected.

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, particularly as a result of inaccurate financial reporting, and our stock price to decline.

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. As of August 1, 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.

 

   

Inadequate account reconciliation and analysis process.

 

   

Lack of spreadsheet controls, such as the ability to restrict access and monitor changes to, and verify the accuracy of, spreadsheets.

Revenue

 

   

Inadequate controls around accuracy of billing and revenue recognition.

 

   

Inadequate documentation and review of software revenue recognition decisions.

Information Technology

 

   

Inadequate systems access and change management controls.

Some of the significant remedial steps we have taken, or are taking, are the following:

 

   

We have increased, and are continuing to increase, the size and have improved, and are continuing to improve, the skill base of our finance and accounting organization.

 

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We are developing and communicating a comprehensive list of detailed accounting policies and procedures.

 

   

We have implemented a new software and maintenance billing system that will reduce our reliance on manual processes and spreadsheets for maintenance billing and revenue recognition.

 

   

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

The material weaknesses we have identified and our remediation plan are described in more detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Controls over Financial Reporting.”

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.

Remediating our identified control deficiencies depends on several factors, including 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. Through August 31, 2007, we have incurred approximately $2.8 million for services provided by a third party consulting firm to help us execute our plan to improve the effectiveness of our internal controls. We expect to incur an additional estimated $0.8 million in third party consulting fees from September 1, 2007 to December 31, 2007. Although we estimate that we will have remediated all of the identified material weaknesses that we have identified to date by the end of the second calendar quarter of 2008, we cannot be certain whether we will complete the necessary remedial actions in the estimated timeframe 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, particularly if such weaknesses result in a restatement of our financial results, 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 Global Select 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 Select 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 be 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.

 

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As of each year end beginning with the year ending December 31, 2008, our management will be required to evaluate our internal control over financial reporting and to provide in our Form 10-K its assessment of our internal controls to our shareholders. At the same time, our registered independent public accounting firm will be required to evaluate and assess our internal control over financial reporting. 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, 2008, or any subsequent year end, and 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 Select Market. If these events occur, our common stock listing on The Nasdaq Global Select 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.

If we are unsuccessful in entering new markets or further penetrating our existing markets, our revenue or revenue growth could be materially adversely affected.

Our future results depend, in part, on our ability to successfully penetrate new markets, as well as to expand further into our existing markets. In order to grow our business, we 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 and expand into new markets or maintain and increase our market share in our existing markets, our revenue or revenue growth may be materially adversely impacted.

If our existing customers do not buy additional software and services from us, our revenue and revenue growth could be materially adversely affected.

Our business model depends, in part, on the success of our efforts to increase sales to our existing customers. For the six months ended June 30, 2007, approximately two-thirds of total license revenue was derived from sales to existing customers. Our installed customer base has typically 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.

 

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If we are not successful in expanding our international business, our revenue growth could be materially adversely affected.

While we currently have customers in approximately 60 countries, we generated less than 5% of our total license revenue in 2006 and the six months ended June 30, 2007 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 are unable to hire a qualified direct sales force, identify beneficial strategic alliance partners, or negotiate favorable alliance terms, our international growth may be hampered. Our failure to expand successfully in international markets could materially adversely affect our revenue growth.

Expansion internationally will require significant attention from our management and will require us to add additional management and other resources in these markets. If we are unable to grow our international operations in a timely manner, our revenue growth could be materially adversely affected.

If we do not successfully address the risks associated with our current or future international operations, we could experience increased costs or our revenue growth could be materially adversely affected.

We currently have customers in approximately 60 countries, including in the United Kingdom, Europe and the Asia-Pacific region, and we intend to expand our international markets. In addition, we operate facilities in the Philippines, Australia and the United Kingdom.

Doing business internationally involves additional risks and challenges that could materially adversely affect our operating results, 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;

 

   

competition from local and international software vendors;

 

   

disruptions in international communications resulting from damage to, or disruptions of, telecommunications links, gateways, cables or other systems;

 

   

potential difficulties in collecting accounts receivable and longer collection periods;

 

   

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

 

   

potentially higher operating costs due to local laws, regulations and market and competitive conditions;

 

   

foreign currency controls and fluctuation;

 

   

potential adverse tax consequences;

 

   

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

 

   

dependence on local vendors;

 

   

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

 

   

seasonality in business activity specific to various markets;

 

   

potentially longer sales cycles;

 

   

potential restrictions on repatriation of earnings;

 

   

potentially restrictive privacy regulations; and

 

   

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

 

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These risks could increase our costs or adversely affect our revenue growth which could materially impair our ability to operate profitably and our operating results.

Some of these risks may also apply to our offshore product development operations. Our development facility in the Philippines employs approximately 150 of our approximately 400 research and development employees as of September 1, 2007. These employees provide engineering, programming, quality control, documentation and design services for us. In addition, we contract with a product development facility in India that allows us to increase our staffing capabilities on a project-by-project basis and as the need for additional development support arises. This facility includes approximately 50 software and product developers that are trained on our products. The risks of doing business internationally could materially harm our ability to develop our products.

We may be subject to integration and other risks from acquisition activities, which could materially impair our ability to realize the anticipated benefits of any acquisitions.

As part of our business strategy, we may acquire or invest in complementary businesses, technologies, product lines or 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), assets of Applied Integration Management Corporation (AIM) (April 2007) and WST Pacific (WSTP) (May 2007). We may not realize the anticipated strategic or financial benefits of past or potential future acquisitions due to a variety of factors, including the following:

 

   

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 otherwise terminate their maintenance services agreements for our products, or if they are successful in renegotiating their agreements with us on terms that are unfavorable to us, our maintenance services revenues and our operating results could be materially harmed.

Our customers contract with us for ongoing product maintenance and support services. Historically, maintenance services revenues have represented a significant portion of our total revenue, constituting approximately 45%, 42% and 36% of our total revenue in 2004, 2005 and 2006, respectively, and 38% of our total revenue for the six months ended June 30, 2007. Our maintenance services revenue has generally increased year-to-year, including in 2005 and 2006, and for the six months ended June 30, 2007 over the same period in 2006.

Our maintenance and support services are generally billed quarterly and are generally paid in advance. A customer may cancel its maintenance services agreement on 30 days notice prior to the beginning of the next scheduled period. At the end of a contract term, or at the time a customer has quarterly cancellation rights, a customer could seek a modification of its maintenance services agreement terms, including modifications that could 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 rely on its in-house technical staff or replace our software with another product. If our maintenance services business declines due to terminations, 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 maintenance services revenues and operating results could be materially adversely affected.

If we are required to defer recognition of license revenue for a significant period of time after entering into a license agreement, our operating results could be materially adversely affected 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

 

   

under the applicable accounting requirements we are no longer able to separate recognition of license revenue from maintenance or other services-related revenue, thereby requiring us to defer license revenue recognition until the services are provided.

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 license revenue in accordance with our accounting policies, our operating results in any quarter could be materially adversely affected.

If we fail to forecast the timing of our revenues or expenses accurately, our operating results could be materially lower than anticipated.

We use a variety of factors in our forecasting and planning processes, including historical trends, recent customer history, expectations of customer buying decisions, customer implementation schedules and plans, analyses by our sales and service teams, maintenance renewal rates, our assessment of economic or market

 

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conditions and many other factors. While these analyses may provide us with some guidance in business planning and expense management, these estimates are inherently imprecise and may not accurately predict our revenue or expenses 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 or expenses and could result in expenditures without corresponding revenue. As a result, our operating results could be materially lower than anticipated.

If we do not compete effectively against other software providers, we may be forced to reduce prices or limit price increases, which could result in materially reduced margins, net income or market share.

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, materially reduced margins and net income or loss of market share.

If our existing and potential customers seek to acquire software on a subscription basis, and if to meet this customer preference, we need to offer our products on a subscription fee basis in the future, our license revenue and cash flow could be materially reduced.

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 license fee revenue for 2006 and the six month period ended June 30, 2007 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. If in the future our customers seek to acquire software on a subscription basis, we may need to offer our products on a subscription basis. We currently have limited experience with offering products on a subscription basis. As a result, we may not successfully price, market or otherwise execute a subscription-based model. If we operate our software business in whole or in part on a subscription fee basis, we could experience materially reduced license revenues and cash flows.

We may not receive adequate return from our investments in product development, which could result in lower revenues or margins than expected.

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 revenue, and approximately $20.7 million, or 16% of revenue, for the six months ended June 30, 2007. 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.

 

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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 adequate returns from our investment in product development, our revenues or margins could be materially reduced.

If we fail to adapt to changing technological and market trends or changing customer requirements, our market share could decline and our sales and profitability could be materially adversely affected.

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 product features in order to maintain or enhance our competitive position. The introduction of enhanced or new products requires us to manage the transition from, or integration with, older products in order to minimize disruption in sales of existing products and to manage the overall process in a cost-effective manner. If we do not successfully anticipate changing technological and market trends or changing customer requirements and we fail to enhance or develop products timely, effectively and in a cost-effective manner, our ability to retain or increase market share may be harmed and our sales and profitability could be materially adversely affected.

If our existing or prospective customers prefer an application software architecture other than the standards-based technology and platforms upon which we build or support our products, or if we fail to develop our new product enhancements or products to be compatible with the application software architecture preferred by existing and prospective customers, we may not be able to compete effectively and our license revenue could be materially reduced.

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 or product enhancements that are deployable on these platforms. If we are unsuccessful in developing these products or product enhancements, we may lose existing customers or be unable to attract prospective customers.

In addition, 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 license revenue to be materially adversely affected.

Our software products are built upon and depend upon operating platforms and software developed and supplied by third parties. As a result, changes in the availability, features and price of, or support for, any of these third party platforms or software could materially increase our costs, divert management resources and materially adversely affect our competitive position and license revenue.

Our software products are built upon and depend upon operating platforms and software developed by third party providers. We license from several software providers technologies that are incorporated into our products. Our software may also be integrated with third party vendor products for the purpose of providing or enhancing necessary functionality.

 

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If any of these operating platforms or software products ceases to be supported by its third party provider, or if we lose any technology license for software that is incorporated into our products, we may potentially need to devote increased management and financial resources to migrate our software products to an alternative operating platform, identify and license equivalent technology or integrate our software products with an alternative third party vendor product. In addition, if a provider enhances its product in a manner that prevents us from timely adapting our products to the enhancement, we may lose our competitive advantage and our existing customers may migrate to a competitor’s product.

Third party providers may also not remain in business, cooperate with us to support our software products or make their product available to us on commercially reasonable terms or provide an effective substitute product to us and our customers. Any of these adverse developments could materially increase our costs and materially adversely affect our competitive position and license revenue.

If we lose access to, or fail to obtain, third party software development tools on which our product development efforts depend, we may be unable to develop additional applications and functionality and our ability to maintain our existing applications may be diminished, which may cause us to incur materially increased costs, reduced margins or lower revenue.

We license software development tools from third parties and use those tools in the development of our products. Consequently, we depend upon third parties’ abilities to deliver quality products, correct errors, support their current products, develop new and enhanced products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. If any of these third party development tools become unavailable, if we are unable to maintain or renegotiate our licenses with third parties to use the required development tools, or if third party developers fail to adequately support or enhance the tools, we may be forced to establish relationships with alternative third party providers and to rewrite our products using different development tools. 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, we may incur additional costs, which may materially reduce our margins or revenue.

If our products fail to perform properly due to undetected defects or similar problems, and if we fail to develop an enhancement to resolve any defect or other software problem, we could be subject to product liability, performance or warranty claims, incur material costs and our reputation may be harmed, resulting in a potential loss of customer confidence and adversely impacting our sales, revenue and operating results.

Our software applications are complex and, as a result, defects or other software problems may be found during development, product testing, implementation or deployment. In the past, we have encountered defects in our products as they are introduced or enhanced. If our software contains defects or other software problems:

 

   

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;

 

   

we may incur unexpected expenses and diversion of resources to remedy the problem;

 

   

our reputation and competitive position may be damaged; and

 

   

significant customer relations problems may result.

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

 

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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 cause us to lose new sales and materially adversely affect our license and maintenance services revenues and our operating results.

If our products fail to perform properly due to defects or similar problems in operating platforms and software products developed by third parties, the implementation or functionality of our products could be materially impaired and our reputation may be harmed.

The effective implementation of our products depends upon the successful operation of operating platforms and software products developed by third parties and used in conjunction with our products. Any undetected defects or similar problems in these third party products could prevent the implementation or materially impair the functionality of our products, delay new product introductions or harm our reputation. In addition, we may be required to incur significant expenses to repair and investigate the cause of any error due to the use of operating platforms and software products developed by third party providers.

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

Fundamental to the use of enterprise application software, including 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 subject us to claims, which could harm our reputation, and result in significant costs. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could materially harm our operating results. 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.

If we are not able to retain and hire key employees, our business could suffer and we may not be able to execute our business strategy.

Our business strategy and future success depends, in part, upon our ability to 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, it could be more difficult for us to sell and develop our products and services and execute our business strategy, which could lead to a material shortfall in revenue.

 

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The loss of key members of our senior management team could disrupt the management of our business and materially impair the success of our business.

We believe that our success depends on the continued contributions of the members of our senior management team. We rely on our executive officers and other key managers for the successful performance of our business. 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 and maintaining our growth.

We will incur significantly higher costs as a result of being a public company. If we fail to accurately predict or effectively manage these costs, our operating results could be materially adversely affected.

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 Select 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. Through August 31, 2007, we have incurred approximately $2.8 million in third party consulting fees related to preparation for compliance with Section 404 of the Sarbanes-Oxley Act. 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 could be materially adversely affected.

If we are not able to protect our intellectual and other proprietary rights, we may not be able to compete effectively and our license revenue could be materially adversely affected.

Our success and ability to compete is dependent in significant degree on our intellectual property, particularly our proprietary software. We rely on a combination of copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions to establish and protect our rights in our software and other intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy, design around or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary.

Our competitors may independently develop software that is substantially equivalent or superior to our software. Furthermore, 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 and our license revenue. Any litigation to protect our proprietary rights could be time consuming and expensive to prosecute or resolve, result in substantial diversion of management attention and resources and could be unsuccessful.

 

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Claims that we infringe upon third parties’ intellectual property rights could be costly and time-consuming to defend or settle or result in the loss of significant products, any of which could materially adversely impact our revenue and operating results.

Third parties could claim that we have infringed upon their intellectual property rights. Such claims, whether or not they have merit, could be time-consuming to defend, result in costly litigation, divert our 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 such software at a high royalty, our revenue and operating results could be materially adversely affected. In addition, we agree, from time to time, to indemnify our customers against certain claims that our software infringes upon the intellectual property rights of others. We could incur substantial costs in defending our customers against such claims.

Catastrophic events may disrupt our business and could result in materially increased expenses, reduced revenues and profitability and impaired customer relationships.

We are a highly automated business and rely on our network infrastructure 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 may be required to incur significant expenses in order to resume normal business operations. As a result, our revenues and profitability may be materially adversely affected.

Our 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 cause us to lose our government contractor customers and materially adversely affect our revenue generated from these customers.

We derive a significant portion of our revenues from federal government contractors. In 2006 and for the six months ended June 30, 2007, 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.

For example, a key function of our Costpoint application is to enable government contractors to enter, review and organize accounting data in a manner that is compliant with applicable laws and regulations and to easily demonstrate compliance with those laws and regulations. If the federal government alters these compliance

 

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standards, or if there were any significant problem with the functionality of our software from a compliance perspective, we may be required to modify or enhance our software products to satisfy any new or altered compliance standards. Our inability to effectively and efficiently modify our applications to resolve any compliance issue could result in the loss of our government contract customers and materially adversely impact our revenue from these customers.

Significant reductions in the federal government’s budget or changes in the spending priorities for that budget 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 resulting from changes in procurement policies, budget reductions, loss of government contracts, delays in contract awards or other similar procurement obstacles could materially adversely impact our customers’ demand for our software products and related services and maintenance.

Our indebtedness could adversely affect our results of operations and financial condition and prevent us from fulfilling our financial obligations.

We have a significant amount of indebtedness. As of October 15, 2007, we had approximately $235.9 million of outstanding debt under our credit agreement at interest rates which are subject to market fluctuation. We have entered into an agreement which caps our exposure to increased interest rates on $60 million of our indebtedness under the credit agreement. This indebtedness could have important consequences to us, such as:

 

   

limiting our ability to obtain additional financing to fund growth, working capital, capital expenditures, debt service requirements or other cash requirements;

 

   

exposing us to the risk of increased interest costs if the underlying interest rates rise;

 

   

limiting our ability to invest operating cash flow in our business due to debt service requirements;

 

   

limiting our ability to compete with companies that are not as leveraged and that may be better positioned to withstand economic downturns; and

 

   

increasing our vulnerability to economic downturns and changing market conditions.

Our ability to meet our expenses and debt service obligations will depend on our future performance, which will be affected by financial, business, economic and other factors, including potential changes in customer demand, the success of product and marketing innovation and pressure from competitors. If we do not have enough cash to satisfy our debt service obligations, we may be required to refinance all or part of our existing debt, sell assets or reduce our spending. We may not be able to, at any given time, refinance our debt or sell assets on terms acceptable to us or at all.

If we are unable to comply with the covenants or restrictions contained in our credit agreement, our lenders could declare all amounts outstanding under the credit agreement to be due and payable, which could materially adversely affect our financial condition.

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 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,

 

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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.

Risks Related to this Offering and Ownership of Our Common Stock

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 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.

 

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

Upon completion of this offering, we will have 43,034,042 shares of common stock outstanding, of which 34,034,042 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 alongside the New Mountain Funds, which could cause the prevailing market price of our common stock to decline. Approximately 34,034,042 shares of our common stock (and all shares of common stock underlying options outstanding under our 2005 Stock Option Plan) 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 6,281,518 shares subject to options outstanding under our 2005 Stock Option Plan and 2007 Plan, but not exercised, as of the closing of this offering and 1,425,900 shares reserved for issuance under our 2007 Plan and our ESPP as of October 6, 2007.

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.

You may not be able to realize a gain on your investment, since 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, approximately 59% of our outstanding common stock (or approximately 56% if the underwriters exercise their over-allotment option in full) 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 our Class A common stock and at least one-third of our outstanding common stock. In addition, the New Mountain Funds 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

 

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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 $22.03 per share based on an assumed initial public offering price of $18.00 per share, 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 negative net tangible book value per share of common stock that you acquire. This dilution is due 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, and because prior to, and subsequent to, this offering our net tangible book value is negative. If outstanding options to purchase our common stock are exercised, you will experience additional dilution. See “Dilution.”

You will not have the same protections available to other shareholders of Nasdaq-listed companies because we are a “controlled company” within the meaning of The Nasdaq Global Select 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 Select Market. Under these rules, a company as to which an individual, a group or another company holds more than 50% of the voting power is considered a “controlled company” and is exempt from several corporate governance requirements, including requirements that:

 

   

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 Select Market corporate governance requirements as long as the New Mountain Funds own a majority of our outstanding common stock.

Affiliates of Credit Suisse Securities (USA) LLC, J.P. Morgan Securities Inc. and Wachovia Capital Markets LLC, underwriters in this offering, will receive a portion of the net proceeds from this offering to repay indebtedness under our credit agreement and, therefore, have an interest in the successful completion of this offering beyond the underwriting discounts and commissions it will receive.

Affiliates of Credit Suisse Securities (USA) LLC, J.P. Morgan Securities Inc. and Wachovia Capital Markets LLC, underwriters in this offering, will receive a portion of the net proceeds from this offering. We expect to apply approximately $25.0 million of our proceeds in this offering to repay all indebtedness outstanding under our revolving credit facility and $17.6 million of the net proceeds from this offering to repay a portion of our indebtedness under the term loan of our credit agreement. Affiliates of Credit Suisse Securities

 

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(USA) LLC, J.P. Morgan Securities Inc. and Wachovia Capital Markets LLC are lenders under our credit agreement and, assuming an initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover of the prospectus), will receive $19.9 million of the net proceeds we use to repay this indebtedness.

These affiliations present a conflict of interest because each of Credit Suisse Securities (USA) LLC, J.P. Morgan Securities Inc. and Wachovia Capital Markets LLC has an interest in the successful completion of this offering beyond its interest as an underwriter in this offering. The conflict of interest arises due to the interests of the affiliates of these underwriters as recipients of proceeds of the offering. This offering, therefore, is being made using a “qualified independent underwriter” in compliance with the applicable provisions of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc., which are intended to address potential conflicts of interest involving underwriters. The qualified independent underwriter will conduct independent diligence and set a maximum price for the offering. See “Underwriting” for a more detailed description of the independent underwriting procedures that are being used in connection with this offering.

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 Select 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, 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 certain covered persons (as defined in the shareholder’s agreement) vote their shares of our common stock in favor of certain transactions in which the New Mountain Funds propose to sell all or any 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 $42.6 million, assuming an initial public offering price of $18.00 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 $1.1 million payable to New Mountain Capital. We estimate that the net proceeds from the sale of shares of our common stock to be sold by the selling shareholders will be approximately $100.3 million, assuming an initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover of this prospectus) and after deducting estimated underwriting discounts and commissions and the exercise prices of options that the selling shareholders will exercise in connection with the offering. We will not receive any of the proceeds from the sale of common stock by the selling shareholders. However, we expect to receive approximately $3.8 million in proceeds from the selling shareholders in connection with their planned exercise of options in connection with this offering. The selling shareholders include our senior management and directors.

We expect to use the net proceeds we receive from the sale of our common stock to repay the 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 October 15, 2007, we had $25.0 million of principal outstanding under our revolving credit facility and $210.9 million of principal outstanding on our term loan. The term loan was initially incurred in the amount of $115 million 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. The principal amount of the term loan was increased by $100 million on April 28, 2006 to finance the repayment of our 8% subordinated debentures due 2015. As of October 15, 2007, the interest rate was 7.38% for the term loan and 8.00% on a weighted average basis for the revolving credit facility. The term loan matures on April 22, 2011, and the revolving credit facility matures on April 22, 2010.

After application of approximately $25.0 million of the net proceeds from this offering to repay all indebtedness outstanding under our revolving credit facility and approximately $17.6 million of the net proceeds from this offering to repay a portion of our indebtedness under the term loan of our credit agreement, we expect that approximately $193.3 million will be outstanding under our term loan. 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 $18.00 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 $2.7 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 any change in the assumed initial public offering price, we or the selling shareholders may determine to sell fewer or greater shares in this offering.

 

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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 June 30, 2007:

 

   

on an actual basis; and

 

   

on an adjusted basis to reflect:

 

   

the issuance of 574,350 shares of our common stock upon the planned exercise of options in connection with this offering and our receipt of approximately $3,837,180 in proceeds from the selling shareholders in connection with their option exercises;

 

   

the sale of 3,009,475 shares of common stock by us in this offering at an assumed initial public offering price of $18.00 per share, the mid-point of the price range set forth on the cover of this prospectus;

 

   

our receipt of the estimated net proceeds from this offering 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 June 30, 2007  
     Actual     As Adjusted(1)  
    

(unaudited)

       

Cash and cash equivalents

   $ 2,292     $ 6,129  
                

Long-term debt, including current portion

   $ 226,950     $ 184,346  
                

Shareholders’ deficit:

    

Preferred stock $0.001 par value—authorized, 5,000,000 shares; outstanding, 0 shares, actual and as adjusted

     —         —    

Common stock, $0.001 par value—authorized, 200,000,000 shares; outstanding, 39,447,102 shares actual, 43,030,927 shares as adjusted

     39       43  

Class A common stock, $0.001 par value—authorized, 100 shares; outstanding, 100 shares

     —         —    

Additional paid-in-capital

     115,143       161,581  

Accumulated deficit

     (266,373 )     (266,373 )

Accumulated other comprehensive income

     (546 )     (546 )
                

Total shareholders’ deficit

     (151,737 )     (105,296 )
                

Total capitalization

   $ 75,213     $ 79,051  
                

 


(1) Each $1.00 increase or decrease in the assumed initial public offering price of $18.00 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 $2.7 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 any change in the assumed initial offering price, we or the selling shareholders may determine to sell fewer or greater shares in this offering.

The outstanding share information is based upon 39,447,102 shares of our common stock outstanding as of June 30, 2007 plus the issuance of 574,350 shares of our common stock upon the planned exercise of options in connection with this offering. This number excludes:

 

   

5,120,811 shares of our common stock issuable upon the exercise of options that were outstanding under our 2005 Stock Option Plan at June 30, 2007, with a weighted exercise price of $7.79 per share and that will not be exercised in connection with this offering;

 

   

235,500 shares of our common stock issuable upon the exercise of options that were outstanding under our 2007 Plan at June 30, 2007, with a weighted average exercise price of $14.85 per share and that will not be exercised in connection with this offering;

 

   

1,604,500 shares of our common stock reserved for future issuance under our 2007 Plan at June 30, 2007; and

 

   

750,000 shares of our 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 June 30, 2007, our net tangible book value was approximately $(219.8) million, or $(5.57) per share of common stock, and our as adjusted net tangible book value was approximately $(215.9) million, or $(5.40) 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 June 30, 2007, after giving effect to the planned exercise of 574,350 options in connection with this offering to acquire shares of our common stock. After giving effect to our sale in this offering of 3,009,475 shares of our common stock at an assumed initial public offering of $18.00 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 June 30, 2007 would have been approximately $(173.4) million, or $(4.03) per share of our common stock. This represents an immediate increase in as adjusted net tangible book value of $1.37 per share to our existing shareholders and an immediate dilution of $22.03 per share to investors purchasing shares in this offering. This information assumes no exercise by the underwriters of their right to purchase up to 1,347,820 shares of common stock from the selling shareholders to cover over-allotments. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $ 18.00  

As adjusted net tangible book value per share as of June 30, 2007, before giving effect to this offering

   $ (5.40 )  

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

     1.37    
          

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

     $ (4.03 )
          

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

     $ 22.03  
          

The following table summarizes, as of June 30, 2007, the differences between the number of shares of common stock purchased from us, after giving effect to the planned exercise of options in connection with this offering to acquire 574,350 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 $18.00 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    
                (in thousands)           

Existing shareholders

   40,021,452    93.0 %   $ 115,143    68.0 %   $ 2.88

New public investors

   3,009,475    7.0       54,171    32.0     $ 18.00
                          

Total

   43,030,927    100.0 %   $ 169,314    100.0 %  
                          

As of June 30, 2007, excluding the planned exercise of 574,350 options in connection with this offering, there were an additional 5,356,311 options outstanding to purchase shares of our common stock, with a weighted average exercise price of $8.10. To the extent outstanding options are exercised you will experience additional dilution.

A $1.00 increase (decrease) in the assumed initial public offering price of $18.00 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 $2.7 million and increase or decrease, as applicable, the dilution to new investors by $0.94 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. The statement of operations data for the six months ended June 30, 2006 and 2007 and the balance sheet data as of June 30, 2007 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements for the years ended December 31, 2002 and 2003 and for the six months ended June 30, 2006 and 2007, 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 periods 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,    

Six Months Ended

June 30,

 
    2002     2003     2004     2005     2006     2006     2007  
   

(in thousands, except per share data)

 

Statement of Operations Data:

             

REVENUES:

             

Software license fees

  $ 23,742     $ 36,636     $ 34,934     $ 45,923     $ 74,958     $ 34,768     $ 38,649  

Consulting services

    18,063       22,842       28,585       41,212       66,573       28,868       38,270  

Maintenance and support services

    43,987       47,778       54,178       63,709       83,172       39,456       49,375  

Other revenues

    4,512       2,091       3,516       2,112       3,565       2,976       4,529  
                                                       

Total revenues

    90,304       109,347       121,213       152,956       228,268       106,068       130,823  
                                                       

COST OF REVENUES:

             

Cost of software license fees

    7,032       4,269       4,860       4,591       6,867       3,290       4,230  

Cost of consulting services

    16,164       17,164       23,397       32,659       54,676       24,655       33,416  

Cost of maintenance and support services

    10,281       10,504       11,287       11,969       15,483       7,359       7,749  

Cost of other revenues

    3,075       1,972       4,114       2,002       4,634       4,110       5,012  
                                                       

Total cost of revenues

    36,552       33,909       43,658       51,221       81,660       39,414       50,407  
                                                       

GROSS PROFIT

    53,752       75,438       77,555       101,735       146,608       66,654       80,416  
                                                       

Research and development

    22,521       22,305       22,944       26,246       37,293       17,096       20,693  

Sales and marketing

    14,819       15,108       16,680       19,198       37,807       16,163       20,597  

General and administrative

    11,061       10,416       11,367       15,181       26,622       12,066       14,343  

Recapitalization expenses

    —         —         —         30,853       —         —         —    
                                                       

Operating expenses

    48,401       47,829       50,991       91,478       101,722       45,325       55,633  
                                                       

INCOME FROM OPERATIONS

    5,351       27,609       26,564       10,257       44,886       21,329       24,783  

Interest income

    443       438       408       436       397       278       168  

Interest expense

    (635 )     (632 )     (74 )     (11,297 )     (20,098 )     (10,834 )     (9,233 )

Other (expense) income, net

    17       954       (132 )     238       82       8       35  
                                                       

INCOME (LOSS) BEFORE INCOME TAXES

    5,176       28,369       26,766       (366 )     25,267       10,781       15,753  

Income tax (benefit) expense

    3,156       3,594       (1,117 )     (9,098 )     9,969       4,296       6,183  
                                                       

NET INCOME

  $ 2,020     $ 24,775     $ 27,883     $ 8,732     $ 15,298     $ 6,485     $ 9,570  
                                                       

EARNINGS PER SHARE:

             

Basic

  $ 0.02     $ 0.29     $ 0.33     $ 0.17     $ 0.39     $ 0.17     $ 0.24  
                                                       

Diluted

  $ 0.02     $ 0.29     $ 0.33     $ 0.17     $ 0.38     $ 0.16     $ 0.23  
                                                       

Unaudited Pro Forma Data:

             

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

      $ 15,707     $ (3,569 )   $ 15,298     $ 10,781     $ 15,753  

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

      $ 0.19     $ (0.07 )   $ 0.38     $ 0.16     $ 0.23  

COMMON SHARES AND EQUIVALENTS OUTSTANDING:

             

Basic weighted average shares

    112,989       84,741       84,741       52,910       39,332       39,241       39,424  
                                                       

Diluted weighted average shares

    113,989       84,741       84,741       52,910       40,262       40,066       41,030  
                                                       

Balance Sheet Data (end of period):

             

Cash and cash equivalents

  $ 6,417     $ 16,613     $ 13,129     $ 17,679     $ 6,667       $ 2,292  

Working capital (deficit)(2)

    (7,405 )     5,100       3,511       (4,825 )     (22,562 )       (18,077 )

Total assets

    53,793       59,930       56,331       95,650       134,488         134,415  

Deferred revenue

    23,732       16,835       22,541       27,253       26,612         25,268  

Long-term debt, net of current portion

    12,069       3,319       —         213,275       210,375         209,300  

Total shareholders’ equity (deficit)

    966       20,003       14,044       (183,109 )     (164,065 )       (151,737 )

(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

Since our founding in 1983, we have established a leading position as a provider of enterprise applications software and related services designed and developed specifically for project-focused organizations. We believe our leading market position is evidenced by our customer base. These organizations include architectural and engineering 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. As of September 1, 2007, our customers included 90 of the 100 leading federal information technology contractors, including the 10 largest (based on 2006 revenue derived from federal government contracts), and approximately 76% of the 500 largest A/E firms, including 15 of the top 20 (based on design services revenue for 2006). In addition, our software offerings were used by the seven largest information technology services companies and by six of the seven largest aerospace and defense companies (as identified in the Fortune 500 list of America’s largest companies based on 2006 revenue) as of September 1, 2007.

These 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. As of September 1, 2007, we had over 12,000 customers worldwide that spanned numerous project-focused industries and ranged in size from small organizations to large enterprises.

Our revenue is generated from sales of software licenses and related software maintenance and support agreements and professional services to assist customers with the implementation of our products, as well as education and training services. Our continued growth depends, in part, on our ability to generate license revenues from new customers. Approximately one-third of our license revenues are derived from customers to which we have not made previous sales of our products for the six months ended June 30, 2007.

In our management decision making we continuously balance our need to achieve short-term financial goals with the equally critical need to continuously invest in our products and infrastructure to ensure our future success. In making decisions around spending levels in our various functional organizations, we consider many factors, including:

 

   

Our ability to expand our presence and penetration of existing markets;

 

   

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 network of alliance partners;

 

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Our ability to expand our presence in new markets and broaden our reach geographically; and

 

   

The pursuit and successful integration of acquired companies.

We have acquired companies to broaden our product offerings, expand our customer base and provide us with a future opportunity to migrate those added customers to newer applications we may develop. The products of the acquired companies provide our customers with core functionality that complements our own established products.

In evaluating our financial condition and operating performance, we consider a variety of factors including, but not limited to, the following:

 

   

The growth rates of the individual components of our revenues (licenses, services and support) relative to recent historical trends and the growth rate of the overall market as reported or predicted by industry analysts;

 

   

The gross margins of our business relative to recent historical trends;

 

   

Our cash flow from operations;

 

   

The long-term success of our development efforts;

 

   

Our ability to successfully penetrate new markets;

 

   

Our ability to successfully integrate acquisitions and achieve anticipated synergies;

 

   

Our win rate against our competitors;

 

   

Our long-term customer retention rates; and

 

   

Our long-term adjusted EBITDA margin trends.

Each of the factors may be evaluated individually or collectively by our senior management team in evaluating our performance as we balance our short-term quarterly objectives and our strategic goals and objectives.

We continue to actively sell licenses for certain “legacy” products, primarily to customers that require additional licenses for the expansion of their business. These products include Deltek FMS, Deltek Sema4 and Deltek Advantage.

We expect that sales of conversion licenses will become an increasing portion of our license revenues. Over time, we expect our customers to respond to attractive opportunities to upgrade their legacy applications to more current, feature-rich applications we offer today and in the future. However, we believe we differentiate ourselves from competing vendors by maintaining a commitment to supporting acquired applications for many years after the acquisition of a company. We believe that by providing our customers with a longer time horizon for upgrading to a current product, we build greater customer loyalty and enjoy higher customer retention.

Since 2005, we have substantially increased our investments in product development, sales and marketing to increase our presence in our targeted markets so as to raise awareness among our potential customers and compete more aggressively. We believe that these additional investments have been instrumental in further improving our competitive position and driving our recent revenue growth.

Consistent with our business plan, we expect to continue to increase our spending on product development, sales and marketing in the future. We believe that our international expansion plans will require significant investment in local marketing initiatives and translation of our products and related user documentation into local languages. We may also acquire businesses or complementary products in foreign countries to facilitate our international growth objectives.

 

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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 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 product development, sales and marketing 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 approximately 2,500 customers, including primarily small and medium-sized engineering firms.

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-sized government contractors.

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.

In addition, in May 2007, we completed the acquisition of WST Pacific Pty Ltd (WSTP), a provider of earned value management (EVM) solutions based in Australia, and previously a development partner of Welcom. The acquisition complemented our existing EVM development, services and support resources. WSTP was renamed Deltek Australia Pty Ltd in connection with the acquisition.

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 software license fee revenue growth of $29.1 million, or 63%, over 2005. Approximately 27% of the total $29.1 million increase was attributable to acquisitions and 73% to organic growth. Our license fee revenue in the six months ended June 30, 2007 increased $3.8 million, or 11% to $38.6 compared to $34.8 million for the six months ended June 30, 2006. Revenue from our acquisitions contributed $2.9 million to our license fee revenue growth in the six months ended June 30, 2007. 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.

 

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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.

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 fee 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.

 

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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).

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 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

 

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financial history. Accordingly, we recorded $6.4 million and $25.3 million in 2004 and 2005, respectively, 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 statement of operations 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 statement of operations 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, 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 in 2006 and $2.3 million for the first six months of 2007. 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 or compensation committee (or its authorized member(s)) estimated the fair value of our common stock at the time of each option grant. Numerous objective and subjective factors were considered in estimating the value of our common stock at each option grant date in accordance with the guidance in AICPA Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.”

Based on these factors, employee stock options were granted during 2006 at exercise prices ranging from $7.22 to $11.48 and during the first six months of 2007 at exercise prices ranging from $12.24 to $16.04.

Based, in part, upon subsequent valuations, the compensation committee of our board reassessed the estimated fair value of certain stock options previously granted during the first ten months of 2006. As a result of the reassessment, stock option awards granted to 24 employees and directors were determined to have been made at exercise prices below the reassessed fair value on the date of grant. As a result, those option grants were modified to increase the exercise price to be equal to the revised assessment of the fair value on the date of grant. The option prices for those grants were adjusted upward from the original fair values ranging from $7.22 to $10.19 to revised fair values which ranged 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.

 

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The following table represents all stock option grants from July 1, 2006 through the date of this prospectus:

 

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

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   191,000     $11.48   N/A   N/A     $11.48
December 4, 2006   150,666     $11.48   N/A   N/A     $11.48
January 9, 2007   40,000   $ 12.24   N/A   N/A   $ 12.24
January 19, 2007   27,500   $ 12.24   N/A   N/A   $ 12.24
February 5, 2007   17,000   $ 13.05   N/A   N/A   $ 13.05
February 21, 2007   77,500   $ 13.10   N/A   N/A   $ 13.10
March 9, 2007   24,000   $ 13.10   N/A   N/A   $ 13.10
March 15, 2007   700,000   $ 13.10   N/A   N/A   $ 13.10
April 3, 2007   245,500   $ 13.12   N/A   N/A   $ 13.12
May 14, 2007   100,000   $ 14.43   N/A   N/A   $ 14.43
May 18, 2007   74,500   $ 14.43   N/A   N/A   $ 14.43
June 11, 2007   61,000   $ 16.04   N/A   N/A   $ 16.04
July 10, 2007   183,500   $ 16.05   N/A   N/A   $ 16.05
August 6, 2007   389,150   $ 16.12   N/A   N/A   $ 16.12
October 5, 2007   365,500   $ 20.00   N/A   N/A   $ 20.00

Assuming an initial public offering price of $18.00 (based on the midpoint of the range set forth on the cover page of this prospectus), the intrinsic value of the options outstanding at June 30, 2007, was $60.2 million, of which $21.30 million related to options that were vested and $38.90 million related to options that were not vested.

Valuation Methodology

From the date of our recapitalization in April 2005 through January 1, 2006, the board of directors determined the estimated fair value of our common stock based on several factors consistent with the methodology used by New Mountain Capital in the recapitalization. These factors included:

 

   

our historical revenue, earnings and cash flow of the Company;

 

   

expected financial performance for 2005 and beyond;

 

   

the necessity to recruit key talent during 2005 and 2006 to execute on our growth plans; and

 

   

valuation multiples applied to companies with comparable operating margins and revenue growth rates.

Because these factors did not change significantly from the date of the recapitalization through January 1, 2006, we continued to use the valuation methodology employed by New Mountain Capital in the April 2005 recapitalization.

Since January 1, 2006, the valuation method that we used 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 similar enterprise application software firms (the “comparable software companies”). We selected seven comparable companies that met the following criteria:

 

   

The company was primarily engaged in the enterprise software business;

 

   

The company was publicly held and actively traded; and

 

   

The enterprise value of the company was less than $1 billion.

 

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We have not changed the set of comparable software companies used for valuations from January 1, 2006 through our valuation as of July 20, 2007. Based on an analysis of the valuation multiples of the comparable software companies, we determined an appropriate multiple to apply to the relevant 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 the current period, determined as of the valuation date based on management’s estimates; and

 

   

for periods beginning in October 2006, our estimated adjusted EBITDA for 2007.

The result of this calculation was an estimate of our enterprise value using market multiples of comparable software companies.

The comparable transaction methodology considered market valuation multiples of over 20 software company acquisition transactions announced since early 2003. We selected transactions for this methodology from databases of publicly announced and completed controlling interest transactions involving enterprise software companies valued between $10 million and $15 billion. The analysis of comparable transactions included for each valuation was consistently updated to include transactions announced and completed since the prior valuation. The factors considered in our comparable transaction methodology analysis were the acquired company’s enterprise value to revenue multiple and its 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 that considered our growth rate and adjusted EBITDA margin levels was applied to our revenue and adjusted EBITDA levels. We further adjusted this value to remove the estimated 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 acquired software firms.

The application of the market multiple methodology and the comparable transaction methodology was equally weighted and yielded an estimated enterprise value which we then adjusted for our cash and debt balances to estimate the aggregate value of our common stock. We then adjusted that valuation for a marketability discount ranging from 5% to 15% depending upon the proximity of an expected liquidity event such as our planned initial public offering to reflect the fact that our shares were not publicly tradable. The resulting valuation of our company was used to determine the estimated fair value of our common stock at the valuation date.

The valuation of our common stock underlying the stock option exercise prices has increased significantly over the 12 months ended June 30, 2007. The following significant events and changes in key assumptions have impacted our valuation at various dates.

 

   

As of July 24, 2006, we performed a contemporaneous valuation that, compared with the prior valuation, reflected a 16% increase in our trailing four quarters’ adjusted EBITDA, a 2% increase in our projection of 2006 adjusted EBITDA and a 9% increase in our projection of 2006 revenues. The impact of these increases was partially offset by market driven decreases in the adjusted EBITDA multiples of the comparable software companies. The valuation also reflected a marketability discount of 10%. Based on these factors, our valuation increased to $10.19 per share. This value was initially used as the strike price for our October 23, 2006 grants which were later modified to use the fair value determined as of October 20, 2006 as the strike price.

 

   

As of October 20, 2006, we performed a contemporaneous valuation that reflected market driven increases in the adjusted EBITDA multiples of the comparable software companies, as well as a 5% increase in our trailing four quarters’ revenue. Because we had commenced planning for our initial public offering, we reduced our marketability discount from 10% to 5%. Based on these factors, our valuation increased to $11.48 per share. This value was used for all option grants made from the

 

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valuation date through December 4, 2006 as we determined there were no significant changes to the underlying assumptions used for the valuation during this period.

 

   

As of December 20, 2006, we performed a contemporaneous valuation that reflected an increase in the multiples applied to our trailing four quarters’ adjusted EBITDA, as well as increases to the multiples applied to our forecasted adjusted EBITDA for 2006 and 2007. The increase in the multiples selected was based on our continued over-achievement compared to previously forecasted results, and resulted in a valuation of $12.24 per share. This value was used for option grants made subsequent to the valuation date of December 20, 2006 until the next valuation was performed as of January 20, 2007.

 

   

As of January 20, 2007, we performed a contemporaneous valuation that reflected 2006 adjusted EBITDA achievement that was 2.4% higher than previously forecasted in the December 20, 2006 valuation. In addition, the valuation increased with the consideration of our full year 2006 revenues and adjusted EBITDA, compared with the use of the trailing four quarters’ figures for the valuation as of December 20, 2006. As a result, our valuation increased to $13.05 per share. This value was used for option grants made subsequent to the valuation date of January 20, 2007 until the next valuation was performed as of February 20, 2007 as there were no significant changes in the underlying assumptions used between these dates.

 

   

As of February 20, 2007 and March 20, 2007, we performed contemporaneous valuations. The assumptions used for these valuations did not change materially from those used as of January 20, 2007. As a result, our estimated valuation increased to $13.10 and $13.12 per share as of February 20, 2007 and March 20, 2007, respectively. The February 20, 2007 valuation was used for all option grants made from February 20, 2007 until the March 20, 2007 valuation, which was used for all option grants made from March 20, 2007 through the next valuation performed as of April 20, 2007.

 

   

As of April 20, 2007, we performed a contemporaneous valuation that reflected increases in revenue and adjusted EBITDA for the first quarter of 2007 compared to 2006 and the application of higher revenue and adjusted EBITDA multiples. The use of higher multiples was considered to be appropriate as the result of our sustained revenue and adjusted EBITDA growth, and increases in the average market multiples implied by the anticipated 2007 results of the comparable software companies. As a result, our estimated valuation increased to $14.43 per share as of April 20, 2007. All option grants made from April 20, 2007 until our next valuation performed as of May 20, 2007 were granted based upon this valuation as there had been no significant changes in the underlying assumptions used.

 

   

As of May 20, 2007, we performed a contemporaneous valuation that reflected an increase in market revenue and adjusted EBITDA multiples used in the comparable transaction methodology for recently announced acquisition transactions. At the same time, the multiples applied to the market multiple methodology reflected the impact of our sustained revenue and EBITDA growth into the current year. As a result, our estimated valuation increased to $16.04 per share as of May 20, 2007. All option grants made from May 20, 2007 until our next valuation as of June 20, 2007 were made based upon this value as there had been no significant changes in the underlying assumptions used.

 

 

 

As of June 20, 2007 and July 20, 2007, we performed contemporaneous valuations that reflected insignificant changes in the market and company performance. As a result, our estimated valuations increased slightly to $16.05 and $16.12 per share, respectively. The option grants made on July 10, 2007 were made based upon the June 20, 2007 valuation and the grants made on August 6, 2007 were based upon the July 20, 2007 valuation as there had been no significant changes in the underlying assumptions used in the July 20, 2007 valuation.

 

   

On October 5, 2007, we determined the estimated fair value of our common stock to be $20.00 per share for purposes of option grants awarded on that date. This valuation, provided on September 12, 2007, was determined based upon the availability of a preliminary estimated offering price range, the availability of a preliminary view of the Company’s execution towards expected third quarter results (which achievement had been assumed when determining the estimated range) and the proximity of our expected initial public offering.

 

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Differences related to our option grants and the estimated price range:

On October 11, 2007, we, in consultation with our managing underwriters, determined a current preliminary estimated offering price range of $17.00 to $19.00 per share. The estimated offering price range was based on market comparable data, prevailing market conditions, our continuing business execution and estimates of the Company’s future performance. As described above, the per share value of our common stock, as determined by the Company in accordance with the guidance in AICPA Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” was $16.12 as of August 6, 2007. The significant factors contributing to the difference between the fair value as determined by the Company and the assumed initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover of this prospectus) were:

 

   

A marketability discount was applied to all valuations performed by the Company but was not included in determining the estimated offering price range as the completion of our initial public offering is assumed in the range.

 

   

Only a market comparable approach was applied in determining the estimated offering price range, while the Company also applied a comparable transactions methodology.

 

   

In applying the market comparable approach for determining the estimated offering price range only future forecasted results were considered with assumed achievement of those results. The Company’s valuation weighted historical results in addition to future expected results.

 

   

The companies included in the market comparable approach used in determining the estimated offering price range were weighted differently than in the Company’s application of the market comparable approach.

 

   

The estimated offering price range was subject to a number of contingencies and variables including the timing of our offering and continued business execution.

Because we do not have significant history associated with our stock options in order to determine the expected volatility of our options, we calculated expected volatility as of each grant date 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 Payment, 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 or compensation committee (or its authorized member(s)) 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 and FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty for Income Taxes—An Interpretation of FASB Statement No. 109. 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. We adopted FIN 48 effective January 1, 2007. FIN 48 requires significant

 

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judgement in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition and measurement of tax positions can affect the estimate of the effective tax rate and consequently affect our operating results.

These temporary differences result in deferred tax assets and liabilities. As of June 30, 2007, we had deferred tax assets of approximately $11.1 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 carryforwards. 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 June 30, 2007, we maintained a valuation allowance equal to the $0.5 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.

Management makes estimates of fair value based upon assumptions and estimates we believe to be reasonable. These estimates are based upon a number of factors, including historical experience, market

 

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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.

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, 2006 and the six months ended June 30, 2006 and 2007, 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, 2006 and the six month period ended June 30, 2007 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 49% of their book value on the date of acquisition, from a total of $6.3 million to $3.1 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 that may not be recoverable include under-performance relative to historical or projected operating results, significant changes or limitations in the manner of our use of the acquired assets, changes in our business strategy, adverse market conditions, changes in applicable laws or regulations and a variety of other factors and circumstances.

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

 

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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 Control over Financial Reporting

Effective internal control over financial reporting is 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 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. A “material weakness” in internal control over financial reporting is defined as a single deficiency, or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Since August 2006, we have been engaged in a program to evaluate our system of internal control 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 management and staffing resources, particularly in the financial close and reporting area. As of August 1, 2007, through our own assessment of our internal control 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.

 

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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 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 control over financial reporting. The errors identified during the course of their work resulted in audit adjustments that decreased net income by a total of $1.0 million for 2006, $0.8 million of which resulted in an increase in net income in our 2005 financial statements as discussed further below. We believe that the conclusions of our independent registered public accounting firm related to our internal controls 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.

 

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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 have implemented a new software and maintenance billing system that has significantly reduced 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 performed a comprehensive review of system access rights and established appropriate access to assure proper segregation of duties by functional area.

We believe that each of these actions will strengthen our internal control 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.

We estimate that we will have remediated all of the identified material weaknesses that we have identified to date by the end of the second calendar quarter of 2008.

Through August 31, 2007, we have incurred approximately $2.8 million for services provided by a third-party consulting firm to help us execute our plan to improve the effectiveness of our internal control. We expect to incur an additional estimated $0.8 million in third-party consulting fees from September 1, 2007 through December 31, 2007.

Under current requirements, our independent registered public accounting firm is not required to evaluate and assess our internal control over financial reporting 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 later 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, particularly as a result of inaccurate 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.”

 

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Results of Operations

The following table sets forth our statements of operations including dollar and percentage of change from the prior periods indicated:

 

    Year Ended December 31     2004 versus 2005     2005 versus 2006     Six Months Ended
June 30
    2006 versus 2007  
    2004     2005     2006     Change     % Change     Change     % Change       2006         2007       Change     % Change  
                                              (unaudited)              
   

(dollars in millions)

 

Revenues

 

Software license fees

  $ 34.9     $ 45.9     $ 75.0     $ 11.0     32 %   $ 29.1     63 %   $ 34.8     $ 38.6     $ 3.8     11 %

Consulting services

    28.6       41.2       66.6       12.6     44       25.4     62       28.9       38.3       9.4     33  

Maintenance and support services

    54.2       63.7       83.2       9.5     18       19.5     31       39.4       49.4       10.0     25  

Other revenues

    3.5       2.1       3.5       (1.4 )   (40 )     1.4     67       3.0       4.5       1.5     50  
                                                                     

Total revenues

  $ 121.2     $ 152.9     $ 228.3     $ 31.7     26     $ 75.4     49     $ 106.1     $ 130.8     $ 24.7     23  
                                                                     

Cost of revenues

                     

Cost of software license fees

  $ 4.9     $ 4.6     $ 6.9     $ (0.3 )   (6 )   $ 2.3     50     $ 3.3     $ 4.2     $ 0.9     27  

Cost of consulting services

    23.4       32.6       54.7       9.2     39       22.1     68       24.7       33.4       8.7     35  

Cost of maintenance and support services

    11.3       12.0       15.5       0.7     6       3.5     29       7.4       7.7       0.3     4  

Cost of other revenues

    4.1       2.0       4.6       (2.1 )   (51 )     2.6     130       4.1       5.0       0.9     22  
                                                                     

Total cost of revenues

  $ 43.7     $ 51.2     $ 81.7     $ 7.5     17     $ 30.5     60     $ 39.5     $ 50.3     $ 10.8     27  
                                                                     

Gross Profit

  $ 77.5     $ 101.7     $ 146.6     $ 24.2     31     $ 44.9     44     $ 66.6     $ 80.5     $ 13.9     21  

Operating expenses

                     

Research and development

  $ 22.9     $ 26.2     $ 37.3     $ 3.3     14     $ 11.1     42     $ 17.1     $ 20.7     $ 3.6     21  

Sales and marketing

    16.7       19.2       37.8       2.5     15       18.6     97       16.2       20.6       4.4     27  

General and administrative

    11.4       15.2       26.6       3.8     33       11.4     75       12.1       14.3       2.2     18  

Recapitalization expenses

    —         30.9       —         30.9     100       (30.9 )   100       —         —         —       —    
                                                                     

Total operating expenses

  $ 51.0     $ 91.5     $ 101.7     $ 40.5     79     $ 10.2     11     $ 45.4     $ 55.6     $ 10.2     22  
                                                                     

Income from operations

  $ 26.5     $ 10.2     $ 44.9     $ (16.3 )   (62 )   $ 34.7     340     $ 21.2     $ 24.9     $ 3.7     17  

Interest income

    0.5       0.5       0.4       —       0       (0.1 )   (20 )     0.4       0.1       (0.3 )   (75 )

Interest expense

    (0.1 )     (11.3 )     (20.1 )     (11.2 )   11,200       (8.8 )   78       (10.8 )     (9.2 )     1.6     (15 )

Other (expense) income, net

    (0.1 )     0.2       0.1       0.3     (300 )     (0.1 )   (50 )     —         —         —       0  
                                                                     

Income (loss) before income taxes

    26.8       (0.4 )     25.3       (27.2 )   (101 )     25.7     (6,425 )     10.8       15.8       5.0     46  

Income tax (benefit) expense

    (1.1 )     (9.1 )     10.0       (8.0 )   727       19.1     (210 )     4.3       6.2       1.9     44  
                                                                     

Net income

  $ 27.9     $ 8.7     $ 15.3     $ (19.2 )   (69 )   $ 6.6     76     $ 6.5     $ 9.6     $ 3.1     48  
                                                                     

Revenues

 

    Year Ended December 31   2004 versus 2005     2005 versus 2006    

Six Months Ended

June 30

  2006 versus 2007  
    2004   2005   2006   $ Change     % Change     $ Change   % Change       2006       2007     Change   % Change  
                                      (unaudited)          
   

(dollars in millions)

 

Revenues

                     

Software license fees

  $ 34.9   $ 45.9   $ 75.0   $ 11.0     32 %   $ 29.1   63 %     $34.8   $ 38.6   $ 3.8   11 %

Consulting services

    28.6     41.2     66.6     12.6     44       25.4   62       28.9     38.3     9.4   33  

Maintenance and support services

    54.2     63.7     83.2     9.5     18       19.5   31       39.4     49.4     10.0   25  

Other revenues

    3.5     2.1     3.5     (1.4 )   (40 )     1.4   67       3.0     4.5     1.5   50  
                                                       

Total revenues

  $ 121.2   $ 152.9   $ 228.3   $ 31.7     26     $ 75.4   49     $ 106.1   $ 130.8   $ 24.7   23  
                                                       

 

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Software License Fees

Our software applications are generally licensed to end-user customers under perpetual license agreements. We sell our software applications to end-user customers mainly through our direct sales force as well as indirectly through our network of alliance partners and resellers. The timing of the sales cycle for our products varies in length based upon a variety of factors, including the size of the customer, the product being sold and whether the customer is a new or existing customer. We primarily compete on product features, functionality and the needs of our customers within our served markets, with price generally a lesser consideration in competing for new customers. The pricing for our products has remained stable, requiring infrequent modifications to our price list.

Software license revenues increased $11.0 million, or 32%, to $45.9 million from 2004 to 2005. The increase in license revenue fees was primarily the result of sales of our new version 5.1 of our Costpoint product introduced in July 2004. Software license revenues from our Deltek Costpoint and GCS Premier product families grew by approximately $7.0 million, or 31%. The remaining growth of approximately $4.0 million was driven by increased sales of our Deltek Vision product family, including $2.8 million related to our acquisition of Wind2 in October 2005.

From 2005 to 2006, license fee revenues increased $29.1 million, or 63%, to $75.0 million. The increase in license fees resulted from continued sales of our new version of our Costpoint product and increased sales of our Deltek Vision applications. License fee revenue growth from the Costpoint and GCS Premier product families was approximately $6.0 million, or 18%, while revenues from our Vision product family grew by $17.0 million, or 105%. The $29.1 million increase in 2006 also reflected $6.1 million of license fee revenue growth from our project portfolio management products obtained with the Welcom and CSSI acquisitions.

License fee revenues increased $3.8 million, or 11%, to $38.6 million for the six month period ended June 30, 2007 compared to the six month period ended June 30, 2006. During the first six months of 2007, license fee revenues from our Costpoint and GCS Premier product families increased by $3.7 million, while license fee revenues from our project portfolio management products from the acquisitions completed during 2006 grew by $2.9 million, compared to the first six months of 2006. Our license fee revenues for our Vision product family decreased $2.7 million in the first six months of 2007 compared with the first six months of 2006.

In addition, our license revenues in the first six months of 2006 included $0.9 million of revenues deferred on sales in previous periods pending our delivery of certain software modules. Excluding the impact of acquisitions completed during 2006 and the impact of the deferred revenue recognition in the first six months of 2006, license revenue would have been $31.2 million and $33.0 million for the six months ended June 30, 2006 and 2007.

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. We have increased our overall consulting services revenues principally by increasing the sales of customer implementations.

Consulting revenues increased $12.6 million, or 44%, to $41.2 million from 2004 to 2005. Our implementation related services accounted for $37.1 million, or 90%, of total consulting services revenues during the year ended December 31, 2005 compared to $25.2 million, or 88%, of total consulting services revenues during the year ended December 31, 2004. This represents an increase of $11.9 million, or 47%. The increase was driven by increased sales of Costpoint and Vision licenses which drove increased demand for consulting services.

Our training and education related services accounted for $4.1 million, or 10%, of total consulting services revenues during the year ended December 31, 2005 compared to $3.4 million, or 12%, of consulting services during the year ended December 31, 2004. This represents an increase of $0.7 million, or 21%.

 

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Consulting services revenues increased $25.4 million, or 62%, to $66.6 million from 2005 to 2006. Our implementation related services accounted for $61.9 million, or 93%, of total consulting services revenues during the year ended December 31, 2006 compared to $37.1 million, or 90%, of consulting services during the year ended December 31, 2005. This represents an increase of $24.8 million, or 67%. The increase was driven by increased sales of Costpoint and Vision licenses, which drove increased demand for consulting services. Of the 2006 increase in consulting services revenue, 40%, or $5.1 million, related to the recognition of services revenues previously deferred during 2005 due to undelivered elements in software arrangements.

Our training and education related services accounted for $4.7 million, or 7%, of consulting services revenue during the year ended December 31, 2006 compared to $4.1 million, or 10%, of consulting services during the year ended December 31, 2005. This represents an increase of $0.6 million, or 13%.

Consulting services revenues increased $9.4 million, or 33%, to $38.3 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. Our implementation related services account for $35.8 million, or 93%, of consulting services revenues during the six month period ended June 30, 2007 compared to $26.9 million, or 93%, of consulting services during the six month period ended June 30, 2006. This represents an increase of $8.8 million, or 33%, driven by increased demand for services from new and existing customers. In the first six months of 2007, our acquisition of AIM in April 2007 provided a $1.5 million increase in revenues.

Our training and education related services accounted for $2.5 million, or 7%, of consulting services revenues during the six months ended June 30, 2007 compared to $2.0 million, or 7%, of consulting services during the six months ended June 30, 2006. This represents an increase of $0.5 million, or 25%, over the first six months of 2006.

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 unspecified periodic upgrades or enhancements to our software on an as available basis, 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 $9.5 million, or 18%, to $63.7 million from 2004 to 2005. The increase in maintenance revenues was the direct result of the growth in license sales during the same period, which resulted 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. Maintenance related to our Costpoint and GCS Premier product families comprised approximately $4.7 million of the increase. Our Vision product family accounted for the remaining increase of approximately $4.8 million.

Maintenance revenues increased $19.5 million, or 31%, to $83.2 million from 2005 to 2006 with $7.9 million of the increase accounted for by our Costpoint and GCS Premier product families. Approximately $7.4 million 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. The remaining increase of $4.2 million is related to other Vision product family maintenance revenues.

Maintenance revenues increased $10.0 million, or 25%, to $49.4 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. Maintenance revenues from our Costpoint and GCS Premier product families grew by $3.3 million. Maintenance revenues from our Vision product family grew by $3.8 million, and maintenance revenues from our project management products acquired in the Welcom and CSSI acquisitions completed during 2006 grew by $2.8 million.

 

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Other Revenues

Our other revenues consist of sales of third party hardware and software as well as fees collected for our annual user conference, which is typically held during the first six months of the year. The decrease in other revenues from 2004 to 2005 of $1.4 million, or 40%, was due to a decrease in user conference revenues as we held a smaller conference in 2005 than in 2004.

From 2005 to 2006, the increase of $1.4 million, or 67%, is the result of greater user conference revenues associated with larger conference attendance in 2006.

For the six months ended June 30, 2007, other revenues increased by $1.5 million, or 50%, to $4.5 million compared to the six months ended June 30, 2006, reflecting increased revenue from higher attendance at the annual user conference.

Cost of Revenues

 

   

Year Ended
December 31

  2004 versus 2005     2005 versus 2006    

Six Months Ended

June 30

  2006 versus 2007  
    2004   2005   2006   $ Change     % Change     $ Change   % Change        2006         2007      $ Change   % Change  
                                  (unaudited)          
                            (dollars in millions)                

Cost of revenues

                     

Cost of software license fees

  $ 4.9   $ 4.6   $ 6.9   $ (0.3 )   (6 )%   $ 2.3   50 %   $ 3.3   $ 4.2   $ 0.9   27 %

Cost of consulting services

    23.4     32.6     54.7     9.2     39       22.1   68       24.7     33.4     8.7   35  

Cost of maintenance and support services

    11.3     12.0     15.5     0.7     6       3.5   29       7.4     7.7     0.3   4  

Cost of other revenues

    4.1     2.0     4.6     (2.1 )   (51 )     2.6   130       4.1     5.0     0.9   22  
                                                       

Total cost of revenues

  $ 43.7   $ 51.2   $ 81.7   $ 7.5     17     $ 30.5   60     $ 39.5   $ 50.3   $ 10.8   27  
                                                       

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 $0.3 million, or 6%, to $4.6 million from 2004 to 2005. The decrease was a result of changes in the effective royalty rates paid on products resold or embedded with our products based upon newly negotiated royalty agreements.

Cost of software license fees increased $2.3 million, or 50%, to $6.9 million from 2005 to 2006. Approximately $1.1 million, or 44%, 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 software license fees increased by $0.9 million, or 27%, to $4.2 million in the six months ended June 30, 2007 compared to the six months ended June 30, 2006. The increase was a result of approximately $0.6 million in additional royalty expense as well as the impact of amortization of technology acquired in connection with our acquisitions of Welcom and CSSI.

 

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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 9.2 million, or 39%, to $32.6 million from 2004 to 2005. The increase in the cost of services was the result of increased costs for salaries, benefits, incentive compensation and travel as our services headcount increased from 141 at the end of 2004 to 199 at the end of 2005 to meet increasing customer demand for our implementation services. This increase in demand was driven by the increase in license sales during 2005, as well as an increase in the number of larger, more complex project implementations in which we were engaged. Approximately $4.5 million, or 47%, of the 2005 increase was associated with salaries, benefits, and incentive compensation for implementation services personnel and 2.0 million, or 21%, was for travel costs for those engagements. Gross margins on services revenues were 18% during 2004 compared to 21% during 2005. In addition, the increase in margin on services revenues from 2004 to 2005 was impacted by a decrease in stock-based compensation expense for SARs of $0.6 million.

Cost of consulting services increased $22.1 million, or 68%, to $54.7 million from 2005 to 2006. Approximately $13.3 million, or 60%, of the 2006 increase was associated with salaries, benefits and incentive compensation for implementation services personnel and $5.0 million, or 23%, was for travel costs for those engagements. During 2006, we increased our services headcount from 199 at December 31, 2005 to 267 at December 31, 2006. The remaining increase related to increased use of subcontractors to fill short-term labor requirements of our services engagements as well as increased use of facilities and other costs of our business. Gross margins on services revenues were 21% during 2005 compared to 18% during 2006. 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. This decrease in margin was offset by $2.8 million of gross margin recognized related to revenue that had been previously deferred due to undelivered elements in software license arrangements.

Cost of consulting services increased by $8.7 million, or 35%, to $33.4 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. The primary driver of the increase was labor and related benefits, which grew by approximately $4.1 million, or 24%, as we expanded the number of consultants to meet the demand for our services. From December 31, 2006 to June 30, 2007, we increased our services headcount from 267 to 344. In addition, the use of subcontractors increased by $2.4 million to $3.0 million, as we utilized outside resources to meet the short-term demands of our rapid growth in services engagements. We expect to reduce the level of subcontractor costs in the future as newly hired consultants become billable. The remaining costs were associated with travel and other costs related to our overall services organization.

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 $0.7 million, or 6%, to $12.0 million from 2004 to 2005. The increase was primarily the result of increased costs for salaries and related benefits as we increased our customer support staff to meet greater demand for these services. During 2005, we increased our related headcount from 115 at December 31, 2004 to 137 at December 31, 2005. The increase occurred primarily in the fourth quarter.

Cost of maintenance services increased $3.5 million, or 29%, to $15.5 million from 2005 to 2006. The increase was primarily the result of increased costs for salaries and related benefits related to increased headcount from 2005 levels throughout 2006. Approximately $1.8 million, or 53%, of the 2006 increase in cost of

 

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maintenance services was the result of increased headcount to meet demand in customer services levels for our business prior to the impact of acquisitions, and $1.0 million, or 28%, of the increase was associated with increased costs due to acquisitions made during 2006. At December 31, 2006, our customer support headcount was 141. The remaining $0.7 million of the increase was due to other support related costs including royalties and third-party maintenance.

Cost of maintenance services increased $0.3 million, or 4%, to $7.7 million for the six month period ended June 30, 2007 compared to the six months ended June 30, 2006. The increase was a result of additional support staff labor, which grew by $0.7 million, or 13%, required to meet the greater demand for maintenance services, and greater royalty expense of $0.2 million, or 33%, related to maintenance revenue that we receive on third party products which are embedded and sold along with our products.

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 user 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 user conference in 2006.

For the six month period ended June 30, 2007, cost of other revenues increased by $0.9 million, or 22%, to $5.0 million compared to the six month period ended June 30, 2006. This increase was a result of the user conference expense associated with the 2007 event.

Operating Expenses

 

   

Year Ended
December 31

  2004 versus 2005     2005 versus 2006     Six Months Ended
June 30
  2006 versus 2007  
    2004   2005   2006   $ Change   % Change     $ Change     % Change       2006       2007     $ Change   % Change  
                                (unaudited)          
                          (dollars in millions)                    

Operating expenses

                     

Research and development

  $ 22.9   $ 26.2   $ 37.3   $ 3.3   14 %   $ 11.1     42 %   $ 17.1   $ 20.7   $ 3.6   21 %

Sales and marketing

    16.7     19.2     37.8     2.5   15       18.6     97       16.2     20.6     4.4   27  

General and administrative

    11.4     15.2     26.6     3.8   33       11.4     75       12.1     14.3     2.2   18  

Recapitalization expenses

    —       30.9     —       30.9   —         (30.9 )   —         —       —       —     —  
 
                                                       

Total operating expenses

  $ 51.0   $ 91.5   $ 101.7   $ 40.5   79     $ 10.2     11     $ 45.4   $ 55.6   $ 10.2   23  
                                                       

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 $3.3 million, or 14%, to $26.2 million from 2004 to 2005. 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.

Research and development expenses increased $11.1 million, or 42%, to $37.3 million from 2005 to 2006. 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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Research and development expenses increased by $3.6 million, or 21%, to $20.7 million for the six month period ended June 30, 2007 compared to the six month period ended June 30, 2006. The principal driver was an increase of $2.8 million, or 16%, in labor and related costs to support new release development. We also incurred $0.2 million in costs related to our acquisitions of AIM and WSTP.

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 $2.5 million, or 15%, to $19.2 million from 2004 to 2005. This increase was due to increased salaries, benefits and support costs for additional sales and marketing personnel and additional commissions paid on increased license sales.

Sales and marketing expenses increased $18.6 million, or 97%, to $37.8 million from 2005 to 2006. This increase was driven by increased salaries, benefits and support costs for additional sales personnel and additional commissions paid on higher license revenues in 2006 as compared to 2005. In addition, we increased spending in marketing for specific demand generation and corporate branding programs aimed at increasing customer demand for our software applications.

Sales and marketing expenses increased by $4.4 million, or 27%, to $20.6 million for the six month period ended June 30, 2007 compared to the six month period ended June 30, 2006. The increase was driven by additional labor and related benefits costs as well as higher commissions related to the increased license revenues.

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 $3.8 million, or 33%, to $15.2 million from 2004 to 2005. Approximately $0.8 million, or 21%, of the overall increase in expenses in 2005 over 2004 was due to increased salaries and benefits for key management and other administrative personnel, $0.4 million, or 10%, was professional fees and $0.3 million, or 9%, of the increase was due to advisory fees incurred for New Mountain Capital.

General and administrative expenses increased $11.4 million, or 75%, to $26.6 million from 2005 to 2006. Of the total increase, $2.3 million, or, 20%, was associated with increased salary costs in the finance, accounting and legal functions to prepare us for operating as a public company, $2.1 million, or approximately 19%, was associated with consulting costs incurred to begin identification and remediation of control weaknesses, and $2.2 million, or approximately 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.

 

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General and administrative expenses increased by $2.2 million, or 18%, to $14.3 million for the six month period ended June 30, 2007 compared to the six month period ended June 30, 2006. The increase reflected additional labor and related benefits due to greater headcount in our support functions, including finance, human resources and legal.

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 through the six months ended June 30, 2007.

Interest Expense

 

     Year Ended
December 31
  2004 versus 2005     2005 versus 2006    

Six Months
Ended

June 30

  2006 versus 2007  
     2004   2005   2006   Change   % Change     Change   % Change     2006   2007   Change     % Change  
                                    (unaudited)            
                (dollars in millions)                      

Interest expense

  0.1   11.3   20.1   11.2   11,200 %   8.8   78 %   10.8   9.2   (1.6 )   (15 )%

Interest expense increased $11.2 million from 2004 to 2005 to $11.3 million. 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.

Interest expense increased $8.8 million, or 78%, to $20.1 million from 2005 to 2006. The increase 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.

Interest expense decreased by $1.6 million, or 15%, to $9.2 million for the six months ended June 30, 2007 compared to $10.8 million for the six months ended June 30, 2006. The decrease reflected the absence of the write-off of $2.3 million of the deferred debt issuance costs in April 2006, which was partially offset by the impact of increased borrowings under our credit facility during the first six months of 2007.

Income Taxes

 

      Six Months Ended
June 30
 
     2004     2005     2006     2006    2007  
                       (unaudited)  
     (dollars in millions)  

Income tax (benefit) expense

   $ (1.1 )   $ (9.1 )   $ 10.0     $ 4.3    $  6.2  

Change from prior comparable period

       727 %     (210 )%        44 %

 

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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 our 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%.

Income tax expense increased by $1.9 million, or 44%, to $6.2 million for the six months ended June 30, 2007 compared to $4.3 million for the six months ended June 30, 2006. Income tax expense for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 remained relatively constant as a percentage of pre-tax income at 39.3% and 39.8%, respectively.

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109. FIN 48 clarifies the criteria that an individual tax position must satisfy for that position to be recognized in the financial statements. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 resulted in a $0.4 million liability associated with various federal and state income tax matters related to the acquisition of Welcom during 2006. The liability was recorded as an increase to goodwill. During the six months ended June 30, 2007, the reserve increased $0.3 million due to the utilization of research and development credits acquired from Welcom. For further information, see Note 12, Income Taxes, of our consolidated financial statements contained elsewhere in this prospectus. Future changes in the reserve will change goodwill and have no impact on the effective tax rate. We do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.

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 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 this obligation, leaving a remaining balance to be paid of $0.6 million at June 30, 2007.

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, $1.6 million remained to be paid at June 30, 2007.

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.

Term 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). Amounts outstanding under the revolving credit facility accrue interest at 2.50% above the LIBO rate. The spread above the LIBO rate decreases as our leverage ratio, as defined in the credit agreement, decreases and as we achieve specified credit ratings. At our option, the interest rate on loans under the credit agreement may be based on an alternative base (prime) rate (the ABR Rate), and the margins over ABR are 1.00% less than the margins over LIBO. We pay a commitment fee of 0.50% per year on the unused amount of our revolving credit facility.

The credit agreement requires mandatory prepayments of the term loan from our annual excess cash flow (based on our leverage levels) and from the net proceeds of certain assets sales or equity issuances, including this offering. The required prepayment is equal to the lesser of 50% of the net proceeds from the sale of securities, or the amount that reduces the leverage ratio (as defined in the agreement) to less than 2.75. The credit agreement defines adjusted EBITDA similarly to the definition we use in the management of our business, except that the calculation used in the credit agreement does not exclude the impact of retention awards expense in connection with the recapitalization. For more discussion of adjusted EBITDA, see “Prospectus Summary,” page 8. The credit agreement also requires 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 and March 31, 2011, a scheduled principal payment of $51.3 million is due, with the balance due on April 22, 2011, the final maturity date.

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 requiring us to maintain defined minimum levels of interest coverage and fixed charges coverage and providing for a limitation on our leverage ratio.

 

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The following table summarizes the financial covenants (adjusted EBITDA below is as defined in the credit agreement):

 

           As of June 30, 2007     

Covenant Requirement

  

Calculation

   Required Level    Actual Level   

Most Restrictive Required Level

Minimum Interest Coverage

   Cumulative adjusted EBITDA for the prior 4 quarters/consolidated interest expense    Greater than
2.00 to 1.00
   3.53    Greater than 3.00 to 1.00 effective January 1, 2010

Minimum Fixed Charges Coverage

   Cumulative adjusted EBITDA for the prior 4 quarters/(interest expense + principal payments + capital expenditures + capitalized software costs + cash tax payments)    Greater than
1.10
   1.41    Greater than 1.10

Leverage Coverage

   Total debt/cumulative adjusted EBITDA for the prior 4 quarters    Less than
5.00 to 1.00
   3.65    Less than 3.25 to 1.00 effective January 1, 2009

Based on the midpoint of the range set forth on the cover of this prospectus, upon completion of this offering, we expect to reduce our outstanding debt under the credit agreement to a level that results in a leverage coverage level of approximately 2.70. We expect, based on our current and expected performance, and the planned reduction in outstanding indebtedness as a result of this offering, that we will continue to satisfy the financial covenants of our credit agreement for the foreseeable future.

The credit agreement requires us to comply with non-financial covenants that restrict certain corporate activities by us and our subsidiaries, including our ability to:

 

   

incur additional indebtedness, guarantee obligations, or create liens on our assets,

 

   

enter into sale and leaseback transactions,

 

   

engage in mergers or consolidations, or

 

   

pay cash dividends.

In addition, one non-financial 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. As of June 30, 2007, we were in compliance with all covenants related to our credit agreement.

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

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 $2.6 million were reflected in “other assets.” At June 30, 2007, $0.9 million of unamortized debt issuance costs remained in “prepaid and other current assets” and $2.2 million was reflected in “other assets” on the balance sheet. During 2005 and 2006, $0.6 million and $3.1 million of costs were amortized and recorded in interest expense. Included

 

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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. During the six months ended June 30, 2007 compared to June 30, 2006, $0.4 million and $2.6 million of costs were amortized. The June 30, 2006 amount includes the $2.3 million associated with the accelerated shareholder debt issuance costs.

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 approximately $14,000 of the deferred debt issuance costs to interest expense in the period in which we make the repayment.

Liquidity and Capital Resources

 

Overview of Liquidity

Our primary operating cash requirements include the payment of salaries, incentive compensation and related benefits and other headcount-related costs. These include costs of office facilities and information technology systems. We fund these requirements through 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.

The cost of our recent acquisitions has been financed with available cash flow and, to the extent necessary, short-term borrowings from our revolving credit facility. These borrowings are repaid in subsequent periods with available cash provided by operating activities. At June 30, 2007, borrowings of $15.5 million were outstanding under our revolving credit facility.

Historically our cash flows have been subject to variability from year-to-year primarily as a result of one-time or infrequent events. For example, cash flow from operating activities in 2005 includes $22.6 million of one-time cash costs related to our recapitalization. In 2006, we refinanced our shareholder notes, which did not require any interest payment in 2005, with an incremental term loan which requires quarterly interest payments. This refinancing shifted the cash payment of $5.8 million for 2005 interest accrued into 2006. Although we do not expect similar operating cash requirements for a future recapitalization, we do expect that our future growth will continue to require investment in additional working capital. Although such future working capital requirements are difficult to forecast, based on our current estimates of revenues and expenses, we believe that anticipated cash flows from operations and available sources of funds (including available borrowings under our revolving credit facility) will provide sufficient liquidity for us to fund our business and meet our obligations for the next 12 months and the forseeable future thereafter.

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.

Analysis of Cash Flows

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

 

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$22.6 million of costs of the recapitalization plus the cash interest paid on our credit facility of $5.2 million. 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.

For the six months ended June 30, 2007, net cash provided by operating activities was $13.2 million compared to $6.9 million provided during the comparable period of 2006. This improvement was due to reduced working capital requirements during the six months ended June 30, 2007, which were a net use of cash of $1.7 million compared to a net use of cash of $10.4 million during the comparable period of 2006. In addition, we experienced greater collections during the first six months of 2007 and did not incur operating cash requirements for the recapitalization which impacted the first six months of 2006.

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 investing activities was $9.2 million for the six months ended June 30, 2007 compared to $18.8 million used during the comparable period of 2006. During the first six months of 2007, we paid for two acquisitions, AIM and WSTP, which accounted for $5.3 million of our overall cash usage. For the six months ended June 30, 2006, net cash used in investing activities reflected $15.8 million related to our acquisition of Welcom.

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.

Net cash used in financing activities was $8.3 million for the first six months of 2007 compared to $0.5 million used during the first six months of 2006. During 2007, we made an additional payment of $4.8 million to certain shareholders related to our 2005 recapitalization. In addition, during the first six months of 2007, we reduced our outstanding indebtedness under our credit facility by $3.6 million compared to a reduction of $0.3 million during the first six months of 2006.

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 $1.1 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 September 1, 2007, we had approximately $10 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.

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%.

 

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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.

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 June 30, 2007, 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 FASB 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 consolidated financial statements in accordance with SFAS 109. FIN 48 prescribes a

 

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recognition threshold and measurement attribute for the 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. For further information, see Note 12, Income Taxes, of our consolidated financial statements contained elsewhere in this prospectus.

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.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 provides the option to carry many financial assets and liabilities at fair values, with changes in fair value recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 on its 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 June 30, 2007, we had $2.3 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 June 30, 2007, 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.

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 June 30, 2007, a hypothetical 1% decrease in interest rates would decrease interest income by approximately $23,000 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, 2006 or the six months ended June 30, 2007. 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 and developed specifically for project-focused organizations. We believe our leading market position is evidenced by our customer base. As of September 1, 2007, our customers included 90 of the 100 leading federal information technology contractors, including the 10 largest (based on 2006 revenue derived from federal government contracts), and approximately 76% of the 500 largest architectural and engineering firms, including 15 of the top 20 (based on design services revenue for 2006). In addition, our software offerings were used by the seven largest information technology services companies and by six of the seven largest aerospace and defense companies (as identified in the Fortune 500 list of America’s largest companies based on 2006 revenue) as of September 1, 2007.

These project-focused organizations generate revenue from defined, discrete, customer-specific engagements or activities, rather than from mass-producing or distributing products, and they 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 September 1, 2007, we had over 12,000 customers worldwide that spanned numerous project-focused 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.

For the six months ended June 30, 2007, our total revenue increased 23.3% to $130.8 million, and our net income increased 47.6% to $9.6 million, in each case from the six months ended June 30, 2006.

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. International Data Corporation (IDC) 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. In addition, in 2006, AMR Research estimates that the small and midsize business market segment of the enterprise applications software market is the fastest growing segment, with expected cumulative annual growth rates of 8% to 10% from 2005 to 2010. We believe we are well positioned in this segment, as 98% of our customers have less than 1,000 employees.

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

 

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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.

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.

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 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 delivery of engagements, projects and programs. Forrester Research generally observed 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.

 

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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. We believe our leading market position is evidenced by our customer base. As of September 1, 2007, our customers included 90 of the 100 leading federal information technology contractors, including the 10 largest (based on 2006 revenue derived from Federal government contracts), and approximately 76% of the 500 largest A/E firms, including 15 of the top 20 (based on design service revenue for 2006). This leading market position has helped us develop a widely recognized brand across numerous project-focused industries. 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 over 7,000 A/E customers as of September 1, 2007, we estimate that there are an additional 31,000 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 in 2006 that were not subject to audit in 2004, 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. In addition, while we currently have over 2,300 government contractors as customers as of September 1, 2007, we estimate that there are an additional 4,400 government contractors with greater than 10 employees that are potential new business prospects for us.

 

   

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. 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 to assist our marketing, sales and product implementation efforts in the United States and in international markets. This network includes various market participants in the enterprise applications software industry, such as software resellers, industry-specific vendors, software consultants, complementary technology providers, accounting and tax advisors and data and server infrastructure service providers. For the six months ended June 30, 2007, these partners generated approximately 8%

 

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of our revenue. We plan to expand this network of alliance partners to help penetrate new markets, increase our geographical sales force coverage and develop and maintain attractive software products.

 

   

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, 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 and, in May 2007, we acquired a fifth company to add additional development, services and support resources. None of the acquisitions exceeded $20 million in aggregate consideration. 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 of varying sizes 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.

 

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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.

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.

 

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Product Family

  

Targeted Customers and

Value Proposition

  

Features and Functionality

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.

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 end-to-end capabilities in 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, actual costs 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; and

 

   

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.

 

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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 ongoing 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 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 generally billed quarterly and paid in advance.

Customers

We consider a customer to be an organization that purchases one or more licenses for our software, maintenance or support for those licenses, or services related to that software, pursuant to a written agreement or a “click-wrap” license that is activated upon installation. As of September 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, 2006 and the six month period ended June 30, 2007, no single customer accounted for five percent or more of our total revenue.

Historically, our 20 largest customers in any given year have been spread across our primary markets, with our largest customers (measured by license and maintenance and support services revenue) typically belonging to the aerospace and defense, A/E and information technology services industries. None of our top 20 customers in 2004 measured by license revenue were in that group in 2006 and only one of our top 20 customers in 2004 measured by services revenue was in that group in 2006. However, 11 of our top 20 customers in 2004 measured by maintenance billings were in that group in 2006.

Our products are sold to customers in numerous project-focused industries and are deployed by a wide range of organizations, from small not-for-profits to large multinational companies. The following table identifies customers in the various industries that we serve that are illustrative of the types of customers to whom we license our products including small, medium and large revenue-producing customers.

 

Aerospace & Defense

  

Architecture &

Engineering

  

Consulting Companies

  

Discrete Project
Manufacturing

•   Concurrent Technologies

 

•   L-3 Communications

 

•   Orbital Sciences

 

•   BAE Systems

  

•   ARCADIS

 

•   HOK

 

•   TKDA

 

•   URS Corporation

  

•   The Durrant Group

 

•   Fuld & Company

 

•   Garver Engineers

 

•   The Pragma Corporation

  

•   Applied Geo Technology

 

•   Northrop Grumman

 

•   Teledyne Brown Engineering

 

•   Telephonics

 

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Government Agencies

  

Government Contractors

  

Grant-Based

Not-for-Profits

  

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

Sales and Marketing

We sell our products primarily through 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 and for the six months ended June 30, 2007, our direct sales force generated approximately 90% of our license revenue sales and our indirect channel was responsible for the remaining 10%.

In 2005 and 2006 and for the six months ended June 30, 2007, 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. Prior to 2005, we did not distinguish between domestic and international revenue in our financial statement reporting.

See Note 18, “Segment Information,” of our consolidated financial statements contained elsewhere in this prospectus for additional information related to our revenue derived from international customers.

We engage in a variety of marketing activities, including market research, product promotion and participation at industry conferences and trade shows, 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.

Customer Case Studies

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

HOK Group, Inc. (HOK)

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 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

 

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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)

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)

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.

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 September 1, 2007:

 

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

 

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Type of Alliance

  

Role

  

Examples

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.

 

•   Provide managed services for our solutions

  

•   Aronson & Company

 

•   Cherry, Bekaert & Holland

 

•   Watkins, Meegan, Drury & Company

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

 

•   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.

  

•   Artina Group

 

•   Deluxe Corporation

 

•   FORMost Graphics Communications

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, and $20.7 million for the six months ended June 30, 2007. The increased spending in 2006 is primarily related to investments for future applications to drive growth across our business. As of September 1, 2007, we had approximately 400 employees in research and development, of which approximately 230 were in the United States and approximately 150 were in Manila, Philippines. In addition, we contract with a third-party offshore development facility in Bangalore, India for additional product development. This facility includes approximately 50 software and product developers that are trained on our products. This third-party arrangement allows us to increase our staffing capabilities on a project-by-project basis and as the need for additional development support arises. 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. In 2004, 2005 and 2006, and for the six months ended June 30, 2007, we spent $1.7 million, $2.0 million, $2.1 million and $1.5 million, respectively, on third-party product development and support activities.

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 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.

 

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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 and medium-sized government contracting organizations. The software is designed to be easy to install, learn and maintain with minimal information technology support.

• 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. Middle-market customers are typically searching for industry specific functionality, ease of deployment and a lower total cost of ownership with the ability to add functionality over time as their businesses continue to grow. When competing in the small business segment, which consists of organizations with fewer than 100 employees, we face 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.

 

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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.

Employees

As of September 1, 2007, we had 1,212 employees worldwide, including 164 in sales and marketing, 393 in product development, 499 in customer services and support and 156 in general and administrative positions. Of our 1,212 worldwide employees, 1,034 were located in the United States and 178 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 Australia, Canada, the Philippines and the United Kingdom. As of the years ended December 31, 2004, 2005 and 2006 and the six month period ended June 30, 2007, $0.3 million, $0.5 million, $0.6 million and $0.7 million of our total long-lived assets of $20.1 million, $38.0 million, $76.1 million and $81.0 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 Protection 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 sought dismissal or transfer of the action to the U.S. District Court for the Eastern District of Virginia in reliance upon a contractual forum selection clause. The District Court denied that motion, but the United States Court of Appeals for the Fifth Circuit has granted permission to appeal the District Court’s denial of our motion. That interlocutory appeal has now been fully briefed and is pending before the Fifth Circuit.

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 October 1, 2007.

 

Name

   Age   

Position(s)

Kevin T. Parker

   48    Chairman, President and Chief Executive Officer

Eric J. Brehm

   48    Executive Vice President of Product Development

William D. Clark

   48    Executive Vice President and Chief Marketing Officer

David Hare

   53    Executive Vice President of Global Support

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

   49    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

   34    Director

Nanci E. Caldwell (1)(2)

   49    Director

Kathleen deLaski (1)

   47    Director

Joseph M. Kampf (1)

   63    Director

Steven B. Klinsky

   51    Director

Albert A. Notini (2)

   50    Director

Janet R. Perna (2)

   59    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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David Hare has served as our Executive Vice President of Global Support since September 2007. Prior to joining Deltek, Mr. Hare served as Senior Vice President, Global Product Support of Oracle Corporation, an enterprise software company, from January 2005 to September 2007, and as the Group Vice President, Support Services of PeopleSoft, Inc., an enterprise applications software company from August 2001 to January 2005. Prior to joining PeopleSoft, Mr. Hare held various management positions at Aspect Communications, Inc., Baan Company and Amdahl Corporation. Mr. Hare attended Springfield Technical College, Oglethorpe University and DeAnza College.

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.

 

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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 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., National Medical Health Card Systems, Inc. and Oakleaf Global Holdings, 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., Overland Solutions, Inc., Apptis, Inc., National Medical Health Card Systems, Inc. and Oakleaf

 

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Global Holdings, 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 Chief Executive Officer of Apptis, Inc., a provider of information technology solutions and services, since August 2007. Prior to that, he served as President and Chief Operating Officer of Sonus Networks, Inc., a voice infrastructure product provider, since April 2004. Mr. Notini also serves as a senior advisor to New Mountain Capital. 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, 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 ePresence, Inc., Apptis, Inc. and Saints Memorial Hospital. He received his A.B. from Boston College, his M.A. 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. We believe that Ms. Caldwell, Ms. Perna and Mr. Kampf currently meet the independence requirements under the applicable listing standards of The Nasdaq Global Select Market.

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 Select 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 Select 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 Select 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 Select 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.

 

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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 Select 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;

 

   

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 Select 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 (the “Exchange Act”).

Compensation Committee Interlocks and Insider Participation

During 2006, o