Why Sell When the Chips Are Down?

By Bob Starzynski

When a registration for an offering flies through the Securities and Exchange Commission these days, it raises my eyebrows. Any company looking to raise money now on the public market either really needs cash in a big way or does not fear the volatility that is likely to ensue.

One deal now in the works that caught my attention is a secondary stock offer filing by Deltek Systems Inc. of McLean, Va., which provides enterprise software and consulting services to corporations for accounting and management purposes.

The interesting thing about this offering is that company officials own all of the shares being sold. The company itself is not selling any shares and is not raising any money.

But that is not how it was supposed to be. Deltek originally made its filing at the beginning of August, before the recent market correction. At the time, the company was to sell 500,000 shares to raise $10 million for acquisitions, investments and other working capital. Donald and Kenneth deLaski, a father/son team who has run the company since its founding 15 years ago, owned most of the rest of the 2.9 million shares offered at $23.13 a share.

According to company sources, Donald, the 66-year-old chairman, is looking to retire. Kenneth, the 44-year-old president and chief executive, wanted to free up some money to give to charity. Together, the two men and their families wanted to unload $43 million worth of stock ? nearly one quarter of their holdings.

Fair enough. But along comes a bear and shatters most companies' and executives' plans of unleashing more stock on outside investors.

Interestingly, the deLaskis were not swayed when Nasdaq stockholders drove Deltek's stock down almost 25 percent later in August. Rather than scrapping the plans for the offering until the market recuperated, they still wanted their money.

On Sept. 25, the duo issued a revised plan. The company did not need money enough to issue stock at a reduced rate of $17.88 a share. It still has cash in hand from its initial public offering in early 1997 and has been profitable and growing steadily for at least the last five years. The company earned $11.7 million last year on sales of $57.6 million. So the new plan does not include the 500,000 shares offered by the company.

What the new plan does include is a slightly modified attempt by the deLaskis to sell a large part of their holdings. Instead of 2.2 million shares, they now want to get rid of 1.8 million shares.

Why isn't the family waiting for some market stability before trying to tinker with their holdings? Do they need the money so quickly that they are willing to give shares away at a 25 percent discount from their recent high?

There is no indication the company is heading for trouble. Deltek made two strong acquisitions earlier this year and has continued to grow revenue through the first two quarters of 1998. Profits are down by two-thirds to $1.4 million during that time, but only because of one-time charges that threw off the numbers.

Despite the recent price correction, Deltek is still performing well over the long run, up more than 50 percent from its IPO price. It is trading at 44 times earnings. To keep such a fair value, the company must continue its trend of revenue and earnings growth. Otherwise, that P/E ratio and stock price may fall.

One spot that may cause the company some trouble in the near future is the year 2000 problem, according to SEC filings. All of the new software Deltek is selling is year 2000 compliant. But the company has agreed to upgrade all the older systems of its contracted customers for no charge.

According to the filings, the company does not expect much financial impact from this conversion work, but also does not rule out the possibility of a "material adverse effect on the company's business, operating results and financial condition."

We shall see.

One interesting side note: Although Deltek scrapped plans to sell shares in the offering and will not benefit from it in any way, it is still funding most of the expenses on the deLaskis behalf. The company will shell out more than $300,000 in expenses to help the family unload its shares, according to the filings.

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