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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended March 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to _______________
Commission file number 0-15946
DELPHI INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0021975
(State or other jurisdiction of incorporation)(I.R.S. Employer
Identification Number)
3501 Algonquin Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (708) 506-3100
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange of which registered
------------------- -----------------------------------------
Common Stock, par value $0.10 per share NASDAQ SmallCap Market
Indicate by check mark whether the registrant (a) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
As of June 1, 1995, the number of shares of Common Stock
outstanding was 8,318,453. As of such date, the aggregate market
value of Common Stock held by nonaffiliates, based upon the last
sale price of the shares as reported on the NASDAQ National
Market System on such date, was approximately $10,398,066.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement relating
to its 1995 Annual Meeting of Stockholders are incorporated by
reference into Part III.
DELPHI INFORMATION SYSTEMS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Page Reference
--------------
PART I
Caption
-------
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 33
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners
and Management 34
Item 13. Certain Relationships and Related Transactions 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 35
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Delphi Information Systems, Inc. (the "Company") is a leading provider
of automation systems and services for independent property and casualty
insurance agencies and brokerages ("independent agencies") in North America.
The Company develops, markets and supports computer applications software
systems which automate independent agencies including the areas of sales
management, policy and claims administration, accounting, financial
reporting, rating and electronic interface with the computers of insurance
carriers. The Company also provides proprietary software and services which
help insurance carriers rate and quote insurance products and distribute such
rating data to agencies with which the Company has a relationship. In
addition, the Company markets and supports the hardware necessary to operate
its proprietary software systems.
The Company's customer list includes over 90% of the largest 100
brokerages in North America. The Company's software operates on
approximately 75,000 workstations and terminals at more than 4,500 customer
sites representing approximately two-thirds of all workstations and terminals
installed in independent agencies. The Company also provides insurance rating
to more than 8,000 customers.
The Company is an IBM Industry Remarketer (IR) and markets systems that
operate on the UNIX-based IBM RISC System/6000, IBM AS/400, and SCO
UNIX-based microcomputer hardware platforms. The Company also supports
earlier versions of its software which operate on Wang and other IBM hardware
platforms.
Delphi Information Systems, Inc. was founded in 1976 as Delphi Systems,
Inc., a California corporation. In 1983, Delphi Information Systems, Inc., a
Delaware corporation, was formed and acquired all of the outstanding shares
of Delphi Systems, Inc. in an exchange offer. In June, 1987, Delphi Systems,
Inc. was merged into and with Delphi Information Systems, Inc. The Company's
executive offices are located at 3501 Algonquin Road, Rolling Meadows,
Illinois 60008. Its telephone number is (708) 506-3100.
PRODUCTS. The Company's proprietary applications software packages, The
Delphi SMART System, Vista, INfinity, INSIGHT, PC-ELITE and Insurnet, are
designed to enhance the efficiency and profitability of agencies, brokerages,
and insurance carriers. The software is designed to support various
independent agencies' business functions in an integrated manner.
The systems are designed to provide independent agencies with the
following capabilities:
- Management Information - Carrier Interface
- Sales and Prospecting - Policy and Claims Administration
- Marketing - Office Administration
- Finance and Accounting - Rating
- Client Service
3
SYSTEM DESIGN AND ARCHITECTURE. The Company has developed the Delphi
SMART System, a client/server-based system, which supports relational
database software technology, Structured Query Language (SQL), windowing and
graphical user interfaces, among other features. This product development is
part of a continuing strategy of the Company to deliver products to
prospective and current customers that utilize the latest software and
hardware technologies. In fiscal 1995, the Company released several new
modules and enhancements to its products which utilize these newer
technologies including SaleSource, a sales prospecting and management module,
along with enhancements to the networking capabilities of its systems.
The Company implements AIX (IBM's UNIX version) and SCO UNIX as the
basic operating systems for its INfinity and PC-ELITE software, respectively.
UNIX-based systems provide portability of applications software from one
vendor's hardware to that of another, or among various models of a single
manufacturer's hardware, without a costly rewrite as long as the models and
makes of hardware are compatible with UNIX. The Company believes it is the
only major company in its field to utilize the UNIX operating system, which
makes the Delphi system portable to a wide range of computer hardware. The
Company markets its INfinity software and Insurnet software on the IBM RISC
System/6000 computer and its PC-ELITE product on SCO UNIX-compatible
microcomputer hardware platforms. The Company's INSIGHT product is marketed
primarily on the IBM AS/400 computer. The Company's products operate in a LAN
environment with the RS/6000, AS/400 or microcomputer hardware acting as a
host server platform.
INSURANCE CARRIERS. The Company's software also electronically links
the computers of insurance carriers to independent agencies. The Company's
electronic interface products enable the independent agencies and the
participating insurance carriers to decrease the cost of entering information
concerning new policies, renewals, endorsements and inquiries. This also
reduces errors and enhances response time. The software replaces transfers
of information between independent agencies and insurance carriers by mail,
by telephone, or by dedicated terminals supplied by carriers.
Sixty-two insurance carriers interface with the Company's agency
management systems, including the following major property and casualty
companies: American States, Atlantic Mutual, Chubb & Sons, CIGNA, The
Cincinnati Companies, Commercial Union, General Accident, Hanover, Hartford,
Heritage Mutual, Island (Hawaii), ISI Systems, Kemper, Keystone, Maryland
Casualty, Northbrook, Reliance, Royal, Safeco, Safety, St. Paul,
Transamerica, Travelers and The Westfield Companies. While arrangements
differ from one insurance carrier to another, in general an insurance carrier
will advise independent agencies that the Company's electronic interface
products are among the products which are compatible with the carrier's
systems. The insurance carriers mentioned above generally make similar
arrangements with one or more of the Company's competitors.
The Company also provides proprietary software and services to insurance
carriers which help the carriers rate and quote insurance products and
distribute such rating data to agencies with which the carriers have a
relationship.
4
The Company has in the past implemented programs with the objective of
establishing various alliances with specific insurance carriers including
CIGNA and Allied whereby the insurance carriers recommend and support the
Company as an agency automation solution to their preferred agents. While
the Company will continue to pursue sales strategy related to
carrier-sponsored programs, carriers are limiting their participation in
these marketing arrangements.
IBM INDUSTRY REMARKETER. The Company currently purchases a significant
portion of its hardware from IBM, one of its primary hardware suppliers,
under an Industry Remarketer Business Partner Program (IR). The IR, among
other features, provides that IBM marketing and technical representatives may
participate in meetings with prospective customers of the Company to support
sales and marketing efforts for IBM-based products. The Company purchases
computer hardware and maintenance from IBM and other vendors at a discount
from list prices and markets this hardware and maintenance to its customers.
MARKETING, SALES AND SERVICES. The Company markets its software systems
exclusively through its own sales organization primarily from its eight major
operating locations in Rolling Meadows, Illinois; Scottsdale, Arizona;
Pittsburgh, Pennsylvania; Walnut Creek, California; Westlake Village,
California; Burlington, Massachusetts; East Lansing, Michigan and Toronto,
Ontario, Canada. The Company has divided its sales personnel into groups
focusing on global brokerages, regional and local brokerages and agents,
rating customers and insurance carriers.
The systems offered by the Company range in price from $35,000 to over
$1,000,000 for multiple site global brokers. While the largest systems
offered by the Company support in excess of 320 terminals, smaller systems
can accommodate below 10 users. No individual customer represented more than
10% of total revenues in fiscal 1995, 1994 or 1993.
In addition to systems sales to new customers, the Company provides
upgrades of software and hardware to its existing customers as well as
additional computer products. These products consist of various software,
terminals, processor memory, storage devices, and central processing units.
A significant portion of the Company's business comes from the
maintenance of the Company's proprietary software. In addition, hardware
maintenance is purchased by the Company for its customers from third parties.
The Company's customers enter into maintenance contracts under which the
Company agrees to service the software and hardware for varying periods of
time after the expiration of the warranty period. Consulting services,
customized programming and training, which are billed separately, are also
provided to customers who desire specific assistance or enhancement of their
systems.
PRODUCT DEVELOPMENT. At the end of fiscal 1995, the Company employed
104 full-time employees engaged in product development and maintenance
activities. These activities consist of researching and developing
enhancements to the software such as adding new functionality, improving
usefulness, adapting the software to newer software and hardware technologies
and increasing systems responsiveness.
5
Product development expenditures prior to capitalization of software
were $6,550,000, $6,251,000 and $5,643,000 in fiscal 1995, 1994 and 1993,
respectively. The Company strongly believes in the importance of maintaining
and enhancing its technology and expects to continue to invest substantial
amounts in research and development in the future.
COMPETITION. The Company believes its principal competition is
presented by three companies which provide software systems that are
comparable to those offered by the Company.
The Company believes that most insurance carriers are in the process of
reducing or eliminating their agency and brokerage automation strategies.
Nevertheless, some insurance carriers continue to operate subsidiaries which
actively compete with the Company. These carriers have much greater
financial resources than the Company and have in the past subsidized the
automation of independent agencies through various incentives offered to
promote the sale of the carriers' insurance products. Accordingly, there can
be no assurances that insurance carriers will continue to withdraw from
competition with the Company.
The Company is not aware of any large hardware company that has a set of
software explicitly addressing the independent agencies marketplace.
However, the larger hardware suppliers, such as IBM, do sell systems and
components of systems to the independent agencies. The Company, to a much
lesser extent, also experiences competition in the form of smaller,
independent or freelance developers and suppliers of software who sometimes
work in concert with hardware companies to supply systems to independent
agencies.
The Company believes that the key competitive factors in the Company's
market are product features and functions, ease of use, price, reputation,
reliability, and quality of customer support and training. The Company
believes that overall it competes favorably with respect to these factors.
The Company regards its applications software as proprietary and
attempts to protect it with copyrights, trade secret laws and restrictions on
disclosure and transferring title. Despite these precautions, it may be
possible for third parties to copy aspects of the Company's products or,
without authorization, to obtain and use information which the Company
regards as trade secrets. Existing copyright law affords only limited
practical protection and the Company's software is unpatented.
EMPLOYEES. At March 31, 1995, the Company employed 419 persons,
including 54 in sales and marketing, 104 in product development, 177 in
customer service and operations, and 84 in general management, administration
and finance. None of the Company's employees is presently covered by a
collective bargaining agreement. The Company believes that its employee
relations are good.
6
ITEM 2. PROPERTIES
The Company's corporate headquarters is in Rolling Meadows (Chicago),
Illinois, where it occupies approximately 15,000 square feet of office space.
Substantially all corporate executive and administrative functions are
located in Rolling Meadows. The Company also has operational facilities in
Burlington, Massachusetts of 23,400 square feet, Pittsburgh, Pennsylvania, of
17,500 square feet, East Lansing Michigan of 11,000 square feet, Scarborough,
Ontario Canada of 6,012 square feet, Walnut Creek, California of 15,241
square feet, and Scottsdale, Arizona of 10,000 square feet. In addition, the
Company has 32,600 square feet of office space in Westlake Village,
California which it is attempting to sublet and relocate to a smaller, more
cost-effective facility. The Company believes its facilities are adequate
for its current needs and that suitable additional or substitute space will
be available as needed. See Note 8 of Notes to Consolidated Financial
Statements for information regarding the Company's obligations under leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party, and none of its property is subject to, any
material pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the stockholders of the Company was held on Friday,
March 17, 1995, for the following purposes:
1) To amend the Company's certificate of incorporation to increase the
company's authorized Common Stock from 12,000,000 shares to 50,000,000
shares. This matter was approved by a vote of 8,750,553 for, 690,704
against, and 18,831 abstaining.
2) To authorize conversion of the Company's 6% promissory note due June 30,
1996, into shares of the Company's convertible preferred stock. This
matter was approved by a vote of 5,881,359 for, 552,671 against, 10,681
abstaining and 3,759,587 broker non-votes.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The principal market for the Company's common stock (NASDAQ Symbol DLPH)
is the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System (NASDAQ). As of June 1, 1995, there were 184
shareholders of record.
The Company has not paid dividends on its common stock to date. There
are no plans in the near future to do so.
The following tables sets forth the high and low bid prices for common
stock for each calendar quarter in the two year period ending March 31, 1995.
Fiscal 1994 High Low
------------------------------------------
First quarter $ 7.25 $ 5.13
Second quarter 6.00 4.88
Third quarter 6.00 4.75
Fourth quarter 5.00 3.50
Fiscal 1995 High Low
------------------------------------------
First quarter $ 4.00 $ 3.13
Second quarter 3.50 0.88
Third quarter 1.63 0.53
Fourth quarter 1.88 0.69
8
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
1995 1994 1993 1992 1991
------------------------------------------------
RESULTS OF OPERATIONS:
Revenues $ 53,040 $ 53,605 $ 51,607 $ 44,605 $ 28,509
Operating (loss) income (597) (8,160) 947 (8,684) 1,107
Net (loss) income $ (1,681) $ (8,922) $ 531 $ (9,064) $ 855
EARNINGS PER SHARE:
Net (loss) income $ (0.23) $ (1.34) $ 0.07 $ (1.53) $ 0.17
Shares used in computing per
share data (1) 7,306 6,672 7,897 5,922 5,128
FINANCIAL POSITION:
Assets $ 27,547 $ 31,947 $ 24,735 $ 24,232 $ 20,283
Short term debt 2,486 4,029 3,574 867 120
Long term debt 4,250 4,125 -- 2,454 2,945
Stockholders' equity $ 4,553 $ 6,231 $ 9,727 $ 3,718 $ 8,300
(1) Weighted average common and common equivalent shares, where applicable,
were used to compute per share data in all periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Market - While the Company has increased its market share through
acquisitions, fiscal years 1995 and 1994 were a difficult period in the
market for the independent agencies as a down cycle in the property and
casualty insurance has continued. The soft property and casualty insurance
market is evidenced by minimal or no increases in property and casualty
insurance premiums, which has eroded the profits and equity of the Company's
insurance agency and brokerage customers who receive commissions on insurance
premiums. Historically, the property and casualty industry, often
independently of the general economy, goes through up cycles when insurance
premiums are strong and down cycles when insurance premiums remain flat or
decline. The cycle is a function of the insurance carriers' reserves for
their insured customer losses, the related reserve portfolio performance,
competitive strategies and other business issues. The most recent down cycle
has been particularly long compared to historical soft markets. The Company
cannot predict if or when the soft market conditions will change. In
addition, the property and casualty insurance market has experienced
consolidation through mergers. This consolidation is expected to continue
and could negatively impact the Company.
9
Results of Operations - The table below sets forth, for the fiscal periods
indicated, the percentage of revenues represented by each item reflected in
the Company's consolidated statements of operations, and the percentage
increase (decrease) in each item of revenue, cost and expense from the prior
fiscal period.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Year to Year Percentage
Increase (Decrease)
Percentage of Revenues ---------------------------
Year Ended March 31, Fiscal 1995 Fiscal 1994
------------------------ versus versus
1995 1994 1993 Fiscal 1994 Fiscal 1993
- ------------------------------------------------------------------------------------------
REVENUES:
Systems 39.8% 49.4% 50.5% (20.3)% 1.6%
Services 60.2% 50.6% 49.5% 17.8% 6.1%
- ------------------------------------------------------------------------------------------
TOTAL REVENUES 100.0% 100.0% 100.0% (1.0)% 3.9%
COSTS OF REVENUES:
Systems 26.5% 35.2% 33.3% (25.6)% 9.7%
Services 33.9% 31.5% 29.6% 6.4% 10.8%
- ------------------------------------------------------------------------------------------
TOTAL COST OF REVENUES 60.4% 66.7% 62.9% 10.5% 10.2%
- ------------------------------------------------------------------------------------------
GROSS MARGIN 39.6% 33.3% 37.1% 17.9% (6.8)%
OPERATING EXPENSES:
Product development 10.2% 7.4% 6.9% 36.4% 11.0%
Sales and marketing 12.9% 14.7% 15.3% (12.6)% (0.5)%
General and administrative 14.6% 11.7% 10.9% 23.0% 11.4%
Amortization of goodwill,
customer lists and non-
compete agreements 3.1% 2.6% 2.2% 16.5% 28.8%
Consolidation, repositioning
and restructuring charges -- 12.1% -- (100.0)% *
- ------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 40.8% 48.5% 35.3% (16.8)% 42.9%
- ------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (1.2)% (15.2)% 1.8% 92.7% *
Interest expense 1.8% 1.2% 0.7% 47.3% 70.5%
- ------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME
TAXES (3.0)% (16.4)% 1.1% (82.5)% *
Income tax provision (0.3)% 0.2% 0.1% 15.7% *
NET (LOSS) INCOME (3.3)% (16.6)% 1.0% (81.2)% *
- ------------------------------------------------------------------------------------------
* PERCENTAGES HAVE BEEN INTENTIONALLY OMITTED BECAUSE SUCH PERCENTAGES ARE
NOT MEANINGFUL.
10
Revenues - The Company's revenues are derived from two sources, systems
agreements and service fees. Systems agreements with the Company's customers
include the delivery of the Company's proprietary software with the computer
hardware and software of third parties. Service fees include fees for
maintenance, training and consulting services related to the Company's
proprietary software, as well as sales of the Company's proprietary software
which is not bundled with hardware or software of third parties. The
Company's revenue recognition policies comply with the provisions of the
American Institute of Certified Public Accountants (AICPA) Statement of
Position No. 91-1.
Revenues decreased 1% in fiscal 1995, and increased 4% in fiscal 1994. The
decrease in fiscal 1995 was due to a decreased emphasis on low margin
hardware sales, an overall decline in both the cost and resale price of
hardware which the Company resold to customers, a decrease in upgrade sales
to existing customers, and a delay in the release of the Company's latest
product enhancements. Substantially offsetting the decreases noted above was
the inclusion in fiscal 1995 of the full year results of the December, 1993,
acquisitions of Mountain States and Insurnet and an increase in sales of
software which was not bundled with hardware. The increase in fiscal 1994
was due to the acquisitions of Insurnet and Mountain States.
Costs of Systems Revenues - Costs of systems revenues include costs of
computer hardware and third party software, along with costs associated with
the purchase and installation of hardware and software products, and the
amortization of capitalized software development costs. Costs of systems
revenues, as a percentage of systems revenues, were 66.5%, 71.2% and 66% in
fiscal 1995, 1994, and 1993, respectively. Changes in the percentage of
costs of systems expressed as a percentage of revenues are primarily a result
of a changing mix of products sold by the Company. In fiscal 1995, the
Company placed less emphasis on the resale of low margin hardware which had
the effect of decreasing revenues but improving gross margins on a percentage
of revenue basis.
Costs of Service Revenues - Costs of service revenues include costs
associated with maintenance, consulting and training services, and payments
made to third party hardware maintenance vendors. Costs of service revenues
as a percentage of service revenues were 56.3%, 62.3% and 59.7% in fiscal
1995, 1994, and 1993, respectively. Changes in the percentage of costs of
service revenues expressed as a percentage of revenues is the result of a
change in the mix of services delivered. In fiscal 1995, an increase in
sales of the Company's proprietary software which was not bundled with third
party hardware increased service revenues and decreased costs of service
revenues expressed as a percentage of service revenues.
Sales and Marketing Expenses - Sales and marketing expenses expressed as a
percentage of revenues declined to 12.9% of revenues in fiscal 1995, compared
to 14.7% of revenues in fiscal 1994 and 15.3% of revenues in fiscal 1993.
The reductions are the result of overall spending reductions in marketing and
related activities, including reduced headcount, advertising and promotional
spending, as well as decreased commission expense due to the decline of
systems revenues as a percentage of total revenues.
Product Development Expenses - Product development expenses, net of
capitalized software costs, were $5,384,000, $3,948,000 and $3,558,000 in
fiscal 1995, 1994, and 1993, respectively.
11
The increase in fiscal 1995 is primarily a result of a decrease in the amount
of development spending capitalized, combined with an increase in spending
levels. The increase in fiscal 1994 is due to an increase in spending
levels. Product development expenditures prior to the capitalization of
software were $6,550,000, $ 6,251,000 and $5,634,000, respectively, in fiscal
years 1995, 1994, and 1993.
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86, and amortizes these costs
through cost of systems revenues over a maximum of five years. The amount
capitalized varies each period depending on how many software development
projects have reached technological feasibility and whether they are in
general release. The Company strongly believes in the importance of
maintaining its technological strengths and will continue to invest
substantial amounts in software development.
General and Administrative Expenses - General and administrative expenses
were 14.6%, 11.7% and 10.9% of revenues in fiscal years 1995, 1994, and 1993,
respectively. The increase in fiscal 1995 was primarily due to increased
general and administrative expenses as a result of the December, 1993,
acquisitions of Mountain States and Insurnet, as well as severance costs for
certain Company officers in fiscal 1995. The increase in fiscal 1994 was
primarily the result of various one-time expenditures incurred to help
improve operating efficiencies and reduce the cost structure of the Company,
as well as the full year effect of 1993 personnel additions.
Amortization of Goodwill, Customer Lists and Noncompete Agreements - Goodwill
and noncompete agreements are costs from the acquisitions of Insurnet and
Mountain States in December, 1993, and other acquisitions since fiscal 1992.
The increase in fiscal 1995 and fiscal 1994 is attributable to the Insurnet
and Mountain States acquisitions in December, 1993. The company follows a
policy of continual evaluation of the carrying value of its intangible
assets. See Note 2 of Notes to Consolidated Financial Statements of the
Company.
Interest Expense - The Company had interest expense of $944,000 in fiscal
1995, compared to $641,000 in fiscal 1994 and $376,000 in fiscal 1993. The
increase in fiscal 1995 was due to higher interest rates than the prior
fiscal year while the increase in fiscal 1994 was due to increased average
borrowings.
Income Tax Provision (Benefit) - The effective tax rates under SFAS No. 109
for fiscal years 1995, 1994, and 1993, were 9.0%, 1.4% and 7.0%,
respectively. Lower than statutory effective tax rates and tax benefits are
due to the operating losses in fiscal years 1995, 1994, and in 1993 were
substantially a result of the benefits from net operating losses in prior
years offsetting operating income for federal income taxes.
Liquidity and Capital Resources - Working capital was a negative $5,747,000
at March 31, 1995, compared to a negative $4,966,000 at March 31, 1994.
Working capital decreased during fiscal 1995 primarily due to a decrease in
prepaid expenses and other assets and an increase in deferred revenues. The
reduction in cash and accounts receivable was used to reduce bank borrowings
and accounts payable.
12
A major component of the Company's negative net working capital position is a
result of deferred revenues of $6,332,000 at March 31, 1995, substantially
representing prepaid maintenance fees from its customers which are recognized
as revenue ratably over the maintenance agreement terms. Since this
liability is satisfied through normal on-going operations of the Company's
service organization and does not require a payment to a third party, the
Company's bank does not view deferred revenue as a liability in the
calculation of financial covenants under the Company's line of credit.
Net cash provided by operating activities was $2,550,000, $288,000 and
$867,000 for fiscal years ended in 1995, 1994, and 1993, respectively.
Although the Company reported a net loss in fiscal years 1995 and 1994, cash
provided by operating activities was positive because a substantial portion
of the loss was related to non-cash items including the amortization of
goodwill and capitalized software.
Cash used in investing activities was $2,155,000, $4,362,000 and $3,827,000
for the fiscal years ended 1995, 1994, and 1993, respectively.
Cash from financing activities reflects the Company's borrowing and payment
activities on its line of credit, proceeds from the exercise of options under
the Company's various stock option plans and the issuance of preferred stock.
In fiscal 1994, the Company raised $3,443,000 through the issuance of its
Series C Preferred Stock and $1,375,000 through the issuance of Convertible
Promissory Notes. In fiscal 1995, the Company raised the remaining $125,000
of the $1,500,000 of Convertible Promissory Notes.
The Company has a line of credit agreement with a bank totaling $5 million
which expires on December 5, 1995, which the Company expects to renew.
Borrowings under the line of credit are generally limited to 75% of qualified
accounts receivable, increasing to 80% for a forty-five day period each
quarter. At March 31, 1995, the Company had borrowed $2,486,000 on its line
of credit, compared to $3,786,000 on March 31, 1994. The credit agreement
requires that the Company maintain certain minimum financial ratios. It also
restricts certain activities of the Company without the approval of the bank,
including the incurrence of senior debt, mergers and acquisitions, and the
payment of dividends. The interest rate on the line of credit is prime plus
3.5%. At March 31, 1995, $1,409,000 remained available for borrowing under
the line of credit.
The Company believes that cash flows from its operations, along with
available borrowings under its line of credit are sufficient to meet its
current liabilities as they become due, along with meeting the Company's
working capital and capital expenditure requirements for the next fiscal
year. In the event the Company is unable to renew the existing line of
credit, the Company will attempt to arrange alternate working capital
financing through another bank or alternate financing companies. The Company
does not have any material commitments for capital expenditures.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
AS OF MARCH 31
ASSETS 1995 1994
---------------------
CURRENT ASSETS:
Cash $ 877 $ 1,657
Accounts receivable, less allowances of $687 (1995)
and $1,000 (1994) 7,639 9,702
Inventories 983 1,008
Prepaid expenses and other assets 1,424 1,781
-------- --------
TOTAL CURRENT ASSETS 10,923 14,148
Property and equipment, net 3,630 4,484
Software development costs, net 4,389 3,951
Goodwill and customer lists, net 5,284 5,914
Purchased software 2,484 2,693
Other assets 837 757
-------- --------
TOTAL ASSETS $ 27,547 $ 31,947
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,486 $ 4,029
Accounts payable and accrued liabilities 6,402 7,652
Accrued payroll and related benefits 1,441 1,489
Deferred revenue 6,332 5,944
-------- --------
TOTAL CURRENT LIABILITIES 16,661 19,114
Convertible promissory notes 1,500 1,375
Subordinated note payable 2,750 2,750
Excess lease liability 1,445 2,083
Other liabilities 638 394
-------- --------
TOTAL LIABILITIES $ 22,994 $ 25,716
-------- --------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 2,000,000 shares
authorized,
Series A, 0 (1995) and 16,577 (1994) shares
issued and outstanding, respectively 0 3,703
Series B, 9,205 (1995) and 61,950 (1994) shares issued
and outstanding, respectively 780 5,250
Series C, 36,268 shares issued and outstanding 3,570 3,570
Series D, 16,356 (1995) and 0 (1994) shares issued and
outstanding, respectively 3,655 0
Common stock, $.10 par value:
Non-designated, 50,000,000 shares authorized
7,979,173 (1995) and 7,011,415 (1994) issued and
outstanding, respectively 798 701
Additional paid-in capital 18,507 14,085
Accumulated deficit (22,894) (21,213)
Cumulative foreign currency translation adjustment 137 135
-------- --------
TOTAL STOCKHOLDERS' EQUITY 4,553 6,231
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,547 $ 31,947
-------- --------
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
14
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED MARCH 31 1995 1994 1993
--------------------------------
REVENUES:
Systems $21,100 $26,485 $26,057
Services 31,940 27,120 25,550
------- ------- -------
TOTAL REVENUES 53,040 53,605 51,607
COSTS OF REVENUES:
Systems 14,027 18,862 17,201
Services 17,983 16,906 15,265
------- ------- -------
TOTAL COST OF REVENUES 32,010 35,768 32,466
------- ------- -------
GROSS MARGIN 21,030 17,837 19,141
OPERATING EXPENSES:
Product development 5,384 3,948 3,558
Sales and marketing 6,879 7,873 7,909
General and administrative 7,718 6,273 5,630
Amortization of goodwill, customer lists
and noncompete agreements 1,646 1,413 1,097
Consolidation, repositioning and
restructuring charges -- 6,490 --
------- ------- -------
TOTAL OPERATING EXPENSES 21,627 25,997 18,194
------- ------- -------
OPERATING (LOSS) INCOME (597) (8,160) 947
Interest expense 944 641 376
(Loss) income before income taxes (1,541) (8,801) 571
Income tax provision 140 121 40
------- ------- -------
Net (loss) income ($1,681) ($8,922) $ 531
------- ------- -------
------- ------- -------
Net (loss) income per common share ($0.23) ($1.34) $ 0.07
------- ------- -------
------- ------- -------
Weighted average common shares and common
share equivalents outstanding 7,306 6,672 7,897
------- ------- -------
------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for shares outstanding)
PREFERRED STOCK COMMON STOCK
------------------------------------------------------------------------ -----------------
SERIES A: SERIES B: SERIES C: SERIES D:
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1992 9,945 $2,215 31,950 $2,708 -- $ -- -- $ -- 6,160,615 $617
-------------------------------------------------------------------------------------------
Net income -- -- -- -- -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- -- -- -- 231,575 23
Exercise of employee stock
purchase plan -- -- -- -- -- -- -- -- 22,957 2
Issuance of common stock
in connection with
acquisitions -- -- -- -- -- -- -- -- 113,222 11
Issuance of Series A
Preferred Stock 6,632 1,488 -- -- -- -- -- -- -- --
Issuance of Series B Preferred
Stock due to the conversion
of subordinated debentures -- -- 30,000 2,542 -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1993 16,577 $3,703 61,950 $5,250 -- -- -- -- 6,528,369 $653
-------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- -- -- -- -- --
Redshaw acquisition adjustmentment 50,687 5
Exercise of stock options -- -- -- -- -- -- -- -- 17,023 2
Exercise of employee stock
purchase plan -- -- -- -- -- -- -- -- 453 3
Issuance of common stock in
conjunction with the
acquisitions of Mountain
Systems International, Inc.
and Insurnet, Inc. -- -- -- -- -- -- -- -- 414,883 41
Issuance of Series C
Preferred Stock -- -- -- -- 36,268 3,570 -- -- -- --
Translation adjustment -- -- -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1994 16,577 $3,703 61,950 $5,250 36,268 $3,570 -- -- 7,011,415 $701
-------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- -- -- -- -- --
Conversion of Series A,
Preferred Stock (16,577) (3,703) -- -- -- -- 16,356 3,655 24,995 3
Conversion of Series B,
Preferred Stock -- -- (52,745) (4,470) -- -- -- -- 879,083 88
Mountain States' acquisition
adjustments -- -- -- -- -- -- -- -- 63,680 6
Translation adjustment -- -- -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 0 $ 0 9,205 $ 780 36,268 $3,570 16,356 $3,655 7,979,173 $798
-------------------------------------------------------------------------------------------
ADDITIONAL FOREIGN
PAID-IN ACCUMULATED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT
----------------------------------------
BALANCE, MARCH 31, 1992 $10,969 ($12,822) $32
Net income -- 531 --
Exercise of stock options 807 -- --
Exercise of employee stock
purchase plan 134 -- --
Issuance of common stock
in connection with
acquisitions 423 -- --
Issuance of Series A
Preferred Stock -- -- --
Issuance of Series B Preferred
Stock due to the conversion
of subordinated debentures -- -- --
Translation adjustment -- -- 47
----------------------------------------
BALANCE, MARCH 31, 1993 $12,333 ($12,291) $79
----------------------------------------
Net loss -- (8,922) --
Redshaw acquisition adjustment 236 -- --
Exercise of stock options 54 -- --
Exercise of employee stock
purchase plan 3 -- --
Issuance of common stock
in conjunction with the
acquisitions of Mountain
Systems International, Inc.
and Insurnet, Inc. 1,459 -- --
Issuance of Series C
Preferred Stock -- -- --
Translation adjustment -- -- 56
----------------------------------------
BALANCE, MARCH 31, 1994 $14,085 ($21,213) $135
----------------------------------------
Net loss -- (1,681) --
Conversion of Series A,
Preferred Stock 46 -- --
Conversion of Series B,
Preferred Stock 4,382 -- --
Mountain States'
acquisition adjustment (6) -- --
Translation adjustment -- -- 2
----------------------------------------
BALANCE, MARCH 31, 1995 $18,507 ($22,894) $137
----------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED MARCH 31 1995 1994 1993
---------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income ($1,681) ($8,922) $ 531
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,495 1,248 1,032
Amortization of capitalized software development costs 1,128 979 1,002
Amortization of purchased software 436 -- --
Amortization of goodwill, customer lists and
noncompete agreements 1,646 1,413 1,097
Write off of capitalized software development costs -- 1,878 --
Foreign currency translation adjustment 2 56 47
Loss on disposal of fixed assets 76 318 --
Excess lease cost (638) 2,083 --
Other -- 134 --
CHANGES IN ASSETS AND LIABILITIES NET OF EFFECT OF
ACQUISITION OF BUSINESSES:
Accounts receivable, net 1,876 522 454
Inventories 25 690 955
Prepaid expenses and other assets (550) (12) (873)
Accounts payable and accrued liabilities (1,250) 262 (2,966)
Accrued payroll and related benefits (48) (141) (1,581)
Other liabilities and deferred revenue 183 (220) 1,169
---------------------------------
Net cash provided by operating activities 2,700 288 867
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (718) (1,435) (1,361)
Expenditures for capitalized software development (1,166) (2,303) (2,076)
Purchased software (177) (332) (98)
Cash outlays for acquisitions, net of cash acquired (244) (292) (292)
---------------------------------
Net cash used in investing activities (2,305) (4,362) (3,827)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable (3,550) (8,653) (10,642)
Borrowings on notes payable 2,250 8,366 10,895
Proceeds from exercise of stock options and
employee stock purchase plan -- 59 966
Proceeds from issuance of convertible promissory notes 125 1,375 --
Proceeds from issuance of preferred stock -- 3,443 1,488
---------------------------------
Net cash provided by financing activities (1,175) 4,590 2,707
---------------------------------
Net increase (decrease) in cash (780) 516 (253)
Cash at the beginning of the year 1,657 1,141 1,394
---------------------------------
Cash at the end of the year $ 877 $1,657 $1,141
---------------------------------
---------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 594 $ 407 $ 215
Taxes paid 140 135 67
NON-CASH TRANSACTIONS:
Common stock, preferred stock, subordinated convertible
debentures and notes payable issued for acquisitions $ 450 $5,229 $ 434
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
17
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF THE COMPANY:
Delphi Information Systems, Inc., (the "Company") develops, markets and
supports computer software systems which automate independent property and
casualty insurance agencies and brokerages including the areas of rating,
sales management, policy administration, accounting and electronic interface
with the computers of insurance carriers. The Company also markets computer
hardware and hardware support services to its customers.
From January, 1991, to December, 1993, the Company acquired eight companies
in similar or complimentary lines of business, including the March, 1993,
acquisition of Continental Systems, Inc. ("Continental") and the December,
1993, acquisitions of Mountain Systems International, Inc. ("Mountain
States") and Insurnet, Inc. ("Insurnet") noted below. The Company's recent
efforts have been, and will continue to be, to streamline and consolidate
operations which will result in cost savings and/or enhanced customer service.
On March 9, 1993, the Company acquired all of the outstanding stock of
Continental in exchange for 444,714 shares of the Company's common stock.
Continental develops and markets insurance rating software and services for
property and casualty insurance carriers and the independent agencies and
brokerages in the property and casualty insurance industry. The merger was
accounted for as a pooling of interests. Consequently, the historical
financial statements of the Company have been restated to include the
historical results of Continental.
Fiscal 1993 revenues for the previously separate companies were $48,790,000
for the Company and $2,817,000 for Continental, and net income was $663,000
for the Company and the net loss for Continental was $132,000.
On December 16, 1993, the Company acquired all of the outstanding stock of
Mountain States of Scottsdale, Arizona, for consideration of 311,320 shares
of the Company's common stock and a note payable of $500,000, which was paid
in January, 1994. Per the terms of the merger agreement, the 311,320 shares
of common stock was subject to a potential upward adjustment of an additional
63,680 shares which were issued in December, 1994, for a total of 375,000
shares. In addition, the shareholders of Mountain States earned additional
consideration based upon growth in sales (see Note 11). The acquisition
became effective on December 23, 1993.
On December 30, 1993, the Company acquired all of the issued and outstanding
capital stock of Insurnet, a wholly-owned subsidiary of Pacific Insurance
Company, in exchange for a $5,000,000 principal amount, $2,750,000 carrying
value subordinated note bearing interest at 6%, due June 30, 1996 (see Note
5), 103,563 shares of the Company's common stock, and a non-interest bearing
$250,000 principal amount, $237,500 carrying value note, which was paid in
March, 1995. The Agreement also provides that under certain circumstances
Pacific Insurance Company may receive no more than 21,437 additional shares
of Company common stock or additional subordinated notes, bearing interest at
6%, equal to the fair market value of such additional shares of Company
common stock (see Note 11).
18
Mountain States develops and services agency management software that
operates in a DOS and Windows-based Local Area Network (LAN) environment.
Insurnet provides agency management systems and services to the independent
property and casualty insurance industry throughout North America.
Both acquisitions have been accounted for as purchases. Accordingly, the
results of Mountain States have been recorded in the financial statements
commencing on December 24, 1993, and the results of Insurnet have been
recorded in the financial statements commencing on December 31, 1993. The
excess of the cost of the acquisitions over the net fair value of
identifiable assets and liabilities assumed at the date of acquisition was
recorded as an intangible asset and amortized on a straight-line basis over
five years for Mountain States, and on a straight-line basis over ten years
for Insurnet.
Proforma revenues, net loss and loss per share of the Company for the years
ended March 31, 1994, and March 31, 1993, are presented as though the
Mountain States and Insurnet operations had been combined with the Company at
the beginning of each of these periods. The proforma results do not reflect
any changes in operations which may occur as a result of the mergers.
Fiscal 1994 proforma revenues, net loss and loss per share are $64,635,000,
$8,827,000 and $1.27, respectively. Fiscal 1994 proforma results include
Insurnet and Mountain States results beginning April 1, 1993, through the
respective acquisition date combined with the Company's results as of March
31, 1994, which includes Insurnet and Mountain States activity for the period
from the respective acquisition date through March 31, 1994. Fiscal 1993
proforma revenues, net loss and loss per share are $66,856,000, $1,522,000
and $0.23, respectively. Fiscal 1993 proforma results consist of Insurnet
and Mountain States activity for calendar year 1992 combined with the
Company's fiscal year 1993 activity. Proforma loss and loss per share
include the amortization of noncompete agreements and goodwill representing
expected annual charges of $641,000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation - The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries after elimination of
intercompany transactions and balances.
Revenue Recognition - The Company recognizes revenues related to software
licenses and software maintenance in compliance with the American Institute
of Certified Public Accountants (AICPA) Statement of Position No. 91-1,
"Software Revenue Recognition". System revenues consist of revenues earned
under software license agreements and revenues from computer hardware
purchased by customers of the Company. When all components necessary to run
the system have been shipped and only insignificant post-delivery obligations
remain, revenue and costs are recognized at the time of shipment, based upon
the sales price and the cost of specific items shipped.
19
Service revenues include maintenance fees for providing system updates for
software products, user documentation and technical support, and sales of the
Company's proprietary software which is not bundled with hardware or software
of third parties. Hardware maintenance provided by third parties, but billed
by the Company, is also offered to customers. Maintenance is generally
billed to the customers in advance monthly, quarterly or annually and
recognized as revenue ratably over the term of the maintenance contract.
Other service revenues including training and consulting are recognized as
the services are performed. Revenues related to custom programming are
recognized based on the percentage of completion method.
Software Development Costs - The Company capitalizes internally generated
software development costs in compliance with the Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed." Capitalization of software
development costs begins upon the establishment of technological feasibility
for the product. The establishment of technological feasibility and the
ongoing assessment of the recoverability of these costs consider external
factors including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amortization of capitalized software development costs, through
costs of systems revenues, begins when the products are available for general
release to customers. The annual amortization is the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear
to the total of current and anticipated future gross product revenues for
that product or (b) the straight-line method over the remaining estimated
economic life of the product including the period being reported on. The
maximum amortization period on a straight-line basis is five years.
Capitalized software costs are amortized on a product-by-product basis.
Amortization of capitalized software development costs was $1,128,000,
$979,000 and $1,002,000 in fiscal 1995, 1994, and 1993, respectively.
Net software development costs at March 31, 1995 and 1994 consist of the
following (in thousands):
1995 1994
- --------------------------------------------------------------------
Total software development costs capitalized $5,496 $4,252
Less accumulated amortization (1,107) (301)
- --------------------------------------------------------------------
$4,389 $3,951
- --------------------------------------------------------------------
- --------------------------------------------------------------------
During the third quarter of fiscal 1994, the Company wrote down its
capitalized software development costs by $1,878,000 (see Note 3).
Accounts Receivable - The Company's accounts receivable resulting from system
sales are unsecured; however, the Company reserves a purchase security
interest in the hardware until such time that the purchase price is paid in
full.
Inventories - Inventories, which consist primarily of computer equipment and
consist entirely of finished goods, are stated at the lower of cost or market
value. The cost of substantially all inventories is determined by specific
identification.
20
Goodwill, Acquisition Costs and Customer Lists - Intangible assets relate to
the excess of the cost of acquisitions over the net fair value of
identifiable assets and liabilities and value assigned to customer lists.
These costs are being amortized on a straight-line basis over five to ten
years. Subsequent to acquisitions, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
useful life of the intangible assets may warrant revision or that the
remaining balance of the intangible assets may not be recoverable. When
factors indicate that the intangible assets should be evaluated for possible
impairment, the Company uses an estimate of the related business segment's
sufficiency of operating income and related cash flow over the remaining life
of the intangible assets in measuring whether the intangible assets' value is
recoverable. If management's assessment or other facts and circumstances
pertaining to the recoverability of intangible assets of a particular
business unit were to change, including their estimate of future operating
income and related cash flows, the Company would adjust the carrying value of
the intangible assets as appropriate. As of March 31, 1995, and 1994, the
accumulated amortization was $2,306,000 and $1,514,000, respectively.
Amortization of goodwill, acquisition costs and customer lists was $823,000,
$649,000 and $359,000 in fiscal 1995, 1994, and 1993, respectively.
Purchased Software - Purchased software represents product purchased for use
in developing product, for licensing with the Company's products, or for
direct sale to the Company's customers. These costs are being amortized on a
straight-line basis over a maximum term of five years, or a shorter period,
depending upon any contractual license agreement limitations or estimated
remaining useful life. In fiscal 1994, the Company assigned $2,109,000 of
the purchase price of Mountain States to purchased software.
Other Assets - Other assets consist primarily of the long-term portion of
noncompete agreements as well as miscellaneous long-term deposits.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to ten years. Leasehold improvements are amortized
over the shorter of the expected life of the improvements or the lease term.
Income Taxes - The Company has adopted the liability method of accounting for
income taxes pursuant to the Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". Deferred income taxes are
recorded to reflect the tax consequences on future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end. Business tax credits are accounted for under the
flow-through method.
Income (Loss) Per Common Share - Income (loss) per common share for fiscal
1995, 1994, and 1993 is based on the weighted average number of common shares
outstanding which includes the dilutive effect of convertible preferred
stock, options and warrants in fiscal 1993. The effect of common share
equivalents is not included in the loss per common share calculation for
fiscal 1995 and 1994 because inclusion would be anti-dilutive. Primary and
fully diluted earnings per share are the same for all periods presented.
21
Foreign Currency Transactions - The accounts of the Company's foreign
subsidiary have been translated according to the provisions of the Statement
of Financial Accounting Standards No. 52, "Foreign Currency Translation".
Gains or losses resulting from translation of the foreign subsidiary's
financial statements are included in stockholders' equity. Any gains or
losses resulting from foreign currency transactions are reflected in the
consolidated results of the period in which they occur.
NOTE 3 - CONSOLIDATION, REPOSITIONING AND RESTRUCTURING CHARGES:
In fiscal 1994, as a result of the acquisition of Mountain States and its
products, the Company's market and sales focus shifted. In evaluating the
position of the Company, it was determined that it was necessary to write
down certain assets to their net realizable value. Therefore, the Company
took a charge to earnings of $4,206,000 in the third quarter of fiscal 1994.
Capitalized software was written down to reflect the decreased value of such
software in light of the acquisition. Additionally, the need for leased
facilities diminished as a result of downsizing, resulting in a charge for
excess lease commitments as well as headcount reductions. In the fourth
quarter of fiscal 1994, the Company incurred an additional charge of
$2,284,000. The initial charge reflected the Company's diminished use of its
lease capacity in one of its facilities. In connection with its restructuring
strategy, the Company considered ways to address such excess capacity,
including subletting the entire facility and relocating to a smaller, more
cost-effective operation. Based on such consideration and additional
information relating to sublease opportunities, management decided to
sublease the entire facility. This charge was partially reduced by an
estimate of future sublease revenue, which is subject to update upon signing
of a sublease agreement. Upon finalization of any sublease arrangement, the
estimate will be adjusted. This adjustment could be material to the
financial statements.
The following summarizes the major restructuring costs (in thousands):
Non-cash write down of capitalized software development costs $1,878
Reductions and changes in workforce and the elimination of facilities 3,919
Impairment of asset value due to acquisitions 628
Other items 65
- ----------------------------------------------------------------------------------
$6,490
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1995 and 1994 consists of the following (in
thousands):
1995 1994
- ----------------------------------------------------------------------------------
Computer equipment & purchased software $6,996 $7,401
Leasehold improvements 362 346
Furniture, fixtures and other 2,308 2,039
- ----------------------------------------------------------------------------------
9,666 9,786
Less accumulated depreciation and amortization (6,036) (5,302)
- ----------------------------------------------------------------------------------
$3,630 $4,484
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
22
NOTE 5 - NOTES PAYABLE:
Notes payable at March 31, 1995, and 1994, are comprised of the following:
1995 1994
- -----------------------------------------------------------------------------
Notes payable to bank $ 2,486 $ 3,786
Note payable and accrued interest from the purchase
of Insurnet 0 243
Convertible promissory notes 1,500 1,375
Subordinated note payable 2,750 2,750
- -----------------------------------------------------------------------------
6,736 8,154
Current portion (2,486) (4,029)
- -----------------------------------------------------------------------------
$ 4,250 $ 4,125
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
The Company has a $5,000,000 line of credit agreement with a bank of which
$2,486,000 was outstanding at March 31, 1995. At March 31, 1995, $1,409,000
remained available for borrowing under the line of credit.
The line, which expires on December 5, 1995, carries an interest rate at the
bank's prime lending rate plus 3.5 percent. Permitted borrowings under the
line vary as a function of qualified accounts receivable and are
collateralized by substantially all of the Company's assets. The agreement
contains certain restrictive covenants including achievement by the Company
of specified operating results and balance sheet ratios. The line also
restricts certain activities of the Company without the approval of the bank,
including the incurrence of senior debt, mergers and acquisitions, and the
payment of dividends.
Additional information related to line of credit borrowings for the three
years ended March 31, 1995, is as follows (in thousands):
1995 1994 1993
- ----------------------------------------------------------------------------
Maximum amount borrowed during the year $4,036 $4,479 $3,114
Average amount borrowed during the year $3,340 $3,640 $1,815
Interest rate at the end of the year 12.5% 9.3% 9.0%
Weighted average interest rate incurred during
the year 12.8% 8.6% 9.3%
Average borrowings were determined based on the amounts outstanding at each
month end. The weighted average interest rate during the year was computed
by dividing actual interest by average borrowings outstanding during each of
the years.
The convertible promissory notes of $1,500,000 are due March 15, 1998, and
bear interest at the prime rate and are convertible at the option of the
holder into shares of the Company's common stock at a per share conversion
price of $2.00, subject to certain anti-dilution provisions, for a total of
750,000 shares of common stock.
23
A total of $1,165,000 of the $1,500,000 promissory notes outstanding were to
related parties, including $1,000,000 to Coral Group and $115,000 to
foundations and trusts associated with and family members of Donald L. Lucas.
Yuval Almog, Chairman of the Company's Board of Directors, is Managing
Partner of Coral Group, Inc. Donald L. Lucas is a member of the Company's
Board of Directors.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities at March 31, 1995, and 1994, consist
of the following (in thousands):
1995 1994
- ----------------------------------------------------------------------------
Trade accounts payable $1,743 $4,643
Taxes other than income tax 330 350
Accrued reorganization costs 1,297 1,511
Other 3,032 1,148
- ----------------------------------------------------------------------------
$6,402 $7,652
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
NOTE 7 - INCOME TAXES:
Pretax income (loss) from continuing operations consisted of (in thousands):
1995 1994 1993
- -------------------------------------------------------
Domestic $(1,624) $(8,910) $ 721
Foreign 83 109 (150)
- -------------------------------------------------------
Total $(1,541) $(8,801) $ 571
- -------------------------------------------------------
- -------------------------------------------------------
The provisions for taxes on income from continuing operations consist of (in
thousands):
1995 1994 1993
- -------------------------------------------------------
Current:
U.S. Federal $ -- $ -- $--
State 74 73 40
Foreign 66 48 --
- -------------------------------------------------------
Total $140 $121 $40
- -------------------------------------------------------
Deferred:
U.S. Federal $ -- $ -- $--
State -- -- --
Foreign -- -- --
- -------------------------------------------------------
Total $ -- $ -- $--
- -------------------------------------------------------
Total Provision $140 $121 $40
- -------------------------------------------------------
- -------------------------------------------------------
24
The income tax provision (benefit) on income (loss) differs from the amount
obtained by applying the federal statutory rate because of the following
items:
1995 1994 1993
- -----------------------------------------------------------------------------
Statutory rate (35.0)% (35.0)% 34.0%
State income tax, net of federal tax effect 4.8 0.8 7.0
Amortization of intangible assets relating to
acquired businesses 18.7 2.1 17.9
Losses producing no current tax benefit 16.3 32.9 --
NOL used to offset income -- -- (57.1)
Other, net 4.2 0.6 5.2
- -----------------------------------------------------------------------------
Effective rate 9.0% 1.4% 7.0%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. These temporary differences are determined
in accordance with SFAS No. 109 and are more inclusive in nature than "timing
differences" as determined under previously applicable accounting principles.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1995 and 1994 are as
follows (in thousands):
1995 1994
---------------------- ----------------------
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
- -----------------------------------------------------------------------------------------
Product enhancements $ -- $1,756 $ -- $1,582
Deferred rent 67 -- 146 --
Reserves 1,171 -- 1,154 --
NOL not utilized 6,593 -- 5,712 --
Tax credits not utilized 1,218 -- 1,271 --
- -----------------------------------------------------------------------------------------
9,049 1,756 8,283 1,582
Valuation allowance (7,293) -- (6,701) --
------- ------ ------- ------
Total deferred taxes $1,756 $1,756 $1,582 $1,582
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
As of March 31, 1995, the Company had investment and business tax credit
carryforwards of $161,000 and $1,057,000, respectively for both financial
statement and federal income tax purposes. In addition, the Company has net
operating losses available for offset against future taxable income of
$16,640,000 for federal income tax, $15,817,000 for federal alternative
minimum tax, and $4,646,000 for tax purposes for the primary State taxing
authority.
25
In addition, the Company received net operating loss carry forwards in the
acquisition of Redshaw of $3,220,000 for regular tax and $3,103,000 for
alternative minimum tax. The Company received net operating loss
carryforwards in the merger of Continental of $430,000 for federal income tax
purposes. The utilization of these net operating losses could be limited due
to the change in ownership of the acquired companies.
Federal net operating loss carryforwards and a substantial portion of
investment and other business tax credits will begin to expire after 1997,
becoming fully expired by the year 2010 if not offset against future taxable
income.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
Leases - The Company leases office space under non-cancelable operating
leases with expiration dates ranging through 2000, with various renewal
options. Other operating leases range from three to five years and are
primarily for computer equipment.
The aggregate minimum annual lease payments under leases in effect on March
31, 1995 are set forth below (in thousands) as follows:
- ----------------------------------------------------------------------
Capital Operating
Fiscal Year Ending Leases Leases
- ----------------------------------------------------------------------
1996 $ 128 $2,544
1997 54 1,911
1998 46 1,734
1999 30 1,429
2000 2 378
- ----------------------------------------------------------------------
Total minimum lease commitments $ 260 $7,996
------
Less: amount representing interest (36)
- ------------------------------------------------------
Present value of obligations under capital
leases 224
Less: current portion (110)
- ------------------------------------------------------
Long-term obligations under capital leases $ 114
- ------------------------------------------------------
Rental expense covering the Company's office facilities and equipment for the
fiscal years 1995, 1994 and 1993 aggregated $2,778,000, $2,901,000 and
$2,849,000, respectively.
Noncompetition Agreements - The Company entered into various noncompetition
agreements with the shareholders of McCracken Computer, Inc., purchased in
January, 1991, which expire over a period of 5 to 10 years. These agreements
require the Company to make payments
26
totaling $4,700,000 to the McCracken shareholders over six years of which
$3,636,000 has been paid to date. Future installments of $664,000 are due on
the January, 31, anniversary date of the acquisition in 1996 and $400,000 in
1997. Noncompetition Agreements entered with the shareholders of other
acquisitions require a total of $87,500 to be paid through December, 1996.
Commitments related to the noncompetition agreements are amortized and
expensed ratably over the life of each agreement.
Contingencies - The Company is involved in certain legal actions and claims
arising in the ordinary course of its business. It is the opinion of
management and legal counsel that such litigation and claims will be resolved
without a material effect on the Company's future results of operations or
its financial position.
NOTE 9 - SUBORDINATED CONVERTIBLE DEBENTURES:
In connection with the acquisition of Redshaw on December 16, 1991, the
Company issued $3,000,000 face value, $2,542,000 discounted carrying value,
of subordinated convertible debt to shareholders of Redshaw. The notes were
converted into 30,000 shares of the Company's Series B Preferred Stock in
September, 1992, as approved by the Company's stockholders in August, 1992.
In connection with the acquisition of Insurnet on December 30, 1993, the
Company issued $5,000,000 face value, $2,750,000 discounted carrying value,
of subordinated convertible debt to shareholders of Pacific Insurance
Company. The note bears interest at the rate of 6%, for an effective annual
interest rate of 11%, and is convertible into shares of a new series of the
Company's preferred stock, to be designated Series E Preferred Stock, at the
option of the Company. The Company is in the process of converting the note
into Series E Preferred Stock.
The Series E Preferred Stock includes a cumulative 6% annual dividend from
the date of issuance, payable in shares of Company Common Stock. The Series
E Preferred Stock would be convertible into shares of Company Common Stock at
the option of the holder not earlier than June 30, 1996, and would
automatically convert into shares of Company Common Stock on December 30,
1998. Each share of Series E Preferred Stock would be convertible into a
number of shares of Common Stock of the Company as determined by dividing
$84.745 plus any accrued and unpaid dividends on the Series E Preferred Stock
at the time of conversion by a conversion price equal to the average of the
closing prices of the Common Stock of the Company for the thirty trading days
immediately prior to such conversion (the "Conversion Price"). The Conversion
Price is subject to a minimum of $8.00 per share and maximum of $4.00 per
share (as adjusted for certain events). Using the applicable trading value as
of March 31, 1995, and assuming conversion of the Subordinated Note on that
date, the Subordinated Note would have converted into 63,426 shares of Series
E Preferred Stock and would have been convertible into 1,343,750 shares of
Company Common Stock as of that date. The Series E preferred stock would be
convertible at the holder's option on June 30, 1996, into a maximum of
approximately 1,437,500 shares of Company Common Stock, based on the maximum
Conversion Price outlined above. The actual Conversion Price at the time of
the conversion will be determined based on the average of the closing prices
of the Common Stock of the Company for the thirty trading days immediately
prior to such conversion, subject to the maximum and minimum conversion
prices outlined above.
27
NOTE 10 - PREFERRED STOCK:
Series A Preferred Stock - During May, 1991, and January, 1993, the Company
issued and sold in two private placements 9,945 and 6,632 shares,
respectively, of its Series A Preferred stock par value of $.10 per share for
a total of $2,249,559 and $1,500,138, respectively. The preferred stock was
convertible by its holders at $4.35 per share into 862,000 shares of common
stock of the Company not earlier than two years subsequent to its issuance
and automatically converts to common stock three years after its issuance.
The preferred stock includes voting rights equivalent to the number of common
shares into which the preferred stock is convertible; certain registration
rights on the common stock into which the preferred stock is converted; and
certain anti-dilution covenants. No dividends are required under the terms
governing the preferred stock. Issuance costs related to the sales of
preferred stock totaled $35,000 in May, 1991, and $12,000 in January, 1993.
The issuance of the Series C Preferred Stock on December 23, 1993, caused an
adjustment in the conversion price of the Company's Series A Preferred Stock
down to the conversion price of the Series C Preferred Stock. The issuance
of the Company's convertible promissory notes in March, 1994 caused an
additional adjustment in the conversion price of the Series A Preferred Stock
down to $2.00.
During May, 1994, the holders of the Company's Series A Preferred Stock
exchanged such preferred stock for an equal number of shares of the Company's
Series D Preferred Stock. The exchange was effected pursuant to agreements
entered into in connection with the Company's issuance of the Series C
Preferred Stock. The terms of the Series D Preferred Stock are substantially
similar to those of the Series A Preferred Stock but do not require the
conversion of the Series D Preferred Stock into common stock at a specified
date. The Series A Preferred Stock was, by its terms, forced to convert to
common stock on May 24, 1994.
Series B Preferred Stock - In connection with the acquisition of Redshaw on
December 16, 1991, 31,950 shares of the Company's Series B Preferred Stock
were issued to shareholders of Redshaw. In September, 1992, the Company's
subordinated convertible debentures were converted into 30,000 shares of the
Company's Series B Preferred Stock. The 61,950 shares of Series B Preferred
Stock became convertible into common stock at the option of the holder after
December 12, 1994, and automatically convert into common stock on December
13, 1995.
On December 16, 1994, the holders of 52,745 shares of the Company's Series B
Preferred Stock converted that stock into 879,083 shares of Common Stock.
The number of shares of common stock issuable on conversion of each share of
Series B Preferred Stock is determined by dividing $100 by the average daily
closing price of the common stock for the 30 trading days prior to
conversion, however, not less than $6 per share. The maximum number of
shares of common stock issuable on conversion of the remaining Series B
Preferred Stock will be 153,417. The Series B Preferred Stock has no voting
rights except as mandated by Delaware law and except that approval of the
holders of more than 66 2/3 percent of the shares of Series B Preferred Stock
is required for certain amendments to the Company's Certificate of
Incorporation, reclassifications, re acquisitions of junior shares and
increases in the authorized number of shares of Series B Preferred Stock.
28
Series C Preferred Stock - On December 23, 1993, the Company issued 36,268
shares of its Series C Preferred Stock. Each share was sold for $100 per
share and had an initial conversion price into common Stock of $3.05058.
Such shares were sold to a group of accredited investors for cash in the
amount of $1,750,000 and for the conversion of $1,750,000 principal amount of
notes payable plus accrued interest of approximately $127,000 owed by the
Company. Issuance costs related to the sale of the Series C Preferred Stock
totaled approximately $57,000.
The issuance of the Company's convertible promissory notes in March, 1994,
caused an adjustment in the conversion price of the Company's Series C
Preferred Stock down to $2.00. The effect of such adjustment is that the
Series C will be convertible into 1,813,400 shares of Common Stock.
NOTE 11 - CONTINGENT ISSUANCES OF COMMON STOCK
In connection with the Company's acquisition of Mountain States, the
shareholders of Mountain States had the opportunity to earn additional
consideration based upon growth in sales of Mountain States software products
in the fiscal year beginning April 1, 1994. Per the terms of this agreement,
a cash payment of $135,135 and an additional 339,280 shares of Common Stock
were issued on May 25, 1995, to the former shareholders of Mountain States.
The 311,320 shares of common stock issued for the acquisition of Mountain
States was subject to a potential upward adjustment of an additional 63,680
shares, for a total of 375,000 shares, depending upon the average daily
closing price of the Company's common stock for the twelve month period
following the closing date of the acquisition. The additional 63,680 shares
were issued December 16, 1994.
The 103,563 shares of common stock issued in the acquisition of Insurnet is
subject to a potential upward adjustment of an additional 21,437 shares, for
a total of 125,000 shares, within two years of the Insurnet acquisition.
This adjustment is contingent upon the price of the Company's common stock if
sold by the Pacific Insurance Company within two years of the sale of
Insurnet to the Company.
NOTE 12 - COMMON STOCKHOLDERS' EQUITY:
Stock Options - The Company has a stock incentive plan which provides for the
granting of 3,000,000 stock options and stock appreciation rights to
officers, directors and employees. Options granted under the program may be
incentive stock options as defined under current tax laws or nonstatutory
options. Options are granted at prices determined by the Board of Directors
(not less than 100 percent of the market price of the stock at the time of
grant and 110 percent with respect to incentive stock options granted to
optionees who own 10 percent or more of the Company's stock). Stock options
under this plan generally become exercisable in 25 percent increments
maturing on each of the first through fourth anniversaries of the date of
grant. All options must be exercised within ten years of the date of grant
(with respect to incentive stock optionees owning 10 percent or more of the
Company's stock, the term may be no longer than five years). No stock
appreciation rights are outstanding.
29
The Company has granted nonstatutory options outside the stock incentive plan
to purchase up to an aggregate of 95,000 shares. These options are granted at
prices determined by the Board of Directors (no less than 100 percent of the
market price). The options have various vesting periods and must be
exercised within seven to ten years of the date of the grant.
Information with respect to the Company's stock options is as follows:
Within Plan Outside Plan
----------- ------------
Shares Shares
Under Option Under Option
Option Prices Option Prices
- ---------------------------------------------------------------------------------
Balance, March 31, 1992 834,619 $2.50-$7.00 373,167 $2.50-$6.78
Granted 248,700 6.00-6.75 259,000 5.75-7.25
Exercised (106,186) 2.50-6.75 (125,389) 2.50
Canceled (183,950) 5.75-7.00 -- --
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Balance, March 31, 1993 793,183 $2.50-$6.88 506,778 $2.50-$7.38
Granted 245,500 4.88-5.50 20,000 4.75
Exercised (17,000) 2.50-5.75 -- --
Canceled (385,538) 2.50-6.88 (198,750) 6.00-7.38
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Balance, March 31, 1994 636,145 $2.50-$6.88 328,028 $2.50-$7.38
Granted 1,326,173 0.78-1.13 20,000 0.78
Exercised --
Canceled (533,937) 6.875-1.00 (253,028) 7.34-2.50
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Balance, March 31, 1995 1,428,381 $0.78-$6.75 95,000 $7.38-$0.78
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Exercisable at March 31,
1995 119,208 $6.75-$2.50 56,662 $4.75-$7.38
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Available for Grant at
March 31, 1995 941,783 -- -- --
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
30
Stock Purchase Plan - In July, 1989, the Company established a stock purchase
plan for eligible employees. Employees may subscribe up to 10 percent of
their compensation to purchase the Company's common stock at the lower of 85
percent of the fair market value at the date of grant or 85 percent of the
fair market value six months after the date of grant. Shares subscribed to
must be exercised one year after the date of grant or are canceled. The
Company has reserved 200,000 shares of common stock for the plan. New
subscriptions were granted by the Company to eligible employees on August 1,
1994. If fully exercised, the 142,942 shares remaining under the plan would
be issued. These shares are due to be exercised on July 31, 1994.
Stock Warrants - In connection with the Delphi/CIGNA Property and Casualty
Agency Division of the CIGNA Property and Casualty Insurance Group of the
Insurance Company of North America ("CIGNA") Agreement entered into in June,
1988, CIGNA received a warrant to acquire up to 250,000 shares of the
Company's common stock for $7.50 per share, subject to adjustment, prior to
expiration of the warrant on January 31, 1996.
In connection with its line of credit agreement renewal with its bank in
December, 1994, the Company agreed to issue to the bank a five-year warrant
option to purchase 375,000 shares of common stock, at a price of $3.50 per
share.
In connection with its line of credit agreement with its bank in May, 1992,
the Company agreed to issue warrants to the bank to purchase up to 75,000
shares of the Company's common stock over a five year term at the fair market
value of the common stock on the date of grant of $6.75 per share.
NOTE 13 - CASH OPTION PROFIT SHARING PLAN AND TRUST:
Effective January 1, 1988, the Company adopted and implemented a 401(k) Cash
Option Profit Sharing Plan which allows employees to contribute part of their
compensation to the Profit Sharing Plan and Trust, on a pre-tax basis. The
Company is under no obligation to contribute to the Plan. For the fiscal
years ending March 31, 1995, 1994, and 1993, the Company did not make any
contributions to the plan.
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Delphi Information Systems, Inc.
We have audited the accompanying consolidated balance sheets of Delphi
Information Systems, Inc. (a Delaware Corporation) and subsidiaries as of
March 31, 1995, and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended March 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amount and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delphi Information Systems,
Inc. and subsidiaries as of March 31, 1995, and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended March 31, 1995, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not a
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
May 24, 1995
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding directors of the Company required by this
item is incorporated by reference to the Company's definitive proxy statement
relating to its August 29, 1995, Annual Meeting of Stockholders under the
captions "Election of Directors" and "Compliance with SEC Filing
Requirements" which will be filed with the Securities and Exchange Commission
within 120 days after March 31, 1995.
The executive officers and senior management of the Company are as
follows:
Name Age Position
- ---- --- --------
M. Denis Connaghan 45 President, Chief Executive Officer
Gustavus J. Esselen 39 Executive Vice President
John R.Sprieser 47 Sr. Vice President, Chief Financial Officer, Secretary
Michael J. Marek 36 Corporate Controller
The executive officers of the Company are elected annually by the Board.
M. Denis Connaghan joined the Company in July, 1994, as Executive Vice
President and Chief Operating Officer. In August, 1994, Mr. Connaghan was
promoted to President, and in November, 1994, to Chief Executive Officer.
From February, 1991, to June, 1994. Mr. Connaghan was with IBAX Healthcare
Systems, most recently as Vice President, Technology and Business Unit
General Manager. IBAX was a joint venture between IBM and Baxter in the
development and marketing of computerized solutions to healthcare providers.
From May, 1978, to February, 1990, Mr. Connaghan held a number of managerial
and executive positions with Pansophic Systems, Inc., a publicly held
computer software company.
Gustavus J. Esselen, an Executive Vice President of the Company, is
responsible for the global sales and marketing operations of the Company.
Mr. Esselen has also been responsible for management of the Insight product
operations of the Company since their acquisition in January 1991, including
various sales and marketing, service, development and administrative
functions. Mr. Esselen, a significant shareholder of the Company, served as a
director of the Company from February, 1991, to September, 1993. Formerly,
Mr. Esselen was the senior sales and marketing executive for McCracken
Computer Inc.
33
John R. Sprieser joined the Company as Senior Vice President, Chief
Financial Officer & Secretary, in January, 1995. He is responsible for all
financial, administrative and internal information systems of the Company.
Previously, Mr. Sprieser was Senior Vice President-Finance of IDC Services,
Inc., which provides data processing and market research services principally
to producers of filmed entertainment and broadcast commercials, from January,
1989, to January, 1995. From November 1986, to December, 1988, Mr. Sprieser
was Vice President-Finance of Longman Group USA, Inc., a U.S. subsidiary of
Pearson p/c, a U.K.-based publisher of books and software. Mr. Sprieser is a
Certified Public Accountant.
Michael J. Marek joined the Company as Corporate Controller in April,
1993. From April, 1992, to April, 1993, Mr. Marek was Director of Finance
for Bang & Olufsen of America, Inc., the U.S. subsidiary of a European-based
electronic component manufacturer. From November, 1991, to April, 1992, Mr.
Marek was an independent financial consultant. From September, 1990, to
November, 1991, Mr. Marek was Director of Financial Reporting for Pansophic
Systems, Inc., a publicly held computer software company. From October,
1986, to September 1990 Mr. Marek held various positions with Applied
Learning International, Inc., a subsidiary of National Education Corporation,
most recently as U.S. Controller. Mr. Marek is a Certified Public Accountant.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing
under the caption "Compensation of Directors and Executive Officers" in the
Company's proxy statement for its August 29, 1995, Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after March 31, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information appearing
under the captions "Security Ownership of Management" and "Principal
Stockholders of Delphi" in the Company's proxy statement for its August 29,
1995, Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after March 31, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information appearing
under the captions "Compensation of Directors and Executive Officers" in the
Company's proxy statement for its August 29, 1995, Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after March 31, 1995.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements and supplementary data
of the Company and its subsidiaries, required by Part II, Item 8 are
filed herewith:
- Report of Independent Public Accountants
- Consolidated Balance Sheets as of March 31, 1995, and 1994
- Consolidated Statements of Operations for the Years Ended March 31,
1995, 1994, and 1993
- Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1995, 1994, and 1993
- Consolidated Statements of Cash Flows for the Years Ended March 31,
1995, 1994, and 1993
- Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENTS.
The following financial statement schedule is filed herewith:
Schedule II - Valuation and Qualifying Accounts for the Years Ended
March 31, 1995, 1994, and 1993.
Schedules other than those listed above have been omitted because they
are not applicable or the required information is included in the
financial statements or notes thereto.
(b) EXHIBITS
2.2 Agreement for purchase and sale of stock of Insurnet, Incorporated among
the Continental Corporation, Pacific Insurance Company, Insurnet,
Incorporated and the Company (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K for December 30, 1993, and incorporated herein
by reference).
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1991, and incorporated herein by reference).
3.2 Certificate of Designations of Series B Preferred Stock filed with the
Secretary of State of the State of Delaware on December 11, 1991, (filed
as Exhibit 4.1 to the Company's Current Report on Form 8-K for December
16, 1991, and incorporated herein by reference).
35
3.3 Certificate of Designations of Series C Preferred Stock filed with the
Secretary of State of Delaware on December 21, 1993, (filed as Exhibit
4.1 to the Company's Current Report on Form 8-K for December 23, 1993,
and incorporated herein by reference).
3.4 Certificate of Designations of Series D Preferred Stock filed with the
Secretary of State of Delaware on May 20, 1994.
3.5 Bylaws of the Company, as amended (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (No. 33-14501) and incorporated herein
by reference).
4.1 Loan and Security Agreement dated June 8, 1993, between the Company and
Silicon Valley Bank (filed as Exhibit 4.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1993, and incorporated
herein by reference).
4.2 Registration Rights Agreement dated as of January 31, 1991, among the
Company, Frank H. McCracken and Gustavus Esselen (filed as Exhibit 4.3
to the Company's Registration Statement on Form S-1 (No. 33-57680) and
incorporated herein by reference).
4.3 Registration Rights Agreement dated as of January 31, 1991, between the
Company and The Chubb Corporation (filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (No. 33-45153) and incorporated
herein by reference).
4.5 Registration Rights Agreement dated as of March 1, 1993, among the
Company and David J. Jordan, Karen E. Jordan, Kenneth M. Johnson and
James H. Potter (filed as Exhibit 4.5 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1993, and incorporated
herein by reference).
4.6 Investors' Rights Agreement of the Company's Series C Preferred Stock
dated as of December 21, 1993.
4.7 Registration Rights Agreement dated as of December 30, 1993, between the
Company and Pacific Insurance Company.
4.8 Registration Rights Agreement dated as of December 10, 1993, between the
Company and Phil Frandsen and Brenda Frandsen.
4.9 Investors' Rights Agreement of the Company's Convertible Promissory
Notes dated as of March 15, 1994.
4.10 Promissory Note due June 30, 1996, dated as of December 30, 1993, to the
order of Pacific Insurance Company.
4.11 Promissory Note due June 30, 1994, dated as of December 30, 1993, to the
order of Pacific Insurance Company.
4.12* Amended schedule to Loan and Security Agreement dated December 21, 1994,
between the Company and Silicon Valley Bank.
36
MANAGEMENT CONTRACTS AND COMPENSATION PLANS AND ARRANGEMENTS
10.1 Delphi Information Systems, Inc. 1983 Stock Incentive Plan,
as amended (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 33-45153) and
incorporated herein by reference).
10.2 Delphi Information Systems, Inc. Cash Option Profit Sharing
Plan (filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (No. 33-19310) and incorporated herein
by reference).
10.3 Delphi Information Systems, Inc. 1989 Stock Purchase Plan
(included in the prospectus filed as part of the Company's
Registration Statement on Form S-8 (No. 33-35952) and
incorporated herein by reference).
10.4 Delphi Information Systems, Inc. Non-Qualified Stock Option
Plan for Directors (filed as Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1992, and incorporated herein by reference).
10.9 Agreement for Authorized Dealers and Industry Remarketers
between the Company and International Business Machines
Corporation, as amended (filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (No. 33-45153)
and incorporated herein by reference).
10.10 Stock Purchase Warrant dated June 5, 1992, issued by the
Company to Silicon Valley Bank, and related Registration
Rights Agreement (filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (No. 33-45153) and
incorporated herein by reference).
10.13 Stock Purchase Warrant, dated as of June 30, 1988, between
CIGNA and the Company (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K for July 6, 1988, and
incorporated herein by reference).
10.16 Amendment #1 dated June 29, 1990, to the Stock Purchase
Warrant between CIGNA and the Company (filed as Exhibit 10.8
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1990, and incorporated herein by
reference).
10.17 Lease between the Company and Westlake Renaissance Court
for office space in Westlake Village, California, as amended
(filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (No. 33-14501) and incorporated herein
by reference).
10.18 Lease dated April 17, 1986, between Mortimer B. Zuckerman
and Edward H. Linde, as Trustees, as Landlord and McCracken
Computer Inc., as Tenant, relating to premises at 10-20
Burlington Mall Road, Burlington, Massachusetts, as amended
(filed as Exhibit 10.22 to the Company's Form S-1
Registration Statement (No. 33-45153) and incorporated
herein by reference).
37
10.23* Employment agreement dated July 7, 1994, between the
Company and M. Denis Connaghan.
10.24* Employment agreement dated January 31, 1995, between the
Company and John R. Sprieser.
10.25* Severance Compensation Agreement dated October 19, 1994,
between the Company and David J. Torrence.
10.26* Form of Stock Purchase Warrant between the Company and
Silicon Valley Bank.
22.1 The subsidiaries of the Company and State of incorporation.
27.1* Financial Data Schedule.
99.1* Information, Financial Statements, and Exhibits required
by Form 11-K in accordance with Rule 15d-21 under the
Securities Exchange Act of 1934.
- ------------------
* Filed herewith
(c) Reports on Form 8-K
-------------------
None.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DELPHI INFORMATION SYSTEMS, INC.
(Registrant)
By /s/ M. Denis Connaghan
----------------------------
M. Denis Connaghan, President
Date: June 27, 1995
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Yuval Almog Chairman of the Board June 27, 1995
- ----------------------
(Yuval Almog)
/s/M. Denis Connaghan Director, President and June 27, 1995
- ---------------------- Chief Executive Officer
(M. Denis Connaghan)
/s/John R. Sprieser Senior Vice President, June 27,1995
- --------------------- Finance and Administration,
(John R. Sprieser) Chief Financial Officer and
Corporate Secretary
/s/Michael J. Marek Corporate Controller June 27, 1995
- ---------------------
(Michael J. Marek)
39
/s/Donald L. Lucas Director June 27, 1995
- ----------------------
(Donald L. Lucas)
/s/Larry G. Gerdes Director June 27, 1995
- ----------------------
(Larry G. Gerdes)
/s/Richard R. Janssen Director June 27, 1995
- ----------------------
(Richard R. Janssen)
40
SCHEDULE II
-----------
DELPHI INFORMATION SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993
Allowance for doubtful accounts receivable.
March 31, March 31, March 31,
1995 1994 1993
---- ---- ----
Beginning Balance $1,000,000 $735,000 $1,188,000
Provisions for Allowance 396,000 547,000 179,000
Write Off of Accounts Receivable
Against Allowance (847,000) (664,000) (632,000)
Allowance Acquired in Acquisitions 138,000 382,000 --
---------- --------- ---------
$ 687,000 $1,000,000 $735,000
---------- ---------- ---------
---------- ---------- ---------
41