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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, 1996
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 (I.R.S. Employer
of incorporation) Identification Number)
3501 Algonquin Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (847) 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 NASDAQ SmallCap Market
$0.10 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file 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, 1996, the number of shares of Common Stock outstanding was
29,849,724. 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 $61,565,000.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement relating to its 1996
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 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 36
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial
Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 38
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Delphi is a leading provider of business application software and services
for independent property and casualty insurance agencies, brokerages, managing
general agents and insurance companies in the United States and Canada. Delphi
develops, markets and supports software products that automate the operations of
independent agents. The Company also has developed and markets an application
system that integrates its application software products with other database
products to help its customers manage their information needs.
For fifteen years Delphi has provided application software solutions to
large property and casualty agencies. In 1990, to meet the changing industry
dynamics, Delphi began pursuing a strategy of obtaining market share through the
acquisition of other application software businesses.
Delphi's customer list includes a majority of the largest 100 brokerages
and top 200 agencies in the United States and Canada, and provides a base for
the introduction of new products and services. Delphi'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.
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 (847) 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
Delphi has begun combining the complementary strong features of the six
software products into one "best breed" software system, currently called
"Common Delphi," that will serve as the front-end of Delphi's total business
solution strategy. Common Delphi is intended to increase customer satisfaction
through a comprehensive feature set and to lower Delphi's cost of research and
development, marketing, and customer support by eliminating multiple systems.
The first version of Common Delphi is currently in beta test.
3
On September 16, 1995 Delphi Information Systems and IBM Corporation
announced a strategic industry alliance under which they will jointly market in
the distribution segment of the insurance industry. Delphi and IBM will work
together to deliver turnkey solutions built upon Delphi's new generation of
agency management systems and IBM's hardware, software, and service offerings.
This alliance will facilitate the integration of Lotus Notes and DB2 with
Delphi's products.
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 400 terminals, smaller systems can
accommodate less than 10 users. No individual customer represented more than
10% of total revenues in fiscal 1996, 1995, or 1994.
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 the customers
who desire specific assistance or enhancement of their systems.
Delphi historically has been a vendor of hardware but is in the process of
exiting that business. Profit margins in the computer hardware business are
slim and declining. Delphi has signed an agreement to outsource the hardware
function, allowing Delphi to remain a full service provider while improving the
level of customers' satisfaction with their computer hardware. In addition, the
agreement provides for commission payments to Delphi for both computer hardware
sales and hardware maintenance agreements, allowing Delphi to receive high
margin revenue from hardware sales.
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
4
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.
PRODUCT DEVELOPMENT. At the end of fiscal 1996, the Company employed 96
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.
Product development expenditures prior to capitalization of software were
$6,486,000, $6,550,000 and $6,251,000 in fiscal 1996, 1995 and 1994,
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.
PROPRIETARY RIGHTS. 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
5
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, 1996, the Company employed 326 persons, including
53 in sales and marketing, 96 in product development, 152 in customer service
and operations, and 25 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.
ITEM 2. PROPERTIES
All of the Company's office facilities are leased. 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, 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.
Also, the Company leases 11,000 square feet of space in East Lansing, Michigan,
which the Company plans to sublet on or about April 1, 1997. 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 9 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
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1996.
6
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, 1996, there were 358 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, 1996.
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
FISCAL 1996 HIGH LOW
----------- ---- ---
First quarter $ 2.38 $ 0.88
Second quarter 3.13 2.00
Third quarter 2.63 0.88
Fourth quarter 1.50 0.69
7
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
RESULTS OF OPERATIONS:
Revenues $ 44,081 $ 53,040 $ 53,605 $ 51,607 $ 44,605
Operating (loss) income (11,120) (597) (8,160) 947 (8,684)
Net (loss) income $ (11,833) $ (1,681) $ ( 8,922) $ 531 $ (9,064)
EARNINGS PER SHARE:
Net (loss) income $ (1.37) $ (0.23) $ (1.34) $ 0.07 $ (1.53)
Shares used in computing per
share data (1) 8,621 7,306 6,672 7,897 5,922
FINANCIAL POSITION:
Assets $ 20,389 $ 27,547 $ 31,947 $ 24,735 $ 24,232
Short term debt 3,030 2,486 4,029 3,574 867
Long term debt 1,500 4,250 4,125 -- 2,454
Stockholders' equity (deficit) $ (3,346) $ 4,553 $ 6,231 $ 9,727 $ 3,718
(1) Weighted average common and common equivalent shares, where applicable,
were used to compute per share data in all periods.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The insurance industry has experienced major consolidation and
restructuring driven by slower premium growth and tighter margins. Industry
participants historically have been fragmented and poorly integrated, leading to
the inefficient delivery of high cost, high price products and services. The
Company's management believes that the insurance industry will experience
significant changes during the next two to three years in order to remedy these
deficiencies. These changes may create opportunities for innovation in
products, services and process automation.
The role of the independent agency distribution system has changed little
until recently. Historically, buyers of insurance purchased insurance
protection from an independent agent who secured policies directly from an
insurer. While the method of distribution and the details of the policy have,
over time, increased in complexity, certain fundamental activities of a
traditional insurance transaction have remained constant. The agent served
primarily as the sales arm in the process, and insurer as the risk bearer, who
typically performed risk analysis and pricing functions. The agent was also
primarily responsible for servicing the customer and providing risk management
and consulting services.
Company management believes that the insurance industry in the future is
likely to be characterized by industry automation efforts as opposed to separate
insurance company automation and independent agency automation. This industry
automation solution may well connect many insurance industry participants
electronically and integrate the workflow across different enterprises through
computer networks. Industry wide team computing would allow both improved
efficiency and marketing innovation.
The Company believes that major efficiencies will be gained in the property
and casualty distribution network. Replacing paper-based transactions with
electronic integration solutions should enable all participants -- carriers,
wholesalers, independent agencies, information providers, and the insured -- to
decrease the cost of entering information for new policies, renewals,
endorsements and inquiries. Electronic integration also reduces errors and
improves response time. The Company believes that computer software/information
services are likely to replace transfer of information between independent
agencies and insurance carriers by mail, facsimile, by telephone, or by
dedicated terminals supplied by carriers.
The Company's strategy is to expand its market from that of the agency
automation vendor to industry automation solution provider. Delphi also intends
to attempt to shift its revenue base from annual license fees to transaction
based revenue and fee based services. The focus will include, in addition to
the Company's historical base, adding efficiency to independent agencies and
adding quality and value to the entire insurance distribution system. Delphi
intends to develop and provide products and services aimed at providing
automation through the entire property and casualty insurance distribution
network.
The Company's success and profitablity will be dependent on its ability to
develop a new application system product which is compatible with its existing
products as well as its ability to strategically shift its business from selling
computer hardware and application software to
9
becoming a provider of outsourced processing services. In addition, the Company
continually must develop product enhancements and new products that keep pace
with continuing changes in computer hardware and software technology and satisfy
the needs of its customers. The Company is developing a new application system,
Common Delphi, which is currently in beta testing. To a significant extent, the
Company's future operating results will be dependent upon the success of this
product. While the Company has identified several of the outsourcing services
that it intends to provide, none of these service offerings has been developed
or is ready for marketing. There can be no assurances that the Company will be
successful in adequately addressing changing technologies, that it can introduce
services and products to the marketplace on a timely basis, or that its new
services and new or enhanced products will be successful in the marketplace on
timely basis, or that its new services and new or enhanced products will be
successful in the marketplace. Any failure to successfully introduce such
services and products will materially impact the Company's existing business and
its future profitability.
The Company has experienced losses in each of its last two years and in each
quarter of the current fiscal year. The Company attributes these losses
primarily to a soft market, or possibly a changed market, for insurance agency
automation equipment by reason of the relatively lower profitablity of
independent agencies during the last three years as compared with earlier
periods, industry-wide consolidation and customer dissatisfaction with certain
products and their concern regarding the Company's financial statements. The
Company has taken steps to reduce costs, strengthen its management and improve
its product offering so as to be in a position to achieve profitability as
market conditions improve, but no assurances can be given that those steps will
be successful and help the Company achieve profitability. The Company cannot
survive continued operating losses indefinitely, and consequently, may be forced
to raise additional funds or further restructure it business.
10
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 1996 Fiscal 1995
-------------------------------------- versus versus
1996 1995 1994 Fiscal 1995 Fiscal 1994
- ------------------------------------------------------------------------------------------------------------------
REVENUES:
Systems 32.8% 39.8% 49.4% (31.6)% (20.3)%
Services 67.2% 60.2% 50.6% (7.2)% 17.8%
- ------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 100.0% 100.0% 100.0% (16.9)% (1.0)%
COSTS OF REVENUES:
Systems 26.3% 26.5% 35.2% (17.3)% (25.6)%
Services 39.1% 33.9% 31.5% (4.1)% 6.4%
- ------------------------------------------------------------------------------------------------------------------
TOTAL COST OF REVENUES 65.4% 60.4% 66.7% (9.9)% 10.5%
- ------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 34.6% 39.6% 33.3% (27.5)% 17.9%
OPERATING EXPENSES:
Product development 11.5% 10.2% 7.4% (6.2)% 36.4%
Sales and marketing 14.6% 12.9% 14.7% (6.4)% (12.6)%
General and administrative 17.4% 14.6% 11.7% (0.8)% 23.0%
Amortization of goodwill,
customer lists and non-
compete agreements 3.4% 3.1% 2.6% (9.7)% 16.5%
Consolidation, repositioning
and restructuring charges 13.0% -- 12.1% * (100.0)%
- ------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 59.9% 40.8% 48.5% 21.9% (16.8)%
- ------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (25.3)% (1.2)% (15.2)% 1762.6% 92.7%
Interest expense 1.4% 1.8% 1.2% (36.5)% 47.3%
- ------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (26.7)% (3.0)% (16.4)% 660.5% (82.5)%
Income tax provision 0.3% (0.3)% 0.2% (18.6)% 15.7%
NET LOSS (27.0)% (3.3)% (16.6)% 603.9% (81.2)%
- ------------------------------------------------------------------------------------------------------------------
* PERCENTAGE HAS BEEN INTENTIONALLY OMITTED BECAUSE SUCH PERCENTAGE IS NOT
MEANINGFUL.
11
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
recongizes revenue consistent with the provisions of the American Institute of
Certified Public Accountants (AICPA) Statement of Position No. 91-1.
Revenues decreased 16.9% in fiscal 1996, and decreased 1% in fiscal 1995. The
decrease in fiscal 1996 was primarily due to decreased sales of system upgrades
to existing customers. The decrease in system sales was the result of several
factors, including increased competitive pressures, an overall decline in both
the cost and resale price of hardware which the Company resold to customers, a
decline in sales force productivity due to reorganization of the sales force,
and a temporary, unforseen complexity in the installation process of certain
advanced features of the Company's latest product releases.
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 80.3%, 66.5% and 71.2% in fiscal 1996,
1995, and 1994, 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 and a decline in margin on the resale of third-
party hardware.
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 58.2%, 56.3% and 62.3% in fiscal 1996, 1995, and 1994,
respectively. In fiscal 1996 the increase was primarily due to short-term non-
variability of the largest component of costs of services revenues, namely
direct labor, during a period when service revenues were declining. 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.
Product Development Expenses - Product development expenses, net of
capitalized software costs, were $5,051,000, $5,384,000 and $3,948,000 in
fiscal 1996, 1995, and 1994, respectively. The decrease in fiscal 1996 is
primarily the result of increased capitalization of software due to increased
outside consulting expenditures for new product development. The increase in
fiscal 1995 is primarily a result of a decrease in the amount of development
spending capitalized due to a greater relative proportion of spending in
product research, combined with an increase in spending levels. Product
development expenditures, including those which were capitalized, were
$6,486,000, $ 6,550,000 and $6,251,000, respectively, in fiscal years 1996,
1995, and 1994.
Sales and Marketing Expenses - Sales and marketing expenses decreased 6.4% in
fiscal 1996, compared to a decrease of 12.6% in fiscal 1995. The decrease in
fiscal 1996 is primarily due to a reduction in the sales force headcount. The
decrease in fiscal 1995 was primarily due to a one-time charge in 1994
associated with the elimination and consolidation of certain expenses.
12
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
decreased 0.8% in fiscal 1996, and increased 23.0% in fiscal 1995. The
decrease in fiscal 1996 was primarily due to a reduction in headcount and
overall spending reductions, partially offset by severance and relocation costs
for certain Company personnel. 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.
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.
Amortization expense decreased 9.7% in fiscal 1996, compared to an increase of
16.5% in fiscal 1995. The decrease in fiscal 1996 is the result of some assets
becoming fully amortized in the current year. The increase in the prior fiscal
year is attributable to the Insurnet and Mountain States acquisitions in
December 1993. The Company follows a policy of periodic 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 $599,000 in fiscal 1996,
compared to $944,000 in fiscal 1995 and $641,000 in fiscal 1994. The decrease
in fiscal 1996 was due to decreased average borrowings compared to the prior
fiscal year. The increase in fiscal 1995 was due to higher interest rates.
Income Tax Provision - The effective tax rates under SFAS No. 109 for fiscal
years 1996, 1995, and 1994, were 1.0%, 9.0% and 1.4%, respectively. Lower than
statutory effective tax rates and tax benefits are due to the operating losses.
Due to the Company's recurring losses, net operating loss carryforwards have
been generated for income tax purposes. The Company continues to provide a
valuation allowance against this and all other net deferred tax assets, thus no
income tax benefit has been recorded. The tax provision relates to certain
state and foreign income taxes.
Liquidity and Capital Resources - Working capital was a negative $11,367,000 at
March 31, 1996, compared to a negative $5,738,000 at March 31, 1995. The
working capital deficit increased during fiscal 1996 as the result of a decrease
in prepaid expenses and other assets due to the amortization and write off of
the short-term portion of noncompete agreements and an increase in deferred
revenue due to a change in the customer support billing cycle from monthly to
quarterly.
13
The Company's negative net working capital position is primarily a result of
deferred revenues of $10,031,000 at March 31, 1996, representing prepaid
maintenance fees from its customers which are recognized as revenue ratably over
the maintenance agreement terms. This liability is satisfied through normal
ongoing operations of the Company's service organization and does not require a
payment to a third party.
Net cash provided by operating activities was $1,094,000, $2,700,000 and
$288,000 for fiscal years ended in 1996, 1995, and 1994, respectively. Although
the Company reported a net loss in fiscal years 1996 and 1995, 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 and the consolidation, repositioning and restructuring
charge.
Cash used in investing activities was $2,028,000, $2,305,000 and $4,362,000 for
the fiscal years ended 1996, 1995, and 1994, respectively.
Cash from financing activities reflects the Company's borrowing and payment
activities on its line of credit, proceeds from the convertible promissory note,
proceeds from the exercise of options under the Company's various stock option
plans and the issuance of preferred stock. In fiscal 1996, the Company raised
$433,000 in cash from the exercise of employee stock options. In fiscal 1995,
the Company received proceeds from the issuance of the remaining $125,000 of the
$1,500,000 of Convertible Promissory Notes, of which $1,375,000 was raised in
fiscal 1994.
The Company had a line of credit agreement with a bank totaling $5 million which
expired on June 5, 1996. Borrowings under the line of credit were generally
limited to 75% of qualified accounts receivable, increasing to 80% for a forty-
five day period each quarter. At March 31, 1996, the Company had borrowed
$2,606,000 on its line of credit, compared to $2,486,000 on March 31, 1995. The
credit agreement required that the Company maintain certain minimum financial
ratios. It also restricted 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 was prime plus 3.5%. At March 31, 1996, $1,438,000 remained available
for borrowing under the line of credit. The Company is currently in active
negotiations to replace the expired line of credit. While the Company expects
to be successful in such negotiations, there can be no assurances that this will
occur. As of the date of expiration, the Company had no borrowings outstanding
under the line of credit.
In May 1996, the Company completed a private equity placement providing gross
proceeds of $10,700,000 to the Company. Under the terms of the placement, the
Company issued 10,700,000 units at a price of $1.00 per unit. Each unit
consisted of one share of common stock and a redeemable warrant to purchase one
share of common stock at an exercise price of $1.50 per share, subject to
certain anti-dilution adjustments. The shares and redeemable warrants
comprising the units are immediately detachable and separately transferable.
The redeemable warrants may be exercised at any time after their date of
issuance for a period of three years. The Company can redeem the redeemable
warrants at any time subsequent to 180 days after the issuance of the redeemable
warrants if the closing bid price for the common stock is above $2.00 per share
for twenty consecutive trading days subsequent to when the redeemable warrants
first are redeemable.
14
The private equity placement provided net proceeds of approximately $9,478,000
to the Company. The proceeds will be used for product research and development,
to strengthen the Company's sales and marketing organization, to reduce debt, to
strengthen working capital, and to continue the consolidation of Delphi's
operations. In addition, the Company may use proceeds to make strategic
investments in complementary businesses.
In conjunction with the equity placement, the Company converted its outstanding
Series C Preferred Stock, Series D Preferred Stock, and Series E Preferred Stock
into 8,747,570 shares of common stock. In addition $1,500,000 in outstanding
promissory notes were converted into 1,500,000 units, identical to those
described above.
The statements contained in this MD&A and elsewhere in this 10K that are not
historical facts are forward-looking statements subject to the safe harbor
created by Private Securities Litigation Reform Act of 1995. A number of
important factors could cause the Company's actual results for 1996 and beyond
to differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in 1995.
Implementation is required in the fiscal year commencing January 1, 1996. SFAS
No. 123 established financial accounting and reporting standards for stock-based
compensation plans. The Company is currently evaluating the impact this
statement will have on the Company's consolidated financial statements.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1996, and 1995, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended March 31, 1996. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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, 1996, and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1996, 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 17, 1996
16
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
AS OF MARCH 31
ASSETS 1996 1995
CURRENT ASSETS: -----------------------
Cash $ 920 $ 877
Accounts receivable, less allowances of $922
and $687, respectively 8,079 7,639
Inventories 592 983
Prepaid expenses and other assets 365 1,424
-------- --------
TOTAL CURRENT ASSETS 9,956 10,923
Property and equipment, net 2,869 3,630
Software development costs, net 4,407 4,389
Goodwill and customer lists, net 1,182 5,284
Purchased software, net 1,845 2,484
Other assets 130 837
-------- --------
TOTAL ASSETS $ 20,389 $ 27,547
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 3,030 $ 2,486
Accounts payable and accrued liabilities 6,823 6,402
Accrued payroll and related benefits 1,439 1,441
Deferred revenue 10,031 6,332
-------- --------
TOTAL CURRENT LIABILITIES 21,323 16,661
Convertible promissory notes 1,500 1,500
Subordinated note payable 0 2,750
Excess lease liability 824 1,445
Other liabilities 88 638
-------- --------
TOTAL LIABILITIES 23,735 22,994
-------- --------
Commitments and contingencies (Note 9)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stocks, $.10 par value, 2,000,000 shares authorized,
Series B, 0 and 9,205 shares issued and
outstanding, respectively 0 780
Series C, 36,268 shares issued and outstanding 3,570 3,570
Seried D, 16,356 shares issued and outstanding 3,655 3,655
Common stock, $.10 par value:
Non-designated, 50,000,000 shares authorized
10,307,700 and 7,979,173 issued and
outstanding, respectively 1,031 798
Additional paid-in capital 23,019 18,507
Accumulated deficit (34,727) (22,894)
Cumulative foreign currency translation adjustment 106 137
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (3,346) 4,553
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 20,389 $ 27,547
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
17
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED MARCH 31 1996 1995 1994
REVENUES: --------------------------------------
Systems $ 14,440 $ 21,100 $ 26,485
Services 29,641 31,940 27,120
-------- -------- --------
TOTAL REVENUES 44,081 53,040 53,605
COSTS OF REVENUES:
Systems 11,601 14,027 18,862
Services 17,238 17,983 16,906
-------- -------- --------
TOTAL COST OF REVENUES 28,839 32,010 35,768
-------- -------- --------
GROSS MARGIN 15,242 21,030 17,837
OPERATING EXPENSES:
Product development 5,051 5,384 3,948
Sales and marketing 6,442 6,879 7,873
General and administrative 7,658 7,718 6,273
Amortization of goodwill, customer lists and
noncompete agreements 1,487 1,646 1,413
Consolidation, repositioning and restructuring charges 5,724 -- 6,490
-------- -------- --------
TOTAL OPERATING EXPENSES 26,362 21,627 25,997
-------- -------- --------
OPERATING LOSS (11,120) (597) (8,160)
Interest expense 599 944 641
-------- -------- --------
Loss before income taxes (11,719) (1,541) (8,801)
Income tax provision 114 140 121
-------- -------- --------
Net loss ($11,833) ($1,681) ($8,922)
-------- -------- --------
-------- -------- --------
Net loss per common share ($1.37) ($0.23) ($1.34)
-------- -------- --------
-------- -------- --------
Weighted average common shares and common share
equivalents outstanding 8,621 7,306 6,672
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
18
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except for shares outstanding)
PREFERRED STOCK
----------------------------------------------------------------------------------------
SERIES A: SERIES B: SERIES C: SERIES D: SERIES E
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1993 16,577 $3,703 61,950 $5,250 -- $ -- -- $ -- -- $ --
----------------------------------------------------------------------------------------
Net loss -- -- -- -- -- -- -- -- -- --
Redshaw acquisition adjustment
Exercise of stock options -- -- -- -- -- -- -- -- -- --
Exercise of options under employee
stock purchase plan -- -- -- -- -- -- -- -- -- --
Issuance of common stock
in conjunction with the
acquisitions of Mountain
Systems International, Inc.
and Insurnet, Inc. -- -- -- -- -- -- -- -- -- --
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 0 0 0 0
----------------------------------------------------------------------------------------
Net loss -- -- -- -- -- -- -- -- -- --
Conversion of Series A, -- -- -- -- -- -- -- -- -- --
Preferred Stock (16,577) (3,703) -- -- -- -- 16,356 3,655 -- --
Conversion of Series B, -- -- -- -- -- -- -- -- -- --
Preferred Stock -- -- (52,745) (4,470) -- -- -- -- -- --
Mountain States' -- -- -- -- -- -- -- -- -- --
acquisition adjustment -- -- -- -- -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 0 0 9,205 780 36,268 3,570 16,356 3,655 0 0
----------------------------------------------------------------------------------------
Net loss -- -- -- -- -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- -- -- -- -- --
Exercise of options under employee
stock purchase plan -- -- -- -- -- -- -- -- -- --
Mountain States'
acquisition adjustment -- -- -- -- -- -- -- -- -- --
Conversion of Note Payable to
Series E Preferred Stock -- -- -- -- -- -- -- -- 63,426 3,125
Conversion of Series B
Preferred Stock -- -- (9,205) (780) -- -- -- -- -- --
Conversion of Series E
Preferred Stock -- -- -- -- -- -- -- -- (63,426) (3,125)
Translation adjustment -- -- -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 0 $0 0 $0 36,268 $3,570 16,356 $3,655 0 $0
----------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL FOREIGN
------------------------ PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
-----------------------------------------------------------------------
BALANCE, MARCH 31, 1993 6,528,369 $653 $12,333 ($12,291) $79
-----------------------------------------------------------------------
Net loss -- -- -- (8,922) --
Redshaw acquisition adjustment 50,687 5 236 -- --
Exercise of stock options 17,023 2 54 -- --
Exercise of options under 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 1,459 -- --
Issuance of Series C
Preferred Stock -- -- -- -- --
Translation adjustment -- -- -- -- 56
-----------------------------------------------------------------------
BALANCE, MARCH 31, 1994 7,011,415 701 14,085 (21,213) 135
-----------------------------------------------------------------------
Net loss -- -- -- (1,681) --
Conversion of Series A,
Preferred Stock 24,995 3 46 -- --
Conversion of Series B,
Preferred Stock 879,083 88 4,382 -- --
Mountain States'
acquisition adjustment 63,680 6 (6) -- --
Translation adjustment -- -- -- -- 2
-----------------------------------------------------------------------
BALANCE, MARCH 31, 1995 7,979,173 798 18,507 (22,894) 137
-----------------------------------------------------------------------
Net loss -- -- -- (11,833) --
Exercise of stock options 121,000 12 64 -- --
Exercise of options under employee
stock purchase plan 255,406 26 333 -- --
Mountain States'
acquisition adjustment 339,280 34 371 -- --
Conversion of Note Payable to
Series E Preferred Stock -- -- -- -- --
Conversion of Series B
Preferred Stock 191,781 19 761 -- --
Conversion of Series E
Preferred Stock 1,421,060 142 2,983 -- --
Translation adjustment -- -- -- -- (31)
-----------------------------------------------------------------------
BALANCE, MARCH 31, 1996 10,307,700 $1,031 $23,019 ($34,727) $106
-----------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
19
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED MARCH 31 1996 1995 1994
---------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss ($11,833) ($1,681) ($8,922)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,434 1,495 1,248
Amortization of capitalized software development costs 1,245 1,128 979
Amortization of purchased software 582 436 --
Amortization of goodwill, customer lists and noncompete agreements 1,487 1,646 1,413
Write off of capitalized software development costs 173 -- 1,878
Write off of goodwill, customer lists, and noncompete agreements 5,017 -- --
Loss on disposal of fixed assets (85) 76 318
Excess lease cost (620) (638) 2,083
Other -- -- 134
CHANGES IN ASSETS AND LIABILITIES NET OF EFFECT OF
ACQUISITION OF BUSINESSES:
Accounts receivable, net (440) 1,876 522
Inventories 391 25 690
Prepaid expenses and other assets (635) (550) (12)
Accounts payable and accrued liabilities 797 (1,250) 262
Accrued payroll and related benefits (2) (48) (141)
Other liabilities and deferred revenue 3,614 183 (220)
---------------------------------------
Net cash provided by operating activities 1,125 2,698 232
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (590) (718) (1,435)
Expenditures for capitalized software development (1,435) (1,166) (2,303)
Purchased software (3) (177) (332)
Cash outlays for acquisitions, net of cash acquired 0 (244) (292)
---------------------------------------
Net cash used in investing activities (2,028) (2,305) (4,362)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable (10,071) (3,550) (8,653)
Borrowings on notes payable 10,615 2,250 8,366
Proceeds from exercise of stock options and
employee stock purchase plan 433 -- 59
Proceeds from issuance of convertible promissory notes -- 125 1,375
Proceeds from issuance of preferred stock -- -- 3,443
---------------------------------------
Net cash provided by (used in) financing activities 977 (1,175) 4,590
---------------------------------------
Foreign currency translation adjustment (31) 2 56
Net increase (decrease) in cash 43 (780) 516
Cash at the beginning of the year 877 1,657 1,141
---------------------------------------
Cash at the end of the year $ 920 $ 877 $ 1,657
---------------------------------------
---------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 884 $ 594 $ 407
Taxes paid 65 140 135
NON-CASH TRANSACTIONS:
Common stock, preferred stock, subordinated convertible
debentures and notes payable issued for acquisitions $ 3,591 $ 450 $ 5,229
The accompanying notes are an integral part of these consolidated financial
statements.
20
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.
From January 1991, to December 1993, the Company acquired eight companies in
similar or complementary 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 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, an additional 63,680
shares were issued in December, 1994, for a total of 375,000 shares. In
addition, the shareholders of Mountain States earned an additional 339,280
shares based upon growth in sales. 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
10), 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.
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 purchased
software (Mountain States) and goodwill (Insurnet) 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 year ended
March 31, 1994, are presented as though the Mountain States and Insurnet
operations had been combined with the Company at the beginning of the period.
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
21
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.
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 accordance 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 based upon the sales price and the cost of specific items shipped.
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. 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. 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 $1,245,000,
$1,128,000 and $979,000 in fiscal 1996, 1995, and 1994, respectively.
22
Net software development costs at March 31, 1996 and 1995 consist of the
following (in thousands):
1996 1995
- --------------------------------------------------------------------------------
Total software development costs capitalized $6,672 $5,496
Less accumulated amortization (2,265) (1,107)
- --------------------------------------------------------------------------------
$4,407 $4,389
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
During the fourth quarter of fiscal 1996, the Company wrote down its capitalized
software development costs by $259,351, and its accumulated amortization by
$86,178 (see Note 4).
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.
Goodwill 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. In fiscal 1996, the Company
decreased the carrying value of certain of these assets by $5,017,000, to
reflect the impairment of the recoverability of those assets (see Note 4). As
of March 31, 1996, and 1995, the accumulated amortization was $968,000 and
$2,306,000, respectively. Amortization of goodwill and customer lists was
$833,000, $823,000 and $649,000 in fiscal 1996, 1995, and 1994, 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.
23
Other Assets - Other assets consist primarily 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.
Loss Per Common Share - Loss per common share for fiscal 1996, 1995, and 1994 is
based on the weighted average number of common shares outstanding. The effect
of common share equivalents is not included in the loss per common share
calculation for fiscal 1996, 1995 and 1994 because inclusion would be anti-
dilutive. Primary and fully diluted earnings per share are the same for all
periods presented.
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.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
was issued in 1995. Implementation of SFAS No. 121 established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill relating to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. The
Company adopted SFAS No. 121 in fiscal 1996. This adoption did not have a
significant impact on the Company's consolidated financial statements.
NOTE 3 - PRIVATE EQUITY PLACEMENT:
In May 1996, the Company completed a private equity placement providing gross
proceeds of $10,700,000 to the Company. Under the terms of the placement, the
Company issued 10,700,000 units at a price of $1.00 per unit. Each unit
consists of one share of common stock
24
and a redeemable warrant to purchase one share of common stock at an exercise
price of $1.50 per share, subject to certain anti-dilutive adjustments. The
shares and redeemable warrants comprising the units are immediately detachable
and separately transferable.
The redeemable warrants may be exercised at any time after their date of
issuance for a period of three years. The Company can redeem the redeemable
warrants at any time subsequent to 180 days after the issuance of the redeemable
warrants if the closing bid price for the common stock is above $2.00 per share
for twenty consecutive trading days subsequent to when the redeemable warrants
first are redeemable.
The private equity placement provided net proceeds of approximately $9,478,000
to the Company. The proceeds will be used for product research and development,
to strengthen the Company's sales and marketing organization, to reduce debt, to
strengthen working capital, and to continue the consolidation of Delphi's
operations. In addition, the Company may use proceeds to make strategic
investments in complementary businesses.
In conjunction with the equity placement, the Company converted its outstanding
Series C Preferred Stock, Series D Preferred Stock, and Series E Preferred Stock
into 8,747,570 shares of common stock. In addition $1,500,000 in outstanding
promissory notes were converted into 1,500,000 units, identical to those
described above. The Series C Preferred Stock and the Series D Preferred Stock
converted in April 1996, while the Series E Preferred Stock converted in March
1996.
NOTE 4 - CONSOLIDATION, REPOSITIONING AND RESTRUCTURING CHARGES:
The Company is operating according to a business plan which includes a product
strategy in which the Company has begun developing a new generation of products,
which incorporates certain functionality and features from several of the
Company's existing products. As part of the business plan, the Company will
cease to develop enhanced versions of certain of the Company's products beyond a
specific, identified product version release. The Company will, however,
continue to support and maintain the existing products for a number of years in
the future, depending upon the economic feasibility of doing so for each
specific product. Consequently, the recoverability of a portion of the
Company's intangible assets classified as goodwill has become impaired, based
upon projected future net cash flows related to the aforementioned products
compared to the net carrying value of the related assets.
The Company's business plan includes continued consolidation and elimination of
duplicate facilities. In conjunction with the plan, the Company made and
communicated the decision to relocate certain of the Company's development and
support functions from one of the Company's facilities to another. As a result,
the Company incurred a charge for severance and excess facilities costs.
25
As a result of the foregoing events, the Company incurred a charge to operations
in fiscal 1996 resulting from the following (in thousands):
Writedown of goodwill and noncompete
agreements $5,017
Write down of capitalized software
development costs 173
Severance and excess facilities cost 534
- -----------------------------------------------------------------------
$5,724
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
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 vaule. Therefore, the Company incurred a
charge to operations 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 the 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 attempt to sublease the entire facility.
The charge associated with excess lease capacity was, therefore, 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.
The following summarizes the major restructuring charge in fiscal 1994 (in
thousands):
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
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Of the above amounts, $2,471 remains accrued at March 31, 1996, virtually all of
which pertains to the original charge of $3,919 pertaining to reductions and
changes in workforce and the elimination of facilities. The majority of the
accrual will remain until the Company is successful in subleasing the remaining
portion of the facility.
26
NOTE 5- PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1996 and 1995 consists of the following (in
thousands):
1996 1995
- ---------------------------------------------------------------------------
Computer equipment and purchased software $6,802 $6,996
Leasehold improvements 1,199 362
Furniture, fixtures and other 3,199 2,308
- ---------------------------------------------------------------------------
11,200 9,666
Less accumulated depreciation and amortization (8,331) (6,036)
- ---------------------------------------------------------------------------
$2,869 $3,630
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE:
Notes payable at March 31, 1996, and 1995, are comprised of the following (in
thousands):
1996 1995
- ---------------------------------------------------------------------------
Notes payable to bank $ 2,606 $ 2,486
Note payable 424 0
Convertible promissory notes 1,500 1,500
Subordinated note payable 0 2,750
- ---------------------------------------------------------------------------
4,530 6,736
Current portion (3,030) (2,486)
- ---------------------------------------------------------------------------
$ 1,500 $4,250
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The Company had a $5,000,000 line of credit agreement with a bank of which
$2,606,000 was outstanding at March 31, 1996. At March 31, 1996, $1,438,000
remained available for borrowing under the line of credit.
The line, which expired on June 5, 1996, carried an interest rate at the bank's
prime lending rate plus 3.5 percent. Permitted borrowings under the line varied
as a function of qualified accounts receivable and were collateralized by
substantially all of the Company's assets. The agreement contained certain
restrictive covenants including achievement by the Company of specified
operating results and balance sheet ratios. The line also restricted 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 Company is currently in active negotiations to replace the expired line of
credit agreement. While the Company expects to be successful in such
negotiations, there can be no assurances that this will occur.
At the date of expiration, the Company had no borrowings outstanding under the
line of credit.
27
Additional information related to line of credit borrowings for the two years
ended March 31, 1996, is as follows (in thousands):
1996 1995
- ----------------------------------------------------------------------
Maximum amount borrowed during the year $4,036 $4,036
Average amount borrowed during the year $2,846 $3,340
Interest rate at the end of the year 11.8% 12.5%
Weighted average interest rate incurred during
the year 13.9% 12.8%
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 were due March 15, 1998, and
bore interest at the prime rate and were 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. In conjunction with the Company's May, 1996
private placement of equity at $1.00 per unit, the convertible promissory
notes were converted into 1,500,000 shares of common stock and 1,500,000
redeemable warrants (see Note 3).
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities at March 31, 1996, and 1995, consist of
the following (in thousands):
1996 1995
- ----------------------------------------------------------------------
Trade accounts payable $1,775 $1,743
Taxes other than income tax 354 330
Accrued severance and reorganization costs 1,963 1,297
Other 2,731 3,032
- ----------------------------------------------------------------------
$6,823 $6,402
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NOTE 8 - INCOME TAXES:
Pretax loss consisted of (in thousands):
1996 1995 1994
- --------------------------------------------------
Domestic $ (11,714) $ (1,624) $ (8,910)
Foreign (5) 83 109
- --------------------------------------------------
Total $ (11,719) $ (1,541) $ (8,801)
- --------------------------------------------------
- --------------------------------------------------
28
The provisions for income taxes consisted of (in thousands):
1996 1995 1994
- --------------------------------------------------
Current:
U.S. Federal $ -- $ -- $ --
State 114 74 73
Foreign -- 66 48
- --------------------------------------------------
Total $114 $140 $121
- --------------------------------------------------
Deferred:
U.S. Federal $ -- $ -- $ --
State -- -- --
Foreign -- -- --
- --------------------------------------------------
Total $ -- $ -- $ --
- --------------------------------------------------
Total Provision $114 $140 $121
- --------------------------------------------------
- --------------------------------------------------
The income tax provision differs from the amount obtained by applying the
federal statutory rate because of the following items:
1996 1995 1994
- ----------------------------------------------------------------------------
Statutory rate (35.0)% (35.0)% (35.0)%
State income tax, net of federal tax effect 1.0 4.8 0.8
Amortization of intangible assets relating to
acquired businesses XX.X 18.7 2.1
Losses producing no current tax benefit XX.X 16.3 32.9
Other, net 0.0 0.6
- ----------------------------------------------------------------------------
Effective rate 1.0% 9.0% 1.4%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
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.
29
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities for 1996 and 1995 are as follows (in
thousands):
1996 1995
--------------------- ---------------------
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
- ----------------------------------------------------------------------------
Product enhancements $ -- $1,763 $ -- $1,756
Deferred rent 40 -- 41 --
Reserves 1,382 -- 1,071 --
NOL not utilized 7,290 -- 5,683 --
Tax credits not utilized 1,057 -- 1,057 --
- ----------------------------------------------------------------------------
9,769 1,763 7,852 1,756
Valuation allowance (8,006) -- (6,096) --
- ----------------------------------------------------------------------------
Total deferred taxes $1,763 $1,763 $1,756 $1,756
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
As of March 31, 1996, the Company had investment business tax credit
carryforwards of $1,057,000 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 $20,828,000 for federal income tax. The
utilization of these net operating losses may be limited due to changes in
ownership and other restrictions imposed by the Internal Revenue Code.
Federal net operating loss carryforwards and a substantial portion of tax
credits will begin to expire after 1997, becoming fully expired by the year 2011
if not offset against future taxable income.
Due to the uncertainity of realizing any of the net deferred tax assets, the
Company has provided a valuation allowance against the entire net amount.
NOTE 9 - 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.
30
The aggregate minimum annual lease payments under leases in effect on March 31,
1996 are set forth below (in thousands) as follows:
- --------------------------------------------------------
Capital Operating
Fiscal Year Ending
Leases Leases
- --------------------------------------------------------
1997 $ 54 $ 1,822
1998 46 1,671
1999 30 1,412
2000 2 395
2001 0 12
- --------------------------------------------------------
Total minimum lease
commitments $ 132 $ 5,312
Less: amount representing
interest (17)
- ----------------------------------------
Present value of obligations
under capital leases 115
Less: current portion (54)
- ----------------------------------------
Long-term obligations under
capital leases $ 61
- ----------------------------------------
Rental expense covering the Company's office facilities and equipment for the
fiscal years 1996, 1995 and 1994 aggregated $2,541,000, $2,778,000 and
$2,901,000, respectively.
Noncompete Agreements - The Company entered into various noncompete 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 totaling $4,700,000 to the McCracken shareholders over
six years of which $4,300,000 has been paid to date. The final installment of
$400,000 is due on January 31, 1997. Commitments related to the noncompete
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 10 - SUBORDINATED CONVERTIBLE DEBENTURES:
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 was converted into 63,426 shares of Series E Preferred Stock in April,
1995. The Series E Preferred Stock was converted into 1,421,060
31
shares of common stock in conjunction with the Company's private placement of
equity (see Note 3).
NOTE 11 - PREFERRED STOCKS:
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 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.
In April 1996, the Company's Series C Preferred Stock was converted into
3,626,800 shares of common stock and the Company's Series D Preferred Stock was
converted into 3,699,710 shares of common stock. Both conversions occurred at a
conversion price of $1.00 per share, and were
32
in conjunction with the Company's private placement of equity completed May 1996
(see Note 3).
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 ten percent or more of the Company's stock, the term may be no
longer than five years). No stock appreciation rights are outstanding.
The Company has granted nonstatutory options outside the stock incentive plan to
purchase up to an aggregate of 100,000 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.
33
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, 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) 1.00-6.88 (253,028) 2.50-7.38
- ---------------------------------------------------------------------------------
Balance,
March 31, 1995 1,428,381 $0.78-$6.75 95,000 $0.78-$7.38
Granted 230,000 1.00-1.56 20,000 1.25
Exercised (121,000) 1.00-3.00 -- --
Canceled (297,650) 0.78-4.88 (15,000) 5.75
- ---------------------------------------------------------------------------------
Balance,
March 31, 1996 1,239,731 $0.78-$6.75 100,000 $0.78-$7.38
- ---------------------------------------------------------------------------------
Exercisable
at March 31, 1996 382,211 $0.78-$6.75 61,660 $0.78-$7.38
- ---------------------------------------------------------------------------------
Available for Grant
at March 31, 1996 1,009,433 -- -- --
- ---------------------------------------------------------------------------------
34
Stock Purchase Plan - The Company has a stock purchase plan for eligible
employees. Employees may subscribe up to ten 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 1,800,000
shares of common stock for the plan. New subscriptions are granted by the
Company to eligible employees on August 1 of each year. If fully exercised, the
26,586 shares remaining under the plan would be issued. These shares are due to
be exercised on July 31, 1996.
In connection with its line of credit agreement renewal with its bank in
December 1994 the Company issued 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 issued warrants to the bank to purchase up to 75,000 shares of the
Company's common stock over a five year term at $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
ended March 31, 1996, 1995, and 1994, the Company did not make any contributions
to the plan.
35
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 September 5, 1996, 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, 1996.
The executive officers and senior management of the Company are as follows:
Name Age Position
- ---- --- --------
M. Denis Connaghan 46 President, Chief Executive Officer
Michael J. Marek 37 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.
36
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 September 5, 1996, Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
March 31, 1996.
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 September 5, 1996, Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after March 31, 1996.
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 September 5, 1996, Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
March 31, 1996.
37
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, 1996, and 1995
- Consolidated Statements of Operations for the Years Ended March
31, 1996, 1995, and 1994
- Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended March 31, 1996, 1995, and 1994
- Consolidated Statements of Cash Flows for the Years Ended March
31, 1996, 1995, and 1994
- 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, 1996, 1995, and 1994.
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
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).
3.4 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).
4.2 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).
38
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* Form of Redeemable Warrant to Purchase Shares of Common Stock of Delphi
Information Systems, Inc.
4.13* Form of Unit Investment Agreement to purchase Common Stock and Warrants
of Delphi Information Systems, Inc.
4.14* Form of Warrant to purchase Shares of Common Stock of Delphi Information
Systems, Inc. held by R.J. Steichen & Company.
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).
39
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).
10.17 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).
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.
23.1* Consent of Independent Public Accountants
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.
40
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 19, 1996
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 19, 1996
- -------------------------
(Yuval Almog)
/s/M. Denis Connaghan Director, President and June 19, 1996
- -------------------------
(M. Denis Connaghan) Chief Executive Officer
/s/Michael J. Marek Corporate Controller June 19, 1996
- -------------------------
(Michael J. Marek)
41
/s/Donald L. Lucas Director June 19, 1996
- -------------------------
(Donald L. Lucas)
/s/Larry G. Gerdes Director June 19, 1996
- -------------------------
(Larry G. Gerdes)
42
SCHEDULE II
DELPHI INFORMATION SYSTEMS, INC.
Schedule II - Valuation and Qualifying Accounts
for the Years Ended March 31, 1996, 1995 and 1994
Allowance for doubtful accounts receivable.
March 31, March 31, March 31,
1996 1995 1994
---- ---- ----
Beginning Balance $687,000 $1,000,000 $735,000
Provisions for Allowance 741,000 396,000 547,000
Write Off of Accounts Receivable
Against Allowance (506,000) (847,000) (664,000)
Allowance Acquired in Acquisitions -- 138,000 382,000
--------- -------- ----------
$ 922,000 $687,000 $1,000,000
--------- -------- ----------
--------- -------- ----------
43