Back to GetFilings.com
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
For the fiscal year ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
-------------------
Common Stock, par value $0.10 per share
Preferred Share Purchase Rights
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, 1998, the number of shares of Common Stock outstanding was
7,395,449. 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 $29,690,000.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement relating to its 1998
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
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 37
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial
Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 39
2
PART I
ITEM 1. BUSINESS
Delphi Information Systems, Inc. ("the Company") 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. On July
23, 1996, the Company acquired Complete Broking Systems ("CBS") of Auckland, New
Zealand.
Delphi is a leading provider of integrated business application software and
services for independent property and casualty insurance agencies, brokerages,
managing general agents and insurance companies worldwide. The Company's
revenues are derived primarily from the licensing and sale of systems comprised
of third party and internally developed software and from professional services,
maintenance, and support services. Professional services include consulting,
implementation, training, project management, and custom software development
provided to the Company's customers with installed systems and those in the
process of installing systems.
The Company's customer list includes a majority of the largest 100 brokerages
and top 200 agencies in the United States and Canada, and many of the largest
global brokers. The Company's software operates on approximately 75,000
workstations and terminals at more than 3,000 customer sites.
PRODUCTS - The Company currently has six "legacy" products including INfinity,
INSIGHT, PC-ELITE, Insurnet, SMART, and Vista. The legacy products provide
basic functions such as policy administration, claims handling, accounting, and
financial reporting. The Company's current product strategy is centered on a new
generation of products, collectively referred to as "Common Delphi" or
"cd.solutions" and are comprised of "cd.global", a modular, state of the art,
agency management solution providing flexibility and the ability to handle
unstructured data and complex risk; "cd.connect", providing electronic
transmission between carriers and brokers; and "cd.one", a structured system
utilizing many features of the legacy products. Legacy products will be
maintained and supported as long as there is adequate economic and strategic
justification. As new products are introduced to the market, customers utilizing
legacy products will be encouraged to migrate to new products.
During the second quarter of fiscal 1997, the Company discontinued the sale and
marketing of computer hardware in order to focus the Company's resources on the
development and sale of software and professional services. Subsequent to the
Company's exit from the hardware sector, the Company continues to receive
commissions from hardware vendors for product referrals.
The systems offered by the Company range in price from $19,500 to over
$1,000,000 for multiple site global brokers. In fiscal year ended March 31,
1998, one domestic customer (including its foreign subsidiaries) accounted for
approximately 12.7% of consolidated revenues. The customer is a publicly traded
multi-national insurance company listed on the New York Stock Exchange. In
fiscal 1997 and 1996, no customer represented more than 10% of total revenues.
3
SYSTEM DESIGN AND ARCHITECTURE - The Company's latest product offerings utilize
the latest technology. cd.global currently is a client/server based system,
which supports Oracle relational database software technology. cd.connect is
Lotus Notes-based and Internet/intranet enabled groupware, while cd.one is
operational on Btrieve.
PRODUCT DEVELOPMENT - At the end of fiscal 1998, the Company employed 39
full-time employees engaged in product development activities. These activities
include research and development of software enhancements such as adding
functionality, improving usefulness, adaptation to newer software and hardware
technologies, and increasing responsiveness.
Product development expenditures including amounts capitalized were $6,089,000,
$6,016,000 and $6,489,000 in fiscal 1998, 1997 and 1996, respectively.
Management believes maintenance and enhancement of product technology is
critical and expects to continue to invest substantial amounts in product
development.
COMPETITION - Management believes its principal competition is represented by
two 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 offers software
which specifically addresses the independent agency marketplace. However,
certain large hardware suppliers do sell systems and systems components to
independent agencies. The Company, to a much lesser extent, also experiences
competition from small, independent or freelance developers and suppliers of
software who sometimes work in concert with hardware companies to supply systems
to independent agencies.
Key competitive factors in the Company's market are product technology, features
and functions, ease of use, price, reputation, reliability, and quality of
customer support and training. Management believes that overall the Company
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 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.
BACKLOG AND DEFERRED REVENUE: The Company traditionally invoices software
maintenance and support in advance of providing the service. The prepaid
software maintenance fees are recorded as
4
deferred revenue and recognized ratably over the term of the respective software
maintenance agreement. As of March 31, 1998 and 1997, the backlog of contracted
professional services and systems sales was not significant.
EMPLOYEES - At March 31, 1998, the Company had 170 employees, including 14
employees in sales and marketing, 39 employees in product development, 89
employees in customer service and operations, and 28 employees in general
management, administration and finance. None of the Company's employees are
presently covered by a collective bargaining agreement. Management believes
that employee relations are good.
ITEM 2. PROPERTIES
The Company's corporate headquarters is in Rolling Meadows (Chicago), Illinois,
where it leases approximately 20,000 square feet of office space. Substantially
all corporate executive and administrative functions are located in Rolling
Meadows. The Rolling Meadows lease expires in October 1998. Management is
currently evaluating various alternatives in the Chicago metropolitan area
including renewal of the current lease. The Company leases additional office
space of approximately 12,000 square feet in Billerica, Massachusetts;
approximately 17,500 square feet in Pittsburgh, Pennsylvania; approximately
6,000 square feet in Scarborough, (Toronto) Canada; approximately 1,500 square
feet in Auckland, New Zealand; approximately 1,500 square feet in Sydney,
Australia; approximately 1,000 square feet in London, England; and approximately
15,000 square feet in Walnut Creek (San Francisco), California. Management
believes its facilities are adequate for its current needs and that suitable
additional or substitute space will be available as needed. See Note 9 to the
financial statements included in Part II, Item 8, for further information
regarding obligations under property leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party, and none of its property is subject to, any material
pending legal proceedings.
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, 1998.
At a Special Meeting of Stockholders held on May 6, 1998, a proposal to amend
the Company's Certificate of Incorporation to effect a one-for-five reverse
stock split (the "Reverse Stock Split") of the Company's outstanding Common
Stock $.10 par value per share (the "Common Stock") and to reduce the number of
authorized shares of the Company's Common Stock from 75,000,000 to 20,000,000
(the "Authorized Share Reduction"), as further described in Proxy Statement
filed April 10, 1998, was submitted to a vote of security holders and approved
effective as of the open of the Nasdaq SmallCap tier (the Nasdaq SmallCap
Market") of the Nasdaq Stock Market, Inc. on May 8, 1998.
5
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 is the Nasdaq SmallCap
Market. The Company's Common Stock trades under the symbol "DLPH". As of June 1,
1998, there were 260 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 closing bid prices for Common
Stock for each calendar quarter in the two year period ending March 31, 1998 as
adjusted to reflect retroactively the Reverse Stock Split effective May 8, 1998.
FISCAL 1998 HIGH LOW
--------------------------------------------------
First quarter $ 7.50 $ 5.15
Second quarter 9.05 4.70
Third quarter 7.05 4.40
Fourth quarter 4.85 3.15
FISCAL 1997 HIGH LOW
--------------------------------------------------
First quarter $ 10.30 $ 5.65
Second quarter 7.20 4.20
Third quarter 7.20 3.45
Fourth quarter 10.00 4.70
As of June 1, 1998 there were 7,395,449 shares of Common Stock outstanding and
221 shares of Series D Preferred Stock, par value $.10 per share outstanding.
6
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
1998 1997 1996 1995 1994
----------------------------------------------------------------
RESULTS OF OPERATIONS:
Revenues $ 22,465 $ 27,714 $ 44,081 $ 53,040 $ 53,605
Operating (loss) income (3,233) (5,880) (11,120) (597) (8,160)
Net (loss) income $ (3,406) $ (5,884) $ ( 11,833) $ (1,681) $ (8,922)
EARNINGS (Loss) PER SHARE: (1)
Basic EPS $ (0.46) $ (0.97) $ (6.86) $ (1.15) $(6.69)
Diluted EPS $ (0.46) $ (0.97) $ (6.86) $ (1.15) $(6.69)
Shares used in computing per
share data
Basic EPS 7,347 6,093 1,724 1,461 1,334
Diluted EPS 7,347 6,093 1,724 1,461 1,334
FINANCIAL POSITION:
Assets $ 14,782 $ 22,577 $ 20,389 $ 27,547 $ 31,947
Short term debt 1,923 1,600 3,030 2,486 4,029
Long term debt 210 - - 1,500 4,250 4,125
Stockholders' equity (deficit) $ 5,591 $ 8,448 $ (3,346) $ 4,553 $ 6,231
(1) Earnings (Loss) per share data adjusted to reflect retroactively the
Reverse Stock Split effective May 8, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The insurance industry has undergone significant consolidation over the past
several years driven by the need for, and benefits from, economies of scale and
scope in providing low-cost insurance. Consolidation has involved both insurance
brokerages, the Company's primary customers, and insurance companies, and is
directly impacting the manner in which insurance products are distributed.
Management believes the insurance industry will continue to experience
significant changes in the next several years to meet the changing distribution
model. Changes in the insurance industry may create opportunities for the
Company.
Management believes consolidation will force brokerages to decrease distribution
costs and eliminate labor intensive tasks via automation. Competition will force
brokerages to increase service levels via improved automated processes such as
quoting and claims processing. Management believes that the Company can partner
with customers to provide integrated information management solutions, and fully
leverage information technology and services.
7
RECENT DEVELOPMENTS - On March 23, 1998, the Board of Directors adopted a
resolution to change the Company's fiscal year end to December 31 effective in
1998. The Company will file Form 10-K for the twelve months ended March 31,
1998, Form 10-Q for each of the three month periods ended June 30, 1998 and
September 30, 1998, and Form 10-K for the nine months ended December 31, 1998.
On May 6, 1998, the Company's stockholders adopted a proposal to amend the
Company's Certificate of Incorporation to effect the Reverse Stock Split and the
Authorized Shares Reduction. The Reverse Stock Split and Authorized Shares
Reduction was effective as of the open of the Nasdaq SmallCap Market on May 8,
1998 (the "Effective Time").
At the Effective Time, each share of Common Stock issued and outstanding was
automatically reclassified and converted into one-fifth a share of Common Stock.
Fractional shares of Common Stock resulting from the Reverse Stock Split were
not issued and instead holders thereof will receive cash in lieu of fractional
shares. All shares and per share information presented as of May 8, 1998 gives
effect to the Reverse Stock Split and Authorized Shares Reduction.
The principal reason for the Reverse Stock Split was to increase the trading
price per share of the Common Stock in order to comply with the revised
standards for continued listing on the Nasdaq SmallCap Market, which went into
effect on February 23, 1998. The new Nasdaq listing requirements required,
among other things, that the minimum bid price per share of a listed company was
$1.00. During the 1997 calendar year, the closing bid price of the Common Stock
ranged from $1.875 to $0.875. Subsequent to the Reverse Stock Split the closing
bid price for the Common Stock ranged from $4.375 to $5.156. There is no
assurance, however, that the Reverse Stock Split will enable the Common Stock to
trade above the $1.00 minimum bid price or that the Company will otherwise be
able to maintain its listing on the Nasdaq SmallCap Market.
RESULTS OF OPERATIONS
TOTAL REVENUES - The Company's revenues are derived from the licensing and sale
of systems comprised of third party and internally developed software
("Systems") and from professional services, maintenance services, and support
services ("Services"). Professional services include consulting, implementation,
training, project management, and custom software development provided to the
Company's customers with installed systems and those in the process of
installing systems. Total fiscal 1998 revenue decreased 18.9% from fiscal 1997
levels and were 51.0% of fiscal 1996 total revenue. Total revenue is comprised
of systems revenue and service revenue.
SYSTEMS REVENUE - The Company currently has six "legacy" products including
INfinity, INSIGHT, PC-ELITE, Insurnet, SMART, and Vista. The legacy products
provide basic functions such as policy administration, claims handling,
accounting, and financial reporting. In September 1996, the Company reviewed its
product development strategy and made several significant adjustments. The
Company embarked on a development strategy of scaleable tailored solutions,
providing a standard agency management software engine to which "plug and play"
modules may be added based on user requirements. The Company's current product
strategy is centered on a new generation of products, collectively referred to
as "Common Delphi" or "cd.solutions" and are comprised of "cd.global", a
8
modular, state of the art, agency management solution providing flexibility and
the ability to handle unstructured data and complex risk; "cd.connect",
providing electronic transmission between carriers and brokers; and "cd.one", a
structured system utilizing many features of the legacy products. Current legacy
products will be maintained and supported as long as there is adequate economic
and strategic justification. As new products are introduced to the market,
customers utilizing legacy products will be encouraged to migrate to new
products.
Systems revenues are comprised of revenues from the sale of Common Delphi
products, current legacy products, legacy products which are no longer offered
for sale (discontinued), hardware, and other. During the second quarter of
fiscal 1997 the Company discontinued the sale and marketing of computer
hardware. The sale of hardware was ceased in order to focus the Company's
resources on the development and sale of software and services. Subsequent to
the Company's exit from the hardware sector, the Company continues to receive
commissions from hardware vendors for product referrals. Accordingly, during
fiscal 1996 and the first quarter of fiscal 1997, systems revenues include
revenues from the sale of computer hardware, subsequently systems revenues
include hardware commissions.
Fiscal 1998 Systems revenues of $3,509,000 were $2,580,000 or 42.4% less than
fiscal 1997 revenues of $6,089,000. Sales of Common Delphi products in fiscal
1998 were $718,000 as compared to $173,000 in fiscal 1997; sales of current
legacy products in fiscal 1998 were $195,000 versus $344,000 in fiscal 1997;
sales of legacy products discontinued in fiscal 1998 were $109,000 in fiscal
1998 versus $1,151,000 in fiscal 1997; hardware revenues and commissions were
$1,011,000 in fiscal 1998 versus $2,876,000 in fiscal 1997; and other systems
revenues were $1,476,000 in fiscal 1998 versus $1,545,000 in fiscal 1997.
Fiscal 1997 Systems revenues of $6,089,000 were $8,351,000 or 57.8% less than
fiscal 1996 revenues of $14,440,000. The decrease is primarily attributable to
the Company's exit from the hardware business in the second quarter of fiscal
1997, and a decrease in the sale of legacy products.
SERVICES REVENUES - Fiscal 1998 Services revenues of $18,956,000 were $2,669,000
or 12.3% less than fiscal 1997 Services revenues of $21,625,000 and $10,685,000
or 36% less than fiscal 1996 services revenues of $29,641,000. The revenue
decreases are primarily attributable to decreased support revenues associated
with the Company's exit from the hardware business and declining legacy support
revenues partially offset by support contract price increases and new support
contracts associated with Common Delphi products.
COSTS OF SYSTEMS REVENUES - Costs of Systems revenues include costs of third
party software and computer hardware, provisions for doubtful accounts, and the
amortization of capitalized software development costs. Costs of Systems
revenues, as a percentage of Systems revenues, were 79.7%, 114.7% and 80.3% in
fiscal 1998, 1997, and 1996, respectively. The increase in costs of Systems
revenues expressed as a percentage of Systems revenues in fiscal 1997 is
primarily due to an increase in the provision for doubtful accounts.
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 48.5%, 54.6% and 58.2% in fiscal
9
1998, 1997, and 1996, respectively. The decrease is primarily due to direct
labor efficiencies gained through headcount reductions.
PRODUCT DEVELOPMENT EXPENSES - Product development expenses, net of capitalized
software costs, were $3,510,000, $4,255,000 and $5,051,000 in fiscal 1998, 1997,
and 1996, respectively. Product development expenditures, including those
which were capitalized, were $6,089,000, $6,016,000 and $6,489,000,
respectively, in fiscal years 1998, 1997, and 1996. Management believes
maintenance and enhancement of product technology is critical and expects to
continue to invest substantial amounts in product development. Product
development activities generally may be accelerated or deferred based on
resource availability.
SALES AND MARKETING EXPENSES - Sales and marketing expenses as a percent of
total revenues were 16% in fiscal 1998 and fiscal 1997 and 15% in fiscal 1996.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses
increased 1.4% in fiscal 1998, and decreased 43.1% in fiscal 1997. The
decrease in fiscal 1997 was primarily due to lower headcount and overall
spending reductions compared to the prior year.
AMORTIZATION OF GOODWILL, CUSTOMER LISTS AND NONCOMPETE AGREEMENTS -
Amortization of goodwill, customer lists, and noncompete agreements was
$136,000, $496,000, and $1,487,000 for fiscal 1998, 1997, and 1996,
respectively. As further discussed in Note 3 to the financial statements
included in Part II, Item 8, in fiscal 1996, the Company decreased the carrying
value of certain goodwill and customer lists by $5,017,000 and during fiscal
1998, all unamortized goodwill and customer lists of $770,000 were written off
to reflect impairment.
INTEREST INCOME/EXPENSE - The Company had net interest expense of $272,000 in
fiscal 1998, compared to net interest income of $23,000 in fiscal 1997 and net
interest expense of $599,000 in fiscal 1996. As further detailed in Note 6 to
the financial statements included in Part II, Item 8, the increase in net
interest in fiscal 1998 was due to higher average borrowings. The decrease in
net interest in fiscal 1997 was due to a reduction in borrowings on the line of
credit and the conversion of an interest-bearing note payable to common stock.
CONSOLIDATION, REPOSITIONING, AND RESTRUCTURING CHARGES - The Company's product
strategy is centered on a new generation of products, collectively referred to
as "Common Delphi" or "cd.solutions". Consistent with the Company's product
strategy, the development of enhanced versions of legacy products has been
limited. As new products are introduced to the market, existing customers
utilizing legacy products are encouraged to migrate to the Company's new
generation of products. As customers migrate from legacy products to the Common
Delphi platform, maintenance revenues from legacy products decrease. Causing
further decreases in legacy maintenance revenues, during the first two quarters
of fiscal 1998 the Company experienced some customer attrition related to
certain legacy product price increases effective in April 1998.
During the second quarter of fiscal 1998, in response to changes in the
Company's markets and technology trends, the product strategy was altered
requiring modification of a portion of the underlying technology of Common
Delphi products.
10
As a result of the decrease in legacy maintenance revenues and the requirement
to modify a portion of the underlying technology of Common Delphi products, the
recoverability of a portion of intangible assets was deemed impaired.
Accordingly, during the second quarter of fiscal 1998, the carrying value of
capitalized and purchased software was reduced $1,283,000 and goodwill and
customer lists of $770,000 were written off.
During the first two quarters of fiscal 1997 the Company generated significant
operating losses. In response to the losses, the Company was restructured
resulting in significant reductions in payroll expense and other operating
expenses. In addition, as the Company transitioned out of the hardware
business, a portion of the inventory on hand was deemed obsolete. As a result,
the Company incurred a restructuring charge in fiscal 1997 of $1,297,000.
In fiscal 1996, the Company adopted a product strategy which dictated
development of a new generation of products, incorporating certain functionality
and features from several of the Company's existing products. As part of the
strategy, the Company ceased to develop enhanced versions of certain existing
products. Consequently, the recoverability of certain intangible assets
classified as goodwill and certain capitalized software costs became impaired.
Further, the Company elected a strategy to consolidate duplicate operations
thereby incurring a charge for severance and excess facilities costs. In fiscal
1996 the Company incurred a repositioning and restructuring charge of
$5,724,000.
LIQUIDITY AND CAPITAL RESOURCES
During fiscsal 1998 the Company experienced negative cashflow of $5,724,000
funded primarily by financing activities providing $1,045,000 and balances on
hand. The funds were utilized for capital expenditures of $980,000, capitalized
and purchased software of $2,579,000 and $3,196,000 for operating activities.
Funds used in operating activities included significant reductions in short term
liabilities including accounts payable and acrued liabilities of $2,589,000 and
deferred revenue and other liabilities of $2,681,000.
The Company's sources of liquidity on both a short and long-term basis include
cash on hand, proceeds from the line of credit agreement, and operating
activity. Sources of liquidity on a long-term basis may also include the
proceeds from the exercise of outstanding stock options and warrants. Management
believes that the Company's sources of liquidity in the short and long-term will
be sufficient to meet the Company's operating cash obligations and provide for
the completion and market introduction of products currently under development.
DEFERRED REVENUE: The Company traditionally invoices software maintenance and
support in advance of providing the service. The prepaid software maintenance
fees are recorded as deferred revenue and recognized ratably over the term of
the respective software maintenance agreement. A significant component of the
Company's negative net working capital position at March 31, 1998, consists of
deferred revenues of $4,381,000. The liability is satisfied through normal
ongoing operations of the Company's service organization and generally does not
require a payment to a third party.
PRODUCT DEVELOPMENT: At the end of fiscal 1998, the Company employed 39
full-time employees engaged in product development and activities. These
activities include research and development of
11
software enhancements, improving usefulness, adaptation to newer software and
hardware technologies, and increasing responsiveness. Product development
expenditures, including amounts capitalized, were $6,089,000, $6,016,000 and
$6,489,000 in fiscal 1998, 1997 and 1996, respectively. Management believes
maintenance and enhancement of product technology is critical and expects to
continue to invest substantial amounts in product development. Product
development activities generally may be accelerated or deferred based on
resource availability.
EXPENSE REDUCTIONS: As part of the Company's ongoing efforts to conduct
operations more efficiently and improve profitability, during January 1998 the
Company implemented a reduction in work force of approximately twenty employees
from various functional areas. The employee departures are not expected to
adversely affect the Company's strategic initiatives. It is anticipated that the
reductions will result in reduced annual operating expenses of approximately
$1,200,000. Severance costs of approximately $150,000 were accrued in the fiscal
third quarter ended December 31, 1997.
BANK LINE-OF-CREDIT - Effective January 1997, the Company established a
$4,000,000 line of credit agreement with a bank subject to certain conditions.
The agreement provides for a minimum monthly interest at the bank's prime
lending rate plus two and one-half percent (2.5%) on the greater of the actual
amount outstanding or $1,600,000. The agreement includes certain covenants
including the maintenance of a minimum net worth of $2,000,000 and restrictions
upon certain activities by the Company without the approval of the bank
including the incurrence of senior debt, certain mergers or acquisitions, and
the payment of dividends. The agreement is secured by the Company's assets.
During December 1997 and March 1998, the Company executed two amendments to the
line of credit agreement. The amendments extend the maturity date of the
agreement two years to January 31, 2001, alter the provisions of the early
termination fee, and modify the criteria for determining the amount available
under the line. In accordance with the amendments, prior to June 30, 1998 the
Company may borrow up to two and one-half times average monthly collections (as
defined ); from July 1998 through September 1998, two times monthly collections;
from October 1998 through December 1998, one and one-half times collections;
from January 1999 through March 1999, one times monthly collections and
subsequently up to seventy-five percent of eligible receivables. As of March
31, 1998, borrowings under the line of credit totaled $1,603,000, and $2,157,000
remained available for borrowing.
NONCOMPETE NOTE PAYABLE - The Company entered into various noncompete agreements
in connection with a January, 1991 acquisition. The final installment of
$400,000 was due on January 31, 1997 and was classified as a current liability
as of March 31, 1997. The amount due was subsequently converted to an 11.75%
interest bearing unsecured note. As of March 31, 1998, the remaining balance is
due in three equal annual payments of $119,574 (principal and interest)
commencing on January 31, 1999. Commitments related to the noncompete agreements
were amortized and expensed ratably over the life of each agreement.
PRIVATE EQUITY PLACEMENTS - The Company completed two private equity placements
in fiscal 1997. In May 1996 , the Company issued 2,140,000 units at a price of
$5.00 per unit . In January 1997, issued 1,126,100 units at a price of $5.00
per unit. Each unit consists of one share of common stock and a redeemable
warrant (further described below). The two private equity placements provided
net proceeds of approximately $14,971,000 to the Company.
12
In conjunction with the May 1996 equity placement, outstanding promissory notes
of $1,500,000 were converted into 300,000 units, all Series C Preferred Stock,
all Series E Preferred Stock, and 16,135 of the 16,356 outstanding shares of
Series D Preferred Stock was converted into 1,739,519 shares of common stock.
REDEEMABLE WARRANTS - As described above, in conjunction with the May 1996 and
January 1997 private equity placements and conversion of a $1,500,000
outstanding promissory note, the Company issued units, each unit consisting of
one share of common stock and one redeemable warrant to purchase one share of
common stock at an exercise price of $7.50 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 the date of issuance
for a period of three years. The Company can redeem the redeemable warrants at
any time subsequent to 180 days after issuance if the closing bid price for the
common stock is at or above $10.00 per share for twenty consecutive trading days
subsequent to when the redeemable warrants first are redeemable.
OTHER WARRANTS - In connection with the May 1996 private equity placement
described above, the Company issued a warrant to the placement agent (the
"Agent's Warrant") to purchase 200,000 shares of the Company's common stock at
$5.00 per share. The Agent's Warrant is not subject to redemption and expires
May 1, 2001.
In connection with the renewal of a line-of-credit agreement in December 1994,
the Company issued to a bank a five-year warrant option to purchase 75,000
shares of common stock at $17.50 per share.
TAX CREDIT CARRYFORWARDS: As further described in Note 8 to the financial
statements included herein at Part II, Item 8; as of March 31, 1998, the Company
has investment business tax credit carryforwards and net operating loss (NOL)
carryforwards for federal income tax purposes aggregating approximately
$32,000,000 expiring at various times through the year 2012.
NEW ACCOUNTING STANDARDS - 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," 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.
SFAS No. 123, "Accounting for Stock-Based Compensation," established financial
accounting and reporting standards for the stock-based employee compensation
plans and requires a fair value based method to determine the compensation cost
of such plan. The Company has not adopted the accounting method prescribed by
the new standard but has, as allowed by the standard, provided supplemental pro
forma disclosure of the effect of such adoption in Note 12.
SFAS No. 128, "Earnings Per Share," modified the standards for computing
earnings per share ("EPS"). As required, the Company adopted SFAS No. 128 as of
December 31, 1997. SFAS No. 128 replaces the presentation of primary and (where
applicable) fully diluted EPS with basic and (where applicable) diluted EPS.
13
Basic EPS is equal to net income divided by the weighted average number of
shares of common stock outstanding for the period. Diluted EPS recognizes the
dilutive effect of common stock equivalents and is equal to net income divided
by the sum of the weighted average number of shares outstanding and common stock
equivalents. At March 31, 1998 the Company's common stock equivalents consist of
stock options, common stock warrants, and convertible preferred stock.
Consistent with previous standards, SFAS No. 128 prohibits inclusion of the
impact of common stock equivalents in the calculation of EPS when inclusion
results in antidilution. Accordingly, for each of the years ended March 31,
1998, 1997, and 1996, basic and diluted EPS are equal.
For each of the years ended March 31, 1997, and 1996, primary and fully diluted
EPS, as previously reported, are equal to basic and diluted EPS respectively.
In October 1997, the AICPA issued Statement of Position (SOP) 97-2, "Software
Revenue Recognition", which supersedes SOP 91-1. The Company will be required to
adopt SOP 97-2 for software transactions entered into beginning April 1, 1998,
and retroactive application to years prior to adoption is prohibited. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements (i.e., software products, upgrades/enhancements, postcontract customer
support, installation, training, etc.) to be allocated to each element based on
relative fair values of the elements. The fair value of an element must be based
on evidence which is specific to the vendor. The revenue allocated to software
products (including specified upgrades/enhancements) generally is recognized
upon delivery of the products. The revenue allocated to postcontract customer
support generally is recognized ratably over the term of the support and revenue
allocated to service elements (such as training and installation) generally is
recognized as the services are performed. If a vendor does not have evidence of
the fair value of all elements in a multiple-element arrangement, all revenue
from the arrangement is deferred until such evidence exists or all elements are
delivered. Management anticipates that the adoption of SOP 97-2 will not have a
material impact on the Company's operations.
YEAR 2000 COMPLIANCE - The Year 2000 issue is the result of computer programs
being written using two digits rather than four digits to define the applicable
year. Any of the Company's internal use computer programs and its software
products that are date sensitive may recognize a date using "00" as the year
1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, the inability to process transactions or engage in normal business
activities.
Based on a preliminary assessment, the Company has determined that it will be
required to modify or replace some of its internal use software and modify
certain existing products so that the software will function properly with
respect to dates in the Year 2000 and thereafter. The Company presently believes
that with modifications to these certain products and conversions to new
internal use software, the Year 2000 issue will not pose significant operational
problems for the Company or its customers. However, if such modifications and
conversions are not made, or not completed timely, the Year 2000 issue could
have a material effect on the Company and customers utilizing certain products.
The Company has warranted that certain products are Year 2000 compliant and that
certain products will be made Year 2000 compliant.
14
The Company has initiated formal communication with its vendors to determine the
extent to which the Company's software products are vulnerable to those third
parties' failure to correct their own Year 2000 issues. Generally, software
provided by third parties and included in the Company's systems is developed by
leading software suppliers with Year 2000 programs in process. There can be no
guarantee that the software of other companies, on which the Company's systems
rely, will be timely or properly converted.
The Company will utilize both internal and external resources to reprogram, or
replace and test its software products for Year 2000 modifications. The Company
anticipates completing the Year 2000 project as soon as practical but prior to
any anticipated impact. The total cost of the Year 2000 project has not yet been
determined, but will be funded through existing cash resources and future
operating cash flows. The requirements and timetable for the correction of Year
2000 issues are based on management's best estimates which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that may cause material differences include, but are not
limited to, the availability of trained personnel, the ability to locate and
collect all relevant computer codes, and similar uncertainties.
This Annual Report on Form 10-K contains various forward-looking statements
and information that are based on management's beliefs as well as assumptions
made by and information currently available to management, including
statements regarding future economic performance and financial condition,
liquidity and capital resources, acceptance of the Company's products by the
market and management's plans and objectives. Such statements are subject to
various risks and uncertainties which could cause actual results to vary
materially from those stated. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated,
expected or projected. Such risks and uncertainties include the Company's
ability to overcome its recent history of operating losses and declining
revenues, the risks associated with future acquisitions, the willingness of
independent insurance agencies to outsource their computer and other
processing needs to third parties, the Company's ability to continue to
develop new products to effectively address market needs in an industry
characterized by rapid technological change, the Company's dependence on the
insurance industry (and in particular independent agents), the highly
competitive and rapidly changing automation systems market, the Company's
ability to effectively protect its applications software and other
proprietary information, the Company's ability to attract and retain quality
management, and software, technical sales and other personnel. Certain of
these as well as other risks and uncertainties are described in more detail
in the Company's Registration statement on Form S-3 filed under the
Securities Act of 1933, Registration No. 333-12781, and the Company's
periodic filings pursuant to the Securities Exchange Act of 1934. The
Company undertakes no obligation to update any such factors or to publicly
announce the results of any of the forward-looking statements contained
herein to reflect future events or developments.
15
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The disclosure requirements pursuant to Item 305 of Regulation S-K are not yet
effective for the Company. Such disclosure will be included in the Company's
filing commencing with its Annual Report on Form 10K for the fiscal year ending
December 31, 1999, unless the Company is not required to make such disclosure
pursuant to Item 305(e).
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1998, and 1997, 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, 1998. 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, 1998, and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998, 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
June 8, 1998
17
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
AS OF MARCH 31
ASSETS 1998 1997
----------------------
CURRENT ASSETS:
Cash $872 $6,596
Accounts receivable, less allowances of $860
and $1,613, respectively 4,807 5,241
Inventories 12 16
Prepaid expenses and other current assets 151 111
------- -------
TOTAL CURRENT ASSETS 5,842 11,964
Property and equipment, net 2,084 2,242
Capitalized and purchased software, net 6,554 7,301
Goodwill and customer lists, net -- 906
Other assets 302 164
------- -------
TOTAL ASSETS $14,782 $22,577
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $1,923 $1,600
Accounts payable and accrued expenses 2,078 4,667
Accrued payroll and related benefits 419 620
Deferred revenue 4,381 7,205
------- -------
TOTAL CURRENT LIABILITIES 8,801 14,092
Notes payable-long term 210 --
Other liabilities 180 37
------- -------
TOTAL LIABILITIES 9,191 14,129
------- -------
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.10 par value, 2,000,000 shares
authorized: Seried D, 221 shares issued and
outstanding, respectively 49 49
Common stock, $.10 par value:
Non-designated, 20,000,000 shares authorized,
7,395,449 and 7,270,234 issued and
outstanding, respectively 740 727
Additional paid-in capital 48,717 48,167
Accumulated deficit (44,017) (40,611)
Cumulative foreign currency translation adjustment 102 116
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,591 8,448
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,782 $22,577
------- -------
------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
18
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED MARCH 31 1998 1997 1996
-------------------------------------
REVENUES:
Systems $3,509 $6,089 $14,440
Services 18,956 21,625 29,641
------- -------- -------
TOTAL REVENUES 22,465 27,714 44,081
COSTS OF REVENUES:
Systems 2,795 6,985 11,601
Services 9,203 11,802 17,238
------- -------- -------
TOTAL COST OF REVENUES 11,998 18,787 28,839
------- -------- -------
GROSS MARGIN 10,467 8,927 15,242
OPERATING EXPENSES:
Product development 3,510 4,255 5,051
Sales and marketing 3,587 4,405 6,442
General and administrative 4,414 4,354 7,658
Amortization of goodwill, customer lists and
noncompete agreements 136 496 1,487
Consolidation, repositioning and restructuring charges 2,053 1,297 5,724
------- -------- -------
TOTAL OPERATING EXPENSES 13,700 14,807 26,362
------- -------- -------
OPERATING LOSS (3,233) (5,880) (11,120)
Interest income (120) (131) 0
Interest expense 392 108 599
------- -------- -------
Loss before income taxes (3,505) (5,857) (11,719)
Income tax provision (benefit) (99) 27 114
------- -------- -------
Net loss ($3,406) ($5,884) ($11,833)
------- -------- -------
------- -------- -------
Basic loss per common share ($0.46) ($0.97) ($6.86)
------- -------- -------
------- -------- -------
Diluted loss per common share ($0.46) ($0.97) ($6.86)
------- -------- -------
------- -------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
19
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except for shares outstanding)
-----------------------------------------------------------------------
SERIES B: SERIES C: SERIES D:
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 9,205 $780 36,268 $3,570 16,356 $3,655
------------------------------------------------------------------------
Net loss -- -- -- -- -- --
Exercise of stock options
Shares sold under employee stock -- -- -- -- -- --
purchase plan
Mountain States' acquisition adjustment -- -- -- -- -- --
Conversion of Note Payable to
Series E Preferred Stock -- -- -- -- -- --
Conversion of Series B
Preferred Stock (9,205) (780) -- -- -- --
Conversion of Series E
Preferred Stock -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 0 0 36,268 3,570 16,356 3,655
------------------------------------------------------------------------
Net loss -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Shares sold under employee stock
purchase plan -- -- -- -- -- --
Conversion of convertible promissory
notes to common stock -- -- -- -- -- --
Conversion of Series C Preferred Stock
to common stock -- -- (36,268) (3,570) -- --
Conversion of Series D Preferred Stock
to common stock -- -- -- -- (16,135) (3,606)
Issuance of common stock in connection
with private equity placements -- -- -- -- -- --
CBS acquisition -- -- -- -- -- --
Issuance of common stock as consideration
for services provided -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 0 0 0 0 221 49
------------------------------------------------------------------------
Net loss -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Shares sold under employee stock
purchase plan -- -- -- -- -- --
Issuance of common stock in connection
with private equity placements -- -- -- -- -- --
Issuance of common stock as consideration
for services provided -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 0 $0 0 $0 221 $49
------------------------------------------------------------------------
COMMON STOCK
-------------------- -----------------------
SERIES E
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------
BALANCE, MARCH 31, 1995 -- $ -- 1,595,835 $160
-----------------------------------------------
Net loss -- -- -- --
Exercise of stock options -- -- 24,200 2
Shares sold under employee stock -- -- 51,081 5
purchase plan -- --
Mountain States' acquisition adjustment -- -- 67,856 7
Conversion of Note Payable to
Series E Preferred Stock 63,426 3,125 -- --
Conversion of Series B
Preferred Stock -- -- 38,356 4
Conversion of Series E
Preferred Stock (63,426) (3,125) 284,212 28
Translation adjustment -- -- -- --
-----------------------------------------------
BALANCE, MARCH 31, 1996 0 0 2,061,540 206
-----------------------------------------------
Net loss -- -- -- --
Exercise of stock options -- -- 10,900 1
Shares sold under employee stock
purchase plan -- -- 4,927 --
Conversion of convertible promissory
notes to common stock -- -- 300,000 30
Conversion of Series C Preferred Stock
to common stock -- -- 725,360 73
Conversion of Series D Preferred Stock
to common stock -- -- 729,947 73
Issuance of common stock in connection
with private equity placements -- -- 3,266,100 327
CBS acquisition -- -- 161,460 16
Issuance of common stock as consideration
for services provided -- -- 10,000 1
Translation adjustment -- -- -- --
-----------------------------------------------
BALANCE, MARCH 31, 1997 0 0 7,270,234 727
-----------------------------------------------
Net loss -- -- -- --
Exercise of stock options -- -- 112,100 12
Shares sold under employee stock
purchase plan -- -- 2,126 --
Issuance of common stock in connection
with private equity placements -- -- -- --
Issuance of common stock as consideration
for services provided -- -- 10,989 1
Translation adjustment -- -- -- --
-----------------------------------------------
BALANCE, MARCH 31, 1998 0 $0 7,395,449 $740
-----------------------------------------------
ADDITIONAL FOREIGN
PAID-IN ACCUMULATED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT
-------------------------------------
BALANCE, MARCH 31, 1995 $19,145 ($22,894) $137
-------------------------------------
Net loss -- (11,833) --
Exercise of stock options 74
Shares sold under employee stock 354 -- --
purchase plan
Mountain States' acquisition adjustment 398 -- --
Conversion of Note Payable to
Series E Preferred Stock -- -- --
Conversion of Series B
Preferred Stock 776 -- --
Conversion of Series E
Preferred Stock 3,097 -- --
Translation adjustment -- -- (31)
-------------------------------------
BALANCE, MARCH 31, 1996 23,844 (34,727) 106
-------------------------------------
Net loss -- (5,884) --
Exercise of stock options 77 -- --
Shares sold under employee stock
purchase plan 27 -- --
Conversion of convertible promissory
notes to common stock 1,470 -- --
Conversion of Series C Preferred Stock
to common stock 3,497 -- --
Conversion of Series D Preferred Stock
to common stock 3,533 -- --
Issuance of common stock in connection
with private equity placements 14,644 -- --
CBS acquisition 1,026 -- --
Issuance of common stock as consideration
for services provided 49
Translation adjustment -- -- 10
-------------------------------------
BALANCE, MARCH 31, 1997 48,167 (40,611) 116
-------------------------------------
Net loss -- (3,406) --
Exercise of stock options 506 -- --
Shares sold under employee stock
purchase plan 11 -- --
Issuance of common stock in connection
with private equity placements (17) -- --
Issuance of common stock as consideration
for services provided 50 -- --
Translation adjustment -- -- (14)
-------------------------------------
BALANCE, MARCH 31, 1998 $48,717 ($44,017) $102
-------------------------------------
20
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED MARCH 31 1998 1997 1996
----------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss ($3,406) ($5,884) ($11,833)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 1,138 1,284 1,434
Amortization of capitalized and purchased software 2,043 2,183 1,827
Amortization of goodwill, customer lists and noncompete agreements 136 496 1,487
Write off of capitalized and purchased software, goodwill and customer lists 2,053 -- 5,190
Loss on disposal of fixed assets -- 14 (85)
Excess lease cost -- (824) (620)
Issuance of common stock as consideration for services provided 51 50 --
CHANGES IN ASSETS AND LIABILITIES NET OF EFFECT OF
ACQUISITION OF BUSINESSES:
Accounts receivable, net 434 3,111 (440)
Inventories 4 576 391
Prepaid expenses and other assets (178) 190 (635)
Accounts payable and accrued liabilities (2,589) (2,300) 797
Accrued payroll and related benefits (201) (826) (2)
Other liabilities and deferred revenue (2,681) (2,988) 3,614
----------------------------------
Net cash provided by (used in) operating activities (3,196) (4,918) 1,125
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (980) (593) (590)
Expenditures for capitalized and purchased software (2,579) (1,761) (1,438)
Cash outlays for acquisitions, net of cash acquired -- (708) --
----------------------------------
Net cash used in investing activities (3,559) (3,062) (2,028)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable -- (3,030) (10,071)
Borrowings on notes payable 533 1,600 10,615
Proceeds from exercise of stock options and
employee stock purchase plan 512 105 433
Net proceeds from private equity placement 14,971 --
----------------------------------
Net cash provided by financing activities 1,045 13,646 977
----------------------------------
Foreign currency translation adjustment (14) 10 (31)
Net increase (decrease) in cash (5,724) 5,676 43
Cash at the beginning of the year 6,596 920 877
----------------------------------
Cash at the end of the year $872 $6,596 $920
----------------------------------
----------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $206 $163 $884
Income taxes paid -- 39 65
NON-CASH TRANSACTIONS:
Common stock, preferred stock, subordinated convertible
debentures and notes payable issued for acquisitions -- -- $3,591
Preferred stock and convertible promissory notes converted
to common stock -- $8,675 --
The accompanying notes are an integral part of these consolidated financial
statements.
21
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS - Delphi Information Systems, Inc. and Subsidiaries, (the
"Company") develops, markets and supports computer software systems which
automate independent property and casualty insurance agencies and brokerages
including the areas of sales management, policy administration, accounting and
electronic interface with the computers of insurance carriers.
MANAGEMENT'S PLAN - The Company has incurred significant losses in each fiscal
year since 1993 and declining revenues in each fiscal year since 1994. The
Company has been challenged by the changes in the insurance industry and the
rapid rate of change in technologies. During fiscal 1998 the Company experienced
operating losses of $3,233,000. The fiscal 1998 loss is attributable to a number
of factors:
1.) Significant investment by the Company in new and enhanced products,
people, marketing, training, and equipment.
2.) Decreased sale of legacy products, at least in part, due to the
anticipated release and pending market acceptance of newer products.
3.) Legacy support revenues declined due to competition and pricing
pressures.
4.) Write down of the carrying value of capitalized and purchased software
of $1,283,000 and goodwill and customer lists of $770,000.
In response to losses the Company has taken the following steps:
1.) Changes in the senior executive management.
2.) Rationalization and reallocation of the overall cost structure.
3.) Implementation of programs to improve customer support.
4.) Finalized development and release of Common Delphi products.
5.) Aggressive marketing of new products and serives.
Some steps taken to improve the Company will not provide immediate results,
however, Management believes the steps taken in fiscal 1998 will yield
long term benefits, creating an organization that is well suited to take
advantage of market opportunities. Management plans to continue to
22
aggressively market the Company's products and services, monitor costs, and fund
development to ensure the Company's products continue to incorporate
state-of-the-art technologies and provide customer value-added solutions.
CONSOLIDATION - The consolidated financial statements include the accounts of
Delphi Information Systems, Inc., ("Delphi USA"), its wholly owned subsidiary,
Delphi Information Systems International, Inc., (Delphi International"), both
Delaware corporations and all majority owned subsidiaries of Delphi
International. Wholly owned subsidiaries of Delphi International are Canadian
Insurance Computer Systems, Inc. ("Delphi Canada"), Delphi Information Systems,
(UK) Ltd., Delphi Information Systems, (NZ) Ltd., and Complete Broking Systems
(Malaysia), Sdn. Bhd. Additionally, Delphi International holds a fifty-four
percent interest in Complete Broking Systems Australia PTY, Ltd. Intercompany
transactions and accounts have been eliminated in consolidation.
On July 23, 1996, the Company acquired Complete Broking Systems ("CBS") of
Auckland, New Zealand in exchange for $500,000 cash and 161,460 shares of the
Company's common stock. The acquisition has been accounted for as a purchase.
Accordingly, the results of CBS have been recorded in the financial statements
commencing on July 24, 1996.
FISCAL YEAR - Prior to April 1998, the Company's fiscal year consisted of the
twelve months ended March 31st. Effective April 1998, the Company's fiscal year
end is December 31st.
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, revenues from computer hardware purchased by customers of
the Company, and hardware commissions received by the Company on third party
hardware sales to the Company's customers. 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. Maintenance is
generally billed to the customers in advance, quarterly or annually, and
recognized as revenue ratably over the term of the maintenance contract. Other
service revenues including training, custom programming, and consulting are
recognized as the services are performed.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents.
SOFTWARE DEVELOPMENT COSTS - The Company capitalizes internally generated
software development costs and purchased software, collectively referred to as
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
23
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 revenues for that
product or (b) the straight-line method over the remaining estimated economic
life of the product. The maximum amortization period is five years.
Software development costs are amortized on a product-by-product basis.
Amortization of software development costs was $2,043,000, $2,183,000 and
$1,827,000 in fiscal 1998, 1997, and 1996, respectively.
Net capitalized and purchased software costs at March 31, 1998 and 1997 consist
of the following (in thousands):
1998 1997
---- ----
Total cost $11,801 $12,907
Less accumulated amortization (5,247) (5,606)
------ ------
$6,554 $7,301
------ ------
------ ------
As further discussed in Note 3, during fiscal 1998 and fiscal 1996, the Company
decreased the carrying value of certain software development costs by $1,283,000
and $173,000, respectively, to reflect impairment.
GOODWILL AND CUSTOMER LISTS - Goodwill consists of the excess of the cost of
acquisitions less the net fair market value of identifiable assets and
liabilities. Customer lists represents the estimated value of acquired customer
lists. Costs are amortized on a straight-line basis over five to ten years. As
further discussed in Note 3, in fiscal 1996, the Company decreased the carrying
value of certain of these assets by $5,017,000 and during fiscal 1998, all
unamortized goodwill and customer lists of $770,000 were written off to reflect
impairment. As of March 31, 1997, accumulated amortization was $1,382,000.
Amortization of goodwill and customer lists was $136,000, $496,000 and $833,000
in fiscal 1998, 1997, and 1996, respectively.
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.
SHARE AND PER SHARE INFORMATION - Share and per share information has been
adjusted to give effect to a one-for-five reverse stock split effective May 8,
1998.
FOREIGN CURRENCY TRANSACTIONS - The accounts of the Company's foreign
subsidiaries have been translated according to the provisions of the Statement
of Financial Accounting Standards No. 52,
24
"Foreign Currency Translation". Gains or losses resulting from translation of
the foreign subsidiaries' 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.
NEW ACCOUNTING STANDARDS - 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," 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.
SFAS No. 123, "Accounting for Stock-Based Compensation," established financial
accounting and reporting standards for the stock-based employee compensation
plans and requires a fair value based method to determine the compensation cost
of such plan. The Company has not adopted the accounting method prescribed by
the new standard but has, as allowed by the standard, provided supplemental pro
forma disclosure of the effect of such adoption in Note 12.
SFAS No. 128 modified the standards for computing earnings per share ("EPS"). As
required, the Company adopted SFAS No. 128 as of December 31, 1997. SFAS No. 128
replaces the presentation of primary and (where applicable) fully diluted EPS
with basic and (where applicable) diluted EPS.
Basic EPS is equal to net income divided by the weighted average number of
shares of common stock outstanding for the period. Diluted EPS recognizes the
dilutive effect of common stock equivalents and is equal to net income divided
by the sum of the weighted average number of shares outstanding and common stock
equivalents. At March 31, 1998 the Company's common stock equivalents consist of
stock options, common stock warrants, and convertible preferred stock.
Consistent with previous standards, SFAS No. 128 prohibits inclusion of the
impact of common stock equivalents in the calculation of EPS when inclusion
results in antidilution. Accordingly, for each of the years ended March 31,
1998, 1997, and 1996, basic and diluted EPS are equal.
For each of the years ended March 31, 1997, and 1996, primary and fully diluted
EPS, as previously reported, are equal to basic and diluted EPS respectively.
Earnings (loss) per share has been adjusted to give effect to a one-for-five
reverse stock split effective May 8, 1998.
CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially subject
the Company to significant concentrations of credit risk consist principally of
cash investments and trade accounts receivable.
25
The Company maintains its domestic cash accounts primarily with two domestic
banks. The deposits are insured by the FDIC for up to $100,000 at each bank. At
March 31, 1998 bank deposits, including foreign accounts, in excess of FDIC
insurance total approximately $672,000.
In fiscal year ended March 31, 1998, one domestic customer (including its
foreign subsidiaries) accounted for approximately 12.7% of consolidated
revenues. At March 31, 1998 accounts receivable from the significant customer
totaled $1,445,000. The customer is a publicly traded multi-national insurance
company listed on the New York Stock Exchange.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
to fiscal 1998 presentation. These changes had no impact on previously reported
net loss or stockholders' equity.
NOTE 2: STOCKHOLDERS' EQUITY:
STOCKHOLDER RIGHTS AGREEMENT - On March 23, 1998, the Board of Directors of
the Company adopted a stockholder rights plan (the "Stockholder Rights Plan")
designed to protect the stockholders from certain unfair and coercive tactics.
Pursuant to a Stockholder Rights Agreement (the "Rights Agreement") the Company
declared a dividend of one preferred share purchase right ("Right") on each
outstanding share of the Company's Common Stock, $.10 par value per share
("Common Shares"), payable to stockholders of record at the close of business on
March 23, 1998. Except as described below, each Right, when exercisable,
entitles the holder thereof to purchase from the Company one one-hundredth of a
share of Series A Junior Participating Preferred Shares, par value $.10 per
share (the "Preferred Shares"), of the Company at an exercise price of $25.00
per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment.
Until the date an "Acquiring Person" (as defined) is identified, the Rights are
not detachable and are not exercisable.
Preferred Shares purchasable upon exercise of the Rights will not be redeemable.
Each Preferred Share will be entitled to the greater of (1) a preferential
quarterly dividend payment of $100 per share, or (2) an aggregate dividend of
100 times the dividend declared per Common Share. In the event of liquidation,
the holders of the Preferred Shares will be entitled to a preferential
liquidation payment of $100 per share, plus an amount equal to 100 times the
aggregate amount to be distributed per share of common stock of 100 times the
payment made per Common Share. Each Preferred Share will have 100 votes, voting
together with the Common Shares except as otherwise required by law. Finally,
in the event of any merger, consolidation or other transaction in which Common
Shares are exchanged, each Preferred Share will be entitled to receive 100 times
the amount received per Common Share. The Rights are protected by customary
antidilution provisions.
If any person or group becomes an Acquiring Person, then each holder of a Right
(other than Rights beneficially owned by the Acquiring Person), will have the
right to receive upon exercise of such Right that number of Common Shares (or,
in certain circumstances, cash, property or other securities of the Company)
having a market value of two times the exercise price of the Right.
26
If at any time after the time that any person or group becomes an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold,
proper provision will be made so that each holder of a Right (other than Rights
beneficially owned by the Acquiring Person), will thereafter have the right to
receive, upon the exercise thereof at the then-current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction will have a market value of two times the Purchase
Price of the Right.
At any time after the time that any person or group becomes an Acquiring Person
and prior to the acquisition by such person or group of 50% or more of the
outstanding Common Shares, the Board of Directors of the Company may exchange
the Rights (other than Rights beneficially owned by such person or group, any
Associate or Affiliate thereof, and certain transferees thereof, which will be
void), in whole or in part, at an exchange ratio of one Common Share or
one-hundredth of a Preferred Share (or of a share of a class or series of the
Company's preferred stock having equivalent rights, preferences and privileges)
per Right (subject to adjustment).
At any time prior to the time that any person becomes an Acquiring Person, the
Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.001 per Right, subject to adjustment, which may (at the
option of the Company) be paid in cash, Common Shares or other consideration
deemed appropriate by the Board of Directors. The redemption of the Rights may
be made effective at such time, on such basis and with such conditions as the
Board of Directors in its sole discretion may establish; provided, however, that
no redemption will be permitted or required after the time that any person
becomes an Acquiring Person. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders of
the Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the Company
without the consent of the holders of the Rights, except that from and after
such time as any person becomes an Acquiring Person no such amendment may make
the Rights redeemable if the Rights are not then redeemable in accordance with
the terms of the Rights Agreement or may adversely affect the interests of the
holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a stockholder of the Company, including, without limitation, the right to vote
or to receive dividends. The Rights will expire on March 23, 2008, unless the
Rights are earlier redeemed or exchanged by the Company, as described.
REVERSE STOCK SPLIT - On May 6, 1998, the Company's stockholders approved a
proposal to amend the Company's Certificate of Incorporation to effect a
one-for-five reverse stock split of the Company's outstanding $.10 par value
Common Stock and to reduce the number of authorized shares from 75,000,000 to
20,000,000 effective May 8, 1998. All share and per share information in these
financial statements as been adjusted accordingly.
PRIVATE EQUITY PLACEMENTS - In May 1996 , the Company issued 2,140,000 units
at a price of $5.00 per unit. In January 1997, issued 1,126,100 units at a
price of $5.00 per unit. Each unit consists of one share of common stock and
a redeemable warrant (further described below). The two private equity
placements provided net proceeds of approximately $14,971,000 to the Company.
27
In conjunction with the May 1996 equity placement, outstanding promissory notes
of $1,500,000 were converted into 300,000 units, all Series C and Series E
Preferred Stock, and 16,135 of the 16,356 outstanding shares of Series D
Preferred Stock was converted into 1,739,519 shares of common stock.
REDEEMABLE WARRANTS - As described above, in conjunction with the May 1996 and
January 1997 private equity placements and conversion of a $1,500,000
outstanding promissory note, the Company issued units, each unit consisting one
share of common stock and one redeemable warrant to purchase one share of common
stock at an exercise price of $7.50 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 the date of issuance
for a period of three years. The Company can redeem the redeemable warrants at
any time subsequent to 180 days after issuance if the closing bid price for the
common stock is at or above $10.00 per share for twenty consecutive trading days
subsequent to when the redeemable warrants first are redeemable.
OTHER WARRANTS - In connection with the May 1996 private equity placement
described above, the Company issued a warrant to the placement agent (the
"Agent's Warrant") to purchase 200,000 shares of the Company's common stock at
$5.00 per share. The Agent's Warrant is not subject to redemption and expires
May 1, 2001.
In connection with the renewal of a line-of-credit agreement in December 1994,
the Company issued to a bank a five-year warrant option to purchase 75,000
shares of common stock at $17.50 per share.
SERIES D CONVERTIBLE PREFERRED STOCK - At March 31, 1998 and 1997 the Company
had 221 shares of Series D Convertible Preferred Stock issued and outstanding.
Each share is convertible into 45 shares of common stock at the request of the
holder. The Preferred Stock has voting rights equal to the number of common
shares into which the preferred shares is convertible. The Preferred Stock is
not entitled to dividends.
SUBORDINATED CONVERTIBLE DEBENTURES - In connection with a December 1993
acquisition, the Company issued $5,000,000 face value, $2,750,000 discounted
carrying value, subordinated convertible debt. The debt was converted into
63,426 shares of Series E Preferred Stock in April, 1995. The Series E
Preferred Stock was converted into 284,212 shares of common stock in 1996.
NOTE 3 - REPOSITIONING AND RESTRUCTURING CHARGES:
The Company's product strategy is centered on a new generation of products,
collectively referred to as "Common Delphi" or "cd.solutions". Consistent with
the Company's product strategy, the development of enhanced versions of legacy
products has been limited. As new products are introduced to the market,
existing customers utilizing legacy products are encouraged to migrate to the
Company's new generation of products. As customers migrate from legacy products
to the Common Delphi platform, maintenance revenues from legacy products
decrease. Causing further decreases in legacy maintenance revenues, during the
first two quarters of fiscal 1998 the Company experienced some customer
attrition related to certain legacy product maintenance price increases
effective in April 1997.
28
During the second quarter of fiscal 1998, in response to changes in the
Company's markets and technology trends, the product strategy was altered
requiring modification of a portion of the underlying technology of Common
Delphi products.
As a result of the decrease in legacy maintenance revenues and the requirement
to modify a portion of the underlying technology of Common Delphi products, the
recoverability of a portion of intangible assets was deemed impaired.
Accordingly, during the second quarter of fiscal 1998, the carrying value of
capitalized and purchased software was reduced $1,283,000 and goodwill and
customer lists of $770,000 were written off.
The Company generated significant operating losses during the first two
quarters of fiscal 1997. In response to the losses, the Company was restructured
resulting in significant reductions in payroll expense and other operating
expenses. In addition, as the Company transitioned out of the hardware
business, a portion of the inventory on hand was deemed obsolete. As a result,
the Company incurred a restructuring charge in fiscal 1997 summarized as follows
(in thousands):
Severance cost $ 643
Inventory Obsolescence 400
Other costs 254
--------
$1,297
--------
--------
In fiscal 1996, the Company adopted a product strategy which dictated
development of a new generation of products, incorporating certain functionality
and features from several of the Company's existing products. As part of the
strategy, the Company ceased to develop enhanced versions of certain existing
products. Consequently, the recoverability of certain intangible assets
classified as goodwill and certain capitalized software costs became impaired.
Further, the Company elected a strategy to consolidate duplicate operations
thereby incurring a charge for severance and excess facilities costs.
The following summarizes the components of a repositioning and restructuring
charge recorded in fiscal 1996 (in thousands):
Write-down goodwill and noncompete
agreements $5,017
Write-down capitalized software
development costs 173
Severance and excess facilities cost 534
------
$5,724
------
------
NOTE 4- INVESTMENT IN APT:
The Company owns a 20% interest in the common stock of Alliance for Productive
Technology, Inc. ("APT"), a privately held company formed as an alliance of
agency automation vendors, insurance companies, agents' associations, and
insurance industry organizations. The purpose of APT is to
29
provide non-proprietary interface products and services to the insurance
industry. The Company has entered into a distribution agreement with APT to
enable it to incorporate certain APT products and features into the Company's
products. The investment of $230,000 has been recorded as a long-term asset
as of March 31, 1998. As further described in Note 6, a portion of the
Company's investment is held as security for a note payable to APT.
NOTE 5 - PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1998 and 1997 consists of the following (in
thousands):
1998 1997
---- ----
Computer equipment and purchased software $6,676 $5,722
Leasehold improvements 984 989
Furniture, fixtures and other 1,742 1,727
------ ------
9,402 8,438
Less accumulated depreciation and amortization (7,318) (6,196)
------ ------
$2,084 $2,242
------ ------
------ ------
NOTE 6 - NOTES PAYABLE:
Notes payable at March 31, 1998, and 1997, are comprised of the following (in
thousands):
1998 1997
---- ----
Bank line-of-credit $ 1,603 $ 1,600
Noncompete note payable 300 -
Note payable - APT 230
----- -----
2,133 1,600
Less current portion (1,923) (1,600)
----- -----
$ 210 $ 0
----- ---
----- ---
BANK LINE-OF-CREDIT - Effective January 1997, the Company established a
$4,000,000 line of credit agreement with a bank subject to certain
conditions. The agreement provides for a minimum monthly interest at the
bank's prime lending rate plus two and one-half percent (2.5%) on the greater
of the actual amount outstanding or $1,600,000. The agreement includes
certain covenants including the maintenance of a minimum net worth of
$2,000,000 and restrictions upon certain activities by the Company without
the approval of the bank including the incurrence of senior debt, certain
mergers or acquisitions, and the payment of dividends. The agreement is
secured by the Company's assets.
During December 1997 and March 1998, the Company executed two amendments to
the line of credit agreement. The amendments extend the maturity date of the
agreement two years to January 31, 2001, alter the provisions of the early
termination fee, and modify the criteria for determining the amount available
under the line. In accordance with the amendments, prior to June 30, 1998
the Company may borrow up to two and one-half times average monthly
collections (as defined ); from July 1998
30
thru September 1998, two times monthly collections; from October 1998 thru
December 1998, one and one-half times collections; from January 1999 thru
March 1999, one times monthly collections and subsequently up to seventy-five
percent of eligible receivables. As of March 31, 1998, borrowings under the
line of credit totaled $1,603,000, and $2,157,000 remained available for
borrowing.
As discussed above, the line of credit agreement provides for minimum monthly
interest on the greater of the balance outstanding or $1,600,000. In order
to minimize interest expense net of interest income, the Company has
periodically drawn on the line of credit and invested the proceeds in short
term marketable securities. The securities are unrestricted and may be
utilized by the Company at any time.
Additional information related to line of credit borrowings for the two years
ended March 31, 1998, is as follows (in thousands):
1998 1997
---- ----
Maximum amount borrowed during the year $2,294 $1,600
Average amount borrowed during the year $1,546 $427
Interest rate at the end of the year 11.0% 11.0%
Weighted average interest rate incurred during
the year 11.7% 9.9%
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.
NONCOMPETE NOTE PAYABLE - The Company entered into various noncompete
agreements in connection with a January, 1991 acquisition. The final
installment of $400,000 was due on January 31, 1997 and was classified as a
current liability as of March 31, 1997. The amount due was subsequently
converted to an 11.75% interest bearing unsecured note. As of March 31, 1998,
the remaining balance is due in three equal annual payments of $119,574
(principal and interest) commencing on January 31, 1999. Commitments related
to the noncompete agreements were amortized and expensed ratably over the
life of each agreement.
NOTE PAYABLE-APT - In conjunction with the purchase of the common stock of
APT discussed in Note 4, the Company entered into a note payable secured by a
portion of the APT common stock. The note bears interest at the prime rate,
8.5% at March 31, 1998. Interest is due semi-annually with a final principal
payment of $230,000 due January 1, 1999. The note may be prepaid without
penalty.
31
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued liabilities at March 31, 1998, and 1997, consist
of the following (in thousands):
1998 1997
---- ----
Trade accounts payable $833 $958
Taxes other than income tax 230 329
Accrued severance and reorganization costs 121 1,284
Other 894 2,096
--- -----
$2,078 $4,667
------ ------
------ ------
NOTE 8 - INCOME TAXES:
Loss before income taxes consisted of (in thousands):
1998 1997 1996
---- ---- ----
Domestic $ (3,985) $ (5,681) $ (11,714)
Foreign 480 (176) (5)
---- --- --
Total $ (3,505) $ (5,857) $ (11,719)
-------- -------- ---------
-------- -------- ---------
The income tax provision (benefit) consisted of (in thousands):
1998 1997 1996
---- ---- ----
Current:
U.S. Federal $ - $-- $--
State (48) 27 114
Foreign (51) -- --
--- --- ---
Total $(99) $27 $114
---- --- ----
---- --- ----
32
The income tax provision differs from the amount obtained by applying the
federal statutory rate because of the following items:
1998 1997 1996
Statutory rate (35.0)% (35.0)% (35.0)%
State income tax (1.4) 0.5 1.0
Amortization of intangible assets relating to
acquired businesses .3 3.3 6.5
Increase in valuation allowances 26.2 24.7 28.5
Other, net 7.1 7.0 0.0
--- --- ---
Effective rate (2.8)% 0.5% 1.0%
--- --- ---
--- --- ---
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences and carryforwards
which give rise to a significant portion of deferred tax assets and
liabilities for 1998 and 1997 are as follows (in thousands):
1998 1997
Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Product enhancements $ - $2,675 $ - $1,872
Reserves 780 - 1,259 -
NOL carryforwards 12,417 - 10,050 -
Tax credit carryforwards 738 - 903 -
--- --------- --- -------
13,935 - 12,212 1,872
Valuation allowance (11,260) - (10,340)
------- --------- -------- -------
Total deferred taxes $2,675 $2,675 $1,872 $1,872
------ ------ ------ ------
------ ------ ------ ------
Due to the uncertainty of realizing any of the net deferred tax assets, the
Company has provided a valuation allowance against the entire net amount.
As of March 31, 1998, the Company has investment business tax credit
carryforwards and net operating loss (NOL) carryforwards for federal income
tax purposes aggregating approximately $32,000,000 expiring at various times
through the year 2012. The utilization of tax credits and net operating
losses may be limited due to changes in ownership and other restrictions
imposed by the Internal Revenue Code.
33
NOTE 9 - LEASE COMMITMENTS:
The Company leases office space under non-cancelable operating leases with
expiration dates ranging through 2002, with various renewal options. Capital
leases range from three to five years and are primarily for computer
equipment.
The aggregate minimum annual lease payments under leases in effect on March
31, 1998 are set forth below (in thousands) as follows:
Capital Operating
Year Leases Leases
- ---- ------ ------
1999 $ 170 $ 988
2000 96 327
2001 48 308
2002 44 120
2003 19 25
------ ------
Total minimum lease
commitments $ 377 $1,768
------
------
Less: amount representing
interest (100)
------
Present value of obligations
under capital leases 277
Less: current portion (120)
------
Long-term obligations under
capital leases $ 157
------
------
The current portion of the present value of obligations under capital leases
is included in the consolidated balance sheets with accounts payable and
accrued expenses, the long-term portion is included with other liabilities.
Rental expense for office facilities and certain equipment subject to
operating leases for fiscal year 1998, 1997 and 1996 aggregated $1,826,000,
$2,421,000 and $2,541,000, respectively.
NOTE 10 - 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 360,000 shares of common
stock for issuance under the plan. New subscriptions are granted by the
Company to eligible employees on August 1st of each year. At March 31,
1998, 4,802 shares are available to be purchased under the plan. These
shares can be exercised on July 31, 1998.
34
NOTE 11 - 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, 1998, 1997, and 1996, the Company did not make any
contributions to the plan.
NOTE 12 - STOCK OPTIONS:
The Company has adopted the 1996 Stock Incentive Plan which provides for the
granting of 1,200,000 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 20,000 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.
At March 31, 1998, the Company had four stock-based compensation plans. The
Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its
stock option plans and its stock purchase plan. Had compensation cost for
these stock based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method
prescribed by FASB Statement No. 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
1998 1997
-------------------------------
Net loss, as reported ($3,406) ($5,884)
Pro forma net loss ($4,417) ($6,276)
Net loss per share, as reported ($0.46) ($0.97)
Net loss per share, pro forma ($0.60) ($1.03)
Because the FASB No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that expected in future years. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
the grants in 1998 and 1997, respectively; no dividends; risk free interest
rates of 6.21% and 6.61% and an expected life of 10 years.
35
A summary of the status of the Company's stock options plans at December 31,
1998, 1997, and 1996, and changes during the years then ended, is presented
below:
Within Plan Outside Plan
----------------------------------- -----------------------------------
Weighted Weighted
Shares Average Shares Average
Under Option Exercise Under Option Exercise
Option Prices Price Option Prices Price
- -----------------------------------------------------------------------------------------------
Balance,
March 31, 1995 285,676 $3.90-$33.79 5.75 18,000 $3.90-$36.90 24.85
Granted 46,000 5.00-7.80 5.50 4,000 6.25 6.25
Exercised (24,200) 3.90-5.00 4.75 - - - - - -
Canceled (59,530) 3.90-24.40 4.80 (2,000) 28.75 28.75
Balance,
March 31, 1996 247,946 $3.90-$33.75 6.05 20,000 $3.90-$36.90 20.70
Granted 484,850 3.45-5.95 4.95 - - - - - -
Exercised (3,100) 5.00 5.00 - - - - - -
Canceled (226,438) 3.90-33.75 5.65 (19,000) 3.90-36.90 20.45
Balance,
March 31, 1997 503,258 $3.45-$33.75 5.15 1,000 $3.90-$36.90 26.25
Granted 826,151 3.28-7.50 4.65 - - - - - -
Exercised (112,100) 3.44-5.00 4.62 - - - - - -
Canceled (370,301) 3.44-7.50 5.20 - - - - - -
Balance,
March 31, 1998 847,008 $3.28-$33.75 $4.77 1,000 $26.25 $26.25
Exercisable
at March 31, 1998 205,901 $3.75-$33.75 $5.88 1,000 $26.25 $26.25
Available for Grant
at March 31,1998 294,075 - - - - - - - - - -
The remaining lives for the options outstanding at March 31, 1998 are 9.2
years. The weighted average fair market value of options granted at March 31,
1998 and 1997 are $4.50 and $3.85, respectively.
36
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 1997 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,
1997.
The executive officers and senior management of the Company are as follows:
Name Age Position
- ---- --- --------
Max Seybold 37 President, Chief Executive Officer
Reid E. Simpson 41 Senior Vice President-Finance & Administration
and Chief Financial Officer
Robin Raina 30 Senior Vice-President
The executive officers of the Company are elected annually by the Board.
Max Seybold joined the Company in January 1998 as Senior Vice
President-Professional Services and was named President and Chief Executive
Officer in February 1998. In March 1998, Mr. Seybold was elected to the Board of
Directors. Prior to joining the Company, Mr. Seybold held the position of
President and Chief Executive Officer for Mindware/BPR, Inc. of Waltham,
Massachusetts, an international solutions consulting firm. Prior to joining
Mindware/BPR Mr. Seybold founded software/professional services firms based in
Switzerland and Germany. Mr. Seybold holds an Masters of Business Administration
in Strategic Management and Information Technology from
Friedrich-Alexander-University in Nuernberg, Germany.
Reid Simpson joined the Company in December, 1997 as Senior Vice
President-Finance & Administration and Chief Financial Officer. Prior to joining
the Company, Mr. Simpson served the
37
Dun & Bradstreet Corporation (D&B), a business information and solutions company
for seventeen years. While at D&B, Simpson served as Chief Financial Officer of
three divisions as follows: from 1993 to 1997, DonTech, a yellow pages
publisher; from 1991 to 1993, Nielson Marketing Research, a market research
company; and from 1988 to 1991, D&B Plan Services, a third party administrator
for health insurance plans. In addition, while at D&B, Mr. Simpson held
positions at McCormack & Dodge, a provider of packaged financial software,
Corporate headquarters, and internal audit. Mr. Simpson received a B.S. in
Accounting from Michigan State University in 1979.
Robin Raina joined the Company in October, 1997 as Vice President-Professional
Services and was promoted to Senior Vice President in February 1998. Prior to
joining the Company, Mr. Raina held senior management positions for Mindware/BPR
serving in Asia and North America. While employed by Mindware/BPR, an
international technology consulting firm, Mr. Raina was responsible for managing
projects for multinational corporations including setting-up offshore
laboratories, building intranets, managing service bureaus and support centers,
providing custom programming, and year 2000 conversions. Mr. Raina holds an
Industrial Engineering degree from Thapar University in Punjab, India.
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 1998 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission within 120 days after March 31,
1998.
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 1998 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after March 31, 1998.
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 1998 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission within 120 days after March 31,
1998.
38
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, 1998, and 1997
- Consolidated Statements of Operations for the Years Ended March
31, 1998, 1997, and 1996
- Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended March 31, 1998, 1997, and 1996
- Consolidated Statements of Cash Flows for the Years Ended March
31, 1998, 1997, and 1996
- 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, 1998, 1997, and 1996.
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.
EXHIBITS
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-8 (No. 333-23361), and
incorporated herein by reference).
3.2 Bylaws of the Company
4.1 Form of Redeemable Warrant to purchase shares of common stock of
Delphi Information Systems, Inc. (filed as Exhibit 4.12 to the
Company's Annual Report on Form 10K for the fiscal year ended March
31, 1996, and incorporated herein by reference).
4.2 Form of Unit Investment Agreement to purchase common stock and
warrants of Delphi Information Systems, Inc. (filed as Exhibit 4.13 to
the Company's Annual Report on Form 10K for the fiscal year ended
March 31, 1996, and incorporated herein by reference).
4.3 Form of Warrant to purchase shares of common stock of Delphi
Information Systems, Inc. held by R.J. Steiken & Company (filed as
Exhibit 4.14 to the Company's Annual Report on Form 10K for the fiscal
year ended March 31, 1996, and incorporated herein by reference).
39
4.4 Rights Agreement between Delphi Information Systems, Inc. and
ChaseMellon Shareholder Services, LLC, as Rights Agent (filed as
Exhibit 99.1 to the Company's Registration of Certain Classes of
Securities on Form 8-A (No. 000-15946) and incorporated herein by
reference).
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).
10.5 Delphi Information Systems, Inc. 1996 Stock Incentive Plan (filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-8 (File
No. 33323261), and incorporated herein by reference).
10.6 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).
10.7 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).
10.8 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).
10.9 Employment agreement dated July 7, 1994, between the Company and M.
Denis Connaghan (filed as Exhibit 10.23 to the Company's Annual Report
on Form 10K for the fiscal year ended March 31, 1995, and incorporated
herein by reference).
10.10 Form of Stock Purchase Warrant between the Company and Silicon Valley
Bank (filed as Exhibit 10.26 to the Company's Annual Report on Form
10K for the fiscal year ended March 31, 1995, and incorporated herein
by reference).
40
10.11 Loan and Security Agreement as amended between the Company and Coast
Business Credit dated January 1997 and related Schedule and Capex
Promissory Note. (filed as Exhibit 10.11 to the Company's Annual
Report on Form 10K for the fiscal year ended March 31, 1997, and
incorporated herein by reference).
10.12 Second Amendment dated December 18, 1997 to Loan and Security
Agreement between the Company and Coast Business Credit dated January
1997. (filed as Exhibit 10.12 to the Company's Form 10-Q for the
quarter ended December 31, 1997, and incorporated herein by
reference.)
10.13* Third Amendment dated March 23, 1998 to Loan and Security Agreement
between the Company and Coast Business Credit dated January 1997.
22.1 The subsidiaries of the Company.
23.1* Consent of Independent Public Accountants
23.2* 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
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K in the fourth quarter of the
year ended March 31, 1998.
The Company filed a report dated April 7, 1998 on Form 8-K to announce
a change in year end, the adoption of a shareholder rights plan and the
declaration of a dividend distribution of one Preferred Share Purchase Right on
each outstanding share of the Company's Common Stock.
41
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/ Max Seybold
-------------------------------------
Max Seybold
President and Chief Executive Officer
Date: June 29, 1998
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 29, 1998
- -------------------------
(Yuval Almog)
/s/Max Seybold Director, President. and June 29, 1998
- ------------------------- Chief Executive Officer
(Max Seybold)
/s/Reid E. Simpson Vice President-Finance & June 29, 1998
- ------------------------- Administration and
(Reid E. Simpson) Chief Financial Officer
/s/William R. Baumel Director June 29, 1998
- -------------------------
(William R. Baumel)
/s/Larry G.Gerdes Director June 29, 1998
- -------------------------
(Larry G. Gerdes)
42
SCHEDULE II
DELPHI INFORMATION SYSTEMS, INC.
Schedule II - Valuation and Qualifying Accounts
for the Years Ended March 31, 1998, 1997 and 1996
Allowance for doubtful accounts receivable.
March 31, March 31, March 31,
1998 1997 1996
---- ---- ----
Beginning Balance $1,613,000 $ 922,000 $ 687,000
Provisions for Allowance 356,000 1,662,000 741,000
Write Off of Accounts Receivable
Against Allowance (1,109,000) (971,000) (506,000)
----------- ----------- ----------
$ 860,000 $ 1,613,000 $ 922,000
----------- ----------- ----------
----------- ----------- ----------
43