UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-2
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED MARCH 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
Commission file number 0-15946
DELPHI INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0021975
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number)
3501 Algonquin Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (708) 506-3100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE OF WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $0.10 per share NASDAQ NMS
Indicate by check mark whether the registrant (a) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
As of June 18, 1993, the number of shares of Common Stock outstanding was
6,530,392. 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 $39,182,352.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement relating to its 1993
Annual Meeting of Stockholders are incorporated by reference into Part III.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ACQUISITIONS, MANAGEMENT CHANGES AND REPOSITIONING
The Company has pursued an acquisition strategy beginning late in fiscal 1991
to strengthen its market position and increase its growth opportunities. In
January 1991, the Company acquired McCracken Computer, Inc. ("McCracken"), a
privately held company, and in December 1991, the Company acquired Redshaw,
Inc. ("Redshaw") from the Hartford Fire Insurance Company and other insurance
companies. Both McCracken and Redshaw were former competitors of the Company
providing proprietary software and automation systems to independent
insurance agencies and brokerages.
In March 1993, the Company acquired Continental Systems, Inc. ("Continental")
a company providing rating service products which help property and casualty
insurance carriers, agencies and brokerages to rate and price insurance
policies for their customers. In late fiscal 1993, the Company also acquired
Compusult, Inc., Project Software Services, Inc. and Specialty Programs
Services, Inc., three smaller companies which provide services to the Redshaw
customers. The Company's acquisitions reflect the consolidation occurring
among vendors in the independent agency automation market. Revenues have
grown from $28.5 million in 1991 to $51.6 million in 1993.
The acquisitions, particularly of McCracken and Redshaw, have significantly
increased the size of the Company. The acquisitions of both McCracken and
Redshaw were accounted for as purchases and their operating result shave been
reported with those of the Company since the Acquisition date of January 31,
1991 for McCracken and December 16, 1991 for Redshaw. The acquisition of
Continental has been accounted for as a pooling of interests and as a result,
the historical financial statements of the Company have been restated to
include the historical results of Continental. During fiscal 1993, 1992, and
1991, Continental reported revenues of $2.8, $2.2 and $2.0 million,
respectively.
During December 1991, the Company appointed a new Chief Executive Officer and
President and began to recruit various new management personnel. During the
fourth quarter of fiscal 1992 as a result of management's evaluation of the
Company's position with respect to future business strategy and the
assimilations of Redshaw and McCracken, the Company decided to consolidate
and reposition its operations and products. The Company charged $7,961,000
to earnings in 1992 related to its consolidation and repositioning. This
included $6,504,000 related to the non-cash write down of intangible assets
to net expected realizable values and $1,457,0000 associated with reductions
and changes in workforce and discontinued facilities. The Company had
substantially completed it recruitment of new management by the end of fiscal
1993.
MARKET
While the Company has increased its market share through acquisitions, fiscal
1992 and fiscal 1993 were a difficult market for the independent agencies as
a down cycle in the property and casualty insurance industry has continued.
The independent agencies were further adversely impacted by the recessionary
North American economy. The soft property and casualty insurance market is
evidenced by minimal or no increases in property and casualty insurance
premiums, which has eroded the profits and equity of the Company's insurance
agency and brokerage customers who receive commissions on insurance premiums.
Historically, the property and
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
casualty industry, often independently of the general economy, goes through
up cycles when insurance premiums are strong and down cycles when insurance
premiums remain flat or decline. The cycle is a function of the insurance
carriers' reserves for their insured customer losses, the related reserve
portfolio performance, competitive strategies and other business issues. The
most recent down cycle has been particularly long compared to historical soft
markets. The Company cannot predict if and when the soft market conditions
will change.
Prospectively, as a result of consolidation within its market, management
believes that the Company's market is changing to one that offers more growth
potential for the Company. Historically, the subsidiaries of insurance
carriers have subsidized the automation of independent agencies in an effort
to influence the distribution of insurance products by the independent
agencies. Many insurance carriers over the last several years have reduced or
eliminated their agency automation strategies. Over the last three years, at
least five insurance carriers have announced either the closing, reduced
support and subsidy, or sale of their agency automation subsidiaries which
compete with the Company. The withdrawal of the subsidiaries of insurance
companies from the market should provide for more favorable market
conditions, particularly if the soft market conditions improve.
RESULTS OF OPERATIONS
The table on the following page sets forth, for the fiscal periods indicated,
the percentage of revenues represented by each item reflected in the
Company's consolidated statements of operations, and the percentage increase
(decrease) in each item of revenue, cost and expense from the prior fiscal
period.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
YEAR TO YEAR PERCENTAGE
INCREASE (DECREASE)
-------------------
PERCENTAGE OF REVENUES FISCAL 1993 FISCAL 1992
YEAR ENDED MARCH 31, VERSUS VERSUS
--------------------
1993 1992 1991 FISCAL 1992 FISCAL 1991
----- ----- ----- ----------- -----------
REVENUES:
Systems 50.5% 57.4 % 60.8% 1.9 % 47.7%
Services 49.5% 42.6 % 39.2% 34.3 % 70.0%
----- ----- ----- ----------- -----------
TOTAL REVENUES 100.0% 100.0 % 100.0% 15.7 % 56.5%
COST OF REVENUES:
Systems 33.3% 39.4 % 31.2% (2.1)% 97.3%
Services 29.6% 26.7 % 27.3% 28.0 % 53.2%
----- ----- ----- ----------- -----------
TOTAL COST OF REVENUES 62.9% 66.1 % 58.5% 10.1 % 76.7%
----- ----- ----- ----------- -----------
Gross Margin 37.1% 33.9 % 41.5% 26.7 % 27.8%
OPERATING EXPENSES:
Product development 6.9% 7.2 % 6.2% 10.2 % 81.8%
Sales & marketing 15.3% 16.7 % 20.4% 6.3 % 27.8%
General & administrative 10.9% 9.1 % 10.3% 38.8 % 38.5%
Amortization of goodwill, customer
lists & noncompete agreements 2.1% 2.5 % 0.7% (0.7)% 490.9%
Consolidation and repositioning costs -- 17.8 % -- * *
----- ----- ----- ----------- -----------
TOTAL OPERATING EXPENSES 35.3% 53.3 % 37.6% (23.5)% 122.1%
----- ----- ----- ----------- -----------
OPERATING INCOME (LOSS) 1.8% (19.5)% 3.9% * *
Interest expense 0.7% 1.1 % 0.5% (23.7)% 252.1%
----- ----- ----- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1.1% (20.6)% 3.4% * *
Income tax provision (benefit) 0.1% (0.3)% 0.4% * *
NET INCOME (LOSS) 1.0% (20.3)% 3.0% * *
===== ===== ===== =========== ===========
* Percentages have been intentionally omitted because such percentages are
not meaningful.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
The Company's revenues are derived from two sources, systems agreements and
service fees. Systems agreements with the Company's customers bundle the
Company's proprietary software with the computer hardware and software of
third parties. Service fees include fees for maintenance, training and
consulting services related to the Company's proprietary software. The
Company's revenue recognition policies comply with the provisions of the
American Institute of Certified Public Accountants (AICPA) Statement of
Position No. 91-1.
Revenues increased 16% in fiscal 1993 and 57% in fiscal 1992 substantially as
a result of the acquisitions of Redshaw in December 1991 and McCracken in
January 1991. The acquisitions of Compusult, Inc., Project Services, Inc.
and Specialty Programs Services, Inc. late in fiscal 1993 also contributed to
the increased revenues in fiscal 1993. Systems revenues increased in fiscal
1993 and 1992 as a result of the acquisitions. Service revenues increased in
fiscal 1993 and 1992 as a result of an expanded number of customers receiving
maintenance consulting and training services along with selected increased
pricing of such services. The Company's expanded customer list is
substantially a result of the acquisitions along with new customer sales.
On a proforma basis, including the Redshaw operations as if Redshaw had been
acquired on April 1, 1991, the Company's total revenues were $52.3 million
for the year ended March 31, 1992. Accordingly, on a proforma basis,
revenues for the year ended March 31, 1993, decreased 1% from the prior year.
The decline in revenues on a proforma basis is attributed to lower systems
sales due to the soft property and casualty insurance market and declining
hardware costs. While an improved property and casualty insurance market
would help increase the revenues and profitability of the Company, the
Company does not anticipate such market improvement during calendar 1993.
The Company hopes to increase systems revenues and profitability by offering
additional products and services to its customers which enhance the
automation of their operations. Furthermore, the Company is also beginning to
sell other ancillary services to insurance carriers which represent a large
potential market for the Company.
COSTS OF SYSTEMS REVENUES. Costs of systems revenues include costs of
computer hardware and third party software along with costs associated with
the purchase and installation of hardware and software products and the
amortization of capitalized software development costs. Costs of systems
revenues, as a percentage of revenues, were 33.3%, 39.4% and 31.2% in fiscal
1993, 1992 and 1991, respectively. Changes in the percentage of costs of
systems as a percentage of revenues are a result of a changing mix of
products sold by the Company significantly related to the acquisitions.
Generally, the Company believes that costs of hardware are increasing as a
percentage of hardware sales due to competitive hardware pricing pressures.
COSTS OF SERVICE REVENUES. Costs of service revenues include costs
associated with maintenance, consulting and training services along with
payments made to third party hardware maintenance vendors. Costs of service
revenues as a percentage of revenues were 29.6%, 26.7% and 27.3%,
respectively, in fiscal 1993, 1992 and 1991. Changes in the percentage of
costs of service revenues as a percentage of revenues reflects the changing
mix of service operations and customers as a result of the acquisitions.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELLING AND MARKETING EXPENSES. Selling and marketing expenses as a
percentage of revenues dropped to 15.3% in fiscal 1993 from 16.7% in 1992 as
compared to 20.4% in 1991. The improvements reflect overhead cost reduction
programs associated with the consolidation of the McCracken and Redshaw
acquisitions and reduced commission expense due to the decline of system
revenues as a percentage of total revenues from 60.8% in fiscal 1991 to 50.5%
in 1993. Sales territory coverage has increased from the acquisitions
resulting in a greater market presence.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses, net of
capitalized software costs, were $3,558,000 in fiscal 1993, $3,229,000 in
fiscal 1992, and $1,776,000 in fiscal 1991. Increases in fiscal 1993 and
fiscal 1992 are substantially as a result of consolidating the McCracken and
Redshaw operations. Expressed as a percentage of revenues, such expenses were
6.9% in fiscal 1993, 7.2% in 1992 and 6.2% in 1991. Product development
expenditures prior to the capitalization of software were $5,634,000,
$4,963,000 and $3,102,000, respectively, in fiscal 1993, 1992 and 1991.
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86, and amortizes these costs
over a maximum of five years. The amount capitalized varies each period
depending on how many software development projects have reached
technological feasibility and whether they are in general release. The
Company strongly believes in the importance of maintaining its technological
strengths and will continue to invest substantial amounts in software
development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were 10.9%, 9.1% and 10.3% of revenues in fiscal years 1993, 1992, and 1991,
respectively. The increase as a percent of revenues in fiscal 1993 is
attributed substantially to the recruiting and hiring of a new management
team as noted under "Acquisitions, Management Changes and Repositioning"
above and costs related to the Company's acquisition and business development
activities. General and administrative expenses decreased as a percentage of
revenues in fiscal 1992 as a result of eliminations of redundant general and
administrative expenses from the acquired organizations.
AMORTIZATION OF GOODWILL AND NONCOMPETE AGREEMENTS. These costs represent
costs from the acquisitions of McCracken since January 1991, Redshaw since
December 1991 and other smaller acquisitions late in fiscal 1993. The
increase in fiscal 1992 reflects the timing of the McCracken and Redshaw
acquisitions. The decrease in fiscal 1993 is attributed to the write down of
goodwill in the Company's consolidation and repositioning during fiscal 1992,
offset somewhat by amortization related to the acquisitions in fiscal 1993.
INTEREST EXPENSE. The Company had interest expense of $376,000 in fiscal
1993 compared to $493,000 in fiscal 1992 and $140,000 in fiscal 1991. The
Company's acquisitions contributed to a higher use of its bank line during
fiscal 1992 resulting in higher interest expense. Positive cash flow reduced
the lines average outstanding borrowings in fiscal 1993, lowering the
interest expense in addition to lower interest rates.
INCOME TAX PROVISION (BENEFIT). At the end of fiscal 1992, the Company
adopted the Statement of Financial Accounting Standards (SFAS) No.
109-Accounting for Income Taxes. There was no material effect to the Company
upon adoption of SFAS No. 109. The effective tax rates under SFAS No. 109
for fiscal years 1993 and 1992 were 7.0% and (1.2)%, respectively, and under
SFAS No. 96 in 1991 was 11.6%. Lower than
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
statutory effective tax rates and tax benefits are substantially a result of
the benefits from net operating losses in prior years offsetting operating
income for federal income taxes.
LIQUIDITY AND CAPITAL RESOURCES. Working capital was a negative $2,448,000
at March 31, 1993, compared to a negative $1,875,000 at March 31, 1992.
Working capital decreased during fiscal 1993 substantially as a result of the
reclassification of the Company's line of credit from long-term to short-term
per terms of the credit agreement. Excluding the reclassification of the
line of credit, net working capital increased $1,496,000 during fiscal 1993,
reflecting profitability plus non-cash expense items and reduced inventories.
Working capital decreased in fiscal 1992 substantially as a result of the
acquisition of Redshaw's negative working capital.
A major component of the Company's negative net working capital position is a
result of deferred revenues of $5,392,000 at March 31, 1993 substantially
representing prepaid maintenance fees from it customers which are recognized
as revenue ratably over the maintenance agreement terms. Since this
liability is satisfied through normal on-going operations of the Company's
service organization and does not require a payment to a third party, the
Company's bank does not view deferred revenue as a liability in the
calculation of financial covenants under the Company's line of credit.
Net cash provided by operating activities was $535,000, $402,000 and $271,000
for fiscal years ended in 1993, 1992 and 1991, respectively. Although the
Company reported a $9,064,000 net loss in fiscal 1992, cash provided by
operating activities was positive because a substantial portion of the loss
was related to non-cash items including the write-off of goodwill and
capitalized software.
Cash used in investing activities was $3,495,000, $2,055,000 and $2,990,000
for the fiscal years ended 1993, 1992 and 1991. Expenditures for capitalized
software development and capital goods have increased absolutely each year as
a result of the acquisitions of Redshaw and McCracken but remained similar as
a percentage of revenues. The cash used in fiscal 1991 includes $1,274,000
related to the acquisition of McCracken Computer Inc., including payments
under noncompete agreements.
Cash from financing activities reflects the Company's borrowing and payment
activities on its line of credit, proceeds from the exercise of options under
the Company's various stock option plans and the issuance of preferred stock.
In fiscal 1992, the Company raised $2,215,000 from the issuance of its
Series A Preferred Stock and in January 1993, the Company raised $1,488,000
in net proceeds from the issuance of additional shares of its Series A
Preferred Stock. On August 20, 1992, pursuant to authorization by
stockholders, the Company's $3,000,000 face amount of subordinated notes
issued in the acquisition of Redshaw were converted into 30,000 shares of
Series B Preferred Stock. See Notes 9 and 10 of Notes to Consolidated
Financial Statements of the Company.
The Company has a line of credit agreement with a bank totaling $5 million
which expires on July 5, 1994. Permitted borrowings under the line of credit
vary as a percentage of qualified accounts receivable. At March 31, 1993,
the Company had borrowed $3,114,000 on its line of credit compared to
$2,069,000 on March 31, 1992. The Company's line of credit agreement requires
that the Company maintain certain minimum financial ratios. The line also
restricts certain activities of the Company without the approval of the bank,
including the
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
incurrence of senior debt, mergers and acquisitions, and the payment of
dividends. At March 31, 1993, $1,100,000 remained available for borrowing
under the Company's line of credit agreement.
On June 8, 1993, the Company's bank renewed it line of credit agreement with
the Company, which now expires May 15, 1994. The bank lowered its interest
rate on the line of credit from Prime Plus 3% to Prime Plus 2% (which adjusts
downwards to Prime Plus 1% as the Company meets certain financial objectives)
and set financial covenants to reflect the acquisition activity of the
Company in fiscal 1993. The renewed line of credit established new financial
covenants for the Company for the quarter ended March 31, 1993. The Company
was in compliance with these covenants.
The Company believes that cash flows from its operations, along with
borrowings on its line of credit agreement are sufficient to meet its current
liabilities as they become due along with meeting the Company's working
capital and capital expenditure requirements for at least the next fiscal
year. The Company further believes that continued and improving
profitability will strengthen the Company's liquidity position and, to that
end, the Company has pursued various programs to enhance profitability
including the consolidation and repositioning of the Company at the end of
fiscal 1992. During fiscal 1993, while the Company continued reducing
certain redundant expenses of acquired companies, the Company also recruited
and strengthened it management team with the goal of improving the Company's
growth and profitability. Further, the Company is pursuing the acquisition
of additional companies and products to expand its product offering to its
large customer base and to a new market, the insurance carriers, thus
leveraging the Company's cost of sales to create greater profitability. The
Company does not have any material commitments for capital expenditures.
The significant increase in the allowances for uncollectible accounts
receivable from $227,000 at March 31, 1991, to $1,188,000 at March 31, 1992,
or from 4% of accounts receivable to 12%, is substantially a result of
allowances acquired in the Redshaw acquisition. Previous to Redshaw's
acquisition, Redshaw, under a new program, began billing its customers for
services which had previously been provided at no cost to the customers,
which results in an increased amount of disputed receivables. Redshaw began
collecting such receivables in late fiscal 1992, but set aside a reserve to
provide for expected non-collection. As this collection process is
completed, the allowance is expected to decline as was the case in fiscal
1993 as the reserve decreased to 8% of accounts receivable.
MARKET INFORMATION
The principal market for the Company's common stock (NASDAQ Symbol DLPH) is
the National Market System of the National Association of Securities Dealers
Automated Quotation System (NASDAQ). As of June 4, 1993, there were 215
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.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth the high and low bid prices for common stock
for each calendar quarter in the two year period ending March 31, 1993.
FISCAL 1992 HIGH LOW
First Quarter $7.75 $7.00
Second Quarter 8.00 6.50
Third Quarter 7.50 6.50
Fourth Quarter 7.88 6.75
FISCAL 1993 HIGH LOW
First Quarter $7.50 $6.75
Second Quarter 7.25 6.00
Third Quarter 6.50 5.75
Fourth Quarter 7.75 6.13
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
ASSETS
MARCH 31 1993 1992
-------- -------- --------
CURRENT ASSETS:
Cash $ 1,141 $ 1,394
Accounts receivable, less allowances of $735 (1993)
and $1,188 (1992) 8,273 8,667
Inventories 849 1,797
Prepaid expenses and other assets 2,001 1,549
-------- --------
TOTAL CURRENT ASSETS 12,264 13,407
Property and equipment, net 3,600 3,249
Software development costs, net 4,506 3,432
Goodwill and customer lists, net 2,961 2,586
Other assets 1,404 1,558
-------- --------
TOTAL ASSETS $ 24,735 $ 24,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 3,574 $ 867
Accounts payable and accrued liabilities 4,470 7,333
Accrued payroll and related benefits 1,276 2,799
Deferred revenue 5,392 4,283
-------- --------
TOTAL CURRENT LIABILITIES 14,712 15,282
Notes payable -- 2,454
Other liabilities 296 236
-------- --------
TOTAL LIABILITIES $ 15,008 $ 17,972
-------- --------
Commitments and contingencies: (Note 8)
Subordinated convertible debt -- 2,542
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 2,000,000 shares authorized,
Series A, 16,577 (1993) and 9,945 (1992) shares issued
and outstanding 3,703 2,215
Series B, 61,950 (1993) and 31,950 (1992) shares issued
and outstanding 5,250 2,708
Common stock, $.10 par value:
Non-designated, 12,000,000 shares authorized
6,528,369 (1993) and 6,160,615 (1992) issued
and outstanding 653 616
Additional paid-in capital 12,333 10,969
Accumulated deficit (12,291) (12,822)
Cumulative foreign currency translation adjustment 79 32
-------- --------
TOTAL STOCKHOLDERS' EQUITY 9,727 6,260
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,735 $ 24,232
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31, 1993 1992 1991
-------------------- ------- ------- -------
REVENUES:
Systems $26,057 $25,581 $17,321
Services 25,550 19,024 11,188
------- ------- -------
TOTAL REVENUES 51,607 44,605 28,509
COSTS OF REVENUES:
Systems 17,201 17,570 8,903
Services 15,265 11,930 7,788
------- ------- -------
TOTAL COST OF REVENUES 32,466 29,500 16,691
------- ------- -------
GROSS MARGIN 19,141 15,105 11,818
OPERATING EXPENSES:
Product development 3,558 3,229 1,776
Sales and marketing 7,909 7,439 5,821
General and administrative 5,630 4,055 2,927
Amortization of goodwill, customer lists and
noncompete agreements 1,097 1,105 187
Consolidation, repositioning and restructuring
charges -- 7,961 --
------- ------- -------
TOTAL OPERATING EXPENSES 18,194 23,789 10,711
------- ------- -------
OPERATING (LOSS) INCOME 947 (8,684) 1,107
INTEREST EXPENSE 376 493 140
------- ------- -------
(Loss) income before income taxes 571 (9,177) 967
Income tax provision (benefit) 40 (113) 112
------- ------- -------
NET INCOME (LOSS) $ 531 ($9,064) $ 855
======= ======= =======
NET INCOME (LOSS) PER COMMON SHARE $ 0.07 ($1.53) $ 0.17
======= ======= =======
Weighted average common shares and common share
equivalents outstanding 7,897 5,922 5,128
======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARES OUTSTANDING)
PREFERRED STOCK COMMON STOCK
------------------------------------- ------------------- ADDITIONAL FOREIGN
SERIES A: SERIES B: PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
------ ------ ------ ------ --------- ------ ------- ----------- -----------
BALANCE, MARCH 31, 1990 -- $ -- -- $ -- 4,653,141 $466 $7,788 ($4,613) $ --
------ ------ ------ ------ --------- ---- ------- -------- ----
NET INCOME 855
Exercise of stock options 44,775 5 154
Issuance of common stock
in connection with the
McCracken acquisition 1,032,000 103 3,513
Amortization of warrants 29
------ ------ ------ ------ --------- ---- ------- -------- ----
BALANCE, MARCH 31, 1991 -- -- -- -- 5,729,916 574 11,484 (3,758) --
------ ------ ------ ------ --------- ---- ------- -------- ----
Net loss (9,064)
Exercise of stock options 114,302 12 378
Exercise of employee stock
purchase plan 33,751 3 169
Issuance of common stock
in conjunction with the
Redshaw acquisition 282,646 28 1,872
Issuance of Series A Preferred
Stock 9,945 2,215
Issurance of Series B Preferred
Stock at redemption value
in connection with the
Redshaw acquisition 31,950 2,708
Redshaw purchase price allo-
cation adjustment required
to carry the Series B
Preferred stock and
subordinated convertible
debentures at fair market
value (2,950)
Amortization of warrants 16
Translation adjustment 32
------ ------ ------ ------ --------- ---- ------- -------- ----
BALANCE, MARCH 31, 1992 9,945 2,215 31,950 2,708 6,160,615 617 10,969 (12,822) 32
------ ------ ------ ------ --------- ---- ------- -------- ----
Net income 531
Exercise of stock options 231,575 23 807
Exercise of employee stock
purchase plan 22,957 2 134
Issuance of common stock
in conjunction with the
acquisitions of Compusult, Inc.
Project Software Services, Inc.,
and Specialty Programs
Services, Inc. 113,222 11 423
Issuance of Series A Preferred
stock 6,632 1,488
Issuance of Series B Preferred
stock due to the conversion of
subordinated debentures 30,000 2,542
Translation adjustment 47
------ ------ ------ ------ --------- ---- ------- -------- ----
BALANCE, MARCH 31, 1993 16,577 $3,703 61,950 $5,250 6,528,369 $653 $12,333 ($12,291) $79
------ ------ ------ ------ --------- ---- ------- -------- ----
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31, 1993 1992 1991
-------- -------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 531 ($9,064) $ 855
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,032 749 523
Amortization of capitalized software development costs 1,002 931 913
Amortization of goodwill and acquisition costs 1,097 1,105 187
Write-off of goodwill -- 5,598 --
Write-off of capitalized software development costs -- 1,156 --
Foreign currency translation adjustment 47 32 --
Other -- (14) --
CHANGES IN ASSETS AND LIABILITIES NET OF EFFECT OF
ACQUISITION OF BUSINESSES:
Accounts receivable, net 484 (1,784) (2,089)
Inventories 955 622 439
Prepaid expenses and other assets (971) (1,344) 669
Goodwill and customer lists (264) (122) --
Accounts payable and accrued liabilities (2,966) 1,322 (169)
Accrued payroll and related benefits (1,581) 821 149
Deferred income taxes -- (185) 112
Other liabilities and deferred revenue 1,169 579 (1,318)
-------- -------- -------
Net cash provided by operating activities 535 402 271
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures; net of retirements (1,361) (577) (390)
Expenditures for capitalized software development (2,076) (1,734) (1,326)
Cash outlays for acquisitions, net of cash acquired (58) 256 (294)
Prepaid noncompete agreements (980)
-------- -------- -------
Net cash used in investing activities (3,495) (2,055) (2,990)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable (10,642) (14,532) (5,074)
Borrowings on notes payable 10,895 13,650 7,935
Proceeds from exercise of stock options and
employee stock purchase plan 966 578 170
Proceeds from issuance of preferred stock 1,488 2,215 --
-------- -------- -------
Net cash provided by financing activities 2,707 1,911 3,031
-------- -------- -------
Net increase (decrease) in cash (253) 258 312
Cash at the beginning of the year 1,394 1,136 824
-------- -------- -------
Cash at the end of the year $ 1,141 $ 1,394 $ 1,136
======== ======== =======
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 215 $ 398 $ 101
Taxes paid 67 4 --
NON-CASH TRANSACTIONS:
Common stock, preferred stock, subordinated
convertible debentures and notes payable
issued for acquisitions $ 434 $ 5,250 $ 3,605
======== ======== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Delphi Information Systems, Inc.
We have audited the accompanying consolidated balance sheets of Delphi
Information Systems, Inc. (a Delaware Corporation) and subsidiaries as of
March 31, 1993, and 1992, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended March 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts 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.
It is our opinion, the financial statements referred to above present fairly,
in all materials respects, the financial position of Delphi Information
Systems, Inc. and subsidiaries as of March 31, 1993, and 1992, and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 1993, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Los Angeles, California
May 14, 1993
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF THE COMPANY
Delphi Information Systems, Inc. (the "Company") develops, markets and
supports computer software systems which automate independent property and
casualty insurance agencies and brokerages including the areas of rating,
sales management, policy administration, accounting and electronic interface
with the computer of insurance carriers. The Company also markets computer
hardware and hardware support services to its customers.
On January 31, 1991, the Company acquired all of the outstanding stock of
McCracken Computer Inc. ("McCracken") for consideration of $3,200,000 in cash
and 1,032,000 shares of the Company's common stock. On December 16, 1991,
the Company acquired all of the outstanding stock of Redshaw, Inc.
("Redshaw") for consideration of $3,750,000 in cash less $1,750,000 cash paid
to Delphi related to a service agreement, 282,646 shares of the Company's
common stock, 31,950 shares of Series B Preferred stock and $3,000,000
principal amount, $2,542,000 carrying value of subordinated convertible notes
of the Company due December 12, 1994. The notes were converted into 30,000
shares of the Company's Series B Preferred Stock in September, 1992, (see
Notes 8, 9 and 10).
Both McCracken and Redshaw, similar to the company, provide computer
automation systems and services to independent property and casualty
insurance agencies and brokerages. The acquisitions have been accounted for
as purchases. Accordingly, the result of McCracken have been recorded in the
financial statements commencing on February 1, 1991, and the result of
Redshaw have been recorded in the financial statements commencing December
17, 1991. The McCracken transaction was valued at $6,805,000 including an
assigned fair value of $3,605,000 for the company's common stock exchanged in
the transaction. The excess of the cost of the acquisition over the net fair
value of identifiable assets and liabilities assumed at the date of
acquisition of $5,075,000 was recorded as an intangible asset and amortized
on a straight-line basis over ten years. Subsequently, the intangible asset
was written down to its net realizable value of $1,534,000 at March 31, 1992,
as part of a repositioning of the Company (see Note 3).
The Redshaw transaction was valued at $6,200,000 including an assigned fair
value of 4,200,000 for common stock, Series B Preferred stock, and
subordinated convertible debt issued in the transaction. The excess of the
cost of the acquisition over the net fair value of identifiable assets and
liabilities totaled $3,568,000. The Company assigned $879,000 of the value
to customer lists to be amortized on a straight-line basis over ten years.
The remaining amount was charged to earnings as part of a consolidation and
repositioning of the Company (see Note 3).
Proforma revenues, net loss and loss per share of the Company for the years
ended March 31, 1992 and March 31, 1991, are presented as though the
McCracken and Redshaw operations had been combined with the Company at the
beginning of each of these periods. The proforma results do not reflect any
changes in operations which may occur as a result of the mergers.
Fiscal 1992 proforma revenues, net loss and loss per share are $52,286,000,
$7,908,000 and $1.44, respectively. Fiscal 1991 proforma revenues, net loss
and loss per share are $62,856,000, $1,317,000 and $0.22, respectively.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proforma loss and loss per share include the amortization of noncompete
agreements, goodwill and customer lists representing expected annual charges
of $832,000 after the write down of these assets in the consolidation and
repositioning of the Company (see Note 3). Also included is additional
interest expense from bank debt used to fund a portion of the acquisitions of
$450,000 for each year.
The Company acquired all of the outstanding stock of Specialty Programs
Services, Inc. on December 1, 1992; Compusult, Inc. on December 9, 1992, and
substantially all of the assets and business of Project Software Services,
Inc. on January 15, 1993, for an aggregate of 113,222 shares which were
assigned an aggregate fair value of $434,000. These companies provide
service and products to the Redshaw customers. The acquisitions have been
accounted for as purchases and the result of their operations have been
recorded in the Company's financial statements commencing on their respective
dates of acquisition. The excess of the costs of the acquisitions over the
net fair value of identifiable assets and liabilities totaled $535,000 and
has been recorded as an intangible asset and amortized on a straight-line
basis over five years.
On March 9, 1993, the Company acquired all of the outstanding stock of
Continental Systems, Inc. ("Continental") in exchange for 444,714 shares of
the Company's Common Stock. Continental develops and markets insurance
rating software and services for property and casualty insurance carriers and
the independent agencies and brokerages in the property and casualty
insurance industry. The merger was accounted for as a pooling of interests.
Consequently, the historical financial statements of the Company have been
restated to include the historical result of Continental.
Fiscal 1993 revenues for the previously separate companies were $48,790,000
for the Company and $2,817,000 for Continental, and the net income was
$663,000 for the Company and the net loss for Continental was $132,000.
Fiscal 1992 revenues for the previously separate companies were $42,396,000
for the Company and $2,209,000 for Continental, and the net loss was
$8,653,00 for the Company and $411,000 for Continental.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation - The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries after elimination of
inter-company transactions and balances.
Revenue Recognition - The Company recognizes revenues related to software
licenses and software maintenance in compliance with the American Institute
of Certified Public Accountants (AICPA) Statement of Position No. 91-1,
"Software Revenue Recognition." System revenues consist of revenues earned
under software license agreements and revenues from computer hardware
purchased by customers of the Company. Revenues are recognized as the
related software and hardware products are shipped to the customers. Where
partial shipments on an order are made, revenue is recognized at the time of
shipment to the customer based upon the ratio of the cost of the partial
shipment to the cost of the order. The Company bundles its software with
computer hardware in its purchase and license agreement with its customers
and, accordingly, cannot separate hardware from software revenues.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service revenues include maintenance fees for providing system updates for
software products, user documentation and technical support. Hardware
maintenance provided by third parties, but billed by the Company, is also
offered to customers. Maintenance is generally billed to the customers in
advance either monthly or quarterly and recognized as revenue over the term
of the maintenance contract. Other service revenues including training and
consulting are recognized as the service is performed. Revenues related to
custom programming are recognized based on the percentage of completion
method.
Software Development Costs - The Company capitalizes internally generated
software development costs in compliance with the Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed." Capitalization of software
development costs begins upon the establishment of technological feasibility
for the product. The establishment of technological feasibility and the
ongoing assessment of the recoverability of these costs consider external
factors including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amortization of capitalized software development costs begins
when the products are available for general release to customers. The annual
amortization is the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross product revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the
product including the period being reported on. The maximum amortization
period of software development costs on a straight-line basis is five years.
Capitalized software costs are amortized on a product-by-product basis.
Net software development costs at March 31, 1993, and 1992, consist of the
following (in thousands):
1993 1992
----- ------
Total software development costs
capitalized $8,415 $6,339
Less accumulated amortization (3,909) (2,907)
----- -------
$4,506 $3,432
====== =======
During the fourth quarter of fiscal 1992, the Company wrote down its
capitalized software development costs by $906,000 (see Note 3).
Inventories - Inventories, which consist primarily of computer equipment and
consist entirely of finished goods, are stated at the lower of cost or market
value. The costs of substantially all inventories is determined by specific
identification.
Goodwill and Customer Lists - Intangible assets relate to the excess of the
cost of acquisitions over the net fair value of identifiable assets and
liabilities, and value assigned to customer lists. These costs are being
amortized on straight-line basis over five to ten years. Subsequent to
acquisitions, the Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining useful life of
goodwill may warrant revisions or that the remaining balance of goodwill may
not be recoverable. When factors indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related business
segment's sufficiency of operating income and related cash flow over the
remaining life of the goodwill in measuring whether the goodwill is
recoverable. If management's assessment or other facts and circumstances
pertaining to the recoverability of intangible
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets of a particular business unit were to change, including their estimate
of future operating income and related cash flows, the Company would adjust
the carrying value of intangible assets as appropriate. As of March 31,
1993, and 1992, the accumulated amortization was $898,000 and $1,264,000,
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 seven 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. When SFAS No. 109 was adopted at the end of fiscal
1992, there was no significant impact on the balance sheet or statements of
operations.
Income (Loss) Per Common Share - Income (loss) per common share for fiscal
1993, 1992 and 1991 are based on the weighted average number of common shares
outstanding which includes the dilutive effect of convertible preferred
stock, options and warrants in fiscal 1993 and 1991. The effect of dilutive
common share equivalents is not included in the loss per common share
calculation for fiscal 1992. Primary and fully diluted earnings per share
are the same for all periods presented.
Foreign Currency Transactions - The accounts of the Company's foreign
subsidiary have been translated according to the provisions of the Statement
of Financial Accounting Standards No. 52, "Foreign Currency Translation."
Gain or losses resulting from translation of the foreign subsidiary's
financial statements are included in stockholders' equity. Any gains or
losses resulting from foreign currency transactions are reflected in the
consolidated results of the period in which they occur.
Reclassification - Certain reclassifications have been made in the prior
years' financial statements to conform to the 1993 presentation.
NOTE 3 - CONSOLIDATION AND REPOSITIONING OF OPERATIONS AND PRODUCTS:
In 1992, new management of the Company determined that a consolidation and
repositioning was necessary as a result of an evaluation of the Company's
position with respect to new technologies, current markets and future
business. In evaluating the position of the Company, it was determined that
it was necessary to write down certain intangible assets to their net
realizable value. Therefore, during 1992, as a result of the consolidation
of operations and the repositioning of products, the Company decided to
restructure its business and charge to earnings $7,961,000 of related costs.
The consolidation and repositioning of the Company included a redirection of
the marketing and product development efforts along with the elimination of
certain personnel. The following summarizes the major consolidation and
repositioning costs (in thousands):
Non-cash write down of intangible assets related
to the McCracken and Redshaw acquisitions $5,598
Non-cash write down of capitalized software
development costs 906
Reductions and changes in workforce and the
eliminations of facilities 1,457
------
$7,961
======
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the above, Continental recorded a non-cash write down of
purchased software of $250 in fiscal 1992.
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1993, and 1992, consists of the following
(in thousands):
1993 1992
------ ------
Computer equipment & purchased software $ 6,574 $ 6,467
Leasehold improvements 1,388 1,381
Furniture, fixtures and other 2,052 1,920
------- -------
10,014 9,768
Less accumulated depreciation and amortization (6,414) (6,519)
------- -------
$ 3,600 $ 3,249
======= ========
NOTE 5 - NOTES PAYABLE:
Notes payable at March 31, 1993, and 1992, are comprised of the following:
1993 1992
------- ------
Notes payable to bank $ 3,114 $2,069
Note payable - Norick Software, Inc. 460 1,072
Other notes 0 180
------- ------
3,574 3,321
Current portion (3,574) (867)
------- -------
$ 0 $2,454
======= =======
The Company has a $5,000,000 line of credit agreement with a bank of which
$3,114,000 was outstanding at March 31, 1993. The line, as extended on June
8, 1993, carries an interest rate at the bank's prime lending rate plus 2
percent (which adjusts downward to 1 percent as the Company meets certain
financial objectives) and expires July 8, 1994. Permitted borrowings under
the line vary as a function of qualified accounts receivable and are
collateralized by substantially all of the Company's assets. The agreement
contains certain restrictive covenants including achievement by the Company
of specified operating results and balance sheet ratios. The agreement also
restricts certain activities of the Company without the approval of the bank,
including the incurrence of senior debt, mergers and acquisitions, and the
payment of dividends. The renewed line of credit established new financial
covenants for the Company for the quarter ended March 31, 1993. The Company
was in compliance with these covenants.
Additional information related to short-term borrowings for the three years
ended March 31, 1993, is as follows (in thousands):
1993 1992 1991
------ ------ ------
Maximum amount borrowed during the year $3,114 $4,224 $3,445
Average amount borrowed during the year $1,815 $2,618 $ 820
Interest rate at the end of the year 9.0% 10.0% 12.5%
Weighted average interest
rate incurred during the year 9.3% 11.0% 12.2%
====== ====== ======
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Average borrowings were determined based on the amounts outstanding at each
month end. The weighted average interest rate during the year was computed
by dividing actual interest by average borrowings outstanding during each of
the years.
The $1,072,000 note was issued in March, 1992, to purchase a customer list
and certain agreements of Norick Software, Inc. The note bears interest at
11% due in varying monthly installments ranging from $71,000 to $79,000
through June 1, 1993, including a final installments of $243,000 due June 1,
1993. Continental also had other notes outstanding with a bank at March 31,
1992, subsequently paid by the Company.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts Payable and accrued liabilities at March 31, 1993, and 1992, consist
of the following (in thousands):
1993 1992
------ ------
Trade accounts payable $3,599 $6,526
Taxes other than income tax 405 555
Other 466 252
------ ------
$4,470 $7,333
====== ======
NOTE 7 - INCOME TAXES
Components of the deferred tax provision (benefit) resulting from temporary
differences in the recognition of certain items for tax and financial
reporting purposes are as following (in thousands):
1993 1992 1991
------ ------ -----
Installment sales deferrals $-- $(38) $(38)
State taxes, net of federal tax effect 40 (100) 56
Tax credits and net operating loss carryovers (1,018) 938 (116)
Capitalized product development 365 (35) 140
Reserves 623 (915) 21
Depreciation, amortization and other 30 37 49
------ ------ -----
$40 $(113) $112
====== ====== =====
The income tax provision (benefit) on income (loss) differs from the amount
obtained by applying the federal statutory rate because of the following
items:
1993 1992 1991
------ ------ -----
Statutory rate 34.0% (34.0)% 34.0%
Losses producing no current tax benefit -- 31.4 --
State income tax, net of federal tax effect 7.0 1.1 6.5
NOL used to offset income (148.3) (10.3) (35.5)
Alternative minimum tax -- -- 3.0
Reserves 109.1 10.1 2.4
Other, net 5.2 0.5 2.7
------ ------ -----
Effective Rate 7.0% (1.2)% 13.1%
====== ====== =====
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes (credit) for 1993 reflect the impact of "temporary
differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws. These temporary
differences are determined in accordance with SFAS No. 109 and are more
inclusive in nature than "timing differences" as determined under previously
applicable accounting principles.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1993 are as follows:
DEFERRED TAX DEFERRED TAX
(IN THOUSANDS) ASSETS LIABILITIES
------------- ------------- ------------
Product enhancements $ 1,532 $ --
Deferred rent -- 136
Reserves -- 741
NOL not utilized 2,459 --
Tax credits not utilized 1,191 --
------- ----
5,182 877
Valuation allowance (4,329) --
Total deferred taxes $ 853 $877
======= ====
As of March 31, 1993, the Company had investment and business tax credit
carryovers of $161,395 and $1,029,340, respectively for both financial
statement and federal income tax purposes. In addition, the Company has net
operating losses available for offset against future taxable income as
follows (in thousands):
PRIMARY STATE
FEDERAL TAXING AUTHORITY
----------------------- -------------------------
ALTERNATIVE ALTERNATIVE
REGULAR MINIMUM REGULAR MINIMUM
TAX TAX TAX TAX
------- ----------- ------- ----------
Financial statement purposes $ 7,039 $6,507 $1,320 $2,912
Income tax purposes $12,078 $8,776 $2,960 $3,557
In addition, the Company received net operating loss carryforwards in the
acquisition of Redshaw of $3,220,136 for regular tax and $3,102,634 for
alternative minimum tax. The Company received net operating loss
carryforwards in the merger of Continental of $1,450,000 for financial
statement purposes and $430,000 for federal income tax purposes.
Federal net operating loss carryovers and a substantial portion of investment
and other business tax credits will begin to expire after 1997, becoming
fully expired by the year 2007 if not offset against future taxable income. As
a result of acquisitions discussed in Note 1, the utilization of net
operating losses relating to the entities acquired could be limited due to
their ownership change. Additionally, the State of California has suspended
the use of net operating losses to offset against any income for 1993 and 1994.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
Leases - The Company leases office space under non-cancelable operating
leases with expiration dates ranging through 1999, with various renewal
options. Other operating leases range from three to five years and are
primarily for computer equipment.
The aggregate minimum annual lease payments under leases in effect on March
31, 1993, are set forth below (in thousands) as follows:
CAPITAL OPERATING
FISCAL YEAR ENDING LEASES LEASES
------------------ ------- ---------
1994 $ 61 $ 3,148
1995 61 2,721
1996 61 2,006
1997 5 1,424
1998 -- 1,573
Thereafter -- 519
---- -------
Total minimum lease
commitments $188 $11,391
=======
Less: amount representing
interests (27)
----
Present value of obligations
under capital leases 161
Less: current portion (47)
----
Long-term obligations
under capital leases $114
====
Rental expense covering the Company's office facilities and equipment for the
fiscal years 1993, 1992 and 1991 aggregated $2,849,000, $2,413,000 and
$1,635,000, respectively.
Noncompetition Agreements - The Company entered into various noncompetition
agreements with the shareholders of McCracken (see Note 1) which expires over
a period of 5 to 10 years. These agreements require the Company to make
payments totaling $4,700,000 to the McCracken shareholders over six years of
which $2,308,000 has been paid to date. Future installments of $664,000 are
due on the January 31 anniversary date of the acquisition in 1994 through
1996 and $400,000 in 1997. Noncompetition Agreements entered with the
shareholders of other acquisitions require a total of $100,000 to be paid
through November, 1995. Commitments related to the noncompetition agreements
are amortized and expensed ratably over the life of each agreement.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service Agreement - In connection with the acquisition of Redshaw
on December 16, 1991, the Company entered into a Service
Agreement with Redshaw and its former shareholders to provide
certain maintenance and support services for at least two years
to users of the Redshaw insurance agency automation systems.
Redshaw, under separate agreements with its customers, receives
payments for these services. At the closing of the acquisition,
the Company received a non-refundable fee of $1,750,000 for its
commitment to provide such services and has been accounted for in
connection with the overall purchase of assets and, therefore,
has been netted against the consideration in determining the fair
value of the acquisition.
Contingencies - The Company is involved in certain legal action
and claims arising in the ordinary course of its business. It is
the opinion of management and legal counsel that such litigation
and claims will be resolved without a material effect on the
Company's future results of operations or its financial position.
NOTE 9 - SUBORDINATED CONVERTIBLE DEBENTURES:
In connection with the acquisition of Redshaw on December 16,
1991, the Company issued $3,000,000 face value, $2,542,000
discounted carrying value, of subordinated convertible debt to
shareholders of Redshaw. The notes were converted into 30,000
shares of the Company's Series B Preferred Stock in September,
1992, as approved by the Company's stockholders in August, 1992.
NOTE 10 - PREFERRED STOCK:
Series A Preferred Stock - During May, 1991, and January, 1993,
the Company issued and sold in two private placements 9,945 and
6,632 shares, respectively, of its Series A Preferred stock par
value of $.10 per share for a total of $2,249,559 and $1,500,138,
respectively. The preferred stock is convertible by its holders
at $4.35 per share into 862,000 shares of common stock of the
Company not earlier than two years subsequent to it issuance and
automatically converts to common stock three years after it
issuance. The preferred stock includes voting rights equivalent
to the number of common shares into which the preferred stock is
convertible; certain registration rights on the common stock into
which the preferred stock is converted; and certain antidilution
covenants. No dividends are required under the preferred stock
agreement. Issuance costs related to the sales of preferred
stock totaled $35,000 in May, 1991, and $12,000 in January, 1993.
Series B Preferred Stock - In connection with the acquisition of
Redshaw on December 16, 1991, 31,950 shares of the Company's
Series B Preferred stock were issued to shareholders of Redshaw.
In September, 1992, the Company's subordinated convertible
debentures were converted into 30,000 shares of the Company's
Series B Preferred stock. The 61,950 shares of Series B
Preferred stock become convertible into common stock at the
option of the holder after December 12, 1994, and automatically
converts into common stock on December 13, 1995. The number of
share of common stock issuable on conversion of each share of
Series B Preferred stock is determined by dividing $100 by the
average daily closing price of the common stock for the 30
trading days prior to conversion; however, not less that $6 per
share. The maximum number of shares of common stock issuable on
conversion of the Series B Preferred stock will be 1,032,50
shares on December 6, 1994, (subject to antidilution
adjustments), using the closing trading value on March 31, 1993,
and 1992, of 7 1/4 and 6 7/8, respectively, the 61,950 shares of
Series B Preferred stock would be converted into 780,983 and
776,997 common shares on March 31, 1993, and
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1992, respectively. The Series B Preferred stock has
no voting rights except as mandated by Delaware law and except
that approval of the holders of more than 66 2/3 percent of the
shares of Series B Preferred stock is required for certain
amendments to the Company's Certificate of Incorporation,
reclassifications, reacquisitions of junior shares and increases
in the authorized number of shares of Series B Preferred stock.
The Series B Preferred stock ranks on a parity with the Company's
already outstanding series A Preferred stock and is senior to its
common stock. In the case of a liquidation, dissolution or
winding up of the Company prior to December 16, 1994, the Series
B Preferred stock is entitled to an annual dividend of $5.085 per
share. Such dividends would accrue from the date of the original
issuance and would be payable in cash. In the case of a
liquidation, dissolution, winding up, exercise of conversion
rights or redemption of Series B Preferred stock, all occurring
subsequent to December 16, 1994, such dividends would be
cumulative from December 16, 1994, and would be payable in common
stock based on the average daily closing price for the common
stock for the 30 trading days prior to such event.
The Series B Preferred stock may be redeemed at the Company's
option prior to December 16, 1994, by payment in cash of a
redemption price equal to $84.745 per share plus dividends
accrued from the date of issuance, and may be redeemed thereafter
by payment of a redemption price of $100 in cash per share plus
dividends accrued from that date and payable in common stock.
Contingent Issuance of Common Stock - The 282,646 shares of
common stock issued to a Redshaw shareholder in connection with
the acquisition of Redshaw on December 16, 1991 is subject to
upward or downward adjustment depending on the average market
price of the stock for a test period following the effective date
of a registration statement which the Company intends to file
under the Securities Act of 1933 with respect to such shares.
The adjusted number will not be more than 333,333 or less than
250,000 shares.
NOTE 11 - COMMON STOCKHOLDERS' EQUITY:
Stock Options - The Company has a stock incentive plan which
provides for the granting of 1,750,000 stock options and stock
appreciation rights to officers, directors and employees.
Options granted under the program may be incentive stock options
as defined under current tax laws or nonstatutory options.
Options are granted at prices determined by the Board of
Directors (not less than 100 percent of the market price of the
stock at the time of grant and 110 percent with respect to
incentive stock options granted to optionees who own 10 percent
or more of the Company's stock). Stock options under this plan
generally become exercisable in 25 percent increments maturing on
each of the first through fourth anniversaries of the date of
grant. All options must be exercised within ten years of the
date of grant (with respect to incentive stock optionees owning
10 percent or more of the Company's stock, the term may be no
longer than five years). No stock appreciation rights are
outstanding.
The Company has granted nonstatutory options outside the stock
incentive plan to purchase up to an aggregate of 648,000 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.
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to the Company's stock option is as
follows:
WITHIN PLAN OUTSIDE PLAN
------------------- --------------------
SHARES SHARES
UNDER OPTION UNDER OPTION
OPTION PRICES OPTION PRICES
-------- --------- -------- ---------
Balance, March 31, 1990 482,488 2.50-5.75 183,167 2.50-7.50
Granted 287,750 5.75-6.25 100,000 5.75-6.25
Exercised (39,775) 2.50-5.75 (5,000) 2.50
Canceled (54,525) 2.50-5.75 (15,004) 5.75-7.50
-------- --------- -------- ---------
Balance, March 31, 1991 675,938 2.50-6.25 263,163 2.50-7.50
Granted 337,083 6.75-7.00 240,000 6.78
Exercised (114,302) 2.50-5.75 -- --
Canceled (64,100) 2.50-6.75 (129,996) 2.50-7.50
-------- --------- -------- ---------
Balance, March 31, 1992 834,619 2.50-7.00 373,167 2.50-6.78
Granted 248,700 6.00-6.75 259,000 5.75-7.25
Exercised (106,186) 2.50-6.75 (125,389) 2.50
Canceled (188,950) 5.75-7.00 -- --
-------- --------- -------- ---------
Balance, March 31, 1993 788,183 2.50-6.88 506,778 2.50-7.38
======== ========= ======== =========
Exercisable at March 31, 1993 403,778 2.50-6.88 151,108 2.50-7.38
======== ========= ======== =========
Available for grant at March 31, 1993 343,981 -- 25,000 --
======== ========= ======== =========
Stock Purchase Plan - In July 1989, the Company established a
stock purchase plan for eligible employees. Employees may
subscribe up to 10 percent of their compensation to purchase the
Company's common stock at the lower of 85 percent of the fair
market value at the date of grant or 85 percent of the fair
market value six months after the date of grant. Shares
subscribed to must be exercised one year after the date of grant
or are canceled. The Company has reserved 200,000 share of
common stock for the plan. On July 31, 1992, 22,957 shares were
exercised. New subscriptions were granted by the Company to
eligible employees on August 2, 1992 totaling 59,072 shares.
These shares are due to be exercised on July 31, 1993.
Stock Warrants - In connection with the Delphi/CIGNA Agreement
(see Note 12), CIGNA received a warrant to acquire up to 250,000
shares of the Company's common stock for $7.50 per share, subject
to adjustment, prior to expiration of the warrant on January 31,
1996. The number of shares that may be
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchased upon exercise of the warrant, was made directly
proportional to achievement of the aggregate annual sales
commitment. The Company assigned a value of $200,000 to these
warrants which is being amortized to cost of sales in proportion
to sales under the agreement. As of March 31, 1993, warrants for
approximately 190,000 shares were exercisable.
In connection with its line of credit agreement with its bank in
May, 1992, the company agreed to issue warrants to the bank to
purchase up to 75,000 shares of the Company's common stock over a
five year term at the fair market value of the common stock on
the date of grant of $6.75 per share.
NOTE 12 - MAJOR CUSTOMERS:
The Company had revenues of $4,500,000 from one customer in
fiscal 1992 which represented 11% of total revenues in that year.
No individual customer represented more than 10% of total
revenues in either fiscal 1993 or 1991 (except as further
explained below). In June, 1988, the CIGNA Property and Casualty
Agency Division ("CIGNA") of the CIGNA Property and Casualty
Insurance Group of the Insurance Company of North America and
Delphi signed a Marketing Agreement under which Delphi was to
deliver full-function agency automation systems to target CIGNA
agents and brokers. The Agreement, amended in June 1990,
provided for a fund, financed and administered by CIGNA to
subsidize the purchase of Delphi systems by CIGNA agents. No
funds remained available at the end of fiscal 1992 to further
subsidize agencies. Revenues from sales to CIGNA and to agencies
whose systems were subsidized either partially or in total by
CIGNA represented less than 10 percent of revenues in fiscal
1992. In fiscal 1991, revenues from CIGNA agencies amounted to
$6,165,000 or 23 percent of total revenues.
NOTE 13 - CASH OPTION PROFIT SHARING PLAN AND TRUST:
Effective January 1, 1988, the Company adopted and implemented a
401(k) Cash Option Profit Sharing Plan which allows employees to
contribute part of their compensation to the Profit Sharing Plan
and Trust, on a pre-tax basis. The Company is under no
obligation to contribute to the Plan. For the fiscal years
ending March 31, 1993, 1992 and 1991, the Company did not make
any contributions to the plan.