UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-15946
DELPHI INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0021975
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3501 ALGONQUIN ROAD
ROLLING MEADOWS, IL 60008
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847-506-3100
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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 such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No (2) Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date. 7,395,449 SHARES
AS OF AUGUST 7, 1998.
DELPHI INFORMATION SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED June 30, 1998
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1998
(unaudited) and March 31, 1998............................. 2
Consolidated Statements of Operations for the Three
Months Ended June 30, 1998 and 1997 (unaudited)............ 3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 1998 and 1997 (unaudited)................... 4
Notes to Consolidated Financial Statements (unaudited)........ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 7
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ......................................... 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................... 11
SIGNATURE.......................................................... 11
1
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
(UNAUDITED)
JUNE 30, MARCH 31,
1998 1998
-----------------------
ASSETS
CURRENT ASSETS:
Cash $ 1,011 $ 872
Accounts receivable, net 3,995 4,807
Inventories 18 12
Prepaid expenses and other current assets 234 151
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TOTAL CURRENT ASSETS 5,258 5,842
Property and equipment, net 1,911 2,084
Capitalized and purchased software, net 6,720 6,554
Other assets 314 302
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TOTAL ASSETS $14,203 $14,782
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,408 $ 1,923
Accounts payable and accrued liabilities 1,720 2,078
Accrued payroll and related benefits 144 419
Deferred revenue 3,451 4,381
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TOTAL CURRENT LIABILITIES 7,723 8,801
Notes payable-long term 209 210
Other liabilities 180 180
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TOTAL LIABILITIES 8,112 9,191
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Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 2,000,000 shares
authorized:
Series D, 221 shares issued and outstanding 49 49
Common stock, $.10 par value:
Non-designated, 20,000,000 shares authorized,
7,395,449 issued and outstanding 740 740
Additional paid-in capital 48,717 48,717
Accumulated deficit (43,515) (44,017)
Cumulative foreign currency translation adjustment 100 102
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TOTAL STOCKHOLDERS' EQUITY 6,091 5,591
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,203 $14,782
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The accompanying notes are an integral part of these consolidated financial
statements.
2
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
JUNE 30,
1998 1997
---- ----
REVENUES:
Systems $1,304 $ 982
Services 4,863 4,584
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TOTAL REVENUES 6,167 5,566
COSTS OF REVENUES:
Systems 726 714
Services 1,942 2,136
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TOTAL COST OF REVENUES 2,668 2,850
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GROSS MARGIN 3,499 2,716
OPERATING EXPENSES:
Product development 747 1,074
Sales and marketing 650 705
General and administrative 1,335 742
Amortization of goodwill, customer lists and
noncompete agreements - - 132
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TOTAL OPERATING EXPENSES 2,732 2,653
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OPERATING INCOME 767 63
Minority interest 155 29
Interest income - - (54)
Interest expense 104 66
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Income before income taxes 508 22
Income tax provision 6 1
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Net income $ 502 $ 21
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Basic income per common share $ 0.07 $ 0.00
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Diluted income per common share $ 0.07 $ 0.00
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The accompanying notes are an integral part of these consolidated financial
statements.
3
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
JUNE 30
1998 1997
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 502 $ 21
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 272 291
Amortization of capitalized and purchased software 434 513
Amortization of goodwill, customer lists and noncompete agreements - - 132
Foreign currency translation adjustment (2) 3
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable, net 812 1,430
Inventories (6) 2
Prepaid expenses and other assets (95) (14)
Accounts payable and accrued liabilities (358) (1,490)
Accrued payroll and related benefits (275) (307)
Other liabilities and deferred revenue (930) (1,490)
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Net cash provided by (used in) operating activities 354 (909)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (99) (160)
Expenditures for capitalized and purchased software (600) (206)
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Net cash used in investing activities (699) (366)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable 484 - -
Proceeds from exercise of stock options and
employee stock purchase plan - - 292
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Net cash provided by financing activities 484 292
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Net increase (decrease) in cash 139 (983)
Cash at the beginning of the year 872 6,596
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Cash at the end of the year $1,011 $5,613
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---------------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
DELPHI INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. BASIS OF PRESENTATION
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the results of the
interim periods.
These financial statements should be read in conjunction with the financial
statements, and accompanying notes thereto, included in the Company's
Annual Report on Form 10-K, as amended, for the fiscal year ended March 31,
1998.
The results of operations for current interim periods are not necessarily
indicative of results to be expected for the entire current year.
Certain prior period amounts have been reclassified to conform to the
current presentation. These changes had no impact on previously reported
earnings or stockholder's equity.
Note 2. REVERSE STOCK SPLIT
As previously reported, on May 6, 1998 the Company's shareholders 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 has been adjusted accordingly.
5
Note 3. EARNINGS (LOSS) PER SHARE
In February, 1997 the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share", which modifies the standards for computing
earnings per share. As required, the Company adopted SFAS No. 128 as of
December 15, 1997. SFAS No. 128 replaces the presentation of primary and
(where applicable) fully diluted earnings per share ("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 of common stock
outstanding and common stock equivalents. 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.
For the three months ended June 30, 1997, primary and fully diluted EPS, as
previously reported, are equal to basic and diluted EPS, respectively.
The computation of earnings per share (in thousands except per share data)
follows:
THREE MONTHS ENDED
JUNE 30,
------------------
1998 1997
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Net income (loss) $ 502 $ 21
Common stock-weighted
average number of shares
outstanding 7,395 7,411
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Common stock equivalents:
stock options 71 44
warrants 0 0
preferred stock 10 10
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Total equivalents 81 54
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Total shares common stock
and equivalents (for diluted
EPS) 7,476 7,465
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Basic EPS $ 0.07 $ 0.00
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Diluted EPS $ 0.07 $ 0.00
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited
financial statements and the notes thereto included in Item 1 of this
Quarterly Report and the financial statements and notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K, as amended,
for the fiscal year ended March 31, 1998.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended June 30, 1998 operating activities provided
cash of $354,000. This was primarily due to net income of $502,000, non-cash
expenses for depreciation and amortization of $706,000, and a decrease in
accounts receivable of $812,000 partially offset by decreases in accounts
payable and accrued expenses of $358,000, a decrease in accrued payroll and
related benefits of $275,000, a decrease in deferred revenue of $930,000 and
an increase in prepaids and other assets of $101,000. During the three month
period cash flows from investing activities resulted in a use of cash of
$699,000 due to expenditures of $600,000 for capitalized and purchased
software and other capital expenditures of $99,000. Cashflows from investing
activities for the same period provided $484,000 resulting from bank
borrowings.
The Company's sources of liquidity on both a short and long-term basis
include cash on hand, the proceeds from the Company's 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.
BANK LINE-OF-CREDIT - As previously reported, effective January 1997, the
Company established a $4,000,000 line of credit agreement with a bank,
maturing in January 2001, subject to certain conditions. In accordance with
the agreement, as amended, prior to June 30, 1998 the Company could 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 June 30, 1998,
borrowings under the line of credit totaled $2,087,000, and $1,673,000
remained available for borrowing.
REVERSE STOCK SPLIT - As previously reported, 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.
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
instituted, among other things, a $1.00 minimum per share bid price for
listed companies. There is no assurance, however, that the reverse stock
split will enable the
7
Company's 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.
NEW ACCOUNTING STANDARDS - As previously reported, in October 1997, the AICPA
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition",
which supersedes SOP 91-1. The Company adopted, as required, SOP 97-2 for
software transactions entered into beginning April 1, 1998. 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. The Company has been and is currently providing customers upgrade
alternatives to Year 2000 compliant versions of the Company's products.
The Company is currently working on a comprehensive plan to address the Year
2000 issue and potential business impact. The Plan includes 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.
8
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.
RESULTS OF OPERATIONS
The Company's business plan includes a product strategy centered on a new
generation of products, collectively referred to as "Common Delphi", or
"cd.solutions" and currently comprised of "cd.one", "cd.connect", and
"cd.global", each of which are Delphi trademarks. The 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,
existing customers utilizing legacy products will be encouraged to migrate to
the Company's new generation of products.
THREE MONTH PERIOD ENDED JUNE 30, 1998 AND 1997
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 revenues, consisting of Systems revenue and
Services revenue, for the quarter ended June 30, 1998 were $6,167,000,
representing an 11% increase compared to the same quarter of the prior year.
Systems revenues of $1,304,000 for the quarter reflect an increase of
$322,000 compared to the same quarter of the prior year. The increase is
primarily attributable to an increase in revenues from the sale of
cd.solutions products, partially offset by declining hardware revenues and
legacy product sales.
Service revenues for the quarter were $4,863,000 in the current year versus
$4,584,000 in the prior year, an increase of 6%. The increase is comprised
of an increase in service revenue related to cd.solutions products partially
offset by a decrease in service revenues associated with legacy products.
9
Costs of systems revenues as a percentage of systems revenues were 56% in the
quarter ended June 30, 1998 compared to 73% in the same quarter of the prior
year. Exclusive of amortization of capitalized and purchased software
expense, costs of systems revenues were 22% of systems revenues in the
current quarter as compared to 20% for the same period last year.
Costs of service revenues as a percentage of total service revenues decreased
to 40% in the first quarter of the current year, compared to 47% in the first
quarter of the prior fiscal year primarily due to decreased payroll costs and
decreased use of outside consultants in the current year.
Product development expenses for the quarter ended June 30, 1998 were
$747,000, a decrease of $327,000, compared to the same quarter of the prior
year. Total product development expenditures for the three months ended June
30, 1998 were $1,347,000, consisting of capitalized purchased software and
software development costs of $600,000 and product development expense of
$747,000. Total product development expenditures for the three months ended
June 30, 1997 were $1,280,000, consisting of capitalized purchased software
and software development costs of $206,000 and product development expense of
$1,074,000.
Sales and marketing expenses for the quarter ended June 30, 1998 were
$650,000, representing a decrease of $55,000 or 8%, from the comparable
quarter in the prior year. The decrease is primarily attributable to a
reduction in payroll expenses.
General and administrative expenses for the quarter ended June 30, 1998 were
$1,335,000, versus $742,000 in the comparable quarter in the prior year. The
increase is primarily due to an increase in payroll and legal expenses.
There was no amortization of goodwill, customer lists and noncompete
agreements for the quarter ended June 30, 1998 compared to $132,000 for the
same quarter of the prior year. The elimination of amortization expense is
the result of the write-off of remaining goodwill and customer lists in the
second quarter of fiscal year ended March 31, 1998 due to impaired
recoverability.
Interest expense net of interest income for the quarter ended June 30, 1998
was $104,000, an increase of $92,000 compared to the same quarter of the
prior year. The increase is due to increased borrowings, interest, and fees
related to the line of credit facility.
This Quarterly Report on Form 10-Q 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
10
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Part II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On May 6, 1998, the
Company's shareholders approved a proposal to amend the Company's Certificate
of Incorporation (the "Charter Amendment Proposal") to effect a 1-for-5
reverse stock split of the Company's outstanding common stock $.10 par value
per share ("Common Stock") and to reduce the authorized shares of Common
Stock from 75,000,000 to 20,000,000 which became effective May 8, 1998.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company
held a special meeting of stockholders on May 6, 1998 to consider and vote
upon the Charter Amendment Proposal. Holders of 29,094,039 shares of Common
Stock voted in favor of the Charter Amendment Proposal. 1,297,318 shares of
Common Stock against the Charter Amendment Proposal. 26,204 shares of Common
Stock abstained from voting.
Item 5. OTHER INFORMATION. Proxies solicited with respect to the Company's
1999 annual meeting of stockholders may confer discretionary authority to
vote on various matters including any matter with respect to which the
Company has not received notice by July 28, 1999. This date may change in
the event that the Company significantly changes the date of its annual
stockholders meeting in connection with the anticipated change in its fiscal
year to December 31.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See exhibit index.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements 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.
Date: August 12, 1998 By /s/ Reid E. Simpson
-------------------------------------
Reid E. Simpson
Chief Financial Officer and
Duly authorized officer
11
EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION
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3 Certificate of Incorporation as Amended
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
12