UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from April 1, 1998 to December 31, 1998
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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: (847) 506-3100
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
-------------------
Common Stock, par value $0.10 per share
Preferred Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ ]
As of March 31, 1999, the number of shares of Common Stock outstanding was
8,119,089. 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 SmallCap Market System on such date, was approximately $50,866,000.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement relating to its 1999
Annual Meeting of Stockholders are incorporated by reference into Part III.
DELPHI INFORMATION SYSTEMS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Page Reference
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PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial
Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 42
2
PART I
ITEM 1. BUSINESS
Delphi Information Systems, Inc. ("the Company") was founded in 1976 as
Delphi Systems, Inc., a California corporation. In 1983, Delphi Information
Systems, Inc., a Delaware corporation, was formed and acquired all of the
outstanding shares of Delphi Systems, Inc. in an exchange offer. In June,
1987, Delphi Systems, Inc. was merged into and with Delphi Information
Systems, Inc. On July 23, 1996, the Company acquired Complete Broking Systems
("CBS") of Auckland, New Zealand.
Delphi is an international provider of software and Internet-based solutions
for the insurance industry. The Company's revenue is derived primarily from
the licensing and sale of software comprised of internally developed and
third-party software and from professional services, maintenance, and support
services. Professional services include consulting, implementation, training,
and project management provided to the Company's customers with installed
systems and those in the process of installing systems.
The Company's customer list includes a majority of the largest 100 brokerages
and top 200 agencies in the United States and Canada, and many of the largest
global brokers. The Company's software operates on approximately 75,000
workstations and terminals at more than 3,000 customer sites.
PRODUCTS - The Company's current product strategy is centered on a new
generation of products, collectively referred to as the "cd" product line
which is comprised of "cd.global", a modular, state of the art, agency
management solution providing flexibility and the ability to handle
unstructured data and complex risk; "EBIX.COM", an internet browser based
product providing electronic transmission between carriers and brokers; and
"cd.one", a structured system utilizing many features of the Company's
previous products. The Company also has six "legacy" products including
INfinity, INSIGHT, PC-ELITE, Insurnet, SMART, and Vista. The legacy products
provide basic functions such as policy administration, claims handling,
accounting, and financial reporting. Legacy products will be maintained and
supported as long as there is adequate economic and strategic justification.
Customers utilizing legacy products will continue to be encouraged to migrate
to newer products.
During the second quarter of fiscal 1997, the Company discontinued the sale
and marketing of computer hardware in order to focus the Company's resources
on the development and sale of software and professional services. Subsequent
to the Company's exit from the hardware sector, the Company continues to
receive commissions from hardware vendors for product referrals although this
is not a material source of revenue for the Company.
The software products offered by the Company range in price from $2,000 to
$2,200 on a per license basis, but the total contract value for certain
multiple-site global brokers is over $1,000,000. In the fiscal year ended
March 31, 1998, one domestic customer (including its foreign subsidiaries)
accounted for approximately 12.7% of consolidated revenue. The customer is a
publicly traded multi-national insurance company listed on the New York Stock
Exchange. In the nine-month period ended December 31, 1998 and fiscal 1997,
no customer represented more than 10% of total revenue. The decrease in the
percentage of revenue attributed to this customer in the nine months ended
December 31, 1998 was due to an overall increase in Company revenue.
3
SYSTEM DESIGN AND ARCHITECTURE - The Company's new product offerings utilize
the latest technology. "cd.global" is a client/server based system, which
supports Oracle relational database software technology. ebix.COM-TM- is an
Internet browser-based product, while "cd.one" is operational on Btrieve.
PRODUCT DEVELOPMENT - At December 31, 1998, the Company employed 43 full-time
employees engaged in product development activities. These activities include
research and development of software enhancements such as adding
functionality, improving usefulness, adaptation to newer software and
hardware technologies, and increasing responsiveness.
Product development expenditures including amounts capitalized were
$3,716,000, $6,089,000, and $6,016,000 in the nine-month period ended
December 31, 1998 and fiscal 1998 and 1997, respectively. Management believes
maintenance and enhancement of product technology is critical and expects to
continue to invest substantial amounts in product development. The decrease
in expenditures in the nine month period ended December 31, 1998 from prior
periods results from the Company's efforts to streamline its product
development activities to be more efficient.
COMPETITION - Management believes its principal competition is represented by
two companies which provide software systems that are comparable to those
offered by the Company. Both of these companies are larger than the Company
and may have greater financial resources. In addition, one of the companies
is partially owned by a large insurance carrier.
The Company believes that most insurance carriers are in the process of
reducing or eliminating their in-house agency and brokerage automation
efforts. Nevertheless, some insurance carriers continue to operate
subsidiaries which actively compete with the Company. These carriers have
much greater financial resources than the Company and have in the past
subsidized the automation of independent agencies through various incentives
offered to promote the sale of the carriers' insurance products. Accordingly,
there can be no assurances that insurance carriers will continue to withdraw
from competition with the Company.
The Company is not aware of any large hardware company that offers software
which specifically addresses the independent agency marketplace. However,
certain large hardware suppliers do sell systems and systems' components to
independent agencies. The Company, to a much lesser extent, also experiences
competition from small, independent or freelance developers and suppliers of
software who sometimes work in concert with hardware companies to supply
systems to independent agencies.
Key competitive factors in the Company's market are product technology,
features and functions, ease of use, price, reputation, reliability, and
quality of customer support and training. Management believes that overall
the Company competes favorably with respect to these factors.
PROPRIETARY RIGHTS - The Company regards its applications software as
proprietary and attempts to protect it with copyrights, trade secret laws and
restrictions on disclosure and transferring title. Despite these precautions,
it may be possible for third parties to copy aspects of the Company's
products or, without authorization, to obtain and use information which the
Company regards as trade secrets. Existing copyright law affords only limited
practical protection and the Company's software is unpatented.
BACKLOG AND DEFERRED REVENUE - The Company traditionally invoices software
maintenance and support on a quarterly and annual basis in advance of
providing the service. The prepaid software maintenance fees are recorded as
deferred revenue and recognized ratably over the term of the respective
4
software maintenance agreement. As of December 31, 1998 and March 31, 1998,
the backlog of contracted professional services fees sales was not
significant. As of December 31, 1998 and March 31, 1998, the backlog of
contracted software license fees totaled approximately $1.8 million and zero,
respectively.
EMPLOYEES - At December 31, 1998, the Company had 191 employees, including 16
employees in sales and marketing, 43 employees in product development, 101
employees in customer service and operations, and 31 employees in general
management, administration and finance. None of the Company's employees are
presently covered by a collective bargaining agreement. Management believes
that employee relations are good.
ITEM 2. PROPERTIES
The Company's corporate headquarters is in Rolling Meadows (Chicago),
Illinois, where it leases approximately 20,000 square feet of office space.
Substantially all corporate executive and administrative functions are
located in Rolling Meadows. The Rolling Meadows lease expires in October
2003. The Company leases additional office space of approximately 6,800
square feet in Atlanta, Georgia; approximately 12,000 square feet in
Billerica, Massachusetts; approximately 15,000 square feet in Walnut Creek
(San Francisco), California; approximately 17,500 square feet in Pittsburgh,
Pennsylvania; approximately 6,000 square feet in Scarborough, (Toronto)
Canada; approximately 1,500 square feet in Auckland, New Zealand;
approximately 1,500 square feet in Sydney, Australia; approximately 1,000
square feet in London, England; and approximately 1,500 square feet in
Singapore. Management believes its facilities are adequate for its current
needs and that suitable additional or substitute space will be available as
needed. See Note 9 to the financial statements included in Part II, Item 8,
for further information regarding obligations under property leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party, and none of its property is subject to, any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1998.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The principal market for the Company's Common Stock is the Nasdaq SmallCap
Market. The Company's Common Stock trades under the symbol "DLPH". As of
March 31, 1999, there were 164 shareholders of record.
The Company has not paid dividends on its Common Stock to date. There are no
plans in the near future to do so.
The following tables set forth the high and low closing bid prices for the
Company's Common Stock for each calendar quarter in the nine-month period
ended December 31, 1998 and the fiscal year ending March 31, 1998 as restated
to reflect the one-for-five reverse stock split effective May 8, 1998.
NINE MONTHS ENDED
DECEMBER 31, 1998 HIGH LOW
----------------------------------------------------------------
April-June $ 5.19 $ 3.60
July - September 5.56 2.91
October - December 8.75 2.94
FISCAL 1998 HIGH LOW
----------------------------------------------------------------
First quarter $ 7.50 $ 5.15
Second quarter 9.05 4.70
Third quarter 7.05 4.40
Fourth quarter 4.85 3.15
As of March 31, 1999 there were 8,119,089 shares of Common Stock outstanding
and 221 shares of Series D Preferred Stock, par value $.10 per share
outstanding.
6
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
NINE MONTHS
ENDED
DECEMBER 31, FISCAL YEARS ENDED MARCH 31,
1998 1998 1997 1996 1995
---------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Revenue $ 19,221 $ 22,465 $ 27,714 $ 44,081 $ 53,040
Operating income (loss) 835 (3,186) (5,880) (11,120) (597)
Net income (loss) $ 501 $ (3,406) $ (5,884) $(11,833) $ (1,681)
NET INCOME (LOSS) PER SHARE: (1)
Basic EPS $ 0.07 $ (0.46) $ (0.97) $ (6.86) $ (1.15)
Diluted EPS $ 0.07 $ (0.46) $ (0.97) $ (6.86) $ (1.15)
SHARES USED IN COMPUTING PER
SHARE DATA: (1)
Basic EPS 7,395 7,347 6,093 1,724 1,461
Diluted EPS 7,419 7,347 6,093 1,724 1,461
FINANCIAL POSITION:
Assets $ 16,545 $ 14,782 $ 22,577 $ 20,389 $ 27,547
Short-term debt 4,032 1,923 1,600 3,030 2,486
Long-term debt 210 210 -- 1,500 4,250
Stockholders' equity (deficit) $ 6,067 $ 5,591 $ 8,448 $ (3,346) $ 4,553
(1) Net income (loss) per share and share data restated to reflect the
one-for-five reverse stock split effective May 8, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The insurance industry has undergone significant consolidation over the past
several years driven by the need for, and benefits from, economies of scale
and scope in providing low-cost insurance. Consolidation has involved both
insurance brokerages, the Company's primary customers, and insurance
companies, and is directly impacting the manner in which insurance products
are distributed. Management believes the insurance industry will continue to
experience significant changes in the next several years to meet the changing
distribution model. Changes in the insurance industry may create
opportunities and challenges for the Company.
Management believes consolidation will force brokerages to decrease
distribution costs and eliminate labor-intensive tasks via automation.
Competition will force brokerages to increase service levels via improved
automated processes such as quoting and claims processing. Management
believes that the Company can partner with customers to provide integrated
information management solutions, and fully leverage information technology
and services.
7
The consolidation of the industry will create a marketplace of fewer yet more
sophisticated customers. In such an environment, the Company could be subject
to heightened effects of competition, particularly with respect to product
functionality, service and price.
RECENT DEVELOPMENTS - On March 23, 1998, the Board of Directors adopted a
resolution to change the Company's fiscal year end to December 31 effective
in 1998. The Company has filed Form 10-K for the twelve months ended March
31, 1998, Form 10-Q for each of the three-month periods ended June 30, 1998
and September 30, 1998, and is filing this Form 10-K for the nine months
ended December 31, 1998.
This report encompasses the "1998 transition period", the nine months ended
December 31, 1998, "fiscal 1998", the twelve months ended March 31, 1998, and
"fiscal 1997", the twelve months ended March 31, 1997.
On May 6, 1998, the Company's stockholders adopted and approved a proposal to
amend the Company's Certificate of Incorporation to effect the reverse stock
split and the authorized shares reduction. The reverse stock split and
authorized shares reduction was effective as of the open of the Nasdaq
SmallCap Market on May 8, 1998 (the "Effective Time").
At the Effective Time, each share of Common Stock issued and outstanding was
automatically reclassified and converted into one-fifth share of Common
Stock. Fractional shares of Common Stock resulting from the reverse stock
split were not issued and instead holders thereof received cash in lieu of
fractional shares. All shares and per share information presented gives
effect to the one-for-five reverse stock split and authorized shares
reduction.
The principal reason for the one-for-five 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 criteria
require, among other things, that the minimum bid price per share of a listed
company be $1.00. There is no assurance, however, that the Common Stock will
continue 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.
8
RESULTS OF OPERATIONS
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
NINE MONTHS ENDED DECEMBER 31,
----------------------------------
1997
1998 (UNAUDITED)
----------------------------------
REVENUE:
Software $ 6,375 $ 2,497
Services and other 12,846 14,139
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TOTAL REVENUE 19,221 16,636
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COST OF REVENUE:
Software 2,337 2,044
Services and other 7,352 7,136
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TOTAL COST OF REVENUE 9,689 9,180
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GROSS MARGIN 9,532 7,456
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OPERATING EXPENSES:
Product development 2,160 3,021
Sales and marketing 2,167 2,682
General and administrative 4,370 3,126
Write-off of software, goodwill
and customer lists -- 2,189
-------- --------
TOTAL OPERATING EXPENSES 8,697 11,018
-------- --------
OPERATING INCOME (LOSS) 835 (3,562)
Other expense 312 187
-------- --------
Income (loss) before income taxes 523 (3,749)
Income tax provision (benefit) 22 (41)
-------- --------
Net income (loss) $ 501 $ (3,708)
-------- --------
-------- --------
TOTAL REVENUE - The Company's revenue is derived from the licensing and sale
of internally-developed and third party software ("Software") and from
professional services, maintenance services, and support services
("Services"). Professional services include consulting, implementation,
training and project management provided to the Company's customers with
installed systems and those in the process of installing systems. Total
revenue is comprised of software revenue and service revenue. Total revenue
for the 1998 transition period increased $2,585,000 or 15.5% from the
comparable period in the prior year. Total fiscal 1998 revenue decreased
18.9% from the fiscal 1997 level.
SOFTWARE REVENUE - The Company's current product strategy is centered on a
new generation of products, collectively referred to as the "cd" product line
and are comprised of "cd.global", a modular, state of the art, agency
management solution providing flexibility and the ability to handle
unstructured
9
data and complex risk; "EBIX.COM-TM-" an internet browser-based product,
providing electronic transmission between carriers and brokers; and "cd.one",
a structured system utilizing many features of the Company's previous
products. The Company also has six "legacy" products including INfinity,
INSIGHT, PC-ELITE, Insurnet, SMART, and Vista. The legacy products provide
basic functions such as policy administration, claims handling, accounting,
and financial reporting. Current legacy products will be maintained and
supported as long as there is adequate economic and strategic justification.
Customers utilizing legacy products will continue to be encouraged to migrate
to newer products.
Software revenue is comprised of revenue from the sale of "cd" products,
current legacy products, hardware, and other software. During the second
quarter of fiscal 1997 the Company discontinued the sale and marketing of
computer hardware. The sale of hardware was ceased in order to focus the
Company's resources on the development and sale of software and services.
Subsequent to the Company's exit from the hardware sector, the Company
continues to receive commissions from hardware vendors for product referrals
although this is not a material source of revenue for the Company.
Accordingly, during the first quarter of fiscal 1997, software revenue
includes revenue from the sale of computer hardware; subsequently software
revenue includes hardware commissions.
1998 transition period software revenue of $6,375,000 was $3,878,000 or 155%
greater than software revenue of $2,497,000 for the same period in the prior
year due primarily to the introduction of "cd.global" during the period.
Fiscal 1998 Software revenue of $3,509,000 was $2,580,000 or 42.4% less than
fiscal 1997 revenue of $6,089,000. Although sales of "cd" products in fiscal
1998 were $545,000 greater than fiscal 1997, this increase was offset
primarily by a $1.0 million decrease in discontinued legacy products and a
$1.9 million decrease in hardware revenue and commissions.
SERVICES REVENUE - The 1998 transition period Services revenue was
$12,846,000 compared to $14,139,000 in the similar period in 1997, a decrease
of 9.1% due primarily to a lower customer support base. Fiscal 1998 Services
revenues of $18,956,000 were $2,669,000 or 12.3% less than fiscal 1997
Services revenue of $21,625,000. The revenue decrease in fiscal 1998 from
fiscal 1997 is primarily attributable to decreased support revenue associated
with the Company's exit from the hardware business and declining legacy
support revenue partially offset by support price increases and new support
contracts associated with "cd" products.
COST OF SOFTWARE REVENUE - Cost of Software revenue includes the cost of
third party software and computer hardware and the amortization of
capitalized software development cost. Cost of Software revenue, as a
percentage of Software revenue, was 36.7%, 81.9%, 69.5%, and 87.4% in the
1998 transition period, the nine months ended December 31, 1997 and fiscal
1998 and 1997, respectively. The downward trend of cost of Software revenue
as a percentage of Software revenue from fiscal 1997 to the 1998 transition
period is due to higher software sales and also the write-off of intangible
assets in prior periods.
COST OF SERVICES REVENUE - Cost of Services revenue includes costs associated
with support, consulting and training services, and provisions for doubtful
accounts. Cost of Services revenue as a percentage of Services revenue was
57.2%, 50.5%, 50.2%, and 62.3% in the 1998 transition period, the nine months
ended December 31, 1997 and fiscal 1998 and 1997, respectively. The decrease
from fiscal 1997 to fiscal 1998 is primarily due to direct labor efficiencies
gained through headcount reductions. The increase from the nine months ended
December 31, 1997 and fiscal 1998 to the 1998 transition period is due to
higher personnel levels to support "cd.global" sales.
10
PRODUCT DEVELOPMENT EXPENSES - Product development expenses, net of
capitalized software cost were $2,160,000 in the 1998 transition period
compared to $3,021,000 in the same period in 1997. Product development
expenses, net of capitalized software costs, were $3,510,000 and $4,255,000
in fiscal 1998 and 1997, respectively. Product development expenditures,
including those which were capitalized, were $3,716,000 in the 1998
transition period compared to $4,399,000 in the same period in 1997. Product
development expenditures, including those which were capitalized, were
$6,089,000 and $6,016,000, respectively, in fiscal years 1998 and 1997. The
decrease in the transition period expenditures from prior periods results
from the Company's efforts to streamline its product development activities
to be more efficient. Management believes maintenance and enhancement of
product technology is critical and expects to continue to invest substantial
amounts in product development. Product development activities generally may
be accelerated or deferred based on resource availability.
SALES AND MARKETING EXPENSES - Sales and marketing expenses as a percent of
total revenue were 11.3% in the 1998 transition period and approximately 16%
in the same period in 1997, fiscal 1998 and fiscal 1997. The decrease in the
transition period is due to lower average personnel levels in the transition
period.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses
increased 39.8% in the 1998 transition period from the same period in 1997.
General and administrative expenses as a percentage of total revenue were
22.7%, 18.8%, 19.6% and 15.7% for the 1998 transition period, the nine months
ended December 31, 1997 and fiscal 1998 and fiscal 1997, respectively. The
increase in the transition period from prior periods primarily relates to
higher expenditures for personnel, facilities and information technology.
General and administrative expenses increased 1.4% in fiscal 1998 from fiscal
1997.
AMORTIZATION OF GOODWILL, CUSTOMER LISTS AND NONCOMPETE AGREEMENTS -
Amortization of goodwill, customer lists, and noncompete agreements was
$136,000 and $496,000 in fiscal 1998 and 1997, respectively. As further
discussed in Note 3 to the financial statements included in Part II, Item 8,
during fiscal 1998, all unamortized goodwill and customer lists of $770,000
were written off to reflect impairment.
OTHER INCOME/EXPENSE - Other income/expense consists of minority interest,
interest income and interest expense. Minority interest is relatively
insignificant. The Company had net interest expense of $359,000 in the 1998
transition period compared to $143,000 for the same period in 1997. The
Company had net interest expense of $272,000 in fiscal 1998, compared to net
interest income of $23,000 in fiscal 1997. As further detailed in Note 6 to
the financial statements included in Part II, Item 8, the increase in net
interest in the 1998 transition period and fiscal 1998 was due to higher
average borrowings.
RESTRUCTURING CHARGES - The Company's product strategy is centered on a new
generation of products, collectively referred to as the "cd" product line.
Consistent with the Company's product strategy, the development of enhanced
versions of legacy products has been limited. As new products are introduced
to the market, existing customers utilizing legacy products are encouraged to
migrate to the Company's new generation of products. During the first two
quarters of fiscal 1998 the Company experienced some customer attrition
related to certain legacy support price increases effective in April 1997.
During the second quarter of fiscal 1998, in response to changes in the
Company's markets and technology trends, the product strategy was altered
requiring modification of a portion of the underlying technology of "cd"
products.
As a result of the decrease in legacy maintenance revenue and the requirement
to modify a portion of the underlying technology of "cd" products, the
recoverability of a portion of intangible assets was deemed
11
impaired. Accordingly, during the second quarter of fiscal 1998, the carrying
value of capitalized and purchased software was reduced $1,283,000 and
goodwill and customer lists of $770,000 were written off.
During the first two quarters of fiscal 1997 the Company generated
significant operating losses. In response to the losses, the Company was
restructured resulting in significant reductions in payroll expense and other
operating expenses. In addition, as the Company transitioned out of the
hardware business, a portion of the inventory on hand was deemed obsolete. As
a result, the Company incurred a restructuring charge in fiscal 1997 of
$1,297,000.
LIQUIDITY AND CAPITAL RESOURCES
During the 1998 transition period the Company achieved positive operating
cash flow of $190,000, due principally to profitable operations, which were
partially offset by an increase in accounts receivable of $1,571,000 and a
decrease in deferred revenue of $878,000. The Company funded investments in
capital expenditures of $537,000 and capitalized software of $1,556,000
primarily through line of credit borrowings of $2,109,000.
Despite the improved financial results during the 1998 transition period, the
Company is currently faced with liquidity concerns. Subsequent to January 1,
1999, the Company received approximately $4.9 million in cash related to
proceeds from the exercise of outstanding stock warrants. These proceeds were
used to fund operations, pay aged accounts payable and reduce borrowings
under the Company's bank line of credit, which was designed to provide up to
$4.0 million, subject to certain borrowing base limits. The amount borrowed
under the line of credit was reduced from approximately $3.7 million at
December 31, 1998 to approximately $1.4 million as of March 31, 1999. As of
April 15, 1999, the total amount that the bank has made available, and that
the Company is borrowing, under the bank line of credit is approximately $1.4
million. The Company believes the amount that should be available under the
terms of the line of credit is substantially higher. Based on the Company's
projections, the borrowing requirements of the business at certain times
during 1999 will exceed $1.4 million but not the higher Company calculated
maximum borrowing capacity under the existing line of credit. The cash
requirements are, in great part, affected by the extended payment terms
offered to customers on new software sales. In order to meet the projected
cash requirements of the business, it will be necessary for the Company to
secure financing sources, beyond those currently available, in order to
continue as a going concern.
Management believes that the required financing sources to operate the
business as a going concern will be secured, although there can be no
assurances that such financing will be available or that it will be available
on terms satisfactory to the Company. As of April 15, 1999, management is
having ongoing discussions with its bank in order to come to an agreement as
to the available borrowing base under its line of credit agreement.
Management believes that the borrowing base will be expanded, however, to
date, no agreement has been reached, and there can be no assurance that such
lender calculated maximum borrowing capacity will be adequate.
Management also believes that there may be additional infusions of cash from
the further exercise of outstanding stock warrants, which would supplement
any cash made available through successful bank negotiations. In late March,
1999, the expiration date of warrants to purchase approximately 1.5 million
shares of common stock at $7.50 per share was extended from April 19, 1999 to
June 18, 1999. Finally, if the Company is unable to successfully renegotiate
its available borrowings under its current line-of-credit agreement,
management will endeavor to secure the necessary financing from other
sources. Such sources could include a different bank, a "mezzanine lender",
or an equity investor. Again, although management believes the Company will
be able to secure financing on terms satisfactory to the Company and on a
timely basis, there can be no assurances that this will happen. Management
intends to aggressively seek the required financing sources that are
necessary in order to continue to operate the business.
DEFERRED REVENUE - The Company traditionally invoices software maintenance
and support in advance of providing the service. The prepaid software
maintenance fees are recorded as deferred revenue and recognized ratably over
the term of the respective software maintenance agreement. A significant
component of the Company's current liabilities at December 31, 1998, consists
of deferred revenues of
12
$3,418,000. The liability is satisfied through normal ongoing operations of
the Company's service organization and generally does not require payment to
third parties.
PRODUCT DEVELOPMENT - At December 31, 1998, the Company employed 43 full-time
employees engaged in product development and activities. These activities
include research and development of software enhancements, improving
usefulness, adaptation to newer software and hardware technologies, and
increasing responsiveness. Product development expenditures, including
amounts capitalized, were $3,716,000 for the nine-months ended December 31,
1998 and $6,089,000 and $6,016,000 in fiscal 1998, and 1997, respectively.
Management believes maintenance and enhancement of product technology is
critical and expects to continue to invest substantial amounts in product
development. The decrease in the transition period expenditures from prior
periods results from the Company's efforts to streamline its product
development activities to be more efficient. Product development activities
generally may be accelerated or deferred based on resource availability.
BANK LINE-OF-CREDIT - Effective January 1997, the Company established a line
of credit up to $4,000,000 subject to borrowing base limits. The agreement
provides for a minimum monthly interest at the bank's prime lending rate plus
two and one-half percent (2.5%) on the greater of the actual amount
outstanding or $1,600,000. The agreement contains certain covenants including
the maintenance of a minimum net worth of $2,000,000 and restrictions upon
certain activities by the Company without the approval of the bank including
the incurrence of senior debt, certain mergers or acquisitions, and the
payment of dividends. The borrowings under the agreement are secured by
substantially all of the Company's assets.
In December 1997, March 1998, and September 1998, the Company executed
amendments to the line of credit agreement. The amendments extend the
maturity date of the agreement to January 31, 2001, alter the provisions of
the early termination fee, and modify the criteria for determining the amount
available under the line. In accordance with the agreement, as amended, prior
to December 31, 1998 the Company could borrow up to two and one-half times
average monthly collections (as defined); from January 1999 through March
1999, two times average monthly collections; and subsequently the sum of one
times average monthly recurring maintenance collections and seventy-five
percent of eligible non-maintenance receivables (as defined). As of December
31, 1998, borrowings under the line of credit totaled $3,712,000, and $7,000
remained available for borrowing. As of March 31, 1999, borrowings under the
line of credit were $1,408,000 and $29,000 remained available for borrowing.
NONCOMPETE NOTE PAYABLE - The Company entered into various noncompete
agreements in connection with a January 1991 acquisition. The final
installment of $400,000 was due on January 31, 1997, but was subsequently
converted to an 11.75% interest bearing unsecured note. As of December 31,
1998, the remaining balance is due in three equal annual payments of $119,574
(principal and interest) commencing on January 31, 1999. The January, 1999
payment was paid by the Company. Commitments related to the noncompete
agreements were amortized and expensed ratably over the life of each
agreement.
PRIVATE EQUITY PLACEMENTS - The Company completed two private equity
placements in fiscal 1997. In May 1996, the Company issued 2,140,000 units at
a price of $5.00 per unit. In January 1997, the Company issued 1,126,100
units at a price of $5.00 per unit. Each unit consists of one share of common
stock and a redeemable warrant (further described below). The two private
equity placements provided net proceeds of approximately $14,971,000 to the
Company.
In conjunction with the May 1996 equity placement, outstanding promissory
notes of $1,500,000 were converted into 300,000 units. Each unit consists of
one share of common stock and a redeemable
13
warrant (further described below). In addition, all Series C Preferred Stock,
and 16,135 of the 16,356 outstanding shares of Series D Preferred Stock were
converted into 1,455,307 shares of common stock.
REDEEMABLE WARRANTS - As described above, in conjunction with the May 1996
and January 1997 private equity placements and conversion of a $1,500,000
outstanding promissory note, the Company issued units, each consisting of one
share of common stock and one redeemable warrant to purchase one share of
common stock at an exercise price of $7.50 per share, subject to certain
anti-dilutive adjustments. The shares and redeemable warrants comprising the
units are immediately detachable and separately transferable.
The redeemable warrants may be exercised at any time after the date of
issuance for a period of three years. The Company can redeem the redeemable
warrants at any time subsequent to 180 days after issuance if the closing bid
price for the common stock is at or above $10.00 per share for twenty
consecutive trading days subsequent to when the redeemable warrants first are
redeemable.
Subsequent to January 1, 1999, warrants to acquire approximately 609,000
shares of Common Stock that were due to expire on April 19, 1999 were
exercised generating $4.6 million in cash. On March 31, 1999, the Company
extended the expiration date from April 19, 1999 to June 18, 1999 for the
remaining unexercised warrants originally issued in May 1996 to acquire
approximately 1,531,000 shares of Common Stock. Of these unexercised
warrants, 200,000 warrants are held by the Company's largest shareholder.
In addition, subsequent to January 1, 1999, warrants to acquire 25,000 shares
of common stock that were due to expire January 24, 2000 and warrants to
acquire 5,000 shares of common stock related to the conversion of the
promissory notes were exercised generating approximately $225,000 in cash.
OTHER WARRANTS - In connection with the May 1996 private equity placement
described above, the Company issued a warrant to the placement agent (the
"Agent's Warrant") to purchase 200,000 shares of the Company's common stock
at $5.00 per share. These warrants are not subject to redemption and expire
May 1, 2001. Subsequent to January 1, 1999, warrants to acquire 18,000 shares
of Common Stock were exercised generating $90,000 in cash.
In connection with a renewal of a line-of-credit agreement in December 1994,
the Company issued to a bank a five-year warrant option to purchase 75,000
shares of common stock at $17.50 per share.
TAX CREDIT CARRYFORWARDS - As further described in Note 8 to the financial
statements included herein at Part II, Item 8; as of December 31, 1998, the
Company has investment business tax credit carryforwards and net operating
loss (NOL) carryforwards for federal income tax purposes aggregating
approximately $35,000,000 expiring at various times through the year 2012.
NEW ACCOUNTING STANDARDS - In June 1997, SFAS No. 130, "Reporting
Comprehensive Income," established standards for reporting and displaying
comprehensive income and its components. The Company has chosen to disclose
Comprehensive Income (Loss), which encompasses net income (loss) and foreign
currency translation adjustments, in the Consolidated Statements of
Stockholders' Equity. Prior years have been restated to conform to the
requirements of SFAS No. 130.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" established reporting standards for companies operating in more
than one business segment. Since the Company manages its business as a single
entity that provides application software and related services to a single
industry on a worldwide basis, the Company believes that the segment
disclosure requirements of SFAS
14
No. 131 are not applicable to its operations. However, the applicable
enterprise-wide disclosures required by SFAS No. 131 are included elsewhere
in Part II, Item 8, Note 1.
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. 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 the Company 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. Further, the SOP limits the recognition
of revenue for contracts with extended payment terms.
In March 1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2, Software Revenue Recognition" and in December 1998,
issued SOP 98-9, "Modification of SOP 97-2, Software Recognition, With
Respect to Certain Transactions". For fiscal years beginning on or before
March 15, 1999, SOP 98-4 and 98-9 defer the application of certain passages
in SOP 97-2 which limit what is considered evidence of fair value of various
elements of multiple element arrangements. Additionally, for transactions
entered into in fiscal years beginning after March 15, 1999, SOP 98-9
provides for revenue recognition for certain software arrangements involving
multiple elements where vendor specific evidence does not exist for delivered
elements. Management is in the process of reviewing SOP 98-9 to determine its
impact, if any, on the Company.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivation
Instruments and Hedging Activities", which addresses the accounting for
derivative instruments. SFAS No. 133 is effective for financial statements
for the Company's fiscal year beginning January 1, 2000. The Company does not
expect that SFAS No. 133 will have a significant effect on its current
financial reporting.
EURO CONVERSION - Effective January 1, 1999, eleven of the fifteen member
countries of the European Union (the "participating countries") have agreed
to adopt a new common legal currency (the "euro"). The participating
countries established fixed conversion rates between their existing sovereign
currencies (the "legacy currencies") and the euro. Following the introduction
of the euro, the legacy currencies are scheduled to remain legal tender in
the participating countries as denominations of the euro between January 1,
1999 and January 1, 2002 (the "transition period"). During the transition
period transactions may be settled using either the euro or the participating
country's legacy currency on a "no compulsion, no prohibition" basis.
Conversion rates will no longer be computed directly from one legacy currency
to another but rather will utilize a "triangulation" method specified by
European Union regulations whereby payments made in a legacy currency are
converted to the euro and subsequently converted to the recipient's desired
legacy currency. Beginning January 1, 2002, the participating countries will
issue new euro-denominated bills and coins for use in cash transactions. No
later than July 1, 2002, the participating countries will withdraw all bills
and coins denominated in legacy currencies such that legacy currencies will
no longer be legal tender for any transactions, completing the euro
conversion.
The Company currently has no bank accounts denominated in any legacy currency
and has not entered into any material transactions denominated in any legacy
currency. The Company has produced enhancements to certain software products
marketed in Europe to accommodate the euro conversion
15
process (the "euro module"). The cost to develop the euro module was not
material and will be provided at minimal cost to existing customers.
Management believes the euro module allows for the continued marketing and
sale of the Company's products to customers requiring euro conversion
capabilities.
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 and on-going assessment, the Company has determined
that it will be required to replace most of its internal-use financial and
operational systems software and to modify certain existing products that it
markets to customers, so that the software will function properly with
respect to dates in the year 2000 and thereafter. The Company presently
believes that with the conversion to new internal-use software and with the
planned modifications to its products, the Year 2000 issue will not pose
significant operational problems for the Company and/or its customers.
However, if such conversions and modifications are not made, or not made on a
timely basis, 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 to
customers upgrade alternatives to non-Year 2000 compliant-versions of the
Company's products to its customers.
The Company has outlined and continues to develop a multi-faceted,
comprehensive plan to address the Year 2000 issue and its potential effect on
the Company's business. This plan considers (a) Company-owned or licensed
software for internal use; (b) third-party- provided software services used
for internal use;(c) Company proprietary software marketed to customers; (d)
third-party software embedded in the Company's proprietary software marketed
to customers; and (e) third-party software marketed to customers.
Additionally, the plan will address alternatives and contingencies to address
the possibility of situations whereby certain aspects of the Company's Year
2000 efforts are delayed or otherwise unsuccessful.
Internal-Use Software - The Company plans to address and resolve the Year
2000 issue with respect to internal financial and operational systems, such
as general ledger, order management, accounts payable, billing, accounts
receivable, fixed assets, time reporting and project management, by replacing
substantially all of such internal-use systems with vendor-certified, Year
2000-compliant software systems that offer enhanced features and
functionality relative to the Company's existing internal-use software
systems. The Company has purchased a Year 2000-compliant system and has
started the initial implementation process in March, 1999 and expects to have
the system operational by the third quarter of 1999. The out-of-pocket
software, hardware and personnel cost estimates associated with this
replacement system and requisite modifications to the Company's network
infrastructure range from $500,000 to $750,000. The Company has a financing
agreement with a third-party leasing company to finance the software cost of
$225,000. Other implementation consulting services of approximately $265,000
will be paid on a monthly basis through the implementation period, starting
in April, 1999.
Approximately 50% of the Company's expenses are payroll-related expenses. The
Company relies on a third party for most of its payroll processing services.
The Company has received written certification from this payroll processing
vendor that the software used in its payroll processing services is Year 2000
compliant. Payroll processing may be further impacted by the preparedness of
various financial institutions and government agencies which receive
information via electronic interface. The Company
16
further intends to request, but has not yet requested, from certain vendors
of lesser significant products and services to the Company a written
certification regarding Year 2000 compliance.
Software Marketed to Customers - The Company has used and intends to continue
using both internal and external resources to re-program, replace and test
its proprietary software products for Year 2000 compliance. The Company
anticipates completing the Year 2000 project as soon as practical, but in any
event before any anticipated adverse impact. The total cost of this Year 2000
project is estimated to be approximately $150,000 of which approximately
$50,000 has been spent to date. This project has been and will be funded over
the next year through existing cash resources and operating cash flows.
The Company also plans to determine the extent to which the Company's
software products are vulnerable to the failure of third party products to be
Year 2000 compliant. Generally, software products provided by third parties
that are marketed directly or indirectly by the Company to its customers are
developed by leading software suppliers with Year 2000 programs in process.
There can be no guarantee, however, that third-party software products
marketed by the Company will be rendered Year 2000-compliant on a timely
basis. The Company intends to continually monitor and evaluate Year 2000
compliance through internal testing and by obtaining written certification of
Year 2000 compliance from the vendors. If necessary, the Company will
consider alternative vendors to ensure Year 2000 compliance for third-party
software products marketed to its customers.
While the Company is not heavily reliant on non-IT equipment with embedded
technology, the Company will assess and evaluate such equipment as a part of
its Year 2000 efforts.
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.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION
REFORM ACT OF 1995 - This Annual Report on Form 10-K contains various
forward-looking statements and information that are based on management's
beliefs as well as assumptions made by and information currently available to
management, including statements regarding future economic performance and
financial condition, liquidity and capital resources, acceptance of the
Company's products by the market and management's plans and objectives. Such
statements are subject to various risks and uncertainties which could cause
actual results to vary materially from those stated. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated, expected or projected. Such risks and uncertainties include the
Company's ability to overcome its recent history of operating losses and
declining revenues, the availability and amount of future sources of capital,
the risks associated with future acquisitions, the willingness of independent
insurance agencies to outsource their computer and other processing needs to
third parties, the Company's ability to continue to develop new products to
effectively address market needs in an industry characterized by rapid
technological change, the Company's dependence on the insurance industry (and
in particular independent agents), the highly competitive and rapidly
changing automation systems market, the Company's ability to effectively
protect its applications software and other proprietary information, the
Company's ability to attract and retain quality management, and software,
technical sales and other personnel. Certain of these as well as other risks
and uncertainties are described in more detail in the Company's Registration
statement on Form S-3 filed under the Securities Act of
17
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Delphi is subject to certain market risks, including foreign currency and
interest rates. The Company has foreign subsidiaries in Australia, Canada,
New Zealand, Singapore and the United Kingdom (UK) that develop and sell
software products and services in those respective countries. The Company is
exposed to potential gains and losses from foreign currency fluctuations
affecting net investments and earnings denominated in foreign currencies. The
Company's primary exposure is to changes in exchange rates for the U.S.
Dollar versus the Australian, Canadian, New Zealand and Singapore Dollars and
the British pound.
In the 1998 transition period, the net change in the cumulative foreign
currency translation adjustments account, which is a component of
stockholder's equity, was an unrealized (loss) of ($25,000). Unrealized
foreign currency translation income (loss) of ($14,000) and $10,000 were
recognized in fiscal 1998 and fiscal 1997, respectively.
Delphi's exposure to interest rate risk relates to its debt obligations,
which are primarily U.S. Dollar denominated. The Company's market risk
therefore is the potential loss arising from adverse changes in interest
rates. As further described in Note 6 to the financial statements included
herein at Part II, Item 8, the Company's debt consists primarily of a
floating-rate bank line-of credit. Market risk is estimated as the potential
decrease in pretax earnings resulting from a hypothetical 10% increase in
interest rates on the Company's debt. If such an increase occurred, the
Company would incur approximately $35,000 per annum in additional interest
expense based on the average debt borrowed during the nine months ended
December 31, 1998. The Company does not feel such additional expense is
significant.
The Company does not currently use any derivative financial instruments
relating to the risk associated with changes in interest rates.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Delphi Information Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Delphi
Information Systems, Inc. (a Delaware Corporation) and subsidiaries as of
December 31 and March 31, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the nine-months ended
December 31, 1998 and each of the two years ended March 31, 1998 and 1997.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delphi Information Systems,
Inc. and subsidiaries as of December 31 and March 31, 1998, and the results
of their operations and their cash flows for the nine months ended December
31, 1998 and each of the two years ended March 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's projections indicate that the
Company's current debt facility will not provide sufficient financing to fund
the cash requirements of the business, which raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to addressing this liquidity issue are also described in Note 1. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not a
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
April 15, 1999
19
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
ASSETS DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,053 $ 872
Accounts receivable, less allowances of $1,068
and $860, respectively 6,378 4,807
Other current assets 310 163
---------- ----------
TOTAL CURRENT ASSETS 7,741 5,842
Property and equipment, net 1,899 2,084
Capitalized and purchased software, net 6,561 6,554
Other assets 344 302
---------- ----------
TOTAL ASSETS $ 16,545 $ 14,782
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 4,032 $ 1,923
Accounts payable and accrued expenses 2,371 2,078
Accrued payroll and related benefits 182 419
Deferred revenue 3,418 4,381
---------- ----------
TOTAL CURRENT LIABILITIES 10,003 8,801
Notes payable-long term 210 210
Other liabilities 265 180
---------- ----------
TOTAL LIABILITIES 10,478 9,191
---------- ----------
Commitments and contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 2,000,000 shares authorized,
221 shares of Series D issued and outstanding, respectively 49 49
Common stock, $.10 par value,
Non-designated, 20,000,000 shares authorized,
7,395,414 and 7,395,449 issued and
outstanding, respectively 740 740
Additional paid-in capital 48,717 48,717
Accumulated deficit (43,516) (44,017)
Cumulative foreign currency translation adjustment 77 102
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 6,067 5,591
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,545 $ 14,782
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
20
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
NINE MONTHS YEARS ENDED
ENDED MARCH 31,
DECEMBER 31, 1998 1998 1997
----------------- ---- ----
REVENUE:
Software $ 6,375 $ 3,509 $ 6,089
Services and other 12,846 18,956 21,625
-------- -------- --------
TOTAL REVENUE 19,221 22,465 27,714
COST OF REVENUE:
Software 2,337 2,439 5,323
Services and other 7,352 9,512 13,464
-------- -------- --------
TOTAL COST OF REVENUE 9,689 11,951 18,787
-------- -------- --------
GROSS MARGIN 9,532 10,514 8,927
OPERATING EXPENSES:
Product development 2,160 3,510 4,255
Sales and marketing 2,167 3,587 4,405
General and administrative 4,370 4,414 4,354
Amortization of goodwill, customer lists and
noncompete agreements - 136 496
Restructuring charges - 2,053 1,297
-------- -------- --------
TOTAL OPERATING EXPENSES 8,697 13,700 14,807
-------- -------- --------
OPERATING INCOME (LOSS) 835 (3,186) (5,880)
Minority interest (47) 47 -
Interest income - (120) (131)
Interest expense 359 392 108
-------- -------- --------
Income (loss) before income taxes 523 (3,505) (5,857)
Income tax provision (benefit) 22 (99) 27
-------- -------- --------
Net income (loss) $ 501 ($ 3,406) ($ 5,884)
-------- -------- --------
-------- -------- --------
Basic net income (loss) per common share $ 0.07 ($ 0.46) ($ 0.97)
-------- -------- --------
-------- -------- --------
Diluted net income (loss) per common share $ 0.07 ($ 0.46) ($ 0.97)
-------- -------- --------
-------- -------- --------
Weighted average shares outstanding:
Basic 7,395 7,347 6,093
-------- -------- --------
-------- -------- --------
Diluted 7,419 7,347 6,093
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
21
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for share amounts)
CUMULATIVE
FOREIGN
Preferred Stock COMMON STOCK ADDITIONAL CURRENCY
--------------------------------------- PAID-IN ACCUMULATED TRANSLATION COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT INCOME (LOSS)
-----------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 52,624 $ 7,225 2,061,540 $ 206 $ 23,844 ($ 34,727) $ 106
-----------------------------------------------------------------------------
Net loss -- -- -- -- -- (5,884) -- ($ 5,884)
Translation adjustment -- -- -- -- -- -- 10 10
---------
Comprehensive loss ($ 5,874)
---------
Exercise of stock options -- -- 10,900 1 77 -- --
Shares sold under employee stock
purchase plan -- -- 4,927 -- 27 -- --
Conversion of convertible promissory
notes to common stock -- -- 300,000 30 1,470 -- --
Conversion of Series C Preferred Stock
to common stock (36,268) (3,570) 725,360 73 3,497 -- --
Conversion of Series D Preferred Stock
to common stock (16,135) (3,606) 729,947 73 3,533 -- --
Issuance of common stock in connection
with private equity placements -- -- 3,266,100 327 14,644 -- --
CBS acquisition -- -- 161,460 16 1,026 -- --
Issuance of common stock as
consideration for services
provided -- -- 10,000 1 49
-----------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 221 49 7,270,234 727 48,167 (40,611) 116
-----------------------------------------------------------------------------
Net loss -- -- -- -- -- (3,406) -- ($ 3,406)
Translation adjustment -- -- -- -- -- -- (14) (14)
---------
Comprehensive loss ($ 3,420)
---------
Exercise of stock options -- -- 112,100 12 489 -- --
Shares sold under employee stock
purchase plan -- -- 2,126 -- 11 -- --
Issuance of common stock as
consideration for services
provided -- -- 10,989 1 50 -- --
-----------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 221 49 7,395,449 740 48,717 (44,017) 102
-----------------------------------------------------------------------------
Net income -- -- -- -- -- 501 -- $ 501
Translation adjustment -- -- -- -- -- -- (25) (25)
---------
Comprehensive income $ 476
---------
Purchase of fractional shares due to
reverse stock split -- -- (35) -- -- --
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 221 $ 49 7,395,414 $ 740 $ 48,717 ($ 43,516) $ 77
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
22
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS YEARS ENDED
ENDED MARCH 31,
DECEMBER 31, 1998 1998 1997
----------------- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 501 ($ 3,406) ($ 5,884)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 722 1,138 1,284
Amortization of capitalized and purchased software 1,549 2,043 2,183
Amortization of goodwill, customer lists and noncompete agreements - 136 496
Write-off of capitalized and purchased software, goodwill and
customer lists and non-compete agreements - 2,053 -
Loss on disposal of fixed assets - - 14
Excess lease cost - - (824)
Issuance of common stock as consideration for services provided - 51 50
CHANGES IN ASSETS AND LIABILITIES NET OF EFFECT OF
ACQUISITION OF BUSINESSES:
Accounts receivable, net (1,571) 434 3,111
Other assets (189) (174) 766
Accounts payable and accrued liabilities 293 (2,589) (2,300)
Accrued payroll and related benefits (237) (201) (826)
Other liabilities and deferred revenue (878) (2,681) (2,988)
---------- --------- ---------
Net cash provided by (used in) operating activities 190 (3,196) (4,918)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (537) (980) (593)
Expenditures for capitalized and purchased software (1,556) (2,579) (1,761)
Cash outlays for acquisitions, net of cash acquired - - (708)
---------- --------- ---------
Net cash used in investing activities (2,093) (3,559) (3,062)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable - - (3,030)
Borrowings on notes payable 2,109 533 1,600
Proceeds from exercise of stock options and
employee stock purchase plan - 512 105
Net proceeds from private equity placement - - 14,971
---------- --------- ---------
Net cash provided by financing activities 2,109 1,045 13,646
---------- --------- ---------
Foreign currency translation adjustment (25) (14) 10
---------- --------- ---------
Net change in cash and cash equivalents 181 (5,724) 5,676
Cash and cash equivalents at the beginning of the period 872 6,596 920
---------- --------- ---------
Cash and cash equivalents at the end of the period 1,053 872 6,596
---------- --------- ---------
---------- --------- ---------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 359 $ 206 $ 163
Income taxes paid - - 39
NON-CASH TRANSACTIONS:
Preferred stock and convertible promissory notes converted
to common stock - - 8,675
The accompanying notes are an integral part of these consolidated financial
statements.
23
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
NATURE OF BUSINESS - Delphi Information Systems, Inc. and Subsidiaries, (the
"Company") develops, markets and supports computer software and
Internet-based solutions which automate independent property and casualty
insurance agencies and brokerages including the areas of sales management,
policy administration, accounting and electronic interface with the computers
of insurance carriers.
FINANCING ISSUES - The Company generated increased revenue, net income and
positive operating cash flow in the nine months ended December 31, 1998 (the
"1998 transition period"). The increase in revenue was due primarily to the
higher level of software sales compared to the prior period.
Prior to the nine months ended December 31, 1998 (the "1998 transition period")
the Company had experienced significant operating losses in each fiscal year
since 1993, along with declining revenue. During this period, the Company
financed its operations through bank financing and private placements of equity
capital. To respond to these losses and declining revenue, during fiscal 1998
and continuing during the 1998 transition period, the Company took the following
steps:
1) Changes in the senior executive management;
2) Rationalization and reallocation of the overall cost structure;
3) Implementation of programs to improve customer support;
4) Finalized development and release of the "cd" product line; and
5) Aggressive marketing of new products and services.
Despite the improved financial results during the 1998 transition period, the
Company is currently faced with liquidity concerns. Subsequent to January 1,
1999, the Company received approximately $4.9 million in cash related to
proceeds from the exercise of outstanding stock warrants. These proceeds were
used to fund operations, pay aged accounts payable and reduce borrowings
under the Company's bank line of credit, which was designed to provide up to
$4.0 million, subject to certain borrowing base limits. The amount borrowed
under the line of credit was reduced from approximately $3.7 million at
December 31, 1998 to approximately $1.4 million as of March 31, 1999. As of
April 15, 1999, the total amount that the bank has made available, and that
the Company is borrowing, under the bank line of credit is approximately $1.4
million. The Company believes the amount that should be available under the
terms of the line of credit is substantially higher. Based on the Company's
projections, the borrowing requirements of the business at certain times
during 1999 will exceed $1.4 million but not the higher Company calculated
maximum borrowing capacity under the existing line of credit. The cash
requirements are, in great part, affected by the extended payment terms
offered to customers on new software sales. In order to meet the projected
cash requirements of the business, it will be necessary for the Company to
secure financing sources, beyond those currently available, in order to
continue as a going concern.
Management believes that the required financing sources to operate the
business as a going concern will be secured, although there can be no
assurances that such financing will be available or that it will be available
on terms satisfactory to the Company. As of April 15, 1999, management is
having ongoing discussions with its bank in order to come to an agreement as
to the available borrowing base under its line of credit agreement.
Management believes that the borrowing base will be expanded, however, to
date, no agreement has been reached, and there can be no assurance that such
lender calculated maximum borrowing capacity will be adequate.
Management also believes that there may be additional infusions of cash from the
further exercise of outstanding stock warrants, which would supplement any cash
made available through successful bank negotiations. In late March, 1999, the
expiration date of warrants to purchase approximately 1.5 million shares of
common stock at $7.50 per share was extended from April 19, 1999 to June 18,
1999. Finally, if the Company is unable to successfully renegotiate its
available borrowings under its current line-of-credit agreement, management will
endeavor to secure the necessary financing from other sources. Such sources
could include a different bank, a "mezzanine lender", or an equity investor.
Again, although management believes that the Company will be able to secure
financing on terms satisfactory to the Company and on a timely basis, there can
be no assurances that this will happen.
Management intends to aggressively seek the required financing sources that
are necessary in order to continue to operate the business. Management
continues to believe that the Company is well suited to take advantage of the
current market opportunities. Upon obtaining the necessary financing, the
Company will continue to aggressively market its products and services, fund
development and monitor costs to ensure the Company's products incorporate
state-of-the-art technologies and provide customers with value-added
solutions.
24
CONSOLIDATION - The consolidated financial statements include the accounts of
Delphi Information Systems, Inc., ("Delphi USA"), its wholly owned
subsidiary, Delphi Information Systems International, Inc., (Delphi
International"), both Delaware corporations and all majority owned
subsidiaries of Delphi International. Wholly owned subsidiaries of Delphi
International are Canadian Insurance Computer Systems, Inc. ("Delphi
Canada"), Delphi Information Systems, (UK) Ltd., Delphi Information Systems,
(NZ) Ltd., Complete Broking Systems (Malaysia), Sdn. Bhd. and Delphi
Information Systems PTE (Singapore) Ltd. Additionally, Delphi International
holds a fifty-four percent interest in Complete Broking Systems Australia
PTY, Ltd. Intercompany transactions and accounts have been eliminated in
consolidation.
Delphi has an insignificant amount of long-lived assets located outside of
the United States in foreign operations as of December 31, 1998. Foreign
operations delivered software and provided related services to external
customers accounting for approximately 17.9% of total revenue for the
nine-month period ended December 31, 1998.
On July 23, 1996, the Company acquired Complete Broking Systems ("CBS") of
Auckland, New Zealand in exchange for $500,000 cash and 161,460 shares of the
Company's common stock. The acquisition has been accounted for as a purchase.
Accordingly, the results of CBS have been recorded in the financial
statements commencing on July 24, 1996.
FISCAL YEAR - Prior to April 1998, the Company's fiscal year consisted of the
twelve months ended March 31st. Effective April 1998, the Company changed its
year-end to December 31st. Condensed statements of operations for the 1998
transition period and the nine months ended December 31, 1997 are noted below
(in thousands):
NINE MONTHS ENDED DECEMBER 31,
-------------------------------
1997
1998 (UNAUDITED)
--------------------------------
Revenue $19,221 $16,636
Cost of revenue 9,689 9,180
------- -------
Gross margin 9,532 7,456
Operating expenses 8,697 11,018
------- -------
Operating income (loss) $ 835 ($3,562)
------- -------
------- -------
Income (loss) before income taxes $ 523 ($3,749)
------- -------
------- -------
Net income (loss) $ 501 ($3,708)
------- -------
------- -------
REVENUE RECOGNITION - In October 1997, the AICPA issued Statement of Position
(SOP) 97-2, "Software Revenue Recognition", which supersedes SOP 91-1. The
Company has adopted SOP 97-2 for software transactions subsequent to March 31,
1998. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements (i.e., software products, upgrades/enhancements,
postcontract
25
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 service elements (such as training and installation)
generally is recognized as the services are performed. Maintenance is
generally billed to customers on a quarterly or annual basis in advance
thereby resulting in deferred revenue, which is recognized as revenue ratably
over the term of the related maintenance contract. If the Company 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. Further, the SOP limits the recognition
of revenue for contracts with extended payment terms.
In March 1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2, Software Revenue Recognition" and in December 1998,
issued SOP 98-9, "Modification of SOP 97-2, Software Recognition, With
Respect to Certain Transactions". For fiscal years beginning on or before
March 15, 1999, SOP 98-4 and 98-9 defer the application of certain passages
in SOP 97-2 which limit what is considered evidence of fair value of various
elements of multiple element arrangements. Additionally, for transactions
entered into in fiscal years beginning after March 15, 1999, SOP 98-9
provides for revenue recognition for certain software arrangements involving
multiple elements where vendor specific evidence does not exist for delivered
elements. Management is in the process of reviewing SOP 98-9 to determine its
impact, if any, on the Company.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less at the time of
purchase to be cash equivalents.
SOFTWARE DEVELOPMENT COSTS - The Company capitalizes internally generated
software development costs and purchased software, collectively referred to
as software development costs, in compliance with the Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed." Capitalization of software
development costs begins upon the establishment of technological feasibility
for the product. The establishment of technological feasibility and the
ongoing assessment of the recoverability of these costs consider external
factors including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amortization of capitalized software development costs, through
cost of software revenue, begins when the products are available for general
release to customers. The annual amortization is the straight-line method
over the remaining estimated economic life of the product. The maximum
amortization period is five years. Amortization of software development costs
is included in cost of software revenue.
Software development costs are amortized on a product-by-product basis.
Amortization of software development costs was $1,549,000 in the 1998
transition period and $2,043,000 and $2,183,000 in fiscal 1998 and 1997,
respectively.
Net capitalized and purchased software costs at December 31, 1998 and March 31,
1998 consist of the following (in thousands):
December 31, 1998 March 31, 1998
----------------- ---------------
Total cost $ 13,357 $ 11,801
Less accumulated amortization (6,796) (5,247)
--------- ---------
$ 6,561 $ 6,554
--------- ---------
--------- ---------
26
As further discussed in Note 3, during the year ended March 31, 1998, the
Company decreased the carrying value of certain software development costs by
$1,283,000, to reflect impairment.
GOODWILL AND CUSTOMER LISTS - Goodwill consists of the excess of the cost of
acquisitions less the net fair market value of identifiable assets and
liabilities. Customer lists represent the estimated value of acquired
customer lists. Costs are amortized on a straight-line basis over five to ten
years. During fiscal 1998, all unamortized goodwill and customer lists of
$770,000 were written off to reflect impairment. Amortization of goodwill and
customer lists was $136,000 and $496,000 in fiscal 1998, and 1997,
respectively.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to ten years. Leasehold improvements are amortized over
the shorter of the expected life of the improvements or the lease term.
INCOME TAXES - The Company follows 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.
EARNINGS PER SHARE - Basic earnings per share ("EPS") is equal to net income
divided by the weighted average number of shares of common stock outstanding
for the period. Diluted EPS recognizes the dilutive effect of common stock
equivalents and is equal to net income divided by the sum of the weighted
average number of shares outstanding and common stock equivalents. At
December 31, 1998 the Company's common stock equivalents consist of stock
options, common stock warrants, and convertible preferred stock. Consistent
with previous standards, SFAS No. 128 prohibits inclusion of the impact of
common stock equivalents in the calculation of EPS when inclusion results in
antidilution. Accordingly, for each of the years ended March 31, 1998 and
1997, basic and diluted EPS are equal.
A reconciliation of the number of weighted average shares used in calculating
basic and diluted net income (loss) per share is as follows (in thousands):
December 31, March 31,
1998 1998 1997
---- --------------------
Weighted average number of
common shares outstanding - basic 7,395 7,347 6,093
Effect of potentially dilutive stock options
and preferred stock 24 (a) (a)
----- ----- -----
Weighted average number of
Common shares outstanding - diluted 7,419 7,347 6,093
----- ----- -----
----- ----- -----
(a) Common stock equivalents excluded to prevent anti-dilution.
Share and net income (loss) per share amounts have been adjusted to reflect
the one-for-five reverse stock split effective May 8, 1998.
FOREIGN CURRENCY TRANSACTIONS - The accounts of the Company's foreign
subsidiaries have been translated according to the provisions of the
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation". Gains or losses resulting from translation of the foreign
subsidiaries' financial statements are included in stockholders' equity. Any
gains or losses resulting from foreign
27
currency transactions are reflected in the consolidated statements of
operations of the period in which they occur.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS - In the 1998 transition period, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income," which established standards
for reporting and displaying comprehensive income and its components. The
Company has chosen to disclose Comprehensive Income (Loss), which encompasses
net income (loss) and foreign currency translation adjustments, in the
Consolidated Statements of Stockholders' Equity. Prior years have been
restated to conform to the requirements of SFAS No. 130.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" established reporting standards for companies operating in more
than one business segment. Since the Company manages its business as a single
entity that provides application software and related services to a single
industry on a worldwide basis, the Company believes that the segment
disclosure requirements of SFAS No. 131 are not applicable to its operations.
The applicable enterprise-wide disclosures required by SFAS No. 131 are
included elsewhere in these notes to consolidated financial statements.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which addresses the accounting for
derivative instruments. SFAS No. 133 is effective for financial statements
for the Company's fiscal year beginning January 1, 2000. The Company does not
expect that SFAS No. 133 will have a significant effect on its current
financial reporting.
CONCENTRATIONS OF CREDIT RISK - In fiscal 1998, one domestic customer
(including its foreign subsidiaries) accounted for approximately 12.7% of
consolidated revenue. At March 31, 1998 accounts receivable from the
significant customer totaled $1,445,000. The customer is a publicly traded
multi-national insurance company listed on the New York Stock Exchange. In
both the 1998 transition period and fiscal 1997, no single customer
represented more than 10% of consolidated revenue.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the 1998 transition period presentation.
NOTE 2: STOCKHOLDERS' EQUITY:
STOCKHOLDER RIGHTS AGREEMENT - On March 23, 1998, the Board of Directors of
the Company adopted a stockholder rights plan (the "Stockholder Rights Plan")
designed to protect the stockholders from certain unfair and coercive tactics.
Pursuant to a Stockholder Rights Agreement (the "Rights Agreement") the
Company declared a dividend of one preferred share purchase right ("Right")
on each outstanding share of the Company's Common Stock, $.10 par value per
share ("Common Shares"), payable to stockholders of record at the close of
business on March 23, 1998. Except as described below, each Right, when
exercisable, entitles the holder thereof to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Shares,
par value $.10 per share (the "Preferred Shares"), of the Company at an
exercise price of $25.00 per one one-hundredth of a Preferred Share (the
"Purchase Price"), subject to adjustment.
28
Until the date an "Acquiring Person" (as defined) is identified, the Rights
are not detachable and are not exercisable.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to the greater of (1) a
preferential quarterly dividend payment of $100 per share, or (2) an
aggregate dividend of 100 times the dividend declared per Common Share. In
the event of liquidation, the holders of the Preferred Shares will be
entitled to a preferential liquidation payment of $100 per share, plus an
amount equal to 100 times the aggregate amount to be distributed per share of
common stock of 100 times the payment made per Common Share. Each Preferred
Share will have 100 votes, voting together with the Common Shares except as
otherwise required by law. Finally, in the event of any merger, consolidation
or other transaction in which Common Shares are exchanged, each Preferred
Share will be entitled to receive 100 times the amount received per Common
Share. The Rights are protected by customary antidilution provisions.
If any person or group becomes an Acquiring Person, then each holder of a
Right (other than Rights beneficially owned by the Acquiring Person), will
have the right to receive upon exercise of such Right that number of Common
Shares (or, in certain circumstances, cash, property or other securities of
the Company) having a market value of two times the exercise price of the
Right.
If at any time after the time that any person or group becomes an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are
sold, proper provision will be made so that each holder of a Right (other
than Rights beneficially owned by the Acquiring Person), will thereafter have
the right to receive, upon the exercise thereof at the then-current exercise
price of the Right, that number of shares of common stock of the acquiring
company which at the time of such transaction will have a market value of two
times the Purchase Price of the Right.
At any time after the time that any person or group becomes an Acquiring
Person and prior to the acquisition by such person or group of 50% or more of
the outstanding Common Shares, the Board of Directors of the Company may
exchange the Rights (other than Rights beneficially owned by such person or
group, any Associate or Affiliate thereof, and certain transferees thereof,
which will be void), in whole or in part, at an exchange ratio of one Common
Share or one-hundredth of a Preferred Share (or of a share of a class or
series of the Company's preferred stock having equivalent rights, preferences
and privileges) per Right (subject to adjustment).
At any time prior to the time that any person becomes an Acquiring Person,
the Board of Directors of the Company may redeem the Rights in whole, but not
in part, at a price of $.001 per Right, subject to adjustment, which may (at
the option of the Company) be paid in cash, Common Shares or other
consideration deemed appropriate by the Board of Directors. The redemption of
the Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish;
provided, however, that no redemption will be permitted or required after the
time that any person becomes an Acquiring Person. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of the Rights will be to receive the Redemption
Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from
and after such time as any person becomes an Acquiring Person no such
amendment may make the Rights redeemable if the Rights are not then
redeemable in accordance with the terms of the Rights Agreement or may
adversely affect the interests of the holders of the Rights.
29
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends. The Rights will expire on March 23, 2008,
unless the Rights are earlier redeemed or exchanged by the Company, as
described. The Rights are not calculated as weighted shares outstanding until
they are exercised.
REVERSE STOCK SPLIT - On May 6, 1998, the Company's stockholders approved an
amendment to 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 have been adjusted accordingly.
PRIVATE EQUITY PLACEMENTS - In May 1996, the Company issued 2,140,000 units
at a price of $5.00 per unit. In January 1997, the Company issued 1,126,100
units at a price of $5.00 per unit. Each unit consists of one share of common
stock and a redeemable warrant (further described below). The two private
equity placements provided net proceeds of approximately $14,971,000 to the
Company.
In conjunction with the May 1996 equity placement, outstanding promissory
notes of $1,500,000 were converted into 300,000 units. Each unit consists of
one share of common stock and a redeemable warrant (further described below).
In addition, all Series C Preferred Stock, and 16,135 of the 16,356
outstanding shares of Series D Preferred Stock were converted into 1,455,307
shares of common stock.
REDEEMABLE WARRANTS - As described above, in conjunction with the May 1996
and January 1997 private equity placements and conversion of a $1,500,000
outstanding promissory note, the Company issued units, each consisting of one
share of common stock and one redeemable warrant to purchase one share of
common stock at an exercise price of $7.50 per share, subject to certain
anti-dilutive adjustments. The shares and redeemable warrants comprising the
units are immediately detachable and separately transferable.
The redeemable warrants may be exercised at any time after the date of
issuance for a period of three years. The Company can redeem the redeemable
warrants at any time subsequent to 180 days after issuance if the closing bid
price for the common stock is at or above $10.00 per share for twenty
consecutive trading days subsequent to when the redeemable warrants first are
redeemable.
Subsequent to January 1, 1999, warrants to acquire approximately 609,000
shares of Common Stock that were due to expire on April 19, 1999 were
exercised generating approximately $4.6 million in cash. On March 31, 1999,
the Company extended the expiration date from April 19, 1999 to June 18, 1999
for the remaining unexercised warrants originally issued in May 1996 to
acquire approximately 1,531,000 shares of Common Stock. Of these unexercised
warrants, 200,000 warrants are held by the Company's largest shareholder.
In addition, subsequent to January 1, 1999, warrants to acquire 25,000 shares
of common stock that were due to expire January 24, 2000 and warrants to
acquire 5,000 shares of common stock related to the conversion of the
promissory notes were exercised generating approximately $225,000 in cash.
OTHER WARRANTS - In connection with the May 1996 private equity placement
described above, the Company issued a warrant to the placement agent (the
"Agent's Warrant") to purchase 200,000 shares of the Company's common stock
at $5.00 per share. The Agent's Warrant is not subject to redemption and
expires May 1, 2001. Subsequent to January 1, 1999, warrants to acquire
18,000 shares of Common Stock were exercised generating approximately $90,000
in cash.
30
In connection with a renewal of a line-of-credit agreement in December 1994,
the Company issued to a bank a five-year warrant option to purchase 75,000
shares of common stock at $17.50 per share.
SERIES D CONVERTIBLE PREFERRED STOCK - At December 31, 1998 the Company had
221 shares of Series D Convertible Preferred Stock issued and outstanding.
Each share is convertible into 45 shares of common stock at the request of
the holder. The Preferred Stock has voting rights equal to the number of
common shares into which the preferred shares is convertible. The Preferred
Stock is not entitled to dividends.
NOTE 3 - RESTRUCTURING CHARGES:
The Company's product strategy is centered on a new generation of products,
collectively referred to as "cd" products. Consistent with the Company's
product strategy, the development of enhanced versions of legacy products has
been limited. As new products are introduced to the market, existing
customers utilizing legacy products are encouraged to migrate to the
Company's new generation of products. During the first two quarters of fiscal
1998 the Company experienced some customer attrition related to certain
legacy product maintenance price increases effective in April 1997.
During the second quarter of fiscal 1998, in response to changes in the
Company's markets and technology trends, the product strategy was altered
requiring modification of a portion of the underlying technology of "cd"
products.
As a result of the decrease in legacy maintenance revenue and the requirement
to modify a portion of the underlying technology of "cd" products, the
recoverability of a portion of intangible assets was deemed impaired.
Accordingly, during the second quarter of fiscal 1998, the carrying value of
capitalized and purchased software was reduced $1,283,000 and goodwill and
customer lists of $770,000 were written off.
The Company generated significant operating losses during the first two
quarters of fiscal 1997. In response to the losses, the Company was
restructured resulting in significant reductions in payroll expense and other
operating expenses. In addition, as the Company transitioned out of the
hardware business, a portion of the inventory on hand was deemed obsolete. As
a result, the Company incurred a restructuring charge in fiscal 1997
summarized as follows (in thousands):
Severance cost $ 643
Inventory Obsolescence 400
Other costs 254
-------
$1,297
-------
-------
As of December 31, 1998, there are no remaining accruals related to these
restructuring charges.
NOTE 4- INVESTMENT IN APT:
The Company owns a 20% interest in the common stock of Alliance for
Productive Technology, Inc. ("APT"), a privately held company formed as an
alliance of agency automation vendors, insurance companies, agents'
associations, and insurance industry organizations. The purpose of APT is to
provide non-proprietary interface products and services to the insurance
industry. The Company has entered into a distribution agreement with APT to
enable it to incorporate certain APT products and features into the Company's
products. The investment of $230,000 has been recorded as a long-term other
asset as of December 31, 1998. As further described in Note 6, a portion of
the Company's investment is held as security for a note payable to APT.
31
NOTE 5- PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1998 and March 31, 1998 consists of
the following (in thousands):
December 31, March 31,
1998 1998
------------ ---------
Computer equipment and purchased software $ 7,111 $ 6,676
Leasehold improvements 975 984
Furniture, fixtures and other 1,804 1,742
------------ ---------
9,890 9,402
Less accumulated depreciation and amortization (7,991) (7,318)
------------ ---------
$ 1,899 $ 2,084
------------ ---------
------------ ---------
NOTE 6 - NOTES PAYABLE:
Notes payable at December 31, 1998 and March 31, 1998, are comprised of the
following (in thousands):
December 31, March 31,
1998 1998
------------ ---------
Bank line-of-credit $ 3,712 $ 1,603
Noncompete note payable 300 300
Note payable - APT (Note 4) 230 230
Less current portion (4,032) (1,923)
------------ ---------
$ 210 $ 210
------------ ---------
------------ ---------
BANK LINE-OF-CREDIT - Effective January 1997, the Company established a line
of credit up to $4,000,000 subject to borrowing base limits. The agreement
provides for minimum monthly interest at the bank's prime lending rate plus
two and one-half percent (2.5%) on the greater of the actual amount
outstanding or $1,600,000. The agreement includes certain covenants including
the maintenance of a minimum net worth of $2,000,000 and restrictions upon
certain activities by the Company without the approval of the bank including
the incurrence of senior debt, certain mergers or acquisitions, and the
payment of dividends. The borrowings under the agreement are secured by
substantially all of the Company's assets.
In December 1997, March 1998, and September 1998 the Company executed
amendments to the line of credit agreement. The amendments extend the
maturity date of the agreement two years to January 31, 2001, alter the
provisions of the early termination fee, and modify the criteria for
determining the amount available under the line. In accordance with the
amendments, prior to December 31, 1998 the Company may borrow up to two and
one-half times average monthly collections (as defined); from January 1999
through March 1999, two times average monthly collections; and subsequently
up to the sum of one times average monthly collections from recurring
maintenance revenue and seventy-five percent of eligible non-maintenance
receivables (as defined). As of December 31, 1998, borrowings under the line
of credit totaled $3,712,000, and $7,000 remained available for borrowing. As
of March 31, 1999, the borrowings under the line of credit totaled $1,408,000
and $29,000 remained available for borrowing.
As discussed above, the line of credit agreement provides for minimum monthly
interest on the greater of the balance outstanding or $1,600,000. In order to
minimize interest expense net of interest income, the Company has
periodically drawn on the line of credit and invested the proceeds in cash
equivalents. The cash equivalents are unrestricted and may be utilized by the
Company at any time. At December 31,
32
1998 the Company was in technical default under certain provisions of the
line of credit. The Company has obtained waivers for these defaults.
As of April 15, 1999, the total amount that the bank has made available, and
that the Company is borrowing under the bank line of credit is approximately
$1.4 million. The Company believes that the amount that should be available
under the terms of the line of credit is substantially higher. Management is
having ongoing discussions with its bank in order to come to an agreement as
to the available borrowing base under its line-of-credit agreement.
Management believes that the borrowing base will be expanded, however, to
date, no agreement has been reached, and there can be no assurance that such
lender calculated maximum borrowing capacity will be adequate. See Note 1 of
the consolidated financial statements for further discussion of financing
issues and financing alternatives.
Additional information related to line of credit borrowings for the nine
months ended December 31, 1998 and the year ended March 31, 1998, is as
follows (in thousands):
December 31, March 31,
1998 1998
------------ ---------
Maximum amount borrowed during the period $ 3,926 $ 2,294
Average amount borrowed during the period $ 2,532 $ 1,546
Interest rate at the end of the period 10.25% 11.0%
Weighted average interest rate incurred during
the period 11.7% 11.7%
Average borrowings were determined based on the amounts outstanding at each
month end. The weighted average interest rate during the period was computed
by dividing actual interest by average borrowings outstanding during each of
the periods.
NONCOMPETE NOTE PAYABLE - The Company entered into various noncompete
agreements in connection with a January, 1991 acquisition. The final
installment of $400,000 was originally due on January 31, 1997, but was
subsequently converted to an 11.75% interest bearing unsecured note. As of
December 31, 1998, the remaining balance is due in three equal annual
payments of $119,574 (principal and interest) commencing on January 31, 1999.
Commitments related to the noncompete agreements were amortized and expensed
ratably over the life of each agreement. The January, 1999 installment was
paid by the Company.
NOTE PAYABLE-APT - In conjunction with the purchase of the common stock of
APT discussed in Note 4, the Company entered into a note payable secured by a
portion of the APT common stock. The note bears
33
interest at the prime rate, 7.75% at December 31, 1998. Interest is due
semi-annually and the final principal payment of $230,000 is due January 1,
1999. The Company is currently discussing an extension of the January 1, 1999
payment and APT continues to hold a portion of the Company's investment as
security for the note payable. The note may be prepaid without penalty.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued liabilities at December 31, 1998 and March 31,
1998, consist of the following (in thousands):
December 31, March 31,
1998 1998
------------ ---------
Trade accounts payable $1,884 $1,304
Accrued and other liabilities 487 774
------ ------
$2,371 $2,078
------ ------
------ ------
NOTE 8 - INCOME TAXES:
Income (loss) before income taxes consisted of (in thousands):
Nine Months Ended Years Ended
December 31, March 31,
------------ ----------
1998 1998 1997
------- ------- --------
Domestic $ 782 $(3,985) $(5,681)
Foreign (259) 480 (176)
Total $ 523 $(3,505) $(5,857)
The income tax provision (benefit) consisted of (in thousands):
Nine Months Ended Years Ended
December 31, March 31,
1998 1998 1997
---- ---- ----
Current:
U.S. Federal $ - $ - $ -
State 22 (48) 27
Foreign -- (51) --
------ ------ ------
Total $ 22 $ (99) $ 27
------ ------ ------
------ ------ ------
34
The income tax provision at the federal statutory rate differs from the
effective rate because of the following items:
Nine Months
Ended Years Ended
December 31, March 31,
------------ ---------
1998 1998 1997
------ ------- -------
Statutory rate 34.0% (34.0)% (34.0)%
State income tax 4.2 (1.4) 0.5
Amortization of intangible assets relating to
acquired businesses _ .3 3.3
Increase in valuation allowances (34.0) 26.2 24.7
Other, net - 6.1 6.0
------ ------- -------
Effective rate 4.2% (2.8)% 0.5%
------ ------- -------
------ ------- -------
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences and carryforwards
which give rise to a significant portion of deferred tax assets and
liabilities for December 31, 1998 and March 31, 1998 are as follows (in
thousands):
December 31, March 31,
1998 1998
Deferred Tax Deferred Tax
------------ ------------
Assets Liabilities Assets Liabilities
---------- ------------- ---------- -------------
Depreciation $ - $ 144 $ - $ 272
Product enhancements - 2,616 - 2,403
Accruals 103 - 272 -
Bad debts 299 - 332 -
NOL carryforwards 12,395 - 12,417 -
Tax credit carryforwards 870 - 738 -
---------- ------------- ---------- -------------
13,667 2,760 13,759 2,675
Valuation allowance 10,907 - (11,084) -
---------- ------------- ---------- -------------
Total deferred taxes $ 2,760 $ 2,760 $ 2,675 $ 2,675
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------
Due to the uncertainty of realizing any of the net deferred tax assets, the
Company has provided a valuation allowance against the entire net amount.
As of December 31, 1998, the Company has investment business tax credit
carryforwards and net operating loss (NOL) carryforwards for federal income
tax purposes aggregating approximately $35,000,000 expiring at various times
through the year 2012. The utilization of tax credits and net operating
losses may be limited due to changes in ownership and other restrictions
imposed by the Internal Revenue Code.
35
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
Lease Commitments:
The Company leases office space under non-cancelable operating leases with
expiration dates ranging through 2003, with various renewal options. Capital
leases range from three to five years and are primarily for computer
equipment.
The aggregate minimum annual lease payments under leases in effect on
December 31, 1998 are set forth below (in thousands) as follows:
Capital Operating
Year Leases Leases
- ---- ------- ---------
1999 $ 228 $ 850
2000 173 798
2001 44 668
2002 30 527
2003 -- 393
------- ---------
Total minimum lease
commitments $ 475 $3,236
---------
---------
Less: amount representing
interest (86)
-------
Present value of obligations
under capital leases 389
Less: current portion (175)
-------
Long-term obligations under
capital leases $ 214
-------
-------
The current portion of the present value of obligations under capital leases
is included in the consolidated balance sheets with accounts payable and
accrued expenses; the long-term portion is included with other liabilities.
Rental expense for office facilities and certain equipment subject to
operating leases for the nine months ended December 31, 1998 and for fiscal
year 1998 and 1997 aggregated $1,392,000, $1,826,000, and $2,421,000,
respectively.
Contingencies:
The Company believes there are no legal contingencies that would have a
material impact on the financial statements.
NOTE 10 - 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 nine-months
ended December 31, and for the fiscal years ended March 31, 1998 and 1997,
the Company did not make any contributions to the plan.
36
NOTE 11 - STOCK OPTIONS:
The Company's 1996 Stock Incentive Plan provides for the granting of
1,200,000 stock options and stock appreciation rights to officers, directors
and employees. Options granted under this plan 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 vesting on each of the
first through fourth anniversaries of the date of grant. All options must be
exercised within ten years of the date of grant (with respect to incentive
stock optionees owning ten percent or more of the Company's stock, the term
may be no longer than five years). No stock appreciation rights are
outstanding.
The Company's 1998 Director Option Plan provides for granting of up to
300,000 stock options to non-employee directors. Only nonstatutory options
may be granted under this plan. Options are granted at prices not less than
100% of the market price of the stock at the time of grant. Stock options
under this plan generally become exercisable over periods ranging from one to
three years. All options must be exercised within ten years of the date of
grant.
The Company has granted nonstatutory options outside the stock incentive plan
to purchase up to an aggregate of 20,000 shares. These options are granted at
prices determined by the Board of Directors (no less than 100 percent of the
market price). The options have various vesting periods and must be exercised
within seven to ten years of the date of the grant.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock-based compensation plans. Accordingly, no compensation cost has
been recognized for its stock option plans and its stock purchase plan. Had
compensation cost for these stock based compensation plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 123, the Company's net income (loss) and net income
(loss) per share would have been adjusted to the pro forma amounts indicated
below (in thousands, except per share data):
Nine Months
Ended
December 31, Years ended March 31,
1998 1998 1997
------------- -------- --------
Net income (loss) as reported $ 501 ($3,406) ($5,884)
Pro forma net loss ($48) ($4,417) ($6,276)
Net income (loss) per share, as reported $0.07 ($0.46) ($0.97)
Net income (loss) per share, pro forma ($0.01) ($0.60) ($1.03)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
shown above may not be representative.
37
The per share weighted-average fair values of stock options granted during the
nine-month period ended December 31, 1998 and the years ended March 31, 1998 and
1997 were $2.38, $4.50 and $3.85, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Nine Months
Ended
December 31, Years ended March 31,
1998 1998 1997
------------ -------- --------
Expected volatility 44% 64% 64%
Expected dividend yield none none none
Risk-free interest rate 5.30% 6.21% 6.61%
Expected life of stock options 6 years 10 years 10 years
38
A summary of the status of the Company's stock options plans at December 31,
1998, and March 31, 1998 and 1997 is presented below:
Within Plan Outside Plan
------------------------------------------------ ----------------------------------------------
Weighted Weighted
Shares Average Shares Average
Under Option Exercise Under Option Exercise
Option Prices Price Option Prices Price
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1996 247,946 $3.90-$33.75 $6.05 20,000 $3.90-$36.90 $20.70
Granted 484,850 3.45-5.95 4.95 -- -- --
Exercised (3,100) 5.00 5.00 -- -- --
Canceled (226,438) 3.90-33.75 5.65 (19,000) 3.90-36.90 20.45
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1997 503,258 $3.45-$33.75 $5.15 1,000 $3.90-$36.90 $26.25
Granted 826,151 3.28-7.50 4.65 -- -- --
Exercised (112,100) 3.44-5.00 4.62 -- -- --
Canceled (370,301) 3.44-7.50 5.20 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1998 847,008 $3.28-$33.75 $4.77 1,000 $26.25 $26.25
Granted 548,400 3.38-5.12 5.07 -- -- --
Exercised -- -- -- -- -- --
Canceled (318,915) 3.28-33.75 $4.59 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 1,076,493 $2.93-$7.85 $4.59 1,000 $26.25 $26.25
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable
at December 31, 1998 228,031 $2.91-$7.85 $4.73 1,000 $26.25 $26.25
- ------------------------------------------------------------------------------------------------------------------------------------
Available for Grant
at December 31, 1998 402,562 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
The weighted average remaining lives for the options outstanding at December
31, 1998 are 9.2 years.
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding directors of the Company required by this item
is incorporated by reference to the Company's definitive proxy statement
relating to its 1999 Annual Meeting of Stockholders for the nine months ended
December 31, 1998 under the captions "Election of Directors" and "Compliance
with SEC Filing Requirements" which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 1998.
In September 1998, the board of directors of the Company accepted the
resignation of Reid E. Simpson, Senior Vice-President and Chief Financial
Officer. While the Company conducted a search for a successor, the board of
directors named the Company's Controller, David J. Vock, acting Chief
Financial Officer. In November 1998, the Company announced the appointment of
Edward J. O'Connell to the positions of Senior Vice President Finance &
Administration, Chief Financial Officer and Secretary.
The executive officers and senior management of the Company are as
follows:
Name Age Position
- ---- --- --------
Max Seybold 38 President, Chief Executive Officer
Robin Raina 32 Executive Vice President, Chief Operating Officer
Edward J. O'Connell 46 Senior Vice President-Finance & Administration,
Chief Financial Officer and Secretary
The executive officers of the Company are elected annually by the Board.
Max Seybold joined the Company in January 1998 as Senior Vice President -
Professional Services and was named President and Chief Executive Officer in
February 1998. In March 1998, Mr. Seybold was elected to the Board of
Directors. Prior to joining the Company, Mr. Seybold held the position of
President and Chief Executive Officer for Mindware/BPR, Inc. of Waltham,
Massachusetts, an international technology consulting firm. Prior to joining
Mindware/BPR Mr. Seybold founded software/professional services firms based
in Switzerland and Germany. Mr. Seybold holds an Masters of Business
Administration in Strategic Management and Information Technology from
Friedrich-Alexander-University in Nuernberg, Germany.
Robin Raina joined the Company in October, 1997 as Vice President -
Professional Services and was promoted to Senior Vice President - Sales and
Marketing in February 1998. Mr. Raina was promoted to Executive Vice
President, Chief Operating Officer in December, 1998. Prior to joining the
Company, Mr. Raina held senior management positions for Mindware/BPR serving
in Asia and North America.
40
While employed by Mindware/BPR, an international technology consulting firm,
Mr. Raina was responsible for managing projects for multinational
corporations including setting-up offshore laboratories, building intranets,
managing service bureaus and support centers, providing custom programming,
and year 2000 conversions. Mr. Raina holds an Industrial Engineering degree
from Thapar University in Punjab, India.
Edward J. O'Connell joined the Company in December, 1998 as Senior Vice
President-Finance & Administration, Chief Financial Officer and Secretary.
Prior to joining the Company, Mr. O'Connell was Chief Operating Officer of
Keck, Mahin & Cate, a professional services partnership from 1995 to 1998.
Mr. O'Connell was Senior Vice President, Finance and Chief Financial Officer
of GenDerm Corporation, a pharmaceutical company, from 1991 to 1995 and was
Executive Vice President - Finance and Administration and Chief Financial
Officer of Union Special Corporation, an international manufacturer of
industrial sewing equipment from 1981 to 1991. Mr. O'Connell is a CPA and
spent seven years with a Big Five public accounting firm. Mr. O'Connell
received a BBA in Accounting from the University of Notre Dame in 1974.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing under the
caption "Compensation of Directors and Executive Officers" in the Company's
proxy statement for its 1999 Annual Meeting of Stockholders, which will be
filed with the Securities and Exchange Commission within 120 days after
December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
There is hereby incorporated by reference the information appearing under the
captions "Security Ownership of Management" and "Principal Stockholders of
Delphi" in the Company's proxy statement for its 1999 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information appearing under the
captions "Compensation of Directors and Executive Officers" in the Company's
proxy statement for its 1999 Annual Meeting of Stockholders, which will be
filed with the Securities and Exchange Commission within 120 days after
December 31, 1998.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements and supplementary data
of the Company and its subsidiaries, required by Part II, Item 8 are
filed herewith:
- Report of Independent Public Accountants
- Consolidated Balance Sheets as of December 31, 1998 and March 31,
1998
- Consolidated Statements of Operations for the nine months ended
December 31, 1998 and for the Years Ended March 31, 1998 and 1997
- Consolidated Statements of Stockholders' Equity for the nine
months ended December 31, 1998 and for the Years Ended March 31,
1998 and 1997
- Consolidated Statements of Cash Flows for the nine months ended
December 31, 1998 and for the Years Ended March 31, 1998 and 1997
- Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENTS.
The following financial statement schedule is filed herewith:
Schedule II - Valuation and Qualifying Accounts for the nine months
ended December 31, 1998 and for the years ended March 31, 1998 and
1997.
Schedules other than those listed above have been omitted because they
are not applicable or the required information is included in the
financial statements or notes thereto.
EXHIBITS
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-8 (No. 333-23361), and
incorporated herein by reference).
3.2 Bylaws of the Company
3.3 Certificate of Amendment of Certificate of Incorporation (filed as
Exhibit 3.1 to the Company's Form 10Q for the quarter ended June 30,
1998, and incorporated herein by reference).
4.1 Form of Redeemable Warrant to purchase shares of common stock of Delphi
Information Systems, Inc. (filed as Exhibit 4.12 to the Company's Annual
Report on Form 10K for the fiscal year ended March 31, 1996, and
incorporated herein by reference).
4.2 Form of Unit Investment Agreement to purchase common stock and warrants
of Delphi Information Systems, Inc. (filed as Exhibit 4.13 to the
Company's Annual Report on Form 10K for the fiscal year ended March 31,
1996, and incorporated herein by reference).
4.3 Form of Warrant to purchase shares of common stock of Delphi Information
Systems, Inc. held by R.J. Steichen & Company (filed as Exhibit 4.14 to
the Company's Annual Report on Form 10K for the fiscal year ended March
31, 1996, and incorporated herein by reference).
4.4 Rights Agreement between Delphi Information Systems, Inc. and
ChaseMellon Shareholder Services, LLC, as Rights Agent (filed as
Exhibit 99.1 to the Company's Registration of Certain Classes of
Securities on Form 8-A (No. 000-15946) and incorporated herein by
reference).
MATERIAL CONTRACTS
10.1 Delphi Information Systems, Inc. 1983 Stock Incentive Plan, as amended
(filed as Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (No. 33-45153) and incorporated herein by reference).
10.2 Delphi Information Systems, Inc. Cash Option Profit Sharing Plan (filed
as Exhibit 4.2 to the Company's Registration Statement on Form S-8 (No.
33-19310) and incorporated herein by reference).
10.3 Delphi Information Systems, Inc. 1989 Stock Purchase Plan (included in
the prospectus filed as part of the Company's Registration Statement on
Form S-8 (No. 33-35952) and incorporated herein by reference).
10.4 Delphi Information Systems, Inc. Non-Qualified Stock Option Plan for
Directors (filed as Exhibit 10.4 to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1992, and incorporated herein
by reference).
10.5 Delphi Information Systems, Inc. 1996 Stock Incentive Plan (filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-8 (File
No. 33323261), and incorporated herein by reference).
10.6 Stock Purchase Warrant dated June 5, 1992, issued by the Company to
Silicon Valley Bank, and related Registration Rights Agreement (filed as
Exhibit 10.12 to the Company's Registration Statement on Form S-1 (No.
33-45153) and incorporated herein by reference).
10.7 Lease between the Company and Westlake Renaissance Court for office
space in Westlake Village, California, as amended (filed as Exhibit 10.5
to the Company's Registration Statement on Form S-1 (No. 33-14501) and
incorporated herein by reference).
10.8 Lease dated April 17, 1986, between Mortimer B. Zuckerman and Edward H.
Linde, as Trustees, as Landlord and McCracken Computer Inc., as Tenant,
relating to premises at 10-20 Burlington Mall Road, Burlington,
Massachusetts, as amended (filed as Exhibit 10.22 to the Company's Form
S-1 Registration Statement (No. 33-45153) and incorporated herein by
reference).
10.9 Employment agreement dated July 7, 1994, between the Company and M.
Denis Connaghan (filed as Exhibit 10.23 to the Company's Annual Report
on Form 10K for the fiscal year ended March 31, 1995, and incorporated
herein by reference).
10.10 Form of Stock Purchase Warrant between the Company and Silicon Valley
Bank (filed as Exhibit 10.26 to the Company's Annual Report on Form 10K
for the fiscal year ended March 31, 1995, and incorporated herein by
reference).
10.11 Loan and Security Agreement as amended between the Company and Coast
Business Credit dated January 1997 and related Schedule and Capex
Promissory Note. (filed as Exhibit 10.11 to the Company's Annual Report
on Form 10K for the fiscal year ended March 31, 1997, and incorporated
herein by reference).
10.12 Second Amendment dated December 18, 1997 to Loan and Security Agreement
between the Company and Coast Business Credit dated January 1997. (filed
as Exhibit 10.12 to the
Company's Form 10-Q for the quarter ended December 31, 1997, and
incorporated herein by reference.)
10.13 Third Amendment dated March 23, 1998 to Loan and Security Agreement
between the Company and Coast Business Credit dated January 1997. (filed
as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 and incorporated herein by reference.)
10.14 Fourth Amendment dated September 30, 1998 to Loan and Security Agreement
between the Company and Coast Business Credit dated January 1997. (filed
as Exhibit 10.14 to the Company's Form 10-Q for the quarter ended
September 30, 1998, and incorporated herein by reference.)
10.15* Lease agreement dated September, 1998 between the Company and Crossroads
of Commerce III, relating to premises at 3501 Algonquin Road, Rolling
Meadows, IL.
10.16* Lease agreement effective October, 1998 between the Company and 485
Properties LLC relating to premises at Five Concourse Parkway, Atlanta,
Georgia.
10.17 Delphi Information Systems, Inc. 1998 Non-Employee Directors' Stock
Option Plan (filed as Exhibit A to the Company's proxy statement dated
August 12, 1998, and incorporated herein by reference.)
21.1* The subsidiaries of the Company.
23.1* Consent of Independent Public Accountants
27.1* Financial Data Schedule.
* Filed herewith
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K in the quarter ended December
31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DELPHI INFORMATION SYSTEMS, INC.
(Registrant)
By /s/ Max Seybold
----------------------------------
Max Seybold
President and Chief Executive Officer
Date: April 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Yuval Almog Chairman of the Board April 14, 1999
- ---------------------------
(Yuval Almog)
/s/Max Seybold Director, President. and April 14, 1999
- --------------------------- Chief Executive Officer
(Max Seybold)
/s/Edward J. O'Connell Senior Vice President-Finance & April 14, 1999
- --------------------------- Administration, Chief Financial
(Edward J. O'Connell) Officer, and Secretary
/s/William R. Baumel Director April 14, 1999
- ---------------------------
(William R. Baumel)
/s/Larry G.Gerdes Director April 14, 1999
- ---------------------------
(Larry G. Gerdes)
SCHEDULE II
DELPHI INFORMATION SYSTEMS, INC.
Schedule II - Valuation and Qualifying Accounts
for the Nine Months Ended December 31, 1998 and Fiscal Years Ended March 31,
1998 and 1997
Allowance for doubtful accounts receivable.
Nine Months Fiscal Fiscal
Ended Year Ended Year Ended
December 31, March 31, March 31,
1998 1998 1997
------------ ---------- ----------
Beginning Balance $860,000 1,613,000 $ 922,000
Provisions for Allowance 699,000 356,000 1,662,000
Write-off of Accounts Receivable
Against Allowance (491,000) (1,109,000) (971,000)
------------ ---------- ----------
$ 1,068,000 $ 860,000 $1,613,000
------------ ---------- ----------
------------ ---------- ----------