<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K / A-1
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended March 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to _______________
Commission file number 0-15946
DELPHI INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0021975
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification Number)
3501 Algonquin Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (708) 506-3100
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
TITLE OF EACH CLASS
Common Stock, par value $0.10 per share
NAME OF EACH EXCHANGE OF WHICH REGISTERED
NASDAQ NMS
Indicate by check mark whether the registrant (a) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
As of June 15, 1994, the number of shares of Common Stock outstanding was
7,036,410. As of such date, the aggregate market value of Common Stock held by
nonaffiliates, based upon the last sale price of the shares as reported on the
NASDAQ National Market System on such date, was approximately $24,627,435.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement relating to its 1994
Annual Meeting of Stockholders are incorporated by reference into Part III.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ACQUISITIONS, MANAGEMENT CHANGES AND REPOSITIONING
The Company has pursued an acquisition strategy beginning late in fiscal 1991 to
strengthen its market position and increase its growth opportunities. In
January 1991, the Company acquired McCracken Computer Inc. ("McCracken"), a
privately held company, and in December 1991, the Company acquired Redshaw, Inc.
("Redshaw") from the Hartford Fire Insurance Company and other insurance
companies. Both McCracken and Redshaw were former competitors of the Company
providing proprietary software and automation systems to independent insurance
agencies and brokerages.
In March 1993, the Company acquired Continental Systems, Inc. ("Continental")
a company providing rating service products which help property and casualty
insurance carriers, agencies and brokerages to rate and price insurance
policies for their customers. In late fiscal 1993, the Company also acquired
Compusult, Inc., Project Software Services, Inc. and Specialty Program
Services, Inc., three smaller companies which provide services to the Redshaw
customers. In December 1993, the Company acquired Insurnet, Inc.
("Insurnet") and Mountain Systems International ("Mountain States"). The
Company's acquisitions reflect the consolidation occurring among vendors in
the independent agency automation market. Revenues have grown from $28.5
million in 1991 to $53.6 million in 1994.
The acquisitions have significantly increased the size of the Company. All
of the acquisitions except Continental were accounted for as purchases and
their operating results have been reported with those of the Company since
the acquisition dates. The acquisition of Continental has been accounted for
as a pooling of interests and as a result, the historical financial
statements of the Company have been restated to include the historical
results of Continental. During fiscal 1993 and 1992 Continental reported
revenues of $2.8 and $2.2 million, respectively.
During December 1991, the Company appointed a new Chief Executive Officer and
President and began to recruit various new management personnel. During the
fourth quarter of fiscal 1992 as a result of management's evaluation of the
Company's position with respect to future business strategy and the
assimilations of Redshaw and McCracken, the Company decided to consolidate and
reposition its operations and products. The Company charged $7,961,000 to
earnings in 1992 related to its consolidation and repositioning. This included
$6,504,000 related to the non-cash write down of intangible assets to net
expected realizable values and $1,457,000 associated with reductions and changes
in workforce and discontinued facilities.
The Company's market and sales focus shifted as a result of the acquisition of
Mountain States and its products. As a result, in the quarter ended December
31, 1993 the Company incurred a restructuring charge of $4,206,000. This charge
was primarily attributable to a write down of $1,878,000 for capitalized
software, $1,627,000 for excess lease commitments, $251,000 for severance, and
$450,000 for other items, primarily due to the acquisitions of Mountain States
and Insurnet. The write down of capitalized software is intended to reflect the
decreased value of such software in light of this product acquisition. The
charge for excess lease commitments
<PAGE>
reflects the Company's diminished need for leased facilities as a result of
downsizing the Company's operations. The charge for severance is primarily due
to headcount reductions to eliminate redundancies. In the fourth quarter of
fiscal 1994, the Company incurred an additional restructuring charge of
$2,284,000. In connection with the restructuring strategy, the Company
considered ways to further address excess lease commitments, including
subletting one of the Company's entire facilities. See Note 3 of Notes to
Consolidated Financial Statements of the Company.
MARKET
While the Company has increased its market share through acquisitions, fiscal
1993 and fiscal 1994 were a difficult market for the independent agencies as a
down cycle in the property and casualty insurance industry has continued. The
soft property and casualty insurance market is evidenced by minimal or no
increases in property and casualty insurance premiums, which has eroded the
profits and equity of the Company's insurance agency and brokerage customers who
receive commissions on insurance premiums. Historically, the property and
casualty industry, often independently of the general economy, goes through up
cycles when insurance premiums are strong and down cycles when insurance
premiums remain flat or decline. The cycle is a function of the insurance
carriers' reserves for their insured customer losses, the related reserve
portfolio performance, competitive strategies and other business issues. The
most recent down cycle has been particularly long compared to historical soft
markets. The Company cannot predict if or when the soft market conditions will
change.
RESULTS OF OPERATIONS
The table on the following page sets forth, for the fiscal periods indicated,
the percentage of revenues represented by each item reflected in the Company's
consolidated statements of operations, and the percentage increase (decrease) in
each item of revenue, cost and expense from the prior fiscal period.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year to Year Percentage
Increase(Decrease)
--------------------------
Percentage of Revenues Fiscal 1994 Fiscal 1993
Year Ended March 31, versus versus
--------------------
1994 1993 1992 Fiscal 1993 Fiscal 1992
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Systems 49.4% 50.5% 57.4% 1.6% 1.9%
Services 50.6% 49.5% 42.6% 6.1% 34.3%
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 100.0% 100.0% 100.0% 3.9% 15.7%
COSTS OF REVENUES:
Systems 35.2% 33.3% 39.4% 9.7% (2.1)%
Services 31.5% 29.6% 26.7% 10.8% 28.0%
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL COST OF REVENUES 66.7% 62.9% 66.1% 10.2% 10.1%
-----------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 33.3% 37.1% 33.9% (6.8)% 26.7%
OPERATING EXPENSES:
Product development 7.4% 6.9% 7.2% 11.0% 10.2%
Sales & marketing 14.7% 15.3% 16.7% (.5)% 6.3%
General and administrative 11.7% 10.9% 9.1% 11.4% 38.8%
Amortization of goodwill,
customer lists, & non-
compete agreements 2.6% 2.2% 2.5% 28.9% (0.7)%
Consolidation, repositioning &,
restructuring charges 12.1% -- 17.8% * *
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 48.5% 35.3% 53.3% 30.3% (23.5)%
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (15.2)% 1.8% (19.5)% * *
Interest expense 1.2% 0.7% 1.1% 70.5% (23.7)%
-----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (16.4)% 1.1% (20.6)% * *
Income tax provision (benefit) .2% 0.1% (0.3)% * *
NET INCOME (LOSS) (16.6)% 1.0% (20.3)% * *
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</TABLE>
*PERCENTAGES HAVE BEEN INTENTIONALLY OMITTED BECAUSE SUCH PERCENTAGES ARE NOT
MEANINGFUL.
<PAGE>
REVENUES. The Company's revenues are derived from two sources, systems
agreements and service fees. Systems agreements with the Company's customers
bundle the Company's proprietary software with the computer hardware and
software of third parties. Service fees include fees for maintenance, training
and consulting services related to the Company's proprietary software. The
Company's revenue recognition policies comply with the provisions of the
American Institute of Certified Public Accountants (AICPA) Statement of Position
No. 91-1.
Revenues increased 4% in fiscal 1994 and 16% in fiscal 1993. The increase in
1994 was due to the acquisitions of Mountain States and Insurnet, both in
December 1993. The increase in 1993 was substantially a result of the
acquisitions of Redshaw in December 1991 and McCracken in January 1991. The
acquisitions of Compusult, Inc., Project Services, Inc. and Specialty
Programming Services, Inc. late in fiscal 1993 also contributed to the increased
revenues in fiscal 1993. Systems revenues increased in fiscal 1994 and 1993 as
a result of the acquisitions. Service revenues increased in fiscal 1994 and
1993 as a result of an expanded number of customers receiving maintenance,
consulting and training services along with selected increased pricing of such
services. The Company's expanded customer list is substantially a result of the
acquisitions, along with new customer sales.
COSTS OF SYSTEMS REVENUES. Costs of systems revenues include costs of computer
hardware and third party software along with costs associated with the purchase
and installation of hardware and software products and the amortization of
capitalized software development costs. Costs of systems revenues, as a
percentage of revenues, were 35.2%, 33.3% and 39.4% in fiscal 1994, 1993 and
1992, respectively. Changes in the percentage of costs of systems as a
percentage of revenues are primarily a result of a changing mix of products sold
by the Company related significantly to the acquisitions over the last several
fiscal years. The Company believes that costs of systems revenues are
increasing as a percentage of sales due to competitive pricing pressures on
hardware.
COSTS OF SERVICE REVENUES. Costs of service revenues include costs associated
with maintenance, consulting and training services along with payments made to
third party hardware maintenance vendors. Costs of service revenues as a
percentage of revenues were 31.5%, 29.6% and 26.7%, respectively in fiscal 1994,
1993 and 1992. Changes in the percentage of costs of service revenues as a
percentage of revenues reflect increased costs of servicing customer maintenance
and increased costs of delivering customer training.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses as a percentage
of revenues dropped to 14.7% in fiscal 1994 from 15.3% in 1993 and 16.7% in
1992. The improvements reflect overhead cost reduction programs associated with
the consolidation of the McCracken and Redshaw acquisitions and reduced
commission expense due to the decline of systems revenues as a percentage of
total revenues from 57.4% in fiscal 1992 to 49.4% in 1994.
<PAGE>
PRODUCT DEVELOPMENT EXPENSES. Product development expenses, net of capitalized
software costs, were $3,948,000 in fiscal 1994, $3,558,000 in fiscal 1993, and
$3,229,000 in fiscal 1992. The increases were primarily due to increased
spending levels. Expressed as a percentage of revenues, such expenses were 7.4%
in fiscal 1994, 6.9% in 1993 and 7.2% in 1992. Product development expenditures
prior to the capitalization of software were $6,251,000, $5,634,000 and
$4,963,000, respectively, in fiscal 1994, 1993 and 1992.
The Company capitalizes software development costs in accordance with Statement
of Financial Accounting Standards No. 86, and amortizes these costs over a
maximum of five years. The amount capitalized varies each period depending on
how many software development projects have reached technological feasibility
and whether they are in general release. The Company strongly believes in the
importance of maintaining its technological strengths and will continue to
invest substantial amounts in software development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
11.7%, 10.9%, and 9.1% of revenues in fiscal years 1994, 1993 and 1992,
respectively. The increased expressed as a percentage of revenues in fiscal
1994 is primarily the result of personnel additions, including the full year
effect of 1993 additions noted below, and various one-time expenditures incurred
in the first quarter of fiscal 1994 to help improve operating efficiencies and
reduce the cost structure of the Company. The increase as a percent of revenues
in fiscal 1993 is attributed substantially to the recruiting and hiring of a new
management team as noted under "Acquisitions, Management Changes and
Repositioning" above and costs related to the Company's acquisition and business
development activities.
AMORTIZATION OF GOODWILL AND NON-COMPETE AGREEMENTS. Goodwill and Non-compete
agreements are costs from the acquisitions of Insurnet in December 1993,
Mountain States in December 1993, McCracken in January 1991, Redshaw in December
1991 and other smaller acquisitions late in fiscal 1993. The increase in
fiscal 1994 is attributable to the Insurnet and Mountain States acquisitions in
December 1993. The decrease in fiscal 1993 is attributed to the write down of
goodwill in the Company's consolidation and repositioning during fiscal 1992,
offset somewhat by amortization related to the acquisitions in fiscal 1993. The
Company follows a policy of continual evaluation of the carrying value of its
intangible assets. See Note 2 of Notes to Consolidate Financial Statements of
the Company.
INTEREST EXPENSE. The Company had interest expense of $641,000 in fiscal 1994
compared to $376,000 in fiscal 1993 and $493,000 in fiscal 1992. The increase
in fiscal 1994 is due to increased average borrowings at higher rates than the
prior fiscal year. The decrease in fiscal 1993 was due to lower average
outstanding borrowings and lower interest rates.
During the second quarter of fiscal 1994, the Company borrowed $1,000,000 from
IAI Venture Capital Group (now known as Coral Group, Inc.) and $550,000 from a
group of lenders through the Sand Hill Financial Company. Both borrowings were
for a term of up to 90 days at an interest rate of 2% per month. Yuval Almog,
Chairman of the Company's Board of Directors, is Managing Partner of Coral
Group. Donald L. Lucas, a member of the Board of Directors of the
<PAGE>
Company, is a general partner of Sand Hill Financial Company. These borrowings
and the related interest thereon were converted into the Company's Series C
Preferred Stock on December 23, 1993, as noted below.
The Company has a $5,000,000 line of credit agreement with a bank of which
$3,786,000 was outstanding at March 31, 1994, and expires July 5, 1994.
On June 8, 1994, the bank notified the Company that the line of credit agreement
was not going to be renewed. The bank extended the Company's borrowing ability,
on a demand loan basis, for a term of 90 days from the line's scheduled
expiration date of July 5, 1994. Subsequently, the bank has expressed it intent
to extend the Company's line of credit until February, 1995. The bank's current
proposal involves a higher rate of interest, a lower advance rate and an
additional warrant to purchase common stock. That warrant, however, would
terminate if the loan is fully repaid in February. The Company currently is in
the process of discussing these terms with the bank.
The Company is currently pursuing alternative lending sources to replace the
line of credit. While management believes that the Company will ultimately be
successful in replacing the existing line of credit, there can be no assurances
that this will occur, or that the Company will have sufficient cash in the near-
term should the Company not be successful in replacing the existing line of
credit. Should it be necessary, the Company would explore the possibility of
raising additional equity. However, since most of the Company's outstanding
convertible securities provide for the adjustment of their conversion rates to
the lowest prices at which the Company issues or commits to issue common stock,
any issuance of additional equity securities would have a substantial dilutive
effect upon the current shareholders.
The line, as extended on June 8, 1993, carried an interest rate at the bank's
prime lending rate plus 2 percent (which adjusts downward to 1 percent as the
Company meets certain financial objectives). Effective August 16, 1993, the
interest rate was increased to the bank's prime lending rate plus 3 percent.
Permitted borrowings under the line vary as a function of qualified accounts
receivable and are collateralized by substantially all of the Company's assets.
INCOME TAX PROVISION (BENEFIT). At the end of fiscal 1992, the Company adopted
the Statement of Financial Accounting Standards (SFAS) No. 109-Accounting for
Income Taxes. There was no material effect to the Company upon adoption of SFAS
No. 109. The effective tax rates under SFAS No. 109 for fiscal years 1994, 1993
and 1992 were 1.4%, 7.0% and (1.2)%, respectively. Lower than statutory
effective tax rates and tax benefits are due to the operating losses in fiscal
years 1994 and 1992, and in 1993 were substantially a result of the benefits
from net operating losses in prior years offsetting operating income for federal
income taxes.
LIQUIDITY AND CAPITAL RESOURCES. Working capital was a negative $4,966,000 at
March 31, 1994 compared to a negative $2,448,000 at March 31, 1993. Working
capital decreased during fiscal 1994 primarily due to an increase in accounts
payable and accrued liabilities as a result of liabilities acquired in and
resulting from the acquisitions of Mountain States and Insurnet.
<PAGE>
Working capital decreased during fiscal 1993 substantially as a result of the
reclassification of the Company's line of credit from long term to short term
pursuant to the scheduled maturity of the loans outstanding under the credit
agreement. Excluding the reclassification of the line of credit, net working
capital increased $1,496,000 during fiscal 1993, reflecting profitability plus
non-cash expense items and reduced inventories.
A major component of the Company's negative net working capital position is a
result of deferred revenues of $5,944,000 at March 31, 1994 substantially
representing prepaid maintenance fees from its customers which are recognized as
revenue ratably over the maintenance agreement terms. Since this liability is
satisfied through normal on-going operations of the Company's service
organization and does not require a payment to a third party, the Company's bank
does not view deferred revenue a liability in the calculation of financial
covenants under the Company's line of credit.
Net cash provided by operating activities was $288,000, $867,000, and $634,000
for fiscal years ended in 1994, 1993 and 1992, respectively. Although the
Company reported a net loss in fiscal years 1994 and 1992, cash provided by
operating activities was positive because a substantial portion of the loss was
related to non-cash items including the write-off of goodwill and capitalized
software.
Cash used in investing activities was $4,362,000, $3,827,000 and $2,287,000 for
the fiscal years ended 1994, 1993 and 1992. Expenditures for capitalized
software development and capital goods have increased in gross spending amounts
each year as a result of the acquisitions, but remained similar as a percentage
of revenues.
Cash from financing activities reflects the Company's borrowing and payment
activities on its line of credit, proceeds from the exercise of options under
the Company's various stock option plans and the issuance of preferred stock.
In fiscal 1994, the Company raised $3,443,000 through the issuance of its Series
C Preferred Stock and $1,375,000 through the issuance of Convertible Promissory
Notes. In fiscal 1992, the Company raised $2,215,000 from the issuance of its
Series A Preferred Stock and in January 1993, the Company raised $1,488,000 in
net proceeds from the issuance of additional shares of its Series A Preferred
Stock. On August 20, 1992, pursuant to authorization by stockholders, the
Company's $3,000,000 face amount of subordinated notes issued in the acquisition
of Redshaw were converted into 30,000 shares of Series B Preferred Stock. See
Note 10 of Notes to Consolidated Financial Statements of the Company.
The Company has a line of credit with a bank totaling $5 million which expires
on July 5, 1994. Permitted borrowings under the line of credit vary as a
percentage of qualified accounts receivable. At March 31, 1994, the Company had
borrowed $3,786,000 on its line of credit compared to $3,114,000 on March 31,
1993. The credit agreement requires that the Company maintain certain minimum
financial ratios. It also restricts certain activities of the Company without
the approval of the bank, including the incurrence of senior debt, mergers and
acquisitions, and the payment of dividends. The interest rate on the line of
credit is prime plus 3%, adjusting downward to prime plus 1% as the Company
meets certain financial objectives. At March 31, 1994, $1,179,000 remained
available for borrowing under the line of credit.
<PAGE>
As of March 31, 1994, the Company was in default under this credit agreement due
to noncompliance with certain financial covenants. The bank, however, while
reserving its rights under the credit agreement to exercise its remedies at any
time, has agreed to forbear exercising such remedies and has agreed to continue
to permit the Company access to its credit facility.
One June 8, 1994, the bank notified the Company that the line of credit
agreement will not be renewed. The bank will extend the Company's borrowing
ability for a term of ninety days from the lines' scheduled expiration date of
July 5, 1994, due on demand. The bank has expressed a willingness to work with
the Company if alternative financing sources have not been obtained within the
ninety days timeframe, although there can be no assurances that this will occur.
The Company is operating according to a plan under which management believes
that the Company will achieve profitability and positive cash flow from
operations in fiscal 1995. The plan requires continued access to a credit
facility similar to the one the Company currently has in place, or alternative
sources of capital. Because of the bank's notification that the credit
agreement will not be renewed, the Company is currently pursuing alternative
sources of capital to replace the line of credit. These alternative sources may
include an additional credit agreement and/or issuance of additional debt or
equity. While management believes that the Company will be successful in
raising the required additional capital, there can be no assurances that this
will occur, or that the Company will have sufficient cash in the near-term
should the Company not be successful in raising the required additional capital.
The Company believes that cash flows from its operations, along with borrowings
on its line of credit are sufficient to meet its current liabilities as they
become due along with meeting the Company's working capital and capital
expenditure requirements for at least the next fiscal year. The Company further
believes that a return to profitability would strengthen the Company's liquidity
position and, to that end, the Company has pursued various programs to enhance
profitability including incurring approximately $800,000 in one time
nonrecurring expenses in the first quarter of fiscal 1994 to improve operating
efficiencies and reduce the cost structure of the Company. Further, the Company
is pursuing the expansion of its product offerings to its large customer base
and to a new market, the insurance carriers, thus attempting to leverage the
Company's cost of sales to create greater profitability. The Company does not
have any material commitments for capital expenditures.
MARKET INFORMATION
The principal market for the Company's common stock (NASDAQ Symbol DLPH) is the
National Market System of the National Association of Securities Dealers
Automated Quotation System (NASDAQ). As of June 3, 1994, there were 185
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.
<PAGE>
The following table sets forth the high and low bid prices for common stock for
each calendar quarter in the two-year period ending March 31, 1994.
<TABLE>
<CAPTION>
FISCAL 1993 HIGH LOW
---------------------------------
<S> <C> <C>
First Quarter $7.50 $6.75
Second Quarter 7.25 6.00
Third Quarter 6.50 5.75
Fourth Quarter 7.75 6.13
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1994 HIGH LOW
---------------------------------
<S> <C> <C>
First Quarter $7.25 $5.13
Second Quarter 6.00 4.88
Third Quarter 6.00 4.75
Fourth Quarter 5.00 3.50
</TABLE>
<PAGE>
Item 8. Financial Statements and Schedules.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
March 31 1994 1995
-------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSET:
Cash $1,657 $1,141
Accounts receivable, less allowances of
$1,000 (1994) and $735 (1993) 9,702 8,273
Inventories 1,008 849
Prepaid expenses and other assets 1,781 2,001
-------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 14,148 12,264
Property and equipment, net 4,484 3,600
Software development costs, net 3,951 4,506
Goodwill and customer lists, net 5,914 2,961
Purchased software 2,693 327
Other assets 757 1,077
-------------------------------------------------------------------------------------------------
TOTAL ASSETS $31,947 $24,735
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $4,029 $3,574
Accounts payable and accrued liabilities 7,652 4,470
Accrued payroll and related 1,489 1,276
Deferred revenue 5,944 5,392
-------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 19,114 14,712
Convertible promissory notes 1,375 --
Subordinated notes payable 2,750 --
Excess lease liability 2,083 --
Other liabilities 394 296
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 25,716 15,008
-------------------------------------------------------------------------------------------------
Commitments and contingencies: (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value,
2,000,000 shares authorized,
Series A, 16,577 (1994) and 16,577 (1993)
shares issued and outstanding 3,703 3,703
Series B, 61,950 (1994) and 61,950 (1993)
shares issued and outstanding 5,250 5,250
Series C, 36,268 (1994)
shares issued and outstanding 3,570 --
Common stock, $.10 par value:
Non-designated, 12,000,000 shares authorized
7,011,415 (1994) and 6,528,369 (1993)
issued and outstanding 701 653
Additional paid-in capital 14,085 12,333
Accumulated deficit (21,213) (12,291)
Cumulative foreign currency translation adjustment 135 79
-------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,231 9,727
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,947 $24,735
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended March 31, 1994 1993 1992
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Systems $26,485 $26,057 $25,581
Services 27,120 25,550 19,024
-------------------------------------------------------------------------------------------------
TOTAL REVENUES 53,605 51,607 44,605
COSTS OF REVENUES:
Systems 18,862 17,201 17,570
Services 16,906 15,265 11,930
-------------------------------------------------------------------------------------------------
TOTAL COST OF REVENUES 35,768 32,466 29,500
-------------------------------------------------------------------------------------------------
GROSS MARGIN 17,837 19,141 15,105
OPERATING EXPENSES:
Product development 3,948 3,558 3,229
Sales & marketing 7,873 7,909 7,439
General & administrative 6,273 5,630 4,055
Amortization of goodwill, customer
lists & non-compete agreements 1,413 1,097 1,105
Consolidation, repositioning and
restructuring charges 6,490 -- 7,961
-------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 25,997 18,194 23,789
-------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (8,160) 947 (8,684)
INTEREST EXPENSE 641 376 493
-------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (8,801) 571 (9,177)
INCOME TAX PROVISION (BENEFIT) 121 40 (113)
-------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(8,922) $531 $(9,064)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $(1.34) $0.07 $(1.53)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Weighted average common shares and
common share equivalents outstanding 6,672 7,897 5,922
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
Consolidated Statements of Stockholders' Equity
(In thousands, except for shares outstanding)
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------------------
SERIES A: SERIES B: SERIES C:
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1991 -- $ -- -- $ -- -- $ --
---------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Exercise of employee stock
purchase plan -- -- -- -- -- --
Issuance of common stock
in conjunction with the
Redshaw acquisition -- -- -- -- -- --
Issuance of Series A Preferred
Stock 9,945 2,215 -- -- -- --
Issurance of Series B Preferred
Stock at redemption value
in connection with the
Redshaw acquisition -- -- 31,950 2,708 -- --
Redshaw purchase price allo-
cation adjustment required
to carry the Series B
Preferred stock and
subordinated convertible
debentures at fair market
value -- -- -- -- -- --
Amortization of warrants -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1992 9,945 2,215 31,950 2,708 -- --
---------------------------------------------------------------------------------------------------------
Net income -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Exercise of employee stock
purchase plan -- -- -- -- -- --
Issuance of common stock
in conjunction with the
acquisitions of Compusult, Inc.
Project Software Services, Inc.,
and Specialty Programs
Services, Inc. -- -- -- -- -- --
Issuance of Series A Preferred
stock 6,632 1,488 -- -- -- --
Issuance of Series B Preferred
stock due to the conversion of
subordinated debentures -- -- 30,000 2,542 -- --
Translation adjustment -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1993 16,577 3,703 61,950 5,250 -- --
---------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- --
Redshaw acquisition adjustment
Exercise of stock options -- -- -- -- -- --
Exercise of employee stock
purchase plan -- -- -- -- -- --
Issuance of common stock
in conjunction with the
acquisitions of Mountain
Systems International, Inc.
and Insurnet, Inc. -- -- -- -- -- --
Issuance of Series C
Preferred Stock -- -- -- -- 36,268 3,570
Translation adjustment -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1994 16,577 $3,703 61,950 $5,250 36,268 $3,570
---------------------------------------------------------------------------------------------------------
<CAPTION>
COMMON STOCK ADDITIONAL FOREIGN
--------------------
PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1991 5,729,916 $574 $11,484 ($3,758) $ --
---------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- (9,064) --
Exercise of stock options 114,302 12 378 -- --
Exercise of employee stock
purchase plan 33,751 3 169 -- --
Issuance of common stock
in conjunction with the
Redshaw acquisition 282,646 28 1,872 -- --
Issuance of Series A Preferred
Stock -- -- -- -- --
Issurance of Series B Preferred
Stock at redemption value
in connection with the
Redshaw acquisition -- -- -- -- --
Redshaw purchase price allo-
cation adjustment required
to carry the Series B
Preferred stock and
subordinated convertible
debentures at fair market
value -- -- (2,950) -- --
Amortization of warrants -- -- 16 -- --
Translation adjustment -- -- -- -- 32
---------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1992 6,160,615 617 10,969 (12,822) 32
---------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 531 --
Exercise of stock options 231,575 23 807 -- --
Exercise of employee stock
purchase plan 22,957 2 134 -- --
Issuance of common stock
in conjunction with the
acquisitions of Compusult, Inc.
Project Software Services, Inc.,
and Specialty Programs
Services, Inc. 113,222 11 423 -- --
Issuance of Series A Preferred
stock -- -- -- -- --
Issuance of Series B Preferred
stock due to the conversion of
subordinated debentures -- -- -- -- --
Translation adjustment -- -- -- -- 47
---------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1993 6,528,369 653 12,333 (12,291) 79
---------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- (8,922) --
Redshaw acquisition adjustment 50,687 5 236
Exercise of stock options 17,023 2 54 -- --
Exercise of employee stock
purchase plan 453 -- 3 -- --
Issuance of common stock
in conjunction with the
acquisitions of Mountain
Systems International, Inc.
and Insurnet, Inc. 414,883 41 1,459 -- --
Issuance of Series C
Preferred Stock -- -- -- -- --
Translation adjustment -- -- -- -- 56
---------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1994 7,011,415 $701 $14,085 ($21,213) $135
---------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended March 31 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $(8,922) $531 $(9,064)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization 1,248 1,032 749
Amortization of capitalized software development costs 979 1,002 931
Amortization of goodwill and acquisition costs 1,413 1,097 1,105
Write off of goodwill -- -- 5,598
Write off of capitalized software development costs 1,878 -- 1,156
Foreign currency translation adjustment 56 47 32
Loss on disposal of fixed assets 318 -- --
Other 134 -- (14)
CHANGES IN ASSETS & LIABILITIES NET OF EFFECT OF
ACQUISITION OF BUSINESSES:
Accounts receivable, net 555 484 (1,784)
Inventories 690 955 622
Prepaid expenses and other assets (12) (873) (1,344)
Goodwill and customer lists (33) (30) 110
Accounts payable and accrued liabilities 262 (2,966) 1,322
Accrued payroll and related (141) (1,581) 821
Deferred income taxes -- -- (185)
Excess Lease liability 2,083 -- --
Other liabilities and deferred revenue (220) 1,169 579
-----------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities 288 867 634
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (1,435) (1,361) (577)
Expenditures for capitalized software development (2,303) (2,076) (1,734)
Purchased software (332) (98) --
Cash outlays for acquisitions, net of cash acquired (292) (292) 24
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (4,362) (3,827) (2,287)
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable (8,653) (10,642) (14,532)
Borrowings on notes payable 8,366 10,895 13,650
Proceeds from exercise of stock options
and employee stock purchase plan 59 966 578
Proceeds from issuance of convertible promissory notes 1,375 -- --
Proceeds from issuance of preferred stock 3,443 1,488 2,215
-----------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,590 2,707 1,911
-----------------------------------------------------------------------------------------------
Net (decrease) increase in cash 516 (253) 258
Cash at the beginning of year 1,141 1,394 1,136
-----------------------------------------------------------------------------------------------
Cash at the end of year $1,657 $1,141 $1,394
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $407 $215 $398
Taxes paid 135 67 4
NON-CASH TRANSACTIONS:
Common stock, preferred stock,
subordinated convertible debentures
and notes payable issued for acquisitions $5,229 $434 $5,250
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Delphi Information Systems, Inc.
We have audited the accompanying consolidated balance sheets of Delphi
Information Systems, Inc. (a Delaware Corporation) and subsidiaries as of March
31, 1994, and 1993, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all materials respects, the financial position of Delphi Information Systems,
Inc. and subsidiaries as of March 31, 1994, and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1994, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
June 8, 1994
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF THE COMPANY:
Delphi Information Systems, Inc., (the "Company") develops, markets and supports
computer software systems which automate independent property and casualty
insurance agencies and brokerages including the areas of rating, sales
management, policy administration, accounting and electronic interface with the
computers of insurance carriers. The Company also markets computer hardware and
hardware support services to its customers.
On December 16, 1991, the Company acquired all of the outstanding stock of
Redshaw, Inc. ("Redshaw") for consideration of $3,750,000 in cash less
$1,750,000 cash paid to Delphi related to a service agreement, 282,646 shares of
the Company's common stock, 31,950 shares of Series B Preferred Stock and
$3,000,000 principal amount, $2,542,000 carrying value of subordinated
convertible notes of the Company due December 12, 1994. The notes were
converted into 30,000 shares of the Company's Series B Preferred Stock in
September 1992 (see Notes 9 and 10). An additional 50,687 shares were issued on
November 19, 1993, as an adjustment of the purchase price (see Note 11).
Redshaw, similar to the Company, provides computer automation systems and
services to independent property and casualty insurance agencies and brokerages.
This acquisition has been accounted for as a purchase. Accordingly, the results
of Redshaw have been recorded in the financial statements commencing on
December 17, 1991. The Redshaw transaction was valued at $6,200,000 including
an assigned fair value of $4,200,000 for common stock, Series B Preferred Stock,
and subordinated convertible debt issued in the transaction. The excess of the
cost of the acquisition over the net fair value of identifiable assets and
liabilities totaled $3,568,000. The Company assigned $879,000 of the value to
customer lists to be amortized on a straight-line basis over ten years. The
remaining amount was charged to earnings as part of a consolidation and
repositioning of the Company (see Note 3).
Proforma revenues, net loss and loss per share of the Company for the year ended
March 31, 1992 are presented as though the Redshaw operations had been combined
with the Company at the beginning of the period. The proforma results do not
reflect any changes in operations which may occur as a result of the merger.
Fiscal 1992 proforma revenues, net loss and loss per share are $52,286,000,
$7,908,000 and $1.44, respectively.
Proforma loss and loss per share include the amortization of non compete
agreements, goodwill and customer lists representing expected annual charges of
$832,000 after the write down of these assets in the consolidation and
repositioning of the Company (see Note 3). Also included is additional interest
expense of $450,000 from bank debt used to fund a portion of the acquisitions.
The Company acquired all of the outstanding stock of Specialty Programs
Services, Inc. on December 1, 1992; Compusult, Inc. on December 9, 1992 and
substantially all of the assets and business of Project Software Services, Inc.
on January 15, 1993 for an aggregate of 113,222 shares which were assigned an
aggregate fair value of $434,000. These companies provide
<PAGE>
service and products to the Redshaw customers. The acquisitions have been
accounted for as purchases and the results of their operations have been
recorded in the Company's financial statements commencing on their respective
dates of acquisition. The excess of the costs of the acquisitions over the net
fair value of identifiable assets and liabilities totaled $535,000 and has been
recorded as an intangible asset and amortized on a straight line basis over five
years.
On March 9, 1993, the Company acquired all of the outstanding stock of
Continental Systems, Inc. ("Continental") in exchange for 444,714 shares of the
Company's common stock. Continental develops and markets insurance rating
software and services for property and casualty insurance carriers and the
independent agencies and brokerages in the property and casualty insurance
industry. The merger was accounted for as a pooling of interests.
Consequently, the historical financial statements of the Company have been so
stated to include the historical results of Continental.
Fiscal 1993 revenues for the previously separate companies were $48,790,000 for
the Company and $2,817,000 for Continental, and net income was $663,000 for the
Company and the net loss for Continental was $132,000.
Fiscal 1992 revenues for the previously separate companies were $42,396,000 for
the Company and $2,209,000 for Continental, and the net loss was $8,653,000 for
the Company and $411,000 for Continental.
On December 16, 1993, the Company acquired all of the outstanding stock of
Mountain Systems International, Inc. ("Mountain States") of Scottsdale, Arizona
for consideration of 311,320 shares of the Company's common stock and a note
payable of $500,000, which was paid in January, 1994. The 311,320 shares of
common stock is subject to potential upward adjustments. In addition, the
shareholders of Mountain States have the opportunity to earn additional
consideration based upon growth in sales (see Note 11). The acquisition became
effective on December 23, 1993.
On December 30, 1993, the Company acquired all of the issued and outstanding
capital stock of Insurnet, Inc. ("Insurnet"), a wholly-owned subsidiary of
Pacific Insurance Company, in exchange for a $5,000,000 principal amount,
$2,750,000 carrying value subordinated note bearing interest at 6%, due June 30,
1996 (see Note 5), 103,563 shares of the Company's common stock, and a non-
interest bearing $250,000 principal amount, $237,500 carrying value note, due
June 30, 1994. The Agreement also provides that under certain circumstances
Pacific Insurance Company may receive no more than 21,437 additional shares of
Company common stock or additional subordinated notes (see Note 11).
Mountain States develops and services agency management software that operates
in a DOS and Windows-based Local Area Network (LAN) environment. Insurnet
provides agency management systems and services to the independent property and
casualty insurance industry throughout North America.
Both acquisitions have been accounted for as purchases. Accordingly, the
results of Mountain States have been recorded in the financial statements
commencing on December 24, 1993, and the results of Insurnet have been recorded
in the financial statements commencing on December 31,
<PAGE>
1993. The Mountain States transaction was valued at $2,109,000 consisting of an
assigned fair value of $1,050,000 for the Company's common stock exchanged in
the transaction, a $500,000 note payable and a net liability assumed of
$559,000. The excess of the cost of the acquisition over the net fair value of
identifiable assets and liabilities assumed at the date of acquisition of
$2,109,000 was assigned to the software acquired in the acquisition.
The Insurnet transaction was valued at $3,437,500 including an assigned fair
value of $450,000 for common stock issued in the transaction. The excess of the
cost of the acquisition over the net fair value of identifiable assets and
liabilities totaled $2,863,000 at the date of acquisition and was recorded as
goodwill and amortized on a straight-line basis over ten years.
Proforma revenues, net loss and loss per share of the Company for the years
ended March 31, 1994 and March 31, 1993 are presented as though the Mountain
States and Insurnet operations had been combined with the Company at the
beginning of each of these periods. The proforma results do not reflect any
changes in operations which may occur as a result of the mergers.
Fiscal 1994 proforma revenues, net loss and loss per share are $64,635,000,
$8,827,000 and $1.27, respectively. Fiscal 1994 proforma results include
Insurnet and Mountain States results beginning April 1, 1993 through the
respective acquisition date combined with the Company's results as of March
31, 1994 which includes Insurnet and Mountain States activity for the period
from the respective acquisition date through March 31, 1994. Fiscal 1993
proforma revenues, net loss and loss per share are $66,856,000, $1,522,000
and $0.23, respectively. Fiscal 1993 proforma results consist of Insurnet
and Mountain States activity for calendar year 1992 combined with the
Company's fiscal year 1993 activity. Proforma loss and loss per share
include the amortization of non compete agreements and goodwill representing
expected annual
charges of $641,000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation - The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries after elimination of intercompany
transactions and balances.
Revenue Recognition - The Company recognizes revenues related to software
licenses and software maintenance in compliance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position No. 91-1, "Software
Revenue Recognition". System revenues consist of revenues earned under software
license agreements and revenues from computer hardware purchased by customers of
the Company. Revenues are recognized as the related software and hardware
products are shipped to the customers. Where partial shipments on an order are
made, revenue is recognized at the time of shipment to the customer based upon
the ratio of the cost of the partial shipment to the cost of the order. Partial
shipments are recognized only in instances in which insignificant obligations on
the part of the Company remain. The Company bundles its software with computer
hardware in its purchase and license agreement with its customers and,
accordingly, cannot separate hardware from software revenues.
Service revenues include maintenance fees for providing system updates for
software products, user documentation and technical support. Hardware
maintenance provided by third parties, but billed by the Company, is also
offered to customers. Maintenance is generally billed to the
<PAGE>
customers in advance monthly, quarterly or annually and recognized as revenue
over the term of the maintenance contract. Other service revenues including
training and consulting are recognized as the service is performed. Revenues
related to custom programming are recognized based on the percentage of
completion method.
Software Development Costs - The Company capitalizes internally generated
software development costs in compliance with the Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed". Capitalization of software development
costs begins upon the establishment of technological feasibility for the
product. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs consider external factors
including, but not limited to, anticipated future gross product revenues,
estimated economic life and changes in software and hardware technology.
Amortization of capitalized software development costs begins when the products
are available for general release to customers. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross product
revenues for that product or (b) the straight-line method over the remaining
estimated economic life of the product including the period being reported on.
The maximum amortization period on a straight-line basis is five years.
Capitalized software costs are amortized on a product-by-product basis.
Amortization of capitalized software development costs were $979,000, $1,002,000
and $931,000 in fiscal 1994, 1993 and 1992, respectively.
Net software development costs at March 31, 1994 and 1993 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
-------------------------------------------------------------------
Total software development costs capitalized $4,252 $6,888
Less accumulated amortization (301) (2,382)
-------------------------------------------------------------------
$3,951 $4,506
===================================================================
</TABLE>
During the third quarter of fiscal 1994, the Company wrote down its capitalized
software development costs by $1,878,000 (see Note 3).
Accounts Receivable - The Company's accounts receivable resulting from system
sales are unsecured; however, the Company reserves a purchase security interest
in the hardware until such time that the purchase price is paid in full.
Inventories - Inventories, which consist primarily of computer equipment and
consist entirely of finished goods, are stated at the lower of cost or market
value. The cost of substantially all inventories is determined by specific
identification.
Goodwill, Acquisition Costs and Customer Lists - Intangible assets relate to the
excess of the cost of acquisitions over the net fair value of identifiable
assets and liabilities and value assigned to customer lists. These costs are
being amortized on a straight-line basis over five to ten years. Subsequent to
acquisitions, the Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining useful life of goodwill
may warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate
<PAGE>
that goodwill should be evaluated for possible impairment, the Company uses an
estimate of the related business segment's sufficiency of operating income and
related cash flow over the remaining life of the goodwill in measuring whether
the goodwill is recoverable. If management's assessment or other facts and
circumstances pertaining to the recoverability of intangible assets of a
particular business unit were to change, including their estimate of future
operating income and related cash flows, the Company would adjust the carrying
value of the intangible assets as appropriate. As of March 31, 1994, and 1993,
the accumulated amortization was $1,514,000 and $898,000 respectively.
Amortization of goodwill, acquisition costs and customer lists was $649,000,
$359,000 and $500,000 in fiscal 1994, 1993 and 1992, respectively, which
excludes the portion of the goodwill write-off in fiscal 1992 (see Note 3).
Purchased Software - Purchased software represents product purchased for use in
developing product, for licensing with the Company's products, or for direct
sale to the Company's customers. These costs are being amortized on a straight-
line basis over a maximum term of five years, or a shorter period, depending
upon any contractual license agreement limitations or estimated remaining useful
life. In fiscal 1994, the Company assigned $2,109,000 of the purchase price of
Mountain States to purchased software.
Other Assets - Other assets consist primarily of purchased software and the
long-term portion of non compete agreements as well as miscellaneous long term
deposits.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to ten years. Leasehold improvements are amortized over
the shorter of the expected life of the improvements or the lease term.
Income Taxes - The Company has adopted the liability method of accounting for
income taxes pursuant to the Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes". Deferred income taxes are recorded to
reflect the tax consequences on future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
year-end. Business tax credits are accounted for under the flow-through method.
When SFAS No. 109 was adopted, at the end of fiscal 1992, there was no
significant impact on the balance sheet or statements of operations.
Income (Loss) Per Common Share - Income (loss) per common share for fiscal 1994,
1993 and 1992 are based on the weighted average number of common shares
outstanding which includes the dilutive effect of convertible preferred stock,
options and warrants in fiscal 1993. The effect of common share equivalents is
not included in the loss per common share calculation for fiscal 1994 and 1992
because inclusion would be antidilutive. Primary and fully diluted earnings per
share are the same for all periods presented.
Foreign Currency Transactions - The accounts of the Company's foreign subsidiary
have been translated according to the provisions of the Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation". Gains or losses
resulting from translation of the foreign subsidiary's financial statements are
included in stockholders' equity. Any gains or losses resulting from foreign
currency transactions are reflected in the consolidated results of the period in
which they occur.
<PAGE>
Reclassification - Certain reclassifications have been made in the prior years'
financial statements to conform to the 1994 presentation.
NOTE 3 - CONSOLIDATION, REPOSITIONING AND RESTRUCTURING CHARGES:
In fiscal 1994, as a result of the acquisition of Mountain States and it's
products, the Company's market and sales focus shifted. In evaluating the
position of the Company, it was determined that it was necessary to write down
certain assets to their net realizable value. Therefore, the Company took a
charge to earnings of $4,206,000 in the third quarter of fiscal 1994.
Capitalized software was written down to reflect the decreased value of such
software in light of the acquisition. Additionally, the need for leased
facilities diminished as a result of downsizing, resulting in a charge for
excess lease commitments as well as headcount reductions. In the fourth quarter
of fiscal 1994, the Company incurred an additional charge of $2,284,000. The
initial charge reflected the Company's diminished use of its lease capacity in
one of its facilities. In connection with its restructuring strategy, the
Company considered ways to address such excess capacity, including subletting
the entire facility and relocating to a smaller, more cost-effective operation.
Based on such consideration and additional information relating to sublease
opportunities, management decided to sublease the entire facility. The charge
relating to excess facilities was partially reduced by an estimate of future
sublease revenue, which is subject to update upon signing of a sublease
agreement. Upon finalization of any sublease arrangement, the estimate will be
adjusted. This adjustment could be material to the financial statements. The
following summarizes the major restructuring costs (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Non-cash write down of capitalized software
development costs $1,878
Reductions and changes in workforce and the
elimination of facilities 3,919
Impairment of asset value due to acquisitions 628
Other items 65
-------------------------------------------------------------------
$6,490
===================================================================
</TABLE>
In 1992, new management of the Company determined that a consolidation and
repositioning was necessary as a result of an evaluation of the Company's
position with respect to new technologies, current markets and future business.
In evaluating the position of the Company, it was determined that it was
necessary to write down certain intangible assets to their net realizable value.
Therefore, during 1992, as a result of the consolidation of operations and the
repositioning of products, the Company decided to restructure its business and
charge to earnings $7,961,000 of related costs. The consolidation and
repositioning of the Company included a redirection of the marketing and product
development efforts along with the elimination of certain personnel.
<PAGE>
The following summarizes the major consolidation and repositioning costs (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Non-cash write down of intangible assets
related to the McCracken and Redshaw
acquisitions $5,598
Non-cash write down of capitalized software
development costs 906
Reductions and changes in workforce and the
elimination of facilities 1,457
--------------------------------------------------------
$7,961
========================================================
</TABLE>
In addition to the above, Continental recorded a non-cash write down of
purchased software of $250 in fiscal 1992.
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1994 and 1993 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Computer equipment & purchased software $7,401 $6,574
Leasehold improvements 346 1,388
Furniture, fixtures and other 2,039 2,052
-----------------------------------------------------------------------
9,786 10,014
Less accumulated depreciation and amortization (5,302) (6,414)
-----------------------------------------------------------------------
$4,484 $3,600
=======================================================================
</TABLE>
NOTE 5 - NOTES PAYABLE:
Notes payable at March 31, 1994 and 1993 are comprised of the following:
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Notes payable to bank $3,786 $3,114
Note payable - Norick Software, Inc. -- 460
Note payable and accrued interest from the
purchase of Insurnet 243 --
Convertible promissory notes 1,375 --
Subordinated note payable 2,750 --
-----------------------------------------------------------------------
8,154 3,574
Current portion (4,029) (3,574)
-----------------------------------------------------------------------
$4,125 $0
=======================================================================
</TABLE>
The Company has a $5,000,000 line of credit agreement with a bank of which
$3,786,000 was outstanding at March 31, 1994, and expires July 5, 1994.
<PAGE>
On June 8, 1994, the bank notified the Company that the line of credit agreement
will not be renewed. The bank will extend the Company's borrowing ability for a
term of ninety days from the line's scheduled expiration date of July 5, 1994,
due on demand. The bank has expressed a willingness to work with the Company if
alternative financing sources have not been obtained within the ninety days
timeframe, although there can be no assurances that this will occur.
The Company is operating according to a plan under which management believes
that the Company will achieve profitability and positive cash flow from
operations in fiscal 1995. The plan requires continued access to a credit
facility similar to the one the Company currently has in place, or alternative
sources of capital. Because of the bank's notification that the credit
agreement will not be renewed, the Company is currently pursuing alternative
sources of capital to replace the line of credit. These alternative sources may
include an additional credit agreement and/or issuance of additional debt or
equity. While management believes that the Company will be successful in
raising the required additional capital, there can be no assurances that this
will occur, or that the Company will have sufficient cash in the near-term
should the Company not be successful in raising the required additional capital.
The line, as extended on June 8, 1993, carried an interest rate at the bank's
prime lending rate plus 2 percent (which adjusts downward to 1 percent as the
Company meets certain financial objectives). Effective August 16, 1993, the
interest rate was increased to the bank's prime lending rate plus 3 percent.
Permitted borrowings under the line vary as a function of qualified accounts
receivable and are collateralized by substantially all of the Company's assets.
The agreement contains certain restrictive covenants including achievement by
the Company of specified operating results and balance sheet ratios. The line
also restricts certain activities of the Company without the approval of the
bank, including the incurrence of senior debt, mergers and acquisitions, and the
payment of dividends. The renewed line of credit established new financial
covenants for the Company. The Company was in non-compliance with these
covenants as of March 31, 1994. The bank, however, while reserving its rights
under the loan agreement to exercise its remedies at any time, has agreed to
forbear exercising such remedies and has agreed to continue to permit the
Company access to its credit facility, as noted above.
Additional information related to line of credit borrowings for the three years
ended March 31, 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount borrowed during the year $4,479 $3,574 $4,224
Average amount borrowed during the year $3,640 $1,815 $2,618
Balance at end of year $4,029 $3,574 $867
Interest rate at the end of the year 9.3% 9.0% 10.0%
Weighted average interest rate incurred during
the year 8.6% 9.3% 11.0%
</TABLE>
Average borrowings were determined based on the amounts outstanding at each
month end. The weighted average interest rate during the year was computed by
dividing actual interest by average borrowings outstanding during each of the
years.
<PAGE>
The note payable and accrued interest of $243,000 is the discounted amount of
the non-interest bearing $250,000 principal amount note payable to the Pacific
Insurance Company, due June 30, 1994, resulting from the purchase of Insurnet.
The convertible promissory notes of $1,375,000 were issued as of March 15, 1994,
with an additional $125,000 being issued in the first quarter of fiscal 1995.
These notes, which are due March 15, 1998, and bear interest at the prime rate,
are convertible at the option of the holder into shares of the Company's common
stock at a per share conversion prices of $2.00, subject to certain antidilution
provisions, for a total of 750,000 shares of common stock. A total of
$1,165,000 of the $1,375,000 promissory notes outstanding were to related
parties, including $1,000,000 to Coral Group and $115,000 to foundations and
trusts associated with, and family members of, Donald L. Lucas. Yuval Almog,
Chairman of the Company's Board of Directors, is Managing Partner of Coral
Group, Inc. Donald L. Lucas is a member of the Company's Board of Directors.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities at March 31, 1994 and 1993 consist of
the following (in thousands):
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $4,643 $3,294
Taxes other than income tax 350 405
Other 2,659 771
------------------------------------------------------------------
$7,652 $4,470
==================================================================
</TABLE>
NOTE 7 - INCOME TAXES:
Pretax income (loss) from continuing operations consisted of (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(8,910) $721 $(9,177)
Foreign 109 (150) --
----------------------------------------------------------------------------
Total $(8,801) $571 $(9,177)
============================================================================
</TABLE>
The provisions for taxes on income form continuing operations consist of (in
thousands):
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. Federal $-- $-- $--
State 73 40 (113)
Foreign 48 -- --
----------------------------------------------------------------------------
Total $121 $40 $(113)
----------------------------------------------------------------------------
Deferred:
U.S. Federal $-- $-- $--
State -- -- --
Foreign -- -- --
----------------------------------------------------------------------------
Total $-- $-- $--
----------------------------------------------------------------------------
Total Tax Provision $121 $40 $(113)
</TABLE>
<PAGE>
Components of the deferred tax provision (benefit) resulting from temporary
differences in the recognition of certain items for tax and financial reporting
purposes are as follows (in thousands):
<TABLE>
<CAPTION>
1992
--------------------------------------------------------
<S> <C>
Installment sales deferrals $(38)
State taxes, net of federal tax effect --
Tax credits and net operating loss carryovers 938
Capitalized product development (35)
Reserves (902)
Depreciation, amortization and 37
--------------------------------------------------------
$--
========================================================
</TABLE>
The income tax provision (benefit) on income (loss) differs from the amount
obtained by applying the federal statutory rate because of the following items:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (35.0)% 34.0% (34.0)%
State income tax, net of federal
tax effect 0.8 7.0 (1.2)
Amortization of intangible assets
relating to acquired businesses 2.1 17.9 22.6
Losses producing no current tax
benefit 32.9 -- 11.2
NOL used to offset income -- (57.1) --
Other net 0.6 5.2 0.2
------------------------------------------------------------------------------
Effective rate 1.4% 7.0% (1.2)%
==============================================================================
</TABLE>
Deferred income taxes (credits) reflect the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. These temporary differences are
determined in accordance with SFAS No. 109 and are more inclusive in nature than
"timing differences" as determined under previously applicable accounting
principles.
Temporary differences and carry forwards which give rise to a significant
portion of deferred tax assets and liabilities for 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
----------------- -----------------
Deferred Tax Deferred Tax
(in thousands) Assets Liabilities Assets Liabilities
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product enhancements $-- $1,582 $-- $1,532
Deferred rent 146 -- 136 --
Reserves 1,154 -- 741 --
NOL not utilized 5,712 -- 2,459 --
Tax credits not utilized 1,271 -- 1,191 --
-------------------------------------------------------------------------------
8,283 1,582 4,527 1,532
Valuation allowance (6,701) (2,995) --
-------------------------------------------------------------------------------
Total deferred taxes $1,582 1,582 $1,532 $1,532
===============================================================================
</TABLE>
<PAGE>
As of March 31, 1994, the Company had investment and business tax credit
carryovers of $161,395 and $1,109,873, respectively, for federal income tax
purposes. In addition, the Company has net operating losses available for
offset against future taxable income of $14,930,000 for federal income tax,
$15,892,000 for federal alternative minimum tax, and $4,127,000 for tax purposes
for the primary State taxing authority.
In addition, the Company received net operating loss carry forwards in the
acquisition of Redshaw of $3,220,136 for regular tax and $3,102,634 for
alternative minimum tax. The Company received net operating loss carry forwards
in the merger of Continental of $430,000 for federal income tax purposes. The
utilization of these net operating losses could be limited due to the change in
ownership of the acquired companies.
Federal net operating loss carryforwards and a substantial portion of investment
and other business tax credits will begin to expire after 1997, becoming fully
expired by the year 2009 if not offset against future taxable income.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
Leases - The Company leases office space under non-cancelable operating leases
with expiration dates ranging through 1999, with various renewal options. Other
operating leases range from three to five years and are primarily for computer
equipment.
The aggregate minimum annual lease payments under leases in effect on March 31,
1994 are set forth below (in thousands) as follows:
<TABLE>
<CAPTION>
______________________________________________________
Capital Operating
Fiscal Year Ending Leases Leases
------------------------------------------------------
<S> <C> <C>
1995 $130 $3,475
1996 121 2,301
1997 47 1,847
1998 40 1,821
1999 28 1,219
Thereafter -- --
------------------------------------------------------
Total minimum lease
commitments $366 $10,663
---------
Less: amount representing
interest (58)
----------------------------------------
Present value of obligations
under capital leases 308
Less: current portion (102)
-----------------------------------------
Long-term obligations under
capital leases $206
-----------------------------------------
</TABLE>
Rental expense covering the Company's office facilities and equipment for the
fiscal years 1994, 1993 and 1992 aggregated $2,901,000, $2,849,000 and
$2,413,000, respectively.
<PAGE>
Noncompetition Agreements - The Company entered into various noncompetition
agreements with the shareholders of McCracken Computer, Inc., purchased in
January, 1991, which expire over a period of 5 to 10 years. These agreements
require the Company to make payments totaling $4,700,000 to the McCracken
shareholders over six years of which $2,972,000 has been paid to date. Future
installments of $664,000 are due on the January 31 anniversary date of the
acquisition in 1995 and 1996 and $400,000 in 1997. Noncompetition Agreements
entered with the shareholders of other acquisitions require a total of $187,500
to be paid through December, 1996. Commitments related to the noncompetition
agreements are amortized and expensed ratably over the life of each agreement.
Contingencies - The Company is involved in certain legal actions and claims
arising in the ordinary course of its business. It is the opinion of management
and legal counsel that such litigation and claims will be resolved without a
material effect on the Company's future results of operations or its financial
position.
NOTE 9 - SUBORDINATED CONVERTIBLE DEBENTURES:
In connection with the acquisition of Redshaw on December 16, 1991, the Company
issued $3,000,000 face value, $2,542,000 discounted carrying value, of
subordinated convertible debt to shareholders of Redshaw. The notes were
converted into 30,000 shares of the Company's Series B Preferred Stock in
September 1992, as approved by the Company's stockholders in August 1992.
In connection with the acquisition of Insurnet on December 30, 1993, the Company
issued $5,000,000 face value, $2,750,000 discounted carrying value, of
subordinated convertible debt to shareholders of Pacific Insurance Company. The
note bears interest at the rate of 6% for an effective annual interest rate of
11%, and is convertible into shares of a new series of the Company's preferred
stock, to be designated Series E Preferred Stock, at the option of the Company.
Such conversion cannot occur until the Company's shareholders approve of an
amendment to the Company's Certificate of Incorporation increasing the number of
authorized shares of the Company's common Stock. The Series E Preferred Stock
into which the Subordinated Note would convert would include a cumulative 6%
annual dividend from the date of issuance, payable in shares of Company common
stock. The Series E Preferred Stock would be convertible into shares of Company
common stock at the option of the holder not earlier than June 30, 1996, and
would automatically convert into shares of Company common stock on December 30,
1998. Each share of Series E Preferred Stock would be convertible into a number
of shares of common stock of the Company as determined by dividing $84.745 plus
any accrued and unpaid dividends on the Series E Preferred Stock at the time of
conversion by a conversion price equal to the average of the closing prices of
the Common Stock of the Company for the thirty trading days immediately prior to
such conversion (the "Conversion Price"). The Conversion Price is subject to a
minimum of $4.00 per share and maximum of $8.00 per share (as adjusted for
certain events). Using the applicable trading value as of March 31, 1994, and
assuming conversion of the Subordinated Note on that date, the Subordinated Note
would have converted into 59,886 shares of Series E Preferred Stock and would
have been convertible into 1,268,750 shares of Company common stock as of that
date. The Series E Preferred Stock would be convertible at the holder's
<PAGE>
option on June 30, 1996, into a maximum of approximately 1,437,500 shares of
Company common stock, based on the maximum Conversion Price outlined above. The
actual conversion price at the time of the conversion will be determined based
on the average of the closing prices of the common stock of the Company for the
thirty trading days immediately prior to such conversion, subject to the maximum
and minimum conversion prices outlined above.
NOTE 10 - PREFERRED STOCK:
Series A Preferred Stock - During May 1991 and January 1993, the Company issued
and sold in two private placements 9,945 and 6,632 shares, respectively, of its
Series A Preferred stock par value of $.10 per share for a total of $2,249,559
and $1,500,138, respectively. The preferred stock was convertible by its
holders at $4.35 per share into 862,000 shares of common stock of the Company
not earlier than two years subsequent to its issuance and automatically converts
to common stock three years after its issuance. The Series A Preferred Stock
includes voting rights equivalent to the number of common shares into which the
Series A Preferred Stock is convertible; certain registration rights on the
common stock into which the Series A Preferred Stock is converted; and certain
antidilution covenants. No dividends are required under the terms governing the
preferred stock. Issuance costs related to the sales of preferred stock totaled
$35,000 in May 1991 and $12,000 in January 1993.
The issuance of the Series C Preferred Stock on December 23, 1993 caused an
adjustment in the conversion price of the Company's Series A Preferred Stock
down to the conversion price of the Series C Preferred Stock. The effect of
such adjustment is to require under the terms of the Company's certificate of
incorporation that the Company have an additional 367,176 shares of common
stock reserved for conversion of the Series A Preferred Stock. The issuance of
the Company's convertible promissory notes in March 1994 caused an additional
adjustment in the conversion price of the Series A Preferred Stock down to
$2.00. The Company does not currently have sufficient shares of common stock
authorized to satisfy both this requirement and similar requirements relating to
its other convertible securities and options. The Company, therefore, intends
to seek approval from its stockholders of an amendment to its Certificate of
Incorporation increasing the authorized number of shares of common stock.
During May 1994, the holders of the Company's Series A Preferred Stock exchanged
such preferred stock for an equal number of shares of the Company's Series D
Preferred Stock. The exchange was effected pursuant to agreements entered into
in connection with the Company's issuance of the Series C Preferred Stock. The
terms of the Series D Preferred Stock are substantially similar to those of the
Series A Preferred Stock but do not require the conversion of the Series D
Preferred Stock into common stock at a specified date. The Series A Preferred
Stock would have been, by its terms, forced to convert to common stock on May
24, 1994.
Series B Preferred Stock - In connection with the acquisition of Redshaw on
December 16, 1991, 31,950 shares of the Company's Series B Preferred Stock were
issued to shareholders of Redshaw. In September 1992, the Company's
subordinated convertible debentures were converted into 30,000 shares of the
Company's Series B Preferred Stock. The 61,950 shares of Series B Preferred
Stock becomes convertible into common stock at the option of the holder after
December 12, 1994 and automatically converts into common stock on December 13,
1995. The number of shares of common stock issuable on conversion of each share
of Series B Preferred
<PAGE>
Stock is determined by dividing $100 by the average daily closing price of the
common stock for the 30 trading days prior to conversion, however, not less than
$6 per share. The maximum number of shares of common stock issuable on
conversion of the Series B Preferred Stock will be 1,032,500 shares on December
6, 1994 (subject to antidilution adjustments). Using the closing trading value
on March 31, 1994 of $4.00, the 61,950 shares of Series B Preferred Stock would
be converted into 1,032,500 common shares on March 31, 1994. The Series B
Preferred Stock has no voting rights except as mandated by Delaware law and
except that approval of the holders of more than 66 2/3 percent of the shares of
Series B Preferred Stock is required for certain amendments to the Company's
Certificate of Incorporation, reclassifications, reacquisitions of junior shares
and increases in the authorized number of shares of Series B Preferred Stock.
The Series B Preferred Stock is senior to its common stock. In the case of a
liquidation, dissolution or winding up of the Company prior to December 16,
1994, the Series B Preferred Stock is entitled to an annual dividend of $5.085
per share. Such dividends would accrue from the date of the original issuance
and would be payable in cash. In the case of a liquidation, dissolution,
winding up, exercise of conversion rights or redemption of Series B Preferred
Stock, all occurring subsequent to December 16, 1994, such dividends would be
cumulative from December 16, 1994 and would be payable in common stock based on
the average daily closing price for the common stock for the 30 trading days
prior to such event.
The Series B Preferred Stock may be redeemed at the option of the Company prior
to December 16, 1994 by payment in cash of a redemption price equal to $84.745
per share plus dividends accrued from the date of issuance, and may be redeemed
thereafter by payment of a redemption price of $100 in cash per share plus
dividends accrued from that date and payable in common stock.
Series C Preferred Stock - On December 23, 1993, the Company issued 36,268
shares of its Series C Preferred Stock. Each share was sold for $100 per share
and has an initial conversion price into common Stock of $3.05058. Such shares
were sold to a group of accredited investors for cash in the amount of
$1,750,000 and for the conversion of $1,750,000 principal amount of notes
payable plus accrued interest of approximately $127,000 owed by the Company.
Issuance costs related to the sale of the Series C Preferred Stock totaled
approximately $57,000.
The issuance of the Company's convertible promissory notes in March 1994 caused
an adjustment in the conversion price of the Company's Series C Preferred Stock
down to $2.00. The effect of such adjustment is to require under the terms of
the Company's certificate of incorporation that the Company have 624,511 shares
of common stock reserved for conversion of the Series C Preferred Stock. The
Company does not currently have sufficient shares of common stock authorized to
satisfy both this requirement and similar requirements relating to its other
convertible securities and options. The Company, therefore, intends to seek
approval from its stockholders of an amendment to its certificate of
incorporation increasing the authorized number of shares of common stock.
<PAGE>
NOTE 11 - CONTINGENT ISSUANCES OF COMMON STOCK
The 282,646 shares of common stock issued to a Redshaw shareholder in connection
with the acquisition of Redshaw on December 16, 1991 was subject to upward or
downward adjustment depending on the average market price of the stock for a
test period following the effective date of a registration statement which the
Company filed in November, 1993 under the Securities Act of 1933 with respect to
such shares. On November 19, 1993, an additional 50,687 shares were issued.
In connection with the Company's acquisition of Mountain States, the
shareholders of Mountain States have the opportunity to earn additional
consideration based upon growth in sales of Mountain States software products in
the fiscal year beginning April 1, 1994. This additional consideration could
range from $0 to $150,000 in cash and $450,000 in common stock, the number of
shares to be based upon the average daily closing price of the Company's common
stock during the thirty calendar days preceding the issuance of such shares.
The 311,320 shares of common stock issued for the acquisition of Mountain States
is subject to a potential upward adjustment of an additional 63,680 shares, for
a total of 375,000 shares, depending upon the average daily closing price of the
Company's common stock for the twelve month period following the closing date of
the acquisition.
The 103,563 shares of common stock issued in the acquisition of Insurnet is
subject to a potential upward adjustment of an additional 21,437 shares, or
additional subordinated notes bearing interest at 6%, equal to the fair market
value of such additional shares of Company common stock, for a total of 125,000
shares, within two years of the Insurnet acquisition. This adjustment is
contingent upon the price of the Company's common stock if sold by the Pacific
Insurance Company within two years of the sale of Insurnet to the Company.
NOTE 12 - COMMON STOCKHOLDERS' EQUITY:
Stock Options - The Company has a stock incentive plan which provides for the
granting of stock options and stock appreciation rights for 1,750,000 shares to
officers, directors and employees. Options granted under the program may be
incentive stock options as defined under current tax laws or nonstatutory
options. Options are granted at prices determined by the Board of Directors
(not less than 100 percent of the market price of the stock at the time of grant
and 110 percent with respect to incentive stock options granted to optionees who
own 10 percent or more of the Company's stock). Stock options under this plan
generally become exercisable in 25 percent increments maturing on each of the
first through fourth anniversaries of the date of grant. All options must be
exercised within ten years of the date of grant (with respect to incentive stock
optionees owning 10 percent or more of the Company's stock, the term may be no
longer than five years). No stock appreciation rights are outstanding.
The Company has granted nonstatutory options outside the stock incentive plan to
purchase up to an aggregate of 631,778 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. Of the 198,750
<PAGE>
shares canceled as part of the Outside Plan, 105,000 shares were surrendered
by the Company's President and CEO, and thereby effectively canceled.
Information with respect to the Company's stock options is as follows:
<TABLE>
<CAPTION>
Within Plan Outside Plan
----------- ------------
Shares Shares
Under Option Under Option
Option Prices Option Prices
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance,
March 31, 1991 675,938 2.50-6.25 263,163 2.50-7.50
Granted 337,083 6.75-7.00 240,000 6.78
Exercised (114,302) 2.50-5.75 -- --
Canceled (64,100) 2.50-6.75 (129,996) 2.50-7.50
Balance,
March 31, 1992 834,619 2.50-7.00 373,167 2.50-6.78
Granted 248,700 6.00-6.75 259,000 5.75-7.25
Exercised (106,186) 2.50-6.75 (125,389) 2.50
Canceled (183,950) 5.75-7.00 -- --
-------------------------------------------------------------------------------
Balance,
March 31, 1993 793,183 2.50-6.88 506,778 2.50-7.38
Granted 245,500 4.88-5.50 20,000 4.75
Exercised (17,000) 2.50-5.75 -- --
Canceled (385,538) 2.50-6.88 (198,750) 6.00-7.38
-------------------------------------------------------------------------------
Balance,
March 31, 1994 636,145 2.50-6.88 328,028 2.50-7.38
===============================================================================
Exercisable
at March 31, 1994 338,081 2.50-6.88 176,608 2.50-7.38
===============================================================================
Available for grant
at March 31, 1994 484,019 -- 303,750 --
===============================================================================
</TABLE>
Stock Purchase Plan - In July 1989, the Company established a stock purchase
plan for eligible employees. Employees may subscribe up to 10 percent of their
compensation to purchase the Company's common stock at the lower of 85 percent
of the fair market value at the date of grant or 85 percent of the fair market
value six months after the date of grant. Shares subscribed to must be
exercised one year after the date of grant or are canceled. The Company has
reserved 200,000 shares of common stock for the plan. On July 31, 1993, 453
shares were exercised. New subscriptions were granted by the Company to
eligible employees on August 2, 1993 totaling 68,637 shares. These shares are
due to be exercised on July 31, 1994.
<PAGE>
Stock Warrants - In connection with the Delphi/CIGNA Property and Casualty
Agency Division of the CIGNA Property and Casualty Insurance Group of the
Insurance Company of North America ("CIGNA") Agreement entered into in June,
1988, CIGNA received a warrant to acquire up to 250,000 shares of the Company's
common stock for $7.50 per share, subject to adjustment, prior to expiration of
the warrant on January 31, 1996.
In connection with its line of credit agreement with its bank in May 1992, the
Company agreed to issue warrants to the bank to purchase up to 75,000 shares of
the Company's common stock over a five year term at the fair market value of the
common stock on the date of grant of $6.75 per share.
NOTE 13 - MAJOR CUSTOMERS:
The Company had revenues of $4,500,000 from one customer in fiscal 1992 which
represented 11% of total revenues in that year. No individual customer
represented more than 10% of total revenues in either fiscal 1994 or 1993.
NOTE 14 - CASH OPTION PROFIT SHARING PLAN AND TRUST:
Effective January 1, 1988, the Company adopted and implemented a 401(k) Cash
Option Profit Sharing Plan which allows employees to contribute part of their
compensation to the Profit Sharing Plan and Trust, on a pre-tax basis. The
Company is under no obligation to contribute to the Plan. For the fiscal years
ending March 31, 1994, 1993 and 1992, the Company did not make any contributions
to the plan.
