<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15946
DELPHI INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0021975
- ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3501 ALGONQUIN ROAD
ROLLING MEADOWS, IL 60008
- ------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847-506-3100
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes /X/ No / / (2) Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date. 7,395,449 shares as
of November 10, 1998.
<PAGE>
DELPHI INFORMATION SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED September 30, 1998
INDEX
Part I - FINANCIAL INFORMATION Page
-----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1998
(unaudited) and March 31, 1998............................. 3
Consolidated Statements of Operations for the Three and Six
Months Ended September 30, 1998 and 1997 (unaudited)........ 4
Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 1998 and 1997 (unaudited)............... 5
Notes to Consolidated Financial Statements (unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 8
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders.......... 14
Item 5. Other Information............................................ 14
Item 6. Exhibits and Reports on Form 8-K........................... 14
SIGNATURE................................................................. 15
2
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DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
1998 1998
--------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 992 $ 872
Accounts receivable, net 6,720 4,807
Other current assets 201 163
------ ------
TOTAL CURRENT ASSETS 7,913 5,842
Property and equipment, net 1,783 2,084
Capitalized and purchased software, net 6,494 6,554
Other assets 311 302
------ ------
TOTAL ASSETS $16,501 $14,782
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 3,126 $ 1,923
Accounts payable and accrued liabilities 2,181 2,078
Accrued payroll and related benefits 457 419
Deferred revenue 3,470 4,381
------ ------
TOTAL CURRENT LIABILITIES 9,234 8,801
Notes payable-long term 210 210
Other liabilities 161 180
------ ------
TOTAL LIABILITIES 9,605 9,191
------ ------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value,
2,000,000 shares authorized:
Seried D, 221 shares issued and
outstanding, respectively 49 49
Common stock, $.10 par value:
Non-designated, 20,000,000 shares
authorized,
7,395,449 outstanding 740 740
Additional paid-in capital 48,717 48,717
Accumulated deficit (42,710) (44,017)
Cumulative foreign currency translation
adjustment 100 102
------ ------
TOTAL STOCKHOLDERS' EQUITY 6,896 5,591
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 16,501 $ 14,782
------ ------
------ ------
</TABLE>
3
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DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Systems $3,107 $ 847 $ 4,411 $ 1,829
Services 3,902 4,550 8,765 9,134
------ ------- ------- --------
TOTAL REVENUES 7,009 5,397 13,176 10,963
COSTS OF REVENUES:
Systems 801 781 1,527 1,558
Services 2,276 2,529 4,218 4,665
------ ------- ------- --------
TOTAL COST OF REVENUES 3,077 3,310 5,745 6,223
------ ------- ------- --------
GROSS MARGIN 3,932 2,087 7,431 4,740
OPERATING EXPENSES:
Product development 813 1,406 1,560 2,480
Sales and marketing 758 1,124 1,407 1,829
General and administrative 1,375 1,260 2,711 2,002
Amortization of goodwill, customer
lists and noncompete agreements -- 69 -- 138
Write off of capitalized and
purchased software, goodwill
and customer lists -- 2,053 -- 2,053
------ ------- ------- --------
TOTAL OPERATING EXPENSES 2,946 5,912 5,678 8,502
------ ------- ------- --------
OPERATING INCOME (LOSS) 986 (3,825) 1,753 (3,762)
Minority interest 65 9 220 38
Interest income -- (45) -- (99)
Interest expense 112 89 216 155
------ ------- ------- --------
Income(loss) before income taxes 809 (3,878) 1,317 (3,856)
Income tax provision (benefit) 4 (40) 10 (39)
------ ------- ------- --------
Net income (loss) $ 805 $(3,838) $ 1,307 $ (3,817)
------ ------- ------- --------
------ ------- ------- --------
Basic net income (loss) per
common share $ 0.11 $ (0.52) $ 0.18 $ (0.52)
------ ------- ------- --------
------ ------- ------- --------
Diluted net income (loss) per
common share $ 0.11 $ (0.52) $ 0.18 $ (0.52)
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
4
<PAGE>
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,307 $ (3,817)
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 510 586
Amortization of capitalized and
purchased software 1,008 1,150
Amortization of goodwill, customer
lists and noncompete agreements - 136
Write off capitalized and purchased
software, goodwill and customer lists - 2,053
Foreign currency translation adjustment (2) (4)
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable, net (1,913) 683
Other current assets (47) 41
Accounts payable and accrued liabilities 103 (1,437)
Accrued payroll and related benefits 38 (78)
Other liabilities and deferred revenue (930) (1,727)
------ --------
Net cash provided by (used in)
operating activities 74 (2,414)
------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (209) (350)
Expenditures for capitalized and
purchased software (948) (206)
------ --------
Net cash used in investing activities (1,157) (556)
------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable 1,203 -
Net proceeds from exercise of stock
options, private equity equity
placement and employee stock
purchase plan - 347
------ --------
Net cash provided by financing
activities 1,203 347
------ --------
Net increase (decrease) in cash 120 (2,623)
Cash at the beginning of the year 872 6,596
------ -------
Cash at the end of the year $ 992 $ 3,973
------ -------
------ -------
</TABLE>
5
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DELPHI INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. BASIS OF PRESENTATION
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the results of the
interim periods.
These financial statements should be read in conjunction with the financial
statements, and accompanying notes thereto, included in the Company's
Annual Report on Form 10-K, as amended, for the fiscal year ended March 31,
1998.
The results of operations for current interim periods are not necessarily
indicative of results to be expected for the entire current year.
Certain prior period amounts have been reclassified to conform to the
current presentation. These changes had no impact on previously reported
earnings or stockholder's equity.
Note 2. REVERSE STOCK SPLIT
As previously reported, on May 6, 1998 the Company's shareholders approved
a proposal to amend the Company's Certificate of Incorporation to effect a
one-for-five reverse stock split of the Company's outstanding $.10 par
value Common Stock and to reduce the number of authorized shares from
75,000,000 to 20,000,000 effective May 8, 1998. All share and per share
information in these financial statements has been adjusted accordingly.
Note 3. BANK LINE-OF-CREDIT AMENDMENT
Effective January 1997, the Company established a $4,000,000 line of credit
agreement with a bank, maturing in January 2001, subject to certain
conditions. Effective September 30, 1998 the Company entered into an
amendment to the agreement whereby the amount of credit available under the
line of credit was increased. In accordance with the agreement, as amended,
prior to December 31, 1998 the Company may borrow up to two and one-half
times average monthly collections (as defined ); from January 1999 through
March 1999, two times monthly collections; and subsequently one times
collections plus seventy-five percent of eligible receivables (as defined).
As of September 30, 1998, borrowings under the line of credit totaled
$2,806,000, and $1,025,000 remained available for borrowing.
6
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Note 4. COMPUTATION OF PER SHARE EARNINGS
In February, 1997 the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share", which modifies the standards for computing earnings per
share. As required, the Company adopted SFAS No. 128 as of December 15, 1997.
SFAS No. 128 replaces the presentation of primary and (where applicable) fully
diluted earnings per share ("EPS") with basic and (where applicable) diluted
EPS.
Basic EPS is equal to net income divided by the weighted average number of
shares of common stock outstanding for the period. Diluted EPS recognizes the
dilutive effect of common stock equivalents and is equal to net income divided
by the sum of the weighted average number of shares of common stock outstanding
and common stock equivalents. Consistent with previous standards, SFAS No. 128
prohibits inclusion of the impact of common stock equivalents in the calculation
of EPS when inclusion results in antidilution.
For the three months and six months ended September 30, 1997, primary and fully
diluted EPS, as previously reported, are equal to basic and diluted EPS
respectively.
The computation of earnings per share (in thousands except per share data)
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 805 $(3,838) $1,307 $(3,817)
------- -------- ------ --------
Common stock-weighted
average number of shares
outstanding 7,395 7,344 7,395 7,314
------- -------- ------ --------
Common stock equivalents:
stock options 18 (a) 24 (a)
warrants 0 (a) 0 (a)
preferred stock 10 (a) 10 (a)
------- ------
Total equivalents 28 (a) 34 (a)
------- ------
Total shares common stock
and equivalents (for
diluted EPS) 7,423 7,344 7,429 7,314
------- -------- ------ --------
Basic EPS $0.11 $(0.52) $0.18 $(0.52)
------- -------- ------ --------
Diluted EPS $0.11 $(0.52) $0.18 $(0.52)
------- -------- ------ --------
</TABLE>
(a) Common stock equivalents excluded to prevent antidilution.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the unaudited
financial statements and the notes thereto included in Item 1 of this
Quarterly Report and the financial statements and notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K, as amended,
for the fiscal year ended March 31, 1998.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended September 30, 1998 operating activities provided
cash of $74,000. This was primarily due to net income of $1,307,000, non-cash
expenses for depreciation and amortization of $1,518,000, and an increase in
accounts payable and accruals of $141,000 partially offset by an increase
accounts receivable of $1,913,000, and a decrease in deferred revenue and other
liabilities of $930,000. During the six month period cashflows from investing
activities resulted in a use of cash of $1,157,000 due to expenditures of
$948,000 for capitalized and purchased software and other capital expenditures
of $209,000. Cashflows from investing activities for the same period provided
$1,203,000 resulting from bank borrowings.
The Company's sources of liquidity on both a short and long-term basis include
cash on hand, the proceeds from the Company's line of credit agreement, and
operating activity. Sources of liquidity on a long-term basis may also include
the proceeds from the exercise of outstanding stock options and warrants.
Management believes that the Company's sources of liquidity in the short and
long-term and will be sufficient to meet the Company's operating cash
obligations.
BANK LINE-OF-CREDIT - Effective January 1997, the Company established a
$4,000,000 line of credit agreement with a bank, maturing in January 2001,
subject to certain conditions. Effective September 30, 1998 the Company
entered into an amendment to the agreement whereby the amount of credit
available under the line of credit was increased. In accordance with the
agreement, as amended, prior to December 31, 1998 the Company may borrow up
to two and one-half times average monthly collections (as defined ); from
January 1999 through March 1999, two times monthly collections; and
subsequently one times collections plus seventy-five percent of eligible
receivables (as defined). As of September 30, 1998, borrowings under the line
of credit totaled $2,806,000, and $1,025,000 remained available for borrowing.
REVERSE STOCK SPLIT - As previously reported, on May 6, 1998, the Company's
stockholders approved a proposal to amend the Company's Certificate of
Incorporation to effect a one-for-five reverse stock split of the Company's
outstanding $.10 par value Common Stock and to reduce the number of authorized
shares from 75,000,000 to 20,000,000 effective May 8, 1998.
8
<PAGE>
The principal reason for the reverse stock split was to increase the trading
price per share of the Common Stock in order to comply with the revised
standards for continued listing on the Nasdaq SmallCap Market, which went into
effect on February 23, 1998. The new Nasdaq listing requirements instituted,
among other things, a $1.00 minimum per share bid price for listed companies.
There is no assurance, however, that the reverse stock split will enable the
Company's common stock to trade above the $1.00 minimum bid price or that the
Company will otherwise be able to maintain its listing on the Nasdaq SmallCap
Market.
NEW ACCOUNTING STANDARDS - As previously reported, in October 1997, the AICPA
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition",
which supersedes SOP 91-1. The Company adopted, as required, SOP 97-2 for
software transactions entered into beginning April 1, 1998. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements (i.e., software products, upgrades/enhancements, postcontract
customer support, installation, training, etc.) to be allocated to each
element based on relative fair values of the elements. The fair value of an
element must be based on evidence which is specific to the vendor. The
revenue allocated to software products (including specified
upgrades/enhancements) generally is recognized upon delivery of the products.
The revenue allocated to postcontract customer support generally is
recognized ratably over the term of the support and revenue allocated to
service elements (such as training and installation) generally is recognized
as the services are performed. If a vendor does not have evidence of the fair
value of all elements in a multiple-element arrangement, all revenue from the
arrangement is deferred until such evidence exists or all elements are
delivered.
In March 1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2, Software Revenue Recognition". SOP 98-4 defers for
one year the application of certain passages in SOP 97-2 which limit what is
considered evidence of fair value of various elements of multiple element
arrangements. The AICPA has publicly indicated its intent to further consider
the matter and, if appropriate, issue an SOP by December 31, 1998.
EURO CONVERSION - Effective January 1, 1999, eleven of the fifteen member
countries of the European Union (the "participating countries") have agreed
to adopt a new common legal currency (the "euro"). The participating
countries are scheduled to establish fixed conversion rates between their
existing sovereign currencies (the "legacy currencies") and the euro.
Following the introduction of the euro, the legacy currencies are scheduled
to remain legal tender in the participating countries as denominations of the
euro between January 1, 1999 and January 1, 2002 (the "transition period").
During the transition period transactions may be settled using either the
euro or the participating country's legacy currency on a "no compulsion, no
prohibition" basis. Conversion rates will no longer be computed directly
from one legacy currency to another but rather will utilize a "triangulation"
method specified by European Union regulations whereby payments made in a
legacy currency are converted to the euro and subsequently converted to the
recipient's desired legacy currency. Beginning January 1, 2002, the
participating countries will issue new euro-denominated bills and coins for
use in cash transactions. No later than July 1, 2002, the participating
countries will withdraw all bills and coins denominated in legacy currencies
such that legacy currencies will no longer be legal tender for any
transactions, completing the euro conversion.
The Company currently has no bank accounts denominated in any legacy currency
and has not entered into any material transactions denominated in any legacy
currency. The Company is currently in the process of producing enhancements
to certain software products marketed in Europe to accommodate the euro
conversion process (the "euro module"). The cost of the euro module is not
material and will be provided at minimal cost to existing customers.
Management believes the euro module will be completed in a timely manner
allowing for the continued marketing and sale of the Company's products to
customers requiring euro conversion capabilities. In the event the
completion of the euro module is delayed the Company's revenues may be
adversely impacted as well as the Company's stature in the marketplace.
YEAR 2000 COMPLIANCE -The Year 2000 issue is the result of computer programs
being written using two digits rather than four digits to define the applicable
year. Any of the Company's internal use computer programs and its software
products that are date sensitive may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, the inability to process transactions or engage in normal business
activities.
Based on a preliminary and on-going assessment, the Company has determined that
it will be required to replace most of its internal-use financial and
operational systems software and to modify certain existing products that it
markets to customers, so that the software will function properly with respect
to dates in the year 2000 and thereafter. The Company presently believes that
with the conversion to new internal-use software and with the planned
modifications to its products, the Year 2000 issue will not pose significant
operational problems for the Company and/or its customers. However, if such
conversions and modifications are not made, or not made on a timely basis, the
Year 2000 issue could have a material effect on the Company and customers
utilizing certain products. The Company has warranted that certain products are
Year
9
<PAGE>
2000 compliant and that certain products will be made Year 2000 compliant.
The Company has been and is currently providing to customers upgrade
alternatives to non-Year 2000 compliant-versions of the Company's products to
its customers.
The Company has outlined and continues to develop a multi-faceted, comprehensive
plan to address the Year 2000 issue and its potential effect on the Company's
business. This plan considers (a) Company-owned or licensed software for
internal use; (b) third-party- provided software services used for internal use;
(c) Company proprietary software marketed to customers; (d) third-party software
embedded in the Company's proprietary software marketed to customers; and (e)
third-party software marketed to customers. Additionally, the plan will
address alternatives and contingencies to address the possibility of
situations whereby certain aspects of the Company's Year 2000 efforts are
delayed or otherwise unsuccessful.
Internal-Use Software - The Company plans to address and resolve the Year
2000 issue with respect to internal financial and operational systems, such
as general ledger, order management, accounts payable, billing, accounts
receivable, fixed assets, time reporting and project management, by replacing
substantially all of such internal-use systems with vendor-certified, Year
2000-compliant software systems that offer enhanced features and
functionality relative to the Company's existing internal-use software
systems. The Company has completed the evaluation of several Year
2000-compliant system alternatives. The Company currently expects to commence
implementation of the replacement internal-use systems before the end of 1998
and to have such systems operational by mid-1999. The out-of-pocket software,
hardware and personnel cost estimates associated with these replacement
systems and requisite modifications to the Company's network infrastructure
range from $250,000 to $750,000, all of which the Company intends to finance
over a twenty-four to thirty-six month period with a third-party leasing
company. The Company does not, however, have a firm financing commitment from
any third-party leasing company with respect to these internal-use
replacement systems at this time.
Approximately 50% of the Company's expenses are payroll-related expenses. The
Company relies on a third party for most of its payroll processing services.
This third-party payroll processing company has verbally represented to the
Company that the software used in its payroll processing services is Year 2000
compliant. The Company has recently requested, but has not yet received, written
certification from this payroll processing vendor that the software used in its
payroll processing services is in fact Year 2000 compliant. The Company further
intends to request, but has not yet requested, from certain vendors of lesser
significant products and services to the Company a written certification
regarding Year 2000 compliance.
Software Marketed to Customers - The Company has used and intends to continue
using both internal and external resources to re-program, replace and test its
proprietary software products for Year 2000 compliance. The Company anticipates
completing the Year 2000 project as soon as practical, but in any event before
any anticipated impact. The total cost of this Year 2000 project is estimated to
be approximately $150,000 of which approximately $25,000 has been spent to date.
This project has been and will be funded over the next year through existing
cash resources and through future operating cash flows.
The Company also plans to determine the extent to which the Company's software
products are vulnerable to the failure of third party products to be Year 2000
compliant. Generally, software products provided by third parties that are
marketed directly or indirectly by the Company to its customers are developed by
leading software suppliers with Year 2000 programs in process. There can be no
guarantee, however, that third-party software products marketed by the Company
will be rendered Year 2000-compliant on a timely basis. The Company intends to
10
<PAGE>
continually monitor and evaluate Year 2000 compliance through internal testing
and by obtaining written certification of Year 2000 compliance from the vendors.
If necessary, the Company will consider alternative vendors to ensure Year 2000
compliance for third-party software products marketed to its customers.
While the Company is not heavily reliant on non-IT equipment with embedded
technology, the Company will assess and evaluate such equipment as a part of
its Year 2000 efforts.
The requirements and timetable for the correction of Year 2000 issues are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that may cause
material differences include, but are not limited to, the availability of
trained personnel, the ability to locate and collect all relevant computer codes
and similar uncertainties.
RESULTS OF OPERATIONS
The Company's business plan includes a product strategy centered on a new
generation of products, collectively referred to as "Common Delphi", or
"cd.solutions" and currently comprised of "cd.one", " cd.connect", and
"cd.global", each of which are Delphi trademarks. The current legacy products
will be maintained and supported as long as there is adequate economic and
strategic justification. As new products are introduced to the market,
existing customers utilizing legacy products will be encouraged to migrate to
the Company's new generation of products.
THREE MONTH PERIOD ENDED SEPTEMBER 30 , 1998 AND 1997
The Company's revenues are derived from the licensing and sale of systems
comprised of third party and internally developed software ("Systems") and
from professional services, maintenance services, and support services
("Services"). Professional services include consulting, implementation,
training, project management, and custom software development provided to the
Company's customers with installed systems and those in the process of
installing systems. Total revenues, consisting of Systems revenue and
Services revenue, for the quarter ended September 30, 1998 were $7,009,000,
representing a 30% increase compared to the same quarter of the prior year.
Systems revenues of $3,107,000 for the quarter reflect an increase of
$2,260,000 compared to the same quarter of the prior year. The increase is
primarily attributable to an increase in revenues from the sale of
cd.solutions products.
Service revenues for the quarter were $3,902,000 in the current year versus
$4,550,000 in the prior year. The decrease is primarily due to a decrease in
support revenues and training revenues.
Costs of systems revenues were $801,000 in the quarter ended September 30,
1998 compared to $781,000 in the same quarter of the prior year. Exclusive of
amortization of capitalized and purchased software expense, costs of systems
revenues were $227,000 in the current quarter as compared to $144,000 for the
same period last year.
11
<PAGE>
Costs of service revenues as a percentage of total service revenues increased
slightly to 58% in the second quarter of the current year, compared to 56% in
the second quarter of the prior fiscal year.
Product development expenses for the quarter ended September 30, 1998 were
$813,000, a decrease of $593,000 from the same quarter of the prior year. Total
product development expenditures for the three months ended September 30, 1998
were $1,161,000, consisting of capitalized purchased software and software
development costs of $348,000 and product development expense of $813,000. Total
product development expenditures for the three months ended September 30, 1997
were $1,406,000, consisting of no capitalized purchased software and software
development costs and product development expense of $1,406,000. The decrease is
due to the introduction of various products to the market in the current year
which were in development in the prior year.
Sales and marketing expenses for the quarter ended September 30, 1998 were
$758,000, representing a decrease of $366,000 or 33%, from the comparable
quarter in the prior year. The decrease is primarily attributable to a
reduction in personnel costs.
General and administrative expenses for the quarter ended September 30, 1998
were $1,375,000, versus $1,260,000 in the comparable quarter in the prior
year. The increase is primarily due to increased personnel costs.
There was no amortization of goodwill, customer lists and noncompete
agreements for the quarter ended September 30, 1998 compared to $69,000 for
the same quarter of the prior year. The elimination of amortization expense
is the result of the write-off of remaining goodwill and customer lists in
the second quarter of fiscal year ended March 31, 1998 due to impaired
recoverability.
Interest expense net of interest income for the quarter ended September 30,
1998 was $112,000, an increase of $68,000 compared to the same quarter of the
prior year. The increase is due to increased borrowings and decreased short
term investments.
SIX MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
Total revenue for the six months ended September 30, 1998 totaled
$13,176,000, compared to $10,963,000 for the same period a year ago. For the
six months ended September 30, 1998, total revenue is comprised of Systems
revenue of $4,411,000 and Services revenue of $8,765,000. For the same period
of the prior year, Systems revenue and Services revenue totaled $1,829,000
and $9,134,000, respectively. Systems revenue increased by $2,582,000
primarily due to higher sales of the cd.solutions products. Services revenue
decreased by $369,000 due to declining support revenue associated with legacy
products partially offset by increases in consulting revenue.
Costs of Systems revenue were $1,527,000 for the six months ended September
30, 1998 compared to $1,558,000 for the same period a year ago. Costs of
Systems revenue includes amortization of capitalized and purchased software
of $1,008,000 for the six months ended September 30, 1998 and $1,150,000 for
the six month period ended September 30, 1997.
12
<PAGE>
Costs of Services revenue as a percentage of Services revenue were 48% for
the six months ended September 30, 1998, a slight reduction from 51% for the
same period a year ago.
Product development expenses for the six months ended September 30, 1998 were
$1,560,000, a decrease of $920,000 from the same period in the prior year. Total
product development expenditures for the six months ended September 30, 1998
were $2,508,000, consisting of capitalized purchased software and software
development costs of $948,000 and product development expense of $1,560,000.
Total product development expenditures for the six months ended September 30,
1997 were $2,686,000, consisting of capitalized purchased software and software
development costs of $206,000 and product development expense of $2,480,000.
Sales and Marketing expense totaled $1,407,000 and $1,829,000 for the six
months ended September 30, 1998 and 1997, respectively. The $422,000 decrease
is primarily due to lower payroll expense and lower overall spending on sales
and marketing.
General and Administrative expense increased $709,000 to $2,711,000 for the
six months ended September 30, 1998 compared to $2,002,000 for the same
period in the prior year. The increase is primarily due to increased payroll
and legal expenses.
Interest expense net of interest income for the six months ended September
30, 1998 totaled $216,000 compared to $56,000 for the same period a year ago.
The increase is due to increased borrowings and decreased short term
investments.
This Quarterly Report on Form 10-Q contains various forward-looking
statements and information that are based on management's beliefs as well as
assumptions made by and information currently available to management,
including statements regarding future economic performance and financial
condition, liquidity and capital resources, acceptance of the Company's
products by the market and management's plans and objectives. Such statements
are subject to various risks and uncertainties which could cause actual
results to vary materially from those stated. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
estimated, expected or projected.
13
<PAGE>
Part II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on September 10, 1998, the
following members were elected to the Company's Board of Directors, each by the
respective vote indicated to the right of such nominee's name:
<TABLE>
<CAPTION>
Authority Broker
Nominee For Withheld Abstentions Non-Votes
- ------- --- --------- ----------- ---------
<S> <C> <C> <C>
Yuval Almog 6,015,305 6,626 0 0
William R. Baumel 6,015,305 6,626 0 0
Larry G. Gerdes 6,015,339 6,592 0 0
W. Max Seybold 6,015,339 6,592 0 0
</TABLE>
In addition to the election of the Company's Board of Directors, the
Stockholders adopted the Company's 1998 Non-Employee Stock Option Plan, under
which the Company's non-employee directors, Messrs. Almog, Baumel and Gerdes,
received, in aggregate, options to acquire 22,800 shares of common stock. Of
the 22,800 shares of common stock (i) 15,600 shares are exercisable at a
price per share of $5.00 at any time prior to September 3, 2006; (ii) 3,600
shares are exercisable at a price per share of $5.94 at any time prior to
September 3, 2007 and (iii) 3,600 shares are exercisable at a price per share
of $2.91 at any time prior to September 9, 2008. Stockholders representing
5,951,659 shares voted for the resolution to adopt the plan, authority was
withheld for 57,490 shares, 12,782 shares abstained, and there were no broker
non-votes.
There were no other matters submitted to a vote of stockholders for the
quarterly period ended September 30, 1998.
Item 5. OTHER INFORMATION
During September 1998, the board of directors of the Company accepted the
resignation of Reid E. Simpson, Senior Vice-President and Chief Financial
Officer. While the Company is conducting a search for a successor, the board of
directors has named the Company's Controller, David J. Vock, acting Chief
Financial Officer.
As previously reported on March 23, 1998, the Board of Directors of the
Company adopted a resolution to change the Company's fiscal year end to the
thirty-first day of December effective April 1998. The Company filed Form
10-K for the twelve months ended March 31, 1998 and Form 10-Q for each of the
three month periods ended June 30, 1998 and September 30, 1998 and will file
Form 10-K for the nine months ended December 31, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See exhibit index.
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELPHI INFORMATION SYSTEMS, INC.
Date: November 16, 1998 By /s/ David J. Vock
-----------------
David J. Vock
Acting Chief Financial Officer and
Duly authorized officer
15
<PAGE>
EXHIBIT INDEX
----------------------
EXHIBIT NO. DESCRIPTION
- ------------------ --------------------------------------------------
10.14 Fourth Amendment dated September 30, 1998 to Loan and
Security Agreement between Company and Coast Business
Credit dated January 1997
11 Computation of per share earnings
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
<PAGE>
Exhibit 10.14 Fourth Amendment to Loan and Security Agreement
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Fourth Amendment to Loan and Security Agreement ("AMENDMENT") is
entered into as of this 30th day of September, 1998, between Delphi Information
Systems, Inc. ("BORROWER") and Coast Business Credit(R), a division of Southern
Pacific Bank ("COAST") in reference to that certain Loan and Security Agreement
between Borrower and Coast dated January 8, 1997, as amended ("LOAN AGREEMENt").
The parties desire that the Loan Agreement be modified as follows:
1. AMENDMENT. Sub paragraph 1(a) of the Schedule to the Loan
Agreement ("SCHEDULE") is hereby deleted and the following is
substituted therefor:
"(a) Loans ("the Receivable Loans") not to exceed the
following amounts:
(i) from October 1, 1998 though December 31, 1998, two
and one-half (2 1/2) times "Monthly Collections,"
which shall be defined as the rolling 12-month moving
average of Borrower's monthly collections (excluding
extraordinary cash receipts);
(ii) from January 1, 1999 through March 31, 1999, two (2)
times Monthly Collections:
(iii) from April 1, 1999 and thereafter with respect to
recurring collections, one (1) times Monthly
Collections and with respect to non-recurring
collections, 75% of the amount of Borrower's Eligible
Receivables (as defined in Section 8 above)."
2. NOTIFICATIONS. Borrower agrees to notify Coast in writing
within two (2) days after the cancellation or termination of
any cd.global contract. Borrower agrees to advise Coast in
writing at the beginning of each calendar quarter of the
status of the cd.global contracts.
3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this
Amendment is subject to the condition that Coast shall have
received each of the following:
a. This Amendment, duly executed and delivered by each
party hereto.
b. Such other documents, instruments, approvals or
opinions as Coast may reasonably request.
4. FACILITY MODIFICATION FEE. In addition to all other fees and
charges, Borrower hereby agrees to pay Coast a facility
modification fee of $50,000, fully earned and payable on the
date hereof.
5. REAFFIRMATION. Except as amended by terms herein, the Loan
Agreement remains in full force and effect. If there is any
conflict between the terms and provisions
<PAGE>
of this Amendment and the terms and provisions of the Loan
Agreement, the terms and provisions of this Amendment
shall govern.
6. COUNTERPARTS. This Amendment may be executed in one or more
counterparts.
7. GOVERNING LAW. This Amendment shall be governed by the laws
of the State of California.
8. ATTORNEYS' FEES. If any action or proceeding shall be
commenced at any time by any party to this Amendment to
enforce, interpret or otherwise concerning the terms herein,
the prevailing party in such action shall be entitled to the
reimbursement of its costs and reasonable attorneys' fees.
EACH OF THE PARTIES HERETO WAIVES THE TRAIL BY JURY IN
CONNECTION WITH ANY ACTION DESCRIBED IN THE PRECEDING
SENTENCE. In addition to all other fees and charges, Borrower
shall reimburse Coast, upon demand, for all attorneys' fees
and costs incurred in connection with the negotiation,
documentation and closing of this Amendment.
"Coast" "Borrower"
COAST BUSINESS CREDIT, DELPHI INFORMATION SYSTEMS, INC.
A DIVISION OF SOUTHERN
PACIFIC BANK By: ________________________________
Its: ________________________________
By: _________________________
Its: ________________________
<PAGE>
Exhibit 11 Computation of Per Share Earnings
In February, 1997 the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share", which modifies the standards for computing earnings per
share. As required, the Company adopted SFAS No. 128 as of December 15, 1997.
SFAS No. 128 replaces the presentation of primary and (where applicable) fully
diluted earnings per share ("EPS") with basic and (where applicable) diluted
EPS.
Basic EPS is equal to net income divided by the weighted average number of
shares of common stock outstanding for the period. Diluted EPS recognizes the
dilutive effect of common stock equivalents and is equal to net income divided
by the sum of the weighted average number of shares of common stock outstanding
and common stock equivalents. Consistent with previous standards, SFAS No. 128
prohibits inclusion of the impact of common stock equivalents in the calculation
of EPS when inclusion results in antidilution.
For the three months and six months ended September 30, 1998, primary and fully
diluted EPS, as previously reported, are equal to basic and diluted EPS
respectively.
The computation of earnings per share (in thousands except per share data)
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 805 $(3,838) $1,307 $(3,817)
------- -------- ------ --------
Common stock-weighted
average number of shares
outstanding 7,395 7,344 7,395 7,314
------- -------- ------ --------
Common stock equivalents:
stock options 18 (a) 34 (a)
warrants 0 (a) 0 (a)
preferred stock 10 (a) 10 (a)
------- ------
Total equivalents 28 (a) 34 (a)
------- -------- ------
Total shares common stock
and equivalents (for
diluted EPS) 7,423 7,344 7,429 7,314
------- -------- ------ --------
Basic EPS $0.11 $(0.52) $0.18 $(0.52)
------- -------- ------ --------
Diluted EPS $0.11 $(0.52) $0.18 $(0.52)
------- -------- ------ --------
</TABLE>
(a) Common stock equivalents excluded to prevent antidilution.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 992
<SECURITIES> 0
<RECEIVABLES> 6,720
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,913
<PP&E> 9,611
<DEPRECIATION> 7,828
<TOTAL-ASSETS> 16,501
<CURRENT-LIABILITIES> 9,234
<BONDS> 0
0
49
<COMMON> 740
<OTHER-SE> 6,896
<TOTAL-LIABILITY-AND-EQUITY> 16,501
<SALES> 13,176
<TOTAL-REVENUES> 13,176
<CGS> 5,745
<TOTAL-COSTS> 5,745
<OTHER-EXPENSES> 5,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 216
<INCOME-PRETAX> 1,317
<INCOME-TAX> 10
<INCOME-CONTINUING> 1,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,307
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
