<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 December 31, 1997
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. 36,922,296 shares as of
-----------------------
January 31, 1998.
- -----------------
<PAGE>
DELPHI INFORMATION SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
INDEX
Part I - FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1997
and March 31, 1997 (unaudited) . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three and Nine
Months Ended December 31, 1997 and 1996 (unaudited). . . . . 4
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 1997 and 1996 (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 5. Executive Appointment . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 15
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
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PART 1. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements
DELPHI INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
(Unaudited)
December 31, March 31,
1997 1997
------------ ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $2,642 $6,596
Accounts receivable, net 3,826 5,241
Inventories 11 16
Prepaid expenses and other assets 93 111
------- --------
TOTAL CURRENT ASSETS 6,572 11,964
Property and equipment, net 1,865 2,242
Capitalized and purchased software, net 5,795 7,301
Goodwill and customer lists, net 0 906
Other assets 127 164
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TOTAL ASSETS $14,359 $22,577
------- --------
------- --------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $2,641 $4,667
Accrued payroll and related benefits 377 620
Deferred revenue 4,466 7,205
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TOTAL CURRENT LIABILITIES 7,484 12,492
Notes payable 1,600 1,600
Other liabilities 33 37
------- --------
TOTAL LIABILITIES 9,117 14,129
------- --------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value,
2,000,000 shares authorized
Series D, 221 shares issued and outstanding 49 49
Common stock, $.10 par value,
Non-designated, 75,000,000 shares authorized
36,922,296 and 36,351,168 shares issued and outstanding, respectively 3,692 3,635
Additional paid-in capital 45,714 45,259
Accumulated deficit (44,319) (40,611)
Cumulative foreign currency translation adjustment 106 116
------- --------
TOTAL STOCKHOLDERS' EQUITY 5,242 8,448
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,359 $22,577
------- --------
------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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DELPHI INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- ------------------
1997 1996 1997 1996
------ ------- ------- --------
<S> <C> <C> <C> <C>
REVENUES:
Systems $668 $821 $2,497 $4,830
Services 5,005 5,277 14,139 16,680
------ ------- ------- --------
TOTAL REVENUES 5,673 6,098 16,636 21,510
------ ------- ------- --------
COSTS OF REVENUES:
Systems 573 876 2,131 5,262
Services 2,390 2,379 7,093 9,441
------ ------- ------- --------
TOTAL COSTS OF REVENUES 2,963 3,255 9,224 14,703
------ ------- ------- --------
GROSS MARGIN:
Systems 95 (55) 366 (432)
Services 2,615 2,898 7,046 7,239
------ ------- ------- --------
TOTAL GROSS MARGIN 2,710 2,843 7,412 6,807
------ ------- ------- --------
OPERATING EXPENSES:
Product development 541 994 3,021 3,596
Sales and marketing 853 675 2,682 3,822
General and administrative 1,122 983 3,126 3,747
Amortization of goodwill, customer
lists and noncompete agreements 0 143 136 336
Restructuring charge 0 0 0 1,297
Write off of capitalized and purchased software,
goodwill and customer lists 0 0 2,053 0
------ ------- ------- --------
TOTAL OPERATING EXPENSES 2,516 2,795 11,018 12,798
------ ------- ------- --------
OPERATING INCOME/(LOSS) 194 48 (3,606) (5,991)
OTHER EXPENSES:
Interest income (20) (2) (119) (76)
Interest expense 107 13 262 60
------ ------- ------- --------
INCOME/(LOSS) BEFORE INCOME TAXES 107 37 (3,749) (5,975)
Income tax provision (2) 0 (41) 28
------ ------- ------- --------
NET INCOME/(LOSS) $109 $37 ($3,708) ($6,003)
------ ------- ------- --------
------ ------- ------- --------
BASIC EARNINGS (LOSS) PER COMMON SHARE $0.00 $0.00 ($0.10) ($0.20)
------ ------- ------- --------
------ ------- ------- --------
DILUTED EARNINGS (LOSS) PER COMMON SHARE $0.00 $0.00 ($0.10) ($0.20)
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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DELPHI INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
December 31
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,708) ($6,003)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 826 966
Amortization of capitalized and purchased software 1,601 1,636
Amortization of goodwill and customer lists 136 348
Write off of capitalized and purchased software,
goodwill and customer lists 2,053 0
Retirement of property and equipment 0 14
Foreign currency translation adjustment (10) 7
Excess lease liability 0 (482)
Changes in assets & liabilities:
Accounts receivable, net 1,415 2,906
Inventories 5 514
Prepaid expenses and other assets 55 112
Accounts payable and accrued expenses (2,026) 1,253
Accrued payroll and related benefits (243) (620)
Other liabilities and deferred revenue (2,743) (3,263)
--------- --------
Net cash used in operating activities (2,639) (2,612)
--------- --------
Cash flows from investing activities:
Capital expenditures (449) (479)
Expenditures for capitalized and purchased software (1,378) (1,357)
Acquisition of Complete Broking Systems 0 (784)
--------- --------
Net cash used in investing activities (1,827) (2,620)
--------- --------
Cash flows from financing activities:
Payments on note payable 0 (3,030)
Proceeds from exercise of stock options 518 52
Net proceeds from private equity placement (17) 9,361
Proceeds from employee stock purchase plan 11 27
--------- --------
Net cash provided by financing activities 512 6,410
--------- --------
Net increase (decrease) in cash (3,954) 1,178
Cash at the beginning of the period $6,596 $920
--------- -------
Cash at the end of the period $2,642 $2,098
--------- -------
--------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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 for the fiscal year ended March 31, 1997.
The results of operations for current interim periods are not necessarily
indicative of results to be expected for the entire current year.
Note 2. NOTE PAYABLE
As previously reported, the Company had established a $4,000,000 line of
credit agreement with a bank subject to certain conditions. The agreement
provided for minimum monthly interest at the bank's prime lending rate plus
two and one-half percent (2.5%) on the greater of the actual amount
outstanding or $1,600,000. The agreement included certain covenants
including the maintenance of a minimum net worth of $2,000,000 and
restrictions upon certain activities by the Company without the approval of
the bank including the incurrence of senior debt, certain mergers or
acquisitions, and the payment of dividends.
During December 1997, the Company executed an amendment to the line of
credit agreement. The amendment extends the maturity date of the agreement
two years to January 31, 2001, alters the provisions of the early
termination fee, and modifies the criteria for determining the amount
available under the line. In accordance with the amendment, prior to June
1, 1998 the Company may borrow up to one and one-half times average monthly
collections (as defined) and subsequently may borrow up to seventy-five
percent of eligible receivables. As of December 31, 1997, borrowings under
the line of credit totaled $1,600,000, and $651,000 remained available for
borrowing.
As discussed above, the line of credit agreement provides for minimum
monthly interest on the greater of the balance outstanding or $1,600,000.
In order to minimize interest expense net of interest income, the Company
has drawn on the line of credit and invested the proceeds in short term
marketable securities. The securities are unrestricted and may be utilized
by the Company at any time. At December 31, 1997, total marketable
securities of $1,805,000 are included in cash.
6
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Note 3. EARNINGS (LOSS) PER SHARE
In February, 1997 the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share", which modifies the standards for computing
earnings per share. As required, the Company adopted SFAS No. 128 as of
December 15, 1997. SFAS No. 128 replaces the presentation of primary and
(where applicable) fully diluted earnings per share ("EPS") with basic and
(where applicable) diluted EPS.
Basic EPS is equal to net income divided by the weighted average number of
shares of common stock outstanding for the period. Diluted EPS recognizes
the dilutive effect of common stock equivalents and is equal to net income
divided by the sum of the weighted average number of shares of common stock
outstanding and common stock equivalents. Consistent with previous
standards, SFAS No. 128 prohibits inclusion of the impact of common stock
equivalents in the calculation of EPS when inclusion results in
antidilution.
For the three months and nine months ended December 31, 1996, 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 Nine Months Ended
December 31, December 31,
-------------------- ---------------------
1997 1996 1997 1996
------- ------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 109 $ 37 $(3,708) $(6,003)
------- ------- --------- --------
Common stock-weighted
average number of shares
outstanding 36,847 30,698 36,662 29,370
------- ------- --------- --------
Common stock equivalents:
stock options 198 143 (a) (a)
warrants 88 0 (a) (a)
preferred stock 50 50 (a) (a)
------- -------
Total equivalents 336 193 (a) (a)
------- -------
Total shares common stock
and equivalents (for diluted
EPS) 37,183 30,891 36,662 29,370
------- ------- --------- --------
Basic EPS $ 0.00 $ 0.00 $ ( 0.10) $ ( 0.20)
------- ------- --------- --------
Diluted EPS $ 0.00 $ 0.00 $ ( 0.10) $ ( 0.20)
------- ------- --------- --------
</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 for the fiscal year ended
March 31, 1997.
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1997 was a negative $912,000, or a decrease of
$384,000 from March 31, 1997. The decrease in working capital is primarily
attributable to a decrease in cash of $3,954,000 and a reduction in accounts
receivable of $1,415,000; partially offset by a decrease in deferred revenue of
$2,739,000 and a reduction in accounts payable and accrued expenses of
$2,026,000.
A major component of the Company's negative net working capital position
consists of deferred revenues of $4,466,000 at December 31, 1997, primarily
representing prepaid software maintenance fees from customers that are
recognized ratably over the software maintenance agreement terms. This
liability is satisfied through normal ongoing operations of the Company's
service organization and generally does not require a payment to a third party.
During the three months ended December 31, 1997 operating activities resulted in
the use of cash of $225,000. This was primarily due to decreases in accounts
payable and accrued expenses, accrued payroll and related benefits, and
deferred revenue and other liabilities of $1,770,000 partially offset by net
income of $109,000, non-cash expenses for depreciation and amortization of
$691,000, and a decrease in accounts receivable of $732,000. During the three
month period cashflows from investing activities resulted in a use of cash of
$1,271,000 due to expenditures of $1,172,000 for capitalized and purchased
software and other capital expenditures of $99,000. Cashflows from investing
activities for the same period provided $165,000 primarily from proceeds from
the exercise of stock options.
During the nine months ended December 31, 1997 operating activities resulted in
the use of cash of $2,639,000. This was due to a net loss of $3,708,000 and
decreases in accounts payable and accrued expenses, accrued payroll and related
benefits, and deferred revenue and other liabilities of $5,012,000 partially
offset by non-cash expenses for depreciation and amortization of $2,563,000, the
write off of certain assets of $2,053,000 and a decrease in accounts receivable
of $1,415,000. During the nine month period cashflows from investing activities
resulted in a use of cash of $1,827,000 due to expenditures of $1,378,000 for
capitalized and purchased software and other capital expenditures of $449,000.
Cashflows from investing activities for the same period provided $512,000
primarily from proceeds from the exercise of stock options.
8
<PAGE>
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 and provide for the completion and market introduction of products
currently under development.
As previously reported, the Company has a $4,000,000 line of credit agreement
with a bank subject to certain conditions. The agreement provides for minimum
monthly interest at the bank's prime lending rate plus two and one-half percent
(2.5%) on the greater of the actual amount outstanding or $1,600,000. The
agreement includes certain covenants including the maintenance of a minimum net
worth of $2,000,000 and restrictions upon certain activities by the Company
without the approval of the bank including the incurrance of senior debt,
certain mergers or acquisitions, and the payment of dividends.
During December 1997, the Company executed an amendment to the line of credit
agreement. The amendment extends the maturity date of the agreement two years to
January 31, 2001, alters the provisions of the early termination fee, and
modifies the criteria for determining the amount available under the line. In
accordance with the amendment, prior to June 1, 1988 the Company may borrow up
to one and one-half times average monthly collections (as defined) and
subsequently may borrow up to seventy-five percent of eligible receivables. As
of December 31, 1997, borrowings under the line of credit totaled $1,600,000,
and $651,000 remained available for borrowing.
The line of credit agreement provides for minimum monthly interest on the
greater of the balance outstanding or $1,600,000. In order to minimize interest
expense net of interest income, the Company has drawn on the line of credit and
invested the proceeds in short-term marketable securities. The securities are
unrestricted and may be utilized by the Company at any time. At December 31,
1997 marketable securities of $1,805,000 are included in cash.
As part of the Company's ongoing efforts to conduct operations more
efficiently and improve profitability, during January 1998 the Company
implemented a reduction in work force of approximately twenty employees from
various functional areas. The employee departures are not expected to
adversely affect the Company's strategic initiatives. It is anticipated that
the reductions will result in reduced annual operating expenses of
approximately $1,200,000. Severance costs of approximately $150,000 have been
accrued in the fiscal third quarter ended December 31, 1997. As of January
31, 1998 the Company has approximately 160 employees. Management is pursuing
other cost reduction initiatives including reducing the use of high cost
consultants in the product development area, the reduction of travel related
costs, renegotiation of telecommunication service agreements, and other
initiatives focused on improving profitability.
The common stock of the Company is traded on the Nasdaq SmallCap Market.
There are various requirements for the maintenance of a listing on the Nasdaq
SmallCap Market. During August 1997 Nasdaq announced the modification of
several requirements for listing effective February 23, 1998. Included in the
revised requirements is a minimum bid price of one dollar ($1.00). In the
event a listed company's bid price is less than $1.00, the listed company
will be allowed ninety days to comply with the minimum bid requirement by
achieving the minimum bid price for ten consecutive trading days. During the
fiscal quarter ended December 31, 1997 and
9
<PAGE>
subsequent thereto the Company's common stock has traded at less than the
required minimum bid price of one dollar ($1.00). Management is currently
reviewing various alternatives to insure compliance with the minimum bid
requirement. In the event the Company is unable to comply with the listing
requirements, the Company could be delisted, which may have an adverse affect
on existing shareholder liquidity and the Company's ability to raise
additional future equity capital, if required. The Company is currently in
compliance with all other Nasdaq listing requirements.
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. In November, 1996 the Company
introduced cd.one and is currently developing certain conversion enhancements
to facilitate conversion from certain legacy products to cd.one. The
Company's current product development efforts are primarily focused on the
development of cd.connect and the modification of the underlying technology
used in the original version of cd.global to address domestic market
requirements.
THREE MONTH PERIOD ENDED DECEMBER 31, 1997 AND 1996
Total revenues for the third quarter ended December 31, 1997 were $5,818,000,
representing a 5% decrease compared to the third quarter of the prior year.
Systems revenues of $668,000 for the third quarter of the current fiscal year
reflect a decrease of $153,000 compared to the third quarter of the prior year.
Current year systems revenues for the third quarter include hardware commissions
of $166,000 versus hardware sales of $382,000 in the prior year. Prior year
results include no systems revenues from the sale of cd.solutions products
versus $92,000 in the current period. Prior year results for the third period
include revenues of $70,000 for the sale of certain legacy products which are no
longer offered. Included in current year systems revenues are $182,000 of
miscellaneous revenues versus $61,000 in the prior year. Systems revenues from
the sale of continuing legacy products for the three months ended December 31,
1997 were $225,000 versus prior year sales for the same period of $308,000.
Service revenues were $5,005,000 in the third quarter of the current year versus
$ 5,277,000 in the prior year for a decrease of $272,000. Service revenues for
the current year include $806,000 related to cd.solutions products versus none
in the prior year. Service revenues from legacy products were $4,200,000 in the
three months ended December 31, 1997 versus $5,277,000 in the same period of the
prior year.
Total costs of revenues as a percentage of total revenues were 51% in the
current quarter, compared to the 53% in the third quarter of the prior year.
Costs of systems revenues were 70%
10
<PAGE>
in the third quarter of the current fiscal year, compared to 107% in the
third quarter of the prior fiscal year. The decrease expressed in percentage
terms was primarily due to additional provisions for hardware expenses in the
third quarter of the prior year.
Costs of service revenues as a percentage of total service revenues increased to
48% in the third quarter of the current year, compared to 45% in the third
quarter of the prior fiscal year.
Product development expenses for the third quarter ended December 31, 1997 were
$541,000, a decrease of $453,000 or 46%, compared to the third quarter of the
prior fiscal year. Total product development expenditures for the three months
ended December 31, 1997 were $1,712,000, consisting of capitalized purchased
software and software development costs of $1,171,000 and product development
expense of $541,000. Total product development expenditures for the three
months ended December 31, 1996 were $1,407,000, consisting of capitalized
purchased software and software development costs of $413,000 and product
development expense of $994,000.
Sales and marketing expenses for the quarter ended December 31, 1997 were
$853,000, representing an increase of $178,000 or 26%, from the comparable
quarter in the prior year. The increase is primarily due to the marketing of
cd.solutions products.
General and administrative expenses for the quarter ended December 31, 1997 were
$1,122,000, representing an increase of $139,000 or 14%, from the comparable
quarter in the prior year. The increase is primarily due to severance
provisions.
There was no amortization of goodwill, customer lists and noncompete agreements
for the quarter ended December 31, 1997 compared to $143,000 for the third
quarter of the prior year. The elimination of amortization expense is the
result of the write-off $770,000 of goodwill and customer lists in the second
quarter of the current year due to impaired recoverability of the assets.
Interest expense for the quarter ended December 31, 1997 was $107,000, an
increase of $94,000 compared to the third quarter of the prior year. The
increase is due to interest and fees related to the line of credit which was
established in the fourth quarter of the prior year. As further described in
Note 2 to the financial statements included in Item 1, the line of credit
agreement provides for minimum monthly interest on the greater of the
outstanding balance or $1,600,000. In order to minimize interest expense net of
interest income the Company has drawn $1,600,000 on the line of credit and
purchased short-term marketable securities in the same amount. The securities
are unrestricted.
NINE MONTH PERIOD ENDED DECEMBER 31, 1997 AND 1996
The Company recorded a net loss of $3,708,000 for the nine months ended December
31, 1997, compared to a net loss for the comparable period in the prior fiscal
year of $6,003,000. The results for the nine months ended December 31, 1997
include a $2,053,000 write-off of capitalized and purchased software, goodwill,
and customer lists. The results for the nine months ended December 31, 1996
include a $1,297,000 restructuring charge. Excluding these two items the net
loss for the nine months ended December 31, 1997 declined $3,051,000 or 65%.
11
<PAGE>
Total revenues for the nine months ended December 31, 1997 were $16,781,000, a
decrease of $4,729,000 or 22%, compared to the nine months ended December 31,
1996.
Systems revenues for the nine months ended December 31, 1997 were $2,497,000,
a decrease of $2,333,000 or 48% compared to the same period of the prior
year. Current year systems revenues include hardware commissions of $621,000
and hardware sales of $187,000 versus $227,000 of commissions and $2,066,000
of hardware sales in the prior year. Prior year results include no systems
revenues from the sale of cd.solutions products versus $432,000 in the current
period. Prior year results include revenues of $666,000 versus $23,000 in the
current year for the sale of certain legacy products which the Company ceased
offering during the current year. Included in current year systems revenues
are $307,000 of miscellaneous revenues versus $214,000 in the prior year.
Systems revenues from the sale of continuing legacy products for the nine
months ended December 31, 1997 were $926,000 versus prior year sales for the
same period of $1,491,000.
Service revenues for the nine month period ended December 31, 1997 were
$14,139,000, a decrease of $2,541,000 or 15%, compared to the nine months
ended December 31, 1996. Prior year service revenues include hardware support
revenues of $1,348,000 versus none in the current year due to the Company's
exit from the hardware business in the second quarter in the prior year.
Service revenues for the current year include $1,889,000 related to
cd.solutions products versus none in the prior year. Service revenues from
legacy products were $12,331,000 in the nine months ended December 31, 1997
versus $15,331,000 in the same period of the prior year, a decrease of 20%.
Total costs of revenues expressed as a percentage of total revenues were 55% for
the nine months ended December 31, 1997, compared to 68% for the same period in
the prior year. Costs of systems revenues expressed as a percentage of systems
revenues were 81% in the first nine months of fiscal 1998, compared to 109%
in the first nine months of fiscal 1997. The decrease expressed in
percentage terms is primarily due to an increased provision for doubtful
accounts and various expenses incurred in the prior fiscal year related to
the Company's exit from the hardware business.
Costs of service revenues expressed as a percentage of service revenues were 50%
in the first nine months of fiscal 1998, compared to 57% in the first nine
months of fiscal 1997. The decrease is primarily driven by the exit from the
hardware maintenance business, in the prior fiscal year.
Product development expenses for the nine month period ended December 31, 1997
were $3,021,000 a decrease of $575,000 or 16%, compared to the same period of
the prior fiscal year. Total product development expenditures for the nine
months ended December 31, 1997 were $4,399,000, consisting of capitalized
purchased software and software development costs of $1,378,000 and product
development expense of $3,021,000. Total product development expenditures for
the nine months ended December 31, 1996 were $4,953,000, consisting of
capitalized purchased software and capitalized software development costs of
$1,357,000 and product development expense of $3,596,000. The decrease in total
product development expenditures is primarily due to resource reductions
afforded by the conclusion of development activity on legacy products in the
prior year. Product development expenditures in the current year have been
focused on cd.solutions products.
12
<PAGE>
Sales and marketing expenses for the first nine months of fiscal 1998 were
$2,682,000, a decrease of $1,140,000, compared to the prior year. The
decrease is primarily due to reduced sales commissions, and compensation
expense resulting from a shift to a less commissioned direct marketing
approach and the Company's exit from the hardware business. In addition,
advertising expense decreased approximately $168,000 to $35,000 in the
current nine month period as compared to the same period last year.
General and administrative expenses for the first nine months of fiscal 1998
were $3,126,000, a decrease of $621,000 as compared to the same period of
fiscal 1997. The decrease is primarily attributable to a decreases in
compensation expense, recruiting and relocation expense, and facility
expenses.
Amortization of goodwill, customer lists, and noncompete agreements for the
nine months ended December 31, 1997 decreased $200,000 or 60%, compared to
the same period of the prior year. The decrease is primarily the result of
the write-off of goodwill and customer lists in the second quarter of the
current year resulting in no amortization expense in the third quarter of the
current year compared to $143,000 in the third quarter of the prior year.
The Company's product strategy is to support existing legacy products as long
it is economically prudent while simultaneously encouraging customers to
migrate to new products as they are introduced. The Company's product
strategy and the availability of competitive products are factors in the
continuous assessment of the recoverability of the Company's carrying value
of its software products. As a result of assessment, during the second
quarter of the current year, the recoverability of a portion of the Company's
intangible assets related to certain legacy products was deemed impaired
based upon projected future net cash flows for those products. Therefore, the
Company wrote off $1,283,000 of capitalized and purchased software and
$770,000 of goodwill and customer lists in the second quarter of the current
year.
Interest expense for the nine months ended December 31, 1997 was $262,000,
compared to $60,000 for the first nine months of fiscal 1997. The increase is
due to interest and fees related to the line of credit which was established
in the fourth quarter of the prior year. As further described in Note 2 to
the financial statements included in Item 1, the line of credit agreement
provides for minimum monthly interest on the greater of the outstanding
balance or $1,600,000. In order to minimize interest expense net of interest
income the Company has drawn $1,600,000 on the line of credit and purchased
marketable securities in the same amount. The securities are unrestricted.
ADOPTION OF SFAS NO. 128 - EARNINGS PER SHARE
As further described in Note 3 to the Consolidated Financial Statements
included herein in Item 1, the Company adopted SFAS No. 128, Earnings Per
Share, effective December 15, 1997. SFAS No. 128 modifies the standards for
the presentation and computation of EPS. SFAS No. 128 replaces the
presentation of primary and (where applicable) fully diluted EPS with basic
and (where applicable) diluted EPS.
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. SFAS No. 128 requires the dilutive effect of common
stock equivalents be excluded in the calculation of basic
13
<PAGE>
EPS and included in the computation of diluted EPS. Under standards prior to
SFAS No. 128 the dilutive effect of common stock equivalents was reflected in
primary and fully diluted EPS.
SFAS No. 128 requires retroactive restatement of prior period financial
statements included as an integral part of financial statements for periods
ending subsequent to December 15, 1997. Due to the relatively nominal number of
dilutive common stock equivalents and nominal earnings in prior periods,
management believes that restated basic and diluted EPS in accordance with SFAS
No. 128 will not be significantly different than previously reported primary and
fully diluted EPS, respectively. Management further believes that given the
Company's current capital structure, SFAS No. 128 will not have a significant
impact on the Company.
This Quarterly Report on Form 10-Q contains various forward-looking statements
and information that are based on management's beliefs and assumptions and
information currently available to management, including statements regarding
future economic performance and financial condition, liquidity and capital
resources, acceptance of the Company's products by the market and management's
plans and objectives. Such statements are subject to various risks and
uncertainties which could cause actual results to vary materially from those
stated. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, expected, or projected. Such
risks and uncertainties include, but are not limited to, the Company's ability
to overcome its recent history of operating losses and declining revenues, its
dependence upon raising additional capital if required, the risks associated
with potential future acquisitions, the willingness of independent insurance
agencies to outsource their computer and other processing needs to third
parties, the Company's ability to continue to develop new products to
effectively address market needs in an industry characterized by rapid
technological change, the Company's dependence on the insurance agency market
(and in particular independent agents), the highly competitive and rapidly
changing automation systems market, the Company's ability to effectively protect
its applications software and other proprietary information and the Company's
ability to attract and retain quality management, and software, technical sales
and other personnel. Certain of these as well as other risks and uncertainties
are described in more detail in the Company's Registration Statement on Form S-3
filed under the Securities Act of 1933, Registration No. 333-12781, and the
Company's periodic filings pursuant to the Securities Exchange Act of 1934. The
Company undertakes no obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
Part II - OTHER INFORMATION
Item 5. EXECUTIVE APPOINTMENT
On February 10, 1998, the board of directors of the Company announced the
appointment of Max Seybold to the positions of President and Chief Executive
Officer replacing John W. Trustman, who left the Company to pursue other
opportunities. Seybold previously served the Company as Senior Vice President
and Chief Operating Officer. Prior to joining the Company in December 1997,
Seybold was President and Chief Executive Officer of Mindware/BPR, Inc., an
international consulting firm with approximately 3500 employees.
14
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See exhibit index.
(b) Reports on Form 8-K
None
15
<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:February 9, 1998 By /s/ Reid E. Simpson
--------------------------------
Reid E. Simpson
Chief Financial Officer and
Duly authorized officer
16
<PAGE>
EXHIBIT INDEX
--------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------
10.12 Second Amendment to Loan and Security
Agreement with Coast Business Credit, a
division of Southern Pacific Bank
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.
17
<PAGE>
Exhibit 10.12
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Second Amendment to Loan and Security Agreement ("Amendment") is
entered into as of this 18th day of December, 1997, between Delphi Information
Systems, Inc. ("Borrower") and Coast Business Credit, a division of Southern
Pacific Bank (formerly known as Southern Pacific Thrift & Loan Association)
("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. Subparagraph 1(a) of the Schedule to Loan and Security Agreement
("Schedule") is hereby deleted and the following is substituted therefore:
"(a) Loans ("the Receivable Loans") in an amount not to exceed one and
one-half (1-1/2) times the rolling 12-month moving average of the monthly
collections (excluding extraordinary cash receipts), which formula shall
remain in effect until May 31, 1998. Thereafter, the Receivable Loan shall
be in an amount not to exceed 75% of the amount of Borrower's Eligible
Receivables (as defined in Section 8 above) provided that if the average
dilution during the then prior nine months exceeded 10%, Coast may, in its
sole discretion, reduce the advance rate against Eligible Receivables."
2. Section 4 of the Schedule is hereby modified by deleting the Maturity
Date of January 31, 1999 and substituting therefor "January 31, 2001."
3. The Early Termination Fee as set forth in Section 4 of the Schedule is
hereby deleted and the following is substituted therefore:
EARLY TERMINATION FEE: A fee equal to the greater of:
(a)the amount of all interest accrued during the six-month period
prior to the effective date of termination;
(b)an amount equal to the average monthly interest due and payable
based on the greater of the six months' interest immediately preceding the
effective date of termination or, if the effective date of termination is
less than six months from the initial funding, an amount equal to the
average monthly interest multiplied by the number of full or partial months
from the effective date of termination to the Maturity Date; or
(c)an amount equal to the Minimum Monthly Interest multiplied by the
number of full or partial months from the effective date of termination to
the Maturity Date.
1
<PAGE>
4. If on June 1, 1998, the change in the advance rate against Eligible
Receivables as set forth in Section 1(a) of the Schedule and in paragraph 1 of
this Amendment result in the then unpaid balance of the Receivable Loans being
greater than 75% (or the applicable percentage pursuant to paragraph 1 above) of
the Eligible Receivables ("Overloan"), Coast may either declare an Event of
Default or, at Coast's sole option, forbear from declaring an Event of Default
and continue the Loans under the terms herein on 30-day extensions for an
additional extension fee of $20,000 per month payable and earned as of the first
day of each calendar month. If the Overloan is cured by Borrower and no other
Events of Default have occurred and are continuing, the Extension Fee shall not
be charged beginning the first month after the date of the cure.
5. Borrower represents and warrants to Coast that it does not own any
copyrights, software or copyrightable material; whether or not such material has
been registered at the U.S. Copyright Office, except as set forth on Exhibit "1"
hereto. Further, there have been no enhancements, modifications or new versions
of any of the material set forth on Exhibit 1 hereto.
6. In addition to all other fees and charges, Borrower hereby agrees
to pay Coast a facility modification fee of $80,000, fully earned on the date
hereof. Said fee shall be payable $40,000 on the date hereof and $40,000 on
May 31, 1998.
7. This Amendment may be executed in one or more counterparts.
8. This Amendment shall be governed by the laws of the State of
California.
9. If any action or proceeding shall be commended 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
reimbursement of its cost and reasonable attorneys' fees. Each of the
parties hereto waive 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.
"Lender" "Borrower"
COAST BUSINESS CREDIT DELPHI INFORMATION SYSTEMS, INC.
By: /s/ Phillip Goessler By: /s/ Reid E. Simpson
-------------------------- ---------------------------------
Its: Vice President Its: Chief Financial Officer
Senior Vice President -
Finance and Administration
2
<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 nine months ended December 31, 1996, 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 Nine Months Ended
December 31, December 31,
--------------------- ----------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------ ------- -------- --------
Net income (loss) $ 109 $ 37 $(3,708) $(6,003)
------ ------- -------- --------
Common stock-weighted
average number of shares
outstanding 36,847 30,698 36,662 29,370
------ ------- -------- --------
Common stock equivalents:
stock options 198 143 (a) (a)
warrants 88 0 (a) (a)
preferred stock 50 50 (a) (a)
------ -------
Total equivalents 336 193 (a) (a)
------ -------
Total shares common stock
and equivalents (for diluted
EPS) 37,183 30,891 36,662 29,370
------ ------- -------- --------
Basic EPS $ 0.00 $ 0.00 $ ( 0.10) $ ( 0.20)
------ ------- -------- --------
Diluted EPS $ 0.00 $ 0.00 $ ( 0.10) $ ( 0.20)
------ ------- -------- --------
</TABLE>
(a) Common stock equivalents excluded to prevent antidilution.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1998
<CASH> 2,642
<SECURITIES> 0
<RECEIVABLES> 3,826
<ALLOWANCES> 0
<INVENTORY> 11
<CURRENT-ASSETS> 6,572
<PP&E> 1,865
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,359
<CURRENT-LIABILITIES> 7,484
<BONDS> 0
0
49
<COMMON> 3,692
<OTHER-SE> 1,501
<TOTAL-LIABILITY-AND-EQUITY> 14,359
<SALES> 0
<TOTAL-REVENUES> 16,636
<CGS> 9,224
<TOTAL-COSTS> 9,224
<OTHER-EXPENSES> 11,018
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> (3,749)
<INCOME-TAX> (41)
<INCOME-CONTINUING> (3,708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,708)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
