<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 March 31, 1999
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. 8,405,000 shares as
of May 10, 1999.
<PAGE>
DELPHI INFORMATION SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
Part I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1999
(unaudited) and December 31, 1998................................ 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 (unaudited).................. 4
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 1999 and 1998 (unaudited).................. 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited)......................... 6
Notes to Consolidated Financial Statements (unaudited)................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 18
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities................................. 18
Item 5. Other Information............................................... 18
Item 6. Exhibits and Reports on Form 8-K................................ 18
SIGNATURE....................................................................... 18
</TABLE>
2
<PAGE>
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
--------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,081 $ 1,053
Accounts receivable, net 9,084 6,378
Other current assets 371 310
--------------- -------------
TOTAL CURRENT ASSETS 10,536 7,741
Property and equipment, net 1,856 1,899
Capitalized and purchased software, net 6,482 6,561
Other assets 345 344
--------------- -------------
TOTAL ASSETS $ 19,219 $ 16,545
--------------- -------------
--------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 1,897 $ 4,032
Accounts payable and accrued liabilities 2,312 2,371
Accrued payroll and related benefits 472 182
Deferred revenue 4,908 3,418
--------------- -------------
TOTAL CURRENT LIABILITIES 9,589 10,003
Notes payable-long term 109 210
Other liabilities 130 265
--------------- -------------
TOTAL LIABILITIES 9,828 10,478
--------------- -------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 2,000,000 shares authorized,
Series D, 221 shares issued and outstanding. 49 49
Common stock, $.10 par value:
Non-designated, 20,000,000 shares authorized,
8,143,811 and 7,395,449 issued and outstanding, respectively. 814 740
Additional paid-in capital 54,062 48,717
Accumulated deficit (45,681) (43,516)
Cumulative foreign currency translation adjustment 147 77
--------------- -------------
TOTAL STOCKHOLDERS' EQUITY 9,391 6,067
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,219 $ 16,545
--------------- -------------
--------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----------- ------------
<S> <C> <C>
REVENUES:
Software $ 1,500 $ 1,012
Services 3,588 4,817
----------- ------------
TOTAL REVENUES 5,088 5,829
COSTS OF REVENUES:
Software 921 664
Services 2,617 2,110
----------- ------------
TOTAL COST OF REVENUES 3,538 2,774
----------- ------------
GROSS MARGIN 1,550 3,055
OPERATING EXPENSES:
Product development 902 489
Sales and marketing 630 905
General and administrative 2,021 1,288
Amortization of noncompete agreement 48 -
----------- ------------
TOTAL OPERATING EXPENSES 3,601 2,682
----------- ------------
OPERATING INCOME (LOSS) (2,051) 373
Interest expense 107 129
----------- ------------
Income (loss) before income taxes (2,158) 244
Income tax provision (benefit) 7 (58)
----------- ------------
Net income (loss) $ (2,165) $ 302
----------- ------------
----------- ------------
Basic net income (loss) per common share $ (0.28) $ 0.04
----------- ------------
----------- ------------
Diluted net income (loss) per common share $ (0.28) $ 0.04
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
Net income (loss) $ (2,165) $ 302
Other Comprehensive income (loss):
Foreign currency translation adjustment 70 (4)
-------- --------
Comprehensive income (loss) $ (2,095) $ 298
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,165) $ 302
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 192 312
Amortization of capitalized and purchased software 595 442
Amortization of noncompete agreement 48 -
Issuance of common stock as consideration for services provided - 51
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable, net (2,706) (981)
Other current assets 127 (234)
Accounts payable and accrued liabilities (59) (563)
Accrued payroll and related benefits 290 42
Other liabilities and deferred revenue 1,355 62
------------ ------------
Net cash provided by (used in) operating activities (2,323) (567)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (149) (531)
Purchase of minority interest (50) -
Expenditures for capitalized and purchased software (516) (1,201)
------------ ------------
Net cash used in investing activities (715) (1,732)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on (repayments of) notes payable (2,236) 533
Net proceeds from exercise of common stock warrants 4,874 -
Net proceeds from exercise of stock options 358 -
------------ ------------
Net cash provided by financing activities 2,996 533
------------ ------------
Foreign currency translation adjustment 70 (4)
Net increase (decrease) in cash 28 (1,770)
Cash at the beginning of the year 1,053 2,642
------------ ------------
Cash at the end of the year $ 1,081 $ 872
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 116 $ 139
Income taxes paid 7 1
NON-CASH TRANSACTIONS:
Common stock issued for purchase of minority interest 187 -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
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 nine month period ended December 31,
1998.
The results of operations for the current interim period 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
stockholders' equity.
Note 2. REVERSE STOCK SPLIT
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 have been
adjusted accordingly.
Note 3. BANK LINE-OF-CREDIT
Effective January 1997, the Company established a line of credit up to
$4,000,000 subject to borrowing base limits. The agreement provides for minimum
monthly interest at the prime lending rate plus two and one-half percent (2.5%)
on the greater of the actual amount outstanding or $1,600,000. Borrowings under
the agreement are secured by substantially all of the Company's assets. 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 lender including the incurrence of senior debt,
certain mergers or acquisitions, and the payment of dividends. As previously
disclosed, at December 31, 1998 the Company was in technical default under
certain provisions of the line of credit. The Company obtained waivers of the
default through March 31, 1999. Subsequent to March 31, 1999, the Company
remains in violation of a certain covenant under the line of credit limiting the
age of accounts payable. Provided that the disclosure of this technical
default does not constitute an admission regarding the materiality of the
default.
In December 1997, March 1998, and September 1998 the Company executed amendments
to the line of credit agreement. The amendments extend the maturity date of the
agreement two years
7
<PAGE>
to January 31, 2001, alter the provisions of the early termination fee, and
modify the criteria for determining the amount available under the line. In
accordance with the amendments, from January 1, through March 31, 1999, the
Company may borrow up to two times average monthly collections and
subsequently, up to the sum of one times average monthly collections from
recurring maintenance revenue and seventy-five percent of eligible
non-maintenance receivables (as defined).
As of March 31 1999 and through April 25, 1999, the total amount that the
lender made available, and that the Company was borrowing under the bank line
of credit, was approximately $1.4 million. The Company believed that the
amount that should have been made available under the terms of the line of
credit was substantially higher and on April 26, 1999, the Company and the
lender reached an agreement regarding the methodology for determining the
available borrowing base under the line of credit. Based on this methodology
the Company and the lender agreed that the available borrowing base under the
line of credit on April 26, 1999 was approximately $2.7 million. As of May
13, 1999 the loan balance under the line of credit was approximately $1.9
million and the available remaining balance was approximately $0.8 million.
Note 4. PURCHASE OF MINORITY INTEREST
Prior to January 1999, Delphi Information Systems International, Inc., a
wholly-owned subsidiary of the Company, held a fifty-four percent interest in
Complete Broking Systems Australia PTY, Ltd. Effective January 1, 1999, the
Company acquired the remaining forty-six percent interest. The Company paid
approximately $50,000 and issued 22,222 shares of the Company's common stock in
exchange for the minority interest and an agreement not to compete from the two
former shareholders. The fair market value of the consideration has been
allocated to the agreement not to compete and is being amortized over the
fifteen-month life of the agreement.
Note 5. REDEEMABLE WARRANTS
On March 31, 1999, the Company extended the expiration date to June 18, 1999,
for 1,823,500 unexercised warrants issued in connection with the May 1996
private equity placement. Each warrant may be converted to one share of common
stock at an exercise price of $7.50 per share.
8
<PAGE>
Note 6. EARNINGS PER SHARE
The computation of earnings per share (in thousands except per share data)
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
------- ------
<S> <C> <C>
Net income (loss) $(2,165) $ 302
------- ------
Common stock-weighted
average number of shares outstanding 7,859 7,395
------- ------
Common stock equivalents:
stock options (a) 5
warrants (a) 0
preferred stock (a) 10
------- ------
Total equivalents (a) 15
------- ------
Total shares of common stock
and equivalents (for
diluted EPS) 7,859 7,410
------- ------
Basic EPS $ (0.28) $ 0.04
------- ------
Diluted EPS $ (0.28) $ 0.04
------- ------
</TABLE>
(a) Common stock equivalents excluded to prevent antidilution.
9
<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 nine
months ended December 31, 1998.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999 the Company experienced negative
operating cash flow of $2,323,000. The Company funded cash used in operating
activities and investments primarily through the use of cash proceeds from the
exercise of stock warrants and employee stock options of approximately
$5,232,000 net of debt payments of $2,236,000.
The Company has limited unused sources of capital. Because the Company may
continue to incur negative operating cash flows during the year, the Company
may be required to obtain additional capital through the additional exercise
of warrants, an increased credit line, or other debt or equity offerings. The
Company is taking steps to improve cash flows through operating efficiencies
and active working capital management. The Company is considering appropriate
cost-cutting measures. In addition, the Company is considering various
approaches towards securing additional funds, but no assurance can be given
that the Company will be successful in its efforts to secure additional
funds, or that funds will be available on terms acceptable to the Company.
CASH FLOW FROM OPERATIONS - Prior to the 1998 transition period, the nine months
ended December 31, 1998 , the Company experienced significant operating losses
in each fiscal year since 1993, along with declining revenue. During this
period, the Company financed its operations through bank financing and private
placements of equity capital. To respond to these losses and declining revenue,
during fiscal 1998 and continuing during the 1998 transition period, the Company
took the following steps:
1) Changes in the senior executive management;
2) Rationalization and reallocation of the overall cost structure;
3) Implementation of programs to improve customer support;
4) Finalized development and release of the "cd" product line; and
5) Aggressive marketing of new products and services.
Despite the improved financial results during the 1998 transition period, the
Company is currently faced with liquidity concerns. During the three months
ended March 31, 1999 the Company experienced negative operating cash flow of
$2,323,000 due principally to an increase in accounts receivable of $2,706,000
and a net loss of $2,165,000, partially offset by non-cash
10
<PAGE>
depreciation and amortization expense of $835,000, and a $1,645,000 increase in
accrued payroll and deferred revenue.
The Company, in order to accelerate its penetration of the market with its new
"cd" line of products, has offered extended payment terms to certain customers.
The practice of offering extended payment terms has had a significant negative
impact on operating cash flow. As products gain additional market acceptance,
the Company plans to reduce payment terms in order to improve operating cashflow
and anticipates larger sales volumes.
COMMON STOCK WARRANTS - During the three months ended March 31, 1999, the
Company received approximately $4.9 million from the exercise of common stock
warrants. Additionally, subsequent to March 31, 1999 through May 10, 1999, the
Company received approximately $1.9 million from the exercise of common stock
warrants. These funds have been used to reduce borrowings and fund operating
expenses and accounts payable.
On March 31, 1999, the Company extended the expiration date to June 18, 1999,
for unexercised warrants issued in connection with the May 1996 private equity
placement.
As of May 10, 1999 the following common stock warrants were outstanding:
<TABLE>
<CAPTION>
Per Share
Number of Warrants Exercise Price Expiration Date
- ------------------- ------------------ -----------------
<S> <C> <C>
1,644,000 $7.50 June 1999
75,000 $17.50 December 1999
1,099,100 $7.50 January 2000
82,400 $5.00 May 2001
</TABLE>
For those warrants listed above with a per share exercise price of $7.50, the
Company may redeem the warrants at $.05 per warrant if the closing bid price for
the common stock is at or above $10.00 per share for twenty consecutive trading
days.
COMMON STOCK OPTIONS - During the three months ended March 31, 1999, The Company
received approximately $358,000 from the exercise of outstanding stock options.
As of May 10, 1999 there are outstanding vested options to purchase
approximately 228,000 shares of Common Stock at an average strike price of $4.27
per share. The majority of outstanding options have expiration dates in
excess of five years from now.
BANK LINE-OF-CREDIT - Effective January 1997, the Company established a line of
credit up to $4,000,000 subject to borrowing base limits. The agreement provides
for minimum monthly interest at the prime lending rate plus two and one-half
percent (2.5%) on the greater of the actual amount outstanding or $1,600,000.
Borrowings under the agreement are secured by substantially all of the Company's
assets. The agreement includes certain covenants including the maintenance of a
minimum net worth of $2,000,000 and restrictions upon certain activities by
11
<PAGE>
the Company without the approval of the lender including the incurrence of
senior debt, certain mergers or acquisitions, and the payment of dividends.
As previously disclosed, at December 31, 1998 the Company was in technical
default under certain provisions of the line of credit. The Company obtained
waivers of the default through March 31, 1999. Subsequent to March 31, 1999,
the Company remains in violation of a certain covenant under the line of
credit limiting the age of accounts payable. Provided that the disclosure of
this technical default does not constitute an admission regarding the
materiality of the default.
In December 1997, March 1998, and September 1998 the Company executed amendments
to the line of credit agreement. The amendments extend the maturity date of the
agreement two years to January 31, 2001, alter the provisions of the early
termination fee, and modify the criteria for determining the amount available
under the line. In accordance with the amendments, from January 1999 through
March 1999, the Company may borrow up to two times average monthly collections;
and subsequently up to the sum of one times average monthly collections from
recurring maintenance revenue and seventy-five percent of eligible
non-maintenance receivables (as defined).
As of March 31, 1999 and through April 25, 1999, the total amount that the
lender made available, and that the Company was borrowing under the bank line
of credit, was approximately $1.4 million. The Company believed that the
amount that should have been made available under the terms of the line of
credit was substantially higher and on April 26, 1999, the Company and the
lender reached an agreement regarding the methodology for determining the
available borrowing base under the line of credit. Based on this methodology
the Company and the lender agreed that the available borrowing base under the
line of credit on April 26, 1999 was approximately $2.7 million. As of May
13, 1999 the loan balance under the line of credit was approximately $1.9
million and the available remaining balance was approximately $0.8 million.
The bank line of credit may be unable to support the Company's current level of
activity without other sources of liquidity. In the event the Company's existing
sources of liquidity are inadequate to support the Company's current level of
activity, management will endeavor to secure additional sources of liquidity.
These sources may include additional debt or equity. The Company may consider
transactions which are dilutive. Dilutive transactions may require the approval
of existing shareholders.
The Company aggressively markets its products and services and dedicates
substantial resources to the improvement of existing products and new product
development. In the event existing sources of liquidity are inadequate to
support the Company's current level of activity, and additional sources of
liquidity are unavailable to the Company on a timely basis with satisfactory
terms, the Company may elect to curtail activity. Management believes the
Company may be operated successfully at a reduced level of activity.
PURCHASE OF MINORITY INTEREST - Prior to January 1999, Delphi Information
Systems International, Inc., a wholly owned subsidiary of the Company, held a
fifty-four percent interest in Complete Broking Systems Australia PTY, Ltd.
Effective January 1, 1999, the Company acquired the remaining forty-six
percent interest. The Company paid approximately $50,000 and issued 22,222
shares of the Company's common stock in exchange for the minority interest
and an agreement not to compete from the two former shareholders. The fair
market value of the consideration has been allocated to the agreement not to
compete and is being amortized over the fifteen-month life of the agreement.
12
<PAGE>
REVERSE STOCK SPLIT - 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. All share and per share information in these
financial statements have been adjusted accordingly.
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 the Company does not have evidence
of the fair value of all elements in a multiple-element arrangement, all revenue
from the arrangement is deferred until such evidence exists or all elements are
delivered. Further, the SOP limits the recognition of revenue for contracts with
extended payment terms.
In March 1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" and in December 1998,
issued SOP 98-9, "Modification of SOP 97-2, Software Recognition, With Respect
to Certain Transactions". For fiscal years beginning on or before March 15,
1999, SOP 98-4 and 98-9 defer the application of certain passages in SOP 97-2
which limit what is considered evidence of fair value of various elements of
multiple element arrangements. Additionally, for transactions entered into in
fiscal years beginning after March 15, 1999, SOP 98-9 provides for revenue
recognition for certain software arrangements involving multiple elements where
vendor specific evidence does not exist for delivered elements. Management is in
the process of reviewing SOP 98-9 to determine its impact, if any, on the
Company.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivation
Instruments and Hedging Activities", which addresses the accounting for
derivative instruments. SFAS No. 133 is effective for financial statements for
the Company's fiscal year beginning January 1, 2000. The Company does not expect
that SFAS No. 133 will have a significant effect on its current financial
reporting.
EURO CONVERSION - Effective January 1, 1999, eleven of the fifteen member
countries of the European Union (the "participating countries") have agreed
to adopt a new common legal currency (the "euro"). The participating
countries established fixed conversion rates between their existing sovereign
currencies (the "legacy currencies") and the euro. Following the introduction
of the euro, the legacy currencies will 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
13
<PAGE>
or the participating country's legacy currency on a "no compulsion, no
prohibition" basis. Conversion rates will no longer be computed directly from
one legacy currency to another but rather will utilize a "triangulation"
method specified by European Union regulations whereby payments made in a
legacy currency are converted to the euro and subsequently converted to the
recipient's desired legacy currency. Beginning January 1, 2002, the
participating countries will issue new euro-denominated bills and coins for
use in cash transactions. No later than July 1, 2002, the participating
countries will withdraw all bills and coins denominated in legacy currencies
such that legacy currencies will no longer be legal tender for any
transactions, completing the euro conversion.
The Company currently has no bank accounts denominated in any legacy currency
and has not entered into any material transactions denominated in any legacy
currency. The Company has produced enhancements to certain software products
marketed in Europe to accommodate the euro conversion process (the "euro
module"). The cost to develop the euro module was not material and will be
provided at minimal cost to existing customers. Management believes the euro
module allows for the continued marketing and sale of the Company's products to
customers requiring euro conversion capabilities.
YEAR 2000 COMPLIANCE -The Year 2000 issue is the result of computer programs
being written using two digits rather than four digits to define the applicable
year. Any of the Company's internal use computer programs and its software
products that are date sensitive may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, the inability to process transactions or engage in normal business
activities.
The Company has developed and continues to monitor 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.
14
<PAGE>
Internal-Use Software - The Company plans to address and resolve the Year
2000 issue with respect to internal financial and operational systems, such
as general ledger, order management, accounts payable, billing, accounts
receivable, fixed assets, time reporting and project management, by replacing
substantially all of such internal-use systems with vendor-certified, Year
2000-compliant software systems that offer enhanced features and
functionality relative to the Company's existing internal-use software
systems. The Company has purchased a Year 2000-compliant system and started
the initial implementation process in March 1999 and expects the system to be
operational during the third quarter of 1999. The out-of-pocket software,
hardware and personnel cost estimates associated with this replacement system
and requisite modifications to the Company's network infrastructure range
from $500,000 to $750,000. The Company has entered a financing agreement with
a third-party leasing company to finance the software cost of $225,000. Other
implementation consulting services of approximately $265,000 will be paid on
a monthly basis through the implementation period. Through April 30, 1999
approximately $100,000 has been incurred for implementation services.
Additional operational systems (telephone, customer service) are being
reviewed for Year 2000 compliance and will need to be replaced at an expected
cost of approximately $400,000, and the Company is in the process of
negotiating contract terms with potential vendors.
Approximately 50% of the Company's expenses are payroll-related expenses. The
Company relies on a third party for most of its payroll processing services. The
Company has received written certification from this payroll processing vendor
that the software used in its payroll processing services is Year 2000
compliant. Payroll processing may be further impacted by the preparedness of
various financial institutions and government agencies which receive information
via electronic interface. For certain vendors of less significant products the
Company has referenced their Year 2000 compliance statements and has performed
tests internally to confirm their compliance. There can be no guarantee that
these third party products will be Year 2000 compliant.
Software Marketed to Customers - The Company has used and intends to continue
using both internal and external resources to re-program, replace and test its
proprietary software products for Year 2000 compliance. The Company anticipates
completing the Year 2000 project as soon as practical, but in any event before
any anticipated adverse impact. The total cost of this Year 2000 project is
estimated to be approximately $150,000 of which approximately $75,000 has been
spent to date. This project has been and will be funded through existing cash
resources and operating cash flows.
The Company also plans to determine the extent to which the Company's software
products are vulnerable to the failure of third party products to be Year 2000
compliant. Generally, software products provided by third parties that are
marketed directly or indirectly by the Company to its customers are developed by
leading software suppliers with Year 2000 programs in process. There can be no
guarantee, however, that third-party software products marketed by the Company
will be rendered Year 2000 compliant on a timely basis. The Company intends to
continually monitor and evaluate Year 2000 compliance through internal testing
and by obtaining written certification of Year 2000 compliance from the vendors.
If necessary, the Company will consider alternative vendors to ensure Year 2000
compliance for third-party software products marketed to its customers.
While the Company is not heavily reliant on non-IT equipment with embedded
technology, the Company will assess and evaluate such equipment as a part of its
Year 2000 efforts.
15
<PAGE>
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.
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.
RESULTS OF OPERATIONS
The Company's current product strategy is centered on a new generation of
products, collectively referred to as the "cd" product line which is comprised
of "cd.global", a modular, state of the art, agency management solution
providing flexibility and the ability to handle unstructured data and complex
risk and "cd.one", a structured system utilizing many features of the Company's
previous products as well as "ebix.link", an internet browser based product
providing electronic transmission between carriers and brokers. The Company also
has six "legacy" products including INfinity, INSIGHT, PC-ELITE, Insurnet,
SMART, and Vista. The legacy products provide basic functions such as policy
administration, claims handling, accounting, and financial reporting. Legacy
products will be maintained and supported as long as there is adequate economic
and strategic justification. Customers utilizing legacy products will continue
to be encouraged to migrate to newer products.
THREE MONTH PERIOD ENDED MARCH 31, 1999 AND 1998
The Company's revenue is derived from the licensing and sale of internally
developed and third party software ("Software") and from professional services,
maintenance services, and support services ("Service"). Professional services
include consulting, implementation, training and project management provided to
the Company's customers with installed systems and those in the process of
installing systems. Total revenue, consisting of Software revenue and Service
revenue, for the quarter ended March 31, 1999 was $5,088,000, a $741,000, or
13%, decrease compared to the same quarter of the prior year.
Software revenue of $1,500,000 for the quarter reflects an 48% increase compared
to the same quarter of the prior year. The increase is primarily attributable to
a 169% increase in revenues from the sale of the "cd" product line partially
offset by reduced sales of legacy software products.
Service revenue for the quarter was $3,588,000 in the current year versus
$4,817,000 in the prior year. The decrease is primarily due to a decrease in
support revenues associated with legacy products partially offset by an increase
in support revenues associated with the new "cd" line of products. It is
anticipated that future support revenues from the "cd" product line will
increase as systems become fully implemented due to delayed recognition of
support revenue until systems are fully implemented.
Costs of software revenue was $921,000, or 61.4 % of software revenue, in the
quarter ended March 31, 1999 compared to $664,000, or 65.6% of software revenue,
in the same quarter of the prior year. Excluding amortization of capitalized and
purchased software, costs of software
16
<PAGE>
revenue was $306,000, 20.4% of software revenue, in the current quarter as
compared to $222,000, or 21.9% of software revenue, for the same period last
year. The increase in software costs reflects the increase in software revenues.
Costs of service revenue increased to $2,617,000, 72.9% of service revenue,
for the quarter ended March 31, 1999, from $2,110,000, 43.8% of service
revenue, for the same quarter of the prior year. The increase is primarily
due to higher personnel costs due to a reorientation of professional services
to support the rollout of the new "cd" line of products.
Product development expenses for the quarter ended March 31, 1999 were
$902,000, an increase of $413,000 from the same quarter of the prior year.
Total product development expenditures including capitalized purchased
software and software development costs were $1,498,000 for the three months
ended March 31, 1999, as compared to $1,690,000 for the same period in the
prior year. The decrease in total product development expenditures is due to
the achievement of operating efficiencies due to the focus on the new "cd"
line of products.
Sales and marketing expenses for the quarter ended March 31, 1999 were $630,000,
representing a decrease of $275,000 or 30%, from the comparable quarter in the
prior year. The decrease is primarily attributable to a reduction in personnel
costs associated with the realignment of the sales force away from legacy
products to focus on the new "cd" line of products.
General and administrative expenses for the quarter ended March 31, 1999 were
$2,021,000, versus $1,288,000 in the comparable quarter in the prior year. The
increase is primarily due to higher expenditures for legal and audit fees, costs
associated with the opening of the London, Singapore, and Atlanta offices, and
improved employee benefits.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION
REFORM ACT OF 1995 - This Quarterly Report on Form 10-Q contains various
forward-looking statements and information that are based on management's
beliefs as well as assumptions made by and information currently available to
management, including statements regarding future economic performance and
financial condition, liquidity and capital resources, acceptance of the
Company's products by the market and management's plans and objectives. Such
statements are subject to various risks and uncertainties which could cause
actual results to vary materially from those stated. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
expected or projected. Such risks and uncertainties include the Company's
ability to overcome its recent history of operating losses and declining
revenues, the need for and the availability and amount of future sources of
capital, the risks associated with future acquisitions, the Company's ability to
continue to develop new products to effectively address market needs in an
industry characterized by rapid technological change, the Company's dependence
on the insurance industry (and in particular independent agents), the highly
competitive and rapidly changing automation systems market, the Company's
ability to effectively protect its applications software and other proprietary
information, the Company's ability to attract and retain quality management, and
software, technical sales and other personnel. Certain of these as well as other
risks and uncertainties are described in more detail in the Company's
Registration statement on Form S-3 filed under the Securities Act of 1933,
Registration No. 333-12781, and the
17
<PAGE>
Company's periodic filings pursuant to the Securities Exchange Act of 1934.
The Company undertakes no obligation to update any such factors or to
publicly announce the results of any of the forward-looking statements
contained herein to reflect future events or developments.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
first quarter ended March 31, 1999. For additional information on market risk,
refer to the "Quantitative and Qualitative Disclosures About Market Risk"
section of the Company's Annual Report on Form 10-K dated December 31, 1998.
Part II - OTHER INFORMATION
Item 3. DEFAULT UPON SENIOR SECURITIES
As previously disclosed, at December 31, 1998 the Company was in technical
default under certain provisions of the line of credit. The Company obtained
waivers of the default through March 31, 1999. Subsequent to March 31, 1999,
the Company remains in violation of a certain covenant under the line of
credit limiting the age of accounts payable. Provided that the disclosure of
this technical default does not constitute an admission regarding the
materiality of the default.
Item 5. OTHER INFORMATION
The Company is currently in discussions with Edward J. O'Connell, Senior
Vice-President and Chief Financial Officer, regarding his separation from the
Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See exhibit index.
(b) Reports on Form 8-K
Form 8-K filed May 16, 1999 regarding a change in auditors.
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: May 21, 1999 By /s/ Max Seybold
--------------------------------------------
Max Seybold
President, Chief
Executive Officer and Acting
Principal Financial Officer
18
<PAGE>
EXHIBIT INDEX
----------------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------ -----------------------------------------------
<S> <C>
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,081
<SECURITIES> 0
<RECEIVABLES> 9,084
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,536
<PP&E> 10,039
<DEPRECIATION> 8,183
<TOTAL-ASSETS> 19,219
<CURRENT-LIABILITIES> 9,589
<BONDS> 0
0
49
<COMMON> 814
<OTHER-SE> 8,528
<TOTAL-LIABILITY-AND-EQUITY> 19,219
<SALES> 5,088
<TOTAL-REVENUES> 5,088
<CGS> 3,538
<TOTAL-COSTS> 3,538
<OTHER-EXPENSES> 3,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> (2,158)
<INCOME-TAX> 7
<INCOME-CONTINUING> (2,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,165)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
