<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
COMMISSION FILE NUMBER 0-13226
SULCUS COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1369276
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
SULCUS CENTRE, 41 NORTH MAIN STREET, GREENSBURG, PA 15601
(Address of principal executive offices, including zip code)
(412) 836-2000
(Registrant's Telephone Number, including area code)
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. Yes X No
--------- ---------
As of November 8, 1995, there were 14,227,629 shares of Common Stock, no par
value, outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets
September 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations
Three Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . 6
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 8-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
<PAGE> 3
SULCUS COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1995 1994
----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 885,371 $ 1,933,895
Short-term investments (at market) 12,908,635 10,324,740
Restricted cash ---- 500,000
Accounts receivable, net of allowance of $2,501,146
and $2,597,088 in 1995 and 1994, respectively 7,683,033 11,639,243
Inventories 2,587,514 2,393,563
Deferred taxes 568,153 758,472
Net investments in sales-type leases 149,885 171,098
Other 589,158 1,159,142
----------- -----------
Total current assets 25,371,749 28,880,153
Purchased and capitalized software,
net of accumulated amortization 5,789,904 6,790,945
Property and equipment, net of accumulated depreciation 1,991,867 2,301,263
Goodwill, net of accumulated amortization 7,208,543 7,726,119
Deferred taxes 1,531,600 1,341,281
Net investments in sales-type leases 482,540 504,005
Other assets 187,801 325,717
----------- -----------
Total Assets $42,564,004 $47,869,483
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short term borrowings $ 6,196,789 $ 6,182,995
Current portion of long-term debt 63,087 468,990
Accounts payable 3,841,053 5,836,482
Shareholder litigation liability 282,759 439,780
Deferred revenues 3,766,990 6,922,281
Customer deposits 1,132,307 1,896,886
Other accrued liabilities 2,013,323 2,949,837
----------- -----------
Total current liabilities 17,296,308 24,697,251
Long-term debt, net of current portion 41,875 85,536
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 30,700,000 shares
authorized (14,225,320 and 14,417,744 shares
issued in 1995 and 1994, respectively) 37,225,156 37,081,413
Note receivable from stockholder (500,000) (500,000)
Retained earnings (deficit) (11,575,206) (13,378,756)
Foreign currency adjustment (47,140) (115,961)
Cumulative unrealized gain on investments available for sale 123,011 ----
----------- -----------
Total Stockholders' Equity 25,225,821 23,086,696
----------- -----------
Total Liabilities and Stockholders' Equity $42,564,004 $47,869,483
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE> 4
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net revenue:
System sales $20,178,554 $18,603,192
Support revenue 12,544,202 12,333,775
Interest income and other 938,431 974,686
----------- -----------
Total revenue 33,661,187 31,911,653
----------- -----------
Cost of goods sold and services provided:
Systems 10,477,458 10,926,122
Support services 3,462,635 3,582,066
----------- -----------
Total cost of sales and services provided 13,940,093 14,508,188
Expenses:
Selling, general, and administrative 16,843,723 16,926,778
Research and development (net of capitalized
software of $756,273 and $1,213,767 during the
nine months ended September 30, 1995 and 1994,
respectively) 938,367 1,288,548
Interest 421,342 399,185
Depreciation and amortization 1,176,117 1,525,824
Unrealized (gain) loss on investments (1,462,005) 1,126,581
----------- -----------
Total expenses 17,917,544 21,266,916
----------- -----------
1,803,550 (3,863,451)
Unusual items:
Write-off of assets ---- 1,820,243
Provision for litigation settlement ---- 125,000
----------- -----------
Total unusual items ---- 1,945,243
----------- -----------
Income (loss) before income taxes 1,803,550 (5,808,694)
Income taxes ---- ----
----------- -----------
Net income (loss) $ 1,803,550 ($5,808,694)
=========== ===========
Income (loss) per common share:
Net income (loss) $0.12 ($0.41)
===== ======
Weighted average number of common shares 14,741,019 14,224,659
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE> 5
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Net revenue:
System sales $ 6,587,655 $ 5,874,530
Support revenue 4,264,169 4,196,168
Interest income and other 345,672 328,329
----------- ------------
Total revenue 11,197,496 10,399,027
----------- ------------
Cost of goods sold and services provided:
Systems 3,641,158 3,615,802
Support services 1,290,341 1,294,927
----------- ------------
Total cost of sales and services provided 4,931,499 4,910,729
Expenses:
Selling, general, and administrative 5,443,487 5,452,477
Research and development (net of capitalized
software of $260,140 and $330,667 during the
three months ended September 30, 1995 and 1994,
respectively) 291,374 408,325
Interest 136,178 140,061
Depreciation and amortization 322,250 384,731
Unrealized (gain) loss on investments ---- 23,312
----------- ------------
Total expenses 6,193,289 6,408,906
----------- ------------
72,708 (920,608)
Unusual items:
Write-off of assets ---- 1,820,243
Provision for litigation settlement ---- 125,000
----------- ------------
Total unusual items ---- 1,945,243
----------- ------------
Income (loss) before income taxes 72,708 (2,865,,851)
Income taxes ---- ----
----------- ------------
Net income (loss) $ 72,708 ($ 2,865,851)
=========== ============
Income (loss) per common share:
Net income (loss) $0.00 ($0.20)
===== ======
Weighted average number of common shares 14,836,634 13,992,324
=========== ============
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE> 6
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 1,803,550 ($5,808,694)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 657,851 804,325
Amortization of capitalized software 1,771,430 1,888,063
Amortization of goodwill 518,266 721,499
Provision for doubtful accounts 364,694 395,147
Inventory obsolescence ---- 45,256
Loss on write-offs of assets ---- 1,820,243
Unrealized and realized (gain) loss on investments (1,648,383) 1,126,581
(Purchases) sales of short-term investments (812,501) 1,420,710
Change in assets and liabilities:
Restricted cash 500,000 ----
Accounts receivable 3,591,516 3,095,211
Insurance receivable ---- 900,000
Inventory (193,951) (557,319)
Other current assets 569,986 (84,993)
Other assets 137,916 190,355
Accounts payable (1,995,429) (561,173)
Deferred revenues (3,155,291) (3,722,759)
Shareholder litigation (157,021) (601,074)
Customer deposits (764,579) 753,519
Accrued liabilities (835,619) (10,674)
----------- -----------
Total adjustments (1,451,115) 7,622,917
----------- -----------
Net cash provided by (used in) operating activities 352,435 1,814,223
Cash flows from investing activities:
Investment in sales-type leases (215,713) ----
Payments received on sales-type leases 172,607 238,999
Capital expenditures (277,478) (754,350)
Capitalization of software development
and purchased software (756,273) (1,213,767)
----------- -----------
Net cash provided by (used in) investing activities (1,076,857) (1,729,118)
----------- -----------
Cash flows from financing activities:
Short term borrowings 13,974 230,971
Principal payments on long-term debt (483,564) (647,276)
Proceeds from stock options exercised 42,847 188,494
Proceeds from notes payable 34,000 ----
----------- -----------
Net cash used in financing activities (392,923) (227,811)
----------- -----------
Cumulative translation adjustment 68,821 64,681
----------- -----------
Net decrease in cash
and cash equivalents (1,048,524) (78,025)
Cash equivalents at beginning of period 1,933,895 1,210,822
----------- -----------
Cash equivalents at end of period $ 885,371 $ 1,132,797
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE> 7
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Cumulative
Unrealized
Gain on Note
Retained Foreign Investments Receivable Stock-
Common Earnings Currency Available From holders'
Stock (Deficit) Adjustment For Sale Stockholder Equity
----------- ------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $37,081,413 ($13,378,756) ($115,961) $0 ($500,000) $23,086,696
Stock options exercised 42,847 ---- ---- ---- ---- 42,847
Cumulative unrealized gain on
investments available for sale ---- ---- ---- 123,011 ---- 123,011
Issuance of stock as settlement of
previously recorded liabilities 95,396 ---- ---- ---- ---- 95,396
Issuance of stock to consultants 5,500 ---- ---- ---- 5,500
Cumulative translation adjustment ---- ---- 68,821 ---- ---- 68,821
Net income ---- 1,803,550 ---- ---- ---- 1,803,550
----------- ------------ --------- -------- --------- -----------
Balance, September 30, 1995 $37,225,156 ($11,575,206) ($ 47,140) $123,011 ($500,000) $25,225,821
=========== ============ ========= ======== ========= ===========
</TABLE>
See notes to the consolidated financial statements.
7
<PAGE> 8
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sulcus
Computer Corporation and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments in
50% or less owned affiliates over which the Company has the ability to exercise
significant influence are accounted for using the equity method.
The accompanying unaudited interim consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods presented. These financial statements have been prepared
in accordance with both generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
These financial statements should be read in conjunction with the
Company's annual audited financial statements for the year ended December 31,
1994, as filed with the Securities and Exchange Commission on Form 10-K.
NOTE 2. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION AND PRIOR RESTATEMENT
OF FINANCIAL STATEMENTS
On March 2, 1993, the Securities and Exchange Commission entered a
formal order directing a private investigation into the Company and present and
former directors, officers and employees for possible violations of the Federal
securities laws in connection with disclosures contained in the Company's
public announcements, public reports and financial statements, trading issues
related to the Company's securities, and internal and accounting controls. The
Company is cooperating with the Securities and Exchange Commission in the
investigation. In response to views expressed by the Securities and Exchange
Commission's staff, the Company reviewed its practices with respect to
accounting for costs and revenue associated with various acquisition
transactions in 1992 and the adoption of SFAS 109 relating to accounting for
income taxes. As a result of this review, the Company restated its financial
statements for the years ended December 31, 1992 and 1991 and included such
restated financial statements in its 1993 Annual Report on Form 10-K.
NOTE 3. LEGAL PROCEEDINGS AND LITIGATION SETTLEMENT
In April 1994, various individual Sulcus shareholders filed 12
lawsuits in the U.S. District Court for the Western District of Pennsylvania
asserting federal securities fraud claims against Sulcus and certain of its
officers and directors, and in seven of these suits, against its then auditors.
The claims followed the issuance of a press release by Sulcus on April 6, 1994,
announcing among other things, the existence of the investigation by the SEC
described above, an anticipated net loss for 1993, and an intent to restate its
Consolidated Financial Statements for the year ended December 31, 1992 which
was subsequently done. These
8
<PAGE> 9
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
lawsuits have been consolidated under the caption "IN RE: Sulcus Computer
Corporation Securities Litigation, II."
Among the principal allegations contained in the complaint are the
following: the Defendants made materially false and misleading positive public
representations, which were included in the Company's quarterly reports, press
releases and other documents regarding Sulcus and its operations, management,
finances, assets, earnings and future business prospects; that these
representations included misrepresentation of Sulcus's financial condition;
that Sulcus's financial statements during the class period (October 22, 1992
through April 6, 1994, inclusive) were false and misleading in that they did
not comply with generally accepted accounting principles and that
revenue was improperly recognized; that the aforesaid acts and practices,
misleading statements and omissions adversely affected the integrity of the
market for Sulcus common stock and artificially inflated or maintained the
price of Sulcus common stock; and while Sulcus officials were issuing favorable
statements about Sulcus's business prospects and financial condition, a
director of the Company sold shares of common stock at the artificially
inflated prices. The Complaint seeks unspecified damages for the decline in
the value of the Company's stock together with Plaintiff's costs and expenses.
The complaint also alleges that the Defendants violated Section 10(b)
of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10(b)-5
promulgated thereunder and that the individual Defendants violated Section 20
of the Exchange Act and also includes charges of negligent misrepresentation
and common law fraud. The Plaintiffs voluntarily dismissed without prejudice
all directors except Mr. Jeffrey Ratner, and also voluntarily dismissed without
prejudice its then auditors. Because the complaint is in its discovery stages,
Sulcus is unable to assess the outcome of these claims. The Company believes
that it has insurance coverage which it anticipates will reduce the impact, if
any, on the Company. The Company believes that it will incur costs of $250,000
defending this action which will not be covered by insurance. Therefore, a
provision of $250,000 was recorded for these costs. However, should the
Company be unsuccessful in defending these lawsuits or should insurance
coverage be unavailable or inadequate and should the ultimate outcome be
comparable to the Company's previous class action lawsuit (discussed in the
following paragraph), it would have an adverse impact on the Company's
operating results, financial position and liquidity.
In 1992 Sulcus and certain of its officers, directors and a former
director were named as defendants in six class action Complaints designated by
the Court as IN RE: Sulcus Computer Corporation Securities Litigation. In
December 1993, the parties entered into a settlement agreement which
established a settlement fund of $600,000 in cash and Sulcus Common Shares with
a value of $1,625,000. The Company has also agreed to pay up to $75,000 of
expenses for administering the settlement. The cash portion of the settlement
was covered entirely by insurance. On September 16, 1994, the court formally
approved the settlement agreement and the number of shares to be issued
(530,612 shares), effective October 16, 1994. The Company issued these shares
in January 1995 as part of the settlement agreement and has reflected these
shares as issued and outstanding as of December 31, 1994.
Sulcus and Jeffrey S. Ratner are defendants in an action filed in
June, 1994, in the Superior Court of Fulton County of the State of Georgia by
Raymond D. Schoenbaum, Theodore J. Munchak, and Nathan I. Lipson. Plaintiff
has alleged that Sulcus and Mr. Ratner made fraudulent misrepresentations and
that Sulcus and Mr. Ratner have breached the Stock Purchase Agreement entered
into between Sulcus and Squirrel Companies, Inc., in March 1992, by failing to
make certain payments of stock. The plaintiffs seek damages of $5,000,000.
Counsel for Sulcus and Mr. Ratner removed the case to Federal District Court in
Atlanta, Georgia. While Defendant's Motion to Dismiss was granted as to the
contract claim against Mr. Ratner and
9
<PAGE> 10
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
was denied as to all other counts, it is the opinion of management and counsel
that the lawsuit is without merit and can be successfully defended based on the
fact that Sulcus and Mr. Ratner deny that they failed to timely tender stock
and in fact that Sulcus tendered the appropriate amount of stock, which was
refused by Counsel for the Plaintiffs.
Other suits arising in the ordinary course of business are pending
against the company and its subsidiaries. The Company cannot predict the
ultimate outcome of these actions or the ones above-described but believes
these other suits will not result in a material adverse effect on the Company's
consolidated financial position.
Pursuant to Sulcus By-Laws, Sulcus has agreed to indemnify its
officers and directors and certain other defendants under certain circumstances
against claims arising from the lawsuits. Sulcus may be obligated to indemnify
certain of its officers, directors, and employees for the costs they may incur
as a result of the lawsuits.
NOTE 4. INCOME TAXES
In the nine months ended September 30, 1995 the Company reflected no
provision for income taxes on pre-tax profits of $1,803,550. This is based
upon the expense at statutory rates being offset by the reduction of valuation
allowances related to deferred tax assets, including tax loss carryforwards,
pursuant to SFAS 109.
For the nine months ended September 30, 1994, the Company did not
record a tax benefit related to its pre-tax loss of $5,808,694, as it increased
the valuation reserves related to deferred tax assets equal to the increase in
tax assets.
At September 30, 1995 and December 31, 1994, the Company had net
deferred tax assets, liabilities and valuation reserves as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets (net of deferred tax
liabilities), including tax loss carryforwards $10,476,483 $13,158,362
Valuation allowance ( 8,376,730) (11,058,609)
------------ ------------
Net deferred tax amounts $ 2,099,753 $ 2,099,753
============ ============
</TABLE>
NOTE 5. SHORT-TERM INVESTMENTS
During the second quarter of 1995, the Company restructured its
investments in short-term marketable securities and changed its investment
philosophy to one of holding securities for the generation primarily of
dividend and interest income. As a result, investments and changes in the
market value of the investments arising subsequent to this change (June 5,
1995) will be accounted for as "Available for Sale". This accounting treatment
will mean that investments are carried at market value with unrealized gains
and losses on investments treated as a component of Stockholders' Equity.
Until June 5, 1995, unrealized gains and losses on investments were treated as
a component of the income statement.
10
<PAGE> 11
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 6. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is determined by dividing net
earnings (loss) by the weighted number of common shares outstanding. When
dilutive, common stock options are included in the computation. Fully diluted
net income (loss) per share is not presented as it is either anti-dilutive or
not different from primary earnings (loss) per share.
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AS COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1994
For the quarter ended September 30, 1995, the Company reported net income of
$72,708 as compared to a net loss of ($2,865,851) for the quarter ended
September 30, 1994. For the quarter ended September 30, 1995, the Company
recognized increased sales and gross margins over those reported in the same
period of 1994. Additionally, the 1994 results included a write-off of assets
($1,820,243) and provision for litigation settlement ($125,000) which are not
components of net income in 1995.
Net sales for the quarter ended September 30, 1995 were $10,851,824,
representing an increase of $781,126 or 8% when compared to net sales of
$10,070,698 for the same period of 1994. Net sales of the Real
Estate/Hospitality Group were $10,402,597, representing an increase of
$569,674, or 6%, for the quarter ended September 30, 1995, as compared to
$9,832,923 for the same period of 1994. Net sales of the Legal Group were
$447,787, an increase of $210,012, or 88%, for the quarter ended September 30,
1995, as compared to the same period of 1994.
Net system sales for the quarter ended September 30, 1995 were $6,587,655 as
compared to $5,874,530 for the same period of 1994, an increase of $713,125 or
12% due primarily to increased sales by the Company's Australian and Singapore
subsidiaries in its Real Estate/Hospitality Group and increases in its Legal
Group. These increases were somewhat offset by decreases in sales by the
Company's European and Hong Kong offices.
Support revenues for the quarter ended September 30, 1995 were $4,264,169 as
compared to $4,196,168 for the same period of 1994, an increase of $68,001 or
2% due primarily to an increased base of Property Management and Squirrel
installations.
Sales by offices and distributors of the Company were $8,852,240 (82%) and
$1,999,584 (18%), respectively, of net sales for the quarter ended September
30, 1995 as compared to $7,529,635 (75%) and $2,541,063 (25%) for the
comparable 1994 period.
Cost of goods sold for the quarter ended September 30, 1995 increased to
$4,931,499 from $4,910,729, an increase of $20,770 over the comparable 1994
period. As a consequence, cost of goods sold as a percentage of net sales
improved for the quarter ended September 30, 1995 to 45%, as compared to 49%
for the same period of 1994. As a result, gross margin of the Company
increased to $5,920,325 from $5,159,969, an increase of $760,356 or 15% over
the quarter ended September 30, 1994.
Cost of system sales for the quarter ended September 30, 1995 was $3,641,158
(55% of system sales) as compared to $3,615,802 (62% of system sales) for the
same period of 1994, an increase of $25,356 or 1%, due primarily to lower
hardware component costs related to Lodgistix systems and reduced software
amortization.
Cost of support for the quarter ended September 30, 1995 was $1,290,341 (30%
of support revenues) as compared to $1,294,927 (31% of support revenues) for
the same period of 1994, a decrease of $4,586, primarily as the result of
internal efforts to reduce these costs.
12
<PAGE> 13
Selling, general, and administrative expenses remained relatively constant in
1995 when compared to 1994. For the quarter ended September 30, 1995, these
expenses were $5,443,487 as compared to $5,452,477 a decrease of $8,990 over
the same period of 1994. Selling, general, and administrative expenses as a
percentage of net sales decreased to 50% for the quarter ended September 30,
1995, a 4 percentage point decrease from the quarter ended September 30, 1994.
Research and development expense for the quarter ended September 30,
1995 decreased to $291,374 from $408,325, a decrease of $116,951, or 29%, as
compared to the quarter ended September 30, 1994. Total amounts expended on
research and development (including amounts expensed and amounts capitalized)
was $551,514 and $738,992 for the three months ended September 30, 1995 and
1994, respectively. Management believes that these reduced expenditures do not
negatively impact the Company's competitive position in the marketplace.
Depreciation and amortization expense for the quarter ended September
30, 1995 decreased to $322,250 from $384,731 for the same period of 1994, a
decrease of $62,481 due primarily to the write-off in the fourth quarter of
1994 of certain goodwill associated with the Company's Hong Kong and Singapore
subsidiaries offset in part by increases in depreciation expense.
Interest income for the quarter ended September 30, 1995 was $345,672
as compared to $328,329 for the same period of 1994, a increase of $17,343 or
5%, due primarily to higher average invested balances.
Interest expense for the quarter ended September 30, 1995 decreased to
$136,178 from $140,061 for the same period of 1994, a decrease of $3,883 or 3%
due to lower outstanding borrowings.
The Company conducts its worldwide operations through separate
geographic area organizations which represent major markets or combinations of
related markets.
Financial information by geographic area for quarters ended September
30, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
Net revenues(1):
<S> <C> <C>
United States $ 7,393,272 $ 7,470,593
Canada 763,403 520,100
Hong Kong 91,564 240,061
Singapore 924,362 353,534
Australia 752,879 432,631
Europe 1,272,016 1,382,108
----------- -----------
Consolidated net revenues $11,197,496 $10,399,027
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net income (loss):
United States $281,604 ($2,558,579)
Canada (48,247) 7,812
Hong Kong (112,740) (210,847)
Singapore (113,636) (65,332)
Australia 56,261 (14,702)
Europe 9,466 (24,203)
-------- ------------
Consolidated net income (loss) $ 72,708 ($2,865,851)
======== ============
<FN>
(1) Sales between geographic areas are not material.
</TABLE>
13
<PAGE> 14
The significant improvement in U.S. operations in 1995 as compared to
1994 can be attributed to the profitability of the Squirrel and Property
Management product lines and reduced losses in the Company's Legal Group as
well as the 1994 write-off of assets and provision for litigation.
The loss in Hong Kong declined due primarily to a reduction in
selling, general and administrative expenses which exceeded the reduction in
sales and margins.
The operating loss in Singapore widened in 1995 due to reduced margins
and increased selling, general and administrative expenses.
The Australian results improved due to an increase in sales and
margins.
The European results improved due to improved margins and reduced
selling, general and administrative expenses.
The Company had a net deferred tax asset amounting to $2,099,753, net
of valuation allowances of $8,376,730 at September 30, 1995 and $11,058,609 at
December 31, 1994. The valuation allowance was decreased in the three months
ended September 30, 1995 by $1,648,556 and increased in the three months ended
September 30, 1994 by $806,452 reflecting the Company's estimate of the
valuation allowance necessary to reduce the net deferred tax asset to the net
amount recordable under Financial Accounting Standard No. 109. As a result,
the income statements for the quarters ended September 30, 1995 and 1994 do not
reflect any income tax provision or benefit on the pre-tax operating results
recorded in those periods. As more fully discussed in the nine months
evaluation of operations herein, the realizability of this deferred tax asset
is contingent upon a number of factors including the ability of the Company to
attain a level of operations that will generate taxable income.
NINE MONTHS ENDED SEPTEMBER 30, 1995 AS COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1994
For the nine months ended September 30, 1995, the Company reported net
income of $1,803,550 as compared to a net loss of ($5,808,694) for the nine
months ended September 30, 1994. For the nine months ended September 30, 1995,
the Company recognized an increase in gross margins of $2,353,884 and a
decrease in net operating expenses of $760,786. Additionally, the 1994 results
included a write-off of assets ($1,820,243) and provision for litigation
settlement ($125,000) which are not a component of net income in 1995.
Finally, the Company recognized a $2,588,586 turnaround in the performance of
its investment portfolio (from an unrealized loss of $1,126,581 in 1994 to an
unrealized gain of $1,462,005 in 1995).
Net sales for the nine months ended September 30, 1995 were
$32,722,756 representing an increase of $1,785,789 or 6% when compared to net
sales of $30,936,967 for the same period of 1994. Net sales of the Real
Estate/Hospitality Group increased to $31,617,608 from $30,220,214 an increase
of $1,397,394, or 5%, for the nine months ended September 30, 1995, as compared
to the same period of 1994. Net sales of the Legal Group increased to
$1,033,443 from $716,753, an increase of $316,690, or 44%, for the nine months
ended September 30, 1995 as compared to the same period of 1994.
Net system sales for the nine months ended September 30, 1995 were
$20,178,554 as compared to $18,603,192 for the same period of 1994, an increase
of $1,575,362 or 8% due primarily to increased sales of Squirrel POS systems.
14
<PAGE> 15
Support revenues for the nine months ended September 30, 1995 were
$12,544,202 as compared to $12,333,775 for the same period of 1994, an increase
of $210,427 or 2% due primarily to an increased base of Squirrel installations.
Sales by offices and distributors of the Company were $25,978,033
(79%) and $6,744,723 (21%), respectively, of net sales for the nine months
ended September 30, 1995 as compared to $23,563,325 (76%) and $7,373,642 (24%)
for the comparable 1994 period.
Cost of goods sold for the nine months ended September 30, 1995
decreased to $13,940,093 from $14,508,188, a decrease of $568,095, or 4%, from
the comparable 1994 period. As a consequence, cost of goods sold as a
percentage of net sales decreased for the nine months ended September 30, 1995
to 43%, as compared to 47% for the same period of 1994. As a result, gross
margin of the Company increased to $18,782,663 from $16,428,779 an increase of
$2,353,884 or 14% over the nine months ended September 30, 1994.
Cost of system sales for the nine months ended September 30, 1995 was
$10,477,458 (52% of system sales) as compared to $10,926,122 (59% of system
sales) for the same period of 1994, a decrease of $448,664 or 4%, due primarily
to lower hardware component costs related to Squirrel and Lodgistix systems and
reduced software amortization.
Cost of support for the nine months ended September 30, 1995 was
$3,462,635 (28% of support revenues) as compared to $3,582,066 (29% of support
revenues) for the same period of 1994, a decrease of $119,431 or 3%, primarily
as the result of internal efforts to reduce these costs.
Selling, general, and administrative expenses remained relatively
constant in 1995 when compared to 1994. For the nine months ended September
30, 1995, these expenses were $16,843,723 compared to $16,926,778 a decrease of
$83,055 over the same period of 1994. Selling, general, and administrative
expenses as a percentage of net sales decreased to 51% for the nine months
ending September 30, 1995, a 4 percentage point decrease from the nine months
ending September 30, 1994.
Research and development expense for the nine months ended September
30, 1995 decreased to $938,367 from $1,288,548, a decrease of $350,181, or 27%,
as compared to the nine months ended September 30, 1994. Total amounts
expended on research and development (including amounts expensed and amounts
capitalized) was $1,694,640 and $2,502,315 for the nine months ended September
30, 1995 and 1994, respectively. Management believes that these reduced
expenses do not negatively impact the Company's competitive position in the
marketplace.
Depreciation and amortization expense for the nine months ended
September 30, 1995 decreased to $1,176,117 from $1,525,824 for the same period
of 1994, a decrease of $349,707 due primarily to the write-off in the fourth
quarter of 1994 of certain goodwill associated with the Company's Hong Kong and
Singapore subsidiaries.
Interest income for the nine months ended September 30, 1995 was
$938,431 as compared to $974,686 for the same period of 1994, a decrease of
$36,255 or 4%, due primarily to lower average invested balances.
Interest expense for the nine months ended September 30, 1995
increased to $421,342 from $399,185 for the same period of 1994, an increase of
$22,157 or 6% due primarily to higher interest rates.
The Company conducts its worldwide operations through separate
geographic area organizations which represent major markets or combinations of
related markets.
15
<PAGE> 16
Financial information by geographic area for nine months ended
September 30, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Net revenues(1):
United States $23,239,127 $22,382,140
Canada 2,674,814 2,248,473
Hong Kong 365,059 1,462,047
Singapore 1,522,507 911,577
Australia 2,012,926 1,033,426
Europe 3,846,754 3,873,990
----------- -----------
Consolidated net revenues $33,661,187 $31,911,653
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Net income (loss):
United States $2,714,420 ($5,072,877)
Canada 210,168 261,020
Hong Kong (463,601) (789,463)
Singapore (607,505) (134,738)
Australia 103,031 (122,599)
Europe (152,963) 49,963
----------- ----------
Consolidated net income (loss) $1,803,550 ($5,808,694)
========== ============
</TABLE>
(1) Sales between geographic areas are not material.
The significant improvement in U.S. operations in 1995 as compared to
1994 was primarily due to improved sales, margins, and operating expenses by
the Company's Property Management systems and improved sales of the Squirrel
POS systems as well as the 1994 write-offs of assets and the provision for
litigation and turnaround in the performance of the Company's investment
portfolio.
The loss in Hong Kong declined due primarily to a reduction in
selling, general and administrative expenses which exceeded the reduction in
sales and margins and a reduction in amortization of goodwill resulting from
the 1994 write-off of these assets.
The operating loss in Singapore widened in 1995 due to reduced margins
and increased selling, general and administrative expenses.
The Australian results improved due to an increase in sales and
margins.
The 1995 European loss is the result of reduced margin rates and
increased selling, general and administrative expenses.
The Company had a net deferred tax asset amounting to $2,099,753, net
of valuation allowances of $8,376,730 at September 30, 1995 and $11,058,609 at
December 31, 1994. The valuation allowance was decreased in the nine months
ended September 30, 1995 by $2,681,879 and increased in the nine months ended
September 30, 1994 by $1,903,978 reflecting the Company's estimate of the
valuation allowance necessary to reduce the net deferred tax asset to the net
amount recordable under Financial Accounting Standard No. 109. As a result,
the income statements for the nine months ended September 30, 1995 and 1994 do
not reflect any income tax provision or benefit on the pre-tax operating
results recorded in those periods. The realizability of this deferred tax
asset is contingent upon a number of factors including the ability
16
<PAGE> 17
of the Company to attain a level of operations that will generate
taxable income. Management believes that it is more likely than not that it
will generate taxable income sufficient to realize a portion of the tax
benefits associated with Net Operating Losses and tax credit carryforwards
prior to their expiration. This belief is based upon the Company's view of
expected profits in 1995 and the next several years. If the Company is unable
to generate sufficient taxable income in the future through operating results,
increases in the valuation allowance will be required through a non-cash charge
to expense. However, if the Company achieves sufficient profitability to
utilize a greater portion of the deferred tax asset, the valuation allowance
will be reduced through a non-cash credit to income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is dependent upon its ability to generate
sufficient working capital through profitable operations. Management believes
that in order to sustain profitability, it must continue to increase sales and
improve productivity related to selling, general and administrative expenses.
In order to increase sales, the Company believes that it must increase its
distribution channels, introduce additional developed or acquired products in
its current market segment and overcome customer uncertainty related to the
Company's securities litigation and reported financial results.
Current short-term capital needs will be funded primarily through
internal working capital and anticipated operating revenues from new sales,
continuing and new support services revenue, and a backlog of orders received
and pending. The Company has no significant unused lines of credit at either
September 30, 1995 or December 31, 1994. To date, bank credit lines have not
been a significant component of the Company's liquidity and capital resources.
At September 30, 1995, Sulcus' cash and cash equivalents decreased to
$885,371 from $1,933,895 at December 31, 1994, a decrease of $1,048,524, or
54%. Since the Company operates in a number of countries, cash and cash
equivalents are maintained by the various operating subsidiaries in the local
currencies of these countries for the purpose of paying expenses as they are
due. Additionally, the Company maintains a portfolio of short-term investments
which may be used for the purpose of providing liquidity. At September 30,
1995, the Company's short-term investment portfolio increased by $2,583,895, or
25%, from $10,324,740 at December 31, 1994 to $12,908,635 at September 30,
1995. This increase consisted primarily of unrealized appreciation of
$1,585,016. These investments are subject to risk, most notably the risk that
the market value of these assets will decline as the result of general market
fluctuations, increases in interest rates or changes in the underlying
operations of the investee. Company policy does not require temporary
investments to be investment grade as determined by a nationally recognized
statistical rating organization nor does it require that such investments have
any additional safety feature such as insurance. Through the first five months
of 1995, the Company maintained its investment philosophy of actively buying
and selling investments with the objective of generating profits of short-term
differences in price ("Trading"). Management sold a portion of these
investments in May and June of 1995 and invested the proceeds of these sales in
securities which will be held for the generation primarily of dividend and
interest income ("Available for Sale"). Additionally, the remaining
investments were reclassified in 1995 from Trading to Available for Sale. The
Company had borrowings at September 30, 1995, and December 31, 1994, of
$5,759,355 and $5,145,753 respectively, on margin against its investments at
the brokers internally established floating interest rate which was 8.375% at
September 30, 1995.
At September 30, 1995, accounts receivable decreased to $7,683,033, as
compared to $11,639,243 at December 31, 1994, a decrease of $3,956,210 or 34%
primarily due to collections on annual support contracts. The Company's gross
accounts receivable includes hardware and software support annual contracts as
well as amounts due on system installations which may take several months to
modify and complete. Support contracts are billed in advance for periods of up
to one year and payments are received throughout
17
<PAGE> 18
the year. As a result, approximately 47% of the Company's gross accounts
receivable is aged over 90 days at September 30, 1995, as compared to
27% at December 31, 1994. The Company provides estimates of amounts which may
ultimately be uncollectible from customers. The allowance for uncollectible
accounts remained relatively constant at September 30, 1995, decreasing
slightly from $2,597,088 at December 31, 1994, to $2,501,146 at September 30,
1995. The revenue from the support contracts is deferred and subsequently
recorded as revenue as the support contracts are fulfilled.
The Company purchases computer hardware and other equipment from
vendors under open accounts payable for the purpose of including these items in
systems sold to customers. Hardware and equipment are readily available in the
marketplace and therefore it is not necessary for the Company to maintain large
quantities of inventories to meet customer needs. Inventories increased by
$193,951 to $2,587,514 at September 30, 1995, as compared to $2,393,563 at
December 31, 1994. Accounts payable decreased by $1,995,429 from $5,836,482 at
December 31, 1994 to $3,841,053 at September 30, 1995.
The Company leases facilities under operating lease agreements of
varying terms. Properties and equipment consist primarily of leasehold
improvements and equipment used in the conduct of business. Property and
equipment, net of accumulated depreciation and amortization, decreased to
$1,991,867 at September 30, 1995 from $2,301,263 at December 31, 1994, a
decrease of $309,396.
In addition to borrowings on margin against its investments, the
Company has outstanding short and long-term borrowings from various financial
institutions. At September 30, 1995, the Company had short-term borrowings
(excluding borrowings under margin) of $437,434 as compared to $1,037,242 at
December 31, 1994, a decrease of $599,808. At September 30, 1995, the Company
had long-term borrowings (including current and noncurrent portions) of
$104,962 as compared to $554,526 at December 31, 1994, a decrease of $449,564.
The backlog of hardware and software orders at September 30, 1995 is
expected to be filled within one year and amounted to $3,429,000 at September
30, 1995 as compared to $3,263,947 at December 31, 1994.
The Company's ability to develop and expand its presence in the
hospitality industry and expand existing business lines for its other markets
depends, in a large part, on the availability of adequate funds. Management
believes that anticipated revenues from the operations together with available
capital will be sufficient to support the anticipated operating and capital
requirements of the Company for at least 12 months. Nonetheless, if
technological changes render Sulcus's products uncompetitive or obsolete, or,
if the Company incurs operating losses, it may be forced to seek additional
financing. There can be no assurance that any financing will be available when
needed, or, if available, that it can be obtained on terms satisfactory to the
Company.
The Company is the plaintiff/defendant in actions presently pending
before various courts. These actions include claims and counterclaims filed by
the Company and customers in the normal course of business. In these matters,
the Company intends to vigorously prosecute and defend its position and
believes there exists the probability for a favorable outcome on behalf of the
Company, or if not, the Company has provided for potential loss when
measurable. Should the Company be unsuccessful in defending these lawsuits, it
could have a material adverse impact on the Company's operating results,
financial position and liquidity.
18
<PAGE> 19
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A previously reported action filed in April 1994, in the United States District
Court for the Southern District of New York by First Hanover Securities, Inc.
involving a dispute over the cancellation of an option to purchase 50,000
shares of Sulcus Common Stock at $2.25 per share was settled on November 1,
1995. The action was discontinued with prejudice as to all parties and the
option was reinstated and extended until October 1, 1997.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Financial Data Schedule
(b) Reports on Form 8-K
None
20
<PAGE> 21
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.
SULCUS COMPUTER CORPORATION
DATE: November 14, 1995 BY: /s/ H. RICHARD HOWIE
-------------------- ------------------------------------------
H. Richard Howie
Chief Financial Officer
(Mr. Howie is the Principal Financial
Officer and has been duly
authorized to sign on behalf of
the Registrant)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995, AS SUBMITTED
IN THE COMPANY'S 10-Q FOR THAT PERIOD AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-Q.
</LEGEND>
<CIK> 0000726712
<NAME> SULCUS COMPUTER CORP.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> SEP-30-1995
<CASH> 885,371
<SECURITIES> 12,908,635
<RECEIVABLES> 10,184,179
<ALLOWANCES> 2,501,146
<INVENTORY> 2,587,514
<CURRENT-ASSETS> 25,371,749
<PP&E> 6,001,593
<DEPRECIATION> 4,009,726
<TOTAL-ASSETS> 42,564,004
<CURRENT-LIABILITIES> 17,296,308
<BONDS> 41,875
<COMMON> 37,225,156
0
0
<OTHER-SE> (11,999,335)
<TOTAL-LIABILITY-AND-EQUITY> 42,564,004
<SALES> 32,722,756
<TOTAL-REVENUES> 33,661,187
<CGS> 13,940,093
<TOTAL-COSTS> 17,917,544
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 364,694
<INTEREST-EXPENSE> 421,342
<INCOME-PRETAX> 1,803,550
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,803,550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,803,550
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
