<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 June 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 July 26, 1995, there were 14,549,732 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
June 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
Six Months Ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations
Three Months Ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Stockholders' Equity
Six Months Ended June 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
June 30, December 31,
1995 1994
----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,216,467 $ 1,933,895
Short-term investments (at market) 12,522,533 10,324,740
Restricted cash ---- 500,000
Accounts receivable, net of allowance of $2,602,369
and $2,597,088 in 1995 and 1994, respectively 8,340,774 11,639,243
Inventories 2,638,682 2,393,563
Deferred taxes 568,153 758,472
Net investments in sales-type leases 121,085 171,098
Other 752,266 1,159,142
----------- -----------
Total current assets 26,159,960 28,880,153
Purchased and capitalized software,
net of accumulated amortization 6,124,901 6,790,945
Property and equipment, net of accumulated depreciation 2,101,676 2,301,263
Goodwill, net of accumulated amortization 7,367,882 7,726,119
Deferred taxes 1,531,600 1,341,281
Net investments in sales-type leases 404,719 504,005
Other assets 297,886 325,717
----------- -----------
Total Assets $43,988,624 $47,869,483
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short term borrowings $ 6,029,274 $ 6,182,995
Current portion of long-term debt 60,664 468,990
Accounts payable 4,157,858 5,836,482
Shareholder litigation liability 363,436 439,780
Deferred revenues 4,668,808 6,922,281
Customer deposits 1,493,225 1,896,886
Other accrued liabilities 2,075,884 2,949,837
----------- -----------
Total current liabilities 18,849,149 24,697,251
Long-term debt, net of current portion 53,670 85,536
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 30,700,000 shares
authorized (14,547,547 and 14,417,744 shares
issued in 1995 and 1994, respectively) 37,218,879 37,081,413
Note receivable from stockholder (500,000) (500,000)
Retained earnings (deficit) (11,647,914) (13,378,756)
Foreign currency adjustment 3,368 (115,961)
Cumulative unrealized gain on investments available for sale 11,472 ----
----------- -----------
Total Stockholders' Equity 25,085,805 23,086,696
----------- -----------
Total Liabilities and Stockholders' Equity $43,988,624 $47,869,483
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE> 4
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net revenue:
System sales $13,590,899 $12,728,662
Support revenue 8,280,033 8,137,607
Interest income and other 592,759 646,357
----------- -----------
Total revenue 22,463,691 21,512,626
----------- -----------
Cost of goods sold and services provided:
Systems 6,836,300 7,310,320
Support services 2,172,294 2,287,139
----------- -----------
Total cost of sales and services provided 9,008,594 9,597,459
Expenses:
Selling, general, and administrative 11,400,236 11,422,681
Research and development (net of capitalized
software of $495,404 and $883,100 during the
six months ended June 30, 1995 and 1994,
respectively) 646,993 931,843
Interest 285,164 259,124
Depreciation and amortization 853,867 1,141,093
Unrealized (gain) loss on investments (1,462,005) 1,103,269
----------- -----------
Total expenses 11,724,255 14,858,010
----------- -----------
Income (loss) before income taxes 1,730,842 (2,942,843)
Income taxes ---- ----
----------- -----------
Net income (loss) $ 1,730,842 ($2,942,843)
=========== ===========
Income (loss) per common share:
Net income (loss) $0.12 ($0.21)
===== ======
Weighted average number of common shares 14,801,259 14,340,827
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE> 5
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Net revenue:
System sales $ 6,787,612 $ 6,634,692
Support revenue 4,067,033 4,011,269
Interest income and other 297,992 328,837
----------- ------------
Total revenue 11,152,637 10,974,798
----------- ------------
Cost of goods sold and services provided:
Systems 3,300,043 3,673,063
Support services 1,093,767 1,423,915
----------- ------------
Total cost of sales and services provided 4,393,810 5,060,978
Expenses:
Selling, general, and administrative 5,821,078 5,856,276
Research and development (net of capitalized
software of $297,700 and $497,335 during the
three months ended June 30, 1995 and 1994,
respectively) 280,545 397,823
Interest 142,666 144,789
Depreciation and amortization 407,553 683,569
Unrealized (gain) loss on investments (580,322) 442,935
----------- ------------
Total expenses 6,071,520 7,525,392
----------- ------------
Income (loss) before income taxes 687,307 (1,611,572)
Income taxes ---- ----
----------- ------------
Net income (loss) $ 687,307 ($ 1,611,572)
=========== ============
Income (loss) per common share:
Net income (loss) $0.05 ($0.11)
===== ======
Weighted average number of common shares 14,842,427 14,058,927
=========== ============
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE> 6
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 1,730,842 ($2,942,843)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 495,128 504,433
Amortization of capitalized software 1,165,231 1,382,608
Amortization of goodwill 358,739 636,660
Provision for doubtful accounts 281,454 216,123
Unrealized and realized (gain) loss on investments (1,538,050) 1,103,268
Purchases of short-term investments (648,271) (1,009,305)
Change in assets and liabilities:
Restricted cash 500,000 ----
Accounts receivable 3,017,015 3,149,094
Insurance receivable ---- 900,000
Inventory (245,119) 140,479
Other current assets 406,876 (417,565)
Other assets 27,831 (33,643)
Accounts payable (1,678,622) (1,285,603)
Deferred revenues (2,253,473) (2,667,435)
Shareholder litigation (76,344) (600,000)
Customer deposits (403,661) 559,141
Accrued liabilities (773,057) (835,956)
----------- -----------
Total adjustments (1,364,323) 1,742,299
----------- -----------
Net cash provided by (used in) operating activities 366,519 (1,200,544)
Cash flows from investing activities:
Investment in sales-type leases (90,674) ----
Payments received on sales-type leases 156,013 129,591
Capital expenditures (215,867) (516,129)
Capitalization of software development
and purchased software (495,404) (883,100)
----------- -----------
Net cash provided by (used in) investing activities (645,932) (1,269,638)
----------- -----------
Cash flows from financing activities:
Short term borrowings (153,721) 520,870
Principal payments on long-term debt (440,193) (446,417)
Proceeds from stock options exercised 36,570 128,020
----------- -----------
Net cash used in financing activities (557,344) 202,473
----------- -----------
Cumulative translation adjustment 119,329 (13,778)
----------- -----------
Net decrease in cash
and cash equivalents (717,428) (2,281,487)
Cash equivalents at beginning of period 1,933,895 2,568,746
----------- -----------
Cash equivalents at end of period $ 1,216,467 $ 287,259
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE> 7
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED June 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 36,570 ---- ---- ---- ---- 36,570
Cumulative unrealized gain on
investments available for sale ---- ---- ---- 11,472 ---- 11,472
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 ---- ---- 119,329 ---- ---- 119,329
Net income ---- 1,730,842 ---- ---- ---- 1,730,842
----------- ------------ --------- -------- --------- -----------
Balance, June 30, 1995 $37,218,879 ($11,647,914) $ 3,368 $11,472 ($500,000) $25,085,805
=========== ============ ========= ======== ========= ===========
</TABLE>
See notes to the consolidated financial statements.
7
<PAGE> 8
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 issued 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
JUNE 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 (ending on April 6,
1994 and beginning at an as yet undetermined date likely to be May 15, 1992 or
October 22, 1992) were false and misleading in that they did not comply with
Generally Accepted Accounting Principles ("GAAP") 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
JUNE 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 they
will not result in a material adverse effect on the Company's consolidated
financial position.
Pursuant to Sulcus's 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 six months ended June 30, 1995 the Company reflected no
provision for income taxes on pre-tax profits of $1,730,842. 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 six months ended June 30, 1994, the Company did not record a
tax benefit related to its pre-tax loss of $2,942,843, as it increased the
valuation reserves related to deferred tax assets equal to the increase in tax
assets.
At June 30, 1995 and December 31, 1994, the Company had net deferred
tax assets, liabilities and valuation reserves as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets (net of deferred tax
liabilities), including tax loss carryforwards $12,125,039 $13,158,362
Valuation allowance (10,025,286) (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
JUNE 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 JUNE 30, 1995 AS COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1994
For the quarter ended June 30, 1995, the Company reported net income of
$687,307 as compared to a net loss of ($1,611,572) for the quarter ended June
30, 1994. This improvement can be attributed to a $1,023,257 turnaround in the
performance of the Company's investment portfolio (from an unrealized loss of
$442,935 in 1994 to an unrealized gain of $580,322 in 1995), an increase in
gross margins of $875,852 and a $403,615 decrease in net operating expenses.
Net sales for the quarter ended June 30, 1995 were $10,854,645, representing
an increase of $208,684 or 2% when compared to net sales of $10,645,961 for the
same period of 1994. Net sales of the Real Estate/Hospitality Group increased
to $10,587,252 from $10,489,587, a 1% increase or $97,665 for the quarter ended
June 30, 1995, as compared to the same period of 1994. Net sales of the Legal
Group decreased to $199,774 from $229,405, a 13% decrease or $29,631 for the
quarter ended June 30, 1995 as compared to the same period of 1994.
Net system sales for the quarter ended June 30, 1995 were $6,787,612 as
compared to $6,634,692 for the same period of 1994, an increase of $152,920 or
2% due primarily to increased sales of Squirrel POS systems and Property
Management license fees from customers. These increases were substantially
offset by decreases in sales by the Company's European and Hong Kong offices
and decreases in the Company's NRG product line.
Support revenues for the quarter ended June 30, 1995 were $4,067,033 as
compared to $4,011,269 for the same period of 1994, an increase of $55,764 or
1% due primarily to an increased base of Property Management and Squirrel
installations.
Sales by offices and distributors of the Company were $8,597,302 (79%) and
$2,257,343 (21%), respectively, of net sales for the quarter ended June 30,
1995 as compared to $7,936,547 (74%) and $2,709,414 (26%) for the comparable
1994 period.
Cost of goods sold for the quarter ended June 30, 1995 decreased to
$4,393,810 from $5,060,978, a 13% decrease or $667,168 over the comparable 1994
period. As a consequence, cost of goods sold as a percentage of net sales
improved for the quarter ended June 30, 1995 to 40%, as compared to 47% for the
same period of 1994. As a result, gross margin of the Company increased to
$6,460,835 from $5,584,983, an increase of $875,852 or 16% over the quarter
ended June 30, 1994.
Cost of system sales for the quarter ended June 30, 1995 was $3,300,043 (49%
of system sales) as compared to $3,637,063 (55% of system sales) for the same
period of 1994, a decrease of $337,020 or 9%, due primarily to lower hardware
component costs related to Lodgistix systems and reduced software amortization.
Cost of support for the quarter ended June 30, 1995 was $1,093,767 (26% of
support revenues) as compared to $1,423,915 (35% of support revenues) for the
same period of 1994, a decrease of $330,148 or 23%, 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 June 30, 1995,
these expenses were $5,821,078 as compared to $5,856,276 a decrease of
$35,198 over the same period of 1994. Selling, general, and administrative
expenses as a percentage of net sales decreased to 53% for the quarter ending
June 30, 1995, a 1 percentage point decrease from the quarter ending June 30,
1994.
Research and development expense for the quarter ended June 30, 1995
decreased to $280,545 from $397,823, a 29% decrease or $117,278 as compared to
the quarter ended June 30, 1994. Total amounts expended on research and
development (including amounts expensed and amounts capitalized) was $578,245
and $895,158 for the three months ended June 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 June 30,
1995 decreased to $407,553 from $683,569 for the same period of 1994, a
decrease of $276,016 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 June 30, 1995 was $297,992 as
compared to $328,837 for the same period of 1994, a decrease of $30,845 or 9%,
due primarily to lower average invested balances.
Interest expense for the quarter ended June 30, 1995 decreased to
$142,666 from $144,789 for the same period of 1994, a decrease of $2,123 or 1%
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 June 30,
1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net revenues(1):
United States $ 7,789,838 $ 7,691,530
Canada 1,030,937 786,273
Hong Kong 178,978 422,618
Singapore 465,594 468,244
Australia 551,634 384,348
Europe 1,135,656 1,221,785
----------- -----------
Consolidated net revenues $11,152,637 $10,974,798
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995 1994
-------- -----------
<S> <C> <C>
Net income (loss):
United States $936,346 ($1,380,993)
Canada 190,345 253,208
Hong Kong (193,978) (498,889)
Singapore (199,909) 29,297
Australia (4,738) (38,886)
Europe (40,759) 24,691
-------- -----------
Consolidated net income (loss) $687,307 ($1,611,572)
======== ===========
<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 was primarily due to a turn around in the performance of the Company's
investment portfolio, and the improved profitability of the Squirrel and
Property Management product lines.
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 1995 European loss is the result of reduced sales and increased
selling, general and administrative expense.
The Company had a net deferred tax asset amounting to $2,099,753, net
of valuation allowances of $10,025,286 at June 30, 1995 and $11,058,609 at
December 31, 1994. The valuation allowance was decreased in the three months
ended June 30, 1995 by $412,252 and increased in the three months ended June
30, 1994 by $276,474 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 June 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 six 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.
SIX MONTHS ENDED JUNE 30, 1995 AS COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1994
For the six months ended June 30, 1995, the Company reported net
income of $1,730,842 as compared to a net loss of ($2,942,843) for the six
months ended June 30, 1994. This improvement can be attributed to a $2,565,274
turnaround in the performance of the Company's investment portfolio (from an
unrealized loss of $1,103,269 in 1994 to an unrealized gain of $1,462,005 in
1995), an increase in gross margins of $1,593,528 and a decrease in net
operating expenses of $568,481.
Net sales for the six months ended June 30, 1995 were $21,870,932,
representing an increase of $1,004,663 or 5% when compared to net sales of
$20,866,269 for the same period of 1994. Net sales of the Real
Estate/Hospitality Group increased to $21,215,011 from $20,452,984 a 4%
increase or $762,027 for the six months ended June 30, 1995, as compared to the
same period of 1994. Net sales of the Legal Group increased to $585,656 from
$478,978, an 22% increase or $106,678 for the six months ended June 30, 1995 as
compared to the same period of 1994.
Net system sales for the six months ended June 30, 1995 were
$13,590,899 as compared to $12,728,662 for the same period of 1994, an increase
of $862,237 or 7% due primarily to increased sales of Squirrel POS systems and
domestic sales of Lodgistix Property Management systems.
Support revenues for the six months ended June 30, 1995 were
$8,280,033 as compared to $8,137,607 for the same period of 1994, an increase
of $142,426 or 2% due primarily to an increased base of Property Management and
Squirrel installations.
14
<PAGE> 15
Sales by offices and distributors of the Company were $17,125,793
(78%) and $4,745,139 (22%), respectively, of net sales for the six months ended
June 30, 1995 as compared to $15,499,575 (74%) and $5,366,694 (26%) for the
comparable 1994 period.
Cost of goods sold for the six months ended June 30, 1995 decreased to
$9,008,594 from $9,597,459, a 6% decrease or $588,865 from the comparable 1994
period. As a consequence, cost of goods sold as a percentage of net sales
decreased for the six months ended June 30, 1995 to 41%, as compared to 46% for
the same period of 1994. As a result, gross margin of the Company increased to
$12,862,338 from $11,268,810 an increase of $1,593,528 or 14% over the six
months ended June 30, 1994.
Cost of system sales for the six months ended June 30, 1995 was
$6,836,300 (50% of system sales) as compared to $7,310,320 (57% of system
sales) for the same period of 1994, a decrease of $474,020 or 6%, due primarily
to lower hardware component costs related to Squirrel and Lodgistix systems and
reduced software amortization.
Cost of support for the six months ended June 30, 1995 was $2,172,294
(26% of support revenues) as compared to $2,287,139 (28% of support revenues)
for the same period of 1994, a decrease of $114,845 or 5%, 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 six months ended June 30,
1995, these expenses were $11,400,236 as compared to $11,422,681 a decrease of
$22,445 over the same period of 1994. Selling, general, and administrative
expenses as a percentage of net sales decreased to 52% for the six months
ending June 30, 1995, a 3 percentage point decrease from the six months ending
June 30, 1994.
Research and development expense for the six months ended June 30,
1995 decreased to $646,993 from $931,843, a 31% decrease or $284,850 as
compared to the six months ended June 30, 1994. Total amounts expended on
research and development (including amounts expensed and amounts capitalized)
was $1,142,397 and $1,814,943 for the six months ended June 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 six months ended June
30, 1995 decreased to $853,867 from $1,141,093 for the same period of 1994, a
decrease of $287,226 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 six months ended June 30, 1995 was $592,759 as
compared to $646,357 for the same period of 1994, a decrease of $53,598 or 8%,
due primarily to lower average invested balances.
Interest expense for the six months ended June 30, 1995 increased to
$285,164 from $259,124 for the same period of 1994, an increase of $26,040 or
10% due primarily to higher interest rates.
15
<PAGE> 16
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 six months ended June 30,
1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net revenues(1):
United States $15,845,855 $14,911,547
Canada 1,911,411 1,728,373
Hong Kong 273,495 1,221,986
Singapore 598,145 558,043
Australia 1,260,047 600,795
Europe 2,574,738 2,491,882
----------- -----------
Consolidated net revenues $22,463,692 $21,512,626
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Net income (loss):
United States $2,432,816 ($2,514,298)
Canada 258,415 253,208
Hong Kong (350,861) (578,616)
Singapore (493,869) (69,406)
Australia 46,770 (107,897)
Europe (162,429) 74,166
---------- -----------
Consolidated net income (loss) $1,730,842 ($2,942,843)
========== ===========
<FN>
(1) Sales between geographic areas are not material.
</TABLE>
The significant improvement in U.S. operations in 1995 as compared to
1994 was primarily due to a turnaround in the performance of the Company's
investment portfolio, improved sales, margins, and operating expenses by the
Company's Property Management systems and improved sales of the Squirrel POS
systems.
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 reduction in amortization of goodwill.
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 $10,025,286 at June 30, 1995 and $11,058,609 at
December 31, 1994. The valuation allowance was decreased in the six months
ended June 30, 1995 by $1,033,323 and increased in the six months ended June
30, 1994 by $1,097,526 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,
16
<PAGE> 17
the income statements for the six months ended June 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 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
Management believes that in order to achieve sustained profitability,
it must 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.
At June 30, 1995, Sulcus' cash and cash equivalents decreased to
$1,216,467 from $1,933,895 at December 31, 1994, a decrease of $717,428, while
the Company's short-term investment portfolio increased by $2,197,793 from
$10,324,740 at December 31, 1994 to $12,522,533 at June 30, 1995. This
increase consisted of unrealized appreciation of $1,473,447 and realized gains
and new investments of $724,316. 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 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 the June 1995 from Trading to
Available for Sale. The Company had borrowings at June 30, 1995, and December
31, 1994, of $4,882,446 and $5,145,753 respectively, on margin against its
investments at the brokers internally established floating interest rate which
was 8.625% at June 30, 1995.
At June 30, 1995, accounts receivable decreased to $8,340,774, as
compared to $11,639,243 at December 31, 1994, a decrease of $3,298,469 or 28%
primarily due to collection 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 the year. As a result,
approximately 44% of the Company's gross accounts receivable is aged over 90
days at June 30, 1995, as compared to 27% at December 31, 1994. The Company
provides estimates of amounts which may ultimately be uncollectible from
customers. This allowance for uncollectible accounts remained relatively
constant at June 30, 1995, increasing slightly from $2,597,088 at December 31,
1994, to $2,602,369 at June 30, 1995. The revenue from the support contracts
is deferred and subsequently recorded as revenue as the support contracts are
fulfilled.
Inventories increased by $245,119 to $2,638,682 at June 30, 1995, as
compared to $2,393,563 at December 31, 1994. Capitalized and purchased
software, net of accumulated amortization, decreased to
17
<PAGE> 18
$6,124,901 at June 30, 1995 from $6,790,945 at December 31, 1994 a decrease of
$666,044, due to amortization exceeding capitalized development. Property and
equipment net of accumulated depreciation and amortization, decreased to
$2,101,676 at June 30, 1995 from $2,301,263 at December 31, 1994, a decrease of
$199,587.
At June 30, 1995, the Company had short term borrowings of $6,029,274
(including $4,882,446 on margin against its investments) as compared to
$6,182,995 (including $5,145,753 on margin against its investments) at December
31, 1994, a decrease of $153,721 and the current portion of long-term debt
decreased by $408,326 from $468,990 at December 31, 1994 to $60,664 at June 30,
1995. Accounts payable decreased by $1,678,624 from $5,836,482 at December
31, 1994 to $4,157,858 at June 30, 1995; deferred revenues decreased by
$2,253,473 from $6,922,281 at December 31, 1994 to $4,668,808 at June 30, 1995;
customer deposits decreased by $403,661 from $1,896,886 at December 31, 1994 to
$1,493,225 at June 30, 1995; and other accrued liabilities decreased by
$873,953 from $2,949,837 at December 31, 1994 to $2,075,884 at June 30, 1995.
The Company has no significant unused lines of credit at either June
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.
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 backlog at June 30, 1995 is expected to be filled within one
year. The following table illustrates the backlog at June 30, 1995 and
December 31, 1994:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Hardware and software orders $ 3,966,000 $ 3,263,947
Service and support 7,043,000 13,521,000
----------- -----------
$11,009,000 $16,784,947
=========== ===========
</TABLE>
Sulcus's ability to develop and expand its presence in the hospitality
industry and expand existing business lines for Sulcus's other markets depends
in large part on the availability of adequate funds. Management believes that
anticipated revenues from the operations of Sulcus 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, Sulcus 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
Sulcus.
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
Lodgistix was the Defendant in an action filed in March 1994, in the Superior
Court of New Jersey, Camden County by Associated Business Telephone Systems
Corporation ("ABTS"). ABTS claimed that Lodgistix is in breach of a Long
Distance Telephone Service Agreement ("Agreement") entered into between the
parties in July 1992. ABTS also claimed that the parties entered into an
Addendum to the Long Distance Service Agreement in December 1993 ("Addendum").
ABTS claimed damages in excess of approximately $791,000. In October 1994, the
Court granted Plaintiffs Motion to Add Squirrel Companies, Inc., Sulcus
Hospitality Group, Inc., and NRG Management Systems, Inc. as Defendants in this
matter. The Company has filed Answers on behalf of these other companies. In
March 1995, Plaintiff filed a Motion for Partial Summary Judgment related to
claims of a violation of an exclusivity clause in the Agreement. Defendant's
opposed the Plaintiff's Motion for Partial Summary Judgment and filed a Motion
for Partial Summary Judgment of their own. Defendant's also filed a Motion
requesting the right to amend their Answer, add affirmative defenses and the
right to file a Counterclaim. On March 31, 1995, the Court dismissed both
Motions for Partial Summary Judgment and the Court granted the rest of
Defendants request. On May 11th, 1995 the parties entered into a Settlement
Agreement and Mutual Release under which the Defendants paid ABTS the sum of
$100,000.00 as payment in full for any and all claims set forth in ABTS'
Complaint.
Sulcus and John W. Ryba were Defendants in an action filed in April 1994, in
the United States District Court for the Southern District of New York by First
Hanover Securities, Inc. ("First Hanover"). First Hanover has alleged that
Sulcus and Mr. Ryba improperly and illegally sought to cancel 50,000 stock
options that were granted to First Hanover in January 1, 1991. On January 3,
1995, the Court granted Sulcus' Motion to Dismiss First Hanover's common-law
fraud and securities fraud claims against Mr. Ryba and Sulcus. First Hanover's
breach of contract claim against Sulcus remains, which management believes is
without merit and can be successfully defended in that First Hanover never
performed any services for Sulcus which therefor enabled Sulcus to cancel the
option. The case was referred to a mediator for non-binding mediation which
was held on June 1, 1995. No settlement was reached at that time, and both
parties are continuing their attempt to resolve this matter. The Court has
scheduled a pre-trial conference for September 29, 1995.
Sulcus Hospitality Group, Inc. was the Defendant in an action filed in
December 1994, in the Superior Court of the State of Arizona in and for the
County of Maricopa by William W. Saunders ("Saunders"). Saunders alleged that
Sulcus failed to pay rent, common area maintenance charges, sales tax, late
charges and interest due and owing for rental space in Phoenix, Arizona from
October through December 15, 1993, totaling $94,891.50. On January 27, 1995,
the Court granted Sulcus' Motion to Remove to Federal Court. On February 16,
1995, the Court transferred the matter to Arbitration. Sulcus also filed an
Answer in this matter. On May 30th, 1995 the parties entered into a Settlement
Agreement and Release, whereby Sulcus Hospitality Group, Inc. agreed to pay
Saunders, in four (4) installments, amounts totaling $74,000.00 representing
lease payments for the period October through December 15th, 1993. As of June
30th, 1995, these payments have been made.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 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: August 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 Finanical Statements for the Six Months Ended June 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,216,467
<SECURITIES> 12,522,533
<RECEIVABLES> 10,943,143
<ALLOWANCES> 2,602,369
<INVENTORY> 2,638,682
<CURRENT-ASSETS> 26,159,960
<PP&E> 5,923,462
<DEPRECIATION> 3,821,786
<TOTAL-ASSETS> 43,988,624
<CURRENT-LIABILITIES> 18,849,149
<BONDS> 53,676
<COMMON> 37,218,879
0
0
<OTHER-SE> (12,133,074)
<TOTAL-LIABILITY-AND-EQUITY> 43,988,624
<SALES> 21,870,932
<TOTAL-REVENUES> 22,463,691
<CGS> 9,008,594
<TOTAL-COSTS> 11,724,255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 281,454
<INTEREST-EXPENSE> 285,164
<INCOME-PRETAX> 1,730,842
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,730,842
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,730,842
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
