<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, 1996
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 6, 1996, there were 15,699,131 shares of Common Stock, no par
value, outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995................................................ 3
Consolidated Statements of Operations
Nine Months Ended September 30, 1996 and 1995........................................... 4
Consolidated Statements of Operations
Three Months Ended September 30, 1996 and 1995.......................................... 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995........................................... 6
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 1996.................................................... 7
Notes to Consolidated Financial Statements....................................................... 8-9
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 10-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... 16
Signatures....................................................................................... 17
</TABLE>
<PAGE> 3
SULCUS COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1996 1995
-------------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,644,067 $ 1,202,325
Short-term investments (at market) 12,271,913 12,408,075
Restricted cash 169,998 550,000
Accounts receivable, net of allowance of $2,153,523
and $2,581,020 in 1996 and 1995, respectively 9,206,467 11,134,576
Inventories 2,444,632 2,573,826
Deferred taxes 146,891 165,557
Other current assets 1,508,789 1,761,465
----------- -----------
Total current assets 28,392,757 29,795,824
Purchased and capitalized software, net of accumulated amortization
of $9,869,286 and $7,992,031 in 1996 and 1995, respectively 3,779,708 4,941,695
Property and equipment, net of accumulated depreciation of $4,548,694
and $4,247,168 in 1996 and 1995, respectively 2,336,128 2,015,816
Goodwill, net of accumulated amortization of $3,249,290
and $2,672,714 in 1996 and 1995, respectively 7,418,857 7,826,683
Deferred taxes 1,952,862 1,934,196
Other noncurrent assets 741,029 812,564
----------- -----------
Total Assets $44,621,341 $47,326,778
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 5,549,427 $6,382,710
Current portion of long-term debt 38,255 46,713
Current portion of obligations under capital leases 142,983 --
Accounts payable 3,460,459 4,352,408
Shareholder litigation liability 1,978,818 3,108,097
Deferred revenues 4,076,964 6,195,289
Customer deposits 1,499,999 1,311,408
Other accrued liabilities 2,030,550 3,008,892
----------- -----------
Total current liabilities 18,777,455 24,405,517
Long-term debt, net of current portion -- 27,175
Obligations under capital leases, net of current portion 207,671 --
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 30,700,000 shares
authorized (15,847,057 and 15,145,570 shares
issued and issuable in 1996 and 1995, respectively) 38,807,418 38,016,248
Note receivable from stockholder -- (500,000)
Retained earnings (deficit) (13,007,115) (14,747,712)
Foreign currency adjustment (53,896) (60,832)
Cumulative unrealized gain (loss) on investments available for sale (110,192) 186,382
----------- -----------
Total Stockholders' Equity 25,636,215 22,894,086
----------- -----------
Total Liabilities and Stockholders' Equity $44,621,341 $47,326,778
=========== ===========
</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, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net revenue:
System sales $22,880,050 $20,178,554
Support revenue 14,104,250 12,544,202
Dividends and other 984,568 938,431
----------- -----------
Total revenue 37,968,868 33,661,187
----------- -----------
Cost of goods sold and services provided:
Systems 12,559,150 10,477,458
Support services 4,018,655 3,462,635
----------- -----------
Total cost of sales and services provided 16,577,805 13,940,093
Expenses:
Selling, general, and administrative 17,105,150 16,843,723
Research and development (net of capitalized
software of $823,085 and $756,273 during the
nine months ended September 30, 1996
and 1995, respectively) 942,941 938,367
Interest 431,463 421,342
Depreciation and amortization 1,170,912 1,176,117
Unrealized (gain) loss on investments -- (1,462,005)
----------- -----------
Total expenses 19,650,466 17,917,544
----------- -----------
Income before income taxes 1,740,597 1,803,550
Income taxes -- --
----------- -----------
Net income $ 1,740,597 $ 1,803,550
=========== ===========
Income per common share:
Net income $0.10 $0.12
===== =====
Weighted average number of common shares 16,868,519 14,741,019
========== ==========
</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, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net revenue:
System sales $8,479,608 $ 6,587,655
Support revenue 4,836,708 4,264,169
Dividends and other 324,249 345,672
---------- -----------
Total revenue 13,640,565 11,197,496
---------- -----------
Cost of goods sold and services provided:
Systems 5,110,013 3,641,158
Support services 1,411,871 1,290,341
---------- -----------
Total cost of sales and services provided 6,521,884 4,931,499
Expenses:
Selling, general, and administrative 5,913,899 5,443,487
Research and development (net of capitalized
software of $266,753 and $260,140 during the
three months ended September 30, 1996 and 1995,
respectively) 352,727 291,374
Interest 140,505 136,178
Depreciation and amortization 394,576 322,250
---------- -----------
Total expenses 6,801,707 6,193,289
---------- -----------
Income before income taxes 316,974 72,708
Income taxes -- --
---------- -----------
Net income $ 316,974 $ 72,708
========== ===========
Income per common share:
Net income $ 0.02 $ 0.00
========== ==========
Weighted average number of common shares 16,947,948 14,836,634
========== ==========
</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, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income $1,740,597 $1,803,550
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 594,336 657,851
Amortization of capitalized software 2,007,108 1,771,430
Amortization of goodwill 576,576 518,266
Provision for doubtful accounts 435,023 364,694
Unrealized (gain) loss on investments -- (1,462,005)
Realized (gain) loss on investments (8,750) --
(Purchases) of trading securities -- (717,726)
Change in assets and liabilities:
Restricted cash 380,002 500,000
Accounts receivable 1,493,086 3,591,516
Inventory 129,194 (193,951)
Other current assets 252,841 569,986
Other assets 103,832 137,916
Accounts payable (891,949) (1,995,429)
Deferred revenues (2,118,325) (3,155,291)
Shareholder litigation (289,279) (157,021)
Customer deposits 188,591 (764,579)
Accrued liabilities (774,543) (835,619)
---------- ----------
Total adjustments 2,077,743 (1,169,962)
---------- ----------
Net cash provided by operating activities 3,818,340 633,588
Cash flows from investing activities:
Purchases of available for sale securities (401,662) (3,816,212)
Proceeds from sales of available for sale securities 250,000 3,535,059
Investment in sales-type leases (187,304) (215,713)
Payments received on sales-type leases 154,842 172,607
Capital expenditures (941,176) (277,478)
Software development capitalized (823,085) (756,273)
---------- ----------
Net cash (used in) investing activities (1,948,385) (1,358,010)
---------- ----------
Cash flows from financing activities:
Short-term borrowings (833,283) 13,794
Principal payments on long-term debt (35,633) (483,564)
Borrowings under capital lease agreements 373,739 --
Payments under capital lease agreements (77,892) --
Proceeds from stock options exercised 137,920 42,847
Proceeds from notes payable -- 34,000
---------- ----------
Net cash (used in) financing activities (435,149) (392,923)
---------- ----------
Cumulative translation adjustment 6,936 68,821
---------- ----------
Net increase (decrease) in cash
and cash equivalents 1,441,742 (1,048,524)
Cash equivalents at beginning of period 1,202,325 1,933,895
---------- ----------
Cash equivalents at end of period $2,644,067 $ 885,371
========== ==========
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE> 7
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Cumulative
Unrealized
Common Shares Gain (Loss) Note
------------------------ Retained Foreign on Investments Receivable Stock-
Number of Earnings Currency Available From holders'
Shares Amount (Deficit) Adjustment For Sale Stockholder Equity
---------- ----------- ------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 15,145,570 $38,016,248 ($14,747,712) ($60,832) $186,382 ($500,000) $22,894,086
Stock options exercised 84,298 137,920 -- -- -- -- 137,920
Issuance of stock, contingent
earnouts on acquisitions
of companies 66,832 168,750 -- -- -- -- 168,750
Cancellation of shares in
repayment of shareholder
loans (220,000) (550,000) -- -- -- 500,000 (50,000)
Adjustment of shares issuable for
purchase of Techotel A.G. 271,859 -- -- -- -- -- --
Adjustment of shares issuable
under earn-out agreement for
Lodgistix Scandinavia A.S. 7,688 -- -- -- -- -- --
Cumulative unrealized (loss) on
investments available for sale -- -- -- -- (296,574) -- (296,574)
Issuance of stock for payment
of accrued expenses 490,810 1,034,500 -- -- -- -- 1,034,500
Cumulative translation adjustment -- -- -- 6,936 -- -- 6,936
Net income -- -- 1,740,597 -- -- -- 1,740,597
---------- ----------- ------------ -------- --------- --------- -----------
Balance, September 30, 1996 15,847,057 $38,807,418 ($13,007,115) ($53,896) ($110,192) $ -- $25,636,215
========== =========== ============ ======== ========= ========= ===========
</TABLE>
See notes to the consolidated financial statements.
7
<PAGE> 8
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
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,
1995, as filed with the Securities and Exchange Commission on Form 10-K.
Certain prior year amounts have been reclassified to conform with
current year reporting practices.
NOTE 2. INCOME TAXES
In the nine months ended September 30, 1996 the Company reflected no
provision for income taxes on pre-tax profits of $1,740,597. This is based upon
management's determination to reduce previously established valuation reserves
related to deferred tax assets, including tax loss carryforwards, pursuant to
SFAS 109.
8
<PAGE> 9
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
At September 30, 1996 and December 31, 1995, the Company had net
deferred tax assets, liabilities and valuation reserves as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets (net of deferred tax
liabilities), including tax loss carryforwards $10,305,720 $ 12,633,976
Valuation allowance (8,205,967) (10,534,223)
----------- ------------
Net deferred tax amounts $ 2,099,753 $ 2,099,753
=========== ============
</TABLE>
NOTE 3. EARNINGS PER SHARE
Primary earnings per share is determined by dividing net earnings by
the weighted number of common shares outstanding. When dilutive, common stock
options are included in the computation. Fully diluted net income per share is
not presented as it is either anti-dilutive or not different from primary
earnings per share.
NOTE 4. ACQUISITIONS
The purchase agreement for Techotel A.G. (Techotel) provided for the
Company to issue shares of Sulcus Common Stock valued at $1,000,000. This was
originally calculated to be 128,141 shares, however, a provision in the
purchase agreement provided for the valuation of shares at a certain future
date. This date was December 31, 1994 at which time the share value was $2.50
and the number of shares issuable were calculated to be 400,000. The parties
agreed to this interpretation of the contract in May 1996 and the number of
shares issuable was adjusted at that time. In addition, the Company and former
shareholders of Techotel agreed to the repayment of the $500,000 loan to
shareholders through the cancellation of 200,000 shares issuable under the
purchase agreement.
In May 1996, the Company and the former shareholders of Lodgistix
Scandinavia A.S. (Lodgistix Scandinavia) agreed to the repayment of a $50,000
loan to shareholders through the cancellation of 20,000 shares issuable under
the purchase agreement. The former shareholders of Lodgistix Scandinavia are
also entitled to receive an additional 66,832 shares of Sulcus Common Stock,
with a value of $168,750, as consideration for attaining earnings in 1996, in
accordance with the Stock Purchase Agreement. The additional consideration has
been reflected as a component of goodwill and the shares as outstanding at
September 30, 1996.
9
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1995
The Company had net income of $316,974 in the quarter ended September
30, 1996 as compared to $72,708 in the quarter ended September 30, 1995 on
sales which increased by $2,464,492 (23%) for these same periods. The Company's
results for the quarter ended September 30, 1996 improved over those for the
same period of 1995 primarily as a result of improvements in margins ($874,107)
which was partially offset by increases in selling, general and administrative
expenses ($470,412).
Net sales for the quarter ended September 30, 1996 were $13,316,316,
representing an increase of $2,464,492 (23%) when compared to net sales of
$10,851,824 for the same period of 1995. Net system sales for the quarter ended
September 30, 1996 were $8,479,608 as compared to $6,587,655 for the same
period of 1995, an increase of $1,891,953 (29%) due primarily to increased
sales of the Company's Point of Sale Systems and the delivery of systems under
a significant contract by the Company's Singapore and Hong Kong sales offices.
Support revenues for the quarter ended September 30, 1996 were $4,836,708 as
compared to $4,264,169 for the same period of 1995, an increase of $572,539
(13%) due primarily to an increased base of Point of Sale installations in 1995
and 1996. Support revenues are billed and collected in advance for periods of
one to twelve months and are recognized as support revenues ratably over the
contract period. Sales by offices and distributors of the Company were
$10,810,163 (81%) and $2,506,153 (19%), respectively, of net sales for the
quarter ended September 30, 1996 as compared to $8,852,240 (82%) and $1,999,584
(18%) for the comparable 1995 period.
Cost of goods sold for the quarter ended September 30, 1996 increased
to $6,521,884 from $4,931,499, an increase of $1,590,385 (32%) from the
comparable 1995 period. Cost of goods sold as a percentage of net sales
increased for the quarter ended September 30, 1996 to 49%, as compared to 45%
for the same period of 1995. Gross margins of the Company increased to
$6,794,432 from $5,920,325, an increase of $874,107 (15%) over the same period
of 1995, due primarily to increases in the Company's Domestic Point of Sale
systems and partially offset by decreases in the Domestic Property Management
subsidiary. Cost of system sales for the quarter ended September 30, 1996 was
$5,110,013 (60% of system sales) as compared to $3,641,158 (55% of system
sales) for the same period of 1995, an increase of $1,468,855 (40%), due
primarily to the mix of software and hardware sales. Cost of support for the
quarter ended September 30, 1996 was $1,411,871 (29% of support revenues) as
compared to $1,290,341 (30% of support revenues) for the same period of 1995,
an increase of $121,530 (9%).
Selling, general, and administrative expenses increased in 1996 when
compared to 1995. For the quarter ended September 30, 1996, these expenses were
$5,913,899 as compared to $5,443,487 an increase of $470,412 (9%) from the same
period of 1995. These increases were predominantly in the Company's Domestic
Property Management subsidiary. Selling, general, and administrative expenses
as a percentage of net sales was 44% for the quarter ended September 30, 1996
as compared to 50% for the same period of 1995.
Research and development expense for the quarter ended September 30,
1996 increased to $352,727 from $291,374, an increase of $61,353 (21%) over the
same period of 1995. Total amounts expended on research and development
(including amounts expensed and amounts capitalized) was $619,480 and $551,514
for the quarters ended September 30, 1996 and 1995, respectively.
10
<PAGE> 11
Depreciation and amortization expense for the quarter ended September
30, 1996 increased to $394,576 from $322,250 for the same period of 1995, an
increase of $72,326 (22%).
Dividends and other income for the quarter ended September 30, 1996
was $324,249 as compared to $345,672 for the same period of 1995, a decrease of
$21,423 (6%).
Interest expense for the quarter ended September 30, 1996 increased to
$140,505 from $136,178 for the same period of 1995, an increase of $4,327 (3%).
The Company conducts its worldwide operations through separate
geographic area organizations which represent major markets or combinations of
related markets. Transfers between markets are valued at cost. Financial
information by geographic area for the quarters ended September 30, 1996 and
1995 and as of September 30, 1996 and December 31, 1995 is summarized as
follows:
<TABLE>
<CAPTION>
Three months ended September 30,
1996 1995
---- ----
<S> <C> <C>
Net revenues(1):
Domestic $ 8,327,673 $ 7,393,272
Canada 1,323,031 763,403
Pacific Region 2,742,771 1,768,805
Europe 1,247,090 1,272,016
----------- -----------
Consolidated net revenues $13,640,565 $11,197,496
=========== ===========
Net income (loss):
Domestic $514,167 $281,604
Canada 88,096 (48,247)
Pacific Region (110,252) (170,115)
Europe (175,037) 9,466
--------- --------
Consolidated net income $316,974 $ 72,708
======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Identifiable assets:
Domestic $34,779,734 $37,646,558
Canada 1,821,528 1,562,171
Pacific Region 3,750,424 3,437,539
Europe 4,269,655 4,680,510
----------- -----------
Consolidated identifiable assets $44,621,341 $47,326,778
=========== ===========
</TABLE>
(1) Sales between geographic areas and export sales are not material.
The Company had a net deferred tax asset amounting to $2,099,753, net
of valuation allowances of $8,205,967 at September 30, 1996 and $10,534,223 at
December 31, 1995. The valuation allowance was decreased in the quarter ended
September 30, 1996 by $1,767,556 and was decreased in the quarter ended
September 30, 1995 by $1,648,556 reflecting the Company's estimate of the
valuation allowance necessary to reduce the net deferred tax asset to the net
recoverable amount. As a result, the income statements for the quarters ended
September 30, 1996 and 1995 do not reflect any income tax provision on the
pre-tax operating results for those periods. As more fully discussed in the
nine month 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 maintain a level of operations that will generate taxable income.
11
<PAGE> 12
NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1995
The Company had net income of $1,740,597 in the nine months ended
September 30, 1996 as compared to $1,803,550 in the nine months ended September
30, 1995 on sales which increased by $4,261,544 (13%) for these same periods.
In 1995, the Company reported unrealized gains on its investment portfolio of
$1,462,005. When eliminating this amount for the purpose of comparability, the
Company showed an improvement on earnings from $341,545 to $1,740,597, a change
of $1,399,052. The Company's results for the nine months ended September 30,
1996 improved over those for the same period of 1995 primarily as a result of
improvements in margins ($1,623,832) which was partially offset by increases in
selling, general and administrative expenses ($261,427). In 1995, the Company
had Trading Securities which had unrealized market appreciation in the first
nine months of $1,462,005. Since that time, the Company has restructured its
portfolio and, therefore, these unrealized market changes are no longer a
component of net income.
Net sales for the nine months ended September 30, 1996 were
$36,984,300, representing an increase of $4,261,544 (13%) when compared to net
sales of $32,722,756 for the same period of 1995. Net system sales for the nine
months ended September 30, 1996 were $22,880,050 as compared to $20,178,554 for
the same period of 1995, an increase of $2,701,496 (13%) due primarily to
increased sales of the Company's Point of Sale Systems and the delivery of
systems under significant contracts by the Company's Singapore and Hong Kong
sales offices. Support revenues for the nine months ended September 30, 1996
were $14,104,250 as compared to $12,544,202 for the same period of 1995, an
increase of $1,560,048 (12%) due primarily to an increased base of Point of
Sale installations in 1995 and 1996. Support revenues are billed and collected
in advance for periods of one to twelve months and are recognized as support
revenues ratably over the contract period. Sales by offices and distributors of
the Company were $30,370,997 (82%) and $6,613,303 (18%), respectively, of net
sales for the nine months ended September 30, 1996 as compared to $25,978,033
(79%) and $6,744,723 (21%) for the comparable 1995 period.
Cost of goods sold for the nine months ended September 30, 1996
increased to $16,577,805 from $13,940,093, an increase of $2,637,712 (19%) from
the comparable 1995 period. Cost of goods sold as a percentage of net sales
increased for the nine months ended September 30, 1996 to 45%, as compared to
43% for the same period of 1995. Gross margins of the Company increased to
$20,406,495 from $18,782,663, an increase of $1,623,832 (9%) over the same
period of 1995, due primarily to increases in the Company's Domestic Point of
Sale systems and partially offset by decreases in the Domestic Property
Management subsidiary. Cost of system sales for the nine months ended September
30, 1996 was $12,559,150 (55% of system sales) as compared to $10,477,458 (52%
of system sales) for the same period of 1995, an increase of $2,081,692 (20%),
due primarily to the mix of software and hardware sales. Cost of support for
the nine months ended September 30, 1996 was $4,018,655 (28% of support
revenues) as compared to $3,462,635 (28% of support revenues) for the same
period of 1995, an increase of $556,020 (16%).
Selling, general, and administrative expenses increased in 1996 when
compared to 1995. For the nine months ended September 30, 1996, these expenses
were $17,105,150 as compared to $16,843,723 an increase of $261,427 (2%) from
the same period of 1995. These increases were predominantly in the Company's
Domestic Property Management subsidiary. Selling, general, and administrative
expenses as a percentage of net sales was 46% for the nine months ended
September 30, 1996 as compared to 51% for the same period of 1995.
Research and development expense for the nine months ended September
30, 1996 increased to $942,941 from $938,367, an increase of $4,574 over the
same period of 1995. Total amounts expended on research and development
(including amounts expensed and amounts capitalized) was $1,766,026 and
$1,694,640 for the nine months ended September 30, 1996 and 1995, respectively.
12
<PAGE> 13
Depreciation and amortization expense for the nine months ended
September 30, 1996 decreased to $1,170,912 from $1,176,117 for the same period
of 1995, a decrease of $5,205.
Dividends and other income for the nine months ended September 30,
1996 was $984,568 as compared to $938,431 for the same period of 1995, an
increase of $46,137 (5%).
Interest expense for the nine months ended September 30, 1996
increased to $431,463 from $421,342 for the same period of 1995, an increase of
$10,121 (2%).
The Company conducts its worldwide operations through separate
geographic area organizations which represent major markets or combinations of
related markets. Transfers between markets are valued at cost. Financial
information by geographic area for the nine months ended September 30, 1996 and
1995 is summarized as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
1996 1995
---- ----
<S> <C> <C>
Net revenues(1):
Domestic $23,981,463 $23,239,127
Canada 3,876,688 2,674,814
Pacific Region 6,089,812 3,900,492
Europe 4,020,905 3,846,754
----------- -----------
Consolidated net revenues $37,968,868 $33,661,187
=========== ===========
Net income (loss):
Domestic $1,928,192 $2,714,420
Canada 219,175 210,168
Pacific Region (129,951) (968,075)
Europe (276,819) (152,963)
----------- -----------
Consolidated net income $1,740,597 $1,803,550
========== ==========
</TABLE>
(1) Sales between geographic areas and export sales are not material.
The Company had a net deferred tax asset amounting to $2,099,753, net
of valuation allowances of $8,205,967 at September 30, 1996 and $10,534,223 at
December 31, 1995. The valuation allowance was decreased in the nine months
ended September 30, 1996 by $2,328,256 and was decreased in the nine months
ended September 30, 1995 by $2,681,879 reflecting the Company's estimate of the
valuation allowance necessary to reduce the net deferred tax asset to the net
recoverable amount. As a result, the income statements for the nine months
ended September 30, 1996 and 1995 do not reflect any income tax provision on
the pre-tax operating results for those periods. The realizability of this
deferred tax asset is contingent upon a number of factors including the ability
of the Company to maintain a level of operations that will generate taxable
income. Management believes that it is more likely than not that the Company
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 1996 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.
13
<PAGE> 14
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 and introduce additional developed or acquired
competitive products in its current market segment.
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, 1996 or December 31, 1995. To date, bank credit lines have not
been a significant component of the Company's liquidity and capital resources.
At September 30, 1996, Sulcus' cash and cash equivalents increased to
$2,644,067 from $1,202,325 at December 31, 1995, an increase of $1,441,742.
This increase is primarily the result of net cash provided by operating
activities which includes cash received during the first three quarters of 1996
related to annual customers support agreements. This cash will be used to
support operations throughout the remainder of 1996. 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.
The Company maintains a portfolio of short-term investments (primarily
in the form of preferred stocks) which may be used for the purpose of providing
liquidity. At September 30, 1996, the Company's short-term investment portfolio
decreased to $12,271,913 from $12,408,075 at December 31, 1995, a decrease of
$136,162 (1%) primarily related to declines in market value. 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, 1996, and
December 31, 1995, of $5,549,427 and $6,062,905 respectively, on margin against
its investments at the brokers internally established floating interest rate
which was 7.875% at September 30, 1996.
At September 30, 1996, accounts receivable decreased to $9,206,467, as
compared to $11,134,576 at December 31, 1995, a decrease of $1,928,109 (17%)
primarily due to collections on annual support contracts. The Company's gross
accounts receivable includes hardware and software support contracts as well as
amounts due on system installations. The Company records a provision for
amounts which it estimates may ultimately be uncollectible from customers. The
allowance for uncollectible accounts decreased at September 30, 1996 to
$2,153,523 as compared to $2,581,020 at December 31, 1995, due to write-offs of
accounts receivable.
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 of computers,
computer components and
14
<PAGE> 15
computer peripherals decreased to $2,444,632 at September 30, 1996 as compared
to $2,573,826 at December 31, 1995, a decrease of $129,194 (5%). Accounts
payable decreased to $3,460,459 at September 30, 1996 as compared to $4,352,408
at December 31, 1995, a decrease of $891,949 (20%).
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, increased to
$2,336,128 at September 30, 1996 from $2,015,816 at December 31, 1995, an
increase of $320,312 (16%).
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, 1996, the Company had no short-term borrowings
(excluding borrowings under margin) as compared to $319,805 at December 31,
1995. At September 30, 1996, the Company had long-term borrowings (including
current and noncurrent portions) of $388,909 as compared to $73,888 at December
31, 1995, an increase of $315,021. This increase is primarily the result of
1996 capitalized lease obligations for equipment.
Other sources of working capital have been generated as a result of
stock transactions in partial settlement of previously accrued liabilities. 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 officers, directors and
others. These lawsuits were consolidated under the caption "IN RE: Sulcus
Computer Corporation Securities Litigation II." On December 27, 1995, the
parties entered into a settlement agreement (which received final approval by
the Court on July 23, 1996) which established a settlement fund of $800,000 in
cash and 1,400,000 Sulcus Common Shares with a value of $2,800,000. The cash
portion of the settlement was paid by insurance ($666,000) and the Company
($134,000). On September 26, 1996, 420,000 shares of Sulcus Common Stock, with
a value of $840,000, were delivered to the plaintiffs as partial payment into
this settlement fund.
The backlog of hardware and software orders at September 30, 1996 is
expected to be filled within one year and amounted to $4,285,000 as compared to
$3,353,000 at December 31, 1995.
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. Cash flow has
been favorably impacted during the past year by improving sales and
profitability. These funds have generally been used to reduce levels of
accounts payable, to fund the development of the Company's software products,
to fund capital expenditures and to repay short-term borrowings. Management
expects that to meet customer needs, it must begin to increase levels in
inventories for the Company's manufactured point-of-sale products and continue
to invest in the development of the Company's software products at levels
consistent with those of the past two years. To finance these needs, the
Company will rely primarily on operating cash flow over the next several years
together with currently available working capital. The Company is working with
financial institutions to develop relationships which will be used, in part, to
provide working capital facilities which will be utilized in the Company's
operations. Nonetheless, if technological changes render Sulcus' products
uncompetitive or obsolete, or, if the Company incurs operating losses,
additional capital may be required. 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.
In furtherance of the Company's strategy of acquisition of computer
software products or companies that complement or expand existing business
lines, the Company intends to continue its pursuit to acquire additional
businesses or software products and/or to create joint ventures related to
existing businesses for this purpose. The Company currently has no plans,
agreements or commitments for any such transactions and is not currently
engaged in any active negotiations with respect to any such transactions. There
can be no assurance that the Company will be able to acquire companies or
software products on a favorable basis.
15
<PAGE> 16
Certain lawsuits arising in the ordinary course of business are
pending against the Company and its subsidiaries. The Company believes that the
ultimate outcome of these actions will not result in a material adverse effect
on the Company's consolidated financial position and liquidity.
16
<PAGE> 17
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
<PAGE> 18
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 , 1996 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)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AS SUBMITTED
IN THE COMPANY'S 10-Q FOR THAT PERIOD AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000726712
<NAME> SULCUS COMPUTER CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,644,067
<SECURITIES> 12,271,913
<RECEIVABLES> 11,359,990
<ALLOWANCES> 2,153,523
<INVENTORY> 2,444,632
<CURRENT-ASSETS> 28,392,757
<PP&E> 6,884,822
<DEPRECIATION> 4,548,694
<TOTAL-ASSETS> 44,621,341
<CURRENT-LIABILITIES> 18,777,455
<BONDS> 207,671
0
0
<COMMON> 38,807,418
<OTHER-SE> (13,171,203)
<TOTAL-LIABILITY-AND-EQUITY> 44,621,341
<SALES> 36,984,300
<TOTAL-REVENUES> 37,968,868
<CGS> 16,577,805
<TOTAL-COSTS> 19,650,466
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 435,023
<INTEREST-EXPENSE> 431,463
<INCOME-PRETAX> 1,740,597
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,740,597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,740,597
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
