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Registration No. 33-85244
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2
to Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
SULCUS COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
_____________________
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<S> <C> <C>
Pennsylvania 7372 25-1369276
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
Sulcus Centre, 41 N. Main St. John W. Ryba, General Counsel
Greensburg, PA 15601 Sulcus Centre, 41 N. Main Street
(412) 836-2000 Greensburg, PA 15601, (412) 836-2000
(Name, address, including zip code, and telephone number, (Name, address, including zip code, and telephone
including area code of registrant's principal executive offices) number, including area code, of agent for service)
Copies to:
Peter Landau, Esq. Kenneth S. Rose, Esq.
Opton, Handler, Gottlieb, Feiler & Katz, LLP Morse, Zelnick, Rose & Lander, LLP
52 Vanderbilt Avenue, 450 Park Avenue,
New York, NY 10017 New York, NY 10022
(212) 599-1744 Fax (212) 972-2219 (212) 838-5030 Fax (212) 838-9190
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Approximate date of commencement of proposed sale to public: as soon as
practicable after effective date of Registration Statement. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
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CALCULATION OF REGISTRATION FEE
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Title of each class of securities Amount to Proposed maximum Proposed maximum Amount of
to be registered be registered offering price per aggregate offering registration fee
Share or Warrant price
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<S> <C> <C> <C> <C>
Series A Convertible Preferred 1,150,000 Shares (1) $ 5.00 $ 5,750,000 $ 1,982.77
Stock Class A Warrants 1,150,000 Warrants (1) $ 0.25 $ 287,500 $ 99.13
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Common Stock (2)(3)** $ * $ * $ *
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Series A Convertible Preferred
Stock 1,150,000 Shares (3)(4) $ 5.00 $ 5,750,000 $ 1,982.77
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Common Stock (3)(5)** $ * $ * $ *
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Underwriter Warrants 100,000 Warrants $ 0.00005 $ 5.00 $ 1.00
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Series A Convertible Preferred 100,000 Shares (3)(6) $ 5.00 $ 500,000 $ 172.40
Stock Class A Warrants 100,000 Warrants (3)(6) $ 0.25 $ 25,000 $ 8.62
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Common Stock (3)(7)** $ * $ * $ *
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Series A Convertible Preferred
Stock 100,000 Shares (3)(8) $ 5.00 $ 500,000 $ 172.40
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Common Stock (3)(9)** $ * $ * $ *
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Total $ $ 4,369.08(10)
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(1) Represents the maximum number of securities that could be issued in the
transactions described in the registration statement including Underwriter
over-allotment option.
(2) Issuable upon conversion of the Preferred Stock.
(3) An indeterminate number of shares of Common and Preferred Stock that may
become issuable pursuant to the anti-dilution provisions of Preferred
Stock and the Warrants are also being registered pursuant to Rule 416.
(4) Issuable upon exercise of the Class A Warrants.
(5) Issuable upon conversion of the Preferred Stock issued upon exercise of
the Warrants.
(6) Issuable upon exercise of Underwriter Warrants.
(7) Issuable upon conversion of Preferred Stock issuable to Underwriter upon
exercise of Underwriters Warrants.
(8) Issuable upon exercise of Class A Warrant issuable to Underwriter upon
exercise of Underwriters Warrants.
(9) Issuable upon conversion of Preferred Stock issuable upon exercise of
Class A Warrants issuable to Underwriter.
(10) Of which $966.89 was previously paid.
* Separate filing fee not required.
** To be supplied by amendment.
The registrant hereby amends the Registration Statement on such date or
dates as may be necessary to delay effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1993 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
and Rule 404(a)
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<CAPTION>
Item No. and Heading in Form S-1 Caption or Location in Prospectus
Registration Statement
<S> <C> <C>
1. Forepart of the Registration Statement Forepart of the Registration Statement;
Outside Front Cover Page of Prospectus Outside of Front Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Pages of
Cover Pages of Prospectus Prospectus and Outside Back Cover
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors
and Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus;
Risk Factors
6. Dilution Dilution
7. Selling Security Holders *
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be Description of Securities
Registered
10. Interests of Named Experts and Counsel *
11. Information with Respect to the Registrant Cover Page of Prospectus; Prospectus Summary; Risk
Factors; Price Range of Common Stock; Dividend Policy;
Selected Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Principal
Stockholders; Certain Transactions; Legal Proceedings;
Legal Matters; Financial Statements
12. Disclosure of Commission Position on *
Indemnification for Securities Acts Liabilities
</TABLE>
*Omitted because answer is negative or item is otherwise not applicable.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT, A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE, THIS PROSPECTUS SHALL NOT CONSITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION DATED MAY 30, 1996
SULCUS
COMPUTER CORPORATION
1,000,000 Shares of Preferred Stock
and
1,000,000 Class A Warrants
Sulcus Computer Corporation, a Pennsylvania corporation (the "Company"
or "Sulcus") hereby offers 1,000,000 shares of Series A Redeemable Convertible
Preferred Stock, no par value per share, (the "Preferred Stock") and 1,000,000
Class A Warrants (the "Warrants") to purchase Preferred Stock. The shares of
Preferred Stock and Warrants (hereinafter collectively referred to as the
"Securities") may only be purchased together on the basis of one share of
Preferred Stock and one Warrant and are separately tradable immediately upon
issuance. Each share of Preferred Stock may be converted into shares
of Common Stock, no par value per share, of the Company (the "Common Stock")
commencing on , 1996 and prior to . The Preferred
Stock is redeemable by the Company any time commencing, 1997, upon not less
than thirty (30) days' notice, at a price of $ per share. Each
Warrant entitles the registered holder thereof to purchase one share of
Preferred Stock at an exercise price of $ per share if exercised
on or before , 1996. Thereafter, the Warrant shall entitle the
registered holder thereof to purchase one half share of Preferred Stock for
($ per share), on or before , 1997, the Warrant
expiration date. See "Description of Securities" and "Risk Factors."
Prior to this Offering, there has been no public market for the Preferred
Stock or the Warrants and there can be no assurance that such a market will
develop after the completion of this Offering or, if developed, that it will be
sustained. For information regarding the factors considered in determining the
initial public offering price of the Securities and the terms of the Warrants,
see "Risk Factors," "Underwriting" and "Description of Securities-Warrants."
The Common Stock of the Company is traded on the American Stock Exchange
("AMEX") under the symbol SUL. The closing price for the Common Stock as
quoted on the AMEX was $3 3/8 on May 21, 1996. See "Price Range of Common
Stock." It is anticipated that the Preferred Stock and Class A Warrants
will be traded on the AMEX under the symbols SULP and SULW, respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" LOCATED ON PAGE 9 AND "DILUTION."
________________________
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION OF THE CONTRARY IS A CRIMINAL OFFENSE.
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Price Underwriting Proceeds
to Public Discounts(1) to Company(2)
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<S> <C> <C> <C>
Per share of Preferred Stock . . . . . . . . $ $ $
Per Class A Warrant . . . . . . . . . . . . $ $ $
Total(3) . . . . . . . . . . . . . . . $ $ $
- -------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes appear on inside front cover.)
The shares of Preferred Stock and Warrants are offered by the Underwriters
on a "firm commitment" basis, when as and if delivered to and accepted by the
Underwriters, and subject to the right of the Underwriters to reject any order
in whole or in part and to certain other conditions. It is expected that
delivery of certificates representing the Preferred Stock and Warrants will be
made at the offices of H.J. Meyers, Inc. 1895 Mt. Hope Avenue, Rochester, NY
14620 on or about , 1996.
H. J. Meyers & Co., Inc. Culverwell & Co., Inc.
The date of this Prospectus is , 1996
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1. Does not include additional compensation to be received by H.J.
Meyers & Co., Inc. (the "Representative") in the form of (i) a
nonaccountable expense allowance of 3% of the gross proceeds of the
offering (including proceeds from the exercise of the
Representative's over-allotment option discussed below in footnote
(3)); and (ii) 100,000 Warrants granted to the Representative to
purchase up to 100,000 shares of Preferred Stock and Warrants,
respectively (the "Representative's Warrant"). The Company also has
agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
2. Before deducting expenses of the offering payable by the Company of
approximately $ including the Underwriters
non-accountable expense allowance.
3. The Company has granted the Underwriters an over-allotment option
(the "Over-Allotment Option"), exercisable within 30 business days
after the date of this Prospectus, to purchase up to 150,000
additional shares of Preferred Stock and Warrants on the same terms
and conditions as set forth above. If all such shares of Preferred
Stock and Warrants are purchased, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to the Company
will be $ , $ and $ , respectively. See
"Underwriting."
The Company distributes annual reports containing audited financial
statements to its stockholders.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AND SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE
AND ANY OTHER EXCHANGES UPON WHICH THE COMPANY MAY LIST THE COMMON STOCK AND
SECURITIES. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK AND SECURITIES
ON THE AMERICAN STOCK EXCHANGE IN ACCORDANCE WITH RULE 10b-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AS AMENDED.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS
PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER THE HEADING "RISK FACTORS." EXCEPT AS OTHERWISE SPECIFIED, THE
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT (I) THE PREFERRED STOCK
HAS NOT BEEN CONVERTED INTO SHARES OF COMMON STOCK, (II) THE WARRANTS HAVE NOT
BEEN EXERCISED, AND (III) THE OVER-ALLOTMENT OPTION AND THE REPRESENTATIVE'S
WARRANTS HAVE NOT BEEN EXERCISED. SEE "UNDERWRITING."
THE COMPANY
Sulcus provides automation solutions to the worldwide hospitality and
tourism market and to the domestic U.S. real estate industry and legal
professions. The Company develops, manufactures, markets and installs
integrated microcomputer systems designed to automate the creation, handling,
storage and retrieval of information and documents.
The Company sells computer systems, which include a network of hardware,
software and cabling as well as stand-alone turnkey systems. Sulcus sells
24-hour customer support to the hospitality industry and regular business hour
support to the real estate industry and the legal profession with each new
system sold. This provides a recurring revenue stream beyond the original
system sale.
The Company's turnkey computer systems provide all of a customers needs
to automate segments of its business. Sulcus believes that this approach is
critical in the vertical markets in which it competes. Some competitors can
automate a specific task, most are unable to automate as broad a range of a
customer's business applications as Sulcus. Customers include hotels, motels,
restaurants, resorts, cruise lines, country clubs, condominiums, real estate
related businesses and law offices.
In 1988, the Company conceived a vision to build a leadership position in
turnkey computer systems for the hospitality, and real-estate industries and
developed a strategic plan to achieve that vision. The strategic plan
envisioned internal growth by way of expanded research and development, as well
as growth through acquisitions, mergers, joint ventures and similar alliances.
In order to fulfill that vision, the Company has made numerous acquisitions,
alliances and joint ventures which created additional market opportunities for
existing products, created or obtained products that complement or expand
existing product lines, and created additional product distribution channels.
The Company has assembled a comprehensive product line that includes
approximately 800 programs contained in 55 business applications with over 255
interfaces for automatic integration with third party software or hardware
systems. Sulcus has built a worldwide distribution system with over 80
locations in over 20 countries and has installed its systems on all continents
except Antarctica. See "Business--Historical Development."
The Company was incorporated under the laws of the Commonwealth of
Pennsylvania on November 5, 1979, under the name "Ragtronics, Inc." and adopted
its present name in December 1982. The principal offices of Sulcus are located
at Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601. Its
telephone number at such address is (412) 836-2000. Unless the context
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indicates otherwise, all references herein to the Company or Sulcus refer to
Sulcus Computer Corporation and its wholly owned subsidiaries.
5
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THE OFFERING
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<S> <C>
Securities Offered: 1,000,000 shares of Series A Redeemable Convertible
Preferred Stock ("Preferred Stock") and 1,000,000 Class A
Warrants, entitling the holder to purchase up to one share of
Preferred Stock.
Offering Price: Per share of Preferred Stock $____________
Per Warrant $____________
Terms of Preferred Stock: CONVERSION RIGHTS. Unless previously redeemed (see below),
each share of Preferred Stock is convertible into ______ shares
of Common Stock, subject to adjustment in certain events, at
any time after six months from the date of issuance. No
fractional shares will be issued, nor will cash in lieu thereof
be paid.
REDEMPTION. The Preferred Stock may be redeemed by the
Company upon payment of $____________ per share at any time on
or after 15 months from the date of this Prospectus, upon 30 days'
prior written notice.
DIVIDENDS. Payable only to the same extent as dividends are
paid on the Common Stock.
LIQUIDATION PREFERENCE. In the event of any liquidation of the
Company, holders of Preferred Stock are entitled to a
liquidation preference of $_______ per share (the public
offering price).
VOTING RIGHTS. Non-voting, except with respect to matters
that alter or change the powers, preferences and rights of the
Preferred Stock.
Terms of Class A Warrants: Each Class A Warrant entitles the holder to purchase one
share of Preferred Stock at $____________ per share if exercised on
or before 75 days from the date of this Prospectus, or at $ ____________ for
one-half of one share of Preferred Stock if exercised thereafter and
on or before ____________, 1997, the Warrant expiration date.
Common Stock Outstanding
and to be Outstanding
after Offering: ____________ shares of Common Stock(1)
</TABLE>
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<TABLE>
<S> <C>
Preferred Stock to be
Outstanding After Offering: 1,000,000 shares of Preferred Stock(2)
Warrants Outstanding After
the Offering: 1,000,000 Class A Warrants
Use of Proceeds: The net proceeds of the Offering will be used for working
capital and general corporate purposes.
Risk Factors: The Offering involves certain risks. See "Risk Factors."
AMEX Symbol: Common Stock SUL
Proposed AMEX Symbols: Preferred Stock SULP
Class A Warrants SULW
</TABLE>
(1) Does not include (i)____________ shares reserved for issuance under the
Company's stock option plans for employees; (ii)_________ shares reserved
for issuance upon exercise of options granted to directors, consultants
and advisors; (iii)____________ shares reserved for issuance under various
"earn out" provisions in connection with recent acquisitions; and (iv)
shares reserved for issuance upon conversion of the Preferred Stock and
the conversion of the Preferred Stock issuable to the Underwriter upon
exercise of the Representative's Warrant.
(2) Does not include shares reserved for issuance upon the exercise of the
Class A Warrants and the exercise of the Class A Warrants issuable to the
Underwriter upon the exercise of the Representative's Warrant.
See "The Company," "Management--Stock Option Plan," "Description of
Securities," and Note______ of Notes to Consolidated Financial Statements.
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SULCUS COMPUTER CORPORATION
Summary Financial Data
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<CAPTION>
(Thousands, except per share data)
Three Months Ended
March 31, Year Ended December 31,
---------------------- -----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
- ----------------------------
Net sales $10,942 $11,016 $44,693 $41,887 $47,346 $35,245 $17,256
Interest income 333 295 1,291 1,256 1,937 1,385 505
------- ------- ------- ------- ------- ------- -------
Total revenue 11,275 11,311 45,984 43,143 49,283 36,630 17,761
Cost of goods sold and services provided 4,468 4,615 18,965 20,588 23,085 15,418 6,153
--------------------------------
Selling, general and administrative expenses 5,506 5,579 22,896 24,388 21,726 14,756 8,091
Research and development 267 366 1,199 1,597 1,878 2,342 1,044
Interest expense 129 142 598 556 403 242 285
Depreciation and amortization 384 446 1,520 2,158 2,034 960 482
Income (loss) before unrealized gain/loss and
unusual items 521 162 806 (6,144) 157 2,912 1,706
Unrealized (gain) loss on investments (1) -- (882) (1,462) 1,861 -- -- --
Income (loss) before unusual items 521 1,044 2,268 (8,005) 157 2,912 1,706
Unusual items -- -- 3,434 3,663 3,207 -- --
Income taxes -- -- 203 -- -- 821 358
Income (loss) before extraordinary item and
cumulative effect of accounting changes 521 1,044 (1,369) (11,668) (3,050) 2,091 1,348
Net income (loss) $521 $1,044 ($1,369) ($11,668) ($3,050) $3,222 $1,692
Per Share Data
- --------------
Income (loss) per share before extraordinary
item and cumulative effect of accounting changes $0.03 $0.07 ($0.09) ($0.84) ($0.22) $0.17 $0.21
Net income (loss) per share $0.03 $0.07 ($0.09) ($0.84) ($0.22) $0.26 $0.26
Weighted average shares used in computing
net income (loss) per share 16,615 14,651 14,720 13,872 14,157 12,446 6,539
Historical Balance Sheet Data
- -----------------------------
Working capital $6,036 $5,771 $5,390 $4,183 $8,643 $10,615 $9,438
Total assets 45,575 45,210 47,327 47,869 58,716 51,499 28,531
Long-term obligations 279 70 27 86 364 1,039 1,387
Stockholders' equity 23,230 24,111 22,894 23,087 33,373 33,489 18,316
</TABLE>
(1) On June 5, 1995, the Company restructured its investment portfolio. As a
result, under FAS No. 115, the Company no longer reports unrealized
gains or losses from the investment portfolio in its statement of earnings.
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RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE CERTAIN RISKS.
IN ANALYZING THIS OFFERING, PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER
THE FOLLOWING FACTORS, AMONG OTHERS:
1. SECURITIES AND EXCHANGE COMMISSION PROCEEDING
On May 2, 1996, the Company entered into an agreement with the Securities
and Exchange Commission ("Commission") resolving the investigation of the
Company by the Commission which commenced in March 1993. Without admitting or
denying any wrongdoing, the Company agreed that it would not in the future
violate Sections 17(a)(2) and (a)(3) of the Securities Act, Sections 10(b),
13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20,
13a-1 and 13a-13 promulgated thereunder. With respect to certain press
releases issued during 1991 and 1992, the Order makes findings against Sulcus
under Section 10(b) and Rule 10b-5. The Order does not make findings against
Sulcus under Section 10(b) or Rule 10b-5 with regard to accounting practices.
In addition, John Picardi, a Sulcus employee and former Chief Financial Officer
of Sulcus' Hospitality Group, and Jeffrey Ratner, Sulcus' Chairman, without
admitting or denying any wrongdoing, agreed that they would not in the future
violate Sections 17(a)(2) and (a)(3) of the Securities Act, Sections 13(a),
13(b)(2)(A) and 13(b)(2) (B) of the Exchange Act and Rules 12b-20, 13a-1,
13a-13 and 13b 2-1 promulgated thereunder. There were no fines or other
penalties imposed upon the Company or Mr. Ratner. Mr. Picardi agreed not to
practice before the Commission as an accountant for a 30 month period.
2. SETTLEMENT OF RECENT SHAREHOLDER LITIGATION
Shortly after the Company announced on April 6, 1994, that it was
proposing to restate earnings and other financial results for 1992, twelve
shareholder class action lawsuits were commenced against the Company and
certain of its officers, and directors as well as its independent auditors, in
the United States District Court for the Western District of Pennsylvania. In
December 1995, the Company announced it had agreed to settle these lawsuits
("The Class Action") which required the establishment of a settlement fund
consisting of $800,000 in cash and 1,400,000 shares of Common Stock. For a
description of the settlement terms of the litigation see "Legal Proceedings"
and "Note 3 of Notes to Consolidated Financial Statements."
3. PRIOR LOSSES
Sulcus has operated at a net loss during three of its last five fiscal
years. For the year ended December 31, 1995, the Company incurred a net loss
of ($1,369,000), as compared to a net loss of ($11,668,000) for the same period
of 1994. The 1994 results included a write-off of software development costs
($1,820,246), the write-off of an investment in an unconsolidated subsidiary
($336,703), the write-off of goodwill ($1,256,000) and a provision for
litigation settlement ($250,000). The significant improvement in 1995 is
primarily the result of increased sales and an improvement in gross margins,
which together accounted for a $4,428,378 improvement in gross margins, a
$1,492,214 reduction in selling, general and administrative expenses and
$3,323,408 in
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portfolio unrealized market changes (from an unrealized loss of
$1,861,403 in 1994 to an unrealized gain of $1,462,005 in 1995). During 1995,
the Company settled certain shareholder litigation which resulted in provisions
of $2,919,333 and wrote-off certain capitalized software development costs
totaling $514,694 representing the end of the estimated useful lives of certain
systems. For the three months ended March 31, 1996, the Company reported net
income of $521,404 as compared to net income of $1,043,535 for the same period
of 1995.
While management believes that there has been a favorable turn around in
the hotel and restaurant industry which should ultimately have a favorable
effect on the Company's operating results and financial condition, the Company
has experienced reduced system sales in 1994 and 1995 when compared to 1993.
Management believes that this decrease is principally attributable to customer
uncertainty regarding the Company's viability resulting from the previously
pending shareholder litigation, the previously pending SEC investigation and
increased competition. As a consequence of the losses noted above, the Company
had a retained earnings (deficit) of ($13,378,756) at December 31, 1994, a
deficit of ($14,747,712) at December 31, 1995, and a deficit of ($14,226,308)
at March 31, 1996.
Management is taking the following measures in an effort to maintain and
improve the Company's profitability: control of cost of sales and selling,
general and administrative expenses; seeking out strategic alliances to
increase product availability to meet customers requirements, investing in the
development of new products and increasing sales productivity. Notwithstanding
the foregoing, there is no assurance that the Company will be profitable in
future periods. See "Business--Historical Development," "Financial
Statements," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," "Management," and "Legal Proceedings."
4. EXPANSION OF BUSINESS; DOMESTICALLY AND INTERNATIONALLY
The Company's operations are subject to certain risks, such as cash
flow problems, obtaining adequate financing, achieving profitability and
management of diverse operations. The Company believes that there are
other principal material risks attendant to its international expansion
associated with the stability, both political and economic of any particular
country. Principal among those risks are the nationalization or privatization
of any industry with which the Company does business in that such changes tend
to impact the time period in which contractual commitments may be honored;
currency crises with attendant exchange rate turbulence; and sudden changes in
interest rates which generally effect the ability of customers to finance their
purchases. The Company's international operations are managed on a country or
regional basis under the direction of local nationals familiar with both the
local economic and political climate. International sales are generally
denominated in the currency of that country in which the Sulcus subsidiary is
located, and most related costs and expenses are also denominated in the local
currency. This tends to lessen foreign currency risks. The exception to this
are international export sales of Sulcus' Squirrel systems, which are
denominated in U.S. dollars. However, the relatively short time between the
order and delivery of the Squirrel systems mitigates the risk of significant
currency fluctuation. Accordingly, to date, the Company has not utilized any
foreign currency or interest rate risk hedging techniques or derivatives. The
Company will continue to monitor and evaluate the need to employ such
techniques. To date the Company has not experienced any material adverse
impact as a result of recent political
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and economic changes or currency fluctuations internationally. See "Business--
Historical Development." These risks may be increased to the extent Sulcus
continues to expand its hospitality business or its other lines of business
both domestically and internationally. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Financial
Statements."
5. NEED FOR ADDITIONAL CAPITAL
Sulcus' ability to develop and expand its presence in the hospitality
industry and to expand its existing business lines for Sulcus' other markets
and operate profitably depends in part on the availability of adequate funds.
Management believes that anticipated revenues from Sulcus' operations together
with available working capital and the proceeds of this Offering 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' products uncompetitive or obsolete, or if adequate funds are not
available from operations and the Company continues to operate at a loss,
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. See "Business--Historical
Development," and "Management's Discussion of Financial Condition and Results
of Operations."
6. SUBSTANTIAL VARIABILITY OF OPERATING RESULTS
The Company's operating results have varied, and the Company expects that
they will continue to do so. Due to the relatively fixed nature of certain of
the Company's costs, including personnel and facilities costs, a decline in net
sales in any period typically results in lower profitability in that quarter.
A variety of factors, many of which are not within the Company's control,
influence the Company's operating results, including patterns of capital
spending by customers, pricing, the timing, size and receipt of orders, delay
of shipments to customers, timing of client projects, competition, new product
or service introductions by the Company or its competitors, levels of market
acceptance for new products, changes in operating expenses and material costs
and general economic conditions. The Company believes, therefore, that past
operating results and period-to-period comparisons should not be relied upon as
an indication of future performance. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition."
7. RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapidly changing
technology, accelerated product obsolescence and rapidly changing industry
standards. The Company's success will depend upon its ability to update its
existing products and to introduce new products and features in a timely manner
to meet evolving customer requirements. There can be no assurance that the
Company will be successful in these efforts. The Company's business and
results of operations will be materially and adversely affected if the Company
incurs delays in developing its products or if such products do not gain broad
market acceptance. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's products or
technologies noncompetitive or obsolete. See "Business-Competition."
11
<PAGE> 14
8. RESEARCH AND DEVELOPMENT
The Company anticipates that it will continue to introduce new and
enhanced products. The development and testing of these products is an
inherently unpredictable process and no assurance can be given as to the timing
of releases or their market acceptance. Research and development expenses net
of capitalized software, represented 2.6%, 3.7%, 3.8% and 2.4% of total
revenues for the fiscal years ending December 31, 1995, 1994, and 1993 and the
first three months of 1996, respectively. The reduced research and development
expense is a result of the Company's plans to focus its efforts on those
specific areas having expected commercial acceptance, while at the same time,
controlling overall research and development expenditures. The Company is also
considering other, more cost effective means of expanding or improving its
software product lines, including where appropriate, external purchases or
acquisitions of software. See "Business-Product Research, Development and
Improvement."
9. COMPETITION
There are numerous software programs available that perform many of the
same functions as Sulcus' products. Competition in the computer software
market is generally intense and competitors often attempt to emulate successful
programs. Increased competition has resulted in greater discounting of prices
with no lessening of the cost of providing systems and services. Many of the
Company's current and potential competitors have substantially greater
financial, technical, marketing and other resources and larger installed
customer bases than the Company. The Company expects that competition will
intensify in each of its lines of business, as more competitors enter the
marketplace. There can be no assurance that the Company will have the
financial resources, technical expertise or marketing and support capabilities
for its products to successfully compete in the marketplace. See
"Business-Competition."
10. COMPETITION FOR KEY PERSONNEL-MANAGEMENT OF GROWTH
The Company's success depends in part on its ability to attract, hire,
train and retain qualified managerial, technical and sales and marketing
personnel, particularly for systems integration, support services and training.
Competition for such personnel is intense. There can be no assurance that the
Company will be successful in attracting and retaining the technical personnel
it requires to conduct and expand its operations successfully. The Company's
results of operations could be materially adversely affected if the Company
were unable to attract, hire, train and retain qualified personnel. See
"Business--Personnel."
12
<PAGE> 15
11. PROPRIETARY RIGHTS
The Company relies on a combination of copyright and trade secret
protection, non-disclosure agreements and licensing arrangements to establish,
protect and enforce its proprietary rights. Despite the Company's efforts to
safeguard and maintain its proprietary rights, there can be no assurance that
the Company will be successful in doing so or that the Company's competitors
will not independently develop or patent technologies that are substantially
equivalent or superior to the Company's technologies.
Although the Company is not a party to any present litigation regarding
proprietary rights, there can be no assurance that third parties will not
assert intellectual property claims against the Company in the future. Such
claims, if proved, could materially and adversely affect the Company's business
and results of operations. In addition, although any such claims may
ultimately prove to be without merit, the necessary management attention to and
legal costs associated with litigation or other resolution of such claims could
materially and adversely affect the Company's business and results of
operations. See "Business-Product Protection."
The laws of certain foreign countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although the Company continues to implement protective measures and
intends to defend its proprietary rights vigorously, there can be no assurance
that these efforts will be successful.
12. SUBSTANTIAL SHARES OF COMMON STOCK RESERVED
The Company has reserved _________________________________ shares of
Common Stock for issuance upon the conversion of the Preferred Stock and the
exercise of the Warrants issued in this Offering. The Company also has
reserved 4,150,000 shares of Common Stock for issuance to key employees,
officers, directors and consultants pursuant to Stock Option Plans and a
maximum of 422,697 shares of Common Stock issuable in connection with earn out
provisions relating to acquisitions. The Company also will issue to the
Representative, in connection with this Offering, the Representative's Warrant
to purchase 100,000 shares of Preferred Stock and 100,000 Warrants and has
reserved ___________________ shares of Common Stock and __________________
shares of Preferred Stock issuable on conversion of the Preferred Stock and
exercise of such Warrant. The existence of the Warrants, the Representative's
Warrant and any other options or warrants may prove to be a hindrance to future
equity financing by the Company. Further, the holders of such Warrants and
options may exercise them at a time when the Company would otherwise be able to
obtain additional equity capital on terms more favorable to the Company. See
"Description of Securities."
13. IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Preferred Stock will incur an immediate and substantial
dilution of approximately ____________ % of their investment in the shares
(assuming conversion into Common Stock) in that the pro forma net book value of
the Company's Common Stock after this Offering will be approximately $_________
per share. See "Dilution."
13
<PAGE> 16
14. DIVIDENDS
Sulcus has not paid any dividends on its Common Stock and does not
anticipate paying any dividends in the foreseeable future. See "Dividend
Policy." As the Preferred Stock is only entitled to dividends if, and to the
extent paid on the Common Stock, it is not anticipated that dividends will be
paid on the Preferred Stock in the foreseeable future.
15. MARKET FOR SECURITIES OFFERED; DETERMINATION OF OFFERING PRICE
Prior to this Offering, there has been no public market for the Preferred
Stock or the Warrants offered hereby. There can be no assurance that any
market for the Preferred Stock or the Warrants will develop or that, if
developed, it will be sustained. The conversion price of the Preferred Stock
and the exercise price of the Warrants has been determined through negotiation
by the Underwriter and Sulcus, and should not be assumed to bear any
relationship to Sulcus' asset value, net worth, or any other established
criteria of value. To the extent that the Preferred Stock suffers a sharp
decline in price, the value of the Warrants may be diminished, in whole or in
part. See "Price Range of Common Stock" and "Underwriting."
16. PENNSYLVANIA ANTI-TAKEOVER LAWS; CHANGE OF CONTROL
Various provisions of the Pennsylvania Business Corporation Law, under
which Sulcus was organized, generally make "hostile" takeovers of Pennsylvania
corporations more difficult by granting certain rights to non-interested
stockholders in certain "change of control" situations by permitting such
stockholders to demand payment from a 20% controlling stockholder of the "fair
value" of such demanding stockholders' shares in cash. Such provisions may
make more difficult the removal of management which would in all likelihood be
more favorable for management. In addition, such provisions may be perceived
by certain investors, such as institutions, as making Sulcus' securities a less
attractive investment. Such provision may also render the accomplishment of a
tender offer more difficult, which may be more beneficial to management in a
hostile tender offer and may have an adverse impact on stockholders who may
want to participate in such a tender offer. Sulcus did not elect to "opt-out"
of these provisions. Employment Agreements with certain of the Company's
officers contain provisions with respect to receiving certain benefits
including monthly salary payments and stock options if their employment is
terminated due to a change in control of the Company which may make a tender
offer less attractive to certain investors. There are no anti-takeover devices
or measures contained in the Company's Articles of Incorporation, By-Laws or
other Corporate governing instruments and none are presently contemplated. See
"Management--Employment Arrangements," and "Description of Securities -
Pennsylvania Anti-takeover Laws."
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Preferred Stock and
Warrants offered hereby, after deducting offering expenses estimated at
$__________, are estimated to be $____________, ($_____________, if the
Underwriters' over-allotment option is exercised in full). The Company expects
to use the net proceeds for working capital and general corporate purposes.
In furtherance of the Company's strategy of acquisition of computer
software products or companies that complement or expand existing business
lines, the Company may also use a portion of the net proceeds to acquire
additional businesses or software products or to support joint ventures related
to existing businesses. The Company currently has no agreements with respect
to any acquisitions and there can be no assurance that it will be able to
acquire companies or software products on a favorable basis.
Pending the application of the proceeds as described above, the Company
will make temporary investments in interest-bearing savings accounts,
certificates of deposit, United States Government obligations, preferred
securities or money market certificates. United States government obligations
are not necessarily those backed by the full faith and credit of the United
States government. Company policy does not require temporary investment 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.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The
Preferred Stock is only entitled to dividends if and to the extent that
dividends are paid on Common Stock, and the current policy of the Board of
Directors is to retain any earnings to provide for the development and growth
of the Company. Consequently, no cash dividends are expected to be paid in the
foreseeable future.
DILUTION
Dilution represents the difference between the public offering price per
share paid by purchasers in this offering and the pro forma net tangible book
value per share immediately after completion of this offering. Net tangible
book value per share is determined by dividing the total number of outstanding
shares of common stock into the difference between total tangible assets less
total liabilities. At March 31, 1996, (unaudited), the net tangible book value
($______________) of the Company was ($_________________) per share. After
giving effect to the sale by the Company of 1,000,000 shares of Preferred
Stock at a public offering price of $______________ per share (convertible into
______________ shares of Common Stock at $___________ per share), and 1,000,000
Warrants at $________________ per Warrant, the pro forma net tangible
book value of March 31, 1996 would have been $_____________ per share of Common
Stock, after deduction of underwriting discounts and commissions and estimated
expenses to be incurred by the Company in connection with this offering.
Investors purchasing shares of Preferred Stock in this offering will thus
experience an immediate dilution of $ _____________ (or ____%) in the tangible
book value per share of their shares of Preferred Stock, while
15
<PAGE> 18
existing shareholders will benefit from an immediate increase in the net
tangible book value of their shares of Common Stock of $________ per share.
The following table illustrates the foregoing effects:
Public offering price per share
Net tangible book value (deficiency) per share before offering
Increase in net tangible book value per share attributable
to existing investors
Pro forma net tangible book value per share after offering
Dilution per share to new investors
If the over-allotment option is exercised in full, the pro forma net
tangible book value after this offering would be $________ per share, which
would result in dilution to the new investors in this offering of $________
per share of Preferred Stock.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to give effect to the sale of 1,000,000 shares
of Series A Redeemable Convertible Preferred Stock, and 1,000,000 Class A
Warrants at an assumed public offering price of $5.00 and $0.25, respectively
and the application of net proceeds therefrom (See "Use of Proceeds"). All
information set forth below should be read in conjunction with the financial
statements and notes thereto in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1996
Actual as Adjusted
----------- ---------------
<S> <C> <C>
Short-Term Debt Excluding Current
Maturities of Long-Term Debt $6,525,443 $6,525,443
Long-Term Debt 478,580 478,580
Stockholders' Equity
Preferred Stock; Authorized 10,000,000
shares of which 8,000,000 are
designated as Series A Redeemable
Convertible, no shares issued and
outstanding; 1,000,000 shares issued
and outstanding, as adjusted -- 4,353,750
Common Stock; no par value; 30,700,000 shares
authorized; 14,960,997 shares issued, and
as adjusted 38,114,272 38,114,272
Note Receivable from Stockholder (500,000) (500,000)
Retained Earnings (Deficit) (14,226,308) (14,226,308)
Foreign Currency Adjustment (27,583) (27,583)
Cumulative Unrealized Loss on Investments
Available for Sale (130,793) (130,793)
----------- -----------
Total Stockholders' Equity $23,229,588 $27,583,338
----------- -----------
Total Capitalization $30,233,611 $34,587,361
=========== ===========
</TABLE>
17
<PAGE> 20
PRICE RANGE OF COMMON STOCK
On May 19, 1992, Sulcus Common Stock began trading on the American Stock
Exchange under the symbol SUL. Previously, Sulcus' Common Stock was traded on
the over-the-counter market on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") National Market System under the symbol SULC.
<TABLE>
<CAPTION>
QUARTER ENDING HIGH LOW
<S> <C> <C>
March 1996 2-13/16 1-7/8
June 1996 (through May 21) 3-9/16 2-5/8
March 1995 3-5/8 2
June 1995 3-3/4 2-1/2
September 1995 3-9/16 2-5/8
December 1995 2-7/16 1-7/8
March 1994 8-3/8 5-3/4
June 1994 6 2-11/16
September 1994 3-15/16 2-3/4
December 1994 3-7/16 2-1/16
</TABLE>
On May 21, 1996, the high and low prices for the Common Stock were $3 9/16
and $3 3/8, respectively.
As of May 21, 1996, there were approximately 2,983 record holders of
Sulcus' Common Stock.
18
<PAGE> 21
SULCUS COMPUTER CORPORATION
Selected Financial Data
The following table sets forth selected consolidated financial data of the
Company for the three months ended March 31, 1995 and March 31, 1996 and for
the five years ended December 31, 1991 through 1995. This information should
be read in conjunction with "Managements Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
(Thousands, except per share data)
Three Months Ended
March 31, Year Ended December 31,
--------------------- --------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
- ----------------------------
Net sales $10,942 $11,016 $44,693 $41,887 $47,346 $35,245 $17,256
Interest income 333 295 1,291 1,256 1,937 1,385 505
------- ------- ------- ------- ------- ------- -------
Total revenue 11,275 11,311 45,984 43,143 49,283 36,630 17,761
Cost of goods sold and services provided 4,468 4,615 18,965 20,588 23,085 15,418 6,153
--------------------------------
Selling, general and administrative expenses 5,506 5,579 22,896 24,388 21,726 14,756 8,091
Research and development 267 366 1,199 1,597 1,878 2,342 1,044
Interest expense 129 142 598 556 403 242 285
Depreciation and amortization 384 446 1,520 2,158 2,034 960 482
Income (loss) before unrealized gain/loss and
unusual items 521 162 806 (6,144) 157 2,912 1,706
Unrealized (gain) loss on investments (1) -- (882) (1,462) 1,861 -- -- --
Income (loss) before unusual items 521 1,044 2,268 (8,005) 157 2,912 1,706
Unusual items -- -- 3,434 3,663 3,207 -- --
Income taxes -- -- 203 -- -- 821 358
Income (loss) before extraordinary item and
cumulative effect of accounting changes 521 1,044 (1,369) (11,668) (3,050) 2,091 1,348
Net income (loss) $521 $1,044 ($1,369) ($11,668) ($3,050) $3,222 $1,692
Per Share Data
- --------------
Income (loss) per share before extraordinary
item and cumulative effect of accounting charges $0.03 $0.07 ($0.09) ($0.84) ($0.22) $0.17 $0.21
Net income (loss) per share $0.03 $0.07 ($0.09) ($0.84) ($0.22) $0.26 $0.26
Weighted average shares used in computing
net income (loss) per share 16,615 14,651 14,720 13,872 14,157 12,446 6,539
Historical Balance Sheet Data
- -----------------------------
Working capital $6,036 $5,771 $5,390 $4,183 $8,643 $10,615 $9,438
Total assets 45,575 45,210 47,327 47,869 58,716 51,499 28,531
Long-term obligations 279 70 27 86 364 1,039 1,387
Stockholders' equity 23,230 24,111 22,894 23,087 33,373 33,489 18,316
</TABLE>
(1) On June 5, 1995, the Company restructured its investment portfolio. As a
result, under FAS No. 115, the Company no longer reports unrealized gains
or losses from the investment portfolio in its statement of earnings.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
The Company had net income of $521,404 in the quarter ended March 31,
1996 as compared to $1,043,535 in the quarter ended March 31, 1995 on sales
which were virtually unchanged. In 1995, the Company reported unrealized gains
on its investment portfolio of $881,683. When eliminating this amount for the
purpose of comparability, the Company showed an improvement on earnings from
$161,852 to $521,404, a change of $359,552. The Company's results for the
quarter ended March 31, 1996 improved over those for the same period of 1995
primarily as a result of improvements in margins ($72,719), reduced selling,
general and administrative expenses ($72,964) and reduced research and
development costs ($99,197). In 1995, the Company had Trading Securities which
had unrealized market appreciation in the first quarter of $881,683. 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 quarter ended March 31, 1996 were $10,941,988,
representing a decrease of $74,299 (1%) when compared to net sales of
$11,016,287 for the same period of 1995. Net system sales for the quarter
ended March 31, 1996 were $6,524,818 as compared to $6,803,287 for the same
period of 1995, a decrease of $278,469 (4%) due primarily to decreased sales of
the Company's Point of Sale Systems. Support revenues for the quarter ended
March 31, 1996 were $4,417,170 as compared to $4,213,000 for the same period of
1995, an increase of $204,170 (5%) due primarily to an increased base of Point
of Sale installations in 1995. 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 $9,310,093 (85%) and $1,631,895 (15%), respectively, of net
sales for the quarter ended March 31, 1996 as compared to $8,726,591 (79%) and
$2,289,696 (21%) for the comparable 1995 period.
Cost of goods sold for the quarter ended March 31, 1996 decreased to
$4,467,766 from $4,614,784, a decrease of $147,018 (3%) from the comparable
1995 period. As a consequence, cost of goods sold as a percentage of net sales
improved for the quarter ended March 31, 1996 to 41%, as compared to 42% for
the same period of 1995. Gross margins of the Company increased to $6,474,222
from $6,401,503, an increase of $72,719 (1%) over the same period of 1995.
Cost of system sales for the quarter ended March 31, 1996 was $3,307,969 (51%
of system sales) as compared to $3,333,777 (49% of system sales) for the same
period of 1995, a decrease of $25,808 (1%), due primarily to the mix of
software and hardware sales. Cost of support for the quarter ended March 31,
1996 was $1,159,797 (26% of support revenues) as compared to $1,281,007 (30% of
support revenues) for the same period of 1995, a decrease of $121,210 (9%),
primarily as the result of the Company's ability to control such costs.
Selling, general, and administrative expenses decreased in 1996 when
compared to 1995. For the quarter ended March 31, 1996, these expenses were
$5,506,194 as compared to $5,579,158 a decrease of $72,964 (1%) from the same
period of 1995. Selling, general, and administrative expenses as a percentage
of net sales was 50% for the quarter ended March 31, 1996 as compared to 51%
for the same period of 1995.
Research and development expense for the quarter ended March 31, 1996
decreased to $267,251 from $366,448, a decrease of $99,197 (27%) from the same
period of 1995. This decrease is attributable primarily to greater amounts
capitalized in 1996 as compared to 1995 ($42,217) and governmental grant
amounts received by the Company to support research and development ($41,238).
In 1996, the Company's Canadian subsidiary entered into an agreement with
National Research Council Canada which provides financial support
20
<PAGE> 23
for development carried out under an approved program. Total amounts expended
on research and development (including amounts expensed, amounts subsidized by
government support and amounts capitalized) was $549,139 and $564,881 for the
quarters ended March 31, 1996 and 1995, respectively.
Depreciation and amortization expense for the quarter ended March 31,
1996 decreased to $383,605 from $446,314 for the same period of 1995, a
decrease of $62,709 (14%).
Interest income for the quarter ended March 31, 1996 was $333,031 as
compared to $294,767 for the same period of 1995, an increase of $38,264 (13%),
due primarily to higher rates earned on invested balances.
Interest expense for the quarter ended March 31, 1996 decreased to
$128,799 from $142,498 for the same period of 1995, a decrease of $13,699 (10%)
due primarily to lower interest rates on outstanding borrowings.
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 March 31, 1996 and 1995
and as of March 31, 1996 and December 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net revenues(1):
North America $ 8,221,523 $ 8,936,491
Pacific Region 1,518,945 935,481
Europe 1,534,551 1,439,082
----------- -----------
Consolidated net revenues $11,275,019 $11,311,054
=========== ===========
Net income (loss):
North America $614,233 $1,564,540
Pacific Region (69,330) (399,335)
Europe (23,499) (121,670)
--------- -----------
Consolidated net income $521,404 $1,043,535
======== ==========
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Identifiable assets:
North America $37,511,061 $39,208,729
Pacific Region 3,276,192 3,437,539
Europe 4,787,944 4,680,510
----------- -----------
Consolidated identifiable assets $45,575,197 $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 $10,401,835 at March 31, 1996 and $10,534,223 at
December 31, 1995. The valuation allowance was decreased in the quarter ended
March 31, 1996 by $132,388 and was decreased in the quarter ended March 31,
1995 by $621,071 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 March 31, 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
21
<PAGE> 24
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.
1995 AS COMPARED TO 1994
The significant improvement in 1995 when compared to 1994 is primarily
the result of a 7% increase in sales and an improvement in gross margins of 8
percentage points, which together accounted for a $4,428,378 improvement in
gross margins, a $1,492,214 reduction in selling, general and administrative
expenses and $3,323,408 in portfolio unrealized market changes (from an
unrealized loss of $1,861,403 in 1994 to an unrealized gain of $1,462,005 in
1995). During 1995, the Company settled certain shareholder litigation which
resulted in provisions of $2,919,333 and wrote-off certain capitalized software
development costs totaling $514,694 representing the end of the estimated
useful lives of certain systems. Primarily as a result of the above, the
Company's net loss in 1995 was ($1,368,956) as compared to a loss of
($11,668,013) in 1994.
Net sales for the year ended December 31, 1995 were $44,693,302,
representing an increase of $2,805,986 (7%) when compared to net sales of
$41,887,316 for the same period of 1994. Net system sales for the year ended
December 31, 1995 were $27,645,389 as compared to $25,893,783 for the same
period of 1994, an increase of $1,751,606 (7%) due primarily to increased sales
of the Company's Point of Sale Systems. Support revenues for the year ended
December 31, 1995 were $17,047,913 as compared to $15,993,533 for the same
period of 1994, an increase of $1,054,380 (7%) due primarily to an increased
base of Point of Sale installations. 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 $35,777,862 (80%) and $8,915,440 (20%), respectively, of
net sales for the year ended December 31, 1995 as compared to $31,705,933 (76%)
and $10,181,383 (24%) for the comparable 1994 period. The Company previously
reported in two industry groups (the Real Estate/Hospitality Group and the
Legal Group). The Legal Group is not material (less than 3% of total sales) to
the consolidated operations of the Company, accounting for sales of $1,074,202
in 1995 and $1,185,910 in 1994. Therefore, this discussion and analysis is
made on the basis of one industry category.
Cost of goods sold for the year ended December 31, 1995 decreased to
$18,965,582 from $20,587,974, a decrease of $1,622,392 (8%) over the comparable
1994 period. As a consequence, cost of goods sold as a percentage of net sales
improved for the year ended December 31, 1995 to 42%, as compared to 50% for
the same period of 1994. Gross margins of the Company increased to $25,727,720
from $21,299,342, an increase of $4,428,378 (21%) over the year ended December
31, 1994. Cost of system sales for the year ended December 31, 1995 was
$14,351,669 (52% of system sales) as compared to $15,078,349 (58% of system
sales) for the same period of 1994, a decrease of $726,680 (5%), due primarily
to the mix of software and hardware sales and the ability of the Company to
control hardware costs. Cost of sales is also lower in 1995 as compared to
1994 because 1994 included amortization of $358,500 related to certain
capitalized software development costs written-off in 1994. Cost of support
for the year ended December 31, 1995 was $4,613,913 (27% of support revenues)
as compared to $5,509,625 (34% of support revenues) for the same period of
1994, a decrease of $895,712 (16%), primarily as the result of the Company's
ability to control such costs.
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Selling, general, and administrative expenses decreased in 1995 when
compared to 1994. For the year ended December 31, 1995, these expenses were
$22,895,996 as compared to $24,388,210 a decrease of $1,492,214 (6%) over the
same period of 1994. Selling, general, and administrative expenses as a
percentage of net sales decreased to 51% for the year ended December 31, 1995,
a 7 percentage point decrease from the year ended December 31, 1994. The
reduction in expense is primarily in the areas of bad debts on accounts
receivable ($770,000), payroll related costs ($218,000) and travel related
expenses ($115,000). Reduction in bad debt expense is the result of changes in
Company procedures in extending credit and collections.
Research and development expense for the year ended December 31, 1995
decreased to $1,198,999 from $1,596,515, a decrease of $397,516 (25%), as
compared to the year ended December 31, 1994. Total amounts expended on
research and development (including amounts expensed and amounts capitalized)
was $2,201,853 and $3,153,403 for the years ended December 31, 1995 and 1994,
respectively. Management believes that these reduced expenditures do not
negatively impact the Company's competitive position in the marketplace. The
Company continuously evaluates the anticipated future sales of the software
systems, and concluded, during the fourth quarter of 1995 that certain systems
would have only nominal future sales and, therefore, should be written-off.
This write-off (recorded in the fourth quarter of 1995) amounted to $514,694
and is reported in the income statement as a separate component of expenses.
In 1994, the Company wrote-off $1,820,246 related to capitalized software
costs.
Depreciation and amortization expense for the year ended December 31,
1995 decreased to $1,520,033 from $2,157,857 for the same period of 1994, a
decrease of $637,824 (30%). In 1994, the Company wrote-off certain goodwill
associated with the Company's Hong Kong and Singapore subsidiaries which
resulted in a $344,000 reduction in 1995 goodwill amortization when compared to
that of 1994.
Interest income for the year ended December 31, 1995 was $1,290,691 as
compared to $1,255,848 for the same period of 1994, an increase of $34,843
(3%), due primarily to higher average invested balances.
Interest expense for the year ended December 31, 1995 increased to
$597,672 from $556,269 for the same period of 1994, an increase of $41,403 (7%)
due to higher outstanding borrowings.
During 1995, the Company made a provision for the settlement of a
shareholder class action suit and increased the estimated cost of the 1993
settlement of a previous shareholder action. On December 27, 1995, the Company
settled with the plaintiffs in the action known as "IN RE: Sulcus Computer
Corporation Securities Litigation, II". This settlement provided for a
settlement fund of $800,000 in cash and 1,400,000 Sulcus Common Shares having a
value of $2,800,000 at the time of settlement. The cash portion of the
settlement will be paid by insurance ($666,000) and the Company ($134,000). At
December 31, 1995, the Company recorded a provision of $2,861,118 which,
together with amounts accrued in 1994, represents costs which the Company
expects to incur in connection with this settlement. Additionally, in
connection with the conclusion of the 1993 settlement action known as "IN RE:
Sulcus Computer Corporation Securities Litigation", the Company expects to
incur costs of $58,215 in addition to those previously accrued.
During 1995, the Company recorded tax expense of $202,645,
representing an estimate of current and deferred taxes attributable to that
year. These taxes are incurred in jurisdictions where loss carryforwards are
not available. Due to losses from operations and loss carryforwards, the
Company incurred no expense in 1994 and 1993. The Company had a net deferred
tax asset amounting to $2,099,753, net of valuation allowances of $10,534,223
at December 31, 1995 and $11,058,609 at December 31, 1994. The valuation
allowance was decreased in the year ended December 31, 1995 by $524,386
reflecting the Company's estimate of the valuation allowance necessary to
reduce the net deferred tax asset to the net recoverable amount. 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
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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.
1994 AS COMPARED TO 1993
For the year ended December 31, 1994, the Company reported net loss of
($11,668,013) as compared to a net loss of ($3,050,100) for the year ended
December 31, 1993. For the year ended December 31, 1994, the Company's sales
and gross margins decreased from those reported in the same period of 1993.
Additionally, the 1994 results included a write-off of software development
costs ($1,820,246), the write-off of an investment in an unconsolidated
subsidiary ($336,703), the write-off of goodwill ($1,256,000) and a provision
for litigation settlement ($250,000) as compared to the 1993 write-off of
assets ($970,184) and provision for litigation settlement ($2,237,310).
Primarily as a result of the above, the Company's net loss in 1994 was
($11,668,013) as compared to ($3,050,100) in 1993.
Net sales for the year ended December 31, 1994 were $41,887,316,
representing a decrease of $5,458,515 or 12% when compared to net sales of
$47,345,831 for the same period of 1993. Net system sales for the year ended
December 31, 1994 were $25,893,783 as compared to $32,944,045 for the same
period of 1993, a decrease of $7,050,262 (21%) due primarily to a sales decline
in the Company's Hong Kong subsidiary, decreases of the Company's Property
Management Systems domestic sales and the loss in 1993 of a distribution
agreement by the Company's Craftech subsidiary in Hong Kong. Support revenues
for the year ended December 31, 1994 were $15,993,533 as compared to
$14,401,786 for the same period of 1993, an increase of $1,591,747 (11%) due
primarily to increased sales of the Company's Point of Sale Systems and
increased support provided under a contract with Holiday Inn Worldwide.
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 $31,705,933
(76%) and $10,181,383 (24%), respectively, of net sales for the year ended
December 31, 1994 as compared to $38,045,473 (80%) and $9,300,358 (20%) for the
comparable 1993 period.
Cost of goods sold for the year ended December 31, 1994 decreased to
$20,587,974 from $23,084,752, a decrease of $2,496,778 (11%) over the
comparable 1993 period. Cost of goods sold as a percentage of net sales
remained relatively constant for the year ended December 31, 1994 at 50%, as
compared to 49% for the same period of 1993. As a result, gross margins of the
Company decreased to $21,299,342 from $24,261,079, a decrease of $2,961,737
(12%) over the year ended December 31, 1993. Cost of system sales for the year
ended December 31, 1994 was $15,078,349 (58% of system sales) as compared to
$19,126,487 (58% of system sales) for the same period of 1993, a decrease of
$4,048,138 (21%). Cost of support for the year ended December 31, 1994 was
$5,509,625 (34% of support revenues) as compared to $3,958,265 (27% of support
revenues) for the same period of 1993, an increase of $1,551,360 (39%)
primarily as the result of increased costs of fulfilling support contracts for
existing and acquired customers in connection with hardware and software
systems sold.
Selling, general, and administrative expenses increased in 1994 when
compared to 1993. For the year ended December 31, 1994, these expenses were
$24,388,210 as compared to $21,726,463 an increase of $2,661,747 (12%) over the
same period of 1993. Selling, general, and administrative expenses as a
percentage of net sales increased to 58% for the year ended December 31, 1994,
a 12 percentage point increase from the year ended December 31, 1993. This
increase in costs occurred primarily in the area of
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payroll and related costs ($2,346,655), legal, professional and auditing
($497,797) and was partially offset by declines in travel related costs
($391,397).
Research and development expense for the year ended December 31, 1994
decreased to $1,596,515 from $1,877,628, a decrease of $281,113 (15%) as
compared to the year ended December 31, 1993. Total amounts expended on
research and development (including amounts expensed and amounts capitalized)
was $3,153,403 and $4,346,965 for the years ended December 31, 1994 and 1993,
respectively. Management believes that these reduced expenditures do not
negatively impact the Company's competitive position in the marketplace.
During the third quarter of 1994, the Company wrote-off capitalized software
costs of $1,820,246, representing the assessment that certain customer related
software would no longer benefit future periods. This write-off is presented
in the income statement as a separate component of expenses.
Depreciation and amortization expense for the year ended December 31,
1994 increased to $2,157,857 from $2,034,144 for the same period of 1993, an
increase of $123,713 (6%).
Interest income for the year ended December 31, 1994 was $1,255,848 as
compared to $1,937,314 for the same period of 1993, a decrease of $681,466
(35%), due primarily to lower average invested balances.
Interest expense for the year ended December 31, 1994 increased to
$556,269 from $402,764 for the same period of 1993, an increase of $153,505
(38%) due to higher outstanding borrowings and higher interest rates.
During 1994 and 1993, the Company did not record a provision for
income tax expense, based upon estimates of the impact of losses for tax
purposes, changes in deferred tax assets and the availability of loss
carryforwards.
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 segments.
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
March 31, 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 March 31, 1996, Sulcus' cash and cash equivalents increased to
$3,000,511 from $1,202,325 at December 31, 1995, an increase of $1,798,186.
This increase is primarily the result of cash received during the first quarter
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 March 31, 1996, the Company's short-term investment portfolio
decreased to $12,232,390 from $12,408,075 at December 31, 1995, a decrease of
$175,685 (1%) primarily related to declines in market value. These investments
are subject to risk, most
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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 March 31, 1996, and December 31, 1995, of
$6,313,889 and $6,062,905 respectively, on margin against its investments at
the brokers internally established floating interest rate which was 7.875% at
March 31, 1996.
At March 31, 1996, accounts receivable decreased to $7,959,404, as
compared to $11,134,576 at December 31, 1995, a decrease of $3,175,172 (29%)
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 remained relatively constant at March 31,
1996, increasing slightly to $2,618,013 as compared to $2,581,020 at December
31, 1995.
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 computer peripherals decreased to $2,513,392 at March
31, 1996 as compared to $2,573,826 at December 31, 1995, a decrease of $60,434
(2%). Accounts payable decreased to $3,600,038 at March 31, 1996 as compared
to $4,352,408 at December 31, 1995, a decrease of $752,370 (17%).
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
$2,409,965 at March 31, 1996 from $2,015,816 at December 31, 1995, an increase
of $394,149.
In addition to borrowings on margin against its investments, the
Company has outstanding short and long-term borrowings from various financial
institutions. At March 31, 1996, the Company had short-term borrowings
(excluding borrowings under margin) of $211,554 as compared to $319,805 at
December 31, 1995, a decrease of $108,251 (34%). At March 31, 1996, the
Company had long-term borrowings (including current and noncurrent portions)
of $478,577 as compared to $128,695 at December 31, 1995, an increase of
$349,882. This increase is primarily the result of 1996 capitalized lease
obligations for equipment.
The backlog of hardware and software orders at March 31, 1996 is
expected to be filled within one year and amounted to $3,632,000 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. 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' 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.
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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.
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BUSINESS
GENERAL
Sulcus develops, manufactures, markets and installs microcomputer systems
designed to automate the creation, handling, storage and retrieval of
information and documents. The Company designs its systems primarily for the
hospitality and real estate industries and to a lesser extent, the legal
profession. The Company's sales practices are currently systems oriented
(rather than individual sales of hardware or software) toward the vertical
marketing of its integrated products. Systems include a network of hardware,
software and cabling as well as stand alone systems for which the hardware and
software are not separately sold. The Company's systems are offered together
with full services, training, maintenance, and support. The Company has
installed systems throughout North and South America, Europe, Africa, Asia and
Australia. Customers include property management companies, condominiums,
hotels, motels, restaurants, resorts, country clubs, cruise lines, real estate
loan and closing offices, title insurance companies, abstract companies, escrow
offices and law offices.
HISTORICAL DEVELOPMENT
The Company provides its computer systems to customers on a turnkey
basis. Each system includes hardware, software, training, maintenance and
support. Sulcus believes that this approach is critical in business
applications because while some system providers can automate a specific task,
most are unable to effectively automate a broad range of a customer's business.
The Company's sales practices and trends are currently oriented to sales of
systems (rather than individual sales of hardware or software) and to the
vertical marketing of its integrated products.
The Company began to develop in 1988 a strategic plan to achieve a
leadership position in turnkey computer systems with specialized software for
the real-estate related, hospitality and legal industry groups. These groups
were chosen because they represented, in management's opinion, large vertical
business markets. The strategic plan envisioned internal growth by way
of expanded research and development, as well as growth through acquisitions,
mergers, joint ventures and similar alliances. In furtherance of this
strategy, Sulcus pursued acquisition opportunities which created additional
market opportunities for existing products, had products that complemented or
expanded existing product lines, and created additional product distribution
channels. Sulcus has made numerous acquisitions to date as described
below.
COMPUSOLV
In July 1989, a subsidiary of Sulcus, acquired a non-exclusive license
from CompuSolv for established property management software systems for the
hospitality industry. These systems are used by the hotel, motel, condominium,
restaurant and travel industries to automate front office, back office, point
of sale and call accounting systems.
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RADIX
In August 1990, Sulcus established Radix Systems, Inc., a wholly-owned
subsidiary with its primary offices in Conshohocken, Pennsylvania. Radix
provided field engineering and support services including site analysis,
cabling, and Novell(R) training. Since that time, Radix has added LANmark
support and Squirrel system sales and support.
LODGISTIX
In February 1991, Sulcus acquired Lodgistix, Inc., an integrator of
property management systems in the hospitality industry. Lodgistix was a
developer of automated hotel systems including front office, back office, sales
and catering and interfaces to other hotel-related systems. The Lodgistix
stockholders received one unit (the "Unit") of Sulcus for each 13.479 shares of
their Lodgistix Common Stock, each Unit consisting of two shares of Sulcus
Common Stock and two Class A Warrants. An aggregate of 484,375 Units were
issued to all Lodgistix stockholders with a value of $3,100,000.
SULCUS (AUSTRALIA) PTY. LTD.
Effective November 1, 1991, the Company established a direct sales office
in Australia by acquiring certain assets, trade names, leasehold improvements
and equipment for approximately $200,000 from Belvoir Lodgistix Group Pty. Ltd.
and its shareholders. Belvoir Lodgistix was the distributor of Lodgistix,
Inc.'s systems in Australia and Eastern Asia. The Company's name was changed
to Sulcus (Australia) Pty. Ltd. Sulcus (Australia) Pty. Ltd. sells and
supports the full range of the Company's property management and point-of-sale
systems.
SQUIRREL
In March 1992, the Company acquired Squirrel Companies, Inc. Squirrel
develops and markets touch-screen software systems to the hospitality industry.
Squirrel's software systems consist principally of point-of-sale software
coupled with food and beverage software and hardware. Sulcus purchased Squirrel
in exchange for $500,000, 401,260 shares of Sulcus Common Stock valued at
$2,307,245. At the closing options to purchase up to 175,000 shares of Sulcus
Common Stock at $4.25 per share were issued as well as options
to purchase 225,000 shares of Sulcus Common Stock at $12.50 per share were
issued, subject to certain earn out provisions in connection with the
acquisition. One half of the options for the 175,000 shares were vested
immediately and the balance vested one year later. A total of 174,263 options
were exercised. The earn out options were to vest in each of the three years
ended December 31, 1992, 1993 and 1994 if Squirrel met its earn-out objective.
None of these options were exercised and have expired. In addition, the
shareholders of Squirrel were entitled to receive up 451,665 additional shares
of the Company's Common Stock if Squirrel attained its earn-out objective for
those three years. For the years ended December 31, 1992 and 1994, Squirrel
achieved sufficient earnings to entitle the former shareholders to earn-out
payments. The Company issued an aggregate of 124,048 shares for 1992 and 1994
respectively, having an aggregate value of $880,288.
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NRG
In March 1992, the Company acquired NRG Management Systems, Inc. (NRG) in
exchange for 61,968 shares of the Company's Common Stock valued at $473,207.
NRG develops and markets energy and room management software to the hotel and
motel industry. The applications include HVAC energy management, in-room
safes, mini-bar, maid status, and room occupancy and security. In 1996, the
Company began marketing an improved version of the product under the name CIRIS
I. The shareholders of NRG were entitled to receive up to 324,324 additional
shares of the Company's Common Stock if NRG attained certain projected after
tax earnings for the years 1992 through 1994. For the year ended December 31,
1992, the Company issued 16,019 shares of Sulcus Common Stock valued at
$148,173 ($9.25 per share) pursuant to the earn-out formula. For the years
ended December 31, 1993 and 1994, pursuant to the terms of the Stock Purchase
Agreement, no earn-out shares were issued.
JBA
In July and September 1992, respectively, the Company acquired JBA (HK)
Ltd. of Hong Kong and JBA Singapore PTE. LTD. The names of the companies were
subsequently changed to Sulcus Hospitality Limited and Sulcus Singapore Pte.
Ltd., respectively. Sulcus Hospitality Limited and Sulcus Singapore Pte. Ltd.
market the full range of the Company's property management and point-of-sale
systems. The purchase price of both companies consisted of a total of
$1,450,000 in cash. In addition, the former shareholders were entitled to
receive shares of Sulcus Common Stock having an aggregate value of up to
$8,855,000, contingent upon achieving certain earnings benchmarks over a
three-year period. For the year ended December 31, 1992, the Company issued
297,652 shares of Sulcus Common Stock valued at $2,827,691 ($9.50 per share).
As a result of the Company's 1992 restatement of earnings, the Company revised
the contingent earn-out calculation based on the restatement adjustments that
affected it. The Company cancelled the number of shares of stock issued on its
books and records as a result of the original calculation; however the
certificates representing these shares have not been surrendered despite
demand. As a result of the share cancellation, at December 31, 1994, the
Company reduced goodwill by approximately $2,168,000, reduced equity by
approximately $912,000, the estimated current value of the shares to be
cancelled, and expensed the difference of $1,256,000 in 1994. For the years
ended December 31, 1993 and 1994, these companies did not achieve their
projection, and therefore, no earn-out shares will be issued.
TECHOTEL
Effective January 1, 1993, the Company acquired Techotel, AG of Zug,
Switzerland, a hotel software development, marketing, and service organization.
The name of the company was subsequently changed to Sulcus Hospitality Group
EMEA, A.G. Sulcus Hospitality Group EMEA, A.G., through Lodgistix
(International) AG, a wholly owned subsidiary, sells and supports the full
range of the Company's property management and point-of-sale systems in 30
markets in Europe, the Middle East, and Africa, primarily through distributors.
The purchase agreement (as amended) provided for the issuance of
Sulcus Common Stock valued at $1,000,000. In addition, the shareholders of
Techotel were entitled to receive additional shares of the Company's Common
Stock if Techotel attained certain projected after-tax earnings for the years
ended December 31, 1993 through 1995. These earnings were achieved for the
1993 and 1995 periods. As a result, Sulcus has issued to the former
shareholders of Techotel 90,517 and 83,676 shares of Sulcus Common Stock valued
at $698,110 ($7.7125 per share) and $168,399 ($2.0125 per share) for the 1993
and 1995 periods, respectively. Sulcus Hospitality Group EMEA, A.G. did not
achieve the required earnings
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for 1994.
LODGISTIX SCANDINAVIA
In November 1993, the Company acquired Lodgistix Scandinavia A.S., a
distributor of Lodgistix systems in Norway, Sweden and Denmark. The name of
this company was subsequently changed to Sulcus Scandinavia, A.S. Sulcus
Scandinavia A.S. offers a full range of Sulcus products including hotel
management systems, restaurant point-of-sale systems, and CIRIS I in-room
management systems. The purchase price consisted of 120,000 shares of Sulcus
Common Stock valued at $300,000. In addition, the former stockholders of
Lodgistix Scandinavia were entitled to receive additional shares of the
Company's Common Stock with a value up to $675,000, contingent upon attaining
certain earnings over a three year period. Sulcus Scandinavia A.S. achieved
the targeted earnings for the years ended December 31, 1993 and 1995, as a
result, Sulcus has issued to the former stockholders of Lodgistix Scandinavia
A.S. 5,808 and 111,801 shares of Sulcus Common Stock valued at $44,864 ($7.725
per share) and $225,000 ($2.0125 per share) for 1993 and 1995, respectively.
Sulcus Scandinavia did not achieve the required earnings for 1994.
INTERNATIONAL OPERATIONS
The Company has established international operations for the marketing,
support, manufacturing and/or distribution of its products as a result of its
acquisition strategy. The Company's international operations presently consist
of the following subsidiaries: Sulcus (Australia) Pty. Ltd., a direct sales
office in Australia; Squirrel Systems of Canada, Ltd., a Canadian subsidiary of
Squirrel located in Vancouver, British Columbia which manufactures and sells
Squirrel products; Sulcus Hospitality Limited located in Hong Kong, and Sulcus
Singapore, PTE. LTD., located in Singapore, each a direct sales office; Sulcus
Hospitality Group EMEA A.G. located in Switzerland; Lodgistix UK, Sulcus
Scandinavia A.S., located in Norway; Sulcus (Malaysia) Sdn Bhd; Squirrel (U.K.)
Ltd., Sulcus Hospitality (U.K.) Ltd., and NRG Management Systems (U.K.) located
in the United Kingdom, all direct sales and support offices, and Sulcus
Hospitality Group (Belgium) located in Belgium, which operates as a customer
support office.
Sulcus localizes its products for use in other countries so that all
monetary references, user messages, and documentation reflect the monetary
units, language and other conventions of a particular country. The Company's
international operations are subject to certain risks common to foreign
operations in general, such as governmental regulations and import
restrictions.
PRODUCTS
HARDWARE
Sulcus markets computer systems consisting of hardware, software, training
and ongoing support. The hardware platform utilized by the Company's property
management and legal systems products can be obtained from Sulcus or from
elsewhere--either from a manufacturer with whom Sulcus has a value-added
remarketing agreement (whereby Sulcus purchases such hardware at a
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discount) or from a completely independent supplier. The hardware platform
utilized by the Company's point-of-sale systems is manufactured by the Company
from commercially available computer components.
In the event of a turnkey purchase in which Sulcus supplies hardware,
software and training, Sulcus offers a Hardware Service Agreement for the
maintenance of the equipment. In certain circumstances the hardware supplier
provides the equipment maintenance with no revenue accruing to Sulcus. Sulcus
performs certain remanufacturing and assembly operations at its own Greensburg,
Pennsylvania, Wichita, Kansas and Vancouver, Canada facilities. Sulcus is not
dependent on a specific manufacturer for its components or systems.
The base systems are supported by printers and other peripherals (as
requested by the customer) purchased by Sulcus from manufacturers. Sulcus is
not dependent upon any individual supplier for these peripherals and support
devices.
SOFTWARE
Through its in-house staff of applications programmers, systems
programmers, and software engineers, Sulcus develops and enhances its own
proprietary software. Sulcus attempts to have its software operate with
single-input (or file-integration) methods so that the user enters data once
and the computer will use that data in the various applications desired. The
following is a brief description of the Company's principal products:
PROPERTY MANAGEMENT SOFTWARE (PMS)
CompuSolv is a UNIX-based software system which automates hotel front
office operations and back office accounting functions. Rights to this
software were obtained under a non-exclusive license.
LANmark is the Company's proprietary software which uses local area
network technology and is designed for managing hotels ranging in size from 150
to more than 2,000 rooms. Customers can purchase different modules of this
system to meet their specific needs including front office operations, back
office accounting functions, credit card authorization, group room sales, and
meeting/function space and event planning.
LANlite is a proprietary system designed to meet the needs of properties
which do not require all of the features of LANmark. As with the LANmark
system, customers can purchase different modules to meet their specific needs.
LANexec is a proprietary management information system allowing customized
reports drawn from the LANmark database.
InnMaxX is a proprietary Windows based software system designed for small
lodging properties including lodges, bed and breakfast inns or small resort
properties.
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<PAGE> 35
CIRIS I is the Company's proprietary centralized in-room information
system which consists of energy and room management software with applications
for HVAC management, in-room safes, mini-bar, maid status and room occupancy
and security.
HOTELtrieve is a licensed computer output to laser disc information
archival and retrieval system tailored to hospitality industry requirements.
This system allows the accurate capture and faithful reproduction of all
archivable information. This system provides storage for up to one million
pages on a single disc and gives the benefits of reduced storage and retrieval
costs, shortened access time, distribution of information to multiple locations
and integration with existing customer electronic systems.
POINT-OF-SALE SOFTWARE (POS)
Squirrel Restaurant Management System offers complete automation of
full-service restaurant operations. This proprietary system automates
order-entry, credit card processing, labor cost management, time and
attendance, food and beverage management and data transfer. In addition to
stationary terminals, this system also offers remote operations through
hand-held terminals.
Squirrelite is proprietary software for restaurant operations similar to
the Squirrel Restaurant Management System but intended for smaller
installations.
OTHER SOFTWARE
The Abstractor is proprietary software which operates together with
portable computers and cellular communication to automate the collection and
organization of real estate title searches.
The Closer 2000 is proprietary software which automates real estate
transfers including closing and settlement statements, truth-in-lending
disclosures, escrow and trust accounting, forms creation and information
indexing.
PRODUCT SUPPORT SERVICES
Management believes that support is fundamental to the continued business
relationship with Sulcus' customers. Software support agreements are entered
into in connection with substantially all system sales.
Under software support agreements, Sulcus offices provide support services
with their regional personnel and, if no solution can be found at that level,
Sulcus maintains second-level support through its Wichita, Kansas or Vancouver,
British Columbia centers which are staffed by specially trained personnel.
This multi-level support is intended to ensure that customers receive prompt
response and service. Software support services are provided for a fee on a
24-hour, seven-day-per-week basis pursuant to a Support, Maintenance and
Enhancement Agreement.
Sulcus provides hardware support for a fee under a Hardware Service
Agreement which enables the user to call for a diagnosis and, repair or
replacement based upon the circumstances. Certain repairs and replacements
come with fees in addition to the support agreement, depending on
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<PAGE> 36
the circumstances. Additionally, depending upon the terms of the service
agreement purchased by the customer, hardware service may be provided at a
customer's site or at centralized facilities. The Company receives certain
hardware support from manufacturers or other service providers for a fee.
PRODUCT RESEARCH, DEVELOPMENT AND IMPROVEMENT
The Company has a number of ongoing research and development projects
consisting of developing new hardware and software products as well as
improving existing products.
Most of the Company's software products are developed internally although
the Company has purchased technology and has licenses for certain intellectual
property rights. Product documentation is also created internally. Internal
development enables Sulcus to maintain closer technical control over the
products and gives the Company the latitude to designate which modifications
and enhancements are more beneficial and when they should be implemented. The
Company has created and acquired a substantial body of development tools and
methodology for creating and enhancing its products. These tools and
methodology are intended to simplify a product's integration with different
operating systems or computers.
By making end-user follow-up contacts and by considering and evaluating
end-user requests for additional features to products, Sulcus maintains an
information base to evaluate market feasibility of new products. Developing
new software and updating existing offerings is a continual process performed
by research and development groups in the effort to keep their products
competitive. Also, since the functions of several products are affected by
changes in tax laws and regulations, Sulcus rewrites such affected software to
meet these changes for its customers.
Updates are made available without charge to those customers who have
purchased support or service agreements. Additionally, formally organized user
groups exist to provide input and suggestions on new features and modules for
products. These groups have periodic meetings and provides significant user
information for new product development. Neither the Company nor any of its
principal business units is dependent upon a single group of customers or a few
customers, the loss of any one or more of which would have a material adverse
effect on the Company or any of its principal business units.
MARKETS
Sulcus offers turnkey systems consisting of hardware, software, supplies,
training, maintenance and support to the hospitality and real estate industries
as well as the legal profession. These systems are installed throughout North
and South America, Europe, Africa, Australia and Asia. Customers include
property management companies, condominiums, hotels, motels, restaurants,
resorts, country clubs, cruise lines, real estate, loan and closing offices,
title insurance companies, abstract companies, escrow offices and law offices.
The Company markets its systems through more than 80 locations in over 20
countries. These include locations maintained by the Company as sales offices
as well as locations of distributors. Customer assistance and support services
are generally offered 24 hours-a-day. The Company has generally had good
experience in utilizing its internal resources as well as distributors
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<PAGE> 37
to market and sell its products and services. Utilizing distributors allows the
Company to take advantage of established operations, eliminate office start-up
costs, and control costs associated with sales and marketing. Management
intends to continue to build the Company's customer and product bases through
current channels and to pursue strategic growth through acquisitions, mergers,
joint ventures or other alliances.
TRAINING
Training of users is performed by employees of Sulcus who are themselves
required to go through a Company training program and occasionally by
distributors familiar with the business function of the user. Sulcus also
trains its personnel in applying the use of teaching techniques to user
requirements. Under the turnkey concept the user is taught to customize the
output for his specific needs. Sulcus conducts training at its offices and at
customers' sites.
MARKETING AND ADVERTISING
Sulcus utilizes Company owned locations and distributors for the sales of
its systems. The Company owned locations account for the majority of Sulcus'
sales and are located throughout the United States and in Australia, Hong Kong,
Singapore, Switzerland, United Kingdom, Norway, Malaysia and Canada. Sales
personnel are employees of the Company and sell Sulcus products directly to
end-users and do not represent any other companies. The Company's compensation
arrangements with its sales employees generally provide for a commission based
on sales performance. Managers engaged in sales activities are compensated by
a combination of salary and commission. Distributors are compensated by means
of a discount on the purchase price which varies with products offered and to a
lesser extent, the territory assigned. The Company sets minimum sales quota
requirements for its sales employees and during the past three fiscal years the
Company has terminated sales employees and distributors for failing to meet
such requirements. The Company is not materially dependent upon any individual
or group of sales employees or distributors.
The Company does not provide customers or distributors with rights to
return products, extended payment terms or similar working capital items. The
Company does not offer any written warranty relating to the performance of its
products or that they will operate error free, and encourages its customers to
enter into a service agreement.
Sulcus has a national advertising program primarily geared to trade
journals and a local and regional cooperative advertising program which
encourages the distributors to advertise in their respective areas and attend
local trade exhibits and conventions. Representatives of Sulcus attend and
demonstrate its products at national conventions of the various industries in
which its customers participate. Some of the conventions and trade shows
attended include the International Association of Hospitality Accountants,
Hotel Industry Technology Exposition and Conference, National Restaurant
Association Convention, and the American Land Title Association Convention.
Sulcus also conducts a year-round direct-mail program.
Through its product strategies, management believes Sulcus can address the
automation requirement of each market segment. By doing so, Sulcus provides a
full-service product integration and upgrade path as a customer outgrows its
present computerized needs. This approach benefits
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<PAGE> 38
customers by protecting their investment in hardware and software, and allows
greater flexibility for future planning.
COMPETITION
Competition in the computer software market is generally intense and
competitors often attempt to emulate successful programs. Of the major
competitors, there does not appear to be a clear dominant vendor, due in part
to the increased number of competitors entering the marketplace over the past
several years. Increased competition has resulted in greater discounting of
prices with no lessening of the cost of providing systems and services.
Competitive advantages are afforded to those companies which are better
capitalized and have programming staffs which are able to meet the changing
demands of hotel and resort property owners or managers. There can be no
assurance that competitors will not develop competitive products or that Sulcus
will be able to successfully compete against such competitors or products. The
competitive position of Sulcus is not readily available because many companies
in this market are privately held and do not publish financial information.
Furthermore, there is no organization that routinely collects and evaluates
competitive information from which a competitive position can reliably be
ascertained.
The Company believes there are approximately five to six competitive
Property Management Systems vendors that have about the same or more
installations than Sulcus. The major competitors in the hotel/property
management market domestically (U.S.) include Hotel Information Systems, Inc.
(HIS), Computerized Lodging Systems, Inc. (a subsidiary of MAI Systems), Encore
Systems, Inc., and Fidelio Software Corporation (a subsidiary of Micros
Systems, Inc.) In Europe, the Middle East and Africa, the major competitors
are Fidelio Software Corporation and Hotel Information Systems, Inc. (HIS). In
Asia, Hotel Information Systems, Inc., and Fidelio Software Corporation are the
Company's major competitors. In the Full Service Restaurant Management System
domestic market, competitors are Micros Systems, Inc., NCR Corporation,
Restaurant Data Concepts, Inc., MenuSoft Systems, Inc. and Panasonic
Communications and Systems Co's. In Europe, the Middle East and Africa, the
major competitors are Remanco International, Inc. and Micros Systems, Inc. In
Asia, Remanco International, Inc., Micros Systems, Inc. and NCR Corporation are
the Company's major competition. The Company has not relied upon any report,
study, or other support in connection with this belief. Sulcus Hospitality has
been an active participant in the hospitality industry for over twelve years.
Management believes that compared to competitive products, Sulcus products
are not only superior in feature and function, but in connectivity and
integration to other products. Sulcus differentiates itself in the hospitality
marketplace in two ways. First, Sulcus utilizes a state-of-the-art development
platform for all of its software products which allows the Company to implement
its systems on both UNIX computers and DOS computers. The software development
platform is extremely flexible and easy to modify, allowing customization of
application programs to meet the specific needs of customers and provide less
expensive enhancements to the system over time. The Company's internal labor
costs are also reduced because of the efficient manner in which its programs
can be created and modified. Second, Sulcus offers a complete family of
products to the hospitality industry. These products include central
reservation systems, property management systems, restaurant POS systems, and
computer-aided training. Management believes that support is
36
<PAGE> 39
fundamental to the continued business relationship with Sulcus' customers and
that its software support is among the industry's leaders. See "Business--
Product Support Services."
The Company has generally had favorable experience in utilizing its own
employees as well as distributors for marketing and selling the Company's
products and services. Use of distributors and dealers allow the Company to
take advantage of established operations having required experience with the
Company's products. Office start-up costs are eliminated which help in the
control of the Company's costs associated with marketing and sales. The
disadvantage to using this method of distribution is the lack of direct control
and a risk inherent with changes in business and conditions of the distributor
which could result in less sales effort and less than expected revenues.
PRODUCT PROTECTION
Sulcus regards its software and application systems as proprietary and
generally relies on a combination of trade secret laws, copyrights, contracts
and internal and external nondisclosure safeguards to protect its products.
Each of the contracts under which customers use Sulcus' products contain
restrictions on using, copying and transferring the products, and prohibit
their disclosure to other parties. Despite these restrictions, it may be
possible for users or competitors to copy aspects of the products or to obtain
information that Sulcus considers as trade secrets. Sulcus believes that any
copies so obtained have limited value without access to the product source code
which is kept highly confidential. Additionally, many of Sulcus' products
contain software and hardware security devises to prevent unauthorized use or
copying. Because of the uncertain enforcement of Sulcus' proprietary rights in
foreign countries, most products distributed internationally use internal copy
protection methods. Only certain aspects of computer software can be patented,
and existing copyright laws afford limited practical protection. Sulcus has
not patented any of its products although it may seek patent protection for
future products. To maintain competitive advantages, Sulcus believes that
rapid technological changes in the computer industry places greater emphasis on
the knowledge and experience of its personnel and their ability to develop,
enhance and market new products, than on patent or copyright protection of
technology. Because of this, all employees are required to sign nondisclosure
agreements at the time of their employment.
Sulcus has registered in the United States and uses the following
trademarks and service marks on its products and services, and considers each
to be proprietary: SULCUS(R), LODGEMATE(R), LANmark(R), SQUIRREL(R),
LODGISTIX(R), PROWARE(R), LAWTOMATION(R) and SULCLINK(R).
Sulcus has the exclusive license and assignment of the following
trademarks: COMPUSOLV(R), EVIDENCE MASTER(R) and COLLECTION LEDGER(R).
Sulcus has applied for, or intends to apply for Federal trademark or service
mark registration for HAT...ms(TM), INNMAXX(TM), LANEXEC(TM), HOTELTRIEVE(TM),
CIRIS I(TM), SQUIRRELITE(TM), NRG(TM), ONE WORLD ONE SYSTEM(SM) and NRG
SAVER(SM). Additionally, Sulcus has registered or applications are pending
for various product names in numerous foreign countries.
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<PAGE> 40
PERSONNEL
As of May 15, 1996, Sulcus employed 408 persons, including 31 executives
engaged in management, 63 persons in administration and finance, 104 technical
personnel, 51 persons engaged in sales marketing and 159 persons in training
and product support. None of Sulcus' employees are subject to collective
bargaining agreements. Sulcus believes its relations with its employees to be
excellent.
PROPERTIES
Sulcus' principal executive, and administrative operations are located at
Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601, in a facility
containing approximately 10,000 square feet. Sulcus leases this building under
several leases, with a trust established by Sulcus' principal stockholder and
Chairman, Jeffrey S. Ratner, expiring on various dates through September 30,
2001. The annual rental commitment under these leases are $229,111 in 1996,
$138,105 in 1997, $85,860 in 1998 and $90,144 in 1999, $91,947 in 2000, and
$91,947 thereafter. The leases renew automatically for additional two-year
terms at a minimum rental of 2% over the prior year's amount, unless canceled
by either party. The aggregate rental commitment is similar to comparable
properties in the area.
Lodgistix leases approximately 22,500 square feet of office space in
Wichita, Kansas. The approximate monthly costs are $22,900, pursuant to a
lease terminating January 31, 1998. Sulcus Hospitality Group, Inc., leases
approximately 4,200 square feet of office space in Phoenix, Arizona. The
approximate monthly costs are $6,700 under a lease terminating July 31, 1996.
Squirrel Systems of Canada, Inc., leases 21,000 square feet in Vancouver,
British Columbia, Canada at an approximate monthly cost of $9,400 under a lease
terminating on October 31, 2005. Sulcus also leases regional and branch office
space under lease arrangements that vary from one year to month-to-month. The
total rent expense for these offices was $165,084; $185,251; and $161,700 for
the years ending December 31, 1995, 1994, and 1993, respectively.
In December 1992, the Company purchased an office building located at 420
West Boynton Beach Boulevard, Boynton Beach, Florida. The purchase price was
$338,000. The building has approximately 6,200 square feet, of which 742 square
feet is under lease which expires at December 1996. The Company utilizes this
facility for executive, sales and administrative offices and, upon expiration
of the existing lease, will also utilize this space for such purposes.
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<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Sulcus are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Jeffrey S. Ratner 53 Director and Chairman of the Board
Robert D. Gries 66 Director (1)
Herbert G. Ratner 88 Director
John W. Ryba 51 Director, General Counsel and Vice President, Administration
David Adler 51 Director (1)
Joel B. Nagelmann 54 President and Principal Executive Officer
H. Richard Howie 41 Chief Financial Officer, Principal Accounting Officer and Treasurer
Delmer C. Gowing III 52 Chief Legal Officer
Margaret Santone 54 Corporate Secretary and Office Manager
William F. McLay 49 Managing Director
Frank Morrisroe 40 President, Sulcus Hospitality Group (2)
Barry Logan 46 Vice President, General Manager, Restaurant Division of Sulcus Hospitality Group
Gary Campbell 53 Vice-President, International Operations, Sulcus Hospitality Group
Bernhard Mantel 42 Vice President, Operations, Sulcus Hospitality Group EMEA, AG
Jappe Kjaer 40 President, Sulcus Scandinavia AS
Thomas Caudill 53 Vice President, General Manager, Lodging Division of Sulcus Hospitality Group
Gerry Lau 57 Chairman, Sulcus Hospitality Limited
</TABLE>
(1) Member of Audit Committee.
(2) Mr. Morrisroe joined Sulcus in 1991 and resigned in January 1996.
Each director is elected for a period of one year at the Company's annual
meeting of Stockholders and serves until his successor is duly elected by the
Stockholders. Officers are appointed and serve at the will of the Board of
Directors subject in certain cases to the terms of employment agreements.
Herbert G. Ratner is the father of Jeffrey S. Ratner.
JEFFREY S. RATNER is a co-founder of the Company and has served as Chief
Executive Officer and Chairman of the Board of Directors since the Company's
inception in 1979. In September 1995, Mr. Ratner vacated the Chief Executive
Officer position. Since 1975, Mr. Ratner has owned Ratner Real Estate and
Ratner Development Corporation and is the Chief Executive Officer and Chairman
of the Board of both companies. In 1992, he became Chief Executive Officer and
Chairman of the Board of City Rentals, Inc., and is its sole shareholder.
These companies purchase, develop, lease and manage commercial and residential
real estate. Mr. Ratner does not devote substantial time to these companies.
On May 2, 1996, Mr. Ratner entered into an agreement with the Securities and
Exchange Commission, without admitting or
39
<PAGE> 42
denying any wrongdoing, which provides that he would not in the future violate
certain sections of the Exchange Act and Rules thereunder. See "Risk Factors."
ROBERT D. GRIES has been a Director of the Company since 1983. From 1964
through the present, Mr. Gries has been President of the Gries Companies and
has been engaged in venture capital financing. From 1966 to 1995 he was Vice
President, director and a major shareholder of the Cleveland Browns Football
Company, Inc., a professional National Football League team.
HERBERT G. RATNER was elected as a Director of the Company in October
1988. Until he retired in 1992, Mr. Ratner was the Chairman of the Board and
principal shareholder of City Industries, Inc., City Rentals, Inc., Supermarket
Realty, Inc. and Key Motors, Inc., since founding these companies in 1965. He
is also a member of the Board of Directors of Holy Cross Hospital in Florida.
Mr. Ratner is the father of Jeffrey S. Ratner, Chairman of the Company.
JOHN W. RYBA joined the Company in September 1987 as its General Counsel
and is presently its General Counsel and Vice President, Administration. Mr.
Ryba was elected a director in May 1989. Mr. Ryba was engaged in the private
practice of law in Pittsburgh, Pennsylvania, from 1984 until joining the
Company. His firm represented computer software and hardware companies.
DAVID H. ADLER was appointed a Director of the Company in August 1993.
Mr. Adler has been Chief Executive Officer and majority shareholder of a group
of privately-owned companies since 1985, including the Adler Financial Group,
David H. Adler Real Estate Enterprises and PEBECO (Pennsylvania Bedding
Incorporated) of Scranton, Pennsylvania, a manufacturer of King Koil and other
private labelled mattresses and sleep products.
JOEL B. NAGELMANN joined the Company in April 1995 as its President.
Previously, from March 1994, until joining the Company, he was Vice President
and General Manager of Enterprise Information Solutions Group of Amdahl
Corporation (AMEX:AMH), which develops and markets computer systems and
services. Prior to joining Amdahl Corporation, from 1988 to 1993, he was
President of Xerox Services (XCS), a division of Xerox Computer Corporation
(NYSE:XEROX). XCS develops and markets specialized software applications
domestically and internationally.
H. RICHARD HOWIE joined the Company in July 1994, as Chief Financial
Officer/Vice President-Finance and Treasurer. Previously, from January 1994 to
June 1994, he was Chief Financial Officer at Central Blood Bank, Inc. From
1987 to November 1993, he was Vice President Finance and Chief Financial
Officer of Stuart Medical, Inc., a nationwide hospital distributor of medical
and surgical supplies.
DELMER C. GOWING III joined the Company in July 1994, as its Chief Legal
Officer. He had been a partner at the law firm of Honigman, Miller, Schwartz
and Cohn, in their West Palm Beach, Florida office from 1991 to July 1994.
From 1989 to 1991, he held the position of Executive Counsel of Finalco Group,
Inc., an equipment leasing company. From June 1995 to date, he is a partner at
Hertz, Schram & Saretsky in their West Palm Beach office while still serving as
Chief Legal Officer of the Company.
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<PAGE> 43
MARGARET SANTONE joined the Company in 1979 as Corporate Secretary and
Office Manager. From 1975 to the present, she has also served as the Corporate
Secretary of Ratner Development Corporation, Ratner Real Estate and City
Rentals. Ms. Santone does not devote substantial time to these companies.
WILLIAM F. MCLAY joined the Company in 1990 as its Chief Financial Officer
until January 1991, when he left to serve as a Financial Advisor to Foster
Industries, Inc. through 1992. Mr. McLay rejoined the Company in 1993, as
Director of Corporate Planning and Development, later becoming Managing
Director. Mr. McLay was Vice-President and Controller of American Equity
Corporation from 1984 to 1989. Prior thereto, from 1976 to 1984, he served as
Controller and Treasurer of Wooding-Verona Tool Works, Inc., a subsidiary of
The Budd Company (formerly NYSE:BF).
BARRY LOGAN was promoted to Vice President, General Manager-Restaurant
Division of Sulcus Hospitality Group in 1994. He joined the Company as Vice
President of Research and Development of Squirrel at the time of its
acquisition by the Company in March 1992. Prior thereto, he was responsible
for the evolution of the Squirrel product line from its inception in 1984.
Prior to joining Squirrel in November 1984, he developed a time sharing system
operation and has been involved in a variety of computer-oriented organizations
since 1972.
GARY CAMPBELL joined the Company in November 1993, as President of a then
newly formed subsidiary, Revenue Management Systems, Inc. In June 1995, he was
appointed Vice President for International Operations of Sulcus Hospitality
Group. From 1991 until joining the Company, Mr. Campbell was a founder and
President of Revenue Technology Services, Inc., a software company. Before
founding Revenue Technology Services, Inc., from 1973, he served as the
Director of Business Information Services, a subsidiary of Control Data
Corporation.
BERNHARD MANTEL joined the Company following the acquisition of its
subsidiary, Techotel, Inc. in January 1993, as the Managing Director of
Techotel, Inc. (now Sulcus Hospitality Group EMEA, AG) and Lodgistix
(International), AG, a wholly-owned subsidiary of Techotel. From 1983 until
joining Sulcus, he founded Techotel, Inc. ("Techotel") and Lodgistix
(International), AG and served in the same capacities for each. He also serves
as a Director of Techotel's subsidiary Lodgistix U.K. Ltd. (since its inception
in 1987).
JAPPE KJAER joined the Company in January 1994, as President of the
Company's subsidiary, Sulcus Scandinavia A/S (formerly Lodgistix Scandinavia
A/S), upon its acquisition by Sulcus. Mr. Kjaer founded Lodgistix Scandinavia
A/S, a Lodgistix distributor in Norway, Sweden, and Denmark, in 1987, and
served as its General Manager.
THOMAS CAUDILL was promoted to Vice President, General Manager--Lodging
Division of Sulcus Hospitality Group in 1994. Previously he had been Vice
President Sales-Eastern Region. Prior to joining the Company, from 1986 to
1993, he was a Director of Sales for Covia, a partnership of seven airlines,
which developed and marketed the Apollo reservation system.
GERRY LAU joined the Company in February 1995 as Chairman of Sulcus
Hospitality Limited. Prior thereto, Mr. Lau served as a Managing Director of
Data General Corporation (NYSE:DGN), from March 1994 until February 1995, as
a partner of TASA International (a Swiss consulting firm), from 1993 to
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<PAGE> 44
March 1994, and as Group Managing Director of Innovest Systems and Services
Private Limited, from 1986 to 1993.
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of the Company ("Outside
Directors") are reimbursed for their direct expenses incurred in attending a
meeting. In addition, pursuant to the Company's Amended and Restated 1991 Stock
Option Plan for Directors (the "Directors Plan"), the Company has reserved
1,000,000 shares of its Common Stock for Directors (including Directors who are
officers or employees) of the Company or any of its subsidiaries. A committee
is charged with authority to administer the Directors Plan, to award options,
determine the option exercise price (at a price not less then the fair market
value of the Common Stock when granted) and fix the vesting schedule and other
terms thereof. Jeffrey S. Ratner and John W. Ryba serve on this committee.
During 1995, no options were awarded under the Directors Plan. See "Stock
Option Plans-Directors Stock Option Plan."
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<PAGE> 45
EXECUTIVE COMPENSATION
The following tables present certain information concerning the cash
compensation and stock options provided to the named executive officers during
the years ended December 31, 1995, 1994 and 1993. More specific information
regarding compensation is provided in the notes accompanying the tables.
SUMMARY COMPENSATION TABLE
The following table reflects the total compensation paid during 1995, 1994
and 1993, for services in all capacities to the Company by the Chairman and
each of the other four most highly compensated executive officers of the
Company during 1995 (the "Named Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------- ----------------------
Awards
------
Securities
Name and Underlying
Principal Other Annual Options/SARs
Position Year Salary($) Bonuses($) Compensation(s) (#)
<S> <C> <C> <C> <C> <C>
Jeffrey Ratner 1995 350,000 -- -- --
Chairman 1994 313,500 -- -- --
1993 325,600 -- -- --
Joel Nagelmann 1995 135,600 33,107 -- 215,579
President 1994 -- -- -- --
1993 -- -- -- --
H. Richard Howie 1995 120,000 -- -- --
Chief Financial 1994 55,000 -- -- 30,000
Officer 1993 -- -- -- --
Frank Morrisroe(1) 1995 146,000 -- -- --
President of 1994 146,000 -- -- 50,000
Sulcus Hospitality 1993 110,000 -- -- --
Group
William McLay 1995 120,000 -- -- 20,000
Managing 1994 75,000 -- -- 60,000
Director 1993 24,500 -- -- --
Gary Campbell 1995 120,000 7,200 -- --
V.P. of Sulcus 1994 120,000 -- -- 40,000
Hospitality Group 1993 -- -- -- --
</TABLE>
(1) Mr. Morrisroe joined Sulcus in February 1991 and resigned in January
1996.
43
<PAGE> 46
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the aggregate amount of shares subject to
stock options granted, for the period January 1, 1995, through December 31,
1995, to the Chairman and each of the Named Officers. No gain on these options
will be realized by the Named Officers without an increase in the price of
Company Common Stock from the date of grant, which will benefit all
stockholders proportionately.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
----------------- at Assumed Annual Rates
of Stock Price Appreciation
for Option Individual Grants
Number of ----------------------------
Securities % of Total
Underlying Options Exercise
Options/ Granted to or Base
SARS Employees in Price Expiration
Name Granted 1995 ($/Sh) Date 5%($)(1) 10%($)(1)
- ---- --------- ------------ -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey S. Ratner 0 0% ---- ---- ---- ----
Joel Nagelmann 215,579 61% 2.50 01/01/01 138,141 305,255
H. Richard Howie 0 0% ---- ---- ---- ----
Frank Morrisroe(2) 0 0% ---- ---- ---- ----
Gary Campbell 0 0% ---- ---- ---- ----
William McLay 20,000 6% 2.00 01/01/01 11,051 24,420
</TABLE>
(1) The calculation of potential realizable values are based on theoretical
and arbitrary rates of appreciation in the price of Company Common Stock
from the date of grant of five and ten percent for the option terms are
mandated by the rules of the United States Securities and Exchange
Commission and may or may not accurately reflect or predict the actual
values of the stock options.
(2) Mr. Morrisroe joined Sulcus in February 1991 and resigned in January
1996. He exercised options for 60,000 shares in 1995. All unexercised
options have expired and terminated.
44
<PAGE> 47
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information concerning the net value realized
on the exercise of stock options in 1995 by the Chairman and each of the Named
Officers as of December 31, 1995.
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at 12/31/95 at 12/31/95 ($)(1)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Jeffrey S. Ratner 0 0 200,000/0 $0/$0
Joel Nagelmann 0 0 87,789/127,790 $0/$0
H. Richard Howie 0 0 6,000/24,000 $0/$0
Frank Morrisroe(2) 60,000 $45,000 20,000/30,000 $0/$0
Gary Campbell 0 0 16,000/24,000 $0/$0
William McLay 0 0 28,000/52,000 $500/$2,000
</TABLE>
(1) The value of unexercised, in-the-money options is the difference between
the exercise price and the fair market value of Company Common Stock at
December 31, 1995, which was $2.125.
(2) Mr. Morrisroe joined Sulcus in February 1991 and resigned in January
1996.
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<PAGE> 48
EMPLOYMENT ARRANGEMENTS
The Company entered into an employment agreement with each of Messrs.
Ratner and Ryba in August 1994, and Mr. Gowing in July 1994. Among other
things, each agreement provides that if the executives' employment is terminated
after a change in control of Sulcus, he may receive, under the agreement,
certain benefits including monthly salary payments and acceleration of portions
of unexercised stock options. Mr. Ratner may receive twice his then existing
salary, benefits and all options granted to him for 36 months if his employment
is terminated other than for cause (as defined in the agreement), either
voluntarily or involuntarily or due to a change in control. Benefits include
insurance, medical and other similar benefits which could otherwise be lost due
to termination. Benefits would be substantially reduced if termination for
cause occurs. If there is a "change in control" (as defined in the agreement),
Mr. Ryba may receive his then existing salary for 12 months. On October 16,
1995, Mr. Gowing's employment agreement was revised reducing his salary,
cancelling all 150,000 stock options previously granted and granting 50,000
options at $2.25, one-half exercisable on April 17, 1996, and one-half
exercisable on December 31, 1996.
The agreements provide for an annual salary of $345,000 for Mr. Ratner, and
$104,000 for Mr. Ryba. Mr. Gowing received a salary of $15,000 per month until
November 1994, $7,500 per month until October 1995 and $1,000 per month
thereafter. Mr. Gowing may continue to work on legal matters unrelated to the
Company so long as they do not conflict with his Company duties.
Bernhard Mantel entered into an employment agreement with Techotel and its
wholly owned subsidiary Lodgistix (International) AG effective January 1, 1993,
the effective date of the Company's acquisition of Techotel, now known at Sulcus
Hospitality Group EMEA, AG and Sulcus (International) AG, respectively. Mr.
Mantel serves as Managing Director (President) of both companies, positions he
held previously. The agreement, which expired December 31, 1995, provided for
an annual salary of Swiss Francs 110,625 (equivalent to U.S. $86,089 at the
exchange rate as of 1.1446 as of April 30, 1995). Mr. Mantel can earn incentive
compensation based on the consolidated pre-tax earnings of these companies
subject to a maximum of $139,100, such compensation to be payable one half in
cash and one half in incentive stock options of Sulcus at a price determined by
dividing one half of such compensation by the average closing price of Company
Common Stock on the first ten trading days of December of the year of the
earnings. In 1993, he earned no incentive compensation. In 1994 he earned
$30,203 of incentive compensation and received options to purchase 6,749 shares
of Common Stock at a price of $2.23 per share under the incentive compensation
provisions in the agreement. Either Techotel/Lodgistix or Mr. Mantel may
terminate the employment agreement at any time with 14 days written notice, and
Lodgistix may terminate immediately with "cause." "Cause" encompasses a breach
of the employment agreement by the employee, the conviction of the employee of a
felony or the commission by the employee of a fraud against the Company.
H. Richard Howie joined the Company in July 1994, as Chief Financial
Officer pursuant to an employment agreement providing for an annual salary of
$120,000. Mr. Howie was granted an option to purchase 30,000 shares of Company
Common Stock at a price of $3.375 per share. These options were cancelled and
new options for 36,000 shares were granted on March 25, 1996, at a price of
$2.4375, twenty percent of which were immediately exercisable and the rest
vesting over four years at twenty percent per
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<PAGE> 49
year beginning in March 1997. This employment agreement can be terminated by
the Company or Mr. Howie on 14 days notice without cause.
Joel Nagelmann joined the Company in April 1995, as President of the
Company pursuant to an employment agreement providing for an annual salary of
$200,000. Mr. Nagelmann is entitled to receive annual bonuses as of December 31
in each year of his employment, commencing in 1995, based upon a percentage of
after-tax earnings of from 3% to 5% (depending on total revenues), subject to
limits of from $200,000 to $343,200, to be paid one-half in cash and one-half in
stock options. These bonus options vest one-half on the date of grant and
one-half one year later. Mr. Nagelmann was also granted an option to purchase
200,000 shares of Common Stock of the Company at $2.50 per share vesting over
five years at the rate of 20 percent per year beginning April 1995. Mr.
Nagelmann may retain all options granted and all other rights for two years if
his employment is terminated without cause. See "Certain Relationships and
Related Transactions."
The Company's employment agreements impose non-competition and
confidentiality obligations and provide for the assignment to the Company of all
rights to any technology developed by the executive during the term of his
employment. The Company has or is obtaining "key man" insurance policies in the
face amount of $200,000 on the life of Mr. Howie and $500,000 on the life of Mr.
Nagelmann under which the Company is, in each case, the beneficiary.
Copies of the foregoing agreements have been filed as exhibits to the
registration statement of which this Prospectus is a part. The above
discussion is only a summary of the terms and conditions of each of these
agreements and is qualified in all respects by reference to the actual
agreements.
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<PAGE> 50
STOCK OPTION PLANS
INCENTIVE STOCK OPTION PLAN
Sulcus has two stock option plans. The Amended and Restated 1983 Incentive
Stock Option Plan for Officers and Other Key Employees (the "1983 Plan") with
options to purchase 500,000 shares granted thereunder, and the 1991
Incentive Stock Option Plan for Officers and other Key Employees (the "Plan")
with 3,000,000 shares reserved for issuance thereunder of which options to
purchase 1,754,480 shares have been granted. No further options may be
granted under the 1983 Plan. The Plan, which was adopted in 1991, is
administered by the Board of Directors which selects the employees to whom the
options are granted, determines the number of shares subject to each option,
sets the time or times when the options will be granted, determines the time
when the options may be exercised and establishes the market value of the
shares. The Plan provides that the purchase price under the option shall be at
least 100 percent of the fair market value of the shares of the Company's
Common Stock. The options are not transferrable. There are limitations on the
amount of incentive stock options that an employee can be granted in a single
calendar year including a limitation that the aggregate fair market value of
shares shall not exceed $100,000. The terms of each option granted under the
Plan is determined by the Board of Directors, but in no event may such term
exceed ten years. As of May 21, 1996, options under both plans covering an
aggregate of 1,785,180 shares have been granted to approximately 185 employees,
at exercise prices ranging from $1.00 to $9.25 per share. As of May 21, 1996,
options for an aggregate of 564,903 shares were exercisable.
DIRECTORS STOCK OPTION PLAN
The Board of Directors of Sulcus authorized and at the June 20, 1991 annual
meeting the stockholders approved the 1991 Directors Stock Option Plan (the
"Directors Plan") covering an aggregate of 500,000 shares of Common Stock. In
October 1993, Stockholders approved increasing the number of authorized shares
to 1,000,000. A three-member committee of the Board of Directors administers
the Directors Plan. Directors of Sulcus who are not employees of the Company
are eligible to participate in the plan. Twenty percent of options granted are
exercisable in the first year and 20% in each succeeding year for the next four
years. Each option granted will have an exercise price equal to fair market
value on the date of grant.
As of May 21, 1996, options under the Directors Plan covering 213,333 shares
have been granted to Directors at exercise prices ranging from $1.9375 to
$6.875 per share. As of such date an aggregate of 154,166 shares were
exercisable.
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<PAGE> 51
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of May 21, 1996, with
respect to shares of Common Stock of the Company beneficially owned by each
Director and by all officers and Directors as a group, and by persons known to
the Company to be beneficial owners of more than 5% of Company Common Stock.
As of such date, 14,826,838 shares of Common Stock were outstanding.
<TABLE>
<CAPTION>
DIRECTORS, OFFICERS AND NUMBER OF SHARES
5% SHAREHOLDERS BENEFICIALLY OWNED PERCENTAGE OF CLASS
<S> <C> <C>
Jeffrey S. Ratner 1,050,000(1) 7%
41 North Main Street
Greensburg, PA 15601
Robert D. Gries 55,000(2) *
John W. Ryba 58,000(3) *
David H. Adler 61,750(4) *
Herbert Ratner 40,500(5) *
Joel Nagelmann 92,289(6) *
H. Richard Howie 7,200(7) *
Delmer C. Gowing III 25,000(8) *
William McLay 45,175(9) *
Margaret Santone 5,220(10) *
Barry Logan 48,824(11) *
Gary Campbell 18,750(12) *
Bernhard Mantel 189,708(13) 1.3%
Jappe Kjaer 128,000(14) *
Thomas Caudill 8,000(15) *
Gerry Lau 0 *
All Directors and executive officers and 1,833,416 12.4%
owners of more than 5% as a group.
(15 persons)
</TABLE>
(1) 1,000,000 of these shares were transferred in 1993 to an Irrevocable Trust
established by Mr. Ratner as Settlor for the benefit of himself, his wife
and his children. Mr. Ratner does not have or share investment control but
retains voting control with respect to shares of the Company. The Trustee
is an independent Trustee unaffiliated with Mr. Ratner or any other
beneficiary and has the discretionary power to allocate the shares of the
Company in the Trust, or any proceeds from the sale of any such shares, in
an amount to be determined by the Trustee in its sole discretion. Mr.
Ratner disclaims beneficial ownership with respect to any shares held in
such Trust which may be allocated by the Trustee for the benefit of any
beneficiary of the Trust other than Mr. Ratner. Includes 50,000 shares
subject to a currently exercisable option.**
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<PAGE> 52
(2) Includes 25,000 shares currently owned of record and 30,000 shares subject
to a currently exercisable option.**
(3) Includes 58,000 shares subject to currently exercisable options.**
(4) Includes 18,000 shares owned of record and 43,750 shares subject to a
currently exercisable option.**
(5) Includes 10,500 shares owned of record and 30,000 shares subject to a
currently exercisable option.**
(6) Includes 4,500 shares currently owned of record and 87,789 shares subject
to a currently exercisable option.**
(7) Includes 7,200 shares subject to a currently exercisable option.**
(8) Includes 25,000 shares subject to a currently exercisable option.**
(9) Includes 13,175 shares currently owned of record and 32,000 shares
subject to currently exercisable options.**
(10) Includes 20 shares currently owned of record and 5,200 shares
subject to a currently exercisable option.**
(11) Includes 900 shares currently owned of record and 47,924 shares
subject to currently exercisable options.**
(12) Includes 2,750 shares currently owned of record and 16,000 shares
subject to currently exercisable options.**
(13) Includes 189,708 shares currently owned of record.
(14) Includes 120,000 shares currently owned of record and 8,000 shares
subject to a currently exercisable option.**
(15) Includes 8,000 shares subject to a currently exercisable option.**
* Less than 1% issued and outstanding.
** A currently exercisable option is one which is exercisable within
60 days from the date hereof.
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<PAGE> 53
CERTAIN TRANSACTIONS
The Company has agreed, under certain circumstances, to provide loans to Joel
Nagelmann, its President, in a gross amount of up to $197,000 for up to three
years at the rate of 5% per annum. On October 27, 1995, the Company made a
loan in the principal amount of $100,000 at 5% interest. The loan is secured
by real estate, proceeds from its sale and other assets. The principal is
payable on either October 27, 1996, or upon the sale of a former residence,
whichever first occurs.
In July 1994, the Company loaned Mr. Jappe Kjaer $50,000, pending the
registration of the stock of the Company issuable to Mr. Kjaer under the terms
of the agreement for the purchase of Lodgistix Scandinavia AS (now known as
Sulcus Scandinavia AS). Mr. Kjaer was the principal shareholder of Lodgistix
Scandinavia AS and remains its President. The note will be repaid from the
proceeds of a sale of Mr. Kjaer's shares of the Company. Prior to the
Company's acquisition of Lodgistix Scandinavia AS, Mr. Kjaer borrowed $20,000
from Lodgistix Scandinavia AS, all of which remains outstanding. These loans
do not bear interest.
In September 1993, the Company loaned Mr. Bernhard Mantel $500,000, pending
the registration of the stock of the Company issuable to Mr. Mantel under terms
of the agreement for the purchase of Techotel. Mr. Mantel was the principal
shareholder of Techotel and remains its Managing Director. The note bears no
interest and will be repaid from the proceeds of a sale of Mr. Mantel's shares
of the Company.
Sulcus' principal executive, and administrative operations are located at
Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601, in a facility
containing approximately 10,000 square feet. Sulcus leases this building under
several leases, with a trust established by Sulcus' principal stockholder and
Chairman, Jeffrey S. Ratner, expiring on various dates through September 30,
2001. Rent expense under these agreements was $225,391; $185,251 and $161,700
for the years ended December 31, 1995, 1994 and 1993, respectively. The annual
rental commitment under these leases are $229,111 in 1996, $138,105 in 1997,
$85,860 in 1998 and $90,144 in 1999, $91,947 in 2000, and $91,947 thereafter.
The leases renew automatically for additional two-year terms at a minimum
rental rate of 2% over the prior year's amount, unless canceled by either
party. The aggregate rental commitment is similar to comparable properties in
the area. See "Business-Property."
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<PAGE> 54
DESCRIPTION OF SECURITIES
Sulcus' Articles of Incorporation, as amended, authorize 30,700,000 shares of
Common Stock, no par value per share, of which 14,826,838 shares were issued
and outstanding as of May 21, 1996. Sulcus' Articles of Incorporation, as
amended, also authorize a class of preferred stock, consisting of 10,000,000
shares, no par value per share. No shares of Preferred Stock are currently
outstanding.
DESCRIPTION OF SECURITIES BEING OFFERED
PREFERRED STOCK
The preferred stock may be issued in one or more series, to be determined and
to bear such title or designation as may be fixed by resolution of the Board of
Directors prior to the issuance of any shares thereof, without any further vote
or action by the shareholders. Each series of preferred stock will have such
voting powers (including, if determined by the Board of Directors, no voting
rights as is the case in the Preferred Stock), preferences and other rights as
determined by the Board of Directors with such qualifications, limitations or
restrictions as may be stated in the resolutions of the Board of Directors
adopted prior to the issuance of any shares of such series of preferred stock.
The Preferred Stock being offered hereby is currently the only class or
series of preferred stock designated by the Board of Directors. The Board has
no present plans to issue any series of preferred stock other than the
Preferred Stock being offered hereby. However, purchasers of the securities
offered hereby should be aware that the holders of any series of preferred
stock which may be issued in the future could have voting rights, rights to
receive dividends or rights to distribution in liquidation superior to those of
holders of the Preferred Stock or Common Stock, thereby diluting or negating
any voting rights, dividend rights or liquidation rights of the Preferred Stock
or Common Stock.
Because the terms of each series of preferred stock may be fixed by the
Company's Board of Directors without shareholder action, a new series of
preferred stock could be issued with terms calculated to delay or defeat a
proposed takeover of the Company, or to make the removal of Sulcus' management
more difficult. Under certain circumstances, this could have the effect of
decreasing the market price of the Preferred Stock, the Class A Warrants and
the Common Stock. Management of Sulcus is not aware of any such threatened
transaction to obtain control of the Company.
SERIES A PREFERRED STOCK
The Company has authorized the issuance of 10,000,000 shares of preferred
stock of which _____ shares have been designated Series A Redeemable Convertible
Preferred Stock, no par value per share ("Preferred Stock"). The shares of
Preferred Stock, when issued, will be duly and validly issued, fully paid and
nonassessable.
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<PAGE> 55
The following description of certain terms of the Preferred Stock is intended
as a summary only, and is qualified in its entirety by reference to the
complete text of the Company's Articles of Incorporation and the Amendment
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
DIVIDENDS. The holders of shares of Preferred Stock will be entitled to
receive dividends to the same extent as any dividends are paid on the Common
Stock. Under Pennsylvania law, the Company may declare and pay dividends on its
shares of capital stock out of earnings and additional paid-in capital.
LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of shares of
Preferred Stock shall be entitled to receive out of the assets of the Company
available for distribution or payment to shareholders, before any distribution
or payment of assets is made with respect to Common Stock of the Company or any
other stock of the Company ranking junior upon liquidation to the Preferred
Stock, liquidating distributions in the amount of $____________ per share
(the "Liquidation Preference"). If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the preferential amounts
payable with respect to the Preferred Stock and any other shares of Preferred
Stock of the Company ranking as to any such liquidation, dissolution or winding
up on a parity with the Preferred Stock are not paid in full, the holders of
the Preferred Stock and of such other shares of Preferred Stock will share
ratably in any such distribution of assets of the Company in proportion to the
full respective preferential amounts to which they are entitled. After payment
to the holders of the Preferred Stock of the full preferential amounts to which
they are entitled, the holders of shares of Preferred Stock will not be
entitled to any further participation in any distribution of assets by the
Company. None of the sale, conveyance, exchange or transfer of all of
substantially all the property and assets of the Company, the consolidation or
merger of the Company with or into any other corporation, or the merger or
consolidation of any other corporation into or with the Company shall be deemed
to be a liquidation, dissolution or winding up of the Company, provided that in
each case, effective provision is made in the certificate of incorporation of
the resulting and surviving corporation or otherwise for the protection of the
rights of the holders of Preferred Stock.
REDEMPTION AT THE OPTION OF THE COMPANY. On or after ____________, 1997,
the Preferred Stock will be redeemable at the option of the Company in
whole, but not in part, for $ _________ per share in cash. The Company will
cause notification of any redemption of shares to be mailed to all record
holders of Preferred Stock to be redeemed, at the address shown on the stock
books of the Company, not less than 30 nor more than 60 days prior to the date
fixed for redemption.
If on the date fixed for redemption funds necessary for the redemption shall
be available, all rights with respect to such shares shall after such date
cease and terminate except the right to receive the redemption price without
interest (unless the Company defaults in the payment of the redemption price).
Shares of the Preferred Stock redeemed shall have the status of authorized but
unissued Preferred Stock without designation as to series, but may not
thereafter be issued as shares of Preferred Stock.
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<PAGE> 56
CONVERSION RIGHTS. The holders of Preferred Stock will be entitled at any
time after ____________, 1996, to convert Preferred Stock into Common Stock
at the initial conversion rate set forth on the cover page of this Prospectus,
subject to adjustment as described below and subject to the availability of
sufficient authorized and unissued shares not reserved for other purposes,
except that, with respect to shares of Preferred Stock which the Company has
called for redemption, conversion rights will expire at the close of business
on the redemption date (unless the Company defaults in the payment of the
redemption price). No payment or adjustment will be made in respect of
dividends on Preferred Stock that may be accrued or unpaid or in arrears upon
conversion of shares of Preferred Stock. No fractional shares will be issued
nor will cash in lieu thereof be paid.
Sulcus will reserve for issuance a number of shares of Common Stock
sufficient to provide for the conversion of the Preferred Stock. When
delivered, such shares of Common Stock will be duly authorized, validly issued,
fully paid and nonassessable.
The conversion rate of the Preferred Stock is subject to adjustment in
certain circumstances, including the payment of a stock dividend on shares of
the Common Stock, certain reclassifications of the Common Stock, the issuance
to Sulcus' stockholders of rights or warrants to subscribe for or purchase
shares of Common Stock at a price per share less than the then-current market
price (as determined in the Amendment) of the Common Stock and certain cash
dividends and distributions of evidences of indebtedness or assets to holders
of certain of Sulcus' capital stock.
In case of any consolidation or merger of Sulcus with any other corporation
(other than a wholly owned subsidiary), in each case where the Company is not
the surviving entity (a "Merger"), or in case of a sale or transfer of all or
substantially all of the assets of Sulcus, or in the case of any share exchange
whereby the Common Stock is converted into other securities or property, the
Company will be required to make appropriate provision so that the holder of
each share of Preferred Stock then outstanding will have the right thereafter
to convert such share of Preferred Stock into the kind and amount of shares of
stock and other securities and property receivable upon such consolidation,
Merger, sale, transfer or share exchange by a holder of the number of shares of
Common Stock into which such shares of Preferred Stock might have been
converted immediately prior to such consolidation, Merger, sale, transfer
or share exchange. No adjustment in the conversion rate is required unless it
would result in at least a 1% increase or decrease in the conversion rate;
however, any adjustment not made shall be carried forward.
VOTING RIGHTS. Except as may be otherwise specifically provided in the
Amended Articles of Incorporation or by Pennsylvania law, each holder of shares
of the Preferred Stock shall in all matters that alter or change the powers,
preferences or rights given to the Preferred Stock be entitled to one vote for
each share of Preferred Stock owned by such holder and the holders of the
Preferred Stock shall vote together as one class on any matter that may be
brought before any meeting of the shareholders of Sulcus relating to such
matters. Holders of Preferred Stock shall not have voting rights with respect
to any other matters.
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<PAGE> 57
So long as any shares of the Preferred Stock shall be outstanding, Sulcus
shall not, without the affirmative vote or consent of the holders of at least
two thirds of the aggregate number of shares of Preferred Stock at the time
outstanding, voting as a class, alter or change the powers, preferences or
rights given to the Preferred Stock so as to affect the holders of the
Preferred Stock adversely.
NO SINKING FUND. Sulcus is not required to provide for the retirement or
redemption of the Preferred Stock through the operation of a sinking fund.
CLASS A WARRANTS
Each Class A Warrant entitles the holder to purchase one share of Preferred
Stock at $____________ per share if exercised on or before , 1996,
or one-half of one share at $ ____________ if exercised thereafter and on or
before ___________________, 1997. The Class A Warrants expire at 5:30 P.M.
New York City time on ____________, one year from the date of this Prospectus.
No fractional shares of Preferred Stock will be issued upon the exercise of
the Class A Warrants and no cash will be paid in lieu thereof.
The holders of the Class A Warrants will not have any of the rights or
privileges of shareholders of Sulcus prior to the exercise of the Class A
Warrants.
The exercise price and number of shares of Preferred Stock or other securities
issuable on exercise of the Class A Warrants are subject to adjustment in
certain circumstances, including issuance of a stock dividend or a
recapitalization, reorganization, Merger, or consolidation of Sulcus.
No Class A Warrant will be exercisable unless at the time of exercise a
current prospectus covering shares of Preferred Stock issuable upon exercise of
such Class A Warrant is then in effect.
DESCRIPTION OF OTHER SECURITIES
COMMON STOCK
Subject to such preferential rights as may be determined by the Board of
Directors of Sulcus in connection with the issuance of any series of preferred
stock, the holders of shares of Common Stock elect all directors, are entitled
to one vote per share for each share of Common Stock held of record by them and
do not have cumulative voting rights which means that the holders of more than
50% of such outstanding shares voting for the election of directors can elect
all of the directors to be elected.
Holders of record are entitled to receive dividends when and if declared by
the Board of Directors out of legally available funds. Upon any liquidation,
dissolution or winding up of Sulcus, holders of Common Stock are entitled to
share PRO RATA in any distribution to the shareholders after the holders of any
preferred stock, including the Preferred Stock, have been paid the applicable
liquidation price per share fixed at the time of the original authorization of
the issue of any preferred stock, including the Preferred Stock.
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<PAGE> 58
Shares of Common Stock are not redeemable and do not have any conversion
rights. All of the outstanding shares of Common Stock are fully paid and
non-assessable and duly authorized.
PENNSYLVANIA ANTI-TAKEOVER LAWS
Various provisions of the Pennsylvania Business Corporation Law (the "BCL"),
under which Sulcus was organized, generally make "hostile" takeovers of
Pennsylvania corporations more difficult by granting certain rights to
non-interested shareholders in certain "change of control" situations by
permitting such shareholders to demand payment from a 20% controlling
shareholder of the "fair value" of such demanding shareholder's shares in cash.
Such provisions may make more difficult the removal of management. The BCL
also, in certain circumstances, prohibits mergers and other "business
combinations" between Sulcus and an "interested shareholder" (or its affiliate)
unless, among other things, (i) either acquisition of such person's 20%
interest or the business combination is approved by Sulcus' Board of Directors
prior to the date such "interested shareholder" acquired its 20% interest or
(ii) if, among other requirements, the business combination is approved by a
majority of non-interested shareholders at least three months prior to the date
such person acquired 80% of the outstanding voting stock and the consideration
paid to the non-interested shareholders in such a transaction meets certain
minimum conditions.
Effective April 27, 1990, certain additional subchapters to the BCL were
adopted. Generally, these new subchapters make hostile takeovers even more
difficult by providing that under certain circumstances (i) "control shares"
lose their voting rights until such rights are restored by a majority vote of
all "disinterested shares" and "voting shares," and (ii) "control shares" may
be redeemed by the target corporation within 24 months after the "control share
acquisition" if, among other things, the acquiring person has not timely
requested a shareholder vote on whether the "control shares" should be accorded
voting rights. Further, a new subchapter provides, among other things, that
any profits earned from any sale of shares within two years before or 18 months
after a person has acquired or expressed the intent to acquire 20% of the
voting shares or an intention to acquire control (a "controlling person") are
recoverable by the Corporation if the shares were acquired within two years
before or 18 months after the acquirer became a controlling person.
The additional subchapters, in certain circumstances, also provide for
severance compensation to employees terminated by a new controlling person, as
well as mandatory preservation of certain labor agreements. They also give the
Board of Directors wider discretion in dealing with hostile takeover attempts.
In addition, Section 1721 of the BCL has been amended through the addition of
provisions that entitle the directors of a corporation, in making decisions
concerning takeovers or any other matters, to the extent they deem appropriate,
to consider, among other things, (i) the effects of any proposed transaction
upon any or all groups affected by such action, including, among others,
shareholders, employees, suppliers, customers and creditors, (ii) the
short-term and long-term interest of such corporation, and (iii) the resources,
intent and conduct of the person seeking control.
Sulcus did not elect within the prescribed time of the statute to opt out of
these provisions.
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TRANSFER AND WARRANT AGENT
The transfer agent for the Common Stock, Preferred Stock and Class A
Warrants and the Warrant Agent under the Warrant Agreement, is American Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
In addition to the Securities covered by this Prospectus, an aggregate of
1,487,782 shares issuable upon the exercise of certain employees, directors and
consultant's stock options at prices ranging from $1.00 to $9.25 per share and
an aggregate of approximately 399,749 shares of Common Stock issued in private
placements, are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act. In general under Rule 144 as currently
in effect, subject to the satisfaction of certain other conditions of Rule 144,
a person, including an affiliate of the Company (or persons whose shares are
aggregated), who has owned restricted securities of the Company beneficially
for at least two years is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the total number of
outstanding shares of the same class or, if the Common Stock is quoted on
NASDAQ, a national securities exchange or a consolidated transaction
reporting system, the average weekly trading volume during the four calendar
weeks preceding the sale. A person who has not been an affiliate of the
Company for at least the three months immediately preceding the sale and who
has beneficially owned restricted shares of Common Stock for at least three
years is entitled to sell such shares under Rule 144 without regard to any of
the limitations described above.
UNDERWRITING
The Underwriters listed below have agreed, subject to terms and conditions of
the Underwriting Agreement between the Company and H. J. Meyers & Co., Inc. and
Culverwell & Co. Inc., as Representatives of the Underwriters, to purchase from
the Company on a firm commitment basis the number of shares of Preferred Stock
and Warrants set forth opposite their names. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions precedent and that the Underwriters shall be obligated to purchase
all of the Securities if any of the Securities are purchased. The _______ %
underwriting discounts set forth on the cover page of this Prospectus will be
allowed to the Underwriters at the time of delivery to the Underwriters of the
Securities so purchased.
<TABLE>
<CAPTION>
Name of Underwriter Number of Shares and Warrants
------------------ -----------------------------
<S> <C>
H. J. Meyers & Co., Inc. . . . . . . . . . .
Culverwell & Co., Inc. . . . . . . . . . . .
Total 1,000,000
</TABLE>
57
<PAGE> 60
The Underwriters have advised the Company that they propose to offer the
Preferred Stock and Warrants to the public at an offering price of $_______
per share of Preferred Stock and $____________ per Warrant and that the
Underwriters may allow certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") a concession of not in excess
of $_______ per share of Preferred Stock and $____________ per Warrant, no
portion of which may be reallowed to certain other dealers. After commencement
of the offering, the public offering price and concession may be changed.
The Company has granted to the Representatives an option, exercisable during
the 30 business day period from the date of this Prospectus, to purchase up to
a maximum of 150,000 additional shares of Preferred Stock and 150,000 Warrants
on the same terms set forth above. The Representative may exercise such right
only to satisfy over-allotments in the sale of Preferred Stock and Warrants.
The Company has agreed to pay to the Representatives a non-accountable
expense allowance equal to 3% of the total proceeds of the offering including
proceeds from the over-allotment option, of which $10,000 has been paid.
In addition to the Underwriting commissions and Representatives' expense
allowance, the Company is required to pay the costs of qualifying the
Preferred Stock and Warrants under federal and state securities laws, together
with legal and accounting fees, printing and other costs in connection with
this offering, estimated to total approximately $____________.
At the closing of the offering, the Company will issue to the
Representatives, for nominal consideration, Warrants (the "Representatives'
Warrant") to purchase for investment a maximum of 100,000 shares of Preferred
Stock and Warrants. The shares of Preferred Stock and Warrants subject to the
Representatives' Warrant will be identical to the shares of Preferred Stock and
Warrants sold to the public except for the purchase price as provided below.
The Representatives' Warrant will be exercisable for a five year period
commencing on the date of this Prospectus. The exercise price of the
Representatives' Warrant is 130% of the public offering price per share of
Preferred Stock and per Warrant. The Representatives' Warrant and the
securities issuable upon exercise thereof will not be transferrable prior to
one year from the date of this Prospectus except to officers of the
Representative and members of the selling group and officers and partners
thereof.
The Representatives' Warrant will contain anti-dilution provisions providing
for adjustment in the event of any recapitalization, stock dividend, stock
split or similar transactions. The Representatives' Warrant also provides for
adjustments similar to those applicable to the Class A Warrants for
reclassification, exchanges, mergers and consolidations. The Representatives'
Warrant does not entitle the Representatives to any rights as a shareholder of
the Company until such warrant is exercised and shares of Preferred Stock and
Warrants are purchased thereunder.
The Representatives' Warrant and the securities thereunder may not be offered
for sale except in compliance with the applicable provisions of the Securities
Act. The Company has agreed that, if it shall cause to be filed with the
Commission either an amendment to the Registration Statement of which this
Prospectus is a part or a separate registration statement, the Representatives
shall have the right ("piggyback right") during the five-year period commencing
on the date of this Prospectus to include in such amendment or Registration
Statement the Representatives' Warrant and the securities issuable upon
58
<PAGE> 61
the exercise of the Representatives' Warrant at no expense to the
Representatives. Additionally, the Company has agreed that, upon written
request by a holder or holders of 50% or more of the Representatives' Warrants
which is made during the exercise period of the Representatives' Warrant,
the Company will, on two separate occasions, register the Representatives'
Warrant and any of the securities issuable upon exercise thereof. The initial
such registration will be at the Company's expense to the extent of $100,000
and any expenses in excess of $100,000 and all expenses for the second such
registration will be at the expense of the holder(s) of the Representatives'
Warrant.
For the period during which the Representatives' Warrant is exercisable, the
holder or holders will have the opportunity to profit from the rise in the
market value of the Company's Preferred Stock and Class A Warrants, with a
resulting dilution in the interests of the other shareholders of the Company.
The holder or holders of the Representatives' Warrant can be expected to
exercise it at a time when the Company would, in all likelihood, be able to
obtain any needed capital from an offering of its unissued Preferred or Common
Stock on terms more favorable to the Company than those provided for in the
Representatives' Warrant. Such fact may adversely affect the terms on which
the Company can obtain additional financing. To the extent that the
Representatives realize any gain from the resale of the Representative Warrant
or the securities issuable thereunder, such gain may be deemed additional
underwriting compensation under the Securities Act.
Officers, directors and holders of five percent or more of the Company's
outstanding capital stock (other than Jeffrey S. Ratner (200,000 options) or
the Irrevocable Trust (1,000,000 shares) established by Mr. Ratner for the
benefit of himself, his wife and his children) agreed with the Representatives
that they will not sell any shares of Common Stock or Series A Preferred Stock
owned by them (or subsequently acquired under any option, warrant or
convertible security owned prior to this offering) for six months following the
date of this Prospectus, without the Representative's prior written
consent.
The Company has agreed that for a period of six months from the date of this
Prospectus, it will not sell any securities (with the exception of the shares
of Common Stock issued upon Conversion of Preferred Stock and the issuance of
Preferred upon exercise of the Class A Warrants, currently outstanding
incentive stock options, options granted under its 1991 Director's Stock
Option Plan shares issuable as "earn out shares" with respect to certain
transactions or issuable in connection with mergers and acquisitions)
without the prior written consent of the Representatives, which
consent shall not be unreasonably withheld.
The Company has also agreed that, for a period of two years from the closing
of this Offering, if it participates in any merger, consolidation or other
transaction which H.J. Meyers & Co., Inc. ("H.J. Meyers") has brought to the
Company (including an acquisition of assets or stock for which it pays, in whole
or in part, with shares of the Company's Common Stock or other securities) then
it will pay H.J. Meyers for such services an amount equal to 5% of the first
$3,000,000 of value paid or received in the transaction, 2 1/2% of any
consideration paid over $3,000,000 and not greater than $5,000,000 and 2% of all
such value above $5,000,000. The Company has also agreed that if, during this
two-year period, someone other than H.J. Meyers brings such a merger,
consolidation or other transaction to the Company and H.J. Meyers is retained in
writing for consultation or other services in connection therewith, then upon
59
<PAGE> 62
consummation of the transaction the Company will pay to H.J. Meyers as
a fee the appropriate amount as set forth above or as otherwise agreed to
between the Company and H.J. Meyers.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Representatives against certain liabilities in connection
with the registration statement, including liabilities under the Securities
Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the Company
pursuant to the Underwriting Agreement, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Prior to this Offering, there has been no public trading market for the
Preferred Stock or the Class A Warrants, consequently, the public offering
price of the Preferred Stock and Warrants and the exercise price of the Class A
Warrants have been determined by negotiations between the Company and the
Representatives. Among the factors considered in determining the offering
price were the market price of the Common Stock, the Company's financial
condition and prospects, market prices of similar securities of comparable
publicly traded companies, certain financial and operating information of
companies engaged in activities similar to those of the Company and general
conditions of the securities markets.
The rules of the Commission generally prohibit the Underwriters from making a
market in the Common Stock during the two business day period prior to
commencement of sales in the offering (the "Cooling Off Period"). The
Commission has, however, adopted Rule 10b-6A ("Rule 10b-6A") which provides an
exemption from such prohibition for certain passive market making transactions.
Such passive market making transactions must comply with applicable price and
volume limits and must be identified as passive market making transactions. In
general, pursuant to Rule 10b-6A, a passive market maker may display its bid
for a security at a price not in excess of the highest independent bid for the
security. If all independent bids are low or below the passive market maker's
bid, however, such bid must then be lowered when certain purchase limits are
exceeded. Further, net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market maker's
average daily trading volume in a security during a specified prior period and
must be discontinued when such limit is reached. Pursuant to the exemption
provided by Rule 10b-6A, certain of the Underwriters and selling group numbers
may engage in passive market making in the Common Stock during the Cooling Off
Period. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail, and if commenced,
may be discontinued at any time.
The foregoing is a brief summary of certain provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A Copy of the Underwriting Agreement is on file with the
Commission as an exhibit to the Registration Statement of which this Prospectus
is a part. See "Available Information."
60
<PAGE> 63
LEGAL PROCEEDINGS
CLASS ACTION LITIGATION
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 others. On October 11, 1994, these lawsuits were consolidated
under the caption "IN RE: SULCUS COMPUTER CORPORATION SECURITIES LITIGATION,
II." Among the principal allegations contained in one or more of the lawsuits
were 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; Sulcus' financial condition; and that financial statements were
false and misleading. The aforesaid adversely affected the integrity of the
market for Sulcus common stock and artificially inflated or maintained the
price of Sulcus common stock. The Complaints sought unspecified damages for
the decline in the value of the Company's stock together with Plaintiff's costs
and expenses.
On December 27, 1995, the parties entered into a settlement agreement which
established a settlement fund of $800,000 in cash and 1,400,000 Sulcus Common
Shares with a value of $2,800,000 as of the date of settlement. The cash
portion of the settlement will be paid by insurance ($666,000) and the Company
($134,000). At December 31, 1995, the Company recorded a provision of
$2,861,118 which, together with amounts previously accrued ($250,000)
represents costs which the Company expects to incur in connection with this
settlement agreement. It is anticipated that subject to final approval of the
settlement by the Court the shares of Sulcus Common Stock would be distributed
in late 1996 or early 1997.
OTHER LITIGATION
Lodgistix is the Plaintiff in an action presently pending before the United
States District Court for the District of Kansas against Total Technical
Services (TTS). Lodgistix is claiming damages in the amount of $796,000
arising from a breach by TTS of an equipment maintenance service agreement
entered into between the parties. TTS has filed a counterclaim against
Lodgistix in the amount of $800,000. Lodgistix denies that they breached the
equipment maintenance service agreement or that they charged the Defendant for
services beyond the scope of the aforesaid Agreement. It is the opinion of
Lodgistix's counsel, David L. Nelson, Esquire, Wichita, Kansas, that the
counterclaim as filed against Lodgistix by TTS is without merit and the
probability of any liability to the Company is remote. The efforts of
Lodgistix to pursue its claim have been stayed because of a Chapter 11
bankruptcy filing by the Defendant.
Sulcus Computer Corporation, NRG Management Systems, Inc., Jeffrey S. Ratner
and Frank Morrisroe are Defendants in an action filed in January 1995, in the
Fort Bend County Court in Texas, by Walter Lipski, Jr. ("Lipski"), a former
executive with the Company's Hospitality Group. Lipski has claimed that
Defendants breached the Employment Agreement and Stock Purchase Agreement
entered into between the parties and seeks unspecified damages. Defendants
believe that there were no breaches and that Mr. Lipski was terminated with
cause for failing to fulfill his job duties and responsibilities, failing to
achieve financial projections for NRG Management Systems, Inc.,
misrepresentation of the assets of NRG Management
61
<PAGE> 64
Systems, Inc. and further violations of the employment agreement and Stock
Purchase Agreement Mr. Lipski executed as a part of his employment with the
Company. Defendants have filed a response to Lipski's complaint. This matter
is in its earliest stages and the ultimate outcome cannot be predicted. Based
on information collected by the Company from the individual defendants, for
the reasons stated above, the Company believes that it has meritorious
defenses and intends to vigorously defend the action.
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.
LEGAL MATTERS
Certain legal matters with respect to the offering will be passed upon for
Sulcus by John W. Ryba, General Counsel for Sulcus, 41 North Main Street,
Greensburg, Pennsylvania 15601 and by Opton, Handler, Gottlieb, Feiler & Katz,
LLP, 52 Vanderbilt Avenue, New York, New York 10017, Special Counsel for
Sulcus. Peter Landau, Esq. counsel to Opton, Handler, Gottlieb, Feiler & Katz,
LLP owns 33,333 shares of Sulcus Common Stock. Morse, Zelnick, Rose & Lander,
LLP, 450 Park Avenue, New York, New York 10022 will pass upon certain legal
matters for the Underwriters.
EXPERTS
The consolidated financial statements of Sulcus Computer Corporation as of
December 31, 1995, and 1994 and for the two years then ended appearing in this
Prospectus and Registration Statement have been audited by Crowe, Chizek and
Company, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
The consolidated financial statements of Sulcus Computer Corporation at
December 31, 1993 and for the year then ended, appearing in this Prospectus and
Registration Statement have been audited by Ferraro & McMurtry, P.C.,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
62
<PAGE> 65
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports (the "Reports") and other information with
the Securities and Exchange Commission (the "Commission"). Reports and other
information filed by the Company with the Commission may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N. W., Room 1024, Washington, D.C. 20549, and at Northwestern
Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661;
and Seven World Trade Center, 13th Floor, New York, New York, 10008. Copies of
such materials also may be obtained from the Commission's Public Reference
Section of the Commission, 450 Fifth Street, N. W., Washington D.C. 20549 at
prescribed rates. The Company's securities are listed and traded on the
American Stock Exchange. The Reports and other statements and other
information concerning the Company filed with that exchange may be inspected at
the offices of such exchange.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement (the "Registration Statement")
with the Commission under the Securities Act with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statements and in the exhibits and schedules thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. Each statement contained herein concerning a document filed
as an exhibit to the Registration Statement is qualified in its entirety by
reference to such exhibit for a complete statement of its provisions. For
further information with respect to the Company and the securities offered
hereby, reference is made to such Registration Statement and to the exhibits
and schedules thereto.
The Registration Statement and any amendments thereto, including exhibits
filed as a part thereof, are available for inspection and copying as set forth
above.
63
<PAGE> 66
SULCUS COMPUTER CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
REPORTS OF INDEPENDENT AUDITORS F-1 to F2
CONSOLIDATED BALANCE SHEETS F-3
MARCH 31, 1996
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
For the three months ended March 31, 1996 and March 31, 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5
For the three months ended March 31, 1996 and March 31, 1995
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-6
For the three months ended March 31, 1996, and March 31, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F7 to F-8
CONSOLIDATED BALANCE SHEETS F-9
Years ended December 31, 1995 and 1994
CONSOLIDATED STATEMENTS OF OPERATIONS F-10
Years ended December 31, 1995, 1994 and 1993
CONSOLIDATED STATEMENTS OF CASH FLOWS F-11
Years ended December 31, 1995, 1994 and 1993
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-12
Years ended December 31, 1995, 1994 and 1993
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-13 to F-29
</TABLE>
<PAGE> 67
[LOGO]
CROWE CHIZEK
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sulcus Computer Corporation
We have audited the accompanying consolidated balance sheet of Sulcus Computer
Corporation as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of Sulcus Computer
Corporation as of December 31, 1993 and the year then ended were audited by
other auditors whose report dated May 13, 1994, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1995 and 1994 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Sulcus Computer Corporation as of December 31, 1995 and 1994 and the results of
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
adopted the provisions of a new accounting pronouncement, Statement of
Financial Accounting Standards No. 115, effective January 1, 1994.
Our audits referred to above also included the financial schedule listed in
answer to item 16(b). In our opinion, such financial schedule presents fairly
the information required to be set further therein.
/s/ CROWE, CHIZEK AND COMPANY LLP
-------------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
March 1, 1996, except for Note 2, as to which
the date is March 21, 1996 and Note 20, as to
which the date is April 10, 1996
<PAGE> 68
[LOGO]
FERRARO & MCMURTRY
REPORT OF INDEPENDENT AUDITORS
May 13, 1994
The Board of Directors and Shareholders
Sulcus Computer Corporation
We have audited the consolidated balance sheet of Sulcus Computer Corporation
as of December 31, 1993, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1993.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, based on our audit, the consolidated financial statements
present fairly, in all material respects, the financial position of
Sulcus Computer Corporation at December 31, 1993, and the consolidated
results of their operations and cash flows for the year ended December 31, 1993
in conformity with generally accepted accounting principles.
Our audit referred to above also included the financial schedule listed in
answer to item 14(a)(2). In our opinion, such financial schedule presents
fairly the information required to be set forth therein.
Ferraro & McMurtry
<PAGE> 69
SULCUS COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -----------
<S> <C>
Current Assets
Cash and cash equivalents $ 3,000,511 $ 1,202,325
Short-term investments (at market) 12,232,390 12,408,075
Restricted cash 378,133 550,000
Accounts receivable, net of allowance of $2,618,013
and $2,581,020 in 1996 and 1995, respectively 7,959,404 11,134,576
Inventories 2,513,392 2,573,826
Deferred taxes 167,166 165,557
Other current assets 1,851,115 1,761,465
----------- -----------
Total current assets 28,102,111 29,795,824
Purchased and capitalized software, net of accumulated amortization
of $8,425,003 and $7,992,031 in 1996 and 1995, respectively 4,639,263 4,941,695
Property and equipment, net of accumulated depreciation of $4,190,515
and $4,247,168 in 1996 and 1995, respectively 2,409,965 2,015,816
Goodwill, net of accumulated amortization of $2,864,906
and $2,672,714 in 1996 and 1995, respectively 7,634,491 7,826,683
Deferred taxes 1,932,587 1,934,196
Other noncurrent assets 856,780 812,564
----------- -----------
Total Assets $45,575,197 $47,326,778
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short term borrowings $6,525,443 $6,382,710
Current portion of long-term debt 43,686 46,713
Current portion of obligations under capital leases 155,582 --
Accounts payable 3,600,038 4,352,408
Shareholder litigation liability 2,898,598 3,108,097
Deferred revenues 5,162,639 6,195,289
Customer deposits 1,187,316 1,311,408
Other accrued liabilities 2,492,998 3,008,892
----------- -----------
Total current liabilities 22,066,300 24,405,517
Long-term debt, net of current portion 15,760 27,175
Obligations under capital leases, net of current portion 263,549 --
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 30,700,000 shares
authorized (14,960,997 and 14,227,629 shares
issued in 1996 and 1995, respectively) 38,114,272 38,016,248
Note receivable from stockholder (500,000) (500,000)
Retained earnings (deficit) (14,226,308) (14,747,712)
Foreign currency adjustment (27,583) (60,832)
Cumulative unrealized gain (loss) on investments available for sale (130,793) 186,382
----------- -----------
Total Stockholders' Equity 23,229,588 22,894,086
----------- -----------
Total Liabilities and Stockholders' Equity $45,575,197 $47,326,778
----------- -----------
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE> 70
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ------------
<S> <C> <C>
Net revenue:
System sales $6,524,818 $6,803,287
Support revenue 4,417,170 4,213,000
Interest income and other 333,031 294,767
---------- ----------
Total revenue 11,275,019 11,311,054
---------- ----------
Cost of goods sold and services provided:
Systems 3,307,969 3,333,777
Support services 1,159,797 1,281,007
---------- ----------
Total cost of sales and services provided 4,467,766 4,614,784
Expenses:
Selling, general, and administrative 5,506,194 5,579,158
Research and development (net of capitalized
software of $240,650 and $198,433 during the
three months ended March 31, 1996 and 1995,
respectively) 267,251 366,448
Interest 128,799 142,498
Depreciation and amortization 383,605 446,314
Unrealized (gain) loss on investments -- (881,683)
---------- ----------
Total expenses 6,285,849 5,652,735
---------- ----------
Income (loss) before income taxes 521,404 1,043,535
Income taxes -- --
---------- ----------
Net income (loss) $521,404 $1,043,535
---------- ----------
Income (loss) per common share:
Net income (loss) $0.03 $0.07
----- -----
Weighted average number of common shares 16,614,944 14,651,262
========== ==========
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE> 71
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 521,404 $ 1,043,535
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 191,413 268,235
Amortization of capitalized software 555,627 550,770
Amortization of goodwill 192,192 178,079
Provision for doubtful accounts 153,571 105,101
Unrealized (gain) on investments -- (881,683)
Realized (gain) on investments (8,750) --
(Purchases) of trading securities -- (1,128,688)
Change in assets and liabilities:
Restricted cash 171,867 500,000
Accounts receivable 3,021,601 3,064,133
Inventory 60,434 56,676
Other current assets (49,469) (101,104)
Other assets (44,608) 44,166
Accounts payable (752,370) (891,899)
Deferred revenues (1,032,650) (1,400,476)
Shareholder litigation liability (209,499) (10,468)
Customer deposits (124,092) (783,170)
Accrued liabilities (454,587) (380,594)
----------- -----------
Total adjustments 1,670,680 (810,922)
----------- -----------
Net cash provided by operating activities 2,192,084 232,613
----------- -----------
Cash flows from investing activities:
Purchases of available for sale securities (382,740) --
Proceeds from sales of available for sale securities 250,000 --
Investment in sales-type leases (68,358) (31,323)
Payments received on sales-type leases 28,569 79,148
Capital expenditures (598,107) (81,205)
Software development capitalized (240,650) (198,433)
----------- -----------
Net cash used in investing activities (1,011,286) (231,813)
----------- -----------
Cash flows from financing activities:
Short-term borrowings 142,733 36,608
Principal payments on long-term debt (14,442) (254,278)
Payments under capital lease obligations 364,324 --
Proceeds from stock options exercised 91,524 16,571
----------- -----------
Net cash (used in) provided by financing activities 584,139 (201,099)
----------- -----------
Cumulative translation adjustment 33,249 (35,585)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 1,798,186 (235,884)
Cash equivalents at beginning of period 1,202,325 1,933,895
----------- -----------
Cash equivalents at end of period $ 3,000,511 $ 1,698,011
----------- -----------
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE> 72
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Cumulative
Unrealized
Gain (Loss) Note
Retained Foreign on 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, 1996 $38,016,248 ($14,747,712) ($60,832) $186,382 ($500,000) $22,894,086
Stock options exercised 91,524 -- -- -- -- 91,524
Cumulative unrealized loss on
investments available for sale -- -- -- (317,175) -- (317,175)
Issuance of stock to consultants 6,500 -- -- -- -- 6,500
Cumulative translation adjustment -- -- 33,249 -- -- 33,249
Net income -- 521,404 -- -- -- 521,404
------------- -------------- ---------- ----------- ---------- -------------
Balance, March 31, 1996 $38,114,272 ($14,226,308) ($27,583) ($130,793) ($500,000) $23,229,588
------------- -------------- ---------- ----------- ---------- -------------
</TABLE>
See notes to the consolidated financial statements.
F-6
<PAGE> 73
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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.
NOTE 2. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On May 2, 1996, the Company entered into an agreement with the
Securities and Exchange Commission ("Commission"), resolving an investigation
which commenced in 1993. Under the terms of the May 2, 1996 agreement, without
admitting or denying any wrongdoing, the Company agreed that it would not in
the future violate Sections 17(a)(2) and 17(a)(3) of the Securities Act,
Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and
Rules 10b-5, 12b-20, 13a-1, and 13a-13 promulgated thereunder. With respect to
certain press releases issued during 1991 and 1992, the Order makes findings
against Sulcus under Section 10(b) and Rule 10b-5. The Order does not make
findings against Sulcus under Section 10(b) or Rule 10b-5 with regard to
accounting practices. In addition, a former accounting officer of the Company
and the Company's Chairman, without admitting or denying any wrongdoing agreed
that they would not in the future violate Sections 17(a)(2) and 17(a)(3) of the
Securities Act; Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act
and Rules 12b-20, 13a-1, 13a-13, and 13b 2-1 promulgated thereunder. There
were no fines or other penalties imposed upon the Company or its Chairman. The
Company's former accounting officer agreed not to practice before the
Commission as an accountant for a 30 month period.
NOTE 3. INCOME TAXES
In the three months ended March 31, 1996 the Company reflected no
provision for income taxes on pre-tax profits of $521,404. 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.
F-7
<PAGE> 74
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
At March 31, 1996 and December 31, 1995, the Company had net deferred
tax assets, liabilities and valuation reserves as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets (net of deferred tax
liabilities), including tax loss carryforwards $12,501,588 $12,633,976
Valuation allowance (10,401,835) (10,534,223)
----------- -----------
Net deferred tax amounts $ 2,099,753 $ 2,099,753
=========== ===========
</TABLE>
NOTE 4. 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.
F-8
<PAGE> 75
SULCUS COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,202,325 $ 1,933,895
Short-term investments (at market) 12,408,075 10,324,740
Restricted cash 550,000 500,000
Accounts receivable, net of allowance of $2,581,020
and $2,597,088 in 1995 and 1994, respectively 11,134,576 11,639,243
Inventories 2,573,826 2,393,563
Deferred taxes 165,557 758,472
Other current assets 1,761,465 1,330,240
----------- -----------
Total current assets 29,795,824 28,880,153
Purchased and capitalized software, net of accumulated amortization
of $7,992,031 and $6,131,665 in 1995 and 1994, respectively 4,941,695 6,790,945
Property and equipment, net of accumulated depreciation of $4,247,168
and $3,378,817 in 1995 and 1994, respectively 2,015,816 2,301,263
Goodwill, net of accumulated amortization of $2,672,714
and $1,987,996 in 1995 and 1994, respectively 7,826,683 7,726,119
Deferred taxes 1,934,196 1,341,281
Other noncurrent assets 812,564 829,722
----------- -----------
Total Assets $47,326,778 $47,869,483
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short term borrowings $6,382,710 $6,182,995
Current portion of long-term debt 46,713 468,990
Accounts payable 4,352,408 5,836,482
Shareholder litigation liability 3,108,097 439,780
Deferred revenues 6,195,289 6,922,281
Customer deposits 1,311,408 1,896,886
Other accrued liabilities 3,008,892 2,949,837
----------- -----------
Total current liabilities 24,405,517 24,697,251
Long-term debt, net of current portion 27,175 85,536
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 30,700,000 shares
authorized (14,227,629 and 14,417,744 shares
issued in 1995 and 1994, respectively) 38,016,248 37,081,413
Note receivable from stockholder (500,000) (500,000)
Retained earnings (deficit) (14,747,712) (13,378,756)
Foreign currency adjustment (60,832) (115,961)
Cumulative unrealized gain on investments available for sale 186,382 --
----------- -----------
Total Stockholders' Equity 22,894,086 23,086,696
----------- -----------
Total Liabilities and Stockholders' Equity $47,326,778 $47,869,483
----------- -----------
</TABLE>
See notes to the consolidated financial statements.
F-9
<PAGE> 76
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net revenue:
System sales $27,645,389 $25,893,783 $32,944,045
Support revenue 17,047,913 15,993,533 14,401,786
Interest income and other 1,290,691 1,255,848 1,937,314
----------- ----------- -----------
Total revenue 45,983,993 43,143,164 49,283,145
----------- ----------- -----------
Cost of goods sold and services provided:
Systems 14,351,669 15,078,349 19,126,487
Support services 4,613,913 5,509,625 3,958,265
----------- ----------- -----------
Total cost of sales and services provided 18,965,582 20,587,974 23,084,752
Expenses:
Selling, general, and administrative 22,895,996 24,388,210 21,726,463
Research and development (net of capitalized
software of $1,002,854, $1,556,888 and
$2,469,337 for 1995, 1994 and 1993,
respectively) 1,198,999 1,596,515 1,877,628
Interest 597,672 556,269 402,764
Depreciation and amortization 1,520,033 2,157,857 2,034,144
Unrealized and realized (gains) losses on
short-term investments (1,462,005) 1,861,403 --
----------- ----------- -----------
Total expenses before unusual items 24,750,695 30,560,254 26,040,999
----------- ----------- -----------
2,267,716 (8,005,064) 157,394
Unusual items:
Write-off of assets 514,694 2,156,949 970,184
Write-off of goodwill -- 1,256,000 --
Provision for litigation settlement 2,919,333 250,000 2,237,310
----------- ----------- -----------
Total unusual items 3,434,027 3,662,949 3,207,494
----------- ----------- -----------
Income (loss) before income taxes (1,166,311) (11,668,013) (3,050,100)
Income taxes 202,645 -- --
----------- ----------- -----------
Net income (loss) ($1,368,956) ($11,668,013) ($3,050,100)
----------- ----------- -----------
Earnings (loss) per share ($0.09) ($0.84) ($0.22)
----------- ----------- -----------
Weighted average number of common shares 14,720,327 13,872,298 14,157,335
----------- ----------- -----------
</TABLE>
See notes to the consolidated financial statements.
F-10
<PAGE> 77
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($1,368,956) ($11,668,013) ($3,050,100)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 835,315 1,147,171 944,318
Amortization of capitalized software 2,447,296 2,388,804 2,078,614
Amortization of goodwill 684,718 1,010,686 1,089,826
Provision for doubtful accounts 573,130 1,343,489 1,253,002
Inventory obsolescence -- -- 143,839
Loss on write-off of assets 514,694 1,820,246 970,184
Write-off of goodwill -- 1,256,000 --
Unrealized and realized (gain) loss on investments (1,462,005) 1,861,403 --
Deferred income taxes -- -- (32,172)
(Purchases) sales of trading securities (851,874) 2,247,706 --
Change in assets and liabilities, net of
effects from acquisitions:
Restricted cash (50,000) -- 540,716
Accounts receivable (68,464) (425,916) (4,555,575)
Insurance receivable -- 900,000 (900,000)
Inventory (180,263) (199,887) (1,070,188)
Other current assets 249,317 (197,610) (235,065)
Other assets (235,209) 295,344 (472,941)
Accounts payable (1,484,074) 558,159 1,157,320
Deferred revenues (726,992) 468,406 (14,842)
Shareholder litigation liability 2,668,317 (585,220) 2,650,000
Customer deposits (585,478) 964,508 (1,448,459)
Accrued liabilities 166,452 200,837 (130,490)
---------- ----------- ----------
Total adjustments 2,494,880 15,054,126 1,968,087
---------- ----------- ----------
Net cash provided by (used in) operating activities 1,125,924 3,386,113 (1,082,013)
---------- ----------- ----------
Cash flows from investing activities:
Purchases of short-term investments -- -- (1,009,476)
Purchases of available for sale securities (4,341,433) -- --
Proceeds from sales of available for sale securities 4,758,359 -- --
Investment in sales-type leases (617,712) (400,841) (71,211)
Payments received on sales-type leases 189,537 250,056 853,371
Purchase of subsidiaries, net of cash used -- -- 143,423
Capital expenditures (660,444) (571,455) (596,213)
Software development capitalized (1,002,854) (1,556,888) (2,469,337)
---------- ------------ ----------
Net cash used in investing activities (1,674,547) (2,279,128) (3,149,443)
---------- ------------ ----------
Cash flows from financing activities:
Short term borrowings 199,715 295,095 4,057,997
Principal payments on long-term debt (480,638) (837,036) (429,956)
Payments under capital lease obligations -- -- (24,022)
Proceeds from stock options exercised 42,847 271,916 1,458,884
Issuance of stock and puts, net of costs -- -- 25,045
Note receivable from shareholder -- -- (500,000)
---------- ------------ ----------
Net cash provided by (used in) financing activities (238,076) (270,025) 4,587,948
---------- ------------ ----------
Cumulative translation adjustment 55,129 (113,887) 86,117
---------- ------------ ----------
Net increase (decrease) in cash
and cash equivalents (731,570) 723,073 442,609
Cash and cash equivalents at beginning of year 1,933,895 1,210,822 768,213
---------- ------------ ----------
Cash and cash equivalents at end of year $1,202,325 $ 1,933,895 $1,210,822
---------- ------------ ----------
</TABLE>
See notes to the consolidated financial statements.
F-11
<PAGE> 78
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994, and 1993
<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, 1993 $32,237,950 $ 1,339,357 ($88,191) $ -- $ -- $ 33,489,116
Net redemption of value of puts
expired and outstanding 375,000 -- -- -- -- 375,000
Stock options exercised 1,458,884 -- -- -- -- 1,458,884
Issuance of puts 25,045 -- -- -- -- 25,045
Issuance of stock, acquisition
of company and contingent earnouts 1,488,541 -- -- -- -- 1,488,541
Cumulative translation adjustment -- -- 86,117 -- -- 86,117
Note receivable from stockholder -- -- -- -- (500,000) (500,000)
Net loss -- (3,050,100) -- -- -- (3,050,100)
----------- ------------ -------- -------- --------- ------------
Balance, December 31, 1993 35,585,420 (1,710,743) (2,074) 0 (500,000) 33,372,603
Stock options exercised 271,916 -- -- -- -- 271,916
Issuance of stock, contingent earnouts on
acquisitions of companies 511,077 -- -- -- -- 511,077
Cumulative translation adjustment -- -- (113,887) -- -- (113,887)
Issuance of stock, shareholder litigation 1,625,000 -- -- -- -- 1,625,000
Cancellation of shares previously issued
as contingent earnout related to acquisition (912,000) -- -- -- -- (912,000)
Net loss -- (11,668,013) -- -- -- (11,668,013)
----------- ------------ -------- -------- --------- ------------
Balance, December 31, 1994 37,081,413 (13,378,756) (115,961) 0 (500,000) 23,086,696
Stock options exercised 42,847 -- -- -- -- 42,847
Issuance of stock, contingent earnouts on
acquisitions of companies 784,592 -- -- -- -- 784,592
Cumulative translation adjustment -- -- 55,129 -- -- 55,129
Cumulative unrealized gain on investments
available for sale -- -- -- 186,382 -- 186,382
Issuance of stock to consultants 12,000 -- -- -- -- 12,000
Issuance of stock as settlement of
previously recorded liabilities 95,396 -- -- -- -- 95,396
Net loss -- (1,368,956) -- -- -- (1,368,956)
----------- ------------ -------- -------- --------- ------------
Balance, December 31, 1995 $38,016,248 ($14,747,712) ($60,832) $186,382 ($500,000) $ 22,894,086
----------- ----------- -------- -------- --------- ------------
</TABLE>
See notes to the consolidated financial statements.
F-12
<PAGE> 79
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE 1. LINE OF BUSINESS
Sulcus Computer Corporation (the Company) develops, installs, and
markets turnkey computer systems with specific software through its
subsidiaries. The Company also markets support services in conjunction with
the placement of software systems and provides trade credit to its customers.
NOTE 2. LEGAL PROCEEDINGS AND LITIGATION SETTLEMENTS
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 was approved on a preliminary basis by the Court on February 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
will be paid by insurance ($666,000) and the Company ($134,000). At December
31, 1995, the Company recorded a provision of $2,861,118 which, together with
amounts accrued in 1994, represents costs which the Company expects to incur in
connection with this agreement.
____________________
Sulcus and certain of its officers, directors and a former director
had been 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 250,000 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, which was received and
distributed in June, 1994.
On September 16, 1994, the court formally approved the settlement
agreement and the number of shares to be issued were increased to 530,612,
effective October 16, 1994. These shares were reflected as issued and
outstanding at December 31, 1994.
____________________
Sulcus and Jeffrey S. Ratner were 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. The action
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.
F-13
<PAGE> 80
On March 20, 1996, the Company, Mr. Ratner and the Plaintiffs agreed
to resolve this dispute. Under the terms of this agreement, the Company agreed
to deliver 498,488 shares of Sulcus Common Shares. These shares will represent
the entire earn-out for the years ended December 31, 1992, 1993 and 1994 and,
therefore, the Company will cancel 120,488 shares previously issued. At
December 31, 1995, the Company recorded an increase in goodwill and capital
stock in the amount of $391,193 to reflect this settlement. On March 21, 1996,
the court dismissed the claims and counterclaims.
____________________
Other suits 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 and those described above will not result in
a material adverse effect on the Company's consolidated financial position.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including contingencies, as well as the reported amounts of revenues and
expenses during the financial statement period. Actual results could differ
from those estimates. Examples of significant estimates include the
collectability of receivables, the future benefit of capitalized computer
software costs, lives assigned to goodwill, the net recoverability of deferred
tax assets and contingencies relating to sales-type financed leases. These
estimates are particularly susceptible to material changes in the near term.
PRINCIPLES OF CONSOLIDATION
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.
CASH AND CASH EQUIVALENTS
The Company considers as cash and cash equivalents certificates of
deposit and commercial paper with original maturities of less than three months
which consists of deposits in commercial banks in the U.S. and abroad. The
Company limits the amount of money placed in any one bank in order to reduce
credit risk.
SHORT-TERM INVESTMENTS
During 1995, the Company changed its investment philosophy and
consequently bought and sold certain investments to realign its investment
portfolio. From January 1, 1994 (effective date of current accounting
standards) through June 5, 1995, the Company actively bought and sold
investments in corporate preferred stocks and mutual funds consisting primarily
of corporate and U.S. government securities with the objective of generating
profits on short-term differences in price, and accordingly, classified its
investments as "Trading Securities" whereby they were carried at market with
unrealized gains or losses reflected in current earnings. 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) are 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. Realized gains and losses on sales of
investments, as determined on a specific identification basis, are included in
the consolidated statement of operations.
F-14
<PAGE> 81
Prior to the effective date of current accounting standards (prior to
January 1, 1994), the Company's short-term investments were carried at the
lower of cost or market. The cumulative effect of adopting the new accounting
standards (Statement of Financial Accounting Standard No. 115 "Accounting for
Certain Investments in Debt and Equity Securities") was not material and
accordingly, no cumulative effect of accounting change was reported.
RESTRICTED CASH
The restricted cash at December 31, 1995, represents cash collateral
for a deposit received on a significant contract in December 1995. As security
for product delivery and for the deposit received under the contract, the
Company issued a letter of credit of $550,000, which expires on December 31,
1996. At the customer's direction, upon the delivery of systems, a draw down
is permitted at the rate of 25% of the value of the equipment delivered. As of
February 29, 1996, approximately $172,000 of restricted cash was released for
general purposes. The restricted cash at December 31, 1994, represents a
customer deposit received on a significant contract which was held in escrow
with a financial institution. As security for performance and the advances
received under the contract, the Company issued a letter of credit, as amended,
of $500,000. The $500,000 remaining in restricted cash at December 31, 1994
was offset by customer deposits in the same amount. In January 1995, the
Company had fulfilled substantially all obligations under this contract and the
cash was released for general purposes and the letter of credit expired.
INVENTORIES
Inventories consist substantially of software and hardware products in
finished form and are valued at the lower of cost or market. Cost is
determined by the specific identification method. Market is net realizable
value.
SOFTWARE DEVELOPMENT
Software development costs incurred prior to establishing
technological feasibility are charged to operations and included in research
and development costs. Software development costs incurred after establishing
technological feasibility, together with purchased software, are capitalized.
Amortization of software development costs is provided for when the product is
available for general release to customers over the greater of the amount
computed using the remaining estimated economic life of the product or the
ratio that current gross revenues for a product bear to the total of current
and anticipated revenues for that product. The products are generally being
amortized over 3 to 5 years.
PROPERTY AND EQUIPMENT
Property and equipment is comprised of office furniture, fixtures,
service equipment, leasehold improvements, and land and building and are
recorded at cost. Depreciation is based upon the straight-line method over the
estimated useful lives of the related assets. Maintenance and repairs are
charged to expense as incurred.
GOODWILL
Goodwill, which represents the excess of the cost of purchased
companies over the fair value of their net assets at the date of acquisition,
is being amortized on a straight-line basis over lives ranging from 10 to 20
years. The Company annually evaluates the carrying value of goodwill based on
current operating results and forecasts of the specific businesses acquired.
INCOME TAXES
Income tax expense includes U.S. and international income taxes.
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of the difference is
reported as deferred income taxes and these amounts are adjusted to reflect tax
rates that will be in effect in the years in which these differences are
expected to reverse. A valuation allowance is provided
F-15
<PAGE> 82
to reduce deferred tax assets to an amount more likely than not to be realized.
Non-U.S. subsidiaries compute taxes in effect in the various countries.
Earnings of these subsidiaries may also be subject to additional income and
withholding taxes when they are distributed as dividends. Undistributed
earnings of non-U.S. subsidiaries are not material.
REVENUE RECOGNITION
The Company recognizes revenue on sales of systems including software
and hardware upon delivery or installation and when all obligations of the
respective contract have been fulfilled. Support services revenue are billed
in advance and recorded as deferred revenue and recognized as income ratably
over the service period of the Software Support and Hardware Maintenance
Agreement.
TRANSLATION ON NON-U.S. CURRENCY AMOUNTS
For non-U.S. subsidiaries which operate in a local currency
environment, assets and liabilities are translated to U.S. dollars at the
current exchange rates at the balance sheet date. Income and expense items are
translated at average rates of exchange prevailing during the year. Translation
adjustments are accumulated in a separate component of stockholders' equity.
EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is computed based on the number of
common shares outstanding, adjusted for the assumed conversion of shares
available upon the exercise of dilutive options, after the assumed repurchase
of common shares with the related proceeds. Fully diluted earnings (loss) per
share is not presented as it is either anti-dilutive or not different from
primary earnings (loss) per share.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with
current year reporting practices.
NOTE 4. SHORT-TERM INVESTMENTS
Securities available for sale at December 31, 1995 are summarized as
follows:
<TABLE>
<CAPTION>
Gross Unrealized
------------------------ Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Securities
maturing between 1 and 5 years $ 515,470 $ -- $ 3,435 $ 512,035
Mutual Funds 1,557,016 -- 33,726 1,523,290
Preferred Stocks 10,149,207 223,543 -- 10,372,750
----------- -------- ------- -----------
$12,221,693 $223,543 $37,161 $12,408,075
=========== ======== ======= ===========
</TABLE>
Trading securities at December 31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
Unrealized Market
Cost Gain(Loss) Value
----------- ---------- -----------
<S> <C> <C> <C>
Mutual Funds $ 2,362,393 ($387,188) $ 1,975,205
Preferred Stocks 9,610,155 (1,260,620) 8,349,535
----------- ----------- -----------
$11,972,548 ($1,647,808) $10,324,740
=========== ============ ===========
</TABLE>
Effective June 5, 1995, the Company restructured its investments as
short-term marketable securities and changed its investment philosophy to one
of holding securities for the generation of dividend and interest income. As a
result, investments and changes in market value of the investments arising
subsequent to this
F-16
<PAGE> 83
date are accounted for as "Available for Sale". At June 5, 1995, the market
value of the securities was below cost by $185,803.
Proceeds, realized gains and realized losses from the sales of
securities classified as available for sale for the year ended December 31,
1995 were $4,758,359, $130,000 and $2,441, respectively. Proceeds, realized
gains and realized losses from the sales of securities classified as trading
securities for the year ended December 31, 1995 were $2,190,926, $76,211 and
$13,112, respectively. Unrealized gains on trading securities amounted to
$1,271,347 through June 5, 1995.
NOTE 5. PURCHASED AND CAPITALIZED SOFTWARE
Purchased and capitalized software consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
---------- ----------
<S> <C> <C>
Purchased software $7,006,270 $7,186,171
Capitalized software 5,927,456 5,736,439
Accumulated amortization (7,992,031) (6,131,665)
----------- -----------
Net purchased and capitalized software $4,941,695 $6,790,945
========== ==========
</TABLE>
The Company capitalized software development costs of $1,002,854,
$1,556,888 and $2,469,337 during the years ended December 31, 1995, 1994 and
1993, respectively. Amortization for the years ended December 31, 1995, 1994,
and 1993 was $2,447,296, $2,388,804, and $2,078,614, respectively. Software
amortization is included in cost of sales.
The Company wrote off capitalized software costs of $514,694 during the
fourth quarter of 1995 and $1,820,246 during the third quarter of 1994. These
write-offs were based on the Company's assessment of its capitalized software
and the conclusion that these costs would not benefit future periods.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
---------- -----------
<S> <C> <C>
Buildings and leasehold improvements $1,007,171 $ 754,499
Furniture and equipment 5,255,813 4,925,581
Accumulated depreciation (4,247,168) (3,378,817)
----------- -----------
Net property and equipment $2,015,816 $2,301,263
========== ==========
</TABLE>
F-17
<PAGE> 84
NOTE 7. LEASES
AS LESSOR
Included in "Other Current Assets" and "Other Noncurrent Assets" are
amounts receivable under lease programs to customers. Classification as to
current or noncurrent is determined based upon scheduled payment by customers
in the case of sales-type lease receivables and lease maturity dates in the
case of net investment in financed leases. The Company, during 1993 and 1992,
leased its products to customers under sales-type leases. The Company's
investment in these sales-type leases is as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Minimum lease payments receivable $ 71,274 $290,211
Estimated residual value of leased property 22,002 34,258
Unearned and deferred income (35,474) (95,749)
-------- --------
Net investment in sales-type leases $ 57,802 $228,720
======== ========
</TABLE>
The scheduled maturities for sales-type lease receivables at December
31, 1995 are $54,046 in 1996 and $17,228 in 1997. The lease receivable
proceeds and the leased property are pledged as collateral under an April 30,
1993 loan agreement with a financial institution (See "Long-Term Debt").
In 1993 the Company modified its sales-type lease program by entering
into an agreement with a finance company whereby it receives 100% of the
discounted minimum lease payments at inception of the lease, assigns the lease
payments to the finance company, grants the finance company a security interest
in the leased equipment and accepts certain recourse liability in event of
default by the lessee. The Company retains ownership in the residual value of
the leased property and has recorded a reserve for the estimated liability
under the recourse agreement. At December 31, 1995 and December 31, 1994, the
Company had the following net investment in these financed sales-type leases:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Estimated residual value of leased property $1,315,427 $ 574,034
Unearned income (269,951) (127,651)
---------- ---------
Net investment in financed sales-type leases $1,045,476 $ 446,383
========== =========
</TABLE>
At December 31, 1995, the Company was contingently liable for
approximately $874,000 related to sales-type leases financed under this
agreement. To date, actual losses from recourse provisions have not been
material.
AS LESSEE
The Company has operating leases with third parties for primary office
space in various locations. The future annual rental commitments under these
leases are $948,000 in 1996; $708,500 in 1997; $332,000 in 1998; $269,000 in
1999; $256,000 in 2000 and $1,332,200 thereafter. Rent expense under these
agreements and other operating leases was $1,611,081, $1,491,615 and
$1,698,119, for the years ended December 31, 1995, 1994, and 1993. See
"Related Party Transactions" for additional operating leases.
F-18
<PAGE> 85
NOTE 8. LONG TERM DEBT
The Company's and subsidiaries' long-term debt consists of the
following:
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Note payable to bank by Squirrel, prime plus
1%, guaranteed by Sulcus Computer Corporation $ -- $ 91,500
Note payable to individual by Lodgistix at prime -- 239,647
Note payable to financial institution by Sulcus
Hospitality Group subsidiary at 12% 70,566 175,418
Notes payable to bank at prime plus 1/2% 3,322 47,961
------- --------
73,888 554,526
Less - current portion 46,713 468,990
------- --------
Long-term debt $27,175 $ 85,536
======= ========
</TABLE>
The Lodgistix note payable was secured by certain inventories, accounts
receivables, equipment and software programs of Lodgistix, Inc. The note was
paid in 1995.
The Sulcus Hospitality Group borrowings were made pursuant to an April
1993 loan agreement with a financial institution. The debt is secured by
certain sales-type leases of the Company and principal payments are required
based upon customer lessee payments received under the sales type leases.
Scheduled maturities of long-term debt at December 31, 1995 are $46,713
in 1996 and $27,175 in 1997.
NOTE 9. SHORT-TERM BORROWINGS
The Company's short-term borrowings consists of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Borrowings with brokerage firm on margin against
the Company's short term investment portfolio $6,062,905 $5,145,753
Unsecured line of credit with a commercial
bank, at prime -- 365,000
Unsecured demand note of the Company's Squirrel
subsidiary with a bank at prime 271,448 295,000
Bank credit lines of the Company's Swiss
subsidiary at prime 48,357 377,242
---------- ----------
Total short-term borrowings $6,382,710 $6,182,995
========== ==========
</TABLE>
The brokerage margin account borrowings are secured by the Company's
short-term investment portfolio, having a market value of $11,914,274 at
December 31, 1995. Interest is charged and paid monthly based on the broker's
internally established rate which was 8.375% at December 31, 1995.
F-19
<PAGE> 86
The Company's Swiss subsidiary (Lodgistix International, AG) has a line
of credit with a bank totaling $127,000 (150,000 Swiss francs). The line of
credit is cancelable at any time and is secured by deposits with the bank which
approximated $58,467 at December 31, 1995. At December 31, 1995, interest was
7.00%.
NOTE 10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current:
Domestic $150,000 $ -- $ --
Foreign 52,645 -- --
Deferred:
Domestic -- -- --
-------- -------- ---------
Total $202,645 $ -- $ --
======== ======== =========
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory tax rate (35%) (35%) (34%)
State income taxes, net of federal income tax effect 8% (4%) (5%)
Benefits not recorded due to net carryforward position 39% 42% 47%
Foreign and Other 5% 1% 4%
Tax credits generated 0% (4%) (12%)
---- ----- -----
17% 0% 0%
==== ==== ====
</TABLE>
The Company's U.S. federal effective rate is generally unaltered by the
rates applicable to its foreign operations as a U.S. foreign tax credit would
be generated for taxes paid in those jurisdictions. Foreign taxes are
recognized on foreign taxable income for which no foreign tax credit is
generated.
Permanent differences include tax-free dividend income and amortization
of goodwill. No tax benefits were recorded for non-deductible write-offs of
goodwill and certain other expenses. Due to the net operating losses, no
material tax payments have been made.
F-20
<PAGE> 87
The following summarizes the significant components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
Deferred Tax Consequences at December 31, 1995
---------------------------------------------------
Assets Liabilities Total
----------- ----------- -----------
<S> <C> <C> <C>
Accounts receivable allowance $ 749,534 $ -- $ 749,534
Unrealized loss on investments 72,463 -- 72,463
Inventory writedowns 108,160 -- 108,160
Accrued expenses not currently deductible 66,300 -- 66,300
Less valuation allowance (830,900) -- (830,900)
----------- ----------- -----------
Current 165,557 -- 165,557
----------- ----------- -----------
Property and equipment book/tax cost differential -- (35,196) (35,196)
Tax loss carryforwards 11,619,173 -- 11,619,173
Tax credits 1,800,000 -- 1,800,000
Software costs capitalized for financial
reporting purposes -- (1,746,458) (1,746,458)
Less valuation allowance (9,703,323) -- (9,703,323)
----------- ----------- -----------
Noncurrent 3,715,850 (1,781,654) 1,934,196
----------- ----------- -----------
Total $ 3,881,407 $(1,781,654) $ 2,099,753
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred Tax Consequences at December 31, 1994
-----------------------------------------------------
Assets Liabilities Total
----------- --------------- -------------
<S> <C> <C> <C>
Accounts receivable allowance $ 1,012,864 $ -- $ 1,012,864
Unrealized loss on investments 642,645 -- 642,645
Accrued expenses not currently deductible 275,792 -- 275,792
Inventory writedowns 270,600 -- 270,600
Deferred revenue 48,750 -- 48,750
Other assets 13,466 -- 13,466
Less valuation allowance (1,505,645) -- (1,505,645)
----------- ----------- -----------
Current 758,472 -- 758,472
----------- ----------- -----------
Property and equipment book/tax cost differential -- (104,823) (104,823)
Tax loss carryforwards 11,665,194 -- 11,665,194
Tax credits 1,844,380 -- 1,844,380
Software costs capitalized for financial
reporting purposes -- (2,510,506) (2,510,506)
Less valuation allowance (9,552,964) -- (9,552,964)
----------- ----------- -----------
Noncurrent 3,956,610 (2,615,329) 1,341,281
----------- ----------- -----------
Total $ 4,715,082 $(2,615,329) $ 2,099,753
=========== =========== ===========
</TABLE>
F-21
<PAGE> 88
<TABLE>
<CAPTION>
Deferred Tax Consequences at December 31, 1993
--------------------------------------------------
Assets Liabilities Total
---------- ----------- -----------
<S> <C> <C> <C>
Accounts receivable allowance $ 582,676 $ -- $ 582,676
Accrued expenses not currently deductible 275,792 -- 275,792
Inventory writedowns 642,160 -- 642,160
Deferred revenue 48,750 -- 48,750
Other assets 13,466 -- 13,466
Less valuation allowance (924,174) -- (924,174)
----------- ----------- -----------
Current 638,670 -- 638,670
----------- ----------- -----------
Property and equipment book/tax cost differential -- (182,823) (182,823)
Tax loss carryforwards 10,339,532 -- 10,339,532
Tax credits 1,492,385 -- 1,492,385
Software costs capitalized for financial
reporting purposes -- (3,410,738) (3,410,738)
Less valuation allowance (6,777,273) -- (6,777,273)
----------- ----------- -----------
Noncurrent 5,054,644 (3,593,561) 1,461,083
----------- ----------- -----------
Total $ 5,693,314 $(3,593,561) $ 2,099,753
=========== =========== ===========
</TABLE>
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 1996 and the next several years. The Company believes that the
results of 1995 were affected by a write-off of software and a shareholder
litigation settlement. Without these items, which are not expected to repeat
in the future, the Company would have generated net income in 1995.
Furthermore, the Company expects increased sales and only slight increases in
expenses in 1996.
Therefore, management believes that the valuation allowance is
appropriate given the current estimates of future taxable income. 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 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 credit to income.
The Company has approximately $29,846,000 of net operating losses, a
portion of which are subject to certain limitations under the Internal Revenue
Code Section 382, and $1,800,000 of tax credits available to offset future
federal tax liabilities. The net operating loss carryforwards expire as
follows:
<TABLE>
<S> <C>
2001 $ 377,000
2002 1,363,000
2003 1,946,000
2004 4,501,000
2005 2,193,000
2006 6,579,000
2007 4,055,000
2008 5,733,000
2009 3,099,000
-----------
Total $29,846,000
===========
</TABLE>
F-22
<PAGE> 89
NOTE 11. RELATED PARTY TRANSACTIONS
The Company leases office space in Greensburg, Pennsylvania from a
trust established by a major stockholder. The leases commenced on various dates
from March 1, 1983 and expire on various dates through September 30, 2001. The
leases may be renewed for additional two-year terms at the rate of 2% over the
prior year's amount unless specifically canceled by either party. Rent expense
under these agreements was $225,391, $185,251 and $161,700 for the years ended
December 31, 1995, 1994, and 1993, respectively. The future annual rental
commitments under these leases are $229,111 in 1996, $138,105 in 1997, $85,860
in 1998, $90,144 in 1999, $91,947 in 2000 and $91,947, thereafter.
The Company has made a relocation loan to its President in the amount
of $100,000 which is secured by real estate and bears interest at the rate of
5%. Interest is payable quarterly and the principal is payable on the earlier
of the sale of a former residence or October 27, 1996.
NOTE 12. COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company had contractual commitments to
purchase certain electronic and other materials used to manufacture systems for
the restaurant management and energy management products. Based on the
contract provisions, these obligations totalled $1,924,000, and are expected to
be fulfilled as follows:
<TABLE>
<S> <C>
1st Quarter, 1996 $1,212,000
2nd Quarter, 1996 $ 559,000
3rd Quarter, 1996 $ 86,000
4th Quarter, 1996 $ 67,000
</TABLE>
The Company has employment agreements with certain of its executive
officers and management personnel. These agreements generally continue until
terminated by either party. The agreements contain certain change in control
provisions.
NOTE 13. INCENTIVE STOCK OPTION PLANS
The Company maintains three stock option plans at December 31, 1995:
the 1983 Incentive Stock Options Plan (1983 plan), the 1991 Incentive Stock
Option Plan (1991 Plan), and the Directors Plan. Options can no longer be
granted under the 1983 Plan. The 1991 Plan (as amended) allows for 3,000,000
stock options available for grant under the plan, which extends through January
1, 2001. The 1991 Plan allows for all of the future stock options to be
granted at any time prior to the termination of the plan. The option price may
not be less that the fair market value at date of grant. Options granted under
the 1991 plan become available to be exercised based upon a five year vesting
schedule.
F-23
<PAGE> 90
The employee stock option plan activity for the years ended December
31, 1995, 1994, and 1993 is as follows:
<TABLE>
<CAPTION>
Options
Outstanding Price
----------- -------
<S> <C> <C> <C>
Outstanding, January 1, 1993 1,036,480 $1.000 - $9.250
--------- ---------------
1993
- ----
Granted 945,500 $6.625 - $9.250
Exercised (169,467) $1.250 - $6.625
Canceled (413,816) $2.281 - $9.250
--------- ---------------
Outstanding, December 31, 1993 1,398,697 $1.000 - $9.250
--------- ---------------
1994
- ----
Granted 957,500 $2.1875 -$7.750
Exercised (90,592) $1.250 - $5.375
Canceled (720,822) $1.375 - $9.250
--------- ---------------
Outstanding, December 31, 1994 1,544,783 $1.000 - $9.250
--------- ---------------
1995
- ----
Granted 328,500 $2.000 - $3.500
Exercised (81,660) $2.125 - $3.500
Canceled (338,841) $2.281 - $8.625
--------- ---------------
Outstanding, December 31, 1995 1,452,782 $1.000 - $9.250
========= ===============
</TABLE>
The Company has authorized 500,000 Nonqualified 1991 Directors Options
under the 1991 Directors Plan. The board of directors on August 20, 1993 and
the stockholders on October 12, 1993 approved the amendment to the Company's
Nonqualified 1991 Director Option Plan to increase the number of shares under
the plan to 1,000,000. During the year ended December 31, 1993, 70,000
director options were granted at prices ranging from $6.625 to $6.875. During
1993, 20,000 director options were exercised. During the year ended December
31, 1994, 50,000 director options were granted at $3.00. During the year ended
December 31, 1995, 83,333 director options were granted at $2.50 and 60,000
options were cancelled at prices ranging from $3.00 to $5.625. No options were
exercised in 1994 or 1995. All options are granted at prices not less than
fair market value.
During March 1992, approximately 388,516 and 11,484 options were
granted to Squirrel shareholders and advisors, respectively, at $4.25 per share
in connection with the acquisition of Squirrel. At December 31, 1992, 87,500
options were exercisable and the balance are exercisable after March 25, 1993.
During the year ended December 31, 1994, 40 options granted to Squirrel
shareholders and advisors were exercised. During 1995, 75,000 options were
cancelled.
The Company periodically grants options to consultants and advisors.
During the year ended December 31, 1995, a total of 50,000 options were granted
at $2.50. All options are granted at prices not less than fair market value.
At December 31, 1995, under all plans, options for approximately
1,199,553 and 1,971,115 shares were exercisable and outstanding, respectively,
at prices ranging from $1.000 to $9.250.
F-24
<PAGE> 91
The Financial Accounting Standards Board issued a statement in October
1995 entitled "Accounting for Stock-Based Compensation" which will be effective
for the Company in 1996. This statement establishes an accounting method based
on the fair value of equity instruments awarded to employees as compensation,
however, companies are permitted to continue applying previous accounting
standards in the determination of net income with disclosure in the notes to
the financial statements of the differences between previous accounting
measurements and those formulated by the new accounting standard. Beginning in
1996, the Company intends to determine net income using previous accounting
standards and to make the appropriate disclosures in the notes to the financial
statements as permitted by the standard.
NOTE 14. NOTE RECEIVABLE FROM STOCKHOLDER
During the year ended December 31, 1993, the Company extended a loan to
the former principal stockholder and current president of Techotel AG (now
Sulcus Hospitality Group EMEA AG) in the amount of $500,000, pending the
registration of the stock of the Company issuable to him under terms of the
agreement for the purchase of Techotel. The note will be repaid upon the
registration by the Company for the stock issuable to him. Based on the nature
of the note, it has been reflected as a reduction of equity.
NOTE 15. ACQUISITIONS
In October of 1993, the Company completed its acquisition of
Lodgistix Scandinavia A.S., a distributor of Lodgistix systems in Norway,
Sweden and Denmark. The purchase price consisted of Sulcus Common Stock having
a value of $300,000. In addition, the former stockholders of Lodgistix
Scandinavia receive additional shares of the Company's stock up to a value of
$675,000 contingent upon attaining certain earnings over a three year period.
Lodgistix Scandinavia achieved such earnings for 1993 and 1995. As a result,
the Company will issue to the former stockholders of Lodgistix Scandinavia
5,808 and 111,801 shares of Sulcus common stock for an aggregate value of
$44,864 ($7.725 per share) and $225,000 ($2.0125 per share) for 1993 and 1995,
respectively. This additional consideration has been recorded as goodwill at
December 31, 1995. Lodgistix Scandinavia did not achieve required earnings for
1994.
Effective January 1, 1993, Sulcus acquired Techotel AG of Switzerland.
The purchase agreement (as amended) provided for the issuance of $1,000,000 of
Common Stock. In addition, the shareholders were entitled to receive shares of
Sulcus based upon a multiple of 1.30 times earnings up to an aggregate value of
$2,890,000 over a three-year period ending December 31, 1995. Techotel
achieved such earnings for 1993 and 1995. As a result, the Company will issue
to the former stockholders of Techotel 90,517 and 83,676 shares of Sulcus
common stock for an aggregate value of $698,110 ($7.7125 per share) and
$168,399 ($2.0125 per share) for 1993 and 1995, respectively. This additional
consideration has been recorded as goodwill at December 31, 1995. Techotel did
not achieve the required earnings for 1994.
In 1992, Sulcus acquired Sulcus Hospitality Limited and Sulcus
Singapore PTE. LTD., sales offices located in Hong Kong and Singapore,
respectively for $1,450,000 in cash. In addition, the shareholders were
entitled to receive shares of Sulcus based upon a multiple of 2.75 times
earnings up to an aggregate value of $8,855,000 contingent upon attaining after
tax earnings over a three-year period. The only year that these subsidiaries
achieved earnings sufficient to entitle the former shareholders to contingent
payments was 1992 and, as a result, the Company issued to the former
shareholders (as amended) 320,827 shares of Sulcus common stock for an
aggregate value of $3,047,852 ($9.50 per share). Subsequent to this
determination Sulcus withheld 23,175 shares with an aggregate value of $220,161
with regard to the write off of the Craftech subsidiary. As a result of the
1992 restatement of earnings, the Company revised the contingent earnout
calculation based on the restatement adjustments that affected it. The Company
reduced the number of shares of stock issued as a result of the original
calculation, all of which are restricted. As a result, the Company reduced
goodwill at December 31, 1994 by approximately $2,168,000, reduced equity by
F-25
<PAGE> 92
approximately $912,000, the estimated current value of the shares to be
canceled, and expensed the difference of $1,256,000 in 1994.
Effective March 1, 1992, Sulcus acquired all of the outstanding stock
of Squirrel Companies, Inc. ("Squirrel"). The purchase price consisted of
$500,000 in cash and 401,260 shares (at $5.75 per share) of the Company's stock
having a value of $1,955,500, net of issuance costs of approximately $351,745,
in exchange for all of the outstanding common stock of Squirrel. In addition,
the shareholders of Squirrel were entitled to receive additional shares of
Sulcus up to an aggregate value of $4,065,000 as well as 225,000 of the
Company's options contingent upon Squirrel's attaining after tax earnings over
a three-year period ending in 1994. Squirrel achieved such earnings for 1992
and 1994 and, as a result, the Company issued to the former shareholders of
Squirrel 53,212 shares for an aggregate value of $703,198 for 1992 and 70,836
shares for an aggregate value of $177,090 for 1994. These additional amounts
are recorded as a component of goodwill. On March 20, 1996, the Company
resolved disputes with the former owners of Squirrel with regard to the
calculation of earnouts in 1992 through 1994. The Company will issue 498,488
shares under the terms of the agreement and will cancel 120,488 earnout shares
which are a portion of the 124,048 earnout shares described above. To reflect
this settlement, the Company recorded an increase in goodwill and capital stock
in the amount of $391,193.
NOTE 16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net interest paid $596,322 $ 556,269 $ 402,764
Non-cash activities:
Acquisitions:
Fair value of assets acquired -- -- $3,772,457
Common stock issued -- -- $1,300,000
Liabilities assumed -- -- $2,472,457
Common stock issued in settlement
of shareholder litigation -- $1,625,000 --
Common stock issued for contingency
payments on acquisitions $393,399 $ 511,077 $ 188,541
Issuance of stock to consultants $ 12,000 -- --
Issuance of stock as settlement of
previously recorded liabilities $ 95,396 -- --
Issuance of stock as settlement
of Squirrel litigation $391,193 -- --
Cancellation of shares previously issued as
contingent earnout related to acquisitions -- $ 912,000 --
Unrealized gain on investments available for sale $186,382 -- --
</TABLE>
F-26
<PAGE> 93
NOTE 17. SEGMENT REPORTING
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 years ended December 31,
1995, 1994, and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Net revenues:
North America $34,821,124 $33,050,319 $38,160,366
Pacific Region 5,736,551 4,852,745 7,077,521
Europe 5,426,318 5,240,100 4,045,258
----------- ----------- -----------
Consolidated net revenues $45,983,993 $43,143,164 $49,283,145
=========== =========== ===========
Net income (loss):
North America $125,811 ($7,973,153) ($1,718,044)
Pacific Region (1,290,717) (3,304,369) (1,937,632)
Europe (204,050) (390,491) 605,576
----------- ----------- ----------
Consolidated net income (loss) ($1,368,956) ($11,668,013) ($3,050,100)
=========== =========== ==========
Identifiable assets:
North America $39,208,729 $40,547,963 $48,600,059
Pacific Region 3,437,539 2,560,219 5,867,076
Europe 4,680,510 4,761,301 4,248,506
----------- ----------- -----------
Consolidated identifiable assets $47,326,778 $47,869,483 $58,715,641
=========== =========== ===========
</TABLE>
The 1995 North American segmental operating income includes the
$2,919,333 litigation settlement provision and $514,694 write-off for software
costs developed and capitalized for the U.S. markets. The 1994 North American
segmental loss includes a $1,647,808 unrealized loss on short-term investments,
a $1,820,246 write off of capitalized software and a $250,000 provision for
litigation.
The 1994 Pacific Region operating losses include $336,703 to write off
investments in two affiliates and a net charge of $1,256,000 to write off
goodwill.
The 1994 European operating loss includes approximately $400,000
related to a French subsidiary.
Other than short-term investments in marketable securities, which are
generally available for working capital, there are no significant non-operating
corporate assets.
Sales between geographic areas and export sales are not material.
Identifiable assets by geographic area exclude intercompany loans,
advances and investments in affiliates. Intercompany trade receivables have
been eliminated. Corporate assets are principally cash, trade receivables and
intangibles.
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
data for the years ended December 31, 1995 and 1994. The Company believes this
information has been prepared on the same basis as the
F-27
<PAGE> 94
Consolidated Financial Statements and that all necessary adjustments
(consisting only of normal recurring adjustments) have been included in the
amounts as stated below to present fairly the selected quarterly information
when read in conjunction with its Consolidated Financial Statements and Notes
thereto.
<TABLE>
<CAPTION>
(In Dollars)
Fiscal Quarter Ended
----------------------------------------------------------------------------------------------
March June September December March June September December
31, 30, 30, 31, 31, 30, 30, 31,
1995 1995 1995 1995 1994 1994 1994 1994
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues 11,311,054 11,152,637 11,197,496 12,322,806 10,537,828 10,974,798 10,399,027 11,231,511
Cost of sales
and expenses 10,267,519 10,465,330 11,124,788 15,292,667 11,869,101 12,586,370 13,264,878 17,090,828
Income (loss)
before taxes 1,043,535 687,307 72,708 (2,969,861) (1,331,273) (1,611,572) (2,865,851) (5,859,317)
Tax provision 0 0 0 202,645 0 0 0 0
Net income
(loss) 1,043,535 687,307 72,708 (3,172,506) (1,331,273) (1,611,572) (2,865,851) (5,859,317)
========= ======= ====== ========== ========== ========== ========== ==========
Earnings (loss) per share 0.07 0.05 0.00 (0.21) (0.09) (0.11) (0.20) (0.40)
==== ==== ==== ===== ==== ==== ==== ====
</TABLE>
The Company's results for the first quarter 1995 include $881,683,
which relates to the unrealized gain on investments. The Company's results for
the fourth quarter 1995, include the provision for litigation settlement of
$2,919,333 and write off of capitalized software of $514,694.
The Company's results for the fourth quarter of 1994 include a
provision of $336,703 to write off an investment in two unconsolidated
affiliates in Singapore and Hong Kong, referred to as Guthrie Retail Systems
and a provision of approximately $400,000 to write down the assets and provide
for expenses related to the disposition of its wholly-owned French subsidiary.
Management reached a decision in the fourth quarter of 1994 to dispose of the
companies because anticipated future revenues did not justify further
investments in these operations. Total 1994 sales of these companies included
in the consolidated statement of operations were approximately $800,000. In
addition, the results of the fourth quarter includes a charge of $1,256,000 to
write off goodwill related to the acquisition of Hong Kong and Singapore (See
Note 14).
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair value are made at a specific point in time, based on
relevant market prices and information about the financial instrument. The
estimated fair values of financial instruments presented below are not
necessarily indicative of the amounts the Company might realize in actual
market transactions.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH (INCLUDING RESTRICTED CASH): The carrying amounts reported in the
balance sheet for cash and restricted cash approximates their fair
value.
SHORT-TERM INVESTMENTS: Short-term investments consists of stocks,
mutual funds and debt securities. Fair values are based on quoted
market prices.
SHORT- AND LONG-TERM DEBT: The carrying amount of the Company's
borrowings under margin accounts and floating rate debt approximates
its fair value. Long-term fixed rate debt is not material.
SHAREHOLDER LITIGATION LIABILITY: Portions due in the form of stock
for settlement of shareholder litigation liability is valued based
upon quoted market prices.
The carrying amounts of trade payables and receivables approximate
their fair value and have been excluded from the accompanying table.
F-28
<PAGE> 95
The carrying amounts and fair value of the Company's financial
instruments are as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
-------------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash $1,202,325 $1,202,325 $1,933,895 $1,933,895
Restricted cash 550,000 550,000 500,000 500,000
Short-term investments 12,408,075 12,408,075 10,324,740 10,324,740
Short-term borrowings 6,382,710 6,382,710 6,182,995 6,182,995
Shareholder litigation
liability 3,108,097 3,283,097 439,780 439,780
Long-term borrowings 73,888 73,888 554,526 554,526
</TABLE>
NOTE 20. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On April 10, 1996, the Company entered into an agreement in principle
with the staff of the Securities and Exchange Commission ("Commission"),
resolving an investigation which commenced in 1993. This agreement is subject
to approval of the full Commission. During 1994, in response to views
expressed by the Commission's staff, the Company reviewed and restated its
financial statements for the years ended December 31, 1992 and 1991 with
respect to accounting for costs and revenue associated with various acquisition
transactions and with respect to the adoption of accounting principles related
to income taxes. Under the terms of the April 10, 1996 agreement, without
admitting or denying any wrongdoing, the Company agreed that it would not in
the future violate Sections 17(a)(2) and 17(a)(3) of the Securities Act,
Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and
Rules 10b-5, 12b-20, 13a-1, and 13a-13 promulgated thereunder. With respect to
certain press releases issued during 1991 and 1992, the proposed Order
Instituting Proceedings makes findings against Sulcus under Section 10(b) and
Rule 10b-5. The proposed Order Instituting Proceedings does not make findings
against Sulcus under Section 10(b) or Rule 10b-5 with regard to accounting
practices. In addition, a former accounting officer of the Company and the
Company's Chairman, without admitting or denying any wrongdoing agreed that
they would not in the future violate Sections 17(a)(2) and (a)(3) of the
Securities Act; Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act
and Rules 12b-20, 13a-1, 13a-13, and 13b 2-1 promulgated thereunder. There
were no fines or other penalties imposed upon the Company or its Chairman. The
Company's former accounting officer agreed not to practice before the
Commission as an accountant for a 30 month period.
F-29
<PAGE> 96
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and if given or made, such information or representation must not be
relied upon as having been authorized by the Company or any Underwriter.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances create any implication that there has been no change in
the affairs of the Company since the date hereof or that information contained
herein is correct as of any date subsequent to the date hereof. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to
whom it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Available Information
Additional Information
Prospectus Summary
Summary Financial Data
Risk Factors
Use of Proceeds
Dividend Policy
Dilution
Capitalization
Price Range of Common Stock
Selected Financial Data
Management's Discussion and
Analysis of Financial Condition
and Results
Business
Management
Principal Shareholders
Certain Transactions
Description of Securities
Shares Eligible for Future Sale
Underwriting
Legal Proceedings
Experts
Index to Financial Information
SULCUS
Computer Corporation
1,000,000 Shares of Preferred Stock
and
1,000,000 Class A Warrants
--------------------
PROSPECTUS
--------------------
H. J. Meyers & Co., Inc.
Culverwell & Co., Inc.
May , 1996
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following expenses are estimated:
<TABLE>
<S> <C>
SEC Registration Fee $ 7,500
American Stock Exchange Fees $ 5,000
Accounting fees $ 25,000
Legal Fees $ 65,000
Printing, Engraving & Mailing $ 60,000
Warrant agent, Transfer agent & registrars fees $ 20,000
Blue Sky fees and expenses $ 22,500
Miscellaneous expenses $ 35,000
--------
TOTAL $240,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 1741 through 1747 of the Pennsylvania 1988 Business Corporation
Law permits indemnification of officers, directors and employees and agents of
a corporation.
Article 5.3 of Article V of the Registrant's By-Laws provides as follows:
5.3 Indemnification of Directors, Officers and Employees: The
Corporation shall indemnify any person who was or is threatened to be made a
party to any threatened, pending or contemplated action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a Director, officer, employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a Director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against all expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding or the defense or settlement thereof of any claim,
issue or matter therein, to the fullest extent permitted by the laws of
Pennsylvania as they may exist from time to time.
Expenses incurred by any such person in defending any such action, suit or
proceeding may be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding if authorized by a majority of the Directors
of the Corporation who are not interested in such action, suit or proceeding.
The proper officers of the Corporation, without further authorization by the
Board of Directors may, in their discretion, purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
Director, officer, employee or agent for another corporation, partnership,
joint venture, trust or other enterprise,
II-1
<PAGE> 98
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the laws of
Pennsylvania and under this Article 5.3.
The indemnification provided by this Article shall not be deemed exclusive
of any other rights to which a person seeking indemnification may be entitled
under any agreement, vote of shareholders or disinterested Directors or
otherwise, both as to action is his official capacity and to action in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a Director, officer, employee or agent of the type referred to
above and shall insure to the benefit of the heirs, executors and
administrators of such a person.
The Stock Purchase Agreements relating to the acquisition of Techotel,
A.G. and Lodgistix Scandinavia, A.S. contain provisions whereby the
Shareholders of each of those companies shall indemnify and hold harmless
Sulcus, each director of Sulcus, each officer of Sulcus who signed the
Registration Statement, and each person who controls any of the foregoing
persons within the meaning of the Securities Act with respect to any statement
or omission from such Registration Statement, filed with the Commission, if
such statement or omission was made in reliance upon and in conformity with
written information furnished to Sulcus specifically for use in connection with
the preparation of such registration statement.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Registrant's By-Laws, the Stock Purchase
Agreements, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the act and is therefore unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person in connection with the securities being registered), the
Registrant will, unless in the opinion of its counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following securities were sold by the
registrant without registration under the Securities Act of 1933, as amended:
On November 15, 1993, Registrant agreed to issue 34,000 shares of its
common stock to the three shareholders of Lodgistix Scandinavia, A.S. in
connection with the acquisition on November 15, 1993, of all of the issued and
outstanding capital stock of Lodgistix Scandinavia, A.S., subject to certain
adjustment, depending upon the price of Sulcus shares on the effective date of
the Registration Statement filed to permit the sale of such shares. As of the
date hereof, the former shareholders of Lodgistix Scandinavia are entitled to
receive an aggregate of 34,000 shares of Common Stock.
II-2
<PAGE> 99
On August 3, 1994, Registrant agreed to issue up to 48,833 of its common
stock to Peter Landau, Esq. as payment for legal services rendered and to be
rendered to Registrant and for expenses in connection therewith.
On August 24, 1994, Registrant agreed to issue 31,707 shares of its common
stock to the Wall Street Group, Inc. as payment for financial public relations
consulting services rendered and to be rendered to Registrant.
On December 13, 1994, Registrant agreed to issue 96,000 shares of its
common stock to O. Gene Bicknell in payment of a Promissory Note and interest
thereon.
The Registrant believes the issuances of the securities referred to above
were and in the case of issuances to be made in the future will be exempt from
registration under the Act pursuant to Section 4(2) of the Act, as not
involving any public offering. Claims of such exemptions are based upon the
following; (i) all of the purchasers in such transactions were sophisticated
investors with the requisite knowledge and experience in financial and business
matters to evaluate the merits and risk of an investment in the Registrant,
were able to bear the economic risk of an investment in the Registrant, had
access to or were furnished with the kinds of information that registration
under the Act would have provided, and acquired securities for their own
accounts in transactions not involving any general solicitations or general
advertising, and not with a view to the distribution thereof, and (ii) a
restrictive legend was placed on each certificate evidencing the securities.
None of the foregoing transactions involved an underwriter (as defined in the
Act).
ITEM 16. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
Unless otherwise noted, the following exhibits are filed with this
Registration Statement.
16 (a) EXHIBITS
1(a) Form of Underwriting Agreement*
(b) Form of Agreement Among Underwriters*
(c) Form of Selected Dealers Agreement*
(2)(a) Agreement and Plan of Reorganization between Lodgistix and
Sulcus.**
(a)(i) Amendment 1. to Agreement and Plan of Reorganization.**
(ii) Amendment 2. to Agreement and Plan of Reorganization.**
(b) Agreement of Merger between Lodgistix and Sulcus.**
(b)(i) Amendment 1. to Agreement of Merger.**
(b)(ii) Amendment 2. to Agreement of Merger.**
(c)(i) Certificate of Merger - Delaware ***
(c)(ii) Certificate of Merger - Kansas ***
(d) Stock Purchase Agreement among Sulcus, Squirrel and
shareholders of Squirrel ****
(e) Stock Purchase Agreement and Plan of Reorganization among
Sulcus, NRG and shareholders of NRG ****
II-3
<PAGE> 100
(f) Stock Purchase Agreement among Sulcus, JBA and shareholders
of JBA++
(g) Stock Purchase Agreement among Sulcus, Techotel and
shareholders of Techotel *****
(h) Stock Purchase Agreement among Sulcus, Lodgistix Scandinavia
and shareholders of Lodgistix Scandinavia *******
(3)(a) Articles of Incorporation+
(b) Certificate of Amendment to Articles of Incorporation+
(c) Form of Proposed Amendments to Articles of Incorporation***
(c)(i) Form of Proposed Amendment to Preferred Stock Provisions of
Articles of Incorporation x
(d) By-Laws*
(4)(a) Form of Common Stock Certificate+
(a)(i) Form of Class A Redeemable Warrant*
(a)(ii) Form of Class A Warrant x
(b) Form of Underwriter's Warrant x
(c) Form of Warrant Agreement x
(d) Form of Preferred Stock Certificate x
(e) Form of Class B Warrant***
(f) Form of Class B Warrant Agreement***
(5)(a) Opinion of Counsel for Sulcus *********
(b) Opinion of David Nelson, Esq. *********
(10)(a) Incentive Stock Option Plan, as amended*
(a)(i) Form of 1991 Incentive Stock Option Plan***
(b) Director's Stock Option Plan*
(b)(ii) Form of 1991 Directors Stock Option Plan***
(c) Form of Incentive Stock Option Agreement*
(d) Form of Directors Stock Option Agreement*
(h) Management Agreement between Hospitality Management
Systems, Inc. and CompuSolv, Inc., dated March 1, 1989*
(i) Exclusive License Agreement between Hospitality Management
Systems, Inc. and CompuSolv, Inc., dated July 14, 1989*
(j) Form of Distributor Agreement*
(l) Form of Reseller Agreement (Software)*
(n) Form of Support, Maintenance & Enhancement Agreement*
(o) Form of Hardware Service Agreement*
(x) Form of Purchase/License Agreement between Hospitality
Management Systems, Inc. and Purchaser*
(y) Lease for premises at 41 N. Main Street, Greensburg, PA*
II-4
<PAGE> 101
(viii) Employment Agreement with Jeffrey S. Ratner ********
(viii)(a) Amendment to Employment Agreement with Jeffrey S. Ratner
*********
(ix) Employment Agreement with John W. Ryba ********
(x) Employment Agreement with Delmer C. Gowing, III ********
(xi) Employment Agreement with H. Richard Howie ********
(xiii) Employment Agreement with Joel Nagelmann**********
(aa) Citibank Agreement*
(bb) Radix Agreement**
(11) Statement RE: Computation of Per Share Earnings
(24)(a) Consents of Ferraro & McMurtry, P.C. and Crowe, Chizek and
Company, LLP (Included in Part II of Registration Statement) x
(b) Consent of Counsel (contained in his opinion Exhibit 5(a)
included in Part II of Registration Statement) x
(c) Consent of Litigation Counsel contained in his opinion
Exhibit 5(b) (included in Part II of Registration Statement) x
(16)(b) FINANCIAL STATEMENT SCHEDULES
Schedule I -Marketable Securities - Other Investments
**********
Schedule VIII - Valuation and Qualifying Accounts **********
Schedule X - Supplementary Income Statement Information
**********
- -------------------
+ Incorporated by reference to Form S-18 Registration Statement (No.
2-91055-W) of Registrant filed on May 10, 1984.
++ Filed with Amendment No. 1 to Registration Statement 33-48682 filed on
June 16, 1992.
+++ Filed with Amendment No. 2 to Registration Statement 33-48682 filed on
June 16, 1992.
++++ Filed with Amendment No. 3 to Registration Statement 33-48682 filed on
June 16, 1992.
* Incorporated by reference to Form S-1 Registration Statement (No.
33-32469) of Registrant filed on December 7, 1989.
** Incorporated by reference to Form S-4 Registration Statement (No.33-37923)
of Registrant filed on November 23, 1990.
*** Incorporated by reference to Form 10-K Annual Report (No. 0-13226) filed
on May 15, 1994.
II-5
<PAGE> 102
**** Incorporated by reference to Form 8-K current report for March 1992.
**** Incorporated by reference to Form 8-K current report for February 1993.
*
**** Incorporated by reference to Form 8-K current report for November 1993.
***
**** Incorporated by reference to Form S-1 Registration Statement (No.
**** 33-85244), filed on October 14, 1994.
***** Incorporated by reference to Amendment No. 1 to Form S-1 Registration
**** Statement (No. 33-85244), filed on January 19, 1995.
***** Incorporated by reference to Form 10-K Form 10-K Annual Report (No.
***** 0-13226) filed on April 15, 1996.
x To be filed by Amendment
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
being offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 103
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriter to permit
prompt delivery to each purchaser.
II-7
<PAGE> 104
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned directors and officers of Sulcus Computer Corporation,
do hereby constitute and appoint Jeffrey S. Ratner, H. Richard Howie and John
W. Ryba, and each of them, our true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution in each of them, to do any
and all acts and things in our respective names and on our respective behalves
in the capacities indicated below that Jeffrey S. Ratner, H. Richard Howie and
John W. Ryba, or any of them, may deem necessary or advisable to enable Sulcus
Computer Corporation to comply with the Securities Act of 1933, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Registration Statement, including
specifically, but not limited to, power and authority to sign for us or any of
us in our respective names in the capacities indicated below any and all
amendments (including post-effective amendments) hereto and to file the same,
with all exhibits thereto and other documents therewith, with the Securities
and Exchange Commission; and we do hereby ratify and confirm all that Jeffrey
S. Ratner, H. Richard Howie and John W. Ryba, or any of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
II-8
<PAGE> 105
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Greensburg, Commonwealth
of Pennsylvania, on May ____________, 1996.
SULCUS COMPUTER CORPORATION
By:/s/ Joel Nagelmann *
------------------------
Joel Nagelmann
President and Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Signature and Title Date
------------------- ----
/s/Jeffrey S. Ratner * May , 1996
- ------------------------------------ -----------------------------
Jeffrey Scott Ratner
Chairman of the Board and Director
/s/John W. Ryba * May , 1996
- ------------------------------------ -----------------------------
General Counsel and Director
/s/Robert D. Gries * May , 1996
- ------------------------------------ -----------------------------
Robert D. Gries, Director
/s/Herbert G. Ratner * May , 1996
- ------------------------------------ -----------------------------
Herbert G. Ratner, Director
/s/David H. Adler * May , 1996
- ------------------------------------ -----------------------------
David Adler, Director
/s/ Joel Nagelmann * May , 1996
- ------------------------------------ -----------------------------
Joel Nagelmann, President and
Principal Executive Officer
/s/H. Richard Howie * May ,1996
- ------------------------------------ -----------------------------
H. Richard Howie, Chief Financial
Officer and Chief Accounting Officer
*By/s/ John W. Ryba May , 1996
- ------------------------------------ -----------------------------
John W. Ryba
Attorney-in-fact
II-9
<PAGE> 106
SULCUS COMPUTER CORPORATION
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Charged to Amount Balance
beginning Acquired cost and charged at end
of period Valuations expenses off of period
--------- ---------- -------- --- ---------
<S> <C> <C> <C> <C>
For the three months ended March 31:
- ------------------------------------
1996
Allowance for doubtful accounts $2,581,020 $0 $153,571 $116,578 $2,618,013
1995
Allowance for doubtful accounts $2,597,088 $0 $105,101 $159,271 $2,542,918
For the twelve months ended December 31:
- ----------------------------------------
1995
Allowance for doubtful accounts $2,597,088 $0 $573,130 $589,198 $2,581,020
1994
Allowance for doubtful accounts $1,494,042 $0 $1,343,489 $240,443 $2,597,088
1993
Allowance for doubtful accounts $1,046,107 $163,486 $1,253,002 $968,553 $1,494,042
</TABLE>
<PAGE> 1
EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<PAGE> 2
SULCUS COMPUTER CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
AND THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years ended December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) attributable
to common stockholders $521,404 $1,043,535 ($1,368,956) ($11,688,013) ($3,050,100)
=========================== =============================================
Shares:
Weighted average number of
common shares outstanding 16,555,758 14,485,019 14,720,327 13,872,298 13,509,078
Assumed conversion of stock options (A) 59,186 76,243 105,130 286,830 648,257
--------------------------- ---------------------------------------------
Average common shares and
common stock equivalents 16,614,944 14,561,262 14,825,457 14,159,128 14,157,335
=========================== =============================================
Earnings (loss) per share $0.03 $0.07 ($0.09) ($0.84) ($0.22)
=========================== =============================================
</TABLE>
(A) Effect of stock options is antidilutive for the years ended December 31,
1995, 1994, and 1993.
<PAGE> 1
<TABLE>
<S> <C>
EXHIBIT (24)(a) CONSENTS OF FERRARO & MCMURTRY, P.C. AND CROWE, CHIZEK AND COMPANY, LLP
</TABLE>
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement of Sulcus Computer
Corporation on Form S-1 of our report dated March 1, 1996, except for Note 2,
as to which the date is March 21, 1996 and Note 20, as to which the date is
April 10, 1996 on the 1995 and 1994 financial statements of Sulcus Computer
Corporation appearing in the Prospectus, which is part of this Registration
Statement and our report dated March 1, 1996 relating to the financial
statement schedule appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
/s/ CROWE, CHIZEK AND COMPANY LLP
--------------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
May 24, 1996
<PAGE> 3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-1 for the
registration of 1,000,000 shares of Series A Redeemable Convertible Preferred
Stock and 1,000,000 Class A Stock Purchase Warrants of Sulcus Computer
Corporation to the uses of our report dated May 13, 1994 appearing in the
prospectus, which is part of such Registration statement, and to the reference
to us under the heading "Experts" in such Prospectus.
We also consent to the incorporation by reference therein of our report with
respect to the financial schedules of Sulcus Computer Corporation for the years
ended December 31, 1993, 1992, 1991 included in the Annual Report (Form 10-K)
for 1993 filed with the Securities and Exchange Commission.
/s/ FERRARO & MCMURTRY
- --------------------------------------
Ferraro & McMurtry, P.C.
(Formerly Ferraro Krebs & McMurtry, P.C.)
May 24, 1996
