<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
COMMISSION FILE NUMBER 0-13226
SULCUS COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1369276
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
SULCUS CENTRE, 41 NORTH MAIN STREET, GREENSBURG, PA 15601
(Address of principal executive offices, including zip code)
(412) 836-2000
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of August 9, 1996, there were 15,275,949 shares of Common Stock, no par
value, outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 .............. 3
Consolidated Statements of Operations
Six Months Ended June 30, 1996 and 1995........... 4
Consolidated Statements of Operations
Three Months Ended June 30, 1996 and 1995......... 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995........... 6
Consolidated Statements of Stockholders' Equity
Six Months Ended June 30, 1996.................... 7
Notes to Consolidated Financial Statements................ 8-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations...............10-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......... 17
Signatures................................................ 18
</TABLE>
<PAGE> 3
SULCUS COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $1,836,700 $1,202,325
Short-term investments (at market) 12,083,557 12,408,075
Restricted cash 378,133 550,000
Accounts receivable, net of allowance of $2,046,869
and $2,581,020 in 1996 and 1995, respectively 9,881,234 11,134,576
Inventories 2,470,960 2,573,826
Deferred taxes 146,649 165,557
Other current assets 2,093,474 1,761,465
----------- -----------
Total current assets 28,890,707 29,795,824
Purchased and capitalized software, net of accumulated amortization
of $9,144,116 and $7,992,031 in 1996 and 1995, respectively 4,233,299 4,941,695
Property and equipment, net of accumulated depreciation of $4,351,388
and $4,247,168 in 1996 and 1995, respectively 2,343,268 2,015,816
Goodwill, net of accumulated amortization of $3,057,098
and $2,672,714 in 1996 and 1995, respectively 7,442,299 7,826,683
Deferred taxes 1,953,104 1,934,196
Other noncurrent assets 740,813 812,564
----------- -----------
Total Assets $45,603,490 $47,326,778
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $5,889,283 $6,382,710
Current portion of long-term debt 45,009 46,713
Current portion of obligations under capital leases 152,022 --
Accounts payable 3,760,920 4,352,408
Shareholder litigation liability 2,832,299 3,108,097
Deferred revenues 4,890,883 6,195,289
Customer deposits 1,440,117 1,311,408
Other accrued liabilities 2,248,267 3,008,892
----------- -----------
Total current liabilities 21,258,800 24,405,517
Long-term debt, net of current portion 3,999 27,175
Obligations under capital leases, net of current portion 230,071 --
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 30,700,000 shares
authorized (15,357,648 and 15,145,570 shares
issued and issuable in 1996 and 1995, respectively) 37,790,800 38,016,248
Note receivable from stockholder -- (500,000)
Retained earnings (deficit) (13,324,089) (14,747,712)
Foreign currency adjustment (67,097) (60,832)
Cumulative unrealized gain (loss) on investments available for sale (288,994) 186,382
----------- -----------
Total Stockholders' Equity 24,110,620 22,894,086
----------- -----------
Total Liabilities and Stockholders' Equity $45,603,490 $47,326,778
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE> 4
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net revenue:
System sales $14,400,442 $13,590,899
Support revenue 9,267,542 8,280,033
Dividends and other 660,319 592,759
----------- -----------
Total revenue 24,328,303 22,463,691
----------- -----------
Cost of goods sold and services provided:
Systems 7,449,137 6,836,300
Support services 2,606,784 2,172,294
----------- -----------
Total cost of sales and services provided 10,055,921 9,008,594
Expenses:
Selling, general, and administrative 11,191,251 11,400,236
Research and development (net of capitalized
software of $556,332 and $495,404 during the
six months ended June 30, 1996 and 1995,
respectively) 590,214 646,993
Interest 290,958 285,164
Depreciation and amortization 776,336 853,867
Unrealized (gain) loss on investments ----- (1,462,005)
----------- -----------
Total expenses 12,848,759 11,724,255
----------- -----------
Income before income taxes 1,423,623 1,730,842
Income taxes ----- -----
----------- -----------
Net income $1,423,623 $1,730,842
=========== ===========
Income per common share:
Net income $0.08 $0.12
===== =====
Weighted average number of common shares 16,844,442 14,801,259
========== ==========
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE> 5
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net revenue:
System sales $7,875,624 $6,787,612
Support revenue 4,850,372 4,067,033
Dividends and other 327,288 297,992
----------- -----------
Total revenue 13,053,284 11,152,637
----------- -----------
Cost of goods sold and services provided:
Systems 4,141,168 3,300,043
Support services 1,446,987 1,093,767
----------- -----------
Total cost of sales and services provided 5,588,155 4,393,810
Expenses:
Selling, general, and administrative 5,685,057 5,821,078
Research and development (net of capitalized
software of $315,682 and $297,700 during the
three months ended June 30, 1996 and 1995,
respectively) 322,963 280,545
Interest 162,159 142,666
Depreciation and amortization 392,731 407,553
Unrealized (gain) loss on investments ----- (580,322)
----------- -----------
Total expenses 6,562,910 6,071,520
----------- -----------
Income before income taxes 902,219 687,307
Income taxes ----- -----
----------- -----------
Net income $902,219 $687,307
=========== ===========
Income per common share:
Net income $0.05 $0.05
===== =====
Weighted average number of common shares 17,017,544 14,842,427
========== ==========
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE> 6
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income $1,423,623 $1,730,842
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 391,952 495,128
Amortization of capitalized software 1,281,381 1,165,231
Amortization of goodwill 384,384 358,739
Provision for doubtful accounts 229,647 281,454
Unrealized and realized (gain) loss on investments ----- (1,462,005)
Realized (gain) on investments (8,750) -----
(Purchases) of trading securities ----- (717,726)
Change in assets and liabilities:
Restricted cash 171,867 500,000
Accounts receivable 1,023,695 3,017,015
Inventory 102,866 (245,119)
Other current assets (218,332) 406,876
Other assets 92,065 27,831
Accounts payable (591,488) (1,678,622)
Deferred revenues (1,304,406) (2,253,473)
Shareholder litigation (275,798) (76,344)
Customer deposits 128,709 (403,661)
Accrued liabilities (567,818) (773,057)
---------- ----------
Total adjustments 839,974 (1,357,733)
---------- ----------
Net cash provided by operating activities 2,263,597 373,109
Cash flows from investing activities:
Purchases of available for sale securities (392,108) (6,590)
Proceeds from sales of available for sale securities 250,000 -----
Investment in sales-type leases (176,072) (90,674)
Payments received on sales-type leases 42,081 156,013
Capital expenditures (736,057) (215,867)
Software development capitalized (556,332) (495,404)
---------- ----------
Net cash (used in) investing activities (1,568,488) (652,522)
---------- ----------
Cash flows from financing activities:
Short term borrowings (493,427) (153,721)
Principal payments on long-term debt (24,880) (440,193)
Borrowings under capital lease agreements 373,739 -----
Payments under capital lease agreements (46,453) -----
Proceeds from stock options exercised 136,552 36,570
---------- ----------
Net cash (used in) financing activities (54,469) (557,344)
---------- ----------
Cumulative translation adjustment (6,265) 119,329
---------- ----------
Net increase (decrease) in cash
and cash equivalents 634,375 (717,428)
Cash equivalents at beginning of period 1,202,325 1,933,895
---------- ----------
Cash equivalents at end of period $1,836,700 $1,216,467
========== ==========
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE> 7
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Cumulative
Unrealized
Common Shares Gain (Loss) Note
------------------------ Retained Foreign on Investments Receivable Stock-
Number of Earnings Currency Available From holders'
Shares Amount (Deficit) Adjustment For Sale Stockholder Equity
---------- ----------- ------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 15,145,570 $38,016,248 ($14,747,712) ($60,832) $186,382 ($500,000) $22,894,086
Stock options exercised 83,698 136,552 ---- ---- ---- ---- 136,552
Cancellation of shares in repayment
of shareholder loans (220,000) (550,000) ---- ---- ---- 500,000 (50,000)
Adjustment of shares issuable for
purchase of Techotel A.G. 271,859 ---- ---- ---- ---- ---- ----
Adjustment of shares issuable
under earn-out agreement for
Lodgistix Scandinavia A.S. 7,688 ---- ---- ---- ---- ---- ----
Cumulative unrealized (loss) on
investments available for sale ---- ---- ---- ---- (475,376) ---- (475,376)
Issuance of stock for payment
of accrued expenses 68,833 188,000 ---- ---- ---- ---- 188,000
Cumulative translation adjustment ---- ---- ---- (6,265) ---- ---- (6,265)
Net income ---- ---- 1,423,623 ---- ---- ---- 1,423,623
---------- ----------- ------------ -------- --------- --------- -----------
Balance, June 30, 1996 15,357,648 $37,790,800 ($13,324,089) ($67,097) ($288,994) $ ---- $24,110,620
========== =========== ============ ======== ========= ========= ===========
</TABLE>
See notes to the consolidated financial statements.
7
<PAGE> 8
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sulcus
Computer Corporation and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments in
50% or less owned affiliates over which the Company has the ability to exercise
significant influence are accounted for using the equity method.
The accompanying unaudited interim consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods presented. These financial statements have been prepared
in accordance with both generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
These financial statements should be read in conjunction with the
Company's annual audited financial statements for the year ended December 31,
1995, as filed with the Securities and Exchange Commission on Form 10-K.
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 (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 (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 six months ended June 30, 1996 the Company reflected no
provision for income taxes on pre-tax profits of $1,423,623. This is based
upon management's determination to reduce previously established valuation
reserves related to deferred tax assets, including tax loss carryforwards,
pursuant to SFAS 109.
8
<PAGE> 9
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
At June 30, 1996 and December 31, 1995, the Company had net deferred
tax assets, liabilities and valuation reserves as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets (net of deferred tax
liabilities), including tax loss carryforwards $12,073,276 $ 12,633,976
Valuation allowance (9,973,523) (10,534,223)
----------- ------------
Net deferred tax amounts $ 2,099,753 $ 2,099,753
=========== ============
</TABLE>
NOTE 4. EARNINGS PER SHARE
Primary earnings per share is determined by dividing net earnings by
the weighted number of common shares outstanding. When dilutive, common stock
options are included in the computation. Fully diluted net income per share is
not presented as it is either anti-dilutive or not different from primary
earnings per share.
NOTE 5. ACQUISITIONS
The purchase agreement for Techotel A.G. (Techotel) provided for the
Company to issue shares of Sulcus Common Stock valued at $1,000,000. This was
originally calculated to be 128,141 shares, however, a provision in the
purchase agreement provided for the valuation of shares at a certain future
date. This date was December 31, 1994 at which time the share value was $2.50
and the number of shares issuable were calculated to be 400,000. The parties
agreed to this interpretation of the contract in May 1996 and the number of
shares issuable was adjusted at that time. In addition, the Company and former
shareholders of Techotel agreed to the repayment of the $500,000 loan to
shareholders through the cancellation of 200,000 shares issuable under the
purchase agreement.
In May 1996, the Company and the former shareholders of Lodgistix
Scandinavia A.S. (Lodgistix Scandinavia) agreed to the repayment of a $50,000
loan to shareholders through the cancellation of 20,000 shares issuable under
the purchase agreement.
9
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
The Company had net income of $902,219 in the quarter ended June
30, 1996 as compared to $687,307 in the quarter ended June 30, 1995 on
sales which increased by $1,871,351 (17%) for these same periods. In
1995, the Company reported unrealized gains on its investment portfolio
of $580,322. When eliminating this amount for the purpose of
comparability, the Company showed an improvement on earnings from
$106,985 to $902,219, a change of $795,234. The Company's results for
the quarter ended June 30, 1996 improved over those for the same period
of 1995 primarily as a result of improvements in margins ($677,006) and
reductions in selling, general and administrative expenses ($136,021).
In 1995, the Company had Trading Securities which had unrealized market
appreciation in the second quarter of $580,322. 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 June 30, 1996 were $12,725,996,
representing an increase of $1,871,351 (17%) when compared to net sales
of $10,854,645 for the same period of 1995. Net system sales for the
quarter ended June 30, 1996 were $7,875,624 as compared to $6,787,612
for the same period of 1995, an increase of $1,088,012 (16%) due
primarily to increased sales of the Company's Point of Sale Systems and
the delivery of systems under a significant contract by the Company's
Hong Kong sales office. Support revenues for the quarter ended June 30,
1996 were $4,850,372 as compared to $4,067,033 for the same period of
1995, an increase of $783,339 (19%) 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 $10,250,741 (81%) and
$2,475,255 (19%), respectively, of net sales for the quarter ended June
30, 1996 as compared to $8,597,302 (79%) and $2,257,343 (21%) for the
comparable 1995 period.
Cost of goods sold for the quarter ended June 30, 1996 increased
to $5,588,155 from $4,393,810, an increase of $1,194,345 (27%) from the
comparable 1995 period. Cost of goods sold as a percentage of net sales
increased for the quarter ended June 30, 1996 to 44%, as compared to 40%
for the same period of 1995. Gross margins of the Company increased to
$7,137,841 from $6,460,835, an increase of $677,006 (10%) over the same
period of 1995. Cost of system sales for the quarter ended June 30,
1996 was $4,141,168 (53% of system sales) as compared to $3,300,043 (49%
of system sales) for the same period of 1995, an increase of $841,125
(25%), due primarily to the mix of software and hardware sales. Cost of
support for the quarter ended June 30, 1996 was $1,446,987 (30% of
support revenues) as compared to $1,093,767 (27% of support revenues)
for the same period of 1995, an increase of $353,220 (32%).
Selling, general, and administrative expenses decreased in 1996
when compared to 1995. For the quarter ended June 30, 1996, these
expenses were $5,685,057 as compared to $5,821,078 a decrease of
$136,021 (2%) from the same period of 1995. Selling, general, and
administrative expenses as a percentage of net sales was 45% for the
quarter ended June 30, 1996 as compared to 54% for the same period of
1995.
Research and development expense for the quarter ended June 30,
1996 increased to $322,963 from $280,545, an increase of $42,418 (15%)
over the same period of 1995. Total amounts expended on research and
development (including amounts expensed and amounts capitalized) was
$638,645 and $578,245 for the quarters ended June 30, 1996 and 1995,
respectively.
10
<PAGE> 11
Depreciation and amortization expense for the quarter ended June 30,
1996 decreased to $392,731 from $407,553 for the same period of 1995, a
decrease of $14,822 (4%).
Dividends and other income for the quarter ended June 30, 1996 was
$327,288 as compared to $297,992 for the same period of 1995, an increase of
$29,296 (10%), due to higher rates earned on invested balances.
Interest expense for the quarter ended June 30, 1996 increased to
$162,159 from $142,666 for the same period of 1995, an increase of $19,493
(14%) due primarily to higher 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 June 30, 1996 and 1995
and as of June 30, 1996 and December 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
1996 1995
----------- -----------
<S> <C> <C>
Net revenues(1):
Domestic $ 8,526,324 $ 7,789,838
Canada 1,459,600 1,030,937
Pacific Region 1,828,096 1,196,206
Europe 1,239,264 1,135,656
----------- -----------
Consolidated net revenues $13,053,284 $11,152,637
=========== ===========
Net income (loss):
Domestic $780,086 $ 936,346
Canada 150,785 190,345
Pacific Region 49,631 (398,625)
Europe (78,283) (40,759)
-------- ---------
Consolidated net income $902,219 $ 687,307
======== =========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Identifiable assets:
Domestic $35,637,661 $37,646,558
Canada 1,900,386 1,562,171
Pacific Region 3,709,569 3,437,539
Europe 4,355,874 4,680,510
----------- -----------
Consolidated identifiable assets $45,603,490 $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 $9,973,523 at June 30, 1996 and $10,534,223 at
December 31, 1995. The valuation allowance was decreased in the quarter ended
June 30, 1996 by $428,312 and was decreased in the quarter ended June 30, 1995
by $412,252 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 June 30, 1996 and
1995 do not reflect any income tax provision on the pre-tax operating results
for those periods. As more fully discussed in the six month evaluation of
operations herein, the realizability of this deferred tax asset
11
<PAGE> 12
is contingent upon a number of factors including the ability of the Company to
maintain a level of operations that will generate taxable income.
SIX MONTHS ENDED JUNE 30, 1996 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company had net income of $1,423,623 in the six months ended June
30, 1996 as compared to $1,730,842 in the six months ended June 30, 1995 on
sales which increased by $1,797,052 (8%) for these same periods. In 1995, the
Company reported unrealized gains on its investment portfolio of $1,462,005.
When eliminating this amount for the purpose of comparability, the Company
showed an improvement on earnings from $268,837 to $1,423,623, a change of
$1,154,786. The Company's results for the six months ended June 30, 1996
improved over those for the same period of 1995 primarily as a result of
improvements in margins ($749,725) and reductions in selling, general and
administrative expenses ($208,985). In 1995, the Company had Trading
Securities which had unrealized market appreciation in the first six months of
$1,462,005. Since that time, the Company has restructured its portfolio and,
therefore, these unrealized market changes are no longer a component of net
income.
Net sales for the six months ended June 30, 1996 were $23,667,984,
representing an increase of $1,797,052 (8%) when compared to net sales of
$21,870,932 for the same period of 1995. Net system sales for the six months
ended June 30, 1996 were $14,400,442 as compared to $13,590,899 for the same
period of 1995, an increase of $809,543 (6%) due primarily to increased sales
of the Company's Point of Sale Systems and the delivery of systems under
significant contracts by the Company's Singapore and Hong Kong sales offices.
Support revenues for the six months ended June 30, 1996 were $9,267,542 as
compared to $8,280,033 for the same period of 1995, an increase of $987,509
(12%) 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
$19,560,834 (83%) and $4,107,150 (17%), respectively, of net sales for the six
months ended June 30, 1996 as compared to $17,125,793 (78%) and $4,745,139
(22%) for the comparable 1995 period.
Cost of goods sold for the six months ended June 30, 1996 increased to
$10,055,921 from $9,008,594, an increase of $1,047,327 (12%) from the
comparable 1995 period. Cost of goods sold as a percentage of net sales
increased for the six months ended June 30, 1996 to 42%, as compared to 41% for
the same period of 1995. Gross margins of the Company increased to $13,612,063
from $12,862,338, an increase of $749,725 (6%) over the same period of 1995.
Cost of system sales for the six months ended June 30, 1996 was $7,449,137 (52%
of system sales) as compared to $6,836,300 (50% of system sales) for the same
period of 1995, an increase of $612,837 (9%), due primarily to the mix of
software and hardware sales. Cost of support for the six months ended June 30,
1996 was $2,606,784 (28% of support revenues) as compared to $2,172,294 (26% of
support revenues) for the same period of 1995, an increase of $434,490 (20%).
Selling, general, and administrative expenses decreased in 1996 when
compared to 1995. For the six months ended June 30, 1996, these expenses were
$11,191,251 as compared to $11,400,236 a decrease of $208,985 (2%) from the
same period of 1995. Selling, general, and administrative expenses as a
percentage of net sales was 47% for the six months ended June 30, 1996 as
compared to 52% for the same period of 1995.
Research and development expense for the six months ended June 30,
1996 decreased to $590,214 from $646,993, a decrease of $56,779 (10%) over the
same period of 1995. This decrease is attributable primarily to greater
amounts capitalized in 1996 as compared to 1995. Total amounts expended on
research and development (including amounts expensed and amounts capitalized)
was $1,146,546 and $1,142,397 for the six months ended June 30, 1996 and 1995,
respectively.
12
<PAGE> 13
Depreciation and amortization expense for the six months ended June
30, 1996 decreased to $776,336 from $853,867 for the same period of 1995, a
decrease of $77,531 (9%).
Dividends and other income for the six months ended June 30, 1996 was
$660,319 as compared to $592,759 for the same period of 1995, an increase of
$67,560 (11%), due to higher rates earned on invested balances.
Interest expense for the six months ended June 30, 1996 increased to
$290,958 from $285,164 for the same period of 1995, an increase of $5,794 (2%).
The Company conducts its worldwide operations through separate
geographic area organizations which represent major markets or combinations of
related markets. Transfers between markets are valued at cost. Financial
information by geographic area for the six months ended June 30, 1996 and 1995
and as of June 30, 1996 and December 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
1996 1995
----------- -----------
<S> <C> <C>
Net revenues(1):
Domestic $15,653,790 $15,845,855
Canada 2,553,657 1,911,411
Pacific Region 3,347,041 2,131,687
Europe 2,773,815 2,574,738
----------- -----------
Consolidated net revenues $24,328,303 $22,463,691
=========== ===========
Net income (loss):
Domestic $1,414,025 $2,432,817
Canada 131,079 258,414
Pacific Region (19,699) (797,960)
Europe (101,782) (162,429)
---------- ----------
Consolidated net income $1,423,623 $1,730,842
========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Identifiable assets:
Domestic $35,637,661 $37,646,558
Canada 1,900,386 1,562,171
Pacific Region 3,709,569 3,437,539
Europe 4,355,874 4,680,510
----------- -----------
Consolidated identifiable assets $45,603,490 $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 $9,973,523 at June 30, 1996 and $10,534,223 at
December 31, 1995. The valuation allowance was decreased in the six months
ended June 30, 1996 by $560,700 and was decreased in the six months ended June
30, 1995 by $1,033,323 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 six months ended June 30,
1996 and 1995 do not reflect any income tax provision on the pre-tax operating
results for those periods. The realizability of this deferred tax asset is
contingent upon a number of factors including the ability of the Company to
maintain a level of operations that will generate taxable income. Management
believes
13
<PAGE> 14
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is dependent upon its ability to generate
sufficient working capital through profitable operations. Management believes
that in order to sustain profitability, it must continue to increase sales and
improve productivity related to selling, general and administrative expenses.
In order to increase sales, the Company believes that it must increase its
distribution channels and introduce additional developed or acquired
competitive products in its current market segment.
Current short-term capital needs will be funded primarily through
internal working capital and anticipated operating revenues from new sales,
continuing and new support services revenue, and a backlog of orders received
and pending. The Company has no significant unused lines of credit at either
June 30, 1996 or December 31, 1995. To date, bank credit lines have not been a
significant component of the Company's liquidity and capital resources.
At June 30, 1996, Sulcus' cash and cash equivalents increased to
$1,836,700 from $1,202,325 at December 31, 1995, an increase of $634,375. This
increase is primarily the result of cash received during the first half 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 June 30, 1996, the Company's short-term investment portfolio
decreased to $12,083,557 from $12,408,075 at December 31, 1995, a decrease of
$324,518 (3%) primarily related to declines in market value. These investments
are subject to risk, most notably the risk that the market value of these
assets will decline as the result of general market fluctuations, increases in
interest rates or changes in the underlying operations of the investee.
Company policy does not require temporary investments to be investment grade as
determined by a nationally recognized statistical rating organization nor does
it require that such investments have any additional safety feature such as
insurance. Through the first five months of 1995, the Company maintained its
investment philosophy of actively buying and selling investments with the
objective of generating profits of short-term differences in price ("Trading").
Management sold a portion of these investments in May and June of 1995 and
invested the proceeds of these sales in securities which will be held for the
generation primarily of dividend and interest income ("Available for Sale").
Additionally, the remaining investments were reclassified in 1995 from Trading
to Available for Sale. The Company had borrowings at June 30, 1996, and
December 31, 1995, of $5,814,644 and $6,062,905 respectively, on margin against
its investments at the brokers internally established floating interest rate
which was 7.875% at June 30, 1996.
At June 30, 1996, accounts receivable decreased to $9,881,234, as
compared to $11,134,576 at December 31, 1995, a decrease of $1,253,342 (11%)
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
14
<PAGE> 15
be uncollectible from customers. The allowance for uncollectible accounts
decreased at June 30, 1996 to $2,046,869 as compared to $2,581,020 at December
31, 1995, due to write-offs of accounts receivable.
The Company purchases computer hardware and other equipment from
vendors under open accounts payable for the purpose of including these items in
systems sold to customers. Hardware and equipment are readily available in the
marketplace and therefore it is not necessary for the Company to maintain large
quantities of inventories to meet customer needs. Inventories of computers,
computer components and computer peripherals decreased to $2,470,960 at June
30, 1996 as compared to $2,573,826 at December 31, 1995, a decrease of $102,866
(4%). Accounts payable decreased to $3,760,920 at June 30, 1996 as compared to
$4,352,408 at December 31, 1995, a decrease of $591,488 (14%).
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
$2,343,268 at June 30, 1996 from $2,015,816 at December 31, 1995, an increase
of $327,452 (16%).
In addition to borrowings on margin against its investments, the
Company has outstanding short and long-term borrowings from various financial
institutions. At June 30, 1996, the Company had short-term borrowings
(excluding borrowings under margin) of $74,639 as compared to $319,805 at
December 31, 1995, a decrease of $245,166 (77%). At June 30, 1996, the
Company had long-term borrowings (including current and noncurrent portions) of
$431,101 as compared to $73,888 at December 31, 1995, an increase of $357,213.
This increase is primarily the result of 1996 capitalized lease obligations for
equipment.
The backlog of hardware and software orders at June 30, 1996 is
expected to be filled within one year and amounted to $3,517,000 as compared to
$3,353,000 at December 31, 1995.
The Company's ability to develop and expand its presence in the
hospitality industry and expand existing business lines for its other markets
depends, in a large part, on the availability of adequate funds. Cash flow has
been favorably impacted during the past year by improving sales and
profitability. These funds have generally been used to reduce levels of
accounts payable, to fund the development of the Company's software products,
to fund capital expenditures and to repay short-term borrowings. Management
expects that to meet customer needs, it must begin to increase levels in
inventories for the Company's manufactured point-of-sale products and continue
to invest in the development of the Company's software products at levels
consistent with those of the past two years. To finance these needs, the
Company will rely primarily on operating cash flow over the next several years
together with currently available working capital. In addition, the Company is
considering the issuance of additional capital stock. On a longer term basis,
the Company is working with financial institutions to develop relationships
which will be used, in part, to provide working capital facilities which will
be utilized in the Company's operations. Nonetheless, if technological changes
render Sulcus' products uncompetitive or obsolete, or, if the Company incurs
operating losses, additional capital may be required. There can be no
assurance that any financing will be available when needed, or, if available,
that it can be obtained on terms satisfactory to the Company.
In furtherance of the Company's strategy of acquisition of computer
software products or companies that complement or expand existing business
lines, the Company intends to continue its pursuit to acquire additional
businesses or software products and/or to create joint ventures related to
existing businesses for this purpose. The Company currently has no plans,
agreements or commitments for any such transactions and is not currently
engaged in any active negotiations with respect to any such transactions.
There can be no assurance that the Company will be able to acquire companies or
software products on a favorable basis.
15
<PAGE> 16
Certain lawsuits arising in the ordinary course of business are pending
against the Company and its subsidiaries. The Company believes that the
ultimate outcome of these actions will not result in a material adverse effect
on the Company's consolidated financial position and liquidity.
16
<PAGE> 17
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SULCUS COMPUTER CORPORATION
DATE: August 14, 1996 BY: /s/ H. RICHARD HOWIE
-------------------- -------------------------------------
H. Richard Howie
Chief Financial Officer
(Mr. Howie is the Principal Financial
Officer and has been duly authorized
to sign on behalf of the Registrant)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AS SUBMITTED IN THE
COMPANY'S 10-Q FOR THAT PERIOD AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000726712
<NAME> SULCUS COMPUTER CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,836,700
<SECURITIES> 12,083,557
<RECEIVABLES> 11,928,103
<ALLOWANCES> 2,046,869
<INVENTORY> 2,470,960
<CURRENT-ASSETS> 28,890,707
<PP&E> 6,694,656
<DEPRECIATION> 4,351,388
<TOTAL-ASSETS> 45,603,490
<CURRENT-LIABILITIES> 21,258,800
<BONDS> 234,070
0
0
<COMMON> 37,790,800
<OTHER-SE> (13,680,180)
<TOTAL-LIABILITY-AND-EQUITY> 45,603,490
<SALES> 23,667,984
<TOTAL-REVENUES> 24,328,303
<CGS> 10,055,921
<TOTAL-COSTS> 12,848,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 229,647
<INTEREST-EXPENSE> 290,958
<INCOME-PRETAX> 1,423,623
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,423,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,423,623
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
