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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-13226
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SULCUS COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1369276
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
SULCUS CENTRE, 41 NORTH MAIN STREET, GREENSBURG, PENNSYLVANIA 15601
(Address of principal executive offices) (Zip Code)
(412)836-2000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, no par value American Stock Exchange
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
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As of April 10, 1996, 14,763,120 shares of no par common stock were
outstanding. The aggregate market value of shares held by non-affiliates as of
April 10, 1996, was $39,565,852 based on the price of the common stock on that
date.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Sulcus Computer Corporation was incorporated in the Commonwealth of
Pennsylvania on November 5, 1979, under the name of "Ragtronics, Inc.," and
adopted its present name in December 1982. As used herein, the terms "Sulcus"
or "Company" are used to refer to Sulcus Computer Corporation and its
subsidiaries. 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 systems to customers on a turnkey basis,
meaning that Sulcus provides all of a customer's needs to automate the portion
of a customer's business where it competes, including hardware, software,
training, maintenance and support. Sulcus believes that this approach is
critical in business applications because while some businesses 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.
In 1988, the Company began to develop a strategic plan to achieve a
leadership position in turnkey computer systems with specific software for the
real-estate related, hospitality and legal industry groups. The strategic plan
envisions internal growth by way of expanded research and development, as well
as growth through acquisitions, mergers, joint ventures and similar alliances.
As part of its growth strategy, Sulcus has explored acquisition opportunities
which create additional market opportunities for existing products, have
products that complement or expand existing product lines, and create
additional product distribution channels. Sulcus has made numerous
acquisitions to date described below:
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 and options to purchase up to 400,000 shares of Sulcus Common
Stock at an exercise price of $4.25 per share. The options for 175,000 shares
were vested immediately and the balance were to vest in each of the three years
ended December 31, 1992, 1993 and 1994 if Squirrel met its earn-out objective.
In addition, the shareholders of Squirrel were entitled to receive up to
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.
The amounts of the earn-out payments and other matters relating to the
agreement were disputed by the former shareholders of Squirrel. This dispute
was settled and all claims and counterclaims were dismissed. (See "Item 3.
Legal Proceedings")
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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 for an aggregate
value of $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.
At December 31, 1992, NRG achieved such earnings for 1992, and the Company
issued 16,019 shares of Sulcus Common Stock for an aggregate value of $148,173
($9.25 per share). For the years ended December 31, 1993 and 1994, NRG did not
achieve their projections, therefore, pursuant to the Stock Purchase Agreement,
no buy 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 up to an aggregate value of $8,855,000 contingent upon
achieving certain earnings over a three-year period. At December 31, 1992,
these entities achieved such earnings for 1992 and the Company issued 297,652
shares of Sulcus Common Stock for an aggregate value of $2,827,691 ($9.50 per
share). As a result of the 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 as a
result of the original calculation, all of which are restricted. As a result,
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 were 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. The purchase agreement (as amended) provided for the issuance of
$1,000,000 of Sulcus Common Stock. 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 in the years 1993
through 1995. The company achieved such earnings for 1993 and 1995. As a
result, Sulcus will issue to the former shareholders 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. Sulcus Hospitality Group EMEA, A.G. did not achieve the required
earnings for 1994. 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.
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LODGISTIX SCANDINAVIA
In November of 1993, the Company acquired Lodgistix Scandinavia A.S.,
distributor of Lodgistix systems in Norway, Sweden and Denmark. The name of
this company was subsequently changed to Sulcus Scandinavia, A.S. This company
sells 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 with a value
of $300,000. In addition, the former stockholders of Lodgistix Scandinavia
were entitled to receive additional shares of the Company's Common Stock up to
a value of $675,000 contingent upon attaining certain earnings over a three
year period. Sulcus Scandinavia achieved required earnings for 1993 and 1995,
as a result, Sulcus 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. Lodgistix Scandinavia did not achieve the required
earnings for 1994.
INTERNATIONAL OPERATIONS
The Company established international operations for the marketing,
support, manufacturing and/or distribution of its products by virtue of certain
of the aforementioned acquisitions. The Company's international operations
presently consist of the following subsidiaries: Sulcus (Australia) Pty. Ltd.,
established as a direct sales office in Australia in November 1991; 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; 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.), Ltd. located in the United
Kingdom, all direct sales and support offices, and Sulcus Hospitality Group
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 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 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.
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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 written for
small lodging properties including lodges, bed and breakfast inns or small
resort properties.
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
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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.
Under software support agreements, Sulcus offices provide response with
their own 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 multilevel support is intended to ensure the customer's prompt response
and service. These services are provided on a 24-hour, seven-day-per-week
basis. Software is serviced for a fee under 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 the
circumstances. Additionally, depending upon the level of service purchased by
the customer, this service may be provided at a customer's site or at
centralized facilities. The Company obtains certain hardware support from
manufacturers or other service providers for a fee.
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PRODUCT RESEARCH AND 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 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.
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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
dependent upon one or a few 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 warranty on its products 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 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
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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 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.
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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 devices 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) and LAWTOMATION(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), NRG SAVER(SM) and
SULCLINK(SM). Additionally, Sulcus has registered or applications are pending
for various product names in numerous foreign countries.
PERSONNEL
As of April 10, 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.
ITEM 2. 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.
10
<PAGE> 12
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 742 square feet
for such purposes.
11
<PAGE> 13
ITEM 3. 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.
SEC INVESTIGATION
In April 1996, the Company entered into an agreement in principle with
the Staff of the Securities and Exchange Commission ("Commission") resolving the
previously disclosed investigation of the Company by the Commission. This
agreement is subject to approval by the full Commission. 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 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, 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 13b2-1
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.
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,
12
<PAGE> 14
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 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. Plaintiffs had
alleged that Sulcus and Mr. Ratner made fraudulent misrepresentations and that
Sulcus and Mr. Ratner breached the Stock Purchase Agreement entered into
between Sulcus and Squirrel Companies, Inc., in March 1992, by failing to make
certain payments of stock regarding the earn-out provision of the Agreement.
The plaintiffs sought damages of $5,000,000.
On March 20, 1996, the Company, Mr. Ratner and the Plaintiffs agreed to
resolve this dispute. The Company agreed to deliver 498,488 shares of Sulcus
Common Stock having an aggregate value of $1,246,220. These shares will
represent the entire earn-out for the years ended December 31, 1992, 1993 and
1994, and, therefore, the Company has cancelled 120,488 shares previously
issued and tendered but not accepted by Plaintiffs. The Court dismissed the
Plaintiff's claims and Sulcus' counterclaims on March 21, 1996.
---------
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF SECURITIES
On May 19, 1992, Sulcus Common Stock began trading on the American
Stock Exchange under the symbol SUL. Previously on November 19, 1991, Sulcus'
securities were included on the NASDAQ National Market System. 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>
COMMON STOCK
QUARTER ENDING HIGH LOW
<S> <C> <C>
March 1996 2-13/16 1-7/8
June 1996 (through April 10) 3-1/4 2-9/16
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
March 1993 9-1/2 7-1/2
June 1993 8-1/2 6-1/2
September 1993 9-7/8 6-5/8
December 1993 11-1/8 7-1/2
</TABLE>
On April 10, 1996, the high and low prices for the Common Stock
were $3 3/16 and $2 7/8, and respectively.
As of April 10, 1996, there were approximately 3,290 record holders of
Sulcus' Common Stock.
14
<PAGE> 16
ITEM: 6 SULCUS COMPUTER CORPORATION
Selected Financial Data
The following table sets forth selected consolidated financial data of the
Company for the five years ended December 31, 1991 through 1995. This
information should be read in conjunction with "Management's 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)
Year Ended December 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Net sales $44,693 $41,887 $47,346 $35,245 $17,256
Interest income 1,291 1,256 1,937 1,385 505
Total revenue 45,984 43,143 49,283 36,630 17,761
Cost of revenue 18,965 20,588 23,085 15,418 6,153
Selling, general and administrative expenses 22,896 24,388 21,726 14,756 8,091
Research and development 1,199 1,597 1,878 2,342 1,044
Interest expense 598 556 403 242 285
Depreciation and amortization 1,520 2,158 2,034 960 482
Unrealized and realized (gain) loss on
investments (1,462) 1,861 ---- ---- ----
Income (loss) before unusual items 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 (1,369) (11,668) (3,050) 2,091 1,348
Net income (loss) ($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 ($0.09) ($0.84) ($0.22) $0.17 $0.21
Net income (loss) per share ($0.09) ($0.84) ($0.22) $0.26 $0.26
Weighted average shares used in computing
net income (loss) per share 14,720 13,872 14,157 12,446 6,539
HISTORICAL BALANCE SHEET DATA
- -----------------------------
Working capital $5,390 $4,183 $8,643 $10,615 $9,438
Total assets $47,327 $47,869 $58,716 $51,499 $28,531
Long-term obligations $27 $86 $364 $1,039 $1,387
Stockholders' equity $22,894 $23,087 $33,373 $33,489 $18,316
</TABLE>
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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.
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
16
<PAGE> 18
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 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
17
<PAGE> 19
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 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).
18
<PAGE> 20
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, 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
December 31, 1995 or December 31, 1994. To date, bank credit lines have not
been a significant component of the Company's liquidity and capital resources.
At December 31, 1995, Sulcus' cash and cash equivalents decreased to
$1,202,325 from $1,933,895 at December 31, 1994, a decrease of $731,570 (38%).
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 December 31, 1995, the Company's short-term investment portfolio
increased to $12,408,075 from $10,324,740 at December 31, 1994, an increase of
$2,083,335 (20%). This increase consisted primarily of unrealized appreciation
of $1,457,728. 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
19
<PAGE> 21
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 December 31, 1995, and December 31, 1994, of
$6,062,905 and $5,145,753 respectively, on margin against its investments at
the brokers internally established floating interest rate which was 8.375% at
December 31, 1995.
At December 31, 1995, accounts receivable decreased to $11,134,576, as
compared to $11,639,243 at December 31, 1994, a decrease of $504,667 (4%)
primarily due to increased collections on support contracts. The Company's
gross accounts receivable includes hardware and software support contracts as
well as amounts due on system installations which may take several months to
modify and complete. 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 December 31, 1995,
decreasing slightly to $2,581,020 at December 31, 1995 as compared to
$2,597,088 at December 31, 1994.
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 increased to $2,573,826 at
December 31, 1995 as compared to $2,393,563 at December 31, 1994, an increase
of $180,263 (8%). Accounts payable decreased to $4,352,408 at December 31,
1995 as compared to $5,836,482 at December 31, 1994, a decrease of $1,484,074
(25%).
The Company leases facilities under operating lease agreements of
varying terms. Properties and equipment consist primarily of leasehold
improvements and equipment used in the conduct of business. Property and
equipment, net of accumulated depreciation and amortization, decreased to
$2,015,816 at December 31, 1995 from $2,301,263 at December 31, 1994, a
decrease of $285,447.
In addition to borrowings on margin against its investments, the
Company has outstanding short and long-term borrowings from various financial
institutions. At December 31, 1995, the Company had short-term borrowings
(excluding borrowings under margin) of $319,805 as compared to $1,037,242 at
December 31, 1994, a decrease of $717,437 (69%). At December 31, 1995, the
Company had long-term borrowings (including current and noncurrent portions) of
$73,888 as compared to $554,526 at December 31, 1994, a decrease of $480,638
(87%).
The backlog of hardware and software orders at December 31, 1995 is
expected to be filled within one year and amounted to $3,353,000 at December
31, 1995 as compared to $3,264,000 at December 31, 1994.
The Company's ability to develop and expand its presence in the
hospitality industry and expand existing business lines for its other markets
depends, in a large part, on the availability of adequate funds. Management
believes that anticipated revenues from the operations together with available
capital will be sufficient to support the anticipated operating and capital
requirements of the Company for at least 12 months. Nonetheless, if
technological changes render Sulcus' 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.
20
<PAGE> 22
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 in the paragraphs above
will not result in a material adverse effect on the Company's consolidated
financial position and liquidity.
21
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements and the Report of Independent
Auditors thereon are listed under Item 14(a) (1) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 20, 1995, and March 22, 1995, the Company filed current
reports on Form 8-K with the Securities and Exchange Commission reporting
respectively, the resignation of its previous accountants, Ferraro, Krebs &
McMurtry, and the engagement of Crowe, Chizek and Company. These reports are
incorporated herein by reference.
22
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 H. 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
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 A/S
Thomas Caudill 53 Vice President, General Manager, Lodging Division of Sulcus
Hospitality Group
Gerry Lau 45 Chairman, Sulcus Hospitality Limited
<FN>
(1) Member of Audit Committee.
</TABLE>
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.
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.
23
<PAGE> 25
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 Rental, 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.
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 hired to create
and 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.
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 and Ratner Real Estate. Ms. Santone
does not devote substantial time to these companies.
24
<PAGE> 26
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 Woodings-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, A.G.) 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 Sulcus (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 on 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 March
1994, and as Group Managing Director of Innovest Systems and Services Private
Limited, from 1986 to 1993.
25
<PAGE> 27
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
the Company's common stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "SEC") and the
American Stock Exchange. Such persons are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representation that no other reports were required, the
Company believes that during 1995 all Section 16(a) filing requirements
applicable to its officers and directors were complied with except for Victor
Nightscales, who made one late filing with regard to shares of stock issued to
him under the terms of a Stock Purchase Agreement regarding Sulcus'
acquisition of Squirrel Companies, Inc.
26
<PAGE> 28
ITEM 11. 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($) Compensation(s) (#)
<S> <C> <C> <C> <C> <C>
Jeffrey Ratner 1995 350,000 ---- ---- ----
Chairman 1994 313,500 ---- ---- ----
1993 325,600 ---- ---- ----
Joel Nagelmann 1995 135,600 33,107 ---- 215,579
President 1994 ---- ---- ---- ----
1993 ---- ---- ---- ----
H. Richard Howie 1995 120,000 ---- ---- ----
Chief Financial 1994 55,000 ---- ---- 30,000
Officer 1993 ---- ---- ---- ----
Frank Morrisroe(1) 1995 146,000 ---- ---- ----
President of 1994 146,000 ---- ---- 50,000
Sulcus Hospitality 1993 110,000 ---- ---- ----
Group
William F. McLay 1995 120,000 ---- ---- 20,000
Managing 1994 75,000 ---- ---- 60,000
Director 1993 24,500 ---- ---- ----
Gary Campbell 1995 120,000 7,200 ---- ----
V.P. of Sulcus 1994 120,000 ---- ---- 40,000
Hospitality Group 1993 ---- ---- ---- ----
<FN>
(1) Mr. Morrisroe joined Sulcus in February 1991 and resigned in January 1996.
</TABLE>
27
<PAGE> 29
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the aggregate amount of shares subject
to stock options granted, for the period January 1, 1995, through December 31,
1995, to the Chairman and each of the Named Officers. No gain on these options
will be realized by the Named Officers without an increase in the price of
Company Common Stock from the date of grant, which will benefit all
stockholders proportionately.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
----------------- at Assumed Annual Rates
of Stock Price Appreciation
Number of for Option Individual Grants
Securities % of Total ----------------------------
Underlying Options Exercise
Options/ Granted to or Base
SARS Employees in Price Expiration
Name Granted 1995 ($/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(1) 0 0% ---- ---- ---- ----
Gary Campbell 0 0% ---- ---- ---- ----
William McLay 20,000 6% 2.00 01/01/01 11,051 24,420
<FN>
(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 and options for 20,000
remain to be exercised until April 1996.
</TABLE>
28
<PAGE> 30
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
<FN>
(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.
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of Sulcus ("Outside
Directors") are reimbursed for their direct expenses incurred in attending a
meeting.
29
<PAGE> 31
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 as
Sulcus Hospitality Group EMEA, A.G. 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 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 of 36,000 shares were granted on March 25, 1996, at a price of
$2.43, twenty percent of which were immediately exercisable and the rest vesting
over four years at twenty percent per 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
30
<PAGE> 32
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 1996. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons participated in compensation decisions made
during 1995: Jeffrey S. Ratner, John W. Ryba, Herbert G. Ratner, Robert D.
Gries, David H. Adler and Gerald J. Voros (who did not stand for re-election at
the annual meeting held on August 29, 1995). There are no interlocking
relationships, as defined in the regulations of the Securities and Exchange
Commission, involving any of these individuals. See "Certain Relationships and
Related Transactions" for a description of certain transactions entered into
by the Company and Jeffrey S. Ratner.
31
<PAGE> 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 10,
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, 14,763,120 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 55,500(4) *
Herbert Ratner 40,500(5) *
Joel Nagelmann 92,289(6) *
H. Richard Howie 7,200(7) *
Delmer C. Gowing III 25,000(8) *
Frank Morrisroe 20,000(9) *
William F. McLay 45,175(10) *
Margaret Santone 4,020(11) *
Barry Logan 46,516(12) *
Gary Campbell 18,750(13) *
Bernhard Mantel 189,708(14) 1%
Jappe Kjaer 128,000(15) *
Thomas Caudill 8,000(16) *
Gerry Lau 0 *
All Directors and executive officers and 1,843,650 12%
owners of more than 5% as a group.
(17 persons)
<FN>
(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. 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.**
</TABLE>
32
<PAGE> 34
(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 37,500 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 20,000 shares subject to a currently exercisable option.**
(10) Includes 13,175 shares currently owned of record and 32,000 shares subject
to currently exercisable options.**
(11) Includes 20 shares currently owned of record and 4,000 shares subject to a
currently exercisable option.**
(12) Includes 900 shares currently owned of record and 45,616 shares subject to
currently exercisable options.**
(13) Includes 2,750 shares currently owned of record and 16,000 shares subject
to currently exercisable options.**
(14) Includes 189,708 shares currently owned of record.
(15) Includes 120,000 shares currently owned of record and 8,000 shares subject
to a currently exercisable option.**
(16) 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.
33
<PAGE> 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 A/S (now known as
Sulcus Scandinavia A/S). Mr. Kjaer was the principal shareholder of Lodgistix
Scandinavia A/S 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 A/S, Mr. Kjaer borrowed $20,000
from Lodgistix Scandinavia A/S, all of which remains outstanding. These loans
do not bear interest.
In December 1990, Frank Morrisroe, President of Sulcus Hospitality
Group through January 1996, purchased 250,000 shares of Lodgistix's, Inc.
Common Stock from Bernhard Mantel, then a European distributor for Lodgistix,
Inc., at a price of $0.50 per share for an aggregate of $125,000. Sulcus lent
Mr. Morrisroe $101,250 in January 1991 to assist him in the purchase of such
shares which was to be repaid over a four-year period with interest at 6% per
year. Upon completion of the merger of Lodgistix, Inc., into Sulcus, he
received 37,094 shares of Sulcus Common Stock and Class A Warrants to purchase
37,094 additional shares in exchange for his shares of Lodgistix, Inc. These
securities were held as collateral for such loans. On January 30, 1996, Mr.
Morrisroe repaid all loans in full.
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.
34
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
*REPORTS OF INDEPENDENT AUDITORS
*CONSOLIDATED BALANCE SHEETS - Years Ended December 31, 1995
and 1994
*CONSOLIDATED STATEMENTS OF OPERATIONS - Years ended December
31, 1995, 1994 and 1993
*CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years ended
December 31, 1995, 1994 and 1993
*CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended December
31, 1995, 1994 and 1993
*NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULES ATTACHED HERETO ARE AS FOLLOWS:
Schedule VIII - Valuation and Qualifying Accounts
All other Schedules are omitted since the required information
is not present in amount sufficient to require submission of
the Schedules, or because the information is included in the
Consolidated Financial Statements and Notes thereto.
3. EXHIBITS INDEX
(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 *****
(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*******
35
<PAGE> 37
(3)(a) Articles of Incorporation+
(b) Certificate of Amendment to Articles of Incorporation+
(c) Form of Proposed Amendments to Articles of Incorporation***
(d) By-Laws*
(4)(a) Form of Common Stock Certificate+
(a) (i) Form of Class A Redeemable Warrant*
(b) Form of Underwriter's Warrant*
(c) Form of Warrant Agreement*
(d) Form of Preferred Stock Certificate***
(e) Form of Class B Warrant***
(f) Form of Class B Warrant Agreement***
(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*
(e) Exclusive License Agreement between Registrant and Data Source
One, Inc., dated May 12, 1988*
(f) License agreement between Registrant and San Francisco Legal
Systems and Christopher N. Visher, dated November 16, 1988*
(g) Exclusive License Agreement between Registrant and Hugh
Haggerty, dated December 23, 1988*
(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*
(k) Form of Regional Representative Agreement*
(l) Form of Reseller Agreement (Software)*
(m) Form of Sales Order*
(n) Form of Support, Maintenance & Enhancement Agreement*
(o) Form of Hardware Service Agreement*
(p) Software Supplier Agreement between Registrant and
Hewlett-Packard Company ("H- P")*
(q) Purchase Agreement between Registrant and H-P*
(r) H-P Terms and Conditions of Sale*
(s) H-P OEM Certification*
(t) H-P OEM/VAR Warranty*
(u) H-P Software License Terms*
(v) H-P Warranty and Installation Terms*
(w) H-P OEM Products Subject to Discount*
36
<PAGE> 38
(x) Form of Purchase/License Agreement between Hospitality
Management Systems, Inc. and Purchaser*
(y) Lease for premises at 41 N. Main Street, Greensburg, PA*
(z) (i) Employment Agreement with Paul E. Hammar**
(ii) Employment Agreement with Frank A. Morrisroe**
(iii) Employment Agreement with Alan Ellenbogen**
(iv) Employment Agreement with Jeffrey B. Edwards**
(v) Amendment to Edwards Employment Agreement***
(vi) Employment Agreement with John Picardi***
(vii) Amendment to Picardi Employment Agreement***
(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 ********
(xii) Employment Agreement with George A. Socher ********
(xiii) Employment Agreement with Joel Nagelmann x
(aa) Citibank Agreement*
(bb) Radix Agreement**
(cc) Agreement with Chi Chi's Restaurants+++
(dd) Agreement with Canadian Pacific Hotels++++
(11) Statement RE: Computation of Per Share Earnings*********
_________________
+ 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.
37
<PAGE> 39
**** Incorporated by reference to Definitive Proxy Statement For 1994
Annual Meeting (File No. 013226), Filed on August 31, 1994.
***** 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.
x Filed herewith
38
<PAGE> 40
22. SUBSIDIARIES OF SULCUS COMPUTER CORPORATION
Sulcus Investment Corporation Delaware
Sulcus Law Management Services, Inc. Maryland
Keystone Credit Corporation Pennsylvania
Sulcus Hospitality Group, Inc. Pennsylvania
Radix Systems, Inc. Pennsylvania
Lodgistix, Inc. Delaware
Sulcus (Australia) Pty. Ltd. Australia
Squirrel Companies, Inc. Georgia
Squirrel Companies of Canada, Ltd. Canada
NRG Management Systems, Inc. Texas
Sulcus Hospitality Limited Hong Kong
Sulcus Singapore, Pte. Ltd. Singapore
Sulcus (Malaysia) SDN BHD Malaysia
Sulcus Hospitality Group EMEA, AG Switzerland
Sulcus (International) AG Switzerland
Sulcus Hospitality (U.K.) Ltd. United Kingdom
Sulcus Scandinavia, A.S. Scandinavia
39
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Greensburg, Commonwealth of Pennsylvania, on March 27, 1996.
SULCUS COMPUTER CORPORATION
By: /s/ Joel Nagelmann
-----------------------------------
Joel Nagelmann
President and Principal
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on March 27, 1996.
Signature and Title Date
------------------- ----
/s/ Jeffrey S. Ratner March 27, 1996
- ----------------------------------- ------------------
Jeffrey S. Ratner
Chairman of the Board and Director
/s/ John W. Ryba March 27, 1996
- ----------------------------------- ------------------
John W. Ryba,
General Counsel and Director
/s/ Robert D. Gries March 27, 1996
- ----------------------------------- ------------------
Robert D. Gries, Director
/s/ Herbert G. Ratner March 27, 1996
- ----------------------------------- ------------------
Herbert G. Ratner, Director
/s/ David Adler March 27, 1996
- ----------------------------------- ------------------
David Adler, Director
/s/ Joel Nagelmann March 27, 1996
- ----------------------------------- ------------------
Joel Nagelmann, President and
Principal Executive Officer
/s/ H. Richard Howie March 27, 1996
- ----------------------------------- ------------------
H. Richard Howie, Chief Financial
Officer and Chief Accounting Officer
<PAGE> 42
[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
its 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 14(a)(2). In our opinion, such financial schedule presents
fairly the information required to be set forth 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
F-1
<PAGE> 43
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 audit.
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 schedules listed in
answer to item 14(a)(2). In our opinion, such financial schedules present
fairly the information required to be set forth therein.
/s/ FERRARO + MCMURTRY
--------------------------
Ferraro + McMurtry
Pittsburgh, Pennsylvania
F-2
<PAGE> 44
SULCUS COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
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-3
<PAGE> 45
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-4
<PAGE> 46
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-5
<PAGE> 47
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-6
<PAGE> 48
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-7
<PAGE> 49
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-8
<PAGE> 50
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-9
<PAGE> 51
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-10
<PAGE> 52
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-11
<PAGE> 53
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-12
<PAGE> 54
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-13
<PAGE> 55
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-14
<PAGE> 56
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-15
<PAGE> 57
<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>
<CAPTION>
<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-16
<PAGE> 58
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-17
<PAGE> 59
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>
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-18
<PAGE> 60
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-19
<PAGE> 61
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-20
<PAGE> 62
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-21
<PAGE> 63
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-22
<PAGE> 64
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-23
<PAGE> 65
SULCUS COMPUTER CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net income (loss) attributable
to common stockholders ($1,368,956) ($11,688,013) ($3,050,100)
=========== ============ ===========
Shares:
Weighted average number of
common shares outstanding 14,720,327 13,872,298 13,509,078
Assumed conversion of stock options (A) 105,130 286,830 648,257
----------- ------------ -----------
Average common shares and
common stock equivalents 14,825,457 14,159,128 14,157,335
=========== ============ ===========
Earnings (loss) per share ($0.09) ($0.84) ($0.22)
=========== ============ ===========
<FN>
(A) Effect of stock options is antidilutive for all periods in 1995 and 1994.
</TABLE>
F-24
<PAGE> 66
SULCUS COMPUTER CORPORATION
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Charged to Amount Balance
beginning Acquired cost and charged at end
of year Valuations expenses off of year
--------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
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>
F-25
<PAGE> 1
EXHIBIT 10(z)(xiii)
April 17, 1995
Mr. Joel Nagelmann
4905 Southern Hills Drive
Frisco, TX 75034
Dear Mr. Nagelmann:
It is my pleasure to offer you the position of President of Sulcus
Computer Corporation (the "Company"). In this capacity, you will report to
the Chairman, performing a number of functions and duties as stated in the
attached position description and duties list, and such additional functions
and duties as may be assigned to you or changed, from time to time. Your total
compensation will be composed of salary and bonus. Your salary compensation
shall be $16,667 each month beginning April 26, 1995. All payments are subject
to appropriate deductions and withholdings and to standard policies of Sulcus
Computer Corporation. Your office will be located in Boynton Beach, Florida.
The second component of your compensation is a bonus calculated on a
calendar year and to be effective on January 1, 1995. The determination of any
bonus, cap thereon and percentage of bonus, will be made and calculated each
year in accordance with the following table, with each year standing on its
own. The bonus will be a percentage of the consolidated annual after tax
earnings of the Company for each calendar year ending on December 31. The
actual percentage for calculating the bonus and the cap will depend on the
Company's total annual revenue for a particular year. The bonus will be paid
one-half in cash and one-half in the Company's stock options. The price of
the bonus options shall be either the first trading day or the last trading day
of the year in which a bonus is earned by you, at your choice. The bonus
options will vest one-half on the date of grant and one-half one year
thereafter. The bonus, if any, will become due and payable as soon as
practicable following the completion of the Company's annual audit and the
filing of its annual report on Form 10-K.
ANNUAL BONUS TABLE
<TABLE>
<CAPTION>
Total Annual Revenue Bonus % Cap on Bonus
of After Tax
Earnings
<S> <C> <C>
(less than)$100 mil. 3.0% $200,000
$100 to $149 mil. 3.9% $260,000
$150 to $249 mil. 4.68% $312,000
$250 and above mil. 5.0% $343,200
</TABLE>
<PAGE> 2
Mr. Joel Nagelmann
April 17, 1995
Page 2
You will be granted options to purchase 200,000 shares of Sulcus
Computer Corporation Common Stock at the fair market value per share of $2 1/2,
subject to the terms of this letter, the Sulcus Computer Corporation 1991
Incentive Stock Option Plan for Officers and Other Key Employees, and an Option
Agreement.
Should a termination of your employment occur with cause as described
in Exhibit B; or you have a disability that prevents you from performing your
obligations to the Company for any three (3) consecutive months; or should you
terminate your employment voluntarily, any and all stock options granted to
you, including those which are vested, immediately will terminate and be
canceled automatically and no further compensation of any type or nature will
be due and owing to you.
The Company will provide you with a loan in the principle amount of
$100,000 at the time that you provide the Company with written notice that your
primary residence located at 4905 Southern Hills Drive, Frisco, Texas has been
placed on the real estate market and you have entered into an agreement of sale
to purchase a new home. You agree to place your primary place of residence on
the market within 60 days from the Effective Date. The loan will be evidenced
by a promissory note and security agreement acceptable to the Company, the
terms of which among other things, will provide for the payment of the
principle amount and interest upon the sale or the lease of your house, or one
year from the date of the note, whichever first occurs. Annual interest rate
on the principle amount shall be 5%.
If you purchase another new home which will become your new place of
residence while your existing home remains unsold or unleased, upon your
written request, the Company will provide you with up to $3,000 each month for
a period of up to twelve months from the closing date of that new home or until
your existing house is sold or leased, whichever first shall occur. The
Company agrees to pay you up to $25,000 for expenses incurred in relocating to
your new office location. Payment of any amount for such moving expenses is
contingent upon the Company receiving invoices and receipts or other documents
showing payment for expenses reimbursable hereunder. Upon the sale of your
present home the Company agrees to pay up to $36,000 of real estate agent
commission upon receiving invoices and other documents showing proof of sale
and calculation of commission due. Each of these amounts will be in the form
of loans evidenced by promissory notes and other documents that the Company may
require. The principle loan amounts will be amortized each over a three year
period from the date of the loan(s). The annual interest rate on the principle
amounts shall be 5%, payable quarterly. If you terminate your employment
voluntarily or are terminated with cause within two years of the date of the
loan(s), the aggregate amount of the original principle and interest of all
such loans will be immediately due and owing to the Company. However, if you
terminate your employment voluntarily or are terminated with cause after two
years from the Effective Date, only that amount which has not been amortized
will be due and payable immediately. If you are terminated without cause the
amounts which have not been amortized will be forgiven. Any and all amounts in
this paragraph must be requested by you within 18 months from the Effective
Date, provided that this agreement is in effect and you remain an employee in
good standing.
<PAGE> 3
Mr. Joel Nagelmann
April 17, 1995
Page 3
You will obtain, at the Company's expense, keyman insurance in the
aggregate amount of $500,000, the policy naming the Company as the beneficiary.
In the event of your death during the term of your employment by the
Company, your estate shall be entitled to your usual monthly salary up to the
end of the month in which the death occurred along with any benefits that have
accrued under the stock purchase plan.
This agreement shall be effective for three years from the Effective
Date, and unless terminated earlier as provided herein, this agreement will
renew automatically for additional terms of one year under the same terms and
conditions unless written notice is received from the terminating party ninety
(90) days prior to the end of the present or any renewal term.
If you are terminated by the Company without cause, any stock options
granted to you will continue to vest in accordance with their terms for up to
two years from the date of your termination. However, after termination you
shall be responsible for an orderly transition of your duties and
responsibilities and you shall make yourself available to the Company and your
replacement for three months after the appointment of your replacement. You
shall work at, or be available to the Company on an as needed basis during this
period in order to ensure an orderly transition. If you do not make yourself
available and the transition is not satisfactory to the Company then
notwithstanding any other provision of this agreement, any and all options will
be cancelled. The Company may terminate this arrangement immediately with
cause. The phrase "with cause" as used in this letter shall have the meanings
set forth on Exhibit "B", which is made a part of this letter, but shall not be
limited to just those meanings.
Group health, major medical, dental insurance, and cafeteria plan will
be made available to you at your option and is partially employee-paid.
Vacations, sick days, and holidays will be in accordance with Company policy.
You recognize, acknowledge and agree that it is essential for the
proper protection of the business of the Company that for a period of one (1)
year following termination of your employment, for any reason, that you be
restrained from and you shall not, directly or indirectly solicit or induce any
employee of the Company to leave the employ of the Company, or hire or attempt
to hire any employee of the Company. You further agree that while employed
with the Company, you shall not, directly or indirectly, solicit the trade of,
or trade with, any existing or prospective customer or software supplier of the
Company for any business purpose other than for the benefit of the Company.
You also agree that for one (1) year following termination of your employment
with the Company, you shall not, directly or indirectly, solicit the trade of,
or trade with, any existing or prospective customer or software supplier of the
Company, except with the written consent of the Company. The term "software
supplier" as used in this paragraph means any entity or person whose software
is remarketed by the Company, or is used in or with the Company's products.
<PAGE> 4
Mr. Joel Nagelmann
April 17, 1995
Page 4
You shall disclose promptly to the Company or its nominee any and all
ideas, works, inventions, improvements, and discoveries authored, conceived or
made by you as a result of your employment and related to the business or
activities of the Company, and hereby assign and agree to assign all your
interests therein to the Company or its nominee. Such obligations shall
continue beyond the termination of employment with respect to ideas, works,
inventions, improvements, and discoveries authored, conceived or made by you
during the time of your employment, and shall be binding upon your assigns,
executors, administrators, and other legal representatives.
You agree to devote your best efforts and full time to the performance
of your duties for the Company and to give proper time and attention to
furthering the Company's business. You agree that should your employment
terminate, that you shall not, directly or indirectly, for yourself, or on
behalf of, or as an employee of any other person, firm, association, or
corporation, engage in or be employed by or in any business similar to or
competitive with the Company, except with the written consent of the Company
for a period of one (1) year. In addition to any other rights or remedies
available to the Company for breach of the Agreement contained in this
paragraph, the Company shall be entitled to enforcement by court injunction.
You acknowledge and agree that the restrictive covenants set forth in and as
part of this arrangement are enforceable in all respects.
The provisions of any instruments or documents pertaining to the loan
amounts set forth above as well as other obligations will survive the
termination of your employment.
Please sign the enclosed Covenant and return it to us. Signing and
returning the Covenant is a condition of your employment with the Company. If
you have already signed a Covenant, please attach a copy hereto.
Please sign and initial both copies of this letter where indicated and
return them to us for signature. Upon acceptance, we will provide you with a
signed copy of this letter for your records.
We look forward to a mutually rewarding relationship and your
contribution to the growth and continued success of the Company.
Sincerely,
Sulcus Computer Corporation
Jeffrey S. Ratner
Chairman and
Chief Executive Officer
Acknowledged and Agreed: Sulcus Computer Corporation
______________________________ By ____________________________________
Joel Nagelmann Chairman and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Financial
Statements for the twelve months ended December 31, 1995, as submitted in the
Company's 10-K for that period and is qualified in its entirety by reference to
such 10-K.
</LEGEND>
<CIK> 0000726712
<NAME> SULCUS COMPUTER CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,202,325
<SECURITIES> 12,408,075
<RECEIVABLES> 13,715,596
<ALLOWANCES> 2,581,020
<INVENTORY> 2,573,826
<CURRENT-ASSETS> 29,795,824
<PP&E> 6,262,984
<DEPRECIATION> 4,247,168
<TOTAL-ASSETS> 47,326,778
<CURRENT-LIABILITIES> 24,405,517
<BONDS> 27,175
<COMMON> 38,016,248
0
0
<OTHER-SE> (15,122,162)
<TOTAL-LIABILITY-AND-EQUITY> 47,326,778
<SALES> 44,693,302
<TOTAL-REVENUES> 45,983,993
<CGS> 18,965,582
<TOTAL-COSTS> 43,716,277
<OTHER-EXPENSES> 3,434,027
<LOSS-PROVISION> 573,130
<INTEREST-EXPENSE> 597,672
<INCOME-PRETAX> (1,166,311)
<INCOME-TAX> 202,645
<INCOME-CONTINUING> (1,368,956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,368,956)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
