<PAGE> 1
Registration No. 33-85244
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 5
to Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
SULCUS COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Pennsylvania 7372 25-1369276
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
<TABLE>
<S> <C>
Sulcus Centre, 41 N. Main St. John W. Ryba, General Counsel
Greensburg, PA 15601 Sulcus Centre, 41 N. Main Street
(412) 836-2000 Greensburg, PA 15601, (412) 836-2000
(Name, address, including zip code, and telephone number, (Name, address, including zip code, and telephone
including area code of registrant's principal executive offices) number, including area code, of agent for service)
</TABLE>
Copies to:
Peter Landau, Esq. Kenneth S. Rose, Esq.
Opton, Handler, Gottlieb, Feiler & Katz,LLP Morse, Zelnick, Rose & Lander, LLP
52 Vanderbilt Avenue, New York, NY 10017 450 Park Avenue, New York, NY 10022
(212) 599-1744 Fax (212) 972-2219 (212) 838-5030 Fax (212) 838-9190
Approximate date of commencement of proposed sale to public: as soon as
practicable after effective date of Registration Statement. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Title of each class of securities to Amount to be registered Proposed maximum Proposed maximum Amount of
be registered offering price per Unit aggregate offering price registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units comprised of: 230,000 Units (1) $ 10.50 $ 2,415,000 $ 832.76
(a) One Share of Preferred Stock 230,000 Shares (1)
(b) Four Warrants 920,000 Warrants (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock (2)(3)** $ * $ * $ *
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock 460,000 Shares (3)(4) $ 10.00 $ 4,600,000 $ 1,586.22
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock (3)(5)** $ * $ * $ *
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriter Warrants 20,000 Warrants $ 0.00010 $ 2.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriter Units comprised of: 20,000 Units $ 10.50 $ 210,000 $ 72.42
(a) One Share of Preferred Stock 20,000 Shares (3)(6)
(b) Four Warrants 80,000 Warrants(3)(6)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock (3)(7)** $ * $ * $ *
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock 40,000 Shares (3)(8) $ 10.00 $ 400,000 $ 137.93
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock (3)(9)** $ * $ * $ *
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ $ 2,630.33(10)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
(1) Represents the maximum number of securities that could be issued in the
transactions described in the registration statement including
Underwriter over-allotment option.
(2) Issuable upon conversion of the Preferred Stock.
(3) An indeterminate number of shares of Common and Preferred Stock that
may become issuable pursuant to the anti-dilution provisions of
Preferred Stock and the Warrants are also being registered pursuant to
Rule 416.
(4) Issuable upon exercise of the Warrants.
(5) Issuable upon conversion of the Preferred Stock issued upon exercise of
the Warrants.
(6) Issuable upon exercise of Underwriter Warrants.
(7) Issuable upon conversion of Preferred Stock issuable to Underwriter
upon exercise of Underwriter Warrant.
(8) Issuable upon exercise of Warrants issuable to Underwriter upon
exercise of Underwriter Warrant.
(9) Issuable upon conversion of Preferred Stock issuable upon exercise of
Warrants issuable to Underwriter.
(10) Previously paid.
* Separate filing fee not required.
** To be supplied by amendment.
The registrant hereby amends the Registration Statement on such date or
dates as may be necessary to delay effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1993 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
and Rule 404(a)
<TABLE>
<CAPTION>
Item No. and Heading in Form S-1 Caption or Location in Prospectus
Registration Statement
<S> <C>
1. Forepart of the Registration Statement Forepart of the Registration Statement;
Outside Front Cover Page of Prospectus Outside of Front Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Pages of
Cover Pages of Prospectus Prospectus and Outside Back Cover
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors
and Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus;
Risk Factors
6. Dilution Dilution
7. Selling Security Holders *
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be Description of Securities
Registered
10. Interests of Named Experts and Counsel *
11. Information with Respect to the Registrant Cover Page of Prospectus; Prospectus Summary; Risk
Factors; Price Range of Common Stock; Dividend Policy;
Selected Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Principal
Stockholders; Certain Transactions; Legal Proceedings;
Legal Matters; Financial Statements
12. Disclosure of Commission Position on *
Indemnification for Securities Acts Liabilities
</TABLE>
*Omitted because answer is negative or item is otherwise not applicable.
<PAGE> 4
PROSPECTUS SUBJECT TO COMPLETION DATED OCTOBER , 1996
SULCUS
COMPUTER CORPORATION
200,000 Units
Each Unit Consisting of
One Share of Preferred Stock
and
Four Class A Warrants
Sulcus Computer Corporation, a Pennsylvania corporation (the" Company"
or "Sulcus") hereby offers for sale 200,000 Units (the "Unit"). Each Unit
consists of one share of the Company's Series A Redeemable Convertible Preferred
Stock, no par value per share, (the "Preferred Stock") and four Class A Warrant
(the "Warrants") to purchase Preferred Stock. The shares of Preferred Stock and
Warrants included in each Unit will be immediately detachable and separately
transferrable. Each share of Preferred Stock may be converted into_____________
shares of Common Stock, no par value per share, of the Company (the "Common
Stock") commencing on__________________ , 1997, (six months from the date of
this Prospectus). The Preferred Stock is redeemable by the Company any time
commencing_________________ , 1997, (15 months from the date of this
Prospectus), upon not less than thirty (30) days' notice, at a price of
$_________ per share. Two Warrants will entitle the registered holder thereof
to purchase one share of Preferred Stock at a price of $__________ if exercised
on or before_______________ , 1996, (75 days from the date of this Prospectus).
Thereafter, four Warrants shall entitle the registered holder thereof to
purchase one share of Preferred Stock at a price of $_____________ , if
exercised on or before______________ , 1997, (one year from the date of this
Prospectus), the Warrant expiration date. See "Description of Securities" and
"Risk Factors."
Prior to this Offering, there has been no public market for the
Preferred Stock or the Warrants and there can be no assurance that such a market
will develop after the completion of this Offering or, if developed, that it
will be sustained. It is currently estimated that the initial public offering
price will be between $10.00 and $11.00 per Unit. For information regarding the
factors considered in determining the initial public offering price of the Units
and the terms of the Preferred Stock and Warrants, see "Risk Factors,"
"Underwriting" and "Description of Securities."
The Common Stock of the Company is traded on the American Stock
Exchange ("AMEX") under the symbol SUL. The closing price for the Common Stock
21/4 on October 21, 1996. See "Price Range of Common Stock." It is anticipated
that the Preferred Stock and Class A Warrants will be traded on the AMEX under
the symbols SULP and SULW, respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" LOCATED ON PAGE 7 AND "DILUTION."
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION OF THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price Underwriting Proceeds
to Public Discounts(1) to Company(2)
<S> <C> <C> <C>
Per Unit . . . . . . . . . . . . . . . . $ $ $
Total(3) . . . . . . . . . . . . . . . $ $ $
</TABLE>
(Footnotes appear on inside front cover.)
The Units are offered by the Underwriter on a "firm commitment" basis,
when as and if delivered to and accepted by the Underwriter, and subject to the
right of the Underwriter to reject any order in whole or in part and to certain
other conditions. It is expected that delivery of certificates representing the
Preferred Stock and Warrants comprising the Units will be made at the offices of
Joseph Stevens & Company, L.P., 33 Maiden Lane, New York, NY 10038 on or
about ____________ , 1996.
Joseph Stevens & Company, L.P.
The date of this Prospectus is_____________ , 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 5
1. Does not include additional compensation to be received by
Joseph Stevens & Company, L.P. (the "Underwriter") in the
form of (i) a non-accountable expense allowance of 3% of the
gross proceeds of the offering (including proceeds from the
exercise of the Underwriter's over-allotment option
discussed below in footnote (3)); and (ii) 20,000 Warrants to
be granted to the Underwriter to purchase up to 20,000 Units
(the "Underwriter's Warrant"). The Company also has agreed
to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
2. Before deducting expenses of the offering payable by the
Company of approximately $ ____________ , including the
Underwriter's non-accountable expense allowance.
3. The Company has granted the Underwriter an over-allotment
option (the "Over-Allotment Option"), exercisable within 30
business days after the date of this Prospectus, to purchase
up to 30,000 additional Units on the same terms and conditions
as set forth above. If all such Units are purchased, the total
Price to Public, Underwriting Discounts and Commissions, and
Proceeds to the Company will be $ _____________, $____________
and $________________, respectively. See "Underwriting."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMPANY'S SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE
AND ANY OTHER EXCHANGES UPON WHICH THE COMPANY MAY LIST ITS SECURITIES. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S SECURITIES ON THE AMERICAN
STOCK EXCHANGE IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934 AS AMENDED.
The Company distributes annual reports containing audited financial
statements to its stockholders.
2
<PAGE> 6
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS
PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
THE HEADING "RISK FACTORS." EXCEPT AS OTHERWISE SPECIFIED, THE INFORMATION
CONTAINED IN THIS PROSPECTUS ASSUMES THAT (I) THE PREFERRED STOCK HAS NOT BEEN
CONVERTED INTO SHARES OF COMMON STOCK, (II) THE WARRANTS HAVE NOT BEEN
EXERCISED, AND (III) THE OVER-ALLOTMENT OPTION AND THE UNDERWRITER'S WARRANTS
HAVE NOT BEEN EXERCISED. SEE "UNDERWRITING."
THE COMPANY
Sulcus provides automation solutions to the worldwide hospitality and
tourism market and to the domestic U.S. real estate industry and legal
professions. The Company develops, manufactures, markets and installs integrated
microcomputer systems designed to automate the creation, handling, storage and
retrieval of information and documents.
The Company sells computer systems, which include a network of
hardware, software and cabling as well as stand-alone turnkey systems. Sulcus
sells 24-hour customer support to the hospitality industry and regular business
hour support to the real estate industry and the legal profession with each new
system sold. This provides a recurring revenue stream beyond the original system
sale.
The Company's turnkey computer systems provide all of a customers needs
to automate segments of its business. Sulcus believes that this approach is
critical in the vertical markets in which it competes. Some competitors can
automate a specific task, most are unable to automate as broad a range of a
customer's business applications as Sulcus. Customers include hotels, motels,
restaurants, resorts, cruise lines, country clubs, condominiums, real estate
related businesses and law offices.
In 1988, the Company conceived a vision to build a leadership position
in turnkey computer systems for the hospitality, and real-estate industries and
developed a strategic plan to achieve that vision. The strategic plan envisioned
internal growth by way of expanded research and development, as well as growth
through acquisitions, mergers, joint ventures and similar alliances. In order to
fulfill that vision, the Company has made numerous acquisitions, alliances and
joint ventures which created additional market opportunities for existing
products, created or obtained products that complement or expand existing
product lines, and created additional product distribution channels. The Company
has assembled a comprehensive product line that includes approximately 800
programs contained in 55 business applications with over 255 interfaces for
automatic integration with third party software or hardware systems. Sulcus has
built a worldwide distribution system with over 80 locations in over 20
countries and has installed its systems on all continents except Antarctica. See
"Business--Historical Development."
The Company was incorporated under the laws of the Commonwealth of
Pennsylvania on November 5, 1979, under the name "Ragtronics, Inc." and adopted
its present name in December 1982. The principal offices of Sulcus are located
at Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601. Its
telephone number at such address is (412) 836-2000. Unless the context indicates
otherwise, all references herein to the Company or Sulcus refer to Sulcus
Computer Corporation and its wholly owned subsidiaries.
3
<PAGE> 7
THE OFFERING
Securities Offered: 200,000 Units, each Unit consisting of one
share of Series A Redeemable Convertible
Preferred Stock ("Preferred Stock") and four
Class A Warrants.
Offering Price: $ 10.50 per Unit
Terms of Preferred Stock: Conversion Rights. Unless previously
redeemed (see below), each share of
Preferred Stock is convertible into
______________shares of Common Stock,
subject to adjustment in certain events, at
any time after six months from the date of
issuance. No fractional shares will be
issued, nor will cash in lieu thereof be
paid.
Redemption. The Preferred Stock may be
redeemed by the Company upon payment of
$___________ per share at any time on or
after 15 months from the date of this
Prospectus, upon 30 days' prior written
notice.
Dividends. Payable only to the same extent
as dividends are paid on the Common Stock.
Liquidation Preference. In the event of any
liquidation of the Company, holders of
Preferred Stock are entitled to a
liquidation preference of $___________ per
share (the public offering price).
Voting Rights. Non-voting, except with
respect to matters that alter or change the
powers, preferences and rights of the
Preferred Stock.
Terms of Class A Warrants: During the 75 day period commencing on the
date of this Prospectus, two Class A
Warrants entitle the holder to purchase one
share of Preferred Stock for $__________.
Thereafter, and prior to____________ , 1997,
(one year from the date of this Prospectus),
the Class A Warrant expiration date, four
Class A Warrants entitle the holder to
purchase one share of Preferred Stock for
$____________. Warrantholders will only be
entitled to exercise Class A Warrants to
purchase whole shares of the Company's
Preferred Stock.
Common Stock Outstanding and to
be Outstanding after Offering: 15,359,625 shares of Common Stock(1)
Preferred Stock to be
Outstanding After Offering: 200,000 shares of Preferred Stock(2)
Warrants Outstanding After
the Offering: 800,000 Class A Warrants
Use of Proceeds: The net proceeds of the Offering will be
used for working capital and general
corporate purposes.
Risk Factors: The Offering involves certain risks. See
"Risk Factors."
AMEX Symbol: Common Stock SUL
Proposed AMEX Symbols: Preferred Stock SULP
Class A Warrants SULW
(1) Does not include (i) 2,678,631 shares reserved for issuance under the
Company's stock option plans for employees; (ii) 605,000 shares
reserved for issuance upon exercise of options granted to directors,
consultants and advisors; (iii) 64,500 shares reserved for issuance
under various "earn out" provisions in connection with recent
acquisitions; (iv)____________ shares reserved for issuance upon
conversion of the Preferred Stock and the conversion of the Preferred
Stock issuable to the Underwriter upon exercise of the Underwriter's
Warrant; and (v) 327,726 shares of Common Stock issued in connection
with "earn out" provisions to the former shareholders of JBA and
subsequently cancelled by the Company. See "Business--Historical
Development-JBA," "The Company," "Management--Stock Option Plan,"
"Description of Securities," and Note 15 of Notes to Consolidated
Financial Statements.
(2) Does not include shares reserved for issuance upon the exercise of the
Class A Warrants and the exercise of the Class A Warrants issuable to
the Underwriter upon the exercise of the Underwriter's Warrant.
4
<PAGE> 8
SULCUS COMPUTER CORPORATION
Summary Financial Data
(Thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 23,668 $ 21,871 $ 44,693 $ 41,887 $ 47,346 $ 35,245 $ 17,256
Dividends and other 660 593 1,291 1,256 1,937 1,385 505
-------- -------- -------- -------- -------- -------- --------
Total revenue 24,328 22,464 45,984 43,143 49,283 36,630 17,761
Cost of goods sold and services provided 10,056 9,009 18,965 20,588 23,085 15,418 6,153
Selling, general and administrative expenses 11,191 11,400 22,896 24,388 21,726 14,756 8,091
Research and development 590 647 1,199 1,597 1,878 2,342 1,044
Interest expense 291 285 598 556 403 242 285
Depreciation and amortization 776 854 1,520 2,158 2,034 960 482
Unrealized (gain) loss on investments (1) -- (1,462) (1,462) 1,861 -- -- --
Unusual items (2) -- -- 3,434 3,663 3,207 -- --
Income taxes -- -- 203 -- -- 821 358
Income (loss) before extraordinary item and
cumulative effect of accounting changes 1,424 1,731 (1,369) (11,668) (3,050) 2,091 1,348
Net income (loss) $ 1,424 $ 1,731 ($ 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 $ 0.08 $ 0.12 ($ 0.09) ($ 0.84) ($ 0.22) $ 0.17 $ 0.21
Net income (loss) per share $ 0.08 $ 0.12 ($ 0.09) ($ 0.84) ($ 0.22) $ 0.26 $ 0.26
Weighted average shares used in computing
net income (loss) per share 16,844 14,801 14,720 13,872 14,157 12,446 6,539
Cash dividends -- -- -- -- -- -- --
RATIO OF EARNINGS TO FIXED CHARGES (3) 5.89 7.07 -- -- -- 13.01 6.98
HISTORICAL BALANCE SHEET DATA
Working capital $ 7,632 $ 7,311 $ 5,390 $ 4,183 $ 8,643 $ 10,615 $ 9,438
Total assets 45,603 43,989 47,327 47,869 58,716 51,499 28,531
Long-term obligations 234 54 27 86 364 1,039 1,387
Stockholders' equity 24,111 25,086 22,894 23,087 33,373 33,489 18,316
</TABLE>
(1) On June 5, 1995, the Company restructured its investment portfolio. As a
result, under SFAS No. 115, the Company no longer reports unrealized
gains or losses from the investment portfolio in its statement of
earnings.
(2) Unusual items include write-offs of assets of $514,694, $2,156,949 and
$970,184 in 1995, 1994 and 1993, respectively, a write-off of goodwill of
$1,256,000 in 1994 and provision for litigation settlements of
$2,919,333, $250,000 and $2,237,310 in 1995, 1994 and 1993, respectively.
(3) In calculating the ratio of earnings to fixed charges, earnings consist
of income from continuing operations before income taxes plus fixed
charges. Fixed charges consist of interest expense. The Company does not
have any amortization of debt expense, capitalized interest or preferred
stock dividend requirements. Due to losses before income taxes in the
twelve months ended December 31, 1995, 1994 and 1993, earnings were
inadequate to cover fixed charges. Losses before income taxes in those
years were $1,166,311, $11,668,013 and $3,050,100, respectively. Fixed
charges in those years were $597,672, $556,269 and $402,764,
respectively.
5
<PAGE> 9
RECENT DEVELOPMENTS
SECURITIES AND EXCHANGE COMMISSION PROCEEDING
On May 2, 1996, the Company entered into an agreement with the
Securities and Exchange Commission ("Commission") resolving the investigation of
the Company by the Commission which commenced in March 1993, concerning Sulcus'
periodic reports filed during 1991 and 1992, a registration statement it filed
in 1992 containing those reports and certain press releases issued in 1991 and
1992. 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 Company agreed that it
would not in the future violate Section 10(b) and Rule 10b-5. The Order does not
allege violations of Section 10(b) or Rule 10b-5 against Sulcus with regard to
its periodic filings or registration statement. In addition, John Picardi, a
Sulcus employee and former Chief Financial Officer of Sulcus' Hospitality Group,
and Jeffrey Ratner, Sulcus' Chairman, without admitting or denying any
wrongdoing, agreed that they would not in the future violate Sections 17(a)(2)
and (a)(3) of the Securities Act, Sections 13(a), 13(b)(2)(A) and 13(b)(2) (B)
of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 and 13b 2-1 promulgated
thereunder. There were no fines or other penalties imposed upon the Company or
Mr. Ratner. Mr. Picardi agreed not to practice before the Commission as an
accountant for a 30 month period.
SETTLEMENT OF RECENT SHAREHOLDER LITIGATION
Shortly after the Company announced on April 6, 1994, that it was
proposing to restate earnings and other financial results for 1992, twelve
shareholder class action lawsuits were commenced against the Company and certain
of its officers, and directors as well as its independent auditors, in the
United States District Court for the Western District of Pennsylvania. In
December 1995, the Company announced it had agreed to settle these lawsuits
("The Class Action") which required the establishment of a settlement fund
consisting of $800,000 in cash and 1,400,000 shares of Common Stock. For a
description of the settlement terms of the litigation see "Legal Proceedings"
and "Note 2 of Notes to Consolidated Financial Statements."
6
<PAGE> 10
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE CERTAIN
RISKS. IN ANALYZING THIS OFFERING, PROSPECTIVE PURCHASERS SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS, AMONG OTHERS:
1. PRIOR LOSSES
Sulcus has operated at a net loss during three of its last five fiscal
years. For the year ended December 31, 1995, the Company incurred a net loss of
($1,369,000), as compared to a net loss of ($11,668,000) for the same period of
1994. The 1994 results included a write-off of software development costs
($1,820,246), the write-off of an investment in an unconsolidated subsidiary
($336,703), the write-off of goodwill ($1,256,000) and a provision for
litigation settlement ($250,000). The significant improvement in 1995 is
primarily the result of increased sales and an improvement in gross margins,
which together accounted for a $4,428,378 improvement in gross margins, a
$1,492,214 reduction in selling, general and administrative expenses and
$3,323,408 in portfolio unrealized market changes (from an unrealized loss of
$1,861,403 in 1994 to an unrealized gain of $1,462,005 in 1995). During 1995,
the Company settled certain shareholder litigation which resulted in provisions
of $2,919,333 and wrote-off certain capitalized software development costs
totaling $514,694 representing the end of the estimated useful lives of certain
systems. For the six months ended June 30, 1996, the Company reported net income
of $1,423,623 as compared to net income of $1,730,842 for the same period of
1995.
While management believes that there has been a favorable turn around
in the hotel and restaurant industry which should ultimately have a favorable
effect on the Company's operating results and financial condition, the Company
has experienced reduced system sales in 1994 and 1995 when compared to 1993.
Management believes that this decrease is principally attributable to customer
uncertainty regarding the Company's viability resulting from the previously
pending shareholder litigation, the previously pending SEC investigation and
increased competition. As a consequence of the losses noted above, the Company
had a retained earnings (deficit) of ($13,378,756) at December 31, 1994, a
deficit of ($14,747,712) at December 31, 1995, and a deficit of ($13,324,089) at
June 30, 1996.
Management is taking the following measures in an effort to maintain
and improve the Company's profitability: control of cost of sales and selling,
general and administrative expenses; seeking out strategic alliances to increase
product availability to meet customers requirements, investing in the
development of new products and increasing sales productivity. Notwithstanding
the foregoing, there is no assurance that the Company will be profitable in
future periods. See "Business--Historical Development," "Financial Statements,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Management," and "Legal Proceedings."
2. EXPANSION OF BUSINESS; DOMESTICALLY AND INTERNATIONALLY
The Company's operations are subject to certain risks, such as cash
flow problems, obtaining adequate financing, achieving profitability and
management of diverse operations. The Company believes that there are other
principal material risks attendant to its international expansion associated
with the stability, both political and economic of any particular country.
Principal among those risks are the nationalization or privatization of any
industry with which the Company does business in that such changes tend to
impact the time period in which contractual commitments may be honored; currency
crises with attendant exchange rate turbulence; and sudden changes in interest
rates which generally effect the ability of customers to finance their
purchases. The Company's international operations are managed on a country or
regional basis under the direction of local nationals familiar with both the
local economic and political climate. International sales are generally
denominated in the currency of that country in which the Sulcus subsidiary is
located, and most related costs and expenses are also denominated in the local
currency. This tends to lessen foreign currency risks. The exception to this are
international export sales of Sulcus' Squirrel systems, which are denominated in
U.S. dollars. However, the relatively short time between the order and delivery
of the Squirrel systems mitigates the risk of significant currency fluctuation.
Accordingly, to date, the Company has not utilized any foreign currency or
interest rate risk hedging techniques or derivatives. The Company will continue
to monitor and evaluate the need to employ such techniques. To date the Company
has not experienced any material adverse impact as a result of recent political
and economic changes or currency fluctuations internationally. See
"Business--Historical Development." These risks may be increased to the extent
Sulcus continues to expand its hospitality business or its other lines of
business both domestically and internationally. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Financial
Statements."
3. NEED FOR ADDITIONAL CAPITAL
Sulcus' ability to develop and expand its presence in the hospitality
industry and to expand its existing business lines for Sulcus' other markets and
operate profitably depends in part on the availability of adequate funds.
Management believes that anticipated revenues from Sulcus' operations together
with available working capital and the proceeds of this Offering will be
sufficient to support the anticipated operating and capital requirements of the
Company for at least 12 months. Nonetheless, if technological changes render
Sulcus' products uncompetitive or obsolete, or if adequate funds are not
available from operations and the Company continues to operate at a loss, Sulcus
may be forced to seek additional financing. There can be no assurance that any
financing will be available when needed, or if available,
7
<PAGE> 11
that it can be obtained on terms satisfactory to Sulcus. See
"Business--Historical Development," and "Management's Discussion of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
4. SUBSTANTIAL VARIABILITY OF OPERATING RESULTS
The Company's operating results have varied, and the Company expects
that they will continue to do so. Due to the relatively fixed nature of certain
of the Company's costs, including personnel and facilities costs, a decline in
net sales in any period typically results in lower profitability in that
quarter. A variety of factors, many of which are not within the Company's
control, influence the Company's operating results, including patterns of
capital spending by customers, pricing, the timing, size and receipt of orders,
delay of shipments to customers, timing of client projects, competition, new
product or service introductions by the Company or its competitors, levels of
market acceptance for new products, changes in operating expenses and material
costs and general economic conditions. The Company believes, therefore, that
past operating results and period-to-period comparisons should not be relied
upon as an indication of future performance. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
5. RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapidly
changing technology, accelerated product obsolescence and rapidly changing
industry standards. The Company's success will depend upon its ability to update
its existing products and to introduce new products and features in a timely
manner to meet evolving customer requirements. There can be no assurance that
the Company will be successful in these efforts. The Company's business and
results of operations will be materially and adversely affected if the Company
incurs delays in developing its products or if such products do not gain broad
market acceptance. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's products or
technologies noncompetitive or obsolete. See "Business-Competition."
6. RESEARCH AND DEVELOPMENT
The Company anticipates that it will continue to introduce new and
enhanced products. The development and testing of these products is an
inherently unpredictable process and no assurance can be given as to the timing
of releases or their market acceptance. Research and development expenses net of
capitalized software, represented 2.6%, 3.7%, 3.8% and 2.4% of total revenues
for the fiscal years ending December 31, 1995, 1994, and 1993 and the first six
months of 1996, respectively. The reduced research and development expense is a
result of the Company's plans to focus its efforts on those specific areas
having expected commercial acceptance, while at the same time, controlling
overall research and development expenditures. The Company is also considering
other, more cost effective means of expanding or improving its software product
lines, including where appropriate, external purchases or acquisitions of
software. See "Business-Product Research, Development and Improvement."
7. COMPETITION
There are numerous software programs available that perform many of the
same functions as Sulcus' products. Competition in the computer software market
is generally intense and competitors often attempt to emulate successful
programs. Increased competition has resulted in greater discounting of prices
with no lessening of the cost of providing systems and services. Many of the
Company's current and potential competitors have substantially greater
financial, technical, marketing and other resources and larger installed
customer bases than the Company. The Company 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., Computerized Lodging Systems, Inc. (a subsidiary of MAI Systems
Corp. (AMEX:NOW)), 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. 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 documentation in connection with this belief. Sulcus
Hospitality has been an active participant in the hospitality industry for over
twelve years. The Company expects that competition will intensify in each of its
lines of business, as more competitors enter the marketplace. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities for its products to successfully
compete in the marketplace. See "Business-Competition."
8
<PAGE> 12
8. COMPETITION FOR KEY PERSONNEL-MANAGEMENT OF GROWTH
The Company's success depends in part on its ability to attract, hire,
train and retain qualified managerial, technical and sales and marketing
personnel, particularly for systems integration, support services and training.
Competition for such personnel is intense. There can be no assurance that the
Company will be successful in attracting and retaining the technical and other
personnel it requires to conduct and expand its operations successfully. The
Company's results of operations could be materially adversely affected if the
Company were unable to attract, hire, train and retain qualified personnel. In
response to discussions with and views expressed by the Commission during the
course of the recently resolved investigation, the Company took several measures
to assure that issues raised with respect to financial statements, books and
records and internal controls will not occur in the future. These measures
included the hiring of a new Chief Financial Officer together with a replacement
of the Company's accounting staff. See "Business--Personnel."
9. PROPRIETARY RIGHTS
The Company relies on a combination of copyright and trade secret
protection, non-disclosure agreements and licensing arrangements to establish,
protect and enforce its proprietary rights. Despite the Company's efforts to
safeguard and maintain its proprietary rights, there can be no assurance that
the Company will be successful in doing so or that the Company's competitors
will not independently develop or patent technologies that are substantially
equivalent or superior to the Company's technologies.
Although the Company is not a party to any present litigation regarding
proprietary rights, there can be no assurance that third parties will not assert
intellectual property claims against the Company in the future. Such claims, if
proved, could materially and adversely affect the Company's business and results
of operations. In addition, although any such claims may ultimately prove to be
without merit, the necessary management attention to and legal costs associated
with litigation or other resolution of such claims could materially and
adversely affect the Company's business and results of operations. See
"Business-Product Protection."
The laws of certain foreign countries do not protect intellectual
property rights to the same extent or in the same manner as do the laws of the
United States. Although the Company continues to implement protective measures
and intends to defend its proprietary rights vigorously, there can be no
assurance that these efforts will be successful.
10. SUBSTANTIAL SHARES OF COMMON STOCK RESERVED
The Company has reserved_____________ shares of Common Stock for
issuance upon the conversion of the Preferred Stock and the conversion of
Preferred Stock issuable upon the exercise of the Warrants included in the Units
offered hereby. The Company also has reserved 3,728,631 shares of Common Stock
for issuance to key employees, officers, directors and consultants pursuant to
Stock Option Plans and a maximum of 64,500 shares of Common Stock issuable in
connection with earn out provisions relating to acquisitions. The Company also
will issue to the Underwriter, in connection with this Offering, the
Underwriter's Warrant to purchase 20,000 Units and has reserved
_______________ shares of Common Stock and ______________ shares of Preferred
Stock issuable upon conversion of the Preferred Stock and exercise of the
Warrants included in the Units. The existence of the Warrants, the
Underwriter's Warrant and any other options or warrants may prove to be a
hindrance to future equity financing by the Company. Further, the holders of
such Warrants and options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. See "Description of Securities."
11. IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Units will incur an immediate and substantial
dilution of approximately______________ % of their investment in the shares of
Preferred Stock included in the Units (assuming conversion into Common Stock) in
that the pro forma net book value of the Company's Common Stock after this
Offering will be approximately $______________ per share. See "Dilution."
12. DIVIDENDS
Sulcus has not paid any dividends on its Common Stock and does not
anticipate paying any dividends in the foreseeable future. See "Dividend
Policy." As the Preferred Stock is only entitled to dividends if, and to the
extent paid on the Common Stock, it is not anticipated that dividends will be
paid on the Preferred Stock in the foreseeable future.
13. MARKET FOR SECURITIES OFFERED; DETERMINATION OF OFFERING PRICE
Prior to this Offering, there has been no public market for the
Preferred Stock or the Warrants offered hereby. There can be no assurance that
any market for the Preferred Stock or the Warrants will develop or that, if
developed, it will be sustained. The conversion price of the Preferred Stock and
the exercise price of the Warrants has been determined through negotiation by
the Underwriter and Sulcus, and should not be assumed to bear any relationship
to Sulcus' asset value, net worth, or any other established criteria of value.
To the extent
9
<PAGE> 13
that the Preferred Stock suffers a sharp decline in price, the value of the
Warrants may be diminished, in whole or in part. See "Price Range of Common
Stock" and "Underwriting."
14. UNDERWRITER'S LACK OF EXPERIENCE
The Underwriter commenced operations in May 1994 and does not have
extensive experience as an underwriter of public offerings of securities. See
"Underwriting."
15. PENNSYLVANIA ANTI-TAKEOVER LAWS; CHANGE OF CONTROL
Various provisions of the Pennsylvania Business Corporation Law, under
which Sulcus was organized, generally make "hostile" takeovers of Pennsylvania
corporations more difficult by granting certain rights to non-interested
stockholders in certain "change of control" situations by permitting such
stockholders to demand payment from a 20% controlling stockholder of the "fair
value" of such demanding stockholders' shares in cash. Such provisions may make
more difficult the removal of management which would in all likelihood be more
favorable for management. In addition, such provisions may be perceived by
certain investors, such as institutions, as making Sulcus' securities a less
attractive investment. Such provision may also render the accomplishment of a
tender offer more difficult, which may be more beneficial to management in a
hostile tender offer and may have an adverse impact on stockholders who may want
to participate in such a tender offer. Sulcus did not elect to "opt-out" of
these provisions. Employment Agreements with certain of the Company's officers
contain provisions with respect to receiving certain benefits including monthly
salary payments and stock options if their employment is terminated due to a
change in control of the Company which may make a tender offer less attractive
to certain investors. There are no anti-takeover devices or measures contained
in the Company's Articles of Incorporation, By-Laws or other Corporate governing
instruments and none are presently contemplated. See "Management--Employment
Arrangements," and "Description of Securities - Pennsylvania Anti- takeover
Laws."
USE OF PROCEEDS
The net proceeds to the Company from this offering, assuming an initial
public offering price of $10.50 per Unit and after deducting estimated
underwriting discounts and offering expenses are estimated to be $1,597,500,
($1,873,125, if the Underwriter's over-allotment option is exercised in full).
The Company expects to use the net proceeds for working capital and general
corporate purposes.
In furtherance of the Company's strategy of acquisition of computer
software products or companies that complement or expand existing business
lines, the Company may also use a portion of the net proceeds to acquire
additional businesses or software products or to support joint ventures related
to existing businesses. The Company currently has no plans, agreements or
commitments for any such acquisitions and is not currently engaged in any active
negotiations with respect to any such acquisitions. There can be no assurance
that the Company will be able to acquire companies or software products on a
favorable basis.
Pending the application of the proceeds as described above, the Company
will make temporary investments in interest-bearing savings accounts,
certificates of deposit, United States Government obligations, preferred
securities or money market certificates. United States government obligations
are not necessarily those backed by the full faith and credit of the United
States government. Company policy does not require temporary investment to be
investment grade as determined by a nationally recognized statistical rating
organization nor does it require that such investments have any additional
safety feature such as insurance.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The
Preferred Stock is only entitled to dividends if and to the extent that
dividends are paid on Common Stock, and the current policy of the Board of
Directors is to retain any earnings to provide for the development and growth of
the Company. Consequently, no cash dividends are expected to be paid in the
foreseeable future.
DILUTION
Dilution represents the difference between the public offering price
per share of Preferred Stock paid by purchasers in this offering (and assumes
the conversion of each shares of Preferred Stock into shares of Common Stock)
and the pro forma net tangible book value per share of Common Stock immediately
after completion of this offering. Net tangible book value per share is
determined by dividing the total number of outstanding shares of Common Stock
into the difference between total tangible assets less total liabilities. At
June 30, 1996, (unaudited), the net tangible book value of the Company was
($16,668,321) or ($1.09) per share of Common Stock. After giving effect to the
sale by the Company of 200,000 shares of Preferred Stock together with 800,000
Warrants at an assumed initial public offering price of $10.50 for one share of
Preferred Stock (convertible into____________________ shares of Common Stock),
and four Warrants at $ per Warrant, the pro forma net tangible book value on
June 30, 1996 would have been $_____________ per share of Common Stock, after
deduction of underwriting discounts and commissions and estimated expenses to be
incurred by the Company in connection with this offering and assuming conversion
of Preferred Stock into Common Stock. Investors purchasing shares of Preferred
Stock in this offering will thus experience an immediate dilution of $__________
(or__________ %) in the tangible book value per share
10
<PAGE> 14
of their shares of Preferred Stock, while existing shareholders will benefit
from an immediate increase in the net tangible book value of their shares of
Common Stock of $ per share. The following table illustrates the foregoing
effects:
<TABLE>
<S> <C>
Assumed public offering price per share $10.50
------- ------
Net tangible book value (deficiency) per share before offering
Increase in net tangible book value per share attributable
to existing investors
Pro forma net tangible book value per share after offering
Dilution per share to new investors
</TABLE>
If the over-allotment option is exercised in full, the pro forma net
tangible book value after this offering would be $ ___________ per share, which
would result in dilution to the new investors in this offering of
$________________ per share of Preferred Stock.
11
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1996, and as adjusted to give effect to the sale of 200,000 Units. Each
Unit consists of one share of the Company's Series A Redeemable Convertible
Preferred Stock and four Class A Warrants at an assumed public offering price of
$10.50 and the application of net proceeds therefrom (See "Use of Proceeds").
All information set forth below should be read in conjunction with the financial
statements and notes thereto in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1996
Actual as Adjusted (1)
----------- --------------
Short-Term Debt Excluding Current
<S> <C> <C>
Maturities of Long-Term Debt 5,889,283 5,889,283
Long-Term Debt 431,101 431,101
Stockholders' Equity
PreferredStock; Authorized 10,000,000 shares of which 1,000,000 are
designated as Series A Redeemable Convertible, no shares
issued and outstanding; 200,000 shares issued
and outstanding, as adjusted -- 1,597,500
Common Stock; no par value; 30,700,000 shares
authorized; 15,357,648 shares issued, and
as adjusted (2) 37,790,800 37,790,800
Note Receivable from Stockholder -- --
Retained Earnings (Deficit) (13,324,089) (13,324,089)
Foreign Currency Adjustment (67,097) (67,097)
Cumulative Unrealized Loss on Investments
Available for Sale (288,994) (288,994)
------------ ------------
Total Stockholders' Equity $ 24,110,620 $ 25,708,120
------------ ------------
Total Capitalization $ 30,431,004 $ 32,028,504
============ ============
</TABLE>
(1) Assumes no exercise of up to 30,000 shares from the exercise of the
Underwriter's Over-Allotment Option, the Underwriter's Warrants, the
conversion of Preferred Stock into Common Stock or the exercise of
Warrants.
(2) Does not include 327,726 shares of Sulcus Common Stock canceled by the
Company in connection with the restatement of earn-out shares for the
purchase of JBA as more fully described in "Business Historical Development
- JBA".
12
<PAGE> 16
PRICE RANGE OF COMMON STOCK
On May 19, 1992, Sulcus Common Stock began trading on the American
Stock Exchange under the symbol SUL. Previously, Sulcus' Common Stock was traded
on the over-the-counter market on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") National Market System under the symbol SULC.
<TABLE>
<CAPTION>
QUARTER ENDING HIGH LOW
<S> <C> <C>
March 1996 2-13/16 1-7/8
June 1996 3-13/16 2-5/8
September 1996 3-5/16 2-3/8
December 1996 (through October 21) 2-5/16 2-3/16
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
</TABLE>
On October 21, 1996, the high and low prices for the Common
Stock were $2-5/16 and $2-3/16, respectively.
As of October 21, 1996, there were approximately 2,725 record
holders of Sulcus' Common Stock.
13
<PAGE> 17
SULCUS COMPUTER CORPORATION
Selected Financial Data
The following table sets forth selected consolidated financial data of the
Company for the six months ended June 30, 1995 and June 30, 1996 and 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)
Six Months Ended
June 30, Year Ended December 31,
------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 23,668 $ 21,871 $ 44,693 $ 41,887 $ 47,346 $ 35,245 $ 17,256
Dividends and other 660 593 1,291 1,256 1,937 1,385 505
-------- -------- -------- -------- -------- -------- --------
Total revenue 24,328 22,464 45,984 43,143 49,283 36,630 17,761
Cost of goods sold and services provided 10,056 9,009 18,965 20,588 23,085 15,418 6,153
Selling, general and administrative expenses 11,191 11,400 22,896 24,388 21,726 14,756 8,091
Research and development 590 647 1,199 1,597 1,878 2,342 1,044
Interest expense 291 285 598 556 403 242 285
Depreciation and amortization 776 854 1,520 2,158 2,034 960 482
Unrealized (gain) loss on investments(1) -- (1,462) (1,462) 1,861 -- -- --
Unusual items(2) -- -- 3,434 3,663 3,207 -- --
Income taxes -- -- 203 -- -- 821 358
Income (loss) before extraordinary item and
cumulative effect of accounting changes 1,424 1,731 (1,369) (11,668) (3,050) 2,091 1,348
Net income (loss) $ 1,424 $ 1,731 ($ 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 $ 0.08 $ 0.12 ($ 0.09) ($ 0.84) ($ 0.22) $ 0.17 $ 0.21
Net income (loss) per share $ 0.08 $ 0.12 ($ 0.09) ($ 0.84) ($ 0.22) $ 0.26 $ 0.26
Weighted average shares used in computing
net income (loss) per share 16,844 14,801 14,720 13,872 14,157 12,446 6,539
Cash dividends -- -- -- -- -- -- --
RATIO OF EARNINGS TO FIXED CHARGES(3) 5.89 7.07 -- -- -- 13.01 6.98
HISTORICAL BALANCE SHEET DATA
Working capital $ 7,632 $ 7,311 $ 5,390 $ 4,183 $ 8,643 $ 10,615 $ 9,438
Total assets 45,603 43,989 47,327 47,869 58,716 51,499 28,531
Long-term obligations 234 54 27 86 364 1,039 1,387
Stockholders' equity 24,111 25,086 22,894 23,087 33,373 33,489 18,316
</TABLE>
(1) On June 5, 1995, the Company restructured its investment portfolio. As a
result, under SFAS No. 115, the Company no longer reports unrealized
gains or losses from the investment portfolio in its statement of
earnings.
(2) Unusual items include write-offs of assets of $514,694, $2,156,949 and
$970,184 in 1995, 1994 and 1993, respectively, a write-off of goodwill of
$1,256,000 in 1994 and provision for litigation settlements of
$2,919,333, $250,000 and $2,237,310 in 1995, 1994 and 1993, respectively.
(3) In calculating the ratio of earnings to fixed charges, earnings consist
of income from continuing operations before income taxes plus fixed
charges. Fixed charges consist of interest expense. The Company does not
have any amortization of debt expense, capitalized interest or preferred
stock dividend requirements. Due to losses before income taxes in the
twelve months ended December 31, 1995, 1994 and 1993, earnings were
inadequate to cover fixed charges. Losses before income taxes in those
years were $1,166,311, $11,668,013 and $3,050,100, respectively. Fixed
charges in those years were $597,672, $556,269 and $402,764,
respectively.
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company had net income of $1,423,623 in the six months ended June
30, 1996 as compared to $1,730,842 in the six months ended June 30, 1995 on
sales which increased by $1,797,052 (8%) for these same periods. In 1995, the
Company reported unrealized gains on its investment portfolio of $1,462,005.
When eliminating this amount for the purpose of comparability, the Company
showed an improvement on earnings from $268,837 to $1,423,623, a change of
$1,154,786. The Company's results for the six months ended June 30, 1996
improved over those for the same period of 1995 primarily as a result of
improvements in margins ($749,725) and reductions in selling, general and
administrative expenses ($208,985). In 1995, the Company had Trading Securities
which had unrealized market appreciation in the first six months of $1,462,005.
Since that time, the Company has restructured its portfolio and, therefore,
these unrealized market changes are no longer a component of net income.
Net sales for the six months ended June 30, 1996 were $23,667,984,
representing an increase of $1,797,052 (8%) when compared to net sales of
$21,870,932 for the same period of 1995. Net system sales for the six months
ended June 30, 1996 were $14,400,442 as compared to $13,590,899 for the same
period of 1995, an increase of $809,543 (6%) due primarily to increased sales of
the Company's Point of Sale Systems and the delivery of systems under
significant contracts by the Company's Singapore and Hong Kong sales offices.
Support revenues for the six months ended June 30, 1996 were $9,267,542 as
compared to $8,280,033 for the same period of 1995, an increase of $987,509
(12%) due primarily to an increased base of Point of Sale installations in 1995.
Support revenues are billed and collected in advance for periods of one to
twelve months and are recognized as support revenues ratably over the contract
period. Sales by offices and distributors of the Company were $19,560,834 (83%)
and $4,107,150 (17%), respectively, of net sales for the six months ended June
30, 1996 as compared to $17,125,793 (78%) and $4,745,139 (22%) for the
comparable 1995 period.
Cost of goods sold for the six months ended June 30, 1996 increased to
$10,055,921 from $9,008,594, an increase of $1,047,327 (12%) from the comparable
1995 period. Cost of goods sold as a percentage of net sales increased for the
six months ended June 30, 1996 to 42%, as compared to 41% for the same period of
1995. Gross margins of the Company increased to $13,612,063 from $12,862,338, an
increase of $749,725 (6%) over the same period of 1995. Cost of system sales for
the six months ended June 30, 1996 was $7,449,137 (52% of system sales) as
compared to $6,836,300 (50% of system sales) for the same period of 1995, an
increase of $612,837 (9%), due primarily to the mix of software and hardware
sales. Cost of support for the six months ended June 30, 1996 was $2,606,784
(28% of support revenues) as compared to $2,172,294 (26% of support revenues)
for the same period of 1995, an increase of $434,490 (20%).
Selling, general, and administrative expenses decreased in 1996 when
compared to 1995. For the six months ended June 30, 1996, these expenses were
$11,191,251 as compared to $11,400,236 a decrease of $208,985 (2%) from the same
period of 1995. Selling, general, and administrative expenses as a percentage of
net sales was 47% for the six months ended June 30, 1996 as compared to 52% for
the same period of 1995.
Research and development expense for the six months ended June 30, 1996
decreased to $590,214 from $646,993, a decrease of $56,779 (10%) over the same
period of 1995. This decrease is attributable primarily to greater amounts
capitalized in 1996 as compared to 1995. Total amounts expended on research and
development (including amounts expensed and amounts capitalized) was $1,146,546
and $1,142,397 for the six months ended June 30, 1996 and 1995, respectively.
Depreciation and amortization expense for the six months ended June 30,
1996 decreased to $776,336 from $853,867 for the same period of 1995, a decrease
of $77,531 (9%).
Dividends and other income for the six months ended June 30, 1996 was
$660,319 as compared to $592,759 for the same period of 1995, an increase of
$67,560 (11%), due to higher rates earned on invested balances.
Interest expense for the six months ended June 30, 1996 increased to
$290,958 from $285,164 for the same period of 1995, an increase of $5,794 (2%).
The Company had a net deferred tax asset amounting to
$2,099,753, net of valuation allowances of $9,973,523 at June 30, 1996 and
$10,534,223 at December 31, 1995. The valuation allowance was decreased in the
six months ended June 30, 1996 by $560,700 and was decreased in the six months
ended June 30, 1995 by $1,033,323 reflecting the Company's estimate of the
valuation allowance necessary to reduce the net deferred tax asset to the net
recoverable amount. As a result, the income statements for the six months ended
June 30, 1996 and 1995 do not reflect any income tax provision on the pre-tax
operating results for those periods. The realizability of this deferred tax
asset is contingent upon a number of factors including the ability of the
Company to maintain a level of operations that will
15
<PAGE> 19
generate taxable income. Management believes that it is more likely than not
that the Company will generate taxable income sufficient to realize a portion of
the tax benefits associated with net operating losses and tax credit
carryforwards prior to their expiration. This belief is based upon the Company's
view of expected profits in 1996 and the next several years. If the Company is
unable to generate sufficient taxable income in the future through operating
results, increases in the valuation allowance will be required through a
non-cash charge to expense. However, if the Company achieves sufficient
profitability to utilize a greater portion of the deferred tax asset, the
valuation allowance will be reduced through a non-cash credit to income.
1995 AS COMPARED TO 1994
The significant improvement in 1995 when compared to 1994 is
primarily the result of a 7% increase in sales and an improvement in gross
margins of 8 percentage points, which together accounted for a $4,428,378
improvement in gross margins, a $1,492,214 reduction in selling, general and
administrative expenses and $3,323,408 in portfolio unrealized market changes
(from an unrealized loss of $1,861,403 in 1994 to an unrealized gain of
$1,462,005 in 1995). During 1995, the Company settled certain shareholder
litigation which resulted in provisions of $2,919,333 and wrote-off certain
capitalized software development costs totaling $514,694 representing the end of
the estimated useful lives of certain systems. Primarily as a result of the
above, the Company's net loss in 1995 was ($1,368,956) as compared to a loss of
($11,668,013) in 1994.
Net sales for the year ended December 31, 1995 were $44,693,302,
representing an increase of $2,805,986 (7%) when compared to net sales of
$41,887,316 for the same period of 1994. Net system sales for the year ended
December 31, 1995 were $27,645,389 as compared to $25,893,783 for the same
period of 1994, an increase of $1,751,606 (7%) due primarily to increased sales
of the Company's Point of Sale Systems. Support revenues for the year ended
December 31, 1995 were $17,047,913 as compared to $15,993,533 for the same
period of 1994, an increase of $1,054,380 (7%) due primarily to an increased
base of Point of Sale installations. Support revenues are billed and collected
in advance for periods of one to twelve months and are recognized as support
revenues ratably over the contract period. Sales by offices and distributors of
the Company were $35,777,862 (80%) and $8,915,440 (20%), respectively, of net
sales for the year ended December 31, 1995 as compared to $31,705,933 (76%) and
$10,181,383 (24%) for the comparable 1994 period. The Company previously
reported in two industry groups (the Real Estate/Hospitality Group and the Legal
Group). The Legal Group is not material (less than 3% of total sales) to the
consolidated operations of the Company, accounting for sales of $1,074,202 in
1995 and $1,185,910 in 1994. Therefore, this discussion and analysis is made on
the basis of one industry category.
Cost of goods sold for the year ended December 31, 1995
decreased to $18,965,582 from $20,587,974, a decrease of $1,622,392 (8%) over
the comparable 1994 period. As a consequence, cost of goods sold as a percentage
of net sales improved for the year ended December 31, 1995 to 42%, as compared
to 50% for the same period of 1994. Gross margins of the Company increased to
$25,727,720 from $21,299,342, an increase of $4,428,378 (21%) over the year
ended December 31, 1994. Cost of system sales for the year ended December 31,
1995 was $14,351,669 (52% of system sales) as compared to $15,078,349 (58% of
system sales) for the same period of 1994, a decrease of $726,680 (5%), due
primarily to the mix of software and hardware sales and the ability of the
Company to control hardware costs. Cost of sales is also lower in 1995 as
compared to 1994 because 1994 included amortization of $358,500 related to
certain capitalized software development costs written-off in 1994. Cost of
support for the year ended December 31, 1995 was $4,613,913 (27% of support
revenues) as compared to $5,509,625 (34% of support revenues) for the same
period of 1994, a decrease of $895,712 (16%), primarily as the result of the
Company's ability to control such costs.
Selling, general, and administrative expenses decreased in 1995
when compared to 1994. For the year ended December 31, 1995, these expenses were
$22,895,996 as compared to $24,388,210 a decrease of $1,492,214 (6%) over the
same period of 1994. Selling, general, and administrative expenses as a
percentage of net sales decreased to 51% for the year ended December 31, 1995, a
7 percentage point decrease from the year ended December 31, 1994. The reduction
in expense is primarily in the areas of bad debts on accounts receivable
($770,000), payroll related costs ($218,000) and travel related expenses
($140,000). 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.
16
<PAGE> 20
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). The Company anticipates
issuing the shares to the settlement fund on or before December 31, 1996. 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 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.
17
<PAGE> 21
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).
Research and development expense for the year ended December 31, 1994
decreased to $1,596,515 from $1,877,628, a decrease of $281,113 (15%) as
compared to the year ended December 31, 1993. Total amounts expended on research
and development (including amounts expensed and amounts capitalized) was
$3,153,403 and $4,346,965 for the years ended December 31, 1994 and 1993,
respectively. Management believes that these reduced expenditures do not
negatively impact the Company's competitive position in the marketplace. During
the third quarter of 1994, the Company wrote-off capitalized software costs of
$1,820,246, representing the assessment that certain customer related software
would no longer benefit future periods. This write-off is presented in the
income statement as a separate component of expenses.
Depreciation and amortization expense for the year ended December 31,
1994 increased to $2,157,857 from $2,034,144 for the same period of 1993, an
increase of $123,713 (6%).
Interest income for the year ended December 31, 1994 was $1,255,848 as
compared to $1,937,314 for the same period of 1993, a decrease of $681,466
(35%), due primarily to lower average invested balances.
Interest expense for the year ended December 31, 1994 increased to
$556,269 from $402,764 for the same period of 1993, an increase of $153,505
(38%) due to higher outstanding borrowings and higher interest rates.
During 1994 and 1993, the Company did not record a provision for income
tax expense, based upon estimates of the impact of losses for tax purposes,
changes in deferred tax assets and the availability of loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is dependent upon its ability to generate
sufficient working capital through profitable operations. Management believes
that in order to sustain profitability, it must continue to increase sales and
improve productivity related to selling, general and administrative expenses. In
order to increase sales, the Company believes that it must increase its
distribution channels and introduce additional developed or acquired competitive
products in its current market segment.
Current short-term capital needs will be funded primarily through
internal working capital and anticipated operating revenues from new sales,
continuing and new support services revenue, and a backlog of orders received
and pending. The Company has no significant unused lines of credit at either
June 30, 1996 or December 31, 1995. To date, bank credit lines have not been a
significant component of the Company's liquidity and capital resources.
At June 30, 1996, Sulcus' cash and cash equivalents increased to
$1,836,700 from $1,202,325 at December 31, 1995, an increase of $634,375. This
increase is primarily the result of cash received during the first half of 1996
related to annual customers support agreements. This cash will be used to
support operations throughout the remainder of 1996. Since the Company operates
in a number of countries, cash and cash equivalents are maintained by the
various operating subsidiaries in the local currencies of these countries for
the purpose of paying expenses as they are due.
The Company maintains a portfolio of short-term investments (primarily
in the form of preferred stocks) which may be used for the purpose of providing
liquidity. At June 30, 1996, the Company's short-term investment portfolio
decreased to $12,083,557 from $12,408,075 at December 31, 1995, a decrease of
$324,518 (3%) primarily related to declines in market value. These investments
are subject to risk, most notably the risk that the market value of these assets
will decline as the result of general market fluctuations, increases in interest
rates or changes in the underlying operations of the investee. Company policy
does not require temporary investments to be investment grade as determined by a
nationally recognized statistical rating organization nor does it require that
such investments have any additional safety feature such as insurance. Through
the first five months of 1995, the Company maintained its investment philosophy
of actively buying and selling investments with the objective of generating
profits of short-term differences in price ("Trading"). Management sold a
portion of these investments in May and June of 1995 and invested the proceeds
of these sales in securities which will be held for the generation primarily of
dividend and interest income ("Available for Sale"). Additionally, the remaining
investments were reclassified in 1995 from Trading to Available for Sale. The
Company had borrowings at June 30, 1996, and December 31, 1995, of $5,814,644
and $6,062,905 respectively, on margin against its investments at the brokers
internally established floating interest rate which was 7.875% at June 30, 1996.
18
<PAGE> 22
At June 30, 1996, accounts receivable decreased to $9,881,234, as
compared to $11,134,576 at December 31, 1995, a decrease of $1,253,342 (11%)
primarily due to collections on annual support contracts. The Company's gross
accounts receivable includes hardware and software support contracts as well as
amounts due on system installations. The Company records a provision for amounts
which it estimates may ultimately be uncollectible from customers. The allowance
for uncollectible accounts decreased at June 30, 1996 to $2,046,869 as compared
to $2,581,020 at December 31, 1995, due to write-offs of accounts receivable.
The Company purchases computer hardware and other equipment from
vendors under open accounts payable for the purpose of including these items in
systems sold to customers. Hardware and equipment are readily available in the
marketplace and therefore it is not necessary for the Company to maintain large
quantities of inventories to meet customer needs. Inventories of computers,
computer components and computer peripherals decreased to $2,470,960 at June 30,
1996 as compared to $2,573,826 at December 31, 1995, a decrease of $102,866
(4%). Accounts payable decreased to $3,760,920 at June 30, 1996 as compared to
$4,352,408 at December 31, 1995, a decrease of $591,488 (14%).
The Company leases facilities under operating lease agreements of
varying terms. Properties and equipment consist primarily of leasehold
improvements and equipment used in the conduct of business. Property and
equipment, net of accumulated depreciation and amortization, increased to
$2,343,268 at June 30, 1996 from $2,015,816 at December 31, 1995, an increase of
$327,452 (16%).
In addition to borrowings on margin against its investments, the
Company has outstanding short and long-term borrowings from various financial
institutions. At June 30, 1996, the Company had short-term borrowings (excluding
borrowings under margin) of $74,639 as compared to $319,805 at December 31,
1995, a decrease of $245,166 (77%). At June 30, 1996, the Company had long-term
borrowings (including current and noncurrent portions) of $431,101 as compared
to $73,888 at December 31, 1995, an increase of $357,213. This increase is
primarily the result of 1996 capitalized lease obligations for equipment.
The backlog of hardware and software orders at June 30, 1996 is
expected to be filled within one year and amounted to $3,517,000 as compared to
$3,353,000 at December 31, 1995.
The Company's ability to develop and expand its presence in the
hospitality industry and expand existing business lines for its other markets
depends, in a large part, on the availability of adequate funds. Cash flow has
been favorably impacted during the past year by improving sales and
profitability. These funds have generally been used to reduce levels of accounts
payable, to fund the development of the Company's software products, to fund
capital expenditures and to repay short-term borrowings. Management expects that
to meet customer needs, it must begin to increase levels in inventories for the
Company's manufactured point-of-sale products and continue to invest in the
development of the Company's software products at levels consistent with those
of the past two years. To finance these needs, the Company will rely primarily
on operating cash flow over the next several years together with currently
available working capital. In addition, the Company is considering the issuance
of additional capital stock. On a longer term basis, the Company is working with
financial institutions to develop relationships which will be used, in part, to
provide working capital facilities which will be utilized in the Company's
operations. Nonetheless, if technological changes render Sulcus' products
uncompetitive or obsolete, or, if the Company incurs operating losses,
additional capital may be required. There can be no assurance that any financing
will be available when needed, or, if available, that it can be obtained on
terms satisfactory to the Company.
In furtherance of the Company's strategy of acquisition of computer
software products or companies that complement or expand existing business
lines, the Company intends to continue its pursuit to acquire additional
businesses or software products and/or to create joint ventures related to
existing businesses for this purpose. The Company currently has no plans,
agreements or commitments for any such transactions and is not currently engaged
in any active negotiations with respect to any such transactions. There can be
no assurance that the Company will be able to acquire companies or software
products on a favorable basis.
Certain lawsuits arising in the ordinary course of business are pending
against the Company and its subsidiaries. The Company believes that the ultimate
outcome of these actions will not result in a material adverse effect on the
Company's consolidated financial position and liquidity.
BUSINESS
GENERAL
Sulcus develops, manufactures, markets and installs microcomputer
systems designed to automate the creation, handling, storage and retrieval of
information and documents. The Company designs its systems primarily for the
hospitality and real estate industries and to a lesser extent, the legal
profession. The Company's sales practices are currently systems oriented (rather
than individual sales of hardware or software) toward the vertical marketing of
its integrated products. Systems include a network of hardware, software and
cabling as well as stand alone systems for which the hardware and software are
not separately sold. The Company's systems are offered together with full
services, training, maintenance, and support. The Company has installed systems
throughout North and South America, Europe,
19
<PAGE> 23
Africa, Asia and Australia. Customers include property management companies,
condominiums, hotels, motels, restaurants, resorts, country clubs, cruise lines,
real estate loan and closing offices, title insurance companies, abstract
companies, escrow offices and law offices.
HISTORICAL DEVELOPMENT
The Company provides its computer systems to customers on a turnkey
basis. Each system includes hardware, software, training, maintenance and
support. Sulcus believes that this approach is critical in business applications
because while some system providers can automate a specific task, most are
unable to effectively automate a broad range of a customer's business. The
Company's sales practices and trends are currently oriented to sales of systems
(rather than individual sales of hardware or software) and to the vertical
marketing of its integrated products.
The Company began to develop in 1988 a strategic plan to achieve a
leadership position in turnkey computer systems with specialized software for
the real-estate related, hospitality and legal industry groups. These groups
were chosen because they represented, in management's opinion, large vertical
business markets. The strategic plan envisioned internal growth by way of
expanded research and development, as well as growth through acquisitions,
mergers, joint ventures and similar alliances. In furtherance of this strategy,
Sulcus pursued acquisition opportunities which created additional market
opportunities for existing products, had products that complemented or expanded
existing product lines, and created additional product distribution channels.
Sulcus has made numerous acquisitions to date as described below.
COMPUSOLV
In July 1989, a subsidiary of Sulcus, acquired a non-exclusive license
from CompuSolv for established property management software systems for the
hospitality industry. These systems are used by the hotel, motel, condominium,
restaurant and travel industries to automate front office, back office, point of
sale and call accounting systems.
RADIX
In August 1990, Sulcus established Radix Systems, Inc., a wholly-owned
subsidiary with its primary offices in Conshohocken, Pennsylvania. Radix
provided field engineering and support services including site analysis,
cabling, and Novell(R) training. Since that time, Radix has added LANmark
support and Squirrel system sales and support.
LODGISTIX
In February 1991, Sulcus acquired Lodgistix, Inc., an integrator of
property management systems in the hospitality industry. Lodgistix was a
developer of automated hotel systems including front office, back office, sales
and catering and interfaces to other hotel- related systems. The Lodgistix
stockholders received one unit (the "Unit") of Sulcus for each 13.479 shares of
their Lodgistix Common Stock, each Unit consisting of two shares of Sulcus
Common Stock and two Class A Warrants. An aggregate of 484,375 Units were issued
to all Lodgistix stockholders with a value of $3,100,000.
SULCUS (AUSTRALIA) PTY. LTD.
Effective November 1, 1991, the Company established a direct sales
office in Australia by acquiring certain assets, trade names, leasehold
improvements and equipment for approximately $200,000 from Belvoir Lodgistix
Group Pty. Ltd. and its shareholders. Belvoir Lodgistix was the distributor of
Lodgistix, Inc.'s systems in Australia and Eastern Asia. The Company's name was
changed to Sulcus (Australia) Pty. Ltd. Sulcus (Australia) Pty. Ltd. sells and
supports the full range of the Company's property management and point-of-sale
systems.
SQUIRREL
In March 1992, the Company acquired Squirrel Companies, Inc. Squirrel
develops and markets touch-screen software systems to the hospitality industry.
Squirrel's software systems consist principally of point-of-sale software
coupled with food and beverage software and hardware. Sulcus purchased Squirrel
in exchange for $500,000, 401,260 shares of Sulcus Common Stock valued at
$2,307,245. At the closing options to purchase up to 175,000 shares of Sulcus
Common Stock at $4.25 per share were issued as well as options to purchase
225,000 shares of Sulcus Common Stock at $12.50 per share were issued, subject
to certain earn out provisions in connection with the acquisition. One half of
the options for the 175,000 shares were vested immediately and the balance
vested one year later. A total of 174,263 options were exercised. The earn out
options were to vest in each of the three years ended December 31, 1992, 1993
and 1994 if Squirrel met its earn out objective. None of these options were
exercised and have expired. In addition, the shareholders of Squirrel were
entitled to receive up 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.
NRG
In March 1992, the Company acquired NRG Management Systems, Inc. (NRG)
in exchange for 61,968 shares of the Company's Common Stock valued at $473,207.
NRG develops and markets energy and room management software to the hotel and
motel industry.
20
<PAGE> 24
The applications include HVAC energy management, in-room safes, mini-bar, maid
status, and room occupancy and security. In 1996, the Company began marketing an
improved version of the product under the name CIRIS I. The shareholders of NRG
were entitled to receive up to 324,324 additional shares of the Company's Common
Stock if NRG attained certain projected after tax earnings for the years 1992
through 1994. For the year ended December 31, 1992, the Company issued 16,019
shares of Sulcus Common Stock valued at $148,173 ($9.25 per share) pursuant to
the earn out formula. For the years ended December 31, 1993 and 1994, pursuant
to the terms of the Stock Purchase Agreement, no earn out shares were issued.
JBA
In July and September 1992, respectively, the Company acquired JBA (HK)
Ltd. of Hong Kong and JBA Singapore PTE. LTD. The names of the companies were
subsequently changed to Sulcus Hospitality Limited and Sulcus Singapore Pte.
Ltd., respectively. Sulcus Hospitality Limited and Sulcus Singapore Pte. Ltd.
market the full range of the Company's property management and point-of-sale
systems. The purchase price of both companies consisted of a total of $1,450,000
in cash. In addition, the former shareholders were entitled to receive shares of
Sulcus Common Stock having an aggregate value of up to $8,855,000, contingent
upon achieving certain earnings benchmarks over a three-year period. For the
year ended December 31, 1992, the Company issued 327,726 shares of Sulcus Common
Stock valued at $2,827,691. As a result of the Company's 1992 restatement of
earnings, the Company revised the contingent earn out calculation based on the
restatement adjustments that affected it. The Company cancelled the 327,726
shares of stock issued on its books and records as a result of the original
calculation; however the certificates representing these shares have not been
surrendered despite demand. As a result of the share cancellation, at December
31, 1994, the Company reduced goodwill by approximately $2,168,000, reduced
equity by approximately $912,000, the estimated current value of the shares to
be cancelled, and expensed the difference of $1,256,000 in 1994. For the years
ended December 31, 1993 and 1994, these companies did not achieve their
projection, and therefore, no earn out shares will be issued.
TECHOTEL
Effective January 1, 1993, the Company acquired Techotel, AG of Zug,
Switzerland, a hotel software development, marketing, and service organization.
The name of the company was subsequently changed to Sulcus Hospitality Group
EMEA, A.G. Sulcus Hospitality Group EMEA, A.G., through Lodgistix
(International) AG, a wholly owned subsidiary, sells and supports the full range
of the Company's property management and point-of-sale systems in 30 markets in
Europe, the Middle East, and Africa, primarily through distributors. The
purchase agreement (as amended) provided for the issuance of Sulcus Common Stock
valued at $1,000,000 and as a result of subsequent discussions and negotiations,
the Company issued 200,000 shares of its Common Stock valued at $500,000 ($2.50
per share) and paid $500,000 in cash. In addition, the shareholders of Techotel
were entitled to receive additional shares of the Company's Common Stock if
Techotel attained certain projected after-tax earnings for the years ended
December 31, 1993 through 1995. These earnings were achieved for the 1993
period. As a result, Sulcus has issued to the former shareholders of Techotel
90,517 shares of Sulcus Common Stock valued at $698,110 ($7.7125 per share) for
the 1993 period. It is the Company's interpretation of the purchase agreement
that Sulcus Hospitality Group EMEA, A.G. did not achieve the required earnings
for 1994 with which interpretation the former shareholders have not yet agreed
and the Company and former shareholders do not agree on the interpretation for
the 1995 earn out. This interpretation involves a range of items including
pricing of shares, licensing of products, intercompany transfer pricing,
step-down pricing, intercompany billings and a variety of interpretations of
earn out calculations for the entire earn out period. The maximum possible
remaining earn out for 1994 and 1995 is $1,926,666. The Company has calculated
the earned portion for 1995 to be $168,399. The actual number of shares to be
issued is dependent upon the final resolution. The price per share for such
determination ranges from $2.0125 to $2.2375.
LODGISTIX SCANDINAVIA
In November 1993, the Company acquired Lodgistix Scandinavia A.S., a
distributor of Lodgistix systems in Norway, Sweden and Denmark. The name of this
company was subsequently changed to Sulcus Scandinavia, A.S. Sulcus Scandinavia
A.S. offers a full range of Sulcus products including hotel management systems,
restaurant point-of-sale systems, and CIRIS I in-room management systems. The
purchase price consisted of 100,000 shares of Sulcus Common Stock valued at
$250,000 and $50,000 in cash. In addition, the former stockholders of Lodgistix
Scandinavia were entitled to receive additional shares of the Company's Common
Stock with a value up to $675,000, contingent upon attaining certain earnings
over a three year period. Sulcus Scandinavia A.S. achieved the targeted earnings
for the years ended December 31, 1993 and 1995, as a result, Sulcus has issued
to the former stockholders of Lodgistix Scandinavia A.S. 5,808 (later calculated
as being 13,494 shares) and 111,801 shares of Sulcus Common Stock valued at
$44,864 (initially valued at $7.725 per share, later valued at $3.325 per share
under the terms of the agreement) and $225,000 ($2.0125 per share) for 1993 and
1995, respectively. Sulcus Scandinavia did not achieve the required earnings for
1994.
INTERNATIONAL OPERATIONS
The Company has established international operations for the marketing,
support, manufacturing and/or distribution of its products as a result of its
acquisition strategy. The Company's international operations presently consist
of the following subsidiaries: Sulcus (Australia) Pty. Ltd., a direct sales
office in Australia; Squirrel Systems of Canada, Ltd., a Canadian subsidiary of
Squirrel located in Vancouver, British Columbia which manufactures and sells
Squirrel products; Sulcus Hospitality Limited located in Hong Kong, and Sulcus
Singapore, PTE. LTD., located in Singapore, each a direct sales office; Sulcus
Hospitality Group EMEA A.G. located in Switzerland;
21
<PAGE> 25
Lodgistix UK, Sulcus Scandinavia A.S., located in Norway; Sulcus (Malaysia) Sdn
Bhd; Squirrel (U.K.) Ltd., Sulcus Hospitality (U.K.) Ltd., and NRG Management
Systems (U.K.) located in the United Kingdom, all direct sales and support
offices, and Sulcus Hospitality Group (Belgium) located in Belgium, which
operates as a customer support office.
Sulcus localizes its products for use in other countries so that all
monetary references, user messages, and documentation reflect the monetary
units, language and other conventions of a particular country. The Company's
international operations are subject to certain risks common to foreign
operations in general, such as governmental regulations and import restrictions.
PRODUCTS
HARDWARE
Sulcus markets computer systems consisting of hardware, software,
training and ongoing support. The hardware platform utilized by the Company's
property management and legal systems products can be obtained from Sulcus or
from elsewhere--either from a manufacturer with whom Sulcus has a value-added
remarketing agreement (whereby Sulcus purchases such hardware at a discount) or
from a completely independent supplier. The hardware platform utilized by the
Company's point-of-sale systems is manufactured by the Company from commercially
available computer components.
In the event of a turnkey purchase in which Sulcus supplies hardware,
software and training, Sulcus offers a Hardware Service Agreement for the
maintenance of the equipment. In certain circumstances the hardware supplier
provides the equipment maintenance with no revenue accruing to Sulcus. Sulcus
performs certain remanufacturing and assembly operations at its own Greensburg,
Pennsylvania, Wichita, Kansas and Vancouver, Canada facilities. Sulcus is not
dependent on a specific manufacturer for its components or systems.
The base systems are supported by printers and other peripherals (as
requested by the customer) purchased by Sulcus from manufacturers. Sulcus is not
dependent upon any individual supplier for these peripherals and support
devices.
SOFTWARE
Through its in-house staff of applications programmers, systems
programmers, and software engineers, Sulcus develops and enhances its own
proprietary software. Sulcus attempts to have its software operate with
single-input (or file-integration) methods so that the user enters data once and
the computer will use that data in the various applications desired. The
following is a brief description of the Company's principal products:
PROPERTY MANAGEMENT SOFTWARE (PMS)
CompuSolv is a UNIX-based software system which automates hotel front
office operations and back office accounting functions. Rights to this software
were obtained under a non-exclusive license.
LANmark is the Company's proprietary software which uses local area
network technology and is designed for managing hotels ranging in size from 150
to more than 2,000 rooms. Customers can purchase different modules of this
system to meet their specific needs including front office operations, back
office accounting functions, credit card authorization, group room sales, and
meeting/function space and event planning.
LANlite is a proprietary system designed to meet the needs of
properties which do not require all of the features of LANmark. As with the
LANmark system, customers can purchase different modules to meet their specific
needs.
LANexec is a proprietary management information system allowing
customized reports drawn from the LANmark database.
InnMaxX is a proprietary Windows based software system designed for
small lodging properties including lodges, bed and breakfast inns or small
resort properties.
CIRIS I is the Company's proprietary centralized in-room information
system which consists of energy and room management software with applications
for HVAC management, in-room safes, mini-bar, maid status and room occupancy and
security.
HOTELtrieve is a licensed computer output to laser disc information
archival and retrieval system tailored to hospitality industry requirements.
This system allows the accurate capture and faithful reproduction of all
archivable information. This system provides storage for up to one million pages
on a single disc and gives the benefits of reduced storage and retrieval costs,
shortened access time, distribution of information to multiple locations and
integration with existing customer electronic systems.
22
<PAGE> 26
POINT-OF-SALE SOFTWARE (POS)
Squirrel Restaurant Management System offers complete automation of
full-service restaurant operations. This proprietary system automates
order-entry, credit card processing, labor cost management, time and attendance,
food and beverage management and data transfer. In addition to stationary
terminals, this system also offers remote operations through hand-held
terminals.
Squirrelite is proprietary software for restaurant operations similar
to the Squirrel Restaurant Management System but intended for smaller
installations.
OTHER SOFTWARE
The Abstractor is proprietary software which operates together with
portable computers and cellular communication to automate the collection and
organization of real estate title searches.
The Closer 2000 is proprietary software which automates real estate
transfers including closing and settlement statements, truth-in-lending
disclosures, escrow and trust accounting, forms creation and information
indexing.
PRODUCT SUPPORT SERVICES
Management believes that support is fundamental to the continued
business relationship with Sulcus' customers. Software support agreements are
entered into in connection with substantially all system sales.
Under software support agreements, Sulcus offices provide support
services with their regional personnel and, if no solution can be found at that
level, Sulcus maintains second-level support through its Wichita, Kansas or
Vancouver, British Columbia centers which are staffed by specially trained
personnel. This multi-level support is intended to ensure that customers receive
prompt response and service. Software support services are provided for a fee on
a 24-hour, seven-day-per-week basis pursuant to a Support, Maintenance and
Enhancement Agreement.
Sulcus provides hardware support for a fee under a Hardware Service
Agreement which enables the user to call for a diagnosis and, repair or
replacement based upon the circumstances. Certain repairs and replacements come
with fees in addition to the support agreement, depending on the circumstances.
Additionally, depending upon the terms of the service agreement purchased by the
customer, hardware service may be provided at a customer's site or at
centralized facilities. The Company receives certain hardware support from
manufacturers or other service providers for a fee.
PRODUCT RESEARCH, DEVELOPMENT AND IMPROVEMENT
The Company has a number of ongoing research and development projects
consisting of developing new hardware and software products as well as improving
existing products.
Most of the Company's software products are developed internally
although the Company has purchased technology and has licenses for certain
intellectual property rights. Product documentation is also created internally.
Internal development enables Sulcus to maintain closer technical control over
the products and gives the Company the latitude to designate which modifications
and enhancements are more beneficial and when they should be implemented. The
Company has created and acquired a substantial body of development tools and
methodology for creating and enhancing its products. These tools and methodology
are intended to simplify a product's integration with different operating
systems or computers.
By making end-user follow-up contacts and by considering and evaluating
end-user requests for additional features to products, Sulcus maintains an
information base to evaluate market feasibility of new products. Developing new
software and updating existing offerings is a continual process performed by
research and development groups in the effort to keep their products
competitive. Also, since the functions of several products are affected by
changes in tax laws and regulations, Sulcus rewrites such affected software to
meet these changes for its customers.
Updates are made available without charge to those customers who have
purchased support or service agreements. Additionally, formally organized user
groups exist to provide input and suggestions on new features and modules for
products. These groups have periodic meetings and provides significant user
information for new product development. Neither the Company nor any of its
principal business units is dependent upon a single group of customers or a few
customers, the loss of any one or more of which would have a material adverse
effect on the Company or any of its principal business units.
23
<PAGE> 27
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.
MARKET, DEVELOPMENT AND OPERATING AGREEMENT WITH HORWATH INTERNATIONAL
On April 8, 1996, Horwath International and Sulcus announced the
execution of a market, development, and operating agreement to market, license,
and sell worldwide a series of automated products and services to be supplied
exclusively by Sulcus.
Horwath International is one of the world's largest international
networks of independent accounting and management consulting firms with offices
throughout the United States and in 90 countries of the world. Horwath's member
and correspondent firms, with more than 300 offices and 10,000 partners and
staff worldwide, offer a spectrum of professional services including consulting,
accounting, auditing, and tax. Horwath member firms specialize and have earned a
worldwide reputation as advisors to the travel and tourism industry, as well as
in information technology and international structuring and tax planning. Sulcus
hospitality products and services will be marketed under the name HAT...MS(TM)
products (Hospitality And Tourism...Management Systems(TM)) and are designed for
automating the operations of hotels, restaurants, convention centers, country
clubs, airlines, and all other businesses involved in hospitality and tourism
throughout the world.
The initial term of the agreement is 66 months, and it will be
automatically renewable for succeeding 12-month periods. Horwath has been
granted an exclusive master license for HAT...MS(TM) products. Horwath is
required to sublicense a minimum of seven Peer Distributors and 10 Peer
Associates per year, all of which must be affiliates of Horwath International
and certified as a member in good standing. Horwath Peer Distributors will be
fully equipped with all HAT...MS(TM)/Sulcus hardware and software and will be
selected on the basis of achieving $750,000 of sales and services, after a
three-month ramp up period, in the first year and $900,000 each year thereafter.
Peer Associates will provide potential clients to either Horwath or Sulcus
without any fixed expectations of sales and services. Management believes that
this agreement with Horwath International should provide Sulcus with expanded
global distribution.
TRAINING
Training of users is performed by employees of Sulcus who are
themselves required to go through a Company training program and occasionally by
distributors familiar with the business function of the user. Sulcus also trains
its personnel in applying the use of teaching techniques to user requirements.
Under the turnkey concept the user is taught to customize the output for his
specific needs. Sulcus conducts training at its offices and at customers' sites.
MARKETING AND ADVERTISING
Sulcus utilizes Company owned locations and distributors for the sales
of its systems. The Company owned locations account for the majority of Sulcus'
sales and are located throughout the United States and in Australia, Hong Kong,
Singapore, Switzerland, United Kingdom, Norway, Malaysia and Canada. Sales
personnel are employees of the Company and sell Sulcus products directly to
end-users and do not represent any other companies. The Company's compensation
arrangements with its sales employees generally provide for a commission based
on sales performance. Managers engaged in sales activities are compensated by a
combination of salary and commission. Distributors are compensated by means of a
discount on the purchase price which varies with products offered and to a
lesser extent, the territory assigned. The Company sets minimum sales quota
requirements for its sales employees and during the past three fiscal years the
Company has terminated sales employees and distributors for failing to meet such
requirements. The Company is not materially dependent upon any individual or
group of sales employees or distributors.
The Company does not provide customers or distributors with rights to
return products, extended payment terms or similar working capital items. The
Company does not offer any written warranty relating to the performance of its
software products or Company manufactured point-of-sale hardware products, or
that they will operate error free. It does represent that when delivered, these
products will conform to their published specifications if used properly and
used on equipment purchased from or approved by the Company. The
24
<PAGE> 28
warranty for hardware purchased by the Company for resale as part of a computer
system is issued by the manufacturer, and is passed on to the customer.
The Company utilizes a sales-type lease program in which the Company
retains ownership in the residual value of the leased property and assumes
certain liability under the recourse provisions in the agreement. The Company
has recorded a reserve for the estimated liability. To date actual losses from
recourse provisions have not been material.
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 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.
25
<PAGE> 29
PRODUCT PROTECTION
Sulcus regards its software and application systems as proprietary and
generally relies on a combination of trade secret laws, copyrights, contracts
and internal and external nondisclosure safeguards to protect its products. Each
of the contracts under which customers use Sulcus' products contain restrictions
on using, copying and transferring the products, and prohibit their disclosure
to other parties. Despite these restrictions, it may be possible for users or
competitors to copy aspects of the products or to obtain information that Sulcus
considers as trade secrets. Sulcus believes that any copies so obtained have
limited value without access to the product source code which is kept highly
confidential. Additionally, many of Sulcus' products contain software and
hardware security devises to prevent unauthorized use or copying. Because of the
uncertain enforcement of Sulcus' proprietary rights in foreign countries, most
products distributed internationally use internal copy protection methods. Only
certain aspects of computer software can be patented, and existing copyright
laws afford limited practical protection. Sulcus has not patented any of its
products although it may seek patent protection for future products. To maintain
competitive advantages, Sulcus believes that rapid technological changes in the
computer industry places greater emphasis on the knowledge and experience of its
personnel and their ability to develop, enhance and market new products, than on
patent or copyright protection of technology. Because of this, all employees are
required to sign nondisclosure agreements at the time of their employment.
Sulcus has registered in the United States and uses the following
trademarks and service marks on its products and services, and considers each to
be proprietary: SULCUS(R), LODGEMATE(R), LANmark(R), SQUIRREL(R), LODGISTIX(R),
PROWARE(R), LAWTOMATION(R) and SULCLINK(R).
Sulcus has the exclusive license and assignment of the following
trademarks: COMPUSOLV(R), EVIDENCE MASTER(R) and COLLECTION LEDGER(R). Sulcus
has applied for, or intends to apply for Federal trademark or service mark
registration for HAT...ms(TM), INNMAXX(TM), LANEXEC(TM), HOTELTRIEVE(TM), CIRIS
I(TM), SQUIRRELITE(TM), NRG(TM), ONE WORLD ONE SYSTEM(sm) and NRG SAVER(sm).
Additionally, Sulcus has registered or applications are pending for various
product names in numerous foreign countries.
PERSONNEL
As of September 10, 1996, Sulcus employed 439 persons, including 22
executives engaged in management, 65 persons in administration and finance, 91
technical personnel, 66 persons engaged in sales marketing and 195 persons in
training and product support. None of Sulcus' employees are subject to
collective bargaining agreements. Sulcus believes its relations with its
employees to be excellent.
PROPERTIES
Sulcus' principal executive, and administrative operations are located
at Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601, in a
facility containing approximately 10,000 square feet. Sulcus leases this
building under several leases, with a trust established by Sulcus' principal
stockholder and Chairman, Jeffrey S. Ratner, expiring on various dates through
September 30, 2001. The annual rental commitment under these leases are $229,111
in 1996, $138,105 in 1997, $85,860 in 1998 and $90,144 in 1999, $91,947 in 2000,
and $91,947 thereafter. The leases renew automatically for additional two-year
terms at a minimum rental of 2% over the prior year's amount, unless canceled by
either party. The aggregate rental commitment is similar to comparable
properties in the area.
Lodgistix leases approximately 22,500 square feet of office space in
Wichita, Kansas. The approximate monthly costs are $22,900, pursuant to a lease
terminating January 31, 1998. Sulcus Hospitality Group, Inc., leases
approximately 4,200 square feet of office space in Phoenix, Arizona. The
approximate monthly costs are $6,700 under a lease terminating July 31, 1996.
Squirrel Systems of Canada, Inc., leases 21,000 square feet in Vancouver,
British Columbia, Canada at an approximate monthly cost of $9,400 under a lease
terminating on October 31, 2005. Sulcus also leases regional and branch office
space under lease arrangements that vary from one year to month-to-month. The
total rent expense for these offices was $165,084; $212,502; and $378,343 for
the years ending December 31, 1995, 1994, and 1993, respectively.
In December 1992, the Company purchased an office building located at
420 West Boynton Beach Boulevard, Boynton Beach, Florida. The purchase price was
$338,000. The building has approximately 6,200 square feet, of which 742 square
feet is under lease which expires at December 1996. The Company utilizes this
facility for executive, sales and administrative offices and, upon expiration of
the existing lease, will also utilize this space for such purposes.
26
<PAGE> 30
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Sulcus are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Jeffrey S. Ratner 53 Director and Chairman of the Board
Robert D. Gries 67 Director (1)
Herbert G. Ratner 88 Director
John W. Ryba 52 Director, General Counsel and Vice President, Administration
David Adler 51 Director (1)
Joel B. Nagelmann 55 President and Principal Executive Officer
H. Richard Howie 42 Chief Financial Officer, Principal Accounting Officer and Treasurer
Delmer C. Gowing III 52 Chief Legal Officer
Margaret Santone 55 Corporate Secretary and Office Manager
William F. McLay 49 Managing Director
Barry Logan 47 Vice President, General Manager, Restaurant Division of Sulcus Hospitality Group
Bernhard Mantel 43 Vice President, Operations, Sulcus Hospitality Group EMEA, AG
Jappe Kjaer 41 President, Sulcus Scandinavia AS
Thomas Caudill 53 Vice President, General Manager, Lodging Division of Sulcus Hospitality Group
Gerry Lau 57 Chairman, Sulcus Hospitality Limited
</TABLE>
(1) Member of Audit Committee.
Each director is elected for a period of one year at the Company's
annual meeting of Stockholders and serves until his successor is duly elected by
the Stockholders. Officers are appointed and serve at the will of the Board of
Directors subject in certain cases to the terms of employment agreements.
Herbert G. Ratner is the father of Jeffrey S. Ratner.
JEFFREY S. RATNER is a co-founder of the Company and has served as
Chief Executive Officer and Chairman of the Board of Directors since the
Company's inception in 1979. In September 1995, Mr. Ratner vacated the Chief
Executive Officer position. Since 1975, Mr. Ratner has owned Ratner Real Estate
and Ratner Development Corporation and is the Chief Executive Officer and
Chairman of the Board of both companies. In 1992, he became Chief Executive
Officer and Chairman of the Board of City Rentals, Inc., and is its sole
shareholder. These companies purchase, develop, lease and manage commercial and
residential real estate. Mr. Ratner does not devote substantial time to these
companies. On May 2, 1996, Mr. Ratner entered into an agreement with the
Securities and Exchange Commission, without admitting or denying any wrongdoing,
which provides that he would not in the future violate certain sections of the
Exchange Act and Rules thereunder. See "Recent Developments."
ROBERT D. GRIES has been a Director of the Company since 1983. From
1964 through the present, Mr. Gries has been President of the Gries Companies
and has been engaged in venture capital financing. From 1966 to 1995 he was Vice
President, director and a major shareholder of the Cleveland Browns Football
Company, Inc., a professional National Football League team.
HERBERT G. RATNER was elected as a Director of the Company in October
1988. Until he retired in 1992, Mr. Ratner was the Chairman of the Board and
principal shareholder of City Industries, Inc., City Rentals, Inc., Supermarket
Realty, Inc. and Key Motors, Inc., since founding these companies in 1965. He is
also a member of the Board of Directors of Holy Cross Hospital in Florida. Mr.
Ratner is the father of Jeffrey S. Ratner, Chairman of the Company.
JOHN W. RYBA joined the Company in September 1987 as its General
Counsel and is presently its General Counsel and Vice President, Administration.
Mr. Ryba was elected a director in May 1989. Mr. Ryba was engaged in the private
practice of law in Pittsburgh, Pennsylvania, from 1984 until joining the
Company. His firm represented computer software and hardware companies.
DAVID H. ADLER was appointed a Director of the Company in August 1993.
Mr. Adler has been Chief Executive Officer and majority shareholder of a group
of privately-owned companies since 1985, including the Adler Financial Group,
David H. Adler
27
<PAGE> 31
Real Estate Enterprises and PEBECO (Pennsylvania Bedding Incorporated) of
Scranton, Pennsylvania, a manufacturer of King Koil and other private labelled
mattresses and sleep products.
JOEL B. NAGELMANN joined the Company in April 1995 as its President.
Previously, from March 1994, until joining the Company, he was Vice President
and General Manager of Enterprise Information Solutions Group of Amdahl
Corporation (AMEX:AMH), which develops and markets computer systems and
services. Prior to joining Amdahl Corporation, from 1988 to 1993, he was
President of Xerox Services (XCS), a division of Xerox Computer Corporation
(NYSE:XEROX). XCS develops and markets specialized software applications
domestically and internationally.
H. RICHARD HOWIE joined the Company in July 1994, as Chief Financial
Officer/Vice President-Finance and Treasurer. Previously, from January 1994 to
June 1994, he was Chief Financial Officer at Central Blood Bank, Inc. From 1987
to November 1993, he was Vice President Finance and Chief Financial Officer of
Stuart Medical, Inc., a nationwide hospital distributor of medical and surgical
supplies.
DELMER C. GOWING III joined the Company in July 1994, as its Chief
Legal Officer. He had been a partner at the law firm of Honigman, Miller,
Schwartz and Cohn, in their West Palm Beach, Florida office from 1991 to July
1994. From 1989 to 1991, he held the position of Executive Counsel of Finalco
Group, Inc., an equipment leasing company. From June 1995, he has been 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, Ratner Real Estate and City
Rentals, Inc. Ms. Santone does not devote substantial time to these companies.
WILLIAM F. MCLAY joined the Company in 1990 as its Chief Financial
Officer until January 1991, when he left to serve as a Financial Advisor to
Foster Industries, Inc. through 1992. Mr. McLay rejoined the Company in 1993, as
Director of Corporate Planning and Development, later becoming Managing
Director. Mr. McLay was Vice-President and Controller of American Equity
Corporation from 1984 to 1989. Prior thereto, from 1976 to 1984, he served as
Controller and Treasurer of Wooding-Verona Tool Works, Inc., a subsidiary of The
Budd Company (formerly NYSE:BF).
BARRY LOGAN was promoted to Vice President, General Manager-Restaurant
Division of Sulcus Hospitality Group in 1994. He joined the Company as Vice
President of Research and Development of Squirrel at the time of its acquisition
by the Company in March 1992. Prior thereto, he was responsible for the
evolution of the Squirrel product line from its inception in 1984. Prior to
joining Squirrel in November 1984, he developed a time sharing system operation
and has been involved in a variety of computer- oriented organizations since
1972.
BERNHARD MANTEL joined the Company following the acquisition of its
subsidiary, Techotel, Inc. in January 1993, as the Managing Director of
Techotel, Inc. (now Sulcus Hospitality Group EMEA, AG) and Lodgistix
(International), AG, a wholly-owned subsidiary of Techotel. From 1983 until
joining Sulcus, he founded Techotel, Inc. ("Techotel") and Lodgistix
(International), AG and served in the same capacities for each. He also serves
as a Director of Techotel's subsidiary Lodgistix U.K. Ltd. (since its inception
in 1987).
JAPPE KJAER joined the Company in January 1994, as President of the
Company's subsidiary, Sulcus Scandinavia A/S (formerly Lodgistix Scandinavia
A/S), upon its acquisition by Sulcus. Mr. Kjaer founded Lodgistix Scandinavia
A/S, a Lodgistix distributor in Norway, Sweden, and Denmark, in 1987, and served
as its General Manager.
THOMAS CAUDILL was promoted to Vice President, General Manager--Lodging
Division of Sulcus Hospitality Group in 1994. Previously he had been Vice
President Sales-Eastern Region. Prior to joining the Company, from 1986 to 1993,
he was a Director of Sales for Covia, a partnership of seven airlines, which
developed and marketed the Apollo reservation system.
GERRY LAU joined the Company in February 1995 as Chairman of Sulcus
Hospitality Limited. Prior thereto, Mr. Lau served as a Managing Director of
Data General Corporation (NYSE:DGN), from March 1994 until February 1995, as a
partner of TASA International (a Swiss consulting firm), from 1993 to March
1994, and as Group Managing Director of Innovest Systems and Services Private
Limited, from 1986 to 1993.
28
<PAGE> 32
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of the Company ("Outside
Directors") are reimbursed for their direct expenses incurred in attending a
meeting. In addition, pursuant to the Company's Amended and Restated 1991 Stock
Option Plan for Directors (the "Directors Plan"), the Company has reserved
1,000,000 shares of its Common Stock for Directors (including Directors who are
officers or employees) of the Company or any of its subsidiaries. A committee is
charged with authority to administer the Directors Plan, to award options,
determine the option exercise price (at a price not less then the fair market
value of the Common Stock when granted) and fix the vesting schedule and other
terms thereof. Jeffrey S. Ratner and John W. Ryba serve on this committee.
During 1995, no options were awarded under the Directors Plan. See "Stock Option
Plans-Directors Stock Option Plan."
EXECUTIVE COMPENSATION
The following tables present certain information concerning the cash
compensation and stock options provided to the named executive officers during
the years ended December 31, 1995, 1994 and 1993. More specific information
regarding compensation is provided in the notes accompanying the tables.
SUMMARY COMPENSATION TABLE
The following table reflects the total compensation paid during 1995,
1994 and 1993, for services in all capacities to the Company by the Chairman and
each of the other four most highly compensated executive officers of the Company
during 1995 (the "Named Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------------------- ----------------------
Awards
Securities
Name and Underlying
Principal Other Annual Options/SARs
Position Year Salary($) Bonuses($) Compensation(s) (#)
- --------- ---- --------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Jeffrey Ratner 1995 350,000 -- -- --
Chairman 1994 313,500 -- -- --
1993 325,600 -- -- --
Joel Nagelmann 1995 135,600 33,107 -- 215,579
President 1994 -- -- -- --
1993 -- -- -- --
H. Richard Howie 1995 120,000 -- -- --
Chief Financial 1994 55,000 -- -- 30,000
Officer 1993 -- -- -- --
Frank Morrisroe(1) 1995 146,000 -- -- --
President of 1994 146,000 -- -- 50,000
Sulcus Hospitality 1993 110,000 -- -- --
Group
William McLay 1995 120,000 -- -- 20,000
Managing 1994 75,000 -- -- 60,000
Director 1993 24,500 -- -- --
Gary Campbell(2) 1995 120,000 7,200 -- --
V.P. of Sulcus 1994 120,000 -- -- 40,000
Hospitality Group 1993 -- -- -- --
</TABLE>
(1) Mr. Morrisroe joined Sulcus in February 1991 and resigned in January
1996.
(2) Mr. Campbell joined Sulcus in November 1993 and resigned in August
1996.
29
<PAGE> 33
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the aggregate amount of shares subject
to stock options granted, for the period January 1, 1995, through December 31,
1995, to the Chairman and each of the Named Officers. No gain on these options
will be realized by the Named Officers without an increase in the price of
Company Common Stock from the date of grant, which will benefit all stockholders
proportionately.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
----------------- at Assumed Annual Rates
of Stock Price Appreciation
Number of for Option Individual Grants
Securities % of Total ----------------------------
Underlying Options Exercise
Options/ Granted to or Base
SARS Employees in Price Expiration
Name Granted 1995 ($/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 01/01/01 148,901 329,033
H. Richard Howie 0 0% -- -- -- --
Frank Morrisroe(2) 0 0% -- -- -- --
Gary Campbell(3) 0 0% -- -- -- --
William McLay 20,000 6% 2.00 01/01/01 11,051 24,420
</TABLE>
(1) The calculation of potential realizable values are based on theoretical
and arbitrary rates of appreciation in the price of Company Common
Stock from the date of grant of five and ten percent for the option
terms are mandated by the rules of the United States Securities and
Exchange Commission and may or may not accurately reflect or predict
the actual values of the stock options.
(2) Mr. Morrisroe joined Sulcus in February 1991 and resigned in January
1996. He exercised options for 60,000 shares in 1995. All unexercised
options have expired and terminated.
(3) Mr. Campbell joined Sulcus in November 1993 and resigned in August
1996. He has not exercised any options.
30
<PAGE> 34
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(3) 0 0 16,000/24,000 $0/$0
William McLay 0 0 28,000/52,000 $500/$2,000
</TABLE>
(1) The value of unexercised, in-the-money options is the difference
between the exercise price and the fair market value of Company Common
Stock at December 31, 1995, which was $2.125.
(2) Mr. Morrisroe joined Sulcus in February 1991 and resigned in January
1996.
(3) Mr. Campbell joined Sulcus in November 1993 and resigned in August
1996.
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 $350,000 for Mr. Ratner,
and $104,000 for Mr. Ryba. Mr. Gowing received a salary of $15,000 per month
until November 1994, $7,500 per month until October 1995 and $1,000 per month
thereafter. Mr. Gowing may continue to work on legal matters unrelated to the
Company so long as they do not conflict with his Company duties.
Bernhard Mantel entered into an employment agreement with Techotel and
its wholly owned subsidiary Lodgistix (International) AG effective January 1,
1993, the effective date of the Company's acquisition of Techotel, now known at
Sulcus Hospitality Group EMEA, AG and Sulcus (International) AG, respectively.
Mr. Mantel serves as Managing Director (President) of both companies, positions
he held previously. The agreement, which expired December 31, 1995, provided for
an annual salary of Swiss Francs 110,625 (equivalent to U.S. $86,089 at the
exchange rate as of 1.1446 as of April 30, 1995). Mr. Mantel could 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
31
<PAGE> 35
of the year of the earnings. In 1993 and 1995, 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.
H. Richard Howie joined the Company in July 1994, as Chief Financial
Officer pursuant to an employment agreement providing for an annual salary of
$120,000. Mr. Howie was granted an option to purchase 30,000 shares of Company
Common Stock at a price of $3.375 per share. These options were cancelled and
new options for 36,000 shares were granted on March 25, 1996, at a price of
$2.4375, twenty percent of which were immediately exercisable and the rest
vesting over four years at twenty percent per year beginning in March 1997. This
employment agreement can be terminated by the Company or Mr. Howie on 14 days
notice without cause.
Joel Nagelmann joined the Company in April 1995, as President of the
Company pursuant to an employment agreement providing for an annual salary of
$200,000. Mr. Nagelmann is entitled to receive annual bonuses as of December 31
in each year of his employment, commencing in 1995, based upon a percentage of
after-tax earnings of from 3% to 5% (depending on total revenues), subject to
limits of from $200,000 to $343,200, to be paid one-half in cash and one-half in
stock options. These bonus options vest one-half on the date of grant and
one-half one year later. Mr. Nagelmann was also granted an option to purchase
200,000 shares of Common Stock of the Company at $2.50 per share vesting over
five years at the rate of 20 percent per year beginning April 1995. Mr.
Nagelmann may retain all options granted and all other rights for two years if
his employment is terminated without cause. See "Certain Relationships and
Related Transactions."
The Company's employment agreements impose non-competition and
confidentiality obligations and provide for the assignment to the Company of all
rights to any technology developed by the executive during the term of his
employment. The Company has or is obtaining "key man" insurance policies in the
face amount of $200,000 on the life of Mr. Howie and $500,000 on the life of Mr.
Nagelmann under which the Company is, in each case, the beneficiary.
Copies of the foregoing agreements have been filed as exhibits to the
registration statement of which this Prospectus is a part. The above discussion
is only a summary of the terms and conditions of each of these agreements and is
qualified in all respects by reference to the actual agreements.
REPORT ON EXECUTIVE COMPENSATION
Compensation of Executive Officers
The salaries paid during 1995 to the Company's executive officers were
either (i) approved or ratified by the Board of Directors of the Company or (ii)
fixed pursuant to employment agreements approved by the Board. See "Executive
Compensation- Employment Arrangements." The Board's approvals were based upon
various subjective factors such as the executive's responsibilities, position,
qualifications, individual performance and years of experience. In no such case
did the Board undertake a formal survey or analysis of compensation paid by
other companies.
Certain executive officers received stock options during 1995 under the
Company's 1991 Stock Option Plan for Officers and Key Employees (the "Stock
Option Plan"). Options under the Stock Option Plan are either awarded by the
Stock Option Committee, whose members are the Outside Directors, or are fixed by
employment agreements approved by the Board. The Stock Option Committee awarded
options under the Stock Option Plans in 1995 based upon the terms of employment
agreements or upon various subjective factors such as the executive's
responsibilities, individual performance and anticipated contribution to the
Company's performance. The Stock Option Committee neither undertook a formal
survey or analysis of options awarded by other companies nor, except to the
extent provided for in employment agreements, established numerical targets or
goals in determining these option awards.
Compensation of the Chairman
The salary of the Chairman, Jeffrey S. Ratner, is fixed pursuant to his
employment agreement with the Company. See "Executive Compensation-Employment
Arrangements." This employment agreement was negotiated by the Board of
Directors. In the case of the salary negotiated under the employment agreement,
the Board considered various subjective factors such as Mr. Ratner's
responsibilities, qualifications and perceived contributions to the Company.
However, the Board did not undertake a formal survey or analysis of salaries
paid by other companies.
32
<PAGE> 36
Deductibility of Compensation.
Effective January 1, 1994, the Internal Revenue Service under Section
162(m) of the Internal Revenue Code will generally deny the deduction of
compensation paid to executives to the extent such compensation exceeds $1
million per executive per year, subject to an exception for compensation that
meets certain "performance-based" requirements. Whether the Section 162(m)
limitation with respect to an executive will be exceeded and whether the
Company's tax deductions for compensation paid in excess of the $1 million limit
will be denied will depend upon the resolution of various factual and legal
issues that cannot be resolved at this time. As to options granted under the
Stock Option Plan, the Stock Option Committee intends to comply to the extent
practicable with the rules governing the Section 162(m) limitations so that
compensation attributable to such options will not be subject to limitation
under such rules. As to other compensation, while it is not expected that
compensation to executives of the Company will exceed the Section 162(m)
limitation in the foreseeable future (and no officer of the Company received
compensation in 1995 which resulted in the non-deductibility of such
compensation to the Company under Section 162(m)), various relevant
considerations will be reviewed from time to time, taking into account the
interests of the Company and its shareholders, in determining whether to
endeavor to cause such compensation to be exempt from the Section 162(m)
limitation.
Submission of Report
This report on Executive Compensation was submitted by the members of
the Board of Directors, Jeffrey S. Ratner, Robert D. Gries, Herbert G. Ratner,
John W. Ryba and David Adler, except with respect to options awarded under the
Stock Option Plan, the report of which was submitted by the members of the Stock
Option Committee, Robert D. Gries and David Adler.
STOCK OPTION PLANS
INCENTIVE STOCK OPTION PLAN
Sulcus has two stock option plans. The Amended and Restated 1983
Incentive Stock Option Plan for Officers and Other Key Employees (the "1983
Plan") with options to purchase 500,000 shares granted thereunder, and the 1991
Incentive Stock Option Plan for Officers and other Key Employees (the "Plan")
with 3,000,000 shares reserved for issuance thereunder of which options to
purchase 2,175,570 shares have been granted. No further options may be granted
under the 1983 Plan. The Plan, which was adopted in 1991, is administered by the
Board of Directors which selects the employees to whom the options are granted,
determines the number of shares subject to each option, sets the time or times
when the options will be granted, determines the time when the options may be
exercised and establishes the market value of the shares. The Plan provides that
the purchase price under the option shall be at least 100 percent of the fair
market value of the shares of the Company's Common Stock. The options are not
transferrable. There are limitations on the amount of incentive stock options
that an employee can be granted in a single calendar year including a limitation
that the aggregate fair market value of shares shall not exceed $100,000. The
terms of each option granted under the Plan is determined by the Board of
Directors, but in no event may such term exceed ten years. As of September
, 1996, options under both plans covering an aggregate of 1,452,062
shares have been granted to approximately 185 employees, at exercise prices
ranging from $1.00 to $9.25 per share. As of October , 1996, options for an
aggregate of 623,920 shares were exercisable.
DIRECTORS STOCK OPTION PLAN
The Board of Directors of Sulcus authorized and at the June 20, 1991
annual meeting the stockholders approved the 1991 Directors Stock Option Plan
(the "Directors Plan") covering an aggregate of 500,000 shares of Common Stock.
In October 1993, Stockholders approved increasing the number of authorized
shares to 1,000,000. A three-member committee of the Board of Directors
administers the Directors Plan. Directors of Sulcus who are not employees of the
Company are eligible to participate in the plan. Twenty percent of options
granted are exercisable in the first year and 20% in each succeeding year for
the next four years. Each option granted will have an exercise price equal to
fair market value on the date of grant.
As of October , 1996, options under the Directors Plan covering
238,333 shares have been granted to Directors at exercise prices ranging from
$1.9375 to $6.875 per share. As of such date an aggregate of 172,916 shares were
exercisable.
33
<PAGE> 37
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of October 1,
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, 15,359,625 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) 6.8%
41 North Main Street
Greensburg, PA 15601
Robert D. Gries 55,000(2) *
John W. Ryba 58,000(3) *
David H. Adler 69,250(4) *
Herbert Ratner 40,500(5) *
Joel Nagelmann 92,289(6) *
H. Richard Howie 7,200(7) *
Delmer C. Gowing III 25,000(8) *
William McLay 45,175(9) *
Margaret Santone 5,220(10) *
Barry Logan 48,824(11) *
Gary Campbell 18,750(12) *
Bernhard Mantel 188,502(13) 1.3%
Jappe Kjaer 46,867(14) *
Thomas Caudill 8,000(15) *
Gerry Lau 0 *
All Directors and executive officers and 1,758,577 11.6%
owners of more than 5% as a group
(16 persons)
</TABLE>
(1) 1,000,000 of these shares were transferred in 1993 to an Irrevocable
Trust established by Mr. Ratner as Settlor for the benefit of himself,
his wife and his children. Mr. Ratner does not have or share investment
control but retains voting control with respect to shares of the
Company. The Trustee is an independent Trustee unaffiliated with Mr.
Ratner or any other beneficiary and has the discretionary power to
allocate the shares of the Company in the Trust, or any proceeds from
the sale of any such shares, in an amount to be determined by the
Trustee in its sole discretion. Mr. Ratner disclaims beneficial
ownership with respect to any shares held in such Trust which may be
allocated by the Trustee for the benefit of any beneficiary of the
Trust other than Mr. Ratner. Includes 50,000 shares subject to a
currently exercisable option.**
(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 51,250 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.**
34
<PAGE> 38
(9) Includes 13,175 shares currently owned of record and 32,000 shares
subject to currently exercisable options.**
(10) Includes 20 shares currently owned of record and 5,200 shares subject
to a currently exercisable option.**
(11) Includes 900 shares currently owned of record and 47,924 shares subject
to currently exercisable options.**
(12) Includes 2,750 shares currently owned of record and 16,000 shares
subject to currently exercisable options which will expire on November
30, 1996.**
(13) Includes 188,502 shares currently owned of record.
(14) Includes 38,867 shares currently owned of record and 8,000 shares
subject to a currently exercisable option.**
(15) Includes 8,000 shares subject to a currently exercisable option.**
* Less than 1% issued and outstanding.
** A currently exercisable option is one which is exercisable within 60
days from the date hereof.
CERTAIN TRANSACTIONS
The Company has agreed, under certain circumstances, to provide loans to
Joel Nagelmann, its President, in a gross amount of up to $197,000 for up to
three years at the rate of 5% per annum. On October 27, 1995, the Company made a
loan in the principal amount of $100,000 at 5% interest. The loan is secured by
real estate, proceeds from its sale and other assets. The principal is payable
on either October 27, 1996, or upon the sale of a former residence, whichever
first occurs. These loans were agreed to as part of Mr. Nagelmann's employment
arrangements in April 1995 and were the result of arms length negotiations. The
Company believes that the interest rate is on more favorable terms than Mr.
Nagelmann could obtain elsewhere.
In July 1994, the Company loaned Mr. Jappe Kjaer $50,000, pending the
registration of the stock of the Company issuable to Mr. Kjaer under the terms
of the agreement for the purchase of Lodgistix Scandinavia AS (now known as
Sulcus Scandinavia AS). Mr. Kjaer was the principal shareholder of Lodgistix
Scandinavia AS and remains its President. The note was repaid in May 1996,
through the cancellation of 20,000 shares of the Company's stock issuable under
the Purchase Agreement. Prior to the Company's acquisition of Lodgistix
Scandinavia AS, Mr. Kjaer borrowed $20,000 from Lodgistix Scandinavia AS, all of
which remains outstanding. These loans do not bear interest. The $50,000 loan to
Mr. Kjaer was negotiated at arms length with Mr. Kjaer in connection with the
Company's obligations to register shares of stock issuable to him and is not
comparable to a transaction with a non-related party. The $20,000 loan was made
to Mr. Kjaer when he was the principal owner of Lodgistix Scandinavia, AS at a
time prior to Sulcus' ownership of that company.
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 was intended
to be repaid upon the registration by the Company for the stock issuable to him.
Based upon the nature of the note, it has been reflected as a reduction of
equity. In May 1996, the Company and the former shareholder of Techotel agreed
to the repayment of the note through the cancellation of 200,000 shares issuable
under the Purchase Agreement.
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 cancelled by either party. While
these leases were not the result of arms length negotiations the Company
believes that the aggregate rental commitment is similar to comparable
properties in the area. See "Business-Property."
35
<PAGE> 39
DESCRIPTION OF SECURITIES
Sulcus' Articles of Incorporation, as amended, authorize 30,700,000 shares
of Common Stock, no par value per share, of which 15,359,625 shares were issued
and outstanding as of October , 1996. Sulcus' Articles of Incorporation, as
amended, also authorize a class of preferred stock, consisting of 10,000,000
shares, no par value per share. No shares of Preferred Stock are currently
outstanding.
DESCRIPTION OF SECURITIES BEING OFFERED
- ---------------------------------------
PREFERRED STOCK
The Company's preferred stock may be issued in one or more series, to be
determined and to bear such title or designation as may be fixed by resolution
of the Board of Directors prior to the issuance of any shares thereof, without
any further vote or action by the shareholders. Each series of preferred stock
will have such voting powers (including, if determined by the Board of
Directors, no voting rights as is the case in the Preferred Stock), preferences
and other rights as determined by the Board of Directors with such
qualifications, limitations or restrictions as may be stated in the resolutions
of the Board of Directors adopted prior to the issuance of any shares of such
series of preferred stock.
The Series A Preferred Stock being offered hereby is currently the only
class or series of preferred stock designated by the Board of Directors. The
Board has no present plans to issue any series of preferred stock other than the
Series A Preferred Stock being offered hereby. However, purchasers of the
securities offered hereby should be aware that the holders of any series of
preferred stock which may be issued in the future could have voting rights,
rights to receive dividends or rights to distribution in liquidation superior to
those of holders of the Series A Preferred Stock or Common Stock, thereby
diluting or negating any voting rights, dividend rights or liquidation rights of
the Series A Preferred Stock or Common Stock.
Because the terms of each series of preferred stock may be fixed by the
Company's Board of Directors without shareholder action, a new series of
preferred stock could be issued with terms calculated to delay or defeat a
proposed takeover of the Company, or to make the removal of Sulcus' management
more difficult. Under certain circumstances, this could have the effect of
decreasing the market price of the Series A Preferred Stock, the Class A
Warrants and the Common Stock. Management of Sulcus is not aware of any such
threatened transaction to obtain control of the Company.
SERIES A PREFERRED STOCK
The Company has authorized the issuance of 1,000,000 shares of preferred
stock of which 2,000,000 shares have been designated Series A Redeemable
Convertible Preferred Stock, no par value per share ("Preferred Stock"). The
shares of Preferred Stock, when issued, will be duly and validly issued, fully
paid and nonassessable.
The following description of certain terms of the Preferred Stock is
intended as a summary only, and is qualified in its entirety by reference to the
complete text of the Company's Articles of Incorporation and the Amendment filed
as exhibits to the Registration Statement of which this Prospectus is a part.
Dividends. The holders of shares of Preferred Stock will be entitled to
receive dividends to the same extent as any dividends are paid on the Common
Stock. Under Pennsylvania law, the Company may only declare and pay dividends on
its shares of capital stock out of earnings and additional paid-in capital.
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of shares of
Preferred Stock shall be entitled to receive out of the assets of the Company
available for distribution or payment to shareholders, before any distribution
or payment of assets is made with respect to Common Stock of the Company or any
other stock of the Company ranking junior upon liquidation to the Preferred
Stock, liquidating distributions in the amount of $______.__ per share (the
"Liquidation Preference"). If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the preferential amounts payable with
respect to the Preferred Stock and any other shares of Preferred Stock of the
Company ranking as to any such liquidation, dissolution or winding up on a
parity with the Preferred Stock are not paid in full, the holders of the
Preferred Stock and of such other shares of Preferred Stock will share ratably
in any such distribution of assets of the
36
<PAGE> 40
Company in proportion to the full respective preferential amounts to which they
are entitled. After payment to the holders of the Preferred Stock of the full
preferential amounts to which they are entitled, the holders of shares of
Preferred Stock will not be entitled to any further participation in any
distribution of assets by the Company. None of the sale, conveyance, exchange or
transfer of all of substantially all the property and assets of the Company, the
consolidation or merger of the Company with or into any other corporation, or
the merger or consolidation of any other corporation into or with the Company
shall be deemed to be a liquidation, dissolution or winding up of the Company,
provided that in each case, effective provision is made in the certificate of
incorporation of the resulting and surviving corporation or otherwise for the
protection of the rights of the holders of Preferred Stock.
Redemption at the Option of the Company. On or after , 1997, (15
months from the date of this Prospectus), the Preferred Stock will be redeemable
at the option of the Company in whole, but not in part, for $ per share in
cash. The Company will cause notification of any redemption of shares to be
mailed to all record holders of Preferred Stock to be redeemed, at the address
shown on the stock books of the Company, not less than 30 nor more than 60 days
prior to the date fixed for redemption.
If on the date fixed for redemption funds necessary for the redemption shall
be available, all rights with respect to such shares shall after such date cease
and terminate except the right to receive the redemption price without interest
(unless the Company defaults in the payment of the redemption price). Shares of
the Preferred Stock redeemed shall have the status of authorized but unissued
Preferred Stock without designation as to series, but may not thereafter be
issued as shares of Preferred Stock.
Conversion Rights. The holders of Preferred Stock will be entitled at any
time after , 1997 (six months from the date of this Prospectus), to
convert Preferred Stock into Common Stock at the initial conversion rate set
forth on the cover page of this Prospectus, subject to adjustment as described
below and subject to the availability of sufficient authorized and unissued
shares not reserved for other purposes, except that, with respect to shares of
Preferred Stock which the Company has called for redemption, conversion rights
will expire at the close of business on the redemption date (unless the Company
defaults in the payment of the redemption price). No payment or adjustment will
be made in respect of dividends on Preferred Stock that may be accrued or unpaid
or in arrears upon conversion of shares of Preferred Stock. No fractional shares
will be issued nor will cash in lieu thereof be paid.
Sulcus will reserve for issuance a number of shares of Common Stock
sufficient to provide for the conversion of the Preferred Stock. When delivered,
such shares of Common Stock will be duly authorized, validly issued, fully paid
and nonassessable.
The conversion rate of the Preferred Stock is subject to adjustment in
certain circumstances, including the payment of a stock dividend on shares of
the Common Stock, certain reclassifications of the Common Stock, the issuance to
Sulcus' stockholders of rights or warrants to subscribe for or purchase shares
of Common Stock at a price per share less than the then-current market price (as
determined in the Amendment) of the Common Stock and certain cash dividends and
distributions of evidences of indebtedness or assets to holders of certain of
Sulcus' capital stock.
In case of any consolidation or merger of Sulcus with any other corporation
(other than a wholly owned subsidiary), in each case where the Company is not
the surviving entity (a "Merger"), or in case of a sale or transfer of all or
substantially all of the assets of Sulcus, or in the case of any share exchange
whereby the Common Stock is converted into other securities or property, the
Company will be required to make appropriate provision so that the holder of
each share of Preferred Stock then outstanding will have the right thereafter to
convert such share of Preferred Stock into the kind and amount of shares of
stock and other securities and property receivable upon such consolidation,
Merger, sale, transfer or share exchange by a holder of the number of shares of
Common Stock into which such shares of Preferred Stock might have been converted
immediately prior to such consolidation, Merger, sale, transfer or share
exchange. No adjustment in the conversion rate is required unless it would
result in at least a 1% increase or decrease in the conversion rate; however,
any adjustment not made shall be carried forward.
Voting Rights. Except as may be otherwise specifically provided in the
Amended Articles of Incorporation or by Pennsylvania law, each holder of shares
of the Preferred Stock shall in all matters that alter or change the powers,
preferences or rights given to the Preferred Stock be entitled to one vote for
each share of Preferred Stock owned by such holder and the holders of the
Preferred Stock shall vote together as one class on any matter that may be
brought before any meeting of the shareholders of Sulcus relating to such
matters. Holders of Preferred Stock shall not have voting rights with respect to
any other matters.
37
<PAGE> 41
So long as any shares of the Preferred Stock shall be outstanding, Sulcus
shall not, without the affirmative vote or consent of the holders of at least
two thirds of the aggregate number of shares of Preferred Stock at the time
outstanding, voting as a class, alter or change the powers, preferences or
rights given to the Preferred Stock so as to affect the holders of the Preferred
Stock adversely.
No Sinking Fund. Sulcus is not required to provide for the retirement or
redemption of the Preferred Stock through the operation of a sinking fund.
CLASS A WARRANTS
Two Class A Warrants will entitle the registered holder thereof to purchase
one share of Preferred Stock at a price of $ ____________ if exercised on or
before __________, 1996, (75 days from the date of this Prospectus). Thereafter,
four Class A Warrants shall entitle the registered holder thereof to purchase
one share of Preferred Stock at a price of $____________, if exercised on or
before , 1997. The Class A Warrants expire at 5:30 P.M. New York City
time on __________, one year from the date of this Prospectus.
No fractional shares of Preferred Stock will be issued upon the exercise of
the Class A Warrants and no cash will be paid in lieu thereof.
The holders of the Class A Warrants will not have any of the rights or
privileges of shareholders of Sulcus prior to the exercise of the Class A
Warrants.
The exercise price and number of shares of Preferred Stock or other
securities issuable on exercise of the Class A Warrants are subject to
adjustment in certain circumstances, including issuance of a stock dividend or a
recapitalization, reorganization, Merger or consolidation of Sulcus.
No Class A Warrant will be exercisable unless at the time of exercise a
current prospectus covering shares of Preferred Stock issuable upon exercise of
such Class A Warrant is then in effect. See "Underwriting" for a description of
Warrants to be issued to the Underwriter in connection with this Offering.
DESCRIPTION OF OTHER SECURITIES
COMMON STOCK
Subject to such preferential rights as may be determined by the Board of
Directors of Sulcus in connection with the issuance of any series of preferred
stock, the holders of shares of Common Stock elect all directors, are entitled
to one vote per share for each share of Common Stock held of record by them and
do not have cumulative voting rights which means that the holders of more than
50% of such outstanding shares voting for the election of directors can elect
all of the directors to be elected.
Holders of record are entitled to receive dividends when and if declared by
the Board of Directors out of legally available funds. Upon any liquidation,
dissolution or winding up of Sulcus, holders of Common Stock are entitled to
share pro rata in any distribution to the shareholders after the holders of any
preferred stock, including the Preferred Stock, have been paid the applicable
liquidation price per share fixed at the time of the original authorization of
the issue of any preferred stock, including the Preferred Stock.
Shares of Common Stock are not redeemable and do not have any conversion
rights. All of the outstanding shares of Common Stock are fully paid and
non-assessable and duly authorized.
PENNSYLVANIA ANTI-TAKEOVER LAWS
Various provisions of the Pennsylvania Business Corporation Law (the "BCL"),
under which Sulcus was organized, generally make "hostile" takeovers of
Pennsylvania corporations more difficult by granting certain rights to
non-interested shareholders in certain "change of control" situations by
permitting such shareholders to demand payment from a 20% controlling
shareholder of the "fair value" of such demanding shareholder's shares in cash.
Such provisions may make more difficult the removal of management. The BCL also,
in certain circumstances, prohibits mergers and other "business combinations"
between Sulcus and an "interested shareholder" (or its affiliate) unless, among
other things, (i) either acquisition of such person's 20% interest or the
business combination is approved by Sulcus' Board of Directors prior to the date
such "interested shareholder" acquired its 20%
38
<PAGE> 42
interest or (ii) if, among other requirements, the business combination is
approved by a majority of non-interested shareholders at least three months
prior to the date such person acquired 80% of the outstanding voting stock and
the consideration paid to the non- interested shareholders in such a transaction
meets certain minimum conditions.
Effective April 27, 1990, certain additional subchapters to the BCL were
adopted. Generally, these new subchapters make hostile takeovers even more
difficult by providing that under certain circumstances (i) "control shares"
lose their voting rights until such rights are restored by a majority vote of
all "disinterested shares" and "voting shares," and (ii) "control shares" may be
redeemed by the target corporation within 24 months after the "control share
acquisition" if, among other things, the acquiring person has not timely
requested a shareholder vote on whether the "control shares" should be accorded
voting rights. Further, a new subchapter provides, among other things, that any
profits earned from any sale of shares within two years before or 18 months
after a person has acquired or expressed the intent to acquire 20% of the voting
shares or an intention to acquire control (a "controlling person") are
recoverable by the Corporation if the shares were acquired within two years
before or 18 months after the acquirer became a controlling person.
The additional subchapters, in certain circumstances, also provide for
severance compensation to employees terminated by a new controlling person, as
well as mandatory preservation of certain labor agreements. They also give the
Board of Directors wider discretion in dealing with hostile takeover attempts.
In addition, Section 1721 of the BCL has been amended through the addition
of provisions that entitle the directors of a corporation, in making decisions
concerning takeovers or any other matters, to the extent they deem appropriate,
to consider, among other things, (i) the effects of any proposed transaction
upon any or all groups affected by such action, including, among others,
shareholders, employees, suppliers, customers and creditors, (ii) the short-term
and long-term interest of such corporation, and (iii) the resources, intent and
conduct of the person seeking control.
Sulcus did not elect within the prescribed time of the statute to opt out of
these provisions.
TRANSFER AND WARRANT AGENT
The transfer agent for the Common Stock, Preferred Stock and Class A
Warrants and the Warrant Agent under the Warrant Agreement, is American Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
In addition to the Securities covered by this Prospectus, an aggregate of
1,864,844 shares issuable upon the exercise of certain employees, directors and
consultant's stock options at prices ranging from $1.00 to $9.25 per share and
an aggregate of approximately 399,749 shares of Common Stock issued in private
placements, are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act. In general under Rule 144 as currently in
effect, subject to the satisfaction of certain other conditions of Rule 144, a
person, including an affiliate of the Company (or persons whose shares are
aggregated), who has owned restricted securities of the Company beneficially for
at least two years is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of 1% of the total number of
outstanding shares of the same class or, if the Common Stock is quoted on
NASDAQ, a national securities exchange or a consolidated transaction reporting
system, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of the Company for at
least the three months immediately preceding the sale and who has beneficially
owned restricted shares of Common Stock for at least three years is entitled to
sell such shares under Rule 144 without regard to any of the limitations
described above.
UNDERWRITING
Joseph Stevens & Company, L.P. (the "Underwriter") has entered into an
Underwriting Agreement with the Company pursuant to which, and subject to the
terms and conditions thereof, it has agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriter on a firm commitment basis
all of the Units offered by the Company hereby.
The Company has been advised by the Underwriter that the Underwriter
initially proposes to offer the Units to the public at the public offering
price set forth on the cover page of this Prospectus and that the
Underwriter may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") concessions not in excess of
$ per Unit, of which amount a sum not in excess of $ per Unit may in turn
be reallowed by such dealers to other dealers. After the commencement of the
Offering, the public offering price, concessions and reallowances may be
changed. The Underwriter has informed the Company that it does not expect sales
to discretionary accounts by the Underwriter to exceed five percent of the
securities offered by the Company hereby.
39
<PAGE> 43
The Company has granted to the Underwriter an option, exercisable during
the 30 business day period from the date of this Prospectus, to purchase up to a
maximum of 30,000 additional Units on the same terms set forth above. The
Underwriter may exercise such right only to satisfy over-allotments in the
sale of Units.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance equal to 3% of the total proceeds of the offering including
proceeds from the over-allotment option, of which $10,000 has been paid. In
addition to the Underwriting commissions and Underwriter's expense allowance,
the Company is required to pay the costs of qualifying the Preferred Stock and
Warrants under federal and state securities laws, together with legal and
accounting fees, printing and other costs in connection with this offering,
estimated to total approximately $____________ .
At the closing of the offering, the Company will issue to the
Underwriter and/or its designees, for nominal consideration, Warrants
(the "Underwriter's Warrant") to purchase for investment a maximum of 20,000
Units. The shares of Preferred Stock and Warrants subject to the Underwriter's
Warrant will be identical to the shares of Preferred Stock and Warrants sold to
the public except for the purchase price as provided below. The Underwriter's
Warrant will be exercisable for a five year period commencing on the date of
this Prospectus. The exercise price of the Underwriter's Warrant is 130% of the
public offering price of the Units offered hereby. The Underwriter's Warrant
may be exercised for cash or, at the holder's option, in whole or in part, for a
number of shares of Preferred Stock and Warrants, as determined in accordance
with a specified formula based on the fair market value of the Company's
securities at the time of exercise. The Underwriter's Warrant and the
securities issuable upon exercise thereof will not be transferrable prior to one
year from the date of this Prospectus except to officers of the Underwriter
and members of the selling group and officers and partners thereof.
The Underwriter's Warrant will contain anti-dilution provisions providing
for adjustment in the event of any recapitalization, stock dividend, stock split
or similar transactions. The Underwriter's Warrant also provides for
adjustments similar to those applicable to the Class A Warrants for
reclassification, exchanges, mergers and consolidations. The Underwriter's
Warrant does not entitle the Underwriter to any rights as a shareholder of
the Company until such warrant is exercised and shares of Preferred Stock and
Warrants are purchased thereunder.
The Underwriter's Warrant and the securities thereunder may not be
offered for sale except in compliance with the applicable provisions of the
Securities Act. The Company has agreed that, if it shall cause to be filed with
the Commission either an amendment to the Registration Statement of which this
Prospectus is a part or a separate registration statement, the Underwriter
shall have the right ("piggyback right") during the five-year period commencing
on the date of this Prospectus to include in such amendment or Registration
Statement the Underwriter's Warrant and the securities issuable upon the
exercise of the Underwriter's Warrant at no expense to the Underwriter.
Additionally, the Company has agreed that, upon written request by a holder or
holders of 50% or more of the Underwriter's Warrants which is made during the
exercise period of the Underwriter's Warrant, the Company will, on two
separate occasions, register the Underwriter's Warrant and any of the
securities issuable upon exercise thereof. The initial such registration will be
at the Company's expense to the extent of $100,000 and any expenses in excess of
$100,000 and all expenses for the second such registration will be at the
expense of the holder(s) of the Underwriter's Warrant.
For the period during which the Underwriter's Warrant is exercisable, the
holder or holders will have the opportunity to profit from the rise in the
market value of the Company's Preferred Stock and Class A Warrants, with a
resulting dilution in the interests of the other shareholders of the Company.
The holder or holders of the Underwriter's Warrant can be expected to
exercise it at a time when the Company would, in all likelihood, be able to
obtain any needed capital from an offering of its unissued Preferred or Common
Stock on terms more favorable to the Company than those provided for in the
Underwriter's Warrant. Such fact may
40
<PAGE> 44
adversely affect the terms on which the Company can obtain additional financing.
To the extent that the Underwriter realize any gain from the resale of the
Underwriter's Warrant or the securities issuable thereunder, such gain may be
deemed additional underwriting compensation under the Securities Act.
Officers, directors and holders of five percent or more of the Company's
outstanding capital stock (other than Jeffrey S. Ratner (200,000 options) or the
Irrevocable Trust (1,000,000 shares) established by Mr. Ratner for the benefit
of himself, his wife and his children) have agreed with the Underwriter that
they will not sell any shares of Common Stock or Series A Preferred Stock owned
by them (or subsequently acquired under any option, warrant or convertible
security owned prior to this offering) for six months following the date of this
Prospectus, without the Underwriter's prior written consent.
The Company has agreed that for a period of six months from the date of this
Prospectus, it will not sell any securities (with the exception of the shares of
Common Stock issued upon conversion of Preferred Stock and the issuance of
Preferred Stock upon exercise of the Class A Warrants, currently outstanding
incentive stock options, options granted under its 1991 Director's Stock Option
Plan, shares issuable as "earn out shares" with respect to certain transactions
or issuable in connection with mergers and acquisitions), without the prior
written consent of the Underwriter, which consent shall not be unreasonably
withheld.
The Company has also agreed that, for a period of two years from the closing
of this Offering, if it participates in any merger, consolidation or other
transaction which the Underwriter has brought to the Company (including an
acquisition of assets or stock for which it pays, in whole or in part, with
shares of the Company's Common Stock or other securities) then it will pay the
Underwriter for such services an amount equal to 5% of the first $3,000,000 of
value paid or received in the transaction, 2 1/2% of any consideration paid over
$3,000,000 and not greater than $5,000,000 and 2% of all such value above
$5,000,000. The Company has also agreed that if, during this two-year period,
someone other than the Underwriter brings such a merger, consolidation or other
transaction to the Company and the Underwriter is retained in writing for
consultation or other services in connection therewith, then upon consummation
of the transaction the Company will pay to the Underwriter as a fee the
appropriate amount as set forth above or as otherwise agreed to between the
Company and the Underwriter.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection
with the registration statement, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the Company
pursuant to the Underwriting Agreement, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Prior to this Offering, there has been no public trading market for the
Units, the Preferred Stock or the Class A Warrants, consequently, the public
offering price of the Units, and the terms of the Preferred Stock and Class A
Warrants have been determined by negotiations between the Company and the
Underwriter. Among the factors considered in determining the offering price
and terms of the securities included in the Units were the market price of the
Common Stock, the Company's financial condition and prospects, market prices of
similar securities of comparable publicly traded companies, certain financial
and operating information of companies engaged in activities similar to those of
the Company and general conditions of the securities markets.
The rules of the Commission generally prohibit the Underwriter from making
a market in the Common Stock during the two business day period prior to
commencement of sales in the offering (the "Cooling Off Period"). The Commission
has, however, adopted Rule 10b-6A ("Rule 10b-6A") which provides an exemption
from such prohibition for certain passive market making transactions. Such
passive market making transactions must comply with applicable price and volume
limits and must be identified as passive market making transactions. In general,
pursuant to Rule 10b-6A, a passive market maker may display its bid for a
security at a price not in excess of the highest independent bid for the
security. If all independent bids are low or below the passive market maker's
bid, however, such bid must then be lowered when certain purchase limits are
exceeded. Further, net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market maker's
average daily trading volume in a security during a specified prior period and
must be discontinued when such limit is reached. Pursuant to the exemption
provided by Rule 10b-6A, the Underwriter and certain selling group numbers
may engage in passive market making in the Common Stock during the Cooling Off
Period. Passive market making may stabilize the market price of the Common Stock
at a level above that which might otherwise prevail, and if commenced, may be
discontinued at any time.
41
<PAGE> 45
The Underwriter commenced operations in May 1994 and therefore does not
have the extensive experience as an underwriter of public offerings of
securities.
The foregoing is a brief summary of certain provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A Copy of the Underwriting Agreement is on file with the Commission
as an exhibit to the Registration Statement of which this Prospectus is a part.
See "Available Information."
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.
Final approval of the settlement by the Court was issued on July 23, 1996, and
it is anticipated that 420,000 shares of Sulcus Common Stock will be
distributed to plaintiff's attorneys in October with the balance to be
distributed to the individual shareholders constituting the Class on or before
December 31, 1996.
Other Litigation
Lodgistix is the Plaintiff in an action presently pending before the United
States District Court for the District of Kansas against Total Technical
Services (TTS). Lodgistix is claiming damages in the amount of $796,000 arising
from a breach by TTS of an equipment maintenance service agreement entered into
between the parties. TTS has filed a counterclaim against Lodgistix in the
amount of $800,000. Lodgistix denies that they breached the equipment
maintenance service agreement or that they charged the Defendant for services
beyond the scope of the aforesaid Agreement. It is the opinion of Lodgistix's
counsel, David L. Nelson, Esquire, Wichita, Kansas, that the counterclaim as
filed against Lodgistix by TTS is without merit and the probability of any
liability to the Company is remote. The efforts of Lodgistix to pursue its claim
have been stayed because of a Chapter 11 bankruptcy filing by the Defendant.
Sulcus Computer Corporation, NRG Management Systems, Inc., Jeffrey S. Ratner
and Frank Morrisroe are Defendants in an action filed in January 1995, in the
Fort Bend County Court in Texas, by Walter Lipski, Jr. ("Lipski"), a former
executive with the Company's Hospitality Group. Lipski has claimed that
Defendants breached the Employment Agreement and Stock Purchase Agreement
entered into between the parties and seeks unspecified damages. Defendants
believe that there were no breaches and that Mr. Lipski was terminated with
cause for failing to fulfill his job duties and responsibilities, failing to
achieve financial projections for NRG Management Systems, Inc.,
misrepresentation of the assets of NRG Management 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. In May of 1995, the Court ruled on various
interlocutory motions filed by Plaintiff. The rulings were favorable to
Defendants and since that time, Plaintiff has taken no action to further the
case. While the ultimate outcome cannot be predicted, based on information
collected by the Company from the individual defendants, 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.
42
<PAGE> 46
LEGAL MATTERS
Certain legal matters with respect to the offering will be passed upon for
Sulcus by John W. Ryba, General Counsel for Sulcus, 41 North Main Street,
Greensburg, Pennsylvania 15601 and by Opton, Handler, Gottlieb, Feiler & Katz,
LLP, 52 Vanderbilt Avenue, New York, New York 10017, Special Counsel for Sulcus.
Peter Landau, Esq. counsel to Opton, Handler, Gottlieb, Feiler & Katz, LLP owns
33,333 shares of Sulcus Common Stock. Morse, Zelnick, Rose & Lander, LLP, 450
Park Avenue, New York, New York 10022 will pass upon certain legal matters for
the Underwriter.
EXPERTS
The consolidated financial statements of Sulcus Computer Corporation as of
December 31, 1995, and 1994 and for the three years then ended December 31,
1995, 1994 and 1993 appearing in this Prospectus and Registration Statement have
been audited by Crowe, Chizek and Company, LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports (the "Reports") and other information with
the Securities and Exchange Commission (the "Commission"). Reports and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N. W., Room 1024, Washington, D.C. 20549, and at Northwestern Atrium
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661; and Seven
World Trade Center, 13th Floor, New York, New York, 10008. Copies of such
materials also may be obtained from the Commission's Public Reference Section of
the Commission, 450 Fifth Street, N. W., Washington D.C. 20549 at prescribed
rates. The Company's securities are listed and traded on the American Stock
Exchange. The Reports and other statements and other information concerning the
Company filed with that exchange may be inspected at the offices of such
exchange.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement (the "Registration
Statement") with the Commission under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statements and in the exhibits and
schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. Each statement contained herein
concerning a document filed as an exhibit to the Registration Statement is
qualified in its entirety by reference to such exhibit for a complete statement
of its provisions. For further information with respect to the Company and the
securities offered hereby, reference is made to such Registration Statement and
to the exhibits and schedules thereto.
The Registration Statement and any amendments thereto, including exhibits
filed as a part thereof, are available for inspection and copying as set forth
above.
43
<PAGE> 47
SULCUS COMPUTER CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
REPORTS OF INDEPENDENT AUDITORS.......................................................................F-1 to F2
CONSOLIDATED BALANCE SHEETS...........................................................................F-3
December 31, 1995 and 1994 and June 30, 1996
CONSOLIDATED STATEMENTS OF OPERATIONS.................................................................F-4
Years ended December 31, 1995, 1994 and 1993 and the
six months ended June 30, 1996 and 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................................F-5
Years ended December 31, 1995, 1994 and 1993 and the
six months ended June 30, 1996 and 1995
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.......................................................F-6
Years ended December 31, 1995, 1994 and 1993 and the
six months ended June 30, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................F-7 to F-23
</TABLE>
44
<PAGE> 48
[CROWE CHIZEK LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sulcus Computer Corporation
We have audited the accompanying consolidated balance sheets 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.
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 16(b). In our opinion, such financial schedule presents fairly
the information required to be set further therein.
/s/ CROWE, CHIZEK AND COMPANY LLP
-----------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
March 1, 1996, except for Note 2, as to which
the date is March 21, 1996 and Note 20, as to
which the date is May 2, 1996
<PAGE> 49
[CROWE CHIZEK LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sulcus Computer Corporation
We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of Sulcus Computer Corporation as of 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Sulcus Computer Corporation 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 16(b). In our opinion, such financial schedules present fairly
the information required to be set forth therein.
/s/ CROWE, CHIZEK AND COMPANY LLP
-----------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
October 18, 1996
<PAGE> 50
SULCUS COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------
1996 1995 1994
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 1,836,700 $ 1,202,325 $ 1,933,895
Short-term investments (at market) 12,083,557 12,408,075 10,324,740
Restricted cash 378,133 550,000 500,000
Accounts receivable, net of allowance of $2,046,869, $2,581,020
and $2,597,088 in 1996, 1995 and 1994, respectively 9,881,234 11,134,576 11,639,243
Inventories 2,470,960 2,573,826 2,393,563
Deferred taxes 146,649 165,557 758,472
Other current assets 2,093,474 1,761,465 1,330,240
------------ ------------ ------------
Total current assets 28,890,707 29,795,824 28,880,153
Purchased and capitalized software, net of accumulated amortization of
$9,144,116, $7,992,031 and $6,131,665 in 1996, 1995 and 1994,
respectively 4,233,299 4,941,695 6,790,945
Property and equipment, net of accumulated depreciation of $4,351,388,
$4,247,168 and $3,378,817 in 1996, 1995 and 1994, respectively 2,343,268 2,015,816 2,301,263
Goodwill, net of accumulated amortization of $3,057,098, $2,672,714
and $1,987,996 in 1996, 1995 and 1994, respectively 7,442,299 7,826,683 7,726,119
Deferred taxes 1,953,104 1,934,196 1,341,281
Other noncurrent assets 740,813 812,564 829,722
------------ ------------ ------------
Total Assets $ 45,603,490 $ 47,326,778 $ 47,869,483
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short term borrowings $ 5,889,283 $ 6,382,710 $ 6,182,995
Current portion of long-term debt 45,009 46,713 468,990
Current portion of obligations under capital leases 152,022 -- --
Accounts payable 3,760,920 4,352,408 5,836,482
Shareholder litigation liability 2,832,299 3,108,097 439,780
Deferred revenues 4,890,883 6,195,289 6,922,281
Customer deposits 1,440,117 1,311,408 1,896,886
Other accrued liabilities 2,248,267 3,008,892 2,949,837
------------ ------------ ------------
Total current liabilities 21,258,800 24,405,517 24,697,251
Long-term debt, net of current portion 3,999 27,175 85,536
Obligations under capital leases, net of current portion 230,071 -- --
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 30,700,000 shares
authorized (15,357,648, 15,145,570 and 14,505,318 shares
issued and issuable in 1996, 1995 and 1994, respectively) 37,790,800 38,016,248 37,081,413
Note receivable from stockholder -- (500,000) (500,000)
Retained earnings (deficit) (13,324,089) (14,747,712) (13,378,756)
Foreign currency adjustment (67,097) (60,832) (115,961)
Cumulative unrealized gain on investments available for sale (288,994) 186,382 --
------------ ------------ ------------
Total Stockholders' Equity 24,110,620 22,894,086 23,086,696
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 45,603,490 $ 47,326,778 $ 47,869,483
============ ============ ============
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE> 51
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
---------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue:
System sales $ 14,400,442 $ 13,590,899 $ 27,645,389 $ 25,893,783 $ 32,944,045
Support revenue 9,267,542 8,280,033 17,047,913 15,993,533 14,401,786
Dividends and other 660,319 592,759 1,290,691 1,255,848 1,937,314
------------ ------------ ------------ ------------ ------------
Total revenue 24,328,303 22,463,691 45,983,993 43,143,164 49,283,145
------------ ------------ ------------ ------------ ------------
Cost of goods sold and services provided:
Systems 7,449,137 6,836,300 14,351,669 15,078,349 19,126,487
Support services 2,606,784 2,172,294 4,613,913 5,509,625 3,958,265
------------ ------------ ------------ ------------ ------------
Total cost of sales and services
provided 10,055,921 9,008,594 18,965,582 20,587,974 23,084,752
Expenses:
Selling, general, and administrative 11,191,251 11,400,236 22,895,996 24,388,210 21,726,463
Research and development (net of capitalized
software of $556,332 and $495,404 for the
six months ended June 30, 1996 and 1995
and $1,002,854, $1,556,888 and $2,469,337
for 1995, 1994 and 1993, respectively) 590,214 646,993 1,198,999 1,596,515 1,877,628
Interest 290,958 285,164 597,672 556,269 402,764
Depreciation and amortization 776,336 853,867 1,520,033 2,157,857 2,034,144
Unrealized and realized
(gains) losses on short-term investments ---- (1,462,005) (1,462,005) 1,861,403 ----
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 expenses 12,848,759 11,724,255 28,184,722 34,223,203 29,248,493
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 1,423,623 1,730,842 (1,166,311) (11,668,013) (3,050,100)
Income taxes ---- ---- 202,645 ---- ----
Net income (loss) $ 1,423,623 $ 1,730,842 ($ 1,368,956) ($11,668,013) ($ 3,050,100)
------------ ------------ ------------ ------------ ------------
Earnings (loss) per share $ 0.08 $ 0.12 ($ 0.09) ($ 0.84) ($ 0.22)
------------ ------------ ------------ ------------ ------------
Weighted average number of common shares 16,844,442 14,801,259 14,720,327 13,872,298 14,157,335
========== ========== ========== ========== ==========
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE> 52
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1996 1995
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,423,623 $ 1,730,842
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 391,952 495,128
Amortization of capitalized software 1,281,381 1,165,231
Amortization of goodwill 384,384 358,739
Provision for doubtful accounts 229,647 281,454
Inventory obsolescence ---- ----
Loss on write-off of assets ---- ----
Write-off of goodwill ---- ----
Unrealized and realized (gain) loss on investments (8,750) (1,462,005)
Deferred income taxes ---- ----
(Purchases) sales of trading securities ---- (717,726)
Change in assets and liabilities, net of
effects from acquisitions:
Restricted cash 171,867 500,000
Accounts receivable 1,023,695 3,017,015
Insurance receivable ---- ----
Inventory 102,866 (245,119)
Other current assets (218,332) 406,876
Other assets 92,065 27,831
Accounts payable (591,488) (1,678,622)
Deferred revenues (1,304,406) (2,253,473)
Shareholder litigation liability (275,798) (76,344)
Customer deposits 128,709 (403,661)
Accrued liabilities (567,818) (773,057)
------------ ------------
Total adjustments 839,974 (1,357,733)
------------ ------------
Net cash provided by (used in) operating activities 2,263,597 373,109
------------ ------------
Cash flows from investing activities:
Purchases of short-term investments ---- ----
Purchases of available for sale securities (392,108) (6,590)
Proceeds from sales of available for sale securities 250,000 ----
Investment in sales-type leases (176,072) (90,674)
Payments received on sales-type leases 42,081 156,013
Purchase of subsidiaries, net of cash used ---- ----
Capital expenditures (736,057) (215,867)
Software development capitalized (556,332) (495,404)
------------ ------------
Net cash used in investing activities (1,568,488) (652,522)
------------ ------------
Cash flows from financing activities:
Short-term borrowings (493,427) (153,721)
Principal payments on long-term debt (24,880) (440,193)
Borrowings under capital lease agreements 373,739 ----
Payments under capital lease agreements (46,453) ----
Proceeds from stock options exercised 136,552 36,570
Issuance of stock and puts, net of costs ---- ----
Note receivable from shareholder ---- ----
------------ ------------
Net cash provided by (used in) financing activities (54,469) (557,344)
------------ ------------
Cumulative translation adjustment (6,265) 119,329
------------ ------------
Net increase (decrease) in cash
and cash equivalents 634,375 (717,428)
Cash and cash equivalents at beginning of year 1,202,325 1,933,895
------------ ------------
Cash and cash equivalents at end of year $ 1,836,700 $ 1,216,467
============ ============
</TABLE>
<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)
Borrowings under capital lease agreements ---- ---- ----
Payments under capital lease agreements ---- ---- (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> 53
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1996 (Unaudited) and
Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Common Stock
--------------------------- Retained
Number of Earnings
Shares Amount (Deficit)
---------- ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1993 13,369,219 $ 32,237,950 $ 1,339,357
Net redemption of value of puts
expired and outstanding ---- 375,000 ----
Stock options exercised 382,086 1,458,884 ----
Issuance of puts ---- 25,045 ----
Issuance of stock, acquisition
of company and contingent earnouts 344,464 1,488,541 ----
Cumulative translation adjustment ---- ---- ----
Note receivable from stockholder ---- ---- ----
Net loss ---- ---- (3,050,100)
---------- ------------ ------------
Balance, December 31, 1993 14,095,769 35,585,420 (1,710,743)
Stock options exercised 135,827 271,916 ----
Issuance of stock, contingent earnouts on
acquisitions of companies 70,836 511,077 ----
Cumulative translation adjustment ---- ---- ----
Issuance of stock, shareholder litigation 530,612 1,625,000 ----
Cancellation of shares previously issued
as contingent earnout related to acquisition (327,726) (912,000) ----
Net loss ---- ---- (11,668,013)
---------- ------------ ------------
Balance, December 31, 1994 14,505,318 37,081,413 (13,378,756)
Stock options exercised 17,660 42,847 ----
Issuance of stock, contingent earnouts on
acquisitions of companies 573,477 784,592 ----
Cumulative translation adjustment ---- ---- ----
Cumulative unrealized gain on investments
available for sale ---- ---- ----
Issuance of stock to consultants 7,408 12,000 ----
Issuance of stock as settlement of
previously recorded liabilities 41,707 95,396 ----
Net loss ---- ---- (1,368,956)
---------- ------------ ------------
Balance, December 31, 1995 15,145,570 38,016,248 (14,747,712)
Stock options exercised 83,698 136,552 ----
Cancellation of shares in
repayment of shareholder loans (220,000) (550,000) ----
Adjustment of shares issuable for
purchase of Techotel A.G 271,859 ---- ----
Adjustment of shares issuable
under earn-out agreement for
Lodgistix Scandinavia A.S 7,688 ---- ----
Cumulative unrealized (loss) on
investments available for sale ---- ---- ----
Issuance of stock for payment
of accrued expenses 68,833 188,000 ----
Cumulative translation adjustment ---- ---- ----
Net Income ---- ---- 1,423,623
---------- ------------ ------------
Balance, June 30, 1996 15,357,648 $ 37,790,800 ($13,324,089)
========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Unrealized
Gain (Loss) On Note
Foreign Investments Receivable Stock-
Currency Available From holders'
Adjustment For Sale Stockholder Equity
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 ($88,191) $ ---- $ ---- $ 33,489,116
Net redemption of value of puts
expired and outstanding ---- ---- ---- 375,000
Stock options exercised ---- ---- ---- 1,458,884
Issuance of puts ---- ---- ---- 25,045
Issuance of stock, acquisition
of company and contingent earnouts ---- ---- ---- 1,488,541
Cumulative translation adjustment 86,117 ---- ---- 86,117
Note receivable from stockholder ---- ---- (500,000) (500,000)
Net loss ---- ---- ---- (3,050,100)
----------- --------- ----------- ----------
Balance, December 31, 1993 (2,074) ---- (500,000) 33,372,603
Stock options exercised ---- ---- ---- 271,916
Issuance of stock, contingent earnouts on
acquisitions of companies ---- ---- ---- 511,077
Cumulative translation adjustment (113,887) ---- ---- (113,887)
Issuance of stock, shareholder litigation ---- ---- ---- 1,625,000
Cancellation of shares previously issued
as contingent earnout related to acquisition ---- ---- ---- (912,000)
Net loss ---- ---- ---- (11,668,013)
----------- --------- ----------- ----------
Balance, December 31, 1994 (115,961) ---- (500,000) 23,086,696
Stock options exercised ---- ---- ---- 42,847
Issuance of stock, contingent earnouts on
acquisitions of companies ---- ---- ---- 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
Issuance of stock as settlement of
previously recorded liabilities ---- ---- ---- 95,396
Net loss ---- ---- ---- (1,368,956)
----------- --------- ----------- ----------
Balance, December 31, 1995 (60,832) 186,382 (500,000) 22,894,086
Stock options exercised ---- ---- ---- 136,552
Cancellation of shares in
repayment of shareholder loans ---- ---- 500,000 (50,000)
Adjustment of shares issuable for
purchase of Techotel A.G ---- ---- ---- ----
Adjustment of shares issuable
under earn-out agreement for
Lodgistix Scandinavia A.S ---- ---- ---- ----
Cumulative unrealized (loss) on
investments available for sale ---- (475,376) ---- (475,376)
Issuance of stock for payment
of accrued expenses ---- ---- ---- 188,000
Cumulative translation adjustment (6,265) ---- ---- (6,265)
Net Income ---- ---- ---- 1,423,623
----------- --------- ----------- ----------
Balance, June 30, 1996 ($67,097) ($288,994) $---- $ 24,110,620
=========== ========= =========== ==========
</TABLE>
See notes to the consolidated financial statements.
F-6
<PAGE> 54
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
AND JUNE 30, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1996 AND 1995
AND FOR THE SIX MONTHS THEN ENDED IS UNAUDITED)
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. The Company anticipates
issuing the shares to the settlement fund on or before December 31, 1996. At
December 31, 1995, the $2,800,000 liability related to this settlement is
included in the "Shareholder Litigation Liability".
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.
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,
results of operations or cash flows.
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
F-7
<PAGE> 55
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.
INTERIM FINANCIAL INFORMATION
The unaudited interim consolidated financial statements reflect
all adjustments (consisting of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of the results for the
interim periods ended June 30, 1996 and 1995 and the financial position at June
30, 1996.
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.
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 June 30, 1996 and 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.
PURCHASED AND CAPITALIZED SOFTWARE
Purchased software has been developed by third parties to the
stage of technological feasibility at the date of acquisition. 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 are
capitalized. Amortization of purchased and capitalized software is provided for
when the product is available for general release to customers
F-8
<PAGE> 56
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, which includes amortization of assets under
capital leases, 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 undiscounted cash flows 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. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
periods in which the deferred tax asset or liability is expected to be realized
or settled. A valuation allowance is provided 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 revenues 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 June 30, 1996, are summarized as
follows:
<TABLE>
<CAPTION>
Gross Unrealized
---------------- Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C>
U.S. Government Securities
maturing between 1 and 5 years $ 515,470 $ -- $ 10,000 $ 505,470
Mutual Funds 1,574,124 -- 44,037 1,530,087
Preferred Stocks 10,282,957 -- 234,957 10,048,000
------------ -------- ----------- -----------
$ 12,372,551 $ -- $ 288,994 $12,083,557
============ ======== =========== ===========
</TABLE>
F-9
<PAGE> 57
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 date are accounted for as "Available for Sale". At June 5,
1995, the market value of the securities was below cost by $185,803.
The Company's 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
statistics rating organization nor does it require that such investments have
any additional safety features such as insurance. At June 30, 1996 and December
31, 1995, an aggregate amount of $4,228,100 and $4,470,750, respectively, of
investments were below investment grade, of which $2,400,000 and $2,600,000,
respectively, represented an investment in the preferred stock of one issuer.
The Company's short-term investment portfolio has been pledged as
collateral against borrowings under a brokerage margin account (See Note 9).
Proceeds, realized gains and realized losses from the sales of
securities classified as available for sale for the six months ended June 30,
1996 were $250,000, $8,750 and $-0-, respectively. 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 six months ended June 30,
1995 and 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>
June 30, December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Purchased software $ 6,897,100 $ 7,006,270 $ 7,186,171
Capitalized software 6,480,315 5,927,456 5,736,439
Accumulated amortization (9,144,116) (7,992,031) (6,131,665)
----------- ----------- -----------
Net purchased and capitalized software $ 4,233,299 $ 4,941,695 $ 6,790,945
=========== =========== ===========
</TABLE>
The Company capitalized software development costs of $556,332
and $495,404 during the six months ended June 30, 1996 and 1995, respectively,
and $1,002,854, $1,556,888 and $2,469,337 during the years ended December 31,
1995, 1994 and 1993, respectively. Amortization for the six months ended June
30, 1996 and 1995 was $1,281,381 and $1,165,231, respectively, and software
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.
F-10
<PAGE> 58
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>
June 30, December 31,
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Buildings and leasehold improvements $ 1,058,546 $ 1,007,171 $ 754,499
Furniture and equipment 5,636,110 5,255,813 4,925,581
Accumulated depreciation (4,351,388) (4,247,168) (3,378,817)
----------- ----------- -----------
Net property and equipment $ 2,343,268 $ 2,015,816 $ 2,301,263
=========== =========== ===========
</TABLE>
The Company leases certain equipment under agreements which are
classified as capital leases. These equipment leases have purchase options at
the end of the original lease term which ranges from 3 to 5 years. Leased
capital assets included in property, plant and equipment at June 30, 1996 and
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31,
June 30, ------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Equipment $493,000 $ -- $ --
Accumulated amortization 67,000 -- --
-------- ------ ------
$426,000 $ -- $ --
======== ====== ======
</TABLE>
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,
June 30, --------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Minimum lease payments receivable $42,143 $ 71,274 $290,211
Estimated residual value of leased property 15,434 22,002 34,258
Unearned and deferred income (6,978) (35,474) (95,749)
------- -------- --------
Net investment in sales-type leases $50,599 $ 57,802 $228,720
======= ======== ========
</TABLE>
At June 30, 1996, these sales-type lease receivables are
scheduled to mature within twelve months. 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 June 30, 1996, December 31, 1995 and December 31,
1994, the Company had the following net investment in these financed sales-type
leases:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Estimated residual value of leased property $1,434,506 $1,315,427 $ 574,034
Unearned income (247,836) (269,951) (127,651)
---------- ---------- ---------
Net investment in financed sales-type leases $1,186,670 $1,045,476 $ 446,383
========== ========== =========
</TABLE>
F-11
<PAGE> 59
At June 30, 1996 and December 31, 1995, the Company was
contingently liable for approximately $568,000 and $874,000, respectively,
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 as of
December 31, 1995 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.
Future minimum payments by year and in the aggregate under noncancelable capital
leases and operating leases with initial or remaining terms of one year or more
consist of the following as of June 30, 1996:
<TABLE>
<CAPTION>
Twelve Months Capital Operating
Ended June 30, Leases Leases
-------------- ------- ---------
<S> <C> <C>
1997 $196,469 $ 955,538
1998 174,567 608,201
1999 95,102 371,032
2000 1,300 336,818
2001 -- 286,985
Thereafter -- 1,157,165
-------- ----------
Total minimum lease payments 467,438 $3,715,739
==========
Amounts representing interest 85,345
--------
Present value of net
minimum payments 382,093
Current portion 152,022
--------
Long-term portion $230,071
========
</TABLE>
Rent expense under these agreements and other operating leases
was $788,476 and $784,648 for the six months ended June 30, 1996 and 1995 and
$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.
NOTE 8. LONG TERM DEBT
The Company's and subsidiaries' long-term debt consists of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
-------------------
1996 1995 1994
---- ---- ----
<S> <C> <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% 49,008 70,566 175,418
Notes payable to bank at prime plus 1/2% -- 3,322 47,961
------- ------- --------
49,008 73,888 554,526
Less-current portion 45,009 46,713 468,990
------- ------- --------
Long-term debt $ 3,999 $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 are $45,009 and $3,999 for
the twelve months ended June 30, 1997 and 1998, respectively. Scheduled
maturities of long-term debt are $46,713 and $27,175 for the twelve months ended
December 31, 1996 and 1997, respectively.
F-12
<PAGE> 60
NOTE 9. SHORT-TERM BORROWINGS
The Company's short-term borrowings consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
---------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Borrowings with brokerage firm on margin against
the Company's short term investment portfolio $5,814,644 $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 61,448 271,448 295,000
Bank credit lines of the Company's Swiss
subsidiary at prime 13,191 48,357 377,242
---------- ---------- ----------
Total short-term borrowings $5,889,283 $6,382,710 $6,182,995
========== ========== ==========
</TABLE>
At June 30, 1996 and December 31, 1995, the Company could borrow
up to $6,100,000 under a brokerage margin account which is secured by the
Company's short-term investment portfolio, having a market value of $11,612,670
at June 30, 1996 and $11,914,274 at December 31, 1995. Interest is charged and
paid monthly based on the broker's internally established rate which was 7.875%
at June 30, 1996 and 8.375% at December 31, 1995.
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 $38,000 at June 30, 1996 and $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>
Six Months Ended June 30, Year Ended December 31,
------------------------- -----------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <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>
Six Months
Ended June 30, Year Ended December 31,
---------------- ---------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. federal statutory tax rate 35% 35% (35%) (35%) (34%)
State income taxes, net of federal income tax effect 4% 4% 8% (4%) (5%)
Benefits not recorded (benefits recognized)
due to net carryforward position (42%) (39%) 39% 42% 47%
Foreign and Other 3% 0% 5% 1% 4%
Tax credits generated 0% 0% 0% (4%) (12%)
--- --- --- --- ---
0% 0% 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.
F-13
<PAGE> 61
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.
The following summarizes the significant components of the
Company's deferred tax assets and liabilities:
<TABLE>
<CAPTION>
Deferred Tax Consequences at June 30, 1996
----------------------------------------------
Assets Liabilities Total
------ ----------- -----
<S> <C> <C> <C>
Accounts receivable allowance $ 635,064 $ -- $ 635,064
Unrealized loss on investments 72,689 -- 72,689
Inventory writedowns 135,460 -- 135,460
Accrued expenses not currently deductible -- --
Less valuation allowance (696,564) -- (696,564)
----------- ----------- -----------
Current 146,649 -- 146,649
----------- ----------- -----------
Property and equipment book/tax cost differential -- (35,196) (35,196)
Tax loss carryforwards 10,991,098 -- 10,991,098
Tax credits 1,800,000 -- 1,800,000
Software costs capitalized for financial
reporting purposes -- (1,525,839) (1,525,839)
Less valuation allowance (9,276,959) -- (9,276,959)
----------- ----------- -----------
Noncurrent 3,514,139 (1,561,035) 1,953,104
----------- ----------- -----------
Total $ 3,660,788 $(1,561,035) $ 2,099,753
=========== =========== ===========
<CAPTION>
Deferred Tax Consequences at June 30, 1995
---------------------------------------------------
Assets Liabilities Total
------ ----------- -----
<S> <C> <C> <C>
Accounts receivable allowance $ 1,014,924 $ -- $ 1,014,924
Unrealized loss on investments 72,463 -- 72,463
Inventory writedowns 270,600 -- 270,600
Accrued expenses not currently deductible 324,542 -- 324,542
Other assets 13,466 -- 13,466
Less valuation allowance (1,127,842) -- (1,127,842)
----------- ----------- -----------
Current 568,153 -- 568,153
----------- ----------- -----------
Property and equipment book/tax cost differential -- (65,823) (65,823)
Tax loss carryforwards 10,940,181 -- 10,940,181
Tax credits 1,869,709 -- 1,869,709
Software costs capitalized for financial
reporting purposes -- (2,250,354) (2,250,354)
Less valuation allowance (8,962,113) -- (8,962,113)
----------- ----------- -----------
Noncurrent 3,847,777 (2,316,177) 1,531,600
----------- ----------- -----------
Total $ 4,415,930 $(2,316,177) $ 2,099,753
=========== =========== ===========
</TABLE>
F-14
<PAGE> 62
<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
=========== =========== ===========
<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
=========== =========== ===========
<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>
F-15
<PAGE> 63
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.
The $560,700 and $968,654 decrease in the valuation allowance in the
six months ended June 30, 1996 and 1995 and the $524,386 decrease in the
valuation allowance in the twelve months ended December 31, 1995 represents the
realization of tax benefits of temporary differences and net operating loss
carryforwards which reversed during 1995 through the generation of taxable
income. The $3,564,888 and $2,431,387 increases in the valuation allowance in
the twelve months ended December 31, 1994 and 1993 respectively represent the
temporary differences and net operating loss carryforwards generated in those
years that the Company believed were not likely to result in tax benefits.
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 at
December 31, 1995 ($28,186,000 as of June 30, 1996), a portion of which are
subject to certain limitations under the Internal Revenue Code Section 382, and
$1,800,000 of tax credits ($1,700,000 of research activities credits and
$100,000 of investment tax credits) available to offset future federal tax
liabilities. The net operating loss carryforwards expire as follows:
<TABLE>
<CAPTION>
As of As of
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
2001 $ -- $ 377,000
2002 1,149,000 1,363,000
2003 1,946,000 1,946,000
2004 4,501,000 4,501,000
2005 2,193,000 2,193,000
2006 6,579,000 6,579,000
2007 2,986,000 4,055,000
2008 5,733,000 5,733,000
2009 3,099,000 3,099,000
----------- -----------
Total $28,186,000 $29,846,000
=========== ===========
</TABLE>
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 $112,340 and $112,879 for the six months
ended June 30, 1996 and 1995 and $225,391, $185,251 and $161,700 for the years
ended December 31, 1995, 1994, and 1993, respectively. As of June 30, 1996, the
future annual rental commitments under these leases (for the 12 months ended
June 30 of the respective years) are $203,537 in 1997, $95,427 in 1998, $89,073
in 1999, $93,519 in 2000, $98,181 in 2001 and $12,980 thereafter. As of December
31, 1995, 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 made a relocation loan in 1995 to its President in
the amount of $100,000 which was secured by real estate and bears interest at
the rate of 5%. This loan was repaid on August 1, 1996. Interest was payable
quarterly and the principal was payable on the earlier of the sale of a former
residence or October 27, 1996.
NOTE 12. COMMITMENTS AND CONTINGENCIES
At June 30, 1996 and 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
$2,000,000 at June 30, 1996 and $1,924,000 at December 31, 1995 and are expected
to be fulfilled as follows:
F-16
<PAGE> 64
<TABLE>
<CAPTION>
At June 30, 1996 At December 31, 1995
---------------- --------------------
<S> <C> <C>
90 days $1,225,000 $1,212,000
180 days $ 600,000 $ 559,000
270 days $ 100,000 $ 86,000
360 days $ 75,000 $ 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 June 30, 1996
and 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.
The employee stock option plan activity for the six months ended
June 30, 1996 and 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
--------- -----------------
1996 (through June 30)
Granted 391,128 $1.9375 - $3.2500
Exercised (23,700) $2.1875 - $2.5625
Canceled (358,699) $2.1875 - $8.6250
--------- -----------------
Outstanding, June 30, 1996 1,461,511 $1.0000 - $9.2500
========= =================
</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 six months ended June 30,
1996, 25,000 director options were granted at $1.9375. 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 or during the six months ended June 30, 1996. All
options are granted at prices not less than fair market value.
F-17
<PAGE> 65
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 June 30, 1996, under all plans, options for approximately
1,084,636 and 2,014,844 shares were exercisable and outstanding, respectively,
at prices ranging from $1.000 to $9.250. 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.
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 was intended to 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. In May 1996,
the Company and the former shareholders of Techotel agreed to the repayment of
the note through the cancellation of 200,000 shares issuable under the purchase
agreement.
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 (later
calculated as being 13,494 shares) and 111,801 shares of Sulcus common stock for
an aggregate value of $44,864 (initially valued as $7.725 per share, later
valued at $3.325 per share under the terms of the agreement) 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. This was originally calculated to be 128,141 shares,
however, a provision in the purchase agreement provided for the valuation of
shares at a certain future date. This date was December 31, 1994 at which time
the share value was $2.50 and the number of shares issuable were calculated to
be 400,000. The parties agreed to this interpretation of the contract in May
1996 and the number of shares issuable was adjusted at that time. In addition,
the 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
F-18
<PAGE> 66
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 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.
F-19
<PAGE> 67
NOTE 16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Ended June 30, Twelve Months Ended December 31,
1996 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net interest paid $290,958 $285,164 $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 $ 13,000 $ 5,500 $ 12,000 - -
Issuance of stock as settlement of
previously recorded liabilities $175,000 $ 95,396 $ 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 -
Cancellation of shares in repayment
of shareholder loans $550,000 - - - -
Unrealized gain on investments
available for sale - $ 11,472 $186,382 - -
Unrealized loss on investments
available for sale $288,994 - - - -
</TABLE>
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 is summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, Twelve Months Ended December 31,
------------------------- --------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues:
Domestic $15,653,790 $15,845,855 $31,195,481 $30,190,420 $35,792,461
Canada 2,553,657 1,911,411 3,625,643 2,859,899 2,367,905
Pacific Region 3,347,041 2,131,687 5,736,551 4,852,745 7,077,521
Europe 2,773,815 2,574,738 5,426,318 5,240,100 4,045,258
---------- ---------- ----------- ----------- -----------
Consolidated
net revenues $24,328,303 $22,463,691 $45,983,993 $43,143,164 $49,283,145
=========== =========== =========== =========== ===========
</TABLE>
F-20
<PAGE> 68
<TABLE>
<CAPTION>
Six Months Ended June 30, Twelve Months Ended December 31,
------------------------- --------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss):
Domestic $1,414,025 $2,432,817 ($147,949) ($8,183,839) ($1,716,591)
Canada 131,079 258,414 273,760 210,686 (1,453)
Pacific Region (19,699) (797,960) (1,290,717) (3,304,369) (1,937,632)
Europe (101,782) (162,429) (204,050) (390,491) 605,576
----------- ----------- ------------ ----------- ----------
Consolidated
net income (loss) $1,423,623 $1,730,842 ($1,368,956) ($11,668,013) ($3,050,100)
========== ========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of December 31,
-------------- --------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Identifiable assets:
Domestic $35,637,661 $37,646,558 $39,288,050 $47,366,589
Canada 1,900,386 1,562,171 1,259,913 1,233,470
Pacific Region 3,709,569 3,437,539 2,560,219 5,867,076
Europe 4,355,874 4,680,510 4,761,301 4,248,506
---------- ----------- ----------- -----------
Consolidated identifiable assets $45,603,490 $47,326,778 $47,869,483 $58,715,641
=========== =========== =========== ===========
</TABLE>
The 1995 Domestic 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 Domestic 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.
F-21
<PAGE> 69
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
data for the six months ended June 30, 1996 and the years ended December 31,
1995 and 1994. The Company believes this information has been prepared on the
same basis as the 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
June March
30, 31,
1996 1996
---- ----
<S> <C> <C>
Total Revenues 13,053,284 11,275,019
Cost of sales
and expenses 12,151,065 10,753,615
Income (loss)
before taxes 902,219 521,404
Tax provision 0 0
Net income
(loss) 902,219 521,404
======= =======
Earnings (loss) per share 0.05 0.03
==== ====
</TABLE>
<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.
F-22
<PAGE> 70
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.
The carrying amounts and fair value of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ----------------------------- ------------------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
<S> <C> <C> <C> <C> <C> <C>
Cash $1,836,700 $1,836,700 $1,202,325 $1,202,325 $1,933,895 $1,933,895
Restricted cash 378,133 378,133 550,000 550,000 500,000 500,000
Short-term investments 12,083,557 12,083,557 12,408,075 12,408,075 10,324,740 10,324,740
Short-term borrowings 5,889,283 5,889,283 6,382,710 6,382,710 6,182,995 6,182,995
Shareholder litigation
liability 2,832,299 2,832,299 3,108,097 3,283,097 439,780 439,780
Long-term borrowings 279,079 279,079 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
alleges violations of Section 10(b) and Rule 10b-5 against Sulcus. The proposed
Order Instituting Proceedings does not allege violations of Section 10(b) or
Rule 10b-5 against Sulcus 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.
On May 2, 1996, the Company entered into an agreement with the
Securities and Exchange Commission resolving the investigation described above.
This agreement was under the terms described above.
F-23
<PAGE> 71
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and if given or made, such information or representation must not be
relied upon as having been authorized by the Company or any Underwriter. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof or that information contained
herein is correct as of any date subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby by anyone in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.......................... 3
Summary Financial Data...................... 5
Recent Developments......................... 6
Risk Factors................................ 7
Use of Proceeds............................. 10
Dividend Policy............................. 10
Dilution.................................... 10
Capitalization.............................. 12
Price Range of Common Stock................. 13
Selected Financial Data..................... 14
Management's Discussion and
Analysis of Financial Condition
and Results............................... 15
Business.................................... 19
Management.................................. 27
Principal Shareholders...................... 34
Certain Transactions........................ 35
Description of Securities................... 36
Shares Eligible for Future Sale............. 39
Underwriting................................ 39
Legal Proceedings........................... 42
Experts..................................... 43
Available Information....................... 43
Additional Information...................... 43
Index to Financial Statements............... 44
</TABLE>
200,000 Units
EACH UNIT CONSISTING OF
ONE SHARE OF PREFERRED STOCK
AND
FOUR CLASS A WARRANTS
PROSPECTUS
JOSEPH STEVENS & COMPANY, L.P.
OCTOBER , 1996
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following expenses are estimated:
<TABLE>
<CAPTION>
<S> <C> <C>
SEC Registration Fee $ 3,500
American Stock Exchange Fees $ 10,000
Accounting fees $ 45,000
Legal Fees $ 80,000
Printing, Engraving & Mailing $ 30,000
Warrant agent, Transfer agent & registrars fees $ 20,000
Blue Sky fees and expenses $ 22,500
Miscellaneous expenses $ 29,000
--------
TOTAL $240,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 1741 through 1747 of the Pennsylvania 1988 Business
Corporation Law permits indemnification of officers, directors and employees and
agents of a corporation.
Article 5.3 of Article V of the Registrant's By-Laws provides as
follows:
5.3 Indemnification of Directors, Officers and Employees: The
Corporation shall indemnify any person who was or is threatened to be made a
party to any threatened, pending or contemplated action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a Director, officer, employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a Director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against all expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding or the defense or settlement thereof of any claim,
issue or matter therein, to the fullest extent permitted by the laws of
Pennsylvania as they may exist from time to time.
Expenses incurred by any such person in defending any such action, suit
or proceeding may be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding if authorized by a majority of the Directors
of the Corporation who are not interested in such action, suit or proceeding.
The proper officers of the Corporation, without further authorization by the
Board of Directors may, in their discretion, purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
Director, officer, employee or agent for another corporation, partnership, joint
venture, trust or other enterprise,
II-1
<PAGE> 73
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the laws of
Pennsylvania and under this Article 5.3.
The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which a person seeking indemnification may be
entitled under any agreement, vote of shareholders or disinterested Directors
or otherwise, both as to action in his official capacity and to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent of the type referred
to above and shall insure to the benefit of the heirs, executors and
administrators of such a person.
The Stock Purchase Agreements relating to the acquisition of Techotel,
A.G. and Lodgistix Scandinavia, A.S. contain provisions whereby the Shareholders
of each of those companies shall indemnify and hold harmless Sulcus, each
director of Sulcus, each officer of Sulcus who signed the Registration
Statement, and each person who controls any of the foregoing persons within the
meaning of the Securities Act with respect to any statement or omission from
such Registration Statement, filed with the Commission, if such statement or
omission was made in reliance upon and in conformity with written information
furnished to Sulcus specifically for use in connection with the preparation of
such registration statement.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Registrant's By-Laws, the Stock Purchase
Agreements, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the act and is therefore unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person in connection with the securities being registered), the
Registrant will, unless in the opinion of its counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following securities were sold by the
registrant without registration under the Securities Act of 1933, as amended:
On November 15, 1993, Registrant agreed to issue 34,000 shares of its
common stock to the three shareholders of Lodgistix Scandinavia, A.S. in
connection with the acquisition on November 15, 1993, of all of the issued and
outstanding capital stock of Lodgistix Scandinavia, A.S., subject to certain
adjustment, depending upon the price of Sulcus shares on the effective date of
the Registration Statement filed to permit the sale of such shares. As of the
date hereof, the former shareholders of Lodgistix Scandinavia have received an
aggregate of 255,295 shares of Common Stock.
II-2
<PAGE> 74
On August 3, 1994, Registrant agreed to issue up to 33,333 of its
common stock to Peter Landau, Esq. as payment for legal services rendered and to
be rendered to Registrant and for expenses in connection therewith.
On August 24, 1994, Registrant agreed to issue 31,707 shares of its
common stock to the Wall Street Group, Inc. as payment for financial public
relations consulting services rendered and to be rendered to Registrant.
On December 13, 1994, Registrant agreed to issue 96,000 shares of its
common stock to O. Gene Bicknell in payment of a Promissory Note and interest
thereon.
The Registrant believes the issuances of the securities referred to
above were and in the case of issuances to be made in the future will be exempt
from registration under the Act pursuant to Section 4(2) of the Act, as not
involving any public offering. Claims of such exemptions are based upon the
following; (i) all of the purchasers in such transactions were sophisticated
investors with the requisite knowledge and experience in financial and business
matters to evaluate the merits and risk of an investment in the Registrant, were
able to bear the economic risk of an investment in the Registrant, had access to
or were furnished with the kinds of information that registration under the Act
would have provided, and acquired securities for their own accounts in
transactions not involving any general solicitations or general advertising, and
not with a view to the distribution thereof, and (ii) a restrictive legend was
placed on each certificate evidencing the securities. None of the foregoing
transactions involved an underwriter (as defined in the Act).
ITEM 16. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
Unless otherwise noted, the following exhibits are filed with this
Registration Statement.
<TABLE>
<CAPTION>
16 (A) EXHIBITS
<S> <C> <C>
1(a) Form of Underwriting Agreement#
(b) Form of Agreement Among Underwriters*
(c) Form of Selected Dealers Agreement*
(2)(a) Agreement and Plan of Reorganization between Lodgistix and Sulcus.**
(a)(i) Amendment 1. to Agreement and Plan of Reorganization.**
(ii) Amendment 2. to Agreement and Plan of Reorganization.**
(b) Agreement of Merger between Lodgistix and Sulcus.**
(b)(i) Amendment 1. to Agreement of Merger.**
(b)(ii) Amendment 2. to Agreement of Merger.**
(c)(i) Certificate of Merger - Delaware ***
(c)(ii) Certificate of Merger - Kansas ***
(d) Stock Purchase Agreement among Sulcus, Squirrel and shareholders of Squirrel ****
(e) Stock Purchase Agreement and Plan of Reorganization among Sulcus, NRG and
shareholders of NRG ****
</TABLE>
II-3
<PAGE> 75
<TABLE>
<CAPTION>
<C> <C>
(f) Stock Purchase Agreement among Sulcus, JBA and shareholders of JBA++
(g) Stock Purchase Agreement among Sulcus, Techotel and shareholders of Techotel
*****
(h) Stock Purchase Agreement among Sulcus, Lodgistix Scandinavia and shareholders
of Lodgistix Scandinavia *******
(3)(a) Articles of Incorporation+
(b) Certificate of Amendment to Articles of Incorporation+
(c) Form of Proposed Amendments to Articles of Incorporation***
(c)(i) Form of Proposed Amendment to Preferred Stock Provisions of Articles of
Incorporation#
(d) By-Laws*
(4)(a) Form of Common Stock Certificate+
(a)(i) Form of Class A Warrant Certificate#
(b) Form of Underwriter's Warrant X
(c) Form of Warrant Agreement#
(d) Form of Preferred Stock Certificate#
(e) Form of Class B Warrant***
(f) Form of Class B Warrant Agreement***
(5)(a) Opinion of Counsel for Sulcus X
(b) Opinion of David Nelson, Esq. *********
(10)(a) Incentive Stock Option Plan, as amended*
(a)(i) Form of 1991 Incentive Stock Option Plan***
(b) Director's Stock Option Plan*
(b)(ii) Form of 1991 Directors Stock Option Plan***
(c) Form of Incentive Stock Option Agreement*
(d) Form of Directors Stock Option Agreement*
(h) Management Agreement between Hospitality Management Systems, Inc. and
CompuSolv, Inc., dated March 1, 1989*
(i) Exclusive License Agreement between Hospitality Management Systems, Inc. and
CompuSolv, Inc., dated July 14, 1989*
(j) Form of Distributor Agreement*
(l) Form of Reseller Agreement (Software)*
(n) Form of Support, Maintenance & Enhancement Agreement*
(o) Form of Hardware Service Agreement*
(x) Form of Purchase/License Agreement between Hospitality Management Systems, Inc.
and Purchaser*
(y) Lease for premises at 41 N. Main Street, Greensburg, PA*
</TABLE>
II-4
<PAGE> 76
<TABLE>
<CAPTION>
<C> <C>
(viii) Employment Agreement with Jeffrey S. Ratner ********
(viii)(a) Amendment to Employment Agreement with Jeffrey S. Ratner *********
(ix) Employment Agreement with John W. Ryba ********
(x) Employment Agreement with Delmer C. Gowing, III ********
(xi) Employment Agreement with H. Richard Howie ********
(xiii) Employment Agreement with Joel Nagelmann**********
(aa) Citibank Agreement*
(bb) Radix Agreement**
(cc) Agreement with Horwath International
(11) Statement RE: Computation of Per Share Earnings
(24)(a) Consents of Crowe, Chizek and Company, LLP
(Included in Part II of Registration Statement)
(b) Consent of Counsel (contained in his opinion Exhibit 5(a) included in Part II of
Registration Statement) X
(c) Consent of Litigation Counsel contained in his opinion Exhibit 5(b) (included in Part
II of Registration Statement) *********
(16) (b) FINANCIAL STATEMENT SCHEDULES
Schedule VIII - Valuation and Qualifying Accounts
</TABLE>
+ Incorporated by reference to Form S-18 Registration Statement (No.
2-91055-W) of Registrant filed on May 10, 1984.
++ Filed with Amendment No. 1 to Registration Statement 33-48682 filed on
June 16, 1992.
+++ Filed with Amendment No. 2 to Registration Statement 33-48682 filed on
June 16, 1992.
++++ Filed with Amendment No. 3 to Registration Statement 33-48682 filed on
June 16, 1992.
* Incorporated by reference to Form S-1 Registration Statement (No.
33-32469) of Registrant filed on December 7, 1989.
** Incorporated by reference to Form S-4 Registration Statement
(No.33-37923) of Registrant filed on November 23, 1990.
*** Incorporated by reference to Form 10-K Annual Report (No. 0-13226) filed
on May 15, 1994.
II-5
<PAGE> 77
**** Incorporated by reference to Form 8-K current report for March 1992.
**** Incorporated by reference to Form 8-K current report for February 1993.
*
**** Incorporated by reference to Form 8-K current report for November 1993.
***
**** Incorporated by reference to Form S-1 Registration Statement (No.
**** 33-85244), filed on October 14, 1994.
***** Incorporated by reference to Amendment No. 1 to Form S-1 Registration
**** Statement (No. 33-85244), filed on January 19, 1995.
***** Incorporated by reference to Form 10-K Form 10-K Annual Report (No.
***** 0-13226) filed on April 15, 1996.
# Incorporated by reference to Amendment No. 3 to Form S-1 Registration
Statement (No. 33-85244), filed on July 29, 1996.
X To be filed by Amendment
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(i) To include any Prospectus required by Section 10(a)
of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration
Statement (or most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new Registration Statement relating to
the securities being offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-6
<PAGE> 78
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
II-7
<PAGE> 79
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned directors and officers of Sulcus Computer
Corporation, do hereby constitute and appoint Jeffrey S. Ratner, H. Richard
Howie and John W. Ryba, and each of them, our true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
to do any and all acts and things in our respective names and on our respective
behalves in the capacities indicated below that Jeffrey S. Ratner, H. Richard
Howie and John W. Ryba, or any of them, may deem necessary or advisable to
enable Sulcus Computer Corporation to comply with the Securities Act of 1933, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Registration Statement, including
specifically, but not limited to, power and authority to sign for us or any of
us in our respective names in the capacities indicated below any and all
amendments (including post-effective amendments) hereto and to file the same,
with all exhibits thereto and other documents therewith, with the Securities and
Exchange Commission; and we do hereby ratify and confirm all that Jeffrey S.
Ratner, H. Richard Howie and John W. Ryba, or any of them, shall do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
II-8
<PAGE> 80
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Greensburg, Commonwealth
of Pennsylvania, on October 23, 1996.
SULCUS COMPUTER CORPORATION
By: /s/ JOEL NAGELMANN *
-------------------------------------
Joel Nagelmann
President and Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature and Title Date
<S> <C>
/s/ JEFFREY S. RATNER * October 23, 1996
- --------------------------------------------- ------------------------------
Jeffrey Scott Ratner
Chairman of the Board and Director
/s/ JOHN W. RYBA * October 23, 1996
- --------------------------------------------- ------------------------------
John W. Ryba
General Counsel and Director
/s/ ROBERT D. GRIES * October 23, 1996
- --------------------------------------------- ------------------------------
Robert D. Gries, Director
/s/ HERBERT G. RATNER * October 23, 1996
- --------------------------------------------- ------------------------------
Herbert G. Ratner, Director
/s/ DAVID H. ADLER * October 23, 1996
- --------------------------------------------- ------------------------------
David Adler, Director
/s/ JOEL NAGELMANN * October 23, 1996
- --------------------------------------------- -------------------------------
Joel Nagelmann, President and
Principal Executive Officer
/s/ H. RICHARD HOWIE * October 23, 1996
- --------------------------------------------- ------------------------------
H. Richard Howie, Chief Financial
Officer and Chief Accounting Officer
*By /s/ JOHN W. RYBA * October 23, 1996
- --------------------------------------------- ------------------------------
John W. Ryba
Attorney-in-fact
</TABLE>
II-9
<PAGE> 1
Exhibit 10(a)(cc)
PORTIONS OF THIS DOCUMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS MARKED BY * AND [ ] HAVE BEEN
SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
A MARKET DEVELOPMENT AND OPERATING AGREEMENT
BETWEEN
SULCUS COMPUTER CORPORATION
AND
HORWATH INTERNATIONAL HAT, INC.
THIS AGREEMENT is made and entered into and effective as of the 1ST
day of January, 1996, by and between Sulcus Computer Corporation, a
Pennsylvania corporation (hereinafter referred to as "Sulcus"), having its
principal office at 41 North Main Street, Greensburg, PA, USA, 15601;
AND
Horwath International HAT, Inc. ("HIHAT"), a Delaware corporation,
with headquarters at 415 Madison Avenue, New York, USA, 10017.
WHEREAS, Sulcus, through its subsidiaries and affiliates, develops,
manufactures, markets, and installs computer systems and provides services for
the hospitality and tourism industry worldwide; and
WHEREAS, HIHAT is involved in various services and consulting
activities to the hospitality and tourism industry worldwide; and
WHEREAS, in accordance with the intentions of the parties HIHAT
shall be authorized to market, license or sell worldwide a series of
automation products and services exclusively supplied by Sulcus to be called
the "Hat...ms Products"; and
WHEREAS, both Sulcus and HIHAT desire to jointly coordinate their
expertise by Sulcus granting an exclusive, nontransferable master license under
the terms of this Agreement; and
WHEREAS, in order to achieve their mutual objectives and purposes the
parties each agree to the following covenants, conditions and terms:
DEFINITIONS
In addition to the words and terms defined in this Agreement, other
definitions are on the Attached Exhibit.
TERM AND GRANT
a. This Agreement shall commence as of January 1, 1996, and shall
continue for an initial term of 66 months. Thereafter, unless earlier
terminated pursuant to this Agreement, this Agreement shall renew automatically
for successive 12 month renewal periods. HIHAT may terminate this Agreement by
giving to Sulcus 90 days written notice prior to expiration of the initial
term, or any 12 month renewal term; and Sulcus may terminate this Agreement by
giving HIHAT 90 days written notice prior to expiration of the initial term, or
any 12 month renewal term. All dollar figures, prices or amounts used in the
Agreement or any other agreements related to or contemplated by this Agreement
shall be denominated in United States dollars.
1
<PAGE> 2
THE INFORMATION MARKED BELOW BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTION HAS BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
b. Sulcus hereby grants to HIHAT an exclusive, nontransferable right
and license, to sublicense to its Peer Distributors copies of the HAT...ms
Products in object code only, and resell Sulcus hardware and other peripherals
as shown on the attached HAT...ms Product Price List for use as part of the
HAT...ms Program for marketing and distribution purposes. For the term of this
Agreement and any subsequent renewal, HIHAT shall pay to Sulcus a master
license fee of an aggregate of [*****] of which will be paid simultaneously
with executing this Agreement. The balance of [*****], will be paid in four (4)
annual installments of [*****] on the first day of each year in consecutive
equal installments, the first such payment to be made on [*****]. Failure to
make the license fee payments when due shall be a material breach of this
Agreement, and Sulcus may, at its sole option, terminate this Agreement.
OBJECTS, PURPOSES, NON-COMPETE AND PEER DISTRIBUTORS
This Agreement is entered into to accomplish the following objects and
purposes:
a. To allow HIHAT to exclusively market, sell, distribute and license
the HAT...ms Product Line which will be supplied solely by Sulcus for
automating hotels, restaurants, convention centers, country clubs, airlines,
and all other businesses directly or indirectly involved in hospitality and
tourism throughout the world, under the HAT...ms Program, subject to Sulcus'
reservation of selling rights. Sulcus will not develop and sell any other
products using the HAT...ms designation or name.
b. To allow HIHAT to enter into licenses, sub-licenses, contracts and
agreements with its Peer Distributors relating to the marketing, distribution,
licensing, use and sales of HAT...ms Products and the training of the customers
and on-going support and maintenance thereof.
c. To do and perform everything or take such action which may be
necessary, advisable or proper for the conduct of the business of and carrying
out the purposes, objects and powers set forth in this Agreement.
d. [*****] A form to be called, "HAT-HI-1," will be completed with
appropriate information inserted and submitted to the managing director (or
his/her assignee) for signatures.
e. During the term of this Agreement or any renewal, and if HIHAT
breaches or terminates this Agreement, for one year after its termination,
HIHAT will not directly or indirectly through an existing or future business
entity or operation recommend, develop, manufacture, purchase, acquire,
license, market, or, enter into any other distribution agreements or any other
agreements with any other corporation, partnership, person or entity engaged in
recommending, creating, marketing, manufacturing and/or licensing hardware and
software products designed by anyone other than Sulcus for the hospitality
industry, which is similar in managing aspects of business, function, price and
quality, to the HAT...ms Product Line, or which are in any way whatsoever
competitive with Sulcus, or supply any customer in the hospitality and tourism
industry with a competing product.
f. HIHAT will identify and select organizations affiliated with HIHAT
who, subject to Sulcus' approval, will distribute the HAT...ms Product Line in
designated territories. HIHAT and each of its Peer Distributors will establish
and maintain marketing and sales operations worldwide to perform the objectives
contemplated by this Agreement. It is expected that such affiliates will enter
into separate contracts with HIHAT either as Peer Distributors of HAT...ms
Products or as Peer Associates. A Peer Distributor, prior to executing its Peer
Distributor Agreement, must have its legal counsel opine in writing that
nothing contained therein is illegal or inappropriate for the territory in
which said Peer Distributor shall be operating, and further shall indemnify and
hold harmless HIHAT and all affiliates. Each Peer Distributor shall place its
order for HAT...ms Products with HIHAT.
2
<PAGE> 3
THE INFORMATION MARKED BELOW BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTION HAS BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
HIHAT shall thereafter place the order directly with Sulcus for shipping and
delivery directly to the Peer Distributor. HIHAT shall be billed by Sulcus and
Sulcus shall receive payment directly from HIHAT. HIHAT shall be entitled to
purchase such products at a discount of [*****] off of the HAT...ms Price List,
as attached and as amended through the term of the agreement. Unless otherwise
expressly stated, discounts shall apply only to the software and hardware
components of the HAT...ms Product Lines. Sulcus reserves the right to change
any prices on the attached HAT...ms Price Lists at any time, except that any
such changes shall not affect any orders from HIHAT received by Sulcus prior to
the stated effective date of any such change.
g. It is agreed that the name, "HAT...ms," will be owned jointly by
the parties, who will take all steps necessary to protect this name and to
register the name for trade or service mark protection in the United States and
in all other countries in which the HAT..ms Program will be implemented. Sulcus
shall take appropriate steps to register the name and marks in the United
States and HIHAT shall do so in all other countries where the HAT...ms Program
is implemented.
h. In addition to the existing marketing materials completed and
approved by the parties, from time to time other marketing materials will be
produced. The cost of artwork, production, printing and related materials will
[*****] subject to the prior approvals of each party. Not included in the costs
will be items that are part of the [*****] internal personnel, or other labor
costs. Except for fees, expenses or costs required to be paid by one party to
the other under the terms of this Agreement, any other costs or expense not
related to the marketing efforts will be paid by the party who incurs them.
i. Sulcus will offer to HIHAT, [*****] hardware products purchased for
end users through the HAT program. The terms, requirements and other
information dealing with the [*****] are set forth in the [*****].
j. HIHAT shall have the right to introduce software and hardware
products [*****]. In order for said hardware and software [*****]. Products
installed without Sulcus' approval shall void all software and hardware
warranties whatsoever, and shall be deemed a material breach of this Agreement.
RESERVED SELLING RIGHTS
Notwithstanding any other provisions of this Agreement to the
contrary, Sulcus reserves the right to sell any of its present or future
products worldwide to the following customers:
a. Federal, state or foreign governments or departments thereof,
except in situations outside of the U.S., this may be modified with mutual
agreement.
b. National or international users which are defined as organizations
having more than [*****] outlets, branches or offices which centralize buying
of some or all products at one or more central purchasing locations. Sulcus
shall periodically provide a list to the Managing Director of HIHAT, upon his
request, of its customers designated as "Premier Accounts," none of which HIHAT
or any Peer Distributor can offer, license or sell HAT...ms Products to. If
either party notifies the other that it is working with a national or
international user not listed on the Premier Account List, then the notified
party will not solicit, offer or sell to such user, for [*****] from the date
of said notice. If a customer listed on the Premium Account List is located in
a Peer Distributor territory, Sulcus shall pay to such Peer Distributor [*****]
of the [*****] (herein after referred to as drop fee) when payments are
received by Sulcus for the software and hardware portions of a transaction for
a transaction completed by Sulcus after the date on which the Peer Distributor
was legally authorized to market in that territory pursuant to this Agreement.
In order to receive such payment the Peer Distributor shall coordinate the
shipment, delivery and installation of the applicable products.
c. Original equipment manufacturers for inclusion in their products.
3
<PAGE> 4
THE INFORMATION MARKED BELOW BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTION HAS BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
d. Under special circumstances as determined solely by Sulcus, any
other entity, company or individual, so long as HIHAT is given a [*****] credit
of the [*****] unless such sale is reserved to Sulcus by the other provisions
of this paragraph, in which case no credit will be provided.
e. Individuals or organizations that were active prospects for a
Sulcus system prior to the effective date of a Peer Distributor Agreement in a
defined territory provided that a purchase contract is consummated within 90
days subsequent to the effective date of this Agreement.
f. Sulcus products for use other than integration with software which
HIHAT is authorized to sell.
g. Where a Peer Distributor concludes a sale of HAT...ms Products to
one of its customers that will be installed outside of its territory, such
Peer Distributor will pay to Sulcus, a Sulcus Business Partner, or to another
Peer Distributor in whose territory the installation will be made, [*****] of
the [*****] for the software and hardware portions of the transaction when
payments are received by said Peer Distributor.
PEER DISTRIBUTOR REQUIREMENTS
During the first 18 months of this Agreement HIHAT shall appoint,
SUBJECT TO Sulcus' approval (i) a minimum of seven (7) Peer Distributors who
shall be organizations with capabilities to market, sell, support and maintain
the HAT...ms Product Line; and (ii) appoint a minimum of ten (10) Peer
Associates, who may be individuals or organizations. Thereafter, from year to
year, HIHAT shall appoint, subject to Sulcus approval and pursuant to this
Agreement, Peer Distributors and Peer Associates each year. Upon seven (7) days
written notice, HIHAT may change any Peer Distributor or Peer Associate,
provided, however, any new or replacements first shall be approved by Sulcus
which approval will not be unreasonably withheld. HIHAT agrees to certify to
Sulcus the good standing of each Peer Distributor and Peer Associate every
twelve (12) months, or immediately if any Peer Distributor or Peer Associate is
no longer affiliated with HIHAT.
Prior to receiving Sulcus approval, each Peer Distributor shall be
required to submit to HIHAT and to Sulcus, a comprehensive business plan
containing financial information and sales projections (Plans) for the initial
term of this Agreement. Sulcus will allow a three month ramp-up period after
which each Peer Distributor must attain end user sales of at least $750,000 for
the next twelve months. Thereafter, each Peer Distributor agreement will
automatically renew for consecutive twelve month periods unless otherwise
terminated in accordance with this Agreement or with the Peer Distributor's
agreement. Each Peer Distributor must attain end user sales of at least
$950,000 in each subsequent twelve month renewal period. If any Peer
Distributor fails to meet any minimum end user sales, Sulcus, at its sole
option, may withdraw its approval of such Peer Distributor, and HIHAT shall
immediately cancel and terminate their agreement with that Peer Distributor. If
the total net end-user sales in any quarter is less than [*****] of the
combined minimum end-user sales including [*****] for all existing Peer
Distributors then under contract, Sulcus, at its sole option, may terminate
this Agreement and all rights granted or licensed hereunder. In such occurrence
all Peer Distributor's and Peer Associate's agreements will be likewise
terminated and canceled by HIHAT as provided in this Agreement.
In order to coordinate operations and communications between Sulcus
and HIHAT under the HAT...ms Program, each party will appoint a person to act
as a Managing Director whose name, address and phone number will be set forth
in the attached Exhibit, whose responsibilities will be to accept all notices
called for in this agreement and to take such actions that may be necessary for
the conduct of the program. Either party may at any time change its managing
director upon seven (7) days written notice which is signed by a duly
authorized officer.
4
<PAGE> 5
THE INFORMATION MARKED BELOW BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTION HAS BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
All HAT...ms installations of the HAT...ms Product Line must be done
by a certified Sulcus trainer whether employed by HIHAT, Peer Distributor or
Sulcus. Sulcus shall provide the first line of support to all HAT..ms
installations. HIHAT shall require its Peer Distributors to provide direct and
continuing back-up support to all HAT..ms installations via telephone or on
site assistance as may be appropriate to all HAT...ms installations having
signed a Sulcus Support, Maintenance and Enhancement(SME) Agreement with
Sulcus. [*****]. HIHAT shall be entitled to receive [*****] received by Sulcus
under the Sulcus Support, Maintenance and Enhancement Agreements.
All Peer Distributor contracts entered into by HIHAT shall contain
such terms and conditions that continually protect the ownership, copyright,
intellectual property and other rights of Sulcus and shall contain, among other
things, terms legally sufficient to:
Grant non-exclusive, nontransferable rights to market the HAT..ms
Product Line.
License, not transfer ownership of any Sulcus intellectual property,
and preserve copyright notices and intellectual property rights of Sulcus
Prohibit reverse engineering, decompiling or recompiling, or other
translation.
Prevent the disclosure of any confidential material or information of
Sulcus.
Require that the performance of any obligations under this Agreement
and under the Peer distributor Agreement comply with all applicable laws and
regulations of each country, province and political subdivision in which the
HAT..ms Products are marketed or delivered.
Sulcus shall have the right to review and approve the terms and
conditions of HIHAT'S proposed Peer Distributor Agreement prior to its
introduction and use.
In addition to any other obligations or requirements stated in this
Agreement, HIHAT shall be responsible for and shall require each Peer
Distributor, at a minimum, to:
- Purchase from HIHAT, exclusively, all components relating to the HAT...ms
Product Line.
- Attend and satisfactorily complete appropriate training
courses offered by Sulcus Training Services.
- Ensure that individuals conducting sales activities comply with the
sales standards.
- Recruit, maintain and replace qualified, certified, trained staff to
provide sales and installation, training, and back-up maintenance
services to Customers.
- Purchase and install a full demonstration system of the HAT...ms
Product Line as shown on the Demonstration System Exhibit.
1. All current HAT..ms Products and any additional products for the
demonstration system will be at [*****].
2. The purchase of the Demonstrations System is not included as part of
the [*****].
3. For any new Hat..ms Products, a demonstration system for such new
product must be purchased and staff must be trained and certified, as
previously defined, before installation of any new HAT...ms Products.
4. Purchase a Support, Maintenance and Enhancement Agreement and a
Hardware Service Agreement for all demonstration systems.
- Maintain in stock for demonstration, training systems, supplies, and
spare parts.
- Promote the HAT...ms Product Line.
- Use Sulcus advertising and promotional materials and conduct specific
marketing programs such as direct mail as may be recommended by Sulcus
from time to time.
- Obtain executed copies of the End-User License and Purchase Agreement
prior to delivery of the HAT...ms Product Line.
- Obtain executed copies of the Software Maintenance and Enhancement
Agreement (SME) and the Hardware Service Agreement (HSA) for all
HAT...ms Products installed.
- Protect Sulcus' proprietary rights in the HAT...ms Product Line.
5
<PAGE> 6
THE INFORMATION MARKED BELOW BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTION HAS BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
PEER ASSOCIATES
If a HIHAT Peer Associate in a designated territory identifies a
prospective customer for the HAT...ms Products, or for other Sulcus products,
then all information regarding such prospect will be sent in writing
immediately to HIHAT as provided for in the Peer Associate Agreement. A
Prospect Form, as defined in the Peer Associate Agreement exhibit, must be
completed by or for the Peer Associate and submitted to Sulcus' and HIHAT'S
Managing Director for approval. If Sulcus or one of its business partners
completes the transaction, HIHAT will be entitled to a [*****] of the [*****]
of the HAT...ms Products' or Sulcus' hardware or software upon receipt of
payment by Sulcus.
TERMINATION
Upon termination of this Agreement, HIHAT shall immediately turn over
to Sulcus all right, title and interest in the HAT...ms Program, name, prior
licensees, trademarks, logos or products. Further, HIHAT shall cease to use or
display the Sulcus name and cease entitlement to all rights and benefits
derived from this Agreement. All rights, title and interest previously held by
HIHAT which were derived from this Agreement shall then become the exclusive
property of Sulcus. Notwithstanding the foregoing, Sulcus shall have no right
or claim to the use of the Horwath or HIHAT names, trademarks or logos. Any
claims, rights or remedies of a party arising out of obligations or duties of
the other party prior to termination shall survive termination and be
enforceable under the appropriate terms of this Agreement.
In the event of any breach of the terms and conditions of this
Agreement by either party, such breaching party shall cure such breach within
30 days of written notice by the other party. In the event such breach is not
cured within said time, the party not in breach may terminate this Agreement
upon written notice. Termination of this Agreement shall not relieve the party
in breach from damages resulting from any breach of this Agreement and either
party may avail itself of any rights and remedies available in law and/or
equity.
Failure of HIHAT to make payment when due of the master license fee;
any other payment required or contemplated by this Agreement; installing any
HAT..ms Product without a Sulcus certified trainer shall constitute a material
breach of this Agreement giving Sulcus the right, at its option, to immediately
terminate this Agreement upon written notice. In such cases, HIHAT agrees to
pay the legal fees incurred by Sulcus in enforcing the terms of this Agreement.
So long as any obligations are owed by HIHAT to Sulcus under this Agreement,
Sulcus shall have the rights provided a secured party under the Uniform
Commercial Code and under any other applicable law.
ARBITRATION AND DAMAGES FOR BREACH OF AGREEMENT
a. ARBITRATION - The parties agree that unresolved disputes between
them arising from this Agreement shall be submitted for binding arbitration to
the Pittsburgh Regional Office of the American Arbitration Association located
in Pittsburgh, Pennsylvania, to be heard and decided in the Pittsburgh
metropolitan area in accordance with the rules and procedures of the American
Arbitration Association.
b. DAMAGES FOR BREACH OF AGREEMENT - In addition to any rights to
terminate this Agreement and any other rights and remedies, including damages
of any type or nature, the parties agree that in the event HIHAT shall breach
any part of this Agreement, Sulcus shall be entitled to liquidated damages to
be calculated as follows: Any unpaid amount due Sulcus for products sold and/or
services provided under this Agreement and any other funds that
6
<PAGE> 7
THE INFORMATION MARKED BELOW BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTION HAS BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
may be due Sulcus plus interest at the annual rate of [*****], or the legal
rate of interest if lower, running from the date such payment was due.
GOVERNING LAW
This Agreement shall be interpreted in accordance with the laws of the
State of Pennsylvania. In the event any part of this Agreement is invalidated
by any judicial or quasi-judicial body, the remainder of this Agreement shall
remain in binding effect.
CONFIDENTIAL INFORMATION, NON-DISCLOSURE AND NON-SOLICITATION
a. In conjunction with this contractual relationship, the parties
acknowledge that it will be necessary for them to obtain confidential
information of each other, the use or disclosure of which would constitute a
breach of trust and cause irreparable injury, and they acknowledge that it is
vital to the protection of each party's competitive position that they be under
restraint against disclosing to others or using to their own advantage any
information regarding the other's business affairs. They also covenant that
should the relationship between the parties be terminated for any reason, the
other shall not take with them any materials, documents or other data
containing or disclosing any confidential information concerning the other's
operation. The parties hereby covenant that so long as this relationship
continues and after such relationship is terminated, for whatever reason, with
or without cause, they shall not disclosure any confidential information
regarding the other's affairs. Each party will assist the other in identifying
and preventing any unauthorized or improper use or disclosure of such other
party's confidential information and will promptly notify the other party if it
learns, or if it has reason to believe that any one has violated or intends to
violate the terms of this Agreement, any license granted under this Agreement,
or any agreement contemplated by the provisions of this Agreement.
b. During the term of this Agreement, or any renewal thereof, and for
a period of [*****] following the termination of this Agreement or its renewal,
neither party shall directly or indirectly solicit for employment or hire any
employee of the other without first obtaining the written consent of the other.
ASSIGNMENT
HIHAT shall have no right to assign any part of this Agreement without
the prior written consent of Sulcus. Sulcus hereby reserves the right to assign
its rights under this Agreement either in whole or in part to a subsidiary, or
any successor in interest. This Agreement does not create an agency
relationship, and neither party is, or may hold itself out as an agent of the
other unless as specifically set forth in this agreement.
COLLECTIONS AND TAXES
HIHAT shall be solely responsible for collecting and/or paying any and
all taxes including but not limited to transportation insurance, customs,
duties, levies and assessments relating to any of the HAT...ms Product Line or
arising out of the performance of this Agreement by the parties, except for
taxes based on Sulcus' income.
PROPRIETARY PRODUCTS
Title to and ownership of all intellectual property, source code,
object code, trade secrets, and copyrights for the HAT...ms Product Line which
are the proprietary products of Sulcus shall at all times remain with Sulcus.
7
<PAGE> 8
HIHAT or Peer Distributor shall acquire no right, title or interest to all or
any part of the HAT...ms Products. HIHAT or Peer Distributor shall not remove
HAT...ms or Sulcus' copyright notices from any such products, nor shall HIHAT
or Peer Distributor make copies of such products other than for back-up
purposes, but shall order and obtain all copies of such products from Sulcus.
HIHAT shall take all reasonable or prudent steps to prevent any unauthorized or
illegal use of the HAT...ms Products, and will promptly notify Sulcus if HIHAT
learns or has reason to believe that an unauthorized or illegal use of the
HAT...ms Products has, or is likely to occur. In such events, HIHAT immediately
shall take any and all reasonable legal or equitable actions, at its cost and
expense, against any person or entity attempting said unauthorized or illegal
use.
WAIVER
The waiver by either party, whether express or implied, of any
provision of this Agreement shall not be deemed to waive any other provision of
this Agreement and shall not be deemed to waive the same provision under
different events or circumstances.
PARAGRAPH HEADINGS
The paragraph heading in this Agreement shall not be construed to have
any substantive meaning and are only used herein for convenience.
ENTIRE AGREEMENT
This Agreement, including any Exhibits, Schedules, and any amendments
made thereto by Sulcus, constitutes the entire Agreement between the parties
and superseded any prior agreements or understandings between the parties. This
Agreement may only be changed by mutual agreement in writing signed by both of
the parties.
NOTIFICATIONS
- -------------
All notices, referrals, information exchange set forth in this
agreement shall be executed by the Managing Directors.
EFFECTIVE DATE
This Agreement shall be effective on January 1, 1996, and shall be
binding on both parties upon the approval of the Board of Directors of HIHAT
which shall occur on or before ____________ and by Sulcus' Board of Directors
which shall occur on or before ____________.
Accepted: Accepted:
Sulcus Computer Corporation Horwath International HAT, Inc.
By: By:
----------------------------- ------------------------------
(Authorized Signature) (Authorized Signature)
Title: Title:
-------------------------- ---------------------------
Date: Date:
--------------------------- ----------------------------
8
<PAGE> 9
Approved by Board of Directors Approved by Board of Directors
of Sulcus Computer Corporation of Horwath International HAT, Inc.
By: By:
----------------------------- ------------------------------
(Authorized Signature) (Authorized Signature)
Title: Title:
-------------------------- ---------------------------
Date: Date:
--------------------------- ----------------------------
9
<PAGE> 1
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
SULCUS COMPUTER CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
AND THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years ended December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) attributable to
common stockholders $ 1,423,623 $ 1,730,842 $(1,368,956) $(11,688,013) $(3,050,100)
=========== =========== =========== ============ ===========
Shares:
Weighted average number of
common shares outstanding 16,645,704 14,587,638 14,720,327 13,872,298 13,509,078
Assumed conversion of stock options(A) 198,738 213,621 105,130 286,830 648,257
----------- ----------- ----------- ------------ -----------
Average common shares and
common stock equivalents 16,844,442 14,801,259 14,825,457 14,159,128 14,157,335
=========== =========== =========== ============ ===========
Earnings (loss) per share $0.08 $0.12 $(0.09) $(0.84) $(0.22)
=========== =========== =========== ============ ===========
</TABLE>
(A) Effect of stock options is antidilutive for the years ended December 31,
1995, 1994, and 1993.
<PAGE> 1
Exhibit 16(b)
(16)(b) FINANCIAL STATEMENT SCHEDULES
Schedule VIII - Valuation and Qualifying Accounts
SULCUS COMPUTER CORPORATION
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Charged to Amount Balance
beginning Acquired cost and charged at end
of period Valuations expenses off of period
--------- ---------- -------- --- ---------
<S> <C> <C> <C> <C> <C>
For the six months ended June 30:
- ---------------------------------
1996
Allowance for doubtful accounts $2,581,020 $0 $ 229,647 $763,798 $2,046,869
1995
Allowance for doubtful accounts $2,597,088 $0 $ 281,454 $276,173 $2,602,369
For the twelve months ended December 31:
- ----------------------------------------
1995
Allowance for doubtful accounts $2,597,088 $0 $ 573,130 $589,198 $2,581,020
1994
Allowance for doubtful accounts $1,494,042 $0 $1,343,489 $240,443 $2,597,088
1993
Allowance for doubtful accounts $1,046,107 $163,486 $1,253,002 $968,553 $1,494,042
</TABLE>
<PAGE> 1
Exhibit 24(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use in this Amendment to Registration Statement No. 33-85244
of Sulcus Computer Corporation on Form S-1 of our report dated March 1, 1996
(except for Note 2, as to which the date is March 21, 1996 and Note 20, as to
which the date is May 2, 1996) on the 1995 and 1994 financial statements and
schedule, and of our report dated October 18, 1996 on the 1993 financial
statements and schedule, of Sulcus Computer Corporation appearing in the
Prospectus, which is part of such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ CROWE, CHIZEK AND COMPANY LLP
---------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
October 23, 1996
