<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- ---------------
COMMISSION FILE NUMBER 0-13226
SULCUS COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1369276
(state of other jurisdiction of (I.R.S. Employer
corporation or organization) Identification Number)
SULCUS CENTRE, 41 NORTH MAIN STREET, GREENSBURG, PA 15601
(Address of principal executive offices, including zip code)
(412) 836-2000
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of August 11, 1997, there were 16,759,673 shares of Common Stock, no par
value, outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996............................................... 3
Consolidated Statements of Operations
Six Months Ended June 30,1997 and 1996............................................ 4
Consolidated Statements of Operations
Three Months Ended June 30, 1997 and 1996......................................... 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996........................................... 6
Notes to Consolidated Financial Statements................................................. 7-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................ 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................................. 15
Signature.................................................................................. 16
</TABLE>
<PAGE> 3
SULCUS COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 3,760,825 $ 2,503,475
Short-term investments (at market) 10,305,176 12,393,411
Accounts receivable, net of allowance of $1,800,430
and $1,913,107 in 1997 and 1996, respectively 8,293,189 12,995,894
Inventories 3,113,794 2,614,321
Deferred taxes 271,145 207,837
Other current assets 1,321,010 1,082,184
------------ ------------
Total Current Assets 27,065,139 31,797,122
Purchased and capitalized software, net of accumulated amortization
of $12,018,415 and $10,660,801 in 1997 and 1996, respectively 2,655,752 3,260,063
Property and equipment, net of accumulated depreciation of $5,119,855
and $4,801,119 in 1997 and 1996, respectively 2,477,234 2,473,324
Goodwill, net of accumulated amortization of $3,843,947
and $3,447,509 in 1997 and 1996, respectively 6,824,200 7,220,638
Deferred taxes 1,828,608 1,891,916
Other noncurrent assets 1,145,023 1,307,036
------------ ------------
Total Assets $ 41,995,956 $ 47,950,099
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 3,394,700 $ 5,826,577
Current portion of long-term debt 3,999 27,175
Current portion of obligations under capital leases 158,174 155,216
Accounts payable 3,020,450 3,947,597
Deferred revenues 4,879,470 6,497,107
Customer deposits 2,417,447 2,102,731
Other accrued liabilities 2,591,213 1,891,494
------------ ------------
Total Current Liabilities 16,465,453 20,447,897
Obligations under capital leases, net of current portion 118,149 184,604
Commitments and contingencies
Stockholders' Equity
Common stock, no par value; 30,700,000 shares
authorized (16,839,555 and 16,832,663 shares
issued and issuable in 1997 and 1996, respectively) 40,793,066 40,780,066
Retained earnings (deficit) (15,223,593) (13,353,160)
Foreign currency adjustment (179,337) (108,453)
Cumulative unrealized gain (loss) on investments available for sale 22,218 (855)
------------ ------------
Total Stockholders' Equity 25,412,354 27,317,598
------------ ------------
Total Liabilities and Stockholders' Equity $ 41,995,956 $ 47,950,099
============ ============
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE> 4
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net revenue:
System sales $16,249,752 $14,400,442
Support revenue 10,038,169 9,267,542
Dividends and other 667,312 660,319
----------- -----------
Total revenue 26,955,233 24,328,303
=========== ===========
Cost of goods sold and services provided:
Systems 9,309,002 7,449,137
Support services 3,039,167 2,606,784
----------- -----------
Total cost of sales and services provided 12,348,169 10,055,921
=========== ===========
Expenses:
Selling, general, and administrative 14,596,756 11,191,251
Research and development (net of capitalized
software of $700,160 and $556,332 during the
six months ended June 30, 1997 and
1996, respectively) 791,605 590,214
Interest 259,428 290,958
Depreciation and amortization 829,708 776,336
----------- -----------
Total expenses 16,477,497 12,848,759
----------- -----------
Income (loss) before income taxes (1,870,433) 1,423,623
Income taxes -- --
----------- -----------
Net income (loss) $(1,870,433) $ 1,423,623
----------- -----------
Income (loss) per common share:
Net income (loss) $ (.11) $ 0.08
----------- -----------
Weighted average number of common shares 16,868,902 16,844,442
----------- -----------
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE> 5
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net revenue:
System sales $ 8,549,055 $ 7,875,624
Support revenue 5,115,375 4,850,372
Dividends and other 321,720 327,288
----------- -----------
Total revenue 13,986,150 13,053,284
----------- -----------
Cost of goods sold and services provided:
Systems 4,917,972 4,141,168
Support services 1,564,042 1,446,987
----------- -----------
Total cost of sales and services provided 6,482,014 5,588,155
----------- -----------
Expenses:
Selling, general, and administrative 6,666,444 5,685,057
Research and development (net of capitalized
software of $358,723 and $315,682 during the
three months ended June 30, 1997 and
1996, respectively) 397,172 322,963
Interest 138,928 162,159
Depreciation and amortization 416,842 392,731
----------- -----------
Total expenses 7,619,386 6,562,910
----------- -----------
Income (loss) before income taxes (115,250) 902,219
Income taxes ---- ----
----------- -----------
Net income (loss) $ (115,250) $ 902,219
----------- -----------
Income (loss) per common share:
Net income (loss) $ (.01) $ 0.05
----------- -----------
Weighted average number of common shares 16,850,244 17,017,544
----------- -----------
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE> 6
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,870,433) $ 1,423,623
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 433,270 391,952
Amortization of capitalized software 1,355,693 1,281,381
Amortization of goodwill 396,438 384,384
Provision for doubtful accounts 316,668 229,647
Realized and unrealized (gain) loss on investments 10,426 (8,750)
Change in assets and liabilities
Restricted cash ---- 171,867
Accounts receivable 4,386,037 1,023,695
Inventories (499,473) 102,866
Other current assets (218,037) (218,332)
Other assets 184,017 92,065
Accounts payable (927,147) (591,488)
Deferred revenues (1,617,637) (1,304,406)
Shareholder litigation liability ---- (275,798)
Customer deposits 314,716 128,709
Accrued liabilities 712,600 (567,818)
----------- -----------
Total adjustments 4,847,571 839,974
----------- -----------
Net cash provided by operating activities 2,977,138 2,263,597
Cash flows from investing activities:
Purchases of available for sale securities (10,888) (392,108)
Proceeds from sales of available for sale securities 2,111,770 250,000
Investment in sales-type leases (136,917) (176,072)
Payments received on sales-type leases 94,124 42,081
Capital expenditures (468,119) (362,318)
Software development capitalized (700,160) (556,332)
----------- -----------
Net cash provided by (used in) investing activities 889,810 (1,194,749)
----------- -----------
Cash flows from financing activities:
Repayment of short term borrowings (2,431,877) (493,427)
Principal payments on long-term debt (23,176) (24,880)
Payments under capital lease agreements (83,661) (46,453)
Proceeds from stock options exercised ---- 136,552
----------- -----------
Net cash (used in) financing activities (2,538,714) (428,208)
----------- -----------
Cumulative translation adjustment (70,884) (6,265)
Net increase in cash and cash equivalents 1,257,350 634,375
Cash equivalents at beginning of period 2,503,475 1,202,325
----------- -----------
Cash equivalents at end of period $ 3,760,825 $ 1,836,700
----------- -----------
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE> 7
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sulcus
Computer Corporation ("the Company") and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Investments in 50% or less owned affiliates over which the Company has the
ability to exercise significant influence are accounted for using the equity
method.
The accompanying unaudited interim consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods presented. These financial statements have been prepared in
accordance with both generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in
conjunction with the Company's annual audited financial statements for the year
ended December 31, 1996, as filed with the Securities and Exchange Commission
on Form 10-K.
Certain prior year amounts have been reclassified to conform with
current year reporting practices.
NOTE 2. INCOME TAXES
In the six months ended June 30, 1997, the Company reflected no
provision for income taxes on a pre-tax loss of $(1,870,433). During the second
quarter of 1997, the Company increased the valuation allowance for deferred
taxes, representing the temporary differences and net operating loss
carryforwards generated where management believes that it is not likely that
future tax benefits will arise.
At June 30, 1997 and December 31, 1996, the Company had net deferred
tax assets, liabilities and valuation reserves as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets (net of deferred tax
liabilities), including tax loss carryforwards $9,571,298 $9,068,229
Valuation allowance (7,471,545) (6,968,476)
---------- ----------
Net deferred tax amounts $2,099,753 $2,099,753
========== ==========
</TABLE>
NOTE 3. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is determined by dividing net
earnings by the weighted number of common shares outstanding. When dilutive,
common stock options are included in the computation. Fully diluted net income
(loss) per share is not presented as it is either anti-dilutive or not
different from primary earnings (loss) per share.
The Financial Accounting Standards Board issued a statement in
February 1997 entitled "Earnings per Share" which will be effective for the
Company in the fourth quarter of 1997. This statement revises the computation
and presentation of earnings per share. Management believes that this new
standard will not materially change amounts presented by the Company under
existing accounting standards.
7
<PAGE> 8
NOTE 4. SEVERANCE OBLIGATION
On February 24, 1997, the Company's Chairman gave notice to the
Company of termination of his employment agreement. Termination provisions of
his employment agreement resulted in a severance obligation of approximately
$1,225,000, plus certain indirect costs. In June 1997, the parties reached an
agreement which entails payment of the obligation over a 42 month period, less
amounts previously paid through the date of the agreement. As evidence for the
obligation, the Company's former Chairman has accepted a promissory note.
8
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AS COMPARED TO THREE MONTHS
ENDED JUNE 30, 1996
Sulcus Computer Corporation ("the Company") had a net loss of
$(115,250) in the quarter ended June 30, 1997 as compared to net income of
$902,219 in the quarter ended June 30, 1996 on sales which increased by
$938,434 (7%) for these same periods. The Company's results for the quarter
ended June 30, 1997 declined when compared to the same period of 1996 primarily
as a result of increased expenses for the development, launch, and support of
new products leading to higher selling, general, and administrative expenses
and lower margins.
Net sales for the quarter ended June 30, 1997 were $13,664,430,
representing an increase of $938,434 (7%) when compared to net sales of
$12,725,996 for the same period of 1996, principally as a result of increases
in net system sales. Net system sales for the quarter ended June 30, 1997 were
$8,549,055 as compared to $7,875,624 for the same period of 1996, an increase
of $673,431 (9%) due primarily to the delivery of systems under significant
contracts by the Company's Pacific Region sales offices and partially offset by
decreases in the Company's Domestic Point of Sale Systems business. Support
revenues for the quarter ended June 30, 1997 were $5,115,375 as compared to
$4,850,372 for the same period of 1996, an increase of $265,003 (5%) due
primarily to an increased base of Point of Sale installations in 1996 and
increases in installations of systems in 1997. 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 $11,187,349 (82%) and $2,477,081 (18%),
respectively, of net sales for the quarter ended June 30, 1997, as compared to
$10,250,741 (81%) and $2,475,255 (19%) for the comparable 1996 period.
Cost of goods sold for the quarter ended June 30, 1997 increased to
$6,482,014 from $5,588,155, an increase of $893,859 (16%) from the comparable
1996 period, principally as a result of increases in system sales and changes
in the mix of sales between hardware and software. Cost of goods sold as a
percentage of net sales increased for the quarter ended June 30, 1997 to 47% as
compared to 44% for the same period of 1996. Gross margins of the Company
increased to $7,182,416 from $7,137,841, an increase of $44,575 (1%) over the
same period of 1996, due primarily to increases in the margins of the Company's
Pacific Region subsidiaries and partially offset by decreases in the Company's
Domestic Point of Sale Systems business. Cost of system sales for the quarter
ended June 30, 1997 was $4,917,972 (58% of system sales) as compared to
$4,141,168 (53% of system sales) for the same period of 1996, an increase of
$776,804 (19%), due primarily to the mix of software and hardware sales and the
mix of sales between sales offices and distributors. The cost of sale
components for hardware sales is higher than that for software sales. Cost of
support for the quarter ended June 30, 1997 was $1,564,042 (31% of support
revenues) as compared to $1,446,987 (30% of support revenues) for the same
period of 1996, an increase of $117,055 (8%).
Selling, general, and administrative expenses increased in 1997 when
compared to 1996. For the quarter ended June 30, 1997, these expenses were
$6,666,444 as compared to $5,685,057 an increase of $981,387 (17%) from the
same period of 1996. These increases were primarily the result of increased
expenditures for payroll and related costs of $374,584, and increased
expenditures for advertising expenses of $226,979. Selling, general, and
administrative expenses as a percentage of net sales was 49% for the quarter
ended June 30, 1997 as compared to 45% for the same period of 1996. Increases
in payroll and related costs is primarily in the Company's Point of Sale
business and in international sales offices, and are required to support added
sales volumes and resources required for the development, launch, and support
of new products. At the beginning of the second quarter of 1997, management
reduced staffing levels in its domestic property management business and in
certain corporate staff positions as part of its efforts to improve the
productivity of the organization.
Research and development expense for the quarter ended June 30, 1997
increased to $397,172 from $322,963, an increase of $74,209 (23%) over the same
period of 1996. Total amounts expended on research and development (including
amounts expensed and amounts capitalized) was $755,895 and $638,645 for the
quarters ended June 30, 1997 and 1996, respectively.
9
<PAGE> 10
Depreciation and amortization expense for the quarter ended June
30, 1997 increased to $416,842 from $392,731 for the same period of 1996, an
increase of $24,111 (6%).
Dividends and other income for the quarter ended June 30, 1997 was
$321,720 as compared to $327,288 for the same period of 1996, a decrease of
$5,568 (2%).
Interest expense for the quarter ended June 30, 1997 decreased to
$138,928 from $162,159 for the same period of 1996, a decrease of $23,231
(14%). This decrease is primarily the result of lower borrowings under the
Company's margin account.
The Company conducts its worldwide operations through separate
geographic area organizations which represent major markets or combinations of
related markets. Transfers between markets are valued at cost. Financial
information by geographic area for the quarters ended June 30, 1997 and 1996
and as of June 30, 1997 and December 31, 1996 is summarized as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Net revenues(1):
Domestic $7,995,824 $8,526,324
Canada 1,741,058 1,459,600
Pacific Region 2,988,105 1,828,096
Europe 1,261,163 1,239,264
----------- -----------
Consolidated net revenues $13,986,150 $13,053,284
----------- -----------
Net income (loss):
Domestic $(169,173) $780,086
Canada 118,109 150,785
Pacific Region 39,750 49,631
Europe (103,936) (78,283)
----------- -----------
Consolidated net income (loss) $(115,250) $902,219
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Identifiable assets:
Domestic $31,219,095 $38,179,244
Canada 2,355,933 1,738,378
Pacific Region 4,629,828 3,966,656
Europe 3,791,100 4,065,821
----------- -----------
Consolidated identifiable assets $41,995,956 $47,950,099
=========== ===========
</TABLE>
(1) Sales between geographic areas and export sales are not material.
The Company had a net deferred tax asset amounting to $2,099,753 net
of valuation allowances of $7,471,545 at June 30, 1997 and $6,968,476 at
December 31, 1996. The valuation allowance was increased in the quarter ended
June 30, 1997 by $53,594 and was decreased in the quarter ended June 30, 1996
by $428,312 reflecting the Company's estimate of the valuation allowance
necessary to reflect the net deferred tax asset to the net recoverable amount.
As a result, the income statements for the quarters ended June 30, 1997 and
1996 do not reflect any income tax provision on the pre-tax operating results
for those periods. As more fully discussed in the six month evaluation of
operations herein, the realizability of this deferred tax asset is contingent
upon a number of factors including the ability of the Company to achieve a
level of operations that will generate taxable income.
10
<PAGE> 11
SIX MONTHS ENDED JUNE 30, 1997 AS COMPARED TO SIX MONTHS
ENDED JUNE 30, 1996
The Company had a net loss of $(1,870,433) in the six months ended
June 30, 1997 as compared to net income of $1,423,623 in the six months ended
June 30, 1996 on sales which increased by $2,619,937 (11%) for these same
periods. The Company's results for the six months ended June 30, 1997 were
unfavorable as compared to the same period of 1996 primarily as a result of
severance costs for the Company's former chairman and the Company's former
president which totaled $ 1,537,609, decreased margins in the Company's
Domestic Property Management System business and certain international sales
offices, and increased expenses for the development, launch, and support of new
products leading to higher selling, general, and administrative expenses.
Net sales for the six months ended June 30, 1997 were $26,287,921,
representing an increase of $2,619,937 (11%) when compared to net sales of
$23,667,984 for the same period of 1996, principally as a result of increases
in net system sales. Net system sales for the six months ended June 30, 1997
were $16,249,752 as compared to $14,400,442 for the same period of 1996, an
increase of $1,849,310 (13%) due primarily to increased sales of the Company's
Point of Sale Systems and the delivery of systems under significant contracts
by the Company's Pacific Region sales offices. Support revenues for the six
months ended June 30, 1997 were $10,038,169 as compared to $9,267,542 for the
same period of 1996, an increase of $770,627 (8%) due primarily to an increased
base of Point of Sale installations in 1996 and increases in installations of
systems in 1997. 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
$21,930,193 (83%) and $4,357,728 (17%), respectively, of net sales for the six
months ended June 30, 1997, the same mix between offices and distributors for
the same period of 1996.
Cost of goods sold for the six months ended June 30, 1997 increased to
$12,348,169 from $10,055,921, an increase of $2,292,248 (23%) from the
comparable 1996 period, principally as a result of increases in system sales
and changes in the mix of sales between hardware and software. Cost of goods
sold as a percentage of net sales increased for the six months ended June 30,
1997 to 47% as compared to 42% for the same period of 1996. Gross margins of
the Company increased to $13,939,752 from $13,612,063, an increase of $327,689
(2%) over the same period of 1996, due primarily to increases in the margins of
the Company's Domestic Point of Sale Systems business, increased volumes in the
Company's Pacific Region subsidiaries, and partially offset by decreases in the
margins of the Domestic Property Management subsidiary. Cost of system sales
for the six months ended June 30, 1997 was $9,309,002 (57% of system sales) as
compared to $7,449,137 (52% of system sales) for the same period of 1996, an
increase of $1,859,865 (25%), due primarily to the mix of software and hardware
sales. The cost of sale components for hardware sales is higher than that for
software sales. Cost of support for the six months ended June 30, 1997 was
$3,039,167 (30% of support revenues) as compared to $2,606,784 (28% of support
revenues) for the same period of 1996, an increase of $432,383 (17%).
Selling, general, and administrative expenses increased in 1997 when
compared to 1996. For the six months ended June 30, 1997, these expenses were
$14,596,756 as compared to $11,191,251 an increase of $3,405,505 (30%) from the
same period of 1996. These increases were the result of severance obligations
to the Company's former chairman of the board and the former president in the
amount of $1,537,609, increased expenditures for payroll and related costs of
$932,495, and increased expenditures for advertising expenses of $321,168.
Selling, general, and administrative expenses as a percentage of net sales was
56% for the six months ended June 30, 1997 as compared to 47% for the same
period of 1996. Increases in payroll and related costs is primarily in the
Company's Point of Sale business and in international sales offices and are
required to support added sales volumes and resources required for the
development, launch, and support of new products.
Research and development expense for the six months ended June 30,
1997 increased to $791,605 from $590,214, an increase of $201,391(34%) over the
same period of 1996. Total amounts expended on research and development
(including amounts expensed and amounts capitalized) was $1,491,765 and
$1,146,546 for the six months ended June 30, 1997 and 1996, respectively.
Depreciation and amortization expense for the six months ended June
30, 1997 increased to $829,708 from $776,336 for the same period of 1996, an
increase of $53,372 (7%).
11
<PAGE> 12
Dividends and other income for the six months ended June 30, 1997
was $667,312 as compared to $660,319 for the same period of 1996, an increase
of $6,993 (1%).
Interest expense for the six months ended June 30, 1997 decreased to
$259,428 from $290,958 for the same period of 1996, a decrease of $31,530
(11%). This decrease is primarily the result of lower borrowings under the
Company's margin account.
The Company conducts its worldwide operations through separate
geographic area organizations which represent major markets or combinations of
related markets. Transfers between markets are valued at cost. Financial
information by geographic area for the six months ended June 30, 1997 and 1996
is summarized as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Net revenues(1):
Domestic $15,818,437 $15,653,790
Canada 3,003,647 2,553,657
Pacific Region 5,619,011 3,347,041
Europe 2,514,138 2,773,815
----------- -----------
Consolidated net revenues $26,955,233 $24,328,303
=========== ===========
Net income (loss):
Domestic $(1,610,684) $1,414,025
Canada 104,572 131,079
Pacific Region (29,485) (19,699)
Europe (334,836) (101,782)
----------- ----------
Consolidated net income (loss) $(1,870,433) $1,423,623
=========== ==========
</TABLE>
(1) Sales between geographic areas and export sales are not material.
The Company had a net deferred tax asset amounting to $2,099,753 net
of valuation allowances of $7,471,545 at June 30, 1997 and $6,968,476 at
December 31, 1996. The valuation allowance was increased in the six months
ended June 30, 1997 by $503,069 and was decreased in the six months ended June
30, 1996 by $560,700 reflecting the Company's estimate of the valuation
allowance necessary to reflect the net deferred tax asset to the net
recoverable amount. As a result, the income statements for the six months ended
June 30, 1997 and 1996 do not reflect any income tax provision on the pre-tax
operating results for those periods. The realizability of this deferred tax
asset is contingent upon a number of factors including the ability of the
Company to maintain a level of operations that will generate taxable income.
Management believes that it is more likely than not that 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 fact that the Company had taxable
income in 1996 and expected profits in the next several years resulting from
current efforts to develop new products.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is primarily dependent upon its ability to
generate sufficient working capital through profitable operations. Management
believes that in order to be profitable, 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.
12
<PAGE> 13
Current short-term capital needs will be funded primarily through
internal working capital, a bank credit facility, anticipated operating
revenues from new sales, continuing and new support services revenue, and a
backlog of orders received and pending.
At June 30, 1997, Sulcus' cash and cash equivalents increased to
$3,760,825 from $2,503,475 at December 31, 1996, an increase of $1,257,350.
This increase is primarily the result of net cash provided by operating
activities which includes cash received during the first and second quarter of
1997 related to annual customers support agreements. This cash will be used to
support operations throughout the remainder of 1997. 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, 1997, the Company's short-term investment portfolio,
valued at market, decreased to $10,305,176, from $12,393,411 at December 31,
1996, primarily as the result of the sale of certain assets. The proceeds of
asset sales were used to repay borrowings on the related margin account. 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. The Company had borrowings at June 30, 1997,
of $3,394,700 on margin against its investments at the broker's internally
established floating interest rate which was 8.125%.
At June 30, 1997, accounts receivable decreased to $8,293,189, from
$12,995,894 at December 31, 1996 representing primarily amounts collected from
customers for annual support agreements. 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 uncollectable from customers.
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.
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.
In addition to borrowings on margin against its investments, the
Company has outstanding long-term borrowings from various financial
institutions. At June 30, 1997, the Company had no short-term borrowings
(excluding borrowings under margin), and only nominal long-term borrowings. In
April 1997, the Company obtained a credit facility in the amount of $3,000,000
secured by domestic receivables, inventory and equipment. Borrowings under this
facility will bear interest at the banks prime rate plus one percent and will
be used to provide working capital.
The backlog of hardware and software orders at June 30, 1997 is
expected to be filled within one year and amounted to $7,000,000.
The Company's ability to develop and expand its presence in the
hospitality industry and expand existing business lines for its other markets
depends, in a large part, on the availability of adequate funds. Management
expects that to meet customer demands, it must continue to invest in the
development of the Company's software products at levels generally 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. Nonetheless, if technological changes
render Sulcus' products uncompetitive or obsolete, or, if the Company continues
to incur operating losses, additional capital may be required. There can be no
assurance that additional financing will be available when needed, or, if
available, that it can be obtained on terms satisfactory to the Company.
13
<PAGE> 14
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. 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, results of operations, and
liquidity.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and the Company's consolidated financial
statements contain certain forward-looking statements that involve risks and
uncertainties, including the following: (i) the realizability of deferred tax
assets totaling $2,099,753 which is contingent upon a number of factors
including the ability of the Company to achieve a level of operations that will
generate taxable income, (ii) management's belief that in order to be
profitable, it must continue to increase sales and improve productivity
relating to selling, general, and administrative expenses, (iii) management's
belief that it must increase its distribution channels and introduce additional
developed or acquired competitive products in its current market segment in
order to increase sales, (iv) the expectation that the Company must continue to
invest in the development of software products at levels generally consistent
with those of the past two years in order to meet customer demands, (v) the
adequacy of operating cash flows over the next several years together with
currently available working capital to finance the growth needs of the Company,
(vi) rapidly changing technology, accelerated product obsolescence and rapidly
changing industry standards in the market for the Company's products, resulting
in the need to update products and introduce new products and services in a
timely manner to meet evolving customer requirements. As a result, the
Company's actual results could differ materially from the results discussed in
the forward-looking statements.
14
<PAGE> 15
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SULCUS COMPUTER CORPORATION
DATE: August 14, 1997 BY: /s/ H. Richard Howie
--------------- -------------------------------------
Chief Financial Officer
(Mr. Howie is the Principal Financial
Officer and has been duly authorized
to sign on behalf of the Registrant)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
INTERIM FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997, AS
SUBMITTED IN THE COMPANY'S 10-Q FOR THAT PERIOD AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000726712
<NAME> SULCUS COMPUTER CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,760,825
<SECURITIES> 10,305,176
<RECEIVABLES> 10,093,619
<ALLOWANCES> 1,800,430
<INVENTORY> 3,113,794
<CURRENT-ASSETS> 27,065,139
<PP&E> 7,597,089
<DEPRECIATION> 5,119,855
<TOTAL-ASSETS> 41,995,956
<CURRENT-LIABILITIES> 16,465,453
<BONDS> 118,149
0
0
<COMMON> 40,793,066
<OTHER-SE> (15,380,712)
<TOTAL-LIABILITY-AND-EQUITY> 41,995,956
<SALES> 26,287,921
<TOTAL-REVENUES> 26,955,233
<CGS> 12,348,169
<TOTAL-COSTS> 12,348,169
<OTHER-EXPENSES> 16,477,497
<LOSS-PROVISION> 316,668
<INTEREST-EXPENSE> 259,428
<INCOME-PRETAX> (1,870,433)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,870,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,870,433)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
