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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . to . . . . .
COMMISSION FILE NUMBER 0-13226
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SULCUS COMPUTER CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1369276
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
SULCUS CENTRE, 41 NORTH MAIN STREET, GREENSBURG, PENNSYLVANIA 15601
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(412) 836-2000
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(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value
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 March 24, 1997, 16,752,032 shares of Common Stock were outstanding. The
aggregate market value of shares held by non-affiliates as of March 24, 1997 was
$26,175,050 based on the closing price of the Common Stock on the American Stock
Exchange on that date.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __X__
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PART I
ITEM 1. BUSINESS
GENERAL
Sulcus Computer Corporation develops, manufactures, markets and
installs microcomputer systems designed to automate the creation, handling,
storage and retrieval of information and documents. The Company designs its
systems primarily for the hospitality and real estate industries and to a
lesser extent, the legal profession. The Company's sales practices are
currently systems oriented (rather than individual sales of hardware or
software) toward the vertical marketing of its integrated products. Systems
include a network of hardware, software and cabling as well as stand alone
systems for which the hardware and software are not separately sold. The
Company's systems are offered together with full services, training,
maintenance, and support. The Company has installed systems throughout North
and South America, Europe, Africa, Asia and Australia. Customers include
property management companies, condominiums, hotels, motels, restaurants,
resorts, country clubs, cruise lines, real estate loan and closing offices,
title insurance companies, abstract companies, escrow offices and law offices.
The Company is a Pennsylvania corporation incorporated on November 5,
1979 under the name "Ragtronics, Inc." It adopted its present name in December
1982. The Company's principal offices are located at Sulcus Centre, 41 North
Main Street, Greensburg, Pennsylvania 15601. Its telephone number at such
address is 412-836-2000. Unless the context indicates otherwise, references
herein to the Company or to Sulcus refer to Sulcus Computer Corporation and its
wholly owned subsidiaries.
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 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.
Much of Sulcus' business is conducted through subsidiaries, most of which were
acquired by the Company. A description of the business conducted by Sulcus'
principal subsidiaries follows.
COMPUSOLV
In July 1989, a subsidiary of Sulcus, acquired a non-exclusive license
from CompuSolv, Inc. 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
provides 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.
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SULCUS (AUSTRALIA) PTY. LTD.
In November 1991, the Company established a direct sales office in
Australia by acquiring certain assets, trade names, leasehold improvements and
equipment. 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.
NRG
In March 1992, the Company acquired NRG Management Systems, Inc. (NRG)
which develops and markets energy and room management software to the hotel and
motel industry.
SULCUS HOSPITALITY LIMITED AND SULCUS SINGAPORE, PTE. LTD.
In July and September 1992, the Company acquired JBA (HK) Ltd. of Hong
Kong and JBA Singapore PTE. LTD. Sulcus Hospitality Limited and Sulcus
Singapore Pte. Ltd. market the full range of the Company's property management
and point-of-sale systems.
SULCUS HOSPITALITY GROUP EMEA, A.G.
In January 1993, the Company acquired Techotel, AG of Zug, Switzerland,
a hotel software development, marketing, and service organization. Sulcus
Hospitality Group EMEA, A.G., 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.
SULCUS SCANDINAVIA, A.S.
In November 1993, the Company acquired Lodgistix Scandinavia A.S., a
distributor of Lodgistix systems in Norway, Sweden and Denmark. 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.
INTERNATIONAL OPERATIONS
The Company has established international operations for the
marketing, support, manufacturing and/or distribution of its products as a
result of its acquisition strategy. The Company's international operations
presently consist of the following subsidiaries: Sulcus (Australia) Pty. Ltd.,
a direct sales office in Australia; Squirrel Systems of Canada, Ltd., a
Canadian subsidiary of Squirrel located in Vancouver, British Columbia which
manufactures and sells Squirrel products; Sulcus Hospitality Limited located in
Hong Kong, and Sulcus Singapore, PTE. LTD., located in Singapore, each a direct
sales office; Sulcus Hospitality Group EMEA A.G. located in Switzerland;
Lodgistix UK, Sulcus Scandinavia A.S., located in Norway; Sulcus (Malaysia) Sdn
Bhd; Squirrel (U.K.) Ltd., Sulcus Hospitality (U.K.) Ltd., and NRG Management
Systems (U.K.) located in the United Kingdom, all direct sales and support
offices, and Sulcus Hospitality Group (Belgium) located in Belgium, which
operates as a customer support office.
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. Certain firms in the network will be licensed to distribute Sulcus
Hospitality products. These 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. Management believes that this agreement with Horwath
International should provide Sulcus with expanded global distribution.
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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.
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.
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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.
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.
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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.
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,
China, Manila, 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 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.
The Company does not provide customers or distributors with rights to
return products, extended payment terms or similar working capital items. The
Company offers limited warranties relating to the performance of its software
products and Company manufactured point-of-sale hardware products. 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 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.
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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
vendors in each of the Property Management Systems and Full Service Restaurant
Management Systems marketplaces that have about the same or more installations
than Sulcus.
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."
PRODUCT PROTECTION
Sulcus regards its software and application systems as proprietary and
generally relies on a combination of trade secret laws, copyrights, contracts
and internal and external nondisclosure safeguards to protect its products.
Each of the contracts under which customers use Sulcus' products contain
restrictions on using, copying and transferring the products, and prohibit
their disclosure to other parties. Despite these restrictions, it may be
possible for users or competitors to copy aspects of the products or to obtain
information that Sulcus considers as trade secrets. Sulcus believes that any
copies so obtained have limited value without access to the product source code
which is kept highly confidential. Additionally, many of Sulcus' products
contain software and hardware security devices to prevent unauthorized use or
copying. Because of the uncertain enforcement of Sulcus' proprietary rights in
foreign countries, most products distributed internationally use internal copy
protection methods. Only certain aspects of computer software can be patented,
and existing copyright laws afford limited practical protection. Sulcus has not
patented any of its products although it may seek patent protection for future
products. To maintain competitive advantages, Sulcus believes that rapid
technological changes in the computer industry places greater emphasis on the
knowledge and experience of its personnel and their ability to develop, enhance
and market new products, than on patent or copyright protection of technology.
Accordingly, 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), 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), and WINNfinity(TM). Additionally, Sulcus has registered
or applications are pending for various product names in numerous foreign
countries.
PERSONNEL
As of March 10, 1997, Sulcus employed 467 persons, including 24
executives engaged in management, 72 persons in administration and finance, 130
technical personnel, 72 persons engaged in sales marketing and 169 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.
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ITEM 2. PROPERTIES
Sulcus' principal executive, and administrative operations are located
at Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601, in a
facility containing approximately 10,000 square feet. Sulcus leases this
building under several leases, with a trust established by Sulcus' principal
stockholder and a director, Jeffrey S. Ratner, expiring on various dates
through September 30, 2001. The annual rental commitment under these leases are
$150,388 in 1997, $99,051 in 1998 and $91,269 in 1999, $95,823 in 2000, and
$74,520 in 2001. 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. 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.
In December 1992, the Company purchased an office building located at
420 West Boynton Beach Boulevard, Boynton Beach, Florida. The Company utilizes
this facility for executive, sales and administrative offices.
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ITEM 3. LEGAL PROCEEDINGS
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
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on December
20, 1996, the holders of the majority of the voting shares of the Company's
common stock voted to elect Leon D. Harris, and re-elect David H. Adler, Robert
D. Gries, Herbert Ratner, Jeffrey S. Ratner and John W. Ryba each for one year
terms on the Board of Directors. Herbert Ratner and John W. Ryba resigned as
Directors in February 1997.
The votes were cast as follows:
<TABLE>
<CAPTION>
Name For Against
<S> <C> <C>
Adler, David H. 10,974,037 2,702,566
Gries, Robert D. 10,973,745 2,702,858
Ratner, Herbert 10,960,124 2,716,479
Ratner, Jeffrey S. 10,965,392 2,711,211
Ryba, John W. 10,976,040 2,700,563
Harris, Leon 10,976,590 2,700,013
</TABLE>
The Stockholders ratified the selection of Crowe, Chizek and Company,
LLP as the Company's independent auditors for 1996 with 12,262,951 votes cast
in favor, 954,017 cast against and 88,635 abstained.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF SECURITIES
On May 19, 1992, Sulcus Common Stock began trading on the American
Stock Exchange under the symbol SUL. Previously, 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 1997 (through March 24) 2-1/8 1-7/16
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 2-1/2 1-11/16
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
</TABLE>
On March 24, 1997, the high and low prices for the Common Stock were
$1 5/8 and $1 9/16, respectively.
As of March 24, 1997, there were approximately 4,732 record holders of
Sulcus' Common Stock.
The Company has not paid cash dividends and does not presently
contemplate paying cash dividends.
10
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
SULCUS COMPUTER CORPORATION
Selected Financial Data
The following table sets forth selected consolidated financial data of
the Company for the five years ended December 31, 1992 through 1996. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
(Thousands, except per share data)
Year ended December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $50,805 $44,693 $41,887 $47,346 $35,245
Dividends and other 1,340 1,291 1,256 1,937 1,385
------- ------- ------- ------- -------
Total revenue 52,145 45,984 43,143 49,283 36,630
Cost of goods sold and services provided 23,354 18,965 20,588 23,085 15,418
Selling, general and administrative expenses 23,847 22,896 24,388 21,726 14,756
Research and development 1,398 1,199 1,597 1,878 2,342
Interest expense 571 598 556 403 242
Depreciation and amortization 1,589 1,520 2,158 2,034 960
Unrealized and realized (gain) loss on
investments (1) (9) (1,462) 1,861 -- --
Unusual items (2) -- 3,434 3,663 3,207 --
Income taxes -- 203 -- -- 821
Income (loss) before extraordinary item and
cumulative effect of accounting changes 1,395 (1,369) (11,668) (3,050) 2,091
Net income (loss) $1,395 ($1,369) ($11,668) ($3,050) $3,222
PER SHARE DATA
Income (loss) per share before extraordinary
item and cumulative effect of accounting changes $0.08 ($0.09) ($0.84) ($0.22) $0.17
Net income (loss) per share $0.08 ($0.09) ($0.84) ($0.22) $0.26
Weighted average shares used in computing
net income (loss) per share 16,833 14,720 13,872 14,157 12,446
Cash dividends -- -- -- -- --
BALANCE SHEET DATA
Working capital $11,349 $5,390 $4,183 $8,643 $10,615
Total assets 47,950 47,327 47,869 58,716 51,499
Long-term obligations 367 74 86 364 1,039
Stockholders' equity 27,318 22,894 23,087 33,373 33,489
</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 of litigation settlements of
$2,919,333, $250,000 and $2,237,310 in 1995, 1994 and 1993, respectively.
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1996 AS COMPARED TO 1995
The Company had net income of $1,394,552 in the year ended December
31, 1996 as compared to a loss of ($1,368,956) in the year ended December 31,
1995 on sales which increased by $6,111,498 (14%) for these same periods. In
1995, the Company reported unrealized gains on its investment portfolio of
$1,462,005 and expenses related to the write-off of assets ($514,694) and
litigation settlement ($2,919,333). When eliminating these amounts for the
purpose of comparability, the Company showed an improvement on earnings from
$603,066 to $1,394,552, a change of $791,486. The Company's results for the
year ended December 31, 1996 improved over those for the same period of 1995
primarily as a result of improvements in margins $1,723,224 partially offset by
increases in selling, general and administrative costs ($950,880).
Net sales for the year ended December 31, 1996 were $50,804,800,
representing an increase of $6,111,498 (14%) when compared to net sales of
$44,693,302 for the same period of 1995. Net system sales for the year ended
December 31, 1996 were $31,721,534 as compared to $27,645,389 for the same
period of 1995, an increase of $4,076,145 (15%) 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 year ended December 31, 1996 were $19,083,266 as
compared to $17,047,913 for the same period of 1995, an increase of $2,035,353
(12%) due primarily to an increased base of Point of Sale installations in 1995
and 1996. 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
$41,801,703 (82%) and $9,003,097 (18%), respectively, of net sales for the year
ended December 31, 1996 as compared to $35,777,862 (80%) and $8,915,440 (20%)
for the comparable 1995 period.
Cost of goods sold for the year ended December 31, 1996 increased to
$23,353,856 from $18,965,582, an increase of $4,388,274 (23%) from the
comparable 1995 period. Cost of goods sold as a percentage of net sales
increased for the year ended December 31, 1996 to 46%, as compared to 42% for
the same period of 1995. Gross margins of the Company increased to $27,450,944
from $25,727,720, an increase of $1,723,224 (7%) over the same period of 1995,
due primarily to increases in the Company's domestic point-of-sale systems
which were partially offset by decreases in the margins of the domestic
property management subsidiary. Cost of system sales for the year ended
December 31, 1996 was $17,641,221 (56% of system sales) as compared to
$14,351,669 (52% of system sales) for the same period of 1995, an increase of
$3,289,552 (23%), 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 year ended December 31, 1996 was $5,712,635 (30%
of support revenues) as compared to $4,613,913 (27% of support revenues) for
the same period of 1995, an increase of $1,098,722 (24%).
Selling, general, and administrative expenses increased in 1996 when
compared to 1995. For the year ended December 31, 1996, these expenses were
$23,846,876 as compared to $22,895,996 an increase of $950,880 (4%) from the
same period of 1995. Selling, general, and administrative expenses as a
percentage of net sales was 47% for the year ended December 31, 1996 as
compared to 51% for the same period of 1995. The increase in selling, general
and administrative expenses is primarily on the areas of payroll and related
costs (approximately $880,000) and bad debt expense (approximately $280,000).
Increases in payroll and related cost represent the expansion of the Company's
distribution channels as well as increased expenses for the marketing and
support of new products.
Research and development expense for the year ended December 31, 1996
increased to $1,398,405 from $1,198,999 an increase of $199,406 (17%) over the
same period of 1995. Total amounts expended on research and development
(including amounts expensed and amounts capitalized) was $2,499,433 and
$2,201,853 for 1996 and 1995, respectively.
Depreciation and amortization expense for the year ended December
31, 1996 increased to $1,588,635 from $1,520,033 for the same period of 1995,
an increase of $68,602 (5%).
Dividends and other income for the year ended December 31, 1996 was
$1,340,345 as compared to $1,290,691 for the same period of 1995, an
increase of $49,654 (4%).
Interest expense for the year ended December 31, 1996 decreased to
$571,571 from $597,672 for the same period of 1995, a decrease of $26,101 (4%).
12
<PAGE> 13
The Company had a net deferred tax asset amounting to $2,099,753, net
of valuation allowances of $6,968,476 at December 31, 1996 and $10,534,223 at
December 31, 1995. The valuation allowance was decreased in the year ended
December 31, 1996 by $3,565,747 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 year ended
December 31, 1996 does not reflect any income tax provision on the pre-tax
operating results for that period. 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 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 actual results achieved in 1996 and the Company's view
of expected profits in 1997 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.
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.
13
<PAGE> 14
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.
Dividends and other 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 was paid by insurance ($666,000) and the Company ($134,000). The
Company issued the shares to the settlement fund on 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 incurred 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 were incurred in jurisdictions where loss carryforwards are
not available.
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 December
31, 1996. To date, bank credit lines have not been a significant component of
the Company's liquidity and capital resources.
At December 31, 1996, Sulcus' cash and cash equivalents increased to
$2,503,475 from $1,202,325 at December 31, 1995, an increase of $1,301,150.
This increase is primarily the result of increased profitability experienced by
the Company in 1996 as compared to 1995 and 1994. Since the Company operates in
a number of countries, cash and cash equivalents are maintained by the various
operating subsidiaries in the local currencies of these countries for the
purpose of paying expenses as they are due.
The Company maintains a portfolio of short-term investments (primarily
in the form of preferred stocks) which may be used for the purpose of providing
liquidity. At December 31, 1996, the Company's short-term investment portfolio,
valued at market, was $12,393,411. 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 December 31, 1996, of $5,826,577, on margin
against its investments at the brokers internally established floating interest
rate which was 7.875%.
At December 31, 1996, accounts receivable increased to $12,995,894.
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 December 31,
1996 to $1,913,107 as compared to $2,581,020 at December 31, 1995, due to
write-offs of accounts receivable.
14
<PAGE> 15
The Company purchases computer hardware and other equipment from
vendors under open accounts payable for the purpose of including these items in
systems sold to customers. Hardware and equipment are readily available in the
marketplace and therefore it is not necessary for the Company to maintain large
quantities of inventories to meet customer needs. Inventories of computers,
computer components and computer peripherals increased to $2,614,321 at
December 31, 1996. Accounts payable decreased to $3,947,597 at December 31,
1996.
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
$2,473,324.
In addition to borrowings on margin against its investments, the
Company has outstanding long-term borrowings from financial institutions. At
December 31, 1996, the Company had no short-term borrowings (excluding
borrowings under margin). At December 31, 1996, the Company had long-term
borrowings (including current and noncurrent portions) of $366,995, primarily a
result of new capitalized lease obligations for equipment.
The backlog of hardware and software orders at December 31, 1996 is
expected to be filled within one year and amounted to $4,911,000.
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. Cash flow has
been favorably impacted during the past year by improving sales and
profitability. These funds have generally been used to provide the Company with
the ability to finance additional receivables from customers, 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 continue 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. 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 efforts 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.
The resignation of the Company's former Chairman resulted in a
severance obligation of approximately $1,050,000. The intent is for the
obligation to be paid monthly over a 36-month period, however, the former
Chairman may elect a lump sum distribution. The Company's former Chairman
disagrees as to the interpretation of the amount due to him under the
termination provisions and the parties are continuing to negotiate to reach a
settlement.
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) risks relating to the expansion of
the Company's business, both domestically and internationally, including risks
associated with cash flow problems, management of diverse operations and the
political and economic stability of particular countries in which the Company
has international operations, (ii) the need for additional capital to fund the
development and expansion of the Company's presence in the hospitality industry
and to expand its existing business lines in other markets, (iii) rapidly
changing technology, accelerated product obsolescence and rapidly changing
15
<PAGE> 16
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, (iv) intense competition by a
large number of competitors, many of which have greater financial, technical,
marketing and other resources and larger installed customer bases than the
Company, (v) discounting of prices with no decrease in the cost of providing
systems and services as a result of the intense competition, (vi) the need to
attract, hire, train and retain qualified managerial, technical and sales and
marketing personnel, and (vii) variation in the Company's operating results
such that past operating results and period-to-period comparisons should not be
relied upon as an indication of future performance. As a result, the Company's
actual results could differ materially from the results discussed in the
forward-looking statements.
16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements and the Report of Independent
Auditors thereon are listed under Item 14(a) (1) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None
17
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of Sulcus are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Robert D. Gries 67 Acting Chairman of the Board and Director (1)
David H. Adler 53 Director (1)
Leon D. Harris 58 Chief Executive Officer and Director
Jeffrey S. Ratner 54 Director
John W. Ryba 52 General Counsel and Vice President, Administration
H. Richard Howie 42 Chief Financial Officer, Principal Accounting Officer and Treasurer
Margaret Santone 55 Corporate Secretary
William F. McLay 50 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 54 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.
ROBERT D. GRIES has been a Director of the Company since 1983. He
became the Acting Chairman of the Board of Directors on March 3, 1997. Since
1964, Mr. Gries has been President of the Gries Companies which engages in
venture capital financing. From 1966 to 1995 he was Vice President, director and
a principal shareholder of the Cleveland Browns Football Company, Inc., a
National Football League team.
DAVID H. ADLER was appointed a Director of the Company in August 1993.
Mr. Adler has been Chief Executive Officer and majority shareholder of a group
of privately-owned companies since 1985, including the Adler Financial Group,
David H. Adler Real Estate Enterprises and PEBECO (Pennsylvania Bedding
Incorporated) of Scranton, Pennsylvania, a manufacturer of King Koil and other
private labeled mattresses and sleep products.
LEON D. HARRIS was appointed a Director of the Company in November
1996 and Chief Executive Officer on March 3, 1997. Since August 1993, he has
been President of Physalia Corporation, a consulting group functioning in the
computer systems/technology market. From 1985 to 1993, Mr. Harris was
President/CEO of Olivetti USA, the American subsidiary of the Italian office
equipment/systems company.
JEFFREY S. RATNER is a co-founder of the Company and served as Chief
Executive Officer from the Company's inception in 1979 to September 1995 and
Chairman of the Board of Directors since the Company's inception in 1979 to
February 1997. 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. 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.
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 and resigned as a director in
February 1997. 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.
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<PAGE> 19
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.
MARGARET SANTONE joined the Company in 1979 as Corporate Secretary.
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.
BARRY LOGAN has served as the Vice President, General
Manager-Restaurant Division of Sulcus Hospitality Group since 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 has served as the Vice President, General
Manager--Lodging Division of Sulcus Hospitality Group since 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
the Company's common stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "SEC") and the
American Stock Exchange. Such persons are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representation that no other reports were required, the
Company believes that during 1996 all Section 16(a) filing requirements
applicable to its officers and directors were complied with.
19
<PAGE> 20
ITEM 11. EXECUTIVE COMPENSATION
The following tables present certain information concerning the cash
compensation and stock options provided to the named executive officers during
the years ended December 31, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
The following table reflects the total compensation paid during 1996,
1995 and 1994, 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 1996 (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 1996 350,000 -- 57,000 (1) 200,000
Chairman 1995 350,000 -- -- --
1994 313,500 -- -- --
Joel Nagelmann 1996 200,000 21,233 -- 11,324
President 1995 135,600 33,107 -- 215,579
1994 -- -- -- --
H. Richard Howie 1996 120,000 -- -- 36,000
Chief Financial 1995 120,000 -- -- --
Officer 1994 55,000 -- -- 30,000
William F. McLay 1996 120,000 -- -- 20,000
Managing 1995 120,000 -- -- 20,000
Director 1994 75,000 -- -- 60,000
Barry Logan 1996 108,158 22,250 -- 10,303
V.P. of Sulcus 1995 113,925 -- -- --
Restaurant Div. 1994 95,833 -- -- 95,000
</TABLE>
(1) Includes amount for unused vacation ($54,000) and travel and other business
expenses incurred under the terms of an employment agreement.
20
<PAGE> 21
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the aggregate amount of shares subject
to stock options granted, for the period January 1, 1996, through December 31,
1996, to the Chairman and each of the Named Officers. No gain on these options
will be realized by the Named Officers without an increase in the price of
Company Common Stock from the date of grant, which will benefit all
stockholders proportionately.
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number of Potential Realizable Value
Securities % of Total at Assumed Annual Rates
Underlying Options Exercise of Stock Price Appreciation
Options/ Granted to or Base for Option Individual Grants
SARS Employees Price Expiration ----------------------------
Name Granted in 1996 ($/Sh) Date 5%($)(1) 10%($)(1)
- ---- ------- ------- ------ ---- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey S. Ratner(2) 200,000 51% $2.4375 01/01/01 $134,687 $297,624
Joel Nagelmann 11,324 3% 1.875 01/01/01 5,866 12,976
H. Richard Howie(2) 36,000 9% 2.4375 01/01/01 24,244 53,572
William F. McLay 20,000 5% 1.9375 01/01/01 10,706 23,657
Barry Logan 10,303 2% 2.0625 01/01/01 5,871 12,973
</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) On March 25, 1996, the Company canceled 200,000 options granted to Mr.
Ratner and 30,000 options granted to Mr. Howie and granted new options of
200,000 options to Mr. Ratner and 36,000 options to Mr. Howie at new
exercise prices. The original exercise price was $5.125 for Mr. Ratner's
options and $3.375 for Mr. Howie's. The new exercise price is $2.4375 for
both, which was the fair market value of the Company's Common Stock on that
date. At the date of repricing, the unexpired term of the original options
were six years for Mr. Ratner and eight years for Mr. Howie.
21
<PAGE> 22
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information concerning the net value
realized on the exercise of stock options in 1996 by the Chairman and each of
the Named Officers as of December 31, 1996.
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at 12/31/96 at 12/31/96 ($)(1)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Jeffrey S. Ratner 0 0 50,000/150,000 $0/$0
Joel Nagelmann 0 0 87,789/127,790 $0/$0
H. Richard Howie 0 0 7,200/28,800 $0/$0
William McLay 0 0 48,000/52,000 $500/$2,000
Barry Logan 0 0 65,924/36,000 $0/$0
</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, 1996, which was $2.0625.
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 one other executive officer served on this
committee in 1996. During 1996, 75,000 options were awarded under the Directors
Plan to David H. Adler and Leon D. Harris.
22
<PAGE> 23
EMPLOYMENT ARRANGEMENTS
The Company entered into an employment agreement with each of Messrs.
Ratner and Ryba in August 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. 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 $1,050,000. The intent is
for the obligation to be paid monthly over a 36-month period, however, the
former Chairman may elect a lump sum distribution. The Company's former Chairman
disagrees as to the interpretation of the amount due to him under the
termination provisions and the parties are continuing to negotiate to reach a
settlement.
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 canceled 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.
On March 10, 1997, Mr. Nagelmann resigned and his employment agreement
was terminated. The Company will continue to pay Mr. Nagelmann his monthly
salary of $16,667 until April 17, 1998, and he will retain all stock options
granted and may exercise them in accordance with their terms until March 10,
1999. A loan in the amount of $65,485 has been forgiven. All other loans
made to Mr. Nagelmann have been repaid in full by him. Agreements between the
Company and Mr. Nagelmann regarding non-disclosure of trade secrets and
confidential information and non-compete and other similar covenants remain in
effect.
In March 1997, Leon Harris was elected as the Company's Chief Executive
Officer. Mr. Harris has entered into an employment agreement with the Company
providing for an annual salary of $225,000. Mr. Harris is entitled to receive
annual bonuses (ranging from 3% to 5% of the annual after-tax earnings) as of
December 31 in each year of his employment, commencing in 1997, subject to
certain limitations, payable 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. Harris also was granted an option to purchase 250,000 shares of the
Company's common stock at $1.625 per share vesting over five years at 20 percent
per year beginning March 4, 1997. Mr. Harris may retain all options granted and
all other rights for two years if his employment is terminated without cause.
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. Harris under which the Company is, in each case, the beneficiary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons participated in compensation decisions made
during 1996: Jeffrey S. Ratner, John W. Ryba, Herbert G. Ratner, Robert D.
Gries and David H. Adler. There are no interlocking relationships, as defined
in the regulations of the Securities and Exchange Commission, involving any of
these individuals. See "Certain Relationships and Related Transactions" for a
description of certain transactions entered into by the Company and Jeffrey S.
Ratner.
23
<PAGE> 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 24,
1997, 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, 16,752,032 shares of Common Stock were outstanding.
<TABLE>
<CAPTION>
Directors, Officers and Number of Shares
5% Shareholders Beneficially Owned Percentage of Class
<S> <C> <C> <C>
Jeffrey S. Ratner 1,100,000 (1) 7%
41 North Main Street
Greensburg, PA 15601
Robert D. Gries 55,000 (2) *
David H. Adler 68,500 (3) *
Leon D. Harris 59,100 (4) *
John W. Ryba 72,000 (5) *
H. Richard Howie 14,400 (6) *
William F. McLay 67,175 (7) *
Margaret Santone 8,420 (8) *
Barry Logan 66,824 (9) *
Bernhard Mantel 188,502 (10) 1%
Jappe Kjaer 101,144 (11) *
Thomas Caudill 16,000 (12) *
Gerry Lau 0 *
All Directors and executive officers
as a group. (13 persons) 1,817,065 11%
</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 100,000 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 6,000 shares owned of record and 62,500 shares subject to a
currently exercisable option.**
(4) Included 9,100 shares owned of record and 50,000 shares subject to a
currently exercisable option.**
(5) Includes 72,000 shares subject to currently exercisable options.**
(6) Includes 14,400 shares subject to a currently exercisable option.**
(7) Includes 15,175 shares currently owned of record and 52,000 shares subject
to currently exercisable options.**
(8) Includes 20 shares currently owned of record and 8,400 shares subject to a
currently exercisable option.**
(9) Includes 900 shares currently owned of record and 65,924 shares subject to
currently exercisable options.**
(10) Includes 188,502 shares currently owned of record.
(11) Includes 89,144 shares currently owned of record and 12,000 shares subject
to a currently exercisable option.**
24
<PAGE> 25
(12) Includes 16,000 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.
25
<PAGE> 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Leon Harris, Chief Executive Officer and Director of the Company
is the President and owner of Physalia Corporation. In April 1996 Physalia
Corporation entered into a management contract with Radix Systems, Inc. a
subsidiary of the Company, to provide management and operating services related
to document conversion activities. The contract provided for the payment by
Radix of a set monthly fee, variable commissions calculated as a percent of
Radix' gross sales, bonus and reimbursement of out-of-pocket expenses. At the
year ended December 31, 1996, payments of $82,563 were made to Physalia. In
accordance with its terms, the contract will terminate on March 31, 1997.
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 Director, Jeffrey S. Ratner, expiring on various dates through
September 30, 2001. Rent expense under these agreements was $233,687; $225,391;
and $185,251 for the years ended December 31, 1996, 1995 and 1994,
respectively. The annual rental commitment under these leases are $150,388 in
1997, $99,051 in 1998 and $91,269 in 1999, $95,823 in 2000, and $74,520 in
2001. The leases renew automatically for additional two-year terms at a minimum
rental rate of 2% over the prior year's amount, unless canceled by either
party. 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.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
* REPORTS OF INDEPENDENT AUDITORS
* CONSOLIDATED BALANCE SHEETS - Years Ended December 31, 1996
and 1995
* CONSOLIDATED STATEMENTS OF OPERATIONS - Years ended
December 31, 1996, 1995 and 1994
* CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years
ended December 31, 1996, 1995 and 1994
* CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended
December 31, 1996, 1995 and 1994
* NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULES ATTACHED HERETO ARE AS FOLLOWS:
Statement Regarding Computation of Per Share Earnings
Schedule VIII - Valuation and Qualifying Accounts
All other Schedules are omitted since the required
information is not present in amount sufficient to require
submission of the Schedules, or because the information is
included in the Consolidated Financial Statements and Notes
thereto.
3. EXHIBITS INDEX
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 ****
(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 *******
27
<PAGE> 28
<TABLE>
<S> <C>
(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 ***
(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 *
(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
</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.
28
<PAGE> 29
<TABLE>
<S> <C>
** 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.
**** 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.
## Incorporated by reference to Amendment No. 5 to Form S-1 Registration
Statement (No. 33-85244), filed on October 23, 1996.
</TABLE>
29
<PAGE> 30
22. SUBSIDIARIES OF SULCUS COMPUTER CORPORATION
Sulcus Investment Corporation Delaware
Sulcus Law Management Services, Inc. Maryland
Sulcus Hospitality Group, Inc. Pennsylvania
Radix Systems, Inc. Pennsylvania
Lodgistix, Inc. Delaware
Sulcus (Australia) Pty. Ltd. Australia
Squirrel Companies, Inc. Georgia
Squirrel Companies of Canada, Ltd. Canada
NRG Management Systems, Inc. Texas
Sulcus Hospitality Limited Hong Kong
Sulcus Singapore, Pte. Ltd. Singapore
Sulcus (Malaysia) SDN BHD Malaysia
Sulcus Hospitality Group EMEA, AG Switzerland
Sulcus (International) AG Switzerland
Sulcus UK United Kingdom
Sulcus Scandinavia, A.S. Scandinavia
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Greensburg, Commonwealth of Pennsylvania, on March 27, 1997.
SULCUS COMPUTER CORPORATION
By: /s/ LEON HARRIS
------------------------------------------------------
Leon Harris
Chief Executive Officer and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on March 27, 1997.
<TABLE>
<CAPTION>
Signature and Title Date
------------------- -----
<S> <C>
/s/ LEON D. HARRIS March 27, 1997
- ------------------------------------------- --------------
Leon D. Harris, Director, Chief Executive
Officer and Principal Executive Officer
/s/ ROBERT D. GRIES March 27, 1997
- ------------------------------------------- --------------
Robert D. Gries, Acting Chairman of the
Board and Director
- ------------------------------------------- --------------
Jeffrey S. Ratner, Director
/s/ DAVID H. ADLER March 27, 1997
- ------------------------------------------- --------------
David H. Adler, Director
/s/ H. RICHARD HOWIE March 27, 1997
- ------------------------------------------- --------------
H. Richard Howie, Chief Financial
Officer and Chief Accounting Officer
</TABLE>
31
<PAGE> 32
[CROWE CHIZEK LOGO]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sulcus Computer Corporation
We have audited the accompanying consolidated balance sheet of Sulcus Computer
Corporation as of December 31, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sulcus Computer
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for each of the years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
Our audits referred to above also included the financial schedule listed in
answer to item 14(a)(2). In our opinion, such financial schedule presents
fairly the information required to be set forth therein.
Crowe, Chizek and Company LLP
Columbus, Ohio
March 5, 1997
<PAGE> 33
SULCUS COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
---------------------------------
1996 1995
---------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $2,503,475 $1,202,325
Short-term investments (at market) 12,393,411 12,408,075
Restricted cash -- 550,000
Accounts receivable, net of allowance of $1,913,107
and $2,581,020 in 1996 and 1995, respectively 12,995,894 11,134,576
Inventories 2,614,321 2,573,826
Deferred taxes 207,837 165,557
Other current assets 1,082,184 1,761,465
----------- -----------
Total current assets 31,797,122 29,795,824
Purchased and capitalized software, net of accumulated amortization
of $10,660,801 and $7,992,031 in 1996 and 1995, respectively 3,260,063 4,941,695
Property and equipment, net of accumulated depreciation of $4,801,119
and $4,247,168 in 1996 and 1995, respectively 2,473,324 2,015,816
Goodwill, net of accumulated amortization of $3,447,509
and $2,672,714 in 1996 and 1995, respectively 7,220,638 7,826,683
Deferred taxes 1,891,916 1,934,196
Other noncurrent assets 1,307,036 812,564
----------- -----------
Total Assets $47,950,099 $47,326,778
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $5,826,577 $6,382,710
Current portion of long-term debt 27,175 46,713
Current portion of obligations under capital leases 155,216 --
Accounts payable 3,947,597 4,352,408
Shareholder litigation liability -- 3,108,097
Deferred revenues 6,497,107 6,195,289
Customer deposits 2,102,731 1,311,408
Other accrued liabilities 1,891,494 3,008,892
----------- -----------
Total current liabilities 20,447,897 24,405,517
Long-term debt, net of current portion -- 27,175
Obligations under capital leases, net of current portion 184,604 --
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 30,700,000 shares
authorized (16,832,663 and 15,145,570 shares
issued and issuable in 1996 and 1995, respectively) 40,780,066 38,016,248
Note receivable from stockholder -- (500,000)
Retained earnings (deficit) (13,353,160) (14,747,712)
Foreign currency adjustment (108,453) (60,832)
Cumulative unrealized gain (loss) on investments available for sale (855) 186,382
----------- -----------
Total Stockholders' Equity 27,317,598 22,894,086
----------- -----------
Total Liabilities and Stockholders' Equity $47,950,099 $47,326,778
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
F-2
<PAGE> 34
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Net revenue:
System sales $31,721,534 $27,645,389 $25,893,783
Support revenue 19,083,266 17,047,913 15,993,533
Dividends and other 1,340,345 1,290,691 1,255,848
----------- ----------- ------------
Total revenue 52,145,145 45,983,993 43,143,164
----------- ----------- ------------
Cost of goods sold and services provided:
Systems 17,641,221 14,351,669 15,078,349
Support services 5,712,635 4,613,913 5,509,625
----------- ----------- ------------
Total cost of sales and services provided 23,353,856 18,965,582 20,587,974
Expenses:
Selling, general, and administrative 23,846,876 22,895,996 24,388,210
Research and development (net of capitalized
software of $1,101,028, $1,002,854 and
$1,556,888 for 1996, 1995 and 1994,
respectively) 1,398,405 1,198,999 1,596,515
Interest 571,571 597,672 556,269
Depreciation and amortization 1,588,635 1,520,033 2,157,857
Unrealized and realized (gains) losses on short-term investments (8,750) (1,462,005) 1,861,403
Unusual items:
Write-off of assets -- 514,694 2,156,949
Write-off of goodwill -- -- 1,256,000
Provision for litigation settlement -- 2,919,333 250,000
----------- ----------- ------------
Total expenses 27,396,737 28,184,722 34,223,203
----------- ----------- ------------
Income (loss) before income taxes 1,394,552 (1,166,311) (11,668,013)
Income taxes -- 202,645 --
----------- ----------- ------------
Net income (loss) $ 1,394,552 ($1,368,956) ($11,668,013)
=========== =========== ============
Earnings (loss) per share $0.08 ($0.09) ($0.84)
===== ====== ======
Weighted average number of common shares 16,833,305 14,720,327 13,872,298
========== ========== ==========
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE> 35
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Cumulative
Unrealized
Common Stock Gain (Loss) on Note
----------------------- Retained Foreign Investments Receivable Stock-
Number of Earnings Currency Available From holders'
Shares Amount (Deficit) Adjustment For Sale Stockholder Equity
---------- ----------- ------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 14,095,769 $35,585,420 ($1,710,743) ($2,074) $ -- ($500,000) $33,372,603
Stock options exercised 135,827 271,916 -- -- -- -- 271,916
Issuance of stock, contingent
earnouts on acquisitions
of companies 70,836 511,077 -- -- -- -- 511,077
Cumulative translation adjustment -- -- -- (113,887) -- -- (113,887)
Issuance of stock, shareholder
litigation 530,612 1,625,000 -- -- -- -- 1,625,000
Cancellation of shares previously
issued as contingent earnout
related to acquisition (327,726) (912,000) -- -- -- -- (912,000)
Net loss -- -- (11,668,013) -- -- -- (11,668,013)
---------- ----------- ------------ --------- --------- --------- -----------
Balance, December 31, 1994 14,505,318 37,081,413 (13,378,756) (115,961) 0 (500,000) 23,086,696
Stock options exercised 17,660 42,847 -- -- -- -- 42,847
Issuance of stock, contingent
earnouts on acquisitions
of companies 573,477 784,592 -- -- -- -- 784,592
Cumulative translation adjustment -- -- -- 55,129 -- -- 55,129
Cumulative unrealized gain on
investments available for sale -- -- -- -- 186,382 -- 186,382
Issuance of stock to consultants 7,408 12,000 -- -- -- -- 12,000
Issuance of stock as settlement of
previously recorded liabilities 41,707 95,396 -- -- -- -- 95,396
Net loss -- -- (1,368,956) -- -- -- (1,368,956)
---------- ----------- ------------ --------- --------- --------- -----------
Balance, December 31, 1995 15,145,570 38,016,248 (14,747,712) (60,832) 186,382 (500,000) 22,894,086
Stock options exercised 84,296 137,920 -- -- -- -- 137,920
Issuance of stock, contingent
earnouts on acquisitions of
companies 66,832 168,750 -- -- -- -- 168,750
Cancellation of shares in
repayment of shareholder
loans (220,000) (550,000) -- -- -- 500,000 (50,000)
Adjustment of shares issuable
for purchase of Techotel A.G. 271,859 -- -- -- -- -- ----
Adjustment of shares issuable
under earn-out agreement for
Lodgistix Scandinavia A.S. 7,688 -- -- -- -- -- ----
Cumulative translation adjustment -- -- -- (47,621) -- -- (47,621)
Cumulative unrealized (loss) on
investments available for sale -- -- -- -- (187,237) -- (187,237)
Issuance of stock to consultants 10,059 26,000 -- -- -- -- 26,000
Issuance of stock as settlement of
previously recorded liabilities 1,466,359 2,981,148 -- -- -- -- 2,981,148
Net Income -- -- 1,394,552 -- -- -- 1,394,552
---------- ----------- ------------ --------- --------- --------- -----------
Balance, December 31, 1996 16,832,663 $40,780,066 ($13,353,160) ($108,453) $ ($855) $0 $27,317,598
========== =========== ============ ========= ========= ========= ===========
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE> 36
SULCUS COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1996 1995 1994
---------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $1,394,552 ($1,368,956) ($11,668,013)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation 813,840 835,315 1,147,171
Amortization of capitalized software 2,803,401 2,447,296 2,388,804
Amortization of goodwill 774,795 684,718 1,010,686
Provision for doubtful accounts 859,341 573,130 1,343,489
Realized and unrealized (gain) loss on investments (8,750) (1,462,005) 1,861,403
Loss on write-off of assets -- 514,694 1,820,246
Write-off of goodwill -- -- 1,256,000
(Purchases) sales of trading securities -- (851,874) 2,247,706
Change in assets and liabilities:
Restricted cash 550,000 (50,000) --
Accounts receivable (2,720,659) (68,464) (425,916)
Insurance receivable -- -- 900,000
Inventories (40,495) (180,263) (199,887)
Other current assets 174,955 249,317 (197,610)
Other assets 161,945 (235,209) 295,344
Accounts payable (404,811) (1,484,074) 558,159
Deferred revenues 301,818 (726,992) 468,406
Shareholder litigation liability (308,097) 2,668,317 (585,220)
Customer deposits 791,323 (585,478) 964,508
Accrued liabilities (933,013) 166,452 200,837
---------- ---------- ----------
Total adjustments 2,815,593 2,494,880 15,054,126
---------- ---------- ----------
Net cash provided by operating activities 4,210,145 1,125,924 3,386,113
---------- ---------- ----------
Cash flows from investing activities:
Purchases of available for sale securities (413,822) (4,341,433) --
Proceeds from sales of available for sale securities 250,000 4,758,359 --
Investment in sales-type leases (286,718) (617,712) (400,841)
Payments received on sales-type leases 134,627 189,537 250,056
Capital expenditures (886,203) (660,444) (571,455)
Software development capitalized (1,101,028) (1,002,854) (1,556,888)
---------- ---------- ----------
Net cash (used in) investing activities (2,303,144) (1,674,547) (2,279,128)
---------- ---------- ----------
Cash flows from financing activities:
Short term borrowings (556,133) 199,715 295,095
Principal payments on long-term debt (46,713) (480,638) (837,036)
Payments under capital lease agreements (93,304) -- --
Proceeds from stock options exercised 137,920 42,847 271,916
---------- ---------- ----------
Net cash (used in) financing activities (558,230) (238,076) (270,025)
---------- ---------- ----------
Cumulative translation adjustment (47,621) 55,129 (113,887)
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 1,301,150 (731,570) 723,073
Cash equivalents at beginning of year 1,202,325 1,933,895 1,210,822
---------- ---------- ----------
Cash equivalents at end of year $2,503,475 $1,202,325 $1,933,895
========== ========== ==========
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE> 37
SULCUS COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including contingencies, as well as the reported amounts of revenues and
expenses during the financial statement period. Actual results could differ
from those estimates. Examples of significant estimates include the
collectability of receivables, the future benefit of capitalized computer
software costs, lives assigned to goodwill, the net recoverability of deferred
tax assets and contingencies relating to sales-type leases. These estimates are
particularly susceptible to material changes in the near term.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Sulcus
Computer Corporation and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments in 50%
or less owned affiliates over which the Company has the ability to exercise
significant influence are accounted for using the equity method.
CASH AND CASH EQUIVALENTS
The Company considers as cash and cash equivalents certificates of
deposit and commercial paper with original maturities of less than three months
which consists of deposits in commercial banks in the U.S. and abroad. The
Company limits the amount of money placed in any one bank in order to reduce
credit risk.
SHORT-TERM INVESTMENTS
During 1995, the Company changed its investment philosophy and
consequently bought and sold certain investments to realign its investment
portfolio. From January 1, 1994 (effective date of current accounting
standards) through June 5, 1995, the Company actively bought and sold
investments in corporate preferred stocks and mutual funds consisting primarily
of corporate and U.S. government securities with the objective of generating
profits on short-term differences in price, and accordingly, classified its
investments as "Trading Securities" whereby they were carried at market with
unrealized gains or losses reflected in current earnings. During the second
quarter of 1995, the Company restructured its investments in short-term
marketable securities and changed its investment philosophy to one of holding
securities for the generation primarily of dividend and interest income. As a
result, investments and changes in the market value of the investments arising
subsequent to this change (June 5, 1995) are accounted for as "Available for
Sale". Available for sale 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.
RESTRICTED CASH
The restricted cash at December 31, 1995 represents cash collateral for
a deposit received on a significant contract. As security for product delivery
and for the deposit received under the contract, the Company issued a letter of
credit of $550,000, which expired on December 31, 1996. At the customer's
direction, upon the delivery of systems, a draw down was permitted at the rate
of 25% of the value of the equipment delivered. At December 31, 1996,
substantially all of the terms of the contract were satisfied and the cash was
released for general purposes.
F-6
<PAGE> 38
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 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 OF 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.
F-7
<PAGE> 39
NOTE 3. SHORT-TERM INVESTMENTS
Securities available for sale at December 31, 1996, 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 $ -- $14,685 $ 500,785
Mutual Funds 1,595,839 5,412 -- 1,601,251
Preferred Stocks 10,282,957 8,418 -- 10,291,375
----------- ------- ------- -----------
$12,394,266 $13,830 $14,685 $12,393,411
=========== ======= ======= ===========
</TABLE>
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>
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 December 31, 1996, an
aggregate amount of $3,800,875 (market value) of investments were below
investment grade, of which $2,512,500 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 "Short-Term
Borrowings").
Proceeds, realized gains and realized losses from the sales of
securities classified as available for sale for the year ended December 31,
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 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.
F-8
<PAGE> 40
NOTE 4. PURCHASED AND CAPITALIZED SOFTWARE
Purchased and capitalized software consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Purchased software $ 6,898,082 $7,006,270
Capitalized software 7,022,782 5,927,456
Accumulated amortization (10,660,801) (7,992,031)
------------ ----------
Net purchased and capitalized software $ 3,260,063 $4,941,695
============ ==========
</TABLE>
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 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Buildings and leasehold improvements $1,107,060 $1,007,171
Furniture and equipment 6,167,383 5,255,813
Accumulated depreciation (4,801,119) (4,247,168)
---------- ----------
Net property and equipment $2,473,324 $2,015,816
========== ==========
</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 are included in property, plant and equipment at December 31,
1996 with a cost of $531,619 and accumulated amortization of $189,570.
NOTE 6. LEASES
AS LESSOR
In 1993 the Company modified its sales-type lease program by entering
into an agreement with a finance company whereby it receives 100% of the
discounted minimum lease payments at inception of the lease, assigns the lease
payments to the finance company, grants the finance company a security interest
in the leased equipment and accepts certain recourse liability in event of
default by the lessee. The Company retains ownership in the residual value of
the leased property and has recorded a reserve for the estimated liability
under the recourse agreement. At December 31, 1996 and December 31, 1995, the
Company had the following net investment in these financed sales-type leases:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Estimated residual value of leased property $1,532,643 $1,315,427
Unearned income (292,237) (269,951)
---------- ----------
Net investment in financed sales-type leases $1,240,406 $1,045,476
========== ==========
</TABLE>
At December 31, 1996, the Company has accrued $557,842 representing
estimated amounts contingently payable related to sales-type leases financed
under this agreement. To date, actual losses from recourse provisions are
$194,461.
F-9
<PAGE> 41
AS LESSEE
The Company has operating leases with third parties for office space
in various locations. The future annual rental commitments as of December 31,
1996 under these leases are $1,109,364 in 1997; $612,014 in 1998; $536,144 in
1999; $380,915 in 2000; $306,944 in 2001 and $1,034,027 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 December 31, 1996:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1997 $193,192 $1,203,623
1998 174,030 650,010
1999 27,208 550,149
2000 2,226 388,679
2001 2,226 309,203
Thereafter -- 1,034,027
-------- ----------
Total minimum lease payments 398,882 $4,135,691
==========
Amounts representing interest 59,062
--------
Present value of net
minimum payments 339,820
Current portion 155,216
--------
Long-term portion $184,604
========
</TABLE>
Rent expense under these agreements and other operating leases was
$1,562,835, $1,611,081, and $1,491,615 for the years ended December 31, 1996,
1995, and 1994, respectively. See "Related Party Transactions" for
additional discussions of operating leases.
NOTE 7. SHORT-TERM BORROWINGS
The Company's short-term borrowings consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Borrowings with brokerage firm on margin against
the Company's short term investment portfolio $5,826,577 $6,062,905
Unsecured demand note of the Company's Squirrel
subsidiary with a bank at prime -- 271,448
Bank credit lines of the Company's Swiss
subsidiary at prime -- 48,357
---------- ----------
Total short-term borrowings $5,826,577 $6,382,710
========== ==========
</TABLE>
At December 31, 1996, 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 $11,891,470 at December 31, 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 December
31, 1996.
NOTE 8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Current:
Domestic $ -- $150,000 $ --
Foreign -- 52,645 --
Deferred:
Domestic -- --
-------- -------- --------
Total $ -- $202,645 $ --
======== ======== ========
</TABLE>
F-10
<PAGE> 42
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
U.S. federal statutory tax rate 35% (35%) (35%)
State income taxes, net of federal income tax effect 6% 8% (4%)
Benefits not recorded (benefits recognized)
due to net carryforward position (43%) 39% 42%
Foreign and other 2% 5% 1%
Tax credits generated 0% 0% (4%)
--- --- ---
0% 17% 0%
=== === ===
</TABLE>
The Company's U.S. federal effective rate is generally unaltered by
the rates applicable to its foreign operations as a U.S. foreign tax credit
would be generated for taxes paid in those jurisdictions. Foreign taxes are
recognized on foreign taxable income for which no foreign tax credit is
generated.
Permanent differences include tax-free dividend income and
amortization of goodwill. No tax benefits were recorded for non-deductible
write-offs of goodwill and certain other expenses. Due to the net operating
losses, no material tax payments have been made.
The following summarizes the significant components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
Deferred Tax Consequences at December 31, 1996
----------------------------------------------
Assets Liabilities Total
---------- ----------- ---------
<S> <C> <C> <C>
Accounts receivable allowance $484,202 -- $484,202
Unrealized loss on investments 61,969 -- 61,969
Inventory writedowns 271,140 -- 271,140
Accrued expenses not currently deductible 80,278 -- 80,278
Less valuation allowance (689,752) -- (689,752)
---------- ----------- ----------
Current 207,837 -- 207,837
Property and equipment book/tax cost differential 23,367 -- 23,367
Tax loss carryforwards 7,979,415 -- 7,979,415
Tax credits 1,231,664 -- 1,231,664
Software costs capitalized for financial
reporting purposes -- (1,063,806) (1,063,806)
Less valuation allowance (6,278,724) -- (6,278,724)
---------- ----------- ----------
Noncurrent 2,955,722 (1,063,806) 1,891,916
---------- ----------- ----------
Total $3,163,559 $(1,063,806) $2,099,753
========== =========== ==========
</TABLE>
F-11
<PAGE> 43
<TABLE>
<CAPTION>
Deferred Tax Consequences at December 31, 1995
----------------------------------------------
Assets Liabilities Total
---------- ----------- ---------
<S> <C> <C> <C>
Accounts receivable allowance $749,534 $ -- $749,534
Unrealized loss on investments 72,463 -- 72,463
Inventory writedowns 108,160 -- 108,160
Accrued expenses not currently deductible 66,300 -- 66,300
Less valuation allowance (830,900) -- (830,900)
--------- --------- ---------
Current 165,557 -- 165,557
--------- --------- ---------
Property and equipment book/tax cost differential -- (35,196) (35,196)
Tax loss carryforwards 11,619,173 -- 11,619,173
Tax credits 1,800,000 -- 1,800,000
Software costs capitalized for financial
reporting purposes -- (1,746,458) (1,746,458)
Less valuation allowance (9,703,323) -- (9,703,323)
---------- ----------- ----------
Noncurrent 3,715,850 (1,781,654) 1,934,196
---------- ------------ ----------
Total $3,881,407 $(1,781,654) $2,099,753
========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Deferred Tax Consequences at December 31, 1994
----------------------------------------------
Assets Liabilities Total
---------- ----------- ---------
<S> <C> <C> <C>
Accounts receivable allowance $1,012,864 $ -- $1,012,864
Unrealized loss on investments 642,645 -- 642,645
Accrued expenses not currently deductible 275,792 -- 275,792
Inventory writedowns 270,600 -- 270,600
Deferred revenue 48,750 -- 48,750
Other assets 13,466 -- 13,466
Less valuation allowance (1,505,645) -- (1,505,645)
---------- ----------- ----------
Current 758,472 -- 758,472
---------- ----------- ----------
Property and equipment book/tax cost differential -- (104,823) (104,823)
Tax loss carryforwards 11,665,194 -- 11,665,194
Tax credits 1,844,380 -- 1,844,380
Software costs capitalized for financial
reporting purposes -- (2,510,506) (2,510,506)
Less valuation allowance (9,552,964) -- (9,552,964)
---------- ----------- ----------
Noncurrent 3,956,610 (2,615,329) 1,341,281
----------- ----------- ----------
Total $4,715,082 $(2,615,329) $2,099,753
========== =========== ==========
</TABLE>
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 the Company's view of expected profits in 1997 and
the next several years.
The $3,565,747 and $524,386 decreases in the valuation allowance in
the years ended December 31, 1996 and 1995 respectively, represents the
realization of tax benefits of temporary differences and net operating loss
carryforwards which reversed during these years through the generation of
taxable income. The $3,357,162 increase in the valuation allowance in the
year ended December 31, 1994 represents the temporary differences and
net operating loss carryforwards generated in that year 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 $22,797,000 of net operating losses at
December 31, 1996, a portion of which are subject to certain limitations under
the Internal Revenue Code Section 382, and $1,200,000 of tax credits
($1,100,000 of
F-12
<PAGE> 44
research activities credits and $100,000 of investment tax credits) available
to offset future federal tax liabilities. The utilization of net operating
losses is limited by certain rules which limit the utilization of losses
incurred by group members prior to their acquisition by Sulcus,
post-acquisition taxable income generated by specific members of the group and
the passage of time . The net operating loss carryforwards expire as follows:
<TABLE>
<S> <C>
2001 $933,000
2002 1,310,000
2003 4,501,000
2004 2,305,000
2005 2,679,000
2006 1,843,000
2007 1,207,000
2008 3,958,000
2009 4,061,000
---------
Total $22,797,000
</TABLE>
NOTE 9. 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 $233,687, $225,391, and $185,251 for the years ended
December 31, 1996, 1995, and 1994, respectively. As of December 31, 1996, the
future annual rental commitments under these leases are $150,388 in 1997,
$99,051 in 1998, $91,269 in 1999, $95,823 in 2000, and $74,520 in 2001.
The Company has agreed, under certain circumstances, to provide to its
former President loans in 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 was secured by real
estate, proceeds from its sale and other assets. The principal and related
interest was repaid on August 1, 1996. During 1996, the Company made advances
totaling $65,485 on the remaining portion of the loan agreement and that amount
is outstanding on December 31, 1996. Interest or outstanding balances is billed
and paid quarterly. As a part of the separation agreement with the Company's
former President, the loan and the related accrued interest was forgiven.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Employment agreements are in place with certain executive officers and
management personnel. These agreements generally continue until terminated by
either party and contain certain change of control provisions.
NOTE 11. INCENTIVE STOCK OPTION PLANS
The Company maintains three stock option plans at December 31, 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.
F-13
<PAGE> 45
Stock option activity under all plans for the years ended December 31,
1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
Options
Outstanding Price
----------- -----
<S> <C> <C>
Outstanding, January 1, 1994 2,149,444 $1.000 - $9.250
--------- ---------------
1994
Granted 1,012,500 $2.1875 - $7.750
Exercised (135,827) $1.250 - $5.375
Canceled (930,637) $1.375 - $9.250
--------- ---------------
Outstanding, December 31, 1994 2,095,480 $1.000 - $9.250
--------- ---------------
1995
Granted 461,833 $2.000 - $3.500
Exercised (17,660) $2.125 - $3.500
Canceled (568,538) $2.281 - $8.625
--------- ---------------
Outstanding, December 31, 1995 1,971,115 $1.000 - $9.250
--------- ---------------
1996
Granted 552,830 $1.9375-$3.25
Exercised (84,296) $2.5000-$3.3125
Canceled (607,104) $2.1875-$8.625
--------- ---------------
Outstanding, December 31, 1996 1,832,545 $1.000-$9.250
========= ===============
Exercisable at December 31, 1996 1,063,603 $1.000-$9.250
========= ===============
</TABLE>
In accordance with the provisions of SFAS 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option plans
and, accordingly, does not recognize compensation cost. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS 123, net income and earnings per
share would have been reduced to the pro forma amounts indicated in the table
below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income-as reported $1,394,552 ($1,368,956)
Net income-pro forma 991,315 ($1,472,533)
Earnings per share-as reported $.08 ($.09)
Earnings per share-pro forma $.06 ($.10)
</TABLE>
The fair value of each options grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield 0%
Expected stock price volatility 30%
Risk-free interest rate 6%
Expected life of options 1 to 5 years
</TABLE>
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995.
NOTE 12. 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 was reflected as a reduction of equity. In May 1996, the
Company and the former stockholders of Techotel agreed to the repayment of the
note through the cancellation of 200,000 shares issuable under the purchase
agreement.
F-14
<PAGE> 46
NOTE 13. 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 were entitled to receive additional shares of the Company's stock
upon attaining certain earnings over a three year period. Lodgistix Scandinavia
achieved such earnings for 1993, 1995 and 1996. As a result, the Company issued
to the former stockholders of Lodgistix Scandinavia a total of 125,295 shares
having a value of $269,864 for 1993 and 1995. For 1996, under the terms of the
Agreement, the Company issued to the former stockholders of Lodgistix
Scandinavia 66,832 shares valued at $168,750 ($2.525 per share). This
additional consideration has been recorded as goodwill at December 31, 1996.
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 $500,000 of
Common Stock and the payment of $500,000 in cash. In addition, the shareholders
were entitled to receive shares of Sulcus based upon attaining certain earnings
over a three-year period ending December 31, 1995. Techotel achieved such
earnings for 1993 and 1995. As a result, the Company issued to the former
stockholders of Techotel a total of 174,193 shares of Sulcus Common Stock for
an aggregate value of $866,509 for those two years. This additional
consideration has been recorded as goodwill at December 31, 1995. Techotel did
not achieve the required earnings for 1994.
In 1992, Sulcus acquired Sulcus Hospitality Limited and Sulcus
Singapore PTE. LTD., sales offices located in Hong Kong and Singapore,
respectively for $1,450,000 in cash. In addition, the shareholders were
entitled to receive shares of Sulcus based upon attaining certain earnings over
a three-year period, however, these earnings levels were not attained.
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 of the Company's stock having a value of
$1,955,500, net of issuance costs of $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 based upon attaining
certain 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 issued 498,488 shares under the terms of the agreement and cancelled
120,488 earnout shares. To reflect this settlement, the Company recorded an
increase in goodwill and capital stock in the amount of $391,193.
F-15
<PAGE> 47
NOTE 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Interest paid $571,571 $596,322 $556,269
Income taxes paid $94,016 -- --
Non-cash activities:
Equipment purchased under capital
lease agreements $406,124 -- --
Common stock issued in settlement
of shareholder litigation $2,800,000 -- $1,625,000
Common stock issued for contingency
payments on acquisitions $168,750 $393,399 $511,077
Issuance of stock to consultants $26,000 $12,000 --
Issuance of stock as settlement of
previously recorded liabilities $181,148 $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 (loss) gain on investments
available for sale ($187,237) $186,382 --
</TABLE>
NOTE 15. 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>
Year Ended December 31,
------------------------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Net revenues:
Domestic $33,596,090 $31,195,481 $30,190,420
Canada 5,231,939 3,625,643 2,859,899
Pacific Region 8,063,939 5,736,551 4,852,745
Europe 5,253,177 5,426,318 5,240,100
----------- ----------- -----------
Consolidated net revenues $52,145,145 $45,983,993 $43,143,164
=========== =========== ===========
</TABLE>
F-16
<PAGE> 48
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Net income (loss):
Domestic $2,190,131 ($147,949) ($8,183,839)
Canada 234,342 273,760 210,686
Pacific Region (508,684) (1,290,717) (3,304,369)
Europe (521,237) (204,050) (390,491)
---------- ----------- ------------
Consolidated net income (loss) $1,394,552 ($1,368,956) ($11,668,013)
========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Identifiable assets:
Domestic $38,179,244 $37,646,558 $39,288,050
Canada 1,738,378 1,562,171 1,259,913
Pacific Region 3,966,656 3,437,539 2,560,219
Europe 4,065,821 4,680,510 4,761,301
----------- ----------- -----------
Consolidated identifiable assets $47,950,099 $47,326,778 $47,869,483
=========== =========== ===========
</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.
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
data for the years ended December 31, 1996 and 1995. 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.
F-17
<PAGE> 49
<TABLE>
<CAPTION>
(In Dollars)
Fiscal Quarter Ended
---------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1996 1996 1996 1996 1995 1995 1995 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues 11,275,019 13,053,284 13,640,565 14,176,277 11,311,054 11,152,637 11,197,496 12,322,806
Cost of sales
and expenses 10,753,615 12,151,065 13,323,591 14,522,322 10,267,519 10,465,330 11,124,788 15,292,667
Income (loss)
before taxes 521,404 902,219 316,974 (346,045) 1,043,535 687,307 72,708 (2,969,861)
Tax provision 0 0 0 0 0 0 0 202,645
Net income
(loss) 521,404 902,219 316,974 (346,045) 1,043,535 687,307 72,708 (3,172,506)
========== ========== ========= ========= ========== ========= ========= ==========
Earnings (loss)
per share 0.03 0.05 0.02 (.02) 0.07 0.05 0.00 (0.21)
========== ========== ========= ========= ========== ========= ========= ==========
</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.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair value are made at a specific point in time, based on
relevant market prices and information about the financial instrument. The
estimated fair values of financial instruments presented below are not
necessarily indicative of the amounts the Company might realize in actual
market transactions.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash (including restricted cash): The carrying amounts reported in the
balance sheet for cash and restricted cash approximates their fair value.
Short-term investments: Short-term investments consists of stocks,
mutual funds and debt securities. Fair values are based on quoted market
prices.
Short- and long-term debt: The carrying amount of the Company's
borrowings under margin accounts and floating rate debt approximates its fair
value. Long-term fixed rate debt is not material.
Shareholder litigation liability: Portions due in the form of stock for
settlement of shareholder litigation liability is valued based upon quoted
market prices.
The carrying amounts of trade payables and receivables approximate
their fair value and have been excluded from the accompanying table.
F-18
<PAGE> 50
The carrying amounts and fair value of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash $2,503,475 $2,503,475 $1,202,325 $1,202,325
Restricted cash -- -- 550,000 550,000
Short-term investments 12,393,411 12,393,411 12,408,075 12,408,075
Short-term borrowings 5,826,577 5,826,577 6,382,710 6,382,710
Shareholder litigation
liability -- -- 3,108,097 3,283,097
Long-term borrowings 366,995 366,995 73,888 73,888
</TABLE>
NOTE 18. 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
was 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. At December 31, 1995, the $2,800,000 liability
related to this settlement is included in the "Shareholder Litigation
Liability". On December 31, 1996, the Company issued the shares to the
settlement fund.
-----------
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
centered around the Stock Purchase Agreement entered into between Sulcus and
Squirrel Companies, Inc., in March 1992. 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 represented the entire earn-out for the years ended
December 31, 1992, 1993 and 1994 and, therefore, the Company cancelled 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 19. SUBSEQUENT EVENTS
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
$1,050,000. The intent is for the obligation to be paid monthly over a 36-month
period, however, the former Chairman may elect a lump sum distribution. The
Company's former Chairman disagrees as to the interpretation of the amount due
to him under the termination provisions and the parties are continuing to
negotiate to reach a settlement. The obligation will result in a charge to
income in the first quarter of 1997.
F-19
<PAGE> 51
SULCUS COMPUTER CORPORATION
STATEMENT REGARDING COMPUTATION OF
PER SHARE EARNINGS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Net income (loss) attributable
to common stockholders $1,394,552 ($1,368,956) ($11,668,013)
========== =========== ============
Shares:
Weighted average number of
common shares outstanding 16,720,092 14,720,327 13,872,298
Assumed conversion of stock
options (A) 113,213 105,130 286,830
---------- ----------- ------------
Average common shares and
common stock equivalents 16,833,305 14,825,457 14,159,128
========== =========== ============
Earnings (loss) per share $0.08 ($0.09) ($0.84)
========== =========== ============
</TABLE>
(A) Effect of stock options is antidilutive for all periods in 1995 and 1994.
F-20
<PAGE> 52
SULCUS COMPUTER CORPORATION
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Balance Charged to Amount Balance
beginning Acquired cost and charged at end
of year valuations expenses off of year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996
Allowance for doubtful accounts $2,581,020 $0 $859,341 $1,527,254 $1,913,107
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
</TABLE>
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDING DECEMBER 31, 1996, AS
SUBMITTED IN THE COMPANY'S 10-K FOR THE PERIOD AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000726712
<NAME> SULCUS COMPUTER CORP.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,503,475
<SECURITIES> 12,393,411
<RECEIVABLES> 14,909,001
<ALLOWANCES> 1,913,107
<INVENTORY> 2,614,321
<CURRENT-ASSETS> 31,797,122
<PP&E> 7,274,443
<DEPRECIATION> 4,801,119
<TOTAL-ASSETS> 47,950,099
<CURRENT-LIABILITIES> 20,447,897
<BONDS> 184,604
0
0
<COMMON> 40,780,066
<OTHER-SE> (13,462,468)
<TOTAL-LIABILITY-AND-EQUITY> 47,950,099
<SALES> 50,804,800
<TOTAL-REVENUES> 52,145,145
<CGS> 23,353,856
<TOTAL-COSTS> 27,396,737
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 859,341
<INTEREST-EXPENSE> 571,571
<INCOME-PRETAX> 1,394,552
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,394,552
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,394,552
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
