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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-13226
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SULCUS HOSPITALITY TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1369276
(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)
(724) 836-2000
(Registrant's telephone number, including area code)
---------------
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
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As of March 24, 1998, 17,059,152 shares of Common Stock were outstanding. The
aggregate market value of shares held by non-affiliates as of March 24,1998 was
$37,749,077 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.
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PART I
ITEM 1. BUSINESS
GENERAL
Sulcus Hospitality Technologies Corp. (formerly Sulcus Computer
Corporation) develops, manufactures, markets and installs computerized systems
designed to automate the creation, handling, storage and retrieval of
information and documents. The Company designs its systems primarily for the
hospitality industry. 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 and cruise lines.
The Company is a Pennsylvania Corporation incorporated on November 5,
1979 and adopted its present name in August 1997. The Company's principal
offices are located at Sulcus Centre, 41 North Main Street, Greensburg,
Pennsylvania 15601. Its telephone number at such address is 724-836-2000. Unless
the context indicates otherwise, references herein to the Company or to Sulcus
refer to Sulcus Hospitality Technologies Corp. and its wholly owned
subsidiaries.
HISTORICAL DEVELOPMENT
The Company provides its customers with computer systems which include
hardware, software, training, maintenance and support. The Company's sales
practices and trends are currently oriented to sales of systems and to the
vertical marketing of its integrated products for the worldwide hospitality
industry.
This industry was chosen because it represents, in management's
opinion, large vertical business markets. The Company has grown by way of
expanded research and development, as well as growth through acquisitions,
mergers, joint ventures and similar alliances. Sulcus has 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.
The Company's acquisitions have included Lodgistix Inc. (1991), NRG
Management Systems Inc. (1992) and Senercomm, Inc. (1997) which are developers
of technology solutions focused in the lodging industry and Squirrel Companies,
Inc. (1992) which is a developer of technology solutions focused in the
restaurant industry. Additionally, the Company has acquired direct sales
offices which sell and support the full range of the Company's products through
the purchase of JBA (HK) Ltd. (1992), JBA Singapore Pte. Ltd. (1992), Techotel
AG (1993) and Lodgistix Scandinavia A.S. The Company also established a direct
sales office in Sydney, Australia (1991) which sells and supports the full
range of the Company's products.
In December 1997, the Company purchased Senercomm, Inc. (Senercomm)
for approximately $2.2 million. Senercomm designs, manufactures and sells
in-room information systems which are used to gather guest data and
environmentally control the condition maintained within a hotel room. The
purchase price consisted of $.5 million of Sulcus Common Stock, $.5 million of
cash, and the balance of $1.2 million payable in three equal annual
installments including interest at the rate of 8%. The acquisition was
accounted for as a purchase and, accordingly, the balance sheet of Senercomm
was included in the consolidated financial statements of the Company at
December 31, 1997 and the results of operations of Senercomm will be
consolidated with those of the Company beginning January 1, 1998. The purchase
price was assigned to identifiable assets of working capital ($.2 million) and
purchased software ($2.0 million).
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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.
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 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 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 Wichita, Kansas and
Vancouver, Canada facilities. Sulcus is not dependent on a specific manufacturer
or supplier for its components or systems.
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:
LODGING AUTOMATION SOFTWARE
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.
wINNmaxX is an easy-to-use, Windows-based Front Office system designed
specifically for the small properties such as bed & breakfasts, small hotels,
inns, highway properties and specialty chains. wINNmaxX offers the management
power of a large luxury resort or grand hotel scaled system to special property
needs. Features include a flexible rate structure, pre-defined
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and custom reports capabilities, folio history, corporate account tracking and
travel agent tracking as well as many others. wINNmaxX is designed to be
customer-friendly and require only nominal support by the user.
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 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.
wINNfinity is a proprietary program designed for automating hotels,
using a new concept for the hospitality industry. The product design allows the
most frequently used tasks to be accomplished on a single screen thus enhancing
staff productivity. Developed for Microsoft(R) Windows NT(R) platform,
wINNfinity includes the typical Property Management functions of Front Office as
well as Attribute Inventory Manager (AIM) that tracks an unlimited number of
room type attributes.
SensorStat and innPULSE are the Company's proprietary centralized
in-room systems which consist of energy and room management software with
applications for HVAC management, in-room safes, mini-bar, maid status and room
occupancy and security.
RESTAURANT AUTOMATION SOFTWARE
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.
Squirrelite is proprietary software for restaurant operations similar
to the Squirrel Restaurant Management System but intended for smaller
installations.
HOSPITALITY INFORMATION MANAGEMENT
The Company's Legacy Solution consolidates data from multiple
management systems and transforms it into the information that hoteliers and
restaurateurs can use to perform business, marketing and operational analysis.
The product collects data from diverse systems and locations, stores the data
and allows management to compile and analyze the data for strategic
applications. Management believes that its customers that use the Legacy
Solution are in a position to build comprehensive business and marketing plans,
execute those plans, measure the results, and fine tune them for the competitive
advantage.
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
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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 provide 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 systems consisting of hardware, software, supplies,
training, maintenance and support to the hospitality industry. 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 and cruise lines.
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.
Financial information about foreign and domestic operations and export
sales are described in the Company's financial statement and notes thereto
which are included herein.
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.
Users are taught to customize the output for their specific needs. Sulcus
conducts training at its offices and at customers' sites.
MARKETING
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, China, The
Philippines, 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
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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.
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 its software products which allows the Company to implement its
systems on currently available operating platforms. These software development
platforms are 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. 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." In
connection with it acquisition of Senercomm, Inc. Sulcus obtained all rights to
an existing patent for a HVAC control system and method. 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 or has been assigned 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), SULCLINK(R), innPULSE(R), SensorStat(R), SensorStat
The Smart Controller(R), Soft Bypass(R) and PageLogic(R).
Sulcus has the exclusive license and assignment of the trademark of
COMPUSOLV(R). Sulcus has applied for, or intends to apply for Federal trademark
or service mark registration for HAT...ms(TM), wINNmaxX(TM), LANEXEC(TM),
HOTELTRIEVE(TM), and wINNfinity(TM). Additionally, Sulcus has registered or
applications are pending for various product names in numerous foreign
countries.
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PERSONNEL
As of February 28, 1998, Sulcus employed 469 persons, including 21
executives engaged in management, 65 persons in administration and finance, 123
technical personnel, 77 persons engaged in sales and marketing and 183 persons
in training and product support. None of Sulcus' employees are subject to
collective bargaining agreements. Sulcus believes its relations with its
employees to be excellent.
ITEM 2. PROPERTIES
Sulcus' principal executive and administrative operations are located
at Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601, in a
facility containing approximately 10,000 square feet. Sulcus leases these
offices under several leases expiring on various dates through September 30,
2001. The annual rental commitment under these leases are $180 thousand in 1998,
$104 thousand in 1999, $96 thousand in 2000, and $75 thousand in 2001.
Lodgistix leases approximately 22,500 square feet of office space in
Wichita, Kansas. The approximate monthly costs are $23 thousand, 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 thousand under a lease terminating on October 31, 2005.
ITEM 3. LEGAL PROCEEDINGS
Sulcus Computer Corporation, NRG Management Systems, Inc., Jeffrey S.
Ratner and Frank Morrisroe were 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 had claimed that
Defendants breached the Employment Agreement and Stock Purchase Agreement
entered into between the parties. In December 1997, the Company, without
admitting or denying the claims of Mr. Lipski, settled this dispute with a cash
payment of $250,000. This settlement was recorded in the 1997 results of
operations. Full payment of this obligation was made in January 1998.
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 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 Shareholders of the Company held on November
14, 1997, the holders of a plurality of the voting shares of the Company's
common stock voted to re-elect Leon D. Harris, David H. Adler, David W. Berkus
and Robert D. Gries. In addition, (1) the holders of a majority of the votes
cast approved certain amendments to the Company's Articles of Incorporation,
adopted Amended and Restated By-Laws of the Company, and ratified the
appointment of Crowe, Chizek and Company as the Company's auditors, and (2) the
holders of a majority of the votes present or represented, in person or by
proxy, and entitled to vote, approved each of the 1997 Sulcus Hospitality
Technologies Corp. Employee Stock Purchase Plan, the 1997 Sulcus Hospitality
Technologies Corp. Long-Term Incentive Plan, and the 1997 Sulcus Hospitality
Technologies Corp. Non-Employee Directors' Stock Option Plan. The votes cast
were as follows:
Proposal 1. Election of Directors.
Name For Against
Adler, David H. 13,196,088 181,548
Berkus, David W. 13,207,574 170,062
Gries, Robert D. 13,203,976 173,660
Harris, Leon D. 13,207,440 170,196
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Proposal 2 The approval of certain amendments to the Company's Articles
of Incorporation and By-Laws to classify the Board of
Directors into three classes.
For: 8,362,643
Against: 1,028,191
Abstain: 242,291
Proposal 3 The approval of certain other amendments to the Articles.
For: 7,864,097
Against: 1,072,149
Abstain: 269,930
Proposal 4 The approval of certain amendments to and a restatement of the
By-Laws.
For: 7,904,314
Against: 1,052,000
Abstain: 258,882
Proposal 5 The approval of the proposed 1997 Sulcus Hospitality
Technologies Corp. Employee Stock Purchase Plan.
For: 9,339,360
Against: 985,863
Abstain: 242,439
Proposal 6 The approval of the proposed 1997 Sulcus Hospitality
Technologies Corp. Long-Term Incentive Plan.
For: 9,141,156
Against: 726,429
Abstain: 263,716
Proposal 7 The approval of the proposed 1997 Sulcus Hospitality
Technologies Corp. Non-Employee Directors' Stock Option
Plan.
For: 8,827,092
Against: 1,016,220
Abstain: 287,991
Proposal 8 The ratification of the appointment of the auditors of the
Company.
For: 15,385,234
Against: 121,923
Abstain: 147,869
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF SECURITIES
Sulcus Common Stock is traded on the American Stock Exchange under
the symbol SUL.
QUARTER ENDING HIGH LOW
March 1998 (through March 24) 2-5/8 2-1/4
March 1997 2-1/8 1-7/16
June 1997 2-3/16 1-7/16
September 1997 2-13/16 1-9/16
December 1997 4-3/16 2-5/16
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
On March 24, 1998, the high and low prices for the Common Stock were
2-3/8 and 2-3/16, respectively.
As of March 24, 1998, there were approximately 4,041 record holders of
Sulcus' Common Stock.
The company has not paid cash dividends and does not presently
contemplate paying cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA
SULCUS HOSPITALITY TECHNOLOGIES CORP.
SELECTED FINANCIAL DATA
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected consolidated financial data of
the Company for the five years ended December 31, 1993 through 1997. 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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA
- ----------------------------
<S> <C> <C> <C> <C> <C>
Net sales $53,822 $50,805 $44,693 $41,887 $47,346
Cost of goods sold and services provided 24,840 23,354 18,965 20,588 23,085
------- ------- ------- ------- -------
Gross profit 28,982 27,451 25,728 21,299 24,261
Selling, general and administrative expenses(1) 28,440 23,847 22,896 24,388 21,726
Research and development 1,501 1,398 1,199 1,597 1,878
Depreciation and amortization 1,701 1,589 1,520 2,158 2,034
Other items(2) 62 -- 3,434 3,663 3,207
------- ------- ------- ------- -------
Income (loss) from operations (2,722) 617 (3,321) (10,507) (4,584)
Interest expense 368 571 598 556 403
Unrealized and realized (gain) loss on investments(3) (74) (9) (1,462) 1,861 --
Dividend income and other (1,006) (1,340) (1,291) (1,256) (1,937)
Income taxes -- -- 203 -- --
-------- ------- -------- -------- --------
Net income (loss) ($2,010) $1,395 ($1,369) ($11,668) ($3,050)
PER SHARE DATA
- --------------
Basic earnings (loss) per share ($.12) $.08 ($.09) ($.84) ($.23)
Weighted average shares used in computing
basic earnings (loss) per share 16,842 16,720 14,720 13,872 13,509
Cash dividends -- -- -- -- --
BALANCE SHEET DATA
- ------------------
Working capital $10,507 $11,350 $5,390 $4,183 $8,643
Total assets 42,206 47,950 47,327 47,869 58,716
Long-term obligations 2,313 367 74 86 364
Stockholders' equity 25,488 27,318 22,894 23,087 33,373
</TABLE>
- ---------------------
(1) Selling, general and administrative expenses for 1997 include costs for the
settlement of severance obligations to the Company's former chairman and the
Company's former president in the amount of $1,538 thousand.
(2) In 1997, the Company realized a $188 thousand gain as a result of the sale
of its land title business and settled litigation for $250 thousand. In 1995 the
Company wrote off $515 thousand of previously capitalized software and recorded
a provision for litigation settlement of $2,919 thousand. In 1994, the Company
wrote off $1,820 thousand of previously capitalized software and $337 thousand
of investments in affiliates, wrote off $1,256 thousand of goodwill and recorded
a provision for litigation of $250 thousand. In 1993, the Company wrote off $328
thousand of previously capitalized software, $642 thousand of investments in
affiliates and recorded a provision for litigation settlements of $2,237
thousand.
(3) Prior to June 1995, the Company reported unrealized gains and losses as a
component of income. On June 5, 1995, the Company restructured its investment
portfolio, and as a result no longer reports unrealized gains or losses from the
investment portfolio in its statement of earnings.
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1997 AS COMPARED TO 1996
The Company had a net loss of ($2,010) thousand in the year ended
December 31, 1997 as compared to net income of $1,395 thousand in the year ended
December 31, 1996. Gross profits increased $1,531 thousand (6%) from $27,451
thousand to $28,982 thousand as the result of a $3,017 thousand increase in
sales. This increase in gross margins was offset by an increase in operating
expenses of $4,870 thousand and a decrease in other income items of $66
thousand. In 1997, the Company reclassified the presentation of its income
statement to reflect what management believes more clearly shows the
relationships between revenues and expenses and income from operations.
Historical information has been reclassified to conform to this presentation. On
December 31, 1997, the Company consummated the purchase of Senercomm, Inc.
(Senercomm). The acquisition has been accounted for as a purchase and,
accordingly, the balance sheet of Senercomm was included in the consolidated
financial statements of the Company at December 31, 1997 and the results of
operations of Senercomm will be consolidated with those of the Company beginning
January 1, 1998.
Net sales for the year ended December 31, 1997 were $53,822 thousand,
representing an increase of $3,017 thousand (6%) when compared to net sales of
$50,805 thousand for the same period of 1996. Net system sales for the year
ended December 31, 1997 were $33,297 thousand as compared to $31,722 thousand
for the same period of 1996, an increase of $1,575 thousand (5%) due primarily
to an increase in sales of the Company's Property Management Systems, offset in
part by decreases in sales of Point of Sales systems and the sale and closure of
certain real estate operations. Support revenues for the year ended December 31,
1997 were $20,525 thousand as compared to $19,083 thousand for the same period
of 1996, an increase of $1,442 thousand (8%) due primarily to increased
installations of the Company's Property Management Systems and 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 to distributors
of the Company were $45,045 thousand (84%) and $8,777 thousand (16%),
respectively, of net sales for the year ended December 31, 1997 as compared to
$41,802 thousand (82%) and $9,003 thousand (18%) for the comparable 1996 period.
Cost of goods sold for the year ended December 31, 1997 increased to
$24,840 thousand from $23,354 thousand, an increase of $1,486 thousand (6%) from
the comparable 1996 period. Cost of goods sold as a percentage of net sales was
46% for both of the years ended December 31, 1997 and 1996. Gross margins of the
Company increased to $28,982 thousand from $27,451 thousand, an increase of
$1,531 thousand (6%) over the same period of 1996, due to increased sales
levels, additional costs paid for hardware and reduced amortization costs on
capitalized software. Cost of system sales for the year ended December 31, 1997
was $21,100 thousand (63% of system sales) as compared to $19,598 thousand (62%
of system sales) for the same period of 1996, an increase of $1,502 thousand
(8%), due primarily to increased sales levels. The Company includes the
amortization of capitalized software costs in Systems Cost of Sales. During
1997, amortization was completed on certain software products, representing the
completion of the estimated useful lives of the products. Software amortization
costs in 1997 as compared to 1996 were therefore reduced by $955 thousand. The
hardware component of the Company's sales increased 4% in 1997 as compared to
1996, however, the related costs of this hardware increased 15%. Cost of support
for the year ended December 31, 1997 was $3,740 thousand (18% of support
revenues) as compared to $3,756 thousand (20% of support revenues) for the same
period of 1996, a decrease of $16 thousand (less than 1%).
Total operating expenses increased $4,870 thousand in 1997 when
compared to 1996 in the areas of selling, general, and administrative ($4,593
thousand), research and development ($103 thousand), depreciation and
amortization ($112 thousand). Also included in operating expenses is a gain on
the sale of the Company's land title business of $188 thousand and a $250
thousand provision for the settlement of litigation. Total operating expenses
were 59% of net sales in 1997 as compared to 53% of net sales in 1996.
Selling, general and administrative expenses increased $4,593 thousand
(19%) in 1997 when compared to 1996. For the year ended December 31, 1997, these
expenses were $28,440 thousand as compared to $23,847 thousand in 1996. Selling,
general, and administrative expenses as a percentage of net sales was 53% for
the year ended December 31, 1997 as compared to 47% for the same period of 1996.
The increase in selling, general and administrative expenses is primarily the
result of severance costs for the Company's former chairman and the Company's
former president of $1,538 thousand, increases in payroll and related costs of
$1,087 thousand, increases in advertising related costs of $589 thousand and
increases in travel and related costs of $392 thousand. Excluding severance, the
increases in payroll and related costs were primarily in the Company's Point of
Sale business and in international sales offices. Increases in payroll,
advertising and travel costs represent the expansion of the Company's
distribution channels as well as increased expenses for the marketing and
support of new products.
11
<PAGE> 12
Research and development expense for the year ended December 31, 1997
increased to $1,501 thousand from $1,398 thousand an increase of $103 thousand
(7%) over the same period of 1996. Total amounts expended on research and
development (including amounts expensed and amounts capitalized) was $3,069
thousand and $2,499 thousand for 1997 and 1996, respectively.
Depreciation and amortization expense for the year ended December 31,
1997 increased to $1,701 thousand from $1,589 thousand for the same period of
1996, an increase of $112 thousand (7%).
Effective September 30, 1997, the Company sold its land title
subsidiary for cash. The sale resulted in a gain on disposal of $188 thousand,
representing the difference between the sales price and the net assets of the
subsidiary, less costs of disposal. The impact of this disposal on gross
margins, operating expenses and net loss was not material. In the fourth
quarter, the Company accrued $250 thousand for the settlement of disputes which
arose in 1995 with regard to the purchase of the Company's NRG Management
Systems, Inc. subsidiary and the employment agreement with that Company's former
owner.
Other income and expense consists of interest expense, realized and
unrealized gains and losses on short-term investments and dividends and other
income. Interest expense for the year ended December 31, 1997 decreased to $368
thousand from $571 thousand for the same period of 1996, a decrease of $203
thousand (36%) due to reduced borrowings. Dividends and other income for the
year ended December 31, 1997 was $1,006 thousand as compared to $1,340 thousand
for the same period of 1996, a decrease of $334 thousand (25%) due to the
liquidation of invested balances to repay borrowings.
The Company had a net deferred tax asset amounting to $2,100 thousand,
net of valuation allowances of $8,802 thousand at December 31, 1997 and $6,969
thousand at December 31, 1996. The valuation allowance was increased in the year
ended December 31, 1997 by $1,833 thousand 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 statement for the year ended
December 31, 1997 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 1995, 1996 and 1997 and the
Company's view of expected profits in 1998 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.
1996 AS COMPARED TO 1995
The Company had net income of $1,395 thousand in the year ended
December 31, 1996 as compared to a loss of ($1,369) thousand in the year ended
December 31, 1995 on sales which increased by $6,112 thousand (14%) for these
same periods. In 1995, the Company reported unrealized gains on its investment
portfolio of $1,462 thousand and expenses related to the write-off of assets of
$515 thousand and litigation settlement $2,919 thousand. When eliminating these
amounts for the purpose of comparability, the Company showed an improvement on
earnings from $603 thousand to $1,395 thousand, a change of $792 thousand. 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 of
$1,723 thousand partially offset by increases in selling, general and
administrative costs of $951 thousand.
Net sales for the year ended December 31, 1996 were $50,805 thousand,
representing an increase of $6,112 thousand (14%) when compared to net sales of
$44,693 thousand for the same period of 1995. Net system sales for the year
ended December 31, 1996 were $31,722 thousand as compared to $27,645 thousand
for the same period of 1995, an increase of $4,077 thousand (15%). This increase
was 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 thousand as compared to $17,048 thousand for the same period
of 1995, an increase of $2,035 thousand (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 to
distributors of the Company were $41,802 thousand (82%) and $9,003 thousand
(18%), respectively, of net sales for the year ended December 31, 1996 as
compared to $35,778 thousand (80%) and $8,915 thousand (20%) for the comparable
1995 period.
Cost of goods sold for the year ended December 31, 1996 increased to
$23,354 thousand from $18,965 thousand, an increase of $4,389 thousand (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 $27,451
thousand from $25,728 thousand, an increase of $1,723 thousand (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 $19,598 thousand (62% of system sales) as compared
to $15,459 thousand (56% of system sales) for the same period of 1995, an
increase of $4,139 thousand (27%), due primarily to the mix of software and
hardware sales. The cost of sale components for hardware sales is higher than
that for
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<PAGE> 13
software sales. Cost of support for the year ended December 31, 1996
was $3,756 thousand (20% of support revenues) as compared to $3,506 thousand
(21% of support revenues) for the same period of 1995, an increase of $250
thousand (7%).
When eliminating the effect of the 1995 write-off of previously
capitalized software costs ($515 thousand) and the 1995 provision for litigation
settlement ($2,919 thousand) for the purposes of comparability, total operating
expenses increased $1,219 thousand in 1996 when compared to 1995. These
increases were in the areas of selling, general, and administrative expenses
($951 thousand), research and development ($199 thousand), and depreciation and
amortization ($69 thousand). Total operating expenses were 53% of net sales in
1996 as compared to 65% of net sales in 1995 (57% of sales if the write-off of
previously capitalized software and the provision for litigation settlement are
removed).
For the year ended December 31, 1996, selling, general and
administrative expenses were $23,847 thousand as compared to $22,896 thousand in
1995, an increase of $951 thousand (4%). 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 ($880 thousand ) and bad debt expense ($280 thousand). Increases
in payroll and related costs 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 thousand from $1,199 thousand an increase of $199 thousand
(17%) over the same period of 1995. Total amounts expended on research and
development (including amounts expensed and amounts capitalized) was $2,499
thousand and $2,202 thousand for 1996 and 1995, respectively.
Depreciation and amortization expense for the year ended December 31,
1996 increased to $1,589 thousand from $1,520 thousand for the same period of
1995, an increase of $69 thousand (5%).
Other income and expense consists of interest expense, realized and
unrealized gains and losses on short-term investments and dividends and other
income. Interest expense for the year ended December 31, 1996 decreased to $571
thousand from $598 thousand for the same period of 1995, a decrease of $27
thousand (4%). Dividends and other income for the year ended December 31, 1996
was $1,340 thousand as compared to $1,291 thousand for the same period of 1995,
an increase of $49 thousand (4%).
The Company had a net deferred tax asset amounting to $2,100 thousand,
net of valuation allowances of $6,969 thousand at December 31, 1996 and $10,534
thousand at December 31, 1995. The valuation allowance was decreased in the year
ended December 31, 1996 by $3,565 thousand 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 statement for the year ended
December 31, 1996 does not reflect any income tax provision on the pre-tax
operating results for that period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is primarily dependent upon its ability to
generate sufficient working capital through profitable operations. Management
believes that in order to achieve sustained 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. Total amounts which could have been borrowed under the Company's
line of credit were $2 million at December 31, 1997, of which $1.3 million was
outstanding at that date. Subsequent to year end, the Company repaid amounts
outstanding under the line of credit of $1,300 thousand.
At December 31, 1997, Sulcus' cash and cash equivalents increased to
$8,894 thousand from $2,503 thousand at December 31, 1996, an increase of $6,391
thousand. This increase was primarily the result of cash provided by
liquidations of the Company's investment of marketable securities which were
reinvested in commercial paper at December 31, 1997. At December 31 1996, the
Company had short-term investment of $12,393 thousand and outstanding borrowings
under a margin agreement for these short-term investments of $5,827 thousand.
During 1997, substantially all of these investments were liquidated and the
margin account repaid leaving $6,000 thousand which is invested at December 31,
1997 in commercial paper with maturities of three months or less. This
commercial paper is classified as a cash equivalent. 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.
At December 31, 1997, accounts receivable were $11,256 thousand as
compared to $12,997 thousand a year earlier. 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
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<PAGE> 14
allowance for uncollectible accounts decreased at December 31, 1997 to $1,785
thousand as compared to $1,913 thousand at December 31, 1996, due to improved
collections of accounts receivable.
The Company purchases computer hardware and other equipment from
vendors under open accounts payable for the purpose of including these items in
systems sold to customers. Hardware and equipment are readily available in the
marketplace and therefore it is not necessary for the Company to maintain large
quantities of inventories to meet customer needs. Inventories of computers,
computer components and computer peripherals increased to $3,261 thousand at
December 31, 1997 as compared to $2,614 thousand a year earlier primarily
in the Company's Point of Sale business. Accounts payable decreased to
$2,645 thousand at December 31, 1997 as compared to $3,948 thousand a year
earlier.
The Company leases facilities under operating lease agreements of
varying terms. Properties and equipment consist of leasehold improvements and
equipment used in the conduct of business. Property and equipment, net of
accumulated depreciation and amortization, was $2,142 thousand at December 31,
1997 as compared to $2,473 thousand a year earlier.
At December 31, 1997, the Company had long-term borrowings (including
current and noncurrent portions) of $2,313 thousand, primarily related to
acquisition debt for a subsidiary and severance obligation to the Company's
former chairman of the board.
The backlog of hardware and software orders at December 31, 1997 is
expected to be filled within one year and amounted to $7,900 thousand.
For the years ended December 31, 1997, 1996 and 1995, 42%, 36% and 33%,
respectively, of the Company's consolidated sales were derived from customers
outside of the United States. Substantially all of the Company's sales outside
of the United States are billed and collected in functional currencies of that
subsidiary. The costs of point-of-sale systems sold by the Company's foreign
subsidiaries are denominated in United States Dollars. Substantially all other
operating expenses of these subsidiaries are incurred in the functional currency
of that subsidiary. Consequently, sales of point-of-sale and reported financial
results are affected by changes in foreign currencies against the U.S. dollar.
To demonstrate the impact of changes in foreign currencies against the U.S.
dollar, the following summarizes the changes in sales and net income had
exchange rates in effect for 1995 been applicable to 1997 and 1996 (in thousands
of dollars):
Pro-Forma results using 1995 Currency Exchange Rates
----------------------------------------------------
1997 Results 1996 Results
------------ ------------
Sales $54,775 $50,710
Net Income ($2,018) $1,391
Since December 31, 1997 the U.S. Dollar has generally strengthened
against functional currencies of the Company's subsidiaries, primarily those in
Australia and Singapore. Had the rates at February 28, 1998 been in effect in
1997, reported sales would have been reduced by $1.3 million, however, net
income would not be materially impacted.
The Company's ability to develop and expand its presence in the
hospitality industry and expand existing business lines for its other markets
depends, in a large part, on the availability of adequate funds. Management
expects that to meet customer needs, it must 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 and its line of credit. 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. Management
believes that available revenue from operations together with available capital
and lines of credit will be sufficient to support the anticipated operating and
capital requirements of the Company for at least twelve months.
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. On December 31, 1997, the Company
consummated the purchase of Senercomm, Inc. (Senercomm) for $2,174 thousand. The
purchase price consisted of $500 thousand of Sulcus Common Stock at $2.60 per
share, $500 thousand cash paid at the closing, and the balance of $1,174
thousand payable in three equal annual installments including interest at the
rate of 8%.
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.
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<PAGE> 15
FORWARD-LOOKING STATEMENTS
The foregoing discussion and the Company's consolidated financial
statements contain certain forward-looking statements that involve risks and
uncertainties, including the following: (i) the realizability of deferred tax
assets which is contingent upon a number of factors including the ability of the
Company to achieve a level of operations that will generate taxable income, (ii)
the expected useful lives of intangible assets such as purchased and capitalized
software and goodwill, (iii) management's belief that in order to be profitable,
it must continue to increase sales and improve productivity relating to selling,
general and administrative expenses, (iv) management's belief that it must
increase its distribution channels and introduce additional developed or
acquired competitive products in its current market segment in order to increase
sales, (v) the expectation that the Company must continue to invest in the
development of software products at levels generally consistent with those of
the past two years in order to meet customer demands, (vi) the adequacy of
operating cash flows over the next several years together with currently
available working capital to finance the growth needs of the Company, (vii)
rapidly changing technology, accelerated product obsolescence and rapidly
changing industry standards in the market for the Company's products, resulting
in the need to update products and introduce new products and services in a
timely manner to meet evolving customer requirements (viii) the impact of
foreign exchange on the reported results. As a result, the Company's actual
results could differ materially from the results discussed in the
forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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
PART III
ITEMS 10 THROUGH 13.
In accordance with the provisions of General Instruction G to Form
10-K, the information required by Item 10 (Directors and Executive Officers of
the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership
of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships
and Related Transactions) is not set forth herein. Reference is made to the
Company's definitive Proxy Statement for its Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year covered by this annual report for such information. Such
information is incorporated in this annual report by reference, except for the
information required to be included in the Proxy Statements by paragraphs (i),
(k) and (l) of Item 402 of Regulations S-K.
15
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(a) 1. FINANCIAL STATEMENTS
* REPORT OF INDEPENDENT AUDITORS
* CONSOLIDATED BALANCE SHEETS - Years Ended December 31, 1997 and 1996
CONSOLIDATED STATEMENTS OF OPERATIONS - Years ended December 31, 1997, 1996 and 1995
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years ended December 31, 1997, 1996 and 1995
* CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended December 31, 1997, 1996 and 1995
* NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULES ATTACHED HERETO ARE AS FOLLOWS:
Schedule VIII - Valuation and Qualifying Accounts, page F-20
All other Schedules are omitted since the required information is not present in amount sufficient to require
submission of the Schedules, or because the information is included in the Consolidated Financial Statements
and Notes thereto.
3. EXHIBITS INDEX
(2)(a) Stock Purchase Agreement and Plan of Reorganization among Sulcus, NRG and shareholders of NRG(4)
(3)(a) Articles of Incorporation as Amended(7)
(b) Certificate of Amendment to Articles of Incorporation(7)
(c) Amended and Restated By-Laws(7)
(4)(a) Form of Common Stock Certificate(1)
(b) Form of Preferred Stock Certificate(5)
(c) Rights Plan(8)
(10)(a) Incentive Stock Option Plan, as amended(2)
(a)(i) Form of 1991 Incentive Stock Option Plan as amended(3)
(b) Director's Stock Option Plan(2)
(b)(ii) Form of 1991 Directors Stock Option Plan as amended(3)
(c) Form of Incentive Stock Option Agreement(2)
(d) Form of Directors Stock Option Agreement(2)
(e) Form of Employee Stock Purchase Plan(7)
(f) Form of 1997 Long-Term Incentive Plan(7)
(g) Form of 1997 Non-Employee Director's Plan(7)
(h) Form of Distributor Agreement(2)
(i) Form of Support, Maintenance & Enhancement Agreement(2)
(j) Form of Hardware Service Agreement(2)
(k) Lease for premises at 41 N. Main Street, Greensburg, PA(2)
(l) Agreement with Horwath International(6)
(11) Statement RE: Computation of Per Share Earnings, filed
with this Report, page F-14
(21) Subsidiaries of Registrant, filed with this Report, page 18
(23)(a) Consent of Crowe Chizek & Company
(27) Financial Data Schedule filed with this Report.
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
---------------------
(1) Incorporated by reference to Form S-18 Registration Statement (No. 2-91055-W) of Registrant filed on
May 10, 1984.
(2) Incorporated by reference to Form S-1 Registration Statement (No. 33-32469) of Registrant filed on
December 7, 1989.
(3) Incorporated by reference to Form 10-K Annual Report (No. 0-13226) filed on May 15, 1994.
(4) Incorporated by reference to Form 8-K Current Report for March 1992.
(5) Incorporated by reference to Amendment No. 3 to Form S-1 Registration Statement (No. 33-85244), filed on
July 29, 1996.
(6) Incorporated by reference to Amendment No. 5 to Form S-1 Registration Statement (No. 33-85244), filed on
October 23, 1996.
(7) Incorporated by reference to Form S-8 Registration Statement filed on December 30, 1997.
(8) Incorporated by reference to Form 8-A Registration Statement filed on February 3, 1998.
(b) REPORTS OF FORM 8-K
None
(c) EXHIBITS ARE LISTED IN ITEM 14(a)
</TABLE>
17
<PAGE> 18
22. SUBSIDIARIES OF SULCUS HOSPITALITY TECHNOLOGIES CORP.
Sulcus Investment Corporation Delaware
Sulcus Hospitality Group, Inc. Pennsylvania
Radix Systems, Inc. Pennsylvania
Lodgistix, Inc. Delaware
Sulcus (Australia) Pty. Ltd. Australia
Squirrel Companies, Inc. Pennsylvania
Squirrel Companies of Canada, Ltd. Canada
NRG Management Systems, Inc. Pennsylvania
Senercomm, Inc. Florida
Sulcus Hospitality Limited Hong Kong
Sulcus Singapore, Pte. Ltd. Singapore
Sulcus (Malaysia) SDN BHD Malaysia
Sulcus Hospitality Technologies EMEA, AG Switzerland
Sulcus (International) AG Switzerland
Sulcus UK United Kingdom
Sulcus Scandinavia, A.S. Scandinavia
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<PAGE> 19
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, 1998.
Sulcus Hospitality Technologies Corp
By: /s/ LEON HARRIS
---------------
Leon Harris
Chairman of the Board,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, 1998.
Signature and Title Date
------------------- ----
/s/ LEON D. HARRIS March 27, 1998
- ------------------ --------------
Leon D. Harris, Chairman of the Board
Chief Executive Officer and
Principal Executive Officer
/s/ ROBERT D. GRIES March 27, 1998
- ------------------- --------------
Robert D. Gries, Vice Chairman of the
Board and Director
/s/ DAVID H. ADLER March 27, 1998
- ------------------ --------------
David H. Adler, Director
/s/ DAVID W. BERKUS March 27, 1998
- ------------------- --------------
David W. Berkus, Director
/s/ CHRISTINE HUGHES March 27, 1998
- --------------------- --------------
Christine Hughes, Director
/s/ H. RICHARD HOWIE March 27, 1998
- -------------------- --------------
H. Richard Howie, Chief Financial
Officer and Chief Accounting Officer
19
<PAGE> 20
[CROWE CHIZEK LOGO]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sulcus Hospitality Technologies Corp.
We have audited the accompanying consolidated balance sheet of Sulcus
Hospitality Technologies Corp. (formerly Sulcus Computer Corporation) as
of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. 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 Hospitality
Technologies, Corp. as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the years in the period ended
December 31, 1997, 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.
/s/ CROWE, CHIZEK AND COMPANY LLP
---------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
February 27, 1998
F-1
<PAGE> 21
SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 8,894 $ 2,503
Short-term investments (at market) 259 12,393
Accounts receivable, net of allowance of $1,785
and $1,913 in 1997 and 1996, respectively 11,256 12,997
Inventories 3,261 2,614
Deferred taxes 389 208
Other current assets 1,718 1,082
------ ------
Total current assets 25,777 31,797
Purchased and capitalized software, net of accumulated amortization
of $11,396 and $10,661 in 1997 and 1996, respectively 4,961 3,260
Property and equipment, net of accumulated depreciation of $4,841
and $4,801 in 1997 and 1996, respectively 2,142 2,473
Goodwill, net of accumulated amortization of $4,240
and $3,448 in 1997 and 1996, respectively 6,428 7,221
Deferred taxes 1,711 1,892
Other noncurrent assets 1,187 1,307
------- -------
Total Assets $42,206 $47,950
======= =======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current Liabilities
Short-term borrowings $ 1,300 $ 5,827
Current portion of long-term debt 705 27
Current portion of obligations under capital leases 160 155
Accounts payable 2,645 3,948
Deferred revenues 6,542 6,497
Customer deposits 1,666 2,102
Other accrued liabilities 2,252 1,891
------ ------
Total current liabilities 15,270 20,447
Long-term debt, net of current portion 1,408 --
Obligations under capital leases, net of current portion 40 185
Commitments and contingencies -- --
Stockholders' equity
Series B Junior Participating Preferred Stock, no par value;
300,000 shares authorized, none issued -- --
Common stock, no par value; 30,000,000 shares
authorized (17,057,063 and 16,832,663 shares
issued and issuable in 1997 and 1996, respectively) 41,338 40,780
Retained earnings (deficit) (15,363) (13,353)
Foreign currency adjustment (496) (108)
Cumulative unrealized gain (loss) on investments available for sale 9 (1)
------- -------
Total Stockholders' Equity 25,488 27,318
------- -------
Total Liabilities and Stockholders' Equity $42,206 $47,950
======= =======
</TABLE>
See notes to the consolidated financial statements.
F-2
<PAGE> 22
SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales:
System sales $33,297 $31,722 $27,645
Support revenue 20,525 19,083 17,048
------- ------- -------
Total net sales 53,822 50,805 44,693
Cost of goods sold and services provided:
Systems 21,100 19,598 15,459
Support services 3,740 3,756 3,506
------- ------- -------
Total cost of sales and services provided 24,840 23,354 18,965
Gross profit 28,982 27,451 25,728
Expenses:
Selling, general, and administrative 28,440 23,847 22,896
Research and development (net of capitalized
software of $1,568, $1,101 and
$1,003 for 1997, 1996 and 1995,
respectively) 1,501 1,398 1,199
Depreciation and amortization 1,701 1,589 1,520
Disposal of assets (188) -- 515
Provision for litigation settlement 250 -- 2,919
------- ------- -------
Total operating expenses 31,704 26,834 29,049
Income (loss) from operations (2,722) 617 (3,321)
Other (income), expense:
Interest 368 571 598
Unrealized and realized (gains) losses on
short-term investments (74) (9) (1,462)
Dividends and other (1,006) (1,340) (1,291)
-------- -------- --------
Total other (income), expense (712) (778) (2,155)
Income (loss) before income taxes (2,010) 1,395 (1,166)
Provision for income taxes -- -- 203
-------- ------- ------
Net income (loss) ($2,010) $ 1,395 ($1,369)
======== ======= ========
Earnings (loss) per share:
Basic ($.12) $ .08 ($.09)
======== ======= ======
Diluted ($.12) $ .08 ($.09)
======== ======= ======
Weighted average number of common shares (in thousands):
Basic 16,842 16,720 14,720
======= ======= =======
Diluted 16,842 16,833 14,720
======= ======= =======
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE> 23
SULCUS HOSPITALITY TECHNOLOGIES, CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Cumulative
Unrealized
Common Stock Gain
---------------------- (Loss) on Note
Number Retained Foreign Investments Receivable Stock-
Of Shares Earnings Currency Available From holders
(Thousands) Amount (Deficit) Adjustment For Sale Stockholder Equity
----------- ------ --------- ---------- -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 14,505 $37,081 ($13,379) ($115) $ 0 ($500) $23,087
Stock options exercised 18 43 -- -- -- -- 43
Issuance of stock, contingent earnouts on
acquisitions of companies 573 785 -- -- -- -- 785
Cumulative translation adjustment -- -- -- 55 -- -- 55
Cumulative unrealized gain on investments
available for sale -- -- -- -- 186 -- 186
Issuance of stock to consultants 8 12 -- -- -- -- 12
Issuance of stock as settlement of
previously recorded liabilities 42 95 -- -- -- -- 95
Net loss -- -- (1,369) -- -- -- (1,369)
------ ------- -------- ----- --- ---- -------
Balance, December 31, 1995 15,146 38,016 (14,748) (60) 186 (500) 22,894
Stock options exercised 84 138 -- -- -- -- 138
Issuance of stock, contingent earnouts on
acquisitions of companies 67 169 -- -- -- -- 169
Cancellation of shares in repayment of
shareholder loans (220) (550) -- -- -- 500 (50)
Adjustment of shares issuable for purchase
of Techotel A.G. 272 -- -- -- -- -- --
Adjustment of shares issuable under earn-out
agreement for Lodgistix Scandinavia A.S. 8 -- -- -- -- -- --
Cumulative translation adjustment -- -- -- (48) -- -- (48)
Change in cumulative unrealized gain (loss)
on investments available for sale -- -- -- -- (187) -- (187)
Issuance of stock to consultants 10 26 -- -- -- -- 26
Issuance of stock as settlement of
previously recorded liabilities 1,466 2,981 -- -- -- -- 2,981
Net income -- -- 1,395 -- -- -- 1,395
------ ------- -------- ----- --- ---- -------
Balance, December 31, 1996 16,833 40,780 (13,353) (108) (1) 0 27,318
Stock options exercised 18 32 -- -- -- -- 32
Issuance of stock, on
acquisition of company 192 500 -- -- -- -- 500
Cumulative translation adjustment -- -- -- (388) -- -- (388)
Change in cumulative unrealized gain (loss)
on investments available for sale -- -- -- -- 10 -- 10
Issuance of stock to consultants 14 26 -- -- -- -- 26
Net loss -- -- (2,010) -- -- -- (2,010)
------ ------- -------- ----- --- ---- -------
Balance, December 31, 1997 17,057 $41,338 ($15,363) ($496) $ 9 $ 0 $25,488
====== ======= ======== ===== === ==== =======
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE> 24
SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,010) $1,395 ($1,369)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation 908 814 835
Amortization of capitalized software 1,849 2,803 2,447
Amortization of goodwill 793 775 685
Provision for doubtful accounts 545 859 573
Unrealized and realized (gain) on investments (74) (9) (1,462)
(Gain) on disposal of subsidiary (188) -- --
Accrued severance obligations 1,538 -- --
Loss on write-off of assets -- -- 515
(Purchases) of trading securities -- -- (852)
Change in assets and liabilities, net of effects of acquisitions and
disposals:
Restricted cash -- 550 (50)
Accounts receivable 1,423 (2,721) (68)
Inventories (504) (41) (180)
Other current assets (583) 175 249
Other assets 600 162 (235)
Accounts payable (1,572) (404) (1,484)
Deferred revenues 142 302 (727)
Shareholder litigation liability -- (308) 2,668
Customer deposits (437) 791 (585)
Accrued liabilities -- (933) 166
------- ------- -------
Total adjustments 4,440 2,815 2,495
------- ------- -------
Net cash provided by operating activities 2,430 4,210 1,126
------- ------- -------
Cash flows from investing activities:
Purchase of subsidiary, net of cash acquired (467) -- --
Purchases of available for sale securities (11) (414) (4,342)
Proceeds from sales of available for sale securities 12,229 250 4,758
Investment in sales-type leases (671) (287) (618)
Payments received on sales-type leases 162 135 190
Proceeds from disposal of subsidiary, net of costs 191 -- --
Proceeds from the sale of building 399 -- --
Capital expenditures (966) (886) (660)
Software development capitalized (1,568) (1,101) (1,003)
------- ------- -------
Net cash provided by (used in) investing activities 9,298 (2,303) (1,675)
------- ------- -------
Cash flows from financing activities:
Change in short term borrowings (4,527) (556) 200
Principal payments on long-term debt (314) (47) (481)
Payments under capital lease agreements (140) (93) --
Proceeds from stock options exercised 32 138 43
--- ---- ---
Net cash (used in) financing activities (4,949) (558) (238)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (388) (48) 55
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 6,391 1,301 (732)
Cash and cash equivalents at beginning of year 2,503 1,202 1,934
------- ------- -------
Cash and cash equivalents at end of year $ 8,894 $ 2,503 $ 1,202
======= ======= =======
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE> 25
SULCUS HOSPITALITY TECHNOLOGIES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1. LINE OF BUSINESS
Sulcus Hospitality Technologies Corp. (the "Company") (formerly known as
Sulcus Computer Corporation) designs, develops, and markets technology solutions
that are used in the hospitality industry to improve the management of business
critical information and data.
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
Hospitality Technologies Corp. 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 amounts on deposits
in banks and cash invested temporarily in various instruments with maturities of
three months or less at the time of purchase.
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.
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 7 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.
F-6
<PAGE> 26
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
The Company adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, for the
period ended December 31, 1997. SFAS No. 128 requires the Company to present
basic and diluted earnings per share (EPS) on the face of the income statement.
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period end plus the
assumed exercise of all dilutive securities, such as stock options. Earnings per
share for the periods presented is not materially different under SFAS No. 128
than that presented under previous accounting standards.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued several
Statements of Financial Account Standards including the following:
SFAS No. 130, "Reporting Comprehensive Income," is effective for
fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income includes net
income and all other changes in shareholders' equity except
those resulting from investments and distributions to owners.
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," is effective for financial statements
issued for periods beginning after December 15, 1997. This
Statement requires financial and descriptive information about
an entity's operating segments to be included in the annual
financial statements.
Additionally, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2 "Software Revenue Recognition." This Statement of Position is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
This statement provides guidance on when revenue should be recognized and in
what amounts for licensing, selling, leasing and otherwise marketing computer
software.
None of these authoritative pronouncements, when implemented, is
expected to impact the reported financial position or results of operations of
the Company. The Company is currently evaluating how it will present
comprehensive income and segment information in future financial statements.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with
current year reporting practices.
F-7
<PAGE> 27
NOTE 3. CASH AND CASH EQUIVALENTS
At December 31, 1997 and 1996, respectively, the Company has cash and
cash equivalents as follows (thousands of dollars):
December 31,
----------------------------
1997 1996
---- ----
Cash in bank $2,894 $2,503
Commercial paper (due within 30 days) 6,000 --
------ ------
Total cash and cash equivalents $8,894 $2,503
====== ======
NOTE 4. SHORT-TERM INVESTMENTS
Securities available for sale at December 31, 1997 consisted of
preferred stocks at a cost of $250 thousand and unrealized gains of $9 thousand:
Securities available for sale at December 31, 1996, are summarized as
follows (thousands of dollars):
<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 $-- $ 14 $ 501
Mutual Funds 1,596 5 -- 1,601
Preferred Stocks 10,283 8 -- 10,291
------- --- ------- -------
$12,394 $13 $ 14 $12,393
======= === ======= =======
</TABLE>
During 1997, the Company entered into a plan to reduce its investments
in marketable securities to settle borrowings on the brokerage margin account
and to provide liquidity. At December 31, 1997, the investments in marketable
securities were reduced by $12,134 thousand. The Company's short-term investment
portfolio had 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, 1997
were $12,229 thousand, $175 thousand and $101 thousand, respectively. 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 thousand, $9
thousand and $0, respectively. Proceeds, realized gains and realized losses from
the sales of securities classified as trading securities for the year ended
December 31, 1995 were $4,758 thousand, $130 thousand and $2 thousand,
respectively. Unrealized gains on trading securities amounted to $1,271 thousand
through June 5, 1995.
NOTE 5. PURCHASED AND CAPITALIZED SOFTWARE
Purchased and capitalized software consists of the following (thousands
of dollars):
December 31,
------------------------
1997 1996
---- ----
Purchased software $8,632 $6,898
Capitalized software 7,725 7,023
Accumulated amortization (11,396) (10,661)
-------- -------
Net purchased and capitalized software $ 4,961 $ 3,260
======== =======
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (thousands of
dollars):
December 31,
------------------------
1997 1996
---- ----
Buildings and leasehold improvements $ 361 $ 1,107
Furniture and equipment 6,622 6,167
Accumulated depreciation (4,841) (4,801)
------- -------
Net property and equipment $ 2,142 $ 2,473
======= =======
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 range from 3 to 5 years. Leased capital
assets are included in property, plant and equipment at December 31, 1997 and
1996 with a cost of $557 thousand and $532 thousand, respectively, and
accumulated amortization of $340 thousand and $190 thousand, respectively.
F-8
<PAGE> 28
NOTE 7. LEASES
AS LESSOR
The Company has a sales-type lease program 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, 1997 and 1996, the Company had the following net investment in these
financed sales-type leases (thousands of dollars):
December 31,
----------------------
1997 1996
---- ----
Estimated residual value of leased property $1,733 $1,533
Unearned income (302) (292)
------ ------
Net investment in financed sales-type leases $1,431 $1,241
====== ======
At December 31, 1997, the Company has accrued $522 thousand
representing estimated amounts contingently payable related to sales-type leases
financed under this agreement. Since the inception of the program in 1995,
actual losses from recourse provisions have been $609 thousand.
AS LESSEE
The Company has operating leases with third parties for office space
and office equipment. 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, 1997
(thousands of dollars):
Capital Operating
Leases Leases
------ ------
1998 $182 $1,092
1999 35 829
2000 6 565
2001 2 355
2002 -- 290
Thereafter -- 939
---- ----
Total minimum lease payments 225 $4,070
======
Amounts representing interest 25
----
Present value of net
minimum payments 200
Current portion 160
----
Long-term portion $ 40
====
Rent expense under these agreements and other operating leases
was $1,595 thousand, $1,563 thousand, and $1,611 thousand for the years ended
December 31, 1997, 1996, and 1995 respectively. See "Related Party Transactions"
for additional discussions of operating leases.
NOTE 8. SHORT-TERM BORROWINGS
The Company's short-term borrowings consists of the following
(thousands of dollars):
December 31,
------------------------
1997 1996
---- ----
Borrowings with brokerage firm on margin against
the Company's short term investment portfolio $ -- $5,827
Borrowings on the Company's line of credit 1,300 --
----- ------
Total short-term borrowings $1,300 $5,827
====== ======
At December 31, 1997, the Company has available a $3 million line of
credit under a commercial revolving note, expiring in April 1998, bearing
interest at the bank's prime rate of interest plus 1% for an effective interest
rate of 9.5%. Borrowings under the note are secured by the Company's equipment,
accounts receivable and inventories located in the United States.
F-9
<PAGE> 29
Available borrowings are based on a formula of eligible accounts receivable and
inventory. The total amount which could have been borrowed at December 31,
1997 was approximately $2 million.
NOTE 9. LONG-TERM DEBT
The Company's long-term debt consists of the following (thousands of dollars):
December 31,
--------------------
1997 1996
---- -----
Unsecured note payable to Jeffrey Ratner (the
Company's former chairman) as evidence
of a severance obligation at 5% $ 939 $ --
Note payable to financial institution at 12% -- 27
Note payable pursuant to the Company's
acquisition of Senercomm, Inc. at 8%
("See Acquisitions") 1,174 --
------ ------
2,113 27
Current portion 705 27
------ ------
Long-term debt $1,408 $ --
====== ======
Scheduled maturities of long-term debt at December 31, 1997 are $705 in 1998,
$751 in 1999 and $657 in 2000.
NOTE 10. INCOME TAXES
The provision for income taxes consists of the following (thousands of
dollars):
Year Ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
Current:
Domestic $ -- $ -- $150
Foreign -- -- 53
Deferred:
Domestic -- -- --
------ ------ ----
Total $ -- $ -- $203
====== ====== ====
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate is as follows:
Year Ended December 31,
-----------------------
1997 1996 1995
----- ---- ----
U.S. federal statutory tax rate (35%) 35% (35%)
State income taxes, net of federal income tax effect (6%) 6% 8%
Benefits not recorded (benefits recognized)
due to net carryforward position 39% (43%) 39%
Foreign and other 2% 2% 5%
Tax credits generated 0% 0% 0%
-- -- --
0% 0% 17%
== == ===
The Company's U.S. federal effective rate is generally unaltered by the
rates applicable to its foreign operations as a U.S. foreign tax credit would be
generated for taxes paid in those jurisdictions. Foreign taxes are recognized on
foreign taxable income for which no foreign tax credit is generated.
Permanent differences include tax-free dividend income and amortization
of goodwill. No tax benefits were recorded for non-deductible write-offs of
goodwill and certain other expenses. Due to the net operating losses, no
material tax payments have been made.
F-10
<PAGE> 30
The following summarizes the significant components of the Company's deferred
tax assets and liabilities (thousands of dollars):
<TABLE>
<CAPTION>
Deferred Tax Consequences at December 31, 1997
----------------------------------------------
Assets Liabilities Total
------ ----------- -----
<S> <C> <C> <C>
Accounts receivable allowance $ 469 -- $ 469
Unrealized loss on investments 4 -- 4
Inventory writedowns 321 -- 321
Accrued expenses not currently deductible 1,003 -- 1,003
Less valuation allowance (1,408) -- (1,408)
------- ------- -------
Current 389 -- 389
------- ------- -------
Property and equipment book/tax
cost differential 45 -- 45
Tax loss carryforwards 9,721 -- 9,721
Tax credits 1,232 -- 1,232
Software costs capitalized for financial
reporting purposes -- (1,893) (1,893)
Less valuation allowance (7,394) -- (7,394)
------- ------- -------
Noncurrent 3,604 (1,893) 1,711
------- ------- -------
Total $ 3,993 ($1,893) $ 2,100
======= ======= =======
Deferred Tax Consequences at December 31, 1996
----------------------------------------------
Assets Liabilities Total
------ ----------- -----
Accounts receivable allowance $ 485 -- $ 485
Unrealized loss on investments 62 -- 62
Inventory writedowns 271 -- 271
Accrued expenses not currently deductible 80 -- 80
Less valuation allowance (690) -- (690)
------- ------- -------
Current 208 -- 208
------- ------- -------
Property and equipment book/tax
cost differential 24 -- 24
Tax loss carryforwards 7,979 -- 7,979
Tax credits 1,232 -- 1,232
Software costs capitalized for financial
reporting purposes -- (1,064) (1,064)
Less valuation allowance (6,279) -- (6,279)
------- ------- -------
Noncurrent 2,956 (1,064) 1,892
------- ------- -------
Total $ 3,164 ($1,064) $ 2,100
======= ======= =======
Deferred Tax Consequences at December 31, 1995
----------------------------------------------
Assets Liabilities Total
------ ----------- -----
Accounts receivable allowance $ 751 $ -- $ 751
Unrealized loss on investments 72 -- 72
Inventory writedowns 108 -- 108
Accrued expenses not currently deductible 66 -- 66
Less valuation allowance (831) -- (831)
------- ------- -------
Current 166 -- 166
------- ------- -------
Property and equipment book/tax
cost differential -- (35) (35)
Tax loss carryforwards 11,618 -- 11,618
Tax credits 1,800 -- 1,800
Software costs capitalized for financial
reporting purposes -- (1,746) (1,746)
Less valuation allowance (9,703) -- (9,703)
------- ------- -------
Noncurrent 3,715 (1,781) 1,934
------- ------- -------
Total $ 3,881 ($1,781) $ 2,100
======= ======= =======
</TABLE>
F-11
<PAGE> 31
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 1998 and the next
several years.
The $1,833 thousand increase in the valuation allowance in the year
ended December 31, 1997 represents net operating loss carryforwards obtained
through the purchase of Senercomm, Inc. and the temporary differences and net
operating loss carryforwards generated in that year that the Company believed
were not likely to result in tax benefits. The $3,565 thousand and $524 thousand
decreases in the valuation allowance in the years ended December 31, 1996 and
1995, respectively, represents the realization of tax benefits of temporary
difference and net operating loss carryforwards which reversed during these
years through the generation of taxable income. 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 $27,775 thousand of net operating losses
at December 31, 1997, a portion of which are subject to certain limitations
under the Internal Revenue Code Section 382, and $1,200 thousand of tax credits
($1,100 thousand of research activities credits and $100 thousand 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 the Company,
post-acquisition taxable income generated by specific members of the group and
the passage of time. The net operating loss carryforwards expire as follows
(thousands of dollars):
2001 $933
2002 1,632
2003 5,957
2004 2,377
2005 2,077
2006 723
2007 1,566
2008 4,498
2009 4,703
2010 846
2011 712
2012 1,751
-----
Total $27,775
=======
NOTE 11. RELATED PARTY TRANSACTIONS
The Company leases office space in Greensburg, Pennsylvania from a
trust established by the Company's former Chairman. The leases commenced on
various dates from March 1, 1983 and expire on various dates through September
30, 2001. Rent expense under these agreements was $228 thousand, $234 thousand,
and $225 thousand for the years ended December 31, 1997, 1996, and 1995,
respectively. As of December 31, 1997, the future annual rental commitments
under these leases are $180 thousand in 1998, $104 thousand in 1999, $96
thousand in 2000, and $75 thousand in 2001.
NOTE 12. 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 13. INCENTIVE STOCK OPTION PLANS
The Company has stock option plans under which certain directors,
officers, and employees are participants. In 1997, stockholders of the Company
approved the addition of a long-term incentive plan, a non-employee directors'
stock option plan and an employee stock purchase plan.
At December 31, 1997, stock option plans consist of the 1983 Incentive
Stock Option Plan for Officers and Other Key Employees (the "1983 Plan"), the
1991 Incentive Stock Option Plan for Officers and Other Key Employees (the "1991
Plan"), the 1991 Stock Option Plan for Directors (the "1991 Director Plan"), and
the 1997 Non-Employee Directors' Stock Option Plan (the "1997 Directors' Plan").
Options can no longer be granted under the 1983 Plan. The 1991 Plan and the 1991
Directors Plan allow for 3 million and 500 thousand stock options available for
grant under the plans, respectively, which extends through January 1, 2001. The
1997 Directors' Plan allows for 500 thousand stock options available for grant
under the plan with extends through October 12, 2007. The price of options
granted under 1991 Plan, the 1991 Directors' Plan and the 1997 Directors Plan
may not be less than the
F-12
<PAGE> 32
fair market value of the Company's common stock on the date of grant. Options
granted under the 1991 Plan and the 1991 Directors' Plan generally become
available to be exercised upon a five-year vesting schedule. Options granted
under the 1997 Directors' Plan generally become available to be exercised upon a
three-year vesting schedule.
Stock option activity under all plans for the years ended December 31, 1997,
1996, and 1995 is as follows (options in thousands):
Outstanding Price
----------- -----
[S] [C] [C]
Outstanding, January 1, 1995 2,096 $1.000-$9.250
------ -------------
1995
----
Granted 462 $2.000-$3.500
Exercised (18) $2.125-$3.500
Canceled (569) $2.281-$8.625
------ -------------
Outstanding, December 31, 1995 1,971 $1.000-$9.250
------ -------------
Exercisable at December 31, 1995 1,200 $1.000-$9.250
------ -------------
1996
----
Granted 553 $1.937-$3.250
Exercised (84) $2.500-$3.312
Canceled (607) $2.187-$8.625
------ -------------
Outstanding, December 31, 1996 1,833 $1.000-$9.250
------ -------------
Exercisable at December 31, 1996 1,064 $1.000-$9.250
------ -------------
1997
----
Granted 1,360 $1.625-$3.312
Exercised (18) $1.750-$3.250
Canceled (1,083) $1.750-$9.250
------ -------------
Outstanding, December 31, 1997 2,092 $1.000-$6.130
====== =============
Exercisable at December 31, 1997 874 $1.000-$6.130
====== =============
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 (thousands of dollars except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income-as reported ($2,010) $1,395 ($1,369)
Net income-pro forma ($2,468) $991 ($1,473)
Earnings per share-as reported ($.12) $.08 ($.09)
Earnings per share-pro forma ($.15) $.06 ($.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:
Expected dividend yield 0%
Expected stock price volatility 30% to 60%
Risk-free interest rate 6%
Expected life of options 1 to 5 years
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts.
The 1997 Long-Term Incentive Plan allows for the issuance of
500 thousand shares in the form of stock options, stock appreciation rights,
restricted stock, stock bonus awards or performance plan awards under the plan
which extends through October 12, 2007. At December 31, 1997, no awards were
outstanding under this plan.
F-13
<PAGE> 33
Effective October 13, 1997, the Company adopted an Employee Stock
Purchase Plan to provide substantially all employees who have been employed by
the Company for one year an opportunity to purchase shares of its common stock
through payroll deductions, up to 10% of compensation. Semi-annually on June 30
and December 31, participant account balances are used to purchase shares of
stock at the lesser of 85% of the fair market value of shares at the beginning
or end of the semi-annual period. The plan expires on October 12, 2007 and a
total of 500 thousand shares can be issued under the plan. At December 31, 1997,
no shares had been issued under the plan.
NOTE 14. NOTE RECEIVABLE FROM STOCKHOLDER
During 1993, the Company extended a loan to the former principal
stockholder and current president of 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.
NOTE 15. EARNINGS PER SHARE
The computation of earning per share is as follows (in thousands except
per share):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss) ($2,010) $ 1,395 ($1,369)
Weighted average number of
common shares outstanding 16,842 16,720 14,720
------- ------- -------
Basic earnings per share ($.12) $ .08 ($.09)
======= ======= =======
Diluted earnings (loss) per share
Net income (loss) ($2,010) $1,395 ($1,369)
Weighted average number of
common shares outstanding 16,842 16,720 14,720
Effect of dilutive securities (options) -- 113 --
------- ------- -------
16,842 16,833 14,720
------- ------- -------
Diluted earnings per share ($.12) $.08 ($.09)
======= ======= =======
</TABLE>
Options to purchase 2.1 million, 1.7 million, and 2.0 million shares of
Common stock were outstanding in 1997, 1996 and 1995, respectively, but were not
included in the computation of diluted earning per share because the options
exercise price exceeded the average market price of the common shares.
NOTE 16. PREFERRED SHARES AUTHORIZED PURSUANT TO A SHAREHOLDER'S RIGHTS PROGRAM
In 1997, the Company authorized 300,000 shares of non redeemable no par
value Series B Junior Participating Preferred Stock("Preferred Stock"). These
shares are reserved for issuance upon exercise of Preferred Stock Purchase
Rights ("Rights"). These Rights were issued in 1997 on each share of common
stock. The Right entitle common shareholders to purchase .01 share of Preferred
Stock for $50, following any public announcement that 10% or more of Sulcus'
shares have been acquired or is tendered for by a person or group of persons.
Series B preferred shares will have annual dividends of $4 per share or 100
times the dividend per common share, and have a liquidation preference of $100
per share or 100 times the payment made per common share. In a business
combination, each exercised Right will receive common stock of an acquiring
company equal to $100. Rights owned by an Acquiring Person will be void. The
Rights may be redeemed by the Board of Directors at $.01 per Right.
NOTE 17. ACQUISITIONS
In December 1997, the Company consummated the purchase of Senercomm,
Inc. (Senercomm) for approximately $2,174 thousand. Senercomm designs,
manufactures and sells in-room information systems which are used to gather
guest data and environmentally control the condition maintained within a hotel
room. The purchase price consisted of $500 thousand of Sulcus
F-14
<PAGE> 34
Common Stock at $2.60 per share, $500 thousand cash paid at the closing, and the
balance of $1,174 thousand payable in three equal annual installments including
interest at the rate of 8%. Payment on the $1,174 thousand note is secured by a
stock pledge. As part of the purchase price the Company will also pay in cash an
amount equal to the excess, if any, of $2.809 over the Company's closing share
price on the last trading day before December 31, 1998.
The acquisition has been accounted for as a purchase and, accordingly,
the balance sheet of Senercomm was included in the consolidated financial
statements of the Company at December 31, 1997 and the results of operations of
Senercomm will be consolidated with those of the Company beginning January 1,
1998. The purchase price was assigned to identifiable assets of working capital
($188 thousand) and purchased software ($1,986 thousand).
The following unaudited pro forma consolidated results of operations
for the years ended December 31, 1997 and 1996 assume the Senercomm acquisition
occurred as of January 1, 1996 (in thousands except per share data):
1997 1996
---- ----
Net sales $55,547 $51,848
Net income (loss) ($2,650) $166
Earnings per share
Basic ($.16) $.01
Diluted ($.16) $.01
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisition been consummated as of the above date,
nor are they necessarily indicative of future operating results.
In October of 1993, the Company completed its acquisition of Lodgistix
Scandinavia A.S., a distributor of the company's products in Norway, Sweden and
Denmark. The purchase price consisted of Sulcus Common Stock having a value of
$300 thousand. 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 thousand shares having a
value of $270 thousand for 1993 and 1995. For 1996, under the terms of the
Agreement, the Company issued to the former stockholders of Lodgistix
Scandinavia 67 thousand shares valued at $169 thousand ($2.525 per share). This
additional consideration was recorded as goodwill at December 31, 1996.
Effective January 1, 1993, Sulcus acquired Techotel AG of Switzerland.
The purchase agreement (as amended) provided for the issuance of $500 thousand
of Common Stock and the payment of $500 thousand 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 thousand shares of Sulcus Common
Stock for an aggregate value of $867 thousand for those two years. This
additional consideration was recorded as goodwill at December 31, 1995.
Effective March 1, 1992, Sulcus acquired all of the outstanding stock
of Squirrel Companies, Inc. ("Squirrel"). The purchase price consisted of $500
thousand in cash and 401 thousand shares of the Company's stock having a value
of $1,955 thousand, net of issuance costs of $352 thousand, 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 thousand shares for an aggregate value of
$703 thousand for 1992 and 71 thousand shares for an aggregate value of $177
thousand 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 thousand shares under the terms of the agreement
and cancelled 120 thousand earnout shares. To reflect this settlement, the
Company recorded an increase in goodwill and capital stock in the amount of $391
thousand.
F-15
<PAGE> 35
NOTE 18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
(thousands of dollars)
<S> <C> <C> <C>
Interest paid $ 369 $ 572 $596
Income taxes paid 82 94 --
Non-cash activities:
Equipment purchased under capital
lease agreements 25 406 --
Common stock issued in settlement
of shareholder litigation -- 2,800 --
Common stock issued for contingency
payments on acquisitions -- 169 393
Issuance of stock to consultants 26 26 12
Issuance of stock as settlement of
previously recorded liabilities -- 181 95
Issuance of stock as settlement
of Squirrel litigation -- -- 391
Issuance of note payable as evidence
of severance obligation 1,245 -- --
Issuance of stock pursuant for purchase
of subsidiary 500 -- --
Assumption of debt pursuant for purchase
of subsidiary 1,174 -- --
Cancellation of shares in repayment
of shareholder loans -- 550 --
Unrealized (loss) gain on investments
available for sale 9 (187) 186
</TABLE>
F-16
<PAGE> 36
NOTE 19. 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 (in
thousands of dollars):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales:
Domestic $31,291 $32,328 $30,000
Canada 5,777 5,232 3,626
Pacific Region 11,689 8,032 5,702
Europe 5,065 5,213 5,365
------- ------- -------
Consolidated net revenues $53,822 $50,805 $44,693
======= ======= =======
Years Ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
Net income (loss):
Domestic ($1,622) $2,190 ($148)
Canada 181 234 274
Pacific Region (44) (508) (1,291)
Europe (525) (521) (204)
------- ------- -------
Consolidated net income (loss) ($2,010) $1,395 ($1,369)
======= ======= =======
As of December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
Identifiable assets:
Domestic $31,831 $38,179 $37,646
Canada 2,570 1,738 1,562
Pacific Region 4,492 3,967 3,438
Europe 3,313 4,066 4,681
------- ------- -------
Consolidated identifiable assets $42,206 $47,950 $47,327
======= ======= =======
</TABLE>
The 1997 Domestic segmental net income (loss) includes the costs of the
severance obligations to the Company's former chairman and the Company's former
president of $1,538 thousand and $250 thousand for settlement of certain
litigation. The 1995 Domestic segmental net income (loss) includes the $2,919
thousand litigation settlement provision and the $515 thousand write-off of
software costs developed and capitalized for the U.S. markets.
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.
F-17
<PAGE> 37
NOTE 20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
data for the years ended December 31, 1997 and 1996. This information has been
prepared on the same basis as the Consolidated Financial Statements and that all
necessary adjustments (consisting only of normal recurring adjustments) have
been included in the amounts as stated below to present fairly the selected
quarterly information when read in conjunction with its Consolidated Financial
Statements and Notes thereto.
<TABLE>
<CAPTION>
Fiscal Quarter Ended
(Thousands of Dollars, except per share amounts)
--------------------------------------------------------------------------------------------------------
March 31, June 30, September December March 31, June 30, September December
1997 1997 30, 1997 31, 1997 1996 1996 30, 1996 31, 1996
---- ---- -------- -------- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $12,623 $13,665 $14,040 $13,494 $10,942 $12,726 $13,316 $13,821
Gross Profit 6,757 7,183 7,354 7,688 6,474 7,138 6,794 7,045
Operating
Income (Loss) (1,965) (303) 34 (488) 317 737 133 (570)
Net Income
(Loss) ($1,755) ($115) $225 ($365) $522 $902 $317 ($346)
======= ======= ======= ======= ======= ======= ======= =======
Basic Earnings (Loss)
Per share ($.10) ($.01) $.01 ($.02) $.03 $.05 $.02 ($.02)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Certain amounts in the annual consolidated financial statements have
been reclassified to conform with current year reporting practices. As a
consequence, the quarterly amounts above may differ than those previously
reported.
The Company's results for the first quarter 1997 include a charge of
$1,538 thousand, which relates to severance costs for the Company's former
chairman and the Company's former president and $250 thousand litigation
settlement. In the third quarter 1997, results included a gain on disposal of a
subsidiary of $188 thousand and gains from the sales of marketable securities of
$44 thousand.
NOTE 21. 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 and cash equivalents: The carrying amounts reported in the
balance sheet for cash approximates their fair value. Cash equivalents such as
commercial paper are valued at quoted market 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.
The carrying amounts of trade payables and receivables approximate their
fair value and have been excluded from the accompanying table.
The carrying amounts and fair value of the Company's financial
instruments are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash $8,894 $8,894 $2,503 $2,503
Short-term investments 259 259 12,393 12,393
Short-term borrowings 1,300 1,300 5,827 5,827
Long-term borrowings 2,313 2,313 367 367
</TABLE>
F-18
<PAGE> 38
NOTE 22. LEGAL PROCEEDINGS AND LITIGATION SETTLEMENTS
In December 1997, the Company entered into a settlement agreement with
the former vice-president of the Company's NRG Management Systems, Inc.
subsidiary, whereby the Company agreed to pay $250 thousand in cash to settle
various issues which arose in 1995 surrounding his employment contract and
earnout provisions of his stock purchase agreement. This payment was made in
January 1998.
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. These matters were settled in
1995 through the payment of cash and the issuance on December 31, 1996 of 1.4
million Sulcus Common Shares valued at $2,800 thousand. At December 31, 1995,
the Company recorded a provision of $2,861 thousand, which together with amounts
previously accrued represented the costs incurred in connection with this
agreement.
On March 20, 1996, the Company and others resolved a dispute
surrounding the 1992 purchase of Squirrel Companies, Inc. Under the terms of the
agreement, the Company agreed to deliver 498 thousand shares of Sulcus Common
Shares and to cancel 120 thousand shares previously issued. At December 31,
1995, the Company recorded an increase in goodwill and capital stock in the
amount of $391 thousand to reflect this settlement.
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.
F-19
<PAGE> 39
SULCUS HOSPITALITY TECHNOLOGIES CORP.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Balance Charged to Amount Balance
beginning Acquired cost and charged at end
of year valuations expenses off of year
------- ---------- -------- --- -------
1997
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $1,913 $0 $545 $673 $1,785
1996
Allowance for doubtful accounts 2,581 0 859 1,527 1,913
1995
Allowance for doubtful accounts 2,597 0 573 589 2,581
</TABLE>
F-20
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation, by reference, of our report dated February 27,
1998, on the financial statements of Sulcus Hospitality Technologies Corp.
included in its Annual Report (Form 10-K) for the year ended December 31, 1997
in its previously filed Registration Statement on Form S-8 for its 1997
Employee Stock Purchase Plan, 1997 Long Term Incentive Plan and 1997
Non-Employee Directors Stock Plan.
Crowe, Chizek and Company LLP
Columbus, Ohio
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDING DECEMBER 31, 1997 AS
SUBMITTED IN THE COMPANY'S 10-K FOR THAT PERIOD AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,894
<SECURITIES> 259
<RECEIVABLES> 13,041
<ALLOWANCES> 1,785
<INVENTORY> 3,261
<CURRENT-ASSETS> 25,777
<PP&E> 6,983
<DEPRECIATION> 4,841
<TOTAL-ASSETS> 42,206
<CURRENT-LIABILITIES> 15,270
<BONDS> 0
0
0
<COMMON> 41,338
<OTHER-SE> (15,850)
<TOTAL-LIABILITY-AND-EQUITY> 42,206
<SALES> 53,822
<TOTAL-REVENUES> 53,822
<CGS> 24,840
<TOTAL-COSTS> 24,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 545
<INTEREST-EXPENSE> 368
<INCOME-PRETAX> (2,010)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,010)
<EPS-PRIMARY> ($.12)
<EPS-DILUTED> ($.12)
</TABLE>
