<PAGE> 1
QUARTERLY REPORT ON FORM 10-Q
United States
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1998.
Commission File Number 0-13226
Sulcus Hospitality Technologies Corp.
Incorporated in the Commonwealth of Pennsylvania
IRS Employer Identification No. 25-1369276
Address: Sulcus Centre
41 North Main Street
Greensburg, Pennsylvania 15601
Telephone: (724) 836-2000
Sulcus Hospitality Technologies Corp. (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 and (2) has been subject to such filing requirements for the
past 90 days.
As of November 6, 1998, there were 17,088,834 shares of Common Stock, no par
value, outstanding.
The following sections of the Third Quarter Report set forth in the
cross-reference index are incorporated in the Quarterly Report on Form 10-Q.
Cross Reference Page(s)
-----------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1 Consolidated Balance Sheet as of
September 30, 1998 and December 31,
1997 7
Consolidated Statement of Operations for
the three months and nine months ended
September 30, 1998 and 1997 8
Consolidated Statement of Cash Flows for
the nine months ended September 30, 1998
and 1997 9
Notes to Consolidated Financial
Statements 10
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Nine Months Ended September 30, 1998
compared with Nine Months Ended
September 30, 1997 2
Three months ended September 30, 1998
compared with Three Months Ended
September 30, 1997 4
Item 3 Quantitative and Qualitative Disclosures
About Market Risks 6
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 13
- ----------------------------------------------------------------
CORPORATE INFORMATION
STOCK INFORMATION
Sulcus Hospitality Technologies Corp.
Common Stock is listed on the American
Stock Exchange under the symbol "SUL".
INTERNET ADDRESS
www.sulcus.com
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the information in
the unaudited condensed consolidated financial statements and notes thereto
included herein and Sulcus Hospitality Technologies Corp.'s Financial Statements
and Management's Discussion and Analysis included in its 1997 Annual Report on
Form 10-K.
OVERVIEW Sulcus Hospitality Technologies Corp. ("Sulcus" or the "Company") is a
leading provider of information technology to the hospitality industry. Sulcus
develops, manufactures, markets and installs computerized systems designed to
automate the creation, handling, storage and retrieval of information and
documents for this industry. Through more than 100 worldwide locations, Sulcus
operates one of the largest distribution and support networks in the hospitality
industry.
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, hotels, motels, restaurants, resorts, casinos and country
clubs.
During the past year, Sulcus' operating strategies have focused on developing
new products and services, and enhancing existing software products. New and
enhanced products are accomplished through internal research and development and
through acquisitions. Internal development efforts have focused on
wINNfinity(TM), a property management system, the "legacy solution", a suite of
products offered to the hospitality industry, and the restaurant division's
TouchTomorrow(TM) Family of Solutions for the restaurant industry.
On December 31, 1997, the Company completed the acquisition of Senercomm, Inc.
(Senercomm) of West Palm Beach, Florida. Senercomm designs, manufactures and
sells in-room information systems to the hotel industry. The acquisition was
accounted for as a purchase. Effective January 1, 1998, Senercomm's results of
operations are included in Sulcus' financial statements.
On November 12, 1998, the Company announced it had agreed to be acquired by
Eltrax Systems, Inc. Under terms of the agreement, Eltrax will acquire Sulcus by
exchanging 0.55 shares of Eltrax common stock for each share of Sulcus stock.
Based on the closing price of Eltrax stock on November 11, 1998, the total value
of the transaction is approximately $66 million. The transaction is expected to
be completed in the first quarter of 1999, pending shareholder approval. E1trax
is a nationwide managed network services and information technology company.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
WITH NINE MONTHS ENDED SEPTEMBER 30, 1997
SUMMARY RESULTS OF OPERATIONS
NINE MONTHS ENDED
Dollars in thousands, SEPTEMBER 30
----------------------
except per share 1998 1997
- ----------------------------------------------------------------
Net revenue $44,539 $40,328
Gross profit 24,192 21,294
Gross profit margin 54.3% 52.8%
Operating loss $(40) $(2,389)
Net income (loss) 241 (1,645)
Diluted earnings (loss) per share .01 (.10)
- ----------------------------------------------------------------
Net income totaled $241 thousand or $.01 per diluted share for the first nine
months of 1998 compared with a net loss of $1.6 million and $.10 per share in
the same period a year ago. Reported results for 1998 included $223 thousand of
professional fees incurred in connection with a cancelled merger agreement and
$138 thousand of severance charges. The 1997 results included severance charges
of $1.5 million. Excluding these charges, net income in 1998 was $602 thousand,
or $.04 per diluted share, and income from operations was $321 thousand compared
with a net loss and loss per share in 1997 of $107 thousand and $.01,
respectively, and an operating loss of $851 thousand. The improved financial
performance was largely attributable to a 10.4% growth in revenue and higher
profit margins.
NET REVENUE For the periods indicated, the Company's net revenue and related
gross profit were:
Nine Months Ended September 30
Dollars in thousands SYSTEM SUPPORT TOTAL
- ----------------------------------------------------------------
1998
Net revenue $27,960 $16,579 $44,539
Cost of sales 15,238 5,109 20,347
-----------------------------------
Gross profit $12,722 $11,470 $24,192
- ----------------------------------------------------------------
1997
Net revenue $25,015 $15,313 $40,328
Cost of sales 14,455 4,579 19,034
-----------------------------------
Gross profit $10,560 $10,734 $21,294
- ----------------------------------------------------------------
Net revenue in the comparison increased $4.2 million, or 10.4%, primarily due to
an increase in property management system sales and the inclusion of Senercomm's
results of operation in 1998. Support revenues increased 8.3%.
Gross profit increased 13.6% to $24.2 million in the first nine months of 1998
compared to $21.3 million in the year-earlier
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period. Gross profit, as a percentage of sales, was 54.3% and 52.8% in the
comparison. The improvement in gross profit is primarily attributable to
obtaining higher margins on sales contracts and a reduction in amortization of
capitalized software costs due to certain software products becoming fully
amortized in late 1997.
OPERATING EXPENSES
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
Dollars in thousands 1998 1997 CHANGE
- ----------------------------------------------------------------
Selling, general and
administrative
Compensation $11,323 $11,542 (1.9)%
Severance 138 1,538 (91.0)
Other 9,991 8,221 21.5
---------- ----------
Total 21,452 21,301 0.7
Research and development 2,740 2,290 nm
Capitalization of software
development costs (1,312) (1,154) nm
---------- ----------
Net research and
development 1,428 1,136 25.7
Depreciation and
amortization
Property and equipment 757 651 16.3
Goodwill 595 595 -
---------- ----------
Total 1,352 1,246 8.5
---------- ----------
Total operating expenses $24,232 $23,683 2.3
- ----------------------------------------------------------------
nm - not meaningful
Total operating expenses in the comparison increased 2.3% to $24.2 million for
the nine months ended September 30, 1998. During 1998, the Company incurred
charges totaling $361 thousand consisting of the merger charges and severance
obligations and, in 1997, $1.5 million of severance obligations. Excluding these
charges, operating expenses increased $1.7 million, or 7.8%, primarily due to
including Senercomm's operations in 1998, an increase in professional fees
related to marketing of new products and services, and additional research and
development expenditures related to product improvements and enhancements.
INCOME FROM OPERATIONS Losses from operations totaled $40 thousand in the first
nine months of 1998 compared with $2.4 million a year ago. Excluding the merger
and severance charges discussed earlier, operating income was $321 thousand in
the first nine months of 1998 compared with an operating loss of $851 thousand
in the year-earlier period. The improved core operating results were primarily
due to volume-related sales growth and higher margins partially offset by modest
increases in expenses.
OTHER INCOME AND EXPENSE During the first nine months of 1998, the Company had
other income of $281 thousand compared with $744 thousand a year ago. The
decline was due to lower dividend and interest income associated with a
reduction in the investment portfolio. This decline was partially offset by
lower interest expense.
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THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
WITH THREE MONTHS ENDED SEPTEMBER 30, 1997
SUMMARY RESULTS OF OPERATIONS
THREE MONTHS ENDED
Dollars in thousands, SEPTEMBER 30
----------------------
except per share 1998 1997
- ----------------------------------------------------------------
Net revenue $14,365 $14,040
Gross profit 7,743 7,354
Gross profit margin 53.9% 52.4%
Operating loss $ (432) $ (121)
Net income (loss) (371) 225
Diluted earnings (loss) per share (.02) .01
- ----------------------------------------------------------------
Third quarter 1998 net loss totaled $371 thousand or $.02 loss per diluted share
compared with net income of $225 thousand or $.01 earnings per diluted share in
the same period a year ago. Excluding the $223 thousand of merger charges, the
Company's net loss and loss per share for the third quarter of 1998 were $148
thousand and $.01, respectively. On this basis, losses from operations totaled
$209 thousand in the third quarter of 1998 compared with losses of $121 thousand
in the year-earlier period. The financial results reflect sales growth and wider
margins offset by increased professional fees related to marketing of new
products and services.
NET REVENUE For the period indicated, the Company's net revenue and related
gross profit were as follows:
Three months ended September 30
Dollars in thousands SYSTEM SUPPORT TOTAL
- ----------------------------------------------------------------
1998
Net revenue $8,545 $5,820 $14,365
Cost of sales 4,646 1,976 6,622
-----------------------------------
Gross profit $3,899 $3,844 $ 7,743
- ----------------------------------------------------------------
1997
Net revenue $8,765 $5,275 $14,040
Cost of sales 5,146 1,540 6,686
-----------------------------------
Gross profit $3,619 $3,735 $ 7,354
- ----------------------------------------------------------------
Net revenue in the quarter-to-quarter comparison increased $325 thousand, or
2.3%, due to the inclusion of Senercomm's results of operations in 1998 that
were partially offset by decreased revenues from the Asian countries.
In the third quarter of 1998 gross profit increased $389 thousand to $7.7
million. As a percentage of sales, gross profit was 53.9% in 1998 and 52.4% in
1997. The improvement in gross profit is primarily attributable to obtaining
higher margins on sales contracts and a reduction in amortization of capitalized
software costs due to certain software products becoming fully amortized in late
1997.
OPERATING EXPENSES
THREE MONTHS ENDED
SEPTEMBER 30
---------------------
Dollars in thousands 1998 1997 CHANGE
- ----------------------------------------------------------------
Selling, general and
administrative
Compensation $3,583 $3,754 (4.6)%
Other 3,708 2,960 25.3
---------------------
Total 7,291 6,714 8.6
Research and development 850 798 nm
Capitalization of software
development costs (422) (454) nm
---------------------
Net research and
development 428 344 24.4
Depreciation and
amortization
Property and equipment 258 219 17.8
Goodwill 198 198 -
---------------------
Total 456 417 9.4
---------------------
Total operating expenses $8,175 $7,475 9.4
- ----------------------------------------------------------------
nm - not meaningful
Total operating expenses in the third quarter of 1998 increased $700 thousand,
or 9.4% compared to the year-earlier period. The increase was primarily due to
including Senercomm's operations in 1998, an increase in professional fees
related to the cancelled merger agreement and additional research and
development expenditures related to product improvements and enhancements. These
increases were partially offset by the effects of staff reductions in certain
operational and corporate positions in connection with initiatives to improve
productivity.
INCOME FROM OPERATIONS In the quarter-to-quarter comparison, losses from
operations totaled $432 thousand and $121 thousand in the third quarter of 1998
and 1997 respectively. Excluding the merger charges, the losses from operations
in the third quarter of 1998 were $209 thousand.
OTHER INCOME AND EXPENSE During the third quarter of 1998, the Company had other
income of $61 thousand compared with $346 thousand a year ago. The decline was
due to nonrecurring gains in 1997 from the sale of a product line and lower
dividend and interest income in 1998 associated with a reduction in the
investment portfolio in 1997.
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GEOGRAPHIC INFORMATION Operations are conducted worldwide through separate
geographic area organizations which represent major markets or combinations of
related markets. Financial information by geographic area was as follows:
NINE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands 1998 1997
- ---------------------------------------------------------------
Net revenues
Domestic $28,224 $23,297
Pacific Rim 8,982 8,963
Canada 4,451 4,378
Europe 2,882 3,690
-------------------------
Consolidated $44,539 $40,328
-------------------------
Net income (loss)
Domestic $(245) $(1,228)
Pacific Rim 128 -
Canada 59 78
Europe 299 (495)
-------------------------
Consolidated $ 241 $(1,645)
-------------------------
SEPTEMBER 30 DECEMBER 31
1998 1997
-------------------------
Identifiable assets
Domestic $28,980 $31,831
Pacific Rim 4,319 4,492
Canada 2,468 2,570
Europe 3,779 3,313
-------------------------
Consolidated $39,546 $42,206
- ---------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity is primarily dependent
upon its ability to generate sufficient working capital through profitable
operations. Cash provided by operations totaled $1.5 million in the first nine
months of 1998 and $2.8 million a year ago. Cash and cash equivalents totaled
$8.3 million and $8.9 million at September 30, 1998 and December 31, 1997,
respectively.
Management believes that to achieve sustained profitability, it must continue to
increase sales and improve productivity related to selling, general and
administrative expenses. To increase sales, the Company believes that it must
increase its distribution channels, continually provide upgrades to current
products and introduce new competitive products in the hospitality industry. The
backlog of hardware and software orders at September 30, 1998 expected to be
filled within one year amounted to $8.1 million.
Current short-term capital needs will be funded primarily through internal
working capital generated from anticipated operating revenues such as new sales,
continuing and new support services revenue and the backlog of orders received
and pending.
At September 30, 1998, the Company has available a $3 million line of credit
under a commercial revolving note, expiring in April 1999, and bearing interest
at the bank's prime rate plus 1.0%. Borrowings under the line of credit are
collateralized by the Company's equipment, accounts receivable and inventories
located in the United States.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations together with working capital will be
adequate to satisfy its obligations and fund operations. If the Company's
sources of funds were insufficient to satisfy the Company's cash requirements,
the Company may need to seek other sources of capital or obtain additional
financing. There is no assurance that such new financing alternatives would be
available.
Stockholders' equity totaled $25.5 million at September 30, 1998 and at year-end
1997. In September 1998, the Company announced its board of directors authorized
it to repurchase, in open market, negotiated or block transactions, up to 1
million shares of Sulcus' common stock. As of September 30, 1998, 116 thousand
shares were repurchased under this program.
INCOME TAXES At September 30, 1998, the Company had net deferred tax assets
totaling $2.1 million, net of valuation allowances of $8.3 million. The
valuation allowance was decreased in the first nine months of 1998 by $453
thousand compared with an increase of $349 thousand in the year-earlier period.
The valuation allowance reflects the Company's estimate of the adjustment
necessary to reduce the net deferred tax assets to the net recoverable amount.
No income tax provision was recorded in the first nine months of 1998 or 1997.
The realizability of Sulcus' 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 Sulcus 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 the first nine months of 1998 and recent years and expected
taxable income in the remainder of 1998 and the next several years thereafter.
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.
MARKET RISK Approximately 64% of Sulcus' net sales are generated from operations
in the United States, 20% in the
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Pacific Rim, 10% from Canada, and 6% from Europe. To the extent operations are
conducted in currencies other than the U.S. dollar, Sulcus is subject to certain
risks associated with foreign currency valuation fluctuations. Sulcus does not
believe such valuation risk is material to its results of operation or financial
position.
EFFECT OF YEAR 2000 The Company is testing the current versions of its products
and is designing the newest versions to process Year 2000 data. While some minor
potential issues were identified, those versions that have been tested are
substantially Year 2000 compliant, and the expense of revising current versions
to be Year 2000 compliant has not been material. Although the Company is testing
its products for Year 2000 compliance, there can be no assurance that undetected
errors or defects will not exist that might cause a product to fail to process
Year 2000 data correctly. After inquiries of its vendors and suppliers, the
Company believes that its major internal business and information systems are or
will be Year 2000 compliant. As part of its normal operations, the Company's
current internal business and information systems were upgraded. The additional
costs, if any, of addressing possible Year 2000 issues are not expected to have
a material adverse impact on the Company's results of operations, liquidity and
capital resources.
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, internally develop and introduce new products and/or acquire
competitive products in the hospitality industry in order to increase sales, (v)
the adequacy of operating cash flows over the next several years together with
currently available working capital to finance the growth needs of the Company,
(vi) rapidly changing technology, accelerated product obsolescence and rapidly
changing hospitality industry standards, resulting in the need to update
products and introduce new products and services in a timely manner to meet
evolving customer requirements (vii) 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.
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SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
In thousands, except share data 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $8,287 $8,894
Short-term investments 259
Accounts receivable, net of allowance of $2,028 and $1,785 9,215 11,256
Inventories 3,761 3,261
Deferred taxes 503 389
Other current assets 1,629 1,718
---------------------------
Total current assets 23,395 25,777
Purchased and capitalized software, net of accumulated
amortization of $12,409 and $11,396 5,624 4,961
Property and equipment, net of accumulated amortization
of $5,713 and $4,841 2,092 2,142
Goodwill, net of accumulated amortization of $4,833 and $4,240 5,833 6,428
Deferred taxes 1,598 1,711
Other noncurrent assets 1,004 1,187
---------------------------
Total Assets $39,546 $42,206
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $1,880 $1,300
Current portion of long-term debt 748 705
Current portion of capitalized leases 58 160
Accounts payable 2,750 2,645
Deferred revenue 4,385 6,542
Customer deposits 1,180 1,666
Other accrued liabilities 1,845 2,252
---------------------------
Total current liabilities 12,846 15,270
Long-term debt 1,128 1,408
Capitalized leases 32 40
STOCKHOLDERS' EQUITY
Preferred Stock - Series B Junior Participating, no par
value; 300,000 shares authorized, none issued - -
Common stock, no par value; 30,000,000 shares authorized and
17,068,751 and 17,057,063 shares issued 41,395 41,338
Retained deficit (15,122) (15,363)
Treasury stock, at cost, 116,133 shares (156) -
Accumulated other comprehensive income (loss) (577) (487)
---------------------------
Total stockholders' equity 23,395 25,488
---------------------------
Total Liabilities and Stockholders' Equity $39,546 $42,206
===========================
</TABLE>
The accompanying notes are an integral part of this statement.
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SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share data 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue
Systems $ 8,545 $ 8,765 $27,960 $25,015
Support 5,820 5,275 16,579 15,313
---------------------------------------------------------
Total revenue 14,365 14,040 44,539 40,328
Cost of goods sold and services provided
Systems 4,646 5,146 15,238 14,455
Support 1,976 1,540 5,109 4,579
---------------------------------------------------------
Total cost of goods sold and services provided 6,622 6,686 20,347 19,034
---------------------------------------------------------
Gross profit 7,743 7,354 24,192 21,294
Operating expenses
Selling, general and administrative 7,291 6,714 21,452 21,301
Research and development 850 798 2,740 2,290
Capitalized software development (422) (454) (1,312) (1,154)
---------------------------------------------------------
Net research and development 428 344 1,428 1,136
Depreciation and amortization 456 417 1,352 1,246
---------------------------------------------------------
Total operating expenses 8,175 7,475 24,232 23,683
Income (loss) from operations (432) (121) (40) (2,389)
Other (income) expense
Interest expense 50 53 110 312
Dividend and interest income (111) (201) (382) (868)
Realized (gains) losses on sales of securities - (10) (9) -
Gain on disposal of product line - (188) - (188)
---------------------------------------------------------
Total other (income) expense (61) (346) (281) (744)
Income (loss) before income taxes (371) 225 241 (1,645)
Income taxes - - - -
---------------------------------------------------------
Net income (loss) $ (371) $ 225 $ 241 $(1,645)
=========================================================
Earnings (Loss) Per Common Share
Basic $ (.02) $ .01 $ .01 $ (.10)
Diluted (.02) .01 .01 (.10)
=========================================================
Weighted Average Shares Outstanding Basic 17,079 16,842 17,068 16,839
Diluted 17,090 17,108 17,362 17,016
---------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
8
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SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 241 $(1,645)
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 2,391 2,865
Provision for doubtful accounts 615 449
Realized investment gains (9) (34)
Gain on disposal of product line - (188)
Changes in operating assets and liabilities
Accounts receivable 1,426 5,142
Inventories (500) (628)
Accounts payable 104 (1,226)
Deferred revenues (2,157) (2,290)
Customer deposits (485) (525)
Other assets and liabilities (150) 841
----------------------------
Net cash provided by operating activities 1,476 2,761
INVESTING ACTIVITIES
Proceeds from disposal of subsidiary, net of costs - 225
Purchases of securities available for sale - (11)
Proceeds from sales of securities available for sale 249 9,761
Investments in sales-type leases (26) (229)
Payments received on sales-type leases 160 130
Capital expenditures (955) (700)
Software development costs capitalized (1,428) (1,153)
----------------------------
Net cash (used in) provided by investing activities (2,000) 8,023
FINANCING ACTIVITIES
Short term borrowings (repayments) 580 (5,327)
Long-term debt repayments (365) (27)
Capitalized lease repayments (119) (123)
Purchase of treasury stock (156) -
Proceeds from exercise of stock options 58 -
----------------------------
Net cash used in financing activities (2) (5,477)
Effect of changes in currency exchange rate (81) (179)
----------------------------
Increase (decrease) in cash (607) 5,128
Cash, beginning of period 8,894 2,503
----------------------------
Cash, end of period $ 8,287 $ 7,631
============================
</TABLE>
The accompanying notes are an integral part of this statement.
9
<PAGE> 10
SULCUS HOSPITALITY TECHNOLOGIES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Sulcus Hospitality Technologies Corp. (the "Company") designs, develops and
markets technology solutions that are used in the hospitality industry to
improve the management of business critical information and data.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION The unaudited condensed consolidated interim financial
statements have been prepared in accordance with generally accepted accounting
principles and include the accounts of Sulcus Hospitality Technologies Corp. and
its wholly owned subsidiaries ("Sulcus"). In management's opinion these
financial statements reflect all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the results for the interim periods
presented. Results for these interim periods are not necessarily indicative of
results to be expected for the full year. Certain prior period amounts have been
reclassified, where necessary, to conform to the current period presentation.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in Sulcus' Annual Report on Form 10-K
for the year ended December 31, 1997.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from the
estimates. Examples of significant estimates include the collectibility 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.
EARNINGS PER SHARE Basic earnings per common share are computed by dividing net
income applicable to common stockholders by the weighted-average number of
shares of common stock outstanding during the year. Diluted earnings per common
share are computed by dividing net income applicable to common stockholders by
the weighted average number of shares of common stock outstanding adjusted for
the assumed conversion of all dilutive securities (employee stock options).
REVENUE RECOGNITION Sulcus adopted Statement of Position 97-2 "Software Revenue
Recognition," effective for transactions entered into on or after January 1,
1998. This statement provides guidance on revenue recognition for licensing,
selling, leasing and otherwise marketing computer software. The adoption of this
statement did not significantly change any of the Company's revenue recognition
policies nor did it materially affect the reported results of operations or
financial position.
TREASURY STOCK Common stock purchased for treasury is recorded at cost. At the
date of subsequent reissue, the treasury stock account is reduced by the cost of
such stock on the first-in, first-out basis.
RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board
recently issued Statement of Financial Accounting Standard No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This Statement, which
is effective beginning with annual financial statements issued for periods
beginning after December 15, 1997 requires financial and descriptive information
about an entity's operating segments to be included in the financial statements.
This standard, when implemented, is not expected to materially impact the
reported financial position or results of operations of Sulcus.
3. MERGERS & ACQUISITIONS
On November 12, 1998, the Company announced it had agreed to be acquired by
Eltrax Systems, Inc. Under terms of the agreement, Eltrax will acquire Sulcus by
exchanging 0.55 shares of Eltrax common stock for each share of Sulcus stock.
Based on the closing price of Eltrax stock on November 11, 1998, the total value
of the transaction is approximately $66 million. The transaction is expected to
be completed in the first quarter of 1999, pending shareholder approval. E1trax
is a nationwide managed network services and information technology company.
In December 1997, the Company acquired Senercomm, Inc. (Senercomm) for
approximately $2.2 million. Senercomm designs, manufactures and sells in-room
information systems that are used to gather guest data and environmentally
control hotel rooms. The purchase price consisted of $.5 million of Sulcus
common stock, $.5 million of cash and the balance of $1.2 million payable in
three equal annual installments including interest at 8% per annum. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of Senercomm are consolidated with the Company's effective January 1,
1998. The purchase price was assigned to identifiable assets of working capital
($.2 million) and purchased software ($2.0 million).
10
<PAGE> 11
4. OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for reporting and
displaying comprehensive income and its components. Comprehensive income is
defined as net income and all other nonowner changes in equity. The adoption of
this Standard did not affect the Company's reported results of operations or
financial position.
Comprehensive income and its components for the periods indicated follows:
Dollars in thousands 1998 1997
- ----------------------------------------------------------------
For the three months ended September 30
Net income (loss) $(371) $ 225
Foreign currency translation 17 (108)
Unrealized securities gains - 70
---------------------
Comprehensive income (loss) $(354) $ 117
=====================
For the nine months ended September 30
Net income (loss) $ 241 $(1,645)
Foreign currency translation (81) (179)
Unrealized securities gains - 83
---------------------
Comprehensive income (loss) $ 160 $(1,824)
- ----------------------------------------------------------------
5. INCOME TAXES
During the first nine months of 1998, the Company reflected no provision or
benefit for income taxes on a pre-tax income of $240 thousand. The valuation
allowance was decreased by $453 thousand reflecting the Company's estimate of
adjustments necessary to reduce the net deferred tax assets to the net
recoverable amount.
The Company had net deferred tax assets, liabilities and valuation reserves as
follows:
SEPTEMBER 30 DECEMBER 31
Dollars in thousands 1998 1997
- ----------------------------------------------------------------
Deferred tax assets $ 1,625 $1,842
Deferred tax liabilities (1,266) (1,893)
Net operating loss carryforwards and
tax credits 10,040 10,953
Valuation allowance (8,349) (8,802)
-------------------------
Net deferred taxes $ 2,100 $2,100
- ----------------------------------------------------------------
6. EARNINGS PER SHARE
The computation of earnings per share for the indicated periods is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income (loss) applicable to common stockholders $ (371) $ 225 $ 241 $(1,645)
Divided by weighted average shares outstanding 17,079 16,842 17,068 16,839
Basic earnings (loss) per share $ (.02) $ .01 $ .01 $ (.01)
- -----------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Net income (loss) applicable to common stockholders $ (371) $ 225 $241 $(1,645)
Divided by sum of
Weighted average shares outstanding 17,079 16,842 17,068 16,839
Conversion of dilutive stock options 11 266 294 177
-----------------------------------------------
Diluted shares outstanding 17,090 17,108 17,362 17,016
Diluted earnings (loss) per share $ (.02) $ .01 $ .01 $ (.10)
-----------------------------------------------
ANTIDILUTIVE STOCK OPTIONS 2,735 609 753 729
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Antidilutive stock options are not included in the computation of diluted
earnings per share because the options' exercise price exceeded the average
market price of the common shares.
11
<PAGE> 12
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K
EXHIBITS The following exhibit index lists the Exhibit to the Quarterly Report
on Form 10-Q:
27 Financial Data Schedule
REPORTS ON FORM 8-K There were no Current Reports on Form 8-K filed during the
quarterly period ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on November XX, 1998, on its
behalf by the undersigned thereunto duly authorized.
Sulcus Hospitality Technologies Corp.
John W. Ryba Frank G. Deible
Senior Vice President and Principal Accounting Officer
Chief Legal Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SULCUS
HOSPITALITY TECHNOLOGIES CORP.'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,287
<SECURITIES> 0
<RECEIVABLES> 11,243
<ALLOWANCES> 2,028
<INVENTORY> 3,761
<CURRENT-ASSETS> 23,395
<PP&E> 7,805
<DEPRECIATION> 5,713
<TOTAL-ASSETS> 39,546
<CURRENT-LIABILITIES> 12,846
<BONDS> 1,128
0
0
<COMMON> 41,395
<OTHER-SE> (15,855)
<TOTAL-LIABILITY-AND-EQUITY> 39,546
<SALES> 44,539
<TOTAL-REVENUES> 44,539
<CGS> 20,347
<TOTAL-COSTS> 24,232
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110
<INCOME-PRETAX> 241
<INCOME-TAX> 0
<INCOME-CONTINUING> 241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
