-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vc3ajezLsbNMKIl1fEFRO+iYfcPINPAbbXdltCJx5UkBqUlDfkz1fSRDf+RBLPI/ 3p0hpm8EJHojsD9SN0jr+g== 0000950128-97-000679.txt : 19970401 0000950128-97-000679.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950128-97-000679 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SULCUS COMPUTER CORP CENTRAL INDEX KEY: 0000726712 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 251369276 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-13226 FILM NUMBER: 97571356 BUSINESS ADDRESS: STREET 1: SULCUS CENTRE STREET 2: 41 N MAIN ST CITY: GREENSBURG STATE: PA ZIP: 15601 BUSINESS PHONE: 4128362000 MAIL ADDRESS: STREET 2: 41 N MAIN STREET CITY: GREENSBURG STATE: PA ZIP: 15601 10-K405 1 SULCUS COMPUTER CORP. 1 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . . . . . to . . . . . COMMISSION FILE NUMBER 0-13226 ------------------------------ SULCUS COMPUTER CORPORATION --------------------------- (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) (412) 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 --- --- As of March 24, 1997, 16,752,032 shares of Common Stock were outstanding. The aggregate market value of shares held by non-affiliates as of March 24, 1997 was $26,175,050 based on the closing price of the Common Stock on the American Stock Exchange on that date. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X__ 2 PART I ITEM 1. BUSINESS GENERAL Sulcus Computer Corporation develops, manufactures, markets and installs microcomputer systems designed to automate the creation, handling, storage and retrieval of information and documents. The Company designs its systems primarily for the hospitality and real estate industries and to a lesser extent, the legal profession. The Company's sales practices are currently systems oriented (rather than individual sales of hardware or software) toward the vertical marketing of its integrated products. Systems include a network of hardware, software and cabling as well as stand alone systems for which the hardware and software are not separately sold. The Company's systems are offered together with full services, training, maintenance, and support. The Company has installed systems throughout North and South America, Europe, Africa, Asia and Australia. Customers include property management companies, condominiums, hotels, motels, restaurants, resorts, country clubs, cruise lines, real estate loan and closing offices, title insurance companies, abstract companies, escrow offices and law offices. The Company is a Pennsylvania corporation incorporated on November 5, 1979 under the name "Ragtronics, Inc." It adopted its present name in December 1982. The Company's principal offices are located at Sulcus Centre, 41 North Main Street, Greensburg, Pennsylvania 15601. Its telephone number at such address is 412-836-2000. Unless the context indicates otherwise, references herein to the Company or to Sulcus refer to Sulcus Computer Corporation and its wholly owned subsidiaries. HISTORICAL DEVELOPMENT The Company provides its computer systems to customers on a turnkey basis. Each system includes hardware, software, training, maintenance and support. Sulcus believes that this approach is critical in business applications because while some system providers can automate a specific task, most are unable to effectively automate a broad range of a customer's business. The Company's sales practices and trends are currently oriented to sales of systems and to the vertical marketing of its integrated products. The Company began to develop in 1988 a strategic plan to achieve a leadership position in turnkey computer systems with specialized software for the real-estate related, hospitality and legal industry groups. These groups were chosen because they represented, in management's opinion, large vertical business markets. The strategic plan envisioned internal growth by way of expanded research and development, as well as growth through acquisitions, mergers, joint ventures and similar alliances. In furtherance of this strategy, Sulcus pursued acquisition opportunities which created additional market opportunities for existing products, had products that complemented or expanded existing product lines, and created additional product distribution channels. Much of Sulcus' business is conducted through subsidiaries, most of which were acquired by the Company. A description of the business conducted by Sulcus' principal subsidiaries follows. COMPUSOLV In July 1989, a subsidiary of Sulcus, acquired a non-exclusive license from CompuSolv, Inc. for established property management software systems for the hospitality industry. These systems are used by the hotel, motel, condominium, restaurant and travel industries to automate front office, back office, point of sale and call accounting systems. RADIX In August 1990, Sulcus established Radix Systems, Inc., a wholly-owned subsidiary with its primary offices in Conshohocken, Pennsylvania. Radix provides field engineering and support services including site analysis, cabling, and Novell(R) training. Since that time, Radix has added LANmark support and Squirrel system sales and support. LODGISTIX In February 1991, Sulcus acquired Lodgistix, Inc., an integrator of property management systems in the hospitality industry. Lodgistix was a developer of automated hotel systems including front office, back office, sales and catering and interfaces to other hotel-related systems. 2 3 SULCUS (AUSTRALIA) PTY. LTD. In November 1991, the Company established a direct sales office in Australia by acquiring certain assets, trade names, leasehold improvements and equipment. Sulcus (Australia) Pty. Ltd. sells and supports the full range of the Company's property management and point-of-sale systems. SQUIRREL In March 1992, the Company acquired Squirrel Companies, Inc. Squirrel develops and markets touch-screen software systems to the hospitality industry. Squirrel's software systems consist principally of point-of-sale software coupled with food and beverage software and hardware. NRG In March 1992, the Company acquired NRG Management Systems, Inc. (NRG) which develops and markets energy and room management software to the hotel and motel industry. SULCUS HOSPITALITY LIMITED AND SULCUS SINGAPORE, PTE. LTD. In July and September 1992, the Company acquired JBA (HK) Ltd. of Hong Kong and JBA Singapore PTE. LTD. Sulcus Hospitality Limited and Sulcus Singapore Pte. Ltd. market the full range of the Company's property management and point-of-sale systems. SULCUS HOSPITALITY GROUP EMEA, A.G. In January 1993, the Company acquired Techotel, AG of Zug, Switzerland, a hotel software development, marketing, and service organization. Sulcus Hospitality Group EMEA, A.G., sells and supports the full range of the Company's property management and point-of-sale systems in 30 markets in Europe, the Middle East, and Africa, primarily through distributors. SULCUS SCANDINAVIA, A.S. In November 1993, the Company acquired Lodgistix Scandinavia A.S., a distributor of Lodgistix systems in Norway, Sweden and Denmark. Sulcus Scandinavia A.S. offers a full range of Sulcus products including hotel management systems, restaurant point-of-sale systems, and CIRIS I in-room management systems. INTERNATIONAL OPERATIONS The Company has established international operations for the marketing, support, manufacturing and/or distribution of its products as a result of its acquisition strategy. The Company's international operations presently consist of the following subsidiaries: Sulcus (Australia) Pty. Ltd., a direct sales office in Australia; Squirrel Systems of Canada, Ltd., a Canadian subsidiary of Squirrel located in Vancouver, British Columbia which manufactures and sells Squirrel products; Sulcus Hospitality Limited located in Hong Kong, and Sulcus Singapore, PTE. LTD., located in Singapore, each a direct sales office; Sulcus Hospitality Group EMEA A.G. located in Switzerland; Lodgistix UK, Sulcus Scandinavia A.S., located in Norway; Sulcus (Malaysia) Sdn Bhd; Squirrel (U.K.) Ltd., Sulcus Hospitality (U.K.) Ltd., and NRG Management Systems (U.K.) located in the United Kingdom, all direct sales and support offices, and Sulcus Hospitality Group (Belgium) located in Belgium, which operates as a customer support office. On April 8, 1996, Horwath International and Sulcus announced the execution of a market, development, and operating agreement to market, license, and sell worldwide a series of automated products and services to be supplied exclusively by Sulcus. Horwath International is one of the world's largest international networks of independent accounting and management consulting firms with offices throughout the United States and in 90 countries of the world. Certain firms in the network will be licensed to distribute Sulcus Hospitality products. These products and services will be marketed under the name HAT...MS(TM) products (Hospitality And Tourism...Management Systems(TM)) and are designed for automating the operations of hotels, restaurants, convention centers, country clubs, airlines, and all other businesses involved in hospitality and tourism throughout the world. The initial term of the agreement is 66 months, and it will be automatically renewable for succeeding 12-month periods. Horwath has been granted an exclusive master license for HAT...MS(TM) products. Management believes that this agreement with Horwath International should provide Sulcus with expanded global distribution. 3 4 Sulcus localizes its products for use in other countries so that all monetary references, user messages, and documentation reflect the monetary units, language and other conventions of a particular country. The Company's international operations are subject to certain risks common to foreign operations in general, such as governmental regulations and import restrictions. PRODUCTS HARDWARE Sulcus markets computer systems consisting of hardware, software, training and ongoing support. The hardware platform utilized by the Company's property management and legal systems products can be obtained from Sulcus or from elsewhere, either from a manufacturer with whom Sulcus has a value-added remarketing agreement (whereby Sulcus purchases such hardware at a discount) or from a completely independent supplier. The hardware platform utilized by the Company's point-of-sale systems is manufactured by the Company from commercially available computer components. In the event of a turnkey purchase in which Sulcus supplies hardware, software and training, Sulcus offers a Hardware Service Agreement for the maintenance of the equipment. In certain circumstances the hardware supplier provides the equipment maintenance with no revenue accruing to Sulcus. Sulcus performs certain remanufacturing and assembly operations at its own Greensburg, Pennsylvania, Wichita, Kansas and Vancouver, Canada facilities. Sulcus is not dependent on a specific manufacturer for its components or systems. The base systems are supported by printers and other peripherals (as requested by the customer) purchased by Sulcus from manufacturers. Sulcus is not dependent upon any individual supplier for these peripherals and support devices. SOFTWARE Through its in-house staff of applications programmers, systems programmers, and software engineers, Sulcus develops and enhances its own proprietary software. Sulcus attempts to have its software operate with single-input (or file-integration) methods so that the user enters data once and the computer will use that data in the various applications desired. The following is a brief description of the Company's principal products: PROPERTY MANAGEMENT SOFTWARE (PMS) CompuSolv is a UNIX-based software system which automates hotel front office operations and back office accounting functions. Rights to this software were obtained under a non-exclusive license. LANmark is the Company's proprietary software which uses local area network technology and is designed for managing hotels ranging in size from 150 to more than 2,000 rooms. Customers can purchase different modules of this system to meet their specific needs including front office operations, back office accounting functions, credit card authorization, group room sales, and meeting/function space and event planning. LANlite is a proprietary system designed to meet the needs of properties which do not require all of the features of LANmark. As with the LANmark system, customers can purchase different modules to meet their specific needs. LANexec is a proprietary management information system allowing customized reports drawn from the LANmark database. InnMaxX is a proprietary Windows based software system designed for small lodging properties including lodges, bed and breakfast inns or small resort properties. CIRIS I is the Company's proprietary centralized in-room information system which consists of energy and room management software with applications for HVAC management, in-room safes, mini-bar, maid status and room occupancy and security. HOTELtrieve is a licensed computer output to laser disc information archival and retrieval system tailored to hospitality industry requirements. This system allows the accurate capture and faithful reproduction of all archivable information. This system provides storage for up to one million pages on a single disc and gives the benefits of reduced storage and retrieval costs, shortened access time, distribution of information to multiple locations and integration with existing customer electronic systems. POINT-OF-SALE SOFTWARE (POS) Squirrel Restaurant Management System offers complete automation of full-service restaurant operations. This proprietary system automates order-entry, credit card processing, labor cost management, time and attendance, food and beverage management and data transfer. In addition to stationary terminals, this system also offers remote operations through hand-held terminals. 4 5 Squirrelite is proprietary software for restaurant operations similar to the Squirrel Restaurant Management System but intended for smaller installations. OTHER SOFTWARE The Abstractor is proprietary software which operates together with portable computers and cellular communication to automate the collection and organization of real estate title searches. The Closer 2000 is proprietary software which automates real estate transfers including closing and settlement statements, truth-in-lending disclosures, escrow and trust accounting, forms creation and information indexing. PRODUCT SUPPORT SERVICES Management believes that support is fundamental to the continued business relationship with Sulcus' customers. Software support agreements are entered into in connection with substantially all system sales. Under software support agreements, Sulcus offices provide support services with their regional personnel and, if no solution can be found at that level, Sulcus maintains second-level support through its Wichita, Kansas or Vancouver, British Columbia centers which are staffed by specially trained personnel. This multi-level support is intended to ensure that customers receive prompt response and service. Software support services are provided for a fee on a 24-hour, seven-day-per-week basis pursuant to a Support, Maintenance and Enhancement Agreement. Sulcus provides hardware support for a fee under a Hardware Service Agreement which enables the user to call for a diagnosis and, repair or replacement based upon the circumstances. Certain repairs and replacements come with fees in addition to the support agreement, depending on the circumstances. Additionally, depending upon the terms of the service agreement purchased by the customer, hardware service may be provided at a customer's site or at centralized facilities. The Company receives certain hardware support from manufacturers or other service providers for a fee. PRODUCT RESEARCH, DEVELOPMENT AND IMPROVEMENT The Company has a number of ongoing research and development projects consisting of developing new hardware and software products as well as improving existing products. Most of the Company's software products are developed internally although the Company has purchased technology and has licenses for certain intellectual property rights. Product documentation is also created internally. Internal development enables Sulcus to maintain closer technical control over the products and gives the Company the latitude to designate which modifications and enhancements are more beneficial and when they should be implemented. The Company has created and acquired a substantial body of development tools and methodology for creating and enhancing its products. These tools and methodology are intended to simplify a product's integration with different operating systems or computers. By making end-user follow-up contacts and by considering and evaluating end-user requests for additional features to products, Sulcus maintains an information base to evaluate market feasibility of new products. Developing new software and updating existing offerings is a continual process performed by research and development groups in the effort to keep their products competitive. Also, since the functions of several products are affected by changes in tax laws and regulations, Sulcus rewrites such affected software to meet these changes for its customers. Updates are made available without charge to those customers who have purchased support or service agreements. Additionally, formally organized user groups exist to provide input and suggestions on new features and modules for products. These groups have periodic meetings and provides significant user information for new product development. Neither the Company nor any of its principal business units is dependent upon a single group of customers or a few customers, the loss of any one or more of which would have a material adverse effect on the Company or any of its principal business units. MARKETS Sulcus offers turnkey systems consisting of hardware, software, supplies, training, maintenance and support to the hospitality and real estate industries as well as the legal profession. These systems are installed throughout North and South America, Europe, Africa, Australia and Asia. Customers include property management companies, condominiums, hotels, motels, restaurants, resorts, country clubs, cruise lines, real estate, loan and closing offices, title insurance companies, abstract companies, escrow offices and law offices. 5 6 The Company markets its systems through more than 80 locations in over 20 countries. These include locations maintained by the Company as sales offices as well as locations of distributors. Customer assistance and support services are generally offered 24 hours-a-day. The Company has generally had good experience in utilizing its internal resources as well as distributors to market and sell its products and services. Utilizing distributors allows the Company to take advantage of established operations, eliminate office start-up costs, and control costs associated with sales and marketing. Management intends to continue to build the Company's customer and product bases through current channels and to pursue strategic growth through acquisitions, mergers, joint ventures or other alliances. TRAINING Training of users is performed by employees of Sulcus who are themselves required to go through a Company training program and occasionally by distributors familiar with the business function of the user. Sulcus also trains its personnel in applying the use of teaching techniques to user requirements. Under the turnkey concept the user is taught to customize the output for his specific needs. Sulcus conducts training at its offices and at customers' sites. MARKETING AND ADVERTISING Sulcus utilizes Company owned locations and distributors for the sales of its systems. The Company owned locations account for the majority of Sulcus' sales and are located throughout the United States and in Australia, Hong Kong, China, Manila, Singapore, Switzerland, United Kingdom, Norway, Malaysia and Canada. Sales personnel are employees of the Company and sell Sulcus products directly to end-users and do not represent any other companies. The Company's compensation arrangements with its sales employees generally provide for a commission based on sales performance. Managers engaged in sales activities are compensated by a combination of salary and commission. Distributors are compensated by means of a discount on the purchase price which varies with products offered and to a lesser extent, the territory assigned. The Company sets minimum sales quota requirements for its sales employees and during the past three fiscal years the Company has terminated sales employees and distributors for failing to meet such requirements. The Company is not materially dependent upon any individual or group of sales employees or distributors. The Company has generally had favorable experience in utilizing its own employees as well as distributors for marketing and selling the Company's products and services. Use of distributors and dealers allow the Company to take advantage of established operations having required experience with the Company's products. Office start-up costs are eliminated which help in the control of the Company's costs associated with marketing and sales. The disadvantage to using this method of distribution is the lack of direct control and a risk inherent with changes in business and conditions of the distributor which could result in less sales effort and less than expected revenues. The Company does not provide customers or distributors with rights to return products, extended payment terms or similar working capital items. The Company offers limited warranties relating to the performance of its software products and Company manufactured point-of-sale hardware products. It does represent that when delivered, these products will conform to their published specifications if used properly and used on equipment purchased from or approved by the Company. The warranty for hardware purchased by the Company for resale as part of a computer system is issued by the manufacturer, and is passed on to the customer. The Company utilizes a sales-type lease program in which the Company retains ownership in the residual value of the leased property and assumes certain liability under the recourse provisions in the agreement. The Company has recorded a reserve for the estimated liability. To date actual losses from recourse provisions have not been material. Sulcus has a national advertising program primarily geared to trade journals and a local and regional cooperative advertising program which encourages the distributors to advertise in their respective areas and attend local trade exhibits and conventions. Representatives of Sulcus attend and demonstrate its products at national conventions of the various industries in which its customers participate. Some of the conventions and trade shows attended include the International Association of Hospitality Accountants, Hotel Industry Technology Exposition and Conference, National Restaurant Association Convention, and the American Land Title Association Convention. Sulcus also conducts a year-round direct-mail program. Through its product strategies, management believes Sulcus can address the automation requirement of each market segment. By doing so, Sulcus provides a full-service product integration and upgrade path as a customer outgrows its present computerized needs. This approach benefits customers by protecting their investment in hardware and software, and allows greater flexibility for future planning. 6 7 COMPETITION Competition in the computer software market is generally intense and competitors often attempt to emulate successful programs. Of the major competitors, there does not appear to be a clear dominant vendor, due in part to the increased number of competitors entering the marketplace over the past several years. Increased competition has resulted in greater discounting of prices with no lessening of the cost of providing systems and services. Competitive advantages are afforded to those companies which are better capitalized and have programming staffs which are able to meet the changing demands of hotel and resort property owners or managers. There can be no assurance that competitors will not develop competitive products or that Sulcus will be able to successfully compete against such competitors or products. The competitive position of Sulcus is not readily available because many companies in this market are privately held and do not publish financial information. Furthermore, there is no organization that routinely collects and evaluates competitive information from which a competitive position can reliably be ascertained. The Company believes there are approximately five to six competitive vendors in each of the Property Management Systems and Full Service Restaurant Management Systems marketplaces that have about the same or more installations than Sulcus. Management believes that compared to competitive products, Sulcus products are not only superior in feature and function, but in connectivity and integration to other products. Sulcus differentiates itself in the hospitality marketplace in two ways. First, Sulcus utilizes a state-of-the-art development platform for all of its software products which allows the Company to implement its systems on both UNIX computers and DOS computers. The software development platform is extremely flexible and easy to modify, allowing customization of application programs to meet the specific needs of customers and provide less expensive enhancements to the system over time. The Company's internal labor costs are also reduced because of the efficient manner in which its programs can be created and modified. Second, Sulcus offers a complete family of products to the hospitality industry. These products include central reservation systems, property management systems, restaurant POS systems, and computer-aided training. Management believes that support is fundamental to the continued business relationship with Sulcus' customers and that its software support is among the industry's leaders. See "Business--Product Support Services." PRODUCT PROTECTION Sulcus regards its software and application systems as proprietary and generally relies on a combination of trade secret laws, copyrights, contracts and internal and external nondisclosure safeguards to protect its products. Each of the contracts under which customers use Sulcus' products contain restrictions on using, copying and transferring the products, and prohibit their disclosure to other parties. Despite these restrictions, it may be possible for users or competitors to copy aspects of the products or to obtain information that Sulcus considers as trade secrets. Sulcus believes that any copies so obtained have limited value without access to the product source code which is kept highly confidential. Additionally, many of Sulcus' products contain software and hardware security devices to prevent unauthorized use or copying. Because of the uncertain enforcement of Sulcus' proprietary rights in foreign countries, most products distributed internationally use internal copy protection methods. Only certain aspects of computer software can be patented, and existing copyright laws afford limited practical protection. Sulcus has not patented any of its products although it may seek patent protection for future products. To maintain competitive advantages, Sulcus believes that rapid technological changes in the computer industry places greater emphasis on the knowledge and experience of its personnel and their ability to develop, enhance and market new products, than on patent or copyright protection of technology. Accordingly, all employees are required to sign nondisclosure agreements at the time of their employment. Sulcus has registered in the United States and uses the following trademarks and service marks on its products and services, and considers each to be proprietary: SULCUS(R), LODGEMATE(R), LANmark(R), SQUIRREL(R), LODGISTIX(R), and SULCLINK(R). Sulcus has the exclusive license and assignment of the following trademarks: COMPUSOLV(R), EVIDENCE MASTER(R) and COLLECTION LEDGER(R). Sulcus has applied for, or intends to apply for Federal trademark or service mark registration for HAT...ms(TM), INNMAXX(TM), LANEXEC(TM), HOTELTRIEVE(TM), CIRIS I(TM), SQUIRRELITE(TM), and WINNfinity(TM). Additionally, Sulcus has registered or applications are pending for various product names in numerous foreign countries. PERSONNEL As of March 10, 1997, Sulcus employed 467 persons, including 24 executives engaged in management, 72 persons in administration and finance, 130 technical personnel, 72 persons engaged in sales marketing and 169 persons in training and product support. None of Sulcus' employees are subject to collective bargaining agreements. Sulcus believes its relations with its employees to be excellent. 7 8 ITEM 2. PROPERTIES Sulcus' principal executive, and administrative operations are located at Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601, in a facility containing approximately 10,000 square feet. Sulcus leases this building under several leases, with a trust established by Sulcus' principal stockholder and a director, Jeffrey S. Ratner, expiring on various dates through September 30, 2001. The annual rental commitment under these leases are $150,388 in 1997, $99,051 in 1998 and $91,269 in 1999, $95,823 in 2000, and $74,520 in 2001. The leases renew automatically for additional two-year terms at a minimum rental of 2% over the prior year's amount, unless canceled by either party. The aggregate rental commitment is similar to comparable properties in the area. Lodgistix leases approximately 22,500 square feet of office space in Wichita, Kansas. The approximate monthly costs are $22,900, pursuant to a lease terminating January 31, 1998. Squirrel Systems of Canada, Inc., leases 21,000 square feet in Vancouver, British Columbia, Canada at an approximate monthly cost of $9,400 under a lease terminating on October 31, 2005. In December 1992, the Company purchased an office building located at 420 West Boynton Beach Boulevard, Boynton Beach, Florida. The Company utilizes this facility for executive, sales and administrative offices. 8 9 ITEM 3. LEGAL PROCEEDINGS Lodgistix is the Plaintiff in an action presently pending before the United States District Court for the District of Kansas against Total Technical Services (TTS). Lodgistix is claiming damages in the amount of $796,000 arising from a breach by TTS of an equipment maintenance service agreement entered into between the parties. TTS has filed a counterclaim against Lodgistix in the amount of $800,000. Lodgistix denies that they breached the equipment maintenance service agreement or that they charged the Defendant for services beyond the scope of the aforesaid Agreement. It is the opinion of Lodgistix's counsel, David L. Nelson, Esquire, Wichita, Kansas, that the counterclaim filed against Lodgistix by TTS is without merit and the probability of any liability to the Company is remote. The efforts of Lodgistix to pursue its claim have been stayed because of a Chapter 11 bankruptcy filing by the Defendant. Sulcus Computer Corporation, NRG Management Systems, Inc., Jeffrey S. Ratner and Frank Morrisroe are Defendants in an action filed in January 1995, in the Fort Bend County Court in Texas, by Walter Lipski, Jr. ("Lipski"), a former executive with the Company's Hospitality Group. Lipski has claimed that Defendants breached the Employment Agreement and Stock Purchase Agreement entered into between the parties and seeks unspecified damages. Defendants believe that there were no breaches and that Mr. Lipski was terminated with cause for failing to fulfill his job duties and responsibilities, failing to achieve financial projections for NRG Management Systems, Inc., misrepresentation of the assets of NRG Management Systems, Inc. and further violations of the employment agreement and Stock Purchase Agreement Mr. Lipski executed as a part of his employment with the Company. Defendants have filed a response to Lipski's complaint. In May of 1995, the Court ruled on various interlocutory motions filed by Plaintiff. The rulings were favorable to Defendants and, since that time, Plaintiff has taken no action to further the case. While the ultimate outcome cannot be predicted, based on information collected by the Company from the individual defendants, the Company believes that it has meritorious defenses and intends to vigorously defend the action. Other suits arising in the ordinary course of business are pending against the Company and its subsidiaries. The Company cannot predict the ultimate outcome of these actions or the ones above-described but believes they will not result in a material adverse effect on the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders of the Company held on December 20, 1996, the holders of the majority of the voting shares of the Company's common stock voted to elect Leon D. Harris, and re-elect David H. Adler, Robert D. Gries, Herbert Ratner, Jeffrey S. Ratner and John W. Ryba each for one year terms on the Board of Directors. Herbert Ratner and John W. Ryba resigned as Directors in February 1997. The votes were cast as follows:
Name For Against Adler, David H. 10,974,037 2,702,566 Gries, Robert D. 10,973,745 2,702,858 Ratner, Herbert 10,960,124 2,716,479 Ratner, Jeffrey S. 10,965,392 2,711,211 Ryba, John W. 10,976,040 2,700,563 Harris, Leon 10,976,590 2,700,013
The Stockholders ratified the selection of Crowe, Chizek and Company, LLP as the Company's independent auditors for 1996 with 12,262,951 votes cast in favor, 954,017 cast against and 88,635 abstained. 9 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF SECURITIES On May 19, 1992, Sulcus Common Stock began trading on the American Stock Exchange under the symbol SUL. Previously, Sulcus' Common Stock was traded on the over-the-counter market on the National Association of Securities Dealers Automated Quotations ("NASDAQ") National Market System under the symbol SULC.
QUARTER ENDING HIGH LOW March 1997 (through March 24) 2-1/8 1-7/16 March 1996 2-13/16 1-7/8 June 1996 3-13/16 2-5/8 September 1996 3-5/16 2-3/8 December 1996 2-1/2 1-11/16 March 1995 3-5/8 2 June 1995 3-3/4 2-1/2 September 1995 3-9/16 2-5/8 December 1995 2-7/16 1-7/8
On March 24, 1997, the high and low prices for the Common Stock were $1 5/8 and $1 9/16, respectively. As of March 24, 1997, there were approximately 4,732 record holders of Sulcus' Common Stock. The Company has not paid cash dividends and does not presently contemplate paying cash dividends. 10 11 ITEM 6. SELECTED FINANCIAL DATA SULCUS COMPUTER CORPORATION Selected Financial Data The following table sets forth selected consolidated financial data of the Company for the five years ended December 31, 1992 through 1996. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere herein.
(Thousands, except per share data) Year ended December 31, -------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA Net sales $50,805 $44,693 $41,887 $47,346 $35,245 Dividends and other 1,340 1,291 1,256 1,937 1,385 ------- ------- ------- ------- ------- Total revenue 52,145 45,984 43,143 49,283 36,630 Cost of goods sold and services provided 23,354 18,965 20,588 23,085 15,418 Selling, general and administrative expenses 23,847 22,896 24,388 21,726 14,756 Research and development 1,398 1,199 1,597 1,878 2,342 Interest expense 571 598 556 403 242 Depreciation and amortization 1,589 1,520 2,158 2,034 960 Unrealized and realized (gain) loss on investments (1) (9) (1,462) 1,861 -- -- Unusual items (2) -- 3,434 3,663 3,207 -- Income taxes -- 203 -- -- 821 Income (loss) before extraordinary item and cumulative effect of accounting changes 1,395 (1,369) (11,668) (3,050) 2,091 Net income (loss) $1,395 ($1,369) ($11,668) ($3,050) $3,222 PER SHARE DATA Income (loss) per share before extraordinary item and cumulative effect of accounting changes $0.08 ($0.09) ($0.84) ($0.22) $0.17 Net income (loss) per share $0.08 ($0.09) ($0.84) ($0.22) $0.26 Weighted average shares used in computing net income (loss) per share 16,833 14,720 13,872 14,157 12,446 Cash dividends -- -- -- -- -- BALANCE SHEET DATA Working capital $11,349 $5,390 $4,183 $8,643 $10,615 Total assets 47,950 47,327 47,869 58,716 51,499 Long-term obligations 367 74 86 364 1,039 Stockholders' equity 27,318 22,894 23,087 33,373 33,489
(1) On June 5, 1995, the Company restructured its investment portfolio. As a result, under SFAS No. 115, the Company no longer reports unrealized gains or losses from the investment portfolio in its statement of earnings. (2) Unusual items include write-offs of assets of $514,694, $2,156,949 and $970,184 in 1995, 1994 and 1993, respectively, a write-off of goodwill of $1,256,000 in 1994 and provision of litigation settlements of $2,919,333, $250,000 and $2,237,310 in 1995, 1994 and 1993, respectively. 11 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 1996 AS COMPARED TO 1995 The Company had net income of $1,394,552 in the year ended December 31, 1996 as compared to a loss of ($1,368,956) in the year ended December 31, 1995 on sales which increased by $6,111,498 (14%) for these same periods. In 1995, the Company reported unrealized gains on its investment portfolio of $1,462,005 and expenses related to the write-off of assets ($514,694) and litigation settlement ($2,919,333). When eliminating these amounts for the purpose of comparability, the Company showed an improvement on earnings from $603,066 to $1,394,552, a change of $791,486. The Company's results for the year ended December 31, 1996 improved over those for the same period of 1995 primarily as a result of improvements in margins $1,723,224 partially offset by increases in selling, general and administrative costs ($950,880). Net sales for the year ended December 31, 1996 were $50,804,800, representing an increase of $6,111,498 (14%) when compared to net sales of $44,693,302 for the same period of 1995. Net system sales for the year ended December 31, 1996 were $31,721,534 as compared to $27,645,389 for the same period of 1995, an increase of $4,076,145 (15%) due primarily to increased sales of the Company's Point of Sale Systems and the delivery of systems under significant contracts by the Company's Singapore and Hong Kong sales offices. Support revenues for the year ended December 31, 1996 were $19,083,266 as compared to $17,047,913 for the same period of 1995, an increase of $2,035,353 (12%) due primarily to an increased base of Point of Sale installations in 1995 and 1996. Support revenues are billed and collected in advance for periods of one to twelve months and are recognized as support revenues ratably over the contract period. Sales by offices and distributors of the Company were $41,801,703 (82%) and $9,003,097 (18%), respectively, of net sales for the year ended December 31, 1996 as compared to $35,777,862 (80%) and $8,915,440 (20%) for the comparable 1995 period. Cost of goods sold for the year ended December 31, 1996 increased to $23,353,856 from $18,965,582, an increase of $4,388,274 (23%) from the comparable 1995 period. Cost of goods sold as a percentage of net sales increased for the year ended December 31, 1996 to 46%, as compared to 42% for the same period of 1995. Gross margins of the Company increased to $27,450,944 from $25,727,720, an increase of $1,723,224 (7%) over the same period of 1995, due primarily to increases in the Company's domestic point-of-sale systems which were partially offset by decreases in the margins of the domestic property management subsidiary. Cost of system sales for the year ended December 31, 1996 was $17,641,221 (56% of system sales) as compared to $14,351,669 (52% of system sales) for the same period of 1995, an increase of $3,289,552 (23%), due primarily to the mix of software and hardware sales. The cost of sale components for hardware sales is higher than that for software sales. Cost of support for the year ended December 31, 1996 was $5,712,635 (30% of support revenues) as compared to $4,613,913 (27% of support revenues) for the same period of 1995, an increase of $1,098,722 (24%). Selling, general, and administrative expenses increased in 1996 when compared to 1995. For the year ended December 31, 1996, these expenses were $23,846,876 as compared to $22,895,996 an increase of $950,880 (4%) from the same period of 1995. Selling, general, and administrative expenses as a percentage of net sales was 47% for the year ended December 31, 1996 as compared to 51% for the same period of 1995. The increase in selling, general and administrative expenses is primarily on the areas of payroll and related costs (approximately $880,000) and bad debt expense (approximately $280,000). Increases in payroll and related cost represent the expansion of the Company's distribution channels as well as increased expenses for the marketing and support of new products. Research and development expense for the year ended December 31, 1996 increased to $1,398,405 from $1,198,999 an increase of $199,406 (17%) over the same period of 1995. Total amounts expended on research and development (including amounts expensed and amounts capitalized) was $2,499,433 and $2,201,853 for 1996 and 1995, respectively. Depreciation and amortization expense for the year ended December 31, 1996 increased to $1,588,635 from $1,520,033 for the same period of 1995, an increase of $68,602 (5%). Dividends and other income for the year ended December 31, 1996 was $1,340,345 as compared to $1,290,691 for the same period of 1995, an increase of $49,654 (4%). Interest expense for the year ended December 31, 1996 decreased to $571,571 from $597,672 for the same period of 1995, a decrease of $26,101 (4%). 12 13 The Company had a net deferred tax asset amounting to $2,099,753, net of valuation allowances of $6,968,476 at December 31, 1996 and $10,534,223 at December 31, 1995. The valuation allowance was decreased in the year ended December 31, 1996 by $3,565,747 reflecting the Company's estimate of the valuation allowance necessary to reduce the net deferred tax asset to the net recoverable amount. As a result, the income statements for the year ended December 31, 1996 does not reflect any income tax provision on the pre-tax operating results for that period. The realizability of this deferred tax asset is contingent upon a number of factors including the ability of the Company to maintain a level of operations that will generate taxable income. Management believes that it is more likely than not that the Company will generate taxable income sufficient to realize a portion of the tax benefits associated with net operating losses and tax credit carryforwards prior to their expiration. This belief is based upon the actual results achieved in 1996 and the Company's view of expected profits in 1997 and the next several years. If the Company is unable to generate sufficient taxable income in the future through operating results, increases in the valuation allowance will be required through a non-cash charge to expense. However, if the Company achieves sufficient profitability to utilize a greater portion of the deferred tax asset, the valuation allowance will be reduced through a non-cash credit to income. 1995 AS COMPARED TO 1994 The significant improvement in 1995 when compared to 1994 is primarily the result of a 7% increase in sales and an improvement in gross margins of 8 percentage points, which together accounted for a $4,428,378 improvement in gross margins, a $1,492,214 reduction in selling, general and administrative expenses and $3,323,408 in portfolio unrealized market changes (from an unrealized loss of $1,861,403 in 1994 to an unrealized gain of $1,462,005 in 1995). During 1995, the Company settled certain shareholder litigation which resulted in provisions of $2,919,333 and wrote-off certain capitalized software development costs totaling $514,694 representing the end of the estimated useful lives of certain systems. Primarily as a result of the above, the Company's net loss in 1995 was ($1,368,956) as compared to a loss of ($11,668,013) in 1994. Net sales for the year ended December 31, 1995 were $44,693,302, representing an increase of $2,805,986 (7%) when compared to net sales of $41,887,316 for the same period of 1994. Net system sales for the year ended December 31, 1995 were $27,645,389 as compared to $25,893,783 for the same period of 1994, an increase of $1,751,606 (7%) due primarily to increased sales of the Company's Point of Sale Systems. Support revenues for the year ended December 31, 1995 were $17,047,913 as compared to $15,993,533 for the same period of 1994, an increase of $1,054,380 (7%) due primarily to an increased base of Point of Sale installations. Support revenues are billed and collected in advance for periods of one to twelve months and are recognized as support revenues ratably over the contract period. Sales by offices and distributors of the Company were $35,777,862 (80%) and $8,915,440 (20%), respectively, of net sales for the year ended December 31, 1995 as compared to $31,705,933 (76%) and $10,181,383 (24%) for the comparable 1994 period. Cost of goods sold for the year ended December 31, 1995 decreased to $18,965,582 from $20,587,974, a decrease of $1,622,392 (8%) over the comparable 1994 period. As a consequence, cost of goods sold as a percentage of net sales improved for the year ended December 31, 1995 to 42%, as compared to 50% for the same period of 1994. Gross margins of the Company increased to $25,727,720 from $21,299,342, an increase of $4,428,378 (21%) over the year ended December 31, 1994. Cost of system sales for the year ended December 31, 1995 was $14,351,669 (52% of system sales) as compared to $15,078,349 (58% of system sales) for the same period of 1994, a decrease of $726,680 (5%), due primarily to the mix of software and hardware sales and the ability of the Company to control hardware costs. Cost of sales is also lower in 1995 as compared to 1994 because 1994 included amortization of $358,500 related to certain capitalized software development costs written-off in 1994. Cost of support for the year ended December 31, 1995 was $4,613,913 (27% of support revenues) as compared to $5,509,625 (34% of support revenues) for the same period of 1994, a decrease of $895,712 (16%), primarily as the result of the Company's ability to control such costs. Selling, general, and administrative expenses decreased in 1995 when compared to 1994. For the year ended December 31, 1995, these expenses were $22,895,996 as compared to $24,388,210 a decrease of $1,492,214 (6%) over the same period of 1994. Selling, general, and administrative expenses as a percentage of net sales decreased to 51% for the year ended December 31, 1995, a 7 percentage point decrease from the year ended December 31, 1994. The reduction in expense is primarily in the areas of bad debts on accounts receivable ($770,000), payroll related costs ($218,000) and travel related expenses ($140,000). Reduction in bad debt expense is the result of changes in Company procedures in extending credit and collections. Research and development expense for the year ended December 31, 1995 decreased to $1,198,999 from $1,596,515, a decrease of $397,516 (25%), as compared to the year ended December 31, 1994. Total amounts expended on research and development (including amounts expensed and amounts capitalized) was $2,201,853 and $3,153,403 for the years ended December 31, 1995 and 1994, respectively. Management believes that these reduced expenditures do not negatively impact the Company's competitive position in the marketplace. The Company continuously evaluates the anticipated future sales of the software systems, and concluded, during the fourth quarter of 1995 that certain systems would have only nominal future sales and, therefore, should be written-off. This write-off (recorded in the fourth quarter of 1995) amounted to $514,694 and is reported in the income statement as a separate component of expenses. In 1994, the Company wrote-off $1,820,246 related to capitalized software costs. 13 14 Depreciation and amortization expense for the year ended December 31, 1995 decreased to $1,520,033 from $2,157,857 for the same period of 1994, a decrease of $637,824 (30%). In 1994, the Company wrote-off certain goodwill associated with the Company's Hong Kong and Singapore subsidiaries which resulted in a $344,000 reduction in 1995 goodwill amortization when compared to that of 1994. Dividends and other income for the year ended December 31, 1995 was $1,290,691 as compared to $1,255,848 for the same period of 1994, an increase of $34,843 (3%), due primarily to higher average invested balances. Interest expense for the year ended December 31, 1995 increased to $597,672 from $556,269 for the same period of 1994, an increase of $41,403 (7%) due to higher outstanding borrowings. During 1995, the Company made a provision for the settlement of a shareholder class action suit and increased the estimated cost of the 1993 settlement of a previous shareholder action. On December 27, 1995, the Company settled with the plaintiffs in the action known as IN RE: Sulcus Computer Corporation Securities Litigation, II. This settlement provided for a settlement fund of $800,000 in cash and 1,400,000 Sulcus Common Shares having a value of $2,800,000 at the time of settlement. The cash portion of the settlement was paid by insurance ($666,000) and the Company ($134,000). The Company issued the shares to the settlement fund on December 31, 1996. At December 31, 1995, the Company recorded a provision of $2,861,118 which, together with amounts accrued in 1994, represents costs which the Company expects to incur in connection with this settlement. Additionally, in connection with the conclusion of the 1993 settlement action known as IN RE: Sulcus Computer Corporation Securities Litigation, the Company incurred costs of $58,215 in addition to those previously accrued. During 1995, the Company recorded tax expense of $202,645, representing an estimate of current and deferred taxes, attributable to that year. These taxes were incurred in jurisdictions where loss carryforwards are not available. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity is dependent upon its ability to generate sufficient working capital through profitable operations. Management believes that in order to sustain profitability, it must continue to increase sales and improve productivity related to selling, general and administrative expenses. In order to increase sales, the Company believes that it must increase its distribution channels and introduce additional developed or acquired competitive products in its current market segment. Current short-term capital needs will be funded primarily through internal working capital and anticipated operating revenues from new sales, continuing and new support services revenue, and a backlog of orders received and pending. The Company has no significant unused lines of credit at December 31, 1996. To date, bank credit lines have not been a significant component of the Company's liquidity and capital resources. At December 31, 1996, Sulcus' cash and cash equivalents increased to $2,503,475 from $1,202,325 at December 31, 1995, an increase of $1,301,150. This increase is primarily the result of increased profitability experienced by the Company in 1996 as compared to 1995 and 1994. Since the Company operates in a number of countries, cash and cash equivalents are maintained by the various operating subsidiaries in the local currencies of these countries for the purpose of paying expenses as they are due. The Company maintains a portfolio of short-term investments (primarily in the form of preferred stocks) which may be used for the purpose of providing liquidity. At December 31, 1996, the Company's short-term investment portfolio, valued at market, was $12,393,411. These investments are subject to risk, most notably the risk that the market value of these assets will decline as the result of general market fluctuations, increases in interest rates or changes in the underlying operations of the investee. Company policy does not require temporary investments to be investment grade as determined by a nationally recognized statistical rating organization nor does it require that such investments have any additional safety feature such as insurance. Through the first five months of 1995, the Company maintained its investment philosophy of actively buying and selling investments with the objective of generating profits of short-term differences in price ("Trading"). Management sold a portion of these investments in May and June of 1995 and invested the proceeds of these sales in securities which will be held for the generation primarily of dividend and interest income ("Available for Sale"). Additionally, the remaining investments were reclassified in 1995 from Trading to Available for Sale. The Company had borrowings at December 31, 1996, of $5,826,577, on margin against its investments at the brokers internally established floating interest rate which was 7.875%. At December 31, 1996, accounts receivable increased to $12,995,894. The Company's gross accounts receivable includes hardware and software support contracts as well as amounts due on system installations. The Company records a provision for amounts which it estimates may ultimately be uncollectible from customers. The allowance for uncollectible accounts decreased at December 31, 1996 to $1,913,107 as compared to $2,581,020 at December 31, 1995, due to write-offs of accounts receivable. 14 15 The Company purchases computer hardware and other equipment from vendors under open accounts payable for the purpose of including these items in systems sold to customers. Hardware and equipment are readily available in the marketplace and therefore it is not necessary for the Company to maintain large quantities of inventories to meet customer needs. Inventories of computers, computer components and computer peripherals increased to $2,614,321 at December 31, 1996. Accounts payable decreased to $3,947,597 at December 31, 1996. The Company leases facilities under operating lease agreements of varying terms. Properties and equipment consist primarily of leasehold improvements and equipment used in the conduct of business. Property and equipment, net of accumulated depreciation and amortization, increased to $2,473,324. In addition to borrowings on margin against its investments, the Company has outstanding long-term borrowings from financial institutions. At December 31, 1996, the Company had no short-term borrowings (excluding borrowings under margin). At December 31, 1996, the Company had long-term borrowings (including current and noncurrent portions) of $366,995, primarily a result of new capitalized lease obligations for equipment. The backlog of hardware and software orders at December 31, 1996 is expected to be filled within one year and amounted to $4,911,000. The Company's ability to develop and expand its presence in the hospitality industry and expand existing business lines for its other markets depends, in a large part, on the availability of adequate funds. Cash flow has been favorably impacted during the past year by improving sales and profitability. These funds have generally been used to provide the Company with the ability to finance additional receivables from customers, to reduce levels of accounts payable, to fund the development of the Company's software products, to fund capital expenditures and to repay short-term borrowings. Management expects that to meet customer needs, it must continue to increase levels in inventories for the Company's manufactured point-of-sale products and continue to invest in the development of the Company's software products at levels consistent with those of the past two years. To finance these needs, the Company will rely primarily on operating cash flow over the next several years together with currently available working capital. On a longer term basis, the Company is working with financial institutions to develop relationships which will be used, in part, to provide working capital facilities which will be utilized in the Company's operations. Nonetheless, if technological changes render Sulcus' products uncompetitive or obsolete, or, if the Company incurs operating losses, additional capital may be required. There can be no assurance that any financing will be available when needed, or, if available, that it can be obtained on terms satisfactory to the Company. In furtherance of the Company's strategy of acquisition of computer software products or companies that complement or expand existing business lines, the Company intends to continue its efforts to acquire additional businesses or software products and/or to create joint ventures related to existing businesses for this purpose. The Company currently has no plans, agreements or commitments for any such transactions and is not currently engaged in any active negotiations with respect to any such transactions. There can be no assurance that the Company will be able to acquire companies or software products on a favorable basis. The resignation of the Company's former Chairman resulted in a severance obligation of approximately $1,050,000. The intent is for the obligation to be paid monthly over a 36-month period, however, the former Chairman may elect a lump sum distribution. The Company's former Chairman disagrees as to the interpretation of the amount due to him under the termination provisions and the parties are continuing to negotiate to reach a settlement. Certain lawsuits arising in the ordinary course of business are pending against the Company and its subsidiaries. The Company believes that the ultimate outcome of these actions will not result in a material adverse effect on the Company's consolidated financial position, results of operations and liquidity. FORWARD-LOOKING STATEMENTS The foregoing discussion and the Company's consolidated financial statements contain certain forward-looking statements that involve risks and uncertainties, including the following: (i) risks relating to the expansion of the Company's business, both domestically and internationally, including risks associated with cash flow problems, management of diverse operations and the political and economic stability of particular countries in which the Company has international operations, (ii) the need for additional capital to fund the development and expansion of the Company's presence in the hospitality industry and to expand its existing business lines in other markets, (iii) rapidly changing technology, accelerated product obsolescence and rapidly changing 15 16 industry standards in the market for the Company's products, resulting in the need to update products and introduce new products and services in a timely manner to meet evolving customer requirements, (iv) intense competition by a large number of competitors, many of which have greater financial, technical, marketing and other resources and larger installed customer bases than the Company, (v) discounting of prices with no decrease in the cost of providing systems and services as a result of the intense competition, (vi) the need to attract, hire, train and retain qualified managerial, technical and sales and marketing personnel, and (vii) variation in the Company's operating results such that past operating results and period-to-period comparisons should not be relied upon as an indication of future performance. As a result, the Company's actual results could differ materially from the results discussed in the forward-looking statements. 16 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements and the Report of Independent Auditors thereon are listed under Item 14(a) (1) of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE None 17 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of Sulcus are as follows:
Name Age Position Robert D. Gries 67 Acting Chairman of the Board and Director (1) David H. Adler 53 Director (1) Leon D. Harris 58 Chief Executive Officer and Director Jeffrey S. Ratner 54 Director John W. Ryba 52 General Counsel and Vice President, Administration H. Richard Howie 42 Chief Financial Officer, Principal Accounting Officer and Treasurer Margaret Santone 55 Corporate Secretary William F. McLay 50 Managing Director Barry Logan 47 Vice President, General Manager, Restaurant Division of Sulcus Hospitality Group Bernhard Mantel 43 Vice President, Operations, Sulcus Hospitality Group EMEA, AG Jappe Kjaer 41 President, Sulcus Scandinavia AS Thomas Caudill 54 Vice President, General Manager, Lodging Division of Sulcus Hospitality Group Gerry Lau 57 Chairman, Sulcus Hospitality Limited
(1) Member of Audit Committee. Each director is elected for a period of one year at the Company's annual meeting of Stockholders and serves until his successor is duly elected by the Stockholders. Officers are appointed and serve at the will of the Board of Directors subject in certain cases to the terms of employment agreements. ROBERT D. GRIES has been a Director of the Company since 1983. He became the Acting Chairman of the Board of Directors on March 3, 1997. Since 1964, Mr. Gries has been President of the Gries Companies which engages in venture capital financing. From 1966 to 1995 he was Vice President, director and a principal shareholder of the Cleveland Browns Football Company, Inc., a National Football League team. DAVID H. ADLER was appointed a Director of the Company in August 1993. Mr. Adler has been Chief Executive Officer and majority shareholder of a group of privately-owned companies since 1985, including the Adler Financial Group, David H. Adler Real Estate Enterprises and PEBECO (Pennsylvania Bedding Incorporated) of Scranton, Pennsylvania, a manufacturer of King Koil and other private labeled mattresses and sleep products. LEON D. HARRIS was appointed a Director of the Company in November 1996 and Chief Executive Officer on March 3, 1997. Since August 1993, he has been President of Physalia Corporation, a consulting group functioning in the computer systems/technology market. From 1985 to 1993, Mr. Harris was President/CEO of Olivetti USA, the American subsidiary of the Italian office equipment/systems company. JEFFREY S. RATNER is a co-founder of the Company and served as Chief Executive Officer from the Company's inception in 1979 to September 1995 and Chairman of the Board of Directors since the Company's inception in 1979 to February 1997. Since 1975, Mr. Ratner has owned Ratner Real Estate and Ratner Development Corporation and is the Chief Executive Officer and Chairman of the Board of both companies. In 1992, he became Chief Executive Officer and Chairman of the Board of City Rentals, Inc., and is its sole shareholder. These companies purchase, develop, lease and manage commercial and residential real estate. On May 2, 1996, Mr. Ratner entered into an agreement with the Securities and Exchange Commission, without admitting or denying any wrongdoing, which provides that he would not in the future violate certain sections of the Exchange Act and Rules thereunder. JOHN W. RYBA joined the Company in September 1987 as its General Counsel and is presently its General Counsel and Vice President, Administration. Mr. Ryba was elected a director in May 1989 and resigned as a director in February 1997. Mr. Ryba was engaged in the private practice of law in Pittsburgh, Pennsylvania, from 1984 until joining the Company. His firm represented computer software and hardware companies. 18 19 H. RICHARD HOWIE joined the Company in July 1994 as Chief Financial Officer/Vice President-Finance and Treasurer. Previously, from January 1994 to June 1994, he was Chief Financial Officer at Central Blood Bank, Inc. From 1987 to November 1993, he was Vice President Finance and Chief Financial Officer of Stuart Medical, Inc., a nationwide hospital distributor of medical and surgical supplies. MARGARET SANTONE joined the Company in 1979 as Corporate Secretary. From 1975 to the present, she has also served as the Corporate Secretary of Ratner Development Corporation, Ratner Real Estate and City Rentals, Inc. Ms. Santone does not devote substantial time to these companies. WILLIAM F. MCLAY joined the Company in 1990 as its Chief Financial Officer until January 1991, when he left to serve as a Financial Advisor to Foster Industries, Inc. through 1992. Mr. McLay rejoined the Company in 1993, as Director of Corporate Planning and Development, later becoming Managing Director. BARRY LOGAN has served as the Vice President, General Manager-Restaurant Division of Sulcus Hospitality Group since 1994. He joined the Company as Vice President of Research and Development of Squirrel at the time of its acquisition by the Company in March 1992. Prior thereto, he was responsible for the evolution of the Squirrel product line from its inception in 1984. Prior to joining Squirrel in November 1984, he developed a time sharing system operation and has been involved in a variety of computer-oriented organizations since 1972. BERNHARD MANTEL joined the Company following the acquisition of its subsidiary, Techotel, Inc. in January 1993, as the Managing Director of Techotel, Inc. (now Sulcus Hospitality Group EMEA, AG) and Lodgistix (International), AG, a wholly-owned subsidiary of Techotel. From 1983 until joining Sulcus, he founded Techotel, Inc. ("Techotel") and Lodgistix (International), AG and served in the same capacities for each. He also serves as a Director of Techotel's subsidiary Lodgistix U.K. Ltd. (since its inception in 1987). JAPPE KJAER joined the Company in January 1994, as President of the Company's subsidiary, Sulcus Scandinavia A/S (formerly Lodgistix Scandinavia A/S), upon its acquisition by Sulcus. Mr. Kjaer founded Lodgistix Scandinavia A/S, a Lodgistix distributor in Norway, Sweden, and Denmark, in 1987, and served as its General Manager. THOMAS CAUDILL has served as the Vice President, General Manager--Lodging Division of Sulcus Hospitality Group since 1994. Previously he had been Vice President Sales-Eastern Region. Prior to joining the Company, from 1986 to 1993, he was a Director of Sales for Covia, a partnership of seven airlines, which developed and marketed the Apollo reservation system. GERRY LAU joined the Company in February 1995 as Chairman of Sulcus Hospitality Limited. Prior thereto, Mr. Lau served as a Managing Director of Data General Corporation (NYSE:DGN), from March 1994 until February 1995, as a partner of TASA International (a Swiss consulting firm), from 1993 to March 1994, and as Group Managing Director of Innovest Systems and Services Private Limited, from 1986 to 1993. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of the Company's common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC") and the American Stock Exchange. Such persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Company, or written representation that no other reports were required, the Company believes that during 1996 all Section 16(a) filing requirements applicable to its officers and directors were complied with. 19 20 ITEM 11. EXECUTIVE COMPENSATION The following tables present certain information concerning the cash compensation and stock options provided to the named executive officers during the years ended December 31, 1996, 1995 and 1994. SUMMARY COMPENSATION TABLE The following table reflects the total compensation paid during 1996, 1995 and 1994, for services in all capacities to the Company by the Chairman and each of the other four most highly compensated executive officers of the Company during 1996 (the "Named Officers").
Annual Compensation Long Term Compensation ------------------- ---------------------- Awards Securities Name and Underlying Principal Other Annual Options/SARs Position Year Salary($) Bonuses($) Compensation(s) (#) Jeffrey Ratner 1996 350,000 -- 57,000 (1) 200,000 Chairman 1995 350,000 -- -- -- 1994 313,500 -- -- -- Joel Nagelmann 1996 200,000 21,233 -- 11,324 President 1995 135,600 33,107 -- 215,579 1994 -- -- -- -- H. Richard Howie 1996 120,000 -- -- 36,000 Chief Financial 1995 120,000 -- -- -- Officer 1994 55,000 -- -- 30,000 William F. McLay 1996 120,000 -- -- 20,000 Managing 1995 120,000 -- -- 20,000 Director 1994 75,000 -- -- 60,000 Barry Logan 1996 108,158 22,250 -- 10,303 V.P. of Sulcus 1995 113,925 -- -- -- Restaurant Div. 1994 95,833 -- -- 95,000
(1) Includes amount for unused vacation ($54,000) and travel and other business expenses incurred under the terms of an employment agreement. 20 21 OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table summarizes the aggregate amount of shares subject to stock options granted, for the period January 1, 1996, through December 31, 1996, to the Chairman and each of the Named Officers. No gain on these options will be realized by the Named Officers without an increase in the price of Company Common Stock from the date of grant, which will benefit all stockholders proportionately.
Individual Grants ----------------- Number of Potential Realizable Value Securities % of Total at Assumed Annual Rates Underlying Options Exercise of Stock Price Appreciation Options/ Granted to or Base for Option Individual Grants SARS Employees Price Expiration ---------------------------- Name Granted in 1996 ($/Sh) Date 5%($)(1) 10%($)(1) - ---- ------- ------- ------ ---- -------- --------- Jeffrey S. Ratner(2) 200,000 51% $2.4375 01/01/01 $134,687 $297,624 Joel Nagelmann 11,324 3% 1.875 01/01/01 5,866 12,976 H. Richard Howie(2) 36,000 9% 2.4375 01/01/01 24,244 53,572 William F. McLay 20,000 5% 1.9375 01/01/01 10,706 23,657 Barry Logan 10,303 2% 2.0625 01/01/01 5,871 12,973
(1) The calculation of potential realizable values are based on theoretical and arbitrary rates of appreciation in the price of Company Common Stock from the date of grant of five and ten percent for the option terms, are mandated by the rules of the United States Securities and Exchange Commission and may or may not accurately reflect or predict the actual values of the stock options. (2) On March 25, 1996, the Company canceled 200,000 options granted to Mr. Ratner and 30,000 options granted to Mr. Howie and granted new options of 200,000 options to Mr. Ratner and 36,000 options to Mr. Howie at new exercise prices. The original exercise price was $5.125 for Mr. Ratner's options and $3.375 for Mr. Howie's. The new exercise price is $2.4375 for both, which was the fair market value of the Company's Common Stock on that date. At the date of repricing, the unexpired term of the original options were six years for Mr. Ratner and eight years for Mr. Howie. 21 22 AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES The following table sets forth information concerning the net value realized on the exercise of stock options in 1996 by the Chairman and each of the Named Officers as of December 31, 1996.
Number of Securities Underlying Value of Unexercised Unexercised In-the-Money Options/SARs Options/SARs at 12/31/96 at 12/31/96 ($)(1) Shares Acquired Value Realized Exercisable/ Exercisable/ Name on Exercise ($) Unexercisable Unexercisable Jeffrey S. Ratner 0 0 50,000/150,000 $0/$0 Joel Nagelmann 0 0 87,789/127,790 $0/$0 H. Richard Howie 0 0 7,200/28,800 $0/$0 William McLay 0 0 48,000/52,000 $500/$2,000 Barry Logan 0 0 65,924/36,000 $0/$0
(1) The value of unexercised, in-the-money options is the difference between the exercise price and the fair market value of Company Common Stock at December 31, 1996, which was $2.0625. COMPENSATION OF DIRECTORS Directors who are not officers or employees of the Company ("Outside Directors") are reimbursed for their direct expenses incurred in attending a meeting. In addition, pursuant to the Company's Amended and Restated 1991 Stock Option Plan for Directors (the "Directors Plan"), the Company has reserved 1,000,000 shares of its Common Stock for Directors (including Directors who are officers or employees) of the Company or any of its subsidiaries. A committee is charged with authority to administer the Directors Plan, to award options, determine the option exercise price (at a price not less then the fair market value of the Common Stock when granted) and fix the vesting schedule and other terms thereof. Jeffrey S. Ratner and one other executive officer served on this committee in 1996. During 1996, 75,000 options were awarded under the Directors Plan to David H. Adler and Leon D. Harris. 22 23 EMPLOYMENT ARRANGEMENTS The Company entered into an employment agreement with each of Messrs. Ratner and Ryba in August 1994. Among other things, each agreement provides that if the executives' employment is terminated after a change in control of Sulcus, he may receive, under the agreement, certain benefits including monthly salary payments and acceleration of portions of unexercised stock options. On February 24, 1997, the Company's Chairman gave notice to the Company of termination of his employment agreement. Termination provisions of his employment agreement resulted in a severance obligation of approximately $1,050,000. The intent is for the obligation to be paid monthly over a 36-month period, however, the former Chairman may elect a lump sum distribution. The Company's former Chairman disagrees as to the interpretation of the amount due to him under the termination provisions and the parties are continuing to negotiate to reach a settlement. H. Richard Howie joined the Company in July 1994, as Chief Financial Officer pursuant to an employment agreement providing for an annual salary of $120,000. Mr. Howie was granted an option to purchase 30,000 shares of Company Common Stock at a price of $3.375 per share. These options were canceled and new options for 36,000 shares were granted on March 25, 1996, at a price of $2.4375, twenty percent of which were immediately exercisable and the rest vesting over four years at twenty percent per year beginning in March 1997. This employment agreement can be terminated by the Company or Mr. Howie on 14 days notice without cause. On March 10, 1997, Mr. Nagelmann resigned and his employment agreement was terminated. The Company will continue to pay Mr. Nagelmann his monthly salary of $16,667 until April 17, 1998, and he will retain all stock options granted and may exercise them in accordance with their terms until March 10, 1999. A loan in the amount of $65,485 has been forgiven. All other loans made to Mr. Nagelmann have been repaid in full by him. Agreements between the Company and Mr. Nagelmann regarding non-disclosure of trade secrets and confidential information and non-compete and other similar covenants remain in effect. In March 1997, Leon Harris was elected as the Company's Chief Executive Officer. Mr. Harris has entered into an employment agreement with the Company providing for an annual salary of $225,000. Mr. Harris is entitled to receive annual bonuses (ranging from 3% to 5% of the annual after-tax earnings) as of December 31 in each year of his employment, commencing in 1997, subject to certain limitations, payable one-half in cash and one-half in stock options. These bonus options vest one-half on the date of grant and one-half one year later. Mr. Harris also was granted an option to purchase 250,000 shares of the Company's common stock at $1.625 per share vesting over five years at 20 percent per year beginning March 4, 1997. Mr. Harris may retain all options granted and all other rights for two years if his employment is terminated without cause. The Company's employment agreements impose non-competition and confidentiality obligations and provide for the assignment to the Company of all rights to any technology developed by the executive during the term of his employment. The Company has or is obtaining "key man" insurance policies in the face amount of $200,000 on the life of Mr. Howie and $500,000 on the life of Mr. Harris under which the Company is, in each case, the beneficiary. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The following persons participated in compensation decisions made during 1996: Jeffrey S. Ratner, John W. Ryba, Herbert G. Ratner, Robert D. Gries and David H. Adler. There are no interlocking relationships, as defined in the regulations of the Securities and Exchange Commission, involving any of these individuals. See "Certain Relationships and Related Transactions" for a description of certain transactions entered into by the Company and Jeffrey S. Ratner. 23 24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of March 24, 1997, with respect to shares of Common Stock of the Company beneficially owned by each Director and by all officers and Directors as a group, and by persons known to the Company to be beneficial owners of more than 5% of Company Common Stock. As of such date, 16,752,032 shares of Common Stock were outstanding.
Directors, Officers and Number of Shares 5% Shareholders Beneficially Owned Percentage of Class Jeffrey S. Ratner 1,100,000 (1) 7% 41 North Main Street Greensburg, PA 15601 Robert D. Gries 55,000 (2) * David H. Adler 68,500 (3) * Leon D. Harris 59,100 (4) * John W. Ryba 72,000 (5) * H. Richard Howie 14,400 (6) * William F. McLay 67,175 (7) * Margaret Santone 8,420 (8) * Barry Logan 66,824 (9) * Bernhard Mantel 188,502 (10) 1% Jappe Kjaer 101,144 (11) * Thomas Caudill 16,000 (12) * Gerry Lau 0 * All Directors and executive officers as a group. (13 persons) 1,817,065 11%
(1) 1,000,000 of these shares were transferred in 1993 to an Irrevocable Trust established by Mr. Ratner as Settlor for the benefit of himself, his wife and his children. Mr. Ratner does not have or share investment control but retains voting control with respect to shares of the Company. The Trustee is an independent Trustee unaffiliated with Mr. Ratner or any other beneficiary and has the discretionary power to allocate the shares of the Company in the Trust, or any proceeds from the sale of any such shares, in an amount to be determined by the Trustee in its sole discretion. Mr. Ratner disclaims beneficial ownership with respect to any shares held in such Trust which may be allocated by the Trustee for the benefit of any beneficiary of the Trust other than Mr. Ratner. Includes 100,000 shares subject to a currently exercisable option.** (2) Includes 25,000 shares currently owned of record and 30,000 shares subject to a currently exercisable option.** (3) Includes 6,000 shares owned of record and 62,500 shares subject to a currently exercisable option.** (4) Included 9,100 shares owned of record and 50,000 shares subject to a currently exercisable option.** (5) Includes 72,000 shares subject to currently exercisable options.** (6) Includes 14,400 shares subject to a currently exercisable option.** (7) Includes 15,175 shares currently owned of record and 52,000 shares subject to currently exercisable options.** (8) Includes 20 shares currently owned of record and 8,400 shares subject to a currently exercisable option.** (9) Includes 900 shares currently owned of record and 65,924 shares subject to currently exercisable options.** (10) Includes 188,502 shares currently owned of record. (11) Includes 89,144 shares currently owned of record and 12,000 shares subject to a currently exercisable option.** 24 25 (12) Includes 16,000 shares subject to a currently exercisable option.** * Less than 1% issued and outstanding. ** A currently exercisable option is one which is exercisable within 60 days from the date hereof. 25 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Leon Harris, Chief Executive Officer and Director of the Company is the President and owner of Physalia Corporation. In April 1996 Physalia Corporation entered into a management contract with Radix Systems, Inc. a subsidiary of the Company, to provide management and operating services related to document conversion activities. The contract provided for the payment by Radix of a set monthly fee, variable commissions calculated as a percent of Radix' gross sales, bonus and reimbursement of out-of-pocket expenses. At the year ended December 31, 1996, payments of $82,563 were made to Physalia. In accordance with its terms, the contract will terminate on March 31, 1997. In September 1993, the Company loaned Mr. Bernhard Mantel $500,000, pending the registration of the stock of the Company issuable to Mr. Mantel under terms of the agreement for the purchase of Techotel. Mr. Mantel was the principal shareholder of Techotel and remains its Managing Director. The note was intended to be repaid upon the registration by the Company for the stock issuable to him. Based upon the nature of the note, it has been reflected as a reduction of equity. In May 1996, the Company and the former shareholder of Techotel agreed to the repayment of the note through the cancellation of 200,000 shares issuable under the Purchase Agreement. Sulcus' principal executive, and administrative operations are located at Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601, in a facility containing approximately 10,000 square feet. Sulcus leases this building under several leases, with a trust established by Sulcus' principal stockholder and Director, Jeffrey S. Ratner, expiring on various dates through September 30, 2001. Rent expense under these agreements was $233,687; $225,391; and $185,251 for the years ended December 31, 1996, 1995 and 1994, respectively. The annual rental commitment under these leases are $150,388 in 1997, $99,051 in 1998 and $91,269 in 1999, $95,823 in 2000, and $74,520 in 2001. The leases renew automatically for additional two-year terms at a minimum rental rate of 2% over the prior year's amount, unless canceled by either party. While these leases were not the result of arms length negotiations the Company believes that the aggregate rental commitment is similar to comparable properties in the area. 26 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS * REPORTS OF INDEPENDENT AUDITORS * CONSOLIDATED BALANCE SHEETS - Years Ended December 31, 1996 and 1995 * CONSOLIDATED STATEMENTS OF OPERATIONS - Years ended December 31, 1996, 1995 and 1994 * CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years ended December 31, 1996, 1995 and 1994 * CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended December 31, 1996, 1995 and 1994 * NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. FINANCIAL STATEMENT SCHEDULES ATTACHED HERETO ARE AS FOLLOWS: Statement Regarding Computation of Per Share Earnings Schedule VIII - Valuation and Qualifying Accounts All other Schedules are omitted since the required information is not present in amount sufficient to require submission of the Schedules, or because the information is included in the Consolidated Financial Statements and Notes thereto. 3. EXHIBITS INDEX 1(a) Form of Underwriting Agreement # (b) Form of Agreement Among Underwriters * (c) Form of Selected Dealers Agreement * (2)(a) Agreement and Plan of Reorganization between Lodgistix and Sulcus. ** (a)(i) Amendment 1. to Agreement and Plan of Reorganization. ** (ii) Amendment 2. to Agreement and Plan of Reorganization. ** (b) Agreement of Merger between Lodgistix and Sulcus. ** (b)(i) Amendment 1. to Agreement of Merger. ** (b)(ii) Amendment 2. to Agreement of Merger. ** (c)(i) Certificate of Merger - Delaware *** (c)(ii) Certificate of Merger - Kansas *** (d) Stock Purchase Agreement among Sulcus, Squirrel and shareholders of Squirrel **** (e) Stock Purchase Agreement and Plan of Reorganization among Sulcus, NRG and shareholders of NRG **** (f) Stock Purchase Agreement among Sulcus, JBA and shareholders of JBA ++ (g) Stock Purchase Agreement among Sulcus, Techotel and shareholders of Techotel ***** (h) Stock Purchase Agreement among Sulcus, Lodgistix Scandinavia and shareholders of Lodgistix Scandinavia ******* 27 28 (3)(a) Articles of Incorporation + (b) Certificate of Amendment to Articles of Incorporation + (c) Form of Proposed Amendments to Articles of Incorporation *** (c)(i) Form of Proposed Amendment to Preferred Stock Provisions of Articles of Incorporation # (d) By-Laws * (4)(a) Form of Common Stock Certificate + (a)(i) Form of Class A Warrant Certificate # (b) Form of Underwriter's Warrant X (c) Form of Warrant Agreement # (d) Form of Preferred Stock Certificate # (e) Form of Class B Warrant *** (f) Form of Class B Warrant Agreement *** (10)(a) Incentive Stock Option Plan, as amended * (a)(i) Form of 1991 Incentive Stock Option Plan *** (b) Director's Stock Option Plan * (b)(ii) Form of 1991 Directors Stock Option Plan *** (c) Form of Incentive Stock Option Agreement * (d) Form of Directors Stock Option Agreement * (h) Management Agreement between Hospitality Management Systems, Inc. and CompuSolv, Inc., dated March 1, 1989 * (i) Exclusive License Agreement between Hospitality Management Systems, Inc. and CompuSolv, Inc., dated July 14, 1989 * (j) Form of Distributor Agreement * (l) Form of Reseller Agreement (Software) * (n) Form of Support, Maintenance & Enhancement Agreement * (o) Form of Hardware Service Agreement * (x) Form of Purchase/License Agreement between Hospitality Management Systems, Inc. and Purchaser * (y) Lease for premises at 41 N. Main Street, Greensburg, PA * (viii) Employment Agreement with Jeffrey S. Ratner ******** (viii)(a) Amendment to Employment Agreement with Jeffrey S. Ratner ********* (ix) Employment Agreement with John W. Ryba ******** (x) Employment Agreement with Delmer C. Gowing, III ******** (xi) Employment Agreement with H. Richard Howie ******** (xiii) Employment Agreement with Joel Nagelmann ********** (aa) Citibank Agreement * (bb) Radix Agreement ** (cc) Agreement with Horwath International # # (11) Statement RE: Computation of Per Share Earnings
+ Incorporated by reference to Form S-18 Registration Statement (No. 2-91055-W) of Registrant filed on May 10, 1984. ++ Filed with Amendment No. 1 to Registration Statement 33-48682 filed on June 16, 1992. +++ Filed with Amendment No. 2 to Registration Statement 33-48682 filed on June 16, 1992. ++++ Filed with Amendment No. 3 to Registration Statement 33-48682 filed on June 16, 1992. * Incorporated by reference to Form S-1 Registration Statement (No. 33-32469) of Registrant filed on December 7, 1989. 28 29 ** Incorporated by reference to Form S-4 Registration Statement (No.33-37923) of Registrant filed on November 23, 1990. *** Incorporated by reference to Form 10-K Annual Report (No. 0-13226) filed on May 15, 1994. **** Incorporated by reference to Form 8-K current report for March 1992. ***** Incorporated by reference to Form 8-K current report for February 1993. ******* Incorporated by reference to Form 8-K current report for November 1993. ******** Incorporated by reference to Form S-1 Registration Statement (No. 33-85244), filed on October 14, 1994. ********* Incorporated by reference to Amendment No. 1 to Form S-1 Registration Statement (No.33-85244), filed on January 19, 1995. ********** Incorporated by reference to Form 10-K Form 10-K Annual Report (No. 0-13226) filed on April 15, 1996. # Incorporated by reference to Amendment No. 3 to Form S-1 Registration Statement (No. 33-85244), filed on July 29, 1996. ## Incorporated by reference to Amendment No. 5 to Form S-1 Registration Statement (No. 33-85244), filed on October 23, 1996.
29 30 22. SUBSIDIARIES OF SULCUS COMPUTER CORPORATION Sulcus Investment Corporation Delaware Sulcus Law Management Services, Inc. Maryland Sulcus Hospitality Group, Inc. Pennsylvania Radix Systems, Inc. Pennsylvania Lodgistix, Inc. Delaware Sulcus (Australia) Pty. Ltd. Australia Squirrel Companies, Inc. Georgia Squirrel Companies of Canada, Ltd. Canada NRG Management Systems, Inc. Texas Sulcus Hospitality Limited Hong Kong Sulcus Singapore, Pte. Ltd. Singapore Sulcus (Malaysia) SDN BHD Malaysia Sulcus Hospitality Group EMEA, AG Switzerland Sulcus (International) AG Switzerland Sulcus UK United Kingdom Sulcus Scandinavia, A.S. Scandinavia 30 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Greensburg, Commonwealth of Pennsylvania, on March 27, 1997. SULCUS COMPUTER CORPORATION By: /s/ LEON HARRIS ------------------------------------------------------ Leon Harris Chief Executive Officer and Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on March 27, 1997.
Signature and Title Date ------------------- ----- /s/ LEON D. HARRIS March 27, 1997 - ------------------------------------------- -------------- Leon D. Harris, Director, Chief Executive Officer and Principal Executive Officer /s/ ROBERT D. GRIES March 27, 1997 - ------------------------------------------- -------------- Robert D. Gries, Acting Chairman of the Board and Director - ------------------------------------------- -------------- Jeffrey S. Ratner, Director /s/ DAVID H. ADLER March 27, 1997 - ------------------------------------------- -------------- David H. Adler, Director /s/ H. RICHARD HOWIE March 27, 1997 - ------------------------------------------- -------------- H. Richard Howie, Chief Financial Officer and Chief Accounting Officer
31 32 [CROWE CHIZEK LOGO] REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Sulcus Computer Corporation We have audited the accompanying consolidated balance sheet of Sulcus Computer Corporation as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sulcus Computer Corporation as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits referred to above also included the financial schedule listed in answer to item 14(a)(2). In our opinion, such financial schedule presents fairly the information required to be set forth therein. Crowe, Chizek and Company LLP Columbus, Ohio March 5, 1997 33 SULCUS COMPUTER CORPORATION CONSOLIDATED BALANCE SHEETS
ASSETS December 31, --------------------------------- 1996 1995 ---------- ----------- Current Assets Cash and cash equivalents $2,503,475 $1,202,325 Short-term investments (at market) 12,393,411 12,408,075 Restricted cash -- 550,000 Accounts receivable, net of allowance of $1,913,107 and $2,581,020 in 1996 and 1995, respectively 12,995,894 11,134,576 Inventories 2,614,321 2,573,826 Deferred taxes 207,837 165,557 Other current assets 1,082,184 1,761,465 ----------- ----------- Total current assets 31,797,122 29,795,824 Purchased and capitalized software, net of accumulated amortization of $10,660,801 and $7,992,031 in 1996 and 1995, respectively 3,260,063 4,941,695 Property and equipment, net of accumulated depreciation of $4,801,119 and $4,247,168 in 1996 and 1995, respectively 2,473,324 2,015,816 Goodwill, net of accumulated amortization of $3,447,509 and $2,672,714 in 1996 and 1995, respectively 7,220,638 7,826,683 Deferred taxes 1,891,916 1,934,196 Other noncurrent assets 1,307,036 812,564 ----------- ----------- Total Assets $47,950,099 $47,326,778 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term borrowings $5,826,577 $6,382,710 Current portion of long-term debt 27,175 46,713 Current portion of obligations under capital leases 155,216 -- Accounts payable 3,947,597 4,352,408 Shareholder litigation liability -- 3,108,097 Deferred revenues 6,497,107 6,195,289 Customer deposits 2,102,731 1,311,408 Other accrued liabilities 1,891,494 3,008,892 ----------- ----------- Total current liabilities 20,447,897 24,405,517 Long-term debt, net of current portion -- 27,175 Obligations under capital leases, net of current portion 184,604 -- Commitments and contingencies Stockholders' equity Common stock, no par value; 30,700,000 shares authorized (16,832,663 and 15,145,570 shares issued and issuable in 1996 and 1995, respectively) 40,780,066 38,016,248 Note receivable from stockholder -- (500,000) Retained earnings (deficit) (13,353,160) (14,747,712) Foreign currency adjustment (108,453) (60,832) Cumulative unrealized gain (loss) on investments available for sale (855) 186,382 ----------- ----------- Total Stockholders' Equity 27,317,598 22,894,086 ----------- ----------- Total Liabilities and Stockholders' Equity $47,950,099 $47,326,778 =========== ===========
See notes to the consolidated financial statements. F-2 34 SULCUS COMPUTER CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, -------------------------------------------- 1996 1995 1994 ----------- ----------- ------------ Net revenue: System sales $31,721,534 $27,645,389 $25,893,783 Support revenue 19,083,266 17,047,913 15,993,533 Dividends and other 1,340,345 1,290,691 1,255,848 ----------- ----------- ------------ Total revenue 52,145,145 45,983,993 43,143,164 ----------- ----------- ------------ Cost of goods sold and services provided: Systems 17,641,221 14,351,669 15,078,349 Support services 5,712,635 4,613,913 5,509,625 ----------- ----------- ------------ Total cost of sales and services provided 23,353,856 18,965,582 20,587,974 Expenses: Selling, general, and administrative 23,846,876 22,895,996 24,388,210 Research and development (net of capitalized software of $1,101,028, $1,002,854 and $1,556,888 for 1996, 1995 and 1994, respectively) 1,398,405 1,198,999 1,596,515 Interest 571,571 597,672 556,269 Depreciation and amortization 1,588,635 1,520,033 2,157,857 Unrealized and realized (gains) losses on short-term investments (8,750) (1,462,005) 1,861,403 Unusual items: Write-off of assets -- 514,694 2,156,949 Write-off of goodwill -- -- 1,256,000 Provision for litigation settlement -- 2,919,333 250,000 ----------- ----------- ------------ Total expenses 27,396,737 28,184,722 34,223,203 ----------- ----------- ------------ Income (loss) before income taxes 1,394,552 (1,166,311) (11,668,013) Income taxes -- 202,645 -- ----------- ----------- ------------ Net income (loss) $ 1,394,552 ($1,368,956) ($11,668,013) =========== =========== ============ Earnings (loss) per share $0.08 ($0.09) ($0.84) ===== ====== ====== Weighted average number of common shares 16,833,305 14,720,327 13,872,298 ========== ========== ==========
See notes to the consolidated financial statements. F-3 35 SULCUS COMPUTER CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Cumulative Unrealized Common Stock Gain (Loss) on Note ----------------------- Retained Foreign Investments Receivable Stock- Number of Earnings Currency Available From holders' Shares Amount (Deficit) Adjustment For Sale Stockholder Equity ---------- ----------- ------------ ---------- ---------- ----------- ----------- Balance, January 1, 1994 14,095,769 $35,585,420 ($1,710,743) ($2,074) $ -- ($500,000) $33,372,603 Stock options exercised 135,827 271,916 -- -- -- -- 271,916 Issuance of stock, contingent earnouts on acquisitions of companies 70,836 511,077 -- -- -- -- 511,077 Cumulative translation adjustment -- -- -- (113,887) -- -- (113,887) Issuance of stock, shareholder litigation 530,612 1,625,000 -- -- -- -- 1,625,000 Cancellation of shares previously issued as contingent earnout related to acquisition (327,726) (912,000) -- -- -- -- (912,000) Net loss -- -- (11,668,013) -- -- -- (11,668,013) ---------- ----------- ------------ --------- --------- --------- ----------- Balance, December 31, 1994 14,505,318 37,081,413 (13,378,756) (115,961) 0 (500,000) 23,086,696 Stock options exercised 17,660 42,847 -- -- -- -- 42,847 Issuance of stock, contingent earnouts on acquisitions of companies 573,477 784,592 -- -- -- -- 784,592 Cumulative translation adjustment -- -- -- 55,129 -- -- 55,129 Cumulative unrealized gain on investments available for sale -- -- -- -- 186,382 -- 186,382 Issuance of stock to consultants 7,408 12,000 -- -- -- -- 12,000 Issuance of stock as settlement of previously recorded liabilities 41,707 95,396 -- -- -- -- 95,396 Net loss -- -- (1,368,956) -- -- -- (1,368,956) ---------- ----------- ------------ --------- --------- --------- ----------- Balance, December 31, 1995 15,145,570 38,016,248 (14,747,712) (60,832) 186,382 (500,000) 22,894,086 Stock options exercised 84,296 137,920 -- -- -- -- 137,920 Issuance of stock, contingent earnouts on acquisitions of companies 66,832 168,750 -- -- -- -- 168,750 Cancellation of shares in repayment of shareholder loans (220,000) (550,000) -- -- -- 500,000 (50,000) Adjustment of shares issuable for purchase of Techotel A.G. 271,859 -- -- -- -- -- ---- Adjustment of shares issuable under earn-out agreement for Lodgistix Scandinavia A.S. 7,688 -- -- -- -- -- ---- Cumulative translation adjustment -- -- -- (47,621) -- -- (47,621) Cumulative unrealized (loss) on investments available for sale -- -- -- -- (187,237) -- (187,237) Issuance of stock to consultants 10,059 26,000 -- -- -- -- 26,000 Issuance of stock as settlement of previously recorded liabilities 1,466,359 2,981,148 -- -- -- -- 2,981,148 Net Income -- -- 1,394,552 -- -- -- 1,394,552 ---------- ----------- ------------ --------- --------- --------- ----------- Balance, December 31, 1996 16,832,663 $40,780,066 ($13,353,160) ($108,453) $ ($855) $0 $27,317,598 ========== =========== ============ ========= ========= ========= ===========
See notes to the consolidated financial statements. F-4 36 SULCUS COMPUTER CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------------------- 1996 1995 1994 ---------- ----------- ------------ Cash flows from operating activities: Net income (loss) $1,394,552 ($1,368,956) ($11,668,013) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation 813,840 835,315 1,147,171 Amortization of capitalized software 2,803,401 2,447,296 2,388,804 Amortization of goodwill 774,795 684,718 1,010,686 Provision for doubtful accounts 859,341 573,130 1,343,489 Realized and unrealized (gain) loss on investments (8,750) (1,462,005) 1,861,403 Loss on write-off of assets -- 514,694 1,820,246 Write-off of goodwill -- -- 1,256,000 (Purchases) sales of trading securities -- (851,874) 2,247,706 Change in assets and liabilities: Restricted cash 550,000 (50,000) -- Accounts receivable (2,720,659) (68,464) (425,916) Insurance receivable -- -- 900,000 Inventories (40,495) (180,263) (199,887) Other current assets 174,955 249,317 (197,610) Other assets 161,945 (235,209) 295,344 Accounts payable (404,811) (1,484,074) 558,159 Deferred revenues 301,818 (726,992) 468,406 Shareholder litigation liability (308,097) 2,668,317 (585,220) Customer deposits 791,323 (585,478) 964,508 Accrued liabilities (933,013) 166,452 200,837 ---------- ---------- ---------- Total adjustments 2,815,593 2,494,880 15,054,126 ---------- ---------- ---------- Net cash provided by operating activities 4,210,145 1,125,924 3,386,113 ---------- ---------- ---------- Cash flows from investing activities: Purchases of available for sale securities (413,822) (4,341,433) -- Proceeds from sales of available for sale securities 250,000 4,758,359 -- Investment in sales-type leases (286,718) (617,712) (400,841) Payments received on sales-type leases 134,627 189,537 250,056 Capital expenditures (886,203) (660,444) (571,455) Software development capitalized (1,101,028) (1,002,854) (1,556,888) ---------- ---------- ---------- Net cash (used in) investing activities (2,303,144) (1,674,547) (2,279,128) ---------- ---------- ---------- Cash flows from financing activities: Short term borrowings (556,133) 199,715 295,095 Principal payments on long-term debt (46,713) (480,638) (837,036) Payments under capital lease agreements (93,304) -- -- Proceeds from stock options exercised 137,920 42,847 271,916 ---------- ---------- ---------- Net cash (used in) financing activities (558,230) (238,076) (270,025) ---------- ---------- ---------- Cumulative translation adjustment (47,621) 55,129 (113,887) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 1,301,150 (731,570) 723,073 Cash equivalents at beginning of year 1,202,325 1,933,895 1,210,822 ---------- ---------- ---------- Cash equivalents at end of year $2,503,475 $1,202,325 $1,933,895 ========== ========== ==========
See notes to the consolidated financial statements. F-5 37 SULCUS COMPUTER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995, AND 1994 NOTE 1. LINE OF BUSINESS Sulcus Computer Corporation (the "Company") develops, installs, and markets turnkey computer systems with specific software through its subsidiaries. The Company also markets support services in conjunction with the placement of software systems and provides trade credit to its customers. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including contingencies, as well as the reported amounts of revenues and expenses during the financial statement period. Actual results could differ from those estimates. Examples of significant estimates include the collectability of receivables, the future benefit of capitalized computer software costs, lives assigned to goodwill, the net recoverability of deferred tax assets and contingencies relating to sales-type leases. These estimates are particularly susceptible to material changes in the near term. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Sulcus Computer Corporation and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments in 50% or less owned affiliates over which the Company has the ability to exercise significant influence are accounted for using the equity method. CASH AND CASH EQUIVALENTS The Company considers as cash and cash equivalents certificates of deposit and commercial paper with original maturities of less than three months which consists of deposits in commercial banks in the U.S. and abroad. The Company limits the amount of money placed in any one bank in order to reduce credit risk. SHORT-TERM INVESTMENTS During 1995, the Company changed its investment philosophy and consequently bought and sold certain investments to realign its investment portfolio. From January 1, 1994 (effective date of current accounting standards) through June 5, 1995, the Company actively bought and sold investments in corporate preferred stocks and mutual funds consisting primarily of corporate and U.S. government securities with the objective of generating profits on short-term differences in price, and accordingly, classified its investments as "Trading Securities" whereby they were carried at market with unrealized gains or losses reflected in current earnings. During the second quarter of 1995, the Company restructured its investments in short-term marketable securities and changed its investment philosophy to one of holding securities for the generation primarily of dividend and interest income. As a result, investments and changes in the market value of the investments arising subsequent to this change (June 5, 1995) are accounted for as "Available for Sale". Available for sale investments are carried at market value with unrealized gains and losses on investments treated as a component of Stockholders' Equity. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statement of operations. RESTRICTED CASH The restricted cash at December 31, 1995 represents cash collateral for a deposit received on a significant contract. As security for product delivery and for the deposit received under the contract, the Company issued a letter of credit of $550,000, which expired on December 31, 1996. At the customer's direction, upon the delivery of systems, a draw down was permitted at the rate of 25% of the value of the equipment delivered. At December 31, 1996, substantially all of the terms of the contract were satisfied and the cash was released for general purposes. F-6 38 INVENTORIES Inventories consist substantially of software and hardware products in finished form and are valued at the lower of cost or market. Cost is determined by the specific identification method. Market is net realizable value. PURCHASED AND CAPITALIZED SOFTWARE Purchased software has been developed by third parties to the stage of technological feasibility at the date of acquisition. Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development costs. Software development costs incurred after establishing technological feasibility are capitalized. Amortization of purchased and capitalized software is provided for when the product is available for general release to customers over the greater of the amount computed using the remaining estimated economic life of the product or the ratio that current gross revenues for a product bear to the total of current and anticipated revenues for that product. The products are generally being amortized over 3 to 5 years. PROPERTY AND EQUIPMENT Property and equipment is comprised of office furniture, fixtures, service equipment, leasehold improvements, and land and building and are recorded at cost. Depreciation, which includes amortization of assets under capital leases, is based upon the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to expense as incurred. GOODWILL Goodwill, which represents the excess of the cost of purchased companies over the fair value of their net assets at the date of acquisition, is being amortized on a straight-line basis over lives ranging from 10 to 20 years. The Company annually evaluates the carrying value of goodwill based on current operating results and forecasts of undiscounted cash flows of the specific businesses acquired. INCOME TAXES Income tax expense includes U.S. and international income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of the difference is reported as deferred income taxes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. A valuation allowance is provided to reduce deferred tax assets to an amount more likely than not to be realized. Non-U.S. subsidiaries compute taxes in effect in the various countries. Earnings of these subsidiaries may also be subject to additional income and withholding taxes when they are distributed as dividends. Undistributed earnings of non-U.S. subsidiaries are not material. REVENUE RECOGNITION The Company recognizes revenue on sales of systems including software and hardware upon delivery or installation and when all obligations of the respective contract have been fulfilled. Support services revenues are billed in advance and recorded as deferred revenue and recognized as income ratably over the service period of the Software Support and Hardware Maintenance Agreement. TRANSLATION OF NON-U.S. CURRENCY AMOUNTS For non-U.S. subsidiaries which operate in a local currency environment, assets and liabilities are translated to U.S. dollars at the current exchange rates at the balance sheet date. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated in a separate component of stockholders' equity. EARNINGS (LOSS) PER SHARE Primary earnings (loss) per share is computed based on the number of common shares outstanding, adjusted for the assumed conversion of shares available upon the exercise of dilutive options, after the assumed repurchase of common shares with the related proceeds. Fully diluted earnings (loss) per share is not presented as it is either anti-dilutive or not different from primary earnings (loss) per share. RECLASSIFICATION Certain prior year amounts have been reclassified to conform with current year reporting practices. F-7 39 NOTE 3. SHORT-TERM INVESTMENTS Securities available for sale at December 31, 1996, are summarized as follows:
Gross Unrealized --------------------- Market Cost Gains Losses Value ---- ----- ------ ------ U.S. Government Securities maturing between 1 and 5 years $ 515,470 $ -- $14,685 $ 500,785 Mutual Funds 1,595,839 5,412 -- 1,601,251 Preferred Stocks 10,282,957 8,418 -- 10,291,375 ----------- ------- ------- ----------- $12,394,266 $13,830 $14,685 $12,393,411 =========== ======= ======= ===========
Securities available for sale at December 31, 1995 are summarized as follows:
Gross Unrealized --------------------- Market Cost Gains Losses Value ---- ----- ------ ------ U.S. Government Securities maturing between 1 and 5 years $ 515,470 $ -- $ 3,435 $ 512,035 Mutual Funds 1,557,016 -- 33,726 1,523,290 Preferred Stocks 10,149,207 223,543 -- 10,372,750 ----------- -------- ------- ----------- $12,221,693 $223,543 $37,161 $12,408,075 =========== ======== ======= ===========
Effective June 5, 1995, the Company restructured its investments as short-term marketable securities and changed its investment philosophy to one of holding securities for the generation of dividend and interest income. As a result, investments and changes in market value of the investments arising subsequent to this date are accounted for as "Available for Sale". At June 5, 1995, the market value of the securities was below cost by $185,803. The Company's investments are subject to risk, most notably the risk that the market value of these assets will decline as the result of general market fluctuations, increases in interest rates or changes in the underlying operations of the investee. Company policy does not require temporary investments to be investment grade as determined by a nationally recognized statistics rating organization nor does it require that such investments have any additional safety features such as insurance. At December 31, 1996, an aggregate amount of $3,800,875 (market value) of investments were below investment grade, of which $2,512,500 represented an investment in the preferred stock of one issuer. The Company's short-term investment portfolio has been pledged as collateral against borrowings under a brokerage margin account (See "Short-Term Borrowings"). Proceeds, realized gains and realized losses from the sales of securities classified as available for sale for the year ended December 31, 1996 were $250,000, $8,750 and $-0-, respectively. Proceeds, realized gains and realized losses from the sales of securities classified as available for sale for the year ended December 31, 1995 were $4,758,359, $130,000 and $2,441, respectively. Proceeds, realized gains and realized losses from the sales of securities classified as trading securities for the year ended December 31, 1995 were $2,190,926, $76,211 and $13,112, respectively. Unrealized gains on trading securities amounted to $1,271,347 through June 5, 1995. F-8 40 NOTE 4. PURCHASED AND CAPITALIZED SOFTWARE Purchased and capitalized software consists of the following:
December 31, ------------------- 1996 1995 ---- ---- Purchased software $ 6,898,082 $7,006,270 Capitalized software 7,022,782 5,927,456 Accumulated amortization (10,660,801) (7,992,031) ------------ ---------- Net purchased and capitalized software $ 3,260,063 $4,941,695 ============ ==========
The Company wrote off capitalized software costs of $514,694 during the fourth quarter of 1995 and $1,820,246 during the third quarter of 1994. These write-offs were based on the Company's assessment of its capitalized software and the conclusion that these costs would not benefit future periods. NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, ------------------- 1996 1995 ---- ---- Buildings and leasehold improvements $1,107,060 $1,007,171 Furniture and equipment 6,167,383 5,255,813 Accumulated depreciation (4,801,119) (4,247,168) ---------- ---------- Net property and equipment $2,473,324 $2,015,816 ========== ==========
The Company leases certain equipment under agreements which are classified as capital leases. These equipment leases have purchase options at the end of the original lease term which ranges from 3 to 5 years. Leased capital assets are included in property, plant and equipment at December 31, 1996 with a cost of $531,619 and accumulated amortization of $189,570. NOTE 6. LEASES AS LESSOR In 1993 the Company modified its sales-type lease program by entering into an agreement with a finance company whereby it receives 100% of the discounted minimum lease payments at inception of the lease, assigns the lease payments to the finance company, grants the finance company a security interest in the leased equipment and accepts certain recourse liability in event of default by the lessee. The Company retains ownership in the residual value of the leased property and has recorded a reserve for the estimated liability under the recourse agreement. At December 31, 1996 and December 31, 1995, the Company had the following net investment in these financed sales-type leases:
December 31, ------------------- 1996 1995 ---- ---- Estimated residual value of leased property $1,532,643 $1,315,427 Unearned income (292,237) (269,951) ---------- ---------- Net investment in financed sales-type leases $1,240,406 $1,045,476 ========== ==========
At December 31, 1996, the Company has accrued $557,842 representing estimated amounts contingently payable related to sales-type leases financed under this agreement. To date, actual losses from recourse provisions are $194,461. F-9 41 AS LESSEE The Company has operating leases with third parties for office space in various locations. The future annual rental commitments as of December 31, 1996 under these leases are $1,109,364 in 1997; $612,014 in 1998; $536,144 in 1999; $380,915 in 2000; $306,944 in 2001 and $1,034,027 thereafter. Future minimum payments by year and in the aggregate under noncancelable capital leases and operating leases with initial or remaining terms of one year or more consist of the following as of December 31, 1996:
Capital Operating Leases Leases ------- --------- 1997 $193,192 $1,203,623 1998 174,030 650,010 1999 27,208 550,149 2000 2,226 388,679 2001 2,226 309,203 Thereafter -- 1,034,027 -------- ---------- Total minimum lease payments 398,882 $4,135,691 ========== Amounts representing interest 59,062 -------- Present value of net minimum payments 339,820 Current portion 155,216 -------- Long-term portion $184,604 ========
Rent expense under these agreements and other operating leases was $1,562,835, $1,611,081, and $1,491,615 for the years ended December 31, 1996, 1995, and 1994, respectively. See "Related Party Transactions" for additional discussions of operating leases. NOTE 7. SHORT-TERM BORROWINGS The Company's short-term borrowings consists of the following:
December 31, -------------------------- 1996 1995 ---- ---- Borrowings with brokerage firm on margin against the Company's short term investment portfolio $5,826,577 $6,062,905 Unsecured demand note of the Company's Squirrel subsidiary with a bank at prime -- 271,448 Bank credit lines of the Company's Swiss subsidiary at prime -- 48,357 ---------- ---------- Total short-term borrowings $5,826,577 $6,382,710 ========== ==========
At December 31, 1996, the Company could borrow up to $6,100,000 under a brokerage margin account which is secured by the Company's short-term investment portfolio, having a market value of $11,891,470 at December 31, 1996 and $11,914,274 at December 31, 1995. Interest is charged and paid monthly based on the broker's internally established rate which was 7.875% at December 31, 1996. NOTE 8. INCOME TAXES The provision for income taxes consists of the following:
Year Ended December 31, ----------------------------------------- 1996 1995 1994 ------- -------- ------- Current: Domestic $ -- $150,000 $ -- Foreign -- 52,645 -- Deferred: Domestic -- -- -------- -------- -------- Total $ -- $202,645 $ -- ======== ======== ========
F-10 42 A reconciliation between the Company's effective tax rate and the U.S. statutory rate is as follows:
Year Ended December 31, ----------------------------------------- 1996 1995 1994 ------- -------- ------- U.S. federal statutory tax rate 35% (35%) (35%) State income taxes, net of federal income tax effect 6% 8% (4%) Benefits not recorded (benefits recognized) due to net carryforward position (43%) 39% 42% Foreign and other 2% 5% 1% Tax credits generated 0% 0% (4%) --- --- --- 0% 17% 0% === === ===
The Company's U.S. federal effective rate is generally unaltered by the rates applicable to its foreign operations as a U.S. foreign tax credit would be generated for taxes paid in those jurisdictions. Foreign taxes are recognized on foreign taxable income for which no foreign tax credit is generated. Permanent differences include tax-free dividend income and amortization of goodwill. No tax benefits were recorded for non-deductible write-offs of goodwill and certain other expenses. Due to the net operating losses, no material tax payments have been made. The following summarizes the significant components of the Company's deferred tax assets and liabilities:
Deferred Tax Consequences at December 31, 1996 ---------------------------------------------- Assets Liabilities Total ---------- ----------- --------- Accounts receivable allowance $484,202 -- $484,202 Unrealized loss on investments 61,969 -- 61,969 Inventory writedowns 271,140 -- 271,140 Accrued expenses not currently deductible 80,278 -- 80,278 Less valuation allowance (689,752) -- (689,752) ---------- ----------- ---------- Current 207,837 -- 207,837 Property and equipment book/tax cost differential 23,367 -- 23,367 Tax loss carryforwards 7,979,415 -- 7,979,415 Tax credits 1,231,664 -- 1,231,664 Software costs capitalized for financial reporting purposes -- (1,063,806) (1,063,806) Less valuation allowance (6,278,724) -- (6,278,724) ---------- ----------- ---------- Noncurrent 2,955,722 (1,063,806) 1,891,916 ---------- ----------- ---------- Total $3,163,559 $(1,063,806) $2,099,753 ========== =========== ==========
F-11 43
Deferred Tax Consequences at December 31, 1995 ---------------------------------------------- Assets Liabilities Total ---------- ----------- --------- Accounts receivable allowance $749,534 $ -- $749,534 Unrealized loss on investments 72,463 -- 72,463 Inventory writedowns 108,160 -- 108,160 Accrued expenses not currently deductible 66,300 -- 66,300 Less valuation allowance (830,900) -- (830,900) --------- --------- --------- Current 165,557 -- 165,557 --------- --------- --------- Property and equipment book/tax cost differential -- (35,196) (35,196) Tax loss carryforwards 11,619,173 -- 11,619,173 Tax credits 1,800,000 -- 1,800,000 Software costs capitalized for financial reporting purposes -- (1,746,458) (1,746,458) Less valuation allowance (9,703,323) -- (9,703,323) ---------- ----------- ---------- Noncurrent 3,715,850 (1,781,654) 1,934,196 ---------- ------------ ---------- Total $3,881,407 $(1,781,654) $2,099,753 ========== =========== ==========
Deferred Tax Consequences at December 31, 1994 ---------------------------------------------- Assets Liabilities Total ---------- ----------- --------- Accounts receivable allowance $1,012,864 $ -- $1,012,864 Unrealized loss on investments 642,645 -- 642,645 Accrued expenses not currently deductible 275,792 -- 275,792 Inventory writedowns 270,600 -- 270,600 Deferred revenue 48,750 -- 48,750 Other assets 13,466 -- 13,466 Less valuation allowance (1,505,645) -- (1,505,645) ---------- ----------- ---------- Current 758,472 -- 758,472 ---------- ----------- ---------- Property and equipment book/tax cost differential -- (104,823) (104,823) Tax loss carryforwards 11,665,194 -- 11,665,194 Tax credits 1,844,380 -- 1,844,380 Software costs capitalized for financial reporting purposes -- (2,510,506) (2,510,506) Less valuation allowance (9,552,964) -- (9,552,964) ---------- ----------- ---------- Noncurrent 3,956,610 (2,615,329) 1,341,281 ----------- ----------- ---------- Total $4,715,082 $(2,615,329) $2,099,753 ========== =========== ==========
Management believes that it is more likely than not that it will generate taxable income sufficient to realize a portion of the tax benefits associated with net operating losses and tax credit carryforwards prior to their expiration. This belief is based upon the fact that the Company had taxable income in 1996 and the Company's view of expected profits in 1997 and the next several years. The $3,565,747 and $524,386 decreases in the valuation allowance in the years ended December 31, 1996 and 1995 respectively, represents the realization of tax benefits of temporary differences and net operating loss carryforwards which reversed during these years through the generation of taxable income. The $3,357,162 increase in the valuation allowance in the year ended December 31, 1994 represents the temporary differences and net operating loss carryforwards generated in that year that the Company believed were not likely to result in tax benefits. Management believes that the valuation allowance is appropriate given the current estimates of future taxable income. If the Company is unable to generate sufficient taxable income in the future through operating results, increases in the valuation allowance will be required through a charge to expense. However, if the Company achieves sufficient profitability to utilize a greater portion of the deferred tax asset, the valuation allowance will be reduced through a credit to income. The Company has approximately $22,797,000 of net operating losses at December 31, 1996, a portion of which are subject to certain limitations under the Internal Revenue Code Section 382, and $1,200,000 of tax credits ($1,100,000 of F-12 44 research activities credits and $100,000 of investment tax credits) available to offset future federal tax liabilities. The utilization of net operating losses is limited by certain rules which limit the utilization of losses incurred by group members prior to their acquisition by Sulcus, post-acquisition taxable income generated by specific members of the group and the passage of time . The net operating loss carryforwards expire as follows: 2001 $933,000 2002 1,310,000 2003 4,501,000 2004 2,305,000 2005 2,679,000 2006 1,843,000 2007 1,207,000 2008 3,958,000 2009 4,061,000 --------- Total $22,797,000
NOTE 9. RELATED PARTY TRANSACTIONS The Company leases office space in Greensburg, Pennsylvania from a trust established by a major stockholder. The leases commenced on various dates from March 1, 1983 and expire on various dates through September 30, 2001. The leases may be renewed for additional two-year terms at the rate of 2% over the prior year's amount unless specifically canceled by either party. Rent expense under these agreements was $233,687, $225,391, and $185,251 for the years ended December 31, 1996, 1995, and 1994, respectively. As of December 31, 1996, the future annual rental commitments under these leases are $150,388 in 1997, $99,051 in 1998, $91,269 in 1999, $95,823 in 2000, and $74,520 in 2001. The Company has agreed, under certain circumstances, to provide to its former President loans in gross amount of up to $197,000 for up to three years at the rate of 5% per annum. On October 27, 1995, the Company made a loan in the principal amount of $100,000 at 5% interest. The loan was secured by real estate, proceeds from its sale and other assets. The principal and related interest was repaid on August 1, 1996. During 1996, the Company made advances totaling $65,485 on the remaining portion of the loan agreement and that amount is outstanding on December 31, 1996. Interest or outstanding balances is billed and paid quarterly. As a part of the separation agreement with the Company's former President, the loan and the related accrued interest was forgiven. NOTE 10. COMMITMENTS AND CONTINGENCIES Employment agreements are in place with certain executive officers and management personnel. These agreements generally continue until terminated by either party and contain certain change of control provisions. NOTE 11. INCENTIVE STOCK OPTION PLANS The Company maintains three stock option plans at December 31, 1996 and December 31, 1995: the 1983 Incentive Stock Options Plan (1983 plan), the 1991 Incentive Stock Option Plan (1991 Plan), and the Directors Plan. Options can no longer be granted under the 1983 Plan. The 1991 Plan (as amended) allows for 3,000,000 stock options available for grant under the plan, which extends through January 1, 2001. The 1991 Plan allows for all of the future stock options to be granted at any time prior to the termination of the plan. The option price may not be less that the fair market value at date of grant. Options granted under the 1991 plan become available to be exercised based upon a five year vesting schedule. F-13 45 Stock option activity under all plans for the years ended December 31, 1996, 1995, and 1994 is as follows:
Options Outstanding Price ----------- ----- Outstanding, January 1, 1994 2,149,444 $1.000 - $9.250 --------- --------------- 1994 Granted 1,012,500 $2.1875 - $7.750 Exercised (135,827) $1.250 - $5.375 Canceled (930,637) $1.375 - $9.250 --------- --------------- Outstanding, December 31, 1994 2,095,480 $1.000 - $9.250 --------- --------------- 1995 Granted 461,833 $2.000 - $3.500 Exercised (17,660) $2.125 - $3.500 Canceled (568,538) $2.281 - $8.625 --------- --------------- Outstanding, December 31, 1995 1,971,115 $1.000 - $9.250 --------- --------------- 1996 Granted 552,830 $1.9375-$3.25 Exercised (84,296) $2.5000-$3.3125 Canceled (607,104) $2.1875-$8.625 --------- --------------- Outstanding, December 31, 1996 1,832,545 $1.000-$9.250 ========= =============== Exercisable at December 31, 1996 1,063,603 $1.000-$9.250 ========= ===============
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:
1996 1995 ---- ---- Net income-as reported $1,394,552 ($1,368,956) Net income-pro forma 991,315 ($1,472,533) Earnings per share-as reported $.08 ($.09) Earnings per share-pro forma $.06 ($.10)
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% 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. SFAS 123 does not apply to awards prior to 1995. NOTE 12. NOTE RECEIVABLE FROM STOCKHOLDER During the year ended December 31, 1993, the Company extended a loan to the former principal stockholder and current president of Techotel AG (now Sulcus Hospitality Group EMEA AG) in the amount of $500,000, pending the registration of the stock of the Company issuable to him under terms of the agreement for the purchase of Techotel. The note was intended to be repaid upon the registration by the Company for the stock issuable to him. Based on the nature of the note, it was reflected as a reduction of equity. In May 1996, the Company and the former stockholders of Techotel agreed to the repayment of the note through the cancellation of 200,000 shares issuable under the purchase agreement. F-14 46 NOTE 13. ACQUISITIONS In October of 1993, the Company completed its acquisition of Lodgistix Scandinavia A.S., a distributor of Lodgistix systems in Norway, Sweden and Denmark. The purchase price consisted of Sulcus Common Stock having a value of $300,000. In addition, the former stockholders of Lodgistix Scandinavia were entitled to receive additional shares of the Company's stock upon attaining certain earnings over a three year period. Lodgistix Scandinavia achieved such earnings for 1993, 1995 and 1996. As a result, the Company issued to the former stockholders of Lodgistix Scandinavia a total of 125,295 shares having a value of $269,864 for 1993 and 1995. For 1996, under the terms of the Agreement, the Company issued to the former stockholders of Lodgistix Scandinavia 66,832 shares valued at $168,750 ($2.525 per share). This additional consideration has been recorded as goodwill at December 31, 1996. Lodgistix Scandinavia did not achieve required earnings for 1994. Effective January 1, 1993, Sulcus acquired Techotel AG of Switzerland. The purchase agreement (as amended) provided for the issuance of $500,000 of Common Stock and the payment of $500,000 in cash. In addition, the shareholders were entitled to receive shares of Sulcus based upon attaining certain earnings over a three-year period ending December 31, 1995. Techotel achieved such earnings for 1993 and 1995. As a result, the Company issued to the former stockholders of Techotel a total of 174,193 shares of Sulcus Common Stock for an aggregate value of $866,509 for those two years. This additional consideration has been recorded as goodwill at December 31, 1995. Techotel did not achieve the required earnings for 1994. In 1992, Sulcus acquired Sulcus Hospitality Limited and Sulcus Singapore PTE. LTD., sales offices located in Hong Kong and Singapore, respectively for $1,450,000 in cash. In addition, the shareholders were entitled to receive shares of Sulcus based upon attaining certain earnings over a three-year period, however, these earnings levels were not attained. Effective March 1, 1992, Sulcus acquired all of the outstanding stock of Squirrel Companies, Inc. ("Squirrel"). The purchase price consisted of $500,000 in cash and 401,260 shares of the Company's stock having a value of $1,955,500, net of issuance costs of $351,745, in exchange for all of the outstanding common stock of Squirrel. In addition, the shareholders of Squirrel were entitled to receive additional shares of Sulcus based upon attaining certain earnings over a three-year period ending in 1994. Squirrel achieved such earnings for 1992 and 1994 and, as a result, the Company issued to the former shareholders of Squirrel 53,212 shares for an aggregate value of $703,198 for 1992 and 70,836 shares for an aggregate value of $177,090 for 1994. These additional amounts are recorded as a component of goodwill. On March 20, 1996, the Company resolved disputes with the former owners of Squirrel with regard to the calculation of earnouts in 1992 through 1994. The Company issued 498,488 shares under the terms of the agreement and cancelled 120,488 earnout shares. To reflect this settlement, the Company recorded an increase in goodwill and capital stock in the amount of $391,193. F-15 47 NOTE 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year Ended December 31, ------------------------------------------ 1996 1995 1994 ------- -------- ------- Interest paid $571,571 $596,322 $556,269 Income taxes paid $94,016 -- -- Non-cash activities: Equipment purchased under capital lease agreements $406,124 -- -- Common stock issued in settlement of shareholder litigation $2,800,000 -- $1,625,000 Common stock issued for contingency payments on acquisitions $168,750 $393,399 $511,077 Issuance of stock to consultants $26,000 $12,000 -- Issuance of stock as settlement of previously recorded liabilities $181,148 $95,396 -- Issuance of stock as settlement of Squirrel litigation -- $391,193 -- Cancellation of shares previously issued as contingent earnout related to acquisitions -- -- $912,000 Cancellation of shares in repayment of shareholder loans $550,000 -- -- Unrealized (loss) gain on investments available for sale ($187,237) $186,382 --
NOTE 15. SEGMENT REPORTING The Company conducts its worldwide operations through separate geographic area organizations which represent major markets or combinations of related markets. Transfers between markets are valued at cost. Financial information by geographic area is summarized as follows:
Year Ended December 31, ------------------------------------------ 1996 1995 1994 ------- -------- -------- Net revenues: Domestic $33,596,090 $31,195,481 $30,190,420 Canada 5,231,939 3,625,643 2,859,899 Pacific Region 8,063,939 5,736,551 4,852,745 Europe 5,253,177 5,426,318 5,240,100 ----------- ----------- ----------- Consolidated net revenues $52,145,145 $45,983,993 $43,143,164 =========== =========== ===========
F-16 48
Year Ended December 31, ------------------------------------------ 1996 1995 1994 ------- -------- -------- Net income (loss): Domestic $2,190,131 ($147,949) ($8,183,839) Canada 234,342 273,760 210,686 Pacific Region (508,684) (1,290,717) (3,304,369) Europe (521,237) (204,050) (390,491) ---------- ----------- ------------ Consolidated net income (loss) $1,394,552 ($1,368,956) ($11,668,013) ========== =========== ============
As of December 31, ------------------------------------------ 1996 1995 1994 ------- -------- -------- Identifiable assets: Domestic $38,179,244 $37,646,558 $39,288,050 Canada 1,738,378 1,562,171 1,259,913 Pacific Region 3,966,656 3,437,539 2,560,219 Europe 4,065,821 4,680,510 4,761,301 ----------- ----------- ----------- Consolidated identifiable assets $47,950,099 $47,326,778 $47,869,483 =========== =========== ===========
The 1995 Domestic segmental operating income includes the $2,919,333 litigation settlement provision and $514,694 write-off for software costs developed and capitalized for the U.S. markets. The 1994 Domestic segmental loss includes a $1,647,808 unrealized loss on short-term investments, a $1,820,246 write off of capitalized software and a $250,000 provision for litigation. The 1994 Pacific Region operating losses include $336,703 to write off investments in two affiliates and a net charge of $1,256,000 to write off goodwill. The 1994 European operating loss includes approximately $400,000 related to a French subsidiary. Other than short-term investments in marketable securities, which are generally available for working capital, there are no significant non-operating corporate assets. Sales between geographic areas and export sales are not material. Identifiable assets by geographic area exclude intercompany loans, advances and investments in affiliates. Intercompany trade receivables have been eliminated. Corporate assets are principally cash, trade receivables and intangibles. NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain unaudited quarterly financial data for the years ended December 31, 1996 and 1995. The Company believes this information has been prepared on the same basis as the Consolidated Financial Statements and that all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts as stated below to present fairly the selected quarterly information when read in conjunction with its Consolidated Financial Statements and Notes thereto. F-17 49
(In Dollars) Fiscal Quarter Ended --------------------------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, 1996 1996 1996 1996 1995 1995 1995 1995 ---- ---- ---- ---- ---- ---- ---- ---- Total Revenues 11,275,019 13,053,284 13,640,565 14,176,277 11,311,054 11,152,637 11,197,496 12,322,806 Cost of sales and expenses 10,753,615 12,151,065 13,323,591 14,522,322 10,267,519 10,465,330 11,124,788 15,292,667 Income (loss) before taxes 521,404 902,219 316,974 (346,045) 1,043,535 687,307 72,708 (2,969,861) Tax provision 0 0 0 0 0 0 0 202,645 Net income (loss) 521,404 902,219 316,974 (346,045) 1,043,535 687,307 72,708 (3,172,506) ========== ========== ========= ========= ========== ========= ========= ========== Earnings (loss) per share 0.03 0.05 0.02 (.02) 0.07 0.05 0.00 (0.21) ========== ========== ========= ========= ========== ========= ========= ==========
The Company's results for the first quarter 1995 include $881,683, which relates to the unrealized gain on investments. The Company's results for the fourth quarter 1995, include the provision for litigation settlement of $2,919,333 and write off of capitalized software of $514,694. NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS Estimates of fair value are made at a specific point in time, based on relevant market prices and information about the financial instrument. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash (including restricted cash): The carrying amounts reported in the balance sheet for cash and restricted cash approximates their fair value. Short-term investments: Short-term investments consists of stocks, mutual funds and debt securities. Fair values are based on quoted market prices. Short- and long-term debt: The carrying amount of the Company's borrowings under margin accounts and floating rate debt approximates its fair value. Long-term fixed rate debt is not material. Shareholder litigation liability: Portions due in the form of stock for settlement of shareholder litigation liability is valued based upon quoted market prices. The carrying amounts of trade payables and receivables approximate their fair value and have been excluded from the accompanying table. F-18 50 The carrying amounts and fair value of the Company's financial instruments are as follows:
1996 1995 ----------------------- -------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash $2,503,475 $2,503,475 $1,202,325 $1,202,325 Restricted cash -- -- 550,000 550,000 Short-term investments 12,393,411 12,393,411 12,408,075 12,408,075 Short-term borrowings 5,826,577 5,826,577 6,382,710 6,382,710 Shareholder litigation liability -- -- 3,108,097 3,283,097 Long-term borrowings 366,995 366,995 73,888 73,888
NOTE 18. LEGAL PROCEEDINGS AND LITIGATION SETTLEMENTS In April 1994, various individual Sulcus shareholders filed 12 lawsuits in the U.S. District Court for the Western District of Pennsylvania asserting federal securities fraud claims against Sulcus and certain officers, directors and others. These lawsuits were consolidated under the caption IN RE: Sulcus Computer Corporation Securities Litigation, II. On December 27, 1995, the parties entered into a settlement agreement (which was approved on a preliminary basis by the Court on February 23, 1996) which established a settlement fund of $800,000 in cash and 1,400,000 Sulcus Common Shares with a value of $2,800,000. The cash portion of the settlement was paid by insurance ($666,000) and the Company ($134,000). At December 31, 1995, the Company recorded a provision of $2,861,118 which, together with amounts accrued in 1994, represents costs which the Company expects to incur in connection with this agreement. At December 31, 1995, the $2,800,000 liability related to this settlement is included in the "Shareholder Litigation Liability". On December 31, 1996, the Company issued the shares to the settlement fund. ----------- Sulcus and Jeffrey S. Ratner were defendants in an action filed in June 1994, in the Superior Court of Fulton County of the State of Georgia by Raymond D. Schoenbaum, Theodore J. Munchak, and Nathan I. Lipson. The action centered around the Stock Purchase Agreement entered into between Sulcus and Squirrel Companies, Inc., in March 1992. On March 20, 1996, the Company, Mr. Ratner and the Plaintiffs agreed to resolve this dispute. Under the terms of this agreement, the Company agreed to deliver 498,488 shares of Sulcus Common Shares. These shares represented the entire earn-out for the years ended December 31, 1992, 1993 and 1994 and, therefore, the Company cancelled 120,488 shares previously issued. At December 31, 1995, the Company recorded an increase in goodwill and capital stock in the amount of $391,193 to reflect this settlement. On March 21, 1996, the court dismissed the claims and counterclaims. ----------- Other suits arising in the ordinary course of business are pending against the Company and its subsidiaries. The Company believes that the ultimate outcome of these actions and those described above will not result in a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 19. SUBSEQUENT EVENTS On February 24, 1997, the Company's Chairman gave notice to the Company of termination of his employment agreement. Termination provisions of his employment agreement resulted in a severance obligation of approximately $1,050,000. The intent is for the obligation to be paid monthly over a 36-month period, however, the former Chairman may elect a lump sum distribution. The Company's former Chairman disagrees as to the interpretation of the amount due to him under the termination provisions and the parties are continuing to negotiate to reach a settlement. The obligation will result in a charge to income in the first quarter of 1997. F-19 51 SULCUS COMPUTER CORPORATION STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Year ended December 31, ----------------------------------------- 1996 1995 1994 Net income (loss) attributable to common stockholders $1,394,552 ($1,368,956) ($11,668,013) ========== =========== ============ Shares: Weighted average number of common shares outstanding 16,720,092 14,720,327 13,872,298 Assumed conversion of stock options (A) 113,213 105,130 286,830 ---------- ----------- ------------ Average common shares and common stock equivalents 16,833,305 14,825,457 14,159,128 ========== =========== ============ Earnings (loss) per share $0.08 ($0.09) ($0.84) ========== =========== ============
(A) Effect of stock options is antidilutive for all periods in 1995 and 1994. F-20 52 SULCUS COMPUTER CORPORATION SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Balance Charged to Amount Balance beginning Acquired cost and charged at end of year valuations expenses off of year ---------- ---------- ---------- ---------- ---------- 1996 Allowance for doubtful accounts $2,581,020 $0 $859,341 $1,527,254 $1,913,107 1995 Allowance for doubtful accounts 2,597,088 0 573,130 589,198 2,581,020 1994 Allowance for doubtful accounts 1,494,042 0 1,343,489 240,443 2,597,088
F-21 EX-27 2 SULCUS COMPUTER CORP.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDING DECEMBER 31, 1996, AS SUBMITTED IN THE COMPANY'S 10-K FOR THE PERIOD AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000726712 SULCUS COMPUTER CORP. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,503,475 12,393,411 14,909,001 1,913,107 2,614,321 31,797,122 7,274,443 4,801,119 47,950,099 20,447,897 184,604 0 0 40,780,066 (13,462,468) 47,950,099 50,804,800 52,145,145 23,353,856 27,396,737 0 859,341 571,571 1,394,552 0 1,394,552 0 0 0 1,394,552 .08 .08
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