<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ________ to _________
Commission file number 0-22190
---------------------------------------
ELTRAX SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1484525
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2000 Town Center, Suite 690, Southfield, MI 48075
(Address of principal executive offices)
(248) 358-1699
(Issuer's telephone number)
--------------------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 .
----- -----
Shares of the Registrant's Common Stock, par value $.01 per share,
outstanding as of November 6, 1998: 13,039,938.
<PAGE>
PART I-ITEM 1: FINANCIAL STATEMENTS
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 536,574 $ 366,364
Accounts receivable, net 7,365,713 9,353,349
Inventories, principally purchased components 3,179,588 4,298,794
Other current assets 1,288,122 602,062
-------------- ------------
Total current assets 12,369,997 14,620,569
Furniture and equipment, net 1,434,236 863,174
Intangibles, net 17,124,966 6,007,259
-------------- ------------
Total assets $ 30,929,199 $ 21,491,002
-------------- ------------
-------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 1,429,543 $ 4,744,529
Accounts payable 4,280,555 6,010,516
Accrued compensation 715,689 575,383
Accrued expenses 1,554,227 1,196,222
Unearned revenue 2,262,857 967,507
Income taxes payable 755,440 496,123
Current portion of long-term debt 1,632,619 -
-------------- ------------------
Total current liabilities 12,630,930 13,990,280
Long-term debt 3,098,484 -
-------------- ------------
Total liabilities 15,729,414 13,990,280
Shareholders' equity
Common stock, $.01 par value, 50,000,000 shares authorized;
13,039,938 and 10,847,771 shares issued and outstanding 130,400 108,478
Additional paid-in capital 33,355,749 24,741,499
Accumulated deficit (18,286,364) (17,349,255)
-------------- ------------
Total shareholders' equity 15,199,785 7,500,722
-------------- ------------
Total liabilities and shareholders' equity $ 30,929,199 $ 21,491,002
-------------- ------------
-------------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------------------- -------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Revenue $10,955,012 $14,256,985 $37,908,464 $ 35,862,243
Cost of revenue 7,701,286 11,105,052 28,555,565 29,595,049
------------------- -------------------- ------------------- ---------------------
Gross profit 3,253,726 3,151,933 9,352,899 6,267,194
Operating expenses:
Selling, general and administrative 3,246,029 3,362,884 9,619,075 8,425,907
Research and development 87,143 - 87,143 -
Amortization of intangibles 227,759 95,802 418,154 304,202
Adjustment of Datatech goodwill - - - 2,458,000
------------------- -------------------- ------------------- ---------------------
Total operating expenses 3,560,931 3,458,686 10,124,372 11,188,109
------------------- -------------------- ------------------- ---------------------
Operating loss (307,205) (306,753) (771,473) (4,920,915)
Interest income 33,469 17,593 33,469 63,347
Interest expense (14,407) (108,029) (199,105) (267,286)
------------------- -------------------- ------------------- ---------------------
Loss before income taxes (288,143) (397,189) (937,109) (5,124,854)
Income tax expense - 1,036 - 1,317,006
------------------- -------------------- ------------------- ---------------------
Net loss $ (288,143) $ (398,225) $ (937,109) $ (6,441,860)
------------------- -------------------- ------------------- ---------------------
------------------- -------------------- ------------------- ---------------------
Net loss per common share
- basic and diluted $ (0.02) $ (0.05) $ (0.08) $ (0.81)
--------------------- -------------------- ------------------- ---------------------
--------------------- -------------------- ------------------- ---------------------
Weighted average shares outstanding-basic 12,725,851 8,303,394 11,603,810 7,975,881
--------------------- -------------------- ------------------- ---------------------
--------------------- -------------------- ------------------- ---------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------------ -------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (937,109) $ (6,441,860)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Amortization 418,154 304,202
Depreciation 265,397 79,865
Warrants issued for services 24,000 -
Adjustment of Datatech goodwill - 2,458,000
Adjustment to deferred income taxes - 1,315,970
Changes in current operating items:
Accounts receivable, net 2,965,181 (1,679,955)
Inventories 955,727 (415,262)
Other current assets (371,792) 21,079
Accounts payable (1,972,419) 2,509,531
Accrued compensation (201,738) (28,310)
Accrued expenses (111,880) (80,312)
Other current liabilities (372,341) (177,335)
------------------ -------------------
Net cash provided by (used for) operating activities: 661,180 (2,134,387)
------------------ -------------------
INVESTING ACTIVITIES:
Cash paid in connection with acquisition of Encore, net of cash acquired (8,266,021) -
Cash received in acquisition of Four Corners and Hi-Tech - 312,929
Cash paid in connection with acquisition of MST - (2,028,214)
Purchases of furniture and equipment, net (316,907) (229,903)
------------------ -------------------
Net cash used for investing activities: (8,582,928) (1,945,188)
------------------ -------------------
FINANCING ACTIVITIES:
Distributions to shareholders - (258,727)
Payments on long-term debt (15,119) -
Proceeds from term loan 4,000,000 -
Payments on credit line, net (3,314,986) (109,967)
Net proceeds from issuances of common stock 7,422,063 4,353,355
------------------ -------------------
Net cash provided by financing activities: 8,091,958 3,984,661
------------------ -------------------
Increase (decrease) in cash and cash equivalents 170,210 (94,914)
------------------ -------------------
CASH AND CASH EQUIVALENTS:
Beginning of period 366,364 694,901
------------------ -------------------
End of period $ 536,574 $ 599,987
------------------ -------------------
------------------ -------------------
NON CASH INVESTING AND FINANCING ACTIVITIES:
Common stock consideration for acquisitions-
Encore Group- issuance of 465,000 shares $ 1,190,109
Four Corners- issuance of 400,000 shares $ 1,885,000
Hi-Tech- issuance of 919,999 shares 3,091,965
Long-term debt assumed in the Encore Group acquisition 746,221
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by Eltrax Systems, Inc. (the "Company" or "Eltrax")
in accordance with generally accepted accounting principles, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Pursuant to such rules and regulations, certain financial information
and footnote disclosures normally included in the financial statements
have been condensed or omitted.
In the opinion of management, the accompanying unaudited condensed
financial statements contain all necessary adjustments, consisting only
of those of a recurring nature, and disclosures to present fairly the
financial position as of September 30, 1998 and the results of
operations and cash flows for the periods ended September 30, 1998 and
1997. The condensed consolidated financial statements include the
accounts of Eltrax Systems, Inc. and its subsidiaries, Nordata, Inc.,
Four Corners Technology, Inc., Encore Systems, Inc. ("Encore"), Global
Systems and Support, Inc. ("GSSI"), and Five Star Systems, Inc. ("Five
Star"). Effective January 1, 1998 all other existing subsidiaries of
the Company were merged into Eltrax Systems, Inc. Significant
intercompany transactions have been eliminated.
The year-end condensed consolidated balance sheet was derived from
audited consolidated financial statements, but does not include all
disclosures required by generally accepted accounting principles. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 1997.
2. FINANCING
In September 1998, the Company renegotiated its lending agreements with
State Street Bank and Trust ("State Street"). The revised credit
agreement, which expires in September 2001, consists of a $4,000,000
term loan and a $6,000,000 revolving line of credit. Borrowings under
the line of credit must be supported by eligible accounts receivable
and inventory. At September 30, 1998, approximately $1,430,000 was
outstanding under the line and the eligible collateral was
approximately $4,700,000. The interest rate on the revolving line of
credit is prime plus 1.0%.
The term loan is payable in 36 equal monthly principal installments of
$111,111 plus interest at prime plus 1.5%.
5
<PAGE>
The revised credit agreement contains certain restrictive covenants.
Certain of these covenants change over the term of the agreement, but
currently include maintaining a liquidity ratio of at least 1.0:1.0,
maintaining an indebtedness ratio to net worth of no greater than
1.1:1.0, and meeting certain targets for earnings before taxes,
interest, depreciation, and amortization. The agreement also contains
covenants regarding reporting requirements and restricts certain
activities.
3. NET INCOME (LOSS) PER SHARE
Income (loss) per share is determined by dividing income (loss) by the
weighted average number of common shares outstanding. Common stock
equivalents represent shares issuable upon the assumed exercise of
dilutive stock options and warrants. Common stock equivalents have been
excluded from diluted loss per share calculations, as their inclusion
would be antidilutive.
4. ACQUISITION
Effective September 1, 1998 the Company acquired Encore, GSSI and
Five Star (collectively the "Encore Group") in a cash and stock
transaction. The Encore Group provides software and services
primarily to the hospitality industry. The Company paid the
shareholders of the Encore Group cash of $8,500,000 as well as
465,000 shares of Eltrax Common Stock. Goodwill and other
intangibles, including purchased software, resulting from the
transaction were approximately $11,329,000. These costs have been
amortized over an initial average life of 8 years for the month of
September. The Company is in the process of evaluating the cost and
appropriate lives of the various intangibles acquired and will make
any necessary adjustments in the fourth quarter of 1998.
Pro forma financial information as though the Encore Group
acquisitions had been effective as of the beginning of each period,
is as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Revenue $45,657,000 $43,825,000
Net Loss (2,187,000) (6,254,000)
Loss per share (.18) (.74)
</TABLE>
5. STOCK WARRANT EXERCISE
In June 1998, the Company issued 1,716,667 shares upon the exercise of
several previously issued stock warrants. The warrant exercises
resulted in cash proceeds to the Company of $7,375,000. After the
exercise of these warrants, 541,785 stock warrants remained
outstanding, with exercise prices from $5.25 to $6.00 per share.
6. LITIGATION
The Company is involved in several legal proceedings arising from its
normal business operations. In management's opinion, the ultimate
outcome of these proceedings will not have a material impact on the
Company's financial position.
7. INCOME TAXES
During the second quarter of 1997, the Company increased the valuation
allowance applied to its deferred tax assets by recording $1,315,970 in
income tax expense. The increased reserve resulted in a full
valuation allowance on all deferred assets.
6
<PAGE>
8. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement
of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement,
which is effective with annual financial statements issued for
periods beginning after December 31, 1997, requires financial and
descriptive information about an entity's operating segments to be
included in the financial statements. This statement, when
implemented in the 1998 Form 10-K annual report, will require the
Company to report segment information for both the network services
and hospitality segments.
9. SUBSEQUENT EVENT
On November 11, 1998 the Company announced the execution of a final
merger agreement with Sulcus Hospitality Technologies, Corp.
("Sulcus"). Sulcus is a global provider of technology solutions to
the hospitality and restaurant industries. The closing of the sale
is contingent upon approval by the shareholders of Sulcus and the
Company. The Company will acquire Sulcus by exchanging 0.55 shares
of Eltrax common stock for each share of Sulcus common stock. Sulcus
currently has approximately 18,475,000 shares outstanding on a fully
diluted basis. Eltrax expects to account for this transaction using
the pooling-of-interests method.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission and in the Company's written and
oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" within the meaning of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended, and the Company intends that such forward-looking statements be
subject to the safe harbors created thereby. The words "believe" "expect"
and "anticipate" and similar expressions identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance, but are subject to many
uncertainties and factors relating to the Company's operations and business
environment which may cause the actual results of the Company to be
materially different from any future results expressed or implied by such
forward-looking statements. Examples of such uncertainties include, but are
not limited to, changes in customer demand and requirements, new product
announcements, interest rate fluctuations, changes in federal income tax laws
and regulations, competition, industry specific factors and world wide
economic and business conditions. For a more comprehensive list of
uncertainties, see the section entitled "Certain Important Factors" in the
Company's Report on Form 10-KSB for the year ended December 31, 1997. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements whether as a result of new information, future
events or otherwise.
INTRODUCTION
Eltrax is a national network service provider for local and wide area
networks. The Company has grown through a number of network services
acquisitions in 1997 and 1996. During the third quarter of 1998 the Company
acquired Encore, GSSI and Five Star, which are engaged in providing
installation and support services as well as software to the hospitality
industry. The results of the Encore Group were included in the consolidated
financial statements for one month of the third quarter.
The acquisition of the Encore Group has resulted in the commencement of
research and development activities at the Company as the Company is
investing in enhancements and improvements to its Medallion windows based
hotel management system.
During 1997 and 1998 the Company has focused on increasing its mix of value
added services and has discontinued the majority of its sales to distribution
customers. In addition, during early 1998, the Company's Datatech operation
was closed after a significant drop in revenue at Datatech beginning in the
third quarter of 1997. These actions have resulted in lower reported sales,
but increased gross profit margins.
SUMMARY RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997:
Total revenue for the three months ended September 30, 1998 decreased by
$3,302,000 to $10,955,000 as compared to revenue of $14,257,000 for the three
months ended September 30, 1997. The decrease resulted primarily from
reductions in sales of the Company's former Datatech operation of
approximately $2,600,000 and reduced sales in the Southeastern and
8
<PAGE>
Southwestern regions. The reduction in sales in the Southeastern region was
in part attributable to the decision made to discontinue servicing certain
lower margin distribution customers. Sales from entities acquired subsequent
to September 30, 1997 were included in 1998, which resulted in additional
sales of over $2,000,000 in 1998 as compared to the prior year.
The gross profit margin for the three months ended September 30, 1998 was
29.7% compared to 22.1% for the three months ended September 30, 1997. The
increase in the gross profit margin resulted from both higher margins at the
businesses acquired subsequent to the third quarter of 1997, and the decrease
in Datatech and distribution sales, which carried a lower margin. The gross
margin was also positively impacted in September by the Encore Group margin
in excess of 50% due to work on a short-term installation project. The
Company margins have increased as the Company has focused on providing
integrated systems and network services.
Third quarter operating expenses increased slightly by $102,000 to $3,561,000
compared to operating expenses of $3,459,000 for the three months ended
September 30, 1997 and the distribution activities. Increases in operating
expenses of approximately $779,000 resulted from the inclusion of the
companies acquired in late 1997 and 1998, as well as operating expenses at
the Company's Network Operating Center. These increases were offset by
reduced operating expenses related to Datatech and the distribution
activities. Amortization expense increased due to amortization of intangibles
arising from the Encore Group acquisition in 1998.
Net interest income of $20,000 in the current quarter compared to net
interest expense of $90,000 during the three months ended September 30, 1997
was due to the cash balances on hand prior to the Encore Group acquisition.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997:
Total revenue for the nine months ended September 30, 1998 increased by
$2,046,000 to $37,908,000 as compared to revenue of $35,862,000 for the nine
months ended September 30, 1997. The increase resulted primarily from the
acquisition of several companies subsequent to the second quarter of 1997.
Offsetting these increases were the sales related to the Company's Datatech
subsidiary, which decreased by approximately $12,500,000 from the prior
period due to the closing of all remaining Datatech operations by March 31,
1998. In addition, the discontinuance of service to certain distribution
customers in 1998 has reduced sales compared to the prior period.
The gross profit margin for the nine months ended September 30, 1998 was
24.7% compared to 17.5% for the nine months ended September 30, 1997. The
increase in the gross profit margin resulted from higher margins at the
businesses acquired subsequent to the second quarter of 1997, the Company's
focus on higher margin services, and the decrease in Datatech and
distribution related sales which carried a much lower margin.
Operating expenses for the first nine months decreased by $1,064,000 to
$10,124,000 compared to operating expenses of $11,188,000 for the nine months
ended September 30, 1997. The decrease in operating expenses resulted from
the significant charge in 1997 for Datatech goodwill of $2,458,000 offset by
increases from the inclusion of the companies acquired in the second half of
1997 and 1998 and operating expenses at the Network Operating Center. These
increases were somewhat offset by reduced operating expenses related to the
wind-down of Datatech.
9
<PAGE>
Net interest expense of $166,000 in the current year was lower than the
expense of $204,000 during the nine months ended September 30, 1997. The
decrease is due to reduced third quarter net interest expense, which was
attributable to the cash on hand at the beginning of the quarter. Income tax
expense decreased in 1998, as no adjustment was needed to the valuation
reserve on deferred tax assets as was recorded in 1997.
PRO FORMA FINANCIAL RESULTS
SELECTED PRO FORMA FINANCIAL DATA
The following selected unaudited pro forma financial data should be read in
conjunction with the Company's financial statements and related notes thereto
and "Management's Discussion and Analysis." The unaudited pro forma
financial data is derived from unaudited financial statements of the Company
that are not included herein. The pro forma results are not necessarily
indicative of future results.
The following discussions describe the Company's summary results as if the
Encore Systems, Inc., Global Systems and Support, Inc., Five Star Systems,
Inc., Four Corners Technology, Inc., Hi-Tech Connections, Inc., DataComm
Associates, Inc., and Telecom Associates, Inc. acquisitions (which were
consummated at various dates throughout 1997 and 1998) had taken place as of
the beginning of the nine month period ended September 30, 1997.
PRO FORMA FINANCIAL DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Revenue $12,932,000 $18,872,000
Net Loss (1,320,000) (360,000)
Net Loss per share (.10) (.04)
</TABLE>
COMPARISON OF PRO FORMA FINANCIAL DATA FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997
Pro forma revenue for the three months ended September 30, 1998 decreased by
$5,940,000 to $12,932,000 compared to pro forma revenue of $18,872,000 for the
three months ended September 30, 1997. The decrease is in part due to the
closing of Datatech, which reduced revenue by approximately $2,600,000 from
1997. In addition, the decision made to stop servicing certain distribution
customers resulted in reduced sales in the Southeast. Offsetting this decrease
was higher revenue in each of the remaining regions except the Southwest.
The loss for the three months ended September 30, 1998 was greater than the
prior year due to the reduction in sales and the resulting gross margin as well
as lower income at the Encore Group in July and August, which resulted in a
reduction of earnings of $274,000.
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Revenue $45,657,000 $54,851,000
Net Loss (2,187,000) (6,748,000)
Net Loss per share (.18) (.68)
</TABLE>
COMPARISON OF PRO FORMA FINANCIAL DATA FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND 1997
Total pro forma revenue for the nine months ended September 30, 1998
decreased by $9,194,000 to $45,657,000 compared to pro forma revenue of
$54,851,000 for the nine months ended September 30, 1997. The decrease is
due primarily to the closing of Datatech which reduced revenue by
approximately $12,500,000 from 1997 as well as the decision made to stop
servicing certain distribution customers. Offsetting this increase was higher
revenue in certain of the remaining regions.
The loss for the nine months ended September 30, 1998 decreased by $4,561,000
from the prior year. The major reasons for the decrease were the $2,458,000
charge related to Datatech goodwill together with the increased valuation
reserve related to deferred tax assets of $1,316,000.
LIQUIDITY AND CAPITAL RESOURCES
The level of cash and cash equivalents increased slightly from $366,000 at
December 31, 1997 to $537,000 on September 30, 1998. In addition, the
Company's short-term borrowings under its bank line at State Street decreased
by $3,315,000 to $1,430,000 at September 30, 1998. The availability under
the credit line is limited to the Company's borrowing base, which is a
function of certain accounts receivable and inventories. At September 30,
1998, the borrowing base was approximately $4,700,000.
Cash provided by operating activities was $661,000 for the first nine months
of 1998 reflecting the $937,000 net loss offset by approximately $708,000 of
non-cash charges and a decrease in working capital items of $890,000.
Accounts receivable decreased by $2,965,000 reflecting lower third quarter
sales, which were in part due to the elimination of certain distribution
activities.
Cash utilized in investing activities of $8,583,000 was primarily
attributable to the $8,500,000 cash portion of the Encore Group acquisition,
which was offset by cash on the Encore Group balance sheet at the acquisition
date.
Cash provided by financing activities of $8,092,000 came primarily from two
sources. During the second quarter of 1998, the Company received net
proceeds of $7,375,000 from a warrant exercise program. These funds were
utilized in the second quarter to reduce the Company's credit line. The
excess cash after paying off the credit line was used to fund the cash
component of the Encore Group acquisition price. The Company also borrowed
$4,000,000 utilizing a new term facility during the third quarter. These
loan proceeds were used to fund the remaining cash portion of the Encore
Group acquisition.
11
<PAGE>
With the completion of the revised financing agreement in the third quarter,
the Company anticipates that its line of credit arrangement will be
sufficient to fund short-term working capital requirements.
YEAR 2000 UPDATE
The year 2000 ("Y2K") issue relates to the ability of computer systems and
other equipment to process accurately certain data before, during, or after
the year 2000. The Company is in the process of evaluating the impact of the
Y2K issues in several areas.
The first area is the impact of the Y2K issue on internal business processing
systems. Due to the growth of the Company through a number of acquisitions,
the Company currently uses a number of different business processing systems.
Certain of these systems are not Y2K compliant. To address the
inefficiencies caused by multiple different systems and the Y2K issue, the
Company determined in early 1998 to replace all existing systems with new
uniform Y2K compliant systems that are expected to improve operating
efficiency. The Company is currently evaluating responses from several
software companies to a request for proposal sent out by the Company, and
anticipates making a final selection prior to the end of the year. Once a
software vendor is selected, implementation is expected to occur in the first
and second quarters of 1999. The cost of this system including software,
hardware, and implementation costs, is expected to be in the range of
$400,000 to $750,000, depending on the vendor selected. To date no material
costs have been incurred.
The second area of concern is with network systems sold and/or installed by
the Company. The Company has instituted a program to review the systems of
all customers who currently purchase ongoing maintenance services from the
Company. This program will provide assistance to customers in reviewing their
networks for Y2K issues. Customers not utilizing support services will be
notified of their need to review their networks for Y2K risks. This process
is approximately 50% complete and expected to be completed by the end of
1998. The cost of this project has not resulted in any material incremental
cost to the Company.
The third area of potential impact is with the Company's software products,
which are sold by the Encore Group. The Company has already developed Y2K
versions of current software and is in the process of upgrading customers
systems to be Y2K compliant. This process should be completed in early 1999.
The cost of developing Y2K compliant systems was included in the cost of
software acquired with the purchase of the Encore Group and any future costs
are expected to be minor.
The Company is also beginning the process of evaluating all phases of its
business operations for Y2K issues other than the three areas above. This
review is expected to be completed by mid 1999. In conjunction with this
review, the Company will develop a contingency plan for any possible
deficiencies that are discovered.
Any contingency plans and the costs that the Company incurs in connection
with the Y2K issues will be influenced by its ability to successfully
identify Y2K issues, the effort required to address the issues, and the
ability of third parties (customers, vendors, landlords etc.) with whom the
Company has business relationships, to successfully address their own Y2K
concerns. These and other unforeseen factors including the failure to correct
a material Y2K problem, could result in an interruption in, or a failure of,
certain business activities or operations and have a material adverse effect
on our results of operations or financial condition.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company has previously reported a lawsuit filed against the
Company by Richard Hjelte, a former employee. In October 1998, the
judge in that case granted the Company's motion for summary
judgement. The time period for filing an appeal of that ruling has
not expired.
Item 2. CHANGES IN SECURITIES
During the quarter 465,000 shares of common stock were issued in
connection with the Encore acquisition described in Note 4. The
common stock was issued to two individuals and was exempt from
registration as a "private offering" pursuant to Section 4(2) of the
Securities Act of 1933.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
On November 11, 1998 the Company announced the execution of a final
merger agreement with Sulcus Hospitality Technologies, Corp. as
discussed in Note 9. The transaction is described in the press
release attached to this filing as Exhibit 99.1.
13
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
(a) Exhibits
<S> <C> <C>
2.1 Acquisition Agreement, dated as of August 31, 1998, among Incorporated by reference to Exhibit 2.1,
Eltrax Systems, Inc., Encore Acquiring Corp., Encore contained in the Company's Current Report on
Systems, Inc., Global Systems and Support, Inc., Five Star Form 8-K dated September 10, 1998.
Systems, Inc., Penelope Sellers, and Joseph T. Dyer
10.1 Employment and Non-Competition Agreement, dated as of Incorporated by reference to Exhbit 10.1,
August 31, 1998 between Eltrax Systems, Inc. and Penelope contained in the Company's Current Report on
Sellers Form 8-K dated September 10, 1998.
10.2 Credit Agreement, dated as of September 11, 1998, between Incorporated by reference to Exhbit 10.2,
Eltrax Systems, Inc., Nordata, Inc., Four Corners Technology, contained in the Company's Current Report on
Inc., Encore Systems, Inc., Global Systems and Support, Form 8-K dated September 10, 1998.
Inc., Five Star Systems, Inc. and State Street Bank and
Trust Company
</TABLE>
27 Financial Data Schedule.
99.1 Press Release
(b) Reports on Form 8-K
The Company filed a Form 8-K dated September 10, 1998 describing the
acquisition of the Encore Group and the revision of its credit
facilities. An amendment to the 8-K is expected to be filed on or prior
to November 24, 1998, containing audited financial statements of the
Encore Group and certain pro forma information.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Eltrax Systems, Inc.
Date: November 16, 1998 /s/ Nicholas J. Pyett
----------------------------------------
Nicholas J. Pyett
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 536,574
<SECURITIES> 0
<RECEIVABLES> 7,365,713
<ALLOWANCES> 0
<INVENTORY> 3,179,588
<CURRENT-ASSETS> 12,369,997
<PP&E> 1,434,236
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,929,199
<CURRENT-LIABILITIES> 12,630,930
<BONDS> 0
0
0
<COMMON> 130,400
<OTHER-SE> 15,069,385
<TOTAL-LIABILITY-AND-EQUITY> 30,929,199
<SALES> 37,908,464
<TOTAL-REVENUES> 37,908,464
<CGS> 28,555,565
<TOTAL-COSTS> 28,555,565
<OTHER-EXPENSES> 10,124,372
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,105
<INCOME-PRETAX> (937,109)
<INCOME-TAX> 0
<INCOME-CONTINUING> (937,109)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (937,109)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> 0
</TABLE>
<PAGE>
DATE: November 11, 1998
FROM: Eltrax Systems, Inc.
2000 Town Center
Suite 690
Southfield, MI 48075
(Nasdaq: ELTX)
William P. O'Reilly (248) 358-1699
FOR IMMEDIATE RELEASE
ELTRAX AND SULCUS TO FORM AN INFORMATION TECHNOLOGY LEADER.
Southfield, MI - Eltrax Systems, Inc. (Nasdaq SmallCap: ELTX) and Sulcus
Hospitality Technologies Corp. (Amex: SUL) today jointly announced the
execution of a final merger Agreement pursuant to which Sulcus will become a
subsidiary of Eltrax. Sulcus is a global leader in the design, development
and marketing of technology solutions that are used in the hospitality and
tourism market to improve the management of business-critical information and
data, with offices, distributors and agents worldwide. The combined
companies will produce over $100 million in revenue in 1998 with over
one-third of that being derived from services.
Under the terms of the Agreement, Eltrax will acquire Sulcus by exchanging
0.55 shares of Eltrax common stock for each share of Sulcus stock. There are
approximately 18,475,000 shares of Sulcus stock outstanding on a fully
diluted basis, and therefore, approximately 10,156,000 shares of Eltrax stock
(including share equivalent options) will be issued in this transaction. The
closing price of Eltrax common stock on November 11, 1998 was $6.50 per
share, and therefore, the total value of this transaction is approximately
$66 million. The Sulcus shareholders will own 42.5% of the Eltrax shares
after closing, on a fully diluted basis. The Eltrax acquisition of Sulcus
has been approved by the Boards of Directors of both companies, and the
closing is contingent upon approval by the shareholders of both companies.
Both companies expect to schedule shareholders' meetings in early 1999, and
to complete this transaction in the first quarter. William P. O'Reilly will
remain the Chairman and Chief Executive Officer of Eltrax and Leon Harris,
the Chief Executive of Sulcus, will become the President and Chief Operating
Officer. Eltrax expects to account for this transaction using the
pooling-of-interests method.
William P. O'Reilly stated that, "This acquisition is the most significant
transaction in the history of our Company. In addition to doubling the size
of our Company, we expect the combination to contribute significantly to
profitability and the enhancement of shareholder value. The combined Company
will offer our customers the most advanced technology available in the
managed network services business and in our hospitality business. The
primary Eltrax strategy remains the formation of a leading information
technology services company, through acquisition and internal growth. Our
acquisition of Encore Systems in September of this year expanded our vertical
market expertise in to the hospitality industry to include advanced industry
applications. With the Sulcus acquisition, we will become the worldwide
information technology services leader in the hospitality industry, offering
a complete information technology solution to that
<PAGE>
important vertical market. The combined technology of Encore and Sulcus will
be the best available in the world; the geographic reach of the combined
businesses will be second to none in our industry; and the ability to provide
complete applications and network solutions to our customers will open many
new doors. There is no doubt in my mind that our network services technology
will be a driving force for growth in the hospitality market. Sulcus is also
a leader in restaurant point-of-sale systems which expands the vertical
markets that we serve from our current vertical penetration in banking,
education and hospitality."
Mr. O'Reilly went on to comment that "This acquisition has several other
significant benefits to Eltrax and the combined business. Sulcus brings a
strong, professional sales force in more than 80 locations, in 20 countries
all over the world, which will greatly expand the opportunities for the
existing Eltrax services and systems. Sulcus also brings experienced senior
management, as well as key management in the field. We are excited about
working with Leon Harris to combine these businesses. Finally and
significantly, the combined companies will enjoy a very strong balance sheet.
Sulcus will add over $25 million in shareholders' equity and approximately $6
million to cash."
Leon Harris commented "Our customers are now deriving competitive advantage
through their use of business-critical applications, such as e-mail,
reservations systems, property management systems, financial applications,
retail point-of-sale applications and customer service systems. In the
future, all of these applications will depend on enterprise networks, which
are themselves becoming more complex and mission-critical. While our
application products have given our customers a new level of performance, we
have found that our customers want to leverage these applications across
their networks. In many cases, our customers look for a single source for
application expertise and for network design, implementation and management
expertise. By combining our technology with the next generation software
technology from Encore and with the network services technology of Eltrax, we
will be able to provide our customers with comprehensive information and
performance management across their networks, an industry first."
Some of the preceding statements in this press release constitute
"forward-looking statements" within the meaning of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended, and
the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. Examples of words indicating forward-looking
statements are "expects" and "will." These forward-looking statements reflect
the Company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating to
the Company's operations and business environment which may cause the actual
results of the Company to be materially different from any future results
expressed or implied by such forward-looking statements. Please see the
section entitled "Certain Important Factors" of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1997, which is incorporated by
reference in this press release, for a list of such uncertainties and
factors. The Company undertakes no obligation to publicly update or revise
any forward-looking statement whether as a result of new information, future
events, or otherwise.
<PAGE>
Eltrax will host a conference call to discuss this announcement at 4:30 p.m.
(EST) on Wednesday, November 18, 1998. To participate in the conference
call, please dial 1-800-633-8580. There will be a playback available from
approximately 5:30 p.m. (EST) on November 18, 1998 for two business days by
dialing 1-800-633-8284 (access #1851279).
Eltrax Systems, Inc. is a nationwide managed network services and information
technology company. Eltrax markets managed network solutions, using
proprietary and generic communications products and services for
enterprise-wide networks, and is a leading provider of proprietary software
products and technology services to the hospitality industry. The Company's
shares are traded on the Nasdaq SmallCap market under the symbol ELTX. The
Company's website is www.eltrax.com.
