<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/ X / ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
Commission File Number 0-22190
ELTRAX SYSTEMS, INC.
(Name of issuer as specified in its charter)
MINNESOTA 41-1484525
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2000 TOWN CENTER
SUITE 690
SOUTHFIELD, MI 48075
(Address of principal executive offices)
(248) 358-1699
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $0.01 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 / / .
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and no disclosure will be contained,
to the best of 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]
As of MARCH 18, 1999, 13,039,938 shares of Common Stock of the
registrant were outstanding, and the aggregate market value of the Common Stock
of the registrant as of that date (based upon the last reported sale price of
the Common Stock reported on that date by the NASDAQ Small Cap Market),
excluding outstanding shares beneficially owned by directors and officers, was
$44,744,409.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held May
25, 1999 (the "1999 Proxy Statement").
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
INTRODUCTION
Eltrax Systems, Inc. (the "Company" or "Eltrax") is an international
provider of information technology services supporting internet and private
network E-commerce applications. Eltrax designs and installs networking systems
for corporate and government customers. The Company also provides monitoring,
management, and maintenance services to support enterprise networks. Eltrax has
acquired several independent companies which now comprise Eltrax's national
network of regional operations. In addition, the Company's Encore subsidiary
provides software and related technology services to the hospitality industry.
The Company headquarters is located at 2000 Town Center, Suite 690,
Southfield, MI 48075 and its telephone number is (248) 358-1699. The Company
maintains a worldwide web address at www.eltrax.com.
HISTORY
The Company completed its initial public offering on December 8, 1992.
At that time, the Company was engaged in two businesses: 1) the distribution of
high density magnetic stripe plastic cards to store information used in
patient admissions to health care facilities (the "Health Card Business"); and
2) a digital image archiving business, specializing in digitizing and archiving
X-ray film and other medical information images (the "Imaging Business"). During
the fiscal years ended March 31, 1994 and 1995, the Company incurred aggregate
net losses of approximately $2.3 million, due primarily to expenditures on
infrastructure, sales and marketing, and research and development, which far
exceeded the Company's revenues.
During the fiscal year ended March 31, 1996, several significant
changes took place at the Company; the Company received additional equity
through a private placement of stock and warrants in June 1995; the Company
installed a new management team in August 1995 to formulate a plan and strategy
to enter the data communications business; and the Company sold the Imaging
Business assets and business. During the nine month transition period ended
December 31, 1996, several additional significant changes took place at the
Company; the Company acquired its first two data communication companies; the
Company sold the Health Card Business assets, thereby discontinuing all of its
pre-1996 business operations; and the Company changed its fiscal year-end to a
calendar year. During 1997, the Company made five additional acquisitions
expanding the Company's geographic coverage and adding new service offerings in
the data communications business. In 1998 the Company acquired Encore Systems,
Inc. Global Systems and Support, Inc. and Five Star Systems, Inc. (collectively
the "Encore Group") The Encore Group provides software and technology services
to the hospitality industry.
During 1997, the Company began focusing its efforts on its end user
network systems business, as well as the Company's entry into the network
monitoring and management business. As a consequence, the Company decided to
consolidate certain offices and to close other offices which specialized in the
lower margin distribution of products to reseller customers. This decision was
being implemented during the first quarter of 1998 and is reflected in the
write-down of certain intangible assets in 1997 and significantly reduced 1998
sales from those activities.
During late 1997, the Company began construction of its Network
Operating Center ("Center"), located in Reading, Pennsylvania. The Center became
operational in early 1998 and provides nationwide remote monitoring and
management services for enterprise wide networks.
2
<PAGE>
MERGER WITH SULCUS HOSPITALITY TECHNOLOGIES CORP.
In November 1998 the Company announced it had reached an agreement to
merge with Sulcus Hospitality Technologies Corp. ("Sulcus"). The shareholders of
both companies approved the merger in March 1999 and the merger became effective
on March 25, 1999. Sulcus provides a range of software products, Squirrel
point-of-sale systems, energy management systems and related services, primarily
to the hospitality and restaurant markets. Sulcus distributes its products and
services throughout the world utilizing a network of distributors and company
owned and operated locations. During 1999 the Company will integrate its
existing Encore business and the Lodgistix division of Sulcus which operates in
a similar market. Subsequent to the merger, the Company expects to operate four
segments, Network Services, Hospitality, Squirrel (point-of-sale systems) and
International.
(b) NARRATIVE DESCRIPTION OF BUSINESS
INDUSTRY OVERVIEW
Businesses have an increasing need to utilize E-commerce and exchange
information in a variety of increasingly complex fashions. To facilitate the
exchange of information, businesses are using methods such as remote access,
Intranets, the Internet, e-mail, video conferencing and standard voice
applications. The amount of data required to facilitate E-commerce and complete
these information exchanges has increased traffic and placed significant demand
on corporate networks. Furthermore, the technology employed on corporate
networks has become increasingly complex as large multi-vendor heterogeneous
networks have proliferated. The options available to businesses seeking to build
and manage networks to facilitate these information exchanges include many
rapidly developing, highly sophisticated, new technologies such as switches,
routers, hubs, inverse multiplexers, ATM, frame relay and VLANS. Amid this
complex, rapidly changing technological environment, companies are increasingly
focused on their core competencies and relying to a greater degree on network
professionals to help them manage their information exchange requirements. In
addition, key software companies are looking for applications that can improve
efficiencies together with services that assist in the design, installation and
maintenance of such systems.
STRATEGY
The Company's objective is to become the premier provider of
information technology services supporting internet and intranet E-Commerce
applications. To achieve its objective, the Company is pursuing the following
strategies:
EXPAND SERVICE OFFERINGS. The Company has continued to expand its
service offerings, and anticipates services to comprise a growing portion of
revenues. Increasing the proportion of service revenue such as design,
consulting, network monitoring, maintenance and software is expected to
result in improved operating margins. During 1998 and 1999, the Company
acquired the Encore Group and Sulcus which offers help desk and technology
implementation services.
STRATEGIC ACQUISITIONS. The Company intends to continue to pursue
acquisitions to expand within its existing markets, enter new markets, increase
the Company's range of services and to add technical expertise to the Company.
BUILD AND STRENGTHEN EXISTING CLIENT RELATIONSHIPS. The Company
currently sells its services to a large customer base nationwide. The Company
believes that by delivering dependable, high-quality network services, it
will strengthen its relationship with this existing customer base, thus
leading to increased repeat business.
DEVELOP NICHE BUSINESS UNIT FOCUSING ON TECHNOLOGY AND SERVICES.
Within the network management arena, there are selected niche markets where
the Company can bring together specific applications and network management
services to provide a total technology solution to a customer. The
acquisition of the Encore Group in 1998 was such an entry into the
Hospitality industry with a specialized software product. The Company
anticipates entering other such niche markets in the future.
3
<PAGE>
PRODUCTS AND SERVICES
During 1998 Eltrax focused on developing services to provide
customers with a total systems solution for their networking needs. The
relative contribution to revenue of services provided by the Company has
increased significantly as additional capabilities and technical service
personnel have been acquired or hired.
The Company designs, installs, manages, maintains and monitors
communication networks. Equipment central to these operations includes
modems, routers, channel service units, digital service units, switches, hubs
and multiplexers used in communications networks. This type of equipment is
used by customers who need to (i) build and operate networks for remote
access computing; (ii) link local area networks together to form wide area
networks; (iii) provide secure and efficient access to the internet; (iv)
operate as an internet service provider; and (v) build and operate corporate
intranets. Currently, Eltrax purchases equipment directly from a number of
manufacturers including Adtran, Cisco, Micom, Motorola and 3Com.
The Company's Hospitality Division generates the majority of its
revenues from services related to its proprietary hotel property management
systems software. The Division also provides installation and help desk
services related to other companies' products. In mid 1998 the Division began
rolling out its new Medallion windows based property management product.
SALES AND MARKETING
Eltrax sales activities are directed by the Vice President of Sales and
Marketing and local management. The sales personnel are located in approximately
15 states and generally concentrate their efforts in close proximity to their
home locations. No single customer accounted for ten percent or more of Eltrax's
gross revenue during the last three fiscal periods.
The Company uses a variety of sales and marketing techniques including
hosting technical seminars, attending trade shows, publishing newsletters and
direct mailings. Significant amounts of these marketing efforts are reimbursed
by data networking equipment manufacturers through co-op funding programs.
Additionally, the Company relies upon referrals from these manufacturers and
from telecommunication carriers for sales leads.
COMPETITION
Eltrax focuses on the products of leading edge manufacturers to sell
and distribute. Eltrax is not limited to any single technology, manufacturer or
product line. The volume of purchasing that Eltrax has been able to achieve from
these leading edge manufacturers has allowed it to achieve favorable price
discounts from its essential manufacturer suppliers.
Competition for these products and services is intense. As technology
evolves, the historic products that Eltrax sells require a lower level of
technical expertise to sell and support. This leads manufacturers to sell their
products through large distributors who sell based upon price and availability.
The challenge for Eltrax is to continue to maintain a high degree of technical
expertise to provide its customers with leading edge technology coupled with a
customer total solutions as opposed to solely providing hardware.
The competition for customers is intense, with many options
available to customers. Eltrax competes by building client relationships
whereby the customer relies upon Eltrax to be its key supplier of technology
services and products.
GOVERNMENT REGULATIONS
The Telecommunications Reform Act of 1996 is expected to result in
greater competition throughout the telecommunications industry. Greater
competition is expected to create more opportunities for corporate and
government end-users to utilize communication facilities, thus generating
increasing needs for the equipment and services that Eltrax provides. This
greater competition also creates uncertainties for the Company, in that
competitors with far greater resources could take market share away from the
Company.
4
<PAGE>
RESEARCH AND DEVELOPMENT
Until the acquisition of the Encore Group in 1998, the Company did not
perform significant research and development activities. Research and
development expenditures in 1998 represent the costs incurred in connection with
the continuing development and refinement of the Company's Medallion property
management software product. Accordingly, no such expenditures were made during
the year ended December 31, 1997. For the nine-month transition period ended
December 31, 1996, research and development costs which related to the
discontinued businesses have been included in discontinued operations.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 300 persons
on a full-time basis. The Company's employees are not covered by any collective
bargaining agreements and management believes its employee relationships are
good. The Company's ability to successfully offer commercially marketable
products and to establish a market position in view of continuing technological
developments will depend in part upon its ability to attract and retain
qualified technical personnel. Competition for such personnel is intense.
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company's corporate headquarters is approximately 2,200 square feet
and located in Southfield, Michigan. The lease on this space currently provides
for monthly rent of approximately $4,000 per month, including base rent and a
pro rata share of operating expenses and real estate taxes. This lease
terminates on May 31, 2001.
The Company's Southeast Region is located in Raleigh, North Carolina.
The facility is approximately 14,000 square feet, of which approximately 4,000
square feet is used for offices, 3,000 square feet for technical operations and
7,000 square feet for warehouse space. The lease on this space currently
provides for rent of approximately $7,500 per month including base rent and a
share of operating expenses, and terminates in 2001. The lessors of this space
include two shareholders of the Company that have non-controlling interests in
the lease. The Region also has additional sales offices located throughout the
Southeastern United States.
The Company's Mid Atlantic Region's main facility is located in
Reading, Pennsylvania. The facility is approximately 20,000 square feet, with
8,000 square feet used for offices, 10,000 for technical and warehouse space and
2,000 for the Company's Network Operating Center. The lease on this space
currently provides for base rent of approximately $6,000 per month, and
terminates in 2000 unless renewed. The Region also maintains sales offices in
New Jersey and Virginia.
The Company's Midwest Region's main facility is located in North
Olmsted, Ohio. The facility is approximately 5,600 square feet, with 4,400
square feet used for offices, 600 for technical space and 600 for warehouse. The
two leases covering this space currently provide for base rent of approximately
$7,000 per month. The lessor of this space is a company owned by a shareholder
of the Company. These leases terminate in 2002 and 2006 unless renewed. The
Region also maintains several additional sales offices in Ohio, Indiana and
Michigan.
5
<PAGE>
The Company's Southwest Region's main facility is located in
Scottsdale, Arizona. The facility is approximately 7,200 square feet, with 5,000
square feet used for offices, 1,200 for technical space and 1,000 for warehouse
space. The lease on this space currently provides for base rent of approximately
$5,000 per month and terminates in 1999, but is expected to be renewed. The
Region also maintains several sales offices in the Southwestern United States.
The Company's Western Region's facility is located in Agoura Hills,
California, and consists of 2,250 square feet. Approximately 750 square feet of
this space is used for offices, 500 square feet for technical operations, and
1,000 square feet for warehouse space. The lease on this space currently
provides for base rent of approximately $1,500 per month, and terminates in
1999.
The Company's Encore Group is located in Atlanta, Georgia and consists
of approximately 17,000 square feet. Approximately 5,000 square feet is used for
the Company's help desk operations and 12,000 square feet are used for general
office space. The lease on this space currently provides for base rent of
approximately $28,000 per month, and terminates in April, 2000. The Group also
maintains an office in Phoenix, Arizona for its software development activities
and a sales office in Florida.
The headquarters of Sulcus is located in Greensburg, Pennsylvania and
consists of approximately 10,000 square feet. The leases on various portions
of this space expire through September, 2001 and the monthly lease costs are
approximately $15,000.
The Lodgistix, Inc. subsidiary of Sulcus leases approximately
18,000 square feet in Witchita, Kansas. This facility houses the Lodgistix
service and support functions. This lease expires in November, 2001 and
provides for monthly lease costs of approximately $21,000.
The Squirrel Systems of Canada, Inc. subsidiary of Sulcus leases
21,000 square feet in Vancouver, British Columbia, Canada for its general
administrative, sales and marketing, research and development and assembly
operations. The lease expires in October, 2005 and provides for a monthly
lease cost of $9,000.
Sulcus also leases numerous sales and service offices throughout
North America and in several foreign countries.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal, governmental, administrative or
other proceedings to which the Company is a party of or which any of its
property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1998.
ITEM 4a. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages and the offices held,
as of March 1, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
----------------------- ----- ---------------------------
<S> <C> <C>
William P. O'Reilly 53 Chief Executive Officer of the Company
Edward C. Barrett 50 Executive Vice President and Chief Operating Officer
Terri S. Allen 44 Vice President-Sales and Marketing
Clunet R. Lewis 52 Secretary and General Counsel
Nicholas J. Pyett 39 Chief Financial Officer and Treasurer
</TABLE>
Information regarding the business experience of the executive officers
is set forth below.
WILLIAM P. O'REILLY has been Chief Executive Officer of the Company
since January 1997, Chairman of the Board of Directors since August 1995 and a
director of the Company since July 1995. For the past 15 years, Mr. O'Reilly has
been a private investor and entrepreneur who has managed several different
successful business ventures. In 1989, Mr. O'Reilly formed a group of investors
to acquire Military Communications Center, Inc., where he served as Chairman of
the Board and Chief Executive Officer from 1989 to 1994. In 1986, Mr. O'Reilly
founded Digital Signal, Inc., a provider of fiber optic capacity to long
distance carriers in the telecommunications industry, where he served as Chief
Executive Officer from 1986 to 1989. In 1981, Mr. O'Reilly founded Lexitel
Corporation, a long distance carrier (which was subsequently acquired by ALC
Communications, Inc.), where he served as Chairman of the Board and Chief
Executive Officer from 1980 to 1984. Mr. O'Reilly is also currently a director
of Pointe Communications, Inc., a builder and operator of international
communication networks which provides voice, video and data services, and
several private companies.
6
<PAGE>
EDWARD C. BARRETT joined the Company in August 1997 with the
acquisition of Hi-Tech Connections, Inc. where he served as President for over
thirteen years. In October, 1997, Mr. Barrett assumed the responsibilities of
Chief Operating Officer and was elected an Executive Vice President in February
1998. Since November 1998, Mr. Barrett has served as a director of First
Leesport Bancorp.
TERRI S. ALLEN joined the Company in July 1998 as the Company's Vice
President of Sales and Marketing. Ms. Allen came from Xerox Corporation where
she was employed for approximately 20 years in a variety of positions including
Vice President-Graphic Arts Marketing, Vice President/General Manager-Xerox of
the Carolinas and National Operations Manager-Contracting Services.
CLUNET R. LEWIS has served as a director of the Company since August
1995. From April 1997 he has served as General Counsel and Secretary of the
Company. From September 1996 to March 1997, Mr. Lewis served as Acting Chief
Financial Officer of the Company. Mr. Lewis was a member of the law firm of
Jaffe, Raitt, Heuer & Weiss, P.C. for 20 years, ending in 1993. From 1989 to
1994, Mr. Lewis acted as Secretary, General Counsel and director of Military
Communications Center, Inc. Since 1993, Mr. Lewis has also served on the
Board of Directors and the audit committee of Sun Communities, Inc., a New
York Stock Exchange real estate investment trust.
NICHOLAS J. PYETT joined the Company in April 1997 as Chief Financial
Officer and Treasurer. Prior to joining the Company, Mr. Pyett had over 10 years
experience in private industry, most recently as the Chief Financial Officer of
Arcadia Services, Inc., a national healthcare service company. Mr. Pyett also
has extensive public accounting experience with Arthur Andersen & Company.
On March 24, 1999 the Company entered into an employment agreement
with Don C. Hallacy under which Mr. Hallacy will become the President and
Chief Executive Officer of the Company in April, 1999. Mr. Hallacy is
currently Vice President, Next Generation Systems at Sprint Corporation where
he has been employed since 1992.
7
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the national over-the-counter
market on the NASDAQ Small Cap Market under the symbol "ELTX". The following
table sets forth the quarterly high and low bid prices for the Company's Common
Stock for the years ended December 31, 1998 and 1997 as well as the nine-month
transition period ended December 31, 1996 as reported by the NASDAQ SmallCap
Market. The prices set forth below do not include adjustments for retail
mark-ups, markdowns or commissions and represent inter-dealer and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
First Quarter .................................. $ 7.25 $ 4.88
Second Quarter ................................. 10.38 5.72
Third Quarter .................................. 8.38 3.75
Fourth Quarter ................................. 8.00 3.88
YEAR ENDED DECEMBER 31, 1997:
First Quarter .................................. $ 7.38 $ 4.75
Second Quarter ................................. 7.50 5.50
Third Quarter .................................. 8.50 5.00
Fourth Quarter ................................. 7.13 3.88
NINE-MONTH TRANSITION PERIOD ENDED
DECEMBER 31, 1996:
First Quarter .................................. $ 8.13 $ 3.00
Second Quarter ................................. 7.25 4.75
Third Quarter .................................. 6.25 5.00
</TABLE>
As of December 31, 1998, there were approximately 200 shareholders of
record. The Company estimates that an additional 2,800 shareholders own stock
held for their accounts at brokerage firms and financial institutions. The
Company has never paid cash dividends on any of its securities. The Company
currently intends to retain any earnings for use in its operations and does not
anticipate paying cash dividends in the foreseeable future.
The following chart sets forth the information regarding all securities
issued by the Company during the year ended December 31, 1998, which were not
registered under the Securities Act:
<TABLE>
<CAPTION>
DATE OF EXEMPTION CONVERSION/EXERCISE
SECURITIES ISSUED ISSUANCE PURCHASER CONSIDERATION CLAIMED PRICE
- ------------------------ -------------- ----------------- --------------------- ---------------- ---------------------
<S> <C> <C> <C> <C> <C>
418,500 shares 9/10/98 Penelope A. Common Stock of 4(2) of the N/A
Common Stock Sellers Encore Group (1) Securities Act
46,500 shares 9/10/98 Joseph T. Dyer Common Stock of 4(2) of the N/A
Common Stock Encore Group (1) Securities Act
</TABLE>
(1) For a description of the transaction, see the Company's Current Report
on Form 8-K dated September 10, 1998
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's financial statements and related notes thereto and
"Management's Discussion and Analysis". The statement of operations data and
the balance sheet data have been derived from the consolidated financial
statements of the Company. The historical results are not necessarily
indicative of future results. All amounts in thousands except per share data.
<TABLE>
<CAPTION>
Nine Month
Transition
Period Ended
Years Ended December 31, December 31, Years Ended March 31, (Unaudited)
------------------------ --------------------- -----------
1998 1997(d) 1996 1996 (b) 1995 (c)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (a):
Revenue $ 50,663 $ 49,934 $ 29,731 $ 17,869 $ 13,376
Income (loss) from Continuing Operations (2,522) (11,332) (859) 10 325
Income (loss) from Continuing Operations
per Common Share - basic (.21) (1.34) (.11) -- .07
BALANCE SHEET DATA:
Total Assets 29,739 21,491 16,646 6,480 5,033
Long-term Obligations 2,665 -- -- -- --
</TABLE>
(a) Includes the operations of the following companies acquired by Eltrax
from their respective dates of acquisition: Nordata, Inc. and Rudata,
Inc. (together, "Datatech") (May 17, 1996), Four Corners Technology, Inc.
(July 1, 1997), Hi-Tech Connections, Inc. (August 1, 1997), DataComm
Associates, Inc. and Midwest Telecom Associates, Inc. (October 31,
1997) and the Encore Group, (September 1, 1998). The results of
Atlantic Network Systems, Inc. ("ANS") and EJG Techline Incorporated
("Techline") have been included for all periods presented. These two
companies merged with Eltrax on October 31, 1996 and May 17, 1997,
respectively, in transactions accounted for as pooling-of-interests.
On January 31, 1997, the Company acquired certain assets of the MST
Distribution Business ("MST") from MRK Technologies, LTD.
(b) The selected financial data for the year ended March 31, 1996 is derived
from the Eltrax financial statements for the year ended March 31, 1996,
restated to include the results of Techline.
(c) The selected financial data for the fiscal years ended March 31, 1995 is
derived from the unaudited annual financial statements of ANS and
Techline, as well as certain Eltrax historical data. The March 31, 1995
data represents information for the year ended December 31, 1994 for ANS
and Techline. In 1996, all other units of Eltrax, which were operating at
March 31, 1995, were discontinued. The Eltrax data included above for
1995 represents management's estimate of the income, expenses and assets
from those years that were unrelated to the subsequently discontinued
operations.
(d) The 1997 loss from operations includes $5,714 in goodwill impairments and
$1,316 in income taxes resulting from the recognition of a full valuation
allowance on deferred tax assets.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements in this Form 10-K 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. 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.
CHANGE IN FISCAL YEAR END AND INFORMATION PRESENTED
In October 1996, the Company changed its fiscal year-end from March 31
to December 31, which resulted in a nine-month transition period ended December
31, 1996. The decision to change the fiscal year-end was made for more
convenience in both internal and external communications. To facilitate
comparative analysis, the Company has elected to present the results of
operations for the years ended December 31, 1998, 1997 and December 31, 1996
along with the results of operations for the nine-month transition period
ended December 31, 1996.
The following information excludes the operations of the Company's
Health Card Business, which has reflected as a discontinued operation in the
accompanying financial statements.
RESULTS OF OPERATIONS
Selected Historical Financial data of Eltrax is set forth below (in
thousands).
10
<PAGE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Nine Month
Transition
Years Ended December 31, Period December 31,
--------------------------------------------------------
1998 1997 1996 1996
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 50,663 $ 49,934 $ 34,649 $ 29,731
Cost of Revenue 37,745 41,329 28,636 24,710
-------- -------- -------- --------
Gross Profit 12,918 8,605 6,013 5,021
Operating Expenses 15,131 18,377 6,787 5,875
-------- -------- -------- --------
Operating Loss (2,213) (9,772) (774) (854)
Interest Income (Expense) (309) (244) 14 (5)
-------- -------- -------- --------
Pretax Loss from Continuing Operations (2,522) (10,016) (760) (859)
Income Taxes -- 1,316 -- --
-------- -------- -------- --------
Loss from Continuing Operations $ (2,522) $(11,332) $ (760) $ (859)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Total revenue for the year ended December 31, 1998 increased
slightly to $50.7 million compared to total revenue of $49.9 million for the
year ended December 31, 1997. This increase is due to the inclusion of the
acquisitions made by the Company in both 1998 and 1997. Sales from the Encore
Group, acquired in September, 1998 totaled approximately $4.7 million, and
the full year sales from the 1997 acquisitions increased revenue by $15.6
million. These increases were offset by reduced sales at Datatech and to
certain distribution customers, which decreased by approximately $19.0 million
in 1998 as compared to 1997.
The gross margin percentage increased significantly to 25.5 percent
in the year ended December 31, 1998 from 17.2 percent in the year ended
December 31, 1997. This increase is due to higher margins at the businesses
acquired during 1998 and 1997 which include a higher proportion of service
revenue. In addition, sales in 1997 from the Company's Datatech subsidiary
and distribution operations generally carried lower margins. The Company's
Encore Group margin was approximately 45% in 1998. In the fourth quarter of
1998, the Company recorded a $.4 million provision for inventory reserves on
remaining distribution related products, reducing the 1998 gross profit by
.8%.
Operating expenses decreased 17.7 percent to $15.1 million, or 29.9
percent of revenue in the year ended December 31, 1998, as compared to $18.4
million or 36.8 percent of revenue, in the year ended December 31, 1997. This
decrease is due primarily to the significant goodwill adjustments totaling
$5.7 million recorded in 1997 to reflect the closing of the remainder of the
Company's reseller business. Operating expenses increased by $2.5 million
after taking the $5.7 million charge into account. Approximately $5.4 million
of operating expense increases were due to the full year effect of
acquisitions in 1997 and the Encore acquisition in 1998. In addition, in the
fourth quarter of 1998 the Company recorded approximately $.4 million in
severance, recruiting and related costs. These increases were offset by
expense reductions at Datatech and expenses related to certain distribution
customers.
Interest expense increased slightly in 1998 due primarily to the
borrowings related to the Company's acquisition of the Encore Group.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED)
Results for the year ended December 31, 1997 were significantly
affected by the results of the Company's Datatech subsidiary. As the
subsidiary's operations deteriorated in the first quarter and its losses
increased in the second quarter, the Company undertook an evaluation of the
operation's management and performance. As a result, the Datatech management
team was removed; sales functions were consolidated; inventory was moved and
consolidated with inventory at the Southeastern Region in Raleigh, North
Carolina and the back office functions at Datatech were also consolidated at the
Southeastern Region. Accordingly, the year ended December 31, 1997, reflects
significant expenses related to this situation and includes related charges due
to high levels of customer returns, increased bad debt expenses, provisions to
reduce inventory to market value and severance costs. In addition, the
evaluation resulted in the adjustment of $4.4 million of Datatech goodwill, and
the recording of a valuation allowance against deferred income taxes of $1.3
million.
11
<PAGE>
Total revenue for the year ended December 31, 1997 increased by 44
percent or $15.3 million to $49.9 million when compared to total revenue of
$34.6 million for the year ended December 31, 1996. This increase is due to
the inclusion of the acquisitions made by the Company in both 1996 and 1997.
The four companies purchased in 1997 contributed approximately $10.4 million
of the increase, and sales resulting from the purchase of MST were
approximately $6.2 million. Sales at the Southeast Region were also up
slightly over the prior year. These increases were offset by reduced sales at
Datatech, which decreased by approximately $2.0 million in 1997 compared to
1996, in spite of the 1996 sales including only the seven months since the
date of acquisition.
The gross margin percentage decreased slightly to 17.2 percent in the
year ended December 31, 1997 from 17.4 percent in the year ended December 31,
1996. This decrease is due to lower Datatech margins partially offset by higher
margins at the businesses acquired during 1997 which include a higher proportion
of service revenue.
Operating expenses increased 171 percent to $18.4 million, or 36.8
percent of revenue in the year ended December 31, 1997, as compared to $6.8
million or 19.6 percent of revenue, in the year ended December 31, 1996. This
increase is due to several factors, including the significant goodwill
adjustments totaling $5.7 million that were made to reflect the closing of the
remainder of the Company's reseller business, as well as costs incurred during
the year at Datatech related to customer returns and bad debts. Operating
expenses also increased significantly due to the acquisitions in both 1997 and
1996 as well as the cost of the Company's ongoing growth activities.
Amortization of intangibles contributed $.2 million of the increase.
Interest expense increased significantly due to higher borrowings on
the Company's line of credit utilized to acquire MST and provide operating
capital.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 AND NINE-MONTH TRANSITION PERIOD
ENDED DECEMBER 31, 1996
Total revenue for the year ended December 31, 1997 increased by 68.0
percent to $49.9 million when compared to total revenue of $29.7 million for the
nine-month transition period ended December 31, 1996. This increase is due to
the inclusion of the acquisitions made in 1997 and 1996 as well as the full year
effect in 1997.
The gross margin percentage increased slightly to 17.2 percent in the
year ended December 31, 1997 from 16.9 percent in the nine months ended December
31, 1996 due to higher margins at the businesses acquired in 1997.
Operating expenses increased significantly to $18.4 million in the year
ended December 31, 1997, compared to $5.9 million in the nine months ended
December 31, 1996. This increase is primarily due to the factors relating to
goodwill adjustments, acquisitions, and Datatech related items discussed above,
as well as the full year effect in 1997 compared to the nine-month period ending
December 31, 1996.
Income tax expense in 1997 reflected the $1.3 million valuation
allowance recorded in the second quarter of 1997.
12
<PAGE>
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 consolidated financial statements and
related notes thereto and other sections of "Management's Discussion and
Analysis." The unaudited pro forma consolidated statement of operations data
is derived from unaudited consolidated financial statements of the Company
that are not included herein. The pro forma results are not necessarily
indicative of future results.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA (UNAUDITED):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997
------ ------
<S> <C> <C>
Revenue $ 58,411 $ 71,468
Cost of Revenue 42,390 54,166
-------- --------
Gross Profit 16,021 17,302
Operating Expenses 19,301 26,960
-------- --------
Operating Loss (3,280) (9,658)
Interest Expense, net (869) (1,032)
-------- --------
Pretax Loss from
Continuing Operations (4,149) (10,690)
Income Taxes (77) (1,325)
-------- --------
Net Loss from
Continuing Operations $ (4,226) $(12,015)
-------- --------
-------- --------
</TABLE>
COMPARISON OF PRO FORMA YEARS ENDED DECEMBER 31, 1998 AND 1997.
The following discussion describes the Company results, as if the 1998
and 1997 acquisitions had taken place as of the beginning of the year ended
December 31, 1997.
The pro forma revenue for the year ended December 31, 1998 decreased by
$13.1 million when compared to the pro forma revenue for the year ended December
31, 1997. This decrease is primarily due to the decreased revenue related to
Datatech and the reduction in distribution related sales of $13.0 million. These
decreases were offset by increased revenue at each of the operations acquired in
1998 and 1997.
The pro forma gross margin percentage increased to approximately 27.4
percent in the year ended December 31, 1998 from 24.2 percent in the year ended
December 31, 1997. This increase is also primarily attributed to the 1997 sales
at Datatech, and the reduced distribution sales. These sales carried
significantly lower margins.
The pro forma operating expenses of the Company decreased to $19.3
million in the year ended December 31, 1998, compared to $27.0 million in the
year ended December 31, 1997. This decrease is due to several factors, including
the $5.7 million goodwill adjustments made to reflect the closing of the
remainder of the Company's reseller business as well as costs incurred during
1997 at Datatech related to customer returns and bad debts.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The level of cash and cash equivalents decreased by $355,000 from
$366,000 at December 31, 1997 to $11,000 at December 31, 1998. The lower cash
balances reflect improved cash management procedures resulting in the
consolidation of accounts and lower balances. The Company's short-term
borrowings under its bank line decreased by $2.7 million to $2.0 million at
December 31, 1998.
Cash provided by operations in 1998 of $.3 million reflected the
$2.5 million net loss offset by approximately $1.6 million of non-cash
charges and a reduction in inventories and accounts receivable of $4.6
million. Inventories have continued to decrease as the Company implements its
plan to reduce inventory levels and purchase items on an as-needed basis as
compared to maintaining inventory. Accounts receivable decreased during 1998
primarily due to the reduction in sales to certain distribution customers.
Accounts payable decreased by $2.9 million reflecting the lower inventory
levels.
Cash used for investing activities of $8.9 million reflects primarily
the acquisition of the Encore Group in September 1998 for a net cash outlay of
$8.3 million. Fixed asset purchases of $.6 million were slightly above the $.5
million level in 1997.
Cash provided by financing activities of $8.3 million resulted from the
two major transactions. In June 1998 the Company raised approximately $7.4
million by calling the warrants issued in the 1997 private equity offering of
1,050,000 common shares. In September 1998, in connection with the purchase of
the Encore Group, the Company received $4.0 million in term loan financing from
its bank.
The Company renegotiated its credit facility in September 1998
resulting in availability under the credit line of $6.0 million as well as
the $4.0 million term loan. The revised agreement also modified certain
covenants, and extended the agreement to September 2001. The availability
under the credit line is limited to the Company's borrowing base, which is a
function of certain accounts receivable and inventory. At December 1998, the
borrowing base was approximately $5.2 million while borrowings were $2.0
million. The Company was not in compliance with certain covenants at the end
of 1998 and in early 1999. The bank has waived this noncompliance.
Subsequent to the merger with Sulcus in 1999, the Company
anticipates reducing its credit line and renegotiating its banking agreements
to include certain Sulcus assets in its borrowing base (see Notes 9 and 13).
The Company expects that the revised credit facility and cash on hand after
the merger will be sufficient to meet its short-term financing needs and
expects to meet covenant requirements. The Company expects to meet certain
long-term liquidity requirements such as acquisitions through the issuance of
equity or debt securities. The Company considers these sources to be adequate
and anticipates they will continue to be adequate to meet long-term capital
requirements.
YEAR 2000 ISSUES
As a result of certain computer programs being written using two
digits rather than four to determine the applicable year, any computer systems
that have date sensitive software may recognize a date using a "00" as the year
1900 rather than the year 2000 (the "Year 2000 Issue"). This causes programs
that perform arithmetic operations, comparisons or date sorts to possibly
generate erroneous results when the program is required to process dates from
both centuries. This could result in a system failure, incorrect data or other
business disruptions. Eltrax shareholders should take into account the following
risk factors related to the Year 2000 Issue.
INTERNAL BUSINESS PROCESSING SYSTEMS. The first area of concern is the
impact of the Year 2000 Issue on internal business processing systems. Due to
Eltrax's growth, through a number of acquisitions, Eltrax currently uses a
number of different business processing systems. Certain of these systems may
not be Year 2000 capable. To address the inefficiencies caused by multiple
different systems and the Year 2000 Issue, Eltrax determined in early 1998 to
replace all existing systems with new uniform Year 2000 capable systems that
are expected to improve operating efficiency. The final software selection was
made in late 1998. The implementation is expected to occur throughout 1999. The
cost of this system, including software, hardware, and implementation costs, is
expected to be in the range of $500,000 to $700,000. At December 31, 1998, costs
of approximately $350,000 had been incurred.
CUSTOMERS' NETWORK SYSTEMS. The second area of concern is with
network systems sold and/or installed by Eltrax. Eltrax has instituted a
program to review the systems of all customers who currently purchase ongoing
maintenance services from Eltrax. This program will provide assistance to
customers in reviewing their networks for Year 2000 issues. Customers not
utilizing support services will be notified of their need to review their
networks for Year 2000 risks. This process was substantially complete at the
end of 1998. This project has not resulted in any material incremental cost
to Eltrax.
14
<PAGE>
SOFTWARE PRODUCTS. The third area of concern involves the Eltrax
software products, which are primarily the applications of Encore Systems, Inc.,
a recently-acquired subsidiary of Eltrax. Encore had substantially completed
development of Year 2000 versions of its software at the time Eltrax acquired
Encore, and Encore is in the process of upgrading customers' systems to be Year
2000 compliant. This process should be completed in early 1999, and any future
costs are expected to be minor.
SUPPLIERS. The final area of concern is whether the products and
services procured by Eltrax from its major suppliers will function properly or
be available without interruption in the year 2000. Eltrax intends to request
assurances from its major suppliers that they are addressing the Year 2000 Issue
in a timely fashion. There can be no assurance that all of the Eltrax suppliers
of products and services will successfully address the Year 2000 Issue. It will
be impossible to fully assess the potential consequences if service
interruptions occur from suppliers or in infrastructure areas such as utilities,
communications, transportation, banking and government. As a result, Eltrax also
intends to develop a contingency plan by mid-1999 to minimize the impact of such
external events.
While Eltrax's efforts to address these Year 2000 risks will involve
additional costs and the time and effort of a number of employees, Eltrax
believes, based on currently available information, that it will be able to
properly manage its total Year 2000 exposure. However, Eltrax may not be
successful in this effort, which may have a material adverse effect on Eltrax's
business, financial condition or results of operations.
IMPORTANT FACTORS TO CONSIDER
The following factors are important and should be considered carefully
in connection with any evaluation of the Company's business, financial
condition, results of operations and prospects.
ABILITY TO EFFICIENTLY INTEGRATE AND OPERATE SULCUS
The merger between Eltrax and Sulcus became effective March 25,
1999. Because the merger of Eltrax and Sulcus is the largest business
combination that either company has ever done, the Eltrax management team
will face new and challenging issues associated with combining and
integrating the business operations of the companies, especially the
international operations of Sulcus. Eltrax expects to incur significant
expenses in its integration efforts. The failure to successfully combine and
integrate the operations of both companies will have a material adverse
effect on the combined company's future results of operations and financial
condition.
ELTRAX'S ABILITY TO EFFICIENTLY INTEGRATE AND OPERATE RECENT ACQUISITIONS
During the last two years, in addition to Sulcus, Eltrax has merged
with or acquired seven companies, including Encore Systems, Inc., Global Systems
and Support, Inc. and Five Star Systems, Inc. in September 1998. The rapid
growth associated with these acquisitions and the difficulties associated with
the integration of these businesses into Eltrax has placed, and will continue to
place, a significant strain on Eltrax's systems and controls and its management.
The management of Eltrax has expended, and expects to continue to expend,
significant time and effort in integrating the operations of its acquisitions
and in expanding the Eltrax systems and controls to its acquisitions. The
failure of Eltrax management to accomplish these tasks could have a material
adverse effect on Eltrax's results of operations and financial condition.
FUTURE ELTRAX ACQUISITIONS
Eltrax has an announced strategy to continue to pursue acquisitions of
complementary businesses. Future acquisitions by Eltrax may present any of the
following risks:
(1) Future acquisitions may present increased difficulties in
integrating the operations of new businesses into Eltrax;
(2) Eltrax may be unable to retain key employees of the future
acquisitions;
(3) Future acquisitions may not perform at their historical or
expected levels;
(4) Eltrax may incur additional debt in future acquisitions;
(5) Future acquisitions may result in increased amortization
expenses;
(6) Eltrax's current systems, procedures and controls may not be
adequate to support the company's operations as they are
combined with future acquisitions;
15
<PAGE>
(7) The addition of new acquisitions will impose significant added
responsibilities on members of senior management, including
the need to identify, recruit and integrate new senior level
managers and executives; and
(8) Future acquisitions will dilute the stock ownership of current
shareholders and may have a dilutive effect on earnings.
HISTORY OF LOSSES AND UNCERTAINTY OF FUTURE PROFITABILITY
Eltrax has a history of net losses, including a net loss of
$2,522,349 in 1998 and $11,332,343 in 1997. Sulcus also has a history of net
losses, including a net loss of approximately $4,306,000 in 1998 and
$2,010,000 in 1997. Eltrax may continue to generate net losses in the future.
COMPETITION FROM LARGER COMPETITORS
Competition in Eltrax's business is intense and is expected to
increase. In some cases, competitors of Eltrax larger than Eltrax, have longer
operating histories, have more financial, technical, research, marketing, sales,
distribution and other resources, and have greater name recognition and larger
customer bases than Eltrax. In some cases, these disparities put Eltrax at a
competitive disadvantage. This competitive disadvantage could result in reduced
profit margins or loss of market share.
UNCERTAINTIES REGARDING INTELLECTUAL PROPERTY RIGHTS
The success of Eltrax depends in part upon the protection of the
proprietary nature of its application software and hardware products. Eltrax
relies on a combination of copyright and trade secret protection, non-disclosure
agreements and license agreements to establish, protect and enforce its
intellectual property rights. Eltrax shareholders should take into account two
risk factors related to intellectual property rights.
(1) Despite efforts to safeguard and maintain its proprietary
rights, Eltrax may not be successful in doing so, or its
competitors may independently develop technologies that are
substantially similar or superior to Eltrax technologies.
(2) The laws of certain foreign countries do not protect
intellectual property rights to the same extent or in the same
manner as do the laws of the United States. Although Eltrax
will implement protective measures and intend to defend its
proprietary rights vigorously, these efforts may not be
successful.
DEPENDENCE ON SENIOR MANAGEMENT AND KEY EMPLOYEES
The success of the combined company will be effected by the performance
of its executive officers and other key personnel. Eltrax shareholders should
take into account two risk factors related to executive officers and other key
personnel.
(1) The loss of the services of any of its executive officers or
other key employees could have a material adverse effect on
the company as Eltrax greatly depends on the services of a few
key employees and does not have the management depth of some
larger companies.
(2) Eltrax's future success will also depend in part upon its
ability to attract and retain highly skilled and qualified
technical, managerial and marketing personnel. Competition for
such personnel in the information technology services industry
is intense. The inability to hire or retain qualified
personnel could have a material adverse effect on the Company.
16
<PAGE>
RISKS ASSOCIATED WITH NEW PRODUCTS AND SERVICES
Many of the Eltrax products and services are based on new or improved
technologies that have not previously been available. The success of Eltrax
depends, in large part, upon the markets' acceptance of the new technologies
of Eltrax.
The following list contains examples of new technologies that Eltrax or Sulcus
has recently introduced to market:
(1) Eltrax recently introduced NetWatch ONLINE, its remote
network monitoring and management services, on a nationwide
basis.
(2) Encore Systems, Inc. (an Eltrax subsidiary) recently
introduced its next generation, Microsoft(R)
Windows NT(R) based, Medallion property
management software products for the hospitality industry.
(3) Sulcus recently introduced its next generation
Microsoft(R) Windows NT(R) based version of its Squirrel
product line, which is a restaurant point-of-sale management
system.
(4) Sulcus recently introduced its Legacy data warehousing and
data mining products and services. The Legacy products and
services are used to collect data from hotels about their
guests and generate a variety of information useful in
hotel management and marketing efforts.
Eltrax will have to overcome the difficulties inherent in the
introduction of new or improved technologies to the market. Market acceptance
of these new products and services will depend in large part on the ability
of Eltrax to demonstrate to customers the technical capabilities and the
value of these new technologies. These new technologies may not be accepted
in the market in preference to competing products and services presently
available or newer products and services that may be developed in the future.
Lack of market acceptance of Eltrax's products and services would adversely
affect the Company's performance.
DEPENDENCE ON HOSPITALITY AND TOURISM INDUSTRY
The success of Eltrax is dependent upon demand for its products and
services in the hospitality and tourism industry. Consequently, any decline in
capital spending by the hospitality and tourism industry, in general, or by key
customers of Eltrax in those industries, may have a material adverse effect on
Eltrax's business, operating results and financial condition.
EFFECT OF GENERAL ECONOMIC CONDITIONS
Demand for Eltrax products and services depends, in large part, on the
overall demand for communications and networking products and for applications
solutions, which may be affected by general economic conditions that affect
capital spending levels. These general economic conditions including interest
rate fluctuations, economic recessions and customer business cycles. Eltrax
may experience a decline in demand for its products and services due to general
economic conditions.
SULCUS' INTERNATIONAL SALES AND THE RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS
Sales from Sulcus' international operations represented approximately
39% of Sulcus' total sales for the year ended December 31, 1998 and
approximately 42% of total sales for the year ended December 31, 1997. The
largest portion of these international sales are generated in the Pacific Rim
Region, which represented approximately 19% of Sulcus' total sales for the year
ended December 31, 1998 and approximately 22% of Sulcus' total sales for the
year ended December 31, 1997. Eltrax shareholders should take into account the
following risk factors related to sales in international markets.
(1) There could be unexpected changes in regulatory requirements.
(2) New tariffs or other barriers to certain international markets
may develop.
(3) There are inherent difficulties in staffing and managing
foreign operations.
(4) There are often longer payment cycles and greater difficulty
in accounts receivable collection from sales in certain
international markets.
(5) Unstable political environments could affect general business
conditions in certain international markets.
17
<PAGE>
(6) There may be potentially adverse tax consequences in certain
international markets.
(7) There could be gains and losses on foreign currency conversion
to U.S. dollars.
ELTRAX'S NEED FOR ADDITIONAL CAPITAL TO MAKE ACQUISITIONS
Eltrax has developed a strategy of growth through additional
acquisitions and it is anticipated that the combined company will continue to
pursue acquisitions. While Eltrax believes it will continue to pay the purchase
price for a majority of its acquisitions with capital stock, Eltrax anticipates
that additional capital may be required to make certain acquisitions. However,
the additional capital may not be available to the Company to make those
acquisitions.
LACK OF DIVIDENDS
Eltrax has not paid dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future. The company intends
to retain any earnings to finance the development of its business and,
consequently, may never pay cash dividends.
18
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company has also not entered into financial instruments to manage and reduce
the impact of changes in foreign currency exchange rates and interest rates. The
Company may enter into such transactions in the future.
INTEREST RATE RISKS
The Company's debt at December 31, 1998 primarily carries interest
rates which vary with the prime rate. Accordingly, any increases in the banks'
prime rate will reduce the Company's earnings. A 1% increase in the prime rate
on the Company's $5,691,000 of bank debt at December 31, 1998 would result in an
annual expense increase of approximately $57,000.
Subsequent to the merger with Sulcus, the Company expects to pay down
all short-term debt and operate with positive cash balances. Any short-term
investment income derived in the future will also be sensitive to such changes
in interest rates.
FOREIGN CURRENCY RISKS
Historically the Company has had no foreign currency denominated assets
or liabilities. The merger with Sulcus in 1999 will result in exposures to
changes in foreign currency exchange rates. At December 31, 1998 Sulcus had
foreign currency denominated assets and liabilities of approximately
$10,500,000 and $8,100,000 respectively.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ARE FILED UNDER ITEM 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
THE INFORMATION REQUIRED BY ITEMS 10, 11, 12 AND 13 WILL BE INCLUDED IN THE
COMPANY'S PROXY STATEMENT FOR ITS 1999 ANNUAL MEETING OF SHAREHOLDERS AND IS
INCORPORATED BY REFERENCE.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed herewith as part of this Form
10-K:
(1) A list of the financial statements required to be filed as
a part of this Form 10-K is shown in the "Index to Consolidated Financial
Statements and Financial Statement Schedule" on page F-1.
(2) A list of the financial statement schedules required to be
filed as a part of this Form 10-K is shown in the "Index to Consolidated
Financial Statements and Financial Statement Schedule" on page F-1.
(3) A list of the exhibits required by Item 601 of Regulation
S-K to be filed as a part of this Form 10-K is shown on the "Exhibit Index"
filed herewith.
(b) REPORTS ON FORM 8-K
None.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf on March 29, 1999 by
the undersigned, thereunto duly authorized.
ELTRAX SYSTEMS, INC.
By: /s/ William P. O'Reilly
---------------------------------------------
William P. O'Reilly
Chief Executive Officer, Chairman of the Board
and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/S/ William P. O'Reilly Chief Executive Officer, Chairman of the March 29, 1999
- ----------------------------- Board and Director
William P. O'Reilly (Principal Executive Officer)
/S/ Mack V. Traynor, III Director March 29, 1999
- -----------------------------
Mack V. Traynor, III
/S/ Patrick J. Dirk Director March 29, 1999
- -----------------------------
Patrick J. Dirk
/S/ Clunet R. Lewis Secretary, General Counsel and Director March 29, 1999
- -----------------------------
Clunet R. Lewis
/S/ Stephen E. Raville Director March 29, 1999
- -----------------------------
Stephen E. Raville
/S/ James C. Barnard Director March 29, 1999
- -----------------------------
James C. Barnard
/S/ Penelope A. Sellers Director March 29, 1999
- -----------------------------
Penelope A. Sellers
/S/ Nicholas J. Pyett Chief Financial Officer and Treasurer March 29, 1999
- ----------------------------- (Principal Financial Officer and
Nicholas J. Pyett Principal Accounting Officer)
</TABLE>
21
<PAGE>
ELTRAX SYSTEMS, INC.
EXHIBIT INDEX
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ITEM ITEM METHOD OF FILING
- ---- ---- ----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of May 14, 1996 by and among Eltrax 2.1 to the Company's Current Report
Systems, Inc., Rudata Acquisition on Form 8-K dated June 3, 1996.
Corporation, Nordata Acquisition
Corporation, Rudata, Inc., Nordata, Inc.
and Howard B. and Ruby Lee Norton,
as amended pursuant to that First
Amendment to Agreement and Plan of
Merger dated as of May 17, 1996 by
and among the same parties.
2.2 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of October 31, 1996 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., ANS Acquisition on Form 8-K dated November 12, 1996.
Corporation, Atlantic Network
Systems, Inc. and Walter C. Lovett,
Douglas L. Roberson and B. Taylor
Koonce.
2.3 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of May 14, 1997 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., EJG Techline on Form 8-K dated May 14, 1997.
Acquiring Corporation, EJG Techline
Incorporated and Edward J. and
Kathleen M. Gorlitz and Colin E. and
Diane C. Quinn.
2.4 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of July 1, 1997 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., Four Corners on Form 8-K dated July 1, 1997.
Acquiring Corporation, Four Corners
Technology, Inc. and Robert A. Hughes,
Joel J. Blickenstaff and David Noall.
2.5 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of August 15, 1997 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., Hi-Tech Acquiring on Form 8-K dated August 15, 1997.
Corporation, Hi-Tech Connections, Inc.
and Edward C. Barrett, Daniel M. Christy,
David R. Hurlbrink, David R. Spatz,
Raymond H. Melcher and Timothy E. Devlin.
2.6 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of October 31, 1997 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., DataComm Acquiring on Form 8-K dated October 3, 1997.
Corp., Midwest Acquiring Corp., DataComm
Associates, Inc., Midwest Telecom Associates,
Inc. and John M. Good, and Harold Madison.
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
2.7 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of August 31, 1998, among Eltrax 2.1 to the Company's Current Report
Systems, Inc., Encore Acquiring Corp., on Form 8-K dated September 10, 1998.
Encore Systems, Inc., Global Systems
and Support, Inc., Five Star Systems,
Inc., Penelope A. Sellers, and Joseph T. Dyer.
2.8 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit 2.1
of November 11, 1998, by and among to the Company's Registration Statement on
Eltrax, Sulcus Hospitality Technologies Form S-4 dated February 16, 1999 (File
Corp. and Sulcus Acquiring Corporation. No. 333-68699).
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit
Incorporation of the Company, as 3.1 to the Company's Registration
amended. Statement on Form S-18 (File No. 33-51456).
3.2 Bylaws of the Company, as amended. Incorporated by reference to Exhibit
3.2 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
September 30, 1996.
4.1 Specimen Form of the Company's Incorporated by reference to Exhibit
Common Stock Certificate. 4.1 to the Company's Registration
Statement on Form S-18 (File No. 33-51456).
4.2 Warrant, dated as of October 31, 1996, Incorporated by reference to Exhibit
to purchase 106,250 shares of Common 10.4 to the Company's Current Report
Stock of the Company granted to on Form 8-K filed November 12, 1996.
Walter C. Lovett.
4.3 Warrant, dated as of October 31, 1996, Incorporated by reference to Exhibit
to purchase 106,250 shares of Common 10.5 to the Company's Current Report
Stock of the Company granted to on Form 8-K filed November 12, 1996.
Douglas L. Roberson.
4.4 Warrant, dated as of February 9, 1996 Incorporated by reference to Exhibit
to purchase 166,667 shares of Common 4.4 to the Company's Annual Report
Stock of the Company granted to on Form 10-KSB for the year ended
Morgan Q. Payne. December 31, 1997.
4.5 Warrant dated as of September 23, 1997 Incorporated by reference to Exhibit
to purchase 240,000 shares of Common 4.5 to the Company's Annual Report
Stock of the Company granted to on Form 10-KSB for the year ended
Morgan Q. Payne. December 31, 1997.
10.1 Form of Incentive Stock Option Incorporated by reference to Exhibit
Agreement. (1) 10.6 to the Company's Registration
Statement on Form S-18 (File No. 33-51456).
10.2 Form of Non-Statutory Option Incorporated by reference to Exhibit
Agreement. (1) 10.7 to the Company's Registration
Statement on Form S-18 (File No. 33-51456).
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
10.3 Form of Non-Employees Director Stock Incorporated by reference to Exhibit
Option Agreement. 10.10 to the Company's Annual Report
on Form 10-KSB for the year ended
March 31, 1993.
10.4 1992 Stock Incentive Plan. (1) Incorporated by reference to Exhibit
10.4 to the Company's Registration
Statement on Form S-18 (File No. 33-51456).
10.5 1995 Stock Incentive Plan. (1) Incorporated by reference to Exhibit
10.12 to the Company's Annual Report
on Form 10-KSB for the year ended
March 31, 1995.
10.6 1997 Stock Incentive Plan. (1) Incorporated by reference to the Company's
Proxy Statement for its 1997 Annual
Meeting of Shareholders.
10.7 1998 Stock Incentive Plan. (1) Incorporated by reference to Exhibit
10.27 to the Company's Registration
Statement on Form S-4
(File No. 333-68699).
10.8 Agreement dated as of October 31, Incorporated by reference to Exhibit
1996 by and among the Company, 10.7 to the Company's Current Report
William P. O'Reilly, Clunet R. Lewis, on Form 8-K filed November 12, 1996.
Mack V. Traynor, III and Walter C.
Lovett, Douglas L. Roberson and B.
Taylor Koonce. (1)
10.9 Employment and Noncompetion Incorporated by reference to Exhibit
Agreement dated as of May 14, 1997 10.2 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated May 15, 1997.
and Edward J. Gorlitz. (1)
10.10 Employment and Noncompetion Incorporated by reference to Exhibit
Agreement dated as of May 14, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated May 15, 1997.
and Colin E. Quinn. (1)
10.11 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of July 1, 1997 10.2 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated July 1, 1997.
and Joel J. Blickenstaff. (1)
10.12 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of July 1, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated July 1, 1997.
and Robert A. Hughes. (1)
10.13 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of August 15, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated August 15, 1997.
and Edward C. Barrett. (1)
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C>
10.14 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of August 15, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated August 15, 1997.
and Daniel M. Christy. (1)
10.15 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of August 15, 1997 10.3 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated August 15, 1997.
and David R. Hurlbrink. (1)
10.16 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of October 31, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated October 3, 1997.
and John M. Good. (1)
10.17 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of August 31, 1998 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated September 10, 1998.
and Penelope A. Sellers. (1)
10.18 Consulting Agreement dated as of Filed herewith electronically
April 1, 1999 by and between the
Company and Montana Corp. (1)
10.19 Consulting Agreement dated as of Filed herewith electronically
April 1, 1999 by and between the
Company and CRL Enterprises. (1)
10.20 Credit Agreement dated Incorporated by reference to Exhibit 10.2
September 11, 1998 between the to the Company's Current Report on Form
Company, it subsidiaries and State 8-K dated September 10, 1998.
Street Bank and Trust Company.
10.21 Asset Purchase Agreement dated as of Incorporated by reference to Exhibit
January 29, 1997 between Atlantic 99.1 to the Company's Current Report
Network Systems, Inc. and MRK on Form 8-K filed February 12, 1997.
Technologies, LTD.
10.22 Real Estate Lease dated June 1, 1996 Incorporated by reference to Exhibit 10.11
between Walt Lovett, Doug and Lisa to the Company's Annual Report on Form
Roberson and Atlantic Network 10-KSB for the nine month transition
Systems, Inc. period ended December 31, 1996.
10.23 Lease Agreement between Burgoe/Wyomissing Incorporated by reference to Exhibit 10.30
Partners and Hi-Tech Connections, Inc. to the Company's Annual Report on Form
dated September 15, 1996. 10-KSB for the year ended December 31,
1997.
10.24 Lease Agreement between JMG Development Incorporated by reference to Exhibit 10.31
Co. Ltd and DataComm Associates, Inc. to the Company's Annual Report on Form
dated December 1, 1996. 10-KSB for the year ended December 31,
1997.
10.25 Lease Agreement between Werner Palmquist Incorporated by reference to Exhibit 10.32
Investments and Four Corners Technology, to the Company's Annual Report on Form
Inc. dated February 21, 1996. 10-KSB for the year ended December 31,
1997.
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
10.26 Lease Agreement (as amended) between Incorporated by reference to Exhibit 10.28
900 Corporation and Encore Systems, Inc. to the Company's Registration Statement on
originally dated January 21, 1996. Form S-4 (File No. 333-68699).
10.27 Amended and Restated Preferred Vendor Incorporated by reference to Exhibit 10.29
Arrangement, dated as of May 15, 1992 to the Company's Registration Statement on
between Holiday Hospitality Corporation Form S-4 (File No. 333-68699).
and Encore Systems, Inc.
10.28 Form of Consulting Agreement between Incorporated by reference to Exhibit 10.34
Eltrax and non employee Sulcus directors. (1) to the Company's Registration Statement on
Form S-4 (File No. 333-68699).
10.29 Form of Termination Agreement between Incorporated by reference to Exhibit 10.35
Leon Harris and Sulcus. (1) to the Company's Registration Statement on
Form S-4 (File No. 333-68699).
10.30 Form of Agreement between Leon Harris Incorporated by reference to Exhibit 10.36
and Eltrax. (1) to the Company's Registration Statement on
Form S-4 (File No. 333-68699).
10.31 Employment Agreement dated March 24, 1999 Filed herewith electronically.
between the Company and Don C. Hallacy. (1)
21.1 Subsidiaries of the Registrant. Filed herewith electronically.
23.1 Consent of PricewaterhouseCoopers LLP, Filed herewith electronically.
independent accountants.
27.1 Financial Data Schedule. Filed herewith electronically.
</TABLE>
(1) Management contract or compensatory plan or arrangement required to be
identified by Form 10-K Item 14.
26
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following Consolidated Financial Statements, Financial Statement
Schedule and Independent Accountants' Report are included herein on the pages
indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.............................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.................................F-3
Consolidated Statements of Operations for the years ended December 31, 1998
and 1997 and the nine-month transition period ended December 31, 1996.......................F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998
and 1997 and the nine-month transition period ended December 31, 1996......................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998
and 1997 and the nine-month transition period ended December 31, 1996......................F-6
Notes to Consolidated Financial Statements for the years ended December 31, 1998
and 1997 and the nine-month transition period ended December 31, 1996 .....................F-7
Schedule II - Valuation and Qualifying Accounts ..............................................F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Eltrax Systems, Inc.:
In our opinion, the consolidated financial statements listed in the
index appearing on page F-1 presents fairly, in all material respects, the
financial position of Eltrax Systems, Inc. and its subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years ended December 31, 1998 and 1997 and the
nine-month period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(1) on page
F-1, presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Detroit, Michigan
March 12, 1999, except for the
information in Notes 9 and 13 to
which the date is March 26, 1999
F-2
<PAGE>
ELTRAX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
--------------- --------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 11,175 $ 366,364
Accounts receivable, net of allowance for doubtful
accounts of $656,000 and $1,103,000 8,160,858 9,353,349
Inventories, principally purchased components 1,763,690 4,298,794
Other current assets 904,569 602,062
----------- --------------
Total current assets 10,840,292 14,620,569
Furniture and equipment, net of accumulated depreciation and
amortization of $816,116 and $385,016 1,551,444 863,174
Capitalized software, net of accumulated amortization
of $266,668 3,733,332 --
Intangibles, net of accumulated amortization of
$948,872 and $91,714 13,614,321 6,007,259
------------ --------------
Total assets $ 29,739,389 $ 21,491,002
------------ --------------
------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 2,023,943 $ 4,744,529
Current portion of long-term debt 1,635,775 --
Accounts payable 3,389,091 6,010,516
Accrued compensation 789,970 575,383
Accrued expenses 1,247,467 1,196,222
Unearned revenue 2,873,700 967,507
Income taxes payable 544,714 496,123
------------ --------------
Total current liabilities 12,504,660 13,990,280
Long-term debt 2,665,293 --
------------ --------------
Total liabilities 15,169,953 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 34,310,640 24,741,499
Accumulated deficit (19,871,604) (17,349,255)
------------ --------------
Total shareholders' equity 14,569,436 7,500,722
------------ --------------
Total liabilities and shareholders' equity $ 29,739,389 $ 21,491,002
------------ --------------
------------ --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ELTRAX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Products $ 40,791,785 $ 49,934,139 $ 29,730,826
Services 9,871,002 -- --
------------- ------------- -------------
Total revenue 50,662,787 49,934,139 29,730,826
Cost of revenue:
Products 31,475,639 41,328,951 24,709,812
Services 6,269,370 -- --
------------- ------------- -------------
Total cost of revenue 37,745,009 41,328,951 24,709,812
------------- ------------- -------------
Gross profit 12,917,778 8,605,188 5,021,014
Operating expenses:
Selling, general and administrative 13,939,260 12,227,954 5,666,575
Research and development 334,870 -- --
Amortization of intangibles 857,158 435,144 208,330
Goodwill adjustments -- 5,713,721 --
------------- ------------- -------------
Total operating expenses 15,131,288 18,376,819 5,874,905
------------- ------------- -------------
Operating loss (2,213,510) (9,771,631) (853,891)
Interest income 36,755 92,332 --
Interest expense (345,594) (337,074) (4,655)
------------- ------------- -------------
Pretax loss from continuing operations (2,522,349) (10,016,373) (858,546)
Income tax expense -- 1,315,970 --
------------- ------------- -------------
Loss from continuing operations (2,522,349) (11,332,343) (858,546)
Loss from discontinued operations -- -- (197,585)
Gain on disposal of discontinued operations -- -- 57,030
------------- ------------- -------------
Loss from discontinued operations -- -- (140,555)
------------- ------------- -------------
Net loss $ (2,522,349) $(11,332,343) $ (999,101)
------------- ------------- -------------
------------- ------------- -------------
Net loss per common share-basic and diluted:
Continuing operations $ (0.21) $ (1.34) $ (0.11)
------------- ------------- -------------
------------- ------------- -------------
Discontinued operations $ -- $ -- $ (0.02)
------------- ------------- -------------
------------- ------------- -------------
Net loss per share $ (0.21) $ (1.34) $ (0.13)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding-basic 11,965,793 8,478,784 7,435,311
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ELTRAX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE NINE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------------- ------------------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
April 1, 1996 4,000 $ 29,163 5,677,063 $ 56,771 $ 7,642,427 $ (4,597,285) $ 3,131,076
Net loss -- -- -- -- -- (999,100) (999,100)
Conversion of preferred
shares to common shares (4,000) (29,163) 40,000 400 28,763 -- --
Distributions to shareholders -- -- -- -- -- (161,800) (161,800)
Exercise of stock options -- -- 103,000 1,030 206,861 -- 207,891
Warrant charge (1) -- -- -- -- 10,000 -- 10,000
Datatech acquisition -- -- 1,968,000 19,680 5,474,022 -- 5,493,702
-------- ----------- ------------ ------------ ------------- ------------- -------------
BALANCE,
December 31, 1996 -- $ -- 7,788,063 $ 77,881 $ 13,362,073 $ (5,758,185) $ 7,681,769
Net loss -- -- -- -- -- (11,332,343) (11,332,343)
Distributions to shareholders -- -- -- -- -- (258,727) (258,727)
Exercise of stock options -- -- 154,709 1,547 455,816 -- 457,363
Exercise of stock warrants 135,000 1,350 484,650 -- 486,000
Four Corners acquisition -- -- 400,000 4,000 1,881,000 -- 1,885,000
Hi-Tech acquisition -- -- 919,999 9,200 3,082,765 -- 3,091,965
DataComm acquisition -- -- 488,000 4,880 1,878,495 -- 1,883,375
Telecomm acquisition -- -- 12,000 120 46,191 -- 46,311
Private Placement, net -- -- 1,050,000 10,500 3,999,509 -- 4,010,009
Retirement of shares received
in litigation settlement -- -- (100,000) (1,000) (449,000) -- (450,000)
-------- ----------- ------------ ------------ ------------- ------------- -------------
BALANCE,
December 31, 1997 -- $ -- 10,847,771 $ 108,478 $ 24,741,499 $(17,349,255) $ 7,500,722
Net loss -- -- -- -- -- (2,522,349) (2,522,349)
Exercise of stock options -- -- 10,500 105 46,958 -- 47,063
Exercise of stock warrants -- -- 1,716,667 17,167 7,357,833 -- 7,375,000
Warrant charge (1) -- -- -- -- 30,000 -- 30,000
Encore acquisition -- -- 465,000 4,650 2,134,350 -- 2,139,000
-------- ----------- ------------ ------------ ------------- ------------- -------------
BALANCE,
December 31, 1998 -- $ -- 13,039,938 $ 130,400 $ 34,310,640 $(19,871,604) $ 14,569,436
-------- ----------- ------------ ------------ ------------- ------------- -------------
-------- ----------- ------------ ------------ ------------- ------------- -------------
</TABLE>
(1) Compensation related to the issuance of warrants in exchange for services.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ELTRAX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (2,522,349) $(11,332,343) $ (999,101)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Amortization of capitalized software 266,668 -- --
Amortization of intangibles 857,158 435,144 208,330
Depreciation 431,100 153,190 36,690
Warrants issued for services 30,000 -- 10,000
Goodwill adjustment -- 5,713,721 --
Adjustment to deferred income taxes -- 1,315,970 (275,000)
Settlement of lawsuit -- (450,000) --
Gain on sale of the health card business -- -- (57,030)
Gains and losses on marketable securities -- -- 1,262
Changes in current operating items:
Accounts receivable, net 2,170,036 (78,995) (1,089,299)
Inventories 2,408,617 313,963 1,391,651
Other current assets 11,761 (26,993) 65,274
Accounts payable (2,863,883) (3,102,858) 692,839
Accrued compensation (127,457) 144,241 271,212
Accrued expenses (435,100) (336,569) 326,127
Other current liabilities 27,776 359,462 (115,833)
------------- ------------- -------------
Net cash provided by (used for) operating activities: 254,327 (6,892,067) 467,122
------------- ------------- -------------
INVESTING ACTIVITIES:
Cash paid in connection with acquisitions, net of cash
acquired of $233,979 in 1998 and $750,490 in 1996 (8,266,021) (2,028,214) (695,549)
Cash received in acquisitions -- 456,801 --
Proceeds from sale of short-term investments -- -- 1,383,624
Proceeds from sale of health card business -- -- 32,000
Purchases of furniture and equipment, net (599,818) (502,692) (108,143)
------------- ------------- -------------
Net cash provided by (used for) investing activities: (8,865,839) (2,074,105) 611,932
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from term loan 4,000,000 -- --
Payments on long-term debt (445,154) -- --
Proceeds (payments) on credit line, net (2,720,586) 3,942,990 (1,099,136)
Proceeds from issuances of common stock and warrants, net 7,422,063 4,953,372 207,891
Distributions to shareholders -- (258,727) (161,800)
------------- ------------- -------------
Net cash provided by (used for) financing activities: 8,256,323 8,637,635 (1,053,045)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (355,189) (328,537) 26,009
------------- ------------- -------------
CASH AND CASH EQUIVALENTS:
Beginning of period 366,364 694,901 668,892
------------- ------------- -------------
End of period $ 11,175 $ 366,364 $ 694,901
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Eltrax Systems, Inc. (the "Company" or "Eltrax"), is a national
provider of data communications networking products and services. Eltrax
designs, installs, maintains and monitors networking systems for end-user
corporate and government customers. The Company's products and services include
data communications equipment used in remote access and enterprise-wide
communications networks and the installation and maintenance of that equipment.
The Company also offers Network Management Services to enterprise-wide network
customers. In addition, with the acquisition of the Encore Group in 1998, the
Company provides software and related technology services to the hospitality
industry.
In October 1996, the Company changed its fiscal year-end from March 31
to December 31. Accordingly, the 1996 statements of operations, changes in
stockholders' equity and cash flows are for the nine months ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the Company's financial statements requires
management to make estimates and assumptions that affect the amounts reported in
its consolidated financial statements and accompanying notes.
Actual results may differ from these estimates.
CASH EQUIVALENTS
The Company considers all investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist primarily of short-term money market instruments that are recorded at
cost, which approximates market.
INVENTORIES
Inventories consist principally of purchased components and are stated
at the lower of cost or market. Cost is determined using the first-in, first-out
method.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is computed
using the straight-line method over estimated useful lives of two to ten years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the term of the related lease or its estimated useful life. Upon retirement or
disposal of furniture and equipment, the cost and accumulated depreciation are
removed from the accounts, and any gain or loss is included in income.
CAPITALIZED SOFTWARE
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.
The amortization is determined
F-7
<PAGE>
as 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. Software
products are currently being amortized over five years.
INTANGIBLES
Intangible assets are comprised primarily of goodwill representing
the excess of cost over the fair value of net tangible assets acquired and
purchased customer lists. These assets are generally being amortized on a
straight-line basis over estimated useful lives of three to fifteen years.
Intangibles are evaluated for potential impairment of value whenever events
or changes in circumstances indicate that full asset recoverability is
questionable. Such evaluations consider current as well as anticipated
operating results measured on the basis of undiscounted cash flows of the
operation relative to the asset.
REVENUE RECOGNITION
Revenue from equipment and software sales is generally recognized
upon shipment. Revenue for services such as installation and consulting is
recognized as the service is performed. Revenue from maintenance contracts is
recognized ratably over the term of the service agreement. Unearned revenue
includes customer deposits. Included in accounts receivable are unbilled
revenues for sales and services performed. These unbilled revenues are
generally billed shortly after the end of the period.
SEGMENT INFORMATION
In 1998, Eltrax adopted Statement of Financial Accounting Standards
("FAS") 131, Disclosures about Segments of an Enterprise and Related
Information. FAS 131 supersedes FAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FAS
131 also requires disclosures about products and services, geographic areas,
and major customers. The adoption of FAS 131 did not affect results of
operations or financial position but did affect the information disclosed for
segment information.
LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Net loss per share data is determined by dividing the loss by the
weighted average number of common shares outstanding. Common stock
equivalents, representing shares issuable upon the assumed exercise of
dilutive stock options and warrants, have been excluded from loss per share
calculations as their inclusion would be antidilutive.
SERVICE REVENUE
Revenue derived from services was not material for the periods prior
to 1998. In 1998, the acquisition of the Encore Group together with the full
year effect of the 1997 acquisitions resulted in increased service revenues.
The service revenue and cost of revenue has not been presented prior to 1998.
3. MERGERS AND ACQUISITIONS
DATATECH
On May 17, 1996, the Company acquired the outstanding shares of
Nordata, Inc. and Rudata, Inc. (together doing business as Datatech). Datatech
configured, marketed, installed and maintained data communications equipment for
its customers' computer and telecommunications systems over enterprise wide
local area networks and wide area networks. Total consideration paid (including
acquisition costs) included 1,968,000 unregistered shares of the Company's
common stock and $1,626,000 of cash, resulting
F-8
<PAGE>
in a total purchase price of $7,120,000. The value assigned to the Company's
unregistered common stock issued in the acquisition was 35% below the price at
which the Company's registered shares were then trading. This discount
represented management's estimate of the reduced value of the unregistered
shares.
The Datatech acquisition was accounted for as a purchase and,
accordingly, the results of Datatech's operations are included in the Company's
consolidated financial statements from the date of acquisition. The Company
originally recorded goodwill of $4,849,000 in connection with the acquisition,
which was being amortized over 15 years.
As a result of events which occurred at the Company's Datatech
subsidiary in the second quarter of 1997, the Company determined that there was
a permanent impairment in the fair value of the goodwill recorded in connection
with the Datatech purchase and wrote-off $2,458,000 of the Datatech goodwill.
The remaining goodwill of approximately $1,930,000 was written off in the fourth
quarter on 1997 reflecting the Company's decision to change its focus from the
remaining Datatech customer base and close the Datatech facility in early 1998.
Atlantic Network Systems, Inc.
On October 31, 1996, the Company issued 950,000 shares of its
unregistered common stock in exchange for all of the outstanding common stock of
Atlantic Network Systems, Inc. (ANS). ANS provides data networking products and
services. The ANS merger has been accounted for as a pooling-of-interests and,
accordingly, the Company's consolidated financial statements were restated in
1996 to include the accounts and operations of ANS for all periods prior to the
merger.
MST
On January 31, 1997, ANS acquired certain assets of MST Distribution
("MST") from MRK Technologies, LTD. Acquired assets included inventory,
contracts, furniture and equipment and various intangibles. The purchase price,
including transaction costs, was approximately $2,028,000. The acquisition was
accounted for as a purchase and, accordingly, the results of MST's operations
are included in the Company's consolidated financial statements from January 31,
1997.
The Company recorded $1,412,000 of goodwill in connection with the
acquisition, which was being amortized over 15 years. The remaining goodwill of
approximately $1,326,000 was written off in the fourth quarter of 1997 due to
the Company's decision to focus on end user customers and to eliminate sales to
the majority of the MST customer base.
EJG TECHLINE, INCORPORATED
On May 14, 1997, the Company issued 230,000 unregistered shares of its
common stock in exchange for all of the outstanding common stock of EJG
Techline, Incorporated ("Techline"). Techline provides data networking products
and services. The merger with Techline has been accounted for as a
pooling-of-interests and, accordingly, the Company's consolidated financial
statements have been restated to include the accounts and operations of Techline
for all periods prior to the merger and to eliminate intercompany sales prior to
the merger.
FOUR CORNERS TECHNOLOGY, INC.
On July 1, 1997, the Company acquired the outstanding stock of Four
Corners Technology, Inc. ("Four Corners") for 400,000 unregistered shares of the
Company's common stock. Four Corners provides data networking products and
services. The acquisition has been accounted for as a purchase and, accordingly,
the results of Four Corners' operations are included in the Company's
consolidated financial statements from July 1, 1997. The total purchase price
was approximately $1,912,000 (including transaction costs). The value assigned
to the Company's unregistered common stock issued in the
F-9
<PAGE>
acquisition was 35% below the price at which the Company's registered shares
were then trading. This discount represented management's estimate of the
reduced value of the unregistered shares. The Company recorded goodwill of
approximately $1,638,000 in connection with the acquisition, which is being
amortized over 15 years.
HI-TECH CONNECTIONS, INC.
Effective August 1, 1997, the Company acquired the outstanding stock of
Hi-Tech Connections, Inc. ("Hi-Tech") for 169,999 shares of the Company's common
stock (including 20,000 shares issued to a third party relating to certain
expenses incurred in the transaction). Hi-Tech provides data networking products
and services. Under the terms of the agreement, 750,000 additional unregistered
shares were issued in March 1998 based on the earnings generated by Hi-Tech
during the six month period ended December 31, 1997. The accompanying financial
statements have reflected the additional shares as if issued at December 31,
1997. The acquisition has been accounted for as a purchase and, accordingly, the
results of Hi-Tech operations are included in the Company's consolidated
financial statements from August 1, 1997. The total purchase price was
approximately $3,150,000 (including transaction costs). The value assigned to
the Company's unregistered common stock issued in the acquisition was 35% below
the price at which the Company's registered shares were then trading. This
discount represented management's estimate of the reduced value of the
unregistered shares. The Company recorded goodwill of approximately $3,185,000
in connection with the acquisition, which is being amortized over 15 years.
DATACOMM ASSOCIATES, INC. AND MIDWEST TELECOM ASSOCIATES, INC.
On October 31, 1997 the Company acquired the outstanding common stock
of DataComm Associates, Inc. ("DataComm") and Midwest Telecom Associates, Inc.
("Telecom") for 500,000 unregistered shares of the Company's common stock.
DataComm provides data networking products and services. In addition, the
Company paid broker fees of $160,000. These acquisitions were accounted for as
purchases and, accordingly, the results of DataComm and Telecom are included in
the Company's financial statements from November 1, 1997. The total purchase
price was approximately $2,170,000 (including transaction costs). The value
assigned to the Company's unregistered common stock issued in the acquisition
was 35% below the price at which the Company's registered shares were then
trading. This discount represented management's estimate of the reduced value of
the unregistered shares. The Company recorded goodwill of approximately
$1,267,000 in connection with the acquisitions, which is being amortized over 15
years.
ENCORE SYSTEMS, INC.
Effective September 1, 1998 the Company acquired Encore Systems, Inc.
("Encore"), Global Systems and Support, Inc. ("GSSI"), Five Star Systems, Inc.
("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 unregistered shares of Eltrax Common Stock. The
total consideration paid was $11,005,000 including transaction costs. The common
stock was valued at $4.60 a share representing the market value of the shares
upon announcement of the transaction.
Additional cash payments are also due to the Encore Group
shareholders beginning in 2002 if a certain customer is still using existing
software and paying Encore for ongoing maintenance services on that software.
The contingent payment would be approximately 10% of the maintenance contract
amount. As it is not possible to estimate what, if any, payment would be due,
no such amounts have been included in the recording of the Encore Group
acquisition. Any amounts paid will be recorded as goodwill.
The transaction was accounted for as a purchase and, accordingly, the
results of the Encore Group are included in the Company's financial statements
from September 1, 1998. Intangibles resulting from the transaction were
approximately $12,295,000. The purchase price allocation was allocated as
F-10
<PAGE>
follows: $4,000,000 to software products acquired, $2,000,000 to the installed
customer base and workforce with the remainder of $6,295,000 to goodwill. These
assets are being amortized over five, three and ten years respectively.
PRO FORMA
Unaudited pro forma financial information, as though all of the above
acquisitions had been effective as of the beginning of each period, is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------
1998 1997
-------------------- ----------------------
<S> <C> <C>
Revenue $ 58,411,000 $ 71,468,000
Net loss from continuing operations $ (4,226,000) $(12,015,000)
Basic loss per share $ (0.34) $ (1.19)
</TABLE>
4. DISCONTINUED OPERATIONS
On November 22, 1996, the Company sold its Health Card Business for
$32,000 in cash. The financial statements have been reclassified to present
the results of the Health Card Business as discontinued operations. Revenue
from discontinued operations in 1996 was approximately $472,000.
5. SHAREHOLDERS' EQUITY
PRIVATE PLACEMENT
In September and October 1997, the Company issued 1,050,000 common
shares and warrants in a private placement offering to accredited investors. The
shares and warrants were sold for $4.00 a unit and were unregistered. Proceeds
to the Company from the offering, after commissions and expenses, were
approximately $4,000,000. The warrants had an exercise price of $6.25 and were
called by the Company in 1998.
PREFERRED STOCK
The Company originally authorized 1,000,000 shares of Preferred Stock,
30,000 of which were designated as Series A convertible Preferred Stock (the
"Preferred" Stock). All 30,000 shares of the Preferred Stock have been converted
into 300,000 shares of the Company's Common Stock. There were no outstanding
shares of the Preferred Stock at December 31, 1997 and 1996. Currently, there
are 970,000 shares of undesignated Preferred Stock which are authorized but
unissued.
LITIGATION SETTLEMENT
During the fourth quarter of 1997, the Company settled certain
litigation with the prior owners of Datatech. The settlement resulted in a
payment of $20,000 and 100,000 shares of the Company's Common Stock to the
Company. These shares have been reflected as retired in the accompanying
financial statements. The total payment, valued at $470,000, represented the
reimbursement by the prior owners of certain selling, general and administrative
expenses.
F-11
<PAGE>
STOCK WARRANTS
In connection with various financing and acquisition transactions, and
related services provided to the Company, the Company has issued warrants to
purchase the Company's Common Stock. A summary of warrants outstanding at
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
YEAR ISSUED OF WARRANTS PRICE EXPIRATION
- ----------- ----------- -------- ----------
<S> <C> <C> <C>
Nine months ended
December 31, 1996 275,000 $ 5.25-$6.00 October 2006
Year ended December 31, 1997 265,000 $ 5.00-$6.00 January 2007
-------
Total warrants outstanding 540,000
-------
-------
</TABLE>
The warrants are vested as of December 31, 1998, except for 62,539 of
the warrants issued in 1996, which vest periodically through October 1999 and
202,500 warrants which will vest upon the attainment of certain Common Stock
prices and the continuance of services provided.
During 1997 100,000 of the warrants issued during the nine-month period
ending December 31, 1996 were re-priced from $6.00 to $5.25.
In 1998, warrants for 1,716,667 shares were exercised, including
1,050,000 shares related to the Private Placement discussed above. The proceeds
in 1998 from warrant exercises were $7,375,000. Warrants for 135,000 shares were
exercised in 1997 resulting in proceeds to the Company of $486,000.
6. STOCK OPTIONS
The Company has adopted several Stock Incentive Plans (the "Plans"),
under which a total of 3,000,000 shares of the Company's Common Stock are
available for stock incentive awards. At December 31, 1998, 817,298 of these
shares remained available for grant. The Plans provide that certain eligible
individuals, including officers, employees, non-employee directors, agents and
consultants, may be granted options for providing services to the Company. The
Plans are administered by a compensation committee (the "Committee") consisting
of two members of the Board of Directors. Options are granted at per share
amounts as determined by the Committee, but not less than the fair market value,
as defined in the Plans, at the date of the grant. All outstanding options vest
at various times, not to exceed 10 years, through 2008.
On October 19, 1997, approximately 550,000 options issued earlier in
1997 were reissued at the exercise price of $5.25, which was the market price on
that date. On December 1, 1998, 300,000 options issued earlier in 1998 were
reissued at the exercise price of $5.25, which was the market price on that
date. The cancelled original options have been treated as expired.
F-12
<PAGE>
A summary of the options outstanding under the Plans is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------------------------- ----------------------------
1998 1997 1996
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,382,214 $4.36 546,684 $1.95 497,590 $1.15
Granted 1,131,731 5.97 1,688,228 5.80 149,500 4.71
Exercised (10,500) 4.48 (129,709) 3.19 (78,000) 1.70
Forfeited/Expired (567,750) 7.03 (722,989) 6.11 (22,406) 3.35
------------ ------------- -----------
Outstanding at end of year 1,935,695 4.52 1,382,214 4.36 546,684 1.95
------------ ------------- -----------
------------ ------------- -----------
Options exercisable
at year-end 1,492,275 4.27 984,047 3.86 469,559 1.50
------------ ------------- -----------
------------ ------------- -----------
</TABLE>
The following table contains information about stock options
outstanding at December 31, 1998 under the Plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE NUMBER NUMBER
PRICE LIFE (YEARS) PRICE OUTSTANDING EXERCISABLE
-------- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
$ .38-1.00 6.4 $ .78 273,000 273,000
1.38-2.56 2.7 1.83 119,952 119,952
3.19-4.50 8.8 3.89 65,004 25,626
5.00-7.68 8.8 5.45 1,477,739 1,073,697
--------- ---------
1,935,695 1,492,275
--------- ---------
--------- ---------
</TABLE>
In addition to options granted under the Plans, the Company has granted
10,000 nonqualified options at $1.63 which are fully vested and exercisable at
December 31, 1998. These options expire in August 2003.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, a new standard of accounting and
reporting for stock-based compensation plans. The Company adopted the disclosure
provisions of this new standard in 1996. The Company has continued to measure
compensation cost for its stock incentive and option plans using the intrinsic
value-based method of accounting it has historically used and therefore, the new
standard has no effect on the Company's operating results.
F-13
<PAGE>
Had the Company used the fair value-based method of accounting for its stock
option and incentive plans beginning on April 1, 1996 and charged compensation
cost against income, over the vesting period, based on the fair value of options
at the date of grant, the net loss and net loss per common share for the years
ending December 31, 1998 and 1997, and nine-month transition period ended
December 31, 1996, would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------------- -----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Loss from Continuing Operations
As reported $(2,522,000) $(11,332,000) $ (859,000)
Pro forma (4,771,000) (14,627,000) (1,044,000)
Net Loss per Common Share from
Continuing Operations
As reported $ (0.21) $ (1.34) $ (0.11)
Pro forma (0.40) (1.73) (0.14)
</TABLE>
The pro forma information above only includes stock options granted
since December 31, 1995.
The weighted average grant date fair value of options granted was $4.02
per option for the year ended December 31, 1998, $3.22 per option for the year
ended December 31, 1997, and $2.98 for the nine months ended December 31, 1996.
The weighted average grant date fair value of options was determined using the
fair value of each option grant on the date of grant, utilizing the
Black-Scholes option-pricing model concepts and the following key assumptions:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------------------- ------------------- --------------------
<S> <C> <C> <C>
Risk-free interest rate 5.4% 6.3% 6.5%
Expected life 5 years 5 years 5 years
Expected volatility 60% 55% 70%
Dividends expected None None None
</TABLE>
7. OPERATING LEASES
The Company leases office space and certain equipment under operating
leases which expire at various dates through 2006 with some leases containing
options for renewal. Rent expense under these leases was $602,000 for the year
ended December 31, 1998, $464,000 for the year ended December 31, 1997 and
$275,000 for the nine months ended December 31, 1996.
As of December 31, 1998, approximate future commitments under operating leases
in excess of one year are as follows:
<TABLE>
<S> <C>
1999 $ 705,000
2000 445,000
2001 214,000
2002 91,000
2003 85,000
thereafter 261,000
-----------
Total $1,801,000
-----------
-----------
</TABLE>
F-14
<PAGE>
The Company leases a Raleigh, North Carolina facility from a lessor of which two
shareholders of the Company have a non-controlling interest. The lease expense
for this facility was approximately $90,000 for each of the two years ending
December 31, 1998. The Company also leases a facility in Ohio from an entity of
which a shareholder has a controlling interest. The lease expense for this
facility was approximately $85,000 for 1998.
8. INCOME TAXES
The significant components of income taxes are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income Taxes
Currently Payable $ -- $ -- $ 275,000
Deferred -- 1,315,970 (275,000)
----------- ----------- -----------
Income Tax Expense $ -- $ 1,315,970 $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
A reconciliation of the statutory U.S. federal income tax rate to the
Company's effective tax was as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Statutory U.S. rate (34.0)% (34.0)% (34.0)%
State income taxes net of federal benefit -- -- 8.8
Non-deductible goodwill 12.5 16.1 7.2
Non-deductible merger costs -- 0.2 5.9
Non-deductible business meals .1 0.1 4.4
ANS deferred tax asset recognized at date
of merger -- -- (6.1)
Earnings of pooled entities prior to merger -- (0.5) --
Provision for tax contingencies -- -- 13.8
Effect of valuation allowance 21.4 31.2 --
------- ------- -------
0.0% 13.1% 0.0%
------- ------- -------
------- ------- -------
</TABLE>
Deferred income taxes are recognized to reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets and
(liabilities):
Net operating loss
carryforwards $ 2,239,000 $ 2,323,000
Capital loss
carryforwards 206,000 224,000
Unearned revenue 977,000 133,000
Reserves not deductible 541,000 582,000
Cash to accrual adjustments (121,000) (380,000)
Other 178,000 168,000
Valuation allowance (4,020,000) (3,050,000)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
F-15
<PAGE>
At March 31, 1996, the Company had established a full valuation
allowance due to uncertainty as to the likelihood and timing of future taxable
income. This valuation allowance was reversed in connection with the Company's
acquisition of Datatech when it was determined that it was more likely than not
that the deferred tax assets would be realized in a future period. During the
second quarter of 1997, based on recent operating results, the Company again
established a full valuation allowance. The valuation allowance will continue to
be evaluated against the Company's operating performance and adjusted as deemed
necessary.
At December 31, 1998, the Company had net operating loss carry-forwards
of approximately $6,500,000 expiring at various dates through 2012. In addition,
the Company has capital loss carry-forwards of approximately $600,000. The
utilization of certain loss carry-forwards to offset income in future periods
may be limited as to use in any given year.
9. FINANCING ARRANGEMENTS
The Company has a $6,000,000 line of credit with its bank to be used
for working capital purposes. The line is subject to a formula based on eligible
accounts receivable and inventory. At December 31, 1998 approximately $2,024,000
was outstanding under the line. The collateral at December 31, 1998 supported an
available line of approximately $5,200,000. In 1998 the agreement was amended to
include a $4,000,000 term loan and extend the agreement to September, 2001. The
variable interest rate is one percent above the bank's prime rate on the line of
credit and one and one half percent above the bank's prime rate on the term
loan. At December 31, 1998 the interest rate on the line of credit was 8.75%.
The Company is charged a commitment fee of .25% on any unborrowed amounts on the
line of credit. As the rates charged are variable, the carrying value of the
debt approximates its fair value. All Company assets have been pledged as
security for the line of credit and term loan.
The agreement contains certain restrictive covenants, including
achieving certain monthly earnings before taxes, interest, amortization, and
depreciation, as well as certain reporting covenants. Certain ratios change
over the course of the agreement. At December 31, 1998, the Company was not
in compliance with the quarterly positive earnings covenant. Subsequent to
year-end, the Company was not in compliance with several covenants. At the
Company's request, the bank has waived their rights permanently related to
these past events of non-compliance. The Company's bank has also agreed to
renegotiate covenants in light of the recent merger with Sulcus Hospitality
Technologies Corp. (see note 13). The Company has classified the long-term
portion of the term loan as non-current based on the expectation that the
future covenants will be met.
Long-term debt at December 31, 1998 consists of:
<TABLE>
<S> <C>
Term Loan payable in monthly installments of $111,111 through September,
2001 plus interest at 9.25% at December 31, 1998 $3,666,667
Note payable, payable in monthly installments of $15,000 through February,
2001 with no interest 390,000
Other 244,401
-----------
Total long-term debt 4,301,068
Less current portion 1,635,775
-----------
$2,665,293
-----------
-----------
</TABLE>
Maturities on the long-term debt are as follows:
<TABLE>
<S> <C>
1999 $ 1,635,775
2000 1,641,223
2001 1,024,070
-----------
$ 4,301,068
-----------
-----------
</TABLE>
F-16
<PAGE>
Included in the December 31, 1998 and 1997 amounts outstanding on the
line of credit are approximately $960,000 and $560,000 respectively, of
disbursements outstanding that were financed by the line of credit as they were
presented for payment after year-end.
10. SAVINGS AND RETIREMENT PLAN
The Company sponsors a 401(k) savings and retirement plan which is
available to all eligible employees. Under the plan, the Company may make a
discretionary matching contribution. Discretionary matching contributions were
approximately $101,000 for the year ended December 31, 1998, $52,000 for the
year ended December 31, 1997 and $9,700 for the nine-month transition period
ended December 31, 1996.
11. SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information in 1998. Prior to 1998 the Company operated
in only one segment and accordingly, no segment information is applicable for
these periods. With the acquisition of the Encore Group in 1998, the Company
began to operate in two segments.
Network Services: The Network Services Division is comprised of
regional offices that provide networking equipment and services
to customers throughout North America. The Network Services
Division also encompasses the Company's Network Operations Center.
Hospitality: The Hospitality Division provides software and services to
the hospitality industry. The Division is primarily comprised of the
Encore Group acquired in September 1998.
The accounting policies of the reportable segments are the same as
those described in the Notes to Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on income
before income taxes, intangibles amortization, interest income and expense
and corporate expenses. Intersegment sales and transfers are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
<TABLE>
<CAPTION>
Network Services Hospitality Total
----------------- ------------- ------------
<S> <C> <C> <C>
Revenues $ 46,002,987 $ 4,659,800 $ 50,662,787
Segment profit (loss) (81,132) 1,253,551 1,172,419
Total assets 15,809,077 13,427,754 29,236,831
Capital expenditures 389,686 22,548 412,234
Depreciation 347,174 58,123 405,297
</TABLE>
The following table reconciles the above information to the financial
statements:
<TABLE>
<CAPTION>
NET TOTAL CAPITAL
LOSS ASSETS EXPENDITURES DEPRECIATION
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Segments $ 1,172,419 $ 29,236,831 $ 412,234 $ 405,297
Corporate (2,262,103) 502,558 187,584 25,803
Interest, net (308,839) -- -- --
Amortization (1,123,826) -- -- --
------------ ------------ ------------- -------------
Total $(2,522,349) $ 29,739,389 $ 599,818 $ 431,100
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
The Company currently operates exclusively in North America.
F-17
<PAGE>
12. CASH FLOW DATA
Supplemental Cash Flow information is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
NON CASH INVESTING AND FINANCING ACTIVITIES:
Common stock consideration for acquisitions:
Datatech- issuance of 1,968,000 $ 5,493,702
Encore Group- issuance of 465,000 shares $ 2,139,000
Four Corners- issuance of 400,000 shares $ 1,885,000
Hi-Tech- issuance of 919,999 shares 3,091,965
DataComm- issuance of 488,000 shares 1,883,375
Telecom- issuance of 12,000 shares 46,331
Liabilities assumed in conjunction with business acquisitions
were:
Fair value of assets acquired $ 14,709,090 $10,845,419 $10,826,787
Consideration paid 11,005,013 7,231,832 7,119,702
------------ ----------- ------------
Liabilities assumed $ 3,704,077 $ 3,613,587 $ 3,707,085
------------ ----------- ------------
------------ ----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 336,137 $ 304,202 $ 2,442
------------ ----------- ------------
------------ ----------- ------------
Income taxes paid $ 258,703 $ 10,000 $ --
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
13. SUBSEQUENT EVENTS
SULCUS HOSPITALITY TECHNOLOGIES, CORP.
On November 11, 1998 the Company announced that it had agreed to merge
with Sulcus Hospitalities Technology Corp. ("Sulcus") in a pooling-of-interests
transaction. The merger was contingent on shareholder votes by both the Company
and Sulcus. The votes approving the merger were completed on March 25, 1999 and
the transaction was closed on March 26, 1999. At December 31, 1998 the Company
had incurred approximately $125,000 in transaction costs related to the merger.
These costs were recorded as prepaid expenses subject to the closing in 1999.
Sulcus develops, sells and services technology products and software
primarily to the hospitality industry. Unaudited pro forma financial information
as though the Sulcus merger had occurred at the beginning of each period, is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
---------------- ------------------- -----------------
<S> <C> <C> <C>
Revenue $111,056,000 $103,756,000 $ 85,454,000
Net income (loss) from continuing operations (6,712,000) (13,342,000) 635,000
Income (loss) per share - basic (0.31) (0.75) .04
</TABLE>
F-18
<PAGE>
WINDWARD TECHNOLOGIES GROUP, INC.
On January 26, 1999 the Company announced that it had agreed to
merge with Windward Technology Group, Inc. ("Windward"). The merger is
expected to be closed on March 31, 1999 and be accounted for as a
pooling-of-interest transaction. Windward develops, sells and services data
networking and software products. Windward's unaudited revenue and net income
for the year ended December 31, 1998 was approximately $3,700,000 and
$350,000 respectively. The operating results of Windward will be included in
all future financial statements of the Company.
F-19
<PAGE>
ELTRAX SYSTEMS, INC.
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND ALLOWANCES END OF
DESCRIPTION OF PERIOD EXPENSES ACQUIRED DEDUCTIONS PERIOD
- ------------------------------------ ------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS:
1998 $(1,102,641) $ (574,920) $ (150,412) $ 1,171,681 $ (656,292)
1997 (677,000) (878,802) (151,030) 604,191 (1,102,641)
1996 (1) (10,000) (254,000) (400,000) (13,000) (677,000)
RESERVE FOR INVENTORY OBSOLESCENCE:
1998 $ (609,524) $ (471,640) $ (126,487) $ 271,692 $ (935,959)
1997 (98,331) (278,829) (334,998) 102,634 (609,524)
1996 (1) -- (28,331) (70,000) -- (98,331)
DEFERRED TAX VALUATION ALLOWANCE:
1998 $(3,050,000) $ -- $ (970,000) $ -- $(4,020,000)
1997 (205,100) (1,315,970) (1,528,930) -- (3,050,000)
1996 (1) (1,579,700) -- 1,374,600 -- (205,100)
</TABLE>
(1) 1996 represents the nine-month transition period ended December 31,
1996.
F-20
<PAGE>
Exhibit 10.18
O'REILLY CONSULTING AGREEMENT
THIS AGREEMENT is effective as of April 1, 1999, among Eltrax Systems,
Inc. (the "Company"), Montana Corporation (the "Consulting Firm"), and William
P. O'Reilly (the "Consultant"), with reference to the following facts:
A. The Consultant serves as a member of, and as Chairman of,
the Board of Directors of the Company (the "Board");
B. The Consultant is and employee of the Consulting Firm; and
C. The Company wishes to engage the Consultant to perform
certain consulting services in order to benefit from the
Consultant's management experience and abilities, and the
Consultant wishes to accept such engagement, all upon the
terms and conditions set forth in this Agreement.
The Company, the Consulting Firm, and the Consultant agree as follows:
1. ENGAGEMENT. The Company hereby engages the Consultant to perform various
management duties as may be agreed to from time to time between the Board and
the Consultant. Such duties will include participation in senior management and
assisting the Company in identifying and pursuing possible acquisitions, joint
ventures, marketing agreements and other growth opportunities. The Consultant
agrees to accept such engagement.
2. DUTIES.
a) The Consultant agrees to consult with and to provide services to the
Company that are reasonable be requested by the Board, consistent with
the Consultant's expertise and experience and consistent with the
Consultant's current duties. Initially, the Consultant shall serve as
the Chief Executive Officer and Chairman of the Board of the Company.
b) This Agreement and the Consultant's engagement shall not limit the
Consultant from providing services to any other organization or from
engaging in any other activities, as long as such services or
activities are not in conflict with the interests of the Company.
3. TERM. The term of this Agreement will commence on April 1, 1999, and will
continue for a period of three (3) years, unless earlier terminated in
accordance with Section 4 below. The term of this Agreement will automatically
renew for additional two-year terms unless written notice of election to not
renew is given by either party to the other at least one year before the end of
the term.
4. TERMINATION.
a) The Company may terminate this Agreement for cause upon written notice
to the Consultant specifying the cause for termination. For purposes
of this Agreement, "cause" will mean (i) dishonesty, fraud, gross
misrepresentation, embezzlement or material and deliberate injury or
attempted injury, in each case related to the Company or its business,
(ii) any unlawful or criminal activity of a serious nature affecting
the Company, (iii) any willful breach of duty, habitual neglect of
duty or unreasonable job performance after written notice and a thirty
(30) day period to cure, or (iv) a material breach of any provision of
this Agreement after written notice and a thirty (30) day period to
cure.
<PAGE>
b) The Company may terminate this Agreement 90 days following the
Consultant's Total Disability. For purposes of this Agreement, "Total
Disability" will mean such disability that prevents the Consultant
from performing his duties under Section 2 of this Agreement for a
continuous period of 90 days.
c) This Agreement will automatically terminate upon the death of the
Consultant.
d) In the event of termination of this Agreement, the obligations of the
Company and the Consultant under Sections 5(b), 6, 7, 9, and 10 of
this Agreement shall survive and continue.
5. COMPENSATION.
a) ANNUAL CONSULTING FEE. The Company will pay consulting fees to the
Consulting Firm at the rate of $250,000 per year, payable monthly in
advance.
b) EXPENSES. The Company will reimburse the Consulting Firm for
reasonable expenses that the Consulting Firm incurs while performing
duties under this Agreement, provided that such expenses are incurred
and properly accounted for in accordance with the Company's policies.
c) OFFICE AND SUPPORT. The Company will provide the Consultant with an
office and normal support, consistent with current practice.
6. CONFIDENTIAL INFORMATION
a) CONFIDENTIAL INFORMATION means information that is not generally known
and that is proprietary to the Company or that the Company is
obligated to treat as proprietary. This information includes, without
limitation:
i. trade secret or other proprietary information about the Company and
its products; and
ii. proprietary information concerning any of the Company's past, current,
or future products, and information concerning the Company's research,
development, engineering, purchasing, manufacturing, accounting,
marketing, selling or leasing.
The term "Confidential Information" does not include information,
which becomes available to the public other than as a result of a
disclosure by the Consultant or was within the Consultant's possession
prior to its being furnished to the Consultant by or on behalf of the
Company.
b) NONDISCLOSURE. The Consultant will not disclose Confidential
Information to any person not authorized by the Company to receive it.
c) USE. The Consultant will not make any use of Confidential Information,
other than for the benefit of, and on behalf of the Company.
<PAGE>
d) RETURN OF INFORMATION. When the Consultant's engagement with the
Company ends, he will promptly return to the Company all records and
other items in his possession that disclose or describe Confidential
Information.
7. COMPETITIVE ACTIVITIES. The Consultant agrees that during the term of this
Agreement and for a period of two (2) years after termination of this Agreement,
regardless of the reason for such termination, he will not do any of the
following:
a) directly or indirectly compete with the Company's business, as the
Company has conducted it during the Consultant's engagement, within
any state in the United States or any country in which the Company
directly or indirectly markets its products or services;
b) solicit or encourage any Company customer or potential customer to
cease to do business with or to not do business with the Company; or
c) employ or attempt to employ any of the Company's employees on behalf
of any other entity.
8. NO ADEQUATE REMEDY. The Consultant understands that if he fails to fulfill
his obligations under this Agreement, the damages to the Company would be very
difficult to determine. Therefore, in addition to any other rights or remedies
available to the Company at law, in equity or by statute, the Consultant hereby
consents to the specific enforcement by the Company of Sections 6 and 7 of this
Agreement through an injunction or restraining order issued by an appropriate
court.
9. INDEMNIFICATION & DIRECTORS AND OFFICERS LIABILITY INSURANCE.
a) The Consultant and the Consulting Firm will at all times be entitled
to indemnification from the Company in accordance with Article V of
the Amended and Restated Bylaws of the Company as in effect on the
date hereof. The Consultant and the Consulting Firm will be deemed to
be an "Indemnified Person" as defined therein for all purposes, and
the Consultant's and the Consulting Firm's rights thereunder will not
be adversely affected by any subsequent amendment thereof.
b) The Company will maintain in full force and effect one or more
policies of directors and officers liability insurance providing for
such coverage (in amounts not less than present amounts) as may be
determined from time to time by the Board.
10. MISCELLANEOUS.
a) SUCCESSORS AND ASSIGNS. Either party without the other party's prior
written consent may not assign this Agreement.
b) MODIFICATION. This Agreement may be modified or amended only in
writing signed by each of the parties hereto.
c) GOVERNING LAW. The laws of the State of Michigan will govern the
validity, construction, and performance of this Agreement, without
regard to the conflicts of law provisions of any jurisdictions.
<PAGE>
d) ARBITRATION. All disputes under this Agreement shall be submitted to
binding arbitration by the AAA in Southfield, Michigan, and shall be
governed by the AAA commercial arbitration rules. Judgement may be
entered in a court of competent jurisdiction in Michigan, enforcing
any arbitration award.
ELTRAX SYSTEMS, INC.
- -------------------------
By: Nicholas J. Pyett,
Chief Financial Officer
Montana Corporation
- -------------------------
By: William P. O'Reilly
President
CONSULTANT
- --------------------------
William P. O'Reilly
<PAGE>
Exhibit 10.19
LEWIS CONSULTING AGREEMENT
THIS AGREEMENT is effective as of April 1, 1999, among Eltrax Systems,
Inc. (the "Company"), CRL Enterprises, Inc. (the "Consulting Firm"), and Clunet
R. Lewis (the "Consultant"), with reference to the following facts:
A. The Consultant serves as a member of the Board of Directors of
the Company (the "Board");
B. The Consultant is an employee of the Consulting Firm; and
C. The Company wishes to engage the Consultant to perform certain
consulting services in order to benefit from the Consultant's management
experience and abilities, and the Consultant wishes to accept such engagement,
all upon the terms and conditions set forth in this Agreement.
The Company, the Consultant Firm, and the Consultant agree as follows:
1. ENGAGEMENT. The Company hereby engages the Consultant to perform various
management duties as may be agreed to from time to time between the Board and
the Consultant. Such duties will include participation in senior management and
assisting the Company in identifying and pursuing possible acquisitions, joint
ventures, marketing agreements and other growth opportunities. The Consultant
agrees to accept such engagement.
2. DUTIES.
a) The Consultant agrees to consult with and to provide services to the
Company that are reasonable be requested by the Board, consistent with
the Consultant's expertise and experience and consistent with the
Consultant's current duties. Initially, the Consultant shall serve as
the Secretary, General Counsel, and a member of the Board of the
Company.
b) This Agreement and the Consultant's engagement shall not limit the
Consultant from providing services to any other organization or from
engaging in any other activities, as long as such services or
activities are not in conflict with the interests of the Company.
3. TERM. The term of this Agreement will commence on April 1, 1999, and will
continue for a period of three (3) years, unless earlier terminated in
accordance with Section 4 below. The term of this Agreement will automatically
renew for additional two-year terms unless written notice of election to not
renew is given by either party to the other at least one year before the end of
the term.
4. TERMINATION.
a) The Company may terminate this Agreement for cause upon written notice
to the Consultant specifying the cause for termination. For purposes
of this Agreement, "cause" will mean (i) dishonesty, fraud, gross
misrepresentation, embezzlement or material and deliberate injury or
attempted injury, in each case related to the Company or its business,
(ii) any unlawful or criminal activity of a serious nature affecting
the Company, (iii) any willful breach of duty, habitual neglect of
duty or unreasonable job performance after written notice and a thirty
(30) day period to cure, or (iv) a material breach of any provision of
this Agreement after written notice and a thirty (30) day period to
cure.
<PAGE>
b) The Company may terminate this Agreement 90 days following the
Consultant's Total Disability. For purposes of this Agreement, "Total
Disability" will mean such disability that prevents the Consultant
from performing his duties under Section 2 of this Agreement for a
continuous period of 90 days.
c) This Agreement will automatically terminate upon the death of the
Consultant.
d) In the event of termination of this Agreement, the obligations of the
Company and the Consultant under Sections 5(b), 6, 7, 9, and 10 of
this Agreement shall survive and continue.
5. COMPENSATION.
a) ANNUAL CONSULTING FEE. The Company will pay consulting fees to the
Consulting Firm at the rate of $240,000 per year, payable monthly in
advance.
b) EXPENSES. The Company will reimburse the Consulting Firm for
reasonable expenses that the Consulting Firm incurs while performing
duties under this Agreement, provided that such expenses are incurred
and properly accounted for in accordance with the Company's policies.
c) OFFICE AND SUPPORT. The Company will provide the Consultant with an
office and normal support, consistent with current practice.
6. CONFIDENTIAL INFORMATION
a) CONFIDENTIAL INFORMATION means information that is not generally known
and that is proprietary to the Company or that the Company is
obligated to treat as proprietary. This information includes, without
limitation:
i. trade secret or other proprietary information about the Company and
its products; and
ii. proprietary information concerning any of the Company's past, current,
or future products, and information concerning the Company's research,
development, engineering, purchasing, manufacturing, accounting,
marketing, selling or leasing.
The term "Confidential Information" does not include information,
which becomes available to the public other than as a result of a
disclosure by the Consultant or was within the Consultant's possession
prior to its being furnished to the Consultant by or on behalf of the
Company.
b) NONDISCLOSURE. The Consultant will not disclose Confidential
Information to any person not authorized by the Company to receive it.
c) USE. The Consultant will not make any use of Confidential Information,
other than for the benefit of, and on behalf of the Company.
<PAGE>
d) RETURN OF INFORMATION. When the Consultant's engagement with the
Company ends, he will promptly return to the Company all records and
other items in his possession that disclose or describe Confidential
Information.
7. COMPETITIVE ACTIVITIES. The Consultant agrees that during the term of this
Agreement and for a period of two (2) years after termination of this Agreement,
regardless of the reason for such termination, he will not do any of the
following:
a) directly or indirectly compete with the Company's business, as the
Company has conducted it during the Consultant's engagement, within
any state in the United States or any country in which the Company
directly or indirectly markets its products or services;
b) solicit or encourage any Company customer or potential customer to
cease to do business with or to not do business with the Company; or
c) employ or attempt to employ any of the Company's employees on behalf
of any other entity.
8. NO ADEQUATE REMEDY. The Consultant understands that if he fails to fulfill
his obligations under this Agreement, the damages to the Company would be very
difficult to determine. Therefore, in addition to any other rights or remedies
available to the Company at law, in equity or by statute, the Consultant hereby
consents to the specific enforcement by the Company of Sections 6 and 7 of this
Agreement through an injunction or restraining order issued by an appropriate
court.
9. INDEMNIFICATION & DIRECTORS AND OFFICERS LIABILITY INSURANCE.
a) The Consultant and the Consulting Firm will at all times be entitled
to indemnification from the Company in accordance with Article V of
the Amended and Restated Bylaws of the Company as in effect on the
date hereof. The Consultant and the Consulting Firm will be deemed to
be an "Indemnified Person" as defined therein for all purposes, and
the Consultant's and the Consulting Firm's rights thereunder will not
be adversely affected by any subsequent amendment thereof.
b) The Company will maintain in full force and effect one or more
policies of directors and officers liability insurance providing for
such coverage (in amounts not less than present amounts) as may be
determined from time to time by the Board.
10. MISCELLANEOUS.
a) SUCCESSORS AND ASSIGNS. Either party without the other party's prior
written consent may not assign this Agreement.
b) MODIFICATION. This Agreement may be modified or amended only in
writing signed by each of the parties hereto.
c) GOVERNING LAW. The laws of the State of Michigan will govern the
validity, construction, and performance of this Agreement, without
regard to the conflicts of law provisions of any jurisdictions.
<PAGE>
d) ARBITRATION. All disputes under this Agreement shall be submitted to
binding arbitration by the AAA in Southfield, Michigan, and shall be
governed by the AAA commercial arbitration rules. Judgement may be
entered in a court of competent jurisdiction in Michigan, enforcing
any arbitration award.
e) NOTICES. All notices to the Consultant required by this Agreement will
be either hand delivered or sent by fax to a location where the
Consultant is known to reside.
ELTRAX SYSTEMS, INC.
- -------------------------
By: Nicholas J. Pyett,
Chief Financial Officer
CRL Enterprises, Inc.
- -------------------------
By: Clunet R. Lewis,
President
CONSULTANT
- --------------------------
Clunet R. Lewis
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") between ELTRAX SYSTEMS, INC. a
Minnesota corporation having its principal place of business in Atlanta,
Georgia ("Eltrax"), together with its subsidiaries (collectively, the
"Company") and DON G. HALLACY, an individual residing in the State of Georgia
("Employee"), is dated as of March 24, 1999.
ARTICLE 1: EMPLOYMENT, DUTIES AND TERM
1.1 EMPLOYMENT POSITION. Upon the terms and conditions set forth in this
Agreement, the Company hereby employs Employee as President and Chief
Executive Officer of Eltrax, and Employee accepts such employment.
1.2 DUTIES.
(a) Employee shall devote his full-business time and give his best efforts
to the Company and to fulfilling those duties commensurate with his
position; provided, however, that Employee may serve as a director
for a company that does not compete with Eltrax, subject to the prior
approval of the Eltrax Board of Directors, whose consent shall not be
unreasonably withheld.
(b) Employee shall perform his duties in the best interests of the
Company, its employees and its shareholders.
(c) Employee shall comply with the Company's policies and procedures to
the extent they are not inconsistent with this Agreement, in which
case the provisions of this Agreement shall prevail.
1.3 TERM. The term of Employee's employment shall commence on March 24, 1999
(the "Employment Date"), and shall terminate on the later of March 31, 2003
or the final day of the Severance Period (as defined in Section 3.2(b)(ii),
unless earlier terminated pursuant to Article 3 of this Agreement.
Employee will assume his duties as President and CEO of the Company during
April of 1999, on a date to be determined by the Eltrax Board of Directors.
ARTICLE 2: BASE COMPENSATION, EXPENSES, AND BENEFITS
2.1 BASE SALARY. For all services rendered under this Agreement during the
term of Employee's employment, the Company shall pay Employee, in
accordance with Eltrax's usual pay practices, a base salary, exclusive
1
<PAGE>
of benefits and bonuses, at an annual rate of Two Hundred Fifty Thousand
Dollars ($250,000) (the "Base Salary").
2.2 BONUS.
(a) In addition to the Base Salary, Employee will be entitled to an annual
bonus (which shall not be less than zero) calculated as 2% of the
Company's net income (without taking into account amounts paid under
this Section 2.2(a)), as reported in the Company's Form 10-K (the
"Bonus"). Notwithstanding, for each of 1999 and 2000, Employee shall
receive a minimum $100,000 Bonus and for the first three (3) months of
2003, Employee shall receive an amount equal to the Bonus for such
year multiplied by 25%. Company and the Employee agree that the
formula used to determine the Bonus shall be mutually reviewed on or
within 120 days from the Employment Date.
(b) The declaration and payment of the Bonus shall be made as soon as
practicable following the audit of the Company's annual earnings, but
in no event later than April 15th of each year, and shall be paid in
a lump sum to Employee, subject to applicable withholding rules.
2.3 OPTIONS.
(a) Employee shall receive options (the "Bonus Options") issued under
the Eltrax Stock Incentive Plans (the "Option Plans") to acquire
500,000 shares of Eltrax common stock (the "Bonus Stock"), at an
exercise price equal to the market price of such Bonus Stock on the
Employment Date. To the extent permitted under applicable law, the
Bonus Options shall be characterized as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").
(i) The Bonus Options shall vest, subject to Article 3, according
to the following schedule: (A) 100,000 on the Employment Date,
and (B) 100,000 on each successive yearly anniversary of the
Employment Date.
(ii) Provided termination of this Agreement has not occurred
pursuant to Sections 3.1(a) or 3.2(a), the Company guarantees
that at March 31, 2003, or if earlier, the end of the Severance
Period (as defined in Section 3.2(b)(ii)), the difference
between the Bonus Stock Fair Market Value (defined below) and
the aggregate exercise price of Employee's vested Bonus
Options will be no less than $1,305,000. In the event such
difference is less than $1,305,000, the Company will pay to
the Employee the amount of such deficiency (but in no event
more than
2
<PAGE>
$1,305,000) as additional compensation, as soon as practicable
following the calculation of such deficiency. Bonus Stock
Fair Market Value shall mean the average of the closing prices
of Eltrax common stock on each of the five trading days
preceding the day immediately prior to March 31, 2003, or if
earlier, the end of the Severance Period, multiplied by the
number of shares of Bonus Stock which may be acquired pursuant
to exercise of Employee's vested Bonus Options.
(b) During the first quarter of each year beginning in 2000, Employee
shall receive options to acquire a minimum of 50,000 shares of
Eltrax's common stock at the market price of such shares on such
issuance date (the "Performance Options"). To the extent permitted
under applicable law, the Performance Options shall be characterized
as incentive stock options under Section 422 of the Code. The
vesting of such Performance Options shall be based on standards of
performance for the Employee and the Company determined by the
Company's Board of Directors; provided, however, that vesting shall
not be delayed beyond March 31, 2003.
(c) All aspects of the Bonus Options and the Performance Options shall be
governed by the terms and conditions of the Eltrax Option Plans, unless
specific language regarding the treatment of such Options appears in
this Agreement.
2.4 BENEFITS. In addition to other compensation, Employee shall be entitled
to participate in all benefit plans currently maintained or hereafter
established by the Company for the benefit of its executive officers
generally, in accordance with the terms and conditions of such plans (each
a "Benefit Plan"). To the extent Employee is subject to any waiting period
pending entry into a particular Benefit Plan, the Company will reimburse
Employee during such period for his actual COBRA costs, if any, under his
prior employer's group health plan.
2.5 VACATION. Employee shall be entitled to twenty-five (25) paid vacation
days for each twelve (12) month period of employment, which if unused,
shall accrue ratably during each such period.
2.6 EXPENSES. The Company shall reimburse Employee for all expenses
reasonably and necessarily incurred by Employee during the course and in
furtherance of his employment, subject to and made in accordance with such
reasonable and nondiscriminatory policies and procedures as may be
established by the Company as applicable to its employees.
ARTICLE 3: EARLY TERMINATION
3
<PAGE>
3.1 TERMINATION FOR CAUSE.
(a) The Company may terminate Employee's employment immediately for
Cause. For the purpose hereof, "Cause" means: (i) fraud against
the Company; (ii) theft or embezzlement of the Company's assets,
or misuse of Company funds; (iii) willful violation of law resulting
in a felony conviction against the Company; (iv) Employee's conviction
of any felony not in the Company's business; (v) a material breach of
the terms and conditions of this Agreement not cured within thirty (30)
days after written notice describing such breach; or (vi) the
continued failure by Employee to perform his duties under this
Agreement not cured within thirty (30) days after written notice
describing such failure.
(b) In the event of termination for Cause pursuant to this section, none of
Employee's unvested Bonus Options or Performance Options shall vest
following the Termination Date set forth in a Notice of Termination
(as defined in Section 3.4(a)), and Employee shall receive through
such Termination Date, in accordance with the Company's usual pay
practices, the following:
(i) pay at the usual rate of Employee's Base Salary;
(ii) any accrued but unpaid Bonus relating to the prior calendar
year of employment;
(iii) any benefits to which the Employee is entitled under any
Benefit Plan; and
(iv) compensation for all accrued but unused vacation days, for
all periods under this Agreement, to be paid within
thirty (30) days of termination, calculated by multiplying
the aggregate number of such days by a fraction, the
numerator of which equals the Base Salary and the
denominator of which equals 260.
3.2 TERMINATION WITHOUT CAUSE. Either Employee or the Company may terminate
Employee's employment without Cause by delivering to the other party
hereto, a Notice of Termination which specifies a Termination Date no
sooner than thirty (30) days following the date of such Notice. In the
event of termination of this Agreement and of Employee's employment
pursuant to this section, compensation shall be paid as described below:
(a) If the termination is by Employee, Employee shall receive through the
Termination Date, in accordance with the Company's usual pay practices,
each of the items listed in paragraphs (i) - (iv) of Section 3.1(b)
above, and
4
<PAGE>
none of Employee's unvested Bonus Options or Performance Options shall
vest following such Termination Date.
(b) If the termination is by the Company, or by the Employee with Good
Reason (as defined in Section 3.4(c)), Employee shall receive, in
accordance with the Company's usual pay practices:
(i) Each of the items listed in paragraphs (i) - (iv) of
Section 3.1(b) above, through the Termination Date;
(ii) For a period of twelve (12) months following such
Termination Date (the "Severance Period"):
(1) Employee's Base Salary;
(2) The Bonus applicable to the complete calendar year
which ends within the Severance Period, plus a pro-rata
share of the Bonus applicable to the subsequent calendar
year, calculated by multiplying the Bonus for such year
by a fraction, the numerator of which shall equal the
number of days between January 1st and the final day of
the Severance Period, and the denominator of which shall
equal 365; and
(3) Any benefits to which Employee is entitled under any
Benefit Plan; provided, however, that Employee does not
receive comparable benefits during such Severance Period
from another source.
(iii) Until termination of the Severance Period, with respect to
Employee's Bonus Options and Performance Options, Employee
shall be treated as employed by the Company. As a
consequence, Employee's Bonus Options and Performance
Options will continue to vest, in accordance with their
designated schedules, until the end of the Severance Period,
and such Options shall remain exercisable for a period of
three (3) months following the end of the Severance Period.
Following the Severance Period, no vesting of Employee's
Bonus Options or Performance Options shall occur.
3.3 TERMINATION IN THE EVENT OF DEATH OR DISABILITY. Employee's employment
shall terminate in the event of death or Disability of Employee.
"Disability" shall mean Employee's inability, as reasonably determined by
the Eltrax Board of Directors, to perform the essential functions of his
duties under this Agreement because of illness or incapacity for a
continuous period of six (6) months. In the event of Employee's
termination due to death or Disability, Employee shall receive each of
5
<PAGE>
the items listed in paragraphs (i) and (ii) of Section 3.2(b) above, all
unvested Performance Options and Bonus Options shall immediately vest,
and all such Options will remain exercisable through and including the
end of the Severance Period, but in no event beyond such date.
3.4 DEFINITIONS:
(a) "Termination Date" shall mean the effective date of termination
specified in a Notice of Termination; provided, however, that in the
case of Employee's death, the Termination Date shall be the date of
such death, and in the case of Employee's Disability, the Termination
Date shall be the date Eltrax provides written notice of such
Disability to Employee.
(b) "Notice of Termination" shall include a written notice of termination
communicated to the other party hereto in accordance with Section 6.3
hereof; provided, however, that such Notice shall only be effective
if it:
(i) indicates the specific termination provision in this Agreement
relied upon;
(ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination, and
(iii) states the effective date of termination.
(c) "Good Reason" means:
(i) A material breach by the Company of the terms and conditions
of this Agreement not cured within thirty (30) days after the
Company's receipt of written notice describing such breach;
(ii) The removal of Employee as President or CEO of the Company,
or Employee failing to be named as President and CEO of any
company (or its parent) which acquires more than 50% of the
outstanding stock of the Company; or
(iii) Assuming no prior termination of this Agreement, for any
reason, the failure of the Company on or prior to March 1,
2003, to offer Employee the opportunity to renew his
employment for a period of twenty-four (24) months following
March 31, 2003, on the same terms as set forth in
Sections 1.1, 2.1 2.6 (other than Section 2.3(a)), and
Articles 3, 4 and 5 herein.
6
<PAGE>
ARTICLE 4: CONFIDENTIALITY, DISCLOSURE AND ASSIGNMENT
4.1 CONFIDENTIALITY. Employee will not, during the term or after the
termination or expiration of the term of employment, publish, disclose,
or utilize in any manner any Confidential Information (as hereinafter
defined) obtained while employed by the Company. If Employee leaves
the employ of the Company, Employee will not, without its prior written
consent, retain or take away any drawing, writing or other record in any
form containing any Confidential Information. "Confidential Information"
means information or material which is not generally available to or used
by others, or the utility or value of which is not generally known or
recognized as standard practice, whether or not the underlying details are
in the public domain, including: (a) information or material relating
to the Company, and its businesses as conducted or anticipated to be
conducted, business plans, operations, past, current or anticipated
software, products or services, customers or prospective customers, or
research, engineering, development, manufacturing, purchasing, accounting,
or marketing activities; (b) information or material relating to the
Company's inventions, improvements, discoveries, "know-how," technological
developments, or unpublished works, or to the materials, apparatus,
processes, formulae, plans or methods used in the development, manufacture
or marketing of the Company's software, products or services; (c) any
information marked "proprietary," "private," or "confidential"; (d) trade
secrets; (e) software in any stage of development, including source code
and binary code, software designs, specifications, programming aids
(including subroutines and productivity tools), programming languages,
interfaces, visual displays, technical documentation, user manuals, data
files and databases; and (f) any similar information of the type described
above which the Company obtained from another party and which the Company
treats as or designates as being proprietary, private or confidential,
whether or not owned or developed by the Company.
4.2 BUSINESS CONDUCT AND ETHICS. During the term of employment with the
Company, Employee will engage in no activity or employment which materially
conflicts with the interest of the Company, and will comply with all
reasonable, nondiscriminatory Company policies and guidelines.
4.3 SURVIVAL. The obligations of this Article 4 shall survive the expiration
or termination of Employee's employment.
ARTICLE 5: NON-COMPETITION
5.1 NON-COMPETITION. Employee agrees that on and prior to the time he ceases
to provide services to the Company, or until the end of the
7
<PAGE>
Severance Period, if later:
(a) Employee will not, directly or indirectly, alone or as a partner,
member, officer, director, shareholder or employee of any other firm
or entity, engage in any commercial activity in competition with any
part of the Company's business which was under Employee's management
or supervision at any time during the term of this Agreement or any
part of the Company's business with respect to which Employee has
Confidential Information. For purposes of this section,
"shareholder" shall not include beneficial ownership of less than
five percent (5%) of the combined voting power of all issued and
outstanding voting securities of a publicly held corporation whose
voting stock is traded in a public market;
(b) Employee will not divert, or by aid to others, do anything which would
tend to divert, or may divert from the Company, any trade or business
with any customer, supplier or vendor with whom the Company has had
any contact or association; or
(c) Outside the normal course of Employee's duties as President and Chief
Executive Officer, take any affirmative action to induce or attempt
to induce any person employed by the Company to leave the employment
of the Company.
5.2 ENFORCEMENT. In addition to any other rights and remedies available to
the Company for breach of this Article 5, the Company shall be entitled
to enforcement by court injunction.
5.3 EFFECT OF TERMINATION. Upon the termination of Employee's employment, no
additional compensation shall be paid for the non-competition obligation.
ARTICLE 6: GENERAL PROVISIONS
6.1 NO ADEQUATE REMEDY. The parties acknowledge it is impossible to measure
in money the damages which will accrue to either party by reason of a
failure to perform any of the obligations under this Agreement.
Therefore, in the event of a claim for equitable relief, each party hereby
waives the claim or defense that the other has an adequate remedy at law.
6.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the successors
and assigns of the Company. This Agreement shall not be assignable by the
Employee, but its economic terms shall inure to the benefit of the
Employee's heirs and beneficiaries.
8
<PAGE>
6.3 NOTICES. All notices, requests and demands given to or made pursuant
hereto shall, except as otherwise specified herein, be in writing and be
delivered or mailed to any such party at its address which:
(a) In the case of the Company shall be:
Eltrax Systems, Inc.
2000 Town Center, Suite 690
Southfield, Michigan 48075
Attn: Clunet R. Lewis
With a copy to:
William E. Sider, Esq.
Jaffe, Raitt, Heuer & Weiss, P.C.
One Woodward Avenue, Suite 2400
Detroit, Michigan 48226
(b) In the case of Employee shall be:
Don G. Hallacy
4348 Granby Way
Marietta, Georgia 30062
Any notice, if mailed properly addressed, postage prepaid, registered or
certified mail, shall be deemed sent on the registered date or that
stamped on the certified mail receipt, and shall be deemed received on
the second business day thereafter.
6.4 CAPTIONS. The various headings or captions in this Agreement are for
convenience only and shall not affect the meaning or interpretation of
this Agreement.
6.5 GOVERNING LAW. The validity, construction and performance of this
Agreement shall be governed by the laws of the State of Georgia without
giving effect to the conflict of laws principles thereof.
6.6 CONSTRUCTION. Wherever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under
applicable law. If any provision of this Agreement shall be prohibited or
invalid, all remaining clauses shall remain fully enforceable.
6.7 WAIVERS. No failure on the part of either party to exercise, and no
delay in exercising, any right or remedy hereunder shall operate as a
waiver thereof; nor shall any partial exercise of any right or remedy
hereunder preclude any exercise of that or any other right or remedy
granted hereby by law.
6.8 MODIFICATION. This Agreement may not be and shall
9
<PAGE>
not be modified or amended except by written instrument signed by
all parties.
6.9 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding between the parties hereto in reference to all the matters
herein agreed upon and supersedes all prior or contemporaneous agreements,
understandings and negotiations with respect to the subject matter hereof.
6.10 ARBITRATION. With the sole exception of the injunctive relief
contemplated by Section 5.2 of this Agreement, any controversy or claim
arising out of any aspect of the relationship of the parties hereto, will
be settled by binding arbitration in Atlanta, Georgia by a panel of three
arbitrators in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. Judgment upon any arbitration award
may be entered in any court having jurisdiction thereof and the parties
consent to the jurisdiction of the courts of the State of Georgia for
this purpose.
6.11 ATTORNEYS' FEES. In the event there is litigation or other proceedings
between the parties hereto with respect to their rights and obligations
under this Agreement, the prevailing party in any such litigation shall
be entitled to recover from the opposing party all reasonable attorneys'
fees and expenses (including fees of accountants) incurred by the
prevailing party in connection with such proceeding.
6.12 VENUE; JURISDICTION. The parties agree that all actions or proceedings
arising in connection with this Agreement and the instruments, agreements
and documents executed pursuant to the terms of this Agreement shall be
tried, litigated and arbitrated only in the courts of the United States
located in the Northern District of Georgia, the Georgia state courts or
the offices of the American Arbitration Association located nearest
Atlanta, Georgia. The Employee irrevocably accepts for himself and in
respect of his property, generally and unconditionally, the jurisdiction
of such courts. The Employee irrevocably consents to the service of
process out of any such courts in any such action or proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid,
to him, at his address as set forth in the records of the Company, such
service to become effective ten (10) days after such mailing. Nothing in
this Section 6.12 shall affect the right of any party to serve process in
any other manner permitted by law. Employee irrevocably waives any right
he may have to assert the doctrine of FORUM NON CONVENIENS or to object
to venue to the extent any proceeding is brought in accordance with this
Section 6.12.
6.13 HEADINGS. The headings contained in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation
of this Agreement.
6.14 INDEMNIFICATION. The Company acknowledges that it has reviewed that
certain
10
<PAGE>
Agreement Regarding Special Compensation and Post-Employment
Restrictive Covenants by and between Employee and Sprint Corporation
("Sprint:"), dated December 12, 1995 (the "Sprint Agreement"). The
Company agrees that:
(a) The Company will, at its own cost and expense, defend Employee in all
suits, claims or other actions brought by Sprint against Employee
which arise either directly, or indirectly, under or pursuant to
enforcement of the restrictive employment covenants contained in
Section 12 of the Sprint Agreement; and
(b) To the extent that after adjudication of the Sprint Agreement Employee
is restricted from complying with the terms and conditions of this
Agreement (the "Injunctive Period"), Employee will continue to receive
all compensation and associated benefits set forth herein as if such
restrictions were not present; provided, however, that during the
Injunctive Period Employee does not receive comparable compensation
for services provided to persons other than the Company; and provided
further, that to the extent permitted by law, Employee otherwise
complies with the terms and conditions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
EMPLOYEE ELTRAX SYSTEMS, INC., together with
its subsidiaries
By:
----------------------------------
Don G. Hallacy William P. O'Reilly
Its: Chief Executive Officer
11
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME UNDER
WHICH SUBSIDIARY JURISDICTION OF PERCENTAGE
NAME OF SUBSIDIARY DOES BUSINESS INCORPORATION OWNER OWNED
<S> <C> <C> <C> <C>
Nordata, Inc. Eltrax California Eltrax 100%
Systems, Inc.
Four Corners Eltrax Arizona Eltrax 100%
Technology, Inc. Systems, Inc.
Encore Systems, Inc. Encore Georgia Eltrax 100%
Systems, Inc.
Global Systems, and GSSI Georgia Eltrax 100%
Support Inc. Systems, Inc.
Five Star Systems, Inc. Five Star Georgia Eltrax 100%
Systems, Inc.
</TABLE>
Notes: 1. Four Corners Technology, Inc. merged into Eltrax Systems, Inc. on
December 31, 1998.
2. Subsidiaries acquired by the Company with the acquisition of Sulcus
Hospitality Technologies, Corp. on March 25, 1999 are not listed
as they were not subsidiaries of the Company at December 31, 1998.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Eltrax Systems, Inc. on Forms S-3 (File No. 333-37013; File No. 333-53965; File
No. 333-51003) and on Form S-8 (File No. 333-26015) of our report dated March
12, 1999 on our audits of the consolidated financial statements and financial
statement schedule of Eltrax System, Inc. as of December 31, 1998 and 1997, and
for the years ended December 31, 1998, 1997 and the nine-month period ended
December 31, 1996, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Detroit, Michigan
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 11175
<SECURITIES> 0
<RECEIVABLES> 8160858
<ALLOWANCES> 0
<INVENTORY> 1763690
<CURRENT-ASSETS> 10840292
<PP&E> 1551444
<DEPRECIATION> 0
<TOTAL-ASSETS> 29739389
<CURRENT-LIABILITIES> 12504660
<BONDS> 0
0
0
<COMMON> 130400
<OTHER-SE> 14439036
<TOTAL-LIABILITY-AND-EQUITY> 29739389
<SALES> 50662787
<TOTAL-REVENUES> 50662787
<CGS> 37745009
<TOTAL-COSTS> 37745009
<OTHER-EXPENSES> 15131288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 308839
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (2522349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2522349)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> 0
</TABLE>
