<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _________
Commission file number 0-22190
__________________
ELTRAX SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1484525
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
900 Circle 75 Parkway, Suite 1700, Atlanta, GA 30339
(Address of principal executive offices)
(770) 612-3500
(Issuer's telephone number)
__________________
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No_____.
-----
Shares of the Registrant's Common Stock, par value $.01 per share, outstanding
as of November 6, 1999: 23,729,208.
<PAGE>
PART I-ITEM 1: FINANCIAL STATEMENTS
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 (1)
-------------- --------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,413,870 $ 7,240,130
Accounts receivable, net 25,048,380 23,216,686
Inventories, principally finished goods 5,714,146 5,060,159
Other current assets 3,786,520 4,093,846
-------------- --------------
Total current assets 35,962,916 39,610,821
Furniture and equipment, net 3,956,681 3,680,287
Capitalized software, net 8,010,968 7,783,169
Intangibles, net 17,613,314 18,906,237
-------------- --------------
Total assets $ 65,543,879 $ 69,980,514
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 5,493,333 $ 3,998,203
Current portion of long-term debt 2,425,543 2,780,775
Accounts payable 8,877,793 6,417,449
Accrued compensation 2,627,827 1,326,570
Accrued expenses 6,747,942 4,550,892
Unearned revenue and customer deposits 9,691,629 11,044,540
Income taxes payable 312,839 697,778
-------------- --------------
Total current liabilities 36,176,906 30,816,207
Long-term debt 1,866,937 3,382,357
-------------- --------------
Total liabilities 38,043,843 34,198,564
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
23,729,208 and 23,834,436 shares issued and outstanding 237,292 238,345
Additional paid-in capital 75,394,044 75,667,193
Accumulated deficit (47,379,175) (39,195,705)
Treasury stock, at cost, 144,273 shares - (387,221)
Accumulated other comprehensive loss (752,125) (540,662)
-------------- --------------
Total shareholders' equity 27,500,036 35,781,950
-------------- --------------
Total liabilities and shareholders' equity $ 65,543,879 $ 69,980,514
============== ==============
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transactions, see
Note 3.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1999 1998(1) 1999 1998(1)
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Technology Services Group $ 16,460,022 $ 12,220,524 $ 45,467,642 $ 39,844,107
Hospitality Services Group 16,748,767 14,672,359 49,660,276 44,846,929
-------------- ------------- ------------- ------------
Total revenue 33,208,789 26,892,883 95,127,918 84,691,036
Cost of revenue:
Technology Services Group 11,524,529 9,004,045 30,532,131 30,326,318
Hospitality Services Group 8,639,970 7,403,498 26,121,592 22,769,839
-------------- ------------- ------------- ------------
Total cost of revenue 20,164,499 16,407,543 56,653,723 53,096,157
Gross profit:
Technology Services Group 4,935,493 3,216,479 14,935,511 9,517,789
Hospitality Services Group 8,108,797 7,268,861 23,538,684 22,077,090
-------------- ------------- ------------- ------------
Gross profit 13,044,290 10,485,340 38,474,195 31,594,879
Operating expenses:
Direct expenses:
Technology Services Group 4,800,693 2,690,353 12,461,191 8,265,788
Hospitality Services Group 7,317,610 5,549,115 19,203,144 15,996,027
-------------- ------------- ------------- ------------
Total direct expenses 12,118,303 8,239,468 31,664,335 24,261,815
Research and development:
Technology Services Group 192,289 103,102 842,741 103,102
Hospitality Services Group 187,477 412,457 653,888 1,412,397
-------------- ------------- ------------- ------------
Total research and development 379,766 515,559 1,496,629 1,515,499
Corporate and administrative 1,477,305 1,758,609 4,340,273 5,251,985
Amortization of intangibles 552,838 425,978 1,724,404 1,012,811
Reorganization costs 606,900 - 4,631,900 -
Transaction costs - - 2,288,379 -
-------------- ------------- ------------- ------------
Total operating expenses 15,135,112 10,939,614 46,145,920 32,042,110
-------------- ------------- ------------- ------------
Operating loss (2,090,822) (454,274) (7,671,725) (447,231)
Interest income 6,429 143,810 96,498 424,292
Interest expense (171,687) (65,241) (564,271) (310,092)
-------------- ------------- ------------- ------------
Loss before income taxes (2,256,080) (375,705) (8,139,498) (333,031)
Income tax expense 60,040 169,298 43,972 201,121
-------------- ------------- ------------- ------------
Net loss $ (2,316,120) $ (545,003) $ (8,183,470) $ (534,152)
============== ============= ============= ============
Net loss per common share
- basic and diluted $ (0.10) $ (0.02) $ (0.35) $ (0.02)
============== ============= ============= ============
Weighted average shares outstanding
- basic and diluted 23,728,204 23,494,302 23,715,633 22,366,211
============== ============= ============= ============
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transactions, see
Note 3.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ELTRAX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1999 1998 (1)
-------------- -------------
<S> <C> <C>
Operating Activities:
Net loss $ (8,183,470) $ (534,152)
Items which did not use (provide) cash:
Amortization of capitalized software 1,022,599 995,035
Amortization of intangibles 1,724,404 1,012,811
Depreciation 1,195,513 1,042,291
Stock and warrants issued for services 22,736 24,000
Changes in current operating items:
Accounts receivable, net (1,831,694) 4,267,456
Inventories (653,987) 619,206
Other current assets 307,326 (572,403)
Accounts payable 2,460,344 (1,333,688)
Accrued compensation 1,301,257 140,306
Accrued expenses 2,197,050 (368,713)
Unearned revenue and customer deposits (1,352,911) (2,828,620)
Income taxes payable (384,939) (156,917)
-------------- -------------
Net cash (used for) provided by operating activities: (2,175,772) 2,306,612
-------------- -------------
Investing Activities:
Purchase of Encore Systems - (8,266,021)
Software development costs capitalized, net (1,250,398) (1,432,710)
Purchases of furniture and equipment, net (1,903,388) (1,187,277)
-------------- -------------
Net cash used for investing activities: (3,153,786) (10,886,008)
-------------- -------------
Financing Activities:
Payments on long-term debt (1,870,652) (322,118)
Borrowings (payments) on credit line, net 1,495,130 (2,734,986)
Proceeds from term loan - 4,000,000
Proceeds from issuances of common stock and warrants, net 97,183 7,481,263
Retirement of treasury stock - (166,500)
Payments issued in lieu of fractional shares (6,900) -
-------------- -------------
Net cash (used for) provided by financing activities: (285,239) 8,257,659
-------------- -------------
Effect of changes in currency exchange rate (211,463) (90,000)
Decrease in cash and cash equivalents (5,826,260) (411,737)
-------------- -------------
Cash and Cash Equivalents:
Beginning of period 7,240,130 9,260,364
-------------- -------------
End of period $ 1,413,870 $ 8,848,627
============== =============
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transactions, see
Note 3.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Eltrax Systems, Inc. (the "Company" or "Eltrax") in
accordance with generally accepted accounting principles, pursuant to the
rules and regulations of the Securities and Exchange Commission. Pursuant
to such rules and regulations, certain financial information and footnote
disclosures normally included in the financial statements have been
condensed or omitted.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all necessary adjustments,
consisting only of those of a recurring nature, and disclosures to present
fairly the financial position as of September 30, 1999, and the results of
operations and cash flows for the periods ended September 30, 1999 and
1998. The condensed consolidated financial statements include the accounts
of Eltrax Systems, Inc. and its subsidiaries, including Sulcus Hospitality
Technologies Corp. and subsidiaries ("Sulcus"), and Windward Technology
Group, Inc. ("Windward"), which merged with the Company in the first
quarter of 1999 in transactions accounted for as poolings-of-interests.
Prior financial statements have been restated to include the results of
Sulcus and Windward for all periods presented. Significant intercompany
transactions have been eliminated. Certain prior year amounts in the
consolidated financial statements and notes have been reclassified to
conform with the current year presentation. These reclassifications had no
effect on previously reported net income (loss) or shareholders' equity.
The year-end condensed consolidated balance sheet was derived primarily
from audited consolidated financial statements, but does not include all
disclosures required by generally accepted accounting principles. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1998, and Forms 8-K dated March 25, 1999, and
March 31, 1999, describing the acquisitions of Sulcus and Windward.
2. NET INCOME (LOSS) PER SHARE
The basic net income (loss) per common share is determined by dividing net
income (loss) by the weighted average number of common shares outstanding.
Diluted net income per common share is determined by dividing diluted net
income by the weighted average number of common shares and common stock
equivalents outstanding. Common stock equivalents related to options and
warrants have been excluded from the computation of diluted net income
(loss) per common share because their inclusion would have had an
antidilutive effect.
5
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
3. MERGERS
Sulcus Hospitality Technologies, Corp.
--------------------------------------
On November 11, 1998, the Company announced that it had agreed to merge
with Sulcus. The transaction closed on March 26, 1999. The Company
exchanged 9,296,669 shares of its common stock in connection with the
merger as well as $6,900 in cash for 1,577 fractional shares. The combined
companies have also incurred approximately $2.0 million in transaction
costs related to the merger. These transaction costs were included in
operating expenses in the first quarter of 1999. Sulcus develops, sells and
services technology products and software throughout the world, primarily
to the hospitality industry. The merger has been accounted for as a
pooling-of-interests transaction.
Windward Technologies Group, Inc.
---------------------------------
On March 31, 1999, the Company merged with Windward. The prior shareholders
of Windward received 1,375,001 shares of the Company's common stock. The
transaction costs of $251,000 related to the merger were included in
operating expenses in the first quarter of 1999. Windward develops, sells
and services data networking and software products. The merger has been
accounted for as a pooling-of-interests transaction.
The following table summarizes the combined and separate results of the
Company, Sulcus and Windward for the third quarter and first nine months of
1998. The 1998 results included in the statements of operations have been
restated to include the results of Sulcus and Windward.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Revenue:
Eltrax, as previously reported $10,955,012 $37,908,464
Sulcus 14,364,473 44,539,043
Windward 1,573,398 2,243,529
----------- -----------
Total revenue $26,892,883 $84,691,036
=========== ===========
Net income (loss):
Eltrax, as previously reported $ (288,143) $ (937,109)
Sulcus (371,592) 240,490
Windward 114,732 162,467
----------- -----------
Total net income (loss) $ (545,003) $ (534,152)
=========== ===========
</TABLE>
6
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
4. REORGANIZATION COSTS
In connection with the Company's mergers with Sulcus and Windward, and the
relocation of Company headquarters to Atlanta, the Company has recorded
significant reorganization costs in 1999. These charges are based upon
Management's plans established in the first quarter of 1999 and consist of
the following items:
Reorganization Amount Accrued at
Costs September 30, 1999
-------------- -------------------
Severance and related costs $1,846,000 $265,000
Facility costs 1,138,000 353,000
Recruiting and relocation 462,000 15,000
Program closure costs 716,000 -
Other 469,900 181,000
---------- --------
$4,631,900 $814,000
========== ========
The severance and related costs are attributable to approximately 37
employees who have been, or will be, terminated by the Company. These costs
include $722,000 paid by Sulcus to a former executive of Sulcus, to settle
obligations under an employment agreement.
The facility costs represent the costs for leased facilities that will not
be utilized for their full terms. The leases include the former Sulcus
corporate headquarters and a portion of the Sulcus office used for research
and development activities.
The recruiting and relocation costs relate to the relocation of the
Company's headquarters to Atlanta and organizational changes resulting from
the mergers.
The Company also determined during the first quarter to discontinue
development of certain products, including the Legacy products previously
being developed at Sulcus. Program closing costs include the write-off of
$167,000 in previously capitalized software costs and a $350,000 settlement
of a royalty claim related to the discontinued Sulcus Legacy products.
Included in other costs is the write-down of assets affected by the
Company's change in product focus as a result of the reorganization.
The Company expects to substantially complete the reorganization by
December 31, 1999.
7
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
5. OTHER COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or shareholders'
equity. SFAS No. 130 requires that the Company's change in foreign currency
translation adjustments be included in other comprehensive income.
1999 1998
-------------------------------
Net income loss $(8,183,470) $(534,152)
Other comprehensive loss:
Foreign currency translation (211,463) (90,000)
----------- ---------
Comprehensive loss $(8,394,933) $(624,152)
=========== =========
6. EMPLOYMENT AGREEMENT
In March 1999, the Company entered into an employment agreement with an
executive of the Company. Under this employment agreement, the Company
granted 500,000 stock options which vest over four years. The Company has
guaranteed that the Eltrax options will be worth at least $1,305,000 by
March 31, 2003. The cost of this guarantee will be charged to earnings
ratably over the vesting period. A charge of approximately $82,000 was
recorded in both the second and third quarter of 1999 related to this
agreement.
7. SEGMENT INFORMATION
The Company is reporting information for two segments, the Technology
Services Group and the Hospitality Services Group, and includes the effect
of the mergers with Sulcus and Windward in the first quarter of 1999.
Technology Services: The Technology Services Group consists of three
operating units:
Technology Solutions, which provides strategic assessment, application
and network design, custom application development and integration,
network management, support and maintenance.
Customer Care, which provides 7X24 help desk through the Company's
Network Operations Center as well as training and installation
services to Eltrax customers and other companies on an outsourcing
basis.
Application Services, which provides outsourcing and remote delivery of
applications including network and application management.
Hospitality Services: The Hospitality Services Group provides software
and systems, training and installation services to the hospitality
industry.
8
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
7. SEGMENT INFORMATION (continued)
The accounting policies of the reportable segments are the same as those
described in the Notes to Consolidated Financial Statements in the
Company's 1998 Form 10-K. Management evaluates the business unit
performance based on income before income taxes, intangibles amortization,
interest income and expense and corporate expenses. Inter-segment sales and
transfers are not significant.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 Three Months Ended September 30, 1998
------------------------------------------ -----------------------------------------
Technology Hospitality Technology Hospitality
Services Services Total Services Services Total
------------------------------------------ -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $16,460 $16,749 $33,209 $12,220 $14,672 $26,893
Segment profit (57) 603 546 423 1,308 1,731
Total assets 24,005 38,436 62,441
<CAPTION>
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
------------------------------------------ -----------------------------------------
Technology Hospitality Technology Hospitality
Services Services Total Services Services Total
------------------------------------------ -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $45,468 $49,660 $95,128 $39,844 44,847 $84,691
Segment profit 1,632 3,681 5,313 1,149 4,669 5,818
</TABLE>
The following table reconciles the total segment profit to the pretax loss
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Segments, above $ 546 $ 1,731 $ 5,313 $ 5,818
Corporate and administrative expenses (1,477) (1,759) (4,341) (5,252)
Amortization (excluding acquired software) (553) (426) (1,724) (1,013)
Transaction and reorganization costs (607) - (6,920) -
Interest income (expense), net (165) 78 (468) 114
------- ------- ------- -------
Pretax loss $(2,256) $ (376) $(8,140) $ (333)
======= ======= ======= =======
</TABLE>
8. LITIGATION
The Company is involved in claims and proceedings, which are routine and
which in the aggregate are not deemed material to the Company's business or
financial affairs.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission and in the Company's written and oral
statements made by or with the approval of an authorized executive officer
constitute "forward-looking statements" within the meaning of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and
the Company intends that such forward-looking statements be subject to the safe
harbors created thereby. The words "believe," "will," "expect" and "anticipate"
and similar expressions identify forward-looking statements. These forward-
looking statements reflect the Company's current views with respect to future
events and financial performance, but are subject to many uncertainties and
factors relating to the Company's operations and business environment which may
cause the actual results of the Company to be materially different from any
future results expressed or implied by such forward-looking statements.
Examples of such uncertainties include, but are not limited to, changes in
customer demand and requirements, new product announcements, interest rate
fluctuations, changes in federal income tax laws and regulations, competition,
industry specific factors and world wide economic and business conditions. For
a more comprehensive list of uncertainties, see the section entitled "Important
Factors to Consider" in the Company's Report on Form 10-K for the year ended
December 31, 1998. The Company undertakes no obligation to publicly update or
revise any forward-looking statements whether as a result of new information,
future events or otherwise.
INTRODUCTION
The Company is an international provider of technology and hospitality services.
Through its Technology Services Group, the Company provides technology
solutions, customer care services and application services. Through its
Hospitality Services Group, the Company provides leading edge software, training
and installation services to the hospitality industry. The Company grew through
a number of technology solutions acquisitions prior to 1998. During the third
quarter of 1998 the Company acquired Encore Systems, Inc. ("Encore"), which is
engaged in providing application and support services as well as software to the
hospitality industry.
Effective March 25, 1999, the Company completed its merger with Sulcus
Hospitality Technologies Corp. ("Sulcus"). Sulcus, with 1998 annual sales of
approximately $60 million, is a leading provider of application and support
services to the hospitality industry. Sulcus develops, manufactures, markets and
installs computerized systems primarily intended to automate hospitality
industry property management systems in addition to the Squirrel point-of-sale
system for the restaurant industry. Sulcus distributes its products and services
throughout the world utilizing a network of distributors and company owned and
operated locations.
Effective March 31, 1999 the Company completed its merger with Windward
Technology Group, Inc. ("Windward"). Windward develops, sells and services data
networking and software products. Windward's revenue totaled approximately
$3.7 million in 1998.
The Sulcus and Windward mergers were accounted for as poolings-of-interests and,
accordingly, all financial information has been restated to give effect to the
mergers as if they occurred as of the beginning of the earliest period
presented.
During 1998 the Company focused on increasing its mix of value added services
and discontinued the majority of its sales to distribution customers including
the Company's Datatech operation, which was closed in the first quarter of 1998.
SUMMARY RESULTS OF OPERATIONS
Consolidated Results of Operations
Three Months Ended September 30, 1999, compared to Three Months Ended September
30, 1998
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------------------
Dollars in thousands 1999 1998 Change
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $33,209 $26,893 23.5%
Gross profit 13,044 10,485 24.4
Gross profit margin 39.3% 39.0%
Net loss (2,316) (545) -
Operating expenses (1) 14,528 10,939 32.8
Operating loss (1) (1,484) (454) -
EBITDA (1) (2) (214) 681 -
-------------------------------------------------------------------------------------
</TABLE>
(1) Excludes one-time merger related and reorganization charges of $607
in 1999
(2) Earnings before interest, income taxes, depreciation and
amortization of intangibles and software
10
<PAGE>
For the three months ended September 30, 1999, the Company's net loss totaled
$2.3 million or $.10 per share, compared with a net loss of $545,000 and $.02
per share, for the same period of 1998. Excluding one-time reorganization
charges totaling approximately $607,000, the net loss for the three months ended
September 30, 1999, totaled approximately $1.7 million.
Total revenue was $33.2 million in the three months ended September 30, 1999, an
increase of 23.5% from the same period of 1998. The comparability of revenue was
affected by the inclusion of Encore's operating results beginning in September
1998. Gross profit increased by $2.3 million in the three months ended September
30, 1999, and was 39.3% of revenue compared with 39.0% in the same period of
1998. The increased gross profit margin in the three months ended September 30,
1999, was primarily attributable to increased profit margin in the Technology
Services Group.
Total operating expenses for the three months ended September 30, 1999, were
$14.5 million, excluding $607,000 of non-recurring reorganization charges, an
increase of $3.6 million from the same period of 1998. An increase in Technology
Services Group operating expenses of approximately $2.2 million resulted
primarily from the following factors: the inclusion of the Company's customer
care operations purchased in September 1998; investment in the Company's
Application Services Provider initiatives; and continued investment in personnel
and related costs to fuel growth in the Technology Services Group. An increase
in the Hospitality Services Group operating expenses of approximately $1.5
million resulted primarily from the following factors: an increase of
approximately $900,000 in the reserve for doubtful accounts primarily related to
Sulcus sales prior to 1999; and a charge to earnings of $225,000 for prior year
Sulcus taxes. Amortization of intangibles during the three months ended
September 30, 1999, increased operating expenses by approximately $127,000, when
compared to the same period of 1998. These increases were offset by a $281,000
decrease in corporate and administrative expenses. As a percent of revenue,
total operating expenses were 43.7% during the three months ended September 30,
1999, up from 40.7% in the same period of 1998.
The reorganization costs of $607,000 incurred in the three months ended
September 30, 1999, consisted primarily of costs related to the recruitment and
relocation of management and administrative personnel to Atlanta, and the
settlement of a royalty claim for $350,000 related to the discontinued Sulcus
Legacy products.
Business Unit Performance
<TABLE>
<CAPTION>
Technology Hospitality
Dollars in thousands Services Services Consolidated
-----------------------------------------------------------
For the Three Months Ended
September 30, 1999 1998 1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $16,460 $12,220 $16,749 $14,672 $33,209 $26,893
Gross profit 4,935 3,216 8,109 7,269 13,044 10,485
Operating expenses 4,992 2,793 7,506 5,961 12,498 8,754
----------------------------------------------------------
Earnings before interest, taxes, and
amortization (1) (57) 423 603 1,308 546 1,731
Unallocated items
Corporate and administrative
expenses 1,477 1,759
Amortization expense (1) 553 426
Reorganization costs 607 -
-----------------
Operating loss (2,091) (454)
Interest expense (income), net 165 (78)
-----------------
Pre tax loss (2,256) (376)
-----------------
Gross margin 30.0% 26.3% 48.4% 49.5% 39.3% 39.0%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding amortization of software which is charged to gross profit
The Company currently operates in the following two business segments:
Technology Services Group - The Technology Services Group consists of three
operating units:
Technology Solutions, which provides strategic assessment, application
and network design, custom application development and integration,
network management, support and maintenance.
Customer Care, which provides 7X24 help desk through the Company's
Network Operations Center as well as training and installation services
to Eltrax customers and other companies on an outsourcing basis.
Application Services, which provides outsourcing and remote delivery of
applications including network and
11
<PAGE>
application management
Hospitality Services Group - This group provides leading edge software and
systems, training and installation services to the hospitality and
restaurant industries.
The key factors used to identify reportable business segments are the
organization and alignment of the Company's internal operations, the nature of
the products and services and customer type. Management evaluates business unit
performance based on earnings before interest, taxes, and amortization (EBITA).
Items not allocated to business segments include corporate and administrative
expenses, amortization of intangibles (excluding amortization on acquisition
related software), one-time merger-related and restructuring costs, and interest
income and expense. The results set forth in this section are not necessarily a
measure determined in accordance with generally accepted accounting principles
and may not be comparable to other companies.
Technology Services Group
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------------
Dollars in thousands 1999 1998 Change
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $16,460 $12,220 34.7%
Cost of revenue 11,525 9,004 28.0
------------------------
Gross profit 4,935 3,216 53.5
Gross profit margin 30.0% 26.3%
Operating expenses 4,992 2,793 78.7
------------------------
EBITA (57) 423 (113.5)
--------------------------------------------------------------------------------------------------
</TABLE>
Operating results in the Technology Services Group during the three months ended
September 30, 1999, reflect the impact of actions taken during the prior year to
reposition operations into areas with higher growth and wider margin potential.
Revenues increased $4.2 million in the three months ended September 30, 1999,
over the same period in 1998, primarily due to revenue growth within the
recently merged Windward operations, complemented by the inclusion of revenue
from the Company's customer care operations purchased in September 1998. Gross
profit in the three months ended September 30, 1999, increased 53.5% compared to
the same period in 1998. Gross margins in the three months ended September 30,
1999, increased to 30.0%, reflecting a change in the mix of sales to focus on
services and products with higher margins.
Hospitality Services Group
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------------
Dollars in thousands 1999 1998 Change
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $16,749 $14,672 14.2%
Cost of revenue 8,640 7,403 16.7
------------------------
Gross profit 8,109 7,269 11.6
Gross profit margin 48.4% 49.5%
Operating expenses 7,506 5,961 25.9
------------------------
EBITA, after amortization of acquired software 603 1,308 (53.9)
--------------------------------------------------------------------------------------------------
</TABLE>
For the three months ended September 30, 1999, the Hospitality Services Group
revenue and gross profit increased $2.1 million and $840,000, respectively, over
the same period in 1998. The comparability was affected by the inclusion of
Encore's operating results beginning in September 1998. Additionally, an
increase in revenue from Squirrel point-of-sale systems totaled $1.3 million for
the three months ended September 30, 1999, when compared to the same period in
1998. Operating expenses also increased during the three months ended September
30, 1999, when compared to the same period in 1998, due to the inclusion of
Encore's operating results beginning in September 1998. Research and development
expenses were lower by $225,000 during the three months ended September 30,
1999, when compared to the same period in 1998, due to discontinued development
of certain products, including the Sulcus Legacy products.
12
<PAGE>
Nine Months Ended September 30, 1999, compared to Nine Months Ended September
30, 1998
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------------
Dollars in thousands 1999 1998 Change
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $95,128 $84,691 12.3%
Gross profit 38,474 31,595 21.8
Gross profit margin 40.4% 37.3%
Net loss (8,184) (534) -
Operating expenses (1) 39,226 32,042 22.4
Operating loss (1) (752) (447) -
EBITDA (1) (2) 3,191 2,603 22.6
------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes one-time merger related and reorganization charges of
$6,920 in 1999
(2) Earnings before interest, income taxes, depreciation and
amortization of intangibles and software
For the nine months ended September 30, 1999, the Company's net loss totaled
$8.2 million, or $.35 per share, compared with net loss of $534,000 and $.02 per
share, for the same period of 1998. The current year results included one-time
merger-related transaction costs and restructuring charges totaling
approximately $6.9 million. Excluding these costs, the net loss during the nine
months ended September 30, 1999, totaled $1.3 million.
Total revenue was $95.1 million in the nine months ended September 30, 1999,
reflecting a 12.3% increase from the same period in 1998. The comparability of
revenue was affected by the inclusion of Encore's operating results beginning in
September 1998. This favorable impact was offset by reduced distribution sales,
including the closure of the Company's Datatech subsidiary in the first quarter
of 1998. Gross profit increased by $6.9 million in the nine months ended
September 30, 1999, and was 40.4% of revenue, compared with 37.3% in the same
period of 1998. The increases in gross profit and gross margin in the nine
months ended September 30, 1999, were attributable primarily to the reduction in
sales to distribution customers and an increased services revenue mix in the
Technology Services Group.
Total operating expenses for the nine months ended September 30, 1999, were
$39.2 million, excluding $6.9 million of non-recurring merger-related
transaction costs and restructuring charges, an increase of $7.2 million from
the same period of 1998. An increase in Technology Services Group operating
expenses of approximately $4.9 million resulted primarily from the following
factors: the inclusion of the Company's customer care operations, purchased in
September 1998; investment in the Company's Application Services Provider
initiatives; and continued investment in personnel and related costs to fuel
growth in the Technology Services Group. An increase in the Hospitality Services
Group operating expenses of approximately $2.4 million resulted primarily from
the following factors: the inclusion of Encore's operations beginning in
September 1998; an increase of approximately $900,000 in the reserves for
doubtful accounts primarily related to Sulcus sales prior to 1999; and a charge
to earnings of $225,000 for prior year Sulcus taxes. Amortization of intangibles
during the nine months ended September 30, 1999, also increased operating
expenses by approximately $712,000, when compared to the same period of 1998. As
a percent of revenue, operating expenses were 41.2% during the nine months ended
September 30, 1999, up from 37.8% in the same period of 1998. Corporate expenses
decreased approximately $912,000, during the nine months ended September 30,
1999, due primarily to a reduction of legal fees that occurred at Sulcus in
1998.
The reorganization and transaction costs of $6.9 million incurred in the nine
months ended September 30, 1999, consisted primarily of costs related to
facilities that will not be utilized fully in the future, severance for
employees terminated or to be terminated, costs related to the recruitment
and relocation of management and administrative personnel to Atlanta, and legal,
accounting, and other fees associated with the Windward and Sulcus mergers.
13
<PAGE>
Business Unit Performance
<TABLE>
<CAPTION>
Technology Hospitality
Dollars in thousands Services Services Consolidated
----------------------------------------------------------
For the Nine Months Ended
September 30, 1999 1998 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $45,468 $39,844 $49,660 $44,847 $95,128 $84,691
Gross profit 14,936 9,518 23,538 22,077 38,474 31,595
Operating expenses 13,304 8,369 19,857 17,408 33,161 25,777
----------------------------------------------------------
Earnings before interest, taxes and
amortization (1) 1,632 1,149 3,681 4,669 5,313 5,818
Unallocated items
Corporate and administrative expenses 4,341 5,252
Amortization expense (1) 1,724 1,013
Reorganization costs 4,632 -
Transaction costs 2,288 -
-----------------
Operating loss (7,672) (447)
Interest (income) expense, net 468 (114)
-----------------
Pre tax loss (8,140) (333)
-----------------
Gross margin 32.8% 23.9% 47.4% 49.2% 40.4% 37.3%
-----------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding amortization of software which is charged to gross profit
Technology Services Group
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
Dollars in thousands 1999 1998 Change
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $45,468 $39,844 14.1%
Cost of revenue 30,532 30,326 0.7
----------------------
Gross profit 14,936 9,518 56.9
Gross profit margin 32.8% 23.9%
Operating expenses 13,304 8,369 59.0
----------------------
EBITA 1,632 1,149 42.0
-----------------------------------------------------------------------------------------
</TABLE>
Operating results in the Technology Services Group during the nine months ended
September 30, 1999, reflect the impact of actions taken in the prior year to
reposition operations to areas with higher growth and wider margin potential.
Revenues increased approximately $5.6 million in the nine months ended September
30, 1999, over the same period in 1998, primarily due to the inclusion of the
Company's customer care operations beginning in the third quarter of 1998, and
increased growth in the recently merged Windward operations, offset by reduced
sales from the closure of the Company's distribution operations in early 1998.
The gross margin increased to 32.8% during the nine months ended September 30,
1999, reflecting a change in the mix of sales to focus on services and products
with higher margins. Research and development expenses increased by $740,000 in
the nine months ended September 30, 1999, when compared to the same period in
1998, due primarily to the inclusion of the Company's customer care operation
beginning in September 1998.
14
<PAGE>
Hospitality Services Group
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
Dollars in thousands 1999 1998 Change
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $49,660 $44,847 10.7%
Cost of revenue 26,122 22,770 14.7
----------------------
Gross profit 23,538 22,077 6.6
Gross profit margin 47.4% 49.2%
Operating expenses 19,857 17,408 14.1
----------------------
EBITA, after amortization of acquired software 3,681 4,669 (21.2)
-----------------------------------------------------------------------------------------
</TABLE>
For the nine months ended September 30, 1999, the Hospitality Services Group
revenue and gross profit increased $4.8 million and $1.5 million, respectively,
over the same period in 1998. The comparability was affected by the inclusion of
Encore's operating results beginning in September 1998. Additionally, an
increase in revenue from Squirrel point-of-sale systems totaled $2.8 million for
the nine months ended September 30, 1999, when compared to the same period in
1998. Operating expenses also increased during the nine months ended September
30, 1999, when compared to the same period in 1998, due to the inclusion of
Encore's operating results beginning in September 1998. Research and development
expenses were lower by $758,000 during the nine months ended September 30, 1999,
when compared to the same period in 1998, due to discontinued development of
certain products, including the Sulcus Legacy products.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $1.4 million at September 30, 1999, as
compared to $7.2 million at December 31, 1998. The lower cash balances reflect
the items discussed below.
Nine Months Ended
September 30,
----------------------
Dollars in thousands 1999 1998
------------------------------------------------------------------
Cash provided (used) by
Operating activities $(2,176) $ 2,307
Investing activities (3,154) (10,886)
Financing activities (285) 8,258
Cash used for operations in the nine months ended September 30, 1999, totaled
$2.2 million compared with $2.3 million provided by operations in the same
period of 1998. The net loss in the nine months ended September 30, 1999, of
$8.2 million was offset by non-cash charges for depreciation and amortization of
$3.9 million, and cash provided by operating items of approximately $2.0
million. Unearned revenue decreased in both periods presented, primarily due to
annual maintenance billings made late in the fourth quarter that are collected
in the first quarter.
Cash used for investing activities in the nine months ended September 30, 1999,
totaled $3.2 million, compared to $10.9 million in the same period of 1998. The
Company spent $1.3 million and $1.4 million on capitalized software costs in the
nine months ended September 30, 1999 and 1998, respectively. Capital
expenditures totaled $1.9 million and $1.2 million in the nine months ended
September 30, 1999, and 1998, respectively. In September 1998 the Company
purchased Encore Systems for $8.2 million.
Cash used for financing activities was $300,000 in the nine months ended
September 30, 1999, compared to $8.3 million provided by financing activities in
the same period of 1998. Borrowings on the Company's credit line during the nine
months ended September 30, 1999, totaled $1.5 million and were offset by
payments on long-term debt totaling $1.9 million. The cash provided by financing
activities in the nine months ended September 30, 1999, resulted primarily from
the issuance of common stock of $7.5 million and proceeds from a term loan of
$4.0 million, offset by payments on the credit line of $2.7 million.
The Company's credit facility provides availability under a credit line of $6.0
million. The availability under the credit line is limited to the Company's
borrowing base, which is a function of certain accounts receivable and
inventory, less an outstanding letter of credit of $500,000 on September 30,
1999. At September 30, 1999, the borrowing base was approximately $6.0 million
with borrowings and outstanding payments of approximately $5.5 million. The
Company was not in compliance with certain covenants in 1999. The bank has
waived this noncompliance.
The Company is in the process of negotiating an increase of its credit facility
and a modification of existing covenants. Management believes that an increase
in the existing credit facility and cash on hand will be sufficient to meet its
short-term financing needs. The Company's long term strategic plans will require
additional financing beyond that provided by operations and its line of credit.
Management is exploring several alternatives to meet those long-term
requirements.
16
<PAGE>
YEAR 2000 UPDATE
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.
The Company's 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 Company's
growth through a number of acquisitions and mergers, the Company 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
systems and the Year 2000 Issue, the Company determined in early 1998 to replace
all existing systems with new uniform year 2000 capable systems that are
expected to improve operating efficiency. These systems are also being
implemented at Windward and at the majority of the domestic Sulcus operations.
The final software selection was made in late 1998. The implementation is
expected to occur throughout 1999. The cost of these systems, including
software, hardware, and implementation costs, is expected to be in the range of
$600,000 to $800,000. At September 30, 1999, costs of approximately $680,000 had
been incurred.
Customers' Network Systems. The second area of concern is with network systems
sold and/or installed by the Company. The Company has instituted a program to
review the systems of all customers who currently purchase ongoing maintenance
services from the Company. This program will provide assistance to customers in
reviewing their networks for the Year 2000 Issue. 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 the Company.
Company Products. The third area of concern involves the Company hardware and
software products. The Company's current hardware and software products are
believed to be year 2000 capable. With respect to the Company's products that
were not year 2000 capable when sold, the Company has either discontinued
support of these products, or has substantially completed upgrading them to the
year 2000 capable version. This process should be completed in 1999, and any
future costs are expected to be minor. In cases where the Company has
discontinued support of a product that is not year 2000 capable, the Company has
made significant effort to notify all affected customers, and the Company's web
site provides additional notification of this fact.
Suppliers. The final area of concern is whether the products and services
procured by the Company from its major suppliers will function properly or be
available without interruption in the year 2000. The Company is requesting
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 Company's
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,
the Company is documenting its contingency plan to minimize the impact of such
external events.
While the Company's efforts to address these year 2000 risks will involve
additional costs and the time and effort of a number of employees, the Company
believes, based on currently available information, that it will be able to
properly manage its total year 2000 exposure. However, the Company may not be
successful in this effort, which may have a material adverse effect on Eltrax's
business, financial condition or results of operations.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
DocuCorp Royalty Claim: The DocuCorp claim, which was reported in the
----------------------
Company's previous Form 10Q, was settled during the reporting period,
for a cash payment by the Company of $350,000.
Wager and Benesch Friedlander Litigation: The litigation between the
----------------------------------------
Company and Michael Wager and his lawfirm continues. The Company
continues to believe that its claims are valid and intends to
vigorously pursue those claims against these defendants.
Harris Litigation: The litigation (arbitration) between the Company and
-----------------
Leon Harris (the former CEO of Sulcus Hospitality Technologies Corp.),
which was reported in the previous Form 10Q, was settled after the end
of the reporting period. Mr. Harris will pay $50,000 to the Company,
and the parties have exchanged general releases.
The Company is also involved in other claims and proceedings, which are
routine and which in the aggregate are not deemed material to the
Company's business or financial affairs.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Eltrax Systems, Inc.
Date: November 15, 1999 /s/ William A. Fielder, III
---------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 1,413,870 1,413,870
<SECURITIES> 0 0
<RECEIVABLES> 25,048,380 25,048,380
<ALLOWANCES> 0 0
<INVENTORY> 5,714,146 5,714,146
<CURRENT-ASSETS> 35,962,916 35,962,916
<PP&E> 3,956,681 3,956,681
<DEPRECIATION> 1,195,513 0
<TOTAL-ASSETS> 65,543,879 65,543,879
<CURRENT-LIABILITIES> 36,176,906 36,176,906
<BONDS> 0 0
0 0
0 0
<COMMON> 237,292 237,292
<OTHER-SE> 27,262,744 27,262,744
<TOTAL-LIABILITY-AND-EQUITY> 65,543,879 65,543,879
<SALES> 95,127,918 33,208,789
<TOTAL-REVENUES> 95,127,918 33,208,789
<CGS> 56,653,723 20,164,499
<TOTAL-COSTS> 95,879,364 34,692,711
<OTHER-EXPENSES> 6,920,279 606,900
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 564,271 171,687
<INCOME-PRETAX> (8,139,498) (2,256,080)
<INCOME-TAX> 43,972 60,040
<INCOME-CONTINUING> (8,183,470) (2,316,120)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,183,470) (2,316,120)
<EPS-BASIC> (.35) (.10)
<EPS-DILUTED> (.35) (.10)
</TABLE>
