<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 June 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 August 6, 1999: 22,729,208.
<PAGE>
PART I-ITEM 1: FINANCIAL STATEMENTS
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998 (1)
-------------------- --------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,415,446 $ 7,240,130
Accounts receivable, net 22,887,295 23,216,686
Inventories, principally finished goods 4,772,366 5,060,159
Other current assets 5,040,359 4,093,846
-------------------- --------------------
Total current assets 34,115,466 39,610,821
Furniture and equipment, net 3,973,187 3,680,287
Capitalized software, net 7,594,362 7,783,169
Intangibles, net 17,786,520 18,906,237
-------------------- --------------------
Total assets $ 63,469,535 $ 69,980,514
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 3,557,985 $ 3,998,203
Current portion of long-term debt 2,394,017 2,780,775
Accounts payable 7,274,300 6,417,449
Accrued compensation 1,662,622 1,326,570
Accrued expenses 7,325,134 4,550,892
Unearned revenue and customer deposits 8,471,234 11,044,540
Income taxes payable 460,455 697,778
-------------------- --------------------
Total current liabilities 31,145,747 30,816,207
Long-term debt 2,398,767 3,382,357
-------------------- --------------------
Total liabilities 33,544,514 34,198,564
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
23,722,608 and 23,834,436 shares issued and outstanding 237,226 238,345
Additional paid-in capital 75,367,853 75,667,193
Accumulated deficit (45,063,054) (39,195,705)
Treasury stock, at cost, 144,273 shares - (387,221)
Accumulated other comprehensive loss (617,004) (540,662)
-------------------- --------------------
Total shareholders' equity 29,925,021 35,781,950
-------------------- --------------------
Total liabilities and shareholders' equity $ 63,469,535 $ 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 JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998(1) 1999(2) 1998(1)
---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 32,229,858 $ 28,216,524 $ 61,919,129 $ 57,798,152
Cost of revenue 19,691,734 17,654,888 37,570,440 36,261,274
---------------- -------------- ---------------- ----------------
Gross profit 12,538,124 10,561,636 24,348,689 21,536,878
Operating expenses:
Selling, general and administrative 10,678,689 10,070,475 21,327,783 19,943,062
Research and development 398,867 495,950 1,116,863 999,940
Amortization of intangibles 585,783 297,054 1,171,566 586,833
Reorganization costs 425,000 - 4,025,000 -
Transaction costs - - 2,288,379 -
---------------- -------------- ---------------- ----------------
Total operating expenses 12,088,339 10,863,479 29,929,591 21,529,835
---------------- -------------- ---------------- ----------------
Operating income (loss) 449,785 (301,843) (5,580,902) 7,043
Interest income 18,277 165,374 90,069 280,482
Interest expense (160,746) (121,156) (392,584) (244,851)
---------------- -------------- ---------------- ----------------
Income (loss) before income taxes 307,316 (257,625) (5,883,417) 42,674
Income tax expense (benefit) 63,451 4,846 (16,068) 31,823
---------------- -------------- ---------------- ----------------
Net income (loss) $ 243,865 $ (262,471) $ (5,867,349) $ 10,851
================ ============== ================ ================
Net income (loss) per common share -basic $ 0.01 $ (0.01) $ (0.25) $ 0.00
================ ============== ================ ================
-fully diluted $ 0.01 $ 0.00
================ ================
Weighted average shares outstanding -basic 23,720,217 21,975,271 23,715,894 21,792,041
================ ============== ================ ================
-fully diluted 24,028,237 22,450,697
================ ================
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transactions, see
Note 3.
(2) Amounts have been restated to reflect current classifications, see
Note 1.
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 SIX MONTHS ENDED JUNE 30,
1999 1998 (1)
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (5,867,349) $ 10,851
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Amortization of capitalized software 681,544 665,455
Amortization of intangibles 1,171,566 586,833
Depreciation 819,200 664,222
Stock and warrants issued for services 16,736 18,000
Changes in current operating items:
Accounts receivable, net 329,391 2,558,220
Inventories 287,793 93,497
Other current assets (946,513) (96,722)
Accounts payable 856,851 323,048
Accrued compensation 336,052 (153,917)
Accrued expenses 2,774,242 (737,633)
Unearned revenue and customer deposits (2,573,306) (1,105,470)
Other (297,799) (149,061)
------------------- ----------------
Net cash provided by (used for) operating activities: (2,411,592) 2,677,323
------------------- ----------------
INVESTING ACTIVITIES:
Proceeds from sale of securities available for sale - 259,000
Software development costs capitalized, net (484,110) (890,000)
Purchases of furniture and equipment, net (1,112,100) (971,999)
Other, net - 16,000
------------------- ----------------
Net cash used for investing activities: (1,596,210) (1,586,999)
------------------- ----------------
FINANCING ACTIVITIES:
Payments on long-term debt and capital leases (1,370,348) (327,000)
Payments on credit line, net (440,218) (3,451,529)
Proceeds from issuances of common stock and warrants, net 76,927 7,437,950
Payments issued in lieu of fractional shares (6,901) -
------------------- ----------------
Net cash provided by (used for) financing activities: (1,740,540) 3,659,421
------------------- ----------------
EFFECT OF CHANGES IN CURRENCY EXCHANGE RATE (76,342) (98,000)
Increase (decrease) in cash and cash equivalents (5,824,684) 4,651,745
------------------- ----------------
CASH AND CASH EQUIVALENTS:
Beginning of period 7,240,130 9,260,364
------------------- ----------------
End of period $ 1,415,446 $ 13,912,109
=================== ================
</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
June 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 June 30, 1999 and the
results of operations and cash flows for the periods ended June 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 pooling-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 expenses reported in the Form 10-Q for the
period ending March 31, 1999 have been reclassified in the
accompanying statement of operations.
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 of 308,020 in the second quarter of 1999 and 658,656 for
the six months ended June 30, 1998 include the effect of shares
issuable upon the assumed exercise of dilutive stock options and
warrants.
5
<PAGE>
3. MERGERS
SULCUS HOSPITALITY TECHNOLOGIES, CORP.
On November 11, 1998 the Company announced that it had agreed to merge
with 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. Eltrax exchanged 9,296,669
shares of 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 $2,037,000 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.
WINDWARD TECHNOLOGIES GROUP, INC.
On March 31, 1999 the Company merged with Windward. The merger has been
accounted for as a pooling-of-interests transaction. 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 following table summarizes the combined and separate results of the
Company, Sulcus, and Windward for the second quarter and first six
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 Six Months Ended
June 30, 1998 June 30, 1998
--------------- ---------------
<S> <C> <C>
Revenue:
Eltrax, as previously reported $ 11,978,578 $ 26,953,452
Sulcus 15,709,199 30,174,570
Windward 528,747 670,130
-------------- --------------
Total revenue $ 28,216,524 $ 57,798,152
============== ==============
Net income (loss):
Eltrax, as previously reported $ (461,720) $ (648,966)
Sulcus 191,980 612,082
Windward 7,269 47,735
-------------- -------------
Total net income (loss) $ (262,471) $ 10,851
============== =============
</TABLE>
6
<PAGE>
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:
<TABLE>
<CAPTION>
Reorganization Amount Accrued at
Costs June 30, 1999
---------------- -------------------
<S> <C> <C>
Severance and related costs $1,720,000 $ 600,000
Facility costs 932,000 415,000
Recruiting and relocation 447,000 75,000
Program closure costs 358,000 -
Other 568,000 198,000
------------ ------------
$4,025,000 $ 1,288,000
============ ============
</TABLE>
The severance and related costs are attributable to approximately 35
employees who have been, or will be, terminated by the Company. These
costs include $722,000 paid by Sulcus to Leon Harris, the former
President of Sulcus, to settle obligations under his 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 in Greensburg, Pennsylvania and a portion
of the Wichita, Kansas Sulcus office used for research and development
activities. These costs may be decreased in future periods if the
Company is able to sublease or vacate the Wichita space early.
The Company also determined during the first quarter to discontinue
development of certain products, including the Legacy products
previously being developed at Sulcus. The $358,000 in expenses related
to this decision includes the write-off of $167,000 in capitalized
software costs that had been previously capitalized.
The $447,000 of recruiting and relocation costs incurred in the first
and second quarters relate to moving the Company's headquarters to
Atlanta and organizational changes resulting from the mergers.
The $568,000 in other costs include costs incurred by the Company to
implement the reorganization and 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. The Company expects to incur approximately $450,000
in additional reorganization costs in the third quarter of 1999. These
costs will be charged to expense as incurred and primarily include
product closeout, recruiting and costs to relocate equipment and files.
7
<PAGE>
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.
<TABLE>
<CAPTION>
1999 1998
--------------- ------------
<S> <C> <C>
Net income (loss) $(5,867,349) $ 10,851
Other comprehensive loss:
Foreign currency translation (76,342) (98,000)
--------------- -----------
Comprehensive loss $(5,943,691) $ (87,149)
=============== ============
</TABLE>
6. HALLACY EMPLOYMENT AGREEMENT
In March 1999, the Company entered into an employment agreement with
Don G. Hallacy whereby Mr. Hallacy became President and Chief Executive
Officer of the Company in April 1999. Under Mr. Hallacy's employment
agreement, the Company granted Mr. Hallacy 500,000 stock options which
vest over four years. To compensate for the unvested appreciation of
options that Mr. Hallacy had at his previous employer, the Company has
guaranteed that the Eltrax options will be worth at least $1,305,000 by
March 31, 2003. Should the options not be worth at least $1,305,000,
the Company will pay Mr. Hallacy the shortfall. The cost of this
guarantee may be offset by changes in the price of the Company's common
stock, and will be charged to earnings ratably over the vesting period.
A charge of approximately $82,000 was recorded in the second quarter of
1999 related to this agreement.
7. SEGMENT INFORMATION
Taking into account the mergers of Sulcus and Windward in the first
quarter of 1999, the Company is reporting information for two segments,
the Network Solutions Group and the Applications and Support Group. The
Company is currently reviewing its management reporting structure
and accordingly may report using different segments in the future.
Network Solutions: The Network Solutions Group is comprised of
several regional offices that provide networking services and
equipment to customers throughout North America. The Network Group
also encompasses the Company's Network Operations Center.
Applications and Support: The Applications and Support Group
provides software, proprietary hardware and related services,
primarily to the hospitality industry.
8
<PAGE>
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.
Intersegment 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 June 30, 1999 Three Months Ended June 30, 1998
--------------------------------------------------- ----------------------------------------------
Network Applications and Network Applications and
Solutions Support Total Solutions Support Total
---------------- ------------------- -------------- -------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $12,485 $19,745 $32,230 $12,507 $15,710 $28,217
Segment profit 283 2,606 2,889 226 1,706 1,932
Total assets 17,445 45,211 62,656
<CAPTION>
Six Months Ended June 30, 1999 Six Months Ended June 30, 1998
--------------------------------------------------- ----------------------------------------------
Network Applications and Network Applications and
Solutions Support Total Solutions Support Total
---------------- ------------------- -------------- -------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $23,870 $38,049 $61,919 $27,624 30,174 $57,798
Segment profit 321 4,446 4,767 727 3,385 4,112
</TABLE>
The following table reconciles the total segment profit to the pretax
income (loss) (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
1999 1998 1999 1998
---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Segments, above $ 2,889 $ 1,932 $ 4,767 $ 4,112
Corporate expenses (1,428) (1,937) (2,861) (3,518)
Interest income (expense), net (143) 44 (303) 36
Amortization (excluding acquired software) (586) (297) (1,172) (587)
Transaction and reorganization costs (425) - (6,314) -
----------- ---------- ----------- ----------
Pretax income (loss) $ 307 $ (258) $ (5,883) $ 43
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
8. LITIGATION
EZ Power Systems, Inc., a wholly owned subsidiary of DocuCorp
International, Inc., has asserted a royalty claim under a 1997
agreement between EZ Power and the Company's Sulcus subsidiary. The EZ
Power claim is for $500,000, and if valid, could result in an
additional royalty obligation of $800,000 during the current year.
Although DocuCorp has threatened litigation, none has yet occurred. The
Company has denied any liability under the EZ Power agreement. The
Company is still investigating the facts and circumstances surrounding
the relationship between Sulcus and EZ Power.
The Company is also involved in several additional legal proceedings
arising from its normal business operations. In management's opinion,
the ultimate outcome of these proceedings will not have a material
impact on the Company's future financial position or results of
operations.
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", "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
Eltrax is an international provider of network solutions and application and
support services. The Company grew through a number of network 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 designed to automate the handling, storage and
retrieval of information and documents including the Squirrel point-of-sale
system. 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. Their revenue in 1998 totaled approximately
$3.7 million.
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 has discontinued the majority of its sales to distribution customers
including the Company's Datatech operation which was closed in the first quarter
of 1998.
10
<PAGE>
SUMMARY RESULTS OF OPERATIONS
Consolidated Results of Operations
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------- -----------
DOLLARS IN THOUSANDS 1999 1998 CHANGE
-------------------------------------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
Revenue $32,230 $28,217 14.2%
Gross profit 12,538 10,562 18.7
Gross profit margin 38.9% 37.4%
Net income (loss) 244 (262) -
Operating expenses (1) 11,663 10,863 7.4
Operating income (loss) (1) 875 (302) -
EBITDA (1) (2) 2,229 685 225.4
-------------------------------------------------- ----------------- ------------------ ---------
</TABLE>
(1) EXCLUDES ONE-TIME MERGER RELATED AND REORGANIZATION CHARGES OF $425 IN 1999
(2) EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND AMORTIZATION OF
INTANGIBLES AND SOFTWARE
For the second quarter of 1999, Eltrax's net income totaled $244,000 or $.01 per
share, compared with a net loss of $262,000 and $.01 per share, for the same
period of 1998. The current quarter's results included one-time reorganization
charges totaling approximately $425,000. Excluding these costs, the net income
for the second quarter of 1999 totaled $669,000.
Consolidated revenue totaled $32.2 million in the second quarter of 1999,
reflecting a 14% increase in the quarter-to-quarter comparison with 1998. The
comparability of revenue was affected by the inclusion in 1999 of Encore's
results. Gross profit increased by $2.0 million in 1999 and as a percent of
revenue was 38.9% in the second quarter of 1999 compared with 37.4% in the
year-earlier period. The increased gross profit margin was primarily
attributable to improved margins in the Network Solution Group.
Excluding $425,000 of non-recurring reorganization charges, total operating
expenses for the second quarter of 1999 totaled $11.7 million, an increase of
$0.8 million in the quarter-to-quarter comparison. The inclusion of Encore's
results since its acquisition in the third quarter of 1998 and increased Network
Solutions Group expenses were the primary reasons for the increase. Amortization
of intangibles increased operating expenses by approximately $0.3 million. As
a percent of revenue, operating expenses were 36.2% in the second quarter of
1999 down from 38.5% in the same period of 1998.
The reorganization costs of $425,000 incurred in the second quarter consisted
primarily of costs related to the recruitment and relocation of management to
Atlanta.
11
<PAGE>
BUSINESS UNIT PERFORMANCE
<TABLE>
<CAPTION>
APPLICATIONS
DOLLARS IN THOUSANDS NETWORK AND
SOLUTIONS SUPPORT CONSOLIDATED
------------------ ------------------- -------------------
FOR THE THREE MONTHS ENDED
JUNE 30, 1999 1998 1999 1998 1999 1998
----------------------------------- --------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $12,485 $12,507 $19,745 $15,710 $32,230 $28,217
Gross profit 3,296 2,856 9,242 7,706 12,538 10,562
Operating expenses 3,013 2,630 6,636 6,000 9,649 8,630
--------- -------- --------- --------- --------- ---------
Earnings before interest, taxes
and amortization (1) 283 226 2,606 1,706 2,889 1,932
Unallocated items
Corporate expenses 1,428 1,937
Amortization expense (1) 586 297
Reorganization costs 425 -
--------- ---------
Operating income (loss) 450 (302)
Interest (income) expense, net 143 (44)
--------- ---------
Pre tax income (loss) 307 (258)
--------- ---------
Gross margin 26.4% 22.8% 46.8% 49.1% 38.9% 37.4%
---------------------------------------------------------------------------------------------
</TABLE>
(1) EXCLUDING AMORTIZATION OF SOFTWARE WHICH IS CHARGED TO GROSS PROFIT
Eltrax currently operates in the following two business segments:
NETWORK SOLUTIONS GROUP - This group designs and installs networking
systems for a diverse corporate and government customer base. The Network
Solutions Group also provides monitoring, management, and maintenance
services to support enterprise networks.
APPLICATIONS AND SUPPORT GROUP - This group provides software, hardware,
training services, installation services and support services to specific
vertical industries.
The key factors used to identify reportable business segments are the
organization and alignment of Eltrax'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 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.
NETWORK SOLUTIONS GROUP
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------- --------
DOLLARS IN THOUSANDS 1999 1998 CHANGE
--------------------------------------------- ------------ ------------- --------
<S> <C> <C> <C>
Revenue $12,485 $12,507 (0.2)%
Cost of revenue 9,189 9,651 (4.8)
------- -------
Gross profit 3,296 2,856 15.4
Gross profit margin 26.4% 22.8%
Operating expenses 3,013 2,630 14.6
------- -------
EBITA 283 226 25.2
--------------------------------------------- ------------ ------------- -------
</TABLE>
12
<PAGE>
Second quarter 1999 operating results in the Network Services Group reflect the
impact of actions taken in the past year to reposition operations to areas with
higher growth and wider margin potential. Revenues were flat between the two
periods, however, reduced distribution sales were offset by revenue growth
within the recently merged Windward operations and sales from new products
and services. Gross profit increased 15.4% and gross margins increased to
26.4% reflecting a change in the mix of sales to focus on services and
products with higher margins.
APPLICATIONS AND SUPPORT GROUP
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------------ ------------
DOLLARS IN THOUSANDS 1999 1998 CHANGE
----------------------------------------------------- -------------- --------------- ------------
<S> <C> <C> <C>
Revenue $19,745 $15,710 25.7%
Cost of revenue 10,503 8,004 31.2
------- -------
Gross profit 9,242 7,706 19.9
Gross profit margin 46.8% 49.1%
Operating expenses 6,636 6,000 10.6
------- -------
EBITA, after amortization of acquired software 2,606 1,706 52.7
----------------------------------------------------- -------------- --------------- ------------
</TABLE>
For the three months of 1999, Applications and Support Group revenue and
gross profit increased $4.0 million and $1.5 million, respectively. The
comparability was affected by the inclusion in 1999 of Encore's results, as
well as an increase in Squirrel point-of-sale systems of $0.8 million. The
increase in revenue and gross profit was offset by a decrease in Asian
sales of $1.1 million. Operating expenses also increased due to the inclusion
of Encore's results in the current quarter. Adding back the amortization of
acquired software of approximately $290,000, charged to cost of revenue,
would result in segment EBITA of $2.9 million in 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------- ----------
DOLLARS IN THOUSANDS 1999 1998 CHANGE
------------------------------------------------- ------------------ --------------- ----------
<S> <C> <C> <C>
Revenue $61,919 $57,798 7.1%
Gross profit 24,349 21,537 13.1
Gross profit margin 39.3% 37.3%
Net income (loss) (5,867) 11 -
Operating expenses (1) 23,616 21,530 9.7
Operating income (1) 733 7 10,357.1
EBITDA (1) (2) 3,405 1,924 77.0
------------------------------------------------- ------------------ --------------- ---------
</TABLE>
(1) EXCLUDES ONE-TIME MERGER RELATED AND REORGANIZATION CHARGES
OF $6,313 IN 1999
(2) EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND
AMORTIZATION OF INTANGIBLES AND SOFTWARE
For the first half of 1999, Eltrax's net loss totaled $5.9 million, or $.25 per
share, compared with net income of $11,000 and no cents per share, for the same
period of 1998. The current year results included one-time merger-related and
restructuring charges totaling approximately $6.3 million. Excluding these
costs, 1999 net income totaled $446,000.
Consolidated revenue totaled $61.9 million in 1999, reflecting a 7.1% increase
in the comparison with 1998. The comparability of revenue was affected by the
inclusion in 1999 of Encore's results. 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 $2.8 million
in 1999 and as a percent of revenue was 39.3% in 1999 compared with 37.3% in the
year-earlier period. The increased gross profit and margins were attributable
primarily to the reduction in sales to distribution customers and an increased
services revenue mix in the Network Solutions Group.
13
<PAGE>
Excluding $6.3 million of non-recurring merger-related and restructuring
charges, total operating expenses for 1999 totaled $23.6 million, an increase of
$2.1 million in the year-to-year comparison. The inclusion of Encore's results
since its acquisition in the third quarter of 1998 and increased Network
Solutions Group expenses were the primary reasons for the increase. Amortization
of intangibles also increased operating expenses by approximately $0.6 million.
As a percent of revenue, operating expenses were 38.1% in 1999 and 37.2% in
1998. Corporate expenses decreased $0.7 million in part due to the charging of
certain costs to the segment level in 1999.
The reorganization and transaction costs of $6.3 million incurred in 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 and
costs related to the recruitment and relocation of management to Atlanta.
Additional reorganization costs of up to $0.4 million are expected in the third
quarter of 1999.
BUSINESS UNIT PERFORMANCE
<TABLE>
NETWORK APPLICATIONS
DOLLARS IN THOUSANDS SOLUTIONS AND SUPPORT CONSOLIDATED
------------------- ------------------- -------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 1998 1999 1998 1999 1998
----------------------------------- --------- --------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $23,870 $27,624 $38,049 $30,174 $61,919 $57,798
Gross profit 6,345 6,301 18,004 15,236 24,349 21,537
Operating expenses 6,024 5,574 13,558 11,851 19,582 17,425
------- ------- ------- ------- ------- -------
Earnings before interest, taxes
and amortization (1) 321 727 4,446 3,385 4,767 4,112
Unallocated items
Corporate expenses 2,861 3,518
Amortization expense (1) 1,172 587
Transaction costs 4,025 -
Reorganization costs 2,289 -
------- -------
Operating income (loss) (5,580) 7
Interest (income) expense, net 303 (36)
------- -------
Pre tax income (5,883) 43
------- -------
Gross margin 26.6% 22.8% 47.3% 50.5% 39.3% 37.2%
----------------------------------- --------- --------- ---------- -------- --------- ---------
</TABLE>
(1) EXCLUDING AMORTIZATION OF SOFTWARE WHICH IS CHARGED TO GROSS PROFIT
NETWORK SOLUTIONS GROUP
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------- ----------
DOLLARS IN THOUSANDS 1999 1998 CHANGE
------------------------------------------------ ------------ ------------ ----------
<S> <C> <C> <C>
Revenue $23,870 $27,624 (13.6)%
Cost of revenue 17,525 21,323 (17.8)
------- -------
Gross profit 6,345 6,301 .7
Gross profit margin 26.6% 22.8%
Operating expenses 6,024 5,574 8.1
------- -------
EBITA 321 727 (55.8)
------------------------------------------------ ------------ ------------ ----------
</TABLE>
The 1999 operating results in the Network Services Group reflect the impact of
actions taken in the past year to reposition operations to areas with higher
growth and wider margin potential. Revenues declined due to reduced sales from
the closure of the Eltrax's distribution operations in early 1998. This was
partially offset by revenue growth within the recently merged Windward
operations. While sales and gross profit both declined in the year-to-year
comparison, the gross margin increased to 26.6% reflecting a change in the mix
of sales to focus on services and products with higher margins.
14
<PAGE>
APPLICATIONS AND SUPPORT GROUP
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------- ---------
DOLLARS IN THOUSANDS 1999 1998 CHANGE
----------------------------------------------------- ------------- ------------ ---------
<S> C> <C> <C>
Revenue $38,049 $30,174 26.1%
Cost of revenue 20,045 14,938 34.2
------- -------
Gross profit 18,004 15,236 18.2
Gross profit margin 47.3% 50.5%
Operating expenses 13,558 11,851 14.4
------- -------
EBITA, after amortization of acquired software 4,446 3,385 31.3
----------------------------------------------------- ------------- ------------ ---------
</TABLE>
For the six months of 1999, Applications and Support Group revenue and gross
profit increased $7.9 million and $2.8 million, respectively. The
comparability was affected by the inclusion in 1999 of Encore's results.
Squirrel point-of-sale systems also increased $1.5 million in 1999. In
addition, sales from the Senercomm subsidiary, a provider of in-room
management systems for the hospitality industry, increased almost $0.8
million. The increase in revenue and gross profit was offset by a decrease in
the Asian sales of $2.2 million. Operating expenses also increased due to the
inclusion of Encore's results. Adding back the amortization of acquired
software of $0.7 million would result in EBITA of $5.1 million in 1999.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $1.4 million at June 30, 1999 as compared to
$7.2 million at December 31, 1998. The lower cash balances reflect the items
discussed below.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
-------------------------
DOLLARS IN THOUSANDS 1999 1998
------------------------------------------------ ------------ ------------
<S> <C> <C>
Cash provided (used) by
Operating activities $(2,412) $ 2,677
Investing activities (1,596) (1,587)
Financing activities (1,740) 3,659
</TABLE>
Cash used for operations in the first six months of 1999 totaled $2.4 million
compared with the $2.7 million provided by operations in 1998. The net loss in
1999 of $5.9 million was offset by non-cash charges for depreciation and
amortization of $2.7 million. In addition, expenses accrued for reorganization
costs were approximately $1.3 million at June 30, 1999. 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 totaled $1.6 million in both 1999 and 1998
respectively. Capital expenditures totaled $1.1 million in the current year, up
by $140,000 from 1998.
Cash used for financing activities was $1.7 million in 1999 and was primarily
utilized to pay down the Eltrax and Sulcus short-term credit lines and to reduce
long-term obligations. The cash provided by financing activities in 1998
resulted primarily from the issuance of common stock of $7.4 million, offset by
a reduction in the credit line of $3.5 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. At June 30, 1999, the borrowing base was approximately $4.7 million
with borrowings and outstanding payments of $3.6 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 renegotiating its banking agreements to include
certain Sulcus and Windward assets as collateral and to modify existing
covenants. The Company expects that the revised credit facility and cash on hand
will be sufficient to meet its short-term financing needs and expects to meet
future covenant requirements after the revision. The Company expects to meet
certain long-term capital 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.
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.
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 and mergers, 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
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. 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
$750,000. At June 30, 1999, costs of approximately $500,000 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.
COMPANY PRODUCTS. The third area of concern involves Eltrax hardware and
software products. The Company's current hardware and software products are
believed to be Year 2000 capable. The Company is in the process of upgrading
customers' systems to the Year 2000 capable version. This process should be
completed in 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 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 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 is
documenting its contingency plan 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.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
DOCUCORP ROYALTY CLAIM: EZ Power Systems, Inc., a wholly owned
subsidiary of DocuCorp International, Inc. has asserted a royalty claim
under a 1997 agreement between EZ Power and the Company's Sulcus
subsidiary. The EZ Power claim is for $500,000, and if valid, could
result in an additional royalty obligation of $800,000 during the
current year. Although DocuCorp has threatened litigation, none has yet
occurred. The Company has denied any liability under the EZ Power
agreement. The Company is still investigating the facts and
circumstances surrounding the relationship between Sulcus and EZ Power.
HARRIS, WAGER, AND BENESCH FRIEDLANDER LITIGATION: The Company is
involved in litigation with Leon Harris, the former Chairman and CEO of
the Company's Sulcus subsidiary, Michael Wager, a former director and
counsel to Sulcus, and Mr. Wager's firm Benesch, Friedlander, Coplan &
Aronoff LLP, which also represented Sulcus. The Company has filed an
arbitration claim against Mr. Harris, alleging that Mr. Harris
misrepresented certain facts prior to and in connection with the
Company's merger with Sulcus. The Company also filed a lawsuit on April
27, 1999 in United States District Court for the Eastern District of
Michigan, against Mr. Wager and the Benesch Friedlander firm, alleging
misrepresentation, breaches of certain duties to Sulcus, and billing
irregularities. The misrepresentation and breach claims relate to
certain payments made to Mr. Harris, Mr. Wager, and other Sulcus
directors in March 1999, immediately prior to the completion of the
Sulcus merger, which payments were not disclosed to the Company. The
Company also terminated Mr. Harris' employment and consulting
agreement, and Mr. Harris has indicated his intent to file a
counterclaim in arbitration. The Company believes that its claims are
valid, that the termination of Mr. Harris' employment and consulting
agreement was for proper cause, and therefore, that the Company will
prevail in this litigation. The Company intends to vigorously pursue
its claims against these defendants and is considering additional
claims against other individuals, related to these transactions.
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.
18
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 24, 1999 the Company held its annual meeting of shareholders to
vote on directors and to approve the Company's 1999 Stock Incentive
Plan. The votes were as follows:
<TABLE>
<CAPTION>
ABSTENTIONS OR BROKER
FOR AGAINST OR WITHHELD NON-VOTES
--- ------------------- ---------------------
<S> <C> <C> <C>
William P. O'Reilly 20,239,146 267,543
James C. Barnard 20,295,957 210,732
Patrick J. Dirk 20,293,037 213,652
Don G. Hallacy 20,299,162 207,527
Stephen E. Raville 20,296,532 210,157
Penelope A. Sellers 20,290,776 215,913
William G. Taylor 20,292,789 213,900
1999 Stock Incentive Plan 9,998,099 1,110,526 9,398,064
</TABLE>
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.
On April 12, 1999 the Company filed a Form 8-K dated March 31, 1999
describing the merger with Windward Technology Group, Inc.
19
<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: August 16, 1999 /s/ Nicholas J. Pyett
---------------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,415,446
<SECURITIES> 0
<RECEIVABLES> 22,887,295
<ALLOWANCES> 0
<INVENTORY> 4,772,366
<CURRENT-ASSETS> 5,040,359
<PP&E> 3,973,187
<DEPRECIATION> 0
<TOTAL-ASSETS> 63,469,535
<CURRENT-LIABILITIES> 31,145,747
<BONDS> 0
0
0
<COMMON> 237,226
<OTHER-SE> 29,687,795
<TOTAL-LIABILITY-AND-EQUITY> 63,469,535
<SALES> 32,229,858
<TOTAL-REVENUES> 32,229,858
<CGS> 20,013,734
<TOTAL-COSTS> 20,013,734
<OTHER-EXPENSES> 11,766,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160,746
<INCOME-PRETAX> 449,785
<INCOME-TAX> 63,451
<INCOME-CONTINUING> 243,865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 243,865
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
