<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 March 31, 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)
2000 Town Center, Suite 690, Southfield, MI 48075
(Address of principal executive offices)
(248) 358-1699
(Issuer's telephone number)
--------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No .
--- ---
Shares of the Registrant's Common Stock, par value $.01 per share, outstanding
as of May 6, 1999: 23,722,608.
<PAGE>
PART I-ITEM 1: FINANCIAL STATEMENTS
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998 (1)
---------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,898,299 $ 7,240,130
Accounts receivable, net 19,544,741 23,216,686
Inventories, principally finished goods 5,040,405 5,060,159
Other current assets 4,107,012 4,093,846
------------ -----------
Total current assets 30,590,457 39,610,821
Furniture and equipment, net 3,907,359 3,680,287
Capitalized software, net 7,546,253 7,783,169
Intangibles, net 18,320,454 18,906,237
------------ -----------
Total assets $ 60,364,523 $ 69,980,514
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit $ - $ 3,998,203
Current portion of long-term debt 2,461,782 2,842,072
Accounts payable 7,806,451 6,417,449
Accrued compensation 1,190,922 1,326,570
Accrued expenses 6,680,916 5,165,595
Unearned revenue and customer deposits 9,743,578 11,044,540
Income taxes payable 441,137 697,778
------------ -----------
Total current liabilities 28,324,786 31,492,207
Long-term debt 2,289,231 2,706,357
------------ -----------
Total liabilities 30,614,017 34,198,564
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
23,711,608 and 23,834,436 shares issued and outstanding 237,116 238,345
Additional paid-in capital 75,325,663 75,667,193
Accumulated deficit (45,306,919) (39,195,705)
Treasury stock, at cost, 144,273 shares - (387,221)
Accumulated other comprehensive loss (505,354) (540,662)
------------ -----------
Total shareholders' equity 29,750,506 35,781,950
------------ -----------
Total liabilities and shareholders' equity $ 60,364,523 $ 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
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
1999 1998 (1)
------------- ------------
<S> <C> <C>
Revenue $ 29,689,271 $ 29,581,628
Cost of revenue 18,102,254 19,155,773
------------ ------------
Gross profit 11,587,017 10,425,855
Operating expenses:
Selling, general and administrative 10,268,046 9,323,200
Research and development 875,496 503,990
Amortization of intangibles 585,783 289,779
Reorganization costs 3,600,000 -
Transaction costs 2,288,379 -
------------ ------------
Total operating expenses 17,617,704 10,116,969
------------ ------------
Operating income (loss) (6,030,687) 308,886
Interest income 71,792 115,108
Interest expense (231,838) (123,695)
------------ ------------
Income (loss) before income taxes (6,190,733) 300,299
Income tax expense (benefit) (79,519) 26,977
------------ ------------
Net income (loss) $ (6,111,214) $ 273,322
------------ ------------
------------ ------------
Net income (loss) per common share -basic $ (0.26) $ 0.01
------------ ------------
------------ ------------
-fully diluted $ 0.01
------------
------------
Weighted average shares outstanding -basic 23,697,795 21,607,344
------------ ------------
------------ ------------
-fully diluted 22,425,584
------------
------------
</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
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
1999 1998 (1)
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (6,111,214) $ 273,220
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Amortization of capitalized software 342,114 337,145
Amortization of intangibles 585,783 289,779
Depreciation 390,465 302,672
Stock and warrants issued for services 10,736 12,000
Realized investment gain - (9,000)
Changes in current operating items:
Accounts receivable, net 3,671,945 1,164,561
Inventories 19,754 323,722
Other current assets (13,166) (232,981)
Accounts payable 1,389,002 1,152,038
Accrued compensation (135,648) (241,715)
Accrued expenses 1,515,321 (673,478)
Unearned revenue and customer deposits (1,300,962) (1,029,725)
Other current liabilities (256,641) (164,342)
------------ ------------
Net cash provided by operating activities: 107,489 1,503,896
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of securities available for sale - 259,000
Software development costs capitalized, net (105,198) (425,000)
Purchases of furniture and equipment, net (617,537) (511,662)
Other, net - 26,000
------------ ------------
Net cash used for investing activities: (722,735) (651,662)
------------ ------------
FINANCING ACTIVITIES:
Payments on long-term debt and capital leases (797,416) (106,000)
Payments on credit line, net (3,998,203) (597,897)
Proceeds from issuances of common stock and warrants, net 40,627 36,825
Payments issued in lieu of fractional shares (6,901) -
------------ ------------
Net cash used for financing activities: (4,761,893) (667,072)
------------ ------------
EFFECT OF CHANGES IN CURRENCY EXCHANGE RATE 35,308 (32,000)
Increase (decrease) in cash and cash equivalents (5,341,831) 153,162
------------ ------------
CASH AND CASH EQUIVALENTS:
Beginning of period 7,240,130 9,260,364
------------ ------------
End of period $ 1,898,299 $ 9,413,526
------------ ------------
------------ ------------
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transactions, see
Note 3.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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
financial statements contain all necessary adjustments, consisting only of
those of a recurring nature, and disclosures to present fairly the
financial position as of March 31, 1999 and the results of operations and
cash flows for the periods ended March 31, 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.
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 Form 8-Ks dated March 25, 1999
and March 31, 1999 describing the acquisitions of Sulcus and Windward.
2. NET INCOME (LOSS) PER SHARE
The basic income (loss) per common share is determined by dividing income
(loss) by the weighted average number of common shares outstanding. Diluted
income per common share is determined by dividing income by the weighted
average number of common shares and common stock equivalents outstanding.
Common stock equivalents of 818,240 in 1998 represent shares issuable upon
the assumed exercise of dilutive stock options.
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 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 have been included in
operating expenses in the first quarter.
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 owners of
Windward received 1,375,001 shares of the Company's common stock. The
transaction costs of $251,000 related to the merger have been included in
operating expenses in the first quarter. 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 first quarter of 1998. The 1998
results included in the statements of operations have been restated to
include the results of Sulcus and Windward.
<TABLE>
<CAPTION>
Revenue:
<S> <C>
Eltrax, as previously reported $14,974,873
Sulcus 14,465,000
Windward 141,755
-----------
Total revenue $29,581,628
-----------
-----------
Net income (loss):
Eltrax, as previously reported $ (187,246)
Sulcus 420,000
Windward 40,568
------------
Total net income $ 273,322
------------
------------
</TABLE>
6
<PAGE>
4. REORGANIZATION EXPENSES
In connection with the Company's merger with Sulcus and Windward and
the relocation of Company headquarters to Atlanta, the Company has
recorded significant reorganization costs in the first quarter of 1999.
These charges are based upon Management's plans established in the
first quarter of 1999 and consist of the following items:
<TABLE>
<CAPTION>
Amounts
Accrued at
Costs March 31, 1999
<S> <C> <C>
Severance and related costs $1,741,000 $1,019,000
Facility costs 932,000 932,000
Program closure costs 305,000 88,000
Other costs 622,000 293,000
---------- ----------
$3,600,000 $2,332,000
---------- ----------
---------- ----------
</TABLE>
The severance and related costs are attributable to approximately 30
employees who have been, or will be, terminated by the Company. These costs
include $722,000 paid 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 the portion of the
Wichita, Kansas Sulcus office used for research and development activities.
These costs will be decreased if the Company is able to sublease this
space.
Further, the Company also determined during the first quarter to
discontinue its efforts to develop certain products, including the Legacy
products previously being developed at Sulcus. The $305,000 in expenses
related to this decision include the write-off of $167,000 in software
costs that had been previously capitalized.
The $622,000 of other costs includes recruiting and relocation costs
incurred in the first quarter relating to organizational changes as well as
other costs related to the Company's change in focus from certain
activities.
The Company expects to substantially complete the reorganization by
December 31, 1999. The Company expects to incur approximately $500,000 in
additional reorganization costs in the second and third quarters of 1999.
These costs will be charged to expense as incurred and primarily include
relocating certain executives to Atlanta and recruiting additional
executives to fill key positions following the relocation and mergers.
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) $(6,111,214) $ 273,322
Other comprehensive income:
Foreign currency translation 62,817 (41,000)
------------ ----------
Comprehensive income $(6,048,397) $ 232,322
------------ ----------
------------ ----------
</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 shall 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.
7. SEGMENT INFORMATION
Taking into account the merger of Sulcus and Windward late in the first
quarter of 1999, the Company is reporting information for two segments, the
Network Solutions Group and the Applications and Support Group. Due to the
recent mergers and the reorganization of the Company, 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 March 31, 1999
-----------------------------------------------------
Network Applications and
Solutions Support Total
---------------- ------------------ -----------------
<S> <C> <C> <C>
Revenue $ 11,383 $ 18,306 $ 29,689
Segment profit 37 1,841 1,878
Total assets 16,416 43,666 60,082
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
-----------------------------------------------------
Network Applications and
Solutions Support Total
---------------- ------------------ -----------------
<S> <C> <C> <C>
Revenue $ 15,116 $ 14,465 $ 29,581
Segment profit 506 1,683 2,189
</TABLE>
The following table reconciles the net segment profit above loss to the
pretax income (loss) (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Segments, above $ 1,878 $ 2,189
Corporate expenses (1,435) (1,581)
Interest, net (160) (18)
Amortization (excluding acquired software) (586) (290)
Transaction and reorganization costs (5,888) -
--------- ---------
Pretax income (loss) $ (6,191) $ 300
========= =========
</TABLE>
8. LITIGATION
The Company is involved in several legal proceedings arising from its
normal business operations. In management's opinion, the ultimate outcome
of these proceedings will not have a material impact on the Company's
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. Revenue in 1998 totaled approximately $3.7
million.
The Sulcus and Windward mergers were accounted for as pooling 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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
DOLLARS IN THOUSANDS 1999 1998
-------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Revenue 29,689 29,582
Gross profit 11,587 10,426
Gross profit margin 39.0% 35.2%
Net income (loss) $(6,111) $273
Operating expenses (1) 11,729 10,117
Operating income (loss) (1) (142) 309
EBITDA (1) (2) 1,176 1,238
-------------------------------------------------- ----------------- -----------------
</TABLE>
(1) EXCLUDES ONE-TIME MERGER RELATED AND REORGANIZATION CHARGES OF
$5,888 IN 1999
(2) EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND
AMORTIZATION OF INTANGIBLES AND SOFTWARE
For the first quarter of 1999, Eltrax's net loss totaled $6.1 million, or $.26
per diluted share, compared with net income of $273 thousand and $.01 per
diluted share, for the same period of 1998. The current quarter's results
included one-time merger-related and restructuring charges totaling
approximately $5.9 million. Excluding these costs, the net loss for the first
quarter of 1999 totaled $223 thousand.
Consolidated revenue totaled $29.7 million in the first quarter of 1999,
reflecting a slight increase in the quarter-to-quarter comparison with 1998. The
comparability of revenue was affected by the inclusion in 1999 of Encore's
results and a full quarter of Windward's operations (Windward commenced
operations in February 1998). The favorable impact of these transactions was
offset by reduced distribution sales, including the closure of the Datatech
subsidiary. The gross profit increased by $1.2 million in 1999 and as a percent
of revenue was 39.0% in the first quarter of 1999 compared with 35.2% in the
year-earlier period. The increased gross profit and margins were attributable to
the reduction in sales to distribution customers and improved margins at the
Squirrel point-of-sale operations.
Excluding $5.9 million of non-recurring merger-related and restructuring
charges, total operating expenses for the first quarter of 1999 totaled $11.7
million, an increase of $1.6 million in the quarter-to-quarter comparison. The
inclusion of Encore's results since its acquisition in the third quarter of 1998
was the primary reason for the increase. Amortization of intangibles related to
the Encore transaction increased operating expenses by approximately $320,000.
As a percent of revenue, operating expenses were 39.5% in the first quarter of
1999 and 34.2% in the same period of 1998.
The reorganization and transaction costs of $5.9 million incurred in the first
quarter consisted primarily of costs related to facilities that will not be
utilized fully in the future and severance for employees terminated or to
be terminated. The Company expects to incur additional reorganization costs of
approximately $.5 million in the second and third quarters of 1999 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
MARCH 31, 1999 1998 1999 1998 1999 1998
------------------------------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue $11,384 $15,116 $18,305 $14,466 $29,689 $29,582
Gross profit 3,049 3,446 8,538 6,980 11,587 10,426
Operating expenses 3,012 2,940 6,697 5,297 9,709 8,237
--------- --------- --------- --------- --------- --------
Earnings before interest,
taxes and amortization 37 506 1,841 1,683 1,878 2,189
Unallocated items
Corporate expenses 1,436 1,581
Amortization expense (1) 585 290
Transaction costs 2,288 -
Reorganization costs 3,600 -
--------- --------
Operating income (loss) (6,031) 318
Interest expense, net 160 18
--------- --------
Pre tax income $(6,191) $300
--------- --------
Gross margin 26.8% 22.8% 46.6% 48.3% 39.0% 35.2%
</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, proprietary
hardware and related services primarily to the hospitality industry.
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
12
<PAGE>
NETWORK SOLUTIONS GROUP
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------
DOLLARS IN THOUSANDS 1999 1998 CHANGE
------------------------------------------------ ------------ ------------ ----------
<S> <C> <C> <C>
Revenue $11,384 $15,116 (24.7)%
Cost of revenue 8,335 11,670 (28.6)
------------ ------------
Gross profit 3,049 3,446 (11.5)
Gross profit margin 26.8% 22.8%
Operating expenses 3,012 2,940 2.4
EBITA $ 37 $ 506 (92.7)
------------------------------------------------ ------------ ------------ ----------
</TABLE>
First 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 declined due to reduced sales
from the closure of the Datatech subsidiary and Eltrax's distribution
operations, in 1998. This was partially offset by revenue growth within the
recently acquired Windward operations. While sales and gross profit both
declined in the quarter-to-quarter comparison, the gross margin increased to
26.8% 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 MARCH 31,
--------------------------
DOLLARS IN THOUSANDS 1999 1998 CHANGE
----------------------------------------------------- ------------- ------------ ---------
<S> <C> <C> <C>
Revenue $18,305 $14,466 26.5%
Cost of revenue 9,767 7,486 30.5
------------- ------------
Gross profit 8,538 6,980 22.3
Gross profit margin 46.6% 48.3%
Operating expenses 6,697 5,297 26.4
EBITA, after amortization of acquired software $ 1,841 $ 1,683 9.4
----------------------------------------------------- ------------- ------------ ---------
</TABLE>
For the first three months of 1999, Applications and Support Group revenue and
gross profit increased $3.8 million and $1.6 million, respectively, primarily
due to the Encore acquisition in September 1998. In addition, sales from the
Senercomm subsidiary, a provider of in-room management systems for the
hospitality industry, increased almost $.5 million. Operating expenses increased
due to the inclusion of Encore's results in the current quarter. Adding back the
amortization of acquired software of $277 thousand would result in EBITA of $2.1
million in 1999.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The cash and cash equivalents totaled $1.9 million at March 31, 1999 and
compared to $7.2 million at December 31, 1998. The lower cash balances reflect
the items discussed below.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
-------------------------
DOLLARS IN THOUSANDS 1999 1998
------------------------------------------------ ------------ ------------
<S> <C> <C>
Cash provided (used) by
Operating activities $ 107 $ 1,504
Investing activities (723) (652)
Financing activities (4,761) (667)
------- --------
$(5,377) $ 185
======== ========
</TABLE>
Cash used for operations in the first quarter of 1999 totaled $.1 million
compared with $1.5 million in the first quarter of 1998. The net loss in 1999
of $6.1 million was offset by non-cash charges for depreciation and
amortization of software and intangibles of $1.3 million and a reduction in
accounts receivable of $3.7 million. The reduction in accounts receivables is
primarily attributable to certain annual maintenance billings made late in
the fourth quarter that were collected in the first quarter.
Cash used for investing activities totaled $.7 million in both the first
quarter of 1999 and 1998. Capital expenditures totaled $.6 million in the
current quarter and were in part related to costs for the Company's new
information systems.
Cash used for financing activities was $4.8 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 Company renegotiated its credit facility in September 1998 resulting in
availability under the credit line of $6.0 million as well as a $4.0 million
term loan. The revised agreement also modified certain covenants, and
extended the agreement to September 2001. The availability under the credit
line is limited to the Company's borrowing base, which is a function of
certain accounts receivable and inventory. At March 31, 1999, the borrowing
base was approximately $4.6 million with no borrowings outstanding. The
Company was not in compliance with certain covenants in early 1999. The bank
has waived this noncompliance.
During 1999, the Company anticipates renegotiating its banking agreements to
include certain Sulcus assets in its borrowing base 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. 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.
14
<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, 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 March 31, 1999, costs of
approximately $400,000 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 compliant 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 intends to request
assurances from its major suppliers that they are addressing the Year 2000 Issue
in a timely fashion. There can be no assurance that all of the Eltrax suppliers
of products and services will successfully address the Year 2000 Issue. It will
be impossible to fully assess the potential consequences if service
interruptions occur from suppliers or in infrastructure areas such as utilities,
communications, transportation, banking and government. As a result, Eltrax also
intends to develop a contingency plan 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.
15
<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
On March 31, 1999, 1,375,001 shares of unregistered common stock were
issued in connection with the merger with Windward Technology Group,
Inc. The common stock was issued to several individuals and was exempt
from registration as a "private offering" pursuant to Section 4(2) of
the Securities Act of 1933.
16
<PAGE>
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 19, 1999 the Company held a special meeting to vote on the
merger with Sulcus Hospitality Technologies, Inc. (Proposal 1) and to
approve the addition of 1,500,000 shares to the Company's 1998 Stock
Incentive Plan (Proposal 2). The votes were as follows:
<TABLE>
<CAPTION>
Abstentions or Broker
For Against or Withheld Non-Votes
--- ------------------- ---------------------
<S> <C> <C> <C>
Proposal 1 8,757,199 19,450 15,405
Proposal 2 8,744,517 31,432 16,105
</TABLE>
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of Incorporated by reference to Exhibit 2.1 to the
November 11, 1998, by and among Eltrax, Company's Registration Statement on Form S-4 dated
Sulcus Hospitality Technologies Corp. and February 16, 1999
Sulcus Acquiring Corporation . (File No. 333-68699)
2.2 Agreement and Plan of Merger dated as of Incorporated by reference to Exhibit 2.1 to
March 31, 1999, by and among the Company's Form 8-K dated March 31, 1999.
Eltrax, Windward Acquiring
Corporation, Windward Technology
Group, Inc., Ian Bresnahan, David G. Able,
Todd A. Cochran, Joshua Shipman, Mike Kulzer,
Fred Nix, Tom Loughran, George Lusk, William
M. Gillespie and Richard Dotson.
10.1 Amendment to the Consulting Agreement dated Filed herewith electronically
as of April 1, 1999 by and among the
Company, William P. O'Reilly
and Montana Corp.
10.2 Amendment to the Consulting Agreement dated Filed herewith electronically
as of April 1, 1999 by and among the
Company, Clunet R. Lewis and CRL
Enterprises, Inc.
</TABLE>
17
<PAGE>
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated March 25, 1999 describing the merger
with Sulcus Hospitality Technologies, Corp., including audited financial
statements of Sulcus and certain pro forma data.
The Company filed a Form 8-K dated March 31, 1999 describing the
merger with Windward Technology Group, Inc.
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: May 14, 1999 /s/ Nicholas J. Pyett
------------------------------------------------
Nicholas J. Pyett
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
ex10-1.cnv<PAGE>
AMENDMENT TO O'REILLY CONSULTING AGREEMENT
THIS AGREEMENT is made this 30th day of April 1999, among Eltrax Systems,
Inc. (the "Company"), Montana Corporation (the "Consulting Firm"), and William
P. O'Reilly (the "Consultant"), with reference to the following facts:
A. The Consultant, the Consulting Firm, and the Company are parties to a
certain O'Reilly Consulting Agreement, dated as of April 1, 1999 (the "Original
Agreement"); and
B. The parties wish to amend the Original Agreement, only in the ways set
forth below.
The Company, the Consultant Firm, and the Consultant agree that the Original
Agreement is hereby amended, only as set forth below:
2. Paragraph 3 of the Original Agreement shall be replaced by the following
paragraph:
The term of this Agreement will commence on April 1, 1999, and will
continue for a period of two (2) years, unless earlier terminated in
accordance with Section 4 below. The term of this Agreement will
automatically renew for additional one-year terms unless written notice of
election to not renew is given by either party to the other at least one
year before the end of the term.
1. Notwithstanding paragraph 5(a) of the Original Agreement, the consulting
fees will be reduced by $5000 per month for May through September 1999, and
thereafter will be paid at the rate set forth in paragraph 5(a).
ELTRAX SYSTEMS, INC.
/s/ Nicholas J. Pyett
- ---------------------------
By: Nicholas J. Pyett,
Chief Financial Officer
Montana Corporation
/s/ William P. O'Reilly
- ----------------------------
By: William P. O'Reilly
President
CONSULTANT
/s/ William P. O'Reilly
- --------------------------
William P. O'Reilly
<PAGE>
AMENDMENT TO LEWIS CONSULTING AGREEMENT
THIS AGREEMENT is made this 30th day of April 1999, among Eltrax Systems,
Inc. (the "Company"), CRL Enterprises, Inc. (the "Consulting Firm"), and Clunet
R. Lewis (the "Consultant"), with reference to the following facts:
A. A. The Consultant, the Consulting Firm, and the Company are parties to a
certain Lewis Consulting Agreement, dated as of April 1, 1999 (the "Original
Agreement"); and
B. The parties wish to amend the Original Agreement, only in the ways set
forth below.
The Company, the Consultant Firm, and the Consultant agree that the Original
Agreement is hereby amended, only as set forth below:
1. 1. Paragraph 3 of the Original Agreement shall be replaced by the
following paragraph:
The term of this Agreement will commence on April 1, 1999, and will
continue for a period of two (2) years, unless earlier terminated in
accordance with Section 4 below. The term of this Agreement will
automatically renew for additional one-year terms unless written
notice of election to not renew is given by either party to the other
at least one year before the end of the term.
2. Notwithstanding paragraph 5(a) of the Original Agreement, the consulting
fees will be reduced by $5000 per month for May through September 1999, and
thereafter will be paid at the rate set forth in paragraph 5(a).
ELTRAX SYSTEMS, INC.
/s/ Nicholas J. Pyett
- -------------------------
By: Nicholas J. Pyett,
Chief Financial Officer
CRL Enterprises, Inc.
/s/ Clunet R. Lewis
- -------------------------
By: Clunet R. Lewis,
President
CONSULTANT
/s/ Clunet R. Lewis
- --------------------------
Clunet R. Lewis
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,898,299
<SECURITIES> 0
<RECEIVABLES> 19,544,741
<ALLOWANCES> 0
<INVENTORY> 5,040,405
<CURRENT-ASSETS> 0
<PP&E> 3,907,359
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,364,523
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 237,116
<OTHER-SE> (505,354)
<TOTAL-LIABILITY-AND-EQUITY> 60,364,523
<SALES> 29,689,271
<TOTAL-REVENUES> 29,689,271
<CGS> 18,102,254
<TOTAL-COSTS> 18,102,254
<OTHER-EXPENSES> 17,617,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (231,838)
<INCOME-PRETAX> (6,190,773)
<INCOME-TAX> (79,519)
<INCOME-CONTINUING> (6,111,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,111,214)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
