<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securites Exchange Act of 1934
Date of Report (Date of earliest event reported):
March 25, 1999
ELTRAX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 0-22190 41-1484525
(State of incorporation) (Commission File No.) (I.R.S Employer
I.D. No.)
2000 Town Center, Suite 690, Southfield, MI 48075
(Address of principal executive offices)
(248)358-1699
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
MERGER WITH SULCUS HOSPITALITY TECHNOLOGIES CORP.
On March 25, 1999, pursuant to Merger Agreement dated as of November
11, 1998 (the "Merger Agreement") by and among Eltrax Systems, Inc., a
Minnesota corporation (the "Company"), Sulcus Acquiring Corporation, a
Pennsylvania corporation ("Acquiring Sub"), and Sulcus Hospitality
Technologies Corp., a Pennsylvania corporation ("Sulcus"), Acquiring Sub
merged with and into Sulcus. As a result of the merger, the separate
existence of Acquiring Sub ceased and Sulcus continues as the surviving
corporation and a wholly owned subsidiary of the Company. Sulcus is a
provider of proprietary software, point-of-sale systems, energy management
products, and technology services primarily to the hospitality and restaurant
industries. The description of the merger and stock acquisitions included
herein does not purport to be complete and is qualified in its entirely by
reference to the Merger Agreement which is filed as Exhibit 2.1 hereto.
Pursuant to the terms of the Merger Agreement, upon the closing of the
merger on March 25, 1999, .55 shares of common stock, $.01 par value per
share, of the Company (the "Common Stock") were exchanged for each Sulcus
share held. Approximately 9,298,000 shares of the Company's Common Stock were
issued in the exchange and the Company paid for fractional shares in cash.
The 9,298,000 shares of Common Stock issued in connection with the merger
represents approximately 42% of the issued and outstanding shares of Common
Stock after the closing.
For accounting purposes, it is intended that the merger will be treated
as a pooling-of-interests transaction under APB Opinion No. 16.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The index to the financial information for Sulcus is included on page F-1 of
this report.
(b) PRO FORMA FINANCIAL INFORMATION.
The index to the pro forma financial information is included on page F-1 of
this report.
(c) EXHIBITS.
The exhibits required by Item 7(c) and Item 601 of Regulation S-K are listed
in the Exhibit Index.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ELTRAX SYSTEMS, INC.,
a Minnesota corporation
By: /s/ Nicholas J. Pyett
---------------------
Nicholas J. Pyett,
Chief Financial Officer
Date: March 30, 1999
<PAGE>
EXHIBIT INDEX
Exhibit Method of
Number Description Filing
- ------- ----------- ---------
2.1 Merger Agreement, dated as of Incorporated by reference to
November 11, 1998, among Eltrax Exhibit 2.1 to the Company's
Systems, Inc., Sulcus Acquiring Registration Statement on Form
Corporation, and Sulcus S-4 (File No. 333-68699).
Hospitality Technologies Corp.
23.1 Consent of Crowe Chizek LLP Filed herewith electronically.
<PAGE>
SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS ....................... F-2
Consolidated Balance Sheets .......................... F-3
Consolidated Statements of Operations ................ F-4
Consolidated Statements of Stockholders's Equity ..... F-5
Consolidated Statements of Cash Flows ................ F-6
Notes to Consolidated Financial Statements ........... F-7
</TABLE>
ELTRAX SYSTEMS, INC., SULCUS HOSPITALITY TECHNOLOGIES CORP.
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Narrative Overview ................................................... F-17
Pro Forma Condensed Combined Balance Sheet as of December 31, 1998
(Unaudited) ....................................................... F-18
Notes to Pro Forma Condensed Combined Balance Sheet as
of December 31, 1998 ............................................. F-19
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1998 (Unaudited) .......................... F-20
Notes to Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1998 .................................. F-21
Pro Forma Condensed Combined Statements of Operations for the year
ended December 31, 1997 (Unaudited) ............................... F-22
Notes to Pro Forma Condensed Combined Statements of Operations for
the year ended December 31, 1997 .................................. F-23
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1996 (Unaudited) ......................... F-24
Notes to Pro Forma Condensed Combined Statements of Operations for
the year ended December 31, 1996 .................................. F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Sulcus Hospitality Technologies Corp.
We have audited the accompanying consolidated balance sheet of Sulcus
Hospitality Technologies Corp. as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sulcus
Hospitality Technologies, Corp. as of December 31, 1998 and 1997 and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ CROWE, CHIZEK AND COMPANY LLP
Columbus, Ohio
March 26, 1999
F-2
<PAGE>
SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
IN THOUSANDS, EXCEPT SHARE DATA 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $7,197 $8,894
Short-term investments - 259
Accounts receivable, net of allowance of $2,221 and $1,785 14,163 11,256
Inventories 3,296 3,261
Deferred taxes - 389
Other current assets 2,035 1,718
---------------------------
Total current assets 26,691 25,777
Purchased and capitalized software, net of accumulated
amortization of $12,275 and $11,396 4,050 4,961
Property and equipment, net of accumulated amortization
of $5,971 and $4,841 2,066 2,142
Goodwill, net of accumulated amortization of $4,201 and $4,240 5,292 6,428
Deferred taxes - 1,711
Other noncurrent assets 1,154 1,187
---------------------------
Total Assets $39,253 $42,206
---------------------------
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $1,974 $1,300
Current portion of long-term debt 1,113 705
Current portion of capitalized leases 32 160
Accounts payable 3,056 2,645
Deferred revenue 7,043 6,542
Customer deposits 1,128 1,666
Other accrued liabilities 3,209 2,252
---------------------------
Total current liabilities 17,555 15,270
Long-term debt 676 1,408
Capitalized leases 41 40
Stockholders' Equity
Preferred stock - Series B Junior Participating, no par
value; 300,000 shares authorized, none issued - -
Common stock, no par value; 30,000,000 shares authorized and
17,126,359 and 17,057,063 shares issued 41,462 41,338
Accumulated deficit (19,553) (15,363)
Treasury stock, at cost, 262,315 shares (387) -
Accumulated other comprehensive income (loss) (541) (487)
---------------------------
20,981 25,488
---------------------------
Total Liabilities and Stockholders' Equity $39,253 $42,206
---------------------------
---------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-3
<PAGE>
SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
IN THOUSANDS, EXCEPT PER SHARE 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue
Systems $38,106 $33,297 $31,722
Support 22,287 20,525 19,083
------------------------------------------
Total revenue 60,393 53,822 50,805
Cost of goods sold and services provided
Systems 23,118 21,100 19,598
Support 4,351 3,740 3,756
------------------------------------------
Total cost of goods sold and services provided 27,469 24,840 23,354
------------------------------------------
Gross profit 32,924 28,982 27,451
Operating expenses
Selling, general and administrative 29,227 28,440 23,847
Research and development 3,723 3,069 2,499
Capitalized software development (1,737) (1,568) (1,101)
------------------------------------------
Net research and development 1,986 1,501 1,398
Depreciation and amortization 1,842 1,701 1,589
Impaired asset charges 2,270 - -
Provision for litigation settlement - 250 -
-----------------------------------------
Total operating expenses 35,325 31,892 26,834
Income (loss) from operations (2,401) (2,910) 617
Other (income) expense
Interest expense 205 368 571
Dividend and interest income (508) (1,006) (1,340)
Realized gains on sales of securities (9) (74) (9)
Gain on disposal of product line - (188) -
------------------------------------------
Total other (income) expense (312) (900) (778)
Income (loss) before income taxes (2,089) (2,010) 1,395
Income taxes 2,101 - -
------------------------------------------
Net income (loss) $(4,190) $(2,010) $1,395
------------------------------------------
------------------------------------------
Earnings (Loss) Per Common Share
Basic $(.25) $(.12) $.08
Diluted (.25) (.12) .08
------------------------------------------
------------------------------------------
Weighted Average Shares Outstanding Basic 17,073 16,842 16,720
Diluted 17,073 16,842 16,833
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-4
<PAGE>
SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE ACCUMULATED
RECEIVABLE OTHER TOTAL
COMPREHENSIVE COMMON TREASURY ACCUMULATED FROM COMPREHENSIVE STOCKHOLDERS'
DOLLARS IN THOUSANDS INCOME STOCK STOCK DEFICIT STOCKHOLDER INCOME (LOSS) EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $38,016 $(14,748) $(500) $126 $22,894
Stock options exercised 138 138
Issuance of stock, contingent
earnouts on acquisitions of
companies 169 169
Cancellation of shares in repayment
of shareholder loans (550) 500 (50)
Issuance of stock to consultants 26 26
Issuance of stock as settlement of
previously recorded liabilities 2,981 2,981
Net income $1,395 1,395 1,395
Change in unrealized gains
(losses) on securities
available for sale (187) (187) (187)
Translation adjustment (48) (48) (48)
--------------
$1,160
---------------------------------------------------------------------------------------------
--------------
BALANCE, DECEMBER 31, 1996 40,780 (13,353) - (109) 27,318
Stock options exercised 32 32
Issuance of stock, on acquisition
of company 500 500
Issuance of stock to consultants 26 26
Net loss $(2,010) (2,010) (2,010)
Change in unrealized gains
(losses) on securities
available for sale 10 10 10
Translation adjustment (388) (388) (388)
--------------
$(2,388)
---------------------------------------------------------------------------------------------
--------------
BALANCE, DECEMBER 31, 1997 41,338 - (15,363) - (487) 25,488
Stock options exercised 12 12
Employee stock purchase plan 86 86
Treasury stock purchases (387) (387)
Issuance of stock to consultants 26 26
Net loss $(4,190) (4,190) (4,190)
Change in unrealized gains
(losses) on securities
available for sale (9) (9) (9)
Translation adjustment (45) (45) (45)
--------------
$(4,244)
---------------------------------------------------------------------------------------------
--------------
BALANCE, DECEMBER 31, 1998 $41,462 $(387) $(19,553) $- $(541) $20,981
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-5
<PAGE>
SULCUS HOSPITALITY TECHNOLOGIES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
DOLLARS IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(4,190) $(2,010) $1,395
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 3,066 3,550 4,392
Impaired asset charges 2,270 - -
Deferred tax provision 2,101 - -
Provision for doubtful accounts 1,027 545 859
Realized investment gains (9) (74) (9)
Gain on disposal of product line - (188) -
Accrued severance obligations - 1,538 -
Changes in operating assets and liabilities -
Restricted cash - - 550
Accounts receivable (3,935) 1,423 (2,721)
Inventories (35) (504) (41)
Accounts payable 410 (1,572) (404)
Deferred revenue 501 142 302
Shareholder litigation liability - - (308)
Customer deposits (538) (437) 791
Other assets and liabilities 677 17 (596)
------------------------------------------
Net cash provided by operating activities 1,345 2,430 4,210
INVESTING ACTIVITIES
Capital expenditures (1,475) (966) (886)
Investments in sales-type leases (204) (671) (287)
Payments received on sales-type leases 226 162 135
Proceeds from sales of securities available for sale 259 12,229 250
Purchases of securities available for sale - (11) (414)
Software development costs capitalized (1,737) (1,568) (1,101)
Purchase of subsidiary, net of cash acquired - (467) -
Proceeds from disposal of subsidiary, net of costs - 191 -
Proceeds from the sale of building - 399 -
------------------------------------------
Net cash provided by (used in) investing activities (2,931) 9,298 (2,303)
FINANCING ACTIVITIES
Short term borrowings (repayments) 674 (4,527) (556)
Long-term debt repayments (324) (314) (47)
Capital lease repayments (127) (140) (93)
Treasury stock purchase (387) - -
Proceeds from exercise of stock options and issuance of stock 98 32 138
------------------------------------------
Net cash provided by (used in) financing activities (66) (4,949) (558)
Effect of changes in currency exchange rate (45) (388) (48)
------------------------------------------
Increase (decrease) in cash (1,697) 6,391 1,301
Cash, beginning of period 8,894 2,503 1,202
------------------------------------------
Cash, end of period $7,197 $8,894 $2,503
------------------------------------------
------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-6
<PAGE>
SULCUS HOSPITALITY TECHNOLOGIES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Sulcus Hospitality Technologies Corp. (the "Company") designs, develops and
markets technology solutions that are used in the hospitality industry to
improve the management of business critical information and data.
On November 12, 1998, the Company announced it had agreed to be acquired by
Eltrax Systems, Inc. Eltrax is a nationwide managed network services and
information technology company. Under terms of the agreement, Eltrax will
acquire Sulcus by exchanging 0.55 shares of Eltrax common stock for each share
of Sulcus stock. This merger was approved by Sulcus' shareholders at a special
shareholders' meeting on March 25,1999.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Sulcus
Hospitality Technologies Corp. and its wholly owned subsidiaries ("Sulcus").
Certain prior period amounts have been reclassified, where necessary, to conform
to the current period presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including contingencies,
as well as the reported amounts of revenues and expenses during the financial
statement period. Actual results could differ from those estimates. Examples of
significant estimates include the collectibility of receivables, the future
benefit of capitalized computer software costs, lives assigned to goodwill, the
net recoverability of deferred tax assets and contingencies relating to
sales-type leases. These estimates are particularly susceptible to material
changes in the near term.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Sulcus Hospitality
Technologies Corp. and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments in 50%
or less owned affiliates over which the Company has the ability to exercise
significant influence are accounted for using the equity method.
CASH AND CASH EQUIVALENTS
The Company considers as cash and cash equivalents amounts on deposit in banks
and cash invested temporarily in various instruments with maturities of three
months or less at the time of purchase.
SHORT-TERM INVESTMENTS
Short-term investments are accounted for as "Available for Sale". Available for
sale investments are carried at market value with unrealized gains and losses on
investments treated as a component of Stockholders' Equity. Realized gains and
losses on sales of investments, as determined on a specific identification
basis, are included in the consolidated statement of operations.
INVENTORIES
Inventories consist substantially of software and hardware products in finished
form and are valued at the lower of cost or market. Cost is determined by the
specific identification method. Market is net realizable value.
PURCHASED AND CAPITALIZED SOFTWARE
Purchased software has been developed by third parties to the stage of
technological feasibility at the date of acquisition. Software development costs
incurred prior to establishing technological feasibility are charged to
operations and included in research and development costs. Software development
costs incurred after establishing technological feasibility are capitalized.
Amortization of purchased and capitalized software is provided for when the
product is available for general release to customers over the greater of the
amount computed using the remaining estimated economic life of the product or
the ratio that current gross revenues for a product bear to the total of current
and anticipated revenues for that product. The products are generally being
amortized over 3 to 7 years. The Company evaluates the carrying value of
capitalized software based on current operating results and forecasts of
undiscounted cash flows of the underlying asset.
PROPERTY AND EQUIPMENT
Property and equipment is comprised of office furniture, fixtures, service
equipment, leasehold improvements, and land and building and is recorded at
cost. Depreciation, which includes amortization of assets under capital leases,
is based upon the straight-line method over the estimated useful lives of the
related assets. Maintenance and repairs are charged to expense as incurred.
F-7
<PAGE>
GOODWILL
Goodwill, which represents the excess of the cost of purchased companies over
the fair value of their net assets at the date of acquisition, is being
amortized on a straight-line basis over lives ranging from 10 to 20 years. The
Company evaluates the carrying value of goodwill based on current operating
results and forecasts of undiscounted cash flows of the specific businesses
acquired.
TREASURY STOCK
Common stock purchased for treasury is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the first-in, first-out basis.
INCOME TAXES
Income tax expense includes U.S. and international income taxes. Certain items
of income and expense are not reported in tax returns and financial statements
in the same year. The tax effect of the difference is reported as deferred
income taxes. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the periods in which the deferred
tax asset or liability is expected to be realized or settled. A valuation
allowance is provided to reduce deferred tax assets to an amount more likely
than not to be realized. Non-U.S. subsidiaries compute taxes in effect in the
various countries. Earnings of these subsidiaries may also be subject to
additional income and withholding taxes when they are distributed as dividends.
Undistributed earnings of non-U.S. subsidiaries are not material.
REVENUE RECOGNITION
Sulcus adopted Statement of Position 97-2 "Software Revenue Recognition,"
effective for transactions entered into on or after January 1, 1998. This
statement provides guidance on revenue recognition for licensing, selling,
leasing and otherwise marketing computer software. The adoption of this
statement did not significantly change any of the Company's revenue recognition
policies nor did it materially affect the reported results of operations or
financial position.
The Company recognizes revenue on sales of systems including software and
hardware upon delivery or installation and when all obligations of the
respective contract have been fulfilled. Support services revenues are billed in
advance and recorded as deferred revenue and recognized as income ratably over
the service period of the Software Support and Hardware Maintenance Agreement.
FOREIGN CURRENCY TRANSLATION
For non-U.S. subsidiaries which operate in a local currency environment, assets
and liabilities are translated to U.S. dollars at the current exchange rates at
the balance sheet date. Income and expense items are translated at average rates
of exchange prevailing during the year. Translation adjustments are accumulated
in a separate component of stockholders' equity.
EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income applicable
to common stockholders by the weighted-average number of shares of common stock
outstanding during the year. Diluted earnings per common share are computed by
dividing net income applicable to common stockholders by the weighted average
number of shares of common stock outstanding adjusted for the assumed conversion
of all dilutive securities (employee stock options).
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." This
Statement establishes standards for reporting and displaying comprehensive
income and its components. Comprehensive income is defined as net income and all
other nonowner changes in equity. The Company has elected to present
comprehensive income on the statement of stockholders' equity. Accumulated Other
Comprehensive Income consists principally of the foreign currency translation
adjustment.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents were as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Cash $1,293 $2,894
Commercial paper 5,904 6,000
--------------------------
Total $7,197 $8,894
- ----------------------------------------------------------------
</TABLE>
4. SHORT-TERM INVESTMENTS
Short-term investments are securities available for sale. At December 31, 1997,
such investments consisted of preferred stocks at a cost of $250 thousand and
unrealized gains of $9 thousand. There were no short-term investments at
December 31, 1998. The following table sets forth information pertaining to
sales of securities available for sale
<TABLE>
<CAPTION>
IN THOUSANDS
YEAR ENDED DECEMBER 31 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Proceeds $259 $12,229 $250
Gross realized gains 9 175 9
Gross realized losses - 101 -
- ----------------------------------------------------------------
</TABLE>
F-8
<PAGE>
5. PURCHASED AND CAPITALIZED SOFTWARE.
Purchased and capitalized software consists of the following:
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Purchased software $8,666 $8,632
Capitalized software 7,659 7,725
Accumulated amortization (12,275) (11,396)
--------------------------
Net purchased and capitalized
software $4,050 $4,961
- ----------------------------------------------------------------
</TABLE>
During 1998, the Company wrote-off $1.9 million of previously capitalized
software development costs. The charge was based on the Company's determination
that there was no reasonable expectation of future revenue from its
wINNfinity(TM) software product.
6. PROPERTY, BUILDINGS AND EQUIPMENT
The following table sets forth property, buildings and equipment.
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Buildings and leasehold improvements $403 $361
Furniture and equipment 7,634 6,622
Accumulated depreciation (5,971) (4,841)
--------------------------
Net property and equipment $2,066 $2,142
- ----------------------------------------------------------------
</TABLE>
The Company leases certain equipment under agreements, which are classified as
capital leases. These equipment leases have purchase options at the end of the
original lease term that ranges from 3 to 5 years. Leased capital assets are
included in property, plant and equipment at December 31, 1998 and 1997 with a
cost of $501 thousand and $557 thousand, respectively, and accumulated
amortization of $437 thousand and $340 thousand, respectively.
7. LEASES
AS LESSOR
The Company has a sales-type lease program with a finance company whereby it
receives 100% of the discounted minimum lease payments at inception of the
lease, assigns the lease payments to the finance company, grants the finance
company a security interest in the leased equipment and accepts certain recourse
liability in event of default by the lessee. The Company retains ownership in
the residual value of the leased property and has recorded a reserve for the
estimated liability under the recourse agreement. The following table sets forth
net investment in these financed sales-type leases:
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Estimated residual value of leased
property $1,820 $1,733
Unearned income (245) (302)
--------------------------
Net investment in financed
sales-type leases $1,575 $1,431
- ----------------------------------------------------------------
</TABLE>
At December 31, 1998, the Company has accrued $652 thousand representing
estimated amounts contingently payable related to sales-type leases financed
under this agreement. Since the inception of the program in 1995, actual losses
from recourse provisions have been $957 thousand. The amount of lease payments
assigned and the contingent liability under the recourse agreements are
approximately $7.2 million and $2.0 million, respectively, at December 31, 1998.
AS LESSEE
The Company has operating leases with third parties for office space and office
equipment. Future minimum payments by year and in the aggregate under
noncancelable capital leases and operating leases with initial or remaining
terms of one year or more consist of the following:
<TABLE>
<CAPTION>
CAPITAL OPERATING
IN THOUSANDS LEASES LEASES
- ----------------------------------------------------------------
<S> <C> <C>
1999 $51 $1,337
2000 22 954
2001 6 594
2002 1 251
Thereafter - 777
--------------------------
Total minimum lease payments 80 $3,913
------------
------------
Amount representing interest 7
-------------
Present value of minimum
lease payments 73
Current portion 32
-------------
Long-term portion $41
- ----------------------------------------------------------------
</TABLE>
Rent expense under these agreements and other operating leases was $1.7 million,
$1.6 million, and $1.6 million, for the years ended December 31, 1998, 1997 and
1996, respectively. See "Related Party Transactions" for additional discussions
of operating leases.
F-9
<PAGE>
8. SHORT-TERM BORROWINGS
At December 31, 1998, the Company has available a $3 million line of credit
under a commercial revolving note, expiring in April 1999, bearing interest at
the bank's prime rate of interest plus 1%. Borrowings under the note are secured
by the Company's equipment, accounts receivable and inventories located in the
United States.
In March 1999, the Company repaid all amounts outstanding under the line of
credit.
9. LONG TERM DEBT
The following table sets forth long-term debt:
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Unsecured note payable to former
chairman $615 $939
Note payable-Senercomm 1,174 1,174
--------------------------
1,789 2,113
Current portion 1,113 705
--------------------------
Long-term debt $676 $1,408
- ---------------------------------------------------------------
</TABLE>
Scheduled maturities of long-term debt at December 31, 1998 are $1,113 in 1999
and $676 in 2000.
10. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
YEAR ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current taxes
Domestic $- $- $-
Foreign - - -
-------------------------------
Total current - - -
Adjustment of valuation
allowance 2,101 - -
-------------------------------
Total provision for
income taxes $2,101 $- $-
- ---------------------------------------------------------------
</TABLE>
The reconciliation between the federal statutory income tax rate and the
effective rate is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
YEAR ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate (35)% (35)% 35%
State income taxes, net of
federal tax benefit (6) (6) 6
Benefits not recorded
(benefits recognized) due
to net carryforward
position 39 39 (43)
Other 2 2 2
Valuation allowance 101 - -
-------------------------------
Effective tax rate 101% 0% 0%
- ---------------------------------------------------------------
</TABLE>
Deferred tax assets and (liabilities) consisted of the following:
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Current portion
Allowance for doubtful
accounts $540 $469
Unrealized security losses 4
Inventory writedowns 344 321
Other nondeductible expenses 1,053 1,003
--------------------------
1,937 1,797
Valuation allowance (1,937) (1,408)
--------------------------
- 389
Noncurrent portion
Property and equipment 167 45
Capitalized software costs (1,521) (1,893)
Net operating loss carryforwards 9,405 9,721
Tax credits 1,232 1,232
--------------------------
9,283 9,105
Valuation allowance (9,283) (7,394)
--------------------------
- 1,711
--------------------------
Net deferred tax assets $- $2,100
- ---------------------------------------------------------------
</TABLE>
The provision for income taxes in 1998 represents an increase in the
valuation allowance to eliminate the net deferred tax assets. This was based
upon management's uncertainty as to the realizability of deferred tax assets
due to recent operating losses and the difficulty in predicting future
taxable income. In 1997 and 1996 management believed that it was more likely
than not that sufficient future taxable income would be generated to realize
a portion of the deferred tax benefits.
F-10
<PAGE>
The Company has approximately $26.7 million of net operating losses at December
31, 1998, a portion of which are subject to certain limitations under the
Internal Revenue Code Section 382, and $1.2 million of tax credits ($1.1 million
of research activities credits and $100 thousand of investment tax
credits) available to offset future federal tax liabilities. The utilization of
net operating losses is limited by certain rules which limit the utilization of
losses incurred by group members prior to their acquisition by the Company based
upon post-acquisition taxable income generated by specific members of the group
and the passage of time.
The net operating loss carryforwards expire as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
- --------------------------------------------------
<S> <C>
2001 $933
2002 1,310
2003 5,678
2004 2,377
2005 2,077
2006 723
2007 1,566
2008 4,498
2009 4,703
2010 846
2011 712
2012 1,298
-------------
Total $26,721
- --------------------------------------------------
</TABLE>
11. IMPAIRED ASSET CHARGES
During 1998, the Company recorded a $2,270 thousand charge for impaired assets
consisting of the write-off of $1,928 thousand for previously capitalized
software development costs and $342 thousand for certain goodwill.
12. EARNINGS PER SHARE
The computation of earnings per share is as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, YEAR ENDED DECEMBER 31
EXCEPT PER SHARE 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income (loss) to common
shareholders $(4,190) $(2,010) $1,395
Divided by
Weighted average shares
outstanding 17,073 16,842 16,720
Basic earnings per share $(.25) $.(12) $.08
- -----------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Net income (loss) to common
shareholders $(4,190) $(2,010) $1,395
Divided by sum of
Weighted average shares
outstanding 17,073 16,842 16,720
Effect of dilutive stock
options - - 113
--------------------------------
Diluted shares outstanding 17,073 16,842 16,833
Diluted earnings per share $(.25) $(.12) $.08
- -----------------------------------------------------------------
</TABLE>
Options to purchase 2.6 million, 2.1 million and 1.8 million shares of common
stock were outstanding at December 31, 1998, 1997, and 1996, respectively,
but were not included in the computation of diluted earnings per share
because the options were antidilutive.
The change in common shares during 1998 was as follows:
<TABLE>
<S> <C>
Balance - January 1, 1998 .............................. 17,057,063
Stock options exercised ............................... 6,785
Stock issued under employee stock
purchase plan ....................................... 50,253
Stock issued to consultants ............................ 12,258
----------
Balance - December 31, 1998 ............................ 17,126,359
----------
----------
Shares purchased for Treasury .......................... 262,315
----------
----------
</TABLE>
13. STOCK INCENTIVE PLANS
STOCK PURCHASE PLAN
Effective October 13, 1997, the Company adopted an Employee Stock Purchase Plan
to provide substantially all employees who have been employed by the Company for
one year an opportunity to purchase shares of its common stock through payroll
deductions, up to 10% of compensation. Semi-annually on June 30 and December 31,
participant account balances are used to purchase shares of stock at the lesser
of 85% of the fair market value of shares at the beginning or end of the
semi-annual period. The plan expires on October 12, 2007 and a total of 500
thousand shares can be issued under the plan.
Stock purchase plan activity in the period indicated was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997
- ---------------------------------------------------------------
<S> <C>
Shares purchased 50,253 -
Weighted-average share price $1.71 -
- ---------------------------------------------------------------
</TABLE>
F-11
<PAGE>
STOCK OPTION PLANS
The Company has stock option plans under which certain directors, officers, and
employees are participants. In 1997, stockholders of the Company approved the
addition of a long-term incentive plan, a nonemployee directors' stock option
plan and an employee stock purchase plan.
At December 31, 1998, stock option plans consist of the 1983 Incentive Stock
Option Plan for Officers and Other Key Employees (the "1983 Plan"), the 1991
Incentive Stock Option Plan for Officers and Other Key Employees (the "1991
Plan"), the 1991 Stock Option Plan for Directors (the "1991 Director Plan"), and
the 1997 Non-Employee Directors' Stock Option Plan (the "1997 Directors' Plan").
Options can no longer be granted under the 1983 Plan. The 1991 Plan and the 1991
Directors Plan allow for 3 million and 500 thousand stock options available for
grant under the plans, respectively, which extends through January 1, 2001. The
1997 Directors' Plan allows for 500 thousand stock options available for grant
under the plan with extends through October 12, 2007. The price of options
granted under 1991 Plan, the 1991 Directors' Plan and the 1997 Directors Plan
may not be less than the fair market value of the Company's common stock on the
date of grant. Options granted under the 1991 Plan and the 1991 Directors' Plan
generally become available to be exercised upon a five-year vesting schedule.
Options granted under the 1997 Directors' Plan generally become available to be
exercised upon a three-year vesting schedule.
A summary of the Company's stock option activity and related information for the
three years ended December 31, 1998 follows:
<TABLE>
<CAPTION>
IN THOUSANDS
1998 1997 1996
----------------------------------------------------------------------------------------------
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 2,092 $1.000-$6.125 1,833 $1.000-$9.250 1,971 $1.000-$9.250
Granted 829 $1.188-$2.875 1,360 $1.625-$3.312 553 $1.937-$3.250
Exercised (7) $1.6875-$1.8125 (18) $1.750-$3.250 (84) $2.500-$3.312
Canceled (333) $1.6875-$6.125 (1,083) $1.750-$9.250 (607) $2.187-$8.625
----------------------------------------------------------------------------------------------
End of year 2,581 $1.000-$6.125 2,092 $1.000-$6.125 1,833 $1.000-$9.250
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Exercisable at end of year 1,193 874 1,064
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices for options exercisable as of December 31, 1998 ranged from
$1.000 to $6.125.
In connection with the implementation of SFAS No. 123, "Accounting for
Stock-Based Compensation," Sulcus has elected to continue to account for
stock-based compensation arrangements under the provisions of Accounting
Principles Board (APB) Opinion No. 25, which resulted in no compensation costs
being recorded.
If compensation costs had been determined based on the fair value at the grant
dates according to SFAS No. 123, Sulcus' results would have been as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
YEAR ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $(4,190) $(2,010) $1,395
Pro forma (4,847) (2,468) 991
Diluted earnings (loss)
per share
As reported (.25) (.12) .08
Pro forma (.28) (.15) .06
- ---------------------------------------------------------------
</TABLE>
For purposes of presenting pro forma results, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
IN THOUSANDS
YEAR ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.3% 6.0% 6.0%
Dividend yield - - -
Stock price volatility 30-60% 30-60% 30-60%
Expected life (YEARS) 5 5 5
- ---------------------------------------------------------------
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options, which are significantly different from employee
stock options. Although this valuation model is an acceptable method for use in
presenting pro forma information, because of the differences in traded options
and employee stock options, the Black-Scholes model does not necessarily provide
a single measure of the fair value of employee stock options.
The 1997 Long-Term Incentive Plan allows for the issuance of 500 thousand shares
in the form of stock options, stock appreciation rights, restricted stock, stock
bonus awards or performance plan awards under the plan that extends through
October 12, 2007. At December 31, 1998, no awards were outstanding under this
plan.
F-12
<PAGE>
14. RELATED PARTIES
The Company leases office space in Greensburg, Pennsylvania from a trust
established by the Company's former Chairman. The leases commenced on various
dates from March 1, 1983 and expire on various dates through September 30, 2001.
Rent expense under these agreements was $180 thousand, $228 thousand, and $254
thousand for the years ended December 31, 1998, 1997, and 1996, respectively. As
of December 31, 1998, the future annual rental commitments under these leases
are $182 thousand in 1999, $187 thousand in 2000; and $88 thousand in 2001.
15. COMMITMENTS AND CONTINGENCIES
An employment agreement was in place with the Company's Chief Executive
Officer that contained certain change of control provisions. Upon the merger,
the Chief Executive Officer will receive $722 thousand under the agreement.
In December 1997, the Company entered into a settlement agreement with the
former vice-president of the Company's NRG Management Systems, Inc. subsidiary,
whereby the Company agreed to pay $250 thousand in cash to settle various issues
which arose in 1995 surrounding his employment contract and earnout provisions
of his stock purchase agreement. This payment was made in January 1998.
Other suits arising in the ordinary course of business are pending against
the Company and its subsidiaries. The Company believes that the ultimate
outcome of these actions and those described above will not result in a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
16. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
IN THOUSANDS
YEAR ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
CASH PAID FOR
Interest $205 $369 $572
Income taxes 49 82 94
NON CASH ACTIVITIES
Issuance of stock for
purchase of subsidiary 500
Assumption of debt in
connection with purchase
of subsidiary 1,174
Issuance of note payable
as evidence of severance
obligation 1,245
Issuance of stock to
consultants 26 26 26
Equipment purchased under
capital leases 25 406
Common stock issued in
settlement of
shareholder litigation 2,800
Common stock issued for
contingency payments in
acquisitions 169
Issuance of stock as
settlement of previously
recorded liabilities 181
Cancellation of shares in
repayment of shareholder
loans 550
Change in unrealized gain
(loss) on securities
available for sale (9) 10 (187)
- ---------------------------------------------------------------
</TABLE>
17. PREFERRED STOCK.
In 1997, the Company authorized 300,000 shares of nonredeemable no par value
Series B Junior Participating Preferred Stock ("Preferred Stock"). These shares
are reserved for issuance upon exercise of Preferred Stock Purchase Rights
("Rights"). These Rights were issued in 1997 on each share of common stock. The
Rights entitle common shareholders to purchase .01 share of Preferred Stock for
$50, following any public announcement that 10% or more of Sulcus' shares have
been acquired or is tendered for by a person or group of persons. Series B
preferred shares will have annual dividends of $4 per share or 100 times the
dividend per common share, and have a liquidation preference of $100 per share
or 100 times the payment made per common share. In a business combination, each
exercised right will receive common stock of an acquiring company equal to $100.
Rights owned by an Acquiring Person will be void. The Rights may be redeemed by
the Board of Directors at $.01 per Right. Pursuant to its terms, these rights
are not applicable in a business combination which has been approved by the
Company's Board of Directors.
F-13
<PAGE>
18. ACQUISITIONS
In December 1997, the Company consummated the purchase of Senercomm, Inc.
(Senercomm) for approximately $2.2 million. Senercomm designs, manufactures and
sells in-room information systems that are used to gather guest data and
environmentally control the condition maintained within a hotel room. The
purchase price consisted of $500 thousand of Sulcus Common Stock at $2.60 per
share, $500 thousand cash paid at the closing, and the balance of $1.2 million
payable in three equal annual installments including interest at the rate of 8%.
The note is secured by a stock pledge. As part of the purchase price, the
Company agreed to pay an amount equal to the excess of $2.809 over the Company's
closing share price on the last trading day before December 31, 1998. This
amount totaled $155.4 thousand and was paid in February 1999.
The acquisition has been accounted for as a purchase and, accordingly, the
balance sheet of Senercomm was included in the consolidated financial statements
of the Company at December 31, 1997 and the results of operations of Senercomm
will be consolidated with those of the Company beginning January 1, 1998. The
purchase price was assigned to identifiable assets of working capital ($188
thousand) and purchased software ($2.0 million).
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1997 and 1996 assume the Senercomm acquisition occurred
as of January 1, 1996.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE (UNAUDITED)
YEAR ENDED DECEMBER 31 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Net sales $55,547 $51,848
Net loss (2,650) 166
Earnings (loss) per share
Basic (.16) .01
Diluted (.16) .01
- ---------------------------------------------------------------
</TABLE>
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
IN THOUSANDS, EXCEPT PER SHARE QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net revenue $14,465 $15,709 $14,365 $15,854
Gross profit 8,094 8,355 7,743 8,732
Income (loss) from operations 330 60 (432) (2,359)
Net income (loss) 420 191 (371) (4,430)
Basic earnings (loss) per share .02 .01 (.02) (.26)
Diluted earnings (loss) per share .02 .01 (.02) (.26)
1997
Net revenue 12,623 13,665 14,040 13,494
Gross profit 6,757 7,183 7,354 7,688
Income (loss) from operations (1,965) (303) (121) (521)
Net income (loss) (1,755) (115) 225 (365)
Basic earnings (loss) per share (.10) (.01) .01 (.02)
Diluted earnings (loss) per share (.10) (.01) .01 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's results for the second quarter 1998 include severance
obligations of $138 thousand related to former executive officers. The third
quarter 1998 results include expenses of $223 thousand associated with a
terminated merger agreement. The fourth quarter results were impacted by the
discontinuation of the development of the wINNfinity product ($1.9 million),
the write off of certain goodwill ($342 thousand) and the provision for
income taxes ($2.1 million) reflecting the increase in the Company's deferred
tax asset valuation allowance.
The Company's results for the first quarter 1997 include a charge of $1,538
thousand, which relates to severance costs for the Company's former chairman
and its former president and $250 thousand litigation settlement. In the
third quarter 1997, results included a gain on disposal of a subsidiary of
$188 thousand and gains from the sales of marketable securities of $44
thousand.
F-14
<PAGE>
20. SEGMENTS AND RELATED INFORMATION
In 1998, the Company adopted SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION." SFAS No. 131 established standards for
disclosure of operating segments under the "management approach." For
purposes of this standard, the Company's operating segments are; (i) Lodging
& Hospitality, (ii) Restaurant (which includes its Canadian operations); and
(iii) Foreign (other than Canada). Corporate and other activities include
general corporate expenses, interest and dividend income and interest
expense, certain other unallocated charges and operations that are not part
of other segments. The Company evaluates its business segments' operating
results based on income from operations. The following table sets forth
financial information by reportable segment.
Segment financial information for 1998 is as follows:
<TABLE>
<CAPTION>
LODGING & CORPORATE
IN THOUSANDS HOSPITALITY RESTAURANT FOREIGN AND OTHER CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $18,847 $24,297 $17,249 $60,393
Gross profit 10,324 13,748 8,852 32,924
Gross margin 54.8% 56.6% 51.3% 54.5%
Selling, general and administrative 9,286 11,179 8,595 $167 29,227
Research and development 2,172 1,370 181 3,723
Capitalization of software development costs (1,051) (686) (1,737)
------------------------------------------------------------------------
Net research and development 1,121 684 181 1,986
Depreciation and amortization 477 355 646 364 1,842
Impaired asset charge 2,123 147 2,270
------------------------------------------------------------------------
Total operating expenses 13,007 12,218 9,569 531 35,325
------------------------------------------------------------------------
Income (loss) from operations $(2,683) $ 1,530 $ (717) $ (531) $(2,401)
------------------------------------------------------------------------
------------------------------------------------------------------------
Total assets $13,214 $11,045 $7,941 $7,053 $39,253
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Lodging and Hospitality segment was impacted by the discontinuation of
the development of the wINNfinity product ($1.9 million) and the write off of
certain goodwill ($195 thousand). The results in the foreign segment include
a write off of goodwill of $147 thousand. The Corporate segment results
include severance obligations of $138 thousand related to former executive
officers and expense of $223 thousand associated with a terminated merger
agreement.
Segment financial information for 1997 is as follows:
<TABLE>
<CAPTION>
LODGING & CORPORATE
IN THOUSANDS HOSPITALITY RESTAURANT FOREIGN AND OTHER CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $12,282 $23,408 $16,754 $1,378 $53,822
Gross profit 6,491 13,818 8,238 435 28,982
Gross margin 52.9% 59.0% 49.2% 31.5% 53.8%
Selling, general and administrative 7,188 11,877 7,714 1,661 28,440
Research and development 1,968 1,016 57 28 3,069
Capitalization of software development costs (949) (619) (1,568)
------------------------------------------------------------------------
Net research and development 1,019 397 57 28 1,501
Depreciation and amortization 403 337 608 353 1,701
Provision for litigation settlement 250 250
------------------------------------------------------------------------
Total operating expenses 8,610 12,611 8,379 2,292 31,892
------------------------------------------------------------------------
Income (loss) from operations $(2,119) $ 1,207 $ (141) $(1,857) $(2,910)
------------------------------------------------------------------------
------------------------------------------------------------------------
Total assets $13,093 $11,700 $ 7,805 $ 9,608 $42,206
------------------------------------------------------------------------
------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporate segment includes $1,538 thousand of expenses for the severance
obligations to the Company's former chairman and its former president.
F-15
<PAGE>
Segment financial information for 1996 is as follows:
<TABLE>
<CAPTION>
LODGING & CORPORATE
IN THOUSANDS HOSPITALITY RESTAURANT FOREIGN AND OTHER CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $9,525 $25,137 $13,246 $2,897 $50,805
Gross profit 5,826 13,583 7,053 988 27,451
Gross margin 61.2% 54.0% 53.3% 34.1% 54.0%
Selling, general and administrative 5,923 9,215 7,415 1,294 23,847
Research and development 1,560 727 136 77 2,499
Capitalization of software development costs (594) (497) (11) (1,101)
------------------------------------------------------------------------
Net research and development 966 230 136 66 1,398
Depreciation and amortization 399 399 556 234 1,589
------------------------------------------------------------------------
Total operating expenses 7,288 9,844 8,107 1,594 26,834
------------------------------------------------------------------------
Income (loss) from operations $(1,462) $3,739 $(1,054) $(606) $617
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
GEOGRAPHIC INFORMATION Operations are conducted worldwide through separate
geographic area organizations which represent major markets or combinations of
related markets. Financial information by geographic area was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
DOLLARS IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Net revenues
Domestic $37,106 $31,291 $32,328
Pacific Rim 11,273 11,689 8,032
Canada 6,039 5,777 5,232
Europe 5,975 5,065 5,213
-----------------------------------
Consolidated $60,393 $53,822 $50,805
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
DOLLARS IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before
income taxes:
Domestic $(1,462) $ (1,622) $2,190
Canada 80 181 234
Pacific Region (584) (44) (508)
Europe (123) (525) (521)
-----------------------------------
Consolidated $(2,089) $(2,010) $1,395
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Identifiable assets
Domestic $28,794 $31,831
Pacific Rim 4,639 4,492
Canada 2,518 2,570
Europe 3,302 3,313
-----------------------
Consolidated $39,253 $42,206
- ----------------------------------------------------------------
</TABLE>
The 1998 Domestic segments net income includes charges for the discontinuation
of the development of the wINNfinity product ($1.9 million), the write off of
certain goodwill ($195 thousand), severance obligations ($138 thousand) and
terminated merger agreement expenses ($223 thousand).
The 1997 domestic segmental net income (loss) includes the costs of the
severance obligations to the Company's former chairman and the Company's former
president of $1,538 thousand and $250 thousand for settlement of certain
litigation.
Other than short-term investments in marketable securities, which are generally
available for working capital, there are no significant nonoperating corporate
assets.
Sales between geographic areas and export sales are not materials.
Identifiable assets by geographic area exclude intercompany loans, advances and
investments in affiliates. Intercompany trade receivables have been eliminated.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair value are made at a specific point in time, based on relevant
market prices and information about the financial instrument. The estimated fair
values of financial instruments are not necessarily indicative of the amounts
the Company might realize in actual market transactions. The following methods
and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
for cash approximates their fair value. Cash equivalents such as commercial
paper are valued at quoted market value.
SHORT-TERM INVESTMENTS: Short-term investments consist of stocks, mutual funds
and debt securities. Fair values are based on quoted market prices.
SHORT- AND LONG-TERM DEBT: The carrying amount of the Company's borrowings under
margin accounts and floating rate debt approximates its fair value. Long-term
fixed rate debt is not material.
At December 31, 1998 and 1997, the carrying amounts of all financial instruments
approximate their fair values.
F-16
<PAGE>
ELTRAX SYSTEMS, INC., SULCUS HOSPITALITY TECHNOLOGIES CORP.
PRO FORMA FINANCIAL INFORMATION-NARRATIVE OVERVIEW
(UNAUDITED)
The following unaudited pro forma condensed combined balance sheet as of
December 31, 1998 and condensed combined statements of operations for the
years ended December 31, 1998, 1997 and 1996, combine the historical balance
sheets and statements of operations of Sulcus Hospitality Technologies Corp.
("Sulcus") and the historical balance sheet and statements of operations of
Eltrax Systems, Inc. ("Eltrax") (collectively the "Entities"). The unaudited
pro forma balance sheet as of December 31, 1998 assumes the Entities are
combined at that date. The unaudited pro forma statements of operations
for the years ended December 31, 1998, 1997 and 1996, assume the Entities
were combined effective at the beginning of each fiscal period.
The unaudited pro forma combined financial statements give effect to (i)
the acquisition of the Sulcus Group (ii) the issuance of 9,275,224 common
shares of Eltrax common stock in connection with the acquisition and (iii)
other adjustments as described in the accompanying notes.
The unaudited pro forma combined financial statements are not necessarily
indicative of the financial position or results of operations of Eltrax as
they may be in the future or as they might have been for the periods
presented had the entities actually been combined effective at the beginning
of each fiscal period or as of the dates of the unaudited pro forma balance
sheets. The unaudited pro forma combined financial statements and
accompanying notes should be read in conjunction with the historical
financial statements Eltrax, as filed on Form 10-K for the year ended
December 31, 1998 and the historical financial statements of Sulcus,
including the notes to such financial statements as set forth elsewhere in
this Form 8-K. The pro forma adjustments are based upon available information
and upon certain assumptions that Eltrax management believes are reasonable
under the circumstances.
F-17
<PAGE>
ELTRAX SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Sulcus Eltrax
Eltrax Sulcus Pro Forma Pro Forma
Historical(1) Historical(2) Adjustments Combined
------------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 11 $ 7,197 $ (1,500)(3) $ 5,708
Accounts receivable, net 8,161 14,163 -- 22,324
Inventories 1,764 3,296 -- 5,060
Other current assets 905 2,035 -- 2,940
----------- ---------- ---------- ----------
Total current assets 10,841 26,691 (1,500) 36,032
Property and equipment, net 1,551 2,066 -- 3,617
Purchased and capitalized software, net 3,733 4,050 -- 7,783
Intangibles, net 13,614 5,292 -- 18,906
Other noncurrent assets -- 1,154 -- 1,154
----------- ---------- ---------- ----------
$ 29,739 $ 39,253 $ (1,500) $ 67,492
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term borrowings $ 2,024 $ 1,974 $ -- $ 3,998
Accounts payable 3,389 3,056 -- 6,445
Accrued expenses 2,582 3,209 -- 5,791
Unearned revenue 2,874 8,171 -- 11,045
Current portion of long-term obligations 1,636 1,145 -- 2,781
----------- ---------- ---------- ----------
Total current liabilities 12,505 17,555 -- 30,060
Long-term obligations 2,665 717 -- 3,382
----------- ---------- ---------- ----------
Total liabilities 15,170 18,272 -- 33,442
Shareholders' equity:
Common stock 130 41,462 94 224
(41,462)
Additional paid-in capital 34,311 -- 41,368 75,679
Accumulated deficit (19,872) (19,553) (1,500) (3) (40,925)
Treasury stock -- (387) -- (387)
Other -- (541) -- (541)
----------- ---------- ---------- ----------
Total shareholders' equity 14,569 20,981 (1,500) 34,050
----------- ---------- ---------- ----------
$ 29,739 $ 39,253 $ (1,500) $ 67,492
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-18
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
A. CONDENSED COMBINED BALANCE SHEET AS OF DECEMBER 31, 1998
1. Represents the historical balance sheet of Eltrax as derived from the
audited financial statements filed on Form 10-K for the period ended
December 31, 1998.
2. Represents the historical balance sheet of Sulcus as derived from
audited financial statements included with this Form 8-K.
3. Represents the estimated fees and expenses to be incurred to complete
the Merger.
4. Represents the issuance of 9,275,224 shares of Eltrax common stock
issued in connection with the Merger of Sulcus. As of December 31,
1998 Sulcus had 16,864,044 shares outstanding multiplied by the
exchange ratio of 0.55 shares of Eltrax common stock for every share
of Sulcus common stock. This entry also eliminates the Sulcus common
stock acquired by Eltrax.
5. We estimate that costs of approximately $3,000,000 will be incurred
for integration-related expenses, including the elimination of
duplicate facilities, organizational realignment and related network
force reductions of approximately 30 positions. The Unaudited Pro
Forma Condensed Combined Balance Sheet and the Unaudited Pro Forma
Condensed Combined Statements of Operations do not reflect the impact
of these charges as the estimates are preliminary and subject to
change. We estimate that $2,500,000 of these costs are expected to be
charged to operations in the quarter in which the Merger occurs, and
the remaining costs will be charged as incurred. The Unaudited Pro
Forma Condensed Combined Financial Statements do not reflect any
synergies expected to be realized after the Merger.
F-19
<PAGE>
ELTRAX SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Eltrax
Eltrax Sulcus Pro Forma
Historical(1) Historical(2) Combined
<S> <C> <C> <C>
Revenue $ 50,663 $ 60,393 $ 111,056
Cost of revenue 37,745 27,469 65,214
----------- ---------- ----------
Gross profit 12,918 32,924 45,842
Operating expenses:
Selling, general and administrative 13,508 29,227 42,735
Research and development 335 1,986 2,321
Depreciation and amortization 1,288 1,842 3,130
Impaired asset charge -- 2,270 2,270
----------- ---------- ----------
Total operating expenses 15,131 35,325 50,456
----------- ---------- ----------
Operating loss (2,213) (2,401) (4,614)
Dividend and interest income 37 517 554
Interest expense (346) (205) (551)
----------- ---------- ----------
Loss before income taxes (2,522) (2,089) (4,611)
Income tax expense -- 2,101 2,101
----------- ---------- ----------
Net loss $ (2,522) $ (4,190) $ (6,712)
----------- ---------- ----------
----------- ---------- ----------
Net loss per common share and
common share equivalents-basic $(0.31)
----------
----------
Weighted average shares outstanding-basic (3) 21,355
----------
----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-20
<PAGE>
B. CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1998
1. Represents the historical consolidated statement of operations of
Eltrax as derived from the audited financial statements filed on Form
10-K for the period ended December 31, 1998.
2. Represents the historical consolidated statement of operations of
Sulcus as derived from audited financial statements included with
this Form 8-K.
3. Represents the combination of the Eltrax weighted average shares
outstanding as filed on Form 10-K for the year ended December 31, 1998
with the Sulcus weighted average shares as filed with this 8-K for the
year ended December 31, 1998 converted to shares of Eltrax common
stock using the 0.55 exchange ratio. Common stock equivalents have
been excluded from loss per share calculations as their inclusion
would be antidilutive.
F-21
<PAGE>
ELTRAX SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Eltrax
Eltrax Sulcus Pro Forma
Historical(1) Historical(2) Combined
------------- ------------- --------
<S> <C> <C> <C>
Revenue $ 49,934 $ 53,822 $ 103,756
Cost of revenue 41,329 24,840 66,169
---------- --------- --------
Gross profit 8,605 28,982 37,587
Operating expenses:
Selling, general and administrative 12,075 28,502 40,577
Research and development -- 1,501 1,501
Depreciation and amortization 588 1,701 2,289
Goodwill adjustments 5,714 -- 5,714
---------- --------- --------
Total operating expenses 18,377 31,704 50,081
---------- --------- --------
Operating loss (9,772) (2,722) (12,494)
Dividend and interest income 93 1,080 1,173
Interest expense (337) (368) (705)
---------- --------- --------
Loss before income taxes (10,016) (2,010) (12,026)
Income tax expense 1,316 -- 1,316
---------- --------- --------
Net loss $ (11,332) $ (2,010) $ (13,342)
---------- --------- --------
---------- --------- --------
Net loss per common share and
common share equivalents-basic $(0.75)
---------
---------
Weighted average shares outstanding-basic (3) 17,742
---------
---------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-22
<PAGE>
C. CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1997
1. Represents the historical consolidated statement of operations of
Eltrax as derived from the audited financial statements filed on Form
10-KSB for the year ended December 31, 1997.
2. Represents the historical consolidated statement of operations of
Sulcus as derived from audited financial statements included with
this Form 8-K.
3. Represents the combination of the Eltrax weighted average shares
outstanding as filed on Form 10-KSB for the period ended December 31,
1997 with the Sulcus weighted average shares as filed on Form 10-K/A
for the period ended December 31, 1997 converted to shares of Eltrax
common stock using the 0.55 exchange ratio. Common stock equivalents
have been excluded from loss per share calculations as their inclusion
would be antidilutive.
F-23
<PAGE>
ELTRAX SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ELTRAX ELTRAX ELTRAX
NINE MONTHS THREE MONTHS ELTRAX SULCUS PRO FORMA
HISTORICAL(1) HISTORICAL(2) ADJUSTED HISTORICAL(3) COMBINED
<S> <C> <C> <C> <C> <C>
Revenue $ 29,731 $ 4,918 $ 34,649 $ 50,805 $ 85,454
Cost of revenue 24,710 3,926 28,636 23,354 51,990
--------- -------- --------- ---------- -----------
Gross Profit 5,021 992 6,013 27,451 33,464
Operating expenses:
Selling, general and administrative 5,634 880 6,514 23,847 30,361
Research and development -- -- -- 1,398 1,398
Depreciation and amortization 241 32 273 1,589 1,862
--------- -------- --------- ---------- -----------
Total operating expenses 5,875 912 6,787 26,834 33,621
--------- -------- --------- ---------- -----------
Operating income (loss) (854) 80 (774) 617 (157)
Dividend and interest income -- 19 19 1,349 1,368
Interest expense (5) -- (5) (571) (576)
--------- -------- --------- ---------- -----------
Net income (loss) from continuing operations $ (859) $ 99 $ (760) $ 1,395 $ 635
--------- -------- --------- ---------- -----------
--------- -------- --------- ---------- -----------
Net income from continuing operations per common share and
common share equivalents :
Basic $ 0.04
-----------
-----------
Diluted $ 0.04
-----------
-----------
Weighted average shares outstanding (4):
Basic 15,919
-----------
-----------
Diluted 16,907
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements
F-24
<PAGE>
D. CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1996
1. Represents the historical consolidated statement of operations of
Eltrax as derived from the audited financial statements for the
nine-month transition period ended December 31, 1996 as filed on Form
10-KSB for the fiscal year ended December 31, 1997. In 1996, Eltrax
changed the Company's year end from March 31, to December 31, which
resulted in the nine-month transition period.
2. Represents the unaudited historical consolidated statement of
operations of Eltrax for the quarter ended March 31, 1996.
3. Represents the historical consolidated statement of operations of
Sulcus as derived from audited financial statements included with
this Form 8-K.
4. Represents the unaudited weighted share average of Eltrax at December
31, 1996 combined with the Sulcus weighted average shares as filed on
Form 10-K for the period ended December 31, 1996 converted to shares
of Eltrax common stock using the 0.55 exchange ratio.
F-25
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements
of Eltrax Systems, Inc. on Forms S-3 (File No. 333-37013; File No. 333-53965;
File No. 333-51003) and on Form S-8 (File No. 333-26015) of our report dated
March 26, 1999, on our audits of the consolidated financial statements of
Sulcus Hospitality Technologies Corp. as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998, which
report is included in this Form 8-K.
Crowe, Chizek and Company LLP
Columbus, Ohio
March 29, 1999
