<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934
For the Quarter Ended June 30, 1997
[ ] 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 small business Issuer as specified in its charter)
MINNESOTA 41-1484525
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
10901 Red Circle Drive, Suite 345, Minnetonka, MN 55343
(Address of principal executive offices)
(612) 945-0833
(Issuer's telephone number)
--------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No / /.
Shares of the Registrant's Common Stock, par value $.01 per share, outstanding
as of August 6, 1997: 8,173,126.
<PAGE>
PART I - ITEM 1. FINANCIAL STATEMENTS
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1997 1996(1)
------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 789,064 $ 694,901
Accounts receivable, net 7,299,192 6,342,216
Inventories 4,436,211 3,153,123
Other current assets 183,024 133,086
------------ ------------
Total current assets 12,707,491 10,323,326
------------ ------------
Furniture and equipment, net 315,420 211,216
Deferred income taxes, net -- 1,315,970
Intangible assets, net 3,266,577 4,641,044
Other assets 133,807 154,712
------------ ------------
$ 16,423,295 $ 16,646,268
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 9,281,250 $ 6,841,650
Accrued expenses 1,170,768 936,555
Credit line bank debt 4,254,131 588,539
Other current liabilities 299,513 597,755
------------ ------------
Total current liabilities 15,005,662 8,964,499
------------ ------------
Shareholders' equity:
Common stock, $.01 par value, 50,000,000
shares authorized; 7,812,063 and
7,788,063 shares issued and outstanding 78,121 77,881
Additional paid-in capital 13,400,060 13,362,073
Accumulated deficit (12,060,548) (5,758,185)
------------ ------------
Total shareholders' equity 1,417,633 7,681,769
------------ ------------
$ 16,423,295 $ 16,646,268
------------ ------------
------------ ------------
(1) Amounts have been restated to reflect pooling-of-interests transaction,
see Note 2.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ------------------------------
1997 1996 (1) 1997 (1) 1996 (1)
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 11,343,064 $ 8,164,252 $ 21,605,258 $ 13,082,503
Cost of Revenue 9,984,051 6,638,308 18,489,997 10,564,583
------------ ----------- ------------ ------------
Gross Profit 1,359,013 1,525,944 3,115,261 2,517,920
Operating Expenses:
Selling, general and administrative 2,956,954 1,322,322 5,063,023 2,234,759
Amortization of intangible assets 106,163 53,420 208,400 53,420
Adjustment of Datatech goodwill 2,458,000 -- 2,458,000 --
------------ ----------- ------------ ------------
Total operating expenses 5,521,117 1,375,742 7,729,423 2,288,179
------------ ----------- ------------ ------------
Operating income (loss) (4,162,104) 150,202 (4,614,162) 229,741
Interest income (expense), net (67,760) (5,624) (113,503) 13,699
------------ ----------- ------------ ------------
Income (loss) from continuing operations (4,229,864) 144,578 (4,727,665) 243,440
Income (loss) from discontinued operations -- (2,570) -- 78,167
Gain on disposal of discontinued operations -- -- -- 133,214
------------ ----------- ------------ ------------
Pretax income (loss) (4,229,864) 142,008 (4,727,665) 454,821
Income tax expense 1,315,970 -- 1,315,970 --
------------ ----------- ------------ ------------
Net income (loss) $ (5,545,834) $ 142,008 $ (6,043,635) $ 454,821
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Income (loss) per common share and
common share equivalents:
Continuing operations $ (0.71) $ 0.02 $ (0.77) $ 0.03
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Discontinued operations $ -- $ -- $ -- $ 0.03
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Net income (loss) per share $ (0.71) $ 0.02 $ (0.77) $ 0.06
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Weighted average shares outstanding 7,812,063 7,814,723 7,809,411 7,292,913
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transaction,
see Note 2.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ELTRAX SYSTEMS, INC.
ONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1997 1996 (1)
------------ ------------
<S> <C> <C>
Operating Activities
Net income (loss) $ (6,043,635) $ 454,821
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Amortization 208,400 53,420
Depreciation 33,992 50,701
Adjustment of Datatech goodwill 2,458,000 --
Adjustment to deferred income taxes 1,315,970 --
Gain on sale of digital imaging archiving business -- (133,214)
Changes in current operating items:
Accounts receivable (956,976) (19,300)
Inventories (500,985) 685,932
Other current assets (49,938) 48,230
Accounts payable 2,439,600 (752,488)
Accrued expenses 158,391 623,867
Other current liabilities (298,242) (126,962)
Other assets 20,905 (184,017)
------------ ------------
Net cash (used for) provided by operating activities: (1,214,518) 700,990
------------ ------------
Investing Activities
Cash paid in connection with acquisitions,
net of cash acquired in 1996 of $750,490 (2,028,214) (695,549)
Proceeds from sales of short-term investments, net -- 381,022
Purchases of furniture and equipment (108,196) (19,186)
Proceeds from sale of digital imaging archiving business -- 100,000
------------ ------------
Net cash used for investing activities: (2,136,410) (233,713)
------------ ------------
Financing Activities
Distributions to shareholders (258,728) (175,076)
Line of credit activity, net 3,665,592 (351,114)
Proceeds from issuances of common stock 38,227 49,558
------------ ------------
Net cash provided by (used for) financing activities: 3,445,091 (476,632)
Increase (decrease) in cash and cash equivalents 94,163 (9,355)
------------ ------------
Cash and Cash Equivalents
Beginning of period 694,901 1,122,881
------------ ------------
End of period $ 789,064 $ 1,113,526
------------ ------------
------------ ------------
Non cash investing and financing activities:
Common Stock Consideration for Datatech Acquisition
Original issuance of 2,068,000 shares $ 5,955,840
Return of 100,000 shares resulting from settlement of
escrowed shares (462,138)
------------
$ 5,493,702
------------
------------
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transaction,
see Note 2.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
1. UNAUDITED STATEMENTS
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, (See Notes 2, 3 and 4) and disclosures to
present fairly the financial position as of June 30, 1997 and the results
of operations and cash flows for the periods ended June 30, 1997 and
June 30, 1996. The condensed consolidated financial statements include
the accounts of Eltrax Systems, Inc. ("Eltrax") and its subsidiaries,
Nordata, Inc. and Rudata, Inc. ("Datatech"), Atlantic Network Systems
("ANS") and EJG Techline, Inc. ("Techline"). ANS results are included
for all periods presented resulting from the merger of ANS in a
pooling-of-interests on October 31, 1996. Techline results are
included for all periods presented resulting from the merger of Techline
in a pooling-of-interests on May 14, 1997. The Datatech results are
included since May 17, 1996, the date of acquisition. The Company's
Health Card and Digital Imaging Archiving businesses which were sold in
November 1996 and March 1996 respectively have been reflected as
discontinued operations. Intercompany transactions have been eliminated.
These condensed financial statements should be read in conjunction with the
financial statements and the related notes thereto included in the
Company's Annual Report to Shareholders for the transition period ended
December 31, 1996, and the Company's Current Reports on Form 8-K filed with
the Commission that are dated January 31, 1997, May 15, 1997, and July 1,
1997.
5
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2. MERGERS AND ACQUISITIONS
ACQUISITION OF MST
On January 31, 1997, ANS acquired certain assets of MST Distribution
("MST") from MRK Technologies, LTD. ("MRK"). The assets acquired
included inventory, contracts, furniture and equipment and various
intangibles. The purchase price for the various assets including
transaction costs was approximately $2,028,000.
The acquisition of MST has been accounted for as a purchase and,
accordingly, the results of MST's operations have been included in the
Company's results since January 31, 1997.
MERGER WITH EJG TECHLINE, INCORPORATED
On May 14, 1997 the Company issued 230,000 shares of its common stock in
exchange for all of the outstanding common stock of EJG Techline,
Incorporated, ("Techline"). The merger with Techline has been accounted for
as a pooling-of-interests and, accordingly, the Company's consolidated
financial statements have been restated to include the accounts and
operations of Techline for all periods prior to the merger.
3. ADJUSTMENT OF DATATECH GOODWILL
As a result of events which occurred at the Company's Datatech subsidiary
in the second quarter of 1997, the Company determined that there was a
permanent impairment in the fair value of the goodwill recorded in
connection with the Datatech purchase in May 1996. During the second
quarter, the Company made an initial determination that $2,458,000 of the
remaining Datatech goodwill should be written off.
In making its evaluation of the Datatech goodwill, the Company reviewed a
number of factors. These factors included the loss of existing customers,
a reduction in current sales activity and forecasted sales as compared to
the original sales estimates at the date of acquisition, turnover in
management and sales personnel, the elimination of several functions at
Datatech and the overall state of Datatech operations. In reviewing these
factors, it was determined that the carrying value of Datatech exceeded
the fair value by approximately $2,458,000, resulting in the adjustment.
During the remainder of 1997, the Company will continue to refine its
evaluation of the goodwill and make any necessary adjustments in future
quarters.
4. DEFERRED INCOME TAXES
During the second quarter of 1997, due to the recent financial results,
the Company increased the valuation allowance applied to its deferred
tax assets by recording $1,315,970 in income tax expense.
5. LINE OF CREDIT
The Company has a $5,000,000 line of credit with State Street Bank and
Trust Company ("State Street") which had an outstanding balance of
$4,254,131 on June 30, 1997. The Company has informed State Street that it
is not in compliance with certain of the covenants contained in the line of
credit agreement, including those which require positive monthly earnings
before taxes, interest, and depreciation, as well as a minimum current
ratio. While State Street has not granted a waiver of the non-compliance
with the covenants, no demand for repayment has been made.
6. SUBSEQUENT EVENT
On July 1, 1997, the Company acquired Four Corners Technology, Inc. ("Four
Corners") for 350,000 shares of the Company's common stock. The Company
expects that this acquisition will be accounted for as a purchase and,
accordingly, the results of Four Corners' operations will be included in
the Company's financial statements subsequent to June 30, 1997.
7. INCOME (LOSS) PER SHARE
Income (loss) per common and common stock equivalent shares are computed by
dividing earnings (loss) data by the weighted average number of common and
6
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common stock equivalent shares outstanding during the respective periods.
Common stock equivalent shares included in the computation represent
shares issuable upon assumed exercise of stock options and warrants which
would have had a dilutive effect.
In February 1997, the Financial Accounting Standards board issued Statement
No. 128, "Earnings per Share" (Statement No. 128). This statement modifies
the methodology for calculating earnings per share and will be adopted in
the fourth quarter of 1997. There is no significant difference between the
Company's income (loss) per share data as presented herein and as calculated
under Statement No. 128.
7
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Form 10-QSB and in the 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 "Certain Important Factors" in the
Company's Transition Report on Form 10-K for the nine month period ended
December 31, 1996. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996:
Results for the six months and quarter ended June 30, 1997 have been
significantly effected by the results of the Company's Datatech operations.
Datatech's operations continued to deteriorate from the first quarter and its
losses increased in the second quarter. During the second quarter the
Company undertook an evaluation of the operation's management and
performance. As a result, Datatech's management team was removed; sales were
consolidated under the Company's National Sales Director; Datatech inventory
was moved and consolidated with ANS inventory in Raleigh, North Carolina and
the back office functions at Datatech were consolidated at ANS. The current
quarter reflects expenses connected with the Datatech situation and the
resulting changes which are not expected to recur, including a high level of
customer returns, increased bad debt expenses, provisions to reduce inventory
to market value and severance costs. In addition, the evaluation resulted in
the adjustment of $2,458,000 of Datatech goodwill, and the recording of a
valuation allowance against deferred income taxes of $1,316,000. The effect
of these expenses are discussed in more detail below.
Total revenue for the three months ended June 30, 1997 increased by
$3,179,000 to $11,343,000 compared to revenue of $8,164,000 for the three
months ended June 30, 1996. The increase resulted from Datatech revenue
included for the entire current quarter this year whereas Datatech revenue
was only included in the comparable 1996 period results after the acquisition
date of May 17, 1996, as well as the acquisition of MST on January 31, 1997.
MST contributed approximately $1,659,000 of revenue in the current quarter to
offset lower ANS revenue. While the Datatech revenue recorded increased from
the prior year, revenue in the quarter was adversely effected by a higher
level of customer returns than expected which resulted in total Datatech
second quarter sales being lower than expected and below the same full
quarter of 1996 and the first quarter of 1997.
Gross profit margin as a percentage of revenue for the three months ended
June 30, 1997 was 12.0% compared to 18.7% for the three months ended June 30,
1996 and the 17.1% margin recorded in the first quarter of 1997. Gross
profit margin at ANS increased slightly in the quarter but was offset by
significantly lower margins at Datatech. The Datatech margin was adversely
impacted by the higher level of customer returns of inventory and related
provisions recorded to reduce selected returned inventory to its realizable
value.
Operating expenses increased by $4,145,000 to $5,521,000 compared to
operating expenses of $1,376,000 for the three months ended June 30, 1996.
The largest factor resulting in the increase was the $2,458,000 adjustment to
Datatech goodwill. The remaining increase in operating expenses resulted
primarily from the inclusion of Datatech and MST for the full period as well
as increased Datatech and corporate costs. During the second quarter, most
purchasing, order entry, accounting, and inventory functions were
consolidated at the Company's ANS subsidiary and the corresponding functions
at Datatech were eliminated. The Company anticipates that the savings from
this consolidation will be reflected in the third and fourth quarters of 1997
and beyond. In addition, transitional expenses, severance and bad debt
charges at Datatech increased costs in the second quarter.
Increased operating expenses also resulted from the amortization of
intangibles and increased professional fees and internal costs associated
with Eltrax's growth and merger and acquisition
8
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activities, which are expected to continue.
Net interest expense of $68,000 was $62,000 higher than the expense of $6,000
during the three months ended June 30, 1996. The increase is due to use of
cash and short-term debt under the Company's revolving credit facility with
State Street Bank to acquire MST as well as provide working capital.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Total revenue for the six months ended June 30, 1997 increased by $8,522,000
to $21,605,000 compared to revenue of $13,083,000 for the six months ended
June 30, 1996. As in the second quarter, the increase primarily resulted
from Datatech revenue which is included for the entire current period, but
was not included in the 1996 results until the acquisition date of May 17,
1996. Revenue is also higher at ANS for the period ended June 30, 1997, due
to the acquisition of MST on January 31, 1997, which contributed
approximately $2,680,000 of revenue in the first six months, offsetting
slightly lower existing ANS sales in 1997 compared to 1996.
Gross profit margin as a percentage of revenue for the six months ended June 30,
1997 was 14.4% compared to 19.2% for the six months ended June 30, 1996, and the
15.6% margin for the nine month transition period ended December 31, 1996. The
gross profit margin for the six months was adversely impacted by the second
quarter results, slightly higher ANS margins were offset by lower second
quarter Datatech margins.
Operating expenses increased by $5,441,000 to $7,729,000 compared to operating
expenses of $2,288,000 for the six months ended June 30, 1996. The adjustment
to Datatech goodwill of $2,458,000 accounted for the largest part of the
increase. The remaining increase in operating expenses resulted primarily due
to the inclusion of Datatech and MST in this period as well as the additional
Datatech expenses discussed above. The amortization of intangibles also
contributed $155,000 of the increase. A portion of the increase in general and
administrative expense is associated with Eltrax's growth and merger and
acquisition activity, which is expected to continue.
Net interest expense of $114,000 was $128,000 higher than the income of
$14,000 during the six months ended June 30, 1997 compared to the same period
last year. The increase is due to use of cash and short term debt under the
Company's revolving credit facility with State Street to acquire MST and to
provide working capital.
Income tax expense resulted from the valuation allowance recorded against
deferred tax assets.
9
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PRO FORMA FINANCIAL RESULTS
SELECTED PRO FORMA FINANCIAL DATA
The following selected unaudited pro forma financial data should be read in
conjunction with the Company's financial statements and related notes thereto
and "Management's Discussion and Analysis." The unaudited pro forma
statement of operations data is derived from unaudited financial statements
of the Company that are not included herein. The pro forma results are not
necessarily indicative of future results.
The following discussions describe the Company results as if the Datatech
acquisition had taken place as of the beginning of the six month period
ended June 30, 1996.
PRO FORMA STATEMENT OF OPERATIONS DATA (UNAUDITED):
THREE MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
Revenue $ 11,343,000 $ 11,034,000
Cost of Revenue 9,984,000 8,994,000
------------ ------------
Gross Profit 1,359,000 2,040,000
Operating Expenses 5,521,000 1,925,000
------------ ------------
Operating Income (loss) (4,162,000) 115,000
Interest and Other (net) (68,000) (3,000)
------------ ------------
Income (loss) from Continuing
Operations (4,230,000) 112,000
Discontinued Operations (net) - (3,000)
------------ ------------
Pretax Income (loss) (4,230,000) 109,000
Income Tax Expense 1,316,000 -
------------ ------------
Net Income (loss) $ (5,546,000) $ 109,000
------------ ------------
------------ ------------
COMPARISON OF PRO FORMA RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997
Total revenue for the three months ended June 30, 1997 increased by 2.8% or
$309,000 to $11,343,000 compared to revenue of $11,034,000 for the three
months ended June 30, 1996. The increase is due to the acquisition of MST on
January 31, 1997, which contributed approximately $1,659,000 of revenue in the
current quarter offset by lower revenue at Datatech due in part to the
increased customer returns. ANS revenue was up slightly from prior year
levels for the quarter.
10
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Gross profit margin as a percentage of revenue for the three months ended
June 30, 1997 was 12% compared to 18.5% for the three months ended June 30,
1996 and the 17.1% margin for the first quarter of 1997. Gross profit was
reduced due to the impact of customer returns of older inventory and
provisions recorded to reduce Datatech inventory to its realizable value.
Operating expenses increased by $3,596,000 to $5,521,000 compared to
operating expenses of $1,925,000 for the three months ended June 30, 1996.
The 1997 expenses include the $2,458,000 adjustment to Datatech goodwill.
The remaining increase in operating expenses reflects increased costs at
Datatech for bad debt expense, severance and the moving of selected functions
to ANS. ANS operating expenses increased due to the acquisition of MST in
January, 1997. The amortization of intangibles also contributed $53,000 of
the increase. A portion of the increase in general and administrative
expense is also associated with Eltrax's growth and merger and acquisition
activities, which are expected to continue.
Income tax expense resulted from the valuation allowance recorded against
deferred tax assets.
SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
Revenue $ 21,605,000 $ 20,360,000
Cost of Revenue 18,490,000 16,386,000
------------ ------------
Gross Profit 3,115,000 3,974,000
Operating Expenses 7,729,000 3,503,000
------------ ------------
Operating Income (loss) (4,614,000) 471,000
Interest and Other (net) (114,000) 25,000
------------ ------------
Income (loss) from Continuing
Operations (4,728,000) 496,000
Discontinued Operations (net) - 211,000
Income Taxes - (128,000)
------------ ------------
Pretax Income (loss) (4,728,000) 579,000
Income Tax Expense 1,316,000 -
------------ ------------
Net Income (loss) $ (6,044,000) $ 579,000
------------ ------------
------------ ------------
COMPARISON OF PRO FORMA RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997
AND 1996.
The revenue for the six month period ending June 30, 1997 increased by 6.1%
to $21,605,000 when compared to the pro forma revenue of $20,360,000 for the
six months ended June 30, 1996. This increase resulted from the acquisition
of MST in January, 1997 which added $2,680,000 of revenue offset by a decline
in Datatech revenue.
The pro forma gross margin percentage decreased to 14.4% during the six
months ended
11
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June 30, 1997 from 19.5% in the six months ended June 30, 1996 due to the
second quarter decline at the Datatech operations discussed above.
The pro forma operating expenses of the Company increased by $4,226,000
to $7,729,000 in the six months ended June 30, 1997, compared to $3,503,000
in the six months ended June 30, 1996. The primary reason for the increase
was the $2,458,000 adjustment to Datatech goodwill. This remaining increase
is due to the acquisition of MST and the operating issues at Datatech
discussed above increased selling, general and administrative expenses as
well as amortization. A portion of the increase is also associated with the
Company's growth and merger and acquisition activities.
Income tax expense resulted from the valuation allowance recorded against
deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The level of cash, cash equivalents and short-term investments increased by
$94,000 from $695,000 at December 31, 1996 to $789,000 on June 30, 1997. The
Company's short-term borrowings, however, under its bank line increased by
$3,665,000 to $4,254,000 at June 30, 1997. Approximately $2,028,000 of the
increase was utilized to purchase the assets of MST Distribution. In
addition, borrowings were used to finance operating activities in the first
six months.
The Company currently has a $5,000,000 maximum credit facility available
under its revolving credit agreement with State Street Bank and Trust Company
("State Street"). The Company is currently not in compliance with several
provisions of its agreement with State Street which includes requirements
that the company have positive earnings before interest, depreciation and
amortization, as well as maintain certain financial ratios. While State
Street has not demanded repayment of the credit line, there is no assurance
that such a demand will not be made. Should such a demand be made, the
Company would not have sufficient working capital to continue operations
without obtaining additional financing.
Management believes that the Company will require additional financing during
the third quarter of 1997 to fund current operations, expand sales in its
current product line, and continue development of network services product
offerings. Accordingly, the Company intends to raise additional funds in the
third quarter through a combination of equity and debt financing.
12
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Howard Norton is the former owner of the Company's Nordata,
Inc. subsidiary and was the president of that subsidiary
following its acquisition by the Company. Mr. Norton had a 5
year employment agreement with Nordata, beginning on May 17,
1996. In July of 1997, the Company terminated Mr. Norton's
employment. On July 28, 1997, Mr. Norton initiated legal
proceedings against the Company in Orange County Superior Court
in Santa Ana, California alleging breach of his employment
agreement and other miscellaneous claims. Mr. Norton's lawsuit
seeks monetary damages, an order reinstating his employment and
an order requiring registration of his Eltrax shares. The
Company believes that its termination of Mr. Norton's
employment was with cause and that Mr. Norton's claims against
the Company are without merit. The Company is vigorously
contesting Mr. Norton's claims and intends to institute legal
action against Mr. Norton for breaches of various duties to the
Company and to Nordata.
Item 2. CHANGES IN SECURITIES
On May 15, 1997 the Company issued 230,000 shares of restricted
common stock to the shareholders of Techline, pursuant to the
Techline Merger Agreement as defined in Note 2 to the financial
statements in this Form 10-QSB. This transaction is described in
detail in the Company's Form 8-K filing dated May 15, 1997 as
filed with the Securities and Exchange Commission.
Subsequent to the quarter ending June, 1997, the Company issued
350,000 shares of restricted common stock to the shareholders of
Four Corners, pursuant to the Four Corners Acquisition Agreement
as defined in Note 6 to the financial statements in this Form
10-QSB. This transaction is described in detail in the Company's
Form 8-K filing dated July 1, 1997 as filed with the Securities
and Exchange Commission.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
13
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on May 15,
1997, holders of Eltrax Common Stock voted in favor of the
following actions:
<TABLE>
<CAPTION>
ELECTION OF AGAINST OR ABSTENTIONS OR
DIRECTORS FOR WITHHELD BROKER NON-VOTES
----------- --- ---------- ----------------
<S> <C> <C> <C>
James C. Barnard 6,773,563 16,640 -
Patrick J. Dirk 6,773,463 16,740 -
Mark D. Johnson 6,773,763 16,440 -
Clunet R. Lewis 6,773,763 16,440 -
Thomas F. Madison 6,764,463 16,740 -
William P. O'Reilly 6,773,563 16,640 -
Mack V. Traynor, III 6,773,763 16,440 -
ADOPTION OF THE 1997
STOCK INCENTIVE PLAN 4,917,961 49,702 1,822,540
</TABLE>
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
2.1 Agreement and Plan of Merger Incorporated by reference
dated as of May 14, 1997 by and to Exhibit 2.1 contained in
among Eltrax Systems, Inc., the Company's Current
EJG Techline Acquiring Corp., Report on Form 8-K dated
corporation, EJG Techline, May 15, 1997 (File No. 0-22190).
Incorporated, Edward J. Gorlitz, Jr.,
Kathleen M. Gorlitz, Colin E. Quinn,
and Diane C. Quinn.
2.2 Agreement and Plan of Merger dated Incorporated by reference
as of July 1, 1997 by and among to Exhibit 2.1 contained in
Eltrax Systems, Inc., Four Corners the Company's Current
Acquiring Corp., Four Corners on Form 8-K dated July 1,
Technology, Inc., Robert A. Hughes, 1997 (File No. 0-22190).
Joel J. Blickenstaff, and David Noall.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.1 Employment and Non-Competition Incorporated by reference
Agreement between the Company to Exhibit 10.1 contained in
and Colin E. Quinn. the Company's Current Report on
Form 8-K dated May 15, 1997 (File
No. 0-22190).
10.2 Employment and Non-Competition Incorporated by reference to
Agreement between the Company Exhibit 10.2 contained in the
and Edward J. Gorlitz, Jr. Company's Current Report on
Form 8-K dated May 15, 1997
(File No. 0-22190).
10.3 Employment and Non-Competition Incorporated by reference to
Agreement between the Company Exhibit 10.1 contained in the
and Robert A. Hughes. Company's Current Report on
Form 8-K dated July 1, 1997
(File No. 0-22190).
10.4 Employment and Non-Competition Incorporated by reference to
Agreement between the Company Exhibit 10.2 contained in the
and Joel J. Blickenstaff. Company's Current Report on
Form 8-K dated July 1, 1997
(File No. 0-22190).
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
</TABLE>
The Company filed a Current Report on Form 8-K dated May 15, 1997,
reporting its acquisition of EJG Techline, Incorporated.
The Company filed a Current Report on Form 8-K dated July 1, 1997,
reporting it's acquisition of Four Corners Technology, Inc.
The Company filed a Current Report on Form 8-K dated July 21, 1997
reporting an amendment to its 1995 Stock Incentive Plan.
15
<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.
(the "Registrant")
Date: August 14, 1997 /s/ Nicholas J. Pyett
-----------------------------
Nicholas J. Pyett
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 789,064
<SECURITIES> 0
<RECEIVABLES> 7,299,192
<ALLOWANCES> 0
<INVENTORY> 4,436,211
<CURRENT-ASSETS> 12,707,491
<PP&E> 315,420
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,423,295
<CURRENT-LIABILITIES> 15,005,662
<BONDS> 0
0
0
<COMMON> 78,121
<OTHER-SE> 1,339,512
<TOTAL-LIABILITY-AND-EQUITY> 16,423,295
<SALES> 11,343,064
<TOTAL-REVENUES> 11,343,064
<CGS> 9,984,051
<TOTAL-COSTS> 9,984,051
<OTHER-EXPENSES> 5,588,877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,760
<INCOME-PRETAX> (4,229,864)
<INCOME-TAX> 1,315,970
<INCOME-CONTINUING> (5,545,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,545,834)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
