<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 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
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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
of incorporation or organization) Identification No.)
2000 Town Center, Suite 690, Southfield, MI 48705
(Address of principal executive offices)
(248) 358-1699
(Issuer's telephone number)
--------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No .
----- -----
Shares of the Registrant's Common Stock, par value $.01 per share, outstanding
as of November 7, 1997: 9,995,419.
<PAGE>
PART I-ITEM 1.FINANCIAL STATEMENTS
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1997 1996 (1)
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ASSETS:
Current assets:
Cash and cash equivalents $ 599,987 $ 694,901
Accounts receivable, net 10,068,937 6,342,216
Inventories 4,933,933 3,153,123
Other current assets 411,475 133,086
------------ ------------
Total current assets 16,014,332 10,323,326
Furniture and equipment, net 628,877 211,216
Deferred income taxes - 1,315,970
Intangible assets 5,305,071 4,641,044
Other assets 131,805 154,712
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Total assets $ 22,080,085 $ 16,646,268
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 11,371,618 $ 6,841,650
Accrued expenses 1,265,049 936,555
Credit line bank debt 691,572 588,539
Other current liabilities 994,438 597,755
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Total current liabilities 14,322,677 8,964,499
Shareholders' equity
Common stock, $.01 par value, 50,000,000
shares authorized; 9,474,875 and
7,788,063 shares issued
and outstanding 94,749 77,881
Additional paid-in capital 20,121,431 13,362,073
Accumulated deficit (12,458,772) (5,758,185)
------------ ------------
Total shareholders' equity 7,757,408 7,681,769
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Total liabilities and shareholders'
equity $ 22,080,085 $ 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 consolidated financial
statements.
2
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ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- ------------------------------------
1997 1996 (1) 1997 (1) 1996 (1)
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 14,256,985 $ 11,173,907 $ 35,862,243 $ 24,256,410
Cost of revenue 11,105,052 9,025,011 29,595,049 19,589,594
-------------- ------------- ------------- -------------
Gross profit 3,151,933 2,148,896 6,267,194 4,666,816
Operating expenses:
Selling, general and administrative 3,362,884 1,850,616 8,425,907 4,085,374
Amortization of intangible assets 95,802 68,690 304,202 122,110
Adjustment of Datatech goodwill - - 2,458,000 -
-------------- ------------- ------------- -------------
Total operating expenses 3,458,686 1,919,306 11,188,109 4,207,484
-------------- ------------- ------------- -------------
Operating income (loss) (306,753) 229,590 (4,920,915) 459,332
Interest income (expense), net (90,436) (2,759) (203,939) 10,939
-------------- ------------- ------------- -------------
Income (loss) from continuing operations (397,189) 226,831 (5,124,854) 470,271
Loss from discontinued operations - (111,271) - (33,104)
Gain on disposal of discontinued operations - - - 133,214
-------------- ------------- ------------- -------------
Pretax income (loss) (397,189) 115,560 (5,124,854) 570,381
Income tax expense 1,036 - 1,317,006 -
-------------- ------------- ------------- -------------
Net income (loss) $ (398,225) $ 115,560 $ (6,441,860) $ 570,381
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Net income (loss) per common share and
common share equivalents:
Continuing operations $ (0.05) $ 0.02 $ (0.81) $ 0.06
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Discontinued operations $ - $ (0.01) $ - $ 0.01
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Net income (loss) per share $ (0.05) $ 0.01 $ (0.81) $ 0.07
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Weighted average shares outstanding 8,303,394 8,775,045 7,975,881 7,703,527
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transaction,
see Note 2.
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996(1)
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(6,441,860) $ 570,381
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Amortization 304,202 122,110
Depreciation 79,865 77,127
Gain on sale of digital imaging archiving business - (133,214)
Adjustment of Datatech goodwill 2,458,000 -
Adjustment to deferred income taxes 1,315,970 -
Changes in current operating items:
Accounts receivable, net (1,679,955) (504,931)
Inventories (415,262) 1,313,320
Other current assets (1,828) 37,632
Accounts payable 2,509,531 (1,532,341)
Accrued expenses (108,622) 37,818
Other current liabilities (177,335) (164,767)
Other assets 22,907 (171,384)
------------ -----------
Net cash used in operating activities: (2,134,387) (348,249)
INVESTING ACTIVITIES
Cash paid in connection with acquisition of Datatech, net of
cash acquired of $750,490 - (695,549)
Cash received in acquisition of Four Corners and Hi-Tech 312,929 -
Cash paid in connection with acquisition of MST (2,028,214) -
Proceeds from sales of short-term investments, net - 964,635
Purchases of furniture and equipment (229,903) (70,517)
Proceeds from sale of digital imaging archiving business - 100,000
------------ -----------
Net cash provided by (used in) investing activities: (1,945,188) 298,569
------------ -----------
FINANCING ACTIVITIES
Distributions to shareholders (258,727) (275,076)
Line of credit activity, net (109,967) 199,687
Proceeds from issuances of common stock and warrants 4,353,355 115,620
------------ -----------
Net cash provided by financing activities: 3,984,661 40,231
------------ -----------
Decrease in cash and cash equivalents (94,914) (9,449)
------------ -----------
CASH AND CASH EQUIVALENTS
Beginning of period 694,901 1,122,881
------------ -----------
End of period $ 599,987 $ 1,113,432
============ ===========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Common stock consideration for acquisitions
Datatech:
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
===========
Four Corners- issuance of 350,000 shares $ 1,649,375
Hi-Tech- issuance of 170,000 shares 773,496
</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
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 1997 and the
results of operations and cash flows for the periods ended September 30,
1997 and September 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"), EJG Techline, Incorporated ("Techline"), Four Corners
Technology, Inc. ("Four Corners") and Hi-Tech Connections, Inc. ("Hi-Tech").
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, Four Corners, and
Hi-Tech results are included since May 17, 1996, July 1, 1997 and August 1,
1997, their respective dates 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
consolidated financial statements and the related notes thereto included in
the Company's Annual Report to Shareholders for the nine month transition
period ended December 31, 1996, and the Company's Current Reports on Form
8-K filed with the Commission dated January 31, 1997, May 15, 1997, July 1,
1997, August 15, 1997 and October 3, 1997.
-5-
<PAGE>
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 has been accounted for as a purchase and, accordingly,
the results of MST's operations are included in the Company's
consolidated financial statements from 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.
ACQUISITION OF FOUR CORNERS TECHNOLOGY, INC.
On July 1, 1997, the Company acquired the outstanding stock of Four Corners
Technology, Inc. ("Four Corners") for 350,000 shares of the Company's
common stock. The acquisition has been accounted for as a purchase and,
accordingly, the results of Four Corners' operations are included in the
Company's consolidated financial statements from July 1, 1997.
ACQUISITION OF HI-TECH CONNECTIONS, INC.
Effective August 1, 1997, the Company acquired Hi-Tech Connections, Inc.
("Hi-Tech") for 170,000 shares of the Company's common stock (including
20,000 shares issued to a third party relating to certain expenses
incurred in the transaction). Under the terms of the agreement,
additional shares may be issued based on the earnings generated by
Hi-Tech during the six months ending December 31, 1997. The accompanying
financial statements have not reflected any such additional shares since
their issuance at this time is uncertain. Any issuance of additional
shares under the provisions of the purchase agreement will increase
goodwill. The acquisition has been accounted for as a purchase and,
accordingly, the results of Hi-Tech operations are included in the
Company's consolidated financial statements from August 1, 1997.
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<PAGE>
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.
4. DEFERRED INCOME TAXES
During the second quarter of 1997, due to 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
In early October, the Company and State Street Bank and Trust Company
("State Street") amended the Company's line of credit agreement. The line
of credit was increased to $8 million from $5 million and several covenants
were modified. State Street also has agreed to waive all prior non-
compliance with covenants that were contained in the original line of
credit agreement.
6. NOTE PAYABLE TO OFFICER
In August 1997, a Company officer advanced $400,000 to the Company in
anticipation of participating in the private placement of equity discussed
in Note 7. On October 1, 1997, this note was exchanged for 100,000 common
shares and warrants with the same terms as the other shares purchased in
the private placement. For financial statement purposes these shares and
warrants were treated as being issued in September.
-7-
<PAGE>
7. PRIVATE PLACEMENT
In September 1997, the Company issued 950,000 common shares and warrants in
a private placement offering to accredited investors. On October 1, 1997
an additional 100,000 shares were issued to an officer of the Company as
discussed in Note 6. The shares and warrants were sold for $4.00 a unit
and were unregistered. The warrants have an exercise price of $6.25, and
can be called by the Company at $0.25 per share if the Company's common
stock trades above $8.25 for any ten consecutive days.
Proceeds to the Company after commissions and expenses were approximately
$4,400,000.
8. SUBSEQUENT EVENT
On October 31, 1997 the Company acquired the outstanding shares of DataComm
Associates, Inc. ("DataComm") and Midwest Telecom Associates, Inc.
("Telecom") for 500,000 shares of the Company's common stock. These
acquisitions are expected to be accounted for as purchases and,
accordingly, the results of DataComm and Telecom will be included in the
Company's financial statements from November 1, 1997.
9. 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
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.
-8-
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Form 10-QSB and in future filings by the Company
with the Securities and Exchange Commission and in the Company's written and
oral statements made by or with the approval of an authorized executive officer
constitute "forward-looking statements" within the meaning of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. The words "believe," "expect" and "anticipate" and
similar expressions identify forward-looking statements. These forward-looking
statements reflect the Company's current views with respect to future events and
financial performance, but are subject to many uncertainties and factors
relating to the Company's operations and business environment which may cause
the actual results of the Company to be materially different from any future
results expressed or implied by such forward-looking statements. Examples of
such uncertainties include, but are not limited to, changes in customer demand
and requirements, new product announcements, interest rate fluctuations, changes
in federal income tax laws and regulations, competition, industry specific
factors and world wide economic and business conditions. For a more
comprehensive list of uncertainties, see the section entitled "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 SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996:
Total revenue for the three months ended September 30, 1997 increased by
$3,083,000 to $14,257,000 as compared to revenue of $11,174,000 for the three
months ended September 30, 1996. The increase resulted primarily from the
acquisition of Four Corners and Hi-Tech on July 1, 1997 and August 1, 1997
respectively, which contributed approximately $4,600,000 of revenue, as well
as revenue from the MST division acquired in January. Revenue at the
Company's Southeastern Region (former ANS subsidiary) also increased from the
prior year. The sales of the Western Region (former Datatech Subsidiary)
decreased significantly from the prior period due to the operating problems
which resulted in the adjustment to Datatech goodwill recorded in the second
quarter. Sales levels for the Western Region are expected to continue to be
significantly below 1996 levels.
The gross profit margin for the three months ended September 30, 1997 was
22.1% compared to 19.2% for the three months ended September 30, 1996 and the
14.4% margin recorded in the first six months of 1997. The increase in gross
profit margin resulted from higher margins at the businesses acquired in the
second and third quarter of 1997 as well as improved margins in the Western
Region as compared to the second quarter.
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<PAGE>
Operating expenses increased by $1,539,000 to $3,459,000 compared to
operating expenses of $1,919,000 for the three months ended September 30,
1996. The increase in operating expenses resulted primarily from the
inclusion of the Four Corners, Hi-Tech and MST acquisitions in the period as
well as increased corporate costs. Operating expenses increased by $396,000
from the second quarter (excluding the adjustment of Datatech goodwill),
however, operating expenses at the businesses acquired were $866,000 in the
quarter. Accordingly, net operating expenses at the remaining units were
down from the prior quarter.
Increased operating expenses also resulted from the amortization of
intangibles as well as professional fees and internal costs associated with
Eltrax's growth and merger and acquisition activities, which are expected to
continue.
Net interest expense of $90,000 in the current quarter was significantly
higher than the expense of $3,000 during the three months ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996:
Results for the nine months ending September 30, 1997 have been significantly
affected by the results of the Company's Western Region. As the region's
operations deteriorated in the first quarter and its losses increased in the
second quarter, the Company undertook an evaluation of the operation's
management and performance. As a result, the region's management team was
removed; sales were consolidated under the Company's National Sales Director;
inventory was moved and consolidated with inventory with the Southeastern
Region in Raleigh, North Carolina and the back office functions at the
Western Region were also consolidated at the Southeastern Region. The second
quarter reflected expenses connected with this situation and the resulting
charges 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.
Total revenue for the nine months ended September 30, 1997 increased by
$11,606,000 to $35,862,000 compared to revenue of $24,256,000 for the nine
months ended September 30, 1996. The increase primarily resulted from
acquisitions made in 1996 and 1997. Revenues at the Southeastern Region were
comparable to the earlier period while Western Region revenues declined.
Gross profit as a percentage of revenue for the nine months ended September 30,
1997 was 17.5% compared to 19.2% for the nine months ended September 30, 1996,
and the 15.6% margin for the nine month transition period ended December 31,
1996. The gross profit margin for the nine months was adversely impacted by the
second quarter results for the Western Region.
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<PAGE>
Operating expenses increased by $6,981,000 to $11,188,000 compared to
operating expenses of $4,207,000 for the nine months ended September 30,
1996. The adjustment to Datatech goodwill of $2,458,000 accounted for a
large part of the increase. The remaining increase in operating expenses
resulted primarily due to the effect of the acquisitions made in 1997 and
1996 as well as the additional Western Region expenses in the second quarter
discussed above.
The amortization of intangibles also contributed $182,000 of the increase.
An additional 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 $204,000 was $215,000 higher than the income of $11,000
during the nine months ended September 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.
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's summary results as if the
Datatech, Four Corners and Hi-Tech acquisitions had taken place as of the
beginning of the nine month period ended September 30, 1996. No pro forma
adjustment has been made related to the MST acquisition.
PRO FORMA OPERATIONS DATA (unaudited):
THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Revenue $ 14,892,000 $ 15,001,000
Income (Loss) From Continuing Operations (392,000) 388,000
Net Income (Loss) (392,000) 277,000
Net Income (Loss) per share* (.05) .04
* FROM CONTINUING OPERATIONS
-11-
<PAGE>
COMPARISON OF PRO FORMA OPERATIONS DATA FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total pro forma revenue for the nine months ended September 30, 1997
decreased by approximately 1% or $109,000 to $14,892,000 compared to pro
forma revenue of $15,001,000 for the three months ended September 30, 1996.
The decrease is due primarily to reduced Western Region revenue offset by
revenue resulting from the acquisition of MST on January 31, 1997, which
contributed approximately $1,900,000 of revenue in the current quarter.
Pro forma gross profit margin as a percentage of revenue for the three months
ended September 30, 1997 was 22.4% which was roughly comparable to the 21.3%
for the three months ended September 30, 1996.
Pro forma operating expenses increased by $841,000 to $3,634,000 compared to
pro forma operating expenses of $2,793,000 for the three months ended
September 30, 1996. The increase in pro forma operating expenses reflects
costs relating to the continued development of the Company's service
offerings as well as the Company's growth and merger and acquisition
activities. The amortization of intangibles also contributed $27,000 of the
increase.
NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Revenue $ 43,536,000 $ 43,201,000
Income (Loss) From Continuing Operations (6,550,000) 1,096,000
Net Income (Loss) (6,550,000) 1,196,000
Net Income (Loss) per share* (.77) .12
* FROM CONTINUING OPERATIONS
COMPARISON OF PRO FORMA RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
The pro forma revenue for the nine month period ending September 30, 1997
increased slightly to $43,536,000 when compared to the pro forma revenue of
$43,201,000 for the nine months ended September 30, 1996. This increase
resulted from the acquisition of MST in January, 1997 which added
approximately $4,500,000 of revenue which was offset by the decline in the
Western Region revenue discussed above.
The pro forma gross margin percentage decreased to 18.8% during the nine
months ended September 30, 1997 from 21.5% in the nine months ended September
30, 1996 due to the second quarter decline at the Western Region operations
discussed above.
The pro forma operating expenses of the Company increased by $5,220,000 to
$13,204,000 in the nine months ended September 30, 1997, compared to
$7,984,000 in the nine months ended September 30, 1996. A large component of
the increase was the $2,458,000 adjustment to Datatech goodwill recorded in
the second quarter of 1997. The remaining increase is due to the acquisition
of MST, the operating issues at the Western Region discussed above, increased
selling, general and administrative expenses and the Company's growth and
merger and acquisition activities.
-12-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The level of cash, cash equivalents and short-term investments decreased by
$95,000 from $695,000 at December 31, 1996 to $600,000 on September 30, 1997.
The Company's short-term borrowings, however, under its bank line at State
Street increased by $103,000 to $692,000 at September 30, 1997. These
borrowings were down $3,562,000 from the level at the end of June, 1997.
Cash used for operations was $2,134,000 for the first nine months of 1997
reflecting the $6,442,000 net loss offset by approximately $4,158,000 of
non-cash charges. Increased receivables and inventories have been financed with
increased accounts payable.
Cash used in investing activities of $1,945,000 reflects primarily the
acquisition of the MST operations in January, 1997.
Cash provided by financing activities of $3,985,000 was primarily related to
the raising of approximately $4,400,000 in a private equity offering of
1,050,000 common shares issued with warrants. These funds were utilized to
reduce the bank line in late September, but will be used in the fourth
quarter to reduce trade payables.
The Company renegotiated its credit facility in October resulting in an increase
in the availability under the credit line to $8,000,000 from $5,000,000, the
modification of certain covenants, and the extension of the agreement for an
extra year to October 31, 1999. The availability under the credit line is
limited to the Company's borrowing base, which is a function of certain accounts
receivable and inventories. At September 30, 1997, the borrowing base was
approximately $6,500,000. The Company believes that the current credit line
will be sufficient to fund operations into 1998.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
On July 1, 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 described 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 July 1, 1997 as filed with the Securities and
Exchange Commission.
On August 15, 1997 the Company issued 150,000 shares of restricted common
stock to the shareholders of Hi-Tech, pursuant to the Hi-Tech Acquisition
Agreement as described in Note 2 to the financial statements in this Form
10-QSB. An additional 20,000 shares were issued relating to certain
expenses incurred in the transaction. This transaction is described in
detail in the Company's Form 8-K/A filing dated August 15, 1997 as filed
with the Securities and Exchange Commission.
In September 1997, the Company issued 950,000 of restricted common stock in
a private equity offering as described in Note 7 to the financial
statements in this Form 10-QSB. An additional 100,000 shares were sold in
October as described in Note 6.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-14-
<PAGE>
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 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 Report on Form 8-K dated
Technology, Inc., Robert A. Hughes, July 1, 1997.
Joel J. Blickenstaff, and David Noall.
2.2 Agreement and Plan of Merger dated Incorporated by reference
as of August 15, 1997 by and among to Exhibit 2.1 contained
Eltrax Systems, Inc., Hi-Tech in the Company's
Acquiring Corp., Hi-Tech Current Report on Form
Connections, Inc. and Edward C. 8-K dated August 15, 1997
Barrett Daniel M. Christy
and David R. Hurlbrink.
10.1 Employment and Non-Competition Incorporated by reference
Agreement between the Company to Exhibit 10.1 contained
and Robert A. Hughes. in the Company's
Current Report on Form
8-K dated July 1, 1997
10.2 Employment and Non-Competition Incorporated by reference to
Agreement between the Company Exhibit 10.2 contained
and Joel J. Blickenstaff. in the Company's Current
Report on Form 8-K
dated July 1, 1997
-15-
<PAGE>
10.3 Employment and Non-Competition Incorporated by
Agreement between the Company reference to Exhibit
and Edward C. Barrett. 10.1 contained in the
Company's Current
Report on Form 8-K
dated August 15, 1997
10.4 Employment and Non-Competition Incorporated by
Agreement between the Company reference to Exhibit
and Daniel M. Christy. 10.2 contained in the
Company's Current
Report on Form 8-K
dated August 15, 1997
10.5 Employment and Non-Competition Incorporated by
Agreement between the Company reference to Exhibit
and David R. Hurlbrink. 10.3 contained in the
Company's Current
Report on Form 8-K
dated August 15, 1997
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated July 1, 1997,
reporting its 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.
The Company filed a Current Report on Form 8-K, as amended by Form 8-K/A,
dated August 15, 1997 reporting its acquisition of Hi-Tech Connections, the
move of its corporate office and the resignation of its President.
-16-
<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: November 14, 1997 /s/ Nicholas J. Pyett
------------------------------
Nicholas J. Pyett
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-17-
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