<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 10, 1998
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>
The Current Report on Form 8-K dated September 10, 1998 is amended to read in
its entirety as follows:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
MERGER WITH ENCORE SYSTEMS, INC. AND ACQUISITION OF GLOBAL SYSTEMS AND SUPPORT,
INC. AND FIVE STAR SYSTEMS, INC.
On September 10, 1998, pursuant to an Acquisition Agreement dated as of
August 31, 1998 (the "Acquisition Agreement") by and among Eltrax Systems, Inc.,
a Minnesota corporation (the "Company"), Encore Acquiring Corp., a Georgia
corporation ("Acquiring Sub"), Encore Systems, Inc., a Georgia Corporation
("Encore"), Global Systems and Support, Inc., a Georgia corporation ("GSS"),
Five Star Systems, Inc., a Georgia corporation ("Five Star"), Penelope Sellers
("Sellers"), and Joseph T. Dyer ("Dyer"; Sellers and Dyer are sometimes
hereinafter collectively referred to as the "Shareholders"), Acquiring Sub
merged with and into Encore, and the Company acquired all of the outstanding
stock of GSS and Five Star. As a result of the merger, the separate existence
of Acquiring Sub ceased and Encore continues as the surviving corporation and a
wholly owned subsidiary of the Company. Encore, GSS, and Five Star are
providers of proprietary software products and technology services to the
hospitality industry. The description of the merger and stock acquisitions
included herein does not purport to be complete and is qualified in its entirety
by reference to the Acquisition Agreement which is filed as Exhibit 2.1 hereto.
Pursuant to the terms of the Acquisition Agreement, upon the closing of the
merger on September 10, 1998, 465,000 shares of common stock, $.01 par value per
share, of the Company (the "Common Stock") were issued to the Shareholders in
connection with the merger, and the Company paid the Shareholders $8.5 million
for all of the outstanding capital stock of GSS and Five Star. Furthermore, in
the event the Company elects to treat the acquisition of Five Star stock as a
"deemed sale of assets" pursuant to Section 338(h)(10) of the Internal Revenue
Code, the Company will reimburse the Shareholders (on a "grossed-up" basis for
taxes) for the additional tax resulting from such election. The 465,000 shares
of Common Stock issued in connection with the merger represents approximately
3.6% of the issued and outstanding shares of Common Stock after the closing.
All of the shares of the Common Stock that have been issued to the Shareholders
in connection with the merger are "restricted stock", as defined in Rule 144
promulgated under the Securities Act of 1933, and have certain demand and
"piggyback" registration rights.
In addition to the foregoing, the Company entered into an Employment and
Non-Competition Agreement with Penelope Sellers that provides for the employment
by the Company of Sellers for a period of one (1) year from September 1, 1998.
The agreement also provides for a non-compete period through two (2) years after
the term of the agreement. The description of the Employment and
Non-Competition Agreement included herein does not purport to be complete and is
qualified in its entirety by reference to the Employment and Non-Competition
Agreement which is filed as Exhibit 10.1 hereto.
For accounting purposes, it is intended that the merger will be treated as
a purchase transaction under APB Opinion No. 16.
ITEM 5. OTHER EVENTS.
CREDIT AGREEMENT
The Company has entered into a new three-year credit agreement (the "Credit
Agreement") with State Street Bank and Trust Company that provides for a $4.0
million three-year term loan and a $6.0 million revolving credit loan. Each
loan is due on September 10, 2001, and is secured by a security interest in all
of the Company's personal property. In addition to monthly interest payments
under each loan, equal monthly principal payments of $111,111 are required
pursuant to the term loan. The revolving credit loan accrues
<PAGE>
interest at a rate 100 basis points above the "prime rate" and the term loan
accrues interest at a rate equal to a rate (i) 150 basis points above the "prime
rate" or (ii) 425 basis points above the LIBOR rate, as selected by the Company
pursuant to the terms of the Credit Agreement. The description of the Credit
Agreement included herein does not purport to be complete and is qualified in
its entirety by reference to the Credit Agreement which is filed as Exhibit 10.2
hereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The index to the financial information for Encore, GSS, and Five Star 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: November 23, 1998
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Filed
Number Description Herewith
- ------ ----------- --------
<C> <S> <C>
2.1* Acquisition Agreement, dated as of
August 31, 1998, among Eltrax Systems, Inc.,
Encore Acquiring Corp., Encore Systems, Inc.,
Global Systems and Support, Inc.,
Five Star Systems, Inc.,
Penelope Sellers, and Joseph T. Dyer
10.1* Employment and Non-Competition Agreement,
dated as of August 31, 1998 between Eltrax
Systems, Inc. and Penelope Sellers
10.2* Credit Agreement, dated as of September 11, 1998,
between Eltrax Systems, Inc., Nordata, Inc.,
Four Corners Technology, Inc., Encore Systems, Inc.,
Global Systems and Support, Inc.,
Five Star Systems, Inc., and State Street Bank and
Trust Company
23.1 Consent of PricewaterhouseCoopers LLP X
</TABLE>
*Previously filed with Current Report on Form 8-K dated September 10, 1998
<PAGE>
ENCORE SYSTEMS, INC.
COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . F-2
COMBINED FINANCIAL STATEMENTS
Combined Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Combined Statements of Operations. . . . . . . . . . . . . . . . . . . . . . F-4
Combined Statements of Stockholders' Equity (Deficit). . . . . . . . . . . . F-5
Combined Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . . F-7
ELTRAX SYSTEMS, INC., ENCORE SYSTEMS, INC.,
GLOBAL SYSTEMS AND SUPPORT, INC., AND FIVE STAR SYSTEMS, INC.
PRO FORMA FINANCIAL INFORMATION
Narrative Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-12
Pro Forma Consolidated Balance Sheet as of December 31, 1997
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-13
Notes to Pro Forma Consolidated Balance Sheet as of
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-14
Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1997 (Unaudited) . . . . . . . . . . . . . . . . . . .F-15
Notes to Pro Forma Consolidated Statement of Operations for the
year ended December 31, 1997. . . . . . . . . . . . . . . . . . . . . . .F-16
Pro Forma Consolidated Statement of Operations for the nine months
ended September 30, 1998 (Unaudited). . . . . . . . . . . . . . . . . . .F-17
Notes to Pro Forma Consolidated Statement of Operations for the
nine months ended September 30, 1998. . . . . . . . . . . . . . . . . . .F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Encore Systems, Inc.
In our opinion, the accompanying combined balance sheets and the related
statements of operations, stockholders' equity (deficit), and cash flows present
fairly, in all material respects, the financial position of Encore Systems Inc.
at December 31, 1997 and 1996, and the results of their operations and their
cash flows for the years then ended, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
November 6, 1998
F-2
<PAGE>
ENCORE SYSTEMS INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 899,624 $ 691,465
Accounts receivable, net of allowance for doubtful accounts of $128,000
and $180,000 in 1997 and 1996, respectively 970,929 679,519
Notes receivable, related party 284,349 279,953
Prepaid expenses and other assets 120,576 326
--------------- ---------------
Total current assets 2,275,478 1,651,263
Property, plant and equipment 1,025,352 894,687
Less accumulated depreciation (811,936) (686,594)
--------------- ---------------
Net property, plant and equipment 213,416 208,093
Other 5,329 9,834
--------------- ---------------
Total assets $ 2,494,223 $ 1,869,190
--------------- ---------------
--------------- ---------------
LIABILITIES
Current liabilities:
Accounts payable $ 242,180 $ 308,750
Notes payable, stockholders 198,718 332,096
Current portion of long-term debt 113,461 -
Accrued litigation - 1,476,753
Accrued compensation 330,306 238,006
Income taxes payable 434,065 434,065
Other accrued expenses 298,876 181,917
Deferred revenues 1,502,390 831,201
--------------- ---------------
Total current liabilities 3,119,996 3,802,788
Long-term debt, net of current portion 355,050 -
--------------- ---------------
Total liabilities 3,475,046 3,802,788
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock:
Encore Systems, Inc. (20,000,000 shares authorized, no par, 767,777
issued and outstanding) 2,000 2,000
Global Systems and Support, Inc. (100,000 shares authorized, no par,
1,000 issued and outstanding) 1,000 1,000
Five Star Systems, Inc. (100,000 shares authorized, no par, 1,000 issued
and outstanding) 100 100
Additional paid-in capital 1,388,592 441,478
Accumulated deficit (2,372,515) (2,378,176)
--------------- ---------------
Total shareholders' equity (980,823) (1,933,598)
--------------- ---------------
Total liabilities and stockholders' deficit $ 2,494,223 $ 1,869,190
--------------- ---------------
--------------- ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE COMBINED FINANCIAL STATEMENTS
F-3
<PAGE>
ENCORE SYSTEMS INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revenues:
Services $ 8,947,308 $ 8,593,377
Systems sales 1,560,843 1,275,737
---------------- -----------------
Total revenues 10,508,151 9,869,114
---------------- -----------------
Cost of services provided and system sales 4,199,868 4,395,039
---------------- -----------------
Gross profit 6,308,283 5,474,075
Expenses:
Selling, general and administrative 3,139,338 3,152,320
Research and development 976,549 456,517
Depreciation and amortization 125,529 109,886
Litigation settlement and costs -- 1,548,987
---------------- -----------------
Total operating expenses 4,241,416 5,267,710
---------------- -----------------
Income from operations 2,066,867 206,365
Other (income) expense:
Interest income (64,872) (41,240)
Interest expense 15,269 5,400
---------------- -----------------
Total other (income), expense (49,603) (35,840)
---------------- -----------------
Net income $ 2,116,470 $ 242,205
---------------- -----------------
---------------- -----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE COMBINED FINANCIAL
STATEMENTS.
F-4
<PAGE>
ENCORE SYSTEMS INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS/ TOTAL
COMMON PAID-IN (ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT) EQUITY
------------ -------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 3,100 $ 228,868 $ 36,558 $ 268,526
Net income 242,205 242,205
Distributions to stockholders (228,868) (2,656,939) (2,885,807)
Additional capital contributions, Five Star 441,478 441,478
------------ -------------- ------------------- ------------------
Balance, December 31, 1996 3,100 441,478 (2,378,176) (1,933,598)
Net income 2,116,470 2,116,470
Distributions to stockholders (2,110,809) (2,110,809)
Additional capital contributions, Five Star 947,114 947,114
------------ -------------- ------------------- ------------------
Balance, December 31, 1997 $ 3,100 $ 1,388,592 $ (2,372,515) $ (980,823)
------------ -------------- ------------------- ------------------
------------ -------------- ------------------- ------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE COMBINED FINANCIAL
STATEMENTS.
F-5
<PAGE>
ENCORE SYSTEMS INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,116,470 $ 242,205
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 125,529 109,886
Changes in operating assets and liabilities:
Accounts receivable (291,410) (30,026)
Prepaid expenses and other (120,250) 54,928
Other 109 (6,546)
Accounts payable (66,570) (118,176)
Accrued litigation (1,008,242) 1,476,753
Accrued expenses 209,259 (169,596)
Deferred revenues 671,189 132,931
---------------- ------------------
Net cash provided by operating activities 1,636,084 1,692,359
---------------- ------------------
Cash flows from investing activities:
Investment in property, plant and equipment (130,852) (49,620)
Payment received on notes receivable -- 447,617
---------------- ------------------
Net cash provided by (used in) investing activities (130,852) 397,997
---------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable, stockholders -- 137,862
Payments on notes payable, stockholders (133,378) --
Proceeds from capital contributions 947,114 441,478
Distributions to stockholders (2,110,809) (2,885,807)
---------------- ------------------
Net cash used in financing activities (1,297,073) (2,306,467)
---------------- ------------------
Net increase (decrease) in cash 208,159 (216,111)
Cash, beginning of year 691,465 907,576
---------------- ------------------
Cash, end of year $ 899,624 $ 691,465
---------------- ------------------
---------------- ------------------
Supplemental disclosure of cash flow information, cash paid during the
year for interest -- --
---------------- ------------------
---------------- ------------------
Supplemental disclosure of cash flow information, cash paid during the
year for income taxes -- --
---------------- ------------------
---------------- ------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE COMBINED FINANCIAL
STATEMENTS.
F-6
<PAGE>
ENCORE SYSTEMS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
The Company designs, develops and markets software products used in the
hospitality industry. Additionally, the Company provides installation and
maintenance services related to their software, as well as other nonrelated
products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. PRINCIPLES OF COMBINATION: The combined financial statements include
the accounts of Encore Systems, Inc., Global Systems and Support, Inc.
and Five Star Systems, Inc. (collectively, the "Company"), all of
which have common ownership. Intercompany transactions and accounts
are eliminated in combination.
b. 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 and the net recoverability of deferred tax assets. These
estimates are particularly susceptible to material changes in the near
term.
c. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount of cash,
accounts rceivable/payable, notes receivable/payable and accrued
expenses approximates fair value because of the short maturity of
these instruments.
d. CONCENTRATION OF CREDIT RISK: The Company extends credit to customers
based on an evaluation of the customer's financial condition and
credit history and generally does not require collateral. Revenue
from maintenance contracts are principally collected in advance, and
the Company requires deposits on system sales and installation
contracts. The Company's range of customers includes lodging chains
and franchises, one of which accounted for 63% and 61% of combined
revenues in 1997 and 1996, respectively.
e. REVENUE RECOGNITION: 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.
F-7
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
f. CASH AND CASH EQUIVALENTS: The Company considers as cash and cash
equivalents amounts on deposits in banks and cash invested temporarily
in various instruments with maturities of three months or less at the
time of purchase.
g. PROPERTY AND EQUIPMENT: Property and equipment is recorded at cost
and is depreciated using accelerated and straight-line methods over
the estimated useful lives of the assets which range from three to
five years.
Expenditures for repairs, maintenance and renewals are charged to
income as incurred. Expenditures which improve an asset or extend its
estimated useful life are capitalized. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts and any gain or loss is included in
income.
h. SOFTWARE DEVELOPMENT COSTS: The Company capitalizes software
development costs incurred from the time technological feasibility of
the software is established until the software is ready for use to
provide processing services to customers. Research and development
costs and other computer software maintenance costs related to
software development are expensed as incurred. As of December 31,
1997 and 1996, no software development costs have been capitalized.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
----------- ------------
<S> <C> <C>
Furniture and fixtures $ 189,346 $ 189,346
Computer and office equipment 836,006 705,341
----------- ------------
1,025,352 894,687
Less: accumulated depreciation (811,936) (686,594)
----------- ------------
$ 213,416 $ 208,093
----------- ------------
----------- ------------
</TABLE>
F-8
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
5. SAVINGS PLAN:
The Company has a voluntary defined contribution 401(k) plan covering
substantially all employees. Employees may elect to contribute a maximum
of 15 percent of their pretax wages not to exceed a statutory maximum. The
Company has the option to make either discretionary and/or matching
contributions. Company contributions of approximately $20,000 have been
charged to operations for this plan for the years ended December 31, 1997.
No contribution was made for the year ended December 31, 1996.
6. INCOME TAXES:
The financial statements are a combination of three companies held under
common ownership. Two of these companies have elected to have their income
taxed under Section 1362 of the Internal Revenue Code (the Subchapter S
Corporation Election) and, accordingly, any liabilities for income taxes
are the direct responsibility of the shareholders.
Encore, the sole Subchapter C Corporation had minor tax losses in both 1997
and 1996 and accordingly, no tax provision is recorded in either year. In
addition, Encore has deferred tax assets of approximately $70,000 related
to the timing of certain deductions at the end of 1997 and 1996. Due to
the uncertainty as to the likelihood and timing of future taxable income
for Encore, a full valuation allowance was applied to these taxes.
In addition, Encore's 1991 through 1993 federal income tax returns were
examined by the Internal Revenue Service during 1997. These audits
resulted in the payment of taxes, penalties and interest in 1998 which has
been fully accrued for at December 31, 1997 and 1996.
F-9
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
7. RELATED PARTY:
Transactions with related parties consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DEC 31, 1997 YEAR ENDED DEC 31, 1996
-------------------------------- ---------------------------------
RECEIVABLE PAYABLE RECEIVABLE PAYABLE
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Penny Sellers, stockholder $ - $ - $ - $ 148,604
Jody Dyer, stockholder - 198,718 - 183,492
Omni Systems, Inc. 284,349 155,574 279,953 191,574
-------------- -------------- --------------- ---------------
$ 284,349 $ 354,292 $ 279,953 $ 523,670
-------------- -------------- --------------- ---------------
-------------- -------------- --------------- ---------------
</TABLE>
The Company pays royalties to Omni Systems of Georgia, Inc. ("Omni"), a
company owned by a majority stockholder, for the software it sells.
Royalties paid to Omni were $300,000 for each of the years ended
December 31, 1997 and 1996. The note receivable is due on demand with
interest at 9% and 8%, respectively
A family member of the Company's majority shareholder performs certain
legal services for the Company. Legal expenses relating to these services
were approximately $104,000 and $83,000 for the years ended December 31,
1997 and 1996, respectively.
Notes payable, stockholders, consists of two notes resulting from cash
advances, due on demand, with interest at 0% and 9%, respectively.
8. LEASES:
The company leases facilities and equipment for its operations under
operating lease agreements expiring at various dates through April, 2000.
Rental expense relating to these leases charged to operations was
approximately $438,750 and $411,920 for the years ended December 31, 1997
and 1996, respectively. Future minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998 $ 436,000
1999 338,000
2000 112,000
-----------
$ 886,000
-----------
-----------
</TABLE>
F-10
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
9. LITIGATION:
The Company sub-licenses its primary product, a hotel accounting and
operations software package, from Omni, who has a license agreement with
the developer of the software. Pursuant to the license and sub-license
agreements, the Company's rights to sell the software product is perpetual.
In 1996 a lawsuit was brought against Omni and the Company by the developer
of the software relating to the rights to certain software the Company
markets. Effective December 31, 1997, a Settlement and License Agreement
was entered into, granting Omni the perpetual rights to the software. Under
the terms of the agreement, the Company will pay the developer certain
accrued royalties as well as $15,000 per month for 36 months, beginning
March 1998. The promissory note has no stated interest rate, and has been
stated using an imputed interest rate of 8.5%. Future maturities are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1998 $ 150,000
1999 180,000
2000 180,000
2001 30,000
-----------
540,000
Less imputed interest (71,489)
-----------
$ 468,511
-----------
-----------
</TABLE>
The cost of the litigation and ultimate settlement has been reflected in
the financial statements in 1996.
10. SUBSEQUENT EVENTS:
On September 10, 1998, the Company entered into an Acquisition Agreement
with Eltrax Systems, Inc. ("Eltrax"). Under the terms of the agreement,
Eltrax acquired all the outstanding common stock of the Company for $8.5
million cash and 465,000 shares of Eltrax common stock. The Company was
subsequently merged into Encore Systems, Inc., which became a wholly owned
subsidiary of Eltrax. The acquisition will be accounted for by Eltrax as a
purchase transaction.
F-11
<PAGE>
ELTRAX SYSTEMS, INC., ENCORE SYSTEMS, INC.,
GLOBAL SYSTEMS AND SUPPORT, INC., AND
FIVE STAR SYSTEMS, INC.
PRO FORMA FINANCIAL INFORMATION - NARRATIVE OVERVIEW
(UNAUDITED)
The following unaudited pro forma consolidated balance sheet as of December
31, 1997 and statements of operations for the year ended December 31, 1997
and the nine months ended September 30, 1998, combine the historical balance
sheets and statements of operations of Encore Systems, Inc., Global Systems
and Support, Inc. and Five Star Systems, Inc. ("Encore Group") 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, 1997 assumes the Entities are consolidated at that
date. The unaudited pro forma statements of operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998, assume the
Entities were consolidated effective at the beginning of each fiscal period.
The unaudited pro forma consolidated financial statements give effect to (i)
the acquisition of the Encore Group (ii) the borrowing of $8,500,000 in
connection with the acquisition (iii) the issuance of 465,000 common shares
of Eltrax common stock in connection with the acquisition and (iv) other
adjustments as described in the accompanying notes.
The unaudited pro forma consolidated 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 consolidated effective at the
beginning of each fiscal period or as of the dates of the unaudited pro forma
balance sheets. The unaudited pro forma consolidated financial statements
and accompanying notes should be read in conjunction with the historical
financial statements of Eltrax, as filed on Form 10-KSB for the year ended
December 31, 1997, the Form 10-Q for the nine months ended September 30,
1998, and the historical financial statements of the Encore Group, including
the notes to such financial statements as set forth elsewhere in this Form
8-K/A. The pro forma adjustments are based upon available information and
upon certain assumptions that Eltrax management believes are reasonable under
the circumstances.
F-12
<PAGE>
ELTRAX SYSTEMS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ENCORE ELTRAX
ELTRAX GROUP PRO FORMA PRO FORMA
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS CONSOLIDATED
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 366,364 $ 899,624 $ - $ 1,265,988
Accounts receivable, net 9,353,349 970,929 - 10,324,278
Inventories, principally purchased components 4,298,794 - - 4,298,794
Other current assets 602,062 410,254 - 1,012,316
--------------- -------------- --------------- ---------------
Total current assets 14,620,569 2,280,807 - 16,901,376
Furniture and equipment, net 863,174 213,416 - 1,076,590
Intangibles, net 6,007,259 - 11,020,486 (3) 17,027,745
--------------- -------------- --------------- ---------------
$ 21,491,002 $ 2,494,223 $ 11,020,486 $ 35,005,711
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 4,744,529 $ - $ 4,500,000 (4) $ 9,244,529
Accounts payable 6,010,516 242,180 - 6,252,696
Accrued compensation 575,383 330,306 - 905,689
Accrued expenses 1,196,222 497,594 349,554 (5) 2,043,370
Unearned revenue 967,507 1,502,390 - 2,469,897
Income taxes payable 496,123 434,065 - 930,188
Current portion of long-term debt - 113,461 1,333,332 (4) 1,446,793
--------------- -------------- --------------- ---------------
Total current liabilities 13,990,280 3,119,996 6,182,886 23,293,162
Long-term liabilites - 355,050 2,666,668 (4) 3,021,718
--------------- -------------- --------------- ---------------
Total liabilities 13,990,280 3,475,046 8,849,554 26,314,880
Shareholders' equity
Common stock 108,478 3,100 4,650 (6) 113,128
(3,100) (7)
Additional paid-in capital 24,741,499 1,388,592 1,185,459 (6) 25,926,958
(1,388,592) (7)
Accumulated deficit (17,349,255) (2,372,515) 2,372,515 (7) (17,349,255)
--------------- -------------- --------------- ---------------
Total shareholders' equity 7,500,722 (980,823) 2,170,932 8,690,831
--------------- -------------- --------------- ---------------
$ 21,491,002 $ 2,494,223 $ 11,020,486 $ 35,005,711
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
</TABLE>
See accompanying notes to pro forma consolidated balance sheet.
F-13
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
1. Represents the historical balance sheet 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 balance sheet of the Encore Group as derived from
the audited financial statements as of December 31, 1997 as presented
elsewhere in this Form 8-K/A.
3. Represents the excess of the Eltrax purchase price over the Encore Group
book value on the acquisition date. Eltrax has not completed the final
allocation of the components of the intangible assets, which consist
principally of purchased software and goodwill.
4. Reflects the cash paid for the acquisition. Of the total purchase price,
it is assumed that $4,500,000 is borrowed on the line of credit and
$4,000,000 is borrowed utilizing the term loan.
5. Represents the estimated cash transaction costs paid, or to be paid, by
Eltrax in connection with the Encore Group acquisition.
6. Represents the issuance of 465,000 shares of Eltrax common stock issued in
connection with the acquisition of the Encore Group.
7. Eliminates the components of shareholders' equity of the Encore Group
acquired by Eltrax.
F-14
<PAGE>
ELTRAX SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ENCORE ELTRAX
ELTRAX GROUP PRO FORMA PRO FORMA
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS CONSOLIDATED
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue $ 49,934,139 $ 10,508,151 $ - $ 60,442,290
Cost of revenue 41,328,951 4,199,868 - 45,528,819
--------------- -------------- --------------- ---------------
Gross profit 8,605,188 6,308,283 - 14,913,471
Operating expenses:
Selling, general and administrative 12,227,954 3,264,867 - 15,492,821
Research and development - 976,549 - 976,549
Amortization of intangible assets 435,144 - 1,377,561 (3) 1,812,705
Adjustment of Datatech goodwill 5,713,721 - - 5,713,721
--------------- -------------- --------------- ---------------
Total operating expenses 18,376,819 4,241,416 1,377,561 23,995,796
--------------- -------------- --------------- ---------------
Operating income (loss) (9,771,631) 2,066,867 (1,377,561) (9,082,325)
Interest income 92,332 64,872 - 157,204
Interest expense (337,074) (15,269) (836,500) (4) (1,188,843)
--------------- -------------- --------------- ---------------
Income (loss) before income taxes (10,016,373) 2,116,470 (2,214,061) (10,113,964)
Income tax expense 1,315,970 - - 1,315,970
--------------- -------------- --------------- ---------------
Net income (loss) $ (11,332,343) $ 2,116,470 $ (2,214,061) $ (11,429,934)
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
Net loss per common share and
common share equivalents $ (1.28)
---------------
---------------
Weighted average shares outstanding (5) 8,943,784
---------------
---------------
</TABLE>
See accompanying notes to pro forma consolidated statement of operations.
F-15
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
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 statement of operations for the Encore Group as
derived from the audited financial statements for the year ended December
31, 1997 as presented elsewhere in this Form 8-K/A.
3. Represents an adjustment associated with the amortization of intangible
assets reflecting the excess of the Eltrax purchase price over the Encore
Group book value on the acquisition date. Eltrax has not completed the
final allocation of the components of the intangible assets, which consist
principally of purchased software and goodwill. For purposes of the pro
forma statement of operations, the intangible assets are being amortized on
a straight-line basis over the estimated average intangible life of eight
years.
4. Represents pro forma interest expense associated with the pro forma debt
incurred to fund the $8,500,000 cash component of the purchase price.
5. Includes 465,000 shares of Eltrax common stock issued in connection with
the acquisition.
F-16
<PAGE>
ELTRAX SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
ENCORE ELTRAX
ELTRAX GROUP PRO FORMA PRO FORMA
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS CONSOLIDATED
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue $ 37,908,464 $ 7,748,285 $ - $ 45,656,749
Cost of revenue 28,555,565 4,112,570 - 32,668,135
--------------- -------------- --------------- ---------------
Gross profit 9,352,899 3,635,715 - 12,988,614
Operating expenses:
Selling, general and administrative 9,619,075 2,482,724 - 12,101,799
Research and development 87,143 821,120 - 908,263
Amortization of intangible assets 418,154 - 918,374 (3) 1,336,528
-
--------------- -------------- --------------- ---------------
Total operating expenses 10,124,372 3,303,844 918,374 14,346,590
--------------- -------------- --------------- ---------------
Operating income (loss) (771,473) 331,871 (918,374) (1,357,976)
Interest income 33,469 32,641 - 66,110
Interest expense (199,105) (34,953) (557,667) (4) (791,725)
--------------- -------------- --------------- ---------------
Income (loss) before income taxes (937,109) 329,559 (1,476,041) (2,083,591)
Income tax expense - - - -
--------------- -------------- --------------- ---------------
Net income (loss) $ (937,109) $ 329,559 $ (1,476,041) $ (2,083,591)
--------------- -------------- --------------- ---------------
--------------- -------------- --------------- ---------------
Net loss per common share and
common share equivalents $ (0.17)
---------------
---------------
Weighted average shares outstanding (5) 12,017,143
---------------
---------------
</TABLE>
See accompanying notes to pro forma consolidated statement of operations.
F-17
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
1. Represents the historical consolidated statement of operations of Eltrax as
derived from the unaudited financial statements filed on Form 10-Q for the
nine months ended September 30, 1998. These results include the operations
for the Encore Group for the month of September.
2. Represents the historical combined statement of operations for the Encore
Group as derived from unaudited statements for the eight months ended
August 31, 1998.
3. Represents an adjustment associated with the amortization of intangible
assets reflecting the excess of the Eltrax purchase price over the Encore
Group book value on the acquisition date. Eltrax has not completed the
final allocation of the components of the intangible assets, which consist
principally of purchased software and goodwill. For purposes of the pro
forma statement of operations, the asset is being amortized on a
straight-line basis over the estimated average intangible life of eight
years.
4. Represents pro forma interest expense associated with the pro forma debt
incurred to fund the $8,500,000 cash component of the purchase price.
5. Includes 465,000 shares of Eltrax common stock issued in connection with
the acquisition.
F-18
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registrations statements of
Eltrax Systems, Inc. on Form S-8 (File No. 333-26015) and Form S-3 (File Nos.
333-37013, 333-51003 and 333-53965) of our report dated November 6, 1998 on our
audits of the combined financial statements of Encore Systems, Inc. as of
December 31, 1997 and 1996, and for the years then ended, which report is
included in this Current Report on Form 8-K/A dated September 10, 1998.
PricewaterhouseCoopers LLP
Detroit, Michigan
November 20, 1998
