<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
[ ] 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 Registrant 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 48075
(Address of principal executive offices)
(248) 358-1699
(Issuer's telephone number)
--------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No_____.
Shares of the Registrant's Common Stock, par value $.01 per share,
outstanding as of May 8, 1998: 10,856,771.
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PART I-ITEM 1: FINANCIAL STATEMENTS
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 241,125 $ 366,364
Accounts receivable, net 9,934,513 9,353,349
Inventories 3,804,072 4,298,794
Other current assets 755,843 602,062
------------ ------------
Total current assets 14,735,553 14,620,569
Furniture and equipment, net 920,277 863,174
Goodwill, net 5,915,699 6,007,259
------------ ------------
Total assets $ 21,571,529 $ 21,491,002
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 4,946,632 $ 4,744,529
Accounts payable 6,581,736 6,010,516
Accrued compensation 389,687 575,383
Accrued expenses 1,136,285 1,196,222
Unearned revenue 859,782 967,507
Income taxes payable 295,806 496,123
------------ ------------
Total current liabilities 14,209,928 13,990,280
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
10,856,271 and 10,847,771 shares issued and outstanding 108,563 108,478
Additional paid-in capital 24,789,539 24,741,499
Accumulated deficit (17,536,501) (17,349,255)
------------ ------------
Total shareholders' equity 7,361,601 7,500,722
------------ ------------
Total liabilities and shareholders' equity $ 21,571,529 $ 21,491,002
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
1998 1997 (1)
------------ ------------
<S> <C> <C>
Revenue $ 14,974,873 $ 10,262,194
Cost of revenue 11,617,955 8,505,946
------------ ------------
Gross profit 3,356,918 1,756,248
Operating expenses:
Selling, general and administrative 3,354,137 2,106,068
Amortization of goodwill 91,560 102,237
------------ ------------
Total operating expenses 3,445,697 2,208,305
------------ ------------
Operating loss (88,779) (452,057)
Interest expense, net 98,467 45,743
------------ ------------
Net loss $ (187,246) $ (497,800)
============ ============
Net loss per common share - basic and diluted $ (0.02) $ (0.06)
============ ============
Weighted average shares outstanding-basic 10,849,893 7,806,730
============ ============
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transaction,
see Note 1.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
1998 1997 (1)
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (187,246) $ (497,800)
Adjustments to reconcile net loss to net cash
used for operating activities:
Amortization 91,560 102,237
Depreciation 65,584 17,426
Warrants issued for services 12,000 -
Changes in current operating items:
Accounts receivable, net (581,164) (339,416)
Inventories 494,722 (633,157)
Other current assets (153,781) (29,888)
Accounts payable 571,220 (204,114)
Accrued compensation (185,696) (92,048)
Accrued expenses (59,937) 36,942
Other current liabilities (308,042) (17,432)
----------- --------------
Net cash used for operating activities: (240,780) (1,657,250)
----------- --------------
INVESTING ACTIVITIES:
Cash paid in connection with acquisition of MST - (2,028,214)
Purchases of furniture and equipment, net (122,687) (48,912)
----------- --------------
Net cash used for investing activities: (122,687) (2,077,126)
----------- --------------
FINANCING ACTIVITIES:
Distributions to shareholders - (96,727)
Proceeds from credit line, net 202,103 3,924,470
Proceeds from issuances of common stock 36,125 38,227
----------- --------------
Net cash provided by financing activities: 238,228 3,865,970
----------- --------------
Increase (decrease) in cash and cash equivalents (125,239) 131,594
----------- --------------
CASH AND CASH EQUIVALENTS:
Beginning of period 366,364 694,901
----------- --------------
End of period $ 241,125 $ 826,495
=========== ==============
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transaction,
see Note 1.
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
March 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by Eltrax Systems, Inc. (the "Company" or "Eltrax")
in accordance with generally accepted accounting principles, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Pursuant to such rules and regulations, certain financial information
and footnote disclosures normally included in the financial statements
have been condensed or omitted.
In the opinion of management, the accompanying unaudited condensed
financial statements contain all necessary adjustments, consisting only of
those of a recurring nature, and disclosures to present fairly the
financial position as of March 31, 1998 and the results of operations and
cash flows for the periods ended March 31, 1998 and 1997. The condensed
consolidated financial statements include the accounts of Eltrax Systems,
Inc. ("Eltrax") and its subsidiaries, Nordata, Inc. and Four Corners
Technology, Inc. ("Four Corners"). Effective January 1, 1998 all other
subsidiaries of the Company were merged into Eltrax Systems, Inc.
Significant intercompany transactions have been eliminated.
The Company's financial statements for the period ended March 31, 1997
have been restated from those included in the prior year first quarter
financial statements to reflect the merger with EJG Techline,
Incorporated ("Techline"). Techline results are included for all
periods presented resulting from the merger with Techline in a
pooling-of-interests transaction on May 14, 1997.
The year-end condensed consolidated balance sheet was derived from
audited consolidated financial statements, but does not include all
disclosures required by generally accepted accounting principles. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB
for the year ended December 31, 1997.
2. LINE OF CREDIT
The Company's line of credit agreement contains certain restrictive
covenants, including, maintaining a current ratio of at least 1.1:1.0,
maintaining an indebtedness ratio of no greater than 1.3:1.0, meeting
certain targets for earnings after taxes, interest, depreciation,
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and amortization as well as certain reporting covenants. For the
quarter ending March 31, 1998, the Company was not in compliance with
the current ratio and quarterly positive earnings covenant. At the
Company's request, the bank has waived its rights related to these
events of non-compliance through March 31, 1998. The Company has
classified these borrowings as current as there is no assurance that
they will continue to comply with these covenants in 1998.
3. NET INCOME (LOSS) PER SHARE
Income (loss) per share is determined by dividing income (loss) by the
weighted average number of common shares outstanding. Common stock
equivalents represent shares issuable upon the assumed exercise of
dilutive stock options and warrants. Common stock equivalents have been
excluded from loss per share calculations as their inclusion would be
antidilutive.
4. SUBSEQUENT EVENT
In September 1997 the Company issued twenty-three warrants for 1,050,000
shares with an exercise price of $6.25 per share together with 1,050,000
shares of common stock in a private placement. The warrants contain a
call feature which allows the Company to call each warrant for $.25 if
the Company's common stock trades above an average of $8.25 for 10
consecutive days. In April, the Company's common stock did trade above
the threshold amount and on April 28, 1998 the Company notified the
holders that the warrants were being called.
The holders of the warrants have 20 days after this notification to
either exercise the warrants or notify the Company of their intent to
exercise, or the warrants can be called at $.25. The Company has agreed
to allow the holders to defer the actual exercise of the warrant until 5
days after the underlying shares have been registered. Should all
warrant holders convert their warrants into common stock, the Company
would receive approximately $6,500,000 in exchange for an additional
1,050,000 shares of common stock.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission and in the Company's written and
oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" within the meaning of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended, and the Company intends that such forward-looking statements be
subject to the safe harbors created thereby. The words "believe," "expect"
and "anticipate" and similar expressions identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance, but are subject to many
uncertainties and factors relating to the Company's operations and business
environment which may cause the actual results of the Company to be
materially different from any future results expressed or implied by such
forward-looking statements. Examples of such uncertainties include, but are
not limited to, changes in customer demand and requirements, new product
announcements, interest rate fluctuations, changes in federal income tax laws
and regulations, competition, industry specific factors and world wide
economic and business conditions. For a more comprehensive list of
uncertainties, see the section entitled "Certain Important Factors" in the
Company's Report on Form 10-KSB for the year ended December 31, 1997. 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 MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1997:
Total revenue for the three months ended March 31, 1998 increased by
$4,713,000 to $14,975,000 as compared to revenue of $10,262,000 for the three
months ended March 31, 1997. The increase resulted primarily from the
acquisition of several companies subsequent to the first quarter of 1997.
Revenue at the Company's existing Southeastern and Western Regions also
increased from the prior year by approximately $2,500,000. Offsetting these
increases were the sales of the Company's Datatech subsidiary which decreased
by almost $5,000,000 from the prior period due to the closing of all
remaining Datatech operations by March 31, 1998.
The gross profit margin for the three months ended March 31, 1998 was 22.4%
compared to 17.1% for the three months ended March 31, 1997. The increase in
gross profit margin resulted from higher margins at the businesses acquired
subsequent to the first quarter of 1997 as well as improved margins at
existing operations.
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Operating expenses increased by $1,238,000 to $3,446,000 compared to
operating expenses of $2,208,000 for the three months ended March 31, 1997.
The increase in operating expenses resulted primarily from the inclusion of
the companies acquired in 1997, operating expenses at the Company's Network
Operating Center as well as increased corporate costs reflecting the
Company's continued growth activites. These increases were offset by reduced
operating expenses related to the wind-down of Datatech.
Net interest expense of $98,000 in the current quarter was higher than the
expense of $46,000 during the three months ended March 31, 1997. The
increase is due to increased working capital requirements in 1998.
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
financial 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
Four Corners Technology, Inc., Hi-Tech Connections, Inc., DataComm
Associates, Inc., and Telecom Associates, Inc. acquisitions (which were
consumated at various dates throughout 1997) had taken place as of the
beginning of the three month period ended March 31, 1997.
PRO FORMA FINANCIAL DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Revenue $14,975,000 $15,204,000
Net Loss (187,000) (393,000)
Net Loss per share (.02) (.04)
</TABLE>
COMPARISON OF PRO FORMA FINANCIAL DATA FOR THE THREE MONTHS ENDED MARCH 31,
1998 AND 1997
Total pro forma revenue for the three months ended March 31, 1998 decreased
by $229,000 to $14,975,000 compared to pro forma revenue of $15,204,000 for
the three months ended March 31, 1997. The decrease is due primarily to the
reduced 1998 Datatech revenue which dropped by almost $5,000,000 from 1997.
Offsetting this increase was higher revenue in all of the remaining regions.
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<PAGE>
The gross profit margin as a percentage of revenue for the three months ended
March 31, 1998 was 22.1% which was slightly higher than the 20.3% pro forma
gross profit margin for the three months ended March 31, 1997. The increased
margin resulted from the reduced proportion of Datatech sales which carried a
lower margin than the remaining sales.
Pro forma operating expenses increased slightly by $16,000 to $3,446,000
compared to pro forma operating expenses of $3,430,000 for the three months
ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The level of cash and cash equivalents decreased by $125,000 from $366,000 at
December 31, 1997 to $241,000 on March 31, 1998. The Company's short-term
borrowings under its bank line at State Street increased by $202,000 to
$4,946,000 at March 31, 1998. 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 March 31, 1998, the borrowing base
was approximately $7,100,000.
Cash used for operating activities was $241,000 for the first three months of
1998 reflecting the $187,000 net loss offset by approximately $169,000 of
non-cash charges and a increase in other working capital items of $223,000.
Accounts receivable increased by $581,000 reflecting higher sales in February
and March. This increase was offset by a decrease in inventory of $495,000 as
the Company continues to reduce its investment in inventories.
Cash provided by financing activities of $238,000 was primarily related to an
increase in the bank line as well as minor stock issuances upon the exercise
of stock options.
Subsequent to the end of the quarter the Company issued a notice calling in
warrants for 1,050,000 shares of common stock. The Company expects that the
warrant holders will convert their warrants which will result in net cash
proceeds to the Company of approximately $6,500,000. These funds will be
used to pay down the outstanding credit line, with the remainder being used
for general corporate purposes. The Company anticipates that these funds,
together with its existing line of credit arrangement, will be sufficient to
fund both short-term and long-term working capital requirements.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Eltrax Systems, Inc.
Date: May 12, 1998 /s/ Nicholas J. Pyett
----------------------------------
Nicholas J. Pyett
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 241,125
<SECURITIES> 0
<RECEIVABLES> 9,934,513
<ALLOWANCES> 0
<INVENTORY> 3,804,072
<CURRENT-ASSETS> 14,735,553
<PP&E> 920,277
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,571,529
<CURRENT-LIABILITIES> 14,209,928
<BONDS> 0
0
0
<COMMON> 108,563
<OTHER-SE> 7,253,038
<TOTAL-LIABILITY-AND-EQUITY> 21,571,529
<SALES> 14,974,873
<TOTAL-REVENUES> 14,974,873
<CGS> 11,617,955
<TOTAL-COSTS> 11,617,955
<OTHER-EXPENSES> 3,445,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,467
<INCOME-PRETAX> (187,246)
<INCOME-TAX> 0
<INCOME-CONTINUING> (187,246)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (187,246)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
