<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 June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ________________ to _________
Commission file number 0-22190
---------------------------------------
ELTRAX SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1484525
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 Galleria Parkway, Suite 300, Atlanta, GA 30339
(Address of principal executive offices)
(678) 589-3585
(Issuer's telephone number)
--------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No .
----- -----
Shares of the Registrant's Common Stock, par value $.01 per share, outstanding
as of August 9, 2000: 25,841,484.
<PAGE>
ELTRAX SYSTEMS, INC.
FORM 10-Q
INDEX
Part I. FINANCIAL INFORMATION
Page No.
--------
Item 1.
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999................................................. 2
Condensed Consolidated Statements of Operations for the three months
and for the six months ended June 30, 2000 and 1999............... 3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999...................................... 4
Notes to the Condensed Consolidated Financial Statements............ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 19
Item 2. Changes in Securities and Use of Proceeds....................... 19
Item 6. Exhibits and Reports on Form 8-K................................ 19
Signature Page........................................................... 20
Exhibit Index............................................................ 21
<PAGE>
PART I-ITEM 1: FINANCIAL STATEMENTS
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
ASSETS:
<S> <C> <C>
Current assets:
Accounts receivable, net $ 20,869,063 $ 18,053,692
Inventories, principally finished goods 622,014 933,497
Other current assets 1,650,494 952,291
Assets held for sale 12,344,796 22,954,595
------------ ------------
Total current assets 35,486,367 42,894,075
Furniture and equipment, net 9,586,070 3,991,653
Intangibles, net 8,467,290 9,168,385
------------ ------------
Total assets $ 53,539,727 $ 56,054,113
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 13,091,104 $ 9,468,882
Advance from Cereus Technology Partners, Inc. 4,000,000 -
Accounts payable 16,482,291 9,360,813
Accrued compensation 2,362,116 1,880,876
Accrued expenses 2,739,607 3,733,730
Unearned revenue and customer deposits 1,851,749 4,283,039
Current portion of long-term debt 182,261 389,587
------------ ------------
Total current liabilities 40,709,128 29,116,927
Long-term debt - 54,068
------------ ------------
Total liabilities 40,709,128 29,170,995
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
25,802,378 and 23,808,415 shares issued and outstanding 258,023 238,086
Additional paid-in capital 93,180,109 75,678,836
Accumulated deficit (80,607,533) (49,033,804)
------------ ------------
Total shareholders' equity 12,830,599 26,883,118
------------ ------------
Total liabilities and shareholders' equity $ 53,539,727 $ 56,054,113
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue $ 17,729,115 $15,059,114 $ 35,797,641 $28,703,404
Cost of revenue 13,321,293 9,975,606 25,047,897 19,007,602
------------ ----------- ------------ -----------
Gross profit 4,407,822 5,083,508 10,749,744 9,695,802
Operating expenses:
Direct expenses 12,044,633 3,848,181 19,267,148 7,660,498
Research and development 87,336 385,715 697,016 650,452
Corporate and administrative 3,277,101 1,428,217 5,379,950 2,862,968
Amortization of intangibles 351,238 305,950 702,180 611,604
Reorganization costs 1,500,000 425,000 1,500,000 4,025,000
Transaction costs - - - 2,288,379
------------ ----------- ------------ -----------
Total operating expenses 17,260,308 6,393,063 27,546,294 18,098,901
------------ ----------- ------------ -----------
Operating loss from continuing operations (12,852,486) (1,309,555) (16,796,550) (8,403,099)
Interest expense, net (194,239) (69,568) (287,940) (140,003)
Loss on disposal of assets (41,628) - (41,628) -
------------ ----------- ------------ -----------
Loss from continuing operations
before income taxes (13,088,353) (1,379,123) (17,126,118) (8,543,102)
Income tax benefit - - - 184,644
------------ ----------- ------------ -----------
Loss from continuing operations (13,088,353) (1,379,123) (17,126,118) (8,358,458)
------------ ----------- ------------ -----------
Discontinued operations:
(Loss) income from discontinued
operations, net of income taxes (2,747,062) 1,622,987 (3,947,611) 2,491,109
Estimated loss on disposal of discontinued
operations, net of income taxes (10,500,000) - (10,500,000) -
------------ ----------- ------------ -----------
Total discontinued operations, net of income taxes (13,247,062) 1,622,987 (14,447,611) 2,491,109
------------ ----------- ------------ -----------
Net (loss) income $(26,335,415) $ 243,864 $(31,573,729) $(5,867,349)
============ =========== ============ ===========
Net loss per common share
- basic and diluted:
Loss from continuing operations $ (0.51) $ (0.06) $ (0.69) $ (0.35)
(Loss) income from discontinued operations (0.11) 0.07 (0.16) 0.10
Loss on disposal of discontinued operations (0.41) - (0.42) -
------------ ----------- ------------ -----------
Net loss per common share
- basic and diluted $ (1.03) $ 0.01 $ (1.27) $ (0.25)
============ =========== ============ ===========
Weighted average shares outstanding
- basic and diluted 25,511,858 23,720,311 24,789,876 23,710,406
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ELTRAX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30,
2000 1999
------------- ------------
<S> <C> <C>
Operating Activities:
Continuing operations:
Net loss from continuing operations $(17,126,118) $(8,358,458)
Adjustments to reconcile net loss from continuing operations to net
cash used in continuing operating activities:
Reorganization costs 1,500,000 -
Amortization of intangibles 702,180 611,604
Depreciation 747,361 444,427
Other 53,630 16,736
Changes in current operating items:
Accounts receivable, net (2,887,737) (1,436,158)
Inventories 311,483 862,760
Other current assets (698,203) (363,731)
Accounts payable 7,121,478 1,133,380
Accrued compensation 481,240 248,027
Accrued expenses (1,694,123) 497,270
Unearned revenue and customer deposits (2,431,290) (234,970)
------------- ------------
Net cash used in continuing operating activities (13,920,099) (6,579,113)
------------- ------------
Discontinued operations:
(Loss) income from discontinued operations (14,447,611) 2,491,109
Estimated loss on disposal of discontinued operations 10,500,000 -
Adjustment to reconcile (loss) income from discontinued operations
to net cash (used in) provided by discontinued operating activities 2,061,693 1,483,155
------------- ------------
Net cash (used in) provided by discontinued operating activities (1,885,918) 3,974,264
------------- ------------
Net cash used in operating activities (15,806,017) (2,604,849)
------------- ------------
Investing Activities:
Continuing operations:
Net cash used in investing activities for continuing operations -
Purchases of furniture and equipment, net (6,285,624) (378,056)
------------- ------------
Discontinued operations:
Software development costs capitalized (1,737,871) (484,110)
Purchases of furniture and equipment, net (195,524) (734,044)
------------- ------------
Net cash used in investing activities for discontinued operations (1,933,395) (1,218,154)
------------- ------------
Net cash used in investing activities (8,219,019) (1,596,210)
------------- ------------
Financing Activities:
Continuing operations:
Payments on long-term debt (261,394) (1,245,850)
Borrowings (payments) on credit line, net 3,622,222 (440,218)
Advance from Cereus Technology Partners, Inc. 4,000,000 -
Proceeds from issuances of common stock 16,709,208 76,927
Payments issued in lieu of fractional shares - (6,901)
------------- ------------
Net cash provided by (used in) financing activities
for continuing operations 24,070,036 (1,616,042)
------------- ------------
Discontinued operations:
Net cash used in financing activities for discontinued operations -
Payments on long-term debt (45,000) (124,498)
------------- ------------
Net cash provided by (used in) financing activities 24,025,036 (1,740,540)
------------- ------------
Decrease in cash and cash equivalents - (5,941,599)
------------- ------------
Cash and Cash Equivalents:
Beginning of period - 6,082,438
------------- ------------
End of period $ - $ 140,839
============= ============
</TABLE>
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
June 30, 2000
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
consolidated financial statements contain all necessary adjustments,
consisting only of those of a recurring nature, and disclosures to present
fairly the financial position as of June 30, 2000, and the results of
operations and cash flows for the periods ended June 30, 2000 and 1999. The
condensed consolidated financial statements include the accounts of Eltrax
Systems, Inc. and its subsidiaries, including Sulcus Hospitality
Technologies Corp. and subsidiaries ("Sulcus"), and Windward Technology
Group, Inc. ("Windward"), which merged with the Company in the first
quarter of 1999 in transactions accounted for as poolings-of-interests.
Significant intercompany transactions have been eliminated. Certain prior
year amounts in the consolidated financial statements and notes have been
reclassified to conform with the current year presentation. These
reclassifications had no effect on previously reported net income (loss) or
shareholders' equity.
The year-end condensed consolidated balance sheet was derived primarily
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-K for
the year ended December 31, 1999.
2. DISCONTINUED OPERATIONS
On July 19, 2000, the Company's board of directors formally determined to
dispose of its Hospitality Services Group ("HSG"). The Company expects to
sell HSG during fiscal year 2000. HSG is reported as a discontinued
operation, and the condensed consolidated financial statements have been
reclassified to segregate the net assets and operating results of the
business segment.
The estimated loss recorded during the six months ended June 30, 2000 on
the sale of HSG was $10.5 million, which included a reduction in asset
values of approximately $2.8 million and a provision for anticipated
closing costs and operating losses until disposal of approximately $7.7
million.
5
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2000
2. DISCONTINUED OPERATIONS, Continued
The loss on the sale of HSG of $10.5 million was based on estimates of the
proceeds expected to be realized on the sale. The amounts the Company may
ultimately realize could differ materially in the near term from the
amounts assumed in arriving at the loss on disposal of the discontinued
operations. Summary operating results of the discontinued operations (in
thousands) are as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $11,481 $17,171 $24,306 $33,216
Gross profit 4,794 8,571 10,165 15,734
Operating (loss) income (2,296) 1,759 (3,357) 2,822
Interest expense (204) (73) (334) (163)
Loss on disposal of assets (88) - (88) -
Income tax expense (159) (63) (169) (168)
------- ------- ------- -------
(Loss) income from
discontinued operations $(2,747) $ 1,623 $(3,948) $ 2,491
======= ======= ======= =======
</TABLE>
Net assets held for sale (in thousands) are as follows:
June 30, December 31,
2000 1999
-------- ------------
Current assets $ 15,374 $ 21,304
Furniture and equipment, net 2,288 2,714
Capitalized software, net 9,709 8,370
Intangibles, net 4,172 7,533
Current liabilities (11,816) (17,602)
Reserve for operating losses (8,200) -
Accumulated other comprehensive loss 818 636
-------- --------
Net assets held for sale $ 12,345 $ 22,955
======== ========
6
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2000
2. DISCONTINUED OPERATIONS, Continued
The Company has signed a letter of intent to sell its domestic lodging
systems business and its international operations. The lodging business
and international operations are components of HSG. The transaction will
be structured as a sale of assets and assumption of liabilities. The
completion of the transaction is subject to definitive agreements, the
completion of normal due diligence reviews, and other standard
requirements, all of which are in process.
3. MERGER WITH CEREUS TECHNOLOGY PARTNERS, INC.
On June 12, 2000, the Company agreed to merge its operations with Cereus
Technology Partners, Inc. ("Cereus"). The merger will be structured as a
tax-free reorganization and accounted for as a purchase. In accordance
with the terms of the merger agreement, Cereus has provided to the Company
a bridge facility of up to $5.0 million. Cereus has agreed to provide an
additional $5.0 million under the bridge facility, subject to PNC Bank
National Association ("PNC Bank"), the Company's senior lender, agreeing to
certain modifications to the Company's senior credit facility. At June 30,
2000 Cereus had advanced $4.0 million under the bridge facility.
In the merger, each Cereus share will be converted into 1.75 shares of the
Company's stock, but the exchange rate may be adjusted downward to 1.667
shares of the Company's common stock for each share of Cereus common stock
if Cereus does not, before September 1, 2000, provide the Company with the
additional $5.0 million in borrowing availability under the bridge facility
noted above. If the exchange rate is adjusted to 1.667 of the Company's
common stock for each share of Cereus common stock, then the exchange ratio
may be further adjusted downward if the Company sells, in one or more
transactions, all or any part of HSG for $8.0 million or more in cash in
the aggregate on or before the effective time of the merger.
4. LOAN FACILITY WITH PNC BANK, NATIONAL ASSOCIATION
For the quarter ended March 31, 2000, the Company was not in compliance
with the cumulative net cash flow covenant in its loan facility with PNC
Bank. On May 15, 2000 PNC Bank waived the non-compliance. In connection
with the waiver and the amendment described below, the Company paid PNC
Bank a fee of $250,000.
7
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2000
4. LOAN FACILITY WITH PNC BANK, NATIONAL ASSOCIATION, Continued
The Company was not in compliance with the net cash flow covenant for the
quarter ended June 30, 2000. In addition, the Company was not in
compliance with a covenant regarding year 2000 capital expenditures and a
covenant regarding maximum rental payments under lease arrangements. On
July 27, 2000, PNC Bank waived the non-compliance with each of these
covenants. Also on July 27, 2000, PNC Bank modified the covenants
regarding capital expenditures and rental payments for the balance of
fiscal year 2000. In connection with the waiver and covenant
modifications, the Company agreed to either (i) issue PNC Bank warrants to
purchase 12,532 shares of the Company's stock with certain registration
rights, or (ii) pay PNC a waiver and consent fee of $50,000. The Company
expects to obtain a modification to the net cash flow covenant that
contemplates the planned disposition of HSG, the funding of an additional
$5.0 million under the existing bridge facility between the Company and
Cereus and the revised operating plans for the TSG.
On May 15, 2000, PNC Bank and the Company amended the facility to increase
the requirement that the Company maintain undrawn availability under the
facility from at least $1.0 million at all times to at least $3.0 million
during the first and third month of each fiscal quarter and at least $2.0
million during the second month of each fiscal quarter. In connection with
the closing of the bridge facility with Cereus, PNC Bank and the Company
amended the PNC Bank facility to modify the undrawn availability covenant
to reduce the requirement that the Company maintain undrawn availability
under the facility to at least $1.0 million at all times before October 1,
2000. After that time, the covenant reverts to the staged requirements
discussed above. As a condition to Cereus's obligation to amend the bridge
facility to provide the Company with an additional $5.0 million in
borrowing availability under the bridge facility, PNC Bank has been
requested to maintain the undrawn availability covenant at $1.0 million.
5. PRIVATE PLACEMENT
On March 29, 2000, the Company sold 1,194,532 shares of its common stock to
27 accredited investors in a private placement for net proceeds of
approximately $13.0 million.
On June 29, 2000, the Company sold 180,000 shares of its common stock in a
private placement to an investor for net proceeds of $990,000.
8
<PAGE>
ELTRAX SYSTEMS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2000
6. OTHER RECENT EVENTS
On June 29, 2000, the Company announced that as part of its effort to
improve operational efficiencies and financial performance, it had
reorganized operations and eliminated approximately 100 positions held by
employees, as well as most positions held by contract professionals. As a
result of these actions, the Company recorded restructuring costs of
approximately $1.5 million during the three months ended June 30, 2000.
The Company expects the reduction in force, along with other cost reduction
initiatives implemented in the second quarter, will result in approximately
$12.0 million in annualized cash savings.
7. SUBSEQUENT EVENT
On July 27, 2000, the Company entered into an agreement with an investor to
issue $7.0 million of convertible senior subordinated notes. The notes are
due July 27, 2001, and carry warrants to purchase 364,584 shares of common
stock at an exercise price of $5.03 per share. The notes are convertible
into the Company's common stock at a price of $4.80 per share. The
conversion price is subject to adjustment upon occurrence of certain
events. The notes also have certain put and call features. Concurrent
with the execution of the agreement, $4.0 million dollars was funded by the
investor. An additional $1.0 million will be funded immediately upon
Eltrax's execution of a definitive agreement to sell all or part of its HSG
for proceeds of at least $8.0 million. The remaining $2.0 million will be
funded upon the closing of the merger with Cereus. The Company will file a
registration statement with the Securities and Exchange Commission within
30 days to register for resale the shares of common stock into which the
notes and warrants are convertible.
8. LITIGATION
The Company is involved in claims and proceedings, which are routine and
which in the aggregate are not deemed material to the Company's business or
financial affairs.
9
<PAGE>
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 that are not statements of historical facts are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "intend," "will" and
similar expressions are examples of words that identify forward-looking
statements. Forward-looking statements include, without limitation, statements
regarding our future financial position, business strategy and expected cost
savings. These forward-looking statements are based on our current beliefs, as
well as assumptions we have made based upon information currently available to
us.
Each forward-looking statement reflects our current view of future events and
is subject to risks, uncertainties and other factors that could cause actual
results to differ materially from any results expressed or implied by our
forward-looking statements. Important factors that could cause actual results
to differ materially from the results expressed or implied by any forward-
looking statements include:
- our ability to successfully penetrate the network, application and ASP
markets;
- Eltrax's ability to dispose of its hospitality services group;
- trends for the continued growth of the business of Eltrax and Cereus;
- our ability to successfully access the capital markets to fund the growth of
our business;
- our ability to enhance revenue and earnings growth;
- our ability to continue to successfully market existing products and
services, which may be adversely impacted by competition;
- our ability to integrate the two businesses and other prior and subsequent
mergers and acquisitions;
- our ability to successfully develop and market new products and services;
- our ability to expand our market for existing products and services;
- the effects of our accounting policies and general changes in generally
accepted accounting practices;
- our ability to fund continuing operating losses and capital requirements;
- general economic and business conditions; and
- other factors disclosed in our Form 10-K for the year ended December 31, 1999
and in our other filings with the Securities and Exchange Commission.
10
<PAGE>
All subsequent forward-looking statements relating to the matters described in
this document and attributable to us or to persons acting on our behalf are
expressly qualified in their entirety by such factors. We have no obligation to
publicly update or revise these forward-looking statements to reflect new
information, future events, or otherwise, except as required by applicable
Federal securities laws, and we caution you not to place undue reliance on these
forward-looking statements.
General
-------
Eltrax Systems, Inc. ("Eltrax" or the "Company") operates through two separate
business units: the Technology Services Group ("TSG") and the Hospitality
Services Group ("HSG"). On July 19, 2000, the Company's board of directors
formally determined to dispose of HSG. HSG is reported as a discontinued
operation and the condensed consolidated financial statements have been
reclassified to segregate the net assets and operating results of the business
segment. TSG operations as well as most corporate operations are reflected in
continuing operations. Related to the anticipated sale of HSG, the Company
recorded an estimated loss on disposal of assets of approximately $10.5 million.
In addition, in the second quarter, the Company announced a merger with Cereus
Technology Partners, Inc. ("Cereus") and that it had reorganized its operations
to improve the Company's operational efficiency and financial performance. The
Company eliminated approximately 100 positions held by employees, as well as
most positions held by contract professionals. This reduction in force, along
with other cost reduction initiatives, is expected to achieve approximately
$12.0 million in annualized cash savings. As a result of these actions, the
Company recorded a restructuring charge of approximately $1.5 million during the
three months ended June 30, 2000.
In 1999, the Company acquired two businesses in transactions accounted for as
poolings-of-interests, and recorded non-recurring merger-related transaction and
reorganization costs totaling $6.3 million. The Company believes such events
significantly affect the comparability of the Company's results of operations
from year to year. You should read the following discussion of our results of
operations and financial condition in conjunction with our condensed
consolidated financial statements and related notes thereto.
Consolidated Results of Operations
----------------------------------
Three Months Ended June 30, 2000, compared to Three Months Ended June 30,
1999
For the three months ended June 30, 2000, the Company's net loss totaled $26.3
million or $(1.03) per share, compared with net income of $244,000 and $.01 per
share, for the same period of 1999.
Continuing Operations
---------------------
Excluding one-time reorganization costs totaling $1.5 million and discontinued
operations, the net loss from continuing operations for the three months ended
June 30, 2000, totaled approximately $11.6 million. Excluding one-time
reorganization costs totaling $425,000, the loss from continuing operations for
the three months ended June 30, 1999, totaled approximately $954,000.
11
<PAGE>
Total revenue was $17.7 million in the three months ended June 30, 2000, an
increase of 17.7% from the same period of 1999. Gross profit decreased by
approximately $676,000 in the three months ended June 30, 2000, and was 24.9% of
revenue. The decrease in gross profit for the three months ended June 30, 2000,
was attributable primarily to a write-down of inventory of approximately $1.0
million. Excluding this one-time charge, gross profit increased $324,000 in the
three months ended June 30, 2000, and was 30.5% of revenue, compared with 33.8%
in the same period of 1999. The decreased gross profit percentage in the three
months ended June 30, 2000, when compared to June 30, 1999, resulted from
reduced margins for hardware and software sales.
Total operating expenses, excluding reorganization costs for the three months
ended June 30, 2000, were $15.8 million, an increase of $9.8 million from the
same period of 1999. An increase in TSG operating expenses of approximately $7.9
million resulted primarily from increased personnel and related costs, including
increased personnel and related costs incurred in connection with the Company's
investment in its Application Services Provider ("ASP") initiatives. Corporate
and administrative expenses increased approximately $1.9 million due to
increased marketing, and increased finance, human resources and administrative
costs related to promoting and supporting the Company's new strategic direction.
As a percent of revenue, total operating expenses, excluding reorganization
costs were 88.9% during the three months ended June 30, 2000, up from 39.6% in
the same period of 1999.
Discontinued Operations
-----------------------
Loss from discontinued operations was $2.7 million in the three months ended
June 30, 2000 compared to income of $1.6 million for the same period in 1999.
The loss is due primarily to decreased sales of hardware and software products.
In addition the Company recorded an estimated loss on disposal of discontinued
operations of $10.5 million, which included a reduction in asset values of
approximately $2.8 million and a provision for anticipated closing costs and
operating losses until disposal of approximately $7.7 million.
Six Months Ended June 30, 2000, compared to Six Months Ended June 30, 1999
For the six months ended June 30, 2000, the Company's net loss totaled $31.6
million or $1.27 per share, compared with a net loss of $5.9 million and $.25
per share, for the same period of 1999.
Continuing Operations
---------------------
Excluding one-time reorganization costs totaling $1.5 million and discontinued
operations, the net loss from continuing operations for the six months ended
June 30, 2000, totaled approximately $15.6 million. Excluding one-time
reorganization and transaction costs totaling $6.3 million, the loss from
continuing operations for the six months ended June 30, 1999, totaled
approximately $2.0 million.
Total revenue was $35.8 million in the six months ended June 30, 2000, an
increase of 24.7% from the same period of 1999. Gross profit increased by $1.1
million in the six months ended June 30, 2000, and was 30.0% of revenue. The
gross profit margin in the six months ended June 30, 2000, was negatively
affected by a write-down of inventory of approximately $1.0 million. Excluding
this one-time charge, gross profit increased $2.1 million in the six months
ended June 30, 2000, and was 32.8% of revenue, compared with 33.8% in the same
period of 1999. The decreased gross profit percentage in the six months ended
June 30, 2000, when compared to June 30, 1999, resulted from reduced margins for
hardware and software sales.
12
<PAGE>
Total operating expenses, excluding reorganization and transaction costs for the
six months ended June 30, 2000, were $26.0 million, an increase of $14.3 million
from the same period of 1999. An increase in TSG operating expenses of
approximately $11.7 million resulted primarily from increased personnel and
related costs, including increased personnel and related costs incurred in
connection with the Company's investment in its Application Services Provider
("ASP") initiatives. Corporate and administrative expenses increased
approximately $2.5 million due to increased marketing, and increased finance,
human resources and administrative costs related to promoting and supporting the
Company's new strategic direction. As a percent of revenue, total operating
expenses, excluding reorganization and transaction costs were 72.8% during the
six months ended June 30, 2000, up from 41.1% in the same period of 1999.
Discontinued Operations
-----------------------
Loss from discontinued operations was $3.9 million in the six months ended June
30, 2000 compared to income of $2.5 million for the same period in 1999. The
loss is due primarily to decreased sales of hardware and software products. In
addition the Company recorded an estimated loss on disposal of discontinued
operations of $10.5 million, which included a reduction in asset values of
approximately $2.8 million and a provision for anticipated closing costs and
operating losses until disposal of approximately $7.7 million.
13
<PAGE>
Liquidity and Capital Resources
-------------------------------
Summary
Liquidity is the measurement of the Company's ability to have adequate cash or
access to cash at all times in order to meet financial obligations when due as
well as to fund corporate expansion and other activities. Historically, the
Company has met its liquidity requirements through a combination of working
capital provided by operating activities, debt from third party lenders and
issuances of equity securities.
At June 30, 2000, the Company had a negative working capital position (excess of
current liabilities over current assets) of $5.2 million. The Company's net
cash position (deficit), defined as the sum of cash, cash equivalents and short-
term investments less short term borrowings and long-term debt, was $(17.3
million) at June 30, 2000, compared to $(9.9 million) at December 31, 1999.
Cash Flow
Cash used in operating activities during the six months ended June 30, 2000
totaled approximately $15.8 million. Cash used in continuing operations in the
six months ended June 30, 2000 totaled approximately $13.9 million while cash
used in discontinued operations in the six months ended June 30, 2000 totaled
approximately $1.9 million. The Company's use of cash in continuing operations
during 2000 resulted primarily from a net loss from continuing operations of
$17.1 million and was offset primarily by non-cash charges for depreciation and
amortization of $1.4 million, an accrual for reorganization costs of $1.5
million, and cash provided by operating items of approximately $203,000. The
use of cash in discontinued operations during 2000 resulted primarily from a net
loss from discontinued operations of approximately $14.4 million and was offset
primarily by an accrual for the estimated loss on the disposal of the
discontinued operations of $10.5 million and cash provided by operating
activities of approximately $2.1 million.
Cash used in operating activities during the six months ended June 30, 1999
totaled approximately $2.6 million. Cash used in continuing operations in the
six months ended June 30, 1999 totaled approximately $6.6 million while cash
provided by discontinued operations in the six months ended June 30, 1999
totaled approximately $4.0 million. The Company's use of cash in continuing
operations during 1999 resulted primarily from a net loss from continuing
operations of $8.4 million and was offset primarily by non-cash charges for
depreciation and amortization of $1.1 million, and cash provided by operating
items of approximately $707,000. The cash provided by discontinued operations
during 1999 resulted primarily from a net income from discontinued operations of
approximately $2.5 million and cash provided by operating activities of
approximately $1.5 million.
The Company used cash in investing activities in the six months ended June 30,
2000, of approximately $8.2 million, compared to $1.6 million for the same
period in 1999. For continuing operations, the Company spent approximately $6.3
million and $378,000 on purchases of furniture and equipment during 2000 and
1999, respectively. For discontinued operations, the Company spent
approximately $1.8 million and $484,000 on software development costs during
2000 and 1999, respectively, and approximately $196,000 and $734,000 on
purchases of furniture and equipment during the same periods, respectively.
14
<PAGE>
Cash provided by financing activities totaled approximately $24.1 million in the
six months ended June 30, 2000, compared to cash used in financing activities
of approximately $1.6 million for the same period in 1999. Borrowings on the
Company's credit line during the six months ended June 30, 2000, totaling
approximately $3.6 million, proceeds from the issuance of common stock totaling
approximately $16.7 million, and an advance from Cereus of $4.0 million were
offset by payments on long-term debt totaling $261,000. During 1999, reductions
of the credit line and payments of long-term debt totaled approximately $1.7
million, and were offset by proceeds from issuances of common stock of
approximately $77,000.
On March 14, 2000, the Company obtained a $20.0 million asset-based revolving
credit facility with PNC Bank. The facility is secured by substantially all of
the assets of the Company. The availability under the facility at the closing
was approximately $14.6 million. At June 30, 2000, the Company had
approximately $13.1 million outstanding under the PNC facility. In addition, in
the first quarter of fiscal year 2000, William P. O'Reilly, chairman of the
Board, made a bridge loan to the Company in the amount of $2.6 million, the
proceeds of which were used for the Company's short term working capital needs.
The Company used $7.5 million of the proceeds of the PNC facility to repay the
old facility in full, $2.6 million to repay the bridge loan to Mr. O'Reilly and
approximately $900,000 to repay other third party debt. Additional borrowings
on the Company's PNC credit line during the six months ended June 30, 2000,
totaled approximately $2.1 million.
The Company received a loan of $4.0 million from Cereus during the quarter ended
June 30, 2000 pursuant to a $5.0 million bridge facility. Cereus has agreed to
increase the amount available under the bridge facility, prior to the closing of
the merger, from $5.0 million to $10.0 million, subject to PNC Bank agreeing to
certain modifications to the PNC facility. The loan from Cereus is in the form
of a convertible subordinated note. The convertible subordinated notes bears
interest at prime plus 2.0%.
For the quarter ended March 31, 2000, Eltrax was not in compliance with the
cumulative net cash flow covenant in the PNC Bank facility. On May 15, 2000,
PNC Bank waived the non-compliance. In connection with the waiver and the
amendment described below, Eltrax paid PNC Bank a fee of $250,000.
Because the net cash flow covenant is cumulative, and because of additional
losses from continuing and discontinued operations in the second quarter, Eltrax
was not in compliance with the covenant for the quarter ended June 30, 2000. In
addition, Eltrax was not in compliance with a covenant regarding year 2000
capital expenditures and a covenant regarding maximum rental payments under
lease arrangements. On July 27, 2000 PNC Bank waived the non-compliance with
each of these covenants. Also on July 27, 2000, PNC Bank modified the covenants
regarding capital expenditures and rental payments for the balance of fiscal
year 2000. In connection with the waiver, Eltrax agreed to either (i) issue PNC
Bank warrants to purchase 12,532 shares of Eltrax common stock with certain
registration rights, or (ii) pay PNC Bank a waiver and consent fee of $50,000.
Eltrax expects to obtain modifications to the financial covenants that
contemplates the planned disposition of HSG, the funding of an additional $5
million under the existing bridge facility between Eltrax and Cereus as well as
the projected results of operations.
15
<PAGE>
On May 15, 2000 PNC Bank and Eltrax amended the facility to increase the
requirement that Eltrax maintain undrawn availability under the facility from at
least $1.0 million at all times to at least $3.0 million during the first and
third month of each fiscal quarter and at least $2.0 million during the second
month of each fiscal quarter. In connection with the closing of the bridge
facility with Cereus, PNC Bank and Eltrax amended the PNC Bank facility to
modify the undrawn availability covenant to reduce the requirement that Eltrax
maintain undrawn availability under the facility to at least $1.0 million at all
times before October 1, 2000. After that time, the covenant reverts to the
staged requirements discussed above. As a condition to Cereus's obligation to
amend the bridge facility to provide Eltrax with an additional $5.0 million in
borrowing availability under the bridge facility, PNC Bank has been requested to
maintain the undrawn availability covenant at $1.0 million.
On June 29, 2000 Eltrax announced that as part of its effort to prepare for the
merger, it had reorganized operations and eliminated approximately 100 positions
held by employees, as well as most positions held by contract professionals. As
a result of these actions, Eltrax recorded restructuring costs of approximately
$1.5 million in the second quarter. Eltrax expects the reduction in force, along
with other cost reduction initiatives implemented in the second quarter, will
result in approximately $12.0 million in annualized cash savings.
On June 29, 2000, Eltrax sold 180,000 shares of its common stock in a private
placement to an investor for net proceeds of $990,000.
On July 27, 2000, Eltrax entered into an agreement with an investor to issue
$7.0 million of convertible senior subordinated notes ("Convertible Subordinated
Notes" or "Notes"). The Notes are due July 27, 2001 and carry warrants to
purchase 364,584 shares of common stock at an exercise price of $5.03 per share.
The Notes are convertible into Eltrax's common stock at a price of $4.80 per
share. The conversion price is subject to adjustment upon the occurrence of
certain events. The Notes also have certain put and call features. Concurrent
with the execution of the agreement, $4.0 million dollars was funded by the
investor. An additional $1.0 million will be funded immediately upon Eltrax's
execution of a definitive agreement to sell all or part of its hospitality
services group for proceeds of at least $8.0 million. The remaining $2.0 million
will be funded upon the closing of the merger.
Short-term and Long-term Liquidity
Commencing in the second quarter, due to greater losses than anticipated in the
second quarter and the resultant shortage of available cash, the Company has not
made timely payments to all of its trade and other creditors. As of June 30,
2000, the Company had payables which were more than 30 days past due in the
amount of approximately $4.9 million relating to continuing operations. The
Company has negotiated deferred payment terms with most of these vendors.
The Company expects to meet its short-term working capital needs with borrowings
under the PNC and Cereus facilities, the proceeds from the sale of all or a
portion of HSG, and up to $3.0 million in proceeds from the funding of the
additional Convertible Subordinated Notes. The Company cannot meet its working
capital needs without the capital sources described above. The Company's ability
to access that capital is contingent on events, most of which are outside the
Company's control. For example, the Company has entered into a letter of intent
with respect to the sale of its lodging and international business and are in
discussions for the sale of Squirrel Systems, Inc. However, the consummation of
both of those transactions is contingent on the negotiation and execution of a
definitive agreement and the completion of due diligence and other matters
customary in transactions of that sort.
16
<PAGE>
While the Company expects to be able to close both of these transactions, there
can be no assurance that either or both of the transactions will close. Also,
there can be no assurance that the additional $3.0 million of Convertible
Subordinated Notes will be funded because the funding of $1.0 million of the
Notes is contingent on the execution of a definitive agreement for the sale of
all or a portion of HSG for gross proceeds of at least $8.0 million and the
funding of $2.0 million of the Notes is contingent on the closing of the merger
with Cereus.
Similarly, the Company's access to the additional $5.0 million of funding from
Cereus is contingent upon PNC Bank agreeing to certain modifications to the PNC
facility. While the Company expects to obtain the required modifications, there
can be no assurance that it will be successful in obtaining those modifications.
As such, there can be no assurance that the Company will have access to the
additional Cereus funding.
Finally, the Company's ability to access the PNC facility is contingent on its
compliance with the financial and other covenants and terms of that facility.
If the Company is in violation of the PNC facility, or does not have sufficient
eligible accounts receivable to support the level of borrowings it needs, the
Company will be unable to draw on the facility.
In the event any of these contingencies is not met or the Company is in
violation of the PNC facility so that the Company does not have access to any
one of these sources of capital through the remainder of the 2000 fiscal year,
the Company's ability to continue to operate would be jeopardized. In this
event, the Company would be forced to seek working capital from other sources to
fund delinquent payable balances and meet ongoing trade obligations. However,
there can be no assurance that other financing sources will be available to meet
the Company's needs at that time.
Even if the Company is able to meet its short-term capital needs from the
sources described above, the Company's ability to meet its long-term capital
needs will be subject to factors outside its control. Specifically, unless the
price of the Company's common stock increases significantly so that holders of
the Company's convertible debt are likely to convert such debt into common
stock, the Company will be required to restructure that debt or raise additional
equity capital to fund such debt repayment beginning in June 2001. The
principal amount of the convertible debt outstanding at August 10, 2000 was $9.0
million. In the event the balance of the Convertible Subordinated Notes and the
additional debt from the Cereus bridge facility is funded, the principal amount
of convertible debt outstanding would be $ 17.0 million. To the extent such
debt is not converted in full, or the Company is not able to restructure the
terms of such debt or obtain the necessary funds to retire it in full, the
Company does not expect that it will be able to meet its long-term obligations.
17
<PAGE>
ITEM 2: Quantitative and Qualitative Disclosures about Market Risk
Market Risk
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company has also not entered into financial instruments to manage and reduce
the impact of changes in foreign currency exchange rates and interest rates.
The Company may enter into such transactions in the future.
Interest Rate Risks
The Company's debt at June 30, 2000, primarily carries interest rates which vary
with the prime rate. Accordingly, any increases in the banks' prime rate will
reduce the Company's earnings. A 1.0% increase in the prime rate on the
Company's $13.1 million of bank debt at June 30, 2000 would result in an annual
expense increase of approximately $131,000.
Foreign Currency Risks
At June 30, 2000 the Company had foreign currency denominated assets and
liabilities of approximately $5.5 million and $2.2 million, respectively.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is also involved in other claims and proceedings, which are
routine and which in the aggregate are not deemed material to the
Company's business or financial affairs.
Item 2. Changes in Securities
---------------------
On June 29, 2000, the Company issued 180,000 shares of common stock in
a private placement to one accredited investor in a transaction exempt
from the registration requirements of the Securities Act of 1933, as
amended (the "Act"), pursuant to Section 4(2) of the Act and Rule 506
of Regulation D promulgated thereunder.
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
See Exhibit Index appearing elsewhere herein, which is
incorporated by reference.
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K during the quarter ended
June 30, 2000, which report was dated June 12, 2000. The Form 8-K
reported under Item 5 (Other Events) that the Company, Solemn
Acquisition Corporation ("Solemn"), a wholly-owned subsidiary of
the Company, and Cereus Technology Partners, Inc. ("Cereus") had
entered into an Agreement and Plan of Merger under which Cereus
would be merged into Solemn.
19
<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: August 14, 2000 /s/ William A. Fielder, III
-------------------------------------------
Chief Financial Officer
(duly authorized signatory and
Principal Financial and Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER ITEM METHOD OF FILING
--------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
4.1 Registration Rights Agreement dated Incorporated by reference to Exhibit
June 29, 2000 between Eltrax and 4.8 to Eltrax's registration
E.piphany, Inc. statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
4.2 Amended and Restated Registration Incorporated by reference to Exhibit
Rights Agreement dated June 23, 2000 4.9 to Eltrax's registration
between Eltrax and Cereus statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
10.1 First Amendment to Revolving Credit Incorporated by reference to Exhibit
and Security Agreement by and among 10.37 to Eltrax's registration
PNC Bank and Eltrax and certain of statement on Form S-4 (File No.
its subsidiaries dated May 15, 2000 333-43224)
--------------------------------------------------------------------------------------------------------------------
10.2 Second Amendment to Revolving Credit Incorporated by reference to Exhibit
and Security Agreement by and among 10.38 to Eltrax's registration
PNC Bank and Eltrax and certain of statement on Form S-4 (File No.
its subsidiaries dated June 23, 2000 333-43224)
--------------------------------------------------------------------------------------------------------------------
10.3 Bridge Loan and Security Agreement Incorporated by reference to Exhibit
dated as of June 14, 2000, between 10.43 to Eltrax's registration
Eltrax and Cereus statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
10.4 Amendment No. 1 to Bridge Loan and Incorporated by reference to Exhibit
Security Agreement dated as of June 10.44 to Eltrax's registration
14, 2000, between Eltrax and Cereus statement on Form S-4 (File No.
made as of June 23, 2000 333-43224)
--------------------------------------------------------------------------------------------------------------------
10.5 Amended and Restated Non-Negotiable Incorporated by reference to Exhibit
Subordinated Convertible Promissory 10.45 to Eltrax's registration
Note dated June 23, 2000 between statement on Form S-4 (File No.
Eltrax as maker and Cereus, as holder 333-43224)
--------------------------------------------------------------------------------------------------------------------
10.6 Subordination Agreement dated June Incorporated by reference to Exhibit
14, 2000 among Eltrax, Cereus and PNC 10.46 to Eltrax's registration
Bank, National Association statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
10.7 First Amendment to Subordination Incorporated by reference to Exhibit
Agreement dated June 23, 2000 among 10.47 to Eltrax's registration
Eltrax, Cereus and PNC Bank statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
10.8 Continuing Guaranty Agreement dated Incorporated by reference to Exhibit
June 14, 2000 by Solemn Acquisition 10.48 to Eltrax's registration
Corporation in favor of PNC Bank statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
10.9 Security Agreement dated June 14, Incorporated by reference to Exhibit
2000 by Solemn Acquisition 10.49 to Eltrax's registration
Corporation in favor of PNC Bank statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
10.10 Stock Pledge Agreement dated June 14, Incorporated by reference to Exhibit
2000 by and between Eltrax and PNC 10.50 to Eltrax's registration
Bank statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
EXHIBIT NUMBER ITEM METHOD OF FILING
--------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
--------------------------------------------------------------------------------------------------------------------
10.11 Subscription Agreement dated June 29, Incorporated by reference to Exhibit
2000 between Eltrax and E.piphany, 10.54 to Eltrax's registration
Inc. statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
10.12 Stockholders Proxy Agreement dated as Incorporated by reference to Exhibit
of June 12, 2000 among Cereus and 10.55 to Eltrax's registration
Eltrax' directors statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
10.13 Stockholders Proxy Agreement dated as Incorporated by reference to Exhibit
of June 12, 2000 among Eltrax and 10.56 to Eltrax's registration
Cereus's directors statement on Form S-4 (File No.
333-43224)
--------------------------------------------------------------------------------------------------------------------
27 Financial Data Schedule Filed herewith
--------------------------------------------------------------------------------------------------------------------
</TABLE>
22
