U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Form 10-QSB
(Mark One)
/x/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996.
-------------------
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________ to _________
Commission file number 0-15929
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DATATREND SERVICES, INC.
------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 11-2726109
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1515 Washington Street, Braintree, MA 02184
-------------------------------------------
(Address of Principal Executive Offices)
(617) 691-1200
--------------
(Issuer's Telephone Number, Including Area Code)
____________________________________________
(Former Name, Former Address and Former Fiscal Year, if changed
Since Last Report)
Check whether the issuer: (1) filed all required reports 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 filing requirements forth past 90 days,
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan.
Yes ______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity as of the last practical date: Common Stock, $0.01 par value
4,712,795 shares at November 12, 1996. -----------------------------
- --------------------------------------
Traditional Small Business Disclosure Format (Check One)
Yes X No
---- ----
FORM 10 QSB QUARTERLY REPORT
----------------------------
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
INDEX
-----
Part I: Financial Information Page
Item 1.
Consolidated Balance Sheet - September 30, 1996 and
December 31, 1995 2
Consolidated Statement of Operations - Three Months and
Nine Months Ended September 30, 1996 and September 30, 1995. 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statement of Cash Flows - Nine Months Ended
September 30, 1996 and September 30, 1995 6
Notes to the Financial Statements 7
Item 2.
Management Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II Other Information
Items 1-6 11
Signatures 11
Datatrend Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
<S> <C> <C>
Current Assets
Cash $ 922,947 $ 374,628
Accounts Receivable 4,389,139 4,297,413
Inventories 5,727,245 6,092,711
Advances to Vendors - 594,216
Deferred Tax Asset (Note 2) 100,000 100,000
Other Current Assets 283,263 499,543
----------- -----------
Total Current Assets $11,422,594 $11,958,511
----------- -----------
Property and Equipment
Property and Equipment at Cost $ 789,161 $ 331,767
Accumulated Depreciation (228,437) (128,464)
----------- -----------
Property and Equipment, Net $ 560,724 $ 203,303
----------- -----------
Other Assets $ 82,454 $ 68,134
----------- -----------
Total Assets $12,065,772 $12,229,948
=========== ===========
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
<S> <C> <C>
Current Liabilities
Notes Payable, Bank $ 1,405,713 $ 1,000,000
Notes Payable, Other 1,799,701 1,137,500
Accounts Payable 5,298,201 6,873,465
Accrued Expenses 474,151 410,496
Capital Leases, Current 92,703 40,639
----------- -----------
Total Current Liabilities $ 9,070,469 $ 9,462,100
----------- -----------
Other Liabilities $ - $ -
----------- -----------
Stockholders' Equity
Common Stock $ 47,138 $ 47,138
Additional Paid in Capital 2,343,606 2,343,606
Retained Earnings 604,559 377,104
----------- -----------
Total Stockholders' Equity $ 2,995,303 $ 2,767,848
----------- -----------
Total Liabilities and Stockholders' Equity $12,065,772 $12,229,948
=========== ===========
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
<S> <C> <C> <C> <C>
Sales $7,585,153 $6,637,356 $25,597,444 $19,805,727
Cost of Sales $6,758,225 $5,714,800 $22,172,128 $17,143,041
---------- ---------- ----------- -----------
Gross Profit $ 826,928 $ 922,556 $ 3,425,316 $ 2,662,686
Service Revenue $1,407,310 $ 247,415 $ 3,733,077 $ 288,921
---------- ---------- ----------- -----------
Total $2,234,238 $1,169,971 $ 7,158,393 $ 2,951,607
---------- ---------- ----------- -----------
Operating Expenses $2,687,650 $1,275,370 $ 6,807,024 $ 3,154,774
---------- ---------- ----------- -----------
Operating Income (Loss) $ (453,412) $ (105,399) $ 351,369 $ (203,167)
---------- ---------- ----------- -----------
Other Income and (Expense)
Other Income 11,096 9,945 6,987 26,281
Interest Expense (82,611) (103,702) (82,611) (193,684)
---------- ---------- ----------- -----------
Total Other Income and (Expense) $ (71,515) $ (93,757) $ (75,624) $ (167,403)
---------- ---------- ----------- -----------
Income (Loss) From Continuing Operations $ (524,927) $ (199,156) $ 275,745 $ (370,570)
Before Provision for Income Taxes
Income Tax Expense $ (29,500) $ 10,540 $ 48,290 $ 35,980
---------- ---------- ----------- -----------
Income (Loss) from Continuing Operations $ (495,427) $ (209,696) $ 227,455 $ (406,550)
Income (Expense) From Discontinued Operations - 12,530 55,963
---------- ---------- ----------- -----------
Net Income (Loss) $ (495,427) $ (197,166) $ 227,455 $ (350,587)
========== ========== =========== ===========
Weighted Average Number of Shares 4,712,795 4,712,795 4,712,795 4,189,262
Earnings Per Share
Continuing Operations $ (0.11) $ (0.04) $ 0.05 $ (0.10)
Discontinued Operations $ - $ - $ - $ 0.01
---------- ---------- ----------- -----------
Net $ (0.11) $ (0.04) $ 0.05 $ (0.09)
========== ========== =========== ===========
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
(Unaudited)
Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Common Stock APIC Retained Earnings Total
Shares Par Value
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 4,712,795 $47,138 $2,343,606 $377,104 $2,767,848
--------------------------------------------------------------------------
Net Income for the Period Ended
September 30, 1996 $ - $ - $227,455 $ 227,455
--------------------------------------------------------------------------
Balance September 30, 1996 4,712,795 $47,138 $2,343,606 $604,559 $2,995,303
==========================================================================
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended September 30
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) $ 227,455 $ (350,587)
Adjustments to Net Income
Add Depreciation and Amortization 107,739 51,035
Changes in Working Capital 3,176,716 (1,688,469)
----------- -------------
Cash Provided (Used) by Operations $ 3,511,910 $ (1,988,021)
----------- -------------
Cash Flows from Investing Activities
Acquisition of Property and Equipment $ (373,380) $ (84,148)
Other Assets (22,086) (43,467)
----------- -------------
Cash Provided (Used) by Investing
Activities $ (395,466) $ (127,615)
----------- -------------
Cash Flows from Financing Activities
Advances from Notes Payable $ 7,198,631 $ 18,180,438
Payments on Notes Payable (9,734,806) (17,808,095)
Distribution to S Corporation Shareholders - (137,000)
Purchase and Retirement of Treasury Stock - (210,000)
Proceeds From Business Merger - 2,146,395
Capital Lease Obligations (31,950) (9,458)
------------ -------------
Cash Provided (Used) by Financing
Activities $ (2,568,125) $ 2,162,280
------------ -------------
Net Increase (Decrease) in Cash $ 548,319 $ 46,644
Cash, Beginning of the Period $ 374,628 $ 2,015
------------ -------------
Cash, End of the Period $ 922,947 $ 48,659
============ =============
</TABLE>
See Accompanying Notes to the Financial Statements
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------
Note 1 - The Company
- --------------------
Datatrend, Inc. was incorporated on April 26, 1993 and commenced operations
on that date. Its principal business activity is the wholesale distribution
and retail sale of new, refurbished and used computer hardware throughout
the United States, Canada, and Europe. The Company is also involved in
performing service contracts involving refurbishing computer equipment for
manufacturers and retailers.
In January of 1995, Datatrend, Inc., through a reverse acquisition, was
merged with Babystar, Inc., a publicly traded company ('the Merger").
Babystar, Inc. no longer has any operations. Babystar's net loss for the
three months ended September 30, 1995 is included in the Company's results
for the three months ended September 30, 1995. In November 1995, Babystar,
Inc. changed its name to Datatrend Services, Inc. References to " the
Company" shall apply to Datatrend Services Inc., or, for the period prior to
February 1995, Datatrend, Inc.. Datatrend, Inc. survives as the wholly owned
and sole operating subsidiary of the Company.
In connection with the Merger, certain former Datatrend, Inc. shareholders
received 1,200,000 shares of the Company's common stock, and may receive up
to an additional 1,200,000 shares if after tax earnings reach certain
levels.
The Company also has 4,677,700 stock warrants outstanding, which have
exercise prices between $.5625 and $5.25 per share, with expiration dates
between July, 1997 and June, 2006.
Note 2 - Accounting Policies and Disclosures
- --------------------------------------------
Basis of Presentation - The results of operations for the interim periods
shown in this report are not necessarily indicative of the results to be
expected for the fiscal year. In the opinion of management, the information
contained herein reflects all adjustments necessary to make the results of
operations for the interim periods a fair statement of such operations. All
such adjustments are of a normal recurring nature.
The accompanying financial statements do not contain all of the disclosures
required by generally accepted accounting principles and should be read in
conjunction with financial statements and related notes included in the
Company's annual report on form 10-KSB for the year ended December 31, 1995.
Revenue Recognition - The Company recognizes revenue when its products are
shipped to its customers. Service revenue is recognized when services are
provided to customers.
Note 3 - Notes Payable
- ----------------------
During the year ended December 31, 1994, the Company maintained a line of
credit with the bank which permitted borrowings of up to $5,000,000, and was
collateralized by substantially all of the assets of the Company. In June
of 1995, the Company entered into a similar loan arrangement with another
bank. At September 30, 1996, the Company has repaid these lines in full and
closed them out.
The Company does not believe it will be adversely affected by the closing of
the lines of credit. Effective April 5, 1996, the Company converted
$3,536,154 of trade accounts payable into term notes payable. At September
30, 1996 the amount outstanding on the notes payable is $1,799,701. In
addition, effective April 30, 1996, the Company has obtained a $2,000,000
floor plan line of credit to finance the purchase of inventory.
Note 4 - Contingencies
- ----------------------
The Company has filed an action in United States District Court against a
supplier of computer products, Jabil Circuit, Inc., for breach of contract
and related damages. The Company is seeking damages in excess of one half
million dollars. Jabil Circuit Inc. has filed a counterclaim against the
Company seeking damages in excess of 2 million dollars. The Company
believes it will not be materially affected by the outcome of this lawsuit.
Note 5 - Accounts Receivable
- ----------------------------
The Company had accounts receivable totaling $5,239,901 and has provided an
allowance for doubtful accounts of $850,762 , for a net accounts receivable
of $4,389,139 as of September 30, 1996. The allowance for doubtful accounts
was $525,762 at June 30, 1996 and was increased by $325,000 during the
quarter ended September 30, 1996. This significant increase is due to
management's evaluation of several large accounts, the collectibility of
which is uncertain based upon recent information obtained by management.
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Liquidity and Capital Reserves
- ------------------------------
Working Capital was $2,352,000 at September 30, 1996 as compared to
$2,496,000 at December 31, 1995 which represents a decrease of $144,000.
This decrease in working capital resulted primarily from the purchase of
fixed assets. In addition, the Company terminated its line of credit
relationships with its previous banks, paying off the entire balance of that
line of credit prior to the date hereof.
The Company previously maintained a line of credit with a local banking
institution. The balance of that line of credit at September 30, 1996 and
December 31, 1995 was $-0- and $1,000,000 respectively. The Company has
terminated that line of credit relationship. It is not believed that the
closing of this line of credit will adversely affect the Company. Effective
April 1, 1996 the Company was able to convert approximately $3,600,000 of
trade accounts payable of a particular vendor into a twelve month term note
payable. The balance of this note payable is approximately $1,800,000 as of
September 30, 1996. In addition, effective April 30, 1996, the Company has
entered into a financing arrangement with a commercial finance provider
which allows the Company access to up to $2,000,000 for the purchase of
certain inventory. Based upon the Company's working capital, reasonable
expected levels of future revenues, and the availability of sums to the
Company under the financing arrangements discussed above, the Company's
management believes that it will be able to meet the Company's capital needs
through September 30, 1997.
Results of Operations
- ---------------------
Effective February 1, 1995, the Company acquired all of the capital stock of
Datatrend, Inc. ("DTI") by merging a wholly owned subsidiary of the Company
into DTI. DTI is a Massachusetts corporation, incorporated under the laws of
the Commonwealth of Massachusetts in April 1993. DTI is engaged in the
wholesale and retail distribution of new, used and refurbished computer
hardware and components. Substantially all of the Company's business
operations are currently conducted by its wholly owned subsidiary, DTI. For
financial reporting purposes, the Merger of Babystar Inc. and DTI has been
treated as if DTI acquired Babystar Inc. Any references to the Company made in
this management discussion and in the accompanying financial statements shall
apply to Datatrend Services Inc., or, for the period prior to February 1995,
DTI. DTI survives as the sole operating subsidiary of the Company.
Substantially all of the Company's assets are included in inventory and
accounts receivable. Inventory values are $5,727,000 and $6,092,000, at
September 30, 1996 and December 31, 1995, respectively. This represents a
decrease of $ 365,000, or 6% during the first three quarters of 1996. This
decrease is due primarily to the seasonal sales cycle experienced in the
third quarter of 1996. Accounts receivable were $4,389,000 at September 30,
1996 and $4,297,000 at December 31, 1995, increasing $92,000, or 2%.
Management does not consider this increase material to the financial
statements. Other current assets, including advances to vendors, decreased
$811,000 to $383,000 at September 30, 1996 from $1,194,000 at December 31,
1995. This decrease is primarily due to the reduction in advances to
vendors as a result of the receipt of the associated inventory.
Accounts payable at September 30, 1996 and December 31, 1995 were $5,298,000
and $6,873,000, an decrease of $1,575,000, or 23%. The reduction in accounts
payable includes almost $3,600,000 in accounts payable to one vendor that
was converted into a one year note payable in April of 1996. Exclusive of
the note conversion accounts payable increased during the period. The
increased accounts payable has been offset by increases in cash and fixed
assets.
The Company has paid off $3,937,000 in notes payable during 1996. At
December 31, 1995, the Company had a short term note payable in the amount
of $1,137,500 to an individual and $1,000,000 to the bank from the revolving
credit agreement that were repaid in full during 1996. In addition the
Company has paid approximately $1,800,000 to the vendor whose accounts
payable was converted to a note payable.
Revenues, including product sales and service revenue, for the nine months
ended September 30, 1996 and 1995 respectively were $29,330,000 and
$20,095,000. This represents an increase in revenues of $9,235,000 or 46%.
This increase was due in part to a significant amount of approximately
$3,733,000 in service revenue recognized by the Company during the first
three quarters of 1996, as discussed below. The additional increase in
sales was due to increased volume of product sales to a variety of
customers.
In the first three quarters of 1996, the Company earned $3,733,000 in service
revenue, refurbishing the inventory of other manufacturers. The Company
earned $289,000 in service revenue in the first three quarters of 1995, and
$559,000 for the entire fiscal year 1995. The service component of the
Company's activities results in higher margins for the same level of revenue
activity, or, conversely, requires less revenues to earn margins equivalent
to an inventory sale.
For the nine months ended September 30, 1996 and September 30, 1995, cost of
sales were $22,172,000 and $17,143,000 an increase of $5,029,000, or 29%. The
resulting gross profits on product sales were $3,425,000, or 13% of product
sales, in the first three quarters of 1996, and $2,663,000, or 13% of product
sales, for the same period in 1995. During the first two quarters of 1996 the
overall gross margin increased when compared to 1995. In the third quarter of
1996 the company experienced a decrease in the sales value of certain
inventories. The decrease in sales value can be directly attributed to the
price cuts leading manufacturers made in their retail pricing for new computer
products in the late spring and early summer of this year.
Operating expenses for the first three quarters of 1996 and 1995 were
$6,807,000 and $3,155,000 respectively. The increase of $3,652,000, or 116%
was a result of several major factors. First, the Company engages in
increased activity in refurbishing its purchased inventory. This activity
requires increased personnel levels, as well as a greater level of equipment
and supplies. Second, the Company's aforementioned increased service
business and related activities result in additional expenses, primarily for
increased labor and facilities to perform service related functions. In
addition to these factors, another significant factor in the loss presented in
the current quarter is an increase in the Comapny's allowances for doubtful
accounts. During the third quarter of 1996 $325,000 was added to the allowance.
During the first two quarters of 1996 the additions to the allowance were a
total of $120,000. Management's decision to increase the allowance was related
to changes in payment histories of several large customers and additional
information supplied by these customers regarding their financial position and
ability to meet future payment schedules. The Company also incurred
approximately $50,000 of legal fees in pursuing a civil action filed against
Jabil Circuit, Inc. The civil action is expected to go to trial early in 1997.
The Company's current operations have resulted in a profit in the first
three quarters of 1996 of approximately $227,000, or $.05 per share, as
compared to a loss during the same period in 1995 of approximately
($351,000) or ($.09) per share. Management attributes this increase in
profitability to several factors, however, the single largest contributor to
the profitability is the increased revenues from service contracts.
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
Part II: OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings
- ------- -----------------
As previously reported and more fully discussed in the Company's form 10-KSB
for the year ended December 31, 1995, the Company has filed an action in the
United Stated District Court entitled Datatrend, Inc. v. Jabil Circuit, Inc.
(Civil Action No. 95-11764DPW). This case is expected to go to trial in early
1997.
The Company is not currently involved in any other material legal
proceedings.
Item 2. Changes in Securities
- ------- ---------------------
None.
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the third
quarter of 1996.
Item 5. Other Information
- ------- -----------------
None.
Item 6. Exhibits and Reports of Form 8-K
- ------- --------------------------------
No reports on form 8-K were field during the third quarter of 1996.
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 THEREUNTO DULY AUTHORIZED.
DATATREND SERVICES, INC.
/s/ Mark A. Hanson
________________________________
Mark A. Hanson
President, Chief Executive Officer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 922,947
<SECURITIES> 0
<RECEIVABLES> 4,389,139
<ALLOWANCES> 0
<INVENTORY> 5,727,245
<CURRENT-ASSETS> 11,422,594
<PP&E> 789,161
<DEPRECIATION> 228,427
<TOTAL-ASSETS> 12,065,772
<CURRENT-LIABILITIES> 9,070,469
<BONDS> 0
0
0
<COMMON> 47,138
<OTHER-SE> 2,948,165
<TOTAL-LIABILITY-AND-EQUITY> 12,065,772
<SALES> 29,330,521
<TOTAL-REVENUES> 29,330,521
<CGS> 22,172,128
<TOTAL-COSTS> 6,807,024
<OTHER-EXPENSES> 75,624
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,611
<INCOME-PRETAX> 275,745
<INCOME-TAX> 48,290
<INCOME-CONTINUING> 227,455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 227,455
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
