U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
/X/ Annual report under section 13 or 15 (d) of the Securities
Exchange Act of 1934 (Fee required):
For the fiscal year ended December 31, 1996
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/ / Transition report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (No fee required):
For the transition period from __________ to _____________
Commission file number 0-15929
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DATATREND SERVICES, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 11-2726109
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1515 Washington Street, Braintree, MA 02184
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(Address of Principal Executive Offices) (Zip Code)
(617) 691-1200
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(Issuer's Telephone Number, Including Area Code
Securities registered under Section 12(b) of the Exchange Act;
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Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock (par value $.01 per share) NASDAQ
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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
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Check if there is no disclosure of delinquent filers in response to
item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year $39,424,869
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days. (See definition of affiliate in Rule 12b-2 of the
exchange Act.)
$11,216,452 as of March 31, 1997
Note. If determining whether a person is an affiliate will
involve an unreasonable effort and expense, the issuer may calculate
the aggregate market value of the common equity held by non-
affiliates of reasonable assumptions, if the assumptions are stated.
APPLICABLE ONLY TO ISSUERS INVOLVED IN
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BANKRUPTCY PROCEEDINGS DURING THE
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PRECEDING FIVE YEARS
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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 confirmed by a court.
Yes No
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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 practicable date: Common Stock $0.01 par
value 4,712,795 shares at April 10, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part
II, etc.) into which the document is incorporated: (1) any annual report to
security-holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of
1933 ("Securities Act"). The listed documents should be clearly described
for identification purposes (e.g. annual report to security holders for
fiscal ended December 24, 1990).
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
Item 1. Description of Business
Business Development
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Datatrend Services, Inc. (the "Company") was incorporated in New York
in 1985 under the name of E & C Video Productions, Inc. The company's name
was changed to Star Classics, Inc. in 1987 and then to Star Mark, Inc. in
1991. Effective in March of 1993, the Company changed its name to Babystar
Inc. and was reincorporated in the state of Delaware. On November 14, 1995
the stockholders voted to approve a change of name from Babystar, Inc. to
Datatrend Services, Inc. The Company amended its Certificate of
Incorporation in November 1995 effecting this name change in the State of
Delaware.
Sale of Significant Asset. The Company was previously engaged in the
business of marketing a juvenile car seat for children through its wholly-
owned subsidiary, Travel Safety Children's Products, Inc.("Travel"). Due to
engineering challenges with the Company's car seat product, the Company
ceased production and on November 17, 1994 the Company completed the sale of
Travel to Travel Safety Corp. ("Purchaser"). At the closing, Purchaser paid
$136,000 to the Company and Purchaser delivered to the Company a non-
negotiable note (the "Note") in the amount of $640,000 payable over 14
months commencing December 26, 1994. The Note provided for interest at the
annual rate of 8.5%. The Company and Travel also entered into a License
Agreement pursuant to which Travel had the exclusive right to use car
seat patents owned by the Company. The License Agreement had a term of
seven and half years and provided for royalty payments of $2.00 per product
sold, with minimum royalty payments of $37,500 per calendar quarter
commencing July 1,1995. Effective August 1, 2002, the patents were to be
assigned to Travel, provided that all royalty and other payments required to
be made under the License Agreement have been made. Travel was also granted
the option to make designated lump sum payments and thereby terminate the
License Agreement and acquire the patents prior to August 1,2002. The
Purchaser is currently in default pursuant to the terms of the Note and the
License Agreement. The Company has notified the Purchaser that it has
terminated the Purchaser's rights pursuant to the License Agreement. The
Company has instituted legal proceedings against the Purchaser for the defaults
pursuant to the Note and License Agreement. There is no assurance that any sums
will be ultimately recovered under the Note and/or the License Agreement and
due to this uncertainty, there is a bad debt reserve against all sums due under
the Note and no royalties have been accrued or received under the License
Agreement. Purchaser's President served as a consultant to the Company and is
the inventor and designer of Travel's products.
Acquisition of Datatrend, Inc. Effective on 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 had no predecessor or prior business
activity. DTI is engaged in the wholesale and retail distribution of new,
used and refurbished computer hardware and components. DTI is also engaged
in the business of servicing the returns management needs of certain
computer manufacturers and resellers. Substantially all of the Company's
business operations are currently conducted by its wholly-owned subsidiary,
DTI. Unless otherwise indicated, all references herein to the business of
the Company include the business of DTI.
Business of Issuer
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Principal Products or Services
The Company purchases and sells microcomputers, peripherals,
components and accessories (collectively referred to as "Products"). The
Company sells new, used and refurbished Products. The Company purchases
completed new and used Products from numerous sources, including
manufacturers and other re-sellers. The Products purchased consist of new
Products, including end of life models, excess inventories, close outs and
other such items. The Company also purchases incomplete, defective and
returned Products which are refurbished or remanufactured in order to be
resold for maximum value. The Company performs limited assembly,
remanufacturing and refurbishing activities at its Braintree, Massachusetts
and Memphis, Tennessee facilities and through certain other subcontractors.
The Company has developed relationships with certain manufacturers whereby the
company purchases large quantities of goods returned to the manufacturer by
customers. The Company refurbishes and remarkets these Products through its
distribution channels. The Company has been able to develop relationships
with several large manufacturers, which has strengthened the Company's ability
to obtain Products. These relationships with manufacturers are not pursuant
to any long term contractual relationship and there is no assurance that they
will continue in the future.
The Company also provides management services to manufacturers and
resellers of certain Products. The Company's returns management services
include consulting and services with respect to identifying and analyzing
causes of returns, designing returns limitation programs and designing and
instituting cost effective returns handling programs. The Company provides
comprehensive returns management services, including, but not limited to,
inbound audit of returned products, product reconditioning , product
sanitization (retiring serial no., change model no., etc), parts recycling and
reclamation, and other services relating to such programs such as data
collection, analysis and reporting to assist in evaluating certain problems
and trends in returned products. As a large part of this returns management
service, the Company provides Product reconditioning services to
manufacturers of computer products. The products are reconditioned by the
Company for manufacturers or other entities in exchange for service fees.
The Company currently conducts its reconditioning operations at its
Braintree, Massachusetts facility and also conducts certain reconditioning
operations at a facility in Memphis, Tennessee.
Distribution Methods
The company sells its Products through several alternate channels
within and without the United States. On a wholesale basis, the Company
sells Products to mass merchants, catalogue resellers, retailers and to
value added re-sellers ("VAR"). The Company also channels its Product
directly to retail customers through telemarketing, local advertising and
other direct marketing activities. The Company has relocated from its
previous distribution center in Westwood, Massachusetts, and as a result ,
closed its retail outlet at that location. The Company supplies Products
to most of its customers through its 77,000 square foot distribution center
in Braintree, Massachusetts. In 1993, its first partial year of operation,
a large volume of the Company's business was distributed through a large
mass merchant, Damark International, Inc. In 1994, however, the Company
expanded its customer base greatly and significantly decreased its
dependence on this relationship as a distribution channel for Product.
During 1995 and 1996, the Company further reduced this dependency and less
than 10% of the Company's sales were derived from sales to Damark
International, Inc. During 1996 Canon Computer Systems accounted for 7.7% of
total sales. No other single customer accounted for in excess of 5% of the
Company's sales.
Returns Managements Programs and Revenues.
During 1995, the Company began deriving revenues from design and
implementation of returns management programs. During 1996, the Company
generated approximately $4,895,488 in service revenues compared to $560,000
in 1995. Approximately $3,000,000 (62%) of these revenues were derived from
Canon. The Company currently has no long term contractual relationship
with Canon and there is no assurance that these service revenues will
continue.
Competition
The Company is engaged in a business with numerous competitors, both
for the purchase of the products from manufacturers and the ultimate sale of
the Products to customers. The typical product purchases is usually a small
number of transactions of large quantities of product. The purchases of
product on many occasions result from a bid type procedure with the highest
or most "'responsible" bidder being awarded the purchase. There are numerous
other companies in competition for this product, both within and without the
United States. Many manufacturers are not only interested in the price being
offered for the Product, but the "responsibility" of the purchaser. The
manufacturers look for "responsible" purchasers in order to insure that
quality control measures, warranty service, distribution methods and channels
and many other factors are properly handled by the purchaser so that it does
not affect the manufacturer's reputation, or its relationship with its primary
distributors. The Company has developed relationships with manufacturers
largely based on its ability to meet these concerns of the manufacturers by
providing quality warranty services, re-channeling the products in a manner
not adversely affecting the manufacturers distributor relationships, and
generally meeting the challenges of each manufacturer with respect to any
given product and the related concerns. There is no assurance that these
relationships will continue.
The Company's returns management consulting and service efforts are
also designed to not only produce service revenues, but also to yield
purchase opportunities for the reconditioned Product. There is no assurance
that these programs will result in additional sources of Product for the
Company.
There are also numerous competitors on the resale side of the
Company's business. Many of the Company's own customers compete with the
Company's retail catalogue and telemarketing business. In addition, there
is significant competition for sales to mass merchant, catalogue re-sellers,
VARs and other of the Company's customer base. The Company believes that it
has grown in the face of this competition due to its ability not only to
purchase and offer the product at the correct pricing, but also due to its
ability to meet the unique needs of its customers, its ability to identify
unique cooperative relationships with vendors or retailers who might be
considered competitors, and its ability to offer the right product at the
right time.
Sources of Products and Principal Suppliers
Significant changes and advances have rapidly transformed the
microcomputer industry in the recent past. A market which previously
consisted of a relatively small number of large manufacturers, now consists
of numerous large and small manufacturers. The rapid technological changes
in the industry have resulted in an accelerated rate of product obsolesence
, requiring rapid inventory turnover to avoid product obsolesence. The
Company purchases certain excess inventories of available Product from
manufacturers and re-sellers.
In addition, the large number of competing manufacturers has resulted
in the discontinuance of certain products and product lines, as well as the
discontinuance in the operations of certain manufacturers. The Company
purchases certain discontinued Products and close out inventories. The
Company's sources of Product include not only purchases of new and used
Products from numerous original computer and peripheral manufacturers, but
also include purchases of Products and excess inventories of other re-
sellers. Due to the nature of the Company's business, the Company does not
have a long term contractual relationship with any one manufacturer which it
considers a principal supplier. However, the company has purchased large
volumes of product from many of the major manufacturers in the United States
including AT&T, NEC Technologies, Dell, Okidata, Canon and other such
manufacturers. There is no assurance that the Company's relationship with
any of these manufacturers will continue. The volume of Product available
and purchased is largely dependent upon the manufacturers needs and actions
and the changes in technology, rather than the typical demand of the
Company's market. In fact, the very nature of the Company's business
dictates that many of the Company's purchases result from manufacturer's
discontinuing Products, discontinuing certain operations related to the
Products, or discontinuance of operations as a manufacturer, therefore these
relationships are inherently short term.
The Company's ability to continue to compete effectively for the
purchase of Products is subject to its continuing ability to maximize the
resale value of these Products through its distribution channels, as well as
its continuing ability to meet the challenges set by the individual
manufacturers with respect to the Company's ability to handle certain large
volumes, provide reconditioning services, warranty service and repair, re-
marketing and resale of the Product. The Company has been able to
successfully meet these challenges to date and is attempting to develop new
and stronger relationships with large manufacturers. There can be no
assurance that these efforts will be successful.
Dependence on Major Customers
During 1993 the Company's largest volume customer was Damark
International, Inc. ("Damark"). Damark is a mass merchant engaged in
catalogue sales of numerous types of electronics equipment, including
computer products and accessories. During 1993, approximately 60% of the
Company's revenue was derived from sales to Damark. During 1994, this
volume significantly decreased as total sales and sales to other customers
grew, and only approximately 12% of the Company's revenues were derived from
sales to Damark. During 1994, the Company also had a substantial sales
relationship with Computer City, a large retail seller of computer
equipment and peripheral. Sales to Computer City accounted for
approximately 20% of the Company's revenue during 1994. During 1996 and
1995, the dependence on these customers decreased further and Damark and
Computer City accounted for less than 11% of the Company's sales.
The Company has significantly broadened and is continuing to expand its
customer base through telemarketing, retail sales and other methods to
increase profitability and eliminate dependency on individual large volume
accounts. Although the dollar volume of sales to Damark in relation to the
Company's total revenues was significant during 1993 and somewhat less
significant during 1994, and the dollar volume with Computer City was
significant during 1994, the profit derived from such bulk sales to mass
merchants is generally much lower than profit derived from sales to other
re-sellers, VARs and retail customers. The Company is still selling
Products to both Damark and Computer City. However, due to the decreasing
volume of such sales, the Company does not believe that the loss of sales
to either customer would materially adversely effect the Company's
profitability. Although the Company continues to sell to such large volume
customers, the Company has developed a wholesale and retail customer base
that it believes will support its profitability such that the loss of any
one large customer would not materially adversely effect the Company's
profitability. The Company is continuing to attempt to expand it's own
retail business by opening or expanding new channels of distribution to
retail customers. There is no assurance that these efforts will ultimately
be successful.
The Company's service revenue during 1996 and 1995 was largely derived
from a single customer, Canon. There is no long term service contract with
Canon and there is no assurance that these service revenues will continue.
The Company is currently providing such returns management and reconditioning
services to Canon and other manufacturers. These returns management
programs are usually of either a fixed duration by number of units of
Product, or are of an at-will nature, terminable by either party on short
notice, for any reason.
Patents, Trademarks, Licenses, Royalties
The Company does not have any patents or trademarks and does not
consider patents or trademarks to be significant to its operations. Travel,
the wholly-owned subsidiary sold by the Company, was granted two patents for
its child care seats. These patents are significant to Travel's business
and were assigned pursuant to the License Agreement with the Purchaser.
Based upon the defaults by the Purchaser under the Note and the License
agreement, the Company does not expect any payments or royalties from
Travel, nor does the Company have any assurance that these patents will have
any value to the Company in the event that the Company is successful in
terminating the License Agreement and these patents revert to the Company.
See "Business Development Sale of Significant Asset."
Governmental Approval and Government Regulation
There is no significant approval of the products or business which
currently effect the Company.
Research and Development
The Company has not expended any material sums on any research or
development activities in connection with its current business. Prior to
the sale of Travel in November of 1994, the Company expended certain funds
on research in connection with Travel's juvenile car seat business, which
the Company now treats as discontinued operations.
Compliance with Environmental Laws
The Company does not incur any material expenses related to compliance
with environmental laws or regulations in the conduct of its business.
Employees
The Company has 72 full time and 2 part time employees at its
Braintree facility. The Company employs 49 full time employees at its
Memphis facility. The Company also engages the services of outside
consultants and employs temporary employees for special projects and to meet
short term staffing and production requirements. The Company believes its
present employees are adequate to meet its current business requirements.
Although the Company has a sales force consisting of approximately 8
employees, Mark A. Hanson, the President, CEO and a Director of the Company
has been responsible for in excess of approximately 8% of the dollar volume
of sales of the Company in 1996 and 28% in 1995. In addition, the majority
of the Products purchased by the Company are purchased by Mark A. Hanson and
the Company's ability to purchase Products effectively is largely dependent
upon relationships developed and maintained by Mark A. Hanson. The Company
has a five year employment contract signed in February 1995 with Mr. Hanson
which contains substantial non-compete provisions, however, the loss of Mr.
Hanson would, in the opinion of the Company, significantly adversely impact
the Company's profitability. The Company currently maintains $4,000,000 in
key man life insurance on the life of Mr. Hanson.
Item 2. Description of Property
The Company's principal offices are located at 1515 Washington Street,
Braintree, Massachusetts (1) which are leased from December 27, 1995 through
December 26, 2005 at an annual rental of $212,382.50 in equal monthly
installments of $17,698.54 per month plus escalations for the first full
year. Annual rental for the second through tenth year of the lease term
increases as follows:
<TABLE>
<CAPTION>
Year Annual rent Monthly rent
---- ----------- ------------
<S> <C> <C>
2 $274,166.50 $22,847.21
3 $312,781.50 $26,065.13
4 $328,227.50 $27,352.29
5-6 $339,812.00 $28,317.67
7-8 $355,258.00 $29,604.83
9-10 $370,704.00 $30,892.00
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<F1> The leased premises consist of a building floor area of approximately
77,320 square feet, of which approximately 14,000 square feet is
office space and the remaining 63,000 square feet consists of
warehouse and loading dock area. The warehouse has a separate
mezzanine area which provides an additional usable area of
approximately 29,000 square feet and which is accessible by a lift
providing the ability to move and store pallets of inventory and
materials in the additional mezzanine area.
</TABLE>
During 1996 the Company entered into leases for additional office,
warehouse and reconditioning center space in Tennessee and California. In
1997 the lease in California was terminated. The Tennessee facility remains
in operation.
The Company believes its current facilities are adequate for its
current level of operations and foreseeable needs.
Item 3. Legal Proceedings
The Company has filed an action in the United States District Court
against a supplier of computer products, Jabil Circuit, Inc. for breach of
contract and related damages. The action is entitled Datatrend, Inc. v.
Jabil Circuit, Inc.(Civil Action No. 95-11764DPW). The Company is seeking
damages in excess of one half million dollars. Jabil Circuit, Inc. has
filed a counterclaim against the Company alleging breach of contract,
quantum meruit and unjust enrichment, seeking damages in excess of 2 million
dollars, plus interest and costs.
The Company has also notified the Purchaser of Travel that it has
terminated its rights pursuant to the License Agreement as a result of
Purchaser's failure to make required payments pursuant to the Note and the
License Agreement, for its failure to properly maintain the patents pursuant
to the terms of the License Agreement, and other related defaults. The
Company is in the process of commencing appropriate legal proceedings
against Purchaser to collect sums due and enforce the Company's rights under
the patents, the Note, the License Agreement.
The Company has been named as a defendent in a civil action entitled
Tredex California, Inc. v. Randy Hurtado, et al. Tredex California, Inc. is
seeking damages in excess of $1,750,000. The Company believes it will not be
materially affected by the outcome of this lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
During 1996 the Company did not submit any items for a shareholder
vote. On November 14, 1995, the Company held an annual Meeting at its
offices in Westwood, Massachusetts. At the annual meeting, the Company
submitted the following proposals to a vote of Security Holders.
Election of Directors. To elect five directors to the Board of
Directors of the Company to serve for a term of one year or until their
successors are duly elected and qualified:
<TABLE>
<CAPTION>
FOR WITHHELD
<S> <C> <C>
Mark A. Hanson 4,426,079 20,970
Yitz Grossman 4,426,079 20,970
John G. Bulman 4,426,079 20,970
Werner Haase 4,426,079 20,970
Kevin Donovan 4,426,079 20,970
</TABLE>
Proposal to Amend the Certificate of Incorporation to Change the
Company's Name to Datatrend Services, Inc.
FOR: 4,430,164 AGAINST: 12,385 ABSTAIN: 4,500
Proposal to Amend the Company's Certificate of Incorporation to
Increase Common Stock Authorized to 30,000,000 Shares.
FOR: 4,294,674 AGAINST: 113,975 ABSTAIN: 38,400
Proposal for Ratification of Appointment of Richard A. Eisner &
Company, LLP, independent certified public accountants, as auditors for the
Company for the fiscal year ending December 31,1995.
FOR: 4,421,314 AGAINST: 14,385 ABSTAIN: 11,350
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The following table sets forth the high and low closing bid and asked
quotations for the Company's Common Stock during recent fiscal quarters.
These quotations have been reported by the National Association of
Securities Dealers, Inc. The prices represent quotations by dealers without
adjustments for retail mark-ups, mark-downs or commissions and may not
represent actual transactions.
<TABLE>
<CAPTION>
1995 High Low
---- ---- ---
<S> <C> <C>
Jan 1 through Mar 31 1.75 .81
Apr 1 through Jun 30 3.50 1.50
Jul 1 through Sep 30 5.69 2.50
Oct 1 through Dec 31 3.31 1.63
1996
----
Jan 1 through Mar 31 4.50 2.75
Apr 1 through Jun 30 5.56 3.31
Jul 1 through Sep 30 5.50 3.75
Oct 1 through Dec 31 5.88 3.88
</TABLE>
The Company has not paid a cash dividend on its Common Stock. The
Company does not contemplate paying any dividends in the near future.
As of April 9, 1997, there were 134 holders of record of the Company's
Common Stock. Such number of record owners does not include beneficial
owners of the Company's Common Stock which shares are held in the names of
various security holders, dealers and clearing agencies. The Company
believes that the number of beneficial owners of its Common Stock held by
others or in nominee names exceeds 1300 in number.
Item 6. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Liquidity and Capital Reserves
The Company's liquidity and capital reserves are severely impaired as of
December 31, 1996. The Company's current liabilities ($7,010,984) exceed its
current assets ($6,296,359) by $714,625 at December 31, 1996, resulting in a
current ratio of .9 to 1. In comparison the current ratio at December 31, 1995
was 1.26 to 1. This change is directly related to the Company's current year
operating losses, which has eliminated all of the Company's equity and has
forced the Company to rely on short term financing to meet its day to day cash
needs.
The Company has no long term debt at this time. The only source of third
party financing is from a commercial finance company that will provide funds
for certain inventory purchases up to $2,000,000. Any funds advanced under
this facility must be repaid within 60 days of the funding.
The Company's capital reserves have decreased from $2,767,848 to a
capital deficiency of ($95,954) as of December 31, 1996, due primarily to the
loss from operations. Management believes that it must raise additional
capital to meet the current and future needs of the business and is reviewing
its options for raising additional equity to secure an adequate level of
capital reserves. As of this time there can be no assurance that the additional
capital can be raised. If the capital can not be raised, management is
uncertain that the Company will be able to continue as a going concern.
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, newly formed and 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 $2,234,000 and $6,092,000, at
December 31, 1996 and December 31, 1995, respectively. This represents a
decrease of $3,858,000, or 63% during 1996. This decrease is due primarily to
the lack of working capital and substantial declines in the market values of
computer components in the fourth quarter of 1996. Accounts receivable were
$3,026,000 at December 31, 1996 and $4,297,000 at December 31, 1995, decreasing
$1,271,000, or 30%. The decrease was the result of the reduction of working
capital and the significant additions to the reserves for uncollectable
accounts. Other current assets, including advances to vendors, decreased
$996,000 to $298,000 at December 31, 1996 from $1,294,000 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 December 31, 1996 and December 31, 1995 were
$4,712,000 and $6,873,000, a decrease of $2,161,000, or 31%. 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 Company has paid off $4,788,000 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 a bank from the revolving
credit agreement. These notes were repaid in full during 1996. In addition the
Company has paid approximately $2,650,000 to the vendor whose accounts payable
was converted to a note payable.
Revenues, including product sales and service revenue, for the year ended
December 31, 1996 and 1995 respectively were $39,425,000 and $29,300,000. This
represents an increase in revenues of $10,125,000 or 35%. This increase was due
in part to a significant increase of approximately $4,335,000 in service
revenue recognized by the Company during 1996, as discussed below. The
additional increase in sales was due to increased volume of product sales to a
variety of customers.
In 1996, the Company earned $4,895,000 in service revenue, refurbishing
the inventory of other manufacturers. The Company earned $560,000 in service
revenue for the 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 years ended December 31, 1996 and 1995, cost of sales were
$32,208,000 and $23,909,000 an increase of $8,899,000, or 37%. The resulting
gross profits on product sales were $2,322,000, or 6.7% of product sales for
1996, and $4,830,000, or 16.8% of product sales for 1995. During the fourth
quarter of 1996 the Company had significant losses in the sales value of its
inventory. A total of $1,600,000 was added to the cost of goods sold in the
fourth quarter to account for the devaluation and obsolescence of inventory.
Market conditions for computer equipment were impacted in the fourth quarter
of 1996 by the major manufacturers announcement of enhanced options and
features that would be available in early 1997 leading to a slower than
expected sales volume for holiday season and a reduction in the market values
of inventory on hand caused by the announcement of the new and enhanced
technology.
Operating expenses for 1996 and 1995 were $9,863,000 and $5,032,000
respectively. The increase of $4,831,000, or 96% was a result of two major
factors. First, the Company engaged 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.
The Company's current operations have resulted in a loss of approximately
($2,864,000), or ($.61) per share, as compared to a net profit of $243,000 or
$.05 per share for 1995. This is a decrease in profits of $3,107,000, or ($.66)
per share. Management attributes this decrease to significant operating
costs, including the $1,600,000 of inventory costs discussed above and the
$1,000,000 increase in bad debt reserves discussed below.
A significant factor in the loss presented, is Management's increases in
its allowances for doubtful accounts. During 1996 $1,057,000 was added to the
allowance. 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 payments schedules.
Item 7. Financial Statements
The Financial Statements of the Company are contained in this report
beginning at Page F-2.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act.
Officers and Directors
The officers and directors of the Company are as follows.
<TABLE>
<CAPTION>
Name Age Capacity
---- --- --------
<S> <C> <C>
Mark A. Hanson (41) President, Chief Executive Officer and Director
Yitz Grossman (42) Secretary and Director
Robin Azar (37) Director
Martin Chopp (44) Director
Kevin Donovan (32) Director and Assistant Secretary
</TABLE>
The directors serve for a term of one year or until their successors
are duly elected and qualified. There are no standing audit, nominating or
other committees of the Board of Directors. There are no arrangements as to
compensation of its members in such capacity. Officers serve at the
pleasure of he Board of Directors. Kevin Donovan is Mr. Hanson's brother-
in-law and Ms. Azar is Mr. Hanson's sister. There are no other family
relationships among directors of executive officers.
Mr. Hanson also serves as President, Chief Executive Officer,
Treasurer and a director of DTI. Mr. Donovan is Secretary and a director
of DTI. Ms. Azar is a director of DTI.
Mark A. Hanson was elected President, CEO and Director of the Company
in February 1995. In 1993 he helped found Datatrend, Inc. and has been the
President and a Director of Datatrend, Inc., the Company's wholly owned
subsidiary acquired in February 1995, since its formation in April 1993. Prior
to founding Datatrend, he was President of Bostek, Inc. for approximately four
years, and has been a business consultant specializing in advising
manufacturers and distributors about automation and software customization
since 1978.
Yitz Grossman was elected as Secretary and a director of the Company,
in February 1993. Mr. Grossman has acted as a business consultant to the
Company since March 1992. In July 1984, Mr. Grossman formed Target Capital
Corporation, a New York privately-held corporation engaged in financial
consulting and has been the Chairman and President of that corporation since
that time. Mr Grossman is a director of Water-Jel Technologies, Inc., a
publicly held company involved in producing a line of fire blankets and burn
dressings, and Mark Solutions, Inc., a publicly held business which
manufactures modular prison cells.
Martin Chopp was appointed to the Board of Directors in April 1997. Mr.
Chopp was previously the Chief Executive Officer, President, Chief Financial
Officer and Treasurer of Babystar Inc. He resigned in February 1995 as part
of the merger with Datatrend, Inc.
Kevin Donovan was elected as a director of Datatrend, Inc., the
Company's wholly-owned subsidiary in January 1995. Pursuant to the
Agreement, Mark A. Hanson has the right to appoint one additional Director
of the Company. Kevin Donovan was Mr. Hanson's nominee for that
directorship. Mr. Donovan is a certified public accountant in practice in
the Commonwealth of Massachusetts. Mr. Donovan has been in practice as a
certified public accountant since 1988, and is the principal of Kevin
Donovan, P.C., a privately held professional corporation in the Commonwealth
of Massachusetts formed by Mr. Donovan in June 1994. Mr. Donovan is Mr.
Hanson's brother-in-law. Mr. Donovan was elected at the Company's annual
meeting on November 14, 1995.
Robin Azar was elected as a director to the Company and its wholly
owned subsidiary Datatrend, Inc. in July of 1996. Ms. Azar is the director
of Executive Programs Development of CIO Communications, a leading publisher
in the high technology sector. She has twenty years experience in strategic
marketing and information technology systems. Ms. Azar is Mr. Hansons sister.
Item 10. Executive Compensation
The following table sets forth information with respect to
compensation paid by the Company for services to the Company during the
three fiscal years ended December 31, 1996 of the Company's Chief Executive
Officer and its other officers receiving compensation in excess of $100,000
per year. Information for Messrs. Hanson and Moskowitz for 1994 reflects
compensation received from DTI prior to its acquisition by the Company.
Mr. Hanson became President and Chief Executive Officer of the Company in
February 1995.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
All Other
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Mark A. Hanson 1996 $182,378
President, Chief 1995 $173,019
Executive Officer 1994 $125,167 $ 775
and Director
Michael W. Moskowitz 1996 $ 0
Former CEO and 1995 $ 15,500
Director 1994 $125,167
Martin Chopp
Director, Former President 1996 $ 0
and CEO 1995 $216,000(3) $15,592
1994 $208,000 $30,765(2)
- --------------------
<F2> The Company paid premiums for life insurance policies on the life of
Mr. Chopp. Mr. Chopp was entitled to name the beneficiary on the
policy on his life.
<F3> Includes termination payment to Martin Chopp of $200,000 for early
termination of his employment contract as of January 31, 1995.
</TABLE>
Mr Chopp resigned his position with the Company in February 1995 and
received a $200,000 payment in termination of his employment contract which
is included in the salaries figure above. Subsequent to his resignation,
Mr. Chopp, as a principal of Sun Capital Company, also received fees in the
amount of $15,592 as compensation for providing services with respect to the
collection of sums due from Travel Safety Corp. These fees are included in
All Other Compensation presented above.
Prior to the merger with the Company on February 1, 1995, DTI elected
treatment as a Subchapter S corporation for federal income tax purposes.
DTI paid Mr. Hanson (45% shareholder) and Mr. Moskowitz (45% shareholder),
Mr. Bulman (5% shareholder) and Mr. Steven Kaplan (5% shareholder)
distributions for the tax year ended 1993 in an amount equal to approximately
45.6% of the Subchapter S earnings of DTI reportable on their personal income
tax returns based upon their respective stock ownership. Pursuant to the
Agreement (as hereinafter defined), the Company paid Mr. Hanson and Mr. Bulman
a distribution for the tax year ending December 31, 1994 totaling $125,000 for
payment of their personal income tax liability for Subchapter S earnings
reportable on their personal income tax returns. Mr. Moskowitz is not
entitled to any such distribution and Mr. Kaplan received a distribution for
the year ended December 31,1994 on January 31, 1995.
The aggregate amount of personal benefits, including personal use of
two automobiles provided to officers and used primarily for business
purposes, cannot be specifically or precisely ascertained and do not, in any
event, exceed $50,000 or 10% of compensation as to any person .
The Company offers health insurance to its employees. At the present
time, the Company has established a 401(k) savings plan for its employees
and does not have any other retirement, pension, profit-sharing, or other
similar programs or benefits.
During 1996 the Company issued stock options to Mr. Hanson (75,000),
Mr. Grossman (75,000), Mr. Donovan (75,000), Mr. Haase (75,000), Mr. Bulman
(56,250) and Ms. Azar (12,500) for services rendered by the Board of
Directors. These options are exercisable at $4.75 and are available until
June, 2006.
The Company has no pension or long term incentive plans other than the
401(k) savings plan referenced above.
The following table sets forth information with respect to the number
and value of unexercised options held by the above mentioned officers at the
end of 1996. There were no stock options exercised by the named officers
during the fiscal year. The Company has not granted any stock appreciation
rights.
Aggregated Option Exercises in Last
-----------------------------------
Fiscal Year and Fiscal Year End Option Values
---------------------------------------------
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In the Money Options
Options at 12/31/96 at 12/31/96
--------------------- --------------------
Name Exercisable (#) Exercisable ($)
---- --------------- ---------------
<S> <C> <C>
Mark A. Hanson
President and CEO 75,000 0
</TABLE>
The Company has entered into an employment contract with Mark A.
Hanson, dated January 1995 for a term of five years. Mr. Hanson is to serve
as the President, Chief Executive Officer and a director of the Company.
Mr. Hanson is to receive an annual salary of $180,000 plus escalations. Mr.
Hanson is also entitled to a Company provided vehicle, health insurance and
other such benefits. Mr. Hanson's employment can be terminated by the Board
of Directors if the Company does not meet certain after tax earnings goals
specified in the employment agreement. Mr. Hanson may terminate the
employment agreement should the Company's previous directors come to
constitute a majority of the Board of Directors.
The Company has entered into a consulting agreement with Target
Capital Corp. dated January 1995 for a term of three years. The consulting
agreement automatically renews for a term of an additional three years if
Target Capital Corp. is able to assist the Company in raising certain
specified amounts of equity capital over the initial three year term.
Target Capital Corp. Is wholly-owned by Mr. Grossman. Under this agreement,
Target Capital is entitled to annual consulting fees in the amount of
$100,000. The Company has issued to Mr. Grossman warrants to purchase an
aggregate of 342,000 shares. In October 1994, the exercise price of 247,000
of these warrants was adjusted downwards from $3.26 to $0.62 per share and
the exercise portion of the remaining 95,000 warrants was adjusted downwards
form $0.79 to $0.62 per share. The expiration date was extended from
December 31,1994 to December 31, 1997 on all 342,000 warrants.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock based upon the most recent
information available to the Company for (i) each person known by the
Company to own beneficially more than (5%) percent of the Company's
outstanding Common Stock, each of the Company's officers and directors, and
(ii) all officers and directors of the Company as a group.
Security Ownership of Owners and Management
-------------------------------------------
<TABLE>
<CAPTION>
Name and Address No. Of Shares % of Total
- ---------------- ------------- ----------
<S> <C> <C>
Mark A. Hanson 1,155,000(4) 24.1%
1515 Washington Street
Braintree, MA. 02184
Yitz Grossman 420,800(5) 8.8%
40 Fulton St.
New York, NY
Kevin Donovan 75,000(4) Less than 1%
One Elm Square
Andover, MA 01810
Robin Azar 12,500(4) Less than 1%
1515 Washington Street
Braintree, MA. 02184
Martin Chopp 360(6) Less than 1%
40 Fulton St.
New York, NY
All officers and Directors as 1,663,660 26.1%
a Group (5 persons)
- --------------------
<F4> Includes stock options discussed in Item 10, "Executive Compensation."
<F5> Consists of 3,800 shares and currently exercisable warrants to
purchase 342,000 shares and options to purchase 75,000 shares of common
stock. See "Item 10 - Executive Compensation.".
<F6> Stock held in the name of related minor children.
</TABLE>
Item 12. Certain Relationships and Related Transactions.
Acquisition of DTI
On February 1, 1995, the Company acquired DTI. Pursuant to the terms
of the Agreement and Plan of Merger dated January 31, 1995 (the
"Agreement"), in exchange for the merger, the holders of DTI stock received
1,200,000 shares of the Company's Common Stock as well as the right to
receive an aggregate of 1,200,000 additional shares if certain earnings
tests are met over a period of approximately two years. The Company also
contributed $2,100,000 to DTI, of which $1,209,160 was paid to two DTI
shareholders immediately prior to the consummation of the Agreement for
their DTI stock and to discharge DTI's indebtedness to them. The
consideration paid by the Company was determined by arm's length
negotiations with DTI's shareholders. The cash portion of the consideration
was funded out of working capital. Prior to this transaction, there existed
no affiliation between the Company and DTI or any of their respective
officers and directors.
The Company received an opinion from A.S. Goldmen & Co., independent
investment bankers, that the amount of stock issued as consideration in the
merger is fair to the Company and its shareholders from a financial point of
view.
The Agreement provides that the Board of Directors of the Company
shall consist of five directors, three of which shall be nominated by DTI.
Mark A. Hanson, the President of DTI, John G. Bulman and Kevin Donovan
directors of DTI, have been elected as directors of the Company. The
Company's prior management has the right to nominate two persons to the
Board of Directors. Yitz Grossman continued to be a director and Werner
Haase was elected as the second director, in March of 1997 Mr. Haase resigned
and was replaced by Martin Chopp. In 1996 Mr. Bulman resigned and was
replaced by Robin Azar.
The by-laws of the Company were amended to require, for a period of
four years, the affirmative vote of at least four directors for any stock
issuances, option grants, certain mergers, acquisitions and dispositions,
the incurrence of certain debt obligations, and transactions with
affiliates.
Sale of Wholly-Owned Subsidiary
See "Item 1. - Description of Business - Sale of Travel Safety
Children's Products, Inc." for a description of the sale of the Company's
wholly-owned subsidiary to Travel Safety Corp. Travel Safety Corp.'s
president, served as a consultant to the Company and was the inventor and
designer of Travel's products.
Yitz Grossman - Target Capital Corp.
See "Item 10 - Executive Compensation" for a description of a
consulting agreement between the Company and an affiliate of Mr. Yitz
Grossman, who is an officer and director of the Company, and of certain
warrants which have been issued to Mr. Grossman.
Martin Chopp- Sun Capital Company
Also under the Agreement, Martin Chopp has resigned as a director and
officer of the Company in consideration of a severance payment of $200,000.
The Company entered into a consulting agreement with the Sun Capital Company
which has since been terminated according to its terms. Sun Capital Company
is an entity of which Martin Chopp, the Company's former President and CEO
is a principal. Under this Agreement, in consideration for services in
connection with the collection of sums due from the Purchaser, Sun Capital
Company received fees equal to fifteen percent (15%) of net sums collected
pursuant to the Note and the License Agreement related to the Company's
disposition of Travel.
Item 13. Exhibits and reports on Form 8-K
(a) Exhibits which are indicated as having been previously filed
are incorporated herein by reference.
Exhibit No. Description
- ----------- -----------
3.1 Certification of Incorporation (incorporated by reference to
the exhibit of the same number filed with the Company's
Registration Statement on Form SB-2, No. 33-58196)
3.2 By-Laws (incorporated by reference to the exhibit of the
same number filed with the Company's Registration Statement
on Form SB-2, No. 33-58196)
10.1 Copy of the 1986 Employees' Stock Option Plan of the Company
(filed as Exhibit 28.1 to the Company's form S-18 and
incorporated herein by reference)
10.2 Copy of 1989 Non-Qualified Stock Option Plan (filed as
Exhibit 10.6 to Company's Annual Report on Form 10-K of the
fiscal year ended December 31, 1989 and incorporated herein by
reference)
10.3 1993 Stock Option Plan (filed as Exhibit 10.4 with the
Company's Registration Statement on Form SB-2, No. 33-58196
and incorporated herein by reference)
10.4 Form of indemnity agreements with directors (filed as
Exhibit 10.5 with the Company's Registration Statement on Form
SB-2, No. 33-58196 and incorporated herein by reference)
10.5 Stock Purchase Agreement dated as of November 17, 1994, by
and among the Company, Travel Safety Children's Products, Inc.
And Travel Safety Corp. (Incorporated by reference from the
Company's report on 8-K filed December 1, 1994)
10.6 License Agreement dated as of November 17, 1994, by and
among the Company, Travel Safety Children's Products, Inc. And
Travel Safety Corp. (Incorporated by reference from the
Company's report on 8-K filed December 1, 1994)
10.7 Promissory Note, dated as of November 17, 1994, by and among
the Company, Travel Safety Children's Products, Inc. And Travel
Safety Corp. (Incorporated by reference from the Company's
report on 8-K filed December 1, 1994)
10.8 Agreement and Plan of Merger dated January 31, 1995, by and
among the Company, DTI, BSI Acquisition Corporation and Mark
Hanson (incorporated herein by reference from the Company's
report on 8-K filed February 14, 1995)
10.9 Employment Agreement, dated January 31, 1995, by and among
the Company and Mark Hanson (incorporated herein by reference
from the Company's report on 8-K filed February 14, 1995)
10.10 Lease dated October 27, 1995, by and among the Company, DTI
and Thomas J. Flatley d/b/a The Flatley Company (incorporated
herein by reference from the Company's report on 10-KSB filed
April 14, 1996)
21. Subsidiaries of the Company (incorporated herein by reference
from the Company's report on 10-KSB filed April 14, 1996)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, The
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DataTrend Services, Inc.
- -------------------------------------------------------------------------------
By /s/ Mark A. Hanson
----------------------------------------------------------------------------
Mark A. Hanson, President, Chief
Executive Officer, Principal Financial
Officer, Principal Accounting
Officer, Director
Date: April 21, 1997
------------------------------------------------------------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By /s/ Mark A. Hanson
----------------------------------------------------------------------------
Mark A. Hanson, President, Chief
Executive Officer, Principal Financial
Officer, Principal Accounting
Officer, Director
Date: April 21, 1997
------------------------------------------------------------------------
By /s/ Robin Azar
------------------------------------------------------------------------
Robin Azar, Director
Date: April 21, 1997
------------------------------------------------------------------------
By /s/ Kevin Donovan
------------------------------------------------------------------------
Kevin Donovan,
Asst. Secretary and Director
Date: April 21, 1997
------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
DataTrend Services, Inc.
Braintree, MA 02184
We have audited the accompanying consolidated balance sheets of
DataTrend Services, Inc. and subsidiary as of December 31, 1996 and December
31, 1995, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years than ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of
DataTrend Services, Inc. and subsidiary as at December 31, 1996 and December
31, 1995, and the consolidated results of their operations and their
consolidated cash flows for the years than ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. However, at December 31, 1996,
the Company had a working capital deficiency and a capital deficiency which
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regards to these matters are discussed in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
April 4, 1997
Datatrend Services, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
------
<S> <C> <C>
Current Assets
Cash $ 739,408 $ 374,628
Accounts Receivable, trade, net of
allowance for doubtful accounts
of $1,485,548 in 1996 and $428,950
in 1995. 3,025,558 4,297,413
Inventories (Note 2) 2,233,564 6,092,711
Advances to Vendors - 594,216
Deferred Tax Asset (Note 3) 100,000 100,000
Other Current Assets 197,829 499,543
---------- -----------
Total Current Assets $6,296,359 $11,958,511
---------- -----------
Property and Equipment, at cost (Note 2)
Furniture and Fixtures 175,946 85,211
Warehouse Equipment 354,532 181,130
Leasehold Improvements 173,881 35,033
Computer Equipment 104,739 30,393
---------- -----------
809,098 331,767
Accumulated Depreciation (291,617) (128,464)
---------- -----------
Property and Equipment, Net $ 517,481 $ 203,303
---------- -----------
Other Assets $ 145,190 $ 68,134
---------- -----------
Total Assets $6,959,030 $12,229,948
========== ===========
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
<S> <C> <C>
Current Liabilities
Notes Payable, Financial Institution (Note 7) $ 920,496 $ 1,000,000
Notes Payable, Other (Note 7) 885,718 1,137,500
Accounts Payable 4,711,559 6,873,465
Accrued Expenses 466,069 410,496
Capital Leases Short Term 27,142 40,639
----------- -----------
Total Current Liabilities $ 7,010,984 $ 9,462,100
----------- -----------
Long Term Liabilities
Capital Leases (Note 10) $ 44,000 $ 0
----------- -----------
Stockholders' Equity (Deficit)
Common Stock, $.01 Par value; 30,000,000
authorized, 4,712,795 shares issued and
outstanding at December 31, 1996 and 1995 $ 47,138 $ 47,138
Additional Paid in Capital 2,343,606 2,343,606
Retained Earnings (Accumulated Deficit) (2,486,696) 377,104
----------- -----------
Total Stockholders' Equity (Deficit) $ (95,954) $ 2,767,848
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 6,959,030 $12,229,948
=========== ===========
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Operations
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Sales $34,529,381 $28,739,629
Cost of Sales, including inventory write
down of approximately $1,600,000 in 1996 (Note 2) $32,207,575 $23,909,156
----------- -----------
Gross Profit $ 2,321,806 $ 4,830,473
Service Revenue $ 4,895,488 $ 560,000
----------- -----------
Total $ 7,217,294 $ 5,390,473
----------- -----------
Operating Expenses $ 9,862,276 $ 5,032,140
----------- -----------
Operating Income (Loss) $(2,644,982) $ 358,333
----------- -----------
Other Income and (Expense)
Interest and Other Income 74,349 33,597
Interest Expense (244,879) (256,194)
----------- -----------
Total Other Income and (Expense) $ (170,530) $ (222,597)
----------- -----------
Income (Loss) From Continuing Operations $(2,815,512) $ 135,736
Before Provision for Income Taxes
Provision for Income Taxes Expense(Benefit)
Deferred Tax Benefit $ (100,000)
Income Tax Expense $ 48,290 $ 46,580
----------- -----------
Total Income Tax Expense (Benefit) $ 48,290 $ (53,420)
Income (Loss) from Continuing Operations $(2,863,802) $ 189,156
Income From Discontinued Operations - 54,043
----------- ----------
Net Income (Loss) $(2,863,802) $ 243,199
=========== ==========
Weighted Average Number of Shares 4,712,795 4,320,145
Earnings (Loss) Per Share
Continuing Operations $ (0.61) $ 0.04
Discontinued Operations $ - $ 0.01
----------- ----------
Net $ (0.61) $ 0.05
=========== ==========
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity (Deficit)
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock APIC Treasury Retained Earnings Total
Shares Par Value Stock (Accumulated Deficit)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 1,000 $ 10 $ - $ 725,244 $ 725,254
----------------------------------------------------------------------------------
Distribution to S Corporation Shareholders (137,000) (137,000)
Purchase of Treasury Stock $(210,000) - -
Retirement of Treasury Stock (500) (5) 210,000 (210,000) (210,005)
Termination of S Corporation Status 244,339 (244,339) -
Business Acquisition 3,512,295 35,133 2,099,267 2,134,400
Additional Shares issued in Connection with
Merger 1,200,000 12,000 12,000
Net income for the year ended December 31,
1995 243,199 243,199
----------------------------------------------------------------------------------
Balance December 31, 1995 4,712,795 47,138 2,343,606 $ 377,104 $ 2,767,848
----------------------------------------------------------------------------------
Net (Loss) for the Year Ended December 31,
1996 $ - $ - $(2,863,802) $(2,863,802)
----------------------------------------------------------------------------------
Balance December 31, 1996 4,712,795 $47,138 $2,343,606 $(2,486,698) $ (95,954)
==================================================================================
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) $(2,863,802) $ 243,199
Adjustments to Net Income
Add Depreciation and Amortization 163,153 83,306
Changes in operating assets and liabilities 7,456,753 (1,481,979)
----------- -----------
Cash Provided (Used) by Operations $ 4,756,104 $(1,155,474)
----------- -----------
Cash Flows from Investing Activities
Acquisition of Property and Equipment $ (402,336) $ (202,308)
Other Assets (77,056) (57,597)
----------- -----------
Cash Provided (Used) by Investing Activities $ (479,392) $ (259,905)
----------- -----------
Cash Flows from Financing Activities
Advances from Notes Payable $ 920,496 $ 2,137,500
Payments on Notes Payable (4,787,936) (2,160,084)
Distribution to S Corporation Shareholders - (137,000)
Purchase and Retirement of Treasury Stock - (210,000)
Proceeds From Business Merger - 2,147,128
Capital Lease Obligations (44,492) 10,448
----------- -----------
Cash Provided (Used) by Financing Activities $(3,911,932) $ 1,787,992
----------- -----------
Net Increase in Cash $ 364,780 $ 372,613
Cash, Beginning of the Period $ 374,628 $ 2,015
----------- -----------
Cash, End of the Period $ 739,408 $ 374,628
=========== ===========
Detail of changes in Operating Assets and Liabilities
Accounts Receivable $ 1,271,855 $(2,224,200)
Inventory 4,453,363 (2,805,836)
Other Current Assets 301,714 (700,127)
---------------------------
6,026,932 (5,730,163)
Accounts Payable 1,374,248 4,146,143
Accrued Expenses 55,573 102,041
---------------------------
1,429,821 4,248,184
Net Change in Operating Assets and Liabilities 7,456,753 (1,481,979)
Additional disclosures of Cash Flow information
Cash Paid During the Year for
Interest 244,879 256,192
Income Taxes 48,290 42,160
</TABLE>
See Accompanying Notes to the Financial Statements
DATATREND SERVICES INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 & 1996
Note 1 - The Company
DataTrend Inc. was incorporated on April 26, 1993 and commenced operations
on that date. Its principal business activities include the refurbishment,
wholesale distribution and retail sale of new, refurbished and used computer
hardware throughout the United States, Canada and Europe.
In January of 1995, DataTrend Inc., through a reverse acquisition, was
merged with Babystar Inc. (now DataTrend Services, Inc.), a publicly traded
company ("the Merger"). DataTrend Services, Inc. did not have any significant
operations, other than those of its wholly owned subsidiary, DataTrend, Inc.,
during 1996.
In connection with the merger, certain former DataTrend Inc. shareholders
received 1,200,000 shares of the Company's common stock. These shareholders
had an additional right to receive up to an additional 1,200,000 shares if
after tax earnings reach certain levels. The Company did not meet these
levels and these rights have expired based upon the Company's after tax
earnings for 1996.
As of December 31, 1996 the Company had a working capital and capital
reserve deficiency. Management believes that the current finances of the
Company are inadequate to meet the current and future needs of the business
and is reviewing its options for raising capital. As of this time there can
be no assurances that the additional capital can be raised. If the capital
can not be raised, management is uncertain that the Company will be able to
continue as a going concern.
Note 2 - Summary of Significant Accounting Policies
Inventories - Inventories, which consists primarily of computer hardware,
are stated at lower of cost or market. Cost is determined on the first-in,
first-out (FIFO) method. The Company maintains a reserve for inventory
valuation, variances, and/or obsolescence. The Company purchases new,
reconditioned and un-reconditioned inventory. Un-reconditioned inventory is
typically reconditioned by the Company. On product covered by a manufacturers'
warranty for which the Company is service authorized, the Company typically
obtains reimbursement for warranty qualified repairs direct from the
manufacturer. The Company typically obtains reimbursement for abused/missing
parts and/or repairs which are not warranty eligible from the seller of the
product. Such product is generally salable in its then current condition.
Property and Equipment - Property and equipment is stated at cost. For
financial reporting, depreciation is computed using accelerated methods
calculated to depreciate the cost of the assets over their estimated useful
lives which are as follows:
<TABLE>
<CAPTION>
Assets Years
------ -----
<S> <C>
Furniture and Fixtures 3 - 7
Computer Equipment 3 - 5
Leasehold Improvements 2 - 10
Warehouse Equipment 5
</TABLE>
Earnings per Share - Earnings per share for the years ended December 31,
1995 and 1996 are computed using the weighted average number of shares of
common stock outstanding and dilutive common equivalent shares.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from those
estimates.
Stock Options - The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company has adopted the disclosure requirements
of SFAS 123 during the Company's fiscal year ended December 31, 1996, but will
account for its employee stock option plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock issued to Employees," as permitted under
SFAS 123. (Note 12)
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 - Income Taxes
Income Taxes - Prior to February, 1995, the Company had elected S
corporation status for federal income tax purposes. As such, the company
had not been liable for income taxes, but rather the stockholders reported
their allocable share of the Company's income on their individual tax
returns. As an S corporation in the Commonwealth of Massachusetts, The
Company had been liable for Massachusetts State Income taxes, taxed a rate
of 4.5 %.
In connection with the Merger, the S corporation status was terminated on
January 31, 1995. Effective with the merger, the Company accounts for
income taxes in accordance with Financial accounting Standard No. 109,
"Accounting for Income Taxes." At December 31, 1995 and 1996, the company
had no deferred tax liabilities and had the following net deferred tax
assets:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 1,399,000 $ 1,277,000
Allowance for doubtful accounts 488,000 146,000
Inventory reserves 573,000
Warranty reserve 35,000 35,000
Other 16,000 10,000
----------- -----------
Total Deferred Tax Asset $ 2,511,000 $ 1,468,000
Valuation Allowance (2,411,000) (1,368,000)
----------- -----------
Net Deferred Tax Assets $ 100,000 $ 100,000
----------- -----------
</TABLE>
The net operating loss carryforwards at December 31, 1996 total
approximately $4,116,000 of which $1,484,000 expires in 2008, $2,539,000
expires in 2009 and $93,000 expires in 2011. As a result of a more than 50%
change in ownership, as defined in section 382 of the Internal Revenue Code
due to the public offering of the Company's common stock in June of 1993,
utilization of net operating loss carryforwards of approximately $1,484,000,
relating to the periods prior to the public offering, is limited to
approximately $200,000 per annum, based on management's estimates. The
Company has established a valuation allowance relating to its deferred tax
assets based on its estimates of future utilization of the assets.
The following table reconciles the tax provision per the accompanying
statement of operations for 1996 with the expected provision obtained by
applying statutory rates to the pretax income from continuing operations.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Pretax Income (Loss) $(2,815,000) $135,000
Expected tax/benefit (957,000) 46,000
Adjustments due to:
Permanent differences 55,000
Non deductible expenses 3,000 25,000
State income taxes (41,000) (46,000)
Net increase in valuation reserve 1,043,000 (45,000)
Tax provision per financial statements
(rounded) $ 48,000 $(46,000)
</TABLE>
Non-deductible expenses in 1995 relate to costs incurred in connection
with the Company's merger (Note 1). Permanent differences in 1995 relate to
different requirements for presentation with respect to results of operations
for the year ended December 31, 1995 for financial statement purposes and
federal and state income tax purposes as a result of the Merger. For 1995
the financial statements reflect a full year of operations while federal and
state income taxes only reflect activity from the date of the Merger to
December 31, 1995.
Note 4 - Discontinued Operations
Babystar Inc. (now DataTrend Services Inc.) had been engaged in the business
of marketing a child car seat through its wholly owned subsidiary, Travel
Safety Children's Products, Inc. (Travel). On November 17, 1994, Babystar
Inc. completed the sale of Travel to Travel Safety Corp., whose president
served as a consultant to the Company and is the inventor and designer of
Travel's Product. At the closing, Travel safety Corp. paid $136,000 to
Babystar, Inc. and delivered to Babystar, Inc. a promissory note in the
amount of $640,000 payable over 14 months commencing December 26, 1994.
Miscellaneous items remaining from Babystar Inc.'s sale of Travel survive as
a discontinued operations of the Company. The Company has fully reserved for
the note receivable from Travel Safety Corp., although the Company has
instituted legal proceedings against Travel Safety Corp. in connection with
this matter. Net income from discontinued operations of Babystar Inc. for
1995 was $54,043 and there was no income or loss from discontinued operations
during 1996.
Note 5 - Related Party Transactions
Concurrent with the Merger in 1995, the Company entered into a consulting
agreement with Target Capital Corp., a company wholly owned by Mr. Yitz
Grossman, a director of the Company. Under this agreement, which commenced
in January, 1995, and expires in January 1998, Target Capital is entitled to
annual consulting fees of $100,000. The Company has also issued warrants to
Mr. Grossman to purchase an aggregate of 342,000 shares of the Company's
common stock, at an exercise price of $0.62 per share. During 1996 the
Company paid an additional $30,000 to Target Capital for consulting work not
covered by the 1995 agreement.
Note 6 - Transactions with Significant Customers
During the year ended December 31, 1995, the Company's sales to its largest
customer accounted for 10% of its total sales. Sales in 1996 to this same
customer accounted for less than 5% of total sales. Revenues from Canon
Computer Systems accounted for 62% of the Company's service revenue and 7.7%
of the Company's total revenues during 1996. The Company does not have any
long term service contract with Canon. No other customer accounted for more
than 5% of the Company's total sales in 1995 or 1996.
Mark A. Hanson, President, CEO and Director of the Company has been
responsible, through his sales efforts, for approximately 28% of the dollar
volume of sales of the Company in 1995 and 8% in 1996.
Note 7 - Note Payable, Financial Institution
In June of 1995, the Company entered into a line of credit agreement with a
bank, replacing a previous line of credit arrangement. At December 31, 1995,
the Company was in the process of closing this line of credit and the line of
credit was paid in full during 1996. Amounts outstanding on the line of
credit are $1,000,000 and $0 at December 31, 1995 and 1996.
During 1996, the Company obtained alternative financing from a financial
institution with a credit facility of up to $2,000,000. The line of credit is
renewable annually and bears interest at a rate of prime plus 1% after thirty
(30) days. The amount outstanding on this line of credit is approximately
$920,000 as of December 31, 1996.
Note 8 - Note Payable, Other
At December 31, 1995, the Company has a short term note payable in the
amount of $1,137,500. The note was repaid in full in January 1996. The
Company converted approximately $3,600,000 of accounts payable into a term
note payable in April 1996. This term note has been paid down to a balance
of $885,000 at December 31, 1996 and was paid in full in April 1997.
Note 9 - Employment Agreements - Mark Hanson
The Company has five year employment contract with Mark A. Hanson,
President, CEO and Director of the Company in the amount of $180,000 per
year plus escalations, which expires in January, 2000.
Note 10 - Lease Commitments
In 1995, the Company leased office and warehouse space under an operating
lease that was to expire in May of 1996. The total rent expense for those
facilities amounted to $174,098 for 1995. The Company vacated these premises
in January, 1996 in favor of more expansive premises to accommodate the
Company's growth. The Company has not executed a formal lease termination
agreement with its landlord. However, the company moved out early at the
request of the landlord so the premises could be occupied by a new tenant.
The Company does not expect to incur any significant liability as a result
of the early termination of the lease. The lease expires in May 1996.
During 1995, the Company entered into an operating lease for a larger
facility. The facility has been leased for the period of December 1995
through December, 2005. Annual rent for the first year of the lease, which
is for only part of the facility, is $212,382 payable in monthly installments
of $17,698. Annual and monthly rent for the second through the tenth year of
the lease are as follows:
<TABLE>
<CAPTION>
Year Annual Rent Monthly Rent
---- ----------- ------------
<S> <C> <C>
2 $274,167 $22,847
3 $312,782 $26,065
4 $328,228 $27,352
5 - 6 $339,812 $28,318
7 - 8 $355,258 $29,605
9 - 10 $370,704 $30,892
</TABLE>
During 1996, the Company entered into an operating lease for a second major
facility in Memphis, Tennessee consisting of approximately 80,000 square
feet. The facility has been leased for the period of April 1996 through
April 1999. Annual rent for the first year of the lease is $243,000
payable in monthly installments of $20,250. Annual and monthly rent for
the second through the tenth year of the lease are as follows:
<TABLE>
<CAPTION>
Year Annual Rent Monthly Rent
---- ----------- ------------
<S> <C> <C>
2 $243,000 $20,250
3 $243,000 $20,250
4 $ 81,000 $20,250
</TABLE>
The Company leases motor vehicles under operating lease agreements which
have various expiration dates through 1999. Total rent expenses under the
lease agreement amounted to $14,165 and $5,990 for the years ended December
31, 1995 and 1996 respectively.
At December 31, 1996, future minimal rental commitments under the motor
vehicle leases are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1997 $7,188
1998 $7,188
1999 $1,198
</TABLE>
The Company is the lessee of office and warehouse equipment under capital
leases expiring at various times through 2001. The assets are depreciated
over the lease terms or their estimated productive lives.
The following is a summary of property held under capital leases at December
31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Warehouse Equipment $49,491 $ 85,296
Furniture & Fixtures $26,544 $ 65,734
------- --------
Total $76,035 $151,030
Less: Accumulated Depreciation $44,799 $ 65,023
------- --------
Net Value $31,236 $ 86,007
------- --------
</TABLE>
At December 31, 1996 future minimum lease payments under capital lease
payments are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1997 $32,976
1998 $28,308
1999 $ 5,180
2000 $ 5,337
2001 $ 462
-------
Total minimum lease payments $72,263
Less amounts representing interest $ 7,190
-------
Present value, minimum lease payments $65,073
-------
</TABLE>
Note 11 - 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 law suit.
The Company has been named as a defendant in a civil action entitled Tredex
California, Inc. v. Randy Hurtaad et al. Tredex California, Inc is seeking
damages in excess of $1,750,000. The Company believes it will not be materially
affected by this law suit.
Note 12 - Capitalization
Stock Options
The Company has three stock option plans, a 1986, a 1989, and a 1993 plan.
Under these plans a maximum of 95,000, 95,000 and 500,000 options to purchase
shares, respectively, may be granted at prices not less than 100% of the fair
market value at the date of the option grant.
There were no stock options outstanding at December 31, 1994 and there was
no stock option activity during 1995. During 1996, options to purchase 496,900
shares of common stock were granted at exercise prices ranging from $2.93 to
$4.75 with a weighted average exercise price of $4.46 per share, all of which
were exercisable at December 31, 1996. These options have a remaining
weighted average contractual life of approximately nine and one half years.
At December 31, 1996 options to purchase 421,850 shares were available for
grant under the 1993 plan and options to purchase 95,000 shares were available
for grant under the 1989 plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Option No. 25 and related interpretations in accounting for its plans.
There was no compensation expense recognized in 1996 or 1995. The weighted
average grant date fair value of the options was $1.43 per share. If the
Company had elected to recognize compensation cost for the plans, consistent
with the method prescribed by SFAS No. 123, net loss per share would have been
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------
<S> <C> <C>
Net loss As reported $(2,863,802)
Pro forma $(3,573,028)
Loss per share As reported $ (.61)
Pro forma $ (.76)
</TABLE>
The fair value of the Company's stock options used to compute pro forma net
loss and loss per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following weighted
average assumptions for 1996 and 1995: dividend yield of 2.5% expected
volatility of 30% a risk free interest rate of 5.25% and an expected holding
period of nine and one-half years.
Warrants
The Company also has warrants outstanding to purchase 4,762,100 shares of
common stock, at prices between $.5625 and $4.69 per share, at a weighted
average exercise price of $3.02 per share and with expiration dates between
July, 1997 and June 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 739,408
<SECURITIES> 0
<RECEIVABLES> 3,025,558
<ALLOWANCES> 1,436,916
<INVENTORY> 2,233,564
<CURRENT-ASSETS> 6,296,359
<PP&E> 809,096
<DEPRECIATION> 291,617
<TOTAL-ASSETS> 6,959,028
<CURRENT-LIABILITIES> 6,983,842
<BONDS> 0
0
0
<COMMON> 47,138
<OTHER-SE> (143,094)
<TOTAL-LIABILITY-AND-EQUITY> 6,959,028
<SALES> 39,424,869
<TOTAL-REVENUES> 39,424,869
<CGS> 32,207,575
<TOTAL-COSTS> 9,862,276
<OTHER-EXPENSES> 170,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244,879
<INCOME-PRETAX> (2,815,512)
<INCOME-TAX> 48,290
<INCOME-CONTINUING> (2,863,802)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,863,802)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
