U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Form 10-Q
(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, 1997
------------------
/ / 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
-------
DATATREND SERVICES, INC.
------------------------------------------------------
(Exact Name of Registrant 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)
BABYSTAR, INC.
---------------------------------------------------------------
(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 for the 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 11, 1997.
FORM 10 Q QUARTERLY REPORT
--------------------------
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
INDEX
-----
Part I: Financial Information Page
<TABLE>
<S> <C>
Item 1.
Consolidated Balance Sheet - September 30, 1997 and December 31, 1996 2
Consolidated Statement of Operations - Nine months Ended September 30,
1997 and September 30, 1996 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statement of Cash Flows - Nine months Ended
September 30, 1997 and September 30, 1996 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
</TABLE>
Datatrend Services, Inc. and Subsidiary
Consolidated Balance Sheets
Unaudited
As of September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Assets
------
1997 1996
---- ----
<S> <C> <C>
Current Assets
Cash and Cash equivalents $ 43,096 $ 739,408
Accounts Receivable, trade, net of allowance for
doubtful accounts of $2,120,820 in 1997 and
$1,485,548 in 1996 2,464,637 3,025,558
Inventories, net of reserves totaling $1,419,601 in 1997 3,574,418 2,233,564
Deferred Tax Asset 100,000 100,000
Other Current Assets - 197,829
-------------------------
Total Current Assets $ 6,182,151 $6,296,359
-------------------------
Property and Equipment, at Cost
Furniture and Fixtures 175,946 175,946
Warehouse Equipment 624,271 354,532
Leasehold Improvements 47,771 173,881
Computer Equipment 137,408 104,739
-------------------------
$ 985,396 $ 809,098
Accumulated Depreciation (366,963) (291,617)
-------------------------
Property and Equipment, Net $ 618,433 $ 517,481
-------------------------
Other Assets $ 59,723 $ 145,190
-------------------------
Total Assets $ 6,860,307 $6,959,030
=========================
</TABLE>
See Accompanying Notes to the Financial Statements
Page 2
Datatrend Services, Inc. and Subsidiary
Consolidated Balance Sheets
Unaudited
As of September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Liabilities and Stockholders' (Deficit)
---------------------------------------
1997 1996
---- ----
<S> <C> <C>
Current Liabilities
Notes Payable, Financial Institutions $ - $ 920,496
Notes Payable, Others - 885,718
Accounts Payable 10,694,494 4,711,559
Accrued Expenses 392,826 466,069
Capital Leases, Short Term 49,160 27,142
-------------------------
Total Current Liabilities $11,136,480 $7,010,984
-------------------------
Long Term Liabilities
Capital Leases 263,270 44,000
-------------------------
Stockholders' (Deficit)
Common Stock
$.01 Par value; 30,000,000 shares authorized,
4,712,795 shares issued and outstanding at September 30,
1997 and December 31, 1996 respectively $ 47,138 $ 47,138
Additional Paid in Capital 2,343,606 2,343,606
(Accumulated Deficit) (6,930,187) (2,486,698)
-------------------------
Total (Deficit) $(4,539,443) $ (95,954)
-------------------------
Total Liabilities and Stockholders' (Deficit) $ 6,860,307 $6,959,030
=========================
</TABLE>
See Accompanying Notes to the Financial Statements
Page 3
Datatrend Services, Inc. and Subsidiary
Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Sales $ 7,248,512 $7,585,153 $25,845,895 $25,597,444
Cost of Sales $ 7,703,626 $6,758,225 $25,216,331 $22,172,128
-----------------------------------------------------------------------
Gross Profit $ (455,114) $ 826,928 $ 629,564 $ 3,425,316
Service Revenue $ 597,847 $1,407,310 $ 2,406,882 $ 3,733,077
-----------------------------------------------------------------------
Total $ 142,733 $2,234,238 $ 3,036,446 $ 7,158,393
-----------------------------------------------------------------------
Operating Expenses $ 2,890,854 $2,687,650 $ 7,398,949 $ 6,807,024
-----------------------------------------------------------------------
Operating Income (Loss) $(2,748,121) $ (453,412) $(4,362,503) $ 351,369
-----------------------------------------------------------------------
Other Income and (Expense)
Interest and Other Income (Expense) $ (74,019) 11,096 (59,892) 6,987
Interest Expense - (82,611) (21,094) (82,611)
-----------------------------------------------------------------------
Total Other Income and (Expense) $ (74,019) $ (71,515) $ (80,986) $ (75,624)
-----------------------------------------------------------------------
Income (Loss) From Continuing Operations $(2,822,140) $ (524,927) $(4,443,489) $ 275,745
Before Provision for Income Taxes
Income Tax Expense (Benefit)
Income Tax Expense $ - $ (29,500) $ - $ 48,290
-----------------------------------------------------------------------
Income (Loss) from Continuing Operations $(2,822,140) $ (495,427) $(4,443,489) $ 227,455
Income (Expenses) From Discontinued Operations -
-----------------------------------------------------------------------
Net Income (Loss) $(2,822,140) $ (495,427) $(4,443,489) $ 227,455
=======================================================================
Weighted Average Number of Shares 4,712,795 4,712,795 4,712,795 4,712,795
Earnings (Loss) Per Share
Continuing Operations $ (0.60) $ (0.11) $ (0.94) $ 0.05
-----------------------------------------------------------------------
Net $ (0.60) $ (0.11) $ (0.94) $ 0.05
=======================================================================
</TABLE>
See Accompanying Notes to the Financial Statements
Page 4
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Stockholders' (Deficit)
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended Net Loss for the
September 30, 1997 Period Ended September 30 December 31, 1996
------------------ ------------------------- -----------------
<S> <C> <C> <C>
Common Stock, Shares Outstanding 4,712,795 - 4,712,795
============================================================
Par Value 47,138 - 47,138
Paid in Capital 2,343,606 - 2,343,606
Accumulated Deficit (6,930,187) (4,443,489) (2,486,698)
------------------------------------------------------------
Total Stockholders' Accumulated Deficit (4,539,443) (4,443,489) (95,954)
============================================================
</TABLE>
See Accompanying Notes to the Financial Statements
Page 5
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Cash Flows
Unaudited
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) (4,443,489) $ 722,882
Adjustments to Net Income
Add Depreciation and Amortization 75,346 58,846
Changes in Operating Assets and Liabilities 5,327,588 3,054,195
---------------------------
Cash Provided (Used) by Operations $ 959,445 $ 3,835,923
---------------------------
Cash Flows from Investing Activities
Acquisition of Property and Equipment (42,599) $ (274,590)
Other Assets 85,467 (14,956)
Cost Basis of Fixed Assets Sold 165,301 -
---------------------------
Cash Provided (Used) by Investing Activities $ 208,169 $ (289,546)
---------------------------
Cash Flows from Financing Activities
Payments on Notes Payable (1,806,214) (3,080,049)
Capital Lease Obligations (57,712) (21,261)
Cash Provided (Used) by Financing
---------------------------
Activities $(1,863,926) $(3,101,310)
---------------------------
Net (Decrease) Increase in Cash $ (696,312) $ 445,067
Cash, Beginning of the Period $ 739,408 $ 374,628
---------------------------
Cash, End of the Period $ 43,096 $ 819,695
===========================
</TABLE>
See Accompanying Notes to the Financial Statements
Page 6
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------
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. In November 1995, the combined
entity changed its name to Datatrend Services, Inc. References to "the
Company" shall apply to Datatrend Services 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.
In April of 1997 the Company received notification from NASDAQ that it was
not in compliance with the minimum equity standards to remain listed on the
Small Cap Market. In July of 1997 the Company was delisted.
In September of 1997 the Company announced that it had reached an agreement
to sell a majority of the assets of its operating subsidiary, Datatrend,
Inc. to Genco, Inc. The Company also entered into a separate contract which
calls for Genco to manage the Company's operations and assume certain risks
for losses during the transition period while the proposed sale is voted on
by the shareholders. Genco's management contract began on September 8, 1997.
For further information on this transaction please refer to the Company's
report on form 8K filed on September 25, 1997.
The Company has 3,865,200 stock warrants outstanding, which have exercise
prices between $.75 and $4.69 per share, with expiration dates before
September 1999. In addition, the Company has 617,150 stock options
outstanding, which have exercise prices between $2.93 and $5.25 and
expiration dates between June 2006 and January 2007.
As of September 30, 1997 and December 31, 1996 the Company has a working
capital deficiency and a capital reserve deficiency. Management believes
that the current finances of the Company are not adequate to meet the
current and future needs of the business and is pursuing the sale of the
operating subsidiary discussed above to raise capital. As of this time there
can be no assurances that the transaction will close and that if the sale
was not completed that additional capital can be raised. If the sale is not
consummated or the required capital can not be raised management is
uncertain that the Company will be able to continue as a going concern.
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, 1996.
Page 7
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
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
- ----------------------
Effective April 5, 1996, the Company converted $3,536,154 of trade accounts
payable into term notes payable. At September 30, 1997 this note has been
paid in full. In April of 1996, the Company obtained a $2,000,000 floor plan
line of credit to finance the purchase of inventory. This note was cancelled
during the quarter ended September 30, 1997.
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.
Page 8
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
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
September 30, 1997. The Company's current liabilities ($11,136,480) exceed
its current assets ($6,182,151) by $4,954,329 at September 30, 1997
resulting in a current ratio of .5 to 1. The Company had a current ratio of
.9 to 1 at December 31, 1996.
The Company's accumulated deficit has increased to ($4,539,443) at September
30, 1997 from ($95,954) at December 31, 1996. Management believes that it
must sell the operating subsidiary, as discussed in Note 1, or raise
additional capital to meet the current and future needs of the business. As
of this time there can be no assurance that the proposed sale will be
completed or that additional capital can be raised. If the sale can not be
completed or the capital can not be raised, management is uncertain that the
Company will continue as a going concern.
On September 8, 1997 the Company entered into a Management and
Administrative Services Agreement and an Asset Purchase Agreement with the
Genco Management Company. The management agreement provides that Genco will
manage the operations of the Company's wholly owned subsidiary, Datatrend,
Inc. pending the closing of the Asset Purchase Agreement. Genco will provide
some working capital in addition to management services as part of the
agreement. For further information on this transaction please refer to the
Company's report on form 8K filed on September 25, 1997. This financial
report was prepared primarily from information provided by the Genco
Management Company.
Substantially all of the Company's assets are included in inventory and
accounts receivable. Inventory values are $3,574,418 and $2,233,564 at
September 30, 1997 and December 31, 1996, respectively. This represents an
increase of $1,340,854 or 60% during the first three quarters of 1997. This
increase is due to several programs that began in the first three-quarters
of 1997 with major manufacturers and retailers. These programs allow the
Company to purchase from the manufacturer or retailer inventory on terms to
be resold through employee purchase programs, mass merchants and other
fulfillment programs. Accounts receivable were $2,464,637 at September 30,
1997 and $3,025,558 at December 31, 1996, decreasing $560,921, or 18%. The
decrease is the result of increased reserves for potential bad debts during
the third quarter. Other current assets, including the Deferred Tax Asset,
decreased $197,829 to $-0- at September 30, 1997.
Accounts payable at September 30, 1997 and December 31, 1996 were
$10,694,494 and $4,711,559, an increase of $6,255,540, or 133%. This
increase in accounts payable is attributable to the manufacturer and
retailer programs discussed above. One individual vendor relationship
accounts for over $4,000,000 of the increased payable. Accrued expenses did
not change materially from December 31, 1996 to September 30, 1997.
At December 31, 1996, the Company had a short term note payable in the
amount of $920,496 to a finance company and $885,718 to a vendor; these
notes have been paid in full during 1997.
Results of Operations
- ---------------------
Revenues, including product sales and service revenue, for the nine months
ended September 30, 1997 and 1996 respectively were $7,846,359 and
$7,585,153. This represents an increase in revenues of $261,206 or 3%.
In the first three-quarters of 1997, the Company earned $2,406,882 in
service revenue, by refurbishing the inventory of other manufacturers and
retailers and by other miscellaneous services. The Company earned
$3,733,077 in service revenue in the first three quarters of 1996. This
decrease is attributable to the decreased revenue from a single client who
represented a majority of the 1996 sales. The Company no longer does a
material amount of business with this client.
Page 9
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
(Continued)
Results of Operations (Continued)
For the nine months ended September 30, 1997 and 1996, cost of product sales
were $25,216,331 and $22,172,128 an increase of $3,044,203, or 14%. The
resulting gross profits on product sales were $629,564 or 2.4% of product
sales, in the first three quarters of 1997, and $3,425,316 or 13% of product
sales, for the same period in 1996. During the first three-quarters of 1997
the overall gross margin decreased significantly when compared to 1996. This
decrease can be attributed to two programs that the Company is managing for
manufacturers, one of these programs limits gross margins to 4% and the
other program generates a fixed fee per sale, and the Company has increased
its reserve for obsolescence by $772,000.
Operating expenses for the first three-quarters of 1997 and 1996 were
$7,398,949 and $6,807,024 respectively. The increase of $691,925 or 10% was
primarily from costs associated with closing the Braintree facility,
employee layoffs and increased bad debt reserves.
The Company's current operations have resulted in a loss in the first three-
quarters of 1997 of ($4,443,489), or $(.94) per share, as compared to a
profit during the same period in 1996 of $227,455 or $.05 per share. This
is a decrease in profits of $ 5,064,068, or ($.99) per share. The change
in profitably is directly related to the reduced gross margin on product
sales, reduced service revenue, increased costs for plant closings,
receivable reserves and inventory reserves
Quantitative and Qualitative Discussions about Market Risk
Not Applicable.
Page 10
DATATREND SERVICES, INC. AND SUBSIDIARY
---------------------------------------
Part II: OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings
- ------- -----------------
As previously reported the Company has filed an action in the United Stated
District Court entitled Datatrend, Inc. v. Jabil Circuit, Inc.
The Company was named as a defendant in a civil action entitled Tredex
California, Inc. v. Randy Hurtado et al. Tredex California was seeking
damages in excess of $1,750,000. The Company settled this lawsuit in October
of 1997 for $30,000.
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 first
three-quarters of 1997.
Item 5. Other Information
- ------- -----------------
None.
Item 6. Exhibits and Reports of Form 8-K
- ------- --------------------------------
(a) Exhibit 27. Financial Data Schedule
(b) A form 8K was filed on September 25, 1997. This report discussed the
Asset Purchase Agreement and the Management and Administrative Services
Agreement entered into with Genco Management Company.
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 Accounting Officer
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 43,096
<SECURITIES> 0
<RECEIVABLES> 4,585,457
<ALLOWANCES> 2,120,820
<INVENTORY> 3,574,418
<CURRENT-ASSETS> 6,182,151
<PP&E> 985,396
<DEPRECIATION> 366,963
<TOTAL-ASSETS> 6,860,307
<CURRENT-LIABILITIES> 11,136,480
<BONDS> 0
0
0
<COMMON> 47,138
<OTHER-SE> 2,343,606
<TOTAL-LIABILITY-AND-EQUITY> 6,860,307
<SALES> 25,845,895
<TOTAL-REVENUES> 28,252,777
<CGS> 25,216,331
<TOTAL-COSTS> 7,398,949
<OTHER-EXPENSES> 59,892
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,094
<INCOME-PRETAX> (4,443,489)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,443,489)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,443,489)
<EPS-PRIMARY> (0.94)
<EPS-DILUTED> (0.94)
</TABLE>
