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 June 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)
- -------------------------------------------------------------------------------
(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 [X] 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 August 11, 1997.
<PAGE>
FORM 10 Q QUARTERLY REPORT
DATATREND SERVICES, INC. AND SUBSIDIARY
-----------------------------------------
INDEX
-----
Part I: Financial Information Page
Item 1.
Consolidated Balance Sheet - June 30, 1997 and December 31, 1996 2
Consolidated Statement of Operations - Six Months Ended
June 30, 1997 and June 30, 1996 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statement of Cash Flows - Six Months Ended
June 30, 1997 and June 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
<PAGE>
Datatrend Services, Inc. and Subsidiary
Consolidated Balance Sheets
Unaudited
As of June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Assets
Current Assets
Cash and Cash equivalents $ 371,898 $ 739,408
Accounts Receivable, trade, net of allowance for doubtful
accounts of $1,386,816 in 1997 and $1,485,548 in 1996 2,994,297 3,025,558
Inventories 6,087,217 2,233,564
Deferred Tax Asset 100,000 100,000
Other Current Assets 191,330 197,829
----------------------------
Total Current Assets $ 9,744,742 $ 6,296,359
----------------------------
Property and Equipment, at Cost
Furniture and Fixtures 175,946 175,946
Warehouse Equipment 354,532 354,532
Leasehold Improvements 183,771 173,881
Computer Equipment 137,408 104,739
----------------------------
$ 851,657 $ 809,098
Accumulated Depreciation (382,396) (291,617)
----------------------------
Property and Equipment, Net $ 469,261 $ 517,481
----------------------------
Other Assets $ 69,949 $ 145,190
----------------------------
Total Assets $ 10,283,952 $ 6,959,030
============================
</TABLE>
See Accompanying Notes to the Financial Statements
<PAGE> 2
Datatrend Services, Inc. and Subsidiary
Consolidated Balance Sheets
Unaudited
As of June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Liabilities and Stockholders' (Deficit)
Current Liabilities
Notes Payable, Financial Institutions $ -- $ 920,496
Notes Payable, Others -- 885,718
Accounts Payable 1,275,018 4,711,559
Accrued Expenses 669,095 466,069
Capital Leases, Short Term 27,142 27,142
----------------------------
Total Current Liabilities $ 11,971,255 $ 7,010,984
----------------------------
Long Term Liabilities
Capital Leases 30,000 44,000
----------------------------
Stockholders' (Deficit)
Common Stock
$.01 Par value; 30,000,000 shares authorized, 4,715,795 shares
issued and outstanding at June 30, 1997 and December 31, 1996
respectively $ 47,138 $ 47,138
Additional Paid in Capital 2,343,606 2,343,606
(Accumulated Deficit) (4,108,047) (2,486,698)
----------------------------
Total (Deficit) $ (1,717,303) $ (95,954)
----------------------------
Total Liabilities and Stockholders' (Deficit) $ 10,283,952 $ 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 Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 10,045,017 $ 10,559,839 $ 18,597,383 $ 17,670,457
Cost of Sales $ 9,462,095 $ 9,555,535 $ 17,512,705 $ 15,072,068
----------------------------------------------------------------
Gross Profit $ 582,922 $ 1,004,304 $ 1,084,678 $ 2,598,389
Service Revenue $ 703,648 $ 1,320,698 $ 1,809,035 $ 2,325,767
----------------------------------------------------------------
Total $ 1,286,570 $ 2,325,002 $ 2,893,713 $ 4,924,156
----------------------------------------------------------------
Operating Expenses $ 2,302,054 $ 2,024,556 $ 4,508,097 $ 4,042,786
----------------------------------------------------------------
Operating Income (Loss) $ (1,015,484) $ 300,446 $ (1,614,384) $ 881,370
----------------------------------------------------------------
Other Income and (Expense)
Interest and Other Income 6,313 6,436 14,129 8,652
Interest Expense -- (55,276) (21,094) (89,350)
----------------------------------------------------------------
Total Other Income and (Expense) $ 6,313 $ (48,840) $ (6,965) $ (80,698)
----------------------------------------------------------------
Income (Loss) From Continuing Operations Before Provision
for Income Taxes $ (1,009,171) $ 251,606 $ (1,621,349) $ 800,672
Income Tax Expense (Benefit)
Income Tax Expense $ -- $ 25,040 $ -- $ 77,790
----------------------------------------------------------------
Income (Loss) from Continuing Operations $ (1,009,171) $ 226,566 $ (1,621,349) $ 722,882
Income (Expenses) From Discontinued Operations --
----------------------------------------------------------------
Net Income (Loss) $ (1,009,171) $ 226,566 $ (1,621,349) $ 722,882
================================================================
Weighted Average Number of Shares 4,712,795 4,712,795 4,712,795 4,712,795
Earnings (Loss) Per Share
Continuing Operations $ (0.21) $ 0.05 $ (0.34) $ 0.15
----------------------------------------------------------------
Net $ (0.21) $ 0.05 $ (0.34) $ 0.15
================================================================
</TABLE>
See Accompanying Notes to the Financial Statements
<PAGE> 4
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Stockholders' (Deficit)
Unaudited
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Common Stock
---------------------- Paid In Accumulated
Shares Par Value Capital Deficit Total
--------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1996 4,712,795 47,138 2,343,606 (2,486,698) (95,954)
Net Loss for the Period Ended June 30, 1997 -- -- (1,621,349) (1,621,349)
---------------------------------------------------------------
Balance June 30, 1997 4,712,795 47,138 2,343,606 (4,108,047) (1,717,303)
===============================================================
</TABLE>
See Accompanying Notes to the Financial Statements
<PAGE> 5
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Cash Flows
Unaudited
Six Months Ended June 30
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) $ (1,621,349) $ 722,882
Adjustments to Net Income
Add Depreciation and Amortization 90,779 58,846
Changes in Operating Assets and Liabilities 2,950,592 3,054,195
-----------------------------
Cash Provided (Used) by Operations $ 1,420,022 $ 3,835,923
-----------------------------
Cash Flows from Investing Activities
Acquisition of Property and Equipment $ (42,559) $ (274,590)
Other Assets 75,241 (14,956)
-----------------------------
Cash Provided (Used) by Investing Activities $ 32,682 $ (289,546)
-----------------------------
Cash Flows from Financing Activities
Payments on Notes Payable (1,806,214) (3,080,049)
Capital Lease Obligations (14,000) (21,261)
-----------------------------
Cash Provided (Used) by Financing Activities $ (1,820,214) $ (3,101,310)
-----------------------------
Net (Decrease) Increase in Cash $ (367,510) $ 445,067
Cash, Beginning of the Period $ 739,408 $ 374,628
-----------------------------
Cash, End of the Period $ 371,898 $ 819,695
=============================
</TABLE>
See Accompanying Notes to the Financial Statements
<PAGE> 6
DATATREND SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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.
The Company also has 4,762,100 stock warrants outstanding, which have exercise
prices between $.5625 and $4.69 per share, with expiration dates between July,
1997 and June 1998. In addition, the Company has 586,350 stock options
outstanding, which have exercise prices between $2.93 and $5.25 and expiration
dates between June 2006 and January 2007.
As of June 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 reviewing its options for raising capital. As of
this time there can be no assurances that additional capital can be raised. If
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.
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 June 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 floor plan facility was
reduced to $200,000 as of June 1997 and will expire in September 1997. At
June 30, 1997 the Company owed $-0- on this note.
<PAGE> 7
DATATREND SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 4 - Contingencies
- ----------------------
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 from the Small Cap Market.
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.
The Company has been named as a defendant in a civil action entitled Tredex
California, Inc. Vs. Randy Hurtado et al. Tredex California, Inc. is seeking
damages in excess of $1,750,000. The Company believes that it will not be
materially affected by 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 June
30, 1997. The Company's current liabilities ($11,971,255) exceeds its current
assets ($9,744,742) by $2,226,513 at June 30, 1997 resulting a current ratio
of .8 to 1. The Company's current ratio at December 31, 1996 was .9 to 1.
The Company has no long term debt at this time. In June of 1997 the Company's
short term financing facilities were reduced from $2,000,000 to $200,000 and
are due to expire entirely in September.
The Company's accumulated deficit has increased to ($1,717,303) at June 30,
1997 from ($95,954) at December 31, 1996. 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 continue as a going concern.
Results of Operations
- ---------------------
Substantially all of the Company's assets are included in inventory and
accounts receivable. Inventory values are $6,087,217 and $2,233,564 at June 30,
1997 and December 31, 1996, respectively. This represents an increase of
$3,853,653, or 172% during the first two quarters of 1997. This increase is due
to several programs that began in the first and second quarter 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 $2,994,297 at June 30, 1997 and $3,025,558 at December
31, 1996, decreasing $31,261 or 1%. Management considers this decrease
immaterial. Other current assets, including the Deferred Tax Asset, decreased
$6,499 to $291,330 at June 30, 1997 from $297,829 at December 31, 1996.
Accounts payable at June 30, 1997 and December 31, 1996 were $11,275,018 and
$4,711,559, an increase of $6,563,459, or 139%. This increase in accounts
payable is attributable to the manufacturer and retailer programs discussed
above. Notes payable financial institutions decreased $920,496 (100%) to $-0-
from December 31, 1996. This note is used for short term financing of inventory
purchases that must be paid down within sixty days of the purchase. The change
in balances from December to June was made possible by the use of vendor terms
to pay for the Company's purchases during the period. The vendor terms are
advantageous to the Company as there is usually no finance charges associated
with these. Accrued expenses increased $203,026 (44%) to $669,095 from December
31, 1996 to June 30, 1997.
<PAGE> 9
DATATREND SERVICES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
(Continued)
Results of Operations (Continued)
The Company has paid off $1,806,214 of notes payable during 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. During the first two quarters of
1997 the Company paid both notes in full.
Revenues, including product sales and service revenue, for the six months ended
June 30, 1997 and 1996 respectively were $18,597,383 and $17,670,647. This
represents an increase in revenues of $926,736 or 5%. During the first quarter
of 1997 the Company sold approximately $2,400,000 to one mass merchant
customer. If these sales were removed from the comparative financial statements
revenue would have decreased for the six-month period.
In the first two quarters of 1997, the Company earned $1,809,035 in service
revenue, by refurbishing the inventory of other manufacturers and retailers and
by other miscellaneous services. The Company earned $2,325,767 in service
revenue in the first two quarters of 1996. In 1996 the Company had a
significant concentration with one customer in its refurbishing business,
during 1997 sales to this customer have decreased significantly.
For the six months ended June 30, 1997 and 1996, cost of product sales were
$17,512,705 and $15,072,068 an increase of $2,440,637, or 16%. The resulting
gross profits on product sales were $1,084,678 or 5.8% of product sales, in the
first two quarters of 1997, and $2,598,389 or 14.7% of product sales, for the
same period in 1996. During the first two 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 margin to 4% and the other program generates a
fixed fee per sale.
Operating expenses for the first two quarters of 1997 and 1996 were $4,508,097
and $4,042,786 respectively. The increase of $465,311, or 11% was primarily
from costs associated with operating the Memphis facility. During all of the
first quarter and most of the second quarter of 1996 the Memphis operations
were run out of a smaller facility with less personnel.
The Company's current operations have resulted in a loss in the first two
quarters of 1997 of ($1,621,349), or $(.34) per share, as compared to a profit
during the same period in 1996 of $496,317 or $.11 per share. This is a
decrease in profits of $2,117,666 , or $.45 per share. The change in profitably
is directly related to the decrease in gross margin and additional operating
expenses discussed above. In April of 1997 management took steps to reduce its
operating expenses, including consolidating the warehouse and service
facilities to the Memphis location, and reducing workforce costs.
<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 has been named as a defendant in a civil action entitled Tredex
California, Inc. v. Randy Hurtado et al. Tredex California is seeking damages
in excess of $1,750,000. The Company believes that it will not be materially
affected by this lawsuit.
For further information please refer to the Company's Form 10-KSB for the
year ended December 31, 1996.
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 two
quarters of 1997.
Item 5. Other Information
- --------------------------
None.
Item 6. Exhibits and Reports of Form 8-K
- -----------------------------------------
(a) Exhibit 27. Financial Data Schedule.
(b) No reports on Form 8-K were filed during the first two quarters
of 1997.
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 371,898
<SECURITIES> 0
<RECEIVABLES> 4,381,113
<ALLOWANCES> 1,386,816
<INVENTORY> 6,087,217
<CURRENT-ASSETS> 9,744,742
<PP&E> 851,657
<DEPRECIATION> 382,396
<TOTAL-ASSETS> 10,283,952
<CURRENT-LIABILITIES> 11,971,255
<BONDS> 0
0
0
<COMMON> 47,138
<OTHER-SE> 2,343,606
<TOTAL-LIABILITY-AND-EQUITY> 10,283,952
<SALES> 18,597,383
<TOTAL-REVENUES> 20,406,418
<CGS> 17,512,705
<TOTAL-COSTS> 4,508,097
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,904
<INCOME-PRETAX> (1,621,349)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,621,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,621,349)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
