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 March 31, 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
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DATATREND SERVICES, INC.
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(Exact Name of Registrant 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 Number)
1515 Washington Street, Braintree, MA 02184
- -----------------------------------------------------------------------------
(Address of Principal Executive Offices)
(617) 691-1200
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(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 [ ] 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 April 30, 1997.
FORM 10 Q QUARTERLY REPORT
DATATREND SERVICES, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I: Financial Information
Item 1.
Consolidated Balance Sheet - March 31, 1997 and December 31, 1996 2
Consolidated Statement of Operations - Three Months Ended March 31, 1997
and March 31, 1996 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statement of Cash Flows - Three Months Ended March 31, 1997
and March 31, 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 March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and Cash equivalents $ 447,962 $ 739,408
Accounts Receivable, trade, net of allowance for doubtful
accounts of $1,386,857 in 1997 and $1,485,548 in 1996 3,637,485 3,025,558
Inventories 4,176,490 2,233,564
Deferred Tax Asset 100,000 100,000
Other Current Assets 299,011 197,829
---------------------------
Total Current Assets $ 8,660,948 $ 6,296,359
---------------------------
Property and Equipment, at Cost
Furniture and Fixtures 172,982 175,946
Warehouse Equipment 346,846 354,532
Leasehold Improvements 188,126 173,881
Computer Equipment 124,457 104,739
---------------------------
$ 832,411 $ 809,098
Accumulated Depreciation (330,585) (291,617)
---------------------------
Property and Equipment, Net $ 501,826 $ 517,481
---------------------------
Other Assets $ 72,487 $ 145,190
---------------------------
Total Assets $ 9,235,261 $ 6,959,030
===========================
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Balance Sheets
Unaudited
As of March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Liabilities and Stockholders' (Deficit)
- ---------------------------------------
Current Liabilities
Notes Payable, Financial Institutions $ 215,882 $ 920,496
Notes Payable, Others -- 885,718
Accounts Payable 9,150,513 4,711,559
Accrued Expenses 512,856 466,069
Capital Leases, Short Term 27,142 27,142
---------------------------
Total Current Liabilities $ 9,906,393 $ 7,010,984
---------------------------
Long Term Liabilities
Capital Leases 37,000 44,000
---------------------------
Stockholders' (Deficit)
Common Stock
$.01 Par value; 30,000,000 shares authorized, 4,715,795 shares
issued and outstanding at March 31, 1997 and December 31, 1996
respectively $ 47,138 $ 47,138
Additional Paid in Capital 2,343,606 2,343,606
(Accumulated Deficit) (3,098,876) (2,486,698)
---------------------------
Total (Deficit) $ (708,132) $ (95,954)
---------------------------
Total Liabilities and Stockholders' (Deficit) $ 9,235,261 $ 6,959,030
===========================
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31, 1997 March 31, 1996
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<S> <C> <C>
Sales $ 8,554,367 $ 7,110,620
Cost of Sales $ 8,050,611 $ 5,516,533
------------------------------
Gross Profit $ 503,756 $ 1,594,087
Service Revenue $ 1,103,387 $ 1,005,068
------------------------------
Total $ 1,607,143 $ 2,599,155
------------------------------
Operating Expenses $ 2,205,339 $ 2,018,230
------------------------------
Operating Income (Loss) $ (598,196) $ 580,925
------------------------------
Other Income and (Expense)
Interest and Other Income 7,816 2,216
Interest Expense (21,798) (34,074)
------------------------------
Total Other Income and (Expense) $ (13,982) $ (31,858)
------------------------------
Income (Loss) From Continuing Operations $ (612,178) $ 549,067
Before Provision for Income Taxes
Income Tax Expense
Income Tax Expense $ -- $ 52,750
------------------------------
$ -- $ 52,750
Net Income (Loss) $ (612,178) $ 496,317
==============================
Weighted Average Number of Shares 4,712,795 4,712,795
Earnings (Loss) Per Share $ (0.13) $ 0.11
------------------------------
Net $ (0.13) $ 0.11
==============================
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Stockholders' (Deficit)
Unaudited
Three Months Ended March 31, 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 March 31, 1997 -- -- (612,178) (612,178)
---------------------------------------------------------------
Balance March 31, 1997 4,712,795 47,138 2,343,606 (3,098,876) (708,132)
===============================================================
</TABLE>
See Accompanying Notes to the Financial Statements
Datatrend Services, Inc. and Subsidiary
Consolidated Statement of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------
1997 1996
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<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) $ (612,178) $ 496,317
Adjustments to Net Income
Add Depreciation and Amortization 38,968 18,757
Changes in Operating Assets and Liabilities 1,829,706 1,589,540
-----------------------------
Cash Provided (Used) by Operations $ 1,256,496 $ 2,104,614
-----------------------------
Cash Flows from Investing Activities
Acquisition of Property and Equipment $ (23,313) $ (191,748)
Other Assets 72,703 5,225
-----------------------------
Cash Provided (Used) by Investing Activities $ 49,390 $ (186,523)
-----------------------------
Cash Flows from Financing Activities
Payments on Notes Payable (1,590,332) (1,889,778)
Capital Lease Obligations (7,000) 73,869
-----------------------------
Cash Provided (Used) by Financing Activities $ (1,597,332) $ (1,815,909)
-----------------------------
Net Increase (Decrease) in Cash $ (291,446) $ 102,182
Cash, Beginning of the Period $ 739,408 $ 374,628
-----------------------------
Cash, End of the Period $ 447,962 $ 476,810
=============================
</TABLE>
See Accompanying Notes to the Financial Statements
DATATREND SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31, 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 March 31, 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. At March
31, 1997 the Company owed $215,882 on this note.
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 remained listed on
the Small Cap Market. The Company is responding to notification and has
asked for additional time to raise its equity above the required minimum.
There can be no assurance that the Company will be able to regain compliance
with the standards for maintaining its NASDAQ listing.
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.
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
March 31, 1997. The Company's current liabilities ($9,906,393) exceeds its
current assets ($8,660,948) by $1,245,445 at March 31, 1997 resulting a
current ratio of .9 to 1. The Company had a similar current ratio at
December 31, 1996.
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 sixty days of the funding.
The Company's accumulated deficit has increased to ($708,132) at March 31,
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
- ---------------------
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. 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 $4,176,490 and $2,233,564 at
March 31, 1997 and December 31, 1996, respectively. This represents an
increase of $1,942,926, or 87% during the first quarter of 1997. This
increase is due to several programs that began in the first 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 $3,637,485 at March 31,
1997 and $3,025,558 at December 31, 1996, increasing $611,927, or 20%.
The increase is the result of a sale to a mass merchant customer at the
end of the quarter. Other current assets, including the Deferred Tax
Asset, increased $101,182 to $399,011 at March 31, 1997 from $297,829
at December 31, 1996.
Accounts payable at March 31, 1997 and December 31, 1996 were $9,150,513
and $4,711,559, an increase of $4,438,954, or 94%. This increase in
accounts payable is attributable to the manufacturer and retailer programs
discussed above. Notes payable financial institutions decreased $704,614
(77%) to $215,882 from $920,496 at 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
March 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 the
these. Accrued expenses did not change materially from December 31, 1996
to March 31, 1997.
The Company has paid off $1,590,332 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 quarter of 1997 the Company paid the vendor note in full and reduced
the borrowings from the finance company to $215,882.
Revenues, including product sales and service revenue, for the three
months ended March 31, 1997 and 1996 respectively were $9,657,754 and
$8,115,688. This represents an increase in revenues of $1,542,066 or 19%.
During the first quarter of 1997 the Company sold approximately $2,400,000
to one mass merchant customer. These sales represented a majority of the
comparative increase.
In the first quarter of 1997, the Company earned $1,103,387 in service
revenue, by refurbishing the inventory of other manufacturers and retailers
and by other miscellaneous services. The Company earned $1,005,068 in
service revenue in the first quarter of 1996.
For the three months ended March 31, 1997 and 1996, cost of product sales
were $8,050,611 and $5,516,533 an increase of $2,534,078, or 46%. The
resulting gross profits on product sales were $503,756 or 5.9% of product
sales, in the first quarter of 1997, and $1,594,087 or 22% of product
sales, for the same period in 1996. During the first quarter 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 quarter of 1997 and 1996 were $2,205,339
and $2,018,230 respectively. The increase of $187,109, or 9% was
primarily from costs associated with running the Memphis facility. During
the first 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
quarter of 1997 of ($612,178), or $(.13) 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 $1,108,495, or $.24 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 has taken steps to reduce its operating expenses, including
consolidating the warehouse and service facilities to the Memphis
location, and reducing workforce costs.
Quantitative and Qualitative Discussions About Market Risk
- ----------------------------------------------------------
Not applicable.
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.
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
quarter of 1997.
Item 5. Other Information
- ----------------------------
None.
Item 6. Exhibits and Reports of Form 8-K
- -------------------------------------------
No reports on form 8-K were field during the first quarter 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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 447,962
<SECURITIES> 0
<RECEIVABLES> 5,024,342
<ALLOWANCES> 1,386,857
<INVENTORY> 4,176,490
<CURRENT-ASSETS> 8,660,948
<PP&E> 832,411
<DEPRECIATION> 330,585
<TOTAL-ASSETS> 9,235,261
<CURRENT-LIABILITIES> 9,906,393
<BONDS> 0
0
0
<COMMON> 47,138
<OTHER-SE> 2,343,606
<TOTAL-LIABILITY-AND-EQUITY> 9,235,261
<SALES> 8,554,367
<TOTAL-REVENUES> 9,657,754
<CGS> 8,050,611
<TOTAL-COSTS> 2,205,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,798
<INCOME-PRETAX> (612,178)
<INCOME-TAX> 0
<INCOME-CONTINUING> (612,178)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (612,178)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
