SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
Form 10-QSB
(Mark One)
X QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1995
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-21662
Dataguard Recovery Services, Inc.
(Exact name of registrant as specified in its charter)
Kentucky 61-1064606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10301 Linn Station Road, P.O. Box 37144, Louisville, KY 40233-7144
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 502-426-3434
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check [X] whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date - 4,965,770.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
March 31, December 31,
1995 1994
(Unaudited) (Audited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 487,056 $ 108,603
Accounts receivable, net 2,706,845 122,769
Other current assets 116,327 99,149
Total current assets 3,310,228 330,521
Property and equipment, net 7,106,046 5,224,022
Software development costs, net 618 11,254
Other assets 178,659 137,896
$10,595,551 $ 5,703,693
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 280,632 $ 198,725
Current installments of obligations under
capital leases 1,316,154 783,927
Notes payable to stockholders 991,176 491,176
Accounts payable 785,320 538,426
Accrued expenses 1,332,078 242,491
Other current liabilities 209,760 285,562
Total current liabilities 4,915,120 2,540,307
Long-term debt, excluding current installments 1,101,484 1,191,862
Obligations under capital leases,
excluding current installments 1,875,602 705,769
Customers' deposits 55,380 48,783
Deferred revenue 1,331,721 -
Total liabilities 9,279,307 4,486,721
Stockholders' equity:
Preferred stock without par value. Authorized
2,000,000 shares: Series A Preferred Stock
($10 stated value); authorized 100,000
shares; issued and outstanding 34,167 shares
at March 31, 1995 and December 31, 1994 341,670 341,670
Common stock without par value. Authorized
6,000,000 shares; issued and outstanding
4,965,770 shares at March 31, 1995 and
4,949,770 shares at December 31, 1994 3,005,833 2,997,833
Foreign currency translation adjustment 14,212 -
Accumulated deficit (2,045,471) (2,122,531)
Total stockholders' equity 1,316,244 1,216,972
$10,595,551 $ 5,703,693
</TABLE>
See notes to unaudited condensed consolidated financial statements.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
<TABLE>
Condensed Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended
March 30,
1995 1994
<S> <C> <C>
Service revenues $ 2,003,809 $ 1,071,454
Operating expenses:
Cost of services 1,380,180 804,344
Selling, general and administrative
expenses 441,892 263,160
1,822,072 1,067,504
Operating income 181,737 3,950
Other income (expense):
Interest expense (131,063) (95,921)
Other income 26,386 444
(104,677) (95,477)
Net income (loss) $ 77,060 $ (91,527)
Net income (loss) per share of common
stock $ .01 $ (.02)
Weighted average number of common shares
outstanding 4,962,748 4,731,503
</TABLE>
See notes to unaudited condensed consolidated financial statements.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
<TABLE>
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
<CAPTION>
Series A Foreign
Preferred Common Currency Accumulated
Stock Stock Translation Deficit Total
<S> <C> <C> <C> <C> <C>
Balance at December
31, 1994 $ 341,670 $2,997,833 $ - $(2,122,531) $1,216,972
Issuance of 16,000
shares of Common
Stock - 8,000 - - 8,000
Net income for three
months ended March
31, 1995 - - - 77,060 77,060
Translation adjustment
at March 31, 1995 - - 14,212 - 14,212
Balance at March 31,
1995 $ 341,670 $3,005,833 $ 14,212 $(2,045,471) $1,316,244
</TABLE>
See notes to unaudited condensed consolidated financial statements.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
<TABLE>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 77,060 $ (91,527)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 384,433 277,647
Other 13,866 155
Change in operating assets and liabilities:
Accounts receivable (2,583,577) 127,577
Other current assets (17,179) (12,794)
Accounts payable 246,893 (36,752)
Accrued expenses 1,018,913 (1,659)
Other current liabilities (15,877) -
Increase in other assets (41,379) (17,656)
Increase (decrease) in deferred revenue 1,274,758 (54,002)
Increase (decrease) in customers' deposits 3,635 (17,971)
Net cash provided by operating activities 361,546 173,018
Cash flows from investing activities:
Acquisition of property and equipment (30,941) (25,504)
Investment in subsidiary (218,568) -
Net cash used in investing activities (249,509) (25,504)
Cash flows from financing activities:
Proceeds from note payable to stockholder 500,000 -
Proceeds from long-term debt - 20,000
Principal payments on long-term debt and
obligations under capital leases (233,584) (198,440)
Net cash provided by (used in)
financing activities 266,416 (178,440)
Net increase (decrease) in cash and cash
equivalents 378,453 (30,926)
Cash and cash equivalents at beginning of period 108,603 47,834
Cash and cash equivalents at end of period $ 487,056 $ 16,908
</TABLE>
See notes to unaudited condensed consolidated financial statements.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1995
(1) In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
financial position as of March 31, 1995 and the results of operations
and cash flows for the three months then ended.
Certain reclassifications of amounts in the condensed consolidated
financial statements have been made to reflect comparability.
(2) This financial information should be read in conjunction with the
financial statements and the notes thereto included in the Company's
annual report on Form 10-KSB for the period ended December 31, 1994 and
the information included on Forms 8-K, 8-K/A, and 8-K/A (Amendment No.
2) dated February 3, 1995, April 19, 1995 and May 15, 1995,
respectively.
(3) On February 3, 1995, Dataguard Recovery Services, Inc. ("Dataguard")
purchased certain operating assets of Twinsys, SA ("Twinsys"), a
leading provider of computer disaster back-up services in France. The
purchased assets include multi-year customer contracts expected to
generate annual revenues of approximately 30 million French francs
(approximately $6 million at current exchange rates) in 1995. The
assets purchased by Dataguard also include the lease to Twinsys's main
computer facility in Paris, France, all customer contracts, and certain
other operating assets. Leases for certain of the computer equipment
at the facility are being renegotiated with the lessors. Dataguard
expects to lease certain additional computer equipment needed to meet
the requirements under certain of the assumed customer contracts.
Before the purchase by Dataguard, Twinsys had operated under the
administration of a French insolvency tribunal since November 1994,
following the apparent diversion of company assets to the personal
benefit of a former officer. The purchase price was 1,050,000 French
francs (approximately $210,000). Dataguard also assumed obligations
under back-up contracts for which revenues of approximately 4.9 million
French francs (approximately $1.0 million) had been prepaid.
Dataguard financed the purchase with funds borrowed from EPI
Corporation, Dataguard's largest stockholder, under an amendment to an
existing loan agreement. John P. Snyder, EPI's President and Chairman,
is a director of Dataguard. Dataguard also issued 16,000 shares of its
common stock to EPI in connection with the loan.
Summarized below are the proforma combined results of operations for the
three months ended March 31, 1995 and 1994, adjusted to reflect the
impact of certain lease terms which have been renegotiated; reduction
of personnel costs as a result of fewer required Twinsys employees,
reduced equipment and office rent expense by combining the Twinsys
office locations; and the borrowing of $500,000 by Dataguard from a
stockholder to finance the acquisition of Twinsys and to provide
working capital for its initial operations as though the acquisition
had occurred on January 1, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
Three months ended March 31,
1995 1994
<S> <C> <C>
Revenues $2,664,000 $2,351,000
Income (loss) before
income taxes 224,000 (632,000)
Net income (loss) 224,000 (632,000)
Net income (loss) per
share of common stock $ .04 $ (.14)
</TABLE>
(4) Other current liabilities consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
<S> <C> <C>
Deferred revenue $ 142,492 $ 199,455
Customers' deposits 56,103 59,064
Other 11,165 27,043
$ 209,760 $ 285,562
</TABLE>
(5) Earnings per common share are computed based on the weighted average
number of common and equivalent shares outstanding during the period
using the treasury stock method. Dividends on the cumulative Series A
Preferred Stock are deducted from net income (added to net loss) in the
calculation of earnings per common share. There are 64,012 unexercised
stock options outstanding under the Dataguard 1988 Stock Option Plan at
March 31, 1995. Warrants to purchase 68,334 shares of common stock
were outstanding at March 31, 1995. These outstanding stock options
and warrants had no dilutive effect on earnings per common share.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's 1995 Annual Meeting of Shareholders was held on April
26, 1995. John A. Brenzel, James P. Buren, Richard W. Smith and John P.
Snyder were elected as directors of the Company, to serve a one-year term
expiring at the 1996 Annual Meeting of Shareholders and until their successors
are elected and qualified. The election of directors was uncontested, and
the four nominees received the following votes:
<TABLE>
<CAPTION>
Against Broker
For or Withheld Abstaining Non-Votes
<S> <C> <C> <C> <C>
Brenzel 3,687,437 14,500 - 0
Buren 3,687,437 14,500 - 0
Smith 3,687,437 14,500 - 0
Snyder 3,687,437 14,500 - 0
</TABLE>
No other matters were voted on at the 1995 Annual Meeting.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
In connection with the Company's acquisition of certain
operating assets of Twinsys on February 3, 1995, the Company filed a Current
Report on Form 8-K dated February 3, 1995, as amended by Forms 8-K/A filed on
April 19 and May 15, 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The Company reported revenues of $2,003,809 and $1,071,454 for the three
months ended March 31, 1995 and 1994, respectively. The Company reported net
income of $77,060 for the three month period March 31, 1995 after reporting a
net loss of $91,527 for the same period in 1994. The 87% increase in revenue
is attributable almost entirely to the acquisition of certain operating assets
of Twinsys, S.A., a Paris, France-based provider of disaster recovery services
in Europe, by Twinsys Dataguard S.A., a newly formed subsidiary of the Company
(hereinafter referred to as "Twinsys"), on February 3, 1995. See Note 3 of
Notes to Condensed Consolidated Financial Statements for a more detailed
explanation of the Twinsys acquisition. For the first quarter of 1995,
Twinsys' revenues exceeded expenses by $318,152, which offset the net loss for
the period from the Company's North American operations.
Backup service revenues for the Company's North American operations decreased
21% when compared to the comparable quarter in 1994. A significant decrease
in Bull backup service revenues resulted from the expiration of the backup
services contract with the Company's second largest customer effective
January 1, 1995. Revenues under the expired contract represented
approximately 16% of the Company's total revenues in 1994. IBM backup
service revenues in the first quarter of 1995 grew by 84.6%, but were more
than offset by this decrease in Bull backup service revenues. Consulting
service revenues for the quarter ended March 31, 1995 exceeded revenues for
the same period last year. This increase was offset by a comparable decrease
in revenues from other data processing services during this period. Based
upon the current consulting contracts that have been awarded to the Company,
the Company expects revenues for 1995 from consulting services will exceed
the consulting revenues recorded for 1994. Consulting services and other
data processing services, by their nature, are not recurring, and therefore,
significant changes in these service revenues can occur from year to year.
The Company's operating expenses increased to $1,822,072 for the three months
ended March 31, 1995, from $1,067,504 in 1994. This increase is principally
attributable to Twinsys. The Company's North American operations' operating
expenses decreased slightly during the first quarter of 1995 when compared to
the same period in 1994 principally from reductions in Bull computer equipment
costs and certain marketing expenses. Selling, general and administrative
expenses in North America increased approximately 14.5% for the quarter ended
March 31, 1995 compared to 1994 due to the increased travel, professional
fees, and telephone expenses incurred relative to Twinsys. General and
administrative expenses had remained stable since 1987. These expenses are
expected to be higher throughout 1995 as the Company establishes, refines and
coordinates technical, sales and administrative procedures for its European
operations.
Interest expense totaled $131,063 and $95,921 for the three months ended
March 31, 1995 and 1994, respectively. Interest costs increased as a result
of the additional debt incurred to purchase Twinsys as well as the addition
of interest costs incurred by Twinsys in 1995.
Liquidity and Capital Resources
Accounts payable, accrued expenses and current installments of obligations
under capital leases for computer equipment were the largest components of
current liabilities, which exceeded current assets by $1,604,892 at March 31,
1995.
The principal resources available to reduce the Company's liquidity deficiency
are monthly revenues payable under its backup service contracts. As noted
above, the Company's second largest customer, Honeywell, Inc., elected not to
renew its backup agreement with the Company, which expired on December 31,
1994. Honeywell's action was the result of its decision to outsource certain
of its data processing operations to an affiliate of Bull HN. The
arrangement also included the provision of backup services. Revenues under
the expired agreement totaled $720,000 per year, which represented
approximately 16% of the Company's total service revenues during 1994. The
Company did not significantly decrease its equipment costs as a result of the
expiration of the Honeywell agreement. Thus, the expiration of the Honeywell
agreement had a material adverse impact on the Company's revenues, income,
and cash flows, in the first quarter of 1995. The Company currently cannot
predict when it will be able to generate new revenues to offset lost revenues
from Honeywell. Competitive pressures resulting from the presence of an
affiliate of Bull HN as the first alternate provider of backup services to
users of Bull computers in several years may also adversely affect revenues
receivable under future contracts for such services.
The Company's current backup agreement with the General Electric Company (GE)
expires in May 1995. Service revenues under the GE Agreement totaled
approximately $1,200,000 in 1994, representing approximately 26% of the
Company's total service revenues for that year. The Company has entered into
a new agreement with GE. Annual revenues from this new agreement will be
approximately 76% less than under the existing agreement, due to GE's reduced
backup service requirements. Beginning in the third quarter of 1995, the
Company's equipment cost associated with the GE agreement will significantly
decrease.
Backup service revenues for the Company's customers are generated in most
cases under multi-year, non-cancelable contracts that will provide
quantifiable revenues over the next five years. These contractual revenues,
net of unrecorded lease obligations, though not recorded on the Company's
balance sheet, will be available to help meet the Company's liabilities as
recorded at March 31, 1995. The Company expects to meet its other cash flow
needs in 1995 through payments of consulting revenues by existing customers,
the addition of new customers for both backup and consulting services, as
well as the extension of payment terms on certain monthly expenses and other
debt. In addition, cash flow from operations in 1995 is expected to be
positively affected as certain computer equipment leases expire during 1995
and are replaced by new leases on more favorable terms. The Company has
obtained and will continue to seek more favorable terms for its lease and
maintenance agreements to reduce its costs and expenses. The Company's
computer equipment will meet the technological requirements of the Company's
current and prospective customers without the need for any material capital
expenditure during 1995. The Company's objective is to finance the
expansion of its services with the smallest possible adverse impact on the
Company's liquidity position.
Twinsys Acquisition
As noted above, Dataguard purchased certain operating assets of Twinsys on
February 3, 1995. The purchase price for the Twinsys assets was 1,050,000
French francs (approximately $210,000). To finance the purchase of the
Twinsys assets and to provide working capital to Twinsys, the Company
increased its borrowing under a short-term loan from a stockholder from
$300,000 to $800,000. The Company expects this loan to be renewed at least
through 1995. The purchased multi-year customer contracts are expected to
generate annual revenues of approximately 30 million French francs
(approximately $6,000,000 at current exchange rates) in 1995. In the
Twinsys acquisition, the Company assumed obligations under backup contracts
for which revenues of approximately 4.9 million French francs (approximately
$1 million) had been prepaid prior to the acquisition.
The Twinsys operating results and cash flows in 1995, and Twinsys' ability to
operate without additional funding from sources other than its own operations,
depend upon Twinsys' ability to lease certain computer equipment necessary to
support its existing customer contracts. Although no assurances can be given
that Twinsys will be able to enter into long-term computer equipment leases on
terms that will allow it to operate without additional funding, the Company
has renegotiated some leases and believes the negotiations on the remaining
leases are progressing. The acquisition of a leading European disaster
recovery provider gives the Company, which is the leading provider to Bull
users in North America, an immediate presence in the much larger Bull market
in Europe. The continued profitability and liquidity of Twinsys in the
future depends upon its ability to maintain existing customers and increase
its share of the European market.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATAGUARD RECOVERY SERVICES, INC.
Date: May 19, 1995 By: \s\ Richard W. Smith
Richard W. Smith, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
\s\ Richard W. Smith President and Director May 19, 1995
Richard W. Smith (Chief Executive Officer)
(Chief Financial Officer)
(Chief Accounting Officer)
</TABLE>
