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 September 30, 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 - 4,999,770.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1995 1994
(Unaudited) (Audited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 412,823 $ 108,603
Accounts receivable, net 1,811,007 122,769
Other current assets 174,244 99,149
Total current assets 2,398,074 330,521
Property and equipment, net 9,329,170 5,224,022
Other assets, net 153,537 149,150
$11,880,781 $ 5,703,693
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 328,516 $ 198,725
Current installments of obligations under
capital leases 1,896,384 783,927
Notes payable to stockholders 991,176 491,176
Accounts payable 855,941 538,426
Accrued expenses and other current liabilities 1,144,025 528,053
Total current liabilities 5,216,042 2,540,307
Long-term debt, excluding current installments 1,035,979 1,191,862
Obligations under capital leases,
excluding current installments 2,386,407 705,769
Customers' deposits 56,333 48,783
Deferred revenue 1,421,060 -
Total liabilities 10,115,821 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
September 30, 1995 and December 31, 1994 341,670 341,670
Common stock without par value. Authorized
6,000,000 shares; issued and outstanding
4,999,770 shares at September 30, 1995 and
4,949,770 shares at December 31, 1994 3,021,833 2,997,833
Foreign currency translation adjustment 38,847 -
Accumulated deficit (1,637,390) (2,122,531)
Total stockholders' equity 1,764,960 1,216,972
$11,880,781 $ 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 Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Service revenues $2,463,350 $1,164,438 $6,691,634 $3,338,203
Operating expenses:
Cost of services 1,453,229 784,143 3,973,297 2,380,226
Selling, general and
administrative expenses 621,055 279,272 1,732,217 795,275
2,074,284 1,063,415 5,705,514 3,175,501
Operating income 389,066 101,023 986,120 212,702
Other income (expense):
Interest expense (195,226) (99,066) (512,251) (300,011)
Other 28,207 376 49,801 1,057
(167,019) (93,690) (462,450) (298,954)
Net income (loss) $ 222,047 $ 2,333 $ 523,670 $ (86,252)
Net income (loss) per share
of common stock $ .04 $ - $ .10 $ (.02)
Weighted average number
of common shares
outstanding 4,995,161 4,928,292 4,979,074 4,799,821
</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
Issuance of 16,000
shares of Common
Stock - 8,000 - - 8,000
Payment of dividends - - - (27,598) (27,598)
Net income for three
months ended June
30, 1995 - - - 224,563 224,563
Translation adjustment
at June 30, 1995 - - (17,418) - (17,418)
Balance at June 30,
1995 341,670 3,013,833 (3,206) (1,848,506) 1,503,791
Issuance of 16,000
shares of Common
Stock - 8,000 - - 8,000
Payment of dividends - - - (10,931) (10,931)
Net income for three
months ended September
30, 1995 - - - 222,047 222,047
Translation adjustment
at September 30, 1995 - - 42,053 - 42,053
Balance at September 30,
1995 $341,670 $3,021,833 $ 38,847 $ (1,637,390) $1,764,960
</TABLE>
See notes to unaudited condensed consolidated financial statements.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
<TABLE>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 523,670 $ (86,252)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,508,400 810,843
Other 2,597 1,236
Change in operating assets and liabilities:
Accounts receivable (1,688,237) 147,595
Other current assets (75,096) 26,706
Accounts payable 317,515 (142,885)
Accrued expenses and other
current liabilities 791,296 59,307
Increase in other assets (20,805) (16,952)
Increase (decrease) in deferred revenue 1,221,606 (261,276)
Increase in customers' deposits 31,684 13,456
Net cash provided by operating activities 2,612,630 551,778
Cash flows from investing activities:
Acquisition of property and equipment (595,903) (44,485)
Investment in subsidiary (50,870) -
Net cash used in investing activities (646,773) (44,485)
Cash flows from financing activities:
Proceeds from note payable to stockholder 500,000 -
Proceeds from notes payable to bank - 19,150
Proceeds from issuance of common stock - 100,000
Principal payments on long-term debt and
obligations under capital leases (2,123,108) (594,707)
Payment of dividends (38,529) -
Net cash used in financing
activities (1,661,637) (475,557)
Net increase in cash and cash equivalents 304,220 31,736
Cash and cash equivalents at beginning of period 108,603 47,834
Cash and cash equivalents at end of period $ 412,823 $ 79,570
</TABLE>
See notes to unaudited condensed consolidated financial statements.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 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 September 30, 1995 and the results of operations for the three and nine
months then ended and cash flows for the nine months then ended. Operating
results for the three and nine months ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1995.
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.
On February 3, 1995, the Company purchased certain operating assets of Twinsys,
S.A., a Paris, France-based provider of disaster recovery services in Europe.
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 and nine months ended September 30, 1995 and 1994, as though the
acquisition had occurred on January 1, 1995 and 1994, respectively 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.
<TABLE>
<CAPTION>
Three months Nine Months
ended September 30, ended September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues $2,463,350 $3,025,000 $7,352,000 $8,130,000
Income (loss) before
income taxes 222,047 (421,000) 671,000 (1,010,000)
Net income (loss) 222,047 (421,000) 671,000 (1,010,000)
Net income (loss) per
share of common stock $ .04 $ (.09) $ .12 $ (.22)
</TABLE>
(3) 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 66,012 unexercised stock options outstanding under
the Dataguard 1988 Stock Option Plan at September 30, 1995. Warrants to
purchase 68,334 shares of common stock were outstanding at September 30, 1995.
These outstanding stock options and warrants had no dilutive effect on earnings
per common share.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On February 7, 1995, Bull HN Information Systems Inc. ("Bull HN")
and Honeywell Inc. filed a complaint for declaratory relief in
Massachusetts Superior Court seeking a declaration that Bull HN's
contractual obligation not to compete with Dataguard in the disaster
recovery business was extinguished by certain provisions of a 1991
contract for promotional services between Bull HN and Dataguard, and
upon the termination of that agreement Bull HN ceased to be precluded
from competing with Dataguard. Dataguard has filed counterclaims
against Bull HN claiming breach of contract, intentional interference
with prospective economical advantage and certain related claims, and
seeking declaratory and injunctive relief as to its contractual rights
as well as compensatory damages of more than $2 million and punitive
damages of up to $5 million. The lawsuit has been removed to the
United States District Court for the District of Massachusetts.
On March 24, 1995, Dataguard filed suit against Bull HN in the
United States District Court for the Western District of Kentucky,
alleging violations of federal antitrust laws as a result of Bull HN's
use of certain practices in connection with the licensing of operating
software for Bull HN computer systems to restrain competition in the
markets for disaster recovery services, externally conducted computer
services ("outsourcing") and sales of used Bull computer systems. The
lawsuit seeks injunctive relief and compensatory damages in an
unspecified amount. The suit has been transferred to the
Massachusetts District Court. Bull HN has also filed motions to
dismiss the suit and to stay the action pending disposition of the
ongoing contract proceedings in Massachusetts District Court, which
motions are pending.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
None
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The Company reported revenues of $2,463,350 and $6,691,634 for the three and
nine months ended September 30, 1995, respectively. This compares to
revenues of $1,164,438 and $3,338,203 for the comparable periods in 1994. The
Company reported net income of $222,047 and $523,670 for the three and nine
month periods ended September 30, 1995 after reporting net income of $2,333 and
a net loss of $86,252 for the same periods in 1994. The increase in revenue
and net income for the three and nine month periods in 1995 is attributable
almost entirely to the Company's subsidiary, Twinsys Dataguard S.A.
(hereinafter referred to as "Twinsys"). Dataguard acquired certain operating
assets of Twinsys, S.A., a Paris, France-based provider of disaster recovery
services in Europe on February 3, 1995. See Note 2 of Notes to Condensed
Consolidated Financial Statements for a more detailed explanation of the
Twinsys acquisition. For the first three quarters of 1995, Twinsys' revenues
exceeded expenses, which more than offset the net loss for the period from the
Company's North American operations.
Backup service revenues through September 30, 1995 for the Company's North
American operations decreased 21% when compared to the same period in 1994. A
significant decrease in Bull backup service revenues resulted from the
expiration of the Company's second largest and largest contracts effective
January 1 and June 1, 1995, respectively. These contracts together generated
approximately 42% of the Company's revenues in 1994. The Company's new
contract with its largest customer, the General Electric Company, took
effect on June 1, 1995, and provides for significantly lower revenues due to
GE's reduced backup service requirements. See "Liquidity and Capital
Resources." IBM backup service revenues through September 30, 1995 grew by
25%, but were more than offset by the decrease in Bull backup service revenues.
Consulting service revenues for the quarter and year to date ended September
30, 1995 exceeded revenues for the same periods last year. These increases
were offset by comparable decreases in revenues from other data processing
services during these periods. Based upon the current consulting contracts
that have been awarded to the Company, 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 $2,074,284 and $5,705,514 for the
three and nine months ended September 30, 1995, from $1,063,415 and $3,175,501,
respectively for the same periods in 1994. These increases are principally
attributable to Twinsys. The Company's North American operations' operating
expenses has decreased slightly in 1995 when compared to 1994 principally from
reductions in Bull computer equipment lease and maintenance costs. Selling,
general and administrative expenses in North America have increased
approximately 20% during the nine months ended September 30, 1995 when compared
to the same period in 1994 due to the increased personnel, travel, professional
fees, and telephone expenses incurred relative to Twinsys. General and
administrative expenses prior to 1995 had remained stable for a number of
years. 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 $195,226 and $512,251 for the three and nine months
ended September 30, 1995, respectively, and $99,066 and $300,011 for the same
periods in 1994. Interest costs increased as a result of the additional debt
incurred to purchase Twinsys and capitalized computer equipment leases entered
into 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 $2,817,969 at September
30, 1995.
The principal resources available to reduce the Company's liquidity deficiency
are monthly revenues payable under its backup service contracts. Backup
services 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 September 30,
1995.
The net operating results of Twinsys have provided a significant, positive
impact upon the consolidated working capital of the Company. However, the
timing and volume of working capital transfers between Twinsys and Dataguard
are subject to rules governing dividend payments by French subsidiaries of
multi-national corporations. The Company will assess the working capital needs
of its North American and European operations at year end and will determine
appropriate allocations of working capital at that time. 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 the last quarter of 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 is
exploring alternatives for financing the addition of computer equipment needed
for the backup requirements of some of Twinsys' largest customers beginning in
the first quarter of 1996. The Company's objective is to finance capital needs
with the smallest possible adverse impact on the Company's liquidity position.
As noted above, the Company's new contract with GE will generate lower backup
service revenues. However, the contract also enables the Company to
significantly reduce equipment costs associated with GE's backup service
requirements, beginning the third quarter of 1995. The Company has not yet
been able to generate new revenues in North America to offset lost revenues
from the expiration of its two largest contracts in 1995 and cannot currently
predict when it will be able to accomplish this. Revenues receivable under
future contracts for backup services may also be adversely impacted by new
competitive pressures. During the year, an affiliate of Bull HN entered the
alternate provider of backup services market for Bull users. See Part II Item
1 (Legal Proceedings) of Form 10QSB for additional discussion.
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. Since February, Twinsys has renewed or renegotiated backup
services contracts with substantially all of its customers that were under
contract at the time of the acquisition and it has successfully renegotiated
its most significant computer leases.
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: October 14, 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 October 14, 1995
Richard W. Smith (Chief Executive Officer)
(Chief Financial Officer)
(Chief Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> $ 412,823
<SECURITIES> 0
<RECEIVABLES> 1,811,007
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,398,074
<PP&E> 16,123,560
<DEPRECIATION> 6,794,390
<TOTAL-ASSETS> 11,880,781
<CURRENT-LIABILITIES> 5,216,042
<BONDS> 1,064,394
<COMMON> 3,021,833
0
341,670
<OTHER-SE> (1,598,543)
<TOTAL-LIABILITY-AND-EQUITY> 11,880,781
<SALES> 0
<TOTAL-REVENUES> 6,691,634
<CGS> 0
<TOTAL-COSTS> 5,705,514
<OTHER-EXPENSES> 462,450
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 523,670
<INCOME-TAX> 0
<INCOME-CONTINUING> 523,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 523,670
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
