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 June 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 - 4,981,770.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
June 30, December 31,
1995 1994
(Unaudited) (Audited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 771,973 $ 108,603
Accounts receivable, net 2,143,200 122,769
Other current assets 137,634 99,149
Total current assets 3,052,807 330,521
Property and equipment, net 9,565,487 5,224,022
Software development costs, net - 11,254
Other assets 161,786 137,896
$12,780,080 $ 5,703,693
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 326,128 $ 198,725
Current installments of obligations under
capital leases 2,226,836 783,927
Notes payable to stockholders 991,176 491,176
Accounts payable 1,100,411 538,426
Accrued expenses 1,016,720 242,491
Deferred revenue - 285,562
Total current liabilities 5,661,271 2,540,307
Long-term debt, excluding current installments 1,047,292 1,191,862
Obligations under capital leases,
excluding current installments 3,141,711 705,769
Customers' deposits 69,922 48,783
Deferred revenue 1,356,093 -
Total liabilities 11,276,289 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 June 30,
1995 and December 31, 1994 341,670 341,670
Common stock without par value. Authorized
6,000,000 shares; issued and outstanding
4,981,770 shares at June 30, 1995 and
4,949,770 shares at December 31, 1994 3,013,833 2,997,833
Foreign currency translation adjustment (3,206) -
Accumulated deficit (1,848,506) (2,122,531)
Total stockholders' equity 1,503,791 1,216,972
$12,780,080 $ 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 Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Service revenues $2,224,475 $1,152,311 $4,228,284 $2,223,765
Operating expenses:
Cost of services 1,139,888 791,739 2,520,068 1,596,083
Selling, general and
administrative expenses 669,270 252,843 1,111,162 516,003
1,809,158 1,044,582 3,631,230 2,112,086
Operating income 415,317 107,729 597,054 111,679
Other income (expense):
Interest expense (185,962) (105,024) (317,025) (200,946)
Other (4,792) 237 21,594 681
(190,754) (104,787) (295,431) (200,265)
Net income (loss) $ 224,563 $ 2,942 $ 301,623 $ (88,586)
Net income (loss) per share
of common stock $ .04 $ - $ .06 $ (.02)
Weighted average number
of common shares
outstanding 4,978,957 4,737,506 4,970,897 4,734,521
</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
</TABLE>
See notes to unaudited condensed consolidated financial statements.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
<TABLE>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 301,623 $ (88,586)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 956,147 544,988
Other (34,235) 155
Change in operating assets and liabilities:
Accounts receivable (2,020,431) 138,421
Other current assets (38,485) (8,182)
Accounts payable 585,266 (45,240)
Accrued expenses 660,707 49,563
Other current liabilities (25,851) -
Increase in other assets (22,486) (14,005)
Increase (decrease) in deferred revenue 1,156,638 (168,746)
Increase (decrease) in customers' deposits 2,586 4,261
Net cash provided by operating activities 1,521,479 412,629
Cash flows from investing activities:
Acquisition of property and equipment (345,868) (39,726)
Investment in subsidiary (218,568) -
Net cash used in investing activities (564,436) (39,726)
Cash flows from financing activities:
Proceeds from note payable to stockholder 500,000 -
Proceeds from long-term debt - 19,000
Principal payments on long-term debt and
obligations under capital leases (766,075) (400,017)
Payment of dividends (27,598) -
Net cash used in financing
activities (293,673) (381,017)
Net increase (decrease) in cash and cash equivalents 663,370 (8,114)
Cash and cash equivalents at beginning of period 108,603 47,834
Cash and cash equivalents at end of period $ 771,973 $ 39,720
</TABLE>
See notes to unaudited condensed consolidated financial statements.
DATAGUARD RECOVERY SERVICES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 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 June 30, 1995 and the results of operations for the three and six months
then ended and cash flows for the six 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.
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 six months ended June 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 Six Months
ended June 30, ended June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues $2,224,415 $2,754,000 $4,888,000 $5,105,000
Income (loss) before
income taxes 224,563 (43,000) 449,000 (589,000)
Net income (loss) 224,563 (43,000) 449,000 (589,000)
Net income (loss) per
share of common stock $ .04 $ (.01) $ .08 $ (.13)
</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 June 30, 1995. Warrants to purchase
68,334 shares of common stock were outstanding at June 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. Bull HN has filed motions to dismiss the suit, to
transfer the suit to the Massachusetts District Court and to stay the
action pending disposition of the ongoing proceedings in Massachusetts
District Court.
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 $2,224,475 and $4,228,284 for the three and
six months ended June 30, 1995, respectively. This compares to revenues of
$1,152,311 and $2,223,765 for the comparable periods in 1994. The Company
reported net income of $224,563 and $301,623 for the three and six month
periods ended June 30, 1995 after reporting net income of $2,942 and a net loss
of $88,586 for the same periods in 1994. The increase in revenue and net
income for the three and six 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 two quarters of 1995, Twinsys' revenues exceeded
expenses by $795,577, which offset the net loss for the period from the
Company's North American operations.
Backup service revenues through June 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
renegotiation of the backup services contract with the Company's largest
customer effective June 1, 1995, and the expiration of the backup services
contract with the Company's second largest customer effective January 1, 1995.
Revenues under the renegotiated contract were significantly reduced on June 1,
1995. The expired contract represented approximately 16% of the Company's
total revenues in 1994. IBM backup service revenues in the second quarter of
1995 and year to date through June 30, 1995 grew by 54% and 67%, respectively,
but were more than offset by this decrease in Bull backup service revenues.
Consulting service revenues for the quarter and year to date ended June 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, 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 $1,809,158 and $3,631,230 for the
three and six months ended June 30, 1995, from $1,044,582 and $2,112,086 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 costs and certain marketing expenses. Selling, general
and administrative expenses in North America has doubled during the six months
ended June 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 $185,962 and $317,025 for the three and six months
ended June 30, 1995, respectively, and $105,024 and $200,946 for the same
periods in 1994. Interest costs increased as a result of the additional debt
incurred to purchase Twinsys as well as the addition of interest costs
associated with capitalized computer equipment leases 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 $2,608,464 at June 30,
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 and second quarters 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 backup agreement with the General Electric Company (GE) expired
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 significantly 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 also significantly decrease.
Revised revenue should exceed the revised equipment costs associated with the
GE agreement.
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
June 30, 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. Twinsys has entered into long-term
computer equipment leases on terms that should allow it to operate without
additional funding. The Company has renegotiated most 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: August 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 August 14, 1995
Richard W. Smith (Chief Executive Officer)
(Chief Financial Officer)
(Chief Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> $ 771,973
<SECURITIES> 0
<RECEIVABLES> 2,143,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,052,807
<PP&E> 15,819,586
<DEPRECIATION> 6,254,099
<TOTAL-ASSETS> 12,780,080
<CURRENT-LIABILITIES> 5,661,271
<BONDS> 1,072,686
<COMMON> 3,013,833
0
341,670
<OTHER-SE> (1,851,712)
<TOTAL-LIABILITY-AND-EQUITY> 12,780,080
<SALES> 0
<TOTAL-REVENUES> 4,228,284
<CGS> 0
<TOTAL-COSTS> 3,631,230
<OTHER-EXPENSES> 295,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 301,623
<INCOME-TAX> 0
<INCOME-CONTINUING> 301,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 301,623
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
