UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-20244
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DATA RESEARCH ASSOCIATES, INC.
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(Exact name of registrant as specified in its charter)
MISSOURI 43-1063230
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1276 NORTH WARSON RD. ST. LOUIS, MISSOURI 63132
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(Address of principal executive offices) (Zip Code)
(314) 432-1100
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(Registrant's telephone number, including area code)
Indicate by check mark 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
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
At April 15, 1997 there were 5,536,870 shares of the registrant's common stock
outstanding.
INDEX
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -March 31, 1997
and September 30, 1996
Consolidated statements of income -Three months ended March 31,
1997 and 1996
-Six months ended March 31,
1997 and 1996
Consolidated statements of cash flows -Six months ended March 31,
1997 and 1996
Notes to the unaudited consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders.
SIGNATURES
2
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, September 30,
1997 1996
(Unaudited)
----------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,201 $ 4,855
Short-term investments 8,708 6,968
Accounts receivable less allowance for doubtful
accounts of $81 at March 31, 1997 and
$269 at September 30, 1996:
Billed 8,491 10,803
Unbilled 3,241 3,878
------ ------
11,732 14,681
Inventories 123 178
Prepaid expenses 987 679
Deferred income taxes 133 166
Other current assets 178 153
------ ------
TOTAL CURRENT ASSETS 27,062 27,680
PROPERTY AND EQUIPMENT
Land and improvements 504 504
Building and improvements 2,433 2,219
Data processing equipment 4,903 4,407
Furniture, fixtures, and other 3,478 2,982
------ ------
11,318 10,112
Less accumulated depreciation 5,068 4,517
------ ------
6,250 5,595
NOTE RECEIVABLE 135 296
DEFERRED SOFTWARE COSTS (net of accumulated
amortization of $1,188 at March 31, 1997
and $1,057 at September 30, 1996) 1,091 522
INTANGIBLE ASSETS (net of accumulated
amortization of $3,151 at March 31, 1997
and $2,744 at September 30, 1996) 2,256 2,568
------ ------
$36,794 $36,661
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,811 $ 1,705
Employee compensation 479 694
Deferred revenue 3,217 3,787
Customer deposits 1,103 1,164
Other accrued liabilities 566 777
Income taxes payable 624 615
------ ------
TOTAL CURRENT LIABILITIES 7,800 8,742
DEFERRED INCOME TAXES 354 473
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share--
1,000,000 shares authorized, no shares issued - -
Common stock, par value $.01 per share--10,000,000
shares authorized, 5,536,870 shares issued at
March 31, 1997, 5,777,520 shares issued at
September 30, 1996 55 58
Additional paid-in capital 5,569 5,700
Foreign currency translation adjustment (105) 53
Retained earnings 23,121 21,910
------ ------
28,640 27,721
Less cost of 265,100 shares of treasury stock - 275
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TOTAL SHAREHOLDERS' EQUITY 28,640 27,446
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$36,794 $36,661
====== ======
See notes to unaudited consolidated financial statements.
3
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share data)
Three months ended Six months ended
March 31, March 31,
1997 1996 1997 1996
------ ------ ------ ------
REVENUES
Hardware $ 3,235 $ 5,819 $ 4,631 $ 7,260
Software 2,196 2,216 3,498 3,845
Service and other 4,426 4,139 8,856 7,795
------ ------ ------ ------
9,857 12,174 16,985 18,900
EXPENSES
Cost of revenues
Hardware 2,232 4,758 3,208 5,732
Software 401 318 650 578
Service and other 1,281 1,100 2,142 1,876
------ ------ ------ ------
3,914 6,176 6,000 8,186
Salaries and employee benefits 2,462 2,538 5,024 5,045
General and administrative expenses 1,648 1,603 3,136 2,979
Depreciation and amortization 329 273 623 537
------ ------ ------ ------
8,353 10,590 14,783 16,747
INCOME FROM OPERATIONS 1,504 1,584 2,202 2,153
OTHER INCOME 204 185 406 351
------ ------ ------ ------
Income before income taxes 1,708 1,769 2,608 2,504
PROVISION FOR INCOME TAXES 486 625 845 940
------ ------ ------ ------
NET INCOME $ 1,222 $ 1,144 $ 1,763 $ 1,564
====== ====== ====== ======
Earnings per share $ 0.22 $ 0.21 $ 0.32 $ 0.29
====== ====== ====== ======
Weighted average number
of common shares 5,532,478 5,477,117 5,531,416 5,474,093
========= ========= ========= =========
Dividends declared
per share $ - $ - $ .10 $ -
========= ========= ========= =========
See notes to unaudited consolidated financial statements.
4
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six months ended
March 31,
1997 1996
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OPERATING ACTIVITIES
Net income $ 1,763 $ 1,564
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,056 1,031
Provision for deferred income taxes (87) 55
Changes in operating assets
and liabilities:
Accounts receivable 2,876 (3,150)
Inventories 54 (17)
Prepaid expenses and
other current assets (303) (82)
Accounts payable and
other current liabilities (877) 451
Note receivable 161 45
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NET CASH PROVIDED BY (USED BY)
OPERATING ACTIVITIES 4,643 (103)
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INVESTING ACTIVITIES
Purchase of property and equipment (1,235) (1,291)
Purchase of short-term investments (36,251) (6,013)
Proceeds from sales of short-term investments 34,511 4,000
Purchased software (48) (158)
Deferred software cost (700) (140)
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NET CASH USED BY INVESTING ACTIVITIES (3,723) (3,602)
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FINANCING ACTIVITIES
Proceeds from options exercised 141 35
Dividends paid (552) -
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NET CASH (USED BY) PROVIDED BY
FINANCING ACTIVITIES (411) 35
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EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (163) (23)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 346 (3,693)
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Cash and cash equivalents at
beginning of period 4,855 9,036
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 5,201 $ 5,343
======= =======
See notes to unaudited consolidated financial statements.
5
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. Basis of Presentation
The unaudited consolidated financial statements of Data Research Associates,
Inc. (the "Company" or "DRA") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and,
therefore, should be read in conjunction with the Company's consolidated
financial statements and the notes thereto for the year ended September 30,
1996, contained in the Company's annual report for the year ended
September 30, 1996. In the opinion of management, all adjustments (consisting
only of normal recurring items) considered necessary for a fair presentation
have been included. The results of operations for the six months ended
March 31, 1997, are not necessarily indicative of the results that may be
expected for the year ending September 30, 1997.
2. Inventories
Inventories consist primarily of computer equipment and supplies which are
stated at the lower of cost (first-in, first-out method) or market and the
unamortized cost of computer software purchased for resale. The Company had
only finished goods in inventory at March 31, 1997, and September 30, 1996.
3. Income Taxes
The provision for income taxes is computed using the liability method. The
difference between the effective income tax rate and the U.S. federal income
tax rate is a result of state taxes and the difference between the financial
statement and federal income tax recognition of foreign losses.
4. Treasury Stock Retirement
On February 12, 1997, the Company retired the 265,100 shares of common stock
held in treasury.
6
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's revenues are derived from three sources: (i) computer
hardware sales; (ii) software licenses; and (iii) sales of services,
including training, conversion, networking, database access, system support
and product maintenance. Revenue is recognized on hardware sales and software
licenses upon shipment of the product. Revenue from hardware and software
maintenance contracts is recognized monthly over the term of the maintenance
contract. Other service revenues are recognized upon completion of the
services. The components of the cost for development of software primarily
include salaries and employee benefits and are expensed as incurred. All
costs qualifying for deferral are reported on the balance sheet as deferred
software costs and amortized over the estimated useful life of the product.
The amortization of capitalized software is allocated as a direct cost of
licensing DRA software. The Company typically experiences greater gross
margin on software licenses than on sales of hardware or services. The
Company's profitability depends in part on the mix of its revenue components
and not necessarily on total revenues.
The Company's revenues and earnings can fluctuate from quarter to quarter
depending upon, among other things, such factors as the complexity of
customers' procurement processes, new product and service introductions by
the Company and other vendors, delays in customer purchases due to timing
of library professional conferences and trade shows, installation scheduling
and customer delays in facilities preparation. In addition, a substantial
portion of the Company's revenues for each quarter is attributable to a
limited number of orders and tends to be realized towards the end of each
quarter. Thus, even short delays or deferrals of sales near the end of a
quarter can cause quarterly results to fluctuate substantially. In the future,
the Company's revenues will be increasingly dependent on sales of its next-
generation system which is currently being developed. The timing of the
completion of this system, which is based on object-oriented client/server
design, may be affected by multiple factors, including rapid technological
change, dependence on third-party suppliers and the relative scarcity of
qualified technical staff.
Except for the historical information and statements contained in
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A"), the matters and items contained in this document,
including MD&A, contain forward looking statements that involve uncertainties
and risks. The Company's future results could differ materially from those
discussed in this document. Factors that could cause a contribution to such
differences, include, but are not limited to, those presented in the Company's
Form 10K for the year ended September 30, 1996.
Results of Operations
Three Months Ended March 31, 1997 compared to Three Months Ended
March 31, 1996
Hardware revenues decreased $2.6 million, or 44%, to $3.2 million in the
three months ended March 31, 1997, from $5.8 million in the three months
ended March 31, 1996. The decrease was primarily due to the shipment of two
large full service contracts that generated $3.5 million in revenue in the
three months ended March 31, 1996. The gross margin percentage on hardware
was 31% in the three months ended March 31, 1997, and 18% in the three
months ended March 31, 1996. The increase is due primarily to a larger
percentage of hardware sales being derived from PC's in the three months
ended March 31, 1996. PC's have historically had a lower gross margin than
other components of integrated hardware systems.
7
Software license revenues remained consistent at $2.2 million in
the three months ended March 31, 1997, and the three months ended March 31,
1996. The gross margin percentage on software decreased to 82% in the three
months ended March 31, 1997, from 86% in the three months ended March 31, 1996.
The decrease is primarily due to the mix of third party software sold. While
all third party software typically has a lower gross margin than
DRA developed software, the margin of third party software varies
according to the type of software and the
terms that DRA has negotiated with the developer of the product. These margins
currently range from 50% to 80% of the list price of the product.
Service and other revenues increased $.3 million, or 7%, to $4.4 million in
the three months ended March 31, 1997, from $4.1 million in the three months
ended March 31, 1996. Management expects that maintenance revenues will
continue to increase as the base of licensed software products increases.
The gross margin percentage on service and other revenues decreased to 71%
for the three months ended March 31, 1997, from 73% for the three months
ended March 31, 1996. This decrease is primarily due to the increase in the
three months ended March 31, 1997, of DRA Net revenues which have a lower
margin than other service revenues.
Salaries and employee benefits remained consistent at $2.5 million in the
three months ended March 31, 1997, and in the three months ended March 31,
1996. Annual salary increases in 1997 were offset by higher capitalization of
salaries and employee benefits related to software development in the three
months ended March 31, 1997, than in the three months ended March 31, 1996.
General and administrative expenses remained consistent at $1.6 million in
the three months ended March 31, 1997, and in the three months ended March 31,
1996.
Income from operations decreased $.1 million, or 5%, to $1.5 million in the
three months ended March 31, 1997, from $1.6 million in the three months ended
March 31, 1996.
The Company's consolidated effective tax rate was 28% for the three month
period ended March 31, 1997, and 35% for the three month period ended
March 31, 1996. The rates reflect the change in the valuation of the Company's
foreign subsidiaries' losses. The Company expects to utilize net operating
losses of certain of the Company's foreign subsidiaries in 1997, accordingly,
the Company's effective tax rate for the three month period ended March 31,
1997, reflects a reduction in the effective tax rate in order to approximate
the expected effective rate for the fiscal year ending September 30, 1997.
8
Results of Operations
Six Months Ended March 31, 1997 compared to Six Months Ended
March 31, 1996
Hardware revenues decreased $2.7 million, or 36%, to $4.6 million in the
six months ended March 31, 1997, from $7.3 million in the six months
ended March 31, 1996. The decrease was primarily due to the shipment of two
large full service contracts that generated $3.5 million in revenue in the
six months ended March 31, 1996. The gross margin percentage on hardware
was 31% in the six months ended March 31, 1997, and 21% in the six months
ended March 31, 1996. The increase is due primarily to a larger percentage
of hardware sales being derived from PC's in the six months ended March 31,
1996. PC's have historically had a lower gross margin than other components
of integrated hardware systems.
Software license revenues decreased $.3 million, or 9%, to $3.5 million in
the six months ended March 31, 1997 from $3.8 million in the six months ended
March 31, 1996. The decrease is primarily due to a reduction of third
party software sold during the six months ended March 31, 1997. The gross
margin percentage on software decreased to 81% in the six months ended March
31, 1997, from 85% in the three months ended March 31, 1996. The decrease is
primarily due to the mix of third party software sold. While all third party
software typically has a lower gross margin than DRA developed software, the
margin of third party software varies according to the type of software and the
terms that DRA has negotiated with the developer of the product. These margins
currently range from 50% to 80% of the list price of the product
Service and other revenues increased $1.1 million, or 14%, to $8.9 million in
the six months ended March 31, 1997, from $7.8 million in the six months
ended March 31, 1996. Management expects that maintenance revenues will
continue to increase as the base of licensed software products increases.
The gross margin percentage on service and other revenues remained consistent
at 76% for the six months ended March 31, 1997, and for the six months
ended March 31, 1996.
Salaries and employee benefits remained consistent at $5.0 million in the
six months ended March 31, 1997, and in the six months ended March 31,
1996. Annual salary increases in 1997 were offset by higher capitalization of
salaries and employee benefits related to software development in the six
months ended March 31, 1997, than in the six months ended March 31, 1996.
General and administrative expenses increased $.1 million, or 5%, to $3.1
million in the six months ended March 31, 1997, from $3.0 million in the three
months ended March 31, 1996.
Income from operations remained consistent at $2.2 million, for the
six months ended March 31, 1997, and for the six months ended March 31, 1996.
The Company's consolidated effective tax rate was 32% for the six month
period ended March 31, 1997, and 38% for the six month period ended
March 31, 1996. The rates reflect the change in the valuation of the Company's
foreign subsidiaries' losses. The Company expects to utilize net operating
losses of certain of the Company's foreign subsidiaries in 1997, accordingly,
the Company's effective tax rate for the six month period ended March 31,
1997, reflects a reduction in the effective tax rate in order to approximate
the expected effective rate for the fiscal year ending September 30, 1997.
9
Liquidity and Capital Resources
The Company's cash needs are primarily for working capital and capital
expenditures and historically have been met by cash flows from operations,
bank borrowings, and equipment leases. At March 31, 1997, the Company's
working capital was $19.3 million and its ratio of current assets to current
liabilities was 3.5 to 1, as compared to working capital of $18.9 million
and a ratio of current assets to current liabilities of 3.2 to 1 at
September 30, 1996.
Net cash provided by operating activities was $4.6 million for
the six months ended March 31, 1997, compared to $.1 million used by
operating activities for the six months ended March 31, 1996. The increase
in cash provided by operating activities is primarily due to $4.5 million
of unbilled accounts receivable at March 31, 1996. This amount related to
two contracts and has been billed and collected as of March 31, 1997.
Net cash used by investing activities was $3.7 million for the six months
ended March 31, 1997, compared to $3.6 million for the six months ended
March 31, 1996. The increase in net cash used by investing activities is
primarily a result of an increase in capitalization of deferred software
costs offset by a decrease in the net purchases of short-term investments
in the six months ended March 31, 1997, compared to the six months ended
March 31, 1996.
Financing activities for the six months ended March 31, 1997, include the
payment of a $.10 per share dividend in January 1997. Also in January 1997,
management extended the Company's $6.0 million line of credit to January 1998.
All terms remain the same. The line of credit bears interest at federal
funds rate plus 200 basis points payable monthly on outstanding balances.
There have been no borrowings against the Company's line of credit since
May 1991.
Management believes that, with the current cash position of $5.2 million,
short-term investments of $8.7 million, accounts receivable of $11.7 million,
continued cash flow from operations, availability of the $6.0 million line of
credit, and total current liabilities of $7.8 million, the Company will be
able to meet both its short-term liquidity needs and short-term capital
expenditure needs. The Company has made no material commitments with respect
to capital expenditures planned for fiscal 1997. Management believes that with
total long-term liabilities of approximately $.4 million and no other known
long-term commitments or demands, the Company will be able to satisfy its
known long-term liabilities and liquidity needs through the funding sources
identified above.
10
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Shareholders of the Company
(the "Annual Meeting") was held on February 12, 1997.
Of the 5,522,620 shares entitled to vote at the Annual
Meeting, 5,206,307 shares were present at such meeting
in person or by proxy.
(b) Not applicable.
(c) At the Annual Meeting, the shareholders of the Company elected
Carole Cotton as a Class B Director of the Company, to hold office
until the annual meeting of the Company's shareholders in 2000 and
until her successor has been duly elected and qualified, by a vote
of 5,197,482 for and 8,825 withheld.
At the Annual Meeting, the shareholders of the Company elected
Donald P. Gallop as a Class B Director of the Company, to hold
office until the annual meeting of the Company's shareholders in
2000 and until his successor has been duly elected and qualified,
by a vote of 5,196,557 for and 9,750 withheld.
The First Amendment to Data Research Associates, Inc. Director
Stock Option Plan (the "Amendment") was adopted by the Board of
Directors November 21, 1996, and was submitted to the shareholders
of the Company for their approval at the Annual Meeting. The
Amendment increased the aggregate number of shares available to be
issued under the Data Research Associates, Inc. Director Stock
Option Plan from 75,000 to 175,000. The Amendment was approved by
the shareholders by a vote of 5,155,088 for, 35,594 against, and
8,614 abstentions and broker nonvotes.
(d) Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Employment Agreement
27 Financial Data Schedule
(b) No reports on Form 8-K were required to be filed during the three
months ended March 31, 1997.
11
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
SIGNATURES
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.
DATA RESEARCH ASSOCIATES, INC.
May 9, 1997 /s/ Michael J. Mellinger
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Date Michael J. Mellinger
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
May 9, 1997 /s/Katharine W. Biggs
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Date Katharine W. Biggs
Vice President, and
Chief Financial Officer
(Principal Accounting Officer)
12