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 June 30, 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)
1-314-432-1100
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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 July 15, 1997 there were 5,538,870 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 -June 30, 1997
and September 30, 1996
Consolidated statements of income -Three months ended June 30,
1997 and 1996
-Nine months ended June 30,
1997 and 1996
Consolidated statements of cash flows -Nine months ended June 30,
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 5. Other Information
Item 6. Exhibits
SIGNATURES
2
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, September 30,
1997 1996
(Unaudited)
----------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,442 $ 4,855
Short-term investments 11,743 6,968
Accounts receivable less allowance for doubtful
accounts of $81 at June 30, 1997 and
$269 at September 30, 1996:
Billed 6,817 10,803
Unbilled 1,880 3,878
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8,697 14,681
Inventories 156 178
Prepaid expenses 1,016 679
Deferred income taxes 184 166
Other current assets 167 153
------ ------
TOTAL CURRENT ASSETS 27,405 27,680
PROPERTY AND EQUIPMENT
Land and improvements 504 504
Buildings and improvements 2,498 2,219
Data processing equipment 5,232 4,407
Furniture, fixtures, and other 3,671 2,982
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11,905 10,112
Less accumulated depreciation 5,364 4,517
------ ------
6,541 5,595
NOTE RECEIVABLE 126 296
DEFERRED SOFTWARE COSTS (net of accumulated
amortization of $1,254 at June 30, 1997
and $1,057 at September 30, 1996) 1,425 522
INTANGIBLE ASSETS (net of accumulated
amortization of $3,381 at June 30, 1997
and $2,744 at September 30, 1996) 2,156 2,568
------ ------
$37,653 $36,661
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,996 $ 1,705
Employee compensation 413 694
Deferred revenue 2,860 3,787
Customer deposits 962 1,164
Other accrued liabilities 460 777
Income taxes payable 445 615
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TOTAL CURRENT LIABILITIES 7,136 8,742
DEFERRED INCOME TAXES 813 473
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, 5,538,870 shares issued at
June 30, 1997, 5,777,520 shares issued at
September 30, 1996 55 58
Additional paid-in capital 5,581 5,700
Foreign currency translation adjustment (85) 53
Retained earnings 24,153 21,910
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29,704 27,721
Less cost of 265,100 shares of treasury stock - 275
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TOTAL SHAREHOLDERS' EQUITY 29,704 27,446
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$37,653 $36,661
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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 Nine months ended
June 30, June 30,
1997 1996 1997 1996
------ ------ ------ ------
REVENUES
Hardware $ 2,027 $ 1,765 $ 6,658 $ 9,025
Software 1.831 2,382 5,329 6,227
Service and other 4,844 4,764 13,700 12,559
------ ------ ------ ------
8,702 8,911 25,687 27,811
EXPENSES
Cost of revenues
Hardware 1,378 1,007 4,586 6,739
Software 416 202 1,066 780
Service and other 1,165 1,106 3,307 2,982
------ ------ ------ ------
2,959 2,315 8,959 10,501
Salaries and employee benefits 2,238 2,736 7,262 7,781
General and administrative expenses 1,686 1,777 4,822 4,756
Depreciation and amortization 337 284 960 821
------ ------ ------ ------
7,220 7,112 22,003 23,859
INCOME FROM OPERATIONS 1,482 1,799 3,684 3,952
OTHER INCOME 195 100 601 451
------ ------ ------ ------
Income before income taxes 1,677 1,899 4,285 4,403
PROVISION FOR INCOME TAXES 646 725 1,491 1,665
------ ------ ------ ------
NET INCOME $ 1,031 $ 1,174 $ 2,794 $ 2,738
====== ====== ====== ======
Earnings per share $ 0.19 $ 0.21 $ 0.51 $ 0.50
====== ====== ====== ======
Weighted average number
of common shares 5,538,870 5,488,692 5,531,813 5,488,692
========= ========= ========= =========
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)
Nine months ended
June 30,
1997 1996
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OPERATING ACTIVITIES
Net income $ 2,794 $ 2,738
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,542 1,592
Provision for deferred income taxes 321 180
Gain on disposal of property and equipment (4) -
Changes in operating assets
and liabilities:
Accounts receivable 5,904 (4,449)
Inventories 21 (243)
Prepaid expenses and
other current assets (361) (254)
Accounts payable and
other current liabilities (1,473) (1,380)
Note receivable 170 88
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NET CASH PROVIDED BY (USED BY)
OPERATING ACTIVITIES 8,914 (1,728)
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INVESTING ACTIVITIES
Purchase of property and equipment (1,847) (1,505)
Purchase of short-term investments (50,175) (8,525)
Proceeds from sales of short-term investments 45,400 6,929
Purchased software (65) (249)
Deferred software cost (1,100) (298)
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NET CASH USED BY INVESTING ACTIVITIES (7,787) (3,648)
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FINANCING ACTIVITIES
Proceeds from options exercised 154 70
Dividends paid (552) -
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NET CASH (USED BY) PROVIDED BY
FINANCING ACTIVITIES (398) 70
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EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (142) (24)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 587 (5,330)
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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 $ 5,442 $ 3,706
======= =======
See notes to unaudited consolidated financial statements.
5
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 nine months ended
June 30, 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 June 30, 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.
The Company generally operates with little backlog and most of its revenues
in each quarter result from orders booked in that quarter; however, currently
the Company has a backlog related to two significant contracts. These customers
are awaiting completion of the Company's next-generation system named TAOS.
Delays in the release of TAOS could have a significantly negative impact
on the Company's sales and results of operations. Because of the
complexities inherent in developing software products as sophisticated as
those sold by the Company and the lengthy testing periods associated with
such products, no assurance can be given that future product introductions
by the Company will not be delayed. In the future, the Company's revenues
will be increasingly dependent on sales of TAOS 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 June 30, 1997 compared to Three Months Ended
June 30, 1996
Hardware revenues increased $.2 million, or 15%, to $2.0 million in the
three months ended June 30, 1997, from $1.8 million in the three months
ended June 30, 1996. The increase was primarily due to shipment of hardware
to the Company's current customers. The gross margin percentage on hardware
was 32% in the three months ended June 30, 1997, and 43% in the three
months ended June 30, 1996. The decrease is due primarily to a larger
percentage of hardware sales being derived from PC's in the three months
ended June 30, 1997. PC's have historically had a lower gross margin than
other components of integrated hardware systems.
7
Software license revenues decreased $.6 million, or 23%, to $1.8 million in
the three months ended June 30, 1997, from $2.4 million for the three months
ended June 30, 1996. The decrease is primarily due to the shipment of one large
contract in the three months ended June 30, 1996. The gross margin percentage
on software decreased to 77% in the three months ended June 30, 1997, from 92%
in the three months ended June 30, 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. Increased amortization
expense charged to software cost of revenues in the three months ended June
30, 1997, also contributed to the decrease in gross margin.
Service and other revenues remained consistent at $4.8 million in
the three months ended June 30, 1997, and in the three months ended
June 30, 1996. Management expects that maintenance revenues will
increase as the base of licensed software products increases. The gross
margin percentage on service and other revenues decreased to 76%
for the three months ended June 30, 1997, from 77% for the three months
ended June 30, 1996. This decrease is primarily due to the increase in the
three months ended June 30, 1997, of DRA Net revenues which have a lower
margin than other service revenues.
Salaries and employee benefits decreased $.5 million, or 18%, to $2.2
million in the three months ended June 30, 1997, from $2.7 million in the
three months ended June 30, 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 June 30, 1997, than
in the three months ended June 30, 1996.
General and administrative expenses remained consistent at $1.7 million
in the three months ended June 30, 1997, and $1.8 million in the three
months ended June 30, 1996.
Income from operations decreased $.3 million, or 18%, to $1.5 million in the
three months ended June 30, 1997, from $1.8 million in the three months ended
June 30, 1996. The decrease is primarily due to a reduction in software sales
in the three months ended June 30, 1997 as compared to the three months ended
June 30, 1996.
The Company's consolidated effective tax rate was 38% for the three month
period ended June 30, 1997, and the three month period ended June 30, 1996.
8
Results of Operations
Nine Months Ended June 30, 1997 compared to Nine Months Ended
June 30, 1996
Hardware revenues decreased $2.3 million, or 26%, to $6.7 million in the
nine months ended June 30, 1997, from $9.0 million in the nine months
ended June 30, 1996. The decrease was primarily due to the shipment of two
large full service contracts that generated $3.5 million in revenue in the
nine months ended June 30, 1996. The gross margin percentage on hardware
was 32% in the nine months ended June 30, 1997, and 25% in the nine months
ended June 30, 1996. The increase is due primarily to a smaller percentage
of hardware sales being derived from PC's in the nine months ended June 30,
1997, PC's have historically had a lower gross margin than other components
of integrated hardware systems.
Software license revenues decreased $.9 million, or 14%, to $5.3 million in
the nine months ended June 30, 1997 from $6.2 million in the nine months ended
June 30, 1996. The decrease is primarily due to the shipment of one large
contract in the nine months ended June 30, 1996. The gross margin percentage
on software was 80% in the nine months ended June 30, 1997, and 87% in
the nine months ended June 30, 1996. The decrease in gross margin is
primarily due to increased amortization expense charged to software cost of
revenues in the nine months ended June 30, 1997.
Service and other revenues increased $1.1 million, or 9%, to $13.7 million
in the nine months ended June 30, 1997, from $12.6 million in the nine months
ended June 30, 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 nine months ended June 30, 1997, and for the nine months
ended June 30, 1996.
Salaries and employee benefits decreased $.5 million, or 7%, to $7.3 million
in the nine months ended June 30, 1997, from $7.8 million in the nine 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 nine months ended June 30, 1997, than in the nine months
ended June 30, 1996.
General and administrative expenses remained consistent at $4.8 million,
for the nine months ended June 30, 1997, and for the nine months ended
June 30, 1996.
Income from operations decreased $.3 million, or 7%, to $3.7 million in the
nine months ended June 30, 1997, from $4.0 million the nine months ended
June 30, 1996.
The Company's consolidated effective tax rate was 35% for the nine month
period ended June 30, 1997, and 38% for the nine month period ended
June 30, 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 nine month period ended June 30,
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 June 30, 1997, the Company's
working capital was $20.3 million and its ratio of current assets to current
liabilities was 3.8 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 $8.9 million for
the nine months ended June 30, 1997, compared to $1.7 million used by
operating activities for the nine months ended June 30, 1996. The
increase in cash provided by operating activities is primarily due to
the reduction of accounts receivable to $8.7 million at June 30,
1997, from $15.5 million June 30, 1996. This amount related
to two contracts and has been collected as of June 30, 1997.
Net cash used by investing activities was $7.8 million for the nine months
ended June 30, 1997, compared to $3.6 million for the nine months ended
June 30, 1996. The increase in net cash used by investing activities is
primarily a result of an increase net purchases of short-term investments
in the nine months ended June 30, 1997, compared to the nine months ended
June 30, 1996.
Financing activities for the nine months ended June 30, 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 $5.4 million,
short-term investments of $11.7 million, accounts receivable of $8.7 million,
continued cash flow from operations, availability of the $6.0 million line of
credit, and total current liabilities of $7.1 million, the Company will be
able to meet both its short-term liquidity needs and short-term capital
expenditure needs. The Board of Directors has authorized management to
repurchase its Common Stock in an aggregate amount of up to $4 million.
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 $.8 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.
Not applicable.
Item 5. Other Information.
On July 17, 1997, the Board of Directors authorized the repurchase
of the Company's Common Stock in an aggregate amount of up to $4
million in purchase price.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 First Amendment to Employment Agreement
10.2 Data Research Associates, Inc. Cafeteria Plan as Amended to include
the Data Research Associates, Inc. Dependent Care Assistance Plan
27 Financial Data Schedule
99 Press Release
(b) No reports on Form 8-K were required to be filed during the three
months ended June 30, 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.
August 8, 1997 /s/ Michael J. Mellinger
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Date Michael J. Mellinger
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
August 8, 1997 /s/ Katharine W. Biggs
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Date Katharine W. Biggs
Vice President, and
Chief Financial Officer
(Principal Accounting Officer)
12