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, 1998
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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 July 15, 1998 there were 5,375,453 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, 1998
and September 30, 1997
Consolidated statements of income -Three months ended June 30,
1998 and 1997
-Nine months ended June 30,
1998 and 1997
Consolidated statements of cash flows -Nine months ended June 30,
1998 and 1997
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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SIGNATURES
2
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, September 30,
1998 1997
(Unaudited)
----------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $15,790 $19,734
Accounts receivable less allowance for doubtful
accounts of $102 at June 30, 1998 and
$119 at September 30, 1997:
Billed 7,706 7,689
Unbilled 2,256 869
------ ------
9,962 8,558
Income taxes receivable - 735
Inventories 148 76
Prepaid expenses 675 1,053
Deferred income taxes 211 183
Other current assets 187 171
------ ------
TOTAL CURRENT ASSETS 26,973 30,510
PROPERTY AND EQUIPMENT
Land and improvements 504 504
Buildings and improvements 2,635 2,570
Data processing equipment 6,359 5,562
Furniture, fixtures, and other 3,672 3,713
------ ------
13,170 12,349
Less accumulated depreciation 6,277 5,708
------ ------
6,893 6,641
NOTE RECEIVABLE 71 99
DEFERRED SOFTWARE COSTS (net of accumulated
amortization of $1,568 at June 30, 1998
and $1,360 at September 30, 1997) 3,953 2,051
INTANGIBLE ASSETS (net of accumulated
amortization of $4,391 at June 30, 1998
and $3,685 at September 30, 1997) 588 1,838
------ ------
$38,478 $41,139
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,754 $ 1,792
Employee compensation 362 328
Deferred revenue 3,190 4,047
Customer deposits 857 1,035
Other accrued liabilities 408 528
Income taxes payable 675 591
------ ------
TOTAL CURRENT LIABILITIES 7,246 8,321
DEFERRED INCOME TAXES 1,351 1,376
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share--
1,000 shares authorized, no shares issued - -
Common stock, par value $.01 per share--10,000
shares authorized, 5,557 shares issued at
June 30, 1998, 5,539 shares issued at
September 30, 1997 56 55
Additional paid-in capital 5,770 5,612
Foreign currency translation adjustment (165) (77)
Retained earnings 27,236 25,852
------ ------
32,897 31,442
Less cost of 183 shares of treasury stock (3,016) -
------ ------
TOTAL SHAREHOLDERS' EQUITY 29,881 31,442
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$38,478 $41,139
====== ======
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,
1998 1997 1998 1997
------ ------ ------ ------
REVENUES
Hardware $ 1,151 $ 2,027 $ 4,094 $ 6,658
Software 2,306 1,831 5,856 5,329
Service and other 4,854 4,844 14,153 13,700
------ ------ ------ ------
8,311 8,702 24,103 25,687
EXPENSES
Cost of revenues
Hardware 734 1,378 2,788 4,586
Software 351 416 1,142 1,066
Service and other 1,270 1,165 3,551 3,307
------ ------ ------ ------
2,355 2,959 7,481 8,959
Salaries and employee benefits 2,354 2,238 7,434 7,262
General and administrative expenses 1,909 1,686 5,414 4,822
Depreciation and amortization 454 337 1,250 960
------ ------ ------ ------
7,072 7,220 21,579 22,003
INCOME FROM OPERATIONS 1,239 1,482 2,524 3,684
OTHER INCOME 207 195 700 601
------ ------ ------ ------
Income before income taxes 1,446 1,677 3,224 4,285
PROVISION FOR INCOME TAXES 473 646 1,175 1,491
------ ------ ------ ------
NET INCOME $ 973 $ 1,031 $ 2,049 $ 2,794
====== ====== ====== ======
Basic earnings per share $.18 $.19 $.37 $.51
===== ===== ===== =====
Diluted earnings per share $.18 $.19 $.37 $.50
===== ===== ===== =====
Dividends per share $ - $ - $ 0.12 $ 0.10
====== ======= ====== ======
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,
1998 1997
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OPERATING ACTIVITIES
Net income $ 2,049 $ 2,794
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,607 1,542
Provision for deferred income taxes (54) 321
Gain on disposal of property and equipment - (4)
Changes in operating assets
and liabilities:
Accounts receivable (1,546) 5,904
Inventories (74) 21
Prepaid expenses and
other current assets 360 (361)
Accounts payable and
other current liabilities (171) (1,473)
Note receivable 28 170
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,199 8,914
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INVESTING ACTIVITIES
Purchase of property and equipment (1,443) (1,847)
Purchased software - (65)
Deferred software cost (2,110) (1,100)
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NET CASH USED BY INVESTING ACTIVITIES (3,553) (3,012)
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FINANCING ACTIVITIES
Proceeds from options exercised 158 154
Dividends paid (665) (552)
Purchase of treasury shares (3,016) -
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NET CASH USED BY
FINANCING ACTIVITIES (3,523) (398)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (67) (142)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,944) 5,362
------- -------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 19,734 11,823
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $15,790 $17,185
======== ========
See notes to unaudited consolidated financial statements.
5
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Basis of Presentation
The unaudited consolidated financial statements of Data Research Associates,
Inc. (the "Company") 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, 1997, contained in the
Company's annual report for the year ended September 30, 1997. 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, 1998, are not necessarily
indicative of the results that may be expected for the year ending
September 30, 1998.
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, 1998, and September 30, 1997.
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 subsidiaries' losses for which there
is no current tax benefit.
4. Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated
to conform to the Statement 128 requirements.
6
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1998
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
Three Months Nine Months
Ended Ended
June 30, June 30,
----------------- ---------------
1998 1997 1998 1997
----------------- ---------------
Numerator for basic earnings
per share and diluted earnings
per share:
Net Income $ 973 $1,031 $2,049 $2,794
===== ====== ====== ======
Denominator:
Basic earnings per share-
Weighted-average shares 5,447 5,483 5,503 5,477
Effect of dilutive securities:
Stock options 54 64 31 73
----- ----- ----- -----
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 5,501 5,547 5,534 5,550
===== ===== ===== =====
Basic earnings per share $.18 $.19 $.37 $.51
===== ===== ===== =====
Diluted earnings per share $.18 $.19 $.37 $.50
===== ===== ===== =====
Note 5. Software Revenue Recognition
In October 1997, The Accounting Standards Executive Committee of the AICPA
issued Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition."
SOP 97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997, thus will be effective for the Company for
transactions occurring after September 30, 1998. Management has evaulated the
impact of SOP 97-2 and does not anticipate that the adoption will have a
significant effect on earnings of the finanical position of the Company.
Note 6. New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131 Segment Information. Both
of those standards are effective for fiscal years beginning after December
15, 1997, and thus will be effective for the Company after September 30,
1998. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period
in which they are recognized. Comprehensive income is defined as the change
in equity during a period from transactions and other events and circumstances
from non-owner sources. Net income and other comprehensive income, including
foreign currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. Management does not believe that the impact of SFAS No.
130 will have a material impact on its financial statements. SFAS No. 131 amends
the requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined in SFAS No. 131, are components of an enterprise for which separate
financial information is available and is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance. The financial
information is required to be reported on the basis that it is used internally
for evaluating the segment performance. Management believes the Company
operates in one business and operating segment and does not believe adoption
of these standards will have a material impact on the Company's financial
statements. In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted for years beginning after June 15, 1999. Because
of the the Company's minimal use of derivatives, management does not anticipate
that the adoption of the new Statement will have a significant effect on
earnings or the financial position of the company.
7
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 until such
costs qualify as deferred software costs which are 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 and sevices than on sales
of hardware. 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, Taos, 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. Management expects intial revenue
shipments of Taos in the fourth quarter of this fiscal year.
Management believes that all of its proprietary software products are
currently capable of accurately processing date data related to the year
change from 1999 to 2000. Management further believes the major software
used to run its operations is year 2000 compliant and is in the process
of obtaining year 2000 compliance certification from its major vendors.
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 contribute to such
differences, include, but are not limited to, those presented in Exhibit 99.1,
"Cautionary Statements--Additional Important Factors To Be Considered", in the
Company's Form 10K for the year ended September 30, 1997.
8
Results of Operations
Three Months Ended June 30, 1998 compared to Three Months Ended
June 30, 1997
Hardware revenues decreased $.8 million, or 43%, to $1.2 million for the
three months ended June 30, 1998, from $2.0 million for the three months ended
June 30, 1997. The decrease is primarily due to one large hardware upgrade that
shipped in the three months ended June 30, 1997, and to a lesser extent due to
the customers' ability to buy high-performance systems at lower prices. The
gross margin percentage on hardware was 36% in the three months ended June 30,
1998, and 32% in the three months ended June 30, 1997. The increase is
primarily due to the hardware mix in the three months ended June 30,1998,
versus the three months ended June 30, 1997.
Software license revenues increased $.5 million, or 26%, to $2.3 million in
the three months ended June 30, 1998, from $1.8 million in the three months
ended June 30, 1997. The increase is primarily attributable to one large
software contract shipped in the three months ended June 30, 1998. The
gross margin percentage on software was 85% in the three months ended June 30,
1998, and 77% in the three months ended June 30, 1997. The increase is
primirily
due to an increase in DRA developed software sold and a decrease in third party
software sold in the three months ended June 30, 1998, versus the three months
ended June 30, 1997. Third party software sold has historically had 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 million to $4.9 million in
the three months ended June 30, 1998, from $4.8 million in the three months
ended June 30, 1997. Management expects that software maintenance revenues,
a major compenant of service and other revenues, will continue to increase
as the base of licensed software products increases. The continued increase
in software maintenance revenue was offset by decreased networking
installations in the three months ended June 30, 1998. The gross margin
percentage on service and other revenues was 74% in the three months ended
June 30, 1998, and 76% in the three months ended June 30, 1997.
Salaries and employee benefits increased $.2 million, or 5%, to $2.4 million
in the three months ended June 30, 1998, from $2.2 million in the three
months ended June 30, 1997. This increase is primarily attributable to
annual salary increases.
General and administrative expenses increased $.2 million, or 13%, to $1.9
million in the three months ended June 30, 1998, from $1.7 million in the
three months ended June 30, 1997. This increase is primarily attributable to
increased sales activity in anticipation of the release Taos.
Income from operations decreased $.3 million, or 16%, to $1.2 million in the
three months ended June 30, 1998, from $1.5 million in the three months ended
June 30, 1997. The decrease is primarily attributable to the decrease in
hardware sales in the three months ended June 30, 1998, from June 30, 1997.
The Company's consolidated effective tax rate was 33% for the three month
period ended June 31, 1998, and 39% for the three month period ended
June 30, 1997. The decrease is a result of research and development credits
being utilized in 1998.
9
Results of Operations
Nine Months Ended June 30, 1998 compared to Nine Months Ended
June 30, 1997
Hardware revenues decreased $2.6 million, or 39%, to $4.1 million for the
nine months ended June 30, 1998, from $6.7 million for the nine months ended
June 30, 1997. The decrease is primarily due to large hardware upgrades
that shipped in the nine months ended June 30, 1997, and due to the customers'
ability to buy high-performance systems at lower prices. The gross margin
percentage on hardware was 32% in the nine months ended June 30, 1998, and
31% in the nine months ended June 30, 1997.
Software license revenues increased $.6 million, or 10%, to $5.9 million in
the nine months ended June 30, 1998, from $5.3 million in the nine months
ended June 30, 1997. The increase is primarily attributable to one large
software contract shipped in the nine months ended June 30, 1998. The
gross margin percentage on software was 80% in the nine months ended June
30, 1998, and 1997.
Service and other revenues increased $.5 million, or 3%, to $14.2 million in
the nine months ended June 30, 1998, from $13.7 million in the nine months
ended June 30, 1997. Management expects that software maintenance revenues,a
major compenant of service and other revenues, will continue to increase as
the base of licensed software products increases. The gross margin percentage
on service and other revenues was 75% in the nine months ended June 30, 1998,
and 76% in the nine months ended June 30, 1997.
Salaries and employee benefits increased $.1 million, or 2%, to $7.4 million
in the nine months ended June 30, 1998, from $7.3 million in the nine months
ended June 30, 1997. This increase is primarily attributable to annual salary
increases offset by the capitalization of salaries and employee benefits
related to software development.
General and administrative expenses increased $.6 million, or 12%, to $5.4
million in the nine months ended June 30, 1998, from $4.8 million in the nine
months ended June 30, 1997. The increase is primarily due to a $.4 million
write-off of purchased software that is no longer being sold by the Company.
This increase is also attributable to an increased sales activity in
anticipation of the release Taos
Income from operations decreased $1.2 million, or 31%, to $2.5 million in
the nine months ended June 30, 1998, from $3.7 million in the nine months ended
June 30, 1997. The decrease is primarily attributable to the decrease in
hardware sales in the nine months ended June 30, 1998, from the nine months
ended June 30, 1997, and the write-off of purchased software in the nine
months ended June 30, 1998.
The Company's consolidated effective tax rate was 36% for the nine month
period ended June 31, 1998, and 35% for the nine month period ended
June 30, 1997.
10
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, 1998, the Company's
working capital was $19.7 million and its ratio of current assets to current
liabilities was 3.7 to 1, as compared to working capital of $22.2 million
and a ratio of current assets to current liabilities of 3.7 to 1 at
September 30, 1997.
Net cash provided by operating activities was $3.2 million for the nine
months ended June 30, 1998, compared to $8.9 million for the nine months
ended June 30, 1997. The decrease in net cash provided by operations was
due in part to the receipt in the nine months ended June 30, 1997, of over
$3.2 million from one customer.
Net cash used by investing activities was $3.6 million for the nine months
ended June 30, 1998, compared to $3.0 million for the nine months ended
June 30, 1997. The increase in net cash used by investing activities is
primarily due to an increase in capitalization of deferred software in the
nine months ended June 30, 1998, compared to the nine months ended June 30,
1997, related to the release of Taos.
Net cash used by financing activities was $3.5 million for the nine months
ended June 30, 1998, compared to $.4 million for the nine months ended
June 30, 1997. Net cash used by financing activities for the nine months ended
June 30, 1998, includes the payment of a $.12 per share dividend in January
1998, compared to the payment of a $.10 per share dividend in January 1997,
and also $3.0 million paid to purchase 183,419 shares of treasury stock.
Management extended the Company's $6.0 million line of credit to February 1999.
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 $15.8 million,
accounts receivable of $9.9 million, continued cash flow from operations,
availability of the $6.0 million line of credit, and total current liabilities
of $7.2 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 ended the authorization of management to repurchase its Common Stock.
At June 30, 1998, in excess of $3.0 million has been used to repurchase the
Company's Common Stock. The Company has made no material commitments with
respect to capital expenditures planned for fiscal 1998. Management believes
that with total long-term liabilities of approximately $1.4 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.
11
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.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
27.1 Restated Financial Data Schedules for Quarters Ended in fiscal 1997
27.2 Restated Financial Data Schedules for Years Ended 1997 and 1996
(b) No reports on Form 8-K were required to be filed during the three
months ended June 30, 1998.
12
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 4, 1998 /s/ Michael J. Mellinger
- ------------------- ------------------------------
Date Michael J. Mellinger
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
August 4, 1998 /s/ Katharine W. Biggs
- ------------------- ------------------------------
Date Katharine W. Biggs
Vice President, and
Chief Financial Officer
(Principal Accounting Officer)
13