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 December 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 January 15, 1998 there were 5,541,070 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 -December 31, 1997
and September 30, 1996
Consolidated statements of income -Three months ended December 31,
1997 and 1996
Consolidated statements of cash flows -Three months ended December 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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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)
December 31, September 30,
1997 1997
(Unaudited)
----------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $19,635 $19,734
Accounts receivable less allowance for doubtful
accounts of $119:
Billed 6,289 7,689
Unbilled 1,623 869
------ ------
7,912 8,558
Income tax receivable 430 735
Inventories 73 76
Prepaid expenses 1,063 1,053
Deferred income taxes 215 183
Other current assets 172 171
------ ------
TOTAL CURRENT ASSETS 29,500 30,510
PROPERTY AND EQUIPMENT
Land and improvements 504 504
Building and improvements 2,635 2,570
Data processing equipment 5,808 5,562
Furniture, fixtures, and other 3,970 3,713
------ ------
12,917 12,349
Less accumulated depreciation 6,052 5,708
------ ------
6,865 6,641
NOTE RECEIVABLE 90 99
DEFERRED SOFTWARE COSTS (net of accumulated
amortization of $1,429 at December 31, 1997
and $1,360 at September 30, 1997) 2,231 2,051
INTANGIBLE ASSETS (net of accumulated
amortization of $3,912 at December 31, 1997
and $3,685 at September 30, 1997) 1,565 1,838
------ ------
$40,251 $41,139
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,205 $ 1,792
Employee compensation 323 328
Deferred revenue 3,435 4,047
Customer deposits 1,178 1,035
Other accrued liabilities 251 528
Income taxes payable 634 591
------ ------
TOTAL CURRENT LIABILITIES 7,026 8,321
DEFERRED INCOME TAXES 1,352 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, 5,541 shares issued at
December 31, 1997, 5,539 shares issued at
September 30, 1997 56 55
Additional paid-in capital 5,761 5,612
Foreign currency translation adjustment (102) (77)
Retained earnings 26,344 25,852
------ ------
32,059 31,442
Less cost of 15 shares of treasury stock 186 -
------ ------
TOTAL SHAREHOLDERS' EQUITY 31,873 31,442
------ ------
$40,251 $41,139
====== ======
See notes to unaudited consolidated financial statements.
3
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three months ended
December 31,
1997 1996
------ ------
REVENUES
Hardware $ 1,150 $ 1,396
Software 1,634 1,302
Service and other 4,669 4,430
------ ------
7,453 7,128
EXPENSES
Cost of revenues
Hardware 828 976
Software 308 249
Service and other 1,369 861
------ ------
2,505 2,086
Salaries and employee benefits 2,485 2,562
General and administrative expenses 1,486 1,488
Depreciation and amortization 381 294
------ ------
6,857 6,430
INCOME FROM OPERATIONS 596 698
OTHER INCOME 236 202
------ ------
Income before income taxes 832 900
PROVISION FOR INCOME TAXES 340 359
------ ------
NET INCOME $ 492 $ 541
====== ======
Basic and diluted earnings per share $ 0.09 $ 0.10
====== ======
See notes to unaudited consolidated financial statements.
4
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three months ended
December 31,
1997 1996
------- -------
OPERATING ACTIVITIES
Net income $ 492 $ 541
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 692 546
Provision for deferred income taxes (54) 3
Changes in operating assets
and liabilities:
Accounts receivable 579 4,677
Inventories 3 40
Prepaid expenses and
other current assets (18) (108)
Accounts payable and
other current liabilities (888) (1,956)
Note receivable 9 116
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 815 3,859
------- -------
INVESTING ACTIVITIES
Purchase of property and equipment (596) (752)
Purchased software - (48)
Deferred software cost (250) (200)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (846) (1,000)
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FINANCING ACTIVITIES
Proceeds from options exercised 150 79
Purchase of treasury shares (186) -
------- -------
NET CASH PROVIDED BY (USED BY)
FINANCING ACTIVITIES (36) 79
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (32) (1)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (99) 2,937
------- -------
Cash and cash equivalents at
beginning of period 19,734 11,823
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $19,635 $14,760
======= =======
See notes to the unaudited consolidated financial statements.
5
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 three months ended December 31, 1997, 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 December 31, 1997, 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.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1997
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
December 31,
------------------
1997 1996
---------------------
Numerator for basic earnings
per share and diluted earnings
per share:
Net Income $ 492 $ 541
===== =====
Denominator:
Basic earnings per share-
Weighted-average shares 5,541 5,520
Effect of dilutive securities:
Stock options 26 52
----- -----
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 5,567 5,572
===== =====
Basic earnings per share $.09 $.10
===== =====
Diluted earnings per share $.09 $.10
===== =====
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 is evaluating
the impact, if any, of SOP 97-2 on the financial statements.
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 for transactions occurring
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 comprehensive income or loss will be materially different
than net income or loss. 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.
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. 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 Companys 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.
The Company believes that all of its proprietary software 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 cause a contribution 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.
Results of Operations
Three Months Ended December 31, 1997 compared to Three Months Ended
December 31, 1996
Hardware revenues decreased $.2 million, or 18%, to $1.2 million for the
three months ended December 31, 1997, from $1.4 million at December 31, 1996.
The decrease is primarily due to the customers' ability to buy high-performance
systems at lower prices. The gross margin percentage on hardware was 28% in the
three months ended December 31, 1997, and 30% in the three months ended
December 31, 1996.
Software license revenues increased $.3 million, or 25%, to $1.6 million in
the three months ended December 31, 1997, from $1.3 million in the three months
ended December 31, 1996. The increase is primarily due to one large
full-service contract that generated $.6 million of revenue during the
three months ended December 31, 1997. The gross margin percentage on software
was 81% in the three months ended December 31, 1997, and 1996.
Service and other revenues increased $.3 million, or 5%, to $4.7 million in
the three months ended December 31, 1997, from $4.4 million in the three months
ended December 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 December 31, 1997, from 81% for the three months
ended December 31, 1996. This decrease is primarily due to a $.3 million
increase in the Company's internet network in the three months ended
December 31, 1997.
Salaries and employee benefits decreased $.1 million, or 3%, to $2.5 million
in the three months ended December 31, 1997, from $2.6 million in the three
months ended December 31, 1995. This decrease is primarily attributable to
larger capitalization of salaries and employee benefits related to software
development in the three months ended December 31, 1997, offset by annual
salary increases.
General and administrative expenses remained consistent at $1.5 million in
the three months ended December 31, 1997 and 1996.
Income from operations decreased $.1 million, or 23%, to $.6 million in the
three months ended December 31, 1997, from $.7 million in the three months ended
December 31, 1996.
The Company's consolidated effective tax rate was 40% for the three month
period ended December 31, 1997, and 41% for the three month period ended
December 31, 1996.
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 December 31, 1997, the Company's
working capital was $22.4 million and its ratio of current assets to current
liabilities was 4.2 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 $.8 million for the three
months ended December 31, 1997, compared to $3.9 million for the three months
ended December 31, 1996. The decrease in net cash provided by operations was
primarily due to lower cash receipts on accounts receivable for the three
months ended December 31, 1997, compared to the three months ended December 31,
1996.
Net cash used by investing activities was $.8 million for the three months
ended December 31, 1997, compared to $1.0 million for the three months ended
December 31, 1996. The decrease in net cash used by investing activities is
primarily due to a decrease in property and equipment purchased in the
three months ended December 31, 1997, compared to the three months ended
December 31, 1996.
Net cash used by financing activities for the three months ended
December 31, 1997, was negligible. Management expects to extended
the Company's $6.0 million line of credit to February 1999. All terms
are expected to 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 $19.6 million,
accounts receivable of $7.9 million, continued cash flow from operations,
availability of the $6.0 million line of credit, and total current liabilities
of $7.0 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 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.
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.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were required to be filed during the three
months ended December 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.
February 9, 1998 /s/ Michael J. Mellinger
- ----------------- ------------------------------
Date Michael J. Mellinger
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
February 9, 1998 /s/ Katharine W. Biggs
- ----------------- ------------------------------
Date Katharine W. Biggs
Vice President, and
Chief Financial Officer
(Principal Accounting Officer)
12
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