<PAGE> 1
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, 1999
-------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------------------------
Commission File Number: 0-20244
------------------------------------------------------
DATA RESEARCH ASSOCIATES, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MISSOURI 43-1063230
- ------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1276 NORTH WARSON RD. ST. LOUIS, MISSOURI 63132
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 432-1100
- ------------------------------------------------------------------------------
(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, 2000, there were 4,836,346 shares of the registrant's common
stock outstanding.
<PAGE> 2
INDEX
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -December 31, 1999
and September 30, 1999
Consolidated statements of income -Three months ended December 31,
1999 and 1998
Consolidated statements of cash flows -Three months ended December 31,
1999 and 1998
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
- --------------------------
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
(Unaudited)
------------ -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $16,749 $17,022
Accounts receivable less allowances
of $171 at December 31, 1999
and $212 at September 30, 1999:
Billed 5,707 6,080
Unbilled 1,632 1,919
------ ------
7,339 7,999
Inventories 87 67
Prepaid expenses 1,228 680
Deferred income taxes 214 212
Other current assets 213 274
------ ------
TOTAL CURRENT ASSETS 25,830 26,254
PROPERTY AND EQUIPMENT
Land and improvements 504 504
Buildings and improvements 2,720 2,720
Data processing equipment 7,428 7,298
Furniture, fixtures, and other 4,426 4,384
------ ------
15,078 14,906
Less accumulated depreciation 9,168 8,678
------ ------
5,910 6,228
NOTE RECEIVABLE - 3
DEFERRED SOFTWARE COSTS (net of accumulated
amortization of $1,455 at December 31, 1999
and $1,136 at September 30, 1999) 5,300 5,181
INTANGIBLE ASSETS (net of accumulated
amortization of $2,587 at December 31, 1999
and $2,550 at September 30, 1999) 410 436
------ ------
$37,450 $38,102
====== ======
</TABLE>
<PAGE> 4
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
(Unaudited)
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 807 $ 758
Employee compensation 365 415
Deferred revenue 4,248 4,439
Customer deposits 1,581 1,201
Other accrued liabilities 267 442
Income taxes payable 10 -
------ ------
TOTAL CURRENT LIABILITIES 7,278 7,255
DEFERRED INCOME TAXES 2,142 2,142
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
December 31, 1999 and September 30, 1999 56 56
Additional paid-in capital 5,586 5,606
Accumulated other comprehensive loss (141) (162)
Retained earnings 30,784 30,577
------ ------
36,285 36,077
Less cost of treasury stock, 716 shares
at December 31, 1999, and 621 shares
at September 30, 1999 8,255 7,372
------ ------
TOTAL SHAREHOLDERS' EQUITY 28,030 28,705
------ ------
$37,450 $38,102
====== ======
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE> 5
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
Three months ended
December 31,
1999 1998
------ ------
<S> <C> <C>
REVENUES
Hardware $ 508 $ 474
Software 746 1,214
Service and other 5,199 4,699
------ ------
6,453 6,387
EXPENSES
Cost of revenues
Hardware 345 338
Software 258 376
Service and other 1,418 1,295
------ ------
2,021 2,009
Salaries and employee benefits 2,708 2,442
General and administrative expenses 1,252 1,548
Depreciation and amortization 490 467
------ ------
6,471 6,466
LOSS FROM OPERATIONS (18) (79)
OTHER INCOME 320 264
------ ------
Income before income taxes 302 185
PROVISION FOR INCOME TAXES 96 60
------ ------
NET INCOME $ 206 $ 125
====== ======
Basic and Diluted earnings per share $.04 $.02
===== =====
Dividends per share $ - $ -
===== =====
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE> 6
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
December 31,
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 206 $ 125
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 835 885
Provision for deferred income taxes - (22)
Loss on disposal of property and equipment - 5
Changes in operating assets
and liabilities:
Accounts receivable 671 2,150
Inventories (20) 2
Prepaid expenses and
other current assets (539) (302)
Accounts payable and
other current liabilities 80 (225)
Note receivable 3 10
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,236 2,628
------- -------
INVESTING ACTIVITIES
Purchase of property and equipment (169) (876)
Deferred software cost (439) (386)
Purchase of short-term investments - (9,961)
Proceeds from sale of short-term investments - 4,918
------- -------
NET CASH USED BY
INVESTING ACTIVITIES (608) (6,305)
------- -------
FINANCING ACTIVITIES
Proceeds from options exercised 31 141
Purchase of treasury shares (934) (430)
------- -------
NET CASH USED BY
FINANCING ACTIVITIES (903) (289)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 2 3
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (273) (3,963)
------- -------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 17,022 8,710
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $16,749 $ 4,747
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE> 7
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(In thousands, except per share data)
Note 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, 1999, contained in the
Company's annual report for the year ended September 30, 1999. 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, 1999, are not necessarily
indicative of the results that may be expected for the year ending September 30,
2000.
Note 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. The Company
had only finished goods in inventory at December 31, 1999 and September 30,
1999.
Note 3. Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
-----------------
1999 1998
-----------------
<S> <C> <C>
Numerator for basic earnings
per share and diluted earnings
per share:
Net Income $ 206 $ 125
===== ======
Denominator:
Basic earnings per share-
Weighted-average shares 4,868 5,368
Effect of dilutive securities:
Stock options 3 14
----- -----
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 4,871 5,382
===== =====
Basic earnings per share $.04 $.02
===== =====
Diluted earnings per share $.04 $.02
===== =====
</TABLE>
<PAGE> 8
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Comprehensive Income
The components of comprehensive income, net of related tax, for the three month
period ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
---------------
1999 1998
---------------
<S> <C> <C>
Net income $206 $125
Foreign currency translation adjustment 21 8
---------------
Comprehensive income $227 $133
===============
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
December 31, 1999 and September 30, 1999, are as follows:
<TABLE>
<CAPTION>
December 31, 1999 Sept 30, 1999
----------------------------------
<S> <C> <C>
Foreign currency translation adjustment $(141) $(162)
-----------------------------
Accumulated other comprehensive income $(141) $(162)
=============================
</TABLE>
<PAGE> 9
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's revenue recognition policy is discussed in Note A to the 1999
consolidated financial statements in the Company's form 10-K for the year ended
September 30, 1999. 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 services 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, Taos, which is
based on object-oriented client/server design. Certain modules of Taos went into
general release during the fourth quarter of fiscal 1999 and are currently in
use at customer sites. The Company expects to release two additional modules
during fiscal year 2000. The timing of the completion of these additional
modules may be affected by multiple factors, including rapid technological
change, dependence on third-party suppliers and the relative scarcity of
qualified technical staff. See Exhibit 99.1 "Cautionary Statements - Additional
Important Factors To Be Considered", in the Company's Form 10-K for the year
ended September 30, 1999.
<PAGE> 10
Year 2000 Readiness Disclosure
The arrival of the year 2000 posed certain technological challenges
resulting from a reliance in computer technologies on two digits rather than
four digits to represent the calendar year (e.g., "98" for "1998"). The risks to
the Company and the Company's Y2K action plan and related mitigation efforts
have been described in the Company's most recent annual report on Form 10-K for
the year ended September 30, 1999. The Company completed its Y2K action plan
prior to the arrival of the Year 2000. Specifically, prior to December 31, 1999,
the Company had reviewed all of its proprietary software products and believed
that all of such software products were capable of accurately processing date
data related to the change from 1999 to 2000, if used with third party products
that were also capable of accurately processing such data. Also, by December 31,
1999, the Company had identified, evaluated, tested and validated the ability to
process such data by the computer systems, applications and business processes
used by the Company to operate its business. The Company did not experience, and
through January of 2000 has not experienced, any material problems related to
the processing of date data related to the change from 1999 to 2000 in its own
proprietary software or any other software or systems that the Company uses. The
Company's total costs related to the Y2K issue will be approximately $25,000, of
which $10,000 were external expenses.
Based on the lack of problems experienced by the Company in connection with the
arrival of the Year 2000, the Company currently does not expect any significant
disruptions in the future as a result of Y2K or the fact that 2000 is a leap
year. However, because the Company's continued Y2K compliance in calendar 2000
is in part dependent on the continued Y2K compliance of third parties, there can
be no assurance that the Company's efforts alone have resolved all Y2K issues or
that key third parties will not experience Y2K compliance failures as calendar
2000 progresses. The Company's oversight committee will continue to monitor the
Company's own systems and the preparedness of third parties throughout calendar
2000.
Forward Looking Statements
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 a substantial number of forward-looking statements, indicated by such
words as "expects," "believes," "estimates," "anticipates," "plans,"
"assessment," "should," "will," and similar words. These forward-looking
statements are based on the Company's and management's beliefs, assumptions,
expectations, estimates and projections any or all of which are subject to
future change, depending on unknown developments and facts. These
forward-looking statements should be read in conjunction with the disclosures in
Exhibit 99.1 "Cautionary Statements - Additional Important Factors to Be
Considered," in the Company's Form 10-K for the year ended September 30, 1999.
<PAGE> 11
Results of Operations
Three Months Ended December 31, 1999 compared to Three Months Ended December 31,
1998
Hardware revenues were $.5 million for the three months ended December 31,
1999, remaining consistent with the three months ended December 31, 1998. One
large shipment to an existing customer and one large installation at a new site
allowed for the consistency with the three months ended December 31, 1998, which
had several smaller shipments to existing customers. The gross margin percentage
on hardware was 32% in the three months ended December 31, 1999 and 29% in the
three months ended December 31, 1998. The mix of the types of hardware systems
sold was the major contributor to the margin increase.
Software license revenues decreased $.5 million, or 39%, to $.7 million in
the three months ended December 31, 1999, from $1.2 million for the three months
ended December 31, 1998. The decrease is due primarily to one sale of $.3
million to a single customer in the three months ended December 31, 1998,
coupled with several smaller sales to existing customers. There was one Taos
installation, with revenue of $.2 million, in the three months ended December
31, 1999, with minimal sales to existing customers. The gross margin percentage
on software was 65% in the three months ended December 31,1999, and 69% in the
three months ended December 31, 1998. The decrease in margin is primarily
attributed to the reduced revenue in the three months ended December 31, 1999,
which was less able to support the straight line amortization of the software
development costs.
Service and other revenues increased $.5 million, or 11%, to $5.2 million
in the three months ended December 31, 1999, from $4.7 million in the three
months ended December 31, 1998. The continued increase in software maintenance
revenue was coupled with multiple installation and conversion projects finalized
in the three months ended December 31, 1999. Management expects that software
maintenance revenues, a major component of service and other revenues, will
continue to increase as the base of licensed software products increases.
Additionally, the Company's internet business continued to grow in the three
months ended December 31, 1999 over the three months ended December 31, 1998.
The gross margin percentage on service and other revenues was 73% in the three
months ended December 31, 1999, and 72% in the three months ended December 31,
1998.
Salaries and employee benefits increased $.3 million, or 11%, to $2.7
million in the three months ended December 31, 1999, from $2.4 million in the
three months ended December 31, 1998. This increase is primarily attributable to
additional salaries due to the hiring of added staff, coupled with annual salary
increases.
General and administrative expenses decreased $.3 million, or 19%, to $1.3
million in the three months ended December 31, 1999, from $1.6 million in the
three months ended December 31, 1998. This decrease is primarily attributable to
a reduction in software development consulting expenses for DRA Classic
software.
Loss from operations represents near break even operations for the three
months ended December 31, 1999 from ($.1) million in the three months ended
December 31, 1998. The improvement is primarily attributable to the increase in
overall revenues offset by a decline in software revenue in the three months
ended December 31, 1999, from the three months ended December 31, 1998.
The Company's consolidated effective tax rate was 32% for the three month
period ended December 31, 1999, and for the three month period ended December
31, 1998.
<PAGE> 12
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, 1999, the Company's working
capital was $18.6 million and its ratio of current assets to current liabilities
was 3.5 to 1, as compared to working capital of $19.0 million and a ratio of
current assets to current liabilities of 3.6 to 1 at September 30, 1999.
Net cash provided by operating activities was $1.2 million for the three
months ended December 31, 1999, compared to $2.6 million for the three months
ended December 31, 1998. The decrease in net cash provided by operations was due
primarily to decreased cash receipts in the three months ended December 31,
1999. In the three months ended December 31, 1998, $1.2 million was received
from one customer.
Net cash used by investing activities was $.6 million for the three months
ended December 31, 1999, compared to net cash used of $6.3 million for the three
months ended December 31, 1998. The decrease in net cash used by investing
activities is primarily due to the Company's need to maintain cash with enough
liquidity to fund its repurchase of treasury stock, during the three months
ended December 31, 1999. This has been done by primarily investing in
instruments with a maturity of 90 days or less. For the three months ended
December 31, 1998, the Company purchased investments of $10 million with
maturity exceeding 90 days, and were therefore classified as short-term
investments.
Net cash used by financing activities was $.9 million for the three months
ended December 31, 1999, compared to $.3 million for the three months ended
December 31, 1998. Purchases of treasury stock in the amount of $.9 million for
the three months ended December 31, 1999, compared to $.4 million for the three
months ended December 31, 1998 accounted for the increase in cash used.
In January 2000, the Company renewed its $6.0 million line of credit, which
matures in January 2001 and is subject to annual renewal. The line of credit
bears interest at the federal funds rate plus 200 basis points payable monthly
on outstanding balances and is secured by the Company's accounts receivable,
inventory, and equipment. There have been no borrowings against the Company's
line of credit since May 1991.
Management believes that, with the current cash position of $16.7 million,
accounts receivable of $7.3 million, continued cash flow from operations,
availability of a $6.0 million line of credit, and total current liabilities of
$7.3 million, the Company will be able to meet both its short-term liquidity
needs and short-term capital expenditure needs. Management believes that with
total long-term liabilities of approximately $2.1 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.
<PAGE> 13
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 5. Other Information.
The Company has released version 1.0 of some modules of its next generation
system, Taos, and is completing the developmental stage of other modules. During
the development of Taos, the Company has pursued contractual arrangements with
library systems desiring to purchase Taos once it is completed. Those contracts
include terms that are modified from time-to-time by agreement between the
parties, including terms with respect to the anticipated installation dates for
the various modules of the Taos system, but libraries are not obligated to agree
to such amendments. The Company has experienced some delays with certain
contractual installation schedules, which has resulted in the modification of
certain of these schedules and the termination of certain contracts. While the
Company believes that it will be able to substantially comply with the Taos
installation schedules currently in place with its customers, a variety of
factors could add additional delays in the final release of Taos, necessitating
amendment of various contracts with respect to the installation dates. Such
factors include the difficulties associated with incorporating rapid
technological change into the Taos system, the Company's dependence on
third-party suppliers, and the relative scarcity of qualified technical staff.
For additional risk factors that should be read in conjunction with this
disclosure, see Exhibit 99.1 "Cautionary Statements - Additional Important
Factors to Be Considered" in the Company's Form 10-K for the year ended
September 30, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the three
months ended December 31, 1999.
<PAGE> 14
PART II. OTHER INFORMATION
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 11, 2000 /s/Michael J. Mellinger
- ---------------- ------------------------------
Date Michael J. Mellinger
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
February 11, 2000 /s/Katharine W. Biggs
- ---------------- ------------------------------
Date Katharine W. Biggs
Vice President, and
Chief Financial Officer
(Principal Accounting Officer)
<PAGE> 15
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Form 10-Q
for the three months ended December 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 16,749
<SECURITIES> 0
<RECEIVABLES> 7,339
<ALLOWANCES> 171
<INVENTORY> 87
<CURRENT-ASSETS> 25,830
<PP&E> 15,078
<DEPRECIATION> 9,168
<TOTAL-ASSETS> 37,450
<CURRENT-LIABILITIES> 7,278
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 36,229
<TOTAL-LIABILITY-AND-EQUITY> 37,450
<SALES> 6,453
<TOTAL-REVENUES> 6,453
<CGS> 2,021
<TOTAL-COSTS> 6,472
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (320)
<INCOME-PRETAX> 302
<INCOME-TAX> 96
<INCOME-CONTINUING> 206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 206
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
