10-Q 1 c59716e10-q.txt FORM 10-Q 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, 2000 ------------------------------------------- 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, 2001, there were 4,640,300 shares of the registrant's common stock outstanding. 2 INDEX DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets -December 31, 2000 and September 30, 2000 Consolidated statements of income -Three months ended December 31, 2000 and 1999 Consolidated statements of cash flows -Three months ended December 31, 2000 and 1999 Notes to the unaudited consolidated financial statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Qualitative and Quantitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT INDEX 3 Part I. FINANCIAL INFORMATION Item 1. Financial Statements DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)

See notes to unaudited consolidated financial statements. 5 DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except share data)

See notes to unaudited consolidated financial statements. 6 DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)

See notes to unaudited consolidated financial statements. 7 DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (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, 2000, contained in the Company's annual report for the year ended September 30, 2000. 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, 2000, are not necessarily indicative of the results that may be expected for the year ending September 30, 2001. 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, 2000 and September 30, 2000. Note 3. Earnings per share The following table sets forth the computation of basic and diluted earnings per share:

8 DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4. Comprehensive Income The components of comprehensive income (loss), net of related tax, for the three month period ended December 31, 2000 and 1999 are as follows:

The components of accumulated other comprehensive loss, net of related tax, at December 31, 2000 and September 30, 2000, are as follows:

Note 5. Recent Accounting Pronouncements Effective October 1, 2000, the Company adopted the Financial Accounting Standards Board Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended by SFAS No. 137 and SFAS No. 138. Adoption of SFAS No. 133 did not impact the Company's financial statements. 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 2000 consolidated financial statements in the Company's Form 10-K for the year ended September 30, 2000. 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. The Company's revenues are and 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. During fiscal 2000, one additional module was released and an additional module is expected to be released late in fiscal 2001. The timing of the completion of this additional module may be affected by multiple factors, including rapid technological change, dependence on third-party suppliers and the relative scarcity of qualified technical staff. For additional 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, 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, 2000. 10 Results of Operations Three Months Ended December 31, 2000 compared to Three Months Ended December 31, 1999 Hardware revenues decreased $.4 million, or 76%, to $.1 million in the three months ended December 31, 2000, compared to $.5 million for the three months ended December 31, 1999. The primary reason for the decrease is the lack of major hardware shipments in the three months ended December 31, 2000. In the three months ended December 31, 1999 there was one large shipment to an existing customer and one large installation at a new site. The gross margin percentage on hardware was 30% in the three months ended December 31, 2000 and 32% in the three months ended December 31, 1999. The decrease in margin is primarily due to the mix in types of hardware sold. Software revenues decreased $.3 million, or 41%, to $.4 million in the three months ended December 31, 2000, compared to $.7 million in the three months ended December 31, 1999. The Company had $.2 million in new contract revenue in the three month periods ended December 31, 1999, with no similar new contract revenue in the three months ended December 31, 2000. The gross margin percentage on software was 10% in the three months ended December 31, 2000, and 65% in the three months ended December 31, 1999. The decrease in margin is primarily attributable to the reduced revenue in the three months ended December 31, 2000, which was less able to support the amortization of the software development costs. Service and other revenues decreased $.1 million, or 2%, to $5.1 million in the three months ended December 31, 2000, compared to $5.2 million in the three months ended December 31, 1999. The primary reason for the decrease is the reduction in service revenue associated with the implementation of new software contract revenue in the three months ended December 31, 2000. The gross margin percentage on service and other revenues was 72% in the three months ended December 31, 2000, and 73% in the three months ended December 31, 1999. Salaries and employee benefits increased $.1 million, or 3%, to $2.8 million in the three months ended December 31, 2000, from $2.7 million in the three months ended December 31, 1999. Annual salary increases in the three months ended December 31, 2000, were mitigated somewhat by the capitalization of salaries and benefits associated with software development. General and administrative expenses decreased $.1 million, or 5%, to $1.2 million in the three months ended December 31, 2000, from $1.3 million in the three months ended December 31, 1999. This decline is primarily attributable to a decrease in travel expenses, employee recruitment and general office supplies. Income from operations decreased $.6 million, to $.6 million loss in the three months ended December 31, 2000, from near break even in the three months ended December 31, 1999. The primary contributor to the decline is the reduction of revenue in the three months ended December 31, 2000 as compared to the three months ended December 31, 1999. The Company's consolidated effective tax rate was 32% for the three month period ended December 31, 2000, and for the three month period ended December 31, 1999. 11 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, 2000, the Company's working capital was $18.9 million and its ratio of current assets to current liabilities was 3.5 to 1, as compared to working capital of $18.9 million and a ratio of current assets to current liabilities of 3.2 to 1 at September 30, 2000. Net cash provided by operating activities was $1.2 million for the three months ended December 31, 2000, remaining consistent with the three months ended December 31, 1999. A decrease in net income in the three months ended December 31, 2000, is offset by an increase in cash provided by a decrease in accounts receivable. Net cash used by investing activities was $3.4 million for the three months ended December 31, 2000, compared to net cash used of $.6 million for the three months ended December 31, 1999. The decrease in net cash provided by investing activities is primarily due to the shift of focus to cash investments of 90 days or more, resulting in the reclassification of cash to short-term investments. Net cash used by financing activities was $.1 million for the three months ended December 31, 2000, compared to $.9 million for the nine months ended December 31, 1999. Purchases of treasury stock in the amount of $.2 million for the three months ended December 31, 2000, compared to $.9 million for the three months ended December 31, 1999 accounted for the decrease in cash used. The Company has a $6.0 million line of credit which expires 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 $6.3 million, short-term investments of $14.5 million, accounts receivable of $4.1 million, continued cash flow from operations, availability of a $6.0 million line of credit, and total current liabilities of $7.6 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 $1.9 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. Item 3. Qualitative and Quantitative Disclosures About Market Risk The Company's exposure to potential near-term losses in future earnings, fair value or cash flows resulting from reasonably possible changes in market rates or prices is not material. 12 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 expects to release version 1.0 of Acquisitions, the module that will complete the suite of Taos products, late in fiscal 2001. 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. During the first quarter of fiscal 2001 the Company received written notice from one customer which has implemented Taos that it considered the Company to be in significant breach of its agreement with the customer and requesting a partial refund of funds paid to the Company. The Company reached an amicable settlement with the customer. Subsequent to the end of the of the first quarter of fiscal 2001 a large academic customer which had previously notified DRA that it considered the Company to be in material breach of its agreement with the customer, notified the Company in writing that it is withdrawing its claim of material breach. 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 these projects. 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, 2000. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits There are no exhibits required. (b) Reports on Form 8-K No reports on Form 8-K were required to be filed during the three months ended December 31, 2000. 13 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. January 25, 2001 /s/Michael J. Mellinger ---------------- ------------------------------ Date Michael J. Mellinger Chairman, President, and Chief Executive Officer (Principal Executive Officer) January 25, 2001 /s/Katharine W. Biggs ---------------- ------------------------------ Date Katharine W. Biggs Vice President, and Chief Financial Officer (Principal Accounting Officer)

DATA RESEARCH ASSOCIATES INC 10-Q