10-Q 1 c64537e10-q.txt FORM 10-Q FOR QUARTER ENDING JUNE 30, 2001 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 June 30, 2001 -------------------------------------------- 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 August 9, 2001, there were 4,500,204 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 -June 30, 2001 and September 30, 2000 Consolidated statements of income -Three months ended June 30, 2001 and 2000 -Nine months ended June 30, 2001 and 2000 Consolidated statements of cash flows -Nine months ended June 30, 2001 and 2000 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 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 JUNE 30, 2001 (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 accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States 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 nine months ended June 30, 2001, 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 June 30, 2001 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, net of related tax, for the three and nine month periods ended June 30, 2001 and 2000 are as follows:

The components of accumulated other comprehensive loss, net of related tax, at June 30, 2001 and September 30, 2000, are as follows:

Note 5. Pending Transaction On May 17, 2001, Data Research Associates, Inc. (DRA) and SIRSI Holdings Corp. announced the signing of a definitive merger agreement providing for a subsidiary of SIRSI to purchase all outstanding common stock of DRA for $11.00 per share in cash, or approximately $51.5 million. 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 in general release in the first quarter of fiscal 2002. 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 June 30, 2001 compared to Three Months Ended June 30, 2000 Hardware revenues decreased $.4 million, or 69%, to $.2 million in the three months ended June 30, 2001, compared to $.6 million for the three months ended June 30, 2000. During the three months ended June 30, 2000, hardware revenue was generated from two new contracts and two network upgrades, as compared to the three months ended June 30, 2001 in which revenue was generated from one network upgrade and one Taos migration. The gross margin percentage on hardware was 24% in the three months ended June 30, 2001 and 28% in the three months ended June 30, 2000. Higher margin network upgrades in the three months ended June 30, 2000 are the primary cause of the decrease in margin for the three months ended June 30, 2001. Software revenues remained consistent at $1.2 million in the three months ended June 30, 2001 and in the three months ended June 30, 2000. The primary source of software revenue in the three months ended June 30, 2001, was the migration of existing customers to Taos. Additionally, revenue was generated from the release of a portion of the Taos report writer product in the three months ended June 30, 2001. The gross margin percentage on software was 48% in the three months ended June 30, 2001, and 67% in the three months ended June 30, 2000. The decrease in margin is primarily attributed to the increase in the amortization of software development costs, coupled with an increase in the sale of lower margin third party software, in the three months ended June 30, 2001. Service and other revenues decreased $.1 million to $5.2 million in the three months ended June 30, 2001, compared to $5.3 million in the three months ended June 30, 2000. The primary reason for the decrease was the reduction in revenue from its internet services in the three months ended June 30, 2001. The gross margin percentage on service and other revenues was 78% in the three months ended June 30, 2001, and 72% in the three months ended June 30, 2000. The increase in margin is primarily due to the decrease in revenue from internet services, which have a higher associated cost than other services. Salaries and employee benefits increased $.2 million, or 6%, to $2.8 million in the three months ended June 30, 2001, compared to $2.6 million in the three months ended June 30, 2000. Annual salary increases are the primary reason for the increase in the three months ended June 30, 2001. General and administrative expenses increased $.1 million, or 11%, to $1.3 million in the three months ended June 30, 2001, from $1.2 million in the three months ended June 30, 2000. This increase is primarily attributable to an increase in marketing expenses coupled with an increase in legal and accounting expenses. Income from operations decreased $.2 million, to $.3 million in the three months ended June 30, 2001, from $.5 million in the three months ended June 30, 2000. The primary reason for the decrease is the reduced hardware revenue, coupled with an increase in the cost of software revenues, in the three months ended June 30, 2001 as compared to the three months ended June 30, 2000. Other income and expense decreased $.3 million, to an expense of $.1 million in the three months ended June 30, 2001, from income of $.2 million in the three months ended June 30, 2000. The primary reason for the decrease is $.2 million in expenses relating to the pending transaction with SIRSI in the three months ended June 30, 2001. The Company's consolidated effective tax rate was 35% for the three month period ended June 30, 2001, and 32% for the three month period ended June 30, 2000. The increase in the effective tax rate in the three months ended June 30, 2001, is due to the reduction in research and development credits. 11 Results of Operations Nine Months Ended June 30, 2001 compared to Nine Months Ended June 30, 2000 Hardware revenues decreased $.6 million, or 39%, to $.9 million in the nine months ended June 30, 2001, from $1.5 million in the nine months ended June 30, 2000. In the nine months ended June 30, 2001, the Company had one large and several small migration sites resulting in hardware revenue, compared to the nine months ended June 30, 2000, which had hardware revenue related to the server installation of the Company's web based public access product, coupled with the installation of two Taos servers and two network upgrades. The gross margin percentage on hardware was 26% in the nine months ended June 30, 2001 and 25% in the nine months ended June 30, 2000. Software license revenues decreased $.1 million, or 4%, to $3.1 million in the nine months ended June 30, 2001, from $3.2 million in the nine months ended June 30, 2000. The decrease in revenue is attributable to a reduction in Taos installation contracts for the nine months ended June 30, 2001. The gross margin percentage on software was 52% in the nine months ended June 30, 2001, and 72% in the nine months ended June 30, 2000. The decrease in margin is primarily attributed to the increase in the amortization of software development costs in the nine months ended June 30, 2001, as well as an increase in revenue from third party software which results in lower margin. Service and other revenues decreased $.2 million, or 1%, to $15.5 million in the nine months ended June 30, 2001, compared to $15.7 million in the nine months ended June 30, 2000. An increase in maintenance, the major component of service and other revenue, was offset by a decline in business internet revenue. The gross margin percentage on service and other revenues was 76% in the nine months ended June 30, 2001, and 73% in the nine months ended June 30, 2000. The increase in margin was primarily due to the decrease in revenue from internet services, which have a higher associated cost than other services. Salaries and employee benefits increased $.2 million, or 2%, to $8.5 million in the nine months ended June 30, 2001, compared to $8.3 million in the nine months ended June 30, 2000. Annual salary increases are the primary reason for the increase in the nine months ended June 30, 2001. General and administrative expenses increased $.1 million, or 4%, to $3.9 million in the nine months ended June 30, 2001, compared to $3.8 million the nine months ended June 30, 2000. This increase is primarily attributable to an increase in marketing expenses coupled with an increase in legal and accounting expenses. Income from operations decreased $.7 million to near break even in the nine months ended June 30, 2001, compared to $.7 million in the nine months ended June 30, 2000. The primary reason for the decrease is the reduced hardware revenue, coupled with an increase in the cost of software revenues, in the nine months ended June 30, 2001 as compared to the nine months ended June 30, 2000. Other income decreased $.2 million, to $.6 million in the nine months ended June 30, 2001, from $.8 million in the nine months ended June 30, 2000. The primary reason for the decrease is $.2 million in expenses relating to the pending transaction with SIRSI in the nine months ended June 30, 2001. The Company recorded a onetime charge for pending tax matters related to an Internal Revenue Service examination. Without the effect of this $.3 million charge, the Company's consolidated effective tax rate was 35% for the nine month period ended June 30, 2001, compared to 32% for the nine month period ended June 30, 2000. The increase in the effective tax rate in the nine months ended June 30, 2001, is due to the reduction in research and development credits. With the effect of the $.3 million charge, the Company's consolidated effective tax rate was 78% for the nine month period ended June 30, 2001. 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 June 30, 2001, the Company's working capital was $17.7 million and its ratio of current assets to current liabilities was 2.9 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 $2.7 million for the nine months ended June 30, 2001, compared to $5.2 million in the nine months ended June 30, 2000. A decrease in net income, coupled with the timing of payments of accounts payable, in the nine months ended June 30, 2001, is the primary reason for the decline. Net cash used by investing activities was $5.5 million for the nine months ended June 30, 2001, compared to $2.8 million for the nine months ended June 30, 2000. The increase in net cash used 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 equivalents to short-term investments. Net cash used by financing activities was $1.6 million for the nine months ended June 30, 2001, compared to $2.6 million for the nine months ended June 30, 2000. Purchases of treasury stock in the amount of $1.1 million for the nine months ended June 30, 2001, compared to $2.2 million for the nine months ended June 30, 2000 accounted for the decrease in cash used. The Company has a $6.0 million line of credit, which expires in January 2002 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 $4.1 million, short-term investments of $15.1 million, accounts receivable of $6.4 million, continued cash flow from operations, availability of a $6.0 million line of credit, and total current liabilities of $9.2 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 $1.8 million and no other known long-term commitments or demands, the Company will be able to satisfy its known long-term liabilities and liquidity needs through the funding sources identified above. 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. 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 expects to release version 1.0 of Acquisitions, the module that will complete the suite of Taos products, early in fiscal 2002. 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 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. On May 17, 2001, Data Research Associates, Inc. (DRA) and SIRSI Holdings Corp. announced the signing of a definitive merger agreement providing for a subsidiary of SIRSI to purchase all outstanding common stock of DRA for $11.00 per share in cash, or approximately $51.5 million. The transaction is subject to receipt of at least seventy-five percent (75%) of the DRA shares in the tender offer. As of August 9, 2001, 43% of the shares had been tendered through the tender offer. The transaction is expected to be completed during the month of August. Additional details and updates regarding this announced merger can be found in subsequently filed Securities and Exchange Commission documents as well as in press releases issued by both DRA and SIRSI Holdings Corp. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits No exhibits (b) Reports on Form 8-K A report on Form 8-K (the date of report being May 16, 2001) was filed on May 21, 2001. The items reported were Item 5 Other Events and Item 7 Financial Statements and Exhibits. A report on Form 8-K (the date of report being May 30, 2001) was filed on May 30, 2001. The item reported was Item 7 Financial Statements and Exhibits. A report on Form 8-K (the date of report being June 28, 2001) was filed on June 28, 2001. The items reported were Item 5 Other Events and Item 7 Financial Statements and Exhibits. 14 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 14, 2001 /s/Michael J. Mellinger --------------- ---------------------------------- Date Michael J. Mellinger Chairman, President, and Chief Executive Officer (Principal Executive Officer) August 14, 2001 /s/Katharine W. Biggs --------------- ---------------------------------- Date Katharine W. Biggs Vice President, and Chief Financial Officer (Principal Accounting Officer)

DATA RESEARCH ASSOCIATES INC 10-Q