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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended SEPTEMBER 30, 1998
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
of incorporation or organization) Identification No.)
1276 NORTH WARSON RD. ST. LOUIS, MISSOURI 63132
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 432-1100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is $36,192,388 as of November 30, 1998.
At November 30, 1998 there were 5,370,370 shares of the registrant's common
stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Report by reference:
PART III: The definitive proxy statement of the registrant (to be filed
pursuant to Regulation 14A for the registrant's 1999 Annual Meeting of
Shareholders, which involves the election of a director, is incorporated by
reference into Items 10, 11, 12 and 13 of this Report.
Exhibit Index is on Page 57 of this Report.
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INDEX
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
PART I.
Item 1. Business.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 4A. Executive Officers of the Registrant.
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
SIGNATURES
Exhibit Index
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This document contains 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 Company's
disclosures under the heading "Cautionary Statements - Additional Important
Factors to Be Considered," below.
PART I.
ITEM 1. BUSINESS.
GENERAL
Data Research Associates Inc., a Missouri corporation, and its subsidiaries
(collectively, the "Company" or "DRA") is a leading systems integrator for
libraries and other information providers, offering its own proprietary
information services software; third party software and hardware; Internet,
World Wide Web, and other networking services; and other related support
services. The Company provides a selection of automation systems: the Data
Research System ("DRA Classic"), the INLEX/3000 System, and the MultiLIS System.
Its next-generation system, Taos, is currently being introduced. Taos uses such
leading-edge technologies as an n-tiered client/server structure,
object-oriented design and an object-oriented database. Each of the systems
provided by DRA is a comprehensive, fully integrated package of modular software
applications and is designed to allow customers to add applications without
modifying their existing databases, hardware, or software. The Company also
provides a wide variety of services designed to support the automation of the
library. The Company's software packages are adaptable for use in academic,
public, school, and special libraries ranging from single libraries to large,
multi-branch systems and consortia. The Company's library customer base at
November 30, 1998, is more than 800 systems serving over 2,400 individual
libraries in the United States, Canada, Europe, South America, and the Pacific
Rim. The Company provides Internet services to corporations and institutions
outside of its traditional library market.
Recognizing a trend toward increased sharing of information resources among
libraries, the Company has designed and implemented electronic networking
services that allow libraries to share information resources and reduce their
costs of acquiring and maintaining such resources. DRA has also established
itself as a leader in the development of transparent networking. Products and
services associated with DRA Net, the Company's dedicated, high-speed
telecommunications network, facilitate what management believes is an evolution
toward the "library without walls"--a library whose information resources are
not limited by its physical boundaries.
THE LIBRARY AUTOMATION MARKETPLACE AND CUSTOMERS
Libraries began to use computers in the late 1960s and early 1970s primarily
as a tool to automate manual circulation processes. Automation gradually spread
throughout the library to include other tasks, such as cataloging, acquisitions,
and the replacement of card catalogs with the automated public access catalogs.
DRA was founded in 1975 and entered the library automation marketplace with the
design philosophy of integrating these diverse functions to use a single
bibliographic database based on a national standard for machine-readable
cataloging ("MARC"). With other automation systems of that
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time, there was often a substantial duplication of effort required to maintain
different databases for each of the discrete functions performed in the library.
In addition, the lack of standardization in the format of its bibliographic
database often forced a library to reenter its entire catalog if it changed
automation systems.
The library automation field has undergone dramatic changes since the Company
commenced operations. The emphasis in the marketplace has moved from proprietary
applications designed to meet narrowly defined functions to fully integrated,
modular systems that automate all library functions and provide access to
information resources beyond the physical confines of the library. Far from
simple database management systems, library automation systems are extremely
complex. Because of the complexity of these systems, the Company's sales efforts
in each segment of the marketplace have tended to focus on the largest libraries
and migrate downward.
U.S. AND CANADIAN MARKETS. The library marketplace in the United States and
Canada is segmented by general industry practice into four broad types:
academic, public, school, and special libraries. Combinations of segments exist
in library networks and consortia, which consist of two or more independent
libraries, not necessarily of the same size or even the same type, that purchase
a single automation system to achieve economies of scale and/or
resource-sharing.
Academic, or higher education, libraries include community or junior college,
four-year college and university, and research libraries. School libraries
include those located in schools with students in kindergarten through high
school. Special libraries include corporate libraries and other private,
nonacademic research institutions.
In addition to providing the DRA Classic System, the INLEX/3000 System the
MultiLIS System and the Taos system to academic, public, school, and special
libraries, the Company also provides an automated system for an extremely
specialized type of library, the library for the blind and physically
handicapped ("LBPH"), which is not easily categorized in any of the four
standard industry segments. DRA's LBPH product is used by libraries that account
for more than half of the total circulation by this type of library in the
United States.
INTERNATIONAL MARKETS. DRA has offices in Australia, Canada, France, and
Singapore. These offices serve 42 customers in Australia and the Pacific Rim,
142 customers in Canada, 30 customers in France, 1 customer in Chile, and 3
customers in the Caribbean. See Note F to the consolidated financial statements
for geographic segment data.
CURRENT CUSTOMERS. The Company's systems are installed at over 2,400 academic,
public, school, and special libraries in the United States, Canada, Puerto Rico,
Australia, New Zealand, Indonesia, Singapore, France, Belgium, Chile, and
Malaysia. During fiscal 1998, DRA added 14 sites to its customer base. DRA is
not dependent upon a single customer or a few customers; therefore, the loss of
any one or more customers would not have a material adverse effect on its
business.
PRODUCTS
The Company's automation systems are comprehensive, fully integrated packages
of modular software applications designed for libraries of all sizes, ranging
from single libraries to large, multi-branch library systems and
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consortia. The packages run on a variety of hardware platforms and operating
systems and are marketed according to the specific needs of the customers. The
packages are also designed to allow libraries to share the hardware and data
while allowing an individual library to implement its own policies. Through the
use of DRA Net, the Company provides libraries direct access to remote library
indexes. The Company believes that all its proprietary software products are
currently capable of acurately processing date data related to the change from
1999 to 2000.
The Company's turnkey systems are priced on the basis of several separate
components: central site hardware (including operating systems software),
applications software, peripheral equipment, conversion, documentation and
training, and other services. Initial turnkey system installations currently
tend to range in price from less than $10,000 to more than $2 million. Software
product license fees are based on the type of modules licensed, the number of
users permitted, and the size of hardware on which the software is operating.
The price of software-only contracts has ranged from less than $10,000 to
approximately $800,000. The Company also charges a monthly software maintenance
fee typically equal to between 1 and 1.5 percent of the software license fee for
its products. Virtually all of DRA's customers purchase software maintenance
services.
SOFTWARE PRODUCTS
CATALOGING AND AUTHORITY CONTROL. The entry and management of the database
for information about library materials (books, films, cassettes, etc.) are
handled by the bibliographic database management software. The information about
each book or other material is stored in full MARC format, which is a national
and international standard. The bibliographic database management software
allows librarians to create, edit, read, and write bibliographic information in
machine-readable form. The DRA software allows libraries to connect to national
databases that share cataloging information, which reduces the cost of
cataloging for any participating library. The biblio graphic database management
software also facilitates authority control. This feature directs the
individuals searching the database to the correct term to be used when locating
materials.
CIRCULATION. The Circulation module handles all of the library's circulation
activities, including registering borrowers, checking books in and out, renewing
books, and placing requests for specific titles. An innovative feature of the
Company's circulation software is the extensive, flexible, locally defined
policy file that allows the library automatically to implement its own policies
for library loan periods, fines, library card use, and requests for library
materials. In a multi-library system or consortium, each library can establish
its own set of policies and still share the same computer. The Circulation
module is integrated and thus can accommodate the differences of each library
within the framework of a standardized program using industry-standard formats.
PUBLIC ACCESS. DRA offers a wide range of products to facilitate the
searching of the local library catalog and remote databases. Industry practice
generally labels any product that takes the place of manual card catalogs as an
On-line Public Access Catalog. For searching a library's local catalog, the
Company offers various user interface options designed to accommodate differing
levels of user sophistication. Among the Company's public access products is the
Information Gateway module, which offers access to materials and information
available outside the physical confines of the library. These features include
full-text delivery for journals; access to numerous databases
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via either DRA Net or direct loading on the local computer; creation of and
access to a database that contains detailed listings of local events, social
services, and other programs; creation of and access to an index of newspapers
and serials that are not indexed in commercially prepared citation indexes; and
creation of and access to databases of photographs, illustrations, and diagrams
using "imaging" technology for display on the computer screen. In fiscal 1994,
the Company introduced a public access and research workstation product called
DRA Find, the first product in an evolutionary path toward a distributed
processing extension of the Company's client/server architecture. DRA Find is a
Microsoft Windows-based PC software product that allows simultaneous searching
of multiple databases, as well as retrieval of data in textual or multimedia
formats. In fiscal 1996, the Company introduced DRA Web, a retrieval device
based on the World Wide Web, and DRA Kids, a children's workstation product. On
September 30, 1997, the Company released DRA Web2, a more powerful retrieval
device that incorporates the object- oriented technology of the Company's new
Taos product line. See discussion of cautionary statements at exhibit 99.1.
ACQUISITIONS. The Acquisitions module is designed to handle the purchase of
library materials. It aids librarians in creating lists of books they wish to
order, creating the actual orders that are sent to book publishers or book
suppliers, and maintaining a full audit trail of the funds used by the library
to purchase the materials. Statistics of interest to the library regarding
publisher or supplier performance are maintained and can be reported using the
software's report system.
SERIALS. The Serials module is a comprehensive module for management of
magazine and journal collections. The module contains a check-in function,
records the receipt of all magazine issues, and maintains a list of items that
have an exception status. It also records receipt of special issues. Statistics
of interest to the library regarding performance are maintained and can be
reported using the software's report system.
REPORTS. Because of their funding structures, libraries are required to
produce numerous reports about their collections, usage, and borrowers. All DRA
software offers extensive standard reporting capabilities and, as an option,
report writer modules for specialized reporting needs. The report writer modules
are based on third-party software products that are modified by the Company to
meet unique requirements of the library environment.
JOURNAL CITATION. The Journal Citation module allows users of the Public
Access module to search for magazine articles and then determine if the library
subscribes to the magazine or journal in which the articles are published. If
so, the module then alerts the patron as to where the magazine or journal is
located within the library. It is also possible for the user to place a
photocopy request on-line.
MEDIA BOOKING. Libraries frequently use a separate management system for
handling 16 millimeter films, audiovisual equipment, and video cassettes.
Libraries also require the ability to place holds on material for a specific
number of days, allow for inspection time before they are again ready for
circulation, and allow for shipment of materials between library facilities,
when necessary. The Media Booking module performs these functions and also
monitors the collection of fees for materials that pass through the booking
process. Media Booking is a sub-module of Circulation but must be purchased
separately.
LIBRARY FOR THE BLIND AND PHYSICALY HANDICAPPED--LBPH. The LBPH system,
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which can stand alone from the DRA software, provides automated materials
selection and circulation according to preferences provided by homebound blind
and physically handicapped patrons.
NETWORKING
Libraries have begun to recognize that printed works are only a small subset
of the information resources demanded by their patrons. More and more
information is becoming available in electronic formats. At the same time,
traditional sources of library funding have diminished, and the costs of printed
works have increased. Therefore the Company has focused much of its development
efforts on networking products because it believes that such products allow
libraries to provide access to information without having to bear the full
expense of buying, maintaining, and storing such information.
Management believes that the Company has established a leadership position in
the design and implementation of electronic networks as a means for libraries to
share resources. DRA originally introduced its telecommunications network, DRA
Net, in 1980 to provide large libraries an alternative resource for
MARC-formatted catalog records. In the past few years, additional features have
been added to DRA Net to provide network participants with access to a wide
variety of information resources and support services, including third-party
magazine indexes, databases containing the full text of magazine and journal
articles, access to catalogs and other resources of other network members, and
the ability to lend materials to and borrow materials from other members of the
network.
DRA Net is one of thousands of networks that are commonly and collectively
referred to as the Internet. Today all library subscriptions include, at no
additional charge, the option of using DRA Net to establish the library's
presence on the Internet. The Company has connected its network with DS-3
(extremely high-speed and high-bandwidth) links to multiple Internet access
points. In addition, DRA is a member of the MIT World Wide Web Consortium (W3C),
which was formed to develop standards for the evolution of the World Wide Web,
and the Commercial Internet eXchange, a major industrial trade association. The
World Wide Web has become the primary means of accessing the Internet. The
Company markets Internet access to corporations and institutions outside of its
traditional library marketplace.
During fiscal 1998, the number of library customers using DRA Net declined
slightly as competition for Internet connections from Internet Service Providers
in the libraries' local markets increased. New corporate and institutional
Internet customers outside of the Company's traditional library marketplace
increased. Management believes that easy access to popular library databases,
along with this ability to circumvent the growing congestion of the general
Internet, will continue to provide competitive advantages in the sales of DRA
Net services within the Company's traditional library marketplace.
TRANSPARENT NETWORKING. Management believes that the transparency of its
networking technology is a key product characteristic that differentiates the
Company from its competitors in the library automation industry. Transparency in
a network means that a library user can search the library's local catalog and
then search a magazine index or other remote database that is not physically
located in the library with identical search procedures resulting in displays of
information that are also identical in style. Without transparency, a library
user searching different resources would have to be familiar with the searching
techniques unique to each resource.
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Transparency is achieved through use of the Company's proprietary Information
Gateway software or its DRA Find, DRA Web, DRA Kids, and DRA Web2 products.
These products enable a library user to access and search multiple databases
that are either part of the library's own system or accessible over DRA Net.
OPEN SYSTEMS. There has been considerable emphasis in the computer industry
in general and in the library automation industry specifically on the trend
toward "open systems" computing. Management pursues a philosophy that bases the
development of open systems on the interoperability of differing software
systems. Interoperability allows software systems using diverse hardware
platforms and operating systems to interact directly with each other and thus is
very closely related to transparency. Management believes that national and
international standards, particularly the Z39.50 standard, are the only basis
for achieving open systems in library automation. The Company has recently
furthered its emphasis on standards-based open systems by integrating the Common
Object Request Broker Architecture (CORBA) - an industry standard for
communication among various elements of an automation system - into both its
legacy and next-generation products.
STANDARDS. DRA is a recognized industry leader in the development,
implementation, and promotion of national and international standards as a means
for achieving network-accessible information. The Company was an early proponent
of standardization of library databases using the MARC standard and was one of
the first vendors to market a system that focused on a single MARC database. A
standardized database is critical to the ability of different libraries'
automation systems to connect to each other and exchange information.
More recently, the Company has taken an active role in the development,
implementation, and promotion of the National Information Standards
Organization("NISO") Z39.50 standard. Z39.50 provides for transparent exchange
of data between systems that use entirely different hardware, software, and
operating systems. The Company incorporates this standard throughout its
software product line and continues its leadership role in bringing this
standard to market.
As part of its standards activities, the Company devotes staff and financial
support to national and international standards organizations. DRA President and
Chief Executive Officer Michael J. Mellinger recently served as Chairman of the
Board of Directors of the NISO, the official U.S. standards organization for
libraries and other information services and currently serves as its treasurer.
CUSTOMER SERVICES
Complementing the Company's software products is a broad selection of
customer services. DRA is committed to providing full service to its customers
by offering the following:
INSTALLATION AND CONVERSION. An initial installation usually consists of a
core configuration of the Cataloging and Circulation modules, plus any optional
modules desired by the customer at the time of purchase. The Company's
installation personnel include experienced librarians and computer specialists
who assist the library in general preparation for and installation of the
hardware and software (for turnkey sales) or the software only (for
software-only licenses). DRA has converted a number of different types of
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library automation systems developed by its national competitors, as well as
local software developers. The Company's installation personnel minimize the
amount of downtime or disruption of daily activities during a system conversion
by providing advanced training, off-site data conversion and an efficient backup
circulation system.
DOCUMENTATION AND TRAINING. All of the Company's software modules are
complemented with full documentation and on-site training. The Company also
distributes to its customers updated, current documentation with each new
release of software. The Company has a comprehensive training program designed
and taught by librarians experienced in automation. Each library's training
program is tailored according to the software and hardware purchased. All
courses are taught in a structured environment using training guides, sample
exercises, and hands-on experience.
MAINTENANCE. The Company offers its own maintenance services for its software
modules. Software maintenance includes ongoing software enhancements, as well as
24-hour-per-day, seven-day-per-week, staffed telephone support. DRA also sells
maintenance services on certain hardware pursuant to its agreements with
hardware vendors.
AUTHORITY CONTROL PROCESSING SERVICES. Many libraries want their
bibliographic database "authorized" as part of their installation. Authorization
involves the verification of subject headings and names contained in a library's
bibliographic files against the Library of Congress files. The Company has its
own proprietary authority processing services and pioneered the provision of
networked authority control processing services and ongoing authority
verification via DRA Net, resulting in cost savings when compared to traditional
authorization techniques.
CUSTOM SOFTWARE. In addition to its software modules designed to automate
fundamental library functions, DRA also provides to its customers certain
application software that is customized to meet their special needs or
supplement the Company's standard software modules.
MARKETING AND SALES
The Company's application software is licensed either as part of a turnkey
system or a software-only contract. Public institutions and small colleges have
generally preferred the Company's full-service option. Software-only licenses
are commonly provided to customers with existing relationships with hardware
vendors.
The Company markets its products and services by a variety of methods,
including employing a direct sales force, publishing newsletters, participating
in trade shows and library users' conferences, making presentations at
professional meetings, advertising in trade magazines, and assuming leadership
positions in a number of professional organizations. Through its participation
in cooperative marketing agreements with various hardware vendors, the Company
receives sales assistance and promotional assistance from these companies.
DRA sells and licenses products and services through a direct sales force.
Account managers are assigned to specific geographic territories throughout the
world. A sales support staff provides such support as preparation of quotations
and software demonstrations.
The sales process for a library automation system is typically lengthy,
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often lasting in excess of 18 months. Libraries procuring automation systems use
such methods as Requests For Information ("RFIs"), Requests For Proposals
("RFPs"), recommendations of consultants, site visits to existing customers,
evaluations at professional conferences, and on-site demonstrations in their
selection processes. Libraries replacing an existing automation system often
undertake even more stringent evaluation procedures before purchase. In addition
to its sales and marketing staffs, the Company employs more than ten people
dedicated to responding to RFIs, RFPs, and other forms of bids.
PRODUCT DEVELOPMENT
DRA identifies customer and marketplace product needs by staying current with
articles in the professional literature, by analyzing competitive literature and
products, and through customer satisfaction surveys and direct interaction with
the users' groups of the Company's respective products. The users' groups
regularly poll their members regarding desired software improvements and present
the results to the Company's management.
DRA's product development staff is currently involved in a number of product
enhancements and new product developments. In fiscal 1996, DRA released new
versions of software products with electronic document interchange capabilities,
multilingual capabilities, and bindery capabilities. The Company also released
DRA Web, a web server product, and updates to DRA Find and DRA Kids in fiscal
1996. In fiscal 1997, the Company released DRA Web2, a more powerful retrieval
device that incorporates the object-oriented technology of the Company's new
Taos product line. The Company is involved in developing an interlibrary loan
product. The Company also routinely establishes joint development projects with
leading libraries to support its product development efforts. Fifty-one
full-time employees are directly involved in product development. Several
members of senior management also devote time to product development activities.
See Note A to the consolidated financial statements for research and development
costs and discussion of cautionary statements in exhibit 99.1.
RELATIONSHIP WITH HARDWARE VENDORS
The Data Research System has traditionally operated exclusively on Digital
computers and the Open VMS operating system. During 1998 Digital Equipment
Corporation was purchased by Compaq. Management has taken steps to move toward
support of multiple platforms and operating systems. One of these steps is
migration to next-generation client/server technologies through the development
of Taos using the UNIX and Windows NT operating systems. Due to the purchase of
the MultiLIS system, the Company can also now offer a complete, fully functional
system based on the UNIX operating system. In conjunction with this multi-vendor
strategy, the Company has developed marketing, sales, and product development
relationships with numerous hardware vendors.
Although it is moving away from strong dependence on Digital, DRA maintains
the close business relationship it has had with Digital since 1975. During
fiscal 1997, Digital stopped selling any hardware directly to its value-added
resellers and initiated a partnership among Digital, its resellers, and its
distributors for the purchase of hardware and systems software. Since January
13, 1997, DRA has been party to a Distribution Value Added Reseller ("DVAR")
agreement between the Company and Hall-Mark Computer Products ("Hall-Mark"),
with Digital regarded as a third-party beneficiary of the agreement. Under the
terms of the DVAR agreement, which expires on June 18, 1999, and is subject to
annual renewal, DRA negotiates volume
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discounts directly with Hall-Mark, and Digital continues to provide certain
warranties on the equipment and software and indemnity against copyright or
patent infringement claims relating to the use of Digital products or
documentation. The Company maintains an annually renewable agreement directly
with Digital for the purchase and resale of maintenance on hardware and system
software. The Company also maintains a wide range of volume discount and
reseller arrangements with vendors of support and peripheral equipment and
services. The servers used by the Taos system run on various versions of the
UNIX operating system and on Microsoft's Windows NT operating system. A large
proportion of the initial Taos implementations are expected to run on Sun
hardware using the Solaris operating system, Sun's version of UNIX. DRA has been
a Sun reseller since 1995 and negotiates volume discounts directly with the
distributor MOCA Merisel according to a Sun Master Reseller Agreement. Sun
product pricing is determined through the volume commitments of the Merisel VAR
Vantage program, which renews annually on August 31st. DRA also maintains a
reseller agreement directly with Sun for the purchase and resale of services and
maintenance on hardware and software. During fiscal 1998, DRA completed its Sun
certification process which includes an on-site audit.
The Company also expects to offer the Taos system on other vendors' hardware
platforms, according to market conditions and technical considerations, and has
established or is in the process of establishing several other similar
agreements with major hardware manufacturers.
COMPETITION
While its competition is highly fragmented, DRA recognizes approximately a
dozen direct library competitors, representing a mix of closely held private
companies and divisions of Fortune 100 companies. Certain of the Company's
competitors have greater financial, technical, marketing, and sales resources
than DRA. There can be no assurance that the Company's present competitors or
companies that choose to enter the marketplace in the future will not exert
significant competitive pressures on the Company.
Management believes that the principal competitive factors in the library
automation industry include networking, integration, product functionality,
system performance, vendor and product reputation, financial stability, customer
service and support, and timeliness of product enhancements and upgrades. DRA
believes it competes effectively with respect to all of the above factors
despite the possibility that it may be at a competitive disadvantage against
certain competitors with greater financial and marketing resources. Management
also believes the Company holds key competitive advantages in its networking
capabilities through DRA Net, from the standpoint of both software functionality
and customer recognition.
The Company recognizes over 1,000 competitors in supplying Internet access
services to non-library customers. The competition is highly fragmented, with a
range from closely held private companies to Fortune 100 companies. DRA competes
with a substantial number of network providers. Certain of the Company's
competitors have greater financial, technical, marketing, and sales resources
than the Company. There can be no assurance that its present competitors or
companies that choose to enter the marketplace in the future will not exert
significant competitive pressures on DRA. Management believes that the Company's
years of experience in networking have resulted in core competency that will
allow DRA to compete effectively in this area.
BACKLOG
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The Company's normal backlog consists of signed contracts or purchase orders
for products and services on which the Company expects to realize revenue upon
shipment of products and performance of services. Backlog fluctuates
significantly due to installation scheduling, new product development, customer
delays in facilities preparation, and other factors both within and outside the
Company's control. Because of these factors and because DRA typically ships its
products within a short period after orders are received, management believes
that backlog does not provide a meaningful indication of future performance;
however, currently the Company has a backlog related to eight contracts for the
Company's next-generation Taos system. Recognition of revenue from this backlog
is subject to completion of all required modules mandated by each contract,
along with the logistical considerations that accompany the initial release of a
new product. See "Cautionary Statements- Additional Important Factors to be
Considered" in exhibit 99.1.
PROPRIETARY RIGHTS AND LICENSES
DRA regards its products as proprietary trade secrets and confidential
information. The Company relies upon its license agreements with customers, its
own security systems, confidentiality procedures, and employee confidentiality
agreements to maintain the trade secrecy of its products. The Company's
proprietary software rights are also protected under copyright law. There can be
no assurance that these means of protection will be effective against
unauthorized reproduction.
DRA believes that, due to the rapid pace of innovation within the computer
industry, factors such as (i) technological and creative skill of personnel,
(ii) knowledge and experience of management, (iii) name recognition, (iv)
maintenance and support of software products and (v) the ability to develop,
enhance, market, and acquire software products, and services are more important
for establishing and maintaining a leading position within the industry than are
patent, copyright, and other legal protections for its technology. Management
believes that the Company has all necessary rights to market its products,
although there can be no assurance that third parties will not assert
infringement claims in the future.
EMPLOYEES
As of November 30, 1998, DRA had 215 employees, including 40 in marketing and
sales, 88 in computer operations services and training, and 53 in product
development. None of the Company's employees is represented by a labor union.
Management believes that its employee relations are good. The Company
periodically employs consultants to assist with specific development projects.
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative, product development,
and sales and marketing operations are located in St. Louis, Missouri, where the
Company owns approximately 35,360 square feet of office and warehouse space. DRA
also leases 4,300 square feet in Monterey, California, under a lease that
expires July 31, 1999; 1,056 square feet of office space in Melbourne,
Australia, under a month-to-month lease; 522 square feet of office space in
Singapore under a lease that expires on April 16, 1999; 10,079 square feet of
office space in Montreal, Canada, under a lease that expires January 31, 2001;
and approximately 2,000 square feet of office space in Paris, France, under a
lease that expires March 31, 2005.
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<PAGE> 14
Management believes that the Company's facilities are adequate for its
current needs and that suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any litigation except the following:
In October 1998, Sector 7 U.S.A., Inc. ("Sector 7"), filed suit against the
Company in the United States District Court for the Western District of Texas,
Austin Division (Civil Action No. A98CA 58-575JN) seeking a declaratory judgment
that Sector 7 did not breach a computer software development contract (the
"Contract) between the Company and Sector 7.
Shortly thereafter, the Company filed a lawsuit against Sector 7 in the United
States District Court for the Eastern District of Missouri, Eastern Division
(Cause No. 4:98 CV 01335ERW), claiming breach of the Contract and seeking
$750,000 for breach of warranty and other damages for fraud in the inducement
with respect to such Contract.
The Company believes the allegations of the lawsuit pending in Texas to be
without merit and the Company intends to vigorously defend this matter (and to
prosecute the corresponding action pending in the Eastern District of Missouri).
At this time, the Company cannot predict the probable outcome of these lawsuits
but does not anticipate any material adverse consequences to the Company as a
result of these lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.*
The executive officers of the Company are:
Name Age Position
---- --- --------
Michael J. Mellinger 49 Chairman, President
and Chief Executive
Officer
Katharine W. Biggs 55 Vice-President, Chief
Financial Officer
and Treasurer
Joseph M. Bonwich 39 Vice-President
Set forth below are descriptions of the backgrounds of the executive officers
of DRA.
Mr. Mellinger has served as President, Chief Executive Officer, and Director
of DRA since 1975 and served as Treasurer of the Company from
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<PAGE> 15
April 1992 to February 1995. Mr. Mellinger was elected Chairman of the Board in
April 1992.
Ms. Biggs was elected Chief Financial Officer and Treasurer of the Company in
February 1995. She has served as Vice-President of the Company since May 1991
and served as Controller of the Company from April 1989 to February 1995.
Mr. Bonwich was elected Vice-President of the Company in February 1996. He
now oversees the Company's marketing and corporate communications, groups. He
joined DRA as president of the wholly owned and now dissolved subsidiary formed
to handle the Company's advertising and public relations. From 1994 to 1996, he
was Director of Corporate Communications for DRA. From 1992 to 1994, he was
Director of Marketing.
Each of the executive officers serves at the discretion of the Board of
Directors, except Mr. Mellinger, who is a party to an employment agreement with
the Company, which agreement expires September 30, 2002, with an automatic
five-year renewal, unless terminated by Mr. Mellinger or the Company upon the
occurrence of certain events.
- ----------
*This information is included in Part I as a separate item in accordance with
Instruction 3 to Item 401 (b) of Regulation S-K adopted under the Securities
Exchange Act of 1934.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
MARKET INFORMATION
The common stock is quoted on the NASDAQ National Market System, under the
trading symbol DRAI.
The high and low sales prices, for the common stock during each of the
quarters of fiscal 1997 and fiscal 1998 were as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1997:
Quarter High Low
<S> <C> <C>
First $15.00 $12.50
Second 15.75 13.25
Third 14.00 11.50
Fourth 15.50 11.75
<CAPTION>
Year Ended September 30, 1998
Quarter High Low
<S> <C> <C>
First $14.375 $12.250
Second 14.25 13.125
Third 19.50 13.75
Fourth 19.75 14.00
</TABLE>
15
<PAGE> 16
HOLDERS
As of November 30, 1998, there were 211 shareholders of record of the common
stock. Management believes that there are between 1,200 to 1,500 beneficial
shareholders.
DIVIDENDS
On November 12, 1998, the Board of Directors declared an annual dividend of
$.12 per share of common stock outstanding, payable on January 25, 1999, to
holders of record at the close of market January 8, 1999. The Board of Directors
anticipates paying an annual cash dividend, but may reconsider or revise this
policy from time to time based upon conditions then existing, including the
Company's earnings, performance, financial condition, and capital requirements,
as well as other factors the Board of Directors may deem relevant.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data appearing below have been derived from the
Company's audited consolidated financial statements. The selected financial data
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto appearing elsewhere in this filing.
Income Statement Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30
---------------------------------------------------
1998 1997 1996 1995(1) 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Hardware $ 5,433 $ 9,759 $11,724 $10,905 $ 8,005
Software 8,017 6,969 9,949 8,513 7,255
Service and other 19,095 18,641 16,909 15,449 10,056
Total revenues 32,545 35,369 38,582 34,867 25,316
Expenses:
Cost of revenues 9,703 12,801 13,657 12,651 9,017
Salaries and employee benefits 9,706 9,193 10,379 9,356 6,128
General and
administrative expenses 6,944 6,166 6,788 6,344 5,090
Depreciation and amortization 1,718 1,339 1,147 993 766
Total operating expenses 28,071 29,499 31,971 29,344 21,001
Income from operations 4,474 5,870 6,611 5,523 4,315
Other income (expense), net 1,009 788 590 347 211
Income before income taxes 5,483 6,658 7,201 5,870 4,526
Provision for income taxes 1,783 2,164 2,747 2,236 1,585
Net income $ 3,700 $ 4,494 $ 4,454 $ 3,634 $ 2,941
Basic earnings per share (2) $ .68 $ .81 $ .81 $ .66 $ .54
Diluted earnings per share (2) .67 .81 .80 .66 .54
Dividends paid per
common share $ .12 $ .10 $ -- $ -- $ --
<CAPTION>
Balance Sheet Data
(In thousands)
September 30
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital $21,953 $22,189 $18,938 $14,562 $12,925
Total assets 40,730 41,139 36,661 32,887 27,376
Long-term obligations -- -- -- -- 32
Shareholders' equity 31,505 31,442 27,446 22,813 19,107
</TABLE>
(1) Data for the year ended September 30, 1995, reflects the acquisition of the
MultiLIS System in October 1994.
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<PAGE> 18
(2) All share and per-share information has been retroactively restated to
reflect the three-for-two stock split effected in the form of a stock dividend
approved by the Board of Directors effective July 18, 1996. Information for 1997
and prior years has been restated to reflect the adoption Of SFAS No.128. See
Note A of the Notes to Consolidated Financial Statements--Earnings per Share.
ITEM 7. 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 contracts.
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 in accordance with SFAS
No. 86. 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.
This document contains 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 Company's
disclosures under the heading "Cautionary Statements - Additional Important
Factors to Be Considered," below and in exhibit 99.1.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1997
Hardware revenues decreased $4.4 million, or 44%, to $5.4 million in fiscal
1998 from $9.8 million in fiscal 1997. This decrease is due in part to three
large hardware upgrades that produced $2.1 million in hardware revenue in fiscal
1997; in part to anticipation of Taos delivery; and to a significant degree to
customers' increasing ability to buy high-performance systems at a lower price.
Management expects that hardware revenues will continue to decline. The gross
margin on hardware was 30% in fiscal 1998 and 31% in 1997.
Software license revenues increased $1.0 million, or 15%, to $8.0 million in
fiscal 1998 from $7.0 million in fiscal 1997. The increase
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<PAGE> 19
is primarily a result of a large DRA Classic turnkey contract that generated $.9
million in software license revenue in fiscal 1998, and, in part, due to the
first revenue recognized from Taos. The gross margin percentage on software was
82% for fiscal 1998 and 74% for fiscal 1997. The increase is due primarily to an
increase in fiscal 1998 of revenues from DRA Classic software which has a higher
margin than other types of software sold by the Company.
Service and other revenues increased $.5 million, or 2%, to $19.1 million in
fiscal 1998 from $18.6 million in fiscal 1997. This increase is primarily due to
the larger installed base of licensed software products that annually generate
maintenance revenues. Maintenance revenues increased $1.3 million in fiscal
1998. Management expects that maintenance revenues will continue to increase as
the base of licensed software products increases. The increase in maintenance
revenues was offset by decreases in revenues from some of the Company's contract
implementation services. These revenues decreased because the Company
implemented fewer new contracts in fiscal 1998 than in fiscal 1997. The gross
margin percentage on service and other revenues remained consistent at 77% in
fiscal 1998 and in fiscal 1997.
Cost of revenues decreased $3.1 million, or 24%, to $9.7 million in fiscal
1998 from $12.8 million in fiscal 1997. This decrease is primarily a result of
the decrease in hardware revenues in fiscal 1998 from fiscal 1997.
Salaries and employee benefits increased $.5 million, or 6%, to $9.7 million
in fiscal 1998 from $9.2 million in fiscal 1997. This increase is primarily
attributable to annual raises and to the implementation of a formal pay scale.
The increase was mitigated somewhat by the continued capitalization in fiscal
1998 of salaries and benefits related to software development.
General and administrative expenses increased $.7 million, or 13%, to $6.9
million in fiscal 1998 from $6.2 million in fiscal 1997. This increase is
primarily attributable to the write-off in fiscal 1998 of $.8 million of
development tools that the Company has discontinued using. Depreciation and
amortization increased $.4 million, or 28%, from $1.3 million in fiscal 1997 to
$1.7 million in fiscal 1998 primarily as a result of renovations made in 1998 to
one of the Company's headquarters buildings.
Income from operations decreased $1.4 million, or 24%, to $4.5 million in fiscal
1998 from $5.9 million in fiscal 1997. This decrease is a result of a decrease
in hardware sales and an increase in salaries and benefits and general and
administrative expenses as discussed above.
Other income (expense) increased $.2 million to $1.0 million in fiscal 1998
From $.8 million in fiscal 1997 due to increased rates earned on cash
investments.
The Company's consolidated effective tax rate was 32.5% in both fiscal 1998
and fiscal 1997. The consolidated effective tax rate for fiscal 1998 is less
than the US statutory rate primarily due to the generation and utilization of
significant research and development credits in the current year.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED
19
<PAGE> 20
SEPTEMBER 30, 1996
Hardware revenues decreased $1.9 million, or 17%, to $9.8 million in fiscal
1997 from $11.7 million in fiscal 1996. This decrease is primarily due to two
large full-service contracts that generated $4.6 million in hardware revenues in
fiscal 1996 and, in part, due to anticipation of Taos delivery. The gross margin
percentage on hardware was 31% for fiscal 1997 and 28% for fiscal 1996. The
increase is due primarily to a larger percentage of hardware sales being derived
from PCs in fiscal 1996. PCs have historically had a lower gross margin than
other components of integrated hardware systems. Management expects that
customers' increasing ability to buy high-performance systems at lower prices
may negatively impact the growth of hardware revenues in the future.
Software license revenues decreased $2.9 million, or 30%, to $7.0 million in
fiscal 1997 from $9.9 million in fiscal 1996. The decrease is primarily a result
of two large full-service contracts that generated $1.3 million in software
license revenues in fiscal 1996 and, in part, due to anticipation of Taos
delivery. The gross margin percentage on software was 74% for fiscal 1997 and
88% for fiscal 1996. The decrease is due primarily to a decrease in software
license revenues in fiscal 1997 from fiscal 1996, coupled with increased
amortization expense charged to costs of revenues in fiscal 1997. See Note A to
the consolidated financial statements--Software Development.
Service and other revenues increased $1.7 million, or 10%, to $18.6 million in
fiscal 1997 from $16.9 million in fiscal 1996. This increase is primarily due to
the larger installed base of licensed software products that annually generate
maintenance revenues. Maintenance revenues increased $1.5 million in fiscal
1997. 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 remained consistent at 77% in fiscal 1997 and in
fiscal 1996.
Cost of revenues decreased $.9 million, or 6%, to $12.8 million in fiscal
1997 from $13.7 million in fiscal 1996. This decrease is primarily a result of
the decrease in hardware revenues in fiscal 1997 over fiscal 1996.
Salaries and employee benefits decreased $1.2 million, or 11%, to $9.2
million in fiscal 1997 from $10.4 million in fiscal 1996. This decrease is
primarily attributable to higher capitalization in fiscal 1997 of salaries and
employee benefits related to software development.
General and administrative expenses decreased $.6 million, or 9%, to $6.2
million in fiscal 1997 from $6.8 million in fiscal 1996. This decrease is
primarily attributable to higher capitalization in fiscal 1997 of general and
administrative expenses related to software development.
Income from operations decreased $.7 million, or 11%, to $5.9 million in
fiscal 1997 from $6.6 million in fiscal 1996. This decrease is a result of
decreases in hardware sales and software licenses offset by a decrease in
salaries and benefits and general administrative expenses as discussed above.
20
<PAGE> 21
Other income (expense) increased $198,000 to $788,000 in fiscal 1997 from
$590,000 in fiscal 1996 due to increased investment income from higher
investment levels.
The Company's consolidated effective tax rate was 32.5% in fiscal 1997 And
38.1% in fiscal 1996. This decrease is primarily attributable to the utilization
of foreign subsidiaries' loss carry forwards in fiscal 1997 for which no
previous benefit had been recognized.
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 September 30, 1998, the Company's working
capital was $22.0 million, and its ratio of current assets to current
liabilities was 4.0 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.
The decrease in working capital is primarily attributable to the use of cash for
the Company's stock repurchase program.
Net cash provided by operating activities was $5.4 million for fiscal
1998,compared to $12.8 million for fiscal 1997. The decrease in net cash
provided by operations was primarily due to a $2.0 million increase in the
accounts receivable balance during fiscal 1998, compared to a $6.1 million
decrease in the accounts receivable balance during fiscal 1997. The increase in
accounts receivable relates to the timing of payments received from customers.
Net cash used in investing activities was $12.9 million for fiscal
1998,compared to $4.4 million for fiscal 1997. The Company's significant
investing activities in fiscal 1998 included $8.5 million in short-term
investments, $2.7 million for capitalized software and $.6 million for data
processing equipment. The Company's significant investing activities in fiscal
1997 included $1.8 million for capitalized software, $1.0 million for data
processing equipment, and $.5 million for office renovations.
Net cash used in financing activities was $3.5 million for fiscal 1998 and
$.4 million for fiscal 1997. The Company's primary use of cash for investing in
fiscal 1998 was $3.1 million for the purchase of treasury stock and the payment
of a $.12 per share dividend to common stock shareholders. The Company's
financing activities in fiscal 1997 related to the exercise of stock options by
directors and employees and a $.10 per share dividend to common stock
shareholders.
During fiscal 1998, 1997, and 1996, the Company incurred capital expenditures
of $1.8 million, $2.3 million and $1.8 million respectively. No material
commitments with respect to capital expenditures have been made for fiscal 1999.
In October 1998 the Company's Board of Directors authorized the repurchase of
the Company's common stock in an aggregate amount of up to $3 million, such
purchases to be made from time to time during the following twelve months.
In January 1998, the Company renewed its $6.0 million line of credit, which
will mature in January 1999 and is subject to annual renewal. The
21
<PAGE> 22
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. As of September 30, 1998, the applicable
interest rate was 8.14% per annum. There have been no borrowings against the
Company's line of credit since May 1991.
Management believes that with the current cash position of $8.7 million,
short-term investments of $8.5 million and accounts receivable of $10.5 million,
continued cash flow from operations, availability of a $6.0 million line of
credit, and total current liabilities of $7.2 million, the Company will be able
to meet both its liquidity needs and capital expenditure needs for the next 12
months. Management believes that with total long-term liabilities of slightly
more than $2.0 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.
Recent Accounting Pronouncements
During 1998 the Company adopted SFAS No. 128, "Earnings Per Share." The
adoption of SFAS No. 128 did not have a material effect on the Company's
consolidated financial statements or results of operations. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the requirements of SFAS No. 128. See Note A of the
audited financial statements for a discussion of recent accounting
pronouncements to be adopted.
Year 2000 Readiness Disclosure
The arrival of the year 2000 poses certain technological challenges resulting
from a reliance of some computer technologies on two digits rather than four
digits to represent the calendar year (e.g., "98" for "1998"). It is generally
believed that computer technologies programmed in this manner, if not corrected,
may produce inaccurate or unpredictable results or system failures in connection
with the transition from 1999 to 2000, when dates will begin to have a lower
two-digit number than dates in the prior century. This problem, the so-called
"Year 2000 Problem" or "Y2K Problem," could have an adverse effect on the
Company's financial condition, results of operations, business or business
prospects because, in order to function properly, the Company's products must
interface with a multitude of software and hardware products manufactured by
unrelated third parties. The company has been working diligently to prevent or
mitigate disruptions relating to the year 2000.
As of September 30, 1998, the Company has reviewed all of its proprietary
software products and believes that all of such software products are currently
capable of accurately processing date data related to the change from 1999 to
2000, if used with third party products that are also capable of accurately
processing such data.
The Company has formed an oversight committee and has developed a plan to
coordinate identification, evaluation and implementation of any necessary
changes to the computer systems, applications and business processes used by the
Company in the operation of its business. As of September 30, 1998, the
oversight committee had identified the Company's systems that could potentially
be impacted by the Y2K Problem. The Company is currently in the process of
prioritizing the identified systems and undertaking three primary steps to
validate systems readiness. The three steps are (1) obtaining a
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<PAGE> 23
vendor readiness statement (2) internal testing, and (3) third-party validation
through an authorized organization that has already tested the systems. The
Company plans to obtain a vendor readiness statement for all identified systems
and to perform internal testing on those identified as critical to its
operations that have not already been validated through a third-party authorized
organization. The Company expects to have finished identifying and prioritizing
systems by March 31, 1999. By June 30, 1999, the Company will have completed
necessary testing of critical systems and will have compiled a list of
identified problems and recommended solutions. Beginning in July 1999, the
Company will begin applying solutions, verifying that such solutions make the
system(s) avoid the Y2K Problem, and developing a contingency plan for any
critical system that remains susceptible to theY2K Problem. The Company plans to
be complete with all Y2K readiness and contingency planning well before December
31, 1999.
The Company anticipates that its Y2K action plan discussed above will be
carried out solely by existing employees. Accordingly, the Company has not
incurred any material incremental costs and has not identified any incremental
future costs associated with the Y2K Problem.
No assurances can be given that the Company will be able to completely
identify or address all issues related to the year 2000 Problem that affect the
Company, or that third parties with whom the Company does business will not
experience system failures as a result of the Year 2000 Problem, nor can the
Company fully predict the consequences of any such failure.
There is no single customer or product vendor which, in the Company's
assessment, is or may be likely to present any significant exposure due to the
Year 2000 Problem. However, management anticipates that there may be some
negative impact on the timely receipt of accounts receivable due to the failure
of certain customers to prepare adequately for the Year 2000 Problem. In a
worst-case scenario, these accounts receivable related difficulties might
require the Company to draw down its own credit line or to reduce the amount of
available cash on hand.
The Company also could face some risk from the possible failure of one or
more of its third party vendors to continue to provide uninterrupted service
through the changeover to the year 2000. Because the Company outsources the
delivery of hardware to its customers, such a failure could affect the
installation of the Company's products at customer locations. While an
evaluation of the Year 2000 preparedness of its third party vendors has been
part of the Company's Y2K action plan, the Company's ability to evaluate is
limited to some extent by the willingness of vendors to supply information and
the ability of vendors to verify the Y2K preparedness of their own systems or
their sub-providers. However, the Company has received assurances from its
significant vendors that there will not be any such disruption; accordingly the
Company does not currently anticipate that any of its significant vendors will
fail to provide continuing service due to the Year 2000 Problem.
The Company, like similarly-situated enterprises, is subject to certain risks
as a result of possible industry-wide or area-wide failures triggered by the
Year 2000 Problem. For example, the failure of certain utility providers (e.g.,
electricity, gas, telecommunications) to avoid disruption of service in
connection with the transition from 1999 to 2000 could adversely affect the
Company's results of operations, liquidity and financial condition. In
management's estimate, such a system-wide or area-wide failure presents a
significant risk to the Company in connection with the Year 2000 Problem
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<PAGE> 24
because the resulting disruption may be entirely beyond the ability of the
Company to cure, and the Company relies on such utilities for the delivery of
its own products, particularly telecommunications. The significance of any such
disruption would depend on its duration and systemic and geographic magnitude.
Of course, any such disruption would likely impact businesses other than the
Company.
The foregoing discussion of the Company's Year 2000 Readiness contains 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 Company's disclosures under the heading: "Cautionary
Statements - Additional Important Factors to Be Considered," below and in
Exhibit 99.1.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES REGARDING 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.
CAUTIONARY STATEMENTS--ADDITIONAL IMPORTANT FACTORS TO BE CONSIDERED
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, the following:
RAPID TECHNOLOGICAL CHANGE. The software industry is characterized by rapid
change and uncertainty due to new and emerging technologies. The pace of change
has recently accelerated due to the Internet, on-line services, networking, and
new programming languages. There can be no assurance that DRA will be successful
in developing or acquiring product enhancements and new products necessary to
keep pace with the changing technologies.
CUSTOMER ACCEPTANCE. While the Company performs extensive usability and beta-
testing of its new products, user acceptance and market penetration rates
ultimately dictate the success of development and marketing efforts. The Company
is currently in the later stages of development of a new system called Taos.
CONTRACTS WITH GOVERNMENTAL ENTITIES. A substantial portion of the Company's
business is conducted with governmental entities. Both the award and execution
of its governmental contracts are subject to numerous conditions, including the
availability and appropriation of sufficient funding.
PRODUCT SHIP SCHEDULES. Because 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, even short delays in new-product
releases or delays in the customers' procurement processes can cause results to
fluctuate substantially. Delays in the release of Taos could have a
significantly negative impact on the Company's sales and results of operations.
Because of the complexities inherent in developing software products as
sophisticated as those sold by the Company and the lengthy testing periods
associated with such products, no assurance can be given that future product
introductions by the Company will not be delayed. In the future, the
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<PAGE> 25
Company's revenues will be increasingly dependent on sales of Taos, 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.
COMPETITION. The library automation industry is highly competitive. A number of
companies offer products that target the library automation market. DRA competes
with software vendors whose products operate on Digital hardware platforms and
software vendors whose products operate on different platforms. Certain of the
Company's competitors have substantially greater financial, technical,
marketing, and sales resources than DRA.
DEPENDENCE ON AND RELATIONSHIP WITH COMPAQ. Although DRA is moving away from a
strong dependence on Compaq's Digital computers, a substantial portion of the
Company's revenues are still derived from Compaq`s Digital hardware and
licensing of the Company's software, which was originally designed to operate on
Digital computers.
DEPENDENCE ON KEY PERSONNEL. DRA's continued success depends in large part on
certain key personnel, including Michael J. Mellinger, its founder, President,
and Chief Executive Officer. The loss of the services of Mr. Mellinger and the
inability of the Company to attract and retain a suitable replacement could have
a material adverse effect on the Company.
PRINCIPAL SHAREHOLDERS. Michael J. Mellinger and F. Gilbert Bickel III
combined own in excess of 45 percent of the common stock outstanding. As a
result, Mr.Mellinger and Mr. Bickel may be able to effectively control the
outcome of certain matters requiring a shareholder vote.
POSSIBLE ACQUISITIONS. The Company may make acquisitions in the future.
Acquisitions involve numerous risks, including difficulties in the assimilation
of the operations and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or little direct experience, and potential loss of
key employees of the acquired companies.
YEAR 2000 PROBLEM. See discussion above under Year 2000 Readiness Disclosure.
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Auditors 27
Consolidated Balance Sheets as of September 30,
1998 and 1997 28
Consolidated Statements of Income for the years ended
September 30, 1998, 1997, and 1996 30
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1998, 1997, and 1996 31
Consolidated Statements of Cash Flows for the years
ended September 30, 1998, 1997, and 1996 33
Notes to Consolidated Financial Statements 35
26
<PAGE> 27
Report of Independent Auditors
Board of Directors and Shareholders
Data Research Associates, Inc.
We have audited the accompanying consolidated balance sheets of Data Research
Associates, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended September 30, 1998. Our audits
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the September 30, 1997 and 1996
financial statements of DRA Information Inc., a wholly-owned subsidiary, which
statements reflect total assets constituting seven percent in 1997, and total
revenues constituting thirteen percent in 1997 and twelve percent in 1996, of
the related consolidated totals. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included for DRA Information Inc. as of and for each of the two years
ended September 30, 1997 is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for September 30, 1997 and 1996, the
reports of other auditors, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Data
Research Associates, Inc. and subsidiaries at September 30, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement scheule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
St. Louis, Missouri
November 9, 1998
27
<PAGE> 28
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,710 $19,734
Short-term investments 8,493 -
Accounts receivable less allowance for
doubtful accounts of $101 in 1998
and $119 in 1997:
Billed 8,092 7,689
Unbilled 2,445 869
------- -------
10,537 8,558
Income taxes receivable 278 735
Inventories 136 76
Prepaid expenses 542 1,053
Deferred income taxes 261 183
Other current assets 202 171
------- -------
TOTAL CURRENT ASSETS 29,159 30,510
PROPERTY AND EQUIPMENT:
Land and improvements 504 504
Building and improvements 2,719 2,570
Data processing equipment 6,525 5,562
Furniture, fixtures, and other 3,724 3,713
------- -------
13,472 12,349
Less accumulated depreciation 6,752 5,708
------- -------
6,720 6,641
DEFERRED SOFTWARE COSTS
(net of accumulated amortization
of $1,711 in 1998
and $1,360 in 1997) 4,365 2,051
NOTES RECEIVABLE 43 99
INTANGIBLE ASSETS
(net of accumulated amortization
of $4,221 in 1998
and $3,685 in 1997) 443 1,838
------- -------
$40,730 $41,139
======= =======
</TABLE>
28
<PAGE> 29
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,030 $ 1,792
Employee compensation 375 328
Deferred revenue 4,511 4,047
Customer deposits 695 1,035
Other accrued liabilities 595 528
Income taxes payable - 591
------- -------
TOTAL CURRENT LIABILITIES 7,206 8,321
DEFERRED INCOME TAXES 2,019 1,376
COMMITMENTS AND CONTINGENCIES--
(Notes C and J)
SHAREHOLDERS' EQUITY:
Preferred stock, par value
$.01 per share--1,000,000
shares authorized, no shares
issued
Common stock, par value
$.01 per share--10,000,000
shares authorized, 5,556,670
shares issued in 1998 and
5,538,870 issued and outstanding
in 1997 56 55
Additional paid-in capital 5,763 5,612
Foreign currency translation adjustment (239) (77)
Retained earnings 28,887 25,852
------- -------
34,467 31,442
Less cost of 179,098 shares
of treasury stock (2,962) -
------- -------
TOTAL SHAREHOLDERS' EQUITY 31,505 31,442
------- -------
$40,730 $41,139
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended September 30
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Hardware $ 5,433 $ 9,759 $11,724
Software 8,017 6,969 9,949
Service and other 19,095 18,641 16,909
------- ------- -------
32,545 35,369 38,582
EXPENSES
Cost of revenues
Hardware 3,793 6,751 8,500
Software 1,468 1,814 1,213
Service and other 4,442 4,236 3,944
------ ------ ------
9,703 12,801 13,657
Salaries and employee benefits 9,706 9,193 10,379
General and administrative
expenses 6,944 6,166 6,788
Depreciation and amortization 1,718 1,339 1,147
------ ------ -------
28,071 29,499 31,971
------ ------ ------
INCOME FROM OPERATIONS 4,474 5,870 6,611
OTHER INCOME (EXPENSE)
Interest 928 751 502
Other 81 37 88
------ ------ ------
INCOME BEFORE INCOME TAXES 5,483 6,658 7,201
PROVISION FOR INCOME TAXES 1,783 2,164 2,747
------ ------- ------
NET INCOME $ 3,700 $ 4,494 $ 4,454
======= ======== =======
Basic earnings per share $.68 $.81 $.81
======= ======== =======
Diluted earnings per share $.67 $.81 $.80
======= ======== =======
Dividends per share $0.12 $0.10 $ -
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
Common Stock Additional Foreign Treasury Stock
---------------- Paid-In Currency Retained ----------------
Shares Amount Capital Translation Earnings Shares Cost
--------- ------- ---------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30,
1995 5,736,169 $57 $5,492 $83 $17,456 265,100 $275
Options
exercised 41,351 1 208 - - - -
Net income - - - - 4,454 - -
Foreign
currency
translation
adjustment - - - (30) - - -
--------- --- ------ --- -------- ------- ----
Balance at
September 30,
1996 5,777,520 58 5,700 $53 21,910 265,100 275
Retirement
of treasury
stock (265,100) (3) (272) - - (265,100) (275)
Options
exercised 26,450 - 184 - - - -
Net income - - - - 4,494 - -
Cash
dividends
($.10 per
share) - - - - (552) - -
Foreign
currency
translation
adjustment - - - (130) - - -
--------- --- ------ ----- ------- ------- -------
Balance at
September 30,
1997 5,538,870 $55 $5,612 ($77) $25,852 - $ -
Purchase
of treasury
stock - - - - - (186,200) (3,051)
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Options
exercised 17,800 1 134 - - 2,950 37
Dividend
reinvestment/
employee stock
purchase plan - - 17 - - 4,152 52
Net income - - - - 3,700 - -
Cash
dividends
($.12 per
share) - - - - (665) - -
Foreign
currency
translation
adjustment - - - (162) - - -
--------- --- ------ ----- ------- ------- ------
Balance at
September 30,
1998 5,556,670 $56 $5,763 $(239) $28,887 (179,098) $2,962
========= === ====== ===== ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,700 $ 4,494 $ 4,454
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 3,383 2,543 2,222
Provision for deferred
income taxes 563 885 202
(Gain) loss on disposal of
property and equipment 1 (3) (2)
Changes in operating assets
and liabilities:
Accounts receivable (2,194) 6,020 (2,845)
Note receivable 56 196 (36)
Inventories (61) 101 (42)
Prepaid expenses and
other current assets 555 (408) (224)
Accounts payable and
other current liabilities (564) (981) (1,496)
------ ------- -------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 5,439 12,847 2,233
INVESTING ACTIVITIES
Purchase of property
and equipment (1,778) (2,312) (1,844)
Deferred software costs (2,667) (1,832) (382)
Purchase of short-term
investments (38,717) - -
Proceeds from short-term
Investments 30,224 - -
Proceeds from disposal
of property and equipment - - 9
Purchase of software - (281) (442)
------ ------ -------
NET CASH USED IN
INVESTING ACTIVITIES (12,938) (4,425) (2,659)
FINANCING ACTIVITIES
Proceeds from options exercised 241 184 209
Cash dividends paid (665) (552) -
Purchase of treasury shares (3,051) - -
------ ------ -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,475) (368) 209
Effect of exchange rate changes
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C>
on cash and cash equivalents (50) (143) (19)
------ ------ -------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (11,024) 7,911 (236)
Cash and cash equivalents
at beginning of year 19,734 11,823 12,059
------- ------- -------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 8,710 $19,734 $11,823
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
NOTE A--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Data Research Associates, Inc. and subsidiaries (the Company)
develops, markets, and supports application software and turnkey systems for
libraries. The Company also provides product support, implementation,
consulting, education, custom programming, and systems integration services to
its customers. A significant portion of the Company's sales is derived from its
DRA Classic software product.
Principles of Consolidation: The consolidated financial statements include
the accounts of Data Research Associates, Inc. and its wholly owned
subsidiaries in Australia, Canada, France, and Singapore. All intercompany
accounts and transactions have been eliminated.
The Company's wholly owned subsidiary in France, MultiLIS Europe, S. A.
(MultiLIS), has been consolidated based upon a fiscal period ending June 30,
which the subsidiary utilizes in order to satisfy certain statutory
requirements. Operations of MultiLIS for the three months ended September 30,
1998 and 1997, were not significant.
Cash Equivalents: All highly liquid investments with a maturity of three
months or less when purchased are considered to be cash equivalents. The cash
and cash equivalents include marketable securities of $3,986,000 and $14,909,000
at September 30, 1998 and 1997, respectively. The Company's marketable
securities include mortgage-backed securities and U.S. corporate debt securities
which are classified as held-to-maturity since the Company has the positive
intent and ability to hold these securities to maturity. Held-to-maturity
securities are stated at amortized cost which approximates fair value.
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.
Property and Equipment: Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Depreciation expense for the years
ended September 30, 1998, 1997, and 1996 was $1,666,000, $1,256,000, and
$953,000, respectively.
Revenue Recognition: Revenue from sales of turnkey systems sold under
contractual arrangements is recognized upon shipment of the hardware and
software to the customer. Revenue from hardware and software maintenance
contracts is recognized monthly. Revenue from custom software sales is
recognized when the product is shipped. Revenue from installation and
conversion, documentation and training, and authority control processing
services is recognized as the services are performed.
Warranty: The Company is a reseller of hardware and passes through to its
customers the standard warranties provided by the hardware manufacturers.
35
<PAGE> 36
The Company warrants its applications software products to perform in accordance
with the written user documentation and the agreements negotiated with the
customer. Since the Company does not customize its applications software,
warranty costs are insignificant and are expensed as incurred.
Unbilled Accounts Receivable: Unbilled accounts receivable consist of products
that have been delivered to customers but are not yet billable under the terms
and conditions of the Company's contract with the customer. The manner and
timing of billings are based on the contract and on the Company's credit
policies and are not a function of acceptance by the customer. There are no
significant vendor obligations subsequent to delivery of the Company's systems.
Customer Deposits: Customer deposits typically consist of a 10 to 15% down
payment required under sales contracts and are due on signing the contract.
36
<PAGE> 37
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Software Development: The Company has a comprehensive line of software products
and maintains a programming group to service, update, and enhance those
products. Research and development costs associated with products outside of its
existing line were expensed as incurred and amounted to $1,836,000, $1,265,000,
and $1,900,000 for the years ended September 30, 1998, 1997, and 1996,
respectively. Development costs of $2,665,000 in 1998, $1,832,000 in 1997, and
$382,000 in 1996, associated with significant enhancements to its existing
software products and development of new products incurred subsequent to
attaining technological feasibility were capitalized. Amortization is computed
on an individual product basis and is the greater of (a) the ratio of current
gross revenues for a product to the total current and anticipated future gross
revenues for that product or (b) the straight-line method over the estimated
economic useful life of the product. Currently, the Company is using an
estimated economic useful life of two to five years for all capitalized software
costs. Amortization expense for the years ended September 30, 1998, 1997, and
1996 was $351,000, $303,000, and $194,000, respectively.
Income Taxes: The provision for income taxes is computed using the liability
method. The primary difference between financial statement and taxable income
results from the use of different methods of computing depreciation, capitalized
software development costs, prepaid expenses, and customer deposits.
Stock-Based Compensation: As permitted by Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"
the Company has elected to continue following Accounting Principles Board No.
25 ("APB 25"), "Accounting for Stock Issued to Employees," for measurement and
recognition of stock-based transactions with employees and adopted the
disclosure-only provisions of SFAS No. 123. Under APB 25, generally no
compensation expense is recognized because the exercise price of the options
equals the fair value of the stock at the grant date.
Earnings per Share: In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share." SFAS No. 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 SFAS No. 128 requirements.
For the Company, basic earnings per common share is computed using the weighted
average number of common shares outstanding during the year. Diluted earnings
per common share is computed using the weighted average number of common shares
and potential dilutive common shares that were outstanding during the period.
Potential dilutive common shares consist of outstanding stock options. See Note
H for additional information regarding earnings per share.
37
<PAGE> 38
Translation of Foreign Currency: Each foreign subsidiary's asset and liability
accounts, which are originally recorded in the appropriate local currencies, are
translated for consolidated financial reporting purposes, into U.S. dollar
equivalents at year-end exchange rates. Revenue and expense accounts are
translated at an average of exchange rates in effect during the year.
Intangible Assets: Intangible assets consist of purchased software, customer
lists, and a covenant not to compete. Amortization is computed using the
straight-line method over the estimated useful lives of the respective assets.
Currently, the Company is using an estimated economic useful life of two to five
years for all intangible assets.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
38
<PAGE> 39
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Standards: 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 the Company for
transactions entered into beginning on October 1, 1998. Based on management's
review of this standard, adoption of SOP 97-2 will not have a material impact on
the Company's 1999 financial statements.
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 adoption 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 SFAS 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
Company's minimal use of derivatives, management does not anticipate that the
adoption of SFAS No. 133 will have a significant effect on earnings or the
financial position of the company.
NOTE B-NOTE PAYABLE
The Company has a $6,000,000 line of credit with a local bank which allows the
Company to borrow periodically, primarily to finance hardware purchases and meet
short-term borrowing needs. Interest is payable monthly at the federal
funds rate plus 200 basis points, and the line is collateralized by accounts
receivable, inventory, and equipment. The terms of the loan agreement require,
among other things that the Company maintain certain working capital and net
worth amounts and meet certain financial ratios. There were no outstanding
borrowings during 1998 and 1997. The line is scheduled for renewal in February
1999.
39
<PAGE> 40
NOTE C-LEASES AND COMMITMENTS
The Company leases equipment and office space under various operating leases.
The Company has two minimum monthly purchase commitments for telecommunication
services at September 30, 1998. The following summarizes the operating leases
and purchase commitments for telecommunication services (in thousands):
<TABLE>
<CAPTION>
Operating Telecommunication
Leases Services
<S> <C> <C>
1999 $ 173 $ 840
2000 113 620
2001 84 600
2002 70 600
2003 71 -
------ ------
$ 511 $2,660
====== ======
</TABLE>
Rental expense on operating leases for the years ended September 30, 1998, 1997,
and 1996 was $238,000, $270,000, and $245,000, respectively. Rental expense
included amounts paid to a company that is owned by the president of the Company
totaling $20,000 for each of the years ended September 30, 1998, 1997, and 1996.
40
<PAGE> 41
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D--BENEFIT PLANS
The Company sponsors a defined contribution 401(k) plan covering full-time
employees in the United States who have at least one month of service and are 21
years of age or older. An employee can defer up to 15% of covered compensation
under the plan. The plan provides for a maximum annual Company match of $2,000
plus discretionary Company profit sharing contributions. In April 1994, the
Company included the Company's common stock as an investment election under the
plan and at that time reserved 100,000 shares of common stock for future
issuance under the plan. The Company also sponsors a group retirement plan
covering Canadian employees who have at least six months of service. Under the
group retirement plan, the Company annually matches employee contributions up to
$2,000 per participant. Contributions made by the Company to these plans for the
years ended September 30, 1998, 1997, and 1996 were $250,000, $202,000, and
$200,000, respectively.
The Company sponsors a stock purchase plan covering directors, officers, and
substantially all employees. Under the plan, each participant can contribute up
to 10% of his or her salary per relevant pay period or, in the case of a non
employee director, the greater of 10% of such director's monthly fees or $50 per
month, to purchase Company common stock. The Company will match up to 15% of
participants' contributions. The plan can be terminated at any time by the Board
of Directors. The Company reserved 100,000 shares of common stock for future
issuance under the plan. The Company made contributions of $15,000, $14,000, and
$14,000 for the years ended September 30, 1998, 1997, and 1996, respectively.
41
<PAGE> 42
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E--INCOME TAXES
The components of income before income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended September 30
---------------------------------
1998 1996 1996
------- ------- -------
<S> <C> <C> <C>
Domestic $4,603 $5,086 $7,291
Foreign 880 1,572 (90)
------ ------ ------
$5,483 $6,658 $7,201
====== ====== ======
</TABLE>
The components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended September 30
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 676 $ 903 $2,162
Foreign 464 271 45
State 80 105 338
------ ------ ------
1,220 1,279 2,545
Deferred expense 563 885 202
------ ------ ------
$1,783 $2,164 $2,747
====== ====== ======
</TABLE>
The difference between the effective income tax rate and the U.S. federal
income tax rate is explained as follows (in thousands):
<TABLE>
<CAPTION>
Year ended September 30
-------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Tax expense at U.S.
statutory tax rate $1,864 $2,260 $2,450
State taxes,
net of federal benefit 167 200 284
Effect of foreign subsidiaries 93 (186) 77
Research and development credits (378) (161) (65)
Other items 37 51 1
------ ------ ------
$1,783 $2,164 $2,747
====== ====== ======
</TABLE>
42
<PAGE> 43
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E--INCOME TAXES (Continued)
The tax effects of temporary differences which give rise to deferred income tax
assets and liabilities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Current deferred income taxes:
Loss carryforwards $662 $695
Allowance for doubtful accounts 31 31
Vacation accrual 70 61
Customer deposits 232 220
Prepaids (214) (225)
Other 142 96
----- -----
923 878
Less valuation allowance (662) (695)
----- -----
$ 261 $ 183
===== =====
Non current deferred income taxes:
Deferred software $(1,650) $(775)
Property and equipment (345) (334)
Other (24) (267)
------ -----
$(2,019) $(1,376)
====== ======
</TABLE>
Income tax payments for the years ended September 30, 1998, 1997, and 1996 were
$1,290,000, $3,200,000, and $3,100,000, respectively.
The Company has a federal loss carryforward of $615,000 at September 30, 1998,
that expires in the years 2004 through 2009. This loss carryforward resulted
from the Company's 1994 acquisition of Multicore, a U.S. subsidiary of MultiLIS.
The use of the loss carryforward by the Company is limited to anannual amount
determined under the Internal Revenue Code. In addition, the Company's French
subsidiary has loss carryforwards at September 30, 1998 of approximately
$1,137,000. The loss carryforwards for the French subsidiary expire in 1999 and
2000. A valuation allowance has been established to offset the deferred tax
asset related to loss carryforwards.
Undistributed earnings of certain subsidiaries outside the United States are
considered to be permanently reinvested. Accordingly, no provision for United
States income taxes was made for undistributed earnings of such subsidiaries,
which aggregated $1,254,000 as of September 30, 1998.
43
<PAGE> 44
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F--GEOGRAPHIC SEGMENT DATA
Substantially all of the Company's assets, sales, and operating results are
employed in or derived from the sale of application software and turnkey systems
to libraries.
Financial information, summarized by geographic area, is as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended September 30, 1998
United Australia/
States Canada Asia Europe Eliminations Consolidated
------ ------ ---- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
Unaffiliated
customers $28,825 $2,322 $721 $677 $ -- $32,545
Interarea
transfers 1,027 1,790 228 50 (3,096) --
------- ------ ---- ---- ------- -------
Total $29,852 $4,112 $949 $727 $(3,096) $32,545
======= ====== ==== ==== ======= =======
Income (loss)
from
operations $ 3,600 $ 516 $213 $145 $ -- $ 4,474
======= ====== ==== ==== ======= =======
Identifiable
assets $38,207 $1,580 $636 $307 $ -- $40,730
======= ====== ==== ==== ======= =======
<CAPTION>
Year ended September 30, 1997
United Australia/
States Canada Asia Europe Eliminations Consolidated
------ ------ ---- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
Unaffiliated
customers $31,553 $2,584 $ 689 $ 543 $ -- $35,369
Interarea
transfers 690 1,863 705 -- (3,258) --
------- ------ ------ ----- ------- -------
Total $32,243 $4,447 $1,394 $ 543 $(3,258) $35,369
======= ====== ====== ===== ======= =======
Income (loss)
from
operations
Unaffiliated $ 5,790 $ 372 ($ 148) ($144) $ -- $ 5,870
Interarea
transfers (1,482) -- 704 -- 778 --
------- ------ ------ ----- ------- -------
$ 4,308 $ 372 $ 556 ($144) $ 778 $ 5,870
======= ====== ====== ===== ======= =======
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Identifiable
assets $38,393 $ 1,860 $ 552 $ 334 $ -- $ 41,139
======= ======= ======== ====== ======= ========
<CAPTION>
Year ended September 30, 1996
United Australia/
States Canada Asia Europe Eliminations Consolidated
------ ------ ---- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
Unaffiliated
customers $34,145 $ 2,727 $ 721 $ 989 $ -- $38,582
Interarea
transfers 854 1,861 267 -- (2,982) --
------- ------- ------- ------- ------- -------
Total $34,999 $ 4,588 $ 988 $ 989 $(2,982) $38,582
======= ======= ======= ======= ======= =======
Income (loss)
from
operations $ 6,714 $ 128 $ (217) $ (14) $ -- $ 6,611
======= ======= ======= ======= ======= =======
Identifiable
assets $32,964 $ 1,999 $ 1,158 $ 540 $ -- $36,661
======= ======= ======= ======= ======= =======
</TABLE>
45
<PAGE> 46
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F--GEOGRAPHIC SEGMENT DATA (Continued)
Export sales to Canada from the United States were $1,596,000, $1,708,000, and
$1,563,000 for the years ended September 30, 1998, 1997, and 1996, respectively.
Export sales to Singapore from the United States were $77,000, $45,000 and
$1,013,000 in fiscal 1998, 1997 and 1996, respectively. The transfers between
geographic areas are priced consistent with pricing to nonaffiliated entities.
Most services of the Company are provided on an integrated worldwide basis.
Because of the integration of U.S. and non-U.S. services, it is not practical to
separate precisely the U.S.-oriented services from services resulting from
operations outside the United States and performed for customers outside the
United States. Accordingly, the separation set forth in the above table is based
upon internal allocations, which involve certain management judgments.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G--RELATED PARTY TRANSACTIONS
The Company incurred consulting and legal expenses to entities related to
shareholders and directors of the Company for the years ended September 30,
1998, 1997, and 1996 of $19,000, $31,000, and $90,000, respectively.
NOTE H--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1998 1997 1996
==== ==== ====
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share - net income 3,700,000 4,494,000 4,454,000
Denominator:
Denominator for basic earnings
per share-weighted average shares 5,471,000 5,532,000 5,488,000
Effective of dilutive securities
Stock options 39,000 35,000 59,000
--------- --------- ---------
Denominator for diluted earnings
per share-adjusted weighted average
shares and assumed conversions 5,510,000 5,567,000 5,547,000
--------- --------- ---------
Basic earnings per share .68 .81 .81
Diluted earnings per share .67 .81 .80
--------- --------- ---------
</TABLE>
46
<PAGE> 47
NOTE I--STOCK OPTION PLANS
The Company maintains two stock option plans which provide for the issuance of
stock to certain key employees and directors of the Company. The option price
under the plans equals the fair market value of the common stock at the date of
grant. In 1997 and 1996, an additional 100,000 and 225,000 shares were
authorized by the shareholders under the plans, respectively. Options granted in
1998 and 1997 will be fully vested in 2001 and 1999, respectively.
The following table summarizes the status of the two plans.
<TABLE>
<CAPTION>
Year ended September 30:
1998 1997
------- -------
<S> <C> <C>
Authorized shares to be granted 550,000 550,000
======= =======
Available shares to be granted 303,825 392,575
======= =======
</TABLE>
Options granted, exercised, and canceled:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 30, 1998 September 30, 1997 September 30, 1996
----------------------- ----------------------- -----------------------
Price
per Exer- Exer- Exer-
share Granted cised Canceled Granted cised Canceled Granted cised Canceled
- ------ ------- ------ -------- ------- ------ -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$4.67 - - - - 11,250 - - 33,750 -
6.50 - 3,500 - - 6,200 700 - 1,601 4,500
6.83 - - - - 9,000 - - 6,000 -
8.50 - 15,000 - - - - - - -
9.33 - 2,250 1,500 - - 4,500 30,750 - 2,625
12.625 97,500 - 7,500 - - - - - -
13.50 2,500 - - - - - - - -
13.625 - - 2,250 32,750 - 6,250 - - -
------- ------ ------ ------ ------ ----- ------ ----- -----
100,000 20,750 11,250 32,750 26,450 11,450 30,750 41,351 7,125
======= ====== ====== ====== ====== ====== ====== ====== =====
<CAPTION>
Options outstanding and exercisable:
September 30, 1998 September 30, 1997
------------------------ ----------------------
Price Expiration
per Share Date Outstanding Exercisable Outstanding Exercisable
- --------- ------------ ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
6.50 6/23/1999 4,799 4,799 6,199 3,599
6.50 11/17/1999 1,200 1,200 3,300 3,300
6.50 11/17/1998 15,000 15,000 15,000 15,000
8.50 11/16/1997 - - 15,000 15,000
9.33 11/16/2000 4,875 4,875 8,625 -
9.33 11/16/1999 15,000 15,000 15,000 15,000
</TABLE>
47
<PAGE> 48
<TABLE>
<S> <C> <C> <C> <C> <C>
12.625 11/13/2001 15,000 15,000 - -
12.625 11/13/2002 75,000 - - -
13.50 2/11/2003 2,500 - - -
13.625 11/21/2001 9,250 - 11,500 -
13.625 11/21/2000 15,000 15,000 15,000 15,000
------- ------ ------ ------
157,624 70,874 89,624 66,899
======= ====== ====== ======
</TABLE>
48
<PAGE> 49
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE I--STOCK OPTION PLANS (Continued)
If the Company had elected to recognize compensation costs for
stock-based compensation plans based on the fair value at grant dates of awards
under those plans consistent with the method prescribed by SFAS No. 123, net
income and earnings per share would have changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 30, September 30, September 30,
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Net income As reported $3,700,000 $4,494,000 $4,454,000
Pro forma $3,565,000 $4,401,000 $4,387,000
Basic earnings per share $.68 $.81 $.81
==== ==== ====
Diluted earnings per share $.67 $.81 $.80
==== ==== ====
Pro forma basic earnings per shares $.65 $.80 $.80
==== ==== ====
Pro forma diluted earnings per share $.65 $.79 $.79
==== ==== ====
</TABLE>
The fair value of the stock options used to compute pro forma income and
earnings per share disclosures is the value at grant date using the Black-
Scholes option pricing model with the following weighted average assumptions for
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Expected dividend yield 0.01% 0.01% 0.00%
Expected volatility 34.20% 37.30% 38.0%
Expected holding period in years 2 to 4 3 to 4 3 to 4
Risk-free interest rate 6.50% 6.50% 6.50%
Weighted average value of
options granted during the year $4.20 $3.98 $3.36
</TABLE>
NOTE J--EMPLOYMENT AGREEMENT
The Company has an employment agreement with the president of the Company which
expires September 30, 2002. The agreement, which contains provisions for an
automatic five-year renewal, requires total minimum annual payments in the form
of base compensation of $400,000 and an annual bonus. Base compensation in
excess of $400,000 and the annual bonus are at the discretion of the Board of
Directors and subject to termination provisions as defined by the agreement.
49
<PAGE> 50
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K--QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations by quarter for 1998 and 1997 were as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------
September 30, June 30, March 31, December 31,
1998 1998 1998 1997
------- ------ ------- ------
<S> <C> <C> <C> <C>
Revenues $8,442 $8,311 $8,339 $7,453
Income from operations 1,950 1,239 689 596
Net income 1,651 973 584 492
Basic earnings
per share $.31 $.18 $.11 $.09
Diluted earnings
per share $.30 $.18 $.11 $.08
<CAPTION>
Quarter ended
--------------------------------------------------
September 30, June 30, March 31, December 31,
1997 1997 1997 1996
------- ------ ------- ------
<S> <C> <C> <C> <C>
Revenues $9,682 $8,702 $9,857 $7,128
Income from operations 2,186 1,482 1,504 698
Net income 1,700 1,031 1,222 541
Basic earnings
per share $.31 $.19 $.22 $.10
Diluted earnings
per share $.31 $.19 $.22 $.10
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
50
<PAGE> 51
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the caption "INFORMATION ABOUT THE NOMINEE
AND DIRECTORS CONTINUING IN OFFICE" in the Company's definitive proxy statement
to be filed pursuant to Regulation 14A for the Company's 1999 annual meeting of
shareholders, which involves the election of directors, is incorporated herein
by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "EXECUTIVE COMPENSATION" in the
Company's definitive proxy statement to be filed pursuant to Regulation 14A for
the Company's 1999 annual meeting of shareholders, which involves the election
of directors, is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the captions "VOTING SECURITIES, VOTING
RIGHTS AND PRINCIPAL SECURITY HOLDERS" and "SECURITY OWNERSHIP OF MANAGEMENT" in
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
for the Company's 1999 annual meeting of shareholders, which involves the
election of a director, is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the caption "TRANSACTIONS WITH ISSUER AND
OTHERS" in the Company's definitive proxy statement to be filed pursuant to
Regulation 14A for the Company's 1999 annual meeting of shareholders, which
involves the election of directors, is incorporated herein by this reference.
51
<PAGE> 52
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a.) 1. Financial Statements Page
The following consolidated financial statements of Data Research
Associates, Inc. and its subsidiaries are included in Item 8.
Report of Independent Auditors 25
Consolidated Balance Sheets as of September 30,
1998 and 1997 26
Consolidated Statements of Income for the years ended
September 30, 1998, 1997, and 1996 28
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1998, 1997, and 1996 29
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997, and 1996 31
Notes to Consolidated Financial Statements 33
(a.) 2. Financial Statement Schedule
The following consolidated financial statement schedule is included in this
report in accordance with Item 8 and paragraph (d) of Item 14:
Page
Schedule II - Valuation and Qualifying Accounts 51
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
(a) 3. See Exhibit Index
The following is a list of each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report on Form
10-K pursuant to Item 14(c) of this report:
Employment Agreement dated April 17, 1997, by and between the Registrant
and Michael J. Mellinger
Data Research Associates, Inc. 401(k) Profit Sharing Plan
Data Research Associates, Inc. 1992 Stock Option Plan
Data Research Associates, Inc. Stock Purchase Plan
Data Research Associates, Inc. Director Stock Option Plan
(b) Reports on 8-K
No reports on Form 8-K were filed during the fourth quarter of the
Registrant's fiscal year ended September 30, 1998.
52
<PAGE> 53
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ----------------------- ---------- --------------------- ---------- ---------
Additions
---------------------
Charged Charged
Balance at to Costs to Other Balance
Beginning and Accounts- Deductions- at end of
Description of Period Expenses Describe Describe Period
- ----------------------- ---------- ---------- ---------- ----------- ----------
1998
- ----
<S> <C> <C> <C> <C> <C>
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts $ 119,000 $ -- $ -- $ 18,000(1) $ 101,000
Accumulated amortization
of deferred software
costs 1,360,000 351,000 -- 1,711,000
Accumulated amortization
of purchased software
costs 3,685,00 536,000 -- 4,221,000
Valuation Allowance for
deferred tax assets 695,000 -- -- 33,000(2) 662,000
1997
- ----
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts $ 269,000 $ -- $ -- $150,000(1) $ 119,000
Accumulated amortization
of deferred software
costs 1,056,628 303,372 -- -- 1,360,000
Accumulated amortization
of purchased software
costs 2,743,629 941,371 -- -- 3,685,000
Valuation Allowance for
deferred tax assets 905,000 -- -- 210,000(2) 695,000
1996
- ----
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts $ 138,000 $ 131,000 $ -- $ -- $ 269,000
Accumulated amortization
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C> <C> <C> <C> <C>
of deferred software
costs 862,787 193,841 -- -- 1,056,628
Accumulated amortization
of purchased software
costs 1,691,824 1,051,805 -- -- 2,743,629
Valuation Allowance for
deferred tax assets 777,000 128,000 -- -- 905,000
</TABLE>
- ---------------
(1) Collected amounts previously reserved.
(2) Utilization of foreign net operating loss carryforwards.
54
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of St.
Louis, State of Missouri, on December 18, 1998.
DATA RESEARCH ASSOCIATES, INC.
By:/s/Michael J. Mellinger
- -----------------------------------
Michael J. Mellinger, President
and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Data Research Associates, Inc.,
hereby severally and individually constitute and appoint Michael J. Mellinger
the true and lawful attorney and agent of each of us, with full power of
substitution and resubstitution to execute in the name, place and stead of each
of us (individually and in any capacity stated below) this Form 10-K and any and
all amendments to and all instruments necessary or advisable in connection
therewith and to file the same with the Securities and Exchange
Commission, said attorney and agent to have power to act and to have full power
and authority to do and perform in the name and on behalf of each of the
undersigned every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as any of the undersigned
might or could do in person, and we hereby ratify and confirm our signatures as
they may be signed by our said attorney and agent to any and all such reports,
amendments and instruments.
Name Title Date
/s/ Michael J. Mellinger Director, President, 12/18/98
- ------------------------ ---------------------------- --------
Michael J. Mellinger and Chief Executive Officer
(Principal Executive Officer)
/s/ Katharine W. Biggs Vice-President and 12/18/98
- ------------------------ ---------------------------- --------
Katharine W. Biggs Chief Financial Officer
(Principal Financial and
Accounting Officer)
55
<PAGE> 56
/s/ F. Gilbert Bickel III Director 12/18/98
- ------------------------ ---------------------------- --------
F. Gilbert Bickel III
/s/ Carole Cotton Director 12/18/98
- ------------------------ ---------------------------- --------
Carole Cotton
/s/ Donald P. Gallop Director 12/18/98
- ------------------------ ---------------------------- --------
Donald P. Gallop
/s/ Howard L. Wood Director 12/18/98
- ------------------------ ---------------------------- --------
Howard L. Wood
56
<PAGE> 57
EXHIBIT INDEX
Exhibit Number Description Page
3.1 Restated Articles of Incorporation of the Registrant,
incorporated herein by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1,
Reg. No. 33-47350 (the "Form S-1"). N/A
3.2 Amended and Restated Bylaws of the Registrant, as amended,
incorporated herein by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993 (the "1993 Form 10-K"). N/A
10.1 Employment Agreement dated April 17, 1997, by and between the
Registrant and Michael J. Mellinger, incorporated herein by
reference to Exhibit 10.1 on Form 10-Q for the quarter ended
March 31, 1997, and as amended, by Exhibit 10.1 on Form 10-Q
for the quarter ended June 30, 1997. N/A
10.2 Data Research Associates, Inc. 401(k) Profit Sharing Plan
as amended October 1, 1994, incorporated herein by reference
to Exhibit 10.9 to the 1995 Form 10-K. N/A
10.3 Data Research Associates, Inc. 1992 Stock Option Plan, as amended,
incorporated herein by reference to Exhibit 4 to the
Registrant's Registration Statement on Form S-8,
Reg. No. 333-2372. N/A
10.4 Data Research Associates, Inc. Stock Purchase Plan, as amended,
incorporated herein by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1992. N/A
10.5 Equipment Lease dated April 15, 1991, by and between the
Registrant and Davandy Management, Inc. incorporated
herein by reference to Exhibit 10.7 to the Form S-1. N/A
10.6 Data Research Associates, Inc. Director Stock Option Plan,
as amended, incorporated herein by reference to Exhibit 4.1
to the Registrant's Registration Statement on Form S-8,
Reg. No. 333-22887. N/A
10.7 Time Sharing Agreement dated October 1, 1997, by and between
the Registrant and Charter Communications, Inc. incorporated N/A
herein by reference to Exhibit 10.7 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1997.
10.8 Data Research Associates, Inc. Cafeteria Plan as restated, N/A
incorporated herein by reference to Exhibit 10.8 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997.
10.9 Value Added Reseller Agreement effective June 18, 1998, by and
between the registrant and Hall-Mark Computer Products. 59
57
<PAGE> 58
EXHIBIT INDEX (Continued)
Exhibit
Number Description Page
21 Subsidiaries of the Registrant. 82
23 Consent of Ernst & Young LLP, independent auditors. 83
23.1 Consent of Price Waterhouse, independent auditors. 84
24 Power of Attorney (set forth on signature page).
27 Financial Data Schedule 89
99.1 Cautionary Statements--Additional Important Factors
To Be Considered 85
99.2 Report of Price Waterhouse, independent auditors. 87
99.3 Report of Price Waterhouse, independent auditors. 88
58
<PAGE> 1
Exhibit 10.9
BUSINESS PARTNER
DIGITAL
VALUE ADDED RESELLER
DISTRIBUTOR AUTHORIZED VALUE ADDED RESELLER
PROGRAM
APPLICATION AND AGREEMENT PACKAGE
Overview
DIGITAL's Distributor Authorized Value Added Reseller Program (DA-VAR Program)
allows DIGITAL System Distributors to propose qualified value added resellers
for authorization to distribute DIGITAL Products acquired from the sponsoring
Distributor. If approved by DIGITAL, the value added reseller will be authorized
to use the appropriate DIGITAL Business Partner design mark and relationship
designation, sublicense DIGITAL software and resell specified categories of
DIGITAL Products according to the reseller's business plan within its territory
pursuant to a Distributor/DA-VAR DIGITAL Product Distribution Agreement.
This package includes the information and documentation necessary for the
qualification and creation of a Distributor Authorized Value Added Reseller of
DIGITAL Products.
2
Part I DA-VAR Program Description
Part H DA-VAR Authorization Application
Part HI DA-VAR Business Plan
Part IV Distributor/DA-VAR DIGITAL Product Distribution Agreement
PART I - DISTRIBUTOR AUTHORIZED VALUE ADDED RESELLER PROGRAM DESCRIPTION
A. Program Requirements
DIGITAL's DA-VAR Program allows qualified resellers to become Distributor
Authorized Value Added Resellers (DA-VARs) of DIGITAL Products to end-user
customers. To qualify, a reseller applicant must: (1) meet the Basic Added Value
requirements and the Solution Added Value criteria of one of the program's
authorization categories; and (2) have its DA-VAR Business Plan approved by
DIGITAL prior to executing a Distributor/DA-VAR DIGITAL Product Distribution
Agreement with its sponsoring DIGITAL Distributor.
1. Basic Added Value - To be eligible for the DA-VAR Program all applicants
must:
- Sell primarily on a face-to-face basis with full ownership for the sales
cycle, and only incidental use of telesales or mail-order techniques;
- Provide technical pre-sales support including but not limited to the
following activities:
59
<PAGE> 2
- Announced product information delivery
- Delivery of standard product demos and presentations
- Development and delivery of customized product demos
- Hardware and software configuration design where nonreferenced
products (third party products not sold/supported by DIGITAL) are
involved
- Custom proof of concept and benchmarks
- Application characterization for non-referenced applications
- Product configuration services for customers
- General technical knowledge transfer to customers
- Coordinate installation of the solution.
2. Solution Added Value - In addition, DA-VAR Program applicants must meet
the criteria of one of the following Solution Added Value authorization
categories:
- Application DA-VAR
- System Solution Provider DA-VAR
- Storage Solution Provider DA-VAR
- Project Reseller DA-VAR
The specific criteria for each Solution Added Value authorization category are
set forth in the DA-VAR Business Plan.
B. DA-VAR Program Application Process Guidelines
After consultation with its sponsoring Distributor the DA-VAR applicant must:
1. Complete the attached DA-VAR Authorization Application and DA-VAR Business
Plan. The information in the DA-VAR Business Plan must be certified by the
Applicant and acknowledged by the Distributor.
2. Submit the completed Authorization Application and DA-VAR Business Plan to
DIGITAL for its approval at one of the following addresses:
For DA-VAR applicants with headquarters in AK, AZ, CA, CO, CT, DE, HI, ID,
MA, ME, MT, NH, NJ, NM, NV, NY, OR, PA, RI, UT, VT, WA or WY:
DIGITAL Equipment Corporation
151 Taylor Street
Littleton, MA 01460-1407
Attention: Contracts
Fax. No. 978-506-3429
For DA-VAR applicants with headquarters in AL, AR, DC, FL, GA, IA, IL,
IN, KS, KY, LA, MD, MI, MN, MO, MS, NC, ND, NE, OH, OK, SC, SD, TN, TX,
VA, WI or WV:
DIGITAL Equipment Corporation
5555 Windward Parkway
Alpharetta, GA 30201
Attention Contracts
Fax No. 770-343-0032
60
<PAGE> 3
3. Upon receipt of DIGITAL's written approval of the Authorization
Application and the DA-VAR Business Plan, complete and execute the
Distributor/DA-VAR DIGITAL Product Distribution Agreement with the
approved DA-VAR Business Plan as an attachment.
4. Send a copy of the Distributor/DA-VAR DIGITAL Product Distribution
Agreement, signed by both the DA-VAR and the Distributor, and including a
copy of the DIGITAL approved Business Plan, to DIGITAL at the appropriate
address.
Note: The Authorization Application must be completed in full. The Business Plan
must be completed in full unless specified otherwise in the Business Plan. The
representations in DA-VAR's approved Business Plan will become enforceable
commitments as part of the DA-VAR's Distributor/DA-VAR DIGITAL Product
Distribution Agreement.
PART 11 - DA-VAR AUTHORIZATION APPLICATION
A. Sponsoring Distributor
Distributor Name: Hall-Mark Computer Products
Distributor Branch: St. Louis, Missouri
Business Address: 3783 Rider Trail South
Earth City, Missouri 63045
Telephone No: (314) 770-6415
Facsimile No: (314) 770-6464
Distributor Contact Name: Sheryl Williams Title: Account Representative
B. Applicant's Company Information
1. Applicant Company Name: Data Research Associates, Inc. ("Applicant")
2. Headquarters Address: 1276 North Warson Road
St. Louis, Missouri 63132
Telephone No: (314) 432-1100
Facsimile No: (314) 993-8927
E-mail Address:
Internet Home Page: www.dra.com
3. Senior Business Contacts
Michael J. Mellinger Telephone No: (314) 432-1100
President or CEO Facsimile No: (314) 993-8927
E-mail Address: [email protected]
Joseph M. Bonwich Telephone No: (314) 432-1100
Vice President - Sales/Mkting Facsimile No: (314) 993-8927
E-mail Address [email protected]
Telephone No: (314) 432-1100
Vice President - Technical Facsimile No: (314) 993-8927
E-mail Address:
Telephone No: (314) 432-1100
Purchasing Manager Facsimile No: (314) 993-8927
E-mail Address:
4. Applicant Company Background Information
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<PAGE> 4
Years established? 1975 Years in computer business? 23 Publicly held company?
Yes X No
Has Applicant Company operated under its current name for more than 3 years?
Yes X No
If No, identify the former company name and headquarters address.
Is Applicant Company a division or subsidiary of a parent company? Yes No X
If yes, identify all parent companies and their relationship to the Applicant
Company
5. Description of Applicant's Business (Use additional pages if necessary)
a. Executive Summary - Provide a brief summary of Applicant's
business plan: type of business, market focus, and resource
requirements (e.g., people and funding). Describe how the resale
of DIGITAL Products will affect Applicant's business.
DRA has been automating libraries for over 20 years. Our installed base
includes over 650 systems worldwide. We will continue to grow by
automating new customers, growing existing customers and acquiring
competitors. DRA employs over 200 dedicated professionals. DRA is building
on our leadership position by bringing a next generation client/server
solution to market this year. The company is well funded and trades
publicly (NASDAQ:DRAI).
b. Mission Statement - Describe Applicant's overall strategic
direction, goals and vision for its business.
DRA's mission is to be the premier supplier of automation products and
services for libraries and other information providers. We will provide maximum
value to our customers by being an easy company with which to do business; by
supplying the highest quality products and services; by offering superior
customer support; and by delivering products that incorporate the best available
technology.
We conduct our business with the highest regard for ethics, the rightsof the
individual, fairness to all groups and concern for the environment. We provide a
workplace where employees can enjoy personal growth, equal opportunity and a
share in the rewards of the company's success. By upholding these standards, we
will provide consistent growth in value for our shareholders, our customers and
ourselves.
c. The Market - Describe Applicant's target market, profile its
typical customer, the size of the market for its added value and
services in its sales territories.
DRA automates public, private, academic and research libraries worldwide.
DRA has an installed base of over 650 systems. Approximately 35 new customers
are being added each year. The library automation industry is a $500 million
industry which is growing 10% annually.
d. Sales Strategy - Describe Applicant's sales goals, how it markets
its products and how DIGITAL Products will be sold and supported.
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<PAGE> 5
DRA employs a direct field sales force to win new customers and the
installed base is managed by inside customer account managers. DRA has a
dedicated in-house marketing department. The goal is to grow sales 25% annually.
6. Current Employees of Applicant Company
a. Total number of employees: 212
b. Employees by function:
Outside sales 08 Inside sales 34
Software technical support 32 Software application support 23
Hardware technical support 09 Sales support or marketing 10
Network engineers 54 Executive staff, administrative and
others 42
c. Employees by Location
Sales Office Sales Sales Total Employed Total Employed
Location, Phone Territory Force Sales Sales Technical Technical
Facsimile Nos. Type Force Force Support Support
St. Louis, MO US Direct 4 42 42 64 64
Ph: (314) 432-1100
Fx: (314) 993-8927
Ph:
Fx:
Ph:
Fx:
Ph:
Fx:
Ph:
Fx:
Ph:
Fx:
1. List the city, state or country serviced by this location.
2. Describe the type of sales force used, e.g., direct, agents, or
manufacturers' representatives.
3. Indicate the total number of sales employees used in the sales territory
4. Of the total sales force in the territory, how many are directly employed
by Applicant?
5. Indicate the total number of technical support personnel used in the sales
territory.
6. How many of the total technical support personnel in the territory are
directly employed by Applicant?
7. Applicant's Sales Revenue
a. Sales last fiscal year: (October 01, 1996 to September 30, 1997):
$35,369,000.00
b. Projected sales for current fiscal year: $35,000,000.00
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<PAGE> 6
c. Percentage of last fiscal year sales to :
Large companies (>$ 1 00 million annual revenue) 0%
Small companies (<$ 1 00 million annual revenue) 100%
d. How were revenues generated (indicate if shown an $ or as a
percentage of sales):
<TABLE>
<CAPTION>
Type of Sale Last Fiscal Year Projected this
Fiscal Year
<S> <C> <C>
Hardware 30% 30%
Internally developed hardware 0 0
Internally developed software 40% 40%
Externally acquired software 0 0
Support services 20% 20%
Consulting services 0 0
Training 5% 5%
Other 5% 5%
Total 100% 100%
</TABLE>
e. Sales projection for DIGITAL Products (at DIGITAL list price) to be
purchased for resale during the next fiscal year:$5,000,000.00
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<PAGE> 7
8. Marketing Information
Identify the industry and computer applications where Applicant's value added
products will be marketed.
<TABLE>
<CAPTION>
Industry Applications No. of No. of No. of Projected
Installed Non-DIGITAL DIGITAL DIGITAL
Installations Installations Installations
Last Fiscal Year Last Fiscal Year This Fiscal Year
<S> <C> <C> <C> <C>
Aerospace
Automotive
Business & Prof.
Services
Construction
Education X 07 02*
Federal Government
Civilian
Federal Government
Defense
Financial Services
Health Care & Med.
Insurance
Hotel and
Entertainment
Manufacturing
Printing and
Publishing
Process
Manufacturing
Retailing and
Distribution
State and Local X 13 03*
Government
Telecommunications
and Utilities
Transportation
Services
Other 10 ++additional
New installations
are possible,
dependent upon port
of UNIX.
</TABLE>
65
<PAGE> 8
<TABLE>
<CAPTION>
Solution Segment Applications No. of No. of No. of
Installed Non-DIGITAL DIGITAL Projected
Installations Installations DIGITAL
Last Fiscal Last Fiscal Installations
Year Year This Fiscal
Year
<S> <C> <C> <C> <C>
High Performance
Technology
Data Warehousing
Visual Computing
Financial Solutions
Public Sector Solutions 700 5 30 15
Healthcare Solutions
Media/Entertainment
Mfg/Discrete Solutions
Mfg/Process Solutions
Pharmaceutical Solutions
Educational Industry
Telecommunication
Baan Solutions
Great Plains Solutions
JD Edwards Solutions
Oracle Solutions
People Soft Solutions
SAP Solutions
Systems & Network Mgmt
Windows NT Integration
Mail & Messaging/Exchange
Mail & Messaging/Lotus
Domino
Mail & Messaging/Legacy
Upgrades
Internet
Intranet
Internet Commerce
Year2OOO
Storage Solutions
Isps
</TABLE>
9. Other Reseller Relationships
a. DIGITAL - Does Applicant or any of its affiliates, officers or
principals have an existing reseller relationship with DIGITAL?
Yes X No
If Yes, is it a direct relationship or is it through a Distributor?
Direct Distributor X
If a Distributor, which one? Hallmark
If Yes, provide: Agreement Number: HM71135A Effective Date: 01/13/97
Agreement Type: -Application VAR
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<PAGE> 9
b. Other Manufacturer - Does Applicant have an existing reseller
relationship with one or more of the following companies?
<TABLE>
<CAPTION>
Company Name Yes or No Relationship Type and Products Authorized
Whether Direct or Indirect for Resale
<S> <C> <C> <C>
IBM
Hewlett-Packard Direct HP Products
SUN Indirect Sun Products
Silicon Graphics
Compaq
</TABLE>
10. Customer References
Provide at least three customer testimonial reference letters relating to
Applicant's added value, list the reference below and supply the information
requested.
Company Name: Bergen County Cooperative Company Name: Kansas City
Library System Public Library
Address: 810 Main Street Address: 311 East 12th Street
Hackensack, New Jersey 07601 Kansas City, Missouri 64106
Contact Name: Robert White Contact Name: Sandi Holderman
Phone Number: 201/489-1904 Phone Number: 816/221-2685
Added Value: Applications Software Added Value: Applications Software
& Services & Services
Date Supplied: beginning in 1986 Date Supplied: beginning 1986
Company Name: Pasco County Company Name: LaPorte County
Library System Public Library
Address: 8012 Library Road Address: 904 Indiana Avenue
Hudson, Florida 34667 LaPorte, Indiana 46350
Contact Name: Linda Allen Contact Name: Emily Morris
Phone Number: 813/834-3244 Phone Number: 219/362-6156
Added Value: Applications Software Added Value: Applications Software
& Services & Services
Date Supplied: beginning in 1989 Date Supplied: beginning in 1990
11. Other Information
a. Does Applicant intend to resell DIGITAL Products as part of critical
safety systems, e.g., systems used in the planning, construction,
operation or use of nuclear facilities, airspace management or rail
transportation? Yes No X
If Yes, additional information and special contract provisions may be
necessary.
b. Does Applicant intend to purchase DIGITAL Tempest or encryption
Products? Yes No X
Applicant Certification
The information contained in this DA-VAR Authorization Application is correct
67
<PAGE> 10
and complete and provided in the expectation that DIGITAL and Distributor will
rely upon its accuracy.
Authorized Signature: _________________________ Title: President and CEO
Typed Name: Michael J. Mellinger Date: June 24, 1998
68
<PAGE> 11
PART III - DA-VAR BUSINESS PLAN
EXHIBIT A TO DISTRIBUTOR/DA-VAR DIGITAL PRODUCT DISTRIBUTION AGREEMENT
A. Applicant Information
Company Name: Data Research Associates, Inc. ("Applicant")
Headquarters Address: 1276 North Warson Road, St. Louis, Missouri 63132
Telephone No: (314) 432-1100
Facsimile No: (314) 993-8927
Contact Name: Michael J. Mellinger
Telephone No: (314) 432-1100
Facsimile No: (314) 993-8927
E-Mail Address: [email protected]
Sponsoring Distributor: Hall-Mark Computer Products
B. Product Authorizations
Product Classification Definitions:
Class A -Systems: AlphaServer 4000 & 8000 series
Class B - Systems: AlphaServer 800, 1000 & 1200 series
: DIGITALServer 7000 & 9000 series
Class B - Storage: Raid Array 450 & 700 series;
Enterprise Storage Arrays;
HSx Controllers
DIGITAL may add Products to any of the classifications defined above at any
time.
Applicant should check the applicable Product Class for which it is seeking
authorization and proceed accordingly:
1. X Class A-Systems - DA-VAR's reselling Class A-Systems Products only or
in addition to other DIGITAL Products must fully complete this Part
111, DA-VAR Business Plan.
2. Class B-Systems - DA-VARs reselling Class B-Systems Products only, or
Class B-Systems and Class B-Storage Products only, please proceed to and
complete Sections D. of this Part 111, DA-VAR Business Plan.
3. Class B-Storage Products - DA-VARs reselling only Class B-Storage
Products, please proceed to and complete Section D. of this Part 111,
DA-VAR Business Plan.
C. General Description of Applicant's Added Value
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<PAGE> 12
Describe Applicant's added value and how it meets the Basic Added Value
requirement and one or more of the Solution Added Value authorization category
criteria described below. Please include a description of Applicant's current
and planned products, the added value components and the Applicant's competitive
advantage in its markets.
The DRA System is a comprehensive, fully integrated package of modular
software applications designed for libraries of all sizes, ranging from single
libraries to large, multi-branch library systems and consortia. The software
runs primarily on Digital computers that use the OpenVMS operating system and
has been specifically designed to gain full advantage of the processing power
and the expansion and networking capabilities of OpenVMS. The DRA System is also
designed to allow libraries to share the hardware and data while allowing an
individual library to implement its own policies. Through the use of its DRA Net
network, DRA provides libraries direct access to remote library catalogs and
third-party databases, such as commercially prepared magazine indexes.
Definition of individual modules:
Cataloging and Authority Control
The entry and management of the database for information about the library
materials (books, films, cassettes, etc.) is handled by the bibliographic
database management software. The information about each book or other material
is stored in full MARC format, which is a national and international standard.
The bibliographic database management software allows librarians to create,
edit, read and write bibliographic information in machine-readable forms. The
DRA software allows libraries to connect to national databases that share
participating library. The bibliographic database management software also
facilitates authority control. This feature directs the individuals searching
the database to the correct term to be used when locating materials.
Circulation
The circulation module handles all of the library's circulation activities,
including registering borrowers, checking books in and out, renewing books and
placing requests for specific titles. An innovative feature of the company's
circulation software is the extensive, flexible, locally defined policy file
that allows the library automatically to implement its own policies for library
materials. In a multi-library system or consortium, each library can establish
its own set of policies and still have the same computer. The Circulation module
is integrated and thus can accommodate the differences of each library within
the framework of a standardized program using industry-standard formats.
Public Access
DRA offers a wide range of products to facilitate the searching of the local
library catalog, and remote databases. Industry practice generally labels any
product that takes the place of manual card catalogs as an online Public Access
Catalog. For searching a library's local catalog, DRA offers various user
interface options designed to accommodate differing levels of
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<PAGE> 13
user sophistication. Among DRA's public access products is the Information
Gateway module, which offers access to materials and information available
outside the physical confines of the library. These features include full-text
delivery for journals; access to numerous databases via either DRA NET or direct
loading on the local computer; creation of and access to a database that
contains detailed listings of local events, social services and other programs;
in commercially prepared citation indexes; and creation of and access to
databases of photographs, illustrations and diagrams using "imaging" technology
for display on the computer screen. Because of the cost of imaging and the
telecommunications required to support it, this product is typically configured
on a stand-alone workstation so that the library can create a database of images
for later incorporation into and access through their automation systems.
Acquisitions
The Acquisitions module is designed to handle the purchase of library materials.
It aides librarians in creating lists of books they wish to order, creating the
actual orders that are sent to book publishers or book suppliers and maintaining
full audit trail of the funds used by the library to purchase the materials.
Statistics of interest to the library regarding publisher or supplier
performance are maintained and can be reported using the software's report
system.
Serials
The Serials module is a comprehensive module for management of magazine and
journal collections. The module contains a check-in-function, records the
receipt of all magazine issues and maintains a list of items that have an
exception status. It also records receipt of special issues. Statistics of
interest to the library regarding performance are maintained and can be reported
using the software's report systems.
Reports
Libraries, because of their funding structures, are required to produce numerous
reports about their collections, usage and borrowers. The DRA System offers
extensive standard reporting capabilities and, as an option, a Report Writer
module for specialized reporting needs.
Journal Citation
The Journal Citation module allows users of the Public Access module to search
for magazine articles and then determine if the library subscribes to the
magazine or journal in which the articles are published. If so, the module
then alerts the patron as to where the magazine or journal is located within
the library. It is also possible for the user to place a photocopy request
online.
Media Booking
Libraries frequently use a separate management system for handling 16mm fihns,
audio-visual equipment and videocassettes. Libraries also require the ability to
place holds on material for a specific number of days, allow for inspection time
before they are again ready for circulation and allow for shipment of materials
between library facilities, when necessary. The Media Booking module performs
these functions and also monitors the collection of fees for materials that pass
through the booking process. Media Booking is a sub-
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<PAGE> 14
module of Circulation but must be purchased separately.
D. Added Value, User Support and Marketing Commitments
If approved as a DA-VAR, each DIGITAL Product purchased by the Applicant for
resale or sublicense shall (i) be incorporated into a complete computer system
(not applicable to Storage Solution Provider DA-VARs) and, (ii) resold or
sublicensed only with the added value and under the conditions described in
sections DI through D6 below.
1. Sponsoring Distributor - Applicant shall acquire the DIGITAL Products it
intends to resell or sublicense in its capacity as a DAVAR only from its
sponsoring Distributor with the exception of the DIGITALServer 7100 and 9000
series Products. These Products can be purchased from any Distributor.
2. End User Sales -Applicant shall only resell or sublicense DIGITAL Products
to end-user customers that do not intend to resell the DIGITAL Products.
3. Sales Territory - Applicant shall market and resell or sublicense
DIGITAL Products only within the following geographic territory: USA
4. User Support - Applicant shall provide the following user support to each
of its customers for DIGITAL Products: Help Desk support, training, system
implementation.
5. Basic Added Value - Applicant shall:
Sell primarily on a face-to-face basis with full ownership for the sales cycle,
and only incidental use of telesales or mail-order techniques; Provide technical
pre-sales support including but not limited to the following activates:
Announced product presentations delivery
Delivery of standard product demos
Development and delivery of customized product demos
Hardware and software configuration design where non-referenced products
(third party products not sold/supported by DIGITAL) are involved
Custom proof of concept
Application characterization for non-referenced applications
Product presentations delivery
General technical knowledge transfer to customers
Coordinate installation of the solution.
6. Solution Added Value - Applicant shall meet the criteria for at least one
of the Solution Added Value authorization categories checked and initialed
below:
X Application DA-VAR Initials of Applicant's Authorized Signatory
General Description - Application DA-VARs specialize in selling software
applications it has developed or acquired that provide particular solutions to
new customers. If the software is acquired, n DA-VAR must provide significant
customization to the final product. General purpose, "horizontal" applications
do not qualify.
Added Value Criteria - Application DA-VARs must:
Provide software customization, maintenance, installation and support
services to their customers.
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<PAGE> 15
Provide applications, services and other added value that represent at least
30 percent of the total value of all hardware products sold by the DA-VAR
annually and represent a significant enhancement to the DIGITAL Products it
resells. This criteria does not apply to Class B-Systems.
Other Authorization Criteria - Application DA-VARs must:
Annually purchase and resell or sublicense at least $250,000 (at DIGITAL list
prices) of DIGITAL Products.
Maintain at least one certified sales employee and one certified technical
support employee for its authorized sales territory for every $5 million (at
DIGITAL list prices) of DIGITAL Products purchased from the Distributor.
Product Authorization - Application DA-VARs may purchase for resale or
sublicense only those DIGITAL Products on which its sales and technical support
personnel have been trained and certified by DIGITAL.
System Solution Provider DA-VAR Initials of Applicant's Authorized
Signatory
General Description - System Solution DA-VARs sell general purpose "horizontal"
applications and add value by providing substantial network, technology
migration, mail and messaging systems or other system integration services.
Added Value Criteria - System Solution DA-VARs must:
Provide at least one of the following types of integration service on each
sale:
Integration of solutions from particular independent software developers
using specific sales and technical support personnel who have been trained to
install and service the software developer's product.
Delivery and integration of high performance messaging solutions (i.e.
enterprise-wide deployment of exchange or exchange migration) using specific
sales technical support personnel who have completed DIGITAL's Mail and
Messaging Certification program.
Network integration of multivendor system networks.
Internet or Intranet design, installation and utilization services.
Migration services which facilitate the migration of installed DIGITAL
systems to DIGITAL Alpha systems.
Provide integration services the value of which represent at least 30 percent
of the total value of all products and services sold by the DA-VAR annually and
represent a significant enhancement to the DIGITAL Products it resells. This
criteria does not apply to Class B-Systems and Class C-Systems.
Other Authorization Criteria - System Solution DA-VARs must:
Annually purchase and resell or sublicense at least $500,000 (at DIGITAL list
prices) of DIGITAL Products.
Maintain at least one certified sales employee and one certified technical
support employee at each sales territory for every $5 million (at DIGITAL list
prices) of DIGITAL Products purchased from the Distributor.
Product Authorization - System Solution DA-VARs may purchase for resale or
sublicense only those DIGITAL Products for which its sales and technical
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<PAGE> 16
support personnel have been trained and certified by DIGITAL.
Storage Solution Provider DA-VAR Initials of Applicant's Authorized
Signatory
General Description - Storage Solution DA-VARs have expertise in selling storage
technology, provide multivendor storage solutions and resell DIGITAL Storage
Products primarily for integration with non-DIGITAL systems.
Added Value Criteria - Storage Solution DA-VARs must:
Maintain sales of storage products on multivendor and non-DIGITAL systems as
the primary focus of its business, with revenues from the sale of storage
solutions accounting for more than 30 percent of its annual total revenue.
Provide full range of services to each customer including consulting, systems
analysis and training.
Maintain sales and technical expertise sufficient to implement complex
multivendor storage projects.
Maintain experience, as described in Section C of this Business Plan, and the
manufacturer's certification in at least one of the following major operating
systems; HP-UX ; Solaris , Sun OS , IRIX , AIX , WIN NT , Novell
Other Authorization Criteria - Storage Solution DA-VARs must:
Annually purchase and resell or sublicense at least $250,000 (at DIGITAL list
prices) of DIGITAL Storage Products.
Maintain at least one certified sales employee and one certified technical
support employee at each sales territory for every $5 million (at DIGITAL list
prices) of DIGITAL Storage Products purchased from the Distributor.
Purchase of or access to a DIGITAL Raid Array 3xxx (or higher) appropriate
for demonstration, development and support purposes.
On an annual basis attend Storage sales and training events. For sales and
technical employees attend the equivalent of three (3) days of authorized
Storage training.
Product Authorization - Storage Solution DA-VARs may purchase for resale or
sublicense only those DIGITAL Storage Products on which its sales and technical
support personnel have been trained and certified by DIGITAL.
Project Reseller DA-VAR Initials of Applicant's Authorized Signatory
General Description - Project Reseller DA-VARs sell DIGITAL Products only as
part of a distinct, time-limited project or program
Added Value Criteria - Project Reseller DA-VARs must:
Provide substantial systems integration or consulting services; have prime
contractor (i.e., total project) responsibility; or have facilities and
systems management responsibility.
Other Authorization Criteria - Project Reseller DA-VARs must:
Submit to DIGITAL a project or program sales plan for each engagement
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<PAGE> 17
and obtain DIGITAL's approval in writing prior to the sale.
Product Authorization - Project Reseller DA-VARs may purchase for resale and
sublicense only those DIGITAL Products appropriate to each designated and
approved project or program.
Applicant's Certification
The information and representations contained in its DA-VAR Authorization
Application and this DA-VAR Business Plan are correct and complete and provided
in the expectation that DIGITAL and Distributor will rely upon their accuracy.
Applicant agrees that it shall promptly notify Distributor and DIGITAL of any
intended change in Applicant's Basic Added Value, Solution Added Value or any
other material change in the business described in this Business Plan and that
DIGITAL's approval of this Business Plan shall become void unless the change is
approved by DIGITAL in writing.
Authorized Signature: /s/Michael J. Mellinger Date: June 24, 1998
Name: Michael J. Mellinger
Title: President and CEO
Distributor's Acknowledgment
To the best of Distributor's knowledge, the information and representations
contained in this DA-VAR Business Plan are correct and complete.
Authorized Signature: /s/Sheryl A. Williams Date: 6/25/98
Name: Sheryl A. Williams
Title: Account Manager
Approval by DIGITAL
DIGITAL hereby approves Applicant as a Application DA-VAR and authorizes
Applicant to use the appropriate DIGITAL Business Partner design mark and
relationship designation in accordance with the DIGITAL Business Partner Design
Mark Usage Guidelines. In addition to any other legal rights, DIGITAL reserves
the right to withdraw its approval and authorization if Applicant sells or
sublicenses DIGITAL Products (i) in violation of the added value, user support,
sales territory, end-user sales, sponsoring Distributor, or product commitments
contained in Section D of this Business Plan, or (ii) in breach of the terms and
conditions of the Distributor/DA-VAR DIGITAL Product Distribution Agreement of
which this Business Plan is made a part and such condition is not remedied
within thirty (30) days following receipt of written notice of such violation.
Authorized Signature: /s/Rick Dayneault Date: 7/6/98
Name: Rick Dayneault
Title: Office of Partner Practice
Contract Number: DC81024A Effective Date: 6/18/98
Expiration Date: 6/18/98
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<PAGE> 18
PART IV - DISTRIBUTOR/DA-VAR DIGITAL PRODUCT DISTRIBUTION AGREEMENT
Distributor/DA-VAR DIGITAL Product Distribution Agreement
between
Hallmark Computer Products ("Distributor")
and
Data Research Associates, Inc. (" DA-VAR")
As of __________, 199____ (the "Effective Date")
General Provisions
1.1 This Agreement establishes terms and conditions under which DA-VAR may
purchase from Distributor and resell (including the sublicense of
Software) DIGITAL and certain third party equipment and Software (the
"Products"). The purchase and resale or sublicense of Products may be
subject to additional terms and conditions that are (i) agreed to
between Distributor and DA-VAR and (ii) consistent with the provisions
of this Agreement. Digital Equipment Corporation ("DIGITAL") is
intended to be a third party beneficiary of the agreements and
commitments made in this Agreement.
Authorization
2.1 DA-VAR is authorized to purchase and resell or sublicense the Products
only in accordance with the conditions contained in the DA-VAR's Business
Plan that has been approved by DIGITAL and attached as Exhibit A to this
Agreement.
2.2 DIGITAL reserves the right to modify and/or replace this Agreement at
DIGITAL's discretion by giving thirty (30) days prior written notice of
such change to DA-VAR. Either party may terminate this Agreement or any
part of this Agreement, e.g. participating location(s) or eligible
product(s) if the other fails to perform any material obligation under
this Agreement and such condition is not remedied within thirty (30)
days after receipt of written notice.
Relationships
3.1 Distributor and DA-VAR are independent contractors engaged in purchasing
the Products for resale or sublicense to their respective customers.
Neither Distributor nor DA-VAR is a franchisee, agent, or legal
representative for any purpose of the other or of DIGITAL, and neither has
the authority to act for, bind or commit DIGITAL.
3.2 Neither Distributor nor DA-VAR is authorized to make commitments on behalf
of DIGITAL with respect to product quantities, delivery, modifications,
interfacing capability or suitability to specific applications.
DA-VARs Obligations
4.1 Whenever it resells or sublicenses the Products, DA-VAR shall provide
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<PAGE> 19
the customer with a written invoice that includes the customer's name and
address, the date of purchase and the serial numbers of the Products.
DA-VAR shall retain such invoices or the equivalent information for two
years from the date of sale to enable the DA-VAR to notify customers of
product related information.
4.2 At DIGITAL's discretion, and upon reasonable notice to DA-VAR, DIGITAL
or DIGITAL's designate will at DIGITAL's expense be given on-site access
to DA-VAR's records documenting DIGITAL product and service resales,
inventory records, purchase orders, invoices and other similar documents
to enable DIGITAL to verify and audit DA-VAR's compliance with the terms
of this Agreement. DA-VAR shall retain such information for a period of
at least two (2) years from the date of resale. DA-VAR may request, at
its expense, the use of an independent audit or for any such audit.
DIGITAL agrees that any information provided to DIGITAL during the
course of such audit is to be kept confidential, and shall only be used
for purposes of verifying compliance with this Agreement, and in no
event shall any such information be used to compete with DA-VAR.
4.3 DA-VAR will report end user sales information to DIGITAL each month in
accordance with DIGITAL's then current Sales Reporting Guidelines.
4.4 The Products are not designed, manufactured or intended for use in
critical safety applications (e.g., nuclear facilities, airspace
management systems or rail transportation systems). DA-VAR agrees that
DIGITAL shall not be liable for use of the Products in a critical safety
application, and DA-VAR shall indemnify and hold DIGITAL harmless from
any claims for lost, cost, damage, expense or liability arising out of
or in connection with the use or performance of any Product sold by DA-
VAR and used in a critical safety application.
4.5 DA-VAR agrees that it shall use the appropriate DIGITAL Business Partner
design mark and relationship designation only in accordance with the
DIGITAL Business Partner Design Mark Usage Guidelines.
Warranty
5.1 DA-VAR acknowledges that DIGITAL has made no warranty to DA-VAR with
regard to the Products and that the Products are sold or licensed to DA-
VAR "AS IS" for the sole purpose of resale OR sublicense to DA-VAR's
end-user customers.
5.2 DIGITAL PRODUCTS ARE WARRANTED TO THE END-USER AS SPECIFIED IN DIGITAL'S
THEN CURRENT PRICE LIST OR THE WARRANTY STATEMENT THAT ACCOMPANIES THE
DIGITAL PRODUCT. NO OTHER EXPRESS OR IMPLIED WARRANTY SHALL APPLY TO
DIGITAL PRODUCTS. DIGITAL AND DISTRIBUTOR SPECIFICALLY DISCLAIM THE
IMPLIED WARRANTY OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
NO REPRESENTATION OR WARRANTY INCLUDING BUT NOT LIMITED TO
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<PAGE> 20
STATEMENTS OF CAPACITY, SUITABILITY FOR USE OR PERFORMANCE WHETHER MADE BY
EMPLOYEES OF DIGITAL OR DISTRIBUTOR SHALL BE CONSIDERED TO BE A WARRANTY
BY DIGITAL FOR ANY PURPOSE OR GIVE RISE TO ANY LIABILITY OF DIGITAL.
DIGITAL MAKES NO WARRANTY WITH REGARD TO PRODUCT DOCUMENTATION, OR TO
THIRD PARTY PRODUCTS WHICH MAY BE WARRANTED BY THE THIRD PARTY AS
SPECIFIED IN THE DOCUMENTATION ACCOMPANYING THE THIRD PARTY PRODUCT.
5.3 Neither Distributor nor DA-VAR has the authority to modify the warranty on
any Product. DA-VAR shall provide each of its customers with notice of and
obtain their consent to the DIGITAL warranties and limitations of
liability contained in Exhibit B to this Agreement, and DA-VAR shall
indemnify and hold DIGITAL harmless for all claims and related expenses
incurred by DIGITAL as a result of. (a) DA-VARs failure to provide each of
its customers with notice of and obtain their consent to the DIGITAL
warranties and limitations of liability contained in Exhibit B; (b) any
unauthorized change to a DIGITAL warranty; or (c) any representation or
commitment by DA-VAR concerning the Products which create liability or
obligations beyond such warranty.
Software License Terms
6.1 DA-VAR's use of Software distributed by DIGITAL under a DIGITAL brand name
("DIGITAL Software") is governed by DIGITAL's Software License terms
contained in Exhibit B to this Agreement.
6.2 DA-VAR's use of shrink-wrap licensed DIGITAL Software and Software
distributed by DIGITAL under the brand name of a Third Party ("Third Party
Software") is governed by the license terms accompanying the Software.
6.3 DA-VAR is authorized to sublicense DIGITAL Software by obtaining its
customer's agreement prior to delivery to either:
a. the terms of the DIGITAL Software License contained in Exhibit B;
b. the Software License terms of a valid DIGITAL Business Agreement between
DIGITAL and the customer;
c. DA-VAR's own terms which, subject to DIGITAL's review and approval, are
substantially similar to those contained in Exhibit B;
d. the terms listed on the back of a DIGITAL Product License Key or
applicable License Certificate.
6.4 DA-VAR is authorized to distribute shrink-wrap licensed DIGITAL Software
and Third Party Software by obtaining the customer's agreement that such
Software is governed by the license terms accompanying the Software.
Indemnification and Limitations of Liability
7.1 DIGITAL shall defend at its expense any claim brought against DA-VAR or
its end-user customers alleging that any DIGITAL Product as acquired
under this Agreement infringes a patent, copyright, or mask work right
(the "Claim"). DIGITAL shall pay all costs and damages awarded or
agreed to in settlement of the Claim, provided that DA-VAR or its
end user customer furnishes DIGITAL with prompt written notice of the
Claim, and that both DA-VAR and its customer provide DIGITAL with
reasonable assistance and sole authority to defend or settle the Claim.
DIGITAL shall obtain for DA-VAR or its end user customer the right to
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<PAGE> 21
continue using the Product, replace it or modify it so it becomes non-
infringing. If these remedies are not reasonably available DIGITAL
shall grant DA-VAR a credit for the DIGITAL Product, normally
depreciated, and accept its return. DIGITAL shall have no liability for
any Claim resulting from the combination of the DIGITAL Product with
other products, which were neither supplied nor combined with the
DIGITAL Product by DIGITAL.
7.2 EXCEPT AS PROVIDED IN SECTION 7.1 ABOVE, DIGITAL SHALL ONLY BE LIABLE TO
DA-VAR FOR DIRECT DAMAGES UP TO THE GREATER OF ONE MILLION DOLLARS
($1,000,000 US) OR THE PURCHASE PRICE FOR THE PRODUCT WHICH IS THE
SUBJECT OF THE CLAIM. THE FOREGOING LIMITATION WILL NOT REDUCE
DIGITAL'S LIABILITY FOR PERSONAL INJURY. IN NO EVENT SHALL DIGITAL BE
LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES,
OR ANY DAMAGES RESULTING FROM LOSS OF DATA, USE, OR PROFITS. THESE
LIMITATIONS WILL APPLY TO ANY FORM OF ACTION, WHETHER ARISING UNDER
CONTRACT, STATUTE, TORT OR OTHERWISE.
Authorized Signatures
Data Research Associates, Inc.
Distributor DA-VAR
By: _________________________________ By: ___________________________
Sheryl 6A. Williams Michael J. Mellinger
Title: Account Manager President and CEO
3783 Ryder Trail South 1276 North Warson Road
Earth City, MO 63045 St. Louis, Missouri 63132
EXHIBIT A
DA-VAR's DIGITAL APPROVED BUSINESS PLAN TO BE INSERTED HERE AS EXHIBIT A TO THE
DISTRJIBUTOR/DAVAR DIGITAL PRODUCT DISTRIBUTION AGREEMENT.
EXHIBIT B
END-USER CUSTOMER TERMS
THE FOLLOWING TERMS SHALL APPLY TO THE SALE AND SUBLICENSE OF DIGITAL
EQUIPMENT CORPORATION ("DIGITAL") PRODUCTS By DIGITAL AUTHORIZED RESELLERS TO
END-USER CUSTOMERS.
DIGITAL SOFTWARE LICENSE
The following license terms govern Customer's use of DIGITAL Software
sublicensed to Customer by reseller. All DIGITAL shrink wrap licensed Software,
and all third party Software licensed directly by a third party, is subject only
to the license terms provided with the Software.
Software License: A license for the current version of the Software is granted
on order acceptance and not delivery. Customer may use Software subject to the
use rights and limitations of these terms, including the applicable License Type
terms below and the product specific terms in the Software Product Description
(SPD) or documentation accompanying the Software. The
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<PAGE> 22
Software, including any data bases and the license key, is proprietary
technology owned by DIGITAL or third parties. No ownership in or title to the
Software is transferred to Customer.
Customer may copy the Software only as necessary for licensed use and for
archival purposes. Any full or partial copy of the Software must include all
copyright and other proprietary notices which appear on or in the Software.
Customer may use the Software temporarily on a backup system only in the event
of a system malfunction.
Customer may not transfer the Software or license except as expressly authorized
by DIGITAL. Customer may not reverse engineer, decompile, or disassemble the
Software, except to the extent DIGITAL cannot prohibit such acts by law.
Customer may not make the Software available to any other party or permit others
to use it except Customer's employees and agents who use it on Customer 'S
behalf and who have agreed to these license terms. Customer may not modify or
make inoperable the license key or license management software.
Customer will maintain records matching the use of the Software to the license
grants and will make the records available to DIGITAL or the third party
developer or owner of the Software upon reasonable notice. The owner or
developer of proprietary technology in the Software may enforce these license
terms. DIGITAL may terminate any license granted hereunder if
Customer breaches any license term. Upon termination Customer will destroy all
copies of the Software.
US Government Customers: Commercial Computer Software, and Computer Software
Documentation, and Technical Data for Commercial Items are licensed to the U.S.
Government with DIGITAL's standard commercial license and, when applicable, the
rights in DFAR 252.227-7015, "Technical Data - Commercial Items."
License Types
Traditional License: Customer may use the Software on a single specified
hardware/ operating system. DIGITAL System Chart specifies valid systems. For
additional information see http://www.digital.com/info/softwarelicensing.
Concurrent Use License: Customer may use the Software up to the quantity of uses
(execution or access) at a time, on one system or VAX/VMS cluster configuration,
and on a single specified Operating System.
Personal Use License: Customer may use the Software up to the quantity of
users, on one system or VAX/VMS cluster configuration, and on a single
specified Operating System. 30 day minimum license assignments are required,
unless for system management.
Operating System Base License: Customer may use the Software only for batch,
print, and file services as well as non-interactive display of information on a
single specified system. When SNT Extensions are offered, the Base license is
required for the system's first processor, and the SNT Extension is required for
each additional processor.
Update License: Extends the rights and restrictions of the underlying license
to a subsequent version. The Update license(s) requires an equal quantity of
the underlying
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<PAGE> 23
license(s). Additional terms on page 2
DIGITAL PRODUCT WARRANTY
DIGITAL products are warranted to the end user Customer as specified in
DIGITAL's then current price list or the Warranty Statement accompanying the
DIGITAL product.
Year 2000 DIGITAL Product Warranty: DIGITAL also warrants that the DIGITAL
products designated, at the time of quotation or delivery, on DIGITAL's Year
2000 worldwide web site (http://www.digital.conVyear2OOO) as "Year 2000 Ready"
(Category Blue) and DIGITAL products designated as "Year 2000 Ready version in
development' (Category Green), as of the specified Year 2000 Ready version
number, are capable of accurately processing, providing, and/or receiving date
data from, into and between the twentieth and the twenty-first centuries, and
the years 1999 and 2000, including leap year calculations, when used in
accordance with the associated DIGITAL product documentation and provided that
all hardware, firmware and software used in combination with such DIGITAL
products properly exchange accurate date data with the DIGITAL products.
This Year 2000 DIGITAL Product Warranty supplements and incorporates DIGITAL's
standard product warranties (including their notice, remedies and exclusions
provisions) as specified in DIGITAL's then current price list or the Warranty
Statement that accompanies the DIGITAL product. This Year 2000 DIGITAL Product
Warranty is not applicable to third party products.
NO OTHER WARRANTY, EXPRESS OR IMPLIED, SHALL APPLY TO DIGITAL PRODUCTS. DIGITAL
AND DIGITAL'S RESELLER SPECIFICALLY DISCLAIM THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. No representation or
warranty including but not limited to statements of capacity, suitability for
use or performance, whether made by employees of DIGITAL or DIGITAL's reseller,
shall be considered to be a representation or warranty by DIGITAL for any
purpose. DIGITAL makes no warranty with regard to product documentation or third
party products which may be warranted by the third party as specified in the
documentation accompanying the third party product.
LIMITATION OF LIABILITY
DIGITAL SHALL ONLY BE LIABLE TO CUSTOMER FOR DIRECT DAMAGES UP TO THE GREATER OF
ONE MILLION DOLLARS ($ 1,000,000 US) OR THE PURCHASE PRICE FOR THE PRODUCT WHICH
IS THE SUBJECT OF THE CLAIM. THE FOREGOING LIMITATION WILL NOT REDUCE DIGITAL'S
LIABILITY FOR PERSONAL INJURY. IN NO EVENT SHALL DIGITAL BE LIABLE FOR ANY
SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, OR ANY DAMAGES
RESULTING FROM LOSS OF DATA, USE, OR PROFITS. THESE LIMITATIONS WILL APPLY TO
ANY FORM OF ACTION, WHETHER ARISING UNDER CONTRACT, STATUTE, TORT OR OTHERWISE.
Any action against DIGITAL must be brought within eighteen months after the
cause of action arises.
GENERAL
Customer is responsible for compliance with all export or re-export control laws
and regulations if Customer exports the products.
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<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
Wholly owned subsidiaries of Data Research Associates, Inc. are:
Data Research International (SEA) Pte. Ltd.
Data Research International (Australasia) Pty. Ltd.
DRA Information Inc. (Canada)
MultiLIS Europe S.A. (France) (except directors' qualifying shares)
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<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3, No. 333-38585) pertaining to the Data Research Associates, Inc.
Dividend Reinvestment and Stock Purchase Plan, (Form S-8, No. 333-22887)
pertaining to the Data Research Associates, Inc. Director Stock Option Plan,
(Form S-8, No.333-2372) pertaining to the Data Research Associates, Inc.
1992 Option Plan, (Form S-8, No.33-51576) pertaining to Data Research
Associates, Inc. Stock Purchase Plan, (Form S-8, No.33-61762) pertaining
to the Data Research Associates, Inc. Director Stock Option Plan,
(Form S-8, No. 33-61764) pertaining to the Data Research Associates,
Inc. 1992 Option Plan, and (Form S-8, No.33-77160) pertaining to the
Data Research Associates, Inc. 401(k)Profit Sharing Plan of our report
dated November 9, 1998, with respect to the consolidated financial
statements and schedule of Data Research Associates, Inc. and subsidiaries,
included in the Annual Report (Form 10-K) for the year ended September 30, 1998.
/s/ Ernst & Young LLP
St. Louis, Missouri
December 14, 1998
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<PAGE> 1
EXHIBIT 23.1
To the Securities and Exchange Commission
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33-51576, 33-61762, 33-77160, 333-2372 and
333-22887) and Form S-3 (No. 333-38585) of Data Research Associates,
Inc. of our reports dated October 24, 1997 and October 25, 1996 included
in the Annual Report to Shareholders which is incorporated in the Annual 10-k.
/s/ Price Waterhouse
Chartered Accountants
Montreal, Quebec
December 15, 1998
84
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 8,710
<SECURITIES> 8,493
<RECEIVABLES> 10,537
<ALLOWANCES> 101
<INVENTORY> 136
<CURRENT-ASSETS> 28,881
<PP&E> 13,472
<DEPRECIATION> 6,752
<TOTAL-ASSETS> 40,452
<CURRENT-LIABILITIES> 6,928
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 34,411
<TOTAL-LIABILITY-AND-EQUITY> 40,452
<SALES> 32,545
<TOTAL-REVENUES> 32,545
<CGS> 9,703
<TOTAL-COSTS> 28,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,009)
<INCOME-PRETAX> 5,483
<INCOME-TAX> 2,164
<INCOME-CONTINUING> 3,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,700
<EPS-PRIMARY> .68
<EPS-DILUTED> .67
</TABLE>
<PAGE> 1
Exhibit 99.1
CAUTIONARY STATEMENTS--ADDITIONAL IMPORTANT FACTORS TO BE CONSIDERED
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, the following:
RAPID TECHNOLOGICAL CHANGE. The software industry is characterized by rapid
change and uncertainty due to new and emerging technologies. The pace of change
has recently accelerated due to the Internet, on-line services, networking, and
new programming languages. There can be no assurance that DRA will be successful
in developing or acquiring product enhancements and new products necessary to
keep pace with the changing technologies.
CUSTOMER ACCEPTANCE. While the Company performs extensive usability and beta-
testing of its new products, user acceptance and market penetration rates
ultimately dictate the success of development and marketing efforts. The Company
is currently in the later stages of development of a new system called Taos.
CONTRACTS WITH GOVERNMENTAL ENTITIES. A substantial portion of the Company's
business is conducted with governmental entities. Both the award and execution
of its governmental contracts are subject to numerous conditions, including the
availability and appropriation of sufficient funding.
PRODUCT SHIP SCHEDULES. Because 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, even short delays in new-product
releases or delays in the customers' procurement processes can cause results to
fluctuate substantially. Delays in the release of Taos could have a
significantly negative impact on the Company's sales and results of operations.
Because of the complexities inherent in developing software products as
sophisticated as those sold by the Company and the lengthy testing periods
associated with such products, no assurance can be given that future product
introductions by the Company will not be delayed. In the future, the Company's
revenues will be increasingly dependent on sales of Taos, 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.
COMPETITION. The library automation industry is highly competitive. A number of
companies offer products that target the library automation market. DRA competes
with software vendors whose products operate on Digital hardware platforms and
software vendors whose products operate on different platforms. Certain of the
Company's competitors have substantially greater financial, technical,
marketing, and sales resources than DRA.
DEPENDENCE ON AND RELATIONSHIP WITH COMPAQ. Although DRA is moving away from a
strong dependence on Compaq's Digital computers, a substantial portion of the
Company's revenues are still derived from Compaq `s Digital hardware and
licensing of the Company's software, which was originally designed to operate on
Digital computers.
DEPENDENCE ON KEY PERSONNEL. DRA's continued success depends in large part on
certain key personnel, including Michael J. Mellinger, its founder, President,
and Chief Executive Officer. The loss of the services of Mr. Mellinger and the
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<PAGE> 2
inability of the Company to attract and retain a suitable replacement could have
a material adverse effect on the Company.
PRINCIPAL SHAREHOLDERS. Michael J. Mellinger and F. Gilbert Bickel III
combined own in excess of 45 percent of the common stock outstanding. As a
result, Mr.Mellinger and Mr. Bickel may be able to effectively control the
outcome of certain matters requiring a shareholder vote.
POSSIBLE ACQUISITIONS. The Company may make acquisitions in the future.
Acquisitions involve numerous risks, including difficulties in the assimilation
of the operations and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or little direct experience, and potential loss of
key employees of the acquired companies.
YEAR 2000 PROBLEM See discussion above under Year 2000 Readiness Disclosure.
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<PAGE> 1
Exhibit 99.2
Price Waterhouse
Montreal Quebec
October 24, 1997
AUDITORS' REPORT
To the Shareholder of
DRA Information Inc.
We have audited the balance sheet of DRA Information Inc. as of September 30,
1997 and the statements of income and retained earnings and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 1997 and the
results of its operations and the changes in its cash flow for the year then
ended in accordance with generally accepted accounting principles.
/s/ PriceWaterhouse
Chartered Accountants
87
<PAGE> 1
Exhibit 99.3
Price Waterhouse
Montreal Quebec
October 25, 1996
AUDITORS' REPORT
To the Shareholder of
DRA Information Inc.
We have audited the balance sheet of DRA Information Inc. as of September 30,
1996 and the statements of income and retained earnings and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain
reasonableassurance whether the financial statements are free of material
misstatement.An audit includes examining, on a test basis, evidence supporting
the amountsand disclosures in the financial statements. An audit also includes
assessingthe accounting principles used and significant estimates made by
management,as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 1996 and the
results of its operations and the changes in its cash flow for the year then
ended in accordance with generally accepted accounting principles.
/s/ PriceWaterhouse
Chartered Accountants
88