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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, 1999
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 $ 20,766,756 as of November 30, 1999.
At November 30, 1999 there were 4,860,025 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 2000 Annual Meeting of
Shareholders, which involves the election of directors, is incorporated by
reference into Items 10, 11, 12 and 13 of this Report.
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INDEX
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
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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.
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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. The commercial distribution of its next-generation system, Taos, began
in September 1999 and is installed at several customer sites. Each of these 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, 1999, 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 also has 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 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.
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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 Data Research 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. See Note F to the consolidated financial statements for
revenue and long-lived asset data regarding the U.S. and Canadian markets.
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 revenue and long-lived asset data regarding the international
markets.
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 1999, DRA added approximately 15
sites to its customer base. DRA is not dependent upon a single customer or a few
customers, the loss of any one or more of which would have a material adverse
effect on its business.
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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 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 also are
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 its automation systems are year-2000 compliant.
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 and conversion, documentation,
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.
The core modules of the Taos system, Cataloguing, Circulation and Public Access,
are in general release. These are the products that a customer needs to perform
the basic functions required to operate a library and can be complemented by
adding other modules to the basic system. The Company expects to achieve the
release of Serials, the first of the add-on modules, early in fiscal 2000 and of
the second, Acquisitions, later in the fiscal year.
During the coming fiscal year the Company will be investigating a new approach
to providing library automation services that is commonly referred to as the
Application Service Providers (ASP) model. Under an ASP model, many of the
system support services that have traditionally been performed by staff in the
library are outsourced to a vendor. This can be very attractive, especially to
organizations that do not operate their own information technology departments,
because it helps alleviate difficulties caused by the shortage of qualified
technical personnel. The Company will evaluate providing ASP alternatives to
both existing and new customers.
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.
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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 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. The 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. In fiscal
1999, the Company introduced a graphical user interface for the report writer
module for the DRA Classic and Taos systems.
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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. The Company is evaluating the use of this module
under the Taos system.
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, 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. The Company has therefore 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.
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During fiscal 1999, 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
generated annualized revenues in excess of $300,000. 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.
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, and later as treasurer of NISO, the official U.S. standards
organization for libraries and other information services.
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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
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 core 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.
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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, 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 10 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-eight 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 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.
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In May 1999 DRA was accepted as a Compaq Authorized Enterprise Reseller ("CAER")
and selected Hall-Mark Computer Products ("Hall-Mark") as its distributor for
Compaq products. Under the CAER Program DRA negotiates volume discounts directly
with Hall-Mark, and Compaq continues to provide certain warranties on the
equipment and software and indemnity against copyright or patent infringement
claims relating to the use of Compaq products or documentation. The Company
maintains an annually renewable agreement directly with Compaq 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 included
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 a division of a Fortune 100 company that was sold to private
investors subsequent to the end of fiscal 1999. Certain of the Company's
competitors have greater financial, technical, marketing, and sales resources
than DRA. There can be no assurance that the Company won't continue to expect
significant competition from present competitors or that 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.
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BACKLOG
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
six contracts as compared to eight contracts at the end of fiscal 1998 for the
Company's next-generation Taos system, all of which we believe will be fulfilled
during fiscal 2000. 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 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 also are 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, 1999, DRA had 225 employees, including 39 in marketing and
sales, 89 in computer operations services and training, and 58 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.
13
<PAGE> 14
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, 2001; 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 in April 2001; 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.
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.
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:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael J. Mellinger 50 Chairman, President
and Chief Executive
Officer
Katharine W. Biggs 56 Vice-President, Chief
Financial Officer
and Treasurer
Joseph M. Bonwich 40 Vice-President
</TABLE>
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
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, and resigned as an officer of the Company subsequent to the end of the
fiscal year. At the end of the fiscal year he managed 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.
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<PAGE> 15
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 1998 and fiscal 1999 were as follows:
Year Ended September 30, 1998:
<TABLE>
<CAPTION>
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>
Year Ended September 30, 1999
<TABLE>
<CAPTION>
Quarter High Low
<S> <C> <C>
First $14.00 $11.750
Second 14.625 12.50
Third 12.50 7.125
Fourth 10.875 8.375
</TABLE>
HOLDERS
As of November 30, 1999, there were 209 shareholders of record of the common
stock. Management believes that there are between 1,200 to 1,500 beneficial
shareholders.
DIVIDENDS
On November 11, 1999, the Board of Directors declared an annual dividend of
$.12 per share of common stock outstanding, payable on January 25, 2000, to
holders of record at the close of market January 7, 2000. In fiscal 1998 the
Company paid an annual dividend of $.12 per share. 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.
15
<PAGE> 16
ITEM 6.
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
-----------------------------------------
1999 1998 1997 1996 1995(1)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Hardware $ 3,358 $ 5,433 $ 9,759 $11,724 $10,905
Software 7,413 8,017 6,969 9,949 8,513
Service and other 19,223 19,095 18,641 16,909 15,449
Total revenues 29,994 32,545 35,369 38,582 34,867
Expenses:
Cost of revenues 8,996 9,703 12,801 13,657 12,651
Salaries and employee benefits 10,438 9,898 9,341 10,379 9,356
General and
administrative expenses 6,016 6,752 6,018 6,788 6,344
Depreciation and amortization 1,963 1,718 1,339 1,147 993
Total operating expenses 27,413 28,071 29,499 31,971 29,344
Income from operations 2,581 4,474 5,870 6,611 5,523
Other income (expense), net 834 1,009 788 590 347
Income before income taxes 3,415 5,483 6,658 7,201 5,870
Provision for income taxes 1,082 1,783 2,164 2,747 2,236
Net income $ 2,333 $ 3,700 $ 4,494 $ 4,454 $ 3,634
Basic earnings per share (2) $ .45 $ .68 $ .81 $ .81 $ .66
Diluted earnings per share (2) .45 .67 .81 .80 .66
Dividends paid per
common share $ .12 $ .12 $ .10 $ - $ -
</TABLE>
Balance Sheet Data
(In thousands)
<TABLE>
<CAPTION>
September 30
------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $18,999 $21,953 $22,189 $18,938 $14,562
Total assets 38,102 40,730 41,139 36,661 32,887
Long-term obligations - - - - -
Shareholders' equity 28,705 31,505 31,442 27,446 22,813
</TABLE>
(1) Data for the year ended September 30, 1995, reflects the acquisition of the
MultiLIS System in October 1994.
(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.
16
<PAGE> 17
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, 1999 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998
Hardware revenues decreased $2.0 million, or 38%, to $3.4 million in fiscal
1999 from $5.4 million in fiscal 1998. There were several large
installations of new DRA customers in fiscal 1998. Fiscal 1999 had several new
installations, but the hardware revenue was not significant for any one
customer. Additionally, there has been a general price decline in the hardware
market that has contributed to the overall revenue decline. The gross margin on
hardware was 29% in fiscal 1999 and 30% in 1998.
Software license revenues decreased $.6 million, or 8%, to $7.4 million in
fiscal 1999 from $8.0 million in fiscal 1998. The decrease is primarily a result
of a large DRA Classic turnkey contract that generated $.9 million in software
license revenue in fiscal 1998, offset by several Taos software
installations late in fiscal 1999. The gross margin percentage on software was
79% for fiscal 1999 and 82% for fiscal 1998. The decrease is due primarily to an
increase in fiscal 1999 of software amortization costs associated with DRA Taos
software.
17
<PAGE> 18
Service and other revenues increased $.1 million, or 1%, to $19.2 million in
fiscal 1999 from $19.1 million in fiscal 1998. This increase is primarily due to
the larger installed base of licensed software products that annually generate
maintenance revenues. Maintenance revenues increased $.5 million in fiscal 1999.
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 1999 than in fiscal 1998. The gross
margin percentage on service and other revenues was 74% in fiscal 1999 and 77%
in fiscal 1998. The decline is primarily attributable to the mix of services
provided. Fiscal 1999 showed higher revenue from the Internet services business
than fiscal 1998. Internet services have higher direct cost than the Company's
other services
Cost of revenues decreased $.7 million, or 7%, to $9.0 million in fiscal 1999
from $9.7 million in fiscal 1998. This decrease is primarily a result of the
decrease in hardware revenues in fiscal 1999 from fiscal 1998, coupled with the
increase in costs associated with the Internet services.
Salaries and employee benefits increased $.5 million, or 5%, to $10.4 million
in fiscal 1999 from $9.9 million in fiscal 1998. This increase is primarily
attributable to annual raises and to the addition of several staff in the
development and testing departments. The increase was mitigated somewhat by the
continued capitalization in fiscal 1999 of salaries and benefits related to
software development.
General and administrative expenses decreased $.8 million, or 11%, to $6.0
million in fiscal 1999 from $6.8 million in fiscal 1998. This decrease 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 $.3 million, or 14%, from $1.7 million in fiscal 1998 to
$2.0 million in fiscal 1999 primarily as a result of capital expenditures
related to upgrades to the Company's technological infrastructure.
Income from operations decreased $1.9 million, or 42%, to $2.6 million in
fiscal 1999 from $4.5 million in fiscal 1998. This decrease is a result of a
decrease in hardware revenue, coupled with the less profitable mix of services
sold in fiscal 1999. The decrease in income from operations was mitigated
somewhat by a corresponding decrease in general and administrative expenses.
Other income (expense) decreased $.2 million to $.8 million in fiscal 1999
from $1.0 million in fiscal 1998 due to a decrease in short-term investments.
Primary investments have been in Treasury Stock.
The Company's consolidated effective tax rate was 31.7% in fiscal 1999 and
32.5% in fiscal 1998. The decrease is primarily the result of research and
development credits utilized for both U.S. Federal and Canadian tax purposes.
The consolidated effective tax rate for fiscal 1999 is less than the U.S.
statutory rate primarily due to the generation and utilization of significant
research and development credits in the current year.
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.
18
<PAGE> 19
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 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 $.6 million, or 6%, to $9.9
million in fiscal 1998 from $9.3 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 $.8 million, or 12%, to $6.8
million in fiscal 1998 from $6.0 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 the Company's headquarters building.
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 revenue 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 U.S. statutory rate primarily due to the generation and
utilization of significant research and development credits in the current year.
19
<PAGE> 20
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, 1999, the Company's working
capital was $19.0 million, and its ratio of current assets to current
liabilities was 3.6 to 1, as compared to working capital of $22.0 million and a
ratio of current assets to current liabilities of 4.0 to 1 at September 30,1998.
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 $8.8 million for fiscal
1999,compared to $5.4 million for fiscal 1998. The increase in net cash provided
by operations was primarily due to a $2.6 million decrease in the accounts
receivable balance during fiscal 1999, compared to a $2.2 million increase in
the accounts receivable balance during fiscal 1998. The decrease in accounts
receivable relates to the timing of payments received from customers, coupled
with a decrease in revenue in fiscal year 1999.
Net cash provided by investing activities was $4.7 million for fiscal 1999,
compared to net cash used of $12.9 million for fiscal 1998. The primary
difference is due to the maturity of short-term investment bonds in fiscal 1999,
which were purchased in fiscal 1998. Much of the short term investing in the
fiscal 1999 was in bonds with a maturity of 90 days or less. Therefore, these
investments are classified as cash equivalents rather than short-term
investments.
During fiscal 1999, 1998, and 1997, the Company incurred capital expenditures
of $1.5 million, $1.8 million and $2.3 million, respectively. No material
commitments with respect to capital expenditures have been made for fiscal 2000.
Net cash used by financing activities was $5.2 million for fiscal 1999 and
$3.5 million for fiscal 1998. The purchase of treasury stock in the amount of
$4.8 million for fiscal 1999, compared to $3.1 million for fiscal 1998,
accounted for most of the increase in cash used.
In October 1999, the Company's Board of Directors authorized the repurchase of
the Company's common stock in an aggregate amount of up to $2 million, such
purchases to be made from time to time during the following 12 months.
In January 1999, the Company renewed its $6.0 million line of credit, which
will mature in January 2000 and is subject to annual renewal. The line of credit
bears interest at the federal funds rate plus 200 basis points payable monthly
on outstanding balances and is secured by the Company's accounts receivable,
inventory, and equipment. As of September 30, 1999, the applicable interest rate
was 7.51% 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 $17.0 million and
accounts receivable of $8.0 million, continued cash flow from operations,
availability of a $6.0 million line of credit, and total current liabilities of
$7.3 million, the Company will be able to meet both its short-term liquidity
needs and short-term capital expenditure needs. Management believes that with
total long-term liabilities of $2.1 million and no other known long-term
commitments or demands, the Company will be able to satisfy its known long-term
liabilities and liquidity needs through the funding sources identified above.
20
<PAGE> 21
Recent Accounting Pronouncements
As of October 1, 1998, the Company adopted AICPA SOP 97-2, "Software Revenue
Recognition," which was effective for transactions of the Company on or after
that date. The impact of adoption was not significant to the financial
statements. The provisions of the SOP must be applied prospectively, therefore
prior year financial statements were not restated.
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which reports
Comprehensive Income and its components within the Statement of Consolidated
Shareholders' Equity. Comprehensive Income represents the change in
shareholders' equity during a period from transactions and other events and
circumstances from nonowner sources. Accumulated Other Comprehensive Loss for
the Company is composed solely of cumulative foreign currency translation
adjustments.
In fiscal 1999, the Company adopted SFAS No. 131, "Segment Information", which
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 has made the required
geographic disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
which was required to be adopted in years beginning after June 15, 1999. The
FASB has since delayed the effective date until years beginning after June 15,
2000, with the issuance of Financial Accounting Standards Board Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133". SFAS No. 133 permits early
adoption as of the beginning of any fiscal quarter after its issuance. The
Company expects to adopt the new Statement effective October 1, 2000. SFAS No.
133 will require the Company to recognize all derivatives on the balance sheet
at fair value. Because of the Company's minimal use of derivatives, management
does not anticipate that the adoption of SFAS No. 133 will have a significant
impact on earnings or the financial position of the Company.
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., "99" for "1999"). 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.
21
<PAGE> 22
As of September 30, 1999, 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 formed an oversight committee and 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, 1999, the
oversight committee had identified the Company's systems that could potentially
be impacted by the Y2K Problem, had prioritized the identified systems and
completed three primary steps to validate systems readiness. The three steps
were (1) obtaining a vendor readiness statement (2) internal testing, and (3)
third-party validation through an authorized organization that has already
tested the systems. The Company has obtained a vendor readiness statement for
all identified systems and performed internal testing on those identified as
critical to its operations that had not already been validated through a
third-party authorized organization. During this testing the Company compiled a
list of identified problems and recommended solutions. The Company has applied
recommended solutions, verified that such solutions make the systems avoid the
Y2K problem or developed a contingency plan for any critical system that might
remain susceptible to the Y2K Problem. The Company considers itself to be
substantially complete with all Y2K readiness and contingency planning at
September 30, 1999.
The Company's Y2K action plan discussed above was 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.
22
<PAGE> 23
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 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 many businesses in addition
to the Company.
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. Ultimately,
user acceptance can only be determined after the product goes into commercial
distribution. The Company began commercial distribution of its next-generation
system, Taos, in September 1999. The system is currently in use at several
customer sites and the Company is closely monitoring, and soliciting customer
feedback on, its performance in a production environment.
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 toward 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. 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, the core
modules of which achieved general release in September 1999.
23
<PAGE> 24
The Company's next-generation system, Taos, is in general release and
is currently in use at several libraries. During the development of Taos, the
Company has pursued contractual arrangements with library systems desiring to
purchase Taos upon its completion. These contracts include terms that are
modified from time-to-time by agreement between the parties, including terms
with respect to the anticipated installation dates for the various modules of
the Taos system, but libraries are not obligated to agree to such amendments.
Due to delays in certain contractual installation schedules, the Company has
placed one installation project on hold, has amicably terminated a contract
with one customer and subsequent to the end of the fiscal year, received notice
from one customer that it was considering terminating its contract with the
Company. Subsequent to the end of the fiscal year, the Company received written
notice from a large academic customer which has implemented Taos saying that it
believes the Company to be in material breach of its agreement with the
customer and giving the Company until January 4, 2000, to provide a definitive
action plan for meeting certain functionality, performance and stability
requirements, in some cases by January 31, 2000, and in other cases by a date
to be determined. The Company is reviewing these requirements and will work
with the customer to reach a satisfactory resolution. While the Company
believes that it will be able to substantially comply with the Taos
installation schedules currently in place with its customers, a variety of
factors could add additional delays in these projects. Such factors include the
difficulties associated with incorporating rapid technological change into the
Taos system, the Company's dependence on third-party suppliers, and the
relative scarcity of qualified technical staff.
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 50 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.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
Consolidated Balance Sheets as of September 30,
1999 and 1998
Consolidated Statements of Income for the years ended
September 30, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years
ended September 30, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
25
<PAGE> 26
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, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended September 30, 1999. 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
financial statements of DRA Information Inc., a wholly-owned subsidiary, which
statements reflect total assets constituting seven percent at September 30, 1997
and total revenues constituting thirteen percent for the year ended September
30, 1997, of the related consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for DRA Information Inc. as of and for the year
ended September 30, 1997 is based solely on the report 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 the year ended September 30, 1997,
the report 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, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1999, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, 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, 1999
26
<PAGE> 27
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30
---------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $17,022 $ 8,710
Short-term investments -- 8,493
Accounts receivable less allowances of $212
and $101 at September 30,1999 and 1998,
respectively:
Billed 6,080 8,092
Unbilled 1,919 2,445
------- -------
7,999 10,537
Income taxes receivable -- 278
Inventories 67 136
Prepaid expenses 680 542
Deferred income taxes 212 261
Other current assets 274 202
------- -------
TOTAL CURRENT ASSETS 26,254 29,159
PROPERTY AND EQUIPMENT:
Land and improvements 504 504
Building and improvements 2,720 2,719
Data processing equipment 7,298 6,525
Furniture, fixtures, and other 4,384 3,724
------- -------
14,906 13,472
Less accumulated depreciation 8,678 6,752
------- -------
6,228 6,720
DEFERRED SOFTWARE COSTS
(net of accumulated amortization
of $1,136 and $1,711 at September 30,
1999 and 1998, respectively) 5,181 4,365
NOTES RECEIVABLE 3 43
INTANGIBLE ASSETS
(net of accumulated amortization
of $2,550 and $4,221 at September 30,
1999 and 1998, respectively) 436 443
------- -------
$38,102 $40,730
======= =======
</TABLE>
27
<PAGE> 28
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30
----------------
1999 1998
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 758 $ 826
Employee compensation 415 375
Deferred revenue 4,439 4,511
Customer deposits 1,201 695
Other accrued liabilities 442 799
-------- --------
TOTAL CURRENT LIABILITIES 7,255 7,206
DEFERRED INCOME TAXES 2,142 2,019
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value
$.01 per share--1,000
shares authorized, no shares
issued -- --
Common stock, par value
$.01 per share--10,000
shares authorized, 5,557
shares issued at September 30,1999
and 1998 56 56
Additional paid-in capital 5,606 5,763
Accumulated other comprehensive loss (162) (239)
Retained earnings 30,577 28,887
-------- --------
36,077 34,467
Less cost of treasury stock, 621 and 179
shares at September 30, 1999 and 1998,
respectively (7,372) (2,962)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 28,705 31,505
-------- --------
$ 38,102 $ 40,730
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended September 30
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES
Hardware $ 3,358 $ 5,433 $ 9,759
Software 7,413 8,017 6,969
Service and other 19,223 19,095 18,641
-------- -------- --------
29,994 32,545 35,369
EXPENSES
Cost of revenues
Hardware 2,396 3,793 6,751
Software 1,574 1,468 1,814
Service and other 5,026 4,442 4,236
-------- -------- --------
8,996 9,703 12,801
Salaries and employee benefits 10,438 9,898 9,341
General and administrative
expenses 6,016 6,752 6,018
Depreciation and amortization 1,963 1,718 1,339
-------- -------- --------
27,413 28,071 29,499
-------- -------- --------
INCOME FROM OPERATIONS 2,581 4,474 5,870
OTHER INCOME (EXPENSE)
Interest 759 928 751
Other 75 81 37
-------- -------- --------
INCOME BEFORE INCOME TAXES 3,415 5,483 6,658
PROVISION FOR INCOME TAXES 1,082 1,783 2,164
-------- -------- --------
NET INCOME $ 2,333 $ 3,700 $ 4,494
======== ======== ========
Basic earnings per share $.45 $.68 $.81
======== ======== ========
Diluted earnings per share $.45 $.67 $.81
======== ======== ========
Dividends per share $.12 $.12 $.10
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Common Stock Accumulated Treasury Stock
------------- Additional Other --------------
Paid-In Comprehensive Retained
Shares Amount Capital Income(Loss) Earnings Shares Cost
--------- ------- ---------- ------------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30,
1996 5,778 $58 $5,700 $ 53 $21,910 265 $(275)
Retirement
of treasury
stock (265) (3) (272) - - (265) 275
Options
exercised 26 - 184 - - - -
Net income - - - - 4,494 - -
Cash
dividends
($.10 per
share) - - - - (552) - -
Foreign
currency
translation
adjustment - - - (130) - - -
----- --- ------ ----- ------- ----- ------
Balance at
September 30,
1997 5,539 55 5,612 (77) 25,852 - -
Purchase
of treasury
stock - - - - - 186 (3,051)
Options
exercised 18 1 134 - - (3) 37
Dividend
reinvestment/
employee stock
purchase plan - - 17 - - (4) 52
Net income - - - - 3,700 - -
Cash
dividends
($.12 per
share) - - - - (665) - -
Foreign
currency
translation
adjustment - - - (162) - - -
------ --- ------ ------ ------- ----- ------
</TABLE>
30
<PAGE> 31
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
(In thousands, except for per share data)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30,
1998 5,557 56 5,763 (239) 28,887 179 (2,962)
Purchase
of treasury
stock - - - - - 474 (4,842)
Options
exercised - - (137) - - (21) 280
Dividend
reinvestment/
employee stock
purchase plan - - (20) - - (11) 152
Net income - - - - 2,333 - -
Cash
dividends
($.12 per
share) - - - - (643) - -
Foreign
currency
translation
adjustment - - - 77 - - -
------ --- ------ ------ ------- ----- ------
Balance at
September 30,
1999 5,557 $56 $5,606 $ (162) $30,577 621 $(7,372)
====== === ====== ====== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,333 $ 3,700 $ 4,494
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 3,505 3,383 2,543
Provision for deferred
income taxes 172 563 885
(Gain) loss on disposal of
property and equipment 11 1 (3)
Changes in operating assets
and liabilities:
Accounts receivable 2,615 (2,194) 6,020
Inventories 69 (61) 101
Prepaid expenses and
other current assets 404 555 (408)
Accounts payable and
other current liabilities (316) (564) (981)
Note receivable 40 56 196
------ ------- -------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 8,833 5,439 12,847
INVESTING ACTIVITIES
Purchase of property
and equipment (1,469) (1,778) (2,312)
Purchased software (513) - (281)
Deferred software costs (1,834) (2,667) (1,832)
Purchase of short-term
investments (22,828) (38,717) -
Proceeds from sale of
short-term investments 31,321 30,224 -
------- ------- --------
NET CASH PROVIDED BY (USED BY)
INVESTING ACTIVITIES 4,677 (12,938) (4,425)
FINANCING ACTIVITIES
Proceeds from options exercised 275 241 184
Cash dividends paid (643) (665) (552)
Purchase of treasury shares (4,842) (3,051) -
------- ------- --------
NET CASH USED BY
FINANCING ACTIVITIES (5,210) (3,475) (368)
Effect of exchange rate changes
on cash and cash equivalents 12 (50) (143)
------- ------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 8,312 (11,024) 7,911
</TABLE>
32
<PAGE> 33
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<S> <C> <C> <C>
Cash and cash equivalents
at beginning of year 8,710 19,734 11,823
-------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 17,022 $ 8,710 $ 19,734
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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 revenue is derived from
its DRA Classic and Taos software products.
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,
1999, 1998 and 1997, were not significant.
Cash Equivalents and Short-term Investments: 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
$12,853,000 and $3,986,000 at September 30, 1999 and 1998, 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.
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, 1999, 1998 and 1997 was $1,963,000, $1,666,000 and $1,256,000, 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, conversion,
documentation, training, and authority control processing services is recognized
as the services are performed.
In fiscal 1999, the Company adopted the Accounting Standards Executive Committee
of the AICPA issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition." Adoption of SOP 97-2 has not had a material impact on the
Company's 1999 financial statements.
34
<PAGE> 35
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Warranty: The Company is a reseller of hardware and passes through to its
customers the standard warranties provided by the hardware manufacturers. The
Company warrants its applications software products to perform in accordance
with the written user documentation and the agreements negotiated with the
customer. Because the Company does not customize its applications software,
warranty costs are not significant 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.
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 $1,967,000, $1,836,000
and $1,265,000 for the years ended September 30, 1999, 1998, and 1997,
respectively. Development costs of $1,834,000 in 1999, $2,667,000 in 1998, and
$1,832,000 in 1997, 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, 1999, 1998, and
1997 was $1,019,000, $351,000, and $303,000,
respectively. In fiscal 1999, the Company wrote off fully amortized software
development costs in the amount of $1,594,000. These development costs relate to
software which is no longer being actively marketed by the Company.
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.
35
<PAGE> 36
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income: In fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
which reports Comprehensive Income and its components within the Statement of
Consolidated Shareholders' Equity. Comprehensive Income represents the change in
shareholders' equity during a period from transactions and other events and
circumstances from nonowner sources. Accumulated Other Comprehensive Loss for
the Company is composed solely of cumulative foreign currency translation
adjustments.
The following table sets forth the reconciliation from net income to
comprehensive income for the years ended (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net Income $2,333 $3,700 $4,494
Foreign currency translation
Adjustment 77 (162) (130)
------ ------ ------
Comprehensive income $2,410 $3,538 $4,364
====== ====== ======
</TABLE>
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: 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.
Segment Reporting: In fiscal 1999, the Company adopted SFAS No. 131, "Segment
Information", which 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 has made
the required geographic disclosures.
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.
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)
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. In fiscal 1999, the Company wrote off fully
amortized intangible assets, relating to purchased software, in the amount of
$2,194,000. These costs relate to software which is no longer being actively
marketed by the Company.
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.
Reclassifications: Certain amounts in the 1998 and 1997 financial statements
have been reclassified to conform with the 1999 presentation.
Recently Issued Accounting Standards: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which was required to be adopted in
years beginning after June 15, 1999. The FASB has since delayed the effective
date until years beginning after June 15, 2000, with the issuance of Financial
Accounting Standards Board Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". SFAS No. 133 permits early adoption as of the beginning of
any fiscal quarter after its issuance. The Company expects to adopt the new
Statement effective October 1, 2000. SFAS No. 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of SFAS No. 133 will have a significant impact 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 1999 and 1998. The line is scheduled for renewal in January
2000.
37
<PAGE> 38
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 1999. The following summarizes the operating leases
and purchase commitments for telecommunication services (in thousands):
<TABLE>
<CAPTION>
Operating Telecommunication
Leases Services
--------- -----------------
<S> <C> <C>
2000 $ 202 $ 780
2001 137 720
2002 59 600
2003 26 -
2004 1 -
------ ------
$ 425 $2,100
====== ======
</TABLE>
Rental expense on operating leases for the years ended September 30, 1999, 1998,
and 1997 was $234,000, $238,000 and $270,000, respectively.
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, 1999, 1998, and 1997 were $215,000, $250,000
and $202,000, 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 under the stock purchase
plan of $16,000, $15,000, and $14,000 for the years ended September 30, 1999,
1998, and 1997, respectively.
38
<PAGE> 39
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
-------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Domestic $3,080 $4,603 $5,086
Foreign 335 880 1,572
------ ------ ------
$3,415 $5,483 $6,658
====== ====== ======
</TABLE>
The components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended September 30
--------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $ 635 $ 676 $ 903
Foreign 125 464 271
State 150 80 105
------ ------ ------
910 1,220 1,279
Deferred expense 172 563 885
------ ------ ------
$1,082 $1,783 $2,164
====== ====== ======
</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
---------------------------------
1999 1998 1997
----- ------- -------
<S> <C> <C> <C>
Tax expense at U.S.
statutory tax rate $1,161 $ 1,864 $ 2,260
State taxes,
net of federal benefit 110 167 200
Effect of foreign subsidiaries (23) 93 (186)
Research and development credits (175) (378) (161)
Other items 9 37 51
------ ------- -------
$1,082 $ 1,783 $ 2,164
====== ======= =======
</TABLE>
39
<PAGE> 40
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
--------------
1999 1998
---- ----
<S> <C> <C>
Current deferred income taxes:
Loss carryforwards $ 356 $ 662
Allowance for doubtful accounts 23 31
Vacation accrual 70 70
Customer deposits 167 232
Prepaids (211) (214)
Other 163 142
------- -------
568 923
Less valuation allowance (356) (662)
------- -------
$ 212 $ 261
======= =======
Non current deferred income taxes:
Deferred software $(1,958) $(1,650)
Property and equipment (218) (345)
Other 34 (24)
------- -------
$(2,142) $(2,019)
======= =======
</TABLE>
Income tax payments for the years ended September 30, 1999, 1998, and 1997 were
$998,000, $1,290,000 and $3,200,000, respectively.
The Company has a federal loss carryforward of $464,000 at September 30, 1999,
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 an annual amount
determined under the Internal Revenue Code. In addition, the Company's French
subsidiary has loss carryforwards at September 30, 1999 of approximately
$479,000. The loss carryforwards for the French subsidiary expire in 2000
through 2002. 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 $1,492,000 as of September 30, 1999.
40
<PAGE> 41
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F--GEOGRAPHIC SEGMENT DATA
Substantially all of the Company's assets, revenue, 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):
Year ended September 30, 1999
<TABLE>
<CAPTION>
United
States Canada Australia Asia France Consolidated
----------- ---------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $26,589 $1,928 $ 696 $136 $ 645 $29,994
======= ====== ===== ==== ====== =======
Long-lived
assets $11,582 $ 238 $ 9 $ 5 $ 14 $11,848
======= ====== ===== ==== ==== =======
</TABLE>
Year ended September 30, 1998
<TABLE>
<CAPTION>
United
States Canada Australia Asia France Consolidated
----------- ---------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $28,825 $2,322 $ 586 $135 $ 677 $32,545
======= ====== ===== ==== ====== =======
Long-lived
assets $11,121 $ 407 $ 15 $ 8 $ 20 $11,571
======= ====== ===== ==== ====== =======
</TABLE>
Year ended September 30, 1997
<TABLE>
<CAPTION>
United
States Canada Australia Asia France Consolidated
----------- ---------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $31,553 $2,584 $ 312 $377 $ 543 $35,369
======= ====== ===== ==== ====== =======
Long-lived
assets $ 9,904 $ 639 $ 61 $ 9 $ 16 $10,629
======= ====== ===== ==== ====== =======
</TABLE>
Revenues and long-lived assets in the preceding table are attributable to the
country or territory in which the Company's subsidiaries are located. Included
in U.S. revenues, export sales to Canada from the U.S. were $1,621,000,
$1,596,000 and $1,708,000 for the years ended September 30, 1999, 1998, and
1997, respectively. Export sales to Singapore from the United States were
$851,000, $77,000 and $45,000 in fiscal 1999, 1998 and 1997, 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
U.S. Accordingly, the separation set forth in the above table is based upon
internal allocations, which involve certain management judgments.
41
<PAGE> 42
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,
1999, 1998, and 1997 of $103,000, $19,000 and $31,000, respectively. The Company
incurred communication rental expense, paid to a company that is owned by the
president of the Company, totaling $20,000 for each of the years ended September
30, 1999, 1998, and 1997.
NOTE H--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share - net income $2,333,000 $3,700,000 $4,494,000
========== ========== ==========
Denominator:
Denominator for basic earnings
per share-weighted average shares 5,211,000 5,471,000 5,532,000
Effective of dilutive securities
Stock options 9,000 33,000 35,000
---------- ---------- ----------
Denominator for diluted earnings
per share-adjusted weighted average
shares and assumed conversions 5,220,000 5,504,000 5,567,000
========== ========== ==========
Basic earnings per share $.45 $.68 $.81
========== ========== ==========
Diluted earnings per share $.45 $.67 $.81
========== ========== ==========
</TABLE>
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
1999 and 1998 will be fully vested in 2001 and 2000, respectively.
The following table summarizes the status of the two plans.
<TABLE>
<CAPTION>
at September 30,
1999 1998
------- -------
<S> <C> <C>
Authorized shares to be granted 550,000 550,000
======= =======
Available shares to be granted 257,825 303,825
======= =======
</TABLE>
42
<PAGE> 43
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE I-- STOCK OPTION PLANS (Continued)
Options granted, exercised, and canceled:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 30, 1999 September 30, 1998 September 30, 1997
----------------------- ----------------------- -----------------------
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 -
6.50 - 19,799 - - 3,500 - - 6,200 700
6.83 - - - - - - - 9,000 -
8.50 - - - - 15,000 - - - -
9.33 - 1,500 - - 2,250 1,500 - - 4,500
12.313 82,500 - 15,000 - - - - - -
12.625 - - 20,000 97,500 - 7,500 - - -
13.50 - - - 2,500 - - - - -
13.625 - - 1,500 - - 2,250 32,750 - 6,250
------ ------ ------ ------- ------ ------ ------ ------ ------
82,500 21,299 36,500 100,000 20,750 11,250 32,750 26,450 11,450
====== ====== ====== ======= ====== ====== ====== ====== ======
</TABLE>
Options outstanding and exercisable:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------------ ----------------------
Price Expiration
per Share Date Outstanding Exercisable Outstanding Exercisable
- --------- ------------ ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
6.50 6/23/1999 - - 4,799 4,799
6.50 11/17/1999 1,200 1,200 1,200 1,200
6.50 11/17/1998 - - 15,000 15,000
9.33 11/16/2000 3,375 3,375 4,875 4,875
9.33 11/16/1999 15,000 15,000 15,000 15,000
12.313 1/1/2004 52,500 - - -
12.313 11/12/2002 15,000 15,000 - -
12.625 11/13/2001 15,000 15,000 15,000 15,000
12.625 1/1/2003 50,000 - 55,000 -
12.625 1/1/2000 5,000 5,000 20,000 -
13.50 1/1/2003 2,500 - 2,500 -
13.625 11/21/2001 7,750 7,750 9,250 -
13.625 11/21/2000 15,000 15,000 15,000 15,000
------- ------ ------- ------
182,325 77,325 157,624 70,874
======= ====== ======= ======
</TABLE>
43
<PAGE> 44
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,
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Net income As reported $2,333,000 $3,700,000 $4,494,000
Pro forma 2,048,000 3,485,000 4,419,000
Basic earnings per share $.45 $.68 $.81
==== ==== ====
Diluted earnings per share $.45 $.67 $.81
==== ==== ====
Pro forma basic earnings per share $.39 $.64 $.80
==== ==== ====
Pro forma diluted earnings per share $.39 $.63 $.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
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ----
<S> <C> <C> <C>
Expected dividend yield 0.01% 0.01% 0.01%
Expected volatility 35.60% 34.20% 37.30%
Expected holding period in years 3 to 4 2 to 4 3 to 4
Risk-free interest rate 4.69% 6.50% 6.50%
Weighted average value of
options granted during the year $4.15 $4.20 $3.98
</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.
44
<PAGE> 45
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 1999 and 1998 were as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------
September 30, June 30, March 31, December 31,
1999 1999 1999 1998
------- ------ ------- ------
<S> <C> <C> <C> <C>
Revenues $8,960 $7,656 $6,991 $6,387
Income from operations 1,601 897 162 (79)
Net income 1,261 736 211 125
Basic earnings
per share $.25 $.14 $.04 $.02
Diluted earnings
per share $.25 $.14 $.04 $.02
</TABLE>
<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
</TABLE>
45
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 2000 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 2000 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 2000 annual meeting of shareholders, which involves the election
of directors, 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 2000 annual meeting of shareholders, which
involves the election of directors, is incorporated herein by this reference.
46
<PAGE> 47
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a.) 1. Financial Statements
The following consolidated financial statements of Data Research
Associates, Inc. and its subsidiaries are included in Item 8.
Report of Independent Auditors
Consolidated Balance Sheets as of September 30,
1999 and 1998
Consolidated Statements of Income for the years ended
September 30, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
(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:
Schedule II - Valuation and Qualifying Accounts
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 Registrant's fiscal year ended
September 30, 1999.
47
<PAGE> 48
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended September 30, 1999, 1998, and 1997
<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
- ---------------------- ---------- --------- --------- ----------- ---------
1999
- ----
<S> <C> <C> <C> <C> <C>
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts $ 101,000 $ -- $ 145,000(1) $ 34,000(2) $ 212,000
Accumulated amortization
of deferred software
costs 1,711,000 1,019,000 -- 1,594,000(3) 1,136,000
Accumulated amortization
of purchased software
costs 4,221,000 523,000 -- 2,194,000(3) 2,550,000
Valuation Allowance for
deferred tax assets 662,000 -- -- 306,000(4) 356,000
1998
- ----
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts $ 119,000 $ -- $ -- $ 18,000(5) $ 101,000
Accumulated amortization
of deferred software
costs 1,360,000 351,000 -- -- 1,711,000
Accumulated amortization
of purchased software
costs 3,685,000 536,000 -- -- 4,221,000
Valuation Allowance for
deferred tax assets 695,000 -- -- 33,000(4) 662,000
1997
- ----
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts $ 269,000 $ -- $ -- $ 150,000(5) $ 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(4) 695,000
- ---------------
</TABLE>
(1) Reserve amount for sales returns and allowances.
(2) Actual write-off of bad debt.
(3) Write-off of fully amortized software and intangibles.
(4) Utilization of foreign net operating loss carryforwards.
(5) Collected amounts previously reserved.
48
<PAGE> 49
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 15, 1999.
DATA RESEARCH ASSOCIATES, INC.
/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.
Pursuant to the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the registrant in the capacity and on the
date indicated.
Name Title Date
/s/ Michael J. Mellinger Director, President, 12/15/99
- ------------------------ ---------------------------- --------
Michael J. Mellinger and Chief Executive Officer
(Principal Executive Officer
/s/ Katharine W. Biggs Vice-President and 12/15/99
- ------------------------ ---------------------------- --------
Katharine W. Biggs Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ F. Gilbert Bickel III Director 12/15/99
- ------------------------ ---------------------------- --------
F. Gilbert Bickel III
/s/ Carole Cotton Director 12/15/99
- ------------------------ ---------------------------- --------
Carole Cotton
/s/ Donald P. Gallop Director 12/15/99
----------------------- ---------------------------- --------
Donald P. Gallop
/s/ Marilyn Gell Mason Director 12/15/99
- ------------------------ --------------------------- --------
Marilyn Gell Mason
49
<PAGE> 50
/s/ Howard L. Wood Director 12/15/99
- ------------------------ ---------------------------- --------
Howard L. Wood
50
<PAGE> 51
EXHIBIT INDEX
Exhibit Number Description
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").
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").
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.
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.
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.
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.
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.
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.
10.7 Data Research Associates, Inc. Cafeteria Plan as restated, 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.
51
<PAGE> 52
EXHIBIT INDEX (Continued)
Exhibit
Number Description
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, independent auditors.
23.1 Consent of Price Waterhouse, independent auditors.
24 Power of Attorney (set forth on signature page).
27 Financial Data Schedule
99.1 Cautionary Statements--Additional Important Factors
To Be Considered
99.2 Report of Price Waterhouse, independent auditors.
52
<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)
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following registration
statements of our report dated November 9, 1999, 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, 1999.
<TABLE>
<CAPTION>
Form Registration
Number Statement
Number Description
- ------------------------------------------------------------------------------
<S> <C> <C>
Form S-3 333-38585 Data Research Associates, Inc. Dividend
Reinvestment and Stock Purchase Plan
Form S-8 333-22887 Data Research Associates, Inc. Director
Stock Option Plan
Form S-8 333-2372 Data Research Associates, Inc. 1992 Stock
Option Plan
Form S-8 33-51576 Data Research Associates, Inc. Stock
Purchase Plan
Form S-8 33-61762 Data Research Associates, Inc. Director
Stock Option Plan, amendment
Form S-8 33-61674 Data Research Associates, Inc. 1992 Stock
Option Plan, amendment
Form S-8 33-77160 Data Research Associates, Inc. 401(K)
Profit Sharing Plan
</TABLE>
/s/ Ernst & Young, LLP
St. Louis, Missouri
December 14, 1999
<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
report dated November 24, 1997 included in the Annual Report to Shareholders
which is incorporated in the Annual 10-K.
/s/ Price Waterhouse
Chartered Accountants
Montreal, Quebec
December 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS 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>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-10-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 17,022
<SECURITIES> 0
<RECEIVABLES> 7,999
<ALLOWANCES> 212
<INVENTORY> 67
<CURRENT-ASSETS> 26,254
<PP&E> 14,906
<DEPRECIATION> 8,678
<TOTAL-ASSETS> 38,102
<CURRENT-LIABILITIES> 7,255
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 36,021
<TOTAL-LIABILITY-AND-EQUITY> 38,102
<SALES> 29,994
<TOTAL-REVENUES> 29,994
<CGS> 8,996
<TOTAL-COSTS> 27,413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (759)
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<INCOME-TAX> 1,082
<INCOME-CONTINUING> 2,333
<DISCONTINUED> 0
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<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. Ultimately,
user acceptance can only be determined after the product goes into commercial
distribution. The Company began commercial distribution of its next-generation
system, Taos, in September 1999. The system is currently in use at several
customer sites and the Company is closely monitoring, and soliciting customer
feedback on, its performance in a production environment.
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. 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, the core
modules of which achieved general release in September 1999.
The Company's next-generation system, Taos, is in general release and is
currently in use at several libraries. During the development of Taos, the
Company has pursued contractual arrangements with library systems desiring to
purchase Taos upon its completion. These contracts include terms that are
modified from time-to-time by agreement between the parties, including terms
with respect to the anticipated installation dates for the various modules of
the Taos system, but libraries are not obligated to agree to such amendments.
Due to delays in certain contractual installation schedules, the Company has
placed one installation project on hold, has amicably terminated a contract
with one customer and subsequent to the end of the fiscal year, received notice
from one customer that it was considering terminating its contract with the
Company. Subsequent to the end of the fiscal year, the Company received written
notice from a large academic customer which has implemented Taos saying that is
believes the Company to be in material breach of its agreement with the
customer and giving the Company until January 4, 2000, to provide a definitive
action plan for meeting certain functionality, performance and stabiliy
requirements, in some cases by January 31, 2000, and in other cases by a date
to be determined. The Company is reviewing these requirements and will work
with the customer to reach a satisfactory resolution. While the Company
believes that it will be able to substantially comply with the Taos
installation schedules currently in place with its customers, a variety of
factors could add additional delays in these projects. Such factors include the
difficulties associated with incorporating rapid technological change into the
Taos system, the Company's dependence on third-party suppliers, and the
relative scarcity of qualified technical staff.
<PAGE> 2
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 50 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.
<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
