ITEM 1. BUSINESS.
GENERAL
Data Research Associates Inc., a Missouri corporation, and its subsidiaries (collectively, the "Company" or "DRA") is a leading systems integrator for libraries and other information providers, offering its own proprietary information services software; third party software and hardware; Internet, World Wide Web, and other networking services; and other related support services. The Company provides a selection of automation systems: the Data Research System ("DRA Classic"), the INLEX/3000 System, and the MultiLIS System. Its next-generation system, Taos, is currently being introduced. Taos uses such leading-edge technologies as an n-tiered client/server structure, object-oriented design and an object-oriented database. Each of the systems provided by DRA is a comprehensive, fully integrated package of modular software applications and is designed to allow customers to add applications without modifying their existing databases, hardware, or software. The Company also provides a wide variety of services designed to support the automation of the library. The Company's software packages are adaptable for use in academic, public, school, and special libraries ranging from single libraries to large, multi-branch systems and consortia. The Company's library customer base at November 30, 1998, is more than 800 systems serving over 2,400 individual libraries in the United States, Canada, Europe, South America, and the Pacific Rim. The Company provides Internet services to corporations and institutions outside of its traditional library market.
Recognizing a trend toward increased sharing of information resources among libraries, the Company has designed and implemented electronic networking services that allow libraries to share information resources and reduce their costs of acquiring and maintaining such resources. DRA has also established itself as a leader in the development of transparent networking. Products and services associated with DRA Net, the Company's dedicated, high-speed telecommunications network, facilitate what management believes is an evolution toward the "library without walls"--a library whose information resources are not limited by its physical boundaries.
THE LIBRARY AUTOMATION MARKETPLACE AND CUSTOMERS
Libraries began to use computers in the late 1960s and early 1970s primarily as a tool to automate manual circulation processes. Automation gradually spread throughout the library to include other tasks, such as cataloging, acquisitions, and the replacement of card catalogs with the automated public access catalogs. DRA was founded in 1975 and entered the library automation marketplace with the design philosophy of integrating these diverse functions to use a single bibliographic database based on a national standard for machine-readable cataloging ("MARC"). With other automation systems of that
time, there was often a substantial duplication of effort required to maintain different databases for each of the discrete functions performed in the library. In addition, the lack of standardization in the format of its bibliographic database often forced a library to reenter its entire catalog if it changed automation systems.
The library automation field has undergone dramatic changes since the Company commenced operations. The emphasis in the marketplace has moved from proprietary applications designed to meet narrowly defined functions to fully integrated, modular systems that automate all library functions and provide access to information resources beyond the physical confines of the library. Far from simple database management systems, library automation systems are extremely complex. Because of the complexity of these systems, the Company's sales efforts in each segment of the marketplace have tended to focus on the largest libraries and migrate downward.
U.S. AND CANADIAN MARKETS. The library marketplace in the United States and Canada is segmented by general industry practice into four broad types: academic, public, school, and special libraries. Combinations of segments exist in library networks and consortia, which consist of two or more independent libraries, not necessarily of the same size or even the same type, that purchase a single automation system to achieve economies of scale and/or resource-sharing.
Academic, or higher education, libraries include community or junior college, four-year college and university, and research libraries. School libraries include those located in schools with students in kindergarten through high school. Special libraries include corporate libraries and other private, nonacademic research institutions.
In addition to providing the DRA Classic System, the INLEX/3000 System the MultiLIS System and the Taos system to academic, public, school, and special libraries, the Company also provides an automated system for an extremely specialized type of library, the library for the blind and physically handicapped ("LBPH"), which is not easily categorized in any of the four standard industry segments. DRA's LBPH product is used by libraries that account for more than half of the total circulation by this type of library in the United States.
INTERNATIONAL MARKETS. DRA has offices in Australia, Canada, France, and Singapore. These offices serve 42 customers in Australia and the Pacific Rim, 142 customers in Canada, 30 customers in France, 1 customer in Chile, and 3 customers in the Caribbean. See Note F to the consolidated financial statements for geographic segment data.
CURRENT CUSTOMERS. The Company's systems are installed at over 2,400 academic, public, school, and special libraries in the United States, Canada, Puerto Rico, Australia, New Zealand, Indonesia, Singapore, France, Belgium, Chile, and Malaysia. During fiscal 1998, DRA added 14 sites to its customer base. DRA is not dependent upon a single customer or a few customers; therefore, the loss of any one or more customers would not have a material adverse effect on its business.
PRODUCTS
The Company's automation systems are comprehensive, fully integrated packages of modular software applications designed for libraries of all sizes, ranging from single libraries to large, multi-branch library systems and
consortia. The packages run on a variety of hardware platforms and operating systems and are marketed according to the specific needs of the customers. The packages are also designed to allow libraries to share the hardware and data while allowing an individual library to implement its own policies. Through the use of DRA Net, the Company provides libraries direct access to remote library indexes. The Company believes that all its proprietary software products are currently capable of acurately processing date data related to the change from 1999 to 2000.
The Company's turnkey systems are priced on the basis of several separate components: central site hardware (including operating systems software), applications software, peripheral equipment, conversion, documentation and training, and other services. Initial turnkey system installations currently tend to range in price from less than $10,000 to more than $2 million. Software product license fees are based on the type of modules licensed, the number of users permitted, and the size of hardware on which the software is operating. The price of software-only contracts has ranged from less than $10,000 to approximately $800,000. The Company also charges a monthly software maintenance fee typically equal to between 1 and 1.5 percent of the software license fee for its products. Virtually all of DRA's customers purchase software maintenance services.
SOFTWARE PRODUCTS
CATALOGING AND AUTHORITY CONTROL. The entry and management of the database for information about library materials (books, films, cassettes, etc.) are handled by the bibliographic database management software. The information about each book or other material is stored in full MARC format, which is a national and international standard. The bibliographic database management software allows librarians to create, edit, read, and write bibliographic information in machine-readable form. The DRA software allows libraries to connect to national databases that share cataloging information, which reduces the cost of cataloging for any participating library. The biblio graphic database management software also facilitates authority control. This feature directs the individuals searching the database to the correct term to be used when locating materials.
CIRCULATION. The Circulation module handles all of the library's circulation activities, including registering borrowers, checking books in and out, renewing books, and placing requests for specific titles. An innovative feature of the Company's circulation software is the extensive, flexible, locally defined policy file that allows the library automatically to implement its own policies for library loan periods, fines, library card use, and requests for library materials. In a multi-library system or consortium, each library can establish its own set of policies and still share the same computer. The Circulation module is integrated and thus can accommodate the differences of each library within the framework of a standardized program using industry-standard formats.
PUBLIC ACCESS. DRA offers a wide range of products to facilitate the searching of the local library catalog and remote databases. Industry practice generally labels any product that takes the place of manual card catalogs as an On-line Public Access Catalog. For searching a library's local catalog, the Company offers various user interface options designed to accommodate differing levels of user sophistication. Among the Company's public access products is the Information Gateway module, which offers access to materials and information available outside the physical confines of the library. These features include full-text delivery for journals; access to numerous databases
via either DRA Net or direct loading on the local computer; creation of and access to a database that contains detailed listings of local events, social services, and other programs; creation of and access to an index of newspapers and serials that are not indexed in commercially prepared citation indexes; and creation of and access to databases of photographs, illustrations, and diagrams using "imaging" technology for display on the computer screen. In fiscal 1994, the Company introduced a public access and research workstation product called DRA Find, the first product in an evolutionary path toward a distributed processing extension of the Company's client/server architecture. DRA Find is a Microsoft Windows-based PC software product that allows simultaneous searching of multiple databases, as well as retrieval of data in textual or multimedia formats. In fiscal 1996, the Company introduced DRA Web, a retrieval device based on the World Wide Web, and DRA Kids, a children's workstation product. On September 30, 1997, the Company released DRA Web2, a more powerful retrieval device that incorporates the object- oriented technology of the Company's new Taos product line. See discussion of cautionary statements at exhibit 99.1.
ACQUISITIONS. The Acquisitions module is designed to handle the purchase of library materials. It aids librarians in creating lists of books they wish to order, creating the actual orders that are sent to book publishers or book suppliers, and maintaining a full audit trail of the funds used by the library to purchase the materials. Statistics of interest to the library regarding publisher or supplier performance are maintained and can be reported using the software's report system.
SERIALS. The Serials module is a comprehensive module for management of magazine and journal collections. The module contains a check-in function, records the receipt of all magazine issues, and maintains a list of items that have an exception status. It also records receipt of special issues. Statistics of interest to the library regarding performance are maintained and can be reported using the software's report system.
REPORTS. Because of their funding structures, libraries are required to produce numerous reports about their collections, usage, and borrowers. All DRA software offers extensive standard reporting capabilities and, as an option, report writer modules for specialized reporting needs. The report writer modules are based on third-party software products that are modified by the Company to meet unique requirements of the library environment.
JOURNAL CITATION. The Journal Citation module allows users of the Public Access module to search for magazine articles and then determine if the library subscribes to the magazine or journal in which the articles are published. If so, the module then alerts the patron as to where the magazine or journal is located within the library. It is also possible for the user to place a photocopy request on-line.
MEDIA BOOKING. Libraries frequently use a separate management system for handling 16 millimeter films, audiovisual equipment, and video cassettes. Libraries also require the ability to place holds on material for a specific number of days, allow for inspection time before they are again ready for circulation, and allow for shipment of materials between library facilities, when necessary. The Media Booking module performs these functions and also monitors the collection of fees for materials that pass through the booking process. Media Booking is a sub-module of Circulation but must be purchased separately.
LIBRARY FOR THE BLIND AND PHYSICALY HANDICAPPED--LBPH. The LBPH system,
which can stand alone from the DRA software, provides automated materials selection and circulation according to preferences provided by homebound blind and physically handicapped patrons.
NETWORKING
Libraries have begun to recognize that printed works are only a small subset of the information resources demanded by their patrons. More and more information is becoming available in electronic formats. At the same time, traditional sources of library funding have diminished, and the costs of printed works have increased. Therefore the Company has focused much of its development efforts on networking products because it believes that such products allow libraries to provide access to information without having to bear the full expense of buying, maintaining, and storing such information.
Management believes that the Company has established a leadership position in the design and implementation of electronic networks as a means for libraries to share resources. DRA originally introduced its telecommunications network, DRA Net, in 1980 to provide large libraries an alternative resource for MARC-formatted catalog records. In the past few years, additional features have been added to DRA Net to provide network participants with access to a wide variety of information resources and support services, including third-party magazine indexes, databases containing the full text of magazine and journal articles, access to catalogs and other resources of other network members, and the ability to lend materials to and borrow materials from other members of the network.
DRA Net is one of thousands of networks that are commonly and collectively referred to as the Internet. Today all library subscriptions include, at no additional charge, the option of using DRA Net to establish the library's presence on the Internet. The Company has connected its network with DS-3 (extremely high-speed and high-bandwidth) links to multiple Internet access points. In addition, DRA is a member of the MIT World Wide Web Consortium (W3C), which was formed to develop standards for the evolution of the World Wide Web, and the Commercial Internet eXchange, a major industrial trade association. The World Wide Web has become the primary means of accessing the Internet. The Company markets Internet access to corporations and institutions outside of its traditional library marketplace.
During fiscal 1998, the number of library customers using DRA Net declined slightly as competition for Internet connections from Internet Service Providers in the libraries' local markets increased. New corporate and institutional Internet customers outside of the Company's traditional library marketplace increased. Management believes that easy access to popular library databases, along with this ability to circumvent the growing congestion of the general Internet, will continue to provide competitive advantages in the sales of DRA Net services within the Company's traditional library marketplace.
TRANSPARENT NETWORKING. Management believes that the transparency of its networking technology is a key product characteristic that differentiates the Company from its competitors in the library automation industry. Transparency in a network means that a library user can search the library's local catalog and then search a magazine index or other remote database that is not physically located in the library with identical search procedures resulting in displays of information that are also identical in style. Without transparency, a library user searching different resources would have to be familiar with the searching techniques unique to each resource.
Transparency is achieved through use of the Company's proprietary Information Gateway software or its DRA Find, DRA Web, DRA Kids, and DRA Web2 products. These products enable a library user to access and search multiple databases that are either part of the library's own system or accessible over DRA Net.
OPEN SYSTEMS. There has been considerable emphasis in the computer industry in general and in the library automation industry specifically on the trend toward "open systems" computing. Management pursues a philosophy that bases the development of open systems on the interoperability of differing software systems. Interoperability allows software systems using diverse hardware platforms and operating systems to interact directly with each other and thus is very closely related to transparency. Management believes that national and international standards, particularly the Z39.50 standard, are the only basis for achieving open systems in library automation. The Company has recently furthered its emphasis on standards-based open systems by integrating the Common Object Request Broker Architecture (CORBA) - an industry standard for communication among various elements of an automation system - into both its legacy and next-generation products.
STANDARDS. DRA is a recognized industry leader in the development, implementation, and promotion of national and international standards as a means for achieving network-accessible information. The Company was an early proponent of standardization of library databases using the MARC standard and was one of the first vendors to market a system that focused on a single MARC database. A standardized database is critical to the ability of different libraries' automation systems to connect to each other and exchange information.
More recently, the Company has taken an active role in the development, implementation, and promotion of the National Information Standards Organization("NISO") Z39.50 standard. Z39.50 provides for transparent exchange of data between systems that use entirely different hardware, software, and operating systems. The Company incorporates this standard throughout its software product line and continues its leadership role in bringing this standard to market.
As part of its standards activities, the Company devotes staff and financial support to national and international standards organizations. DRA President and Chief Executive Officer Michael J. Mellinger recently served as Chairman of the Board of Directors of the NISO, the official U.S. standards organization for libraries and other information services and currently serves as its treasurer.
CUSTOMER SERVICES
Complementing the Company's software products is a broad selection of customer services. DRA is committed to providing full service to its customers by offering the following:
INSTALLATION AND CONVERSION. An initial installation usually consists of a core configuration of the Cataloging and Circulation modules, plus any optional modules desired by the customer at the time of purchase. The Company's installation personnel include experienced librarians and computer specialists who assist the library in general preparation for and installation of the hardware and software (for turnkey sales) or the software only (for software-only licenses). DRA has converted a number of different types of
library automation systems developed by its national competitors, as well as local software developers. The Company's installation personnel minimize the amount of downtime or disruption of daily activities during a system conversion by providing advanced training, off-site data conversion and an efficient backup circulation system.
DOCUMENTATION AND TRAINING. All of the Company's software modules are complemented with full documentation and on-site training. The Company also distributes to its customers updated, current documentation with each new release of software. The Company has a comprehensive training program designed and taught by librarians experienced in automation. Each library's training program is tailored according to the software and hardware purchased. All courses are taught in a structured environment using training guides, sample exercises, and hands-on experience.
MAINTENANCE. The Company offers its own maintenance services for its software modules. Software maintenance includes ongoing software enhancements, as well as 24-hour-per-day, seven-day-per-week, staffed telephone support. DRA also sells maintenance services on certain hardware pursuant to its agreements with hardware vendors.
AUTHORITY CONTROL PROCESSING SERVICES. Many libraries want their bibliographic database "authorized" as part of their installation. Authorization involves the verification of subject headings and names contained in a library's bibliographic files against the Library of Congress files. The Company has its own proprietary authority processing services and pioneered the provision of networked authority control processing services and ongoing authority verification via DRA Net, resulting in cost savings when compared to traditional authorization techniques.
CUSTOM SOFTWARE. In addition to its software modules designed to automate fundamental library functions, DRA also provides to its customers certain application software that is customized to meet their special needs or supplement the Company's standard software modules.
MARKETING AND SALES
The Company's application software is licensed either as part of a turnkey system or a software-only contract. Public institutions and small colleges have generally preferred the Company's full-service option. Software-only licenses are commonly provided to customers with existing relationships with hardware vendors.
The Company markets its products and services by a variety of methods, including employing a direct sales force, publishing newsletters, participating in trade shows and library users' conferences, making presentations at professional meetings, advertising in trade magazines, and assuming leadership positions in a number of professional organizations. Through its participation in cooperative marketing agreements with various hardware vendors, the Company receives sales assistance and promotional assistance from these companies.
DRA sells and licenses products and services through a direct sales force. Account managers are assigned to specific geographic territories throughout the world. A sales support staff provides such support as preparation of quotations and software demonstrations.
The sales process for a library automation system is typically lengthy,
often lasting in excess of 18 months. Libraries procuring automation systems use such methods as Requests For Information ("RFIs"), Requests For Proposals ("RFPs"), recommendations of consultants, site visits to existing customers, evaluations at professional conferences, and on-site demonstrations in their selection processes. Libraries replacing an existing automation system often undertake even more stringent evaluation procedures before purchase. In addition to its sales and marketing staffs, the Company employs more than ten people dedicated to responding to RFIs, RFPs, and other forms of bids.
PRODUCT DEVELOPMENT
DRA identifies customer and marketplace product needs by staying current with articles in the professional literature, by analyzing competitive literature and products, and through customer satisfaction surveys and direct interaction with the users' groups of the Company's respective products. The users' groups regularly poll their members regarding desired software improvements and present the results to the Company's management.
DRA's product development staff is currently involved in a number of product enhancements and new product developments. In fiscal 1996, DRA released new versions of software products with electronic document interchange capabilities, multilingual capabilities, and bindery capabilities. The Company also released DRA Web, a web server product, and updates to DRA Find and DRA Kids in fiscal 1996. In fiscal 1997, the Company released DRA Web2, a more powerful retrieval device that incorporates the object-oriented technology of the Company's new Taos product line. The Company is involved in developing an interlibrary loan product. The Company also routinely establishes joint development projects with leading libraries to support its product development efforts. Fifty-one full-time employees are directly involved in product development. Several members of senior management also devote time to product development activities. See Note A to the consolidated financial statements for research and development costs and discussion of cautionary statements in exhibit 99.1.
RELATIONSHIP WITH HARDWARE VENDORS
The Data Research System has traditionally operated exclusively on Digital computers and the Open VMS operating system. During 1998 Digital Equipment Corporation was purchased by Compaq. Management has taken steps to move toward support of multiple platforms and operating systems. One of these steps is migration to next-generation client/server technologies through the development of Taos using the UNIX and Windows NT operating systems. Due to the purchase of the MultiLIS system, the Company can also now offer a complete, fully functional system based on the UNIX operating system. In conjunction with this multi-vendor strategy, the Company has developed marketing, sales, and product development relationships with numerous hardware vendors.
Although it is moving away from strong dependence on Digital, DRA maintains the close business relationship it has had with Digital since 1975. During fiscal 1997, Digital stopped selling any hardware directly to its value-added resellers and initiated a partnership among Digital, its resellers, and its distributors for the purchase of hardware and systems software. Since January 13, 1997, DRA has been party to a Distribution Value Added Reseller ("DVAR") agreement between the Company and Hall-Mark Computer Products ("Hall-Mark"), with Digital regarded as a third-party beneficiary of the agreement. Under the terms of the DVAR agreement, which expires on June 18, 1999, and is subject to annual renewal, DRA negotiates volume
discounts directly with Hall-Mark, and Digital continues to provide certain warranties on the equipment and software and indemnity against copyright or patent infringement claims relating to the use of Digital products or documentation. The Company maintains an annually renewable agreement directly with Digital for the purchase and resale of maintenance on hardware and system software. The Company also maintains a wide range of volume discount and reseller arrangements with vendors of support and peripheral equipment and services. The servers used by the Taos system run on various versions of the UNIX operating system and on Microsoft's Windows NT operating system. A large proportion of the initial Taos implementations are expected to run on Sun hardware using the Solaris operating system, Sun's version of UNIX. DRA has been a Sun reseller since 1995 and negotiates volume discounts directly with the distributor MOCA Merisel according to a Sun Master Reseller Agreement. Sun product pricing is determined through the volume commitments of the Merisel VAR Vantage program, which renews annually on August 31st. DRA also maintains a reseller agreement directly with Sun for the purchase and resale of services and maintenance on hardware and software. During fiscal 1998, DRA completed its Sun certification process which includes an on-site audit.
The Company also expects to offer the Taos system on other vendors' hardware platforms, according to market conditions and technical considerations, and has established or is in the process of establishing several other similar agreements with major hardware manufacturers.
COMPETITION
While its competition is highly fragmented, DRA recognizes approximately a dozen direct library competitors, representing a mix of closely held private companies and divisions of Fortune 100 companies. Certain of the Company's competitors have greater financial, technical, marketing, and sales resources than DRA. There can be no assurance that the Company's present competitors or companies that choose to enter the marketplace in the future will not exert significant competitive pressures on the Company.
Management believes that the principal competitive factors in the library automation industry include networking, integration, product functionality, system performance, vendor and product reputation, financial stability, customer service and support, and timeliness of product enhancements and upgrades. DRA believes it competes effectively with respect to all of the above factors despite the possibility that it may be at a competitive disadvantage against certain competitors with greater financial and marketing resources. Management also believes the Company holds key competitive advantages in its networking capabilities through DRA Net, from the standpoint of both software functionality and customer recognition.
The Company recognizes over 1,000 competitors in supplying Internet access services to non-library customers. The competition is highly fragmented, with a range from closely held private companies to Fortune 100 companies. DRA competes with a substantial number of network providers. Certain of the Company's competitors have greater financial, technical, marketing, and sales resources than the Company. There can be no assurance that its present competitors or companies that choose to enter the marketplace in the future will not exert significant competitive pressures on DRA. Management believes that the Company's years of experience in networking have resulted in core competency that will allow DRA to compete effectively in this area.
BACKLOG
The Company's normal backlog consists of signed contracts or purchase orders for products and services on which the Company expects to realize revenue upon shipment of products and performance of services. Backlog fluctuates significantly due to installation scheduling, new product development, customer delays in facilities preparation, and other factors both within and outside the Company's control. Because of these factors and because DRA typically ships its products within a short period after orders are received, management believes that backlog does not provide a meaningful indication of future performance; however, currently the Company has a backlog related to eight contracts for the Company's next-generation Taos system. Recognition of revenue from this backlog is subject to completion of all required modules mandated by each contract, along with the logistical considerations that accompany the initial release of a new product. See "Cautionary Statements- Additional Important Factors to be Considered" in exhibit 99.1.
PROPRIETARY RIGHTS AND LICENSES
DRA regards its products as proprietary trade secrets and confidential information. The Company relies upon its license agreements with customers, its own security systems, confidentiality procedures, and employee confidentiality agreements to maintain the trade secrecy of its products. The Company's proprietary software rights are also protected under copyright law. There can be no assurance that these means of protection will be effective against unauthorized reproduction.
DRA believes that, due to the rapid pace of innovation within the computer industry, factors such as (i) technological and creative skill of personnel, (ii) knowledge and experience of management, (iii) name recognition, (iv) maintenance and support of software products and (v) the ability to develop, enhance, market, and acquire software products, and services are more important for establishing and maintaining a leading position within the industry than are patent, copyright, and other legal protections for its technology. Management believes that the Company has all necessary rights to market its products, although there can be no assurance that third parties will not assert infringement claims in the future.
EMPLOYEES
As of November 30, 1998, DRA had 215 employees, including 40 in marketing and sales, 88 in computer operations services and training, and 53 in product development. None of the Company's employees is represented by a labor union. Management believes that its employee relations are good. The Company periodically employs consultants to assist with specific development projects.
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative, product development, and sales and marketing operations are located in St. Louis, Missouri, where the Company owns approximately 35,360 square feet of office and warehouse space. DRA also leases 4,300 square feet in Monterey, California, under a lease that expires July 31, 1999; 1,056 square feet of office space in Melbourne, Australia, under a month-to-month lease; 522 square feet of office space in Singapore under a lease that expires on April 16, 1999; 10,079 square feet of office space in Montreal, Canada, under a lease that expires January 31, 2001; and approximately 2,000 square feet of office space in Paris, France, under a lease that expires March 31, 2005.
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.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any litigation except the following:
In October 1998, Sector 7 U.S.A., Inc. ("Sector 7"), filed suit against the Company in the United States District Court for the Western District of Texas, Austin Division (Civil Action No. A98CA 58-575JN) seeking a declaratory judgment that Sector 7 did not breach a computer software development contract (the "Contract) between the Company and Sector 7.
Shortly thereafter, the Company filed a lawsuit against Sector 7 in the United States District Court for the Eastern District of Missouri, Eastern Division (Cause No. 4:98 CV 01335ERW), claiming breach of the Contract and seeking $750,000 for breach of warranty and other damages for fraud in the inducement with respect to such Contract.
The Company believes the allegations of the lawsuit pending in Texas to be without merit and the Company intends to vigorously defend this matter (and to prosecute the corresponding action pending in the Eastern District of Missouri).
At this time, the Company cannot predict the probable outcome of these lawsuits but does not anticipate any material adverse consequences to the Company as a result of these lawsuits.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.*
The executive officers of the Company are:
Name Age Position ---- --- --------
Michael J. Mellinger 49 Chairman, President and Chief Executive Officer
Katharine W. Biggs 55 Vice-President, Chief Financial Officer and Treasurer
Joseph M. Bonwich 39 Vice-President
Set forth below are descriptions of the backgrounds of the executive officers of DRA.
Mr. Mellinger has served as President, Chief Executive Officer, and Director of DRA since 1975 and served as Treasurer of the Company from
April 1992 to February 1995. Mr. Mellinger was elected Chairman of the Board in April 1992.
Ms. Biggs was elected Chief Financial Officer and Treasurer of the Company in February 1995. She has served as Vice-President of the Company since May 1991 and served as Controller of the Company from April 1989 to February 1995.
Mr. Bonwich was elected Vice-President of the Company in February 1996. He now oversees the Company's marketing and corporate communications, groups. He joined DRA as president of the wholly owned and now dissolved subsidiary formed to handle the Company's advertising and public relations. From 1994 to 1996, he was Director of Corporate Communications for DRA. From 1992 to 1994, he was Director of Marketing.
Each of the executive officers serves at the discretion of the Board of Directors, except Mr. Mellinger, who is a party to an employment agreement with the Company, which agreement expires September 30, 2002, with an automatic five-year renewal, unless terminated by Mr. Mellinger or the Company upon the occurrence of certain events.
- ---------- *This information is included in Part I as a separate item in accordance with Instruction 3 to Item 401 (b) of Regulation S-K adopted under the Securities Exchange Act of 1934.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION
The common stock is quoted on the NASDAQ National Market System, under the trading symbol DRAI.
The high and low sales prices, for the common stock during each of the quarters of fiscal 1997 and fiscal 1998 were as follows:
HOLDERS
As of November 30, 1998, there were 211 shareholders of record of the common stock. Management believes that there are between 1,200 to 1,500 beneficial shareholders.
DIVIDENDS
On November 12, 1998, the Board of Directors declared an annual dividend of $.12 per share of common stock outstanding, payable on January 25, 1999, to holders of record at the close of market January 8, 1999. The Board of Directors anticipates paying an annual cash dividend, but may reconsider or revise this policy from time to time based upon conditions then existing, including the Company's earnings, performance, financial condition, and capital requirements, as well as other factors the Board of Directors may deem relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data appearing below have been derived from the Company's audited consolidated financial statements. The selected financial data should be read in conjunction with the Company's audited consolidated financial statements and notes thereto appearing elsewhere in this filing.
Income Statement Data (In thousands, except per share data)
(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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Company's revenues are derived from three sources: (i) computer hardware sales; (ii) software licenses; and (iii) sales of services, including training, conversion, networking, database access, system support, and product maintenance. Revenue is recognized on hardware sales and software licenses upon shipment of the product. Revenue from hardware and software maintenance contracts is recognized monthly over the term of the maintenance contracts. Other service revenues are recognized upon completion of the services. The components of the cost for development of software primarily include salaries and employee benefits and are expensed as incurred. All costs qualifying for deferral are reported on the balance sheet as deferred software costs and amortized over the estimated useful life of the product in accordance with SFAS No. 86. The amortization of capitalized software is allocated as a direct cost of licensing DRA software. The Company typically experiences greater gross margin on software licenses and services than on sales of hardware. The Company's profitability depends in part on the mix of its revenue components and not necessarily on total revenues.
This document contains a substantial number of forward-looking statements, indicated by such words as "expects," "believes," "estimates," "anticipates,""plans," "assessment," "should," "will," and similar words. These forward-looking statements are based on the Company's and management's beliefs, assumptions, expectations, estimates and projections any or all of which are subject to future change, depending on unknown developments and facts. These forward-looking statements should be read in conjunction with the Company's disclosures under the heading "Cautionary Statements - Additional Important Factors to Be Considered," below and in exhibit 99.1.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1997
Hardware revenues decreased $4.4 million, or 44%, to $5.4 million in fiscal 1998 from $9.8 million in fiscal 1997. This decrease is due in part to three large hardware upgrades that produced $2.1 million in hardware revenue in fiscal 1997; in part to anticipation of Taos delivery; and to a significant degree to customers' increasing ability to buy high-performance systems at a lower price. Management expects that hardware revenues will continue to decline. The gross margin on hardware was 30% in fiscal 1998 and 31% in 1997.
Software license revenues increased $1.0 million, or 15%, to $8.0 million in fiscal 1998 from $7.0 million in fiscal 1997. The increase
is primarily a result of a large DRA Classic turnkey contract that generated $.9 million in software license revenue in fiscal 1998, and, in part, due to the first revenue recognized from Taos. The gross margin percentage on software was 82% for fiscal 1998 and 74% for fiscal 1997. The increase is due primarily to an increase in fiscal 1998 of revenues from DRA Classic software which has a higher margin than other types of software sold by the Company.
Service and other revenues increased $.5 million, or 2%, to $19.1 million in fiscal 1998 from $18.6 million in fiscal 1997. This increase is primarily due to the larger installed base of licensed software products that annually generate maintenance revenues. Maintenance revenues increased $1.3 million in fiscal 1998. Management expects that maintenance revenues will continue to increase as the base of licensed software products increases. The increase in maintenance revenues was offset by decreases in revenues from some of the Company's contract implementation services. These revenues decreased because the Company implemented fewer new contracts in fiscal 1998 than in fiscal 1997. The gross margin percentage on service and other revenues remained consistent at 77% in fiscal 1998 and in fiscal 1997.
Cost of revenues decreased $3.1 million, or 24%, to $9.7 million in fiscal 1998 from $12.8 million in fiscal 1997. This decrease is primarily a result of the decrease in hardware revenues in fiscal 1998 from fiscal 1997.
Salaries and employee benefits increased $.5 million, or 6%, to $9.7 million in fiscal 1998 from $9.2 million in fiscal 1997. This increase is primarily attributable to annual raises and to the implementation of a formal pay scale. The increase was mitigated somewhat by the continued capitalization in fiscal 1998 of salaries and benefits related to software development.
General and administrative expenses increased $.7 million, or 13%, to $6.9 million in fiscal 1998 from $6.2 million in fiscal 1997. This increase is primarily attributable to the write-off in fiscal 1998 of $.8 million of development tools that the Company has discontinued using. Depreciation and amortization increased $.4 million, or 28%, from $1.3 million in fiscal 1997 to $1.7 million in fiscal 1998 primarily as a result of renovations made in 1998 to one of the Company's headquarters buildings.
Income from operations decreased $1.4 million, or 24%, to $4.5 million in fiscal 1998 from $5.9 million in fiscal 1997. This decrease is a result of a decrease in hardware sales and an increase in salaries and benefits and general and administrative expenses as discussed above.
Other income (expense) increased $.2 million to $1.0 million in fiscal 1998 From $.8 million in fiscal 1997 due to increased rates earned on cash investments.
The Company's consolidated effective tax rate was 32.5% in both fiscal 1998 and fiscal 1997. The consolidated effective tax rate for fiscal 1998 is less than the US statutory rate primarily due to the generation and utilization of significant research and development credits in the current year.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996
Hardware revenues decreased $1.9 million, or 17%, to $9.8 million in fiscal 1997 from $11.7 million in fiscal 1996. This decrease is primarily due to two large full-service contracts that generated $4.6 million in hardware revenues in fiscal 1996 and, in part, due to anticipation of Taos delivery. The gross margin percentage on hardware was 31% for fiscal 1997 and 28% for fiscal 1996. The increase is due primarily to a larger percentage of hardware sales being derived from PCs in fiscal 1996. PCs have historically had a lower gross margin than other components of integrated hardware systems. Management expects that customers' increasing ability to buy high-performance systems at lower prices may negatively impact the growth of hardware revenues in the future.
Software license revenues decreased $2.9 million, or 30%, to $7.0 million in fiscal 1997 from $9.9 million in fiscal 1996. The decrease is primarily a result of two large full-service contracts that generated $1.3 million in software license revenues in fiscal 1996 and, in part, due to anticipation of Taos delivery. The gross margin percentage on software was 74% for fiscal 1997 and 88% for fiscal 1996. The decrease is due primarily to a decrease in software license revenues in fiscal 1997 from fiscal 1996, coupled with increased amortization expense charged to costs of revenues in fiscal 1997. See Note A to the consolidated financial statements--Software Development.
Service and other revenues increased $1.7 million, or 10%, to $18.6 million in fiscal 1997 from $16.9 million in fiscal 1996. This increase is primarily due to the larger installed base of licensed software products that annually generate maintenance revenues. Maintenance revenues increased $1.5 million in fiscal 1997. Management expects that maintenance revenues will continue to increase as the base of licensed software products increases. The gross margin percentage on service and other revenues remained consistent at 77% in fiscal 1997 and in fiscal 1996.
Cost of revenues decreased $.9 million, or 6%, to $12.8 million in fiscal 1997 from $13.7 million in fiscal 1996. This decrease is primarily a result of the decrease in hardware revenues in fiscal 1997 over fiscal 1996.
Salaries and employee benefits decreased $1.2 million, or 11%, to $9.2 million in fiscal 1997 from $10.4 million in fiscal 1996. This decrease is primarily attributable to higher capitalization in fiscal 1997 of salaries and employee benefits related to software development.
General and administrative expenses decreased $.6 million, or 9%, to $6.2 million in fiscal 1997 from $6.8 million in fiscal 1996. This decrease is primarily attributable to higher capitalization in fiscal 1997 of general and administrative expenses related to software development.
Income from operations decreased $.7 million, or 11%, to $5.9 million in fiscal 1997 from $6.6 million in fiscal 1996. This decrease is a result of decreases in hardware sales and software licenses offset by a decrease in salaries and benefits and general administrative expenses as discussed above.
Other income (expense) increased $198,000 to $788,000 in fiscal 1997 from $590,000 in fiscal 1996 due to increased investment income from higher investment levels.
The Company's consolidated effective tax rate was 32.5% in fiscal 1997 And 38.1% in fiscal 1996. This decrease is primarily attributable to the utilization of foreign subsidiaries' loss carry forwards in fiscal 1997 for which no previous benefit had been recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily for working capital and capital expenditures and historically have been met by cash flows from operations, bank borrowings, and equipment leases. At September 30, 1998, the Company's working capital was $22.0 million, and its ratio of current assets to current liabilities was 4.0 to 1, as compared to working capital of $22.2 million and a ratio of current assets to current liabilities of 3.7 to 1 at September 30,1997. The decrease in working capital is primarily attributable to the use of cash for the Company's stock repurchase program.
Net cash provided by operating activities was $5.4 million for fiscal 1998,compared to $12.8 million for fiscal 1997. The decrease in net cash provided by operations was primarily due to a $2.0 million increase in the accounts receivable balance during fiscal 1998, compared to a $6.1 million decrease in the accounts receivable balance during fiscal 1997. The increase in accounts receivable relates to the timing of payments received from customers.
Net cash used in investing activities was $12.9 million for fiscal 1998,compared to $4.4 million for fiscal 1997. The Company's significant investing activities in fiscal 1998 included $8.5 million in short-term investments, $2.7 million for capitalized software and $.6 million for data processing equipment. The Company's significant investing activities in fiscal 1997 included $1.8 million for capitalized software, $1.0 million for data processing equipment, and $.5 million for office renovations.
Net cash used in financing activities was $3.5 million for fiscal 1998 and $.4 million for fiscal 1997. The Company's primary use of cash for investing in fiscal 1998 was $3.1 million for the purchase of treasury stock and the payment of a $.12 per share dividend to common stock shareholders. The Company's financing activities in fiscal 1997 related to the exercise of stock options by directors and employees and a $.10 per share dividend to common stock shareholders.
During fiscal 1998, 1997, and 1996, the Company incurred capital expenditures of $1.8 million, $2.3 million and $1.8 million respectively. No material commitments with respect to capital expenditures have been made for fiscal 1999.
In October 1998 the Company's Board of Directors authorized the repurchase of the Company's common stock in an aggregate amount of up to $3 million, such purchases to be made from time to time during the following twelve months.
In January 1998, the Company renewed its $6.0 million line of credit, which will mature in January 1999 and is subject to annual renewal. The
line of credit bears interest at the federal funds rate plus 200 basis points payable monthly on outstanding balances and is secured by the Company's accounts receivable, inventory, and equipment. As of September 30, 1998, the applicable interest rate was 8.14% per annum. There have been no borrowings against the Company's line of credit since May 1991.
Management believes that with the current cash position of $8.7 million, short-term investments of $8.5 million and accounts receivable of $10.5 million, continued cash flow from operations, availability of a $6.0 million line of credit, and total current liabilities of $7.2 million, the Company will be able to meet both its liquidity needs and capital expenditure needs for the next 12 months. Management believes that with total long-term liabilities of slightly more than $2.0 million and no other known long-term commitments or demands the Company will be able to satisfy its known long-term liabilities and liquidity needs through the funding sources identified above.
Recent Accounting Pronouncements
During 1998 the Company adopted SFAS No. 128, "Earnings Per Share." The adoption of SFAS No. 128 did not have a material effect on the Company's consolidated financial statements or results of operations. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the requirements of SFAS No. 128. See Note A of the audited financial statements for a discussion of recent accounting pronouncements to be adopted.
Year 2000 Readiness Disclosure
The arrival of the year 2000 poses certain technological challenges resulting from a reliance of some computer technologies on two digits rather than four digits to represent the calendar year (e.g., "98" for "1998"). It is generally believed that computer technologies programmed in this manner, if not corrected, may produce inaccurate or unpredictable results or system failures in connection with the transition from 1999 to 2000, when dates will begin to have a lower two-digit number than dates in the prior century. This problem, the so-called "Year 2000 Problem" or "Y2K Problem," could have an adverse effect on the Company's financial condition, results of operations, business or business prospects because, in order to function properly, the Company's products must interface with a multitude of software and hardware products manufactured by unrelated third parties. The company has been working diligently to prevent or mitigate disruptions relating to the year 2000.
As of September 30, 1998, the Company has reviewed all of its proprietary software products and believes that all of such software products are currently capable of accurately processing date data related to the change from 1999 to 2000, if used with third party products that are also capable of accurately processing such data.
The Company has formed an oversight committee and has developed a plan to coordinate identification, evaluation and implementation of any necessary changes to the computer systems, applications and business processes used by the Company in the operation of its business. As of September 30, 1998, the oversight committee had identified the Company's systems that could potentially be impacted by the Y2K Problem. The Company is currently in the process of prioritizing the identified systems and undertaking three primary steps to validate systems readiness. The three steps are (1) obtaining a
vendor readiness statement (2) internal testing, and (3) third-party validation through an authorized organization that has already tested the systems. The Company plans to obtain a vendor readiness statement for all identified systems and to perform internal testing on those identified as critical to its operations that have not already been validated through a third-party authorized organization. The Company expects to have finished identifying and prioritizing systems by March 31, 1999. By June 30, 1999, the Company will have completed necessary testing of critical systems and will have compiled a list of identified problems and recommended solutions. Beginning in July 1999, the Company will begin applying solutions, verifying that such solutions make the system(s) avoid the Y2K Problem, and developing a contingency plan for any critical system that remains susceptible to theY2K Problem. The Company plans to be complete with all Y2K readiness and contingency planning well before December 31, 1999.
The Company anticipates that its Y2K action plan discussed above will be carried out solely by existing employees. Accordingly, the Company has not incurred any material incremental costs and has not identified any incremental future costs associated with the Y2K Problem.
No assurances can be given that the Company will be able to completely identify or address all issues related to the year 2000 Problem that affect the Company, or that third parties with whom the Company does business will not experience system failures as a result of the Year 2000 Problem, nor can the Company fully predict the consequences of any such failure.
There is no single customer or product vendor which, in the Company's assessment, is or may be likely to present any significant exposure due to the Year 2000 Problem. However, management anticipates that there may be some negative impact on the timely receipt of accounts receivable due to the failure of certain customers to prepare adequately for the Year 2000 Problem. In a worst-case scenario, these accounts receivable related difficulties might require the Company to draw down its own credit line or to reduce the amount of available cash on hand.
The Company also could face some risk from the possible failure of one or more of its third party vendors to continue to provide uninterrupted service through the changeover to the year 2000. Because the Company outsources the delivery of hardware to its customers, such a failure could affect the installation of the Company's products at customer locations. While an evaluation of the Year 2000 preparedness of its third party vendors has been part of the Company's Y2K action plan, the Company's ability to evaluate is limited to some extent by the willingness of vendors to supply information and the ability of vendors to verify the Y2K preparedness of their own systems or their sub-providers. However, the Company has received assurances from its significant vendors that there will not be any such disruption; accordingly the Company does not currently anticipate that any of its significant vendors will fail to provide continuing service due to the Year 2000 Problem.
The Company, like similarly-situated enterprises, is subject to certain risks as a result of possible industry-wide or area-wide failures triggered by the Year 2000 Problem. For example, the failure of certain utility providers (e.g., electricity, gas, telecommunications) to avoid disruption of service in connection with the transition from 1999 to 2000 could adversely affect the Company's results of operations, liquidity and financial condition. In management's estimate, such a system-wide or area-wide failure presents a significant risk to the Company in connection with the Year 2000 Problem
because the resulting disruption may be entirely beyond the ability of the Company to cure, and the Company relies on such utilities for the delivery of its own products, particularly telecommunications. The significance of any such disruption would depend on its duration and systemic and geographic magnitude. Of course, any such disruption would likely impact businesses other than the Company.
The foregoing discussion of the Company's Year 2000 Readiness contains a substantial number of forward-looking statements, indicated by such words as "expects," "believes," "estimates," "anticipates," "plans," "assessment," "should," "will," and similar words. These forward-looking statements are based on the Company's and management's beliefs, assumptions, expectations, estimates and projections any or all of which are subject to future change, depending on unknown developments and facts. These forward-looking statements should be read in conjunction with the Company's disclosures under the heading: "Cautionary Statements - Additional Important Factors to Be Considered," below and in Exhibit 99.1.
ITEM 7A.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES REGARDING MARKET RISK
The Company's exposure to potential near-term losses in future earnings, fair value or cash flows resulting from reasonably possible changes in market rates or prices is not material.
CAUTIONARY STATEMENTS--ADDITIONAL IMPORTANT FACTORS TO BE CONSIDERED
The Company's future results could differ materially from those discussed in this document. Factors that could contribute to such differences include, but are not limited to, the following:
RAPID TECHNOLOGICAL CHANGE. The software industry is characterized by rapid change and uncertainty due to new and emerging technologies. The pace of change has recently accelerated due to the Internet, on-line services, networking, and new programming languages. There can be no assurance that DRA will be successful in developing or acquiring product enhancements and new products necessary to keep pace with the changing technologies.
CUSTOMER ACCEPTANCE. While the Company performs extensive usability and beta- testing of its new products, user acceptance and market penetration rates ultimately dictate the success of development and marketing efforts. The Company is currently in the later stages of development of a new system called Taos.
CONTRACTS WITH GOVERNMENTAL ENTITIES. A substantial portion of the Company's business is conducted with governmental entities. Both the award and execution of its governmental contracts are subject to numerous conditions, including the availability and appropriation of sufficient funding.
PRODUCT SHIP SCHEDULES. Because a substantial portion of the Company's revenues for each quarter is attributable to a limited number of orders and tends to be realized towards the end of each quarter, even short delays in new-product releases or delays in the customers' procurement processes can cause results to fluctuate substantially. Delays in the release of Taos could have a significantly negative impact on the Company's sales and results of operations. Because of the complexities inherent in developing software products as sophisticated as those sold by the Company and the lengthy testing periods associated with such products, no assurance can be given that future product introductions by the Company will not be delayed. In the future, the
Company's revenues will be increasingly dependent on sales of Taos, which is currently being developed. The timing of the completion of this system, which is based on object-oriented client/server design, may be affected by multiple factors, including rapid technological change, dependence on third-party suppliers, and the relative scarcity of qualified technical staff.
COMPETITION. The library automation industry is highly competitive. A number of companies offer products that target the library automation market. DRA competes with software vendors whose products operate on Digital hardware platforms and software vendors whose products operate on different platforms. Certain of the Company's competitors have substantially greater financial, technical, marketing, and sales resources than DRA.
DEPENDENCE ON AND RELATIONSHIP WITH COMPAQ. Although DRA is moving away from a strong dependence on Compaq's Digital computers, a substantial portion of the Company's revenues are still derived from Compaq`s Digital hardware and licensing of the Company's software, which was originally designed to operate on Digital computers.
DEPENDENCE ON KEY PERSONNEL. DRA's continued success depends in large part on certain key personnel, including Michael J. Mellinger, its founder, President, and Chief Executive Officer. The loss of the services of Mr. Mellinger and the inability of the Company to attract and retain a suitable replacement could have a material adverse effect on the Company.
PRINCIPAL SHAREHOLDERS. Michael J. Mellinger and F. Gilbert Bickel III combined own in excess of 45 percent of the common stock outstanding. As a result, Mr.Mellinger and Mr. Bickel may be able to effectively control the outcome of certain matters requiring a shareholder vote.
POSSIBLE ACQUISITIONS. The Company may make acquisitions in the future. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products of the acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no or little direct experience, and potential loss of key employees of the acquired companies.
YEAR 2000 PROBLEM. See discussion above under Year 2000 Readiness Disclosure.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Auditors 27
Consolidated Balance Sheets as of September 30, 1998 and 1997 28
Consolidated Statements of Income for the years ended September 30, 1998, 1997, and 1996 30
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1998, 1997, and 1996 31
Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997, and 1996 33
Notes to Consolidated Financial Statements 35
Report of Independent Auditors
Board of Directors and Shareholders Data Research Associates, Inc.
We have audited the accompanying consolidated balance sheets of Data Research Associates, Inc. and subsidiaries as of September 30, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1998. Our audits included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the September 30, 1997 and 1996 financial statements of DRA Information Inc., a wholly-owned subsidiary, which statements reflect total assets constituting seven percent in 1997, and total revenues constituting thirteen percent in 1997 and twelve percent in 1996, of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for DRA Information Inc. as of and for each of the two years ended September 30, 1997 is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for September 30, 1997 and 1996, the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Data Research Associates, Inc. and subsidiaries at September 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement scheule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
St. Louis, Missouri November 9, 1998
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
(Dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except for per share data)
See accompanying notes to consolidated financial statements.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
NOTE A--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Data Research Associates, Inc. and subsidiaries (the Company) develops, markets, and supports application software and turnkey systems for libraries. The Company also provides product support, implementation, consulting, education, custom programming, and systems integration services to its customers. A significant portion of the Company's sales is derived from its DRA Classic software product.
Principles of Consolidation: The consolidated financial statements include the accounts of Data Research Associates, Inc. and its wholly owned subsidiaries in Australia, Canada, France, and Singapore. All intercompany accounts and transactions have been eliminated.
The Company's wholly owned subsidiary in France, MultiLIS Europe, S. A. (MultiLIS), has been consolidated based upon a fiscal period ending June 30, which the subsidiary utilizes in order to satisfy certain statutory requirements. Operations of MultiLIS for the three months ended September 30, 1998 and 1997, were not significant.
Cash Equivalents: All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. The cash and cash equivalents include marketable securities of $3,986,000 and $14,909,000 at September 30, 1998 and 1997, respectively. The Company's marketable securities include mortgage-backed securities and U.S. corporate debt securities which are classified as held-to-maturity since the Company has the positive intent and ability to hold these securities to maturity. Held-to-maturity securities are stated at amortized cost which approximates fair value.
Inventories: Inventories consist primarily of computer equipment and supplies which are stated at the lower of cost (first-in, first-out method) or market and the unamortized cost of computer software purchased for resale.
Property and Equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense for the years ended September 30, 1998, 1997, and 1996 was $1,666,000, $1,256,000, and $953,000, respectively.
Revenue Recognition: Revenue from sales of turnkey systems sold under contractual arrangements is recognized upon shipment of the hardware and software to the customer. Revenue from hardware and software maintenance contracts is recognized monthly. Revenue from custom software sales is recognized when the product is shipped. Revenue from installation and conversion, documentation and training, and authority control processing services is recognized as the services are performed.
Warranty: The Company is a reseller of hardware and passes through to its customers the standard warranties provided by the hardware manufacturers.
The Company warrants its applications software products to perform in accordance with the written user documentation and the agreements negotiated with the customer. Since the Company does not customize its applications software, warranty costs are insignificant and are expensed as incurred.
Unbilled Accounts Receivable: Unbilled accounts receivable consist of products that have been delivered to customers but are not yet billable under the terms and conditions of the Company's contract with the customer. The manner and timing of billings are based on the contract and on the Company's credit policies and are not a function of acceptance by the customer. There are no significant vendor obligations subsequent to delivery of the Company's systems.
Customer Deposits: Customer deposits typically consist of a 10 to 15% down payment required under sales contracts and are due on signing the contract.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Software Development: The Company has a comprehensive line of software products and maintains a programming group to service, update, and enhance those products. Research and development costs associated with products outside of its existing line were expensed as incurred and amounted to $1,836,000, $1,265,000, and $1,900,000 for the years ended September 30, 1998, 1997, and 1996, respectively. Development costs of $2,665,000 in 1998, $1,832,000 in 1997, and $382,000 in 1996, associated with significant enhancements to its existing software products and development of new products incurred subsequent to attaining technological feasibility were capitalized. Amortization is computed on an individual product basis and is the greater of (a) the ratio of current gross revenues for a product to the total current and anticipated future gross revenues for that product or (b) the straight-line method over the estimated economic useful life of the product. Currently, the Company is using an estimated economic useful life of two to five years for all capitalized software costs. Amortization expense for the years ended September 30, 1998, 1997, and 1996 was $351,000, $303,000, and $194,000, respectively.
Income Taxes: The provision for income taxes is computed using the liability method. The primary difference between financial statement and taxable income results from the use of different methods of computing depreciation, capitalized software development costs, prepaid expenses, and customer deposits.
Stock-Based Compensation: As permitted by Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," the Company has elected to continue following Accounting Principles Board No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees and adopted the disclosure-only provisions of SFAS No. 123. Under APB 25, generally no compensation expense is recognized because the exercise price of the options equals the fair value of the stock at the grant date.
Earnings per Share: In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the SFAS No. 128 requirements.
For the Company, basic earnings per common share is computed using the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed using the weighted average number of common shares and potential dilutive common shares that were outstanding during the period. Potential dilutive common shares consist of outstanding stock options. See Note H for additional information regarding earnings per share.
Translation of Foreign Currency: Each foreign subsidiary's asset and liability accounts, which are originally recorded in the appropriate local currencies, are translated for consolidated financial reporting purposes, into U.S. dollar equivalents at year-end exchange rates. Revenue and expense accounts are translated at an average of exchange rates in effect during the year.
Intangible Assets: Intangible assets consist of purchased software, customer lists, and a covenant not to compete. Amortization is computed using the straight-line method over the estimated useful lives of the respective assets. Currently, the Company is using an estimated economic useful life of two to five years for all intangible assets.
Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Standards: In October 1997, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 is effective for the Company for transactions entered into beginning on October 1, 1998. Based on management's review of this standard, adoption of SOP 97-2 will not have a material impact on the Company's 1999 financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Segment Information." Both of those standards are effective for fiscal years beginning after December 15, 1997, and thus will be effective for the Company after September 30, 1998. SFAS No. 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. Management does not believe that the adoption of SFAS No. 130 will have a material impact on its financial statements.
SFAS No. 131 amends the requirements for public enterprises to report financial and descriptive information about its reportable operating segments. Operating segments, as defined in SFAS No. 131, are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The financial information is required to be reported on the basis that it is used internally for evaluating the segment performance. Management believes the Company operates in one business and operating segment and does not believe adoption of these standards will have a material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted for years beginning after June 15, 1999. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of SFAS No. 133 will have a significant effect on earnings or the financial position of the company.
NOTE B-NOTE PAYABLE
The Company has a $6,000,000 line of credit with a local bank which allows the Company to borrow periodically, primarily to finance hardware purchases and meet short-term borrowing needs. Interest is payable monthly at the federal funds rate plus 200 basis points, and the line is collateralized by accounts receivable, inventory, and equipment. The terms of the loan agreement require, among other things that the Company maintain certain working capital and net worth amounts and meet certain financial ratios. There were no outstanding borrowings during 1998 and 1997. The line is scheduled for renewal in February 1999.
NOTE C-LEASES AND COMMITMENTS
The Company leases equipment and office space under various operating leases. The Company has two minimum monthly purchase commitments for telecommunication services at September 30, 1998. The following summarizes the operating leases and purchase commitments for telecommunication services (in thousands):
Rental expense on operating leases for the years ended September 30, 1998, 1997, and 1996 was $238,000, $270,000, and $245,000, respectively. Rental expense included amounts paid to a company that is owned by the president of the Company totaling $20,000 for each of the years ended September 30, 1998, 1997, and 1996.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D--BENEFIT PLANS
The Company sponsors a defined contribution 401(k) plan covering full-time employees in the United States who have at least one month of service and are 21 years of age or older. An employee can defer up to 15% of covered compensation under the plan. The plan provides for a maximum annual Company match of $2,000 plus discretionary Company profit sharing contributions. In April 1994, the Company included the Company's common stock as an investment election under the plan and at that time reserved 100,000 shares of common stock for future issuance under the plan. The Company also sponsors a group retirement plan covering Canadian employees who have at least six months of service. Under the group retirement plan, the Company annually matches employee contributions up to $2,000 per participant. Contributions made by the Company to these plans for the years ended September 30, 1998, 1997, and 1996 were $250,000, $202,000, and $200,000, respectively.
The Company sponsors a stock purchase plan covering directors, officers, and substantially all employees. Under the plan, each participant can contribute up to 10% of his or her salary per relevant pay period or, in the case of a non employee director, the greater of 10% of such director's monthly fees or $50 per month, to purchase Company common stock. The Company will match up to 15% of participants' contributions. The plan can be terminated at any time by the Board of Directors. The Company reserved 100,000 shares of common stock for future issuance under the plan. The Company made contributions of $15,000, $14,000, and $14,000 for the years ended September 30, 1998, 1997, and 1996, respectively.
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):
The components of income tax expense were as follows (in thousands):
The difference between the effective income tax rate and the U.S. federal income tax rate is explained as follows (in thousands):
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):
Income tax payments for the years ended September 30, 1998, 1997, and 1996 were $1,290,000, $3,200,000, and $3,100,000, respectively.
The Company has a federal loss carryforward of $615,000 at September 30, 1998, that expires in the years 2004 through 2009. This loss carryforward resulted from the Company's 1994 acquisition of Multicore, a U.S. subsidiary of MultiLIS. The use of the loss carryforward by the Company is limited to anannual amount determined under the Internal Revenue Code. In addition, the Company's French subsidiary has loss carryforwards at September 30, 1998 of approximately $1,137,000. The loss carryforwards for the French subsidiary expire in 1999 and 2000. A valuation allowance has been established to offset the deferred tax asset related to loss carryforwards.
Undistributed earnings of certain subsidiaries outside the United States are considered to be permanently reinvested. Accordingly, no provision for United States income taxes was made for undistributed earnings of such subsidiaries, which aggregated $1,254,000 as of September 30, 1998.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F--GEOGRAPHIC SEGMENT DATA
Substantially all of the Company's assets, sales, and operating results are employed in or derived from the sale of application software and turnkey systems to libraries.
Financial information, summarized by geographic area, is as follows (in thousands):
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F--GEOGRAPHIC SEGMENT DATA (Continued)
Export sales to Canada from the United States were $1,596,000, $1,708,000, and $1,563,000 for the years ended September 30, 1998, 1997, and 1996, respectively. Export sales to Singapore from the United States were $77,000, $45,000 and $1,013,000 in fiscal 1998, 1997 and 1996, respectively. The transfers between geographic areas are priced consistent with pricing to nonaffiliated entities.
Most services of the Company are provided on an integrated worldwide basis. Because of the integration of U.S. and non-U.S. services, it is not practical to separate precisely the U.S.-oriented services from services resulting from operations outside the United States and performed for customers outside the United States. Accordingly, the separation set forth in the above table is based upon internal allocations, which involve certain management judgments.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G--RELATED PARTY TRANSACTIONS
The Company incurred consulting and legal expenses to entities related to shareholders and directors of the Company for the years ended September 30, 1998, 1997, and 1996 of $19,000, $31,000, and $90,000, respectively.
NOTE H--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
NOTE I--STOCK OPTION PLANS
The Company maintains two stock option plans which provide for the issuance of stock to certain key employees and directors of the Company. The option price under the plans equals the fair market value of the common stock at the date of grant. In 1997 and 1996, an additional 100,000 and 225,000 shares were authorized by the shareholders under the plans, respectively. Options granted in 1998 and 1997 will be fully vested in 2001 and 1999, respectively.
The following table summarizes the status of the two plans.
Options granted, exercised, and canceled:
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:
The fair value of the stock options used to compute pro forma income and earnings per share disclosures is the value at grant date using the Black- Scholes option pricing model with the following weighted average assumptions for 1998 and 1997:
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.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K--QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations by quarter for 1998 and 1997 were as follows (in thousands, except per share data):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the caption "INFORMATION ABOUT THE NOMINEE AND DIRECTORS CONTINUING IN OFFICE" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A for the Company's 1999 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "EXECUTIVE COMPENSATION" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A for the Company's 1999 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the captions "VOTING SECURITIES, VOTING RIGHTS AND PRINCIPAL SECURITY HOLDERS" and "SECURITY OWNERSHIP OF MANAGEMENT" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A for the Company's 1999 annual meeting of shareholders, which involves the election of a director, is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the caption "TRANSACTIONS WITH ISSUER AND OTHERS" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A for the Company's 1999 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference.
PART IV. ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a.) 1. Financial Statements Page
The following consolidated financial statements of Data Research Associates, Inc. and its subsidiaries are included in Item 8.
Report of Independent Auditors 25 Consolidated Balance Sheets as of September 30, 1998 and 1997 26 Consolidated Statements of Income for the years ended September 30, 1998, 1997, and 1996 28 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1998, 1997, and 1996 29 Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997, and 1996 31 Notes to Consolidated Financial Statements 33
(a.) 2. Financial Statement Schedule
The following consolidated financial statement schedule is included in this report in accordance with Item 8 and paragraph (d) of Item 14:
Page
Schedule II - Valuation and Qualifying Accounts 51
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(a) 3. See Exhibit Index
The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c) of this report:
Employment Agreement dated April 17, 1997, by and between the Registrant and Michael J. Mellinger Data Research Associates, Inc. 401(k) Profit Sharing Plan Data Research Associates, Inc. 1992 Stock Option Plan Data Research Associates, Inc. Stock Purchase Plan Data Research Associates, Inc. Director Stock Option Plan
(b) Reports on 8-K
No reports on Form 8-K were filed during the fourth quarter of the Registrant's fiscal year ended September 30, 1998.
DATA RESEARCH ASSOCIATES, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended September 30, 1998, 1997, and 1996
- --------------- (1) Collected amounts previously reserved. (2) Utilization of foreign net operating loss carryforwards.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of St. Louis, State of Missouri, on December 18, 1998.
DATA RESEARCH ASSOCIATES, INC.
By:/s/Michael J. Mellinger - ----------------------------------- Michael J. Mellinger, President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Data Research Associates, Inc., hereby severally and individually constitute and appoint Michael J. Mellinger the true and lawful attorney and agent of each of us, with full power of substitution and resubstitution to execute in the name, place and stead of each of us (individually and in any capacity stated below) this Form 10-K and any and all amendments to and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, said attorney and agent to have power to act and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorney and agent to any and all such reports, amendments and instruments.
Name Title Date
/s/ Michael J. Mellinger Director, President, 12/18/98 - ------------------------ ---------------------------- -------- Michael J. Mellinger and Chief Executive Officer (Principal Executive Officer)
/s/ Katharine W. Biggs Vice-President and 12/18/98 - ------------------------ ---------------------------- -------- Katharine W. Biggs Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ F. Gilbert Bickel III Director 12/18/98 - ------------------------ ---------------------------- -------- F. Gilbert Bickel III
/s/ Carole Cotton Director 12/18/98 - ------------------------ ---------------------------- -------- Carole Cotton
/s/ Donald P. Gallop Director 12/18/98 - ------------------------ ---------------------------- -------- Donald P. Gallop
/s/ Howard L. Wood Director 12/18/98 - ------------------------ ---------------------------- -------- Howard L. Wood
EXHIBIT INDEX Exhibit Number Description Page
3.1 Restated Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, Reg. No. 33-47350 (the "Form S-1"). N/A
3.2 Amended and Restated Bylaws of the Registrant, as amended, incorporated herein by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 (the "1993 Form 10-K"). N/A
10.1 Employment Agreement dated April 17, 1997, by and between the Registrant and Michael J. Mellinger, incorporated herein by reference to Exhibit 10.1 on Form 10-Q for the quarter ended March 31, 1997, and as amended, by Exhibit 10.1 on Form 10-Q for the quarter ended June 30, 1997. N/A
10.2 Data Research Associates, Inc. 401(k) Profit Sharing Plan as amended October 1, 1994, incorporated herein by reference to Exhibit 10.9 to the 1995 Form 10-K. N/A
10.3 Data Research Associates, Inc. 1992 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-8, Reg. No. 333-2372. N/A
10.4 Data Research Associates, Inc. Stock Purchase Plan, as amended, incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1992. N/A
10.5 Equipment Lease dated April 15, 1991, by and between the Registrant and Davandy Management, Inc. incorporated herein by reference to Exhibit 10.7 to the Form S-1. N/A
10.6 Data Research Associates, Inc. Director Stock Option Plan, as amended, incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, Reg. No. 333-22887. N/A
10.7 Time Sharing Agreement dated October 1, 1997, by and between the Registrant and Charter Communications, Inc. incorporated N/A herein by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997.
10.8 Data Research Associates, Inc. Cafeteria Plan as restated, N/A incorporated herein by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997.
10.9 Value Added Reseller Agreement effective June 18, 1998, by and between the registrant and Hall-Mark Computer Products. 59
EXHIBIT INDEX (Continued)
Exhibit Number Description Page
21 Subsidiaries of the Registrant. 82
23 Consent of Ernst & Young LLP, independent auditors. 83
23.1 Consent of Price Waterhouse, independent auditors. 84
24 Power of Attorney (set forth on signature page).
27 Financial Data Schedule 89
99.1 Cautionary Statements--Additional Important Factors To Be Considered 85
99.2 Report of Price Waterhouse, independent auditors. 87
99.3 Report of Price Waterhouse, independent auditors. 88