<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20509
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from
...................... to .....................
Commission File number 0 - 24326
<TABLE>
<CAPTION>
<S> <C> <C>
Ovid Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13 - 3333107
-------- ------------
(State or other jurisdiction of ( IRS Employer Identification No.)
incorporation or organization)
</TABLE>
333 Seventh Avenue, New York, New York
10001 (Address of principal executive offices - Zip code)
(212) 563-3006
(Registrant's telephone number, including area code)
------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was
required to file reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes .....X..... No .............
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class of Stock No. of Shares Outstanding Date
- -------------- ------------------------- ----
Common 6,091,163 10/31/97
<PAGE>
OVID TECHNOLOGIES, INC.
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
December 31, 1996 and September 30, 1997 3
Condensed Consolidated Statements of Operations for
the three months ended September 30, 1996 and 1997 4
Condensed Consolidated Statements of Operations for
the nine months ended September 30, 1996 and 1997 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1996 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings: 17
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matter to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
Exhibit 11 - Computation of Net Income Per Common Share 18
2
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CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
---------------
<TABLE>
<CAPTION>
DECEMBER 31, September 30,
1996 1997
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents..................................................... $ 1,426 $ 1,087
Short-term investments - held to maturity..................................... 5,382 9,517
Marketable securities, net - available for sale............................... -- 652
Accounts receivable, less allowance for doubtful accounts
of $895 and $960 for 1996 and 1997, respectively............................ 12,310 10,349
Prepaid and other current assets.............................................. 698 2,435
Deferred income taxes......................................................... 298 298
Income tax receivable......................................................... 495 --
------- -------
Total current assets....................................................... 20,609 24,338
------- -------
Equipment and leasehold improvements, net..................................... 3,216 2,724
Full-text database, net....................................................... 2,223 --
Deferred income taxes......................................................... 307 320
Deposits and other assets..................................................... 107 109
------- -------
Total assets.............................................................. $26,462 $27,491
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.............................................................. $ 2,343 $ 2,656
Accrued expenses.............................................................. 3,146 3,424
Customer deposits............................................................. 457 787
Income taxes payable.......................................................... 1,411 1,103
Unearned revenue.............................................................. 3,838 9,490
Obligation under database subscriptions....................................... 656 527
---------- -------
Total current liabilities.................................................. 11,851 17,987
---------- -------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued................................................ -- --
Common stock, $.01 par value; 10,000,000 shares
authorized; 5,894,832 and 6,091,747 shares issued and
outstanding for 1996 and 1997, respectively................................. 59 61
Additional paid-in capital.................................................... 8,688 8,829
Retained earnings............................................................. 5,792 572
Unrealized loss on marketable securities...................................... -- (7)
Foreign currency translation adjustment....................................... 72 49
---------- -------
Total stockholders' equity................................................. 14,611 9,504
---------- -------
Total liabilities and stockholders' equity............................... $26,462 $27,491
========== =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
---------
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Revenues:
Database subscriptions and software .......................................... $ 7,493 $ 2,749
Maintenance and other ........................................................ 714 718
----------- -----------
Total revenues ........................................................... 8,207 3,467
----------- -----------
Cost of revenues:
Database subscriptions and software .......................................... 2,647 4,866
Maintenance and other ........................................................ 31 87
----------- -----------
Total cost of revenues ................................................... 2,678 4,953
----------- -----------
Gross profit (loss) ...................................................... 5,529 (1,486)
Operating expenses:
Sales and marketing .......................................................... 1,709 1,821
Product development .......................................................... 1,353 2,083
General and administrative ................................................... 1,293 1,685
----------- -----------
Total operating expenses ................................................. 4,355 5,589
----------- -----------
Income (loss) from operations ............................................ 1,174 (7,075)
Interest income and other, net ............................................... 69 119
----------- -----------
Income (loss) before provision (benefit) for income taxes ................ 1,243 (6,956)
Provision (benefit) for income taxes ......................................... 497 (278)
----------- -----------
Net income (loss) ........................................................ $ 746 ($ 6,678)
=========== ===========
Net income (loss) per common share ....................................... $ .10 ($ .91)
=========== ===========
PRO FORMA DATA (SEE NOTE 3):
Pro forma income (loss) from operations .................................. $ 1,140 ($ 2,836)
----------- -----------
Pro forma net income (loss) .............................................. $ 726 ($ 1,630)
----------- -----------
Pro forma net income (loss) per common share ............................. $ .10 ($ .22)
----------- -----------
Weighted average number of shares of common stock and common stock equivalents 7,265,449 7,320,341
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revenues:
Database subscriptions and software ............................................ $ 22,143 $ 19,400
Maintenance and other .......................................................... 2,046 2,319
----------- -----------
Total revenues .............................................................. 24,189 21,719
----------- -----------
Cost of revenues:
Database subscriptions and software ............................................ 7,814 10,869
Maintenance and other .......................................................... 136 196
----------- -----------
Total cost of revenues ...................................................... 7,950 11,065
----------- -----------
Gross profit................................................................. 16,239 10,654
Operating expenses:
Sales and marketing............................................................. 5,528 5,764
Product development ............................................................ 4,093 5,210
General and administrative ..................................................... 3,988 4,466
----------- -----------
Total operating expenses .................................................... 13,609 15,440
----------- -----------
Income (loss) from operations ............................................... 2,630 (4,786)
Interest income and other, net .................................................. 185 261
----------- -----------
Income (loss) before provision for income taxes ............................. 2,815 (4,525)
Provision for income taxes ...................................................... 1,126 695
----------- -----------
Net income (loss) .......................................................... $ 1,689 ($ 5,220)
=========== ===========
Net income (loss) per common share .......................................... $ .24 ($ .72)
=========== ===========
PRO FORMA DATA:
Pro forma income (loss) from operations ..................................... $ 1,748 ($ 493)
----------- -----------
Pro forma net income (loss) ................................................. $ 1,014 ($ 133)
----------- -----------
Pro forma net income (loss) per common share ............................... $ .14 ($ .02)
----------- -----------
Weighted average number of shares of common stock
and common stock equivalents ................................................ 7,162,299 7,211,610
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................... $ 1,689 ($ 5,220)
Adjustments to reconcile net income to net cash provided by operating
activities:
Write-down of full-text database and management
information system ............................................ -- 4,298
Depreciation and amortization .................................... 1,685 2,165
Deferred income tax expense and other ............................ 269 144
Changes in assets and liabilities:
(Increase) in full text database cost ......................... (815) (1,496)
(Increase) decrease in accounts receivable .................... (1,940) 1,896
(Increase) decrease in other assets ........................... 278 (1,338)
Decrease in income tax receivable ............................. 748 --
Increase (decrease) in accounts payable ....................... (970) 313
Increase in unearned revenue .................................. 88 5,652
Increase in other liabilities ................................. 880 142
-------- --------
Cash provided by operating activities ...................... 1,912 6,556
-------- --------
Cash flows from investing activities:
Purchase of short-term investments .................................. (15,594) (19,828)
Purchase of marketable securities ................................... -- (659)
Redemption of short-term investments at maturity .................... 13,955 15,700
Capital expenditures ................................................ (1,163) (2,251)
-------- --------
Cash used in investing activities .......................... (2,802) (7,038)
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of stock options ......................... 90 143
-------- --------
Cash provided by financing activities ...................... 90 143
-------- --------
Decrease in cash and cash equivalents ................................ (800) (339)
Cash and cash equivalents, beginning of period ....................... 1,775 1,426
-------- --------
Cash and cash equivalents, end of period ............................. $ 975 $ 1,087
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
OVID TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. Basis of Presentation:
These condensed consolidated financial statements should be read in
conjunction with the Company's Form 10-K dated March 28, 1997, as
amended, and the historical condensed consolidated financial statements
and related notes included therein. In the opinion of management, the
accompanying unaudited condensed financial statements include all
adjustments, consisting of only normal recurring accruals, necessary to
present fairly the condensed consolidated financial position, results
of operations and cash flows of the Company. Certain information and
footnote disclosure normally included in financial statements prepared
in conformity with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission
rules and regulations. Quarterly operating results are not necessarily
indicative of the results that would be expected for the full year.
2. Legal Proceedings
On or about June 6, 1997, an action was commenced in the Circuit Court
of the 13th Judicial Circuit of the State of Florida against the
Company by PowerCerv Technologies Corporation ("PowerCerv"), a firm
hired by the Company to provide certain software and consulting
services. On or about July 7, 1997 the Company removed the action to
the United States District Court for the Middle District of Florida.
The complaint alleges counts for breach of contract, open account, and
tortious interference with contractual or business relationships.
PowerCerv seeks, among other things: $250 as liquidated damages for the
purported hiring by the Company of two former employees of PowerCerv
resulting in an alleged breach of the agreement between the Company and
PowerCerv; approximately $62 for unpaid invoices; and an unspecified
amount of other damages on the tortious interference claim related
thereto. The Company is aware that PowerCerv obtained a preliminary
injunction to prevent its former employees from working with the
Company. The Company has moved to dismiss the action in Florida or,
alternatively, to transfer the action to the District of Utah, which
motion is currently pending. The Company intends to vigorously defend
against the claims asserted against it. While the Company believes that
the litigation will be resolved without a materially adverse effect on
the Company's business or financial position, there can be no assurance
as to the ultimate outcome of, or the costs incurred by the Company in
defending, this litigation.
3. Change in Revenue Recognition Policy
Effective July 1, 1997, the Company has elected early adoption of the
provisions of Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which was issued on October 27, 1997 by the Accounting
Standards Executive Committee of the AICPA. SOP 97-2, which supersedes
SOP 91-1, and significantly changes the Company's recognition of
license fees for third-party databases and proprietary software. Prior
to the adoption of SOP 97-2, the Company recognized these revenues upon
shipment. The Company's costs of fulfilling its obligations under the
terms of the database subscriptions, which are insignificant, were
accrued at the time of delivery. Under the provisions of SOP 97-2,
license fees for third-party databases and the Company's proprietary
software are recognized on a straight-line basis over the term of the
contract, generally one year. Royalty costs associated with the license
fees for third-party databases and fulfillment costs are also
recognized over the same period.
Under its transitional provisions, SOP 97-2 specifically prohibits
retroactive application and requires prospective adoption only on
transactions entered into on or after the effective date.
7
<PAGE>
As a result of adopting SOP 97-2, total revenues and operating income
decreased $4,655 and $3,078 respectively during the three and nine
months ended September 30, 1997 from the amounts that would have been
reported if the change described above had not been made. In addition,
if the change in accounting described above had not been made, the net
loss for the three and nine month periods ended September would have
been $3,601 ($.49 per share) and $2,142 ($ .30 per share),
respectively.
Pro forma income (loss) from operations, pro forma net income (loss)
and pro forma net income (loss) per common share for the three and nine
month periods ended September 30, 1996 and 1997, assuming the Company
had always followed the provisions of SOP 97-2 are presented on the
respective condensed consolidated statements of operations. Further
discussion, including additional pro forma effects of the new
accounting policy, is included in Management's Discussions and Analysis
of Financial Condition and Results of Operations.
4. Write-off of Long-lived Assets
FULL-TEXT DATABASE
As previously reported, in March 1994, the Company acquired certain
assets and assumed certain liabilities of the BRS Online component of
InfoPro Technologies, Inc. Among the assets acquired were certain
full-text databases (the "BRS Databases") to which $2,400 of the
purchase price was allocated. At September 30, 1997, the net carrying
value of these databases was $621.
The BRS Databases continue to be offered by the Company and are
available to its customers; however, a continuing decline in licensing
fees for the BRS Databases during the third quarter of 1997 has
indicated that cash flows from projected future sales may not recover
the related net carrying value. As a result, the Company charged the
net book value to cost of revenues.
In late 1995, the Company expanded its product offerings to include
full-text databases of selected publications. Pursuant to its
agreements with the various publishers, the cost of developing and
converting full-text database information from a print medium to a
standard electronic format is initially the responsibility of the
Company. The agreements generally provide that publishers will deliver
the information in specified electronic format before a certain date or
will be responsible for the conversion costs. In exchange for providing
the information in a standard electronic format, the publisher will
receive a higher royalty on the license fees received by the Company.
However, receipt of the information in a standard electronic format
will reduce the Company's ongoing external conversion costs. External
conversion costs associated with the development and conversion of this
full-text database information from a print medium to a standard
electronic format have been capitalized and amortized on a
straight-line basis over a period of five years, commencing in the
period the database is available for sale. At September 30, 1997, the
net carrying value of these database conversion costs was $2,573.
As a result of recent negotiations with publishers during the third
quarter of 1997, it has become apparent that future royalties on
full-text products will be greater than anticipated. It also has become
apparent that the publishers' ability to provide information
electronically will be slower than previously anticipated. Although the
Company continues to believe that market acceptance of full-text
products will happen, there is sufficient uncertainty in the
8
<PAGE>
marketplace that users have delayed widespread acceptance. As a
result, the Company's penetration with its full-text products has been
slower than expected. Based upon its recently completed reforecast,
the Company has determined that it cannot reasonably anticipate
sufficient cash flow from this asset to warrant its continued
capitalization. Accordingly, the Company has charged the net carrying
value to cost of revenues. In addition, future capitalization of
conversion costs will not occur until recovery is assured.
MANAGEMENT INFORMATION SYSTEM
In January 1996, the Company undertook the development of an integrated
business system (IBS). Since the inception of the IBS project, certain
incremental development costs have been capitalized. As a result of an
independent review of IBS completed during the third quarter of 1997,
the Company determined that the design of IBS would no longer meet its
needs. Additionally, alternative information technology solutions have
been identified that will provide the desired functionality of IBS at a
final cost which is less than the cost to adjust and complete the IBS
project. As a result, the Company has elected to abandon IBS
immediately and begin implementation of the alternative solution. The
carrying cost of IBS, $1,104, has been charged to expense during the
third quarter of 1997 and allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost of revenues $ 276
Sales and marketing 221
Product development 386
General and administrative 221
---------
Total $1,104
</TABLE>
5. Recently Issued Pronouncements
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share".
Statement 128 establishes standards for computing and presenting earnings per
share ("EPS") and is effective for financial statements issued for periods
ending after December 15, 1997. This Statement will eliminate the presentation
of primary EPS and will require the presentation of basic EPS (the principal
difference being that common stock equivalents will not be considered in the
computation of basic EPS). It will also require the presentation of diluted EPS
which will give effect to all dilutive potential common shares that were
outstanding during the period. Under the provisions of SFAS No. 128, basic EPS
would have been $.13 and ($1.10) for the three months ended September 30, 1996
and 1997, respectively, and $.29 and ($.87) for the nine months ended September
30, 1996 and 1997, respectively. Diluted EPS would have been the same as the
reported amounts in the financial statements.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure", which is required to be adopted by the Company in
fiscal 1998. This Statement specifies certain disclosures about capital
structure. Management does not expect that implementation of this Statement
will have a significant impact on the financial statements of the Company.
9
<PAGE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. An enterprise that has no items of other comprehensive
income in any period presented is not required to report comprehensive income.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Management does not believe that the adoption of SFAS 130 will have a material
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS 131 establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Management has not yet assessed the impact that the adoption of SFAS 131 will
have on the Company's financial statements.
10
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OVID TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OVERVIEW
Ovid Technologies, Inc. is a leading provider of electronic information to the
scientific, technical, and medical (STM) markets. The Company develops
sophisticated search software and bundles this technology with an aggregation
of bibliographic and full-text databases. More than 5,000 prominent
institutions worldwide use Ovid's products on Intranets, the Internet, or on
stand-alone systems.
The Company focuses on two principle components to generate its recurring
revenue. The first is the sale of CD-ROM based (Intranet) products for
installation at individual sites. The Company receives recurring revenue
through renewals on the site's database subscriptions and annual maintenance
fees on the software purchase. The second is the Company's Internet online
service. Here, recurring revenue comes through renewals on database
subscriptions and an annual access fee for use of the system. Ovid's customer
retention rate has been historically in excess of 90%.
Growth of the Company continues to be derived from these two components both
domestically and internationally. In each of these markets, a strategic
objective of the Company has been to move customers to the Internet online
service model. This removes certain customer barriers for purchasing large
quantities of full text and produces a larger stream of renewable revenue. Ovid
has seen a significant increase in its online business during 1997. On a
billings basis, for the nine months ended September 30, 1997, Ovid had
approximately $2.5 million in online fixed-fee sales, while for the nine months
ended September 30, 1996, the Company had approximately $600 in online
fixed-fee sales. Additionally, the number of fixed-fee customers has increased
to approximately 6,600 from approximately 4,500 during the 12 month period
ended September 30, 1997.
Ovid is pursuing a number of channels to achieve future growth. Investment in
the international market continues to grow, and while the European market has
experienced only modest growth, the Company continues to create greater
worldwide distribution channels and has recently begun sales and marketing
efforts in South America. Also important is the Company's ability to license
additional content from STM publishers. Ovid now licenses full-text content
from more than forty different publishers and continues to add new journal
titles from both existing and new publishers. The Company has also begun
investment in a new project, the Clinical Information Products (CIP) group.
Products from CIP leverage Ovid's investment in the medical community and
broaden the breadth of information the Company provides. The first CIP product
is expected to be released in the first half of 1998.
As discussed in detail in adjacent sections, the Company adopted SOP 97-2,
Software Revenue Recognition, July 1, 1997. While the revenue recognition
change has an initial dramatic impact on reported revenues, the change is
expected to decrease the cyclical trends historically experienced by the
Company.
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
In combination with the growth drivers as discussed above and the recent
accounting changes, the Company continues to control operating expenses and
also continues to increase its operating cash flow. As of September 30, 1997,
the Company had cash and cash equivalents, short-term investments and
investments in marketable securities of approximately $11.3 million as compared
with cash and cash equivalents, short-term investments and investments in
marketable securities of approximately $6.8 million at December 31, 1996.
SIGNIFICANT EVENTS
The results of operations for the three and nine month periods ended September
30, 1997 have been impacted by several significant events which limit
comparability with corresponding previous periods. These events are described
below:
WRITE-OFF OF LONG-LIVED ASSETS
MANAGEMENT INFORMATION SYSTEM
As more fully described in Note 4 to the condensed consolidated financial
statements, the Company has determined that the capitalized cost of its
integrated business system (IBS) is impaired and has elected to abandon it
effective September 30, 1997. This decision to write-off the costs is the
result of difficulties with the system vendor and the findings of an
independent evaluation of IBS. The Company is currently being sued for breach
of contract by the system vendor. Status of the lawsuit is outlined in Note 2
to the financial statements.
The one time write-off of the $1,104 carrying value of the project at September
30, 1997 was charged as follows: Cost of Sales $276, Selling and Marketing
Expense $221, General and Administrative $221; and Product Development $386.
FULL-TEXT DATABASE
As more fully described in Note 4 to the condensed consolidated financial
statements, the Company has determined that, based on projected future sales
and related expenses revised during the third quarter, the licensing of
full-text databases may not result in positive cash flow for several years. As
a result, the net book value of the full-text databases, $3,194, has been
charged to cost of revenues during the third quarter of 1997. Included in the
write-off are the unamortized costs associated with the BRS Online full-text
databases, $621. Cash flows from projected future sales of these specific
products, which reflect a continuing shift to other Company products, indicate
that the Company may not recover the asset's net carrying value.
The remaining portion of the full-text database write-off, $2,573, relates to
certain external conversion costs associated with the development of a
full-text database product which have been capitalized by the Company since the
end of 1995. The Company initially anticipated that the conversion costs would
only be incurred for a short period of time until the publishers were able to
provide the information in a suitable electronic format. The publishers'
ability to provide information electronically has been slower than anticipated.
Also, as additional publishers' content has been added to the database, and as
a result of recent negotiations during the 3rd quarter with
12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
current content providers, it has become apparent that ongoing royalty rates
will likely be greater than originally anticipated.
CHANGE IN ACCOUNTING PRINCIPLE
As described in Note 3 to the financial statements, the Company has adopted SOP
97-2, Software Revenue Recognition, effective July 1, 1997. Prior to the
adoption of SOP 97-2, the Company recognized license fees for third-party
databases and proprietary software upon shipment. Royalty obligations to
publishers were accrued at the time of shipment. Ovid's costs of fulfilling its
obligations under the terms of the license agreement, which are not
significant, were also accrued at the time of shipment. As a result of the
change, license fees for third-party databases and the Company's proprietary
software revenues for these products are recognized on a straight-line basis
over the term of the contract, generally one year. Royalty costs to publishers
and fulfillment costs are also recognized over the same period.
The transition provisions of SOP 97-2 specifically prohibit retroactive
application and require prospective adoption only on transactions entered into
on or after the effective date. As a result, the Company's reported revenues
will be reduced, although to a lessening extent, until June 30, 1998
at which time the transitional impact will end.
PRO FORMA PRESENTATION
As a result of the write-off of long-lived assets and the change in accounting
principle described above, the results of operations for the three and nine
month periods ended September 30, 1997 are not comparable with amounts from the
corresponding periods of the prior year. Set forth below are pro forma data
which exclude the one-time write-down of assets described above during the
three and nine months ended September 30, 1997 and which assume that the
Company's accounting for license fees for third-party databases and proprietary
software has always conformed to the provisions of SOP 97-2.
Presentation of Pro Forma Data
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Year ended 9 months ended 3 months ended
December 31, September 30, September 30,
1995 1996 1996 1997 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Total revenues ............ $25,037 $31,111 $22,830 $27,352 $ 7,905 $ 9,350
Total cost of revenues .... 7,406 9,933 7,473 8,842 2,410 3,034
Gross profit .............. 17,631 21,178 15,357 18,510 5,495 6,316
Total operating expense ... 16,430 18,310 13,609 14,612 4,355 4,761
Income from operations .... 1,201 2,868 1,748 3,898 1,140 1,555
Net income ................ 943 1,873 1,104 2,339 726 933
Net income per common share $ 0.13 $ 0.26 $ 0.14 $ 0.32 $ 0.10 $ 0.13
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
1997 VS 1996 PRO FORMA OPERATING RESULTS
REVENUES
For the three months ended September 30, 1997, the Company's pro forma total
revenues increased 18% to $9.4 million versus $7.9 million for the comparable
period in 1996. For the first nine months of 1997, pro forma total revenues
increased to $27.3 million, an increase of 20%, from $22.8 million during the
first nine months of 1996. Although the revenue growth was worldwide, network
sales in North America, Japan and Australia were particularly strong during the
third quarter and first nine months of 1997.
Pro forma revenues from database subscriptions and software increased to $8.3
million in the third quarter of 1997 from $6.9 million during the same period
of 1996. These same revenues grew to $24.2 million during the nine months ended
September 30, 1997 from $20.0 million during the comparable period in 1996.
This revenue growth was primarily attributable to an increase in sales of
network configurations to medical and academic institutions in North America
and an increase in sales outside of North America, primarily, Japan, Australia
and western Europe.
Pro forma maintenance revenues increased 12% to $0.8 million for the three
months ended September 30, 1997 from $0.7 million for the same period in 1996.
During the nine months ended September 30, 1997, pro forma maintenance revenues
increased 15% to $2.3 million from $2.0 million for the comparable period in
fiscal 1996. The increase in pro forma maintenance revenues is directly
attributable to the increase in network sales, which have mandatory maintenance
charges of 17% of the first year's software fees.
COST OF REVENUES
Pro forma cost of revenues increased 26% to $3 million in the third quarter of
1997 from $2.4 million for the same period in 1996. As a percent of total
revenues, pro forma total cost of revenues increased to 32% for the third
quarter of 1997 from 30% for the third quarter of 1996. For the nine months
ended September 30, 1997, pro forma total cost of revenues increased 18% to
$8.8 million from $7.5 million for the same period in 1996. As a percentage of
pro forma total revenues, pro forma total cost of revenues decreased to 32% in
the first nine months of 1997 from 33% in the comparable period in 1996. The
increases in pro forma cost of revenues as a percentage of total pro forma
revenues for the three month and nine month periods ended September 30, 1997
were primarily due to an increase in cost of sales of database subscriptions.
Pro forma cost of database subscriptions and software as a percentage of
corresponding revenues remained a constant 35% for the third quarter of 1997
and 1996. For the nine months ended September 30, 1997, pro forma total cost of
database subscriptions and software as a percentage of corresponding revenue
increased to 37% for the first nine months of 1997 from 36% in the comparable
period in 1996. The increase resulted from an increase in royalty expense due
to sales of database subscriptions with higher royalty rates.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
GROSS PROFIT
Pro forma gross profit was $6.3 million for the quarter ended September 30,
1997, compared with $5.5 million for the same period in 1996, representing 68%
and 70% of total revenues, respectively. Pro forma gross profit was $18.5
million during the nine months ended September 30, 1997, compared with $15.4
million for the same period in 1996, representing 68% and 67% of total
revenues, respectively. Changes in gross margin from period to period have
resulted primarily from changes in the cost of revenues within each category of
revenues, as discussed above.
SALES AND MARKETING EXPENSES
Pro forma sales and marketing expenses decreased 6% to $1.6 million during the
third quarter of 1997 from $1.7 million for the same period in 1996. As a
percentage of pro forma total revenues, sales and marketing expenses decreased
to 17% during the third quarter of 1997 from 22% during the comparable quarter
in 1996. Pro forma sales and marketing remained a constant $5.5 million for the
nine months ended September 30, 1997. As a percentage of pro forma total
revenues, pro forma sales and marketing expenses decreased to 20% in the first
nine months of 1997 from 24% during the first nine months of 1996. The
decreases in pro forma sales and marketing expenses are due to the
consolidation of the Company's Amsterdam office into the UK office, as well as,
a reduction in staff in marketing and inside sales.
PRODUCT DEVELOPMENT EXPENSES
Pro forma product development expenses increased 25% to $1.7 million during the
third quarter of 1997 from $1.4 million during the same period in 1996. As a
percentage of pro forma total revenues, pro forma product development expenses
increased to 18% in the third quarter 1997 from 17% in the same period for
1996. For the first nine months of 1997, pro forma product development expenses
increased 18% to $4.8 million as compared to $4.1 million for the same period
in 1996. As a percentage of pro forma total revenues, pro forma product
development expenses remained a constant 18% for the first nine months in 1997
and 1996. The increases in pro forma product development expenses are due to an
increase in staff associated with the ongoing full text project, as well as, a
new development group associated with the new clinical information product.
GENERAL AND ADMINISTRATIVE EXPENSES
Pro forma general and administrative expenses increased 13% to $1.5 million in
the third quarter of 1997 from $1.3 million during the same period in 1996. As
a percentage of pro forma total revenues, general and administrative expenses
remained the same at 16% in the third quarter for both 1997 and 1996. Pro forma
general and administrative expenses increased 6% to $4.2 million during the
first nine months of 1997 from $4.0 million during the same period in 1996. As
a percentage of pro forma total revenues, general and administrative expenses
decreased to 16% in the nine months ended September 30, 1997 from 17% for the
comparable period in 1996. The decrease in the pro forma general and
administrative as a percentage of pro forma total revenues is primarily
attributable to the ability of the Company to increase revenues through new
sales and database subscription renewals while controlling the growth of
general expenses. The Company expects this trend to continue in the future.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash and cash equivalents of
approximately $1.1 million and highly liquid short-term investment and
marketable securities of approximately $10.2 million. Operating activities
provided the Company with $6.6 million in cash during the first nine months of
1997 as compared to $1.9 million during the same period in 1996. The Company's
days revenue in accounts receivable, which typically ranges from 80-100 days,
is expected to continue and is not expected to significantly impact the
Company's liquidity.
The Company's investing activities used cash of $7.0 million during the first
nine months of 1997 compared to using cash of $2.8 million during the same
period in 1996. The primary use of cash in 1997 was the purchase of $2.3
million of capital equipment and the purchase of $19.8 million of short-term
investments less $15.7 million of redemptions. During the first nine months of
1996, the primary use of cash was the purchase of capital expenditures of $1.2
million, and the purchase of $15.6 million of short-term investments less $14.0
million of redemptions. Included in the purchase of short-term investments for
the third quarter is the purchase of $652 of marketable securities, held as
available for sale. During the quarter, the Company decided to invest a portion
of the Company's cash in marketable securities. These securities are high-grade
investment quality and will increase the Company's return without significantly
increasing investment risk.
The Company's financing activities provided $143 from the exercise of stock
options for the nine months ended September 30, 1997 as compared to $90
provided in the same period of 1996. Effective February 13, 1996, the Company
entered into a line-of-credit agreement for $1.0 million collateralized by the
Company's assets, bearing interest at the banks' prime rate plus 1%. There is
no specified expiration date for the agreement; however, the agreement is
cancelable in writing by either party at any time. There have been no
borrowings under this agreement.
Notwithstanding the decision to write-off the net book value of full-text
databases more fully described in Note 4 to the condensed consolidated
financial statements, the Company expects to continue to pursue aggressively
its initiative to license the electronic distribution rights to scientific,
technical and medical related journals in full-text format. The cost of
licensing the content as well as the necessary investment in production is
expected to require significant use of cash in future periods. The level of
expenditure is expected to continue at current levels during 1998, and decrease
thereafter. The Company believes that its available cash and short-term
investments and expected future cash flows from operations can finance these
activities.
As more fully described in Note 4 to the condensed consolidated financial
statements, the Company is undertaking an alternative solution to the abandoned
IBS. Costs are estimated to be less than $1 million for this project. The
Company believes that its available cash and short-term investments and
expected future cash flows from operations can finance this project.
On October 28, 1997 the Company's board of directors authorized the repurchase
of up to $3 million of the Company's common stock. The shares may be purchased
on the open market from time to time, depending upon market conditions.
16
<PAGE>
OVID TECHNOLOGIES, INC.
ITEM 1. LEGAL PROCEEDINGS
See Note 2 of the Notes to Condensed Consolidated Financial Statements.
17
<PAGE>
Exhibit 11
OVID TECHNOLOGIES, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
---------
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
9/30/96 9/30/97 9/30/96 9/30/97
(Historical) (Historical) (Historical) (Historical)
<S> <C> <C> <C> <C>
Net income (loss) .................. $ 746,000 ($6,678,000) $ 1,689,000 ($5,220,000)
========== =========== =========== ===========
Shares used in calculation
of net income per share of
common stock:
Weighted average shares of
common stock outstanding ...... 5,787,439 6,054,006 5,744,281 5,988,014
Dilutive effect of stock options
after the application of the
treasury stock method ............ 1,478,010 1,266,335 1,418,018 1,223,596
---------- ----------- ----------- -----------
7,265,449 7 ,320,341 7,162,299 7,211,610
========== =========== =========== ===========
Net income (loss) per share
of common stock ......... $ .10 ($ .91) $ .24 ($ .72)
========== =========== =========== ===========
</TABLE>
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ovid Technologies, Inc.
(Registrant)
November 13, 1997 /s/ DEBORAH M. HULL
- ------------------------- -------------------
Deborah M. Hull
Chief Operating Officer
November 13, 1997 /s/ JEFFREY A. HOERLE
- ------------------------- ---------------------
Jeffrey A. Hoerle
Chief Financial Officer
19
