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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1996
Commission File Number 0-24326
OVID TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3333107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Seventh Avenue, New York, New York 10001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 563-3006
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value.
(Title of each class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
Aggregate market value of the Registrant's Common Stock held by non-affiliates
at March 5, 1997 (based on the closing sale price for such shares on March 5,
1997 as reported by the NASDAQ Stock Market's National Market and the
assumption for this computation only that all directors and executive officers
of the Registrant are affiliates): $6,557,478.
Common Stock outstanding as of March 5, 1997: 5,957,798 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement relating to the
Registrant's Annual Meeting of Stockholders are incorporated by reference into
Part III of this Report.
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PART I
ITEM 1. BUSINESS
When used in this discussion, the words "believes," "anticipates," "expects"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected. The Company's
operating results are affected by a wide variety of factors that could
materially and adversely affect actual results, including technological
changes, changes in relationships with third-party database suppliers and
competition from other information retrieval services. As a result of these
and other factors, the Company may experience material fluctuations in future
operating results on a quarterly or annual basis, which could materially and
adversely affect its business, financial condition, operating results and
stock price. These forward-looking statements speak only as to the date
hereof. The Company undertakes no obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
GENERAL
Ovid Technologies, Inc. (the "Company" or "Ovid"), which provides
electronic information retrieval services to approximately 77% of the major
medical centers in the United States and Canada, believes it is a leading
provider of these services to the biomedical and healthcare markets. The
Company offers its customers a comprehensive collection of databases licensed
from third parties, which are bundled with the Company's proprietary search
and retrieval software. Ovid's integrated, single-source solution allows
physicians, librarians, students and other researchers to efficiently survey
the large and growing collection of biomedical and scientific literature in
order to retrieve publications and reference materials applicable to patient
care practices and research projects. The Company's single-source information
retrieval services provide direct, desktop access to users, regardless of
their level of computer-searching expertise.
Ovid's proprietary software provides the user with the ability to
locate quickly and accurately citations and abstracts of biomedical and
scientific articles. Distinguishing features of the software include a mapping
capability that enables users, regardless of their level of computer-searching
expertise, to find relevant information; a common graphical user interface
optimized for searching databases under various operating systems (DOS,
Windows and UNIX); and navigational tools to help guide users through large
databases.
The Company offers most of its services on an annual subscription
basis. In the United States and Canada, the Company's services are subscribed
to by approximately 77% of the major medical centers as well as a significant
number of research facilities and hospitals, including the Mayo Clinic,
Memorial Sloan-Kettering Cancer Center, the Harvard Medical School, Johns
Hopkins University School of Medicine, the Centers for Disease Control and
Prevention and the University of Alberta. Ovid's services are also subscribed
to by major European and Asian organizations, including the British Medical
Association, the Max Planck Society, Institut Pasteur, the University of Oslo
and the University of Tokyo. During each of the last three years,
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more than 93% of the subscribers to the Company's services renewed
subscriptions with the Company.
The graphical user interface of the Company's software allows
customers to easily upgrade the speed and sophistication of their information
retrieval systems without incurring significant retraining or administrative
costs. In addition, the Company's annual subscription pricing allows customers
to control their information costs and simplify their budgeting process, and
enables novice searchers to learn the system without increased expense.
In March 1994, the Company began offering online services to its
customers. The Company offers an online service, including the full text of
prominent biomedical journals, over commercial telecommunication networks and
the Internet. Access to full-text documents from a user's workstation
eliminates the time required to retrieve the full-text of documents from a
library or other remote archival storage facility. Online services are offered
on a fixed-fee basis which enables customers, primarily institutions, to have
unlimited access for an annual access and database subscription fee or on a
variable charge basis which is primarily used by physician or other end-user
individuals and institutions with limited searching requirements.
INDUSTRY BACKGROUND
Physicians and medical and scientific researchers rely upon
information retrieval processes to locate biomedical and scientific
publications applicable to their patient care practices and research projects.
The volume of this literature has been expanding rapidly as a result of, among
other things, significant scientific advancements and increased worldwide
funding of scientific and medical research. As a consequence, traditional
methods of identifying pertinent information, such as browsing journals,
attending conferences, consulting with colleagues and performing manual
library research have become increasingly time consuming and, the Company
believes, inadequate. Accordingly, the demand for rapid and efficient
electronic biomedical information retrieval services has continued to
escalate.
In an early response to this growing demand, mainframe-based
information retrieval systems offering access to bibliographic databases
became available in the early 1970's. However, due to the complexities and
high cost of these systems, their effective use was limited primarily to
librarians and other professional searchers. The resulting inability of
medical professionals and researchers to retrieve information directly often
produced delays and increased costs.
Several technological advances in the last decade, including
significant decreases in the cost of data storage, the development of
inexpensive, powerful personal computers and the advent of computer networks,
the Internet and easy-to-use interfaces, have allowed organizations to make
large databases available locally, on a fixed-cost basis. These advances
significantly increased the potential user market for electronic information
retrieval services.
Initially, electronic information retrieval services, both local and
online, only provided access to bibliographic information. After relevant
citations were identified, the searcher had to retrieve the full text of the
articles from a library or through a document retrieval service, causing
additional time delays for the physician or researcher requiring the
information. In the 1980's, several electronic retrieval services began to
provide the text of articles, but these services were
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unable to provide important illustrative information, such as color
photographs, graphics and tables, which were part of the original article, as
well as electronic links to other referenced information. The Company believes
that with existing and developing technologies and protocols, user
expectations and market demand will lead to more widespread use of electronic
full-text products.
OVID PRODUCTS AND SERVICES
The Company offers its customers a comprehensive collection of
databases licensed from third parties, which are bundled with the Company's
proprietary search and retrieval software. Databases
The databases offered by the Company are licensed from various
governmental entities, not-for-profit associations and commercial businesses
which compile and abstract information from a variety of sources. The
databases are licensed from information providers and publishers on a
non-exclusive basis for terms ranging from one to five years. Certain of the
databases licensed from governmental entities, including Medline (for domestic
distribution), are royalty-free. The remaining databases require royalty
payments to the information provider ranging from 2% to 85% of net database
subscription revenues. The Company generally pays an average royalty of 30% to
the original publishers.
Approximately 90% of the Company's customers subscribe to the Medline
database, a bibliography of the world's leading biomedical literature,
produced by the National Library of Medicine. The National Library of Medicine
compiles the database and licenses third parties, including Ovid, to
distribute the database in electronic form. The Company's licensing agreement
with the National Library of Medicine is perpetual, subject to the right of
either party to cancel the agreement on 90 days written notice, and grants
Ovid a license to use the database on a royalty free basis in the United
States and for a relatively low royalty internationally. Other databases that
are frequently subscribed to by the Company's customers are CINAHL, a
bibliography of nursing literature produced by CINAHL Information Systems, and
PsycLIT, a bibliography of psychological literature, produced by the American
Psychological Association, a not-for-profit professional society.
Most databases are updated either weekly or monthly. In addition to
stand-alone CD-ROM's, local CD-ROM's and magnetic networks, the Company
offers an extensive collection of bibliographic databases online. In addition,
Ovid distributes the full text of recently published and archival articles
from over 60 leading biomedical and scientific journals and other
publications. The Company has developed software capable of displaying color
illustrations, graphics and tables as contained in the original print format
of these articles. These bibliographic and full-text databases are accessed
online via commercial telecommunication networks or the Internet. The
full-text database can be searched either through an automatic link feature
after searching and identifying articles in a bibliographic database or by a
free text search of the database itself. Ovid enhances the utility of the
database through extensive pre-loading editorial work which standardizes the
organization of the articles and normalizes the use of symbols, abbreviations
and other scientific representations.
The Company intends to expand its revenues from the biomedical and
healthcare markets by, among other things, increasing the number of
bibliographic databases offered and expanding
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the amount of full-text material accessible through the Company's services. To
help implement this strategy, the Company has licensed 15 additional
biomedical, scientific and academic databases in the last year. In addition
the Company has licensed the rights to distribute an additional 300 biomedical
and scientific journals.
Software
In 1988, the Company introduced a single user CD-ROM product with
features designed to be responsive to the manner in which users conduct
literature searches. In 1990, the Company introduced network products
utilizing CD-ROM and magnetic storage. The products were initially developed
to run under the Novell network operating system. These products allow users
to conduct searches from personal computers on the customer's network at
speeds superior to remote, mainframe-based systems and at a fixed annual cost.
In 1993, the Company introduced OVID, a new version of its search and
retrieval software, following a development and testing program that began in
1991. OVID, written in C++, an object-oriented language, includes a consistent
graphical user interface for the DOS, Windows and UNIX operating systems.
Ovid's core software may be efficiently ported to new platforms or can be
easily extended as new features are released. The Company's software has a
number of innovative features, including:
o Mapping to controlled vocabulary -- allows the novice searcher to use
non-technical terms in a search request; OVID automatically prompts the
user to select the correct term from the database's controlled vocabulary
for the most accurate and thorough retrieval results.
o On-screen support -- a complete help system that provides guidance on the
use of the software at every stage of the user's search session.
o Index display -- allows the user to view all indices and their
descriptions, to scroll alphabetically through index terms and to mark
index terms as search terms with a single keystroke.
o Integrated thesauri -- a searching aid that graphically displays
controlled vocabulary terms and scope notes, which are easily tagged as
search terms.
o Compression algorithm -- reduces storage requirements which increases
speed of retrieval and lowers hardware costs.
The software includes system administration options that enable
custom-tailoring of features to best serve specific user populations. These
options include statistics-gathering modules for assessing user searching
histories and preferences and the capability for creating and displaying
extensive local journal holding messages, with links to appropriate journals.
Local journal links identify articles contained in the customer's library,
enabling the user to limit searches to those articles.
The OVID software has been designed to operate in a single-user
system or as part of a network. OVID software has been designed with a
client-server architecture which in a network
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environment, separates the retrieval processing from the user interface. This
enables efficient access across networks and the Internet.
Pricing Structure
Ovid structures its pricing to build recurring subscription revenue.
All stand-alone CD-ROM and network-based systems customers pay an annual fee
for each database they receive. In addition, network customers pay a software
license fee for Ovid's software. The amount charged to the network customers
for both the databases and the software is determined by the number of users
who can gain access at the same time to each database. Concurrent-user pricing
permits institutions to upgrade their systems as demand grows and also to vary
the level of access to individual databases as usage patterns change.
Typically, network customers pay one-time software fees of $2,500 to
$3,000 per concurrent-user. The average network customer spends approximately
$25,000 in first-year software fees. Thereafter, network customers are charged
an annual software maintenance fee currently calculated at 17% of the
first-year software fee. In addition, network customers are charged an annual
database subscription fee that ranges from $1,000 to $30,000 per database. The
average annual database charge for network customers is approximately $12,000.
Subscribers to single-user CD-ROM databases generally pay between $3,000 and
$5,000 per year in database subscription fees.
Online customers can select either a variable usage-based fee plan
for system access and document display or a fixed-fee annual subscription
option for online database searching, including database and system access
charges based on the number of concurrent-users who can gain access to the
system. The Company believes that the ability of its customers to budget their
total expenses by choosing the fixed-fee option will have particular appeal to
institutions that wish to allow all their members, including students and
others with limited budgets, to have access to the Company's services.
CUSTOMERS
During each of the past three years, no single customer accounted for
more than 3% of that year's total revenues. As of December 31, 1996, the
Company had approximately 700 customers for its local network services, 2,500
customers for its stand-alone CD-ROM systems and 3,000 customers with active
passwords for its online services.
The Company's products have been sold primarily to libraries in major
medical centers, large and medium-sized hospitals, pharmaceutical and
biotechnology companies, and other biomedical institutions throughout North
America, Europe, Australia and Asia. The Company estimates that its systems
have been sold to and are installed in more than 77% of the major medical
centers, as well as a significant number of research facilities and academic
institutions, in the United States and Canada. The Company believes that
hospitals of all sizes, pharmaceutical companies and individual physicians and
small practice groups, as well as entities and individuals engaged in business
in other scientific, technical and academic markets with similar information
seeking characteristics, both domestic and international, provide a sizable
market for the Company's current and proposed products and services.
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The following is a list of certain institutional customers which made
initial purchases of the Company's network systems and services and which
provide the Company with recurring annual revenues ranging from approximately
$10,000 to $660,000:
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MEDICAL CENTERS AND ACADEMIC INSTITUTIONS (U.S.)
Albert Einstein College of Medicine of Yeshiva
University
Beth Israel Medical Center, NY
Cedars-Sinai Medical Center
Centers for Disease Control and Prevention
Children's Hospital of Boston
Claremont Colleges
The Cleveland Clinic Foundation
Columbia University
Dalhousie College Fred Hutchinson Cancer Research Center
Harvard University
Henry Ford Hospital Hennepin County Medical Center
Johns Hopkins University School of Medicine
Loyola University of Chicago
Marquette University
Massachusetts General Hospital
The Mayo Clinic
National Institutes of Health
Northwestern University
Oregon Health Sciences University
Pennsylvania State University College of Medicine
Purdue University
Rutgers University
The Scripps Research Institute
Texas A&M University
University of Arizona
University of Chicago
University of Illinois Urbana and Chicago
University of Miami School of Medicine
University of Minnesota
University of Missouri
University of North Carolina
University of Pennsylvania
University of Texas
University of Virginia School of Medicine
University of Washington Medical Center
University of Wisconsin Medical School
Vanderbilt University Medical Center
Washington University School of Medicine
Yale-New Haven Medical Center
MEDICAL CENTER AND ACADEMIC INSTITUTIONS (CANADA)
The Hospital for Sick-Children-Toronto
McGill University
Montreal Neurological Institute
Queen's University
Royal Victoria Hospital of Montreal
The Toronto Hospital
University de Sherbrooke Faculte de Medicine
University of Alberta
University of British Columbia
University of Calgary Faculty of Medicine
University of Montreal
University of Ottawa
University of Toronto
University of Western Ontario
MEDICAL CENTERS AND ACADEMIC INSTITUTIONS (EUROPE)
Erasmus University
Institut Pasteur
Institute Curie
Karolinska Institute
London Hospital Medical College
Max Planck Society
University of Copenhagen
University of Freiburg
University of Oslo
University of Lausanne
University of Zurich
MEDICAL CENTERS AND ACADEMIC INSTITUTIONS (ASIA AND AUSTRALIA
Kaoshiung Medical College, Taiwan
Nippon Medical School, Japan
Monash University, Australia
University of Auckland, New Zealand
University of New South Wales, Australia
University of Otago, New Zealand
University of Sydney, Australia
University of Tokyo Medical School, Japan
University of Western Australia
Walter & Eliza Hall Research Institution, Australia
CONSORTIA AND ASSOCIATIONS
Arizona Health Information Network (AZHIN)
British Medical Association
Colorado Alliance of Research Libraries
Council of Australian University Libraries (CAUL)
Health Sciences Library Consortium of Pennsylvania
Minitex Consortium
OhioLINK
TexShare
PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES
Boehringer Ingelheim Pharmaceuticals, Inc.
Fisons Corporation
Janssen Pharmaceuticals
Marion Merrell Dow, Inc.
Roche Bioscience
SmithKline Beecham Pharmaceuticals
Wyeth - Ayerst
RW Johnson
Solvay Pharmaceuticals
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SALES AND MARKETING
The Company's sales and marketing organization, consisting as of
January 23, 1997 of 31 employees in the United States and 14 employees based
overseas, operates from the Company's headquarters in New York City and five
sales offices in domestic and foreign cities. The international direct sales
and marketing organization is complemented by approximately 45 distributors.
North America
The Company utilizes telemarketing for its stand-alone CD-ROM
subscriptions and online service and its direct sales force for network
subscriptions and large online prospects. Sales prospects include librarians,
MIS personnel and other senior administrators at medical centers, hospitals,
academic libraries and pharmaceutical companies and other biomedical
institutions.
The Company develops sales prospects through direct mail campaigns,
advertising and participation in trade shows. Significant sales opportunities
also arise from customer referrals. The Company is conducting a public
relations program to generate additional trade press coverage and is
publishing in-house "white papers" describing the Company's products and
services. The Company's customer communications program includes user
newsletters, online forums, electronic bulletin boards and user group
meetings.
International
Outside of North America, the Company's products are sold by its own
sales force and by independent distributors. Ovid continuously evaluates
potential distribution partners who may provide improved access to vertical or
geographical markets. The Company maintains a direct sales and technical
support office in London and sales support offices in Amsterdam, Paris and
Sydney which work with distributors throughout Europe and the Pacific Rim.
PRODUCT DEVELOPMENT
The Company is committed to enhancing existing products and
developing new products in response to market demand. New products and product
enhancements are designed to keep pace with offerings from competitors, adapt
to new hardware platforms and emerging industry standards, including the
Internet and world wide web, and provide additional user-responsive
functionality. In addition, Ovid offers its customers technical support
through a toll-free telephone number as well as an Internet connection, using
both e-mail and electronic bulletin boards and the Company's home page on the
world wide web.
The Company's technical support department is comprised of three
groups specializing in the requirements of stand-alone, network and online
users, respectively. The network technical support group is also responsible
for the installation of Ovid network software either through on-site
installation or through remote installation from the Company's offices. The
processes are believed to provide valuable feedback on the performance
characteristics of the Company's products and customer demands that can be
incorporated into product development.
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COMPETITION
The market for electronic information retrieval services is intensely
competitive and rapidly changing. The Company currently has several categories
of competitors, including CD-ROM database vendors, online information vendors
(including those which are fee-based and advertising supported), library
automation companies and text retrieval software companies. The Company
expects that competition from these sources will increase and new competitors
will enter the market as the Company continues to grow.
Many of the Company's existing and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
marketing and other resources than the Company. Furthermore, as the market for
biomedical and scientific electronic information retrieval services grows, a
number of companies with significantly greater resources than the Company
could attempt to increase their presence in this market by acquiring or
forming strategic alliances with competitors of the Company or by introducing
products or services specifically designed to challenge the Company's
position.
The principal competitive factors affecting the market for the
Company's products and services include vendor and product reputation, breadth
of product and service offerings, direct sales presence, key distributor
relationships, product performance, functionality, price, ease of use,
architecture, platform coverage and quality of support. Based on these
factors, the Company believes that it has competed effectively to date. The
Company expects competition to increase and such increased competition could
result in price reductions and loss of market share for the Company. The
Company believes it must continue to introduce enhancements to its existing
products and services and to add new products and services in a timely manner
in order to remain competitive. There can be no assurance that the Company
will be able to compete successfully or that its present or future competitors
will not exert significant competitive pressures on the Company.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and attempts to
protect it with a combination of license agreements with customers, internal
security procedures and reliance upon copyright law. As is customary in the
software industry, in order to protect its intellectual property rights, the
Company does not sell or transfer title to its software products to customers.
To protect the Company's software products, each of the Company's customers is
required to enter into a non-exclusive, non-transferable license agreement.
The Company's current standard form of license agreement limits the use of the
Company's software to the customer's internal operations. In addition, the
Company requires all of management and other key personnel to sign
confidentiality agreements covering the Company's proprietary rights. In
October 1994, the Company received copyright registration of the OVID software
design. The Company does not rely on patent protection for its software
products.
There can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current
or future products or Corporate names or logos or that any such assertion will
not result in costly litigation or require the Company to obtain a license to
intellectual property and other rights of third parties. There can be no
assurance that
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such licenses will be available on reasonable terms or at all. As the number
of such software products in the industry increases and the functionality of
these products further overlaps, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with
or without merit, can be time consuming and expensive to defend.
EMPLOYEES
As of January 23, 1997, the Company had 174 full-time employees,
consisting of 39 in product development and programming, 23 in production, 45
in sales and marketing, 25 in technical support and customer service and 42 in
finance and general administration. The Company's employees are not
represented by any collective bargaining organization and the Company has
never experienced a work stoppage.
The Company believes it maintains competitive compensation, benefits,
equity participation and work environment policies to assist in attracting and
retaining qualified personnel. The Company believes its relationship with its
employees is good.
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Report.
Ability to Respond to Technological Change. Ovid's future success
will depend upon its ability to enhance its current products and to develop
and introduce new products that keep pace with technological developments and
evolving industry standards, respond to changes in customer requirements and
achieve market acceptance. The Company believes it must continue to respond to
customers' needs for broad functionality and multiple platform support. Any
failure by the Company to anticipate or respond adequately to technological
developments and customer requirements, or any significant delays in product
development or introduction, could have a material adverse effect on the
Company's business, operating results, financial condition and liquidity. At
various times in the Company's operating history, it has experienced
significant delays in product development and introduction, resulting in a
delay in the realization of revenues from these products and the incurrence of
additional software development costs. There can be no assurance that Ovid
will be successful in developing and marketing new products and services or
product and service enhancements on a timely basis or that the Company will
not experience significant delays in the introduction of new products and
services. In addition, there can be no assurance that new products and
services or product and service enhancements developed by the Company will
achieve market acceptance. See "Business - Product Development."
Dependence on Proprietary Technology. The Company's success is
heavily dependent upon its proprietary software. Ovid does not have any
patents on any of its technology and relies upon its license agreements with
customers, copyright law and internal confidentiality procedures to protect
the trade secrecy of its products. The Company has entered into
confidentiality agreements with its employees, its management and key
personnel. There can be no assurance that the steps taken by the Company to
protect its proprietary technology will be adequate to prevent
misappropriation of its technology by third parties or will be adequate under
the laws of some foreign countries, which may not protect the Company's
proprietary rights to the same
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extent as do the laws of the United States. In addition, there can be no
assurance that third parties will not assert successfully technology
infringement claims against the Company. See "Business - Proprietary Rights."
Competition. The market for information retrieval services is
intensely competitive and rapidly changing. The Company's competitors include
CD-ROM database vendors, online information vendors (including those which are
fee-based and advertising-supported), library automation companies, text
retrieval software companies, and publishing companies. The Company expects
that competition from these sources will increase. Furthermore, it is likely
that new competitors will enter the market as the market continues to grow.
Some of the existing and potential competitors have larger technical staffs,
more established and larger marketing and sales organizations, better
developed distribution systems and significantly greater financial resources
than the Company. Furthermore, as the market for information retrieval
services grows, a number of companies with significantly greater resources
than the Company could attempt to increase their presence in this market by
acquiring or forming strategic alliances with competitors of the Company or by
introducing products specifically designed for the scientific, technical and
medical markets. There can be no assurance that existing or new competitors
will not develop products or provide services that are superior to the
Company's products or services or achieve greater market acceptance. Increased
competition could result in price reductions and loss of market share for the
Company. There can be no assurance that the Company will be able to compete
successfully or that competition will not have a material adverse effect on
the Company's business, operating results, financial condition and liquidity.
See "Business - Competition."
Risks Associated with the Expansion and Distribution of a Full-Text
Product. The introduction of a full-text product, with accompanying color
illustrations, graphics and tables of original source documents, involves
significant risks which could have a material adverse effect on the Company's
financial performance. The Company's initiative to expand its full-text
offerings includes significant financial investments in the form of production
costs and prepaid licensing fees. There can be no assurance that publishers of
biomedical and scientific journals will renew existing licensing agreements or
that royalty fees for full-text data charged to the Company by such publishers
will not be significantly increased. In addition, the development and
production costs of a graphics presentation capability as a component of the
full-text product may exceed costs estimates. A delay in the expansion and
distribution of the full-text database product or a significant overrun in the
cost to develop the full-text product could have a material adverse effect on
the Company's business, operating results and financial condition.
Furthermore, the earlier or concurrent development of a comparable full-text
product by any of the Company's competitors, may of whom have significantly
greater financial resources than Ovid, could have a material adverse effect on
the Company. See "Risk Factors - Ability to Respond to Technological Change"
and "--Competition" and "Business."
Dependence on Key Personnel. Ovid's success depends in large part
upon the continued services of Mark Nelson, Ovid's Founder, President and
Chief Executive Officer, and Deborah Hull, Chief Operating Officer of the
Company. The loss of the services of one or both of these key employees would
have a material adverse effect on the Company. The Company has obtained a key
man life insurance policy on the life of Mr. Nelson in the amount of $2
million; no such policy has been or is intended to be obtained on the life of
Ms. Hull. The Company's success also will depend in significant part upon the
continued service of many of its highly
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skilled personnel involved in research and development, sales and marketing,
programming and technical support and customer service, and upon its ability
to attract and retain additional highly qualified employees. The Company's
employees may voluntarily terminate their employment with the Company at any
time. Competition for such personnel in the electronic information services
industry is intense, and there can be no assurance that the Company will be
successful in retaining its existing personnel or attracting and retaining
additional personnel.
Dependence on Third-Party Suppliers. The Company licenses databases
on a non-exclusive, royalty basis from governmental entities, not-for-profit
associations and commercial businesses. These contractual arrangements
typically have terms ranging from one to five years. As part of its growth
strategy, the Company anticipates offering its customers additional
information, licensed from third parties including third parties with whom the
Company has no existing relationship. Historically, the Company has not
experienced difficulty in renewing its database and full-text journal licenses
with any licensers, although there can be no assurance that the licenses will
continue to be renewed or be made available to the Company on terms acceptable
to the Company. Any interruption in the Company's relationship with key
database suppliers could have a material adverse effect on the Company's
business, operating results, financial condition and liquidity. Medline,
licensed from the National Library of Medicine, a division of the Department
of Health and Human Services of the Federal Government, was subscribed to by
approximately 90% of the Company's subscribers at December 31, 1996. The
licensing agreement with the National Library of Medicine for Medline and
various other databases is perpetual, subject to the right of either party to
cancel the agreement on 90 days prior written notice. Medline is licensed by
the Company on a royalty-free basis in the United States and for a small
royalty internationally. There can be no assurance that this license will not
be canceled by the National Library of Medicine or that direct access to
Medline or other databases will not be offered generally to the public for
free or at prices significantly lower than those charged by the Company to its
present and potential subscribers. In addition, the Company has recently
experienced an increase in cost of goods sold due to an increase in the number
of databases with higher royalty costs. This trend is expected to continue as
the Company plans to distribute a higher percentage of databases from
commercial businesses, which tend to charge royalty rates greater than those
charged by governmental entities and not-for-profit associations. In addition,
there can be no assurance that the royalties charged to the Company by third
parties to license their databases and full-text journals will not be
increased significantly as contracts expire. Any such cancellation or
significant decrease in prices charged to the public or increase in royalties
charged by third-party suppliers would have a material adverse effect on the
Company's business, operating results, financial condition and liquidity. See
"Business -- Ovid Products and Services."
Limited Operating History. The Company has a limited operating
history and the revenue growth rates and profitability experienced by the
Company to date may not be indicative of its future growth and profitability.
Future results of operations may fluctuate significantly based upon numerous
factors including the timing of new product introductions by competitors and
by the Company, investment cycles in the information retrieval industry, the
rate of customer acceptance of new products and upgrades, the Company's
product mix and Ovid's level of international sales.
Variability of Quarterly Operating Results. Ovid has experienced, and
may experience in the future, quarter-to-quarter fluctuations in its operating
results. Factors such as the timing of
13
<PAGE>
new product introductions and upgrades, the timing of significant orders
received, the variability of customers' annual budgetary allocations, the mix
of products sold and the mix of domestic and international revenues could
contribute to this quarterly variability. Ovid's financial performance has
historically been somewhat stronger in the fourth quarter than in the other
fiscal quarters, primarily as a result of customer budgeting cycles and the
Company's sales force compensation structure. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Overview."
Revenues Derived from International Sales and Foreign Operations. The
Company's products are sold Internationally by the Company and by distributors
acting on its behalf, primarily to customers in Europe, Asia and Australia.
Revenues from sales to customers outside North America accounted for 32% of
the Company's total revenues in 1996. International sales and foreign
operations are subject to inherent risks, including longer payment cycles,
greater difficulty in accounts receivable collection, compliance with foreign
laws, changes in regulatory requirements, tariffs or other barriers,
difficulties in obtaining export licenses and in staffing and managing foreign
operations, exposure to currency exchange fluctuations and political
instability. Although substantially all the Company's sales and costs are
negotiated and paid in US dollars, changes in the values of foreign currencies
relative to the value of the US dollar can negatively impact international
sales of the Company's products and the Company's foreign operations. The
Company's international business performance may also be materially adversely
affected by the financial stability and technical, marketing and sales
resources devoted by distributors to sales of the Company's products and
subsequent customer support. Although these risks, including the risks
associated with currency exchange fluctuations, have not had any material
adverse effect on the Company to date, there can be no assurance that risks
inherent in international sales and foreign operations will not have a
material adverse effect on the Company in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Control by Principal Stockholder. As of December 31, 1996, the
Company's Founder, President and Chief Executive Officer, Mark Nelson, owned
approximately 69% of the outstanding Common Stock (57% of the Common Stock on
a fully diluted basis). As a result, Mr. Nelson will effectively have the
ability to control the Company and direct its affairs and business, including
the election of all Ovid's directors.
Dividend Policy. The Company has never declared or paid cash
dividends on its capital stock, other than distributions made when the company
was an S Corporation prior to its initial public offering. The Company
currently intends to retain all its earnings following the offering to finance
the expansion and development of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
Certain Anti-Takeover Provisions. The Board of Directors of the
Company is authorized to issue shares of Preferred Stock in one or more
series, and to fix the rights, preferences, privileges and restrictions of
those shares, without any further vote or action by the stockholders. The
potential issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage
bids for the Common Stock at a premium over the market price of the Common
Stock and may adversely affect the market price of, and the voting and other
rights of the holders of, Common Stock. The Company currently has no plans to
issue shares of Preferred Stock. See "Description of Capital Stock --
Preferred Stock."
14
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to
the executive officers and significant employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Mark L. Nelson 39 Founder, President and Chief Executive Officer
Deborah M. Hull 52 Chief Operating Officer
Jerry P. McAuliffe 33 Chief Financial Officer
Carleen E. Nelson 33 Vice President, Worldwide Sales and Marketing
Jeffrey A. Hoerle 29 Vice President, Operations
</TABLE>
Mr. Nelson is the Founder and has been the President and Chief
Executive Officer of Ovid since its inception in 1985. Prior thereto, Mr.
Nelson was with Kaim Associates Inc., a consulting firm that specializes in
the retrieval, evaluation and management of medical and pharmaceutical
information. He has a Bachelors Degree and a Masters Degree in English
Literature from Columbia University.
Ms. Hull, Ovid's Chief Operating Officer, joined the Company in
November 1990. Prior to joining Ovid, Ms. Hull was General Manager of ERM
Computer Services for one year, in charge of production, product development,
acquisitions and sales.
Mr. McAuliffe, Ovid's Chief Financial Officer, joined the Company in
July 1991. From August 1986 to July 1991, Mr. McAuliffe was employed by
Coopers & Lybrand, most recently as a Senior Associate. He has a Bachelors
Degree from Pace University and is a Certified Public Accountant.
Ms. Nelson, Ovid's Vice President, Worldwide Sales and Marketing,
joined the Company in 1988. She is a graduate of Loyola Marymount University.
Mr. Mark Nelson and Ms. Carleen Nelson are brother and sister.
Mr. Hoerle, Ovid's Vice President, Operations, joined the Company in
April 1993. Mr. Hoerle was employed at Macmillan Publishing Inc., from October
1991to February 1993, as Production Assistant and Electronic Text Manager. He
has a Bachelors Degree from Yale University and a Masters in Business
Administration from Columbia University.
Subject to the terms of applicable employment agreements, officers
serve at the discretion of the Board of Directors.
15
<PAGE>
ITEM 2. PROPERTY
The Company's corporate headquarters are located in New York, in a
leased facility of approximately 20,000 square feet of office space occupied
under a lease expiring January 31, 2004. The Company leases additional
facilities and offices, including a 23,000 square foot operating facility in
Salt Lake City, under a lease expiring March 31, 2007 and has sales and
support offices in London, Amsterdam and Sydney, each of which occupy limited
space with various terminations. The Company feels that suitable additional or
alternate space sufficient to serve the Company's foreseeable needs will be
available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on the NASDAQ Stock Market's
National Market (the "National Market") under the symbol OVID. The following
table sets forth, for the periods indicated, the high and low sale prices per
share of the Company's Common Stock from June 14, 1994, the date of the
Company's initial public offering, through December 31, 1996, as listed on the
National Market and reported by the National Quotation Bureau Incorporated.
HIGH LOW
1995
First Quarter............................. 10 8 1/2
Second Quarter........................ 11 1/4 8 1/2
Third Quarter........................... 14 1/2 10 1/2
Fourth Quarter......................... 12 1/2 6 3/4
1996
First Quarter............................. 9 7
Second Quarter......................... 11 1/2 5 3/4
Third Quarter............................ 11 1/8 8 1/4
Fourth Quarter.......................... 10 3/4 7 3/4
On March 25, 1997, there were 45 holders of record and an estimated
1,016 beneficial owners of the Company's Common Stock.
The Company has never declared or paid a cash dividend on its Common
Stock, other than S Corporation distributions to Mark Nelson, relating to
earnings prior to the Company's public offering. The Company currently intends
to retain all its earnings to finance the expansion and development of its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected historical consolidated
statement of operations and balance sheet data for the Company. The following
data should be read in conjunction with all of the financial statements and
notes thereto included elsewhere in this Annual Report on Form 10- K. The
selected consolidated statement of operations data of the Company and the
selected consolidated balance sheet data have been derived from the
consolidated financial statements of Ovid audited by Coopers & Lybrand L.L.P.,
independent accountants whose report with respect to the consolidated
statements of operations for the three years ended December 31, 1996 and to
the consolidated balance sheets as of December 31, 1995 and 1996 is included
elsewhere in this Annual Report on Form 10-K.
17
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
Revenues........................................... $9,674 $11,107 $22,229 $29,323 $33,605
Gross profit....................................... 6,532 8,189 14,690 20,358 22,661
Income from operations............................. 301 845 1,900 3,928 4,342
Income before income taxes......................... 266 798 1,937 4,122 4,595
Net income......................................... 266 702 1,486 2,469 2,756
Net income per share............................... .23 .35 .39
Pro Forma Data (Unaudited):
Historical income before income taxes.............. $ 266 $ 798 $ 1,937
Pro forma provision for income taxes............... -- 263 836
------- -------- --------
Pro forma net income............................... $ 266 $ 535 $ 1,101
======= ======== ========
Pro forma net income per share..................... $ .09 $ .17
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
(in thousands)
Working capital (deficit)............................ ($143) $ 367 $ 3,241 $ 5,921 $ 8,758
Total assets......................................... 2,989 4,880 14,582 20,114 26,462
Long-term debt, less current portion................ 222 342 -- -- --
Total stockholders' equity........................... 287 820 7,849 11,153 14,611
</TABLE>
See Notes 4 and 5 to Notes to Consolidated Financial Statements regarding the
Company's initial public offering and business acquisition in 1994. In respect
to the pro forma data see Notes 2 and 7 to Notes to Consolidated Financial
Statements regarding the Company's change in tax status to a C Corporation in
1994.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
OVERVIEW
The Company's revenues are derived from database subscriptions, which
include CD-ROM subscriptions and online access and usage fees, proprietary
software licenses and software maintenance agreements. Revenues are comprised
of both recurring revenues from the Company's installed customer base and from
first time sales. Several revenue trends have emerged as the Company's
domestic and worldwide sales have grown. Recurring revenues, comprising annual
renewals of database subscriptions and mandatory software maintenance for all
network customers, have become an increasingly larger component of the
Company's revenues, growing from 27% of total revenues in 1994 to 48% of total
revenues in 1996. Royalty fees to third-party data providers, which represent
the largest component of costs related to database subscription revenue, has
increased from 21% to 32% of database subscription revenue between 1994 and
1996, as the Company continues to distribute a higher percentage of databases
from commercial businesses, which tend to charge royalty rates greater than
those charged by governmental entities and not-for-profit associations.
Revenues from operations outside of the United States have increased from 19%
of total revenues in 1994 to 32% in 1996, with the addition of international
sales personnel and the use of third-party distributors. Although the rate of
change may vary, management expects each of these trends to continue.
The Company's marketing, pricing and customer support objectives
focus on generating recurring revenue from annual database subscriptions and
software maintenance contracts. This business model provides a relatively
predictable revenue stream. Renewal revenue from annual database licenses and
software maintenance contracts has increased from $6.1 million in 1994 to $9.1
million in 1995 and to $16.2 million in 1996. For each of the last 3 years,
more than 93% of the Company's subscribers have renewed subscriptions with the
Company, reflecting market acceptance of the Company's integrated solution.
On June 14, 1994, the Company completed an initial public offering of
1,300,000 shares of its Common Stock. The offering consisted of 1,182,000
shares of previously unissued shares by the Company and 118,000 shares from
selling stockholders immediately following their exercise of stock options. On
July 14, 1994, the Company issued an additional 115,000 shares of its Common
Stock pursuant to a 30-day over allotment option provided to the underwriters
of the initial public offering. Proceeds to the Company from the public
offering (including the shares sold pursuant to the exercise of the
overallotment option) net of costs, totaled approximately $6.6 million.
The Company has experienced quarter-to-quarter fluctuations in its
operating results, primarily due to the timing of new product introductions
and upgrades of existing products, the timing of significant orders received,
the variability of customers' annual budgetary allocations, the mix of
products sold and the mix of domestic and international revenues. Ovid's
financial performance has historically been somewhat stronger in the fourth
quarter than in the other fiscal quarters, primarily due to customer budgeting
cycles. The Company expects quarterly fluctuations in financial results to
continue.
19
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Revenues
Total revenues increased 32% from $22.2 million in 1994 to $29.3
million in 1995 and 15% to $33.6 million in 1996. The increases in total
revenues from 1994 to 1995 and from 1995 to 1996 resulted predominately from
increases in database subscriptions and software usage during these years
rather than from an increase in prices.
Revenues from database subscriptions and software increased 37% from
$19.8 million in 1994 to $27.2 million in 1995 and 13% to $30.8 million in
1996. Database subscription revenues represent annual database fees charged to
Ovid customers and database access and usage fees related to the Company's
online service. Software revenues represent first year fees charged to all
network customers, based on the number of users who are authorized to access
the system concurrently, plus additional fees charged to installed customers
for subsequent increases in the number of authorized concurrent-users. There
are no separate software charges for stand-alone customers as all database and
software charges are included in the annual database subscription fee. The
increase in these revenues from 1994 to 1996 was primarily attributable to an
increase in the sale of network configurations and annual online contracts in
North America, Australia, Japan and various parts of Europe. More than 93% of
the Company's subscribers worldwide have renewed their annual database
subscriptions, over the last three years.
Revenues from maintenance and other decreased 11% from $2.4 million
in 1994 to $2.1 million in 1995 and increased 30% to $2.8 million in 1996.
Hardware sales decreased from $736,000 in 1994 to $71,000 in 1995. Maintenance
revenues consist of mandatory software maintenance fees charged to all network
customers at the annual rate of 17% of the original software license fee and
optional annual hardware maintenance fee of 15% of the hardware sales price.
Maintenance revenues increased by $400,000 and $700,000, respectively, in 1995
and 1996, directly attributable to the increase in network sales, partially
offset by the virtual elimination of hardware maintenance fees resulting from
the planned decrease in hardware sales.
Cost of Revenues
The total cost of revenues was $7.5 million in 1994, $9.0 million in
1995 and $10.9 million in 1996, representing 34%, 31% and 33% of total
revenues in 1994, 1995 and 1996, respectively. The percentage decrease from
1994 to 1995 was primarily due to the Company's investment in a RISC-based
online host which permitted the transfer of online services from a more
expensive leased data center partially offset by higher royalty costs on
selected databases. In 1996, the percentage increase in cost of revenue was
primarily due to an increase in the number of databases with higher royalty
rates.
The cost of database subscriptions and software represented 34%, 32%
and 35% of related revenues in 1994, 1995 and 1996, respectively. The cost of
database subscriptions and
20
<PAGE>
software consists primarily of royalties to various information providers, and
mastering, media and distribution costs. The decrease in the cost of database
subscriptions and software as a percentage of related revenues from 1994 to
1995 were due primarily to the discontinued leased data center which served as
the temporary online host for the acquired BRS Online service in 1994,
partially offset by higher royalty costs on selected databases. Excluding data
center costs in 1994, cost of database and subscription revenues, as a
percentage of corresponding revenues increased from 27% in 1994 to 32% in
1995. In 1996, the percentage increase in cost of revenue was primarily due to
an increase in the number of databases with higher royalty rates. This trend
is expected to continue as the Company plans to distribute a higher percentage
of databases from commercial businesses, which tend to charge royalty rates
greater than those charged by governmental entities and not-for-profit
associations. In addition, cost of sales may increase due to the increased
costs associated with the full-text initiative.
The cost of maintenance and other revenues represented 36%, 15% and
6% of maintenance revenues in 1994, 1995 and 1996, respectively, and primarily
represents hardware replacement.
Gross Profit
The aggregate gross profit was $14.7 million in 1994, $20.4 million
in 1995 and $22.7 million in 1996, representing gross margins of 66%, 69% and
67% in 1994, 1995 and 1996, respectively. Changes in the overall 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
Sales and marketing expenses increased 36% from $4.3 million in 1994
to $5.9 million in 1995 and 24% to $7.4 million in 1996. The increases in
sales and marketing expenses during these periods were due primarily to the
expansion of the Company's direct sales and marketing organization, both
domestic and international, in an effort to increase market presence in the
academic market in North America and in European and Australian biomedical
markets. The Company expects this trend to continue. Sales and marketing
expenses as a percentage of total revenues were 20%, 20% and 22% during 1994,
1995 and 1996, respectively. The Company anticipates these expenses as a
percentage of total revenues in 1997 to be consistent with 1996 results.
Product Development
Product development expenses increased 30% from $4.4 million in 1994
to $5.7 million in 1995 and decreased 1% to $5.6 million in 1996. These
expenses are primarily comprised of the cost of programming and product
development activities related to new software modules and existing software
upgrades, payroll for technical support staff and production and other
overhead. Product development expenses reflect investment in projects
including full text, additional databases, software modules and an increase in
support staff to serve the rapidly growing number of customers. The decrease
from 1995 to 1996 is related to the shut down of the Company's Albany
production facility and decreased costs associated with the Company's move to
Salt Lake City in 1995, offset by increases to full-text development costs.
Product development expenses as a percentage of total revenues were 20%, 19%
and 17% in 1994, 1995
21
<PAGE>
and 1996, respectively. The Company anticipates continuing to make significant
expenditures in product development and support as the Company develops new
software products and facilitates service to a growing customer base.
The Company's development costs are treated in accordance with
Statement of Financial Accounting Standards No. 86. This Statement requires
the capitalization of software development costs subsequent to the
establishment of technological feasibility. As of December 31, 1996, no
development costs have been capitalized. While the Company continues to assess
the treatment of its development costs, as a result of changes in hardware and
software technology, future capitalization of these costs is not anticipated.
General and Administrative Expenses
General and administrative expenses increased 19% from $4.1 million
in 1994 to $4.9 million in 1995 and 10% to $5.4 million in 1996. The increase
from 1994 to 1995 was primarily attributable to expanded operations in Salt
Lake City, Amsterdam and Sydney. General and administrative expenses as a
percentage of total revenues were 18%, 17% and 16% in 1994, 1995 and 1996,
respectively. The percentage decreases from 1994 to 1996 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 anticipates this trend to continue in 1997.
Provision for Income Taxes
Prior to the Company's initial public offering of stock on June 14,
1994, the Company elected to be treated for income tax reporting purposes as
an S Corporation. The provision for income taxes for 1994 reflects this
election. Under its S Corporation election, the Company was liable for taxes
only on its taxable income derived from operations in the United Kingdom and
certain jurisdictions in the United States.
On June 14, 1994, the Company terminated its status as an S
Corporation. With the change to a C Corporation, the Company recognized an
effective tax rate for 1994 of approximately 26%, before the recognition of
the cumulative benefit related to the change in tax status. If the Company had
elected C Corporation status prior to 1994, the Company's income tax effective
rate would have been approximately 44% in 1994. The 1995 and 1996 tax
provisions represents an effective annual tax rate of 40%, which reflects the
Company's C Corporation status.
INTERNATIONAL OPERATIONS
The Company maintains sales offices in London, Amsterdam, Paris, Bonn
and Sydney. The Company's products are sold by Company sales personnel and by
distributors acting on the Company's behalf. Revenues from international
operations represented 19%, 27% and 32% of total revenues in 1994, 1995 and
1996, respectively. The increases were attributable to an increase in the
international sales force and size of the third party distributor network. The
Company intends to strengthen its international sales effort by adding more
direct sales representatives in its existing sales offices, by increasing the
number of countries in which it sells directly, and by more actively
supporting its distributors in other countries. The Company
22
<PAGE>
anticipates continued revenue growth from international operations as Ovid's
investment in this area increases.
The Company follows similar pricing for both its domestic and foreign
operations. Revenues from foreign operations, however, are reported net of
commissions paid to third party distributors used to sell product in many of
the international markets. Operating margins from operations outside the
United States historically have been higher than operating margins from
domestic operations, since all product development and support expenses and
substantially all general and administrative expenses have not been directly
allocated to the foreign operations. The domestic business entity considers
these costs in its transfer pricing to related foreign entities.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of
approximately $1.4 million and working capital of $8.8 million. Operating
activities provided the Company with $3.3 million in cash during the year
ended December 31, 1996 as compared to $3.4 million during the same period in
1995. An increase in accounts receivable, decrease in accounts payable, and
increased spending on full-text database offset by an increase in other
liabilities and decrease in other assets, primarily contributed to the minor
decrease in cash flows.
The Company's days revenue in accounts receivable, which typically
ranges from 80 days to 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 $3.8 million during
the year ended December 31, 1996, compared to using cash of $1.5 million
during the same period in 1995. The primary use of cash in 1996 was the
purchase of $2.0 million of capital equipment and the purchase of $21.0
million of short term investments less $19.2 million of redemptions. During
1995, the primary use of cash was the purchase of capital expenditures of $1.9
million, partially offset by the purchase of $12.8 million and redemption of
$13.2 million of short term investments. In the absence of strong investment
opportunities, the Company invests excess cash in short-term investments.
Capital expenditures were $1.9 million for 1995 and $2.0 million for 1996,
principally resulting from the expansion of the Company's online host
operation in Salt Lake City and expenditures related to the Company's
integrated business system in 1995 and 1996.
The Company has begun to aggressively pursue an initiative to obtain
non-exclusive rights to electronically distribute a significant amount of
scientific, technical and medical related journals. Licensing the content as
well as the necessary investment in production will require significant
capital resources. However, it is the current belief of the Company that these
activities can be financed by its available cash and short-term investments
and expected future cash flows from operations.
The Company's financing activities provided $137,000 from the
exercise of stock options for the year ended 1996 as compared to $182,000 used
in the same period of 1995 which related to a distribution in 1995 to the
Company's prior S Corporation stockholder. Effective February 13, 1996, the
Company entered into a line-of-credit agreement for $1.0 million
collateralized by
23
<PAGE>
the Company's accounts receivables, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required pursuant to this
Item begin on page F-1 of this Annual Report on Form 10-K.
24
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the heading "Proposal No. 1 -
Election of Directors" in the Company's definitive Proxy Statement (the "Proxy
Statement") relating to the Company's Annual Meeting of Stockholders to be
held on or about May 29, 1997, to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 with the Securities and Exchange Commission is
incorporated herein by reference. For information concerning the executive
officers and other significant employees of the Company, see "Business -
Executive Officers of the Registrant" in Item 1 above of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The Information contained under the heading "Executive Compensation"
in the Company's Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained under the heading "Beneficial Ownership of
Common Stock" in the Company's Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" in
the Company's Proxy Statement is incorporated herein by reference.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) 1 & 2 The Financial Statements and Financial Statement Schedules
are listed in the accompanying Index to Consolidated
Financial Statements and supplemental Schedule beginning on
page F-1 of this Annual Report on Form 10-K.
3 Exhibits
Exhibit No. Description
- ----------- -----------
3 (a) Certificate of Incorporation of the Registrant, as
amended. *(1)
(b) By-laws of the Registrant. *(1)
4 Specimen Common Stock Certificate. *(1)
10 (a) Licensing Agreement by and between the National Library of
Medicine (the "NLM") to Ovid with respect to the NLM
databases, including Medline, AIDSLINE and Health Planning
and Administration. *(1)
(b) Form of Ovid Database License Agreement. *(1)
(c) Agreement of Lease, dated November 12, 1993, by and between
333 7th Avenue Realty Co. and Ovid. *(1)
(d) Form of Tax Indemnification Agreement. *(1)
(e) Form of Officers' and Directors' Indemnification
Agreement. *(1)
(f) Ovid Technologies, Inc. 1990 Stock Option Plan, as
amended. *(1)(2)
(g) Ovid Technologies, Inc. 1993 Stock Option Plan. *(1)(2)
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Company. *(1)
23 Consent of Coopers & Lybrand L.L.P.
Exhibits have been included in copies of this Report filed with the
Securities and Exchange Commission. Stockholders of the Company will be
provided with copies of these exhibits upon written request to the Company.
26
<PAGE>
(B) Reports on Form 8-K
None.
(C) Exhibits
See (A) 3 above.
(D) Financial Statement Schedule
See "Index to Consolidated Financial Statements and Supplemental
Schedule" beginning on page F-1 of this Annual Report on Form 10-K. Schedules
not included herein are omitted because they are not applicable or the
required information appears in the Consolidated Financial Statements or notes
thereto.
- ---------------------
*(1) Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Registrant's Registration Statement on Form S-1
(File No. 33-78388).
(2) Compensatory plan or arrangement.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
OVID TECHNOLOGIES, INC.
(Registrant)
By: /s/ Mark L. Nelson
-----------------------------------
(Mark L. Nelson)
(President)
__________ , 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Mark L. Nelson President, ________, 1997
- ------------------ Chief Executive Officer
(Mark L. Nelson) (Principal Executive Officer)
and Director
/s/ Jerry P. McAuliffe Chief Financial Officer ________, 1997
- ---------------------- (Principal Financial and
(Jerry P. McAuliffe) Accounting Officer)
/s/ Martin F. Kahn Chairman of the ________, 1997
- ------------------ Board of Directors
(Martin F. Kahn)
/s/ Deborah M. Hull Chief Operating Officer ________, 1997
- ------------------- and Director
(Deborah M. Hull)
/s/ John J. Hanley Director ________, 1997
- ------------------
(John J. Hanley)
/s/ Harry Diakoff Director ________, 1997
- -----------------
(Harry Diakoff)
</TABLE>
28
<PAGE>
OVID TECHNOLOGIES, INC.
Index to Consolidated Financial Statements and Supplemental Schedule
Page
Financial Statements:
Report of Independent Accountants.................................... F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996......... F-2
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996................................... F-3
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 1994, 1995 and 1996 .............. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996................................... F-5
Notes to Consolidated Financial Statements .......................... F-6
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts ..................... S-1
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ovid Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of OVID
TECHNOLOGIES, INC. as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years ended December 31, 1996. We have also audited the
financial statement schedule listed in the index on page 28. These financial
statements and financial statement schedule are the responsibility of the
management of Ovid Technologies, Inc. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based
on our audits.
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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ovid
Technologies, Inc. as of December 31, 1995 and 1996, and the consolidated
results of its operations and cash flows for each of the three years ended
December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 13, 1997.
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS: DECEMBER DECEMBER
31, 1995 31, 1996
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,775 $ 1,426
Short-term investments - held to maturity 3,637 5,382
Accounts receivable, less allowance for doubtful
accounts of $488 and $895 for 1995 and 1996, respectively 7,855 12,310
Prepaid and other current assets 682 698
Deferred income taxes 185 298
Income taxes receivable 748 495
-------- --------
Total current assets 14,882 20,609
Equipment and leasehold improvements, net 2,977 3,216
Full text database, net 1,570 2,223
Deferred income taxes 355 307
Deposits and other assets 330 107
-------- --------
Total assets $ 20,114 $26,462
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,702 $ 2,343
Accrued expenses 2,146 3,146
Customer deposits 734 457
Income taxes payable 465 1,411
Unearned revenue 2,376 3,838
Obligation under database subscriptions 538 656
--------- --------
Total liabilities 8,961 11,851
Commitments (Note 13)
Stockholders' equity:
Preferred stock, non cumulative, $.01 par value; 1,000,000
shares authorized; no shares issued -- --
Common stock, $.01 par value; 10,000,000 shares authorized; 5,699,580 and
5,894,832 shares issued and outstanding for 1995 and 1996, respectively 57 59
Additional paid-in capital 8,058 8,688
Retained earnings 3,036 5,792
Foreign currency translation adjustment 2 72
--------- --------
Total stockholders' equity 11,153 14,611
--------- --------
Total liabilities and stockholders' equity $20,114 $26,462
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C>
Revenues:
Database subscriptions and software $19,839 $27,190 $30,823
Maintenance and other 2,390 2,133 2,782
-------- ------- -------
Total revenues 22,229 29,323 33,605
-------- ------- -------
Cost of revenues:
Database subscriptions and software 6,677 8,653 10,779
Maintenance and other 862 312 165
-------- ------- -------
Total cost of revenues 7,539 8,965 10,944
-------- ------- -------
Gross profit 14,690 20,358 22,661
Operating expenses:
Sales and marketing 4,347 5,912 7,355
Product development 4,371 5,666 5,612
General and administrative 4,072 4,852 5,352
-------- ------- -------
Total operating expenses 12,790 16,430 18,319
-------- ------- -------
Income from operations 1,900 3,928 4,342
Interest and other income, net 37 194 253
-------- ------- -------
Income before income taxes 1,937 4,122 4,595
Provision for income taxes 451 1,653 1,839
-------- ------- -------
Net income $ 1,486 $ 2,469 $ 2,756
======== ======== =======
Net income per share $.23 $.35 $.39
==== ==== ====
Pro Forma Data (Unaudited):
Historical income before income taxes $ 1,937
Pro forma provision for income taxes
(See Notes 2 and 7) 836
--------
Pro forma net income $ 1,101
========
Pro forma net income per share $.17
====
Weighted average number of shares of common stock and common stock
equivalents used in the calculation of historical and pro forma net income
per share 6,540,131 7,031,479 7,139,948
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON STOCK PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------ ------ -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 4,020,000 $ 40 $ 787 $ (7) $ 820
Issuance of common stock, net of
stock issuance costs of $616 1,297,000 13 $ 6,607 6,620
Exercise of stock options and
related income tax benefit 118,000 1 112 113
Reclassification of undistributed
S Corporation earnings and
contribution of Ovid Limited
shares (See Note 1) -- -- 501 (501) -- --
Net income -- -- 1,486 -- 1,486
Distribution to S Corporation
stockholder -- -- -- (1,205) -- (1,205)
Translation adjustment -- -- -- -- 15 15
--------- ----- ------- ------- ------- -------
Balance at December 31, 1994 5,435,000 54 7,220 567 8 7,849
Exercise of stock options and
related income tax benefit 264,580 3 838 841
Net income 2,469 2,469
Translation adjustment (6) (6)
--------- ----- ------- ------- ------- -------
Balance at December 31, 1995 5,699,580 57 8,058 3,036 2 11,153
Exercise of stock options and
related income tax benefit 195,252 2 630 632
Net income 2,756 2,756
Translation adjustment 70 70
---------- -------- -------- -------- ------- -------
Balance at December 31, 1996 5,894,832 $ 59 $ 8,688 $ 5,792 $ 72 $14,611
========== ======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,486 $ 2,469 $ 2,756
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,073 1,793 2,346
Provision for doubtful accounts 350 338 496
Deferred income tax benefit (510) (6) (65)
Changes in assets and liabilities, net of effects from acquisition of BRS
Online:
Increase in accounts receivable, net of unearned revenue (50) (1,968) (3,490)
Increase in full-text database -- (30) (1,220)
(Increase) decrease in other assets (7) (548) 956
Increase (decrease) in accounts payable 135 1,850 (359)
Increase (decrease) in other liabilities 183 (534) 1,857
-------- ------- --------
Cash provided by operating activities 2,660 3,364 3,277
-------- ------- --------
Cash flows from investing activities:
Purchase of short-term investments (10,540) (12,771) (20,975)
Redemption of short-term investments at maturity 6,515 13,159 19,230
Capital expenditures (2,249) (1,895) (2,018)
Acquisition of BRS Online (2,450) -- --
-------- ------- --------
Cash used in investing activities (8,724) (1,507) (3,763)
-------- ------- --------
Cash flows from financing activities:
Proceeds from bank loans 650 -- --
Principal payments under bank loans (1,152) -- --
Proceeds from the exercise of stock options -- 93 137
Net proceeds from the issuance of common stock net of
stock issuance costs of $616 6,620 -- --
Distributions to S Corporation stockholder (930) (275) --
-------- ------- --------
Cash provided by (used in) financing activities 5,188 (182) 137
-------- ------- --------
Net (decrease) increase in cash and cash equivalents (876) 1,675 (349)
Cash and cash equivalents, beginning of year 976 100 1,775
-------- ------- --------
Cash and cash equivalents, end of year $ 100 $ 1,775 $ 1,426
========= ======== ========
Supplementary information:
Cash paid:
Interest $ 35 $ -- --
Income taxes $ 267 $ 1,886 $ 273
Supplemental information on business acquired:
Fair value of assets acquired $ 4,778 -- --
Cash paid (2,450) -- --
-------- ------- --------
Liabilities assumed $ 2,328 -- --
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND NATURE OF THE BUSINESS:
Ovid Technologies, Inc. (the "Company"), a Delaware company, and its
wholly-owned subsidiaries in the United Kingdom and Australia, provide
electronic information retrieval services to the biomedical, academic and
healthcare markets.
As more fully described in Note 4, the Company completed an initial
public offering of the Company's common stock on June 14, 1994. In connection
with the initial public offering, the shares of Ovid Technologies Limited, a
United Kingdom company under common control, were contributed to the Company
as capital and Ovid Technologies Limited became a subsidiary of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
The consolidated financial statements include the financial
statements of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. Prior to the contribution of
the shares of Ovid Technologies Limited described in Note 1, the financial
statements of the Company and all entities under common control were prepared
on a combined basis with all intercompany balances and transactions
eliminated.
Revenue Recognition:
Revenues are derived primarily from database subscriptions and
software licenses, and maintenance agreements. The Company's principal
customers are currently medical centers, colleges and universities, research
facilities, hospitals, pharmaceutical and biotechnology companies.
Database subscriptions and software revenues include license fees for
third-party databases and the Company's proprietary software and access and
usage fees for the Company's online service. License fees for third-party
databases and the Company's proprietary software are recognized upon delivery
of the databases and software. The Company's costs of fulfilling its
obligations under the terms of the database subscriptions, which are
insignificant, are accrued at the time of delivery. Access and usage fees for
the Company's online service are recognized as the service is provided.
Customers may elect to pay a fixed-fee for unlimited access to the
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
online service. Revenues from these customers are recognized on a straight
line basis over the term of the contract.
Maintenance revenues are recognized over the term of the maintenance
agreement.
Software Development Costs:
The Company's development costs are treated in accordance with
Statement of Financial Accounting Standards No. 86. This Statement requires
the capitalization of software development costs subsequent to the
establishment of technological feasibility. As of December 31, 1996, no
development costs have been capitalized due to the uncertainty over future
technological feasibility. The Company continues to assess the treatment of
its development costs but because of changes in hardware and software
technology, future capitalization of development costs is not anticipated.
Software development expenses for the years ended December 31, 1994, 1995 and
1996 were $1,988, $2,347 and $2,542, respectively.
Cash and Cash Equivalents:
The Company considers all highly liquid instruments purchased with
original maturity of three months or less to be cash equivalents.
Short-term Investments - Held to Maturity:
In computing realized gain or loss, the cost of investments is based
on specific identification. Short-term investments - held to maturity,
consisting of U.S. Treasury bills and Variable Rate Remarketed Preferreds
purchased where the Company has the positive intent and ability to hold such
investments until maturity, are recorded at amortized cost. The fair value of
these investments as of December 31, 1996, is $5,382.
Investments with a remaining maturity of less than one year and an
original maturity of greater than 3 months are reported as short-term
investments.
Product Development:
Product development costs include payroll and benefits for technical
support staff and other overhead expenses. Support activities include
providing a telephone "help desk" and internal training. The Company provides
a help desk to all customers although it is only obligated to do so for its
customers with network maintenance agreements. The Company provides the help
desk to all customers as it believes that it provides valuable feedback on the
performance characteristics of its products and customer demands that are
incorporated into the product development process.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
Equipment and Leasehold Improvements:
Equipment and leasehold improvements are stated at cost. Computers,
furniture, fixtures and equipment are depreciated by the straight-line method
over their estimated useful lives of three years. Leasehold improvements are
amortized by the straight-line method over the shorter of their estimated
useful lives or the term of the related lease.
Income taxes:
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end on the basis of the
enacted laws and statutory tax rates applicable to the period in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Prior to the initial public offering of the Company's common stock
described in Note 4, the Company had elected to be treated as an S Corporation
for U.S. income tax reporting purposes which required that the Company's
income or loss for federal and certain state tax jurisdictions be recognized
by the S Corporation stockholder. Consequently, the Company recorded a
provision for income taxes only for taxable income in those jurisdiction which
did not recognize the S Corporation status. Effective with the initial public
offering of the Company's common stock, the Company changed its tax status to
a C Corporation and is subject to federal and all applicable state income
taxes.
Full-text Database:
The portion of the cost of the BRS Online acquisition (See Note 5)
allocated to full-text database is amortized under the straight-line method
over a period of five years. External conversion costs associated with the
development and conversion of additional full-text database information from a
print medium to a standard electronic format are capitalized and amortized on
a straight-line basis over a period of five years, commencing in the period
the database is available for sale. Impairment of the full-text database costs
are assessed quarterly by comparing the unamortized balance of each full-text
database to the gross estimated cash flows projected to generate and any
excess is written off. Amortization expense during the year ended December 31,
1994, 1995 and 1996 was $380, $480 and $566, respectively. Accumulated
amortization as of December 31, 1994, 1995 and 1996 was $380, $860 and $1,426,
respectively. Internal costs incurred to maintain and expand the database are
expensed as incurred.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
Net Income Per Share:
Pro forma and historical net income per share-primary are computed
using the weighted average number of shares of common stock and common stock
equivalents outstanding (using the treasury stock method). Net income per
share - fully diluted reflects the additional dilution related to stock
options due to the use of the market price at the end of the period when
higher than the average price for the period. Net income per share - fully
diluted is not presented as it is equivalent to net income per share-primary.
In accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 64, for all periods prior to the initial public
offering, common stock options issued during the twelve-month period prior to
the initial public offering have been included in the calculation as if they
were outstanding for all periods using the treasury stock method and an
initial public offering price of $6.00 per share. In addition, the calculation
includes approximately 143,000 shares of common stock representing the number
of shares, based on the initial public offering price of $6.00 per share,
whose proceeds would have been necessary to pay the final S Corporation
distribution (See Note 4).
Foreign Currency:
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at the end-of-period exchange rates. Revenues,
costs and expenses are translated at average exchange rates during the period.
The resulting translation gain or loss is reported as a separate component of
stockholders' equity.
Anticipated Effects of Statement of Financial Accounting Standards No. 128,
"Earnings per Share".
In March 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("Statement No. 128"). Statement No.
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. The Company has not determined the effect of
Statement No. 128 on the Company's EPS.
3. PREFERRED AND COMMON STOCK:
In April 1994, the Company authorized the issuance of up to 1,000,000
shares of preferred stock. The Board of Directors has the authority to issue
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions, including dividend, conversion, voting,
redemption (including sinking fund provisions) and liquidation preferences,
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
and the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders of the Company.
The Company has no shares of preferred stock outstanding and has no present
plans to issue any shares of preferred stock.
Effective April 20, 1994, the number of authorized shares of common
stock of the Company was increased to 10,000,000 shares, 4,020,000 shares of
which were then issued and outstanding.
4. INITIAL PUBLIC OFFERING OF COMMON STOCK:
On June 14, 1994, the Company completed an initial public offering of
1,300,000 shares of its common stock. The offering consisted of 1,182,000
shares of previously unissued shares by the Company and 118,000 shares from
selling stockholders immediately following their exercise of stock options.
Proceeds to the Company, net of transaction costs, totaled $6,089. On July 14,
1994, the Company issued an additional 115,000 shares of its common stock
pursuant to a 30-day overallotment option provided to the underwriters of the
initial public offering. Proceeds to the Company from this transaction, net of
transaction costs, totaled $531.
In connection with the change in the Company's tax status to a C
Corporation effective with the initial public offering, the Company paid S
Corporation distributions in 1994 and 1995 to the former sole stockholder.
This distribution was reflected as a reduction to stockholders' equity as of
December 31, 1994.
5. BUSINESS ACQUISITION:
On March 14, 1994, the Company acquired certain assets and assumed
certain liabilities of the BRS Online component of InfoPro Technologies, Inc.,
a subsidiary of Macmillan Communications, Inc. The total cost of the
acquisition was $2,450, consisting of a cash purchase price of $1,900, assumed
severance liabilities of $233 paid at the closing and additional severance
liabilities assumed and transaction and other costs aggregating $317. The cost
of the acquisition was allocated to the assets acquired and liabilities
assumed based upon their estimated fair values, as follows:
Working capital............................. $ (125)
Equipment................................... 175
Full text database.......................... 2,400
--------
$ 2,450
========
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
The estimated fair value of the equipment and full-text database is
being amortized by the straight-line method over their estimated useful lives
of three and five years, respectively. The acquisition was recorded using the
purchase method and, accordingly, the results of operations and financial
position of BRS Online are included in the Company's consolidated financial
statements from the date of the acquisition. In the fourth quarter of 1995, an
escrow agreement established in connection with the BRS acquisition was
settled and the unamortized cost of the full-text database was decreased by
$174.
Unaudited pro forma data giving effect to the purchase as if the
acquisition had been made as of January 1, 1994 and the Company had changed
its tax status to a C Corporation prior to January 1, 1994 (see Note 2) is as
follows:
DECEMBER 31, 1994
-----------------
Revenues.......................................... $24,538
Pro forma net income.............................. $ 1,051
Pro forma net income per share.................... $ .16
The pro forma results above are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect at the beginning of
the period nor are they necessarily indicative of future consolidated results.
6. LINE-OF-CREDIT AGREEMENT:
On February 25, 1994, the Company entered into a line-of-credit
agreement for $650, collateralized by the Company's assets, bearing interest
at the bank's prime rate plus 2%. The Company borrowed the entire $650 on that
date. In connection with the initial public offering of the Company's common
stock on June 14, 1994, as described in Note 4, the Company repaid all
borrowings under the line-of-credit agreement. This agreement expired on June
30, 1994.
Effective February 13, 1996, the Company entered a line-of-credit
agreement for $1,000 collateralized by the Company's accounts receivable,
bearing interest at the bank's prime rate plus 1%. There have been no
borrowings under this agreement. There is no expiration set for this
agreement, however, it is cancelable in writing by either party at any time.
7. INCOME TAXES
Income before income taxes comprises:
1994 1995 1996
---- ---- ----
Domestic................. $1,212 $3,466 3,162
Foreign................... 725 656 1,433
------ ------ ------
$1,937 $4,122 $4,595
====== ====== ======
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
The provision (benefit) for historical income taxes for the years
ended December 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996
---- ---- ----
U.S. Federal income taxes
Current $ 535 $ 1,077 $ 1,052
Deferred (403) 2 (26)
-------- ------- -------
132 1,079 $ 1,026
-------- ------- -------
State and local income taxes
Current 307 319 333
Deferred (123) 1 (4)
-------- ------- -------
184 320 329
-------- ------- -------
Foreign income taxes 135 254 484
-------- ------- -------
$ 451 $ 1,653 $ 1,839
======== ======= =======
The Company recognized a benefit of $56 in 1994 in connection with
the Company's election to change its tax status to a C Corporation, as more
fully discussed in Note 2.
A reconciliation of the U.S. Federal statutory rate to the historical
effective income tax rates of the Company for the years ended December 31,
1994, 1995 and 1996 is as follows:
1994 1995 1996
---- ---- ----
U.S. Federal statutory rate ............. 34.0 % 34.0 % 34.0%
Benefit of S Corporation status ......... (13.9) -- --
State and local income taxes ............ 6.3 5.1 4.7
Cumulative effect of change from
S Corporation status to
C Corporation status ................ (2.9) -- --
Foreign income taxes .................... -- 1.1 --
Other ................................... (0.2) (0.1) 1.3
----- ----- ------
23.3 % 40.1 % 40.0%
===== ==== ====
The components of the deferred income tax asset as of December 31,
1995 and 1996 are as follows:
1995 1996
---- ----
Accounts receivable....................................... 184 298
Accruals for operating expenses........................... 123 209
Equipment and leasehold improvements...................... 53 171
Full text database........................................ 171 (112)
Other..................................................... 9 39
---- -----
540 605
=== =====
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
The provision for pro forma income taxes (unaudited) for the year
ended December 31, 1994 as if the Company had terminated its S Corporation
status prior to January 1, 1994 is as follows:
1994
----
U.S. Federal, state and local income taxes........ $ 701
Foreign income taxes............................... 135
-------
$ 836
=======
A reconciliation of the U.S. Federal statutory rate to the pro forma
effective income tax rates (unaudited) of the Company for the year ended
December 31, 1994 is as follows:
1994
----
U.S. Federal statutory rate................ 34.0%
State and local income taxes............... 7.8
Foreign income taxes....................... 1.7
Other...................................... --
----
43.5%
====
8. BUSINESS SEGMENT:
The Company operates in one industry segment consisting of the
development, marketing and support of search and retrieval software.
The Company's operations are structured to achieve consolidated
objectives. As a result, significant interdependencies exist among
geographical units. Accordingly, the revenue, operating profit and
identifiable assets shown for each geographic area may not be indicative of
the amounts which would have resulted if geographical units were independent
of one another.
Summarized information relating to international operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States...................................... $18,003 $21,553 $22,930
Europe............................................. 3,076 4,305 6,078
Pacific Rim........................................ 1,150 3,465 4,597
------- ------- -------
Total sales to unaffiliated customers...... $22,229 $29,323 $33,605
======= ======= =======
Operating income:
United States...................................... $ 1,175 $ 3,272 $ 2,858
Europe............................................. 553 616 1,433
Pacific Rim........................................ 172 40 51
-------- ------- -------
Total operating income..................... $ 1,900 $ 3,928 $ 4,342
======== ======= =======
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
Sales to unaffiliated customers for the United States include sales
to customers in Canada of $1,250, $1,613 and $1,953 for the years ended
December 31, 1994, 1995 and 1996, respectively. All product development and
support expenses and substantially all general and administrative expenses
have been allocated to operations in the United States.
Identifiable assets are as follows:
DECEMBER 31,
----------------------------
1995 1996
---- ----
Identifiable assets
United States............................ $17,372 $21,083
Europe................................... 1,559 3,491
Pacific Rim........................ ..... 1,183 1,888
------- -------
Total identifiable assets........ $20,114 $26,462
======= =======
Depreciation and amortization are as follows:
DECEMBER 31
------------------------------------
1994 1995 1996
---- ---- ----
United States............. $ 1,061 $ 1,723 $ 2,258
Europe.................... 11 25 33
Pacific Rim............... 1 45 55
------- ------- -------
$ 1,073 $ 1,793 $ 2,346
======= ======= =======
9. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements comprise:
DECEMBER 31,
-------------------------------
1995 1996
---- ----
Computers............................... $4,996 $6,960
Furniture, fixtures and equipment....... 182 195
Leasehold improvements.................. 455 496
------ ------
5,633 7,651
Less, accumulated depreciation........ 2,656 4,435
------ ------
$2,977 $3,216
====== ======
Depreciation and amortization expense for the years ended December
31, 1994, 1995 and 1996 was $693, $1,313 and $1,779, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
10. ACCRUED EXPENSES:
Accrued expenses comprise:
DECEMBER 31,
-------------------------------
1995 1996
---- ----
Royalties................................. $ 1,105 $ 1,510
Employee compensation and benefits........ 619 862
Other..................................... 422 774
-------- -------
$ 2,146 $ 3,146
======= =======
11. STOCK OPTION PLANS:
The Company adopted the Ovid Technologies, Inc. Stock Plan, effective
July 1, 1990, and the Ovid Technologies, Inc. 1993 Stock Plan, effective
October 4, 1993 (the "Plans"), pursuant to which qualified and non-qualified
options to acquire an aggregate of 1,800,000 and 450,000 shares of common
stock, respectively, may be granted to key employees, consultants and
directors of the Company or its affiliates. The Plans authorize the Board to
issue incentive stock options ("ISO"), as defined in Section 422 of the
Internal Revenue Code (the "Code"), and stock options that do not conform to
the requirements of that Code section ("Non-ISO"). The exercise price of each
ISO may not be less than 100% of the fair market value of the Common Stock at
the time of grant, except that in the case of a grant to an employee who owns
(within the meaning of Code Section 422) 10% or more of the outstanding stock
of the Company (a "10% Stockholder"), the exercise price shall not be less
than 110% of such fair market value. The exercise price of each Non-ISO may
not be less than the par value of the common stock. Options may not be
exercised prior to the first anniversary, or on or after the tenth anniversary
(fifth anniversary in the case of an ISO granted to a 10% Stockholder), of
their grant. Options may not be transferred during the lifetime of an option
holder. No stock options may be granted under the Plans after June 30, 2000
and October 3, 2003, respectively. Options vest over a three year period.
The Plans are administered by a designated Committee chosen by the
Board of Directors (the "Committee"). Subject to the provisions of the Plans,
the Committee has the responsibility to recommend to the Board of Directors,
the individuals to whom the stock options are to be granted, the number of
shares to be covered by each option, the option price, the type of option, the
option period, the restrictions, if any, on the exercise of the option, the
terms for the payment of the option price and other terms and conditions.
Payment by the option holders upon exercise of an option may be made (as
determined by the Committee) in cash or other such form of payment acceptable
to the Committee, including shares of the Company's common stock.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting For Stock-Based Compensation" ("SFAS 123") which is
effective for periods beginning after December 15, 1995. SFAS 123 requires
that companies either recognize compensation expense for grants of stock,
stock options, and other equity instruments based on fair value, or provide
pro forma disclosure of net income and earnings per share in the notes to the
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
financial statements. The Company adopted the disclosure provisions of SFAS
123 in 1996 and has applied APB Opinion 25 and related Interpretations in
accounting for its Plans. Accordingly, no compensation cost has been
recognized in its Plans. Had compensation cost for the Company's stock-based
compensation Plans been determined based on the fair value at the grant dates
as calculated in accordance with SFAS 123, the Company's net income and
earnings per share for the years ended December 31, 1995 and 1996 would have
been reduced to the pro forma amounts indicated below:
1995 1996
EARNINGS PER EARNINGS PER
NET INCOME SHARE NET INCOME SHARE
---------- ----- ---------- -----
As Reported $ 2,469 $ .35 $ 2,756 $ .39
Pro Forma 2,398 .34 2,458 .35
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of 5 years, expected volatility of 47%, no
dividend yield and a risk-free interest rate ranging from 5.28% to 7.74%.
The following table summarizes the activity in options under the
plans.
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE WEIGHTED AVERAGE
------ -------------- ----------------
<S> <C> <C> <C>
Options outstanding - December 31, 1993 1,870,200 $ 0.01-$1.50 $ 0.20
Granted ................................ 118,000 $ 2.50-$9.25 $ 4.15
Canceled ............................... (17,000) $ 1.50 $ 1.50
Exercised .............................. (118,000) $ 0.01 $ 0.01
---------
Options outstanding - December 31, 1994 1,853,200 $ 0.01-$9.25 $ 0.45
Granted ................................ 164,950 $8.00-$12.00 $ 9.41
Canceled ............................... (29,334) $ 1.50-$9.50 $ 3.00
Exercised .............................. (264,580) $ 0.01-$2.50 $ 0.35
---------
Options outstanding - December 31, 1995 1,724,236 $0.01-$12.00 $ 1.26
Granted ................................ 273,033 $ 6.00-$9.25 $ 6.80
Canceled ............................... (15,084) $1.50-$12.00 $ 8.23
Exercised .............................. (195,252) $ 0.01-$6.00 $ 0.70
---------
Options outstanding - December 31, 1996 1,786,933 $0.01-$12.00 $ 2.06
Options exercisable - December 31, 1996 1,388,983 $0.01-$12.00 $ 0.60
=========
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
The following table summarized options outstanding and exercisable at
December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED REMAINING
EXERCISE PRICE SHARES AVERAGE CONTRACTUAL LIFE
--------------- --------- --------- ------------------
<S> <C> <C> <C> <C>
$0.01 1,168,000 $0.01 4.8 years
$1.50 - 2.50 162,900 $1.68 8.4 years
$4.80-12.00 456,033 $7.43 9.4 years
---------- ----- ---------
Total options outstanding December 31, 1996 1,786,933 $2.06 6.3 years
========== =====
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED REMAINING
EXERCISE PRICE SHARES AVERAGE CONTRACTUAL LIFE
-------------- ------ -------- -----------------
<S> <C> <C> <C> <C>
$0.01 1,168,000 $0.01 4.8 years
$1.50 - 2.50 147,900 $1.59 8.4 years
$4.8 -12.00 73,083 $8.01 9.4 years
--------- ----- ---------
Total options exercisable December 31, 1996 1,388,983 $0.60 6.3 years
========= ====
</TABLE>
12. DEFINED CONTRIBUTION PENSION PLAN:
The Company sponsors a defined contribution employee pension plan
covering substantially all of its employees. The pension plan provides for
employee contributions of up to 15% of eligible compensation, as defined. The
Company is under no obligation to contribute to the pension plan and has made
no contribution since inception.
13. COMMITMENTS:
The Company rents office facilities under operating leases,
principally in New York, Salt Lake City, London, Sydney and Amsterdam. These
agreements expire at various dates through 2007. Future minimum rental
payments under these operating leases as of December 31, 1996 aggregate as
follows:
1997.................................................. $ 577
1998.................................................. 569
1999.................................................. 588
2000.................................................. 606
2001.................................................. 626
Thereafter............................................ 2,260
------
Total future minimum lease payments ........ $5,226
======
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$485, $635 and $719, respectively.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COL. A Col. B COL. C COL. D COL. E
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
PERIOD EXPENSE DEDUCTIONS PERIOD
------ ------- ---------- ------
<S> <C> <C> <C> <C>
Description
- -----------
Allowance for doubtful accounts
1994........................................... $100,000 350,000 -- 450,000
1995........................................... $450,000 338,000 300,000 488,000
1996........................................... $488,000 496,000 89,000 895,000
</TABLE>
S-1
<PAGE>
Exhibit 11
OVID TECHNOLOGIES, INC.
Computation of Net Income Per
Common Stock and Common Stock Equivalents
Years ended December 31, 1994, 1995 and 1996
(in thousands, except share amounts)
--------------
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 1,486 $ 2,469 $ 2,756
======== ========== =========
Historical income before income taxes $ 1,937
Pro forma provision for income taxes 836
--------
Pro forma net income $ 1,101
========
Primary shares:
Weighted average number of common stock and common stock equivalents
outstanding:
Common stock 4,776,958 5,530,676 5,773,861
Options 1,763,173 1,500,803 1,366,087
--------- --------- ---------
6,540,131 7,031,479 7,139,948
========= ========= =========
Fully diluted shares:
Weighted average number of common stock
and common stock equivalents outstanding:
Common stock 4,776,958 5,530,676 5,773,861
Options 1,785,147 1,500,803 1,366,087
--------- --------- ---------
6,562,105 7,031,479 7,138,179
========= ========= =========
</TABLE>
S-2
