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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, 1997
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.
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. [ ]
Aggregate market value of the Registrant's Common Stock held by
non-affiliates at March 20, 1998 (based on the closing sale price for such
shares on March 20, 1998 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): $ 36,409,973
Common Stock outstanding as of March 20, 1998: 6,206,665 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") provides electronic
information retrieval services to major medical and research centers throughout
the world. The Company believes it is a leading provider of these services to
the scientific, technical and medical (STM) markets. Based in New York, with
several international offices and nearly 200 employees, Ovid develops
sophisticated search and retrieval software for research-intensive institutions
and bundles this technology with full text and bibliographic databases. Ovid
software is distinguished by its intuitive user interface; unique algorithms
that search for and retrieve high-value information; interoperability with
multiple systems and platforms; and an advanced architecture that leverages
electronic full text, a primary focus for the Company.
Ovid technology is available on several platforms locally as part of
a local area network or stand-alone system, and remotely via Ovid Online,
which is offered through the Internet. Ovid's customer base encompasses more
than 5,000 prominent institutions worldwide, including private and public
universities, library consortia, hospital libraries, pharmaceutical firms and
governmental organizations.
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
(GUI) 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. Approximately 77% of the major medical centers in the United States and
Canada, 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, subscribe to the
Company's services. 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, are also Ovid
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subscribers. The Company has maintained a 93% retention rate of renewal
subscription revenue worldwide during the last three years.
The Company's GUI 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 use 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 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.
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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.
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
GUI 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.
o Linking - allows the user to navigate between bibliographic databases
and full text journals through embedded HTML links.
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.
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OVID software has been designed to operate in a single-user system, as
part of a network, or on the Internet. OVID software has been designed with a
client-server architecture, which in a network 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 simultaneously 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, and 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 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, or a variable usage-based fee plan for system access and document
display. The Company believes that the ability of its customers to budget
their total expenses by choosing the fixed-fee option is particularly
appealing to institutions that wish to allow all their users, including
students and others with limited budgets, to have access to the Company's
services.
Databases
The databases offered by the Company are licensed from various
governmental entities, not-for-profit associations and commercial businesses
that 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, 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 approximately 30% of net database
subscription revenues to the original publishers.
Approximately 86% of the Company's customers subscribe to the Medline
database, a bibliography of the world's leading biomedical literature,
produced by the U.S. 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 worldwide. Other
databases that are frequently subscribed to by the Company's customers are:
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Ovid's Core Biomedical Collection, a compilation of fifteen of the world's
leading medical journals; 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 and full text databases online. Ovid
distributes the full text of recently published and archival articles from
over 100 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
through the Internet or by commercial telecommunication networks. The full
text databases 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 full text databases themselves. Ovid enhances the utility
of these databases through extensive data loading procedures, which
standardize the organization of the articles and normalizes the use of
symbols, abbreviations and other scientific representations.
During 1997, the Company licensed 5 additional biomedical, scientific
and academic databases, and more than 100 additional biomedical and scientific
journals.
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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, 1997, the
Company had approximately 840 customers for its local network services, 2,540
customers for its stand-alone CD-ROM systems and 12,800 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 and
online services have been sold to 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 medical 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.
The following is a list of certain institutional customers which
subscribe to the Company's network systems and online services and which
provide the Company with recurring annual revenues ranging from approximately
$10,000 to $1,000,000:
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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
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
San Francisco State 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 Michigan
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
Nottingham University
Sheffield University
University of Aberdeen
University of Copenhagen
University of Freiburg
University of Oslo
University of Lausanne
University of Wales
University of Zurich
Wellcome Institute
MEDICAL CENTERS AND ACADEMIC INSTITUTIONS (ASIA AND AUSTRALIA
Hong Kong University of Sciences and Technology
Kaoshiung Medical College, Taiwan
Ministry of Health, Japan
National Health Research Institute, Taiwan
National University of Singapore
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)
Boston Library Consortium
British Medical Association
Colorado Alliance of Research Libraries
Council of Australian University Libraries (CAUL)
Gaelic Consortium, South Africa
Health Sciences Library Consortium of Pennsylvania
ILCSO (Illinoi7s Library Computer Systems Organization)
Minitex Consortium
OhioLINK
Royal College of Surgeons, Ireland
Royal College of Surgeons, London
TexShare
PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES
Boehringer Ingelheim Pharmaceuticals, Inc.
Eli Lilly
Fisons Corporation
Janssen Pharmaceuticals
Marion Merrell Dow, Inc.
Novartis Pharmaceuticals
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 31, 1998 of 34 employees in the United States and 17 employees based
overseas, operates from the Company's headquarters in New York City and 6
sales offices in domestic and foreign cities. The international direct sales
and marketing organization is complemented by approximately 56 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, CIO's and CTO's, 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 conducts an ongoing public
relations program to generate additional trade press coverage, publishes
in-house "white papers" describing the Company's products and services, and
speaks at industry conferences concerning developments in information
retrieval technology. 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, Bonn,
Copenhagen, 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 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 Internet.
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, which can be
incorporated into future 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, text retrieval software companies, and bibliographic and
STM content providers. 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 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.
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EMPLOYEES
As of January 31, 1998, the Company had 189 full-time employees,
consisting of 44 in product development and programming, 31 in production, 51
in sales and marketing, 29 in technical support and customer service and 34 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 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 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 bibliographic and STM content
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providers. The Company expects that competition from these sources will
increase. Additionally, 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 ongoing 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 cost 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, many 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 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.
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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 86% of the Company's
subscribers at December 31, 1997. 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. The Company licenses Medline on a royalty-free basis worldwide.
There can be no assurance that this license will not be canceled by the
National Library of Medicine or that comparable 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 June 1997, the National Library of Medicine began
offering free access to Medline, via the Internet. To date, the free access has
not adversely impacted revenues. However, there can be no assurance that, over
time, future revenues will not be adversely impacted. 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 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, Australia and
Latin America. Revenues from sales to customers outside North America accounted
for approximately 34% of the Company's total revenues in 1997. 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.
13
<PAGE>
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, 1997, the
Company's Founder, President and Chief Executive Officer, Mark Nelson, owned
approximately 66% of the outstanding Common Stock (56% of the Common Stock on
a 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 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:
NAME AGE POSITION
Mark L. Nelson 40 Founder, President and Chief Executive Officer
Deborah M. Hull 53 Chief Operating Officer
Jeffrey A. Hoerle 30 Chief Financial Officer
Carleen E. Nelson 34 Vice President, Worldwide Sales and Marketing
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. From 1989 to 1990, Ms. Hull served as Vice
President of Sales and Marketing at the Institute for Scientific Information,
responsible for worldwide sales and marketing. From 1979 to 1989, Ms. Hull
served in various executive capacities at BRS Information Services, Inc.,
including Vice President of Sales and Marketing.
Mr. Hoerle joined the Company in April 1993 and was appointed Chief
Financial Officer in August 1997. Mr. Hoerle was employed at Macmillan
Publishing Inc., from October 1991 to April 1993, as Production Assistant and
Electronic Text Manager. He has a Bachelors Degree from Yale University and
has a Masters in Business Administration from Columbia University.
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.
Subject to the terms of applicable employment agreements, officers
serve at the discretion of the Board of Directors.
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 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.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On or about June 6, 1997, an action was commenced in the Circuit
Court of the 13th Judicial Circuit of the State of Florida against the Company
by PowerCerv Technologies Corporation ("PowerCerv"), a firm hired by the
Company to provide certain software and consulting services. On or about July
7, 1997 the Company removed the action to the United States District Court for
the Middle District of Florida. The complaint alleges counts for breach of
contract, open account, and tortious interference with contractual or business
relationships. PowerCerv seeks, among other things: $250,000 as liquidated
damages for the purported hiring by the Company of two former employees of
PowerCerv resulting in an alleged breach of the agreement between the Company
and PowerCerv; approximately $62,000 for unpaid invoices; and an unspecified
amount of other damages on the tortious interference claim related thereto.
This action was settled in March 1998, and, in connection therewith, the
Company paid to PowerCerv an aggregate amount of $102,500.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<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 for the years ended December 31, 1996 and
1997, as listed on the National Market and reported by the National Quotation
Bureau Incorporated.
HIGH LOW
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
1997
First Quarter................... 10 7 1/4
Second Quarter.................. 10 13/16 6 3/4
Third Quarter................... 10 5/8 8
Fourth Quarter.................. 11 1/2 7
On March 20, 1998, there were 50 holders of record and an estimated
1,130 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, 1997 and to
the consolidated balance sheets as of December 31, 1996 and 1997 is included
elsewhere in this Annual Report on Form 10-K.
18
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
Revenues................................ $11,107 $22,229 $29,323 $33,605 $27,249
Gross profit ........................... 8,189 14,690 20,358 22,661 12,507
Income (loss) from operations........... 845 1,900 3,928 4,342 (8,834)
Income (loss) before income taxes....... 798 1,937 4,122 4,595 (8,433)
Net income (loss) ...................... 702 1,486 2,469 2,756 (7,757)
Net income (loss) per share.............
Basic .45 .48 (1.29)
Diluted .35 .39 (1.29)
Pro Forma Data (Unaudited):
SEE NOTE 1 SEE NOTE 2
---------- ----------
Revenues................................ $25,037 $31,111 $37,423
Gross profit ........................... 7,406 9,924 16,953
Income (loss) from operations........... 1,201 2,868 (870)
Income (loss) before income taxes....... 1,395 3,121 (469)
Net Income (loss) ...................... 943 1,873 (522)
Net income (loss) per share.............
Basic .17 .32 (.09)
Diluted .13 .26 (.09)
Historical income before income taxes... $ 798 $ 1,937
Pro forma provision for income taxes.... 263 836
------- -------
Pro forma net income ................... $ 535 $ 1,101
======= =======
Pro forma net income per share..........
Basic $ .13 $ .23
Diluted .09 .17
======= =======
</TABLE>
1. In 1994, the Company completed an initial public offering of
1,300,000 shares of its common stock. Prior to the initial public offering, 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. Effective with the initial public offering, the Company changed
its tax status to a C Corporation. For all periods prior to the initial public
offering, pro forma net income per share include the effect of common stock
options issued during the twelve month period prior to the initial public
offering and 143,000 shares of common stock representing the number of shares
that would have been necessary, assuming an initial offering price of $6.00 per
share, to pay the final S Corporation distribution.
2. Effective July 1, 1997, the Company adopted SOP 97-2. See Note 2 of
the consolidated financial statements and additional discussion in Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
pro forma amounts presented assume the Company had always recognized revenue
from the license of third-party databases in accordance with the provisions of
SOP 97.
19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
(in thousands)
Working capital............................. $ 367 $ 3,241 $ 5,921 $ 8,758 $2,177
Total assets ............................... 4,880 14,582 20,114 26,462 32,349
Long-term debt, less current portion........ 342 -- -- -- 577
Total stockholders' equity.................. 820 7,849 11,153 14,611 5,190
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Ovid Technologies, Inc. is a leading provider of electronic
information to the scientific, technical, and medical (STM) markets. The
Company develops sophisticated search software and bundles this technology
with an aggregation of bibliographic and full text databases. More than 5,000
prominent institutions worldwide use Ovid's products on Intranets, the
Internet, or on stand-alone systems.
The Company focuses on two principle components to generate its
recurring revenue. The first is the sale of CD-ROM based (Intranet) products
for installation at individual sites. The Company receives recurring revenue
through renewals on the site's database subscriptions and annual maintenance
fees on the software purchase. The second is the Company's Internet online
service where recurring revenue comes through renewals on database
subscriptions and an annual access fee for use of the system. Ovid's customer
retention rate has historically been in excess of 90%.
Growth of the Company continues to be derived from these two
components both domestically and internationally. In every market, a strategic
objective of the Company has been to move customers to the Internet online
service model. This removes certain customer barriers for purchasing large
quantities of full text and produces a larger stream of renewable revenue. Ovid
saw a significant increase in its online business during 1997. On a billings
basis, Ovid's online fixed fee sales increased 130% to $7.2 million for the
year ended December 31, 1997, compared to $3.1 million for the same period
during 1996. Additionally, the approximate number of fixed-fee customers
increased to 12,800 from 4,500 during the year ended December 31, 1997. Ovid
also saw a significant increase in its full text business during 1997. On a
billings basis, Ovid's full text sales increased 245% to $4.8 million for the
year ended December 31, 1997, compared to $1.4 million for the same period
during 1996.
Investment in the international market continues to grow, and while
the European market has experienced only modest growth, the Company continues
to create greater worldwide distribution channels and has recently begun sales
and marketing efforts in South America. Also important to the growth of the
Company is the Company's ability to license additional content from STM
publishers. Ovid now licenses full text content from more than forty different
publishers and continues to add new journal titles from both existing and new
publishers. The Company has also begun investment in a new project, the
Clinical Information Products (CIP) group. Products from CIP leverage Ovid's
investment in the medical community and broaden the breadth of information the
Company provides.
As discussed in detail in adjacent sections, effective July 1, 1997,
the Company adopted Statement of Position (SOP) 97-2, Software Revenue
Recognition. The transitional requirements of adopting SOP 97-2 have had an
initial significant impact on reported revenues; however, the change in revenue
recognition is expected to decrease the cyclical trends historically
experienced by the Company.
In combination with the growth drivers discussed above, the Company
continues to control operating expenses and also continues to increase its
operating cash flow. As of December 31, 1997, the Company had cash and cash
equivalents, short-term investments and investments in marketable securities of
approximately $10.8 million as compared with a corresponding balance of
approximately $6.8 million at December 31, 1996.
21
<PAGE>
SIGNIFICANT EVENTS
The results of operations for the year ended December 31, 1997 have
been impacted by several significant events, which limit comparability with
previous years. These events are described below:
WRITE-OFF OF LONG-LIVED ASSETS
MANAGEMENT INFORMATION SYSTEM
As more fully described in Note 5 to the consolidated financial
statements, effective September 30, 1997, the Company wrote off the capitalized
costs associated with its integrated business system (IBS). This decision
resulted from difficulties with the system vendor and the findings of an
independent evaluation of IBS. In addition, a lawsuit against the Company
initiated by the system vendor was settled in March 1998. See Note 14 to the
consolidated financial statements.
The $1.1 million write-off of the carrying value of the project at
September 30, 1997 was charged as follows: cost of revenues $276,000 selling
and marketing expense $221,000 general and administrative $221,000; and product
development $386,000.
FULL-TEXT DATABASE
As more fully described in Note 5 to the consolidated financial
statements, during the third quarter, the Company determined that, based on the
need to continue to make investments in full text content, projected future
sales, and related expenses, the licensing of full-text databases may not
result in positive cash flow for several years. As a result, the net book value
of the full-text databases, $3,194,000, was charged to cost of revenues during
the third quarter of 1997. Included in the write-off were $621,000 of
unamortized costs associated with full text databases acquired from BRS Online
in March 1994. Cash flows from projected future sales of these specific
products, which reflect a continuing shift to other Company products, indicate
that the Company would not recover the asset's net carrying value.
The remaining portion of the full-text database write-off, $2,573,000,
relates to certain external conversion costs associated with the development of
a full-text database product, which have been capitalized by the Company since
the end of 1995. The Company initially anticipated that the conversion costs
would only be incurred for a short period of time until the publishers were
able to provide the information in a suitable electronic format. The
publishers' ability to provide information electronically has been slower than
anticipated. Also, as additional publishers' content has been added to the
database, and as a result of recent negotiations during the 3rd quarter with
current content providers, it has become apparent that ongoing royalty rates
will likely be greater than originally anticipated thereby reducing earlier
estimates of profitability and related cash flows.
CHANGE IN ACCOUNTING PRINCIPLE
As described in Note 2 to the financial statements, the Company has
adopted SOP 97-2, Software Revenue Recognition, effective July 1, 1997. Prior
to the adoption of SOP 97-2, the Company recognized license fees for
third-party databases and proprietary software upon shipment. Royalty
obligations to publishers were accrued at the time of shipment. Ovid's costs of
fulfilling its obligations under the terms of the license agreement, which are
not significant, were also accrued at the time of shipment. As a result of the
change, license fees for third-party databases and the Company's
22
<PAGE>
proprietary software revenues for these products are recognized on a
straight-line basis over the term of the contract, generally one year. Royalty
costs to publishers and fulfillment costs are also recognized over the same
period.
The transition provisions of SOP 97-2 specifically prohibit
retroactive application and require prospective adoption only on transactions
entered into on or after the effective date. As a result, the Company's
reported revenues will be negatively effected, although to a lessening extent,
until June 30, 1998 at which time the transitional impact will end.
RESULTS OF OPERATIONS
Revenues
Total revenues increased from $29.3 million in 1995 to $33.6 million
(an increase of 15%) and decreased to $27.2 million in 1997 (a decrease of
19%). The increase in total revenues from 1995 to 1996 resulted predominantly
from increases in database subscriptions and software usage during these years
rather than from an increase in prices. The decrease in total revenues from
1996 to 1997 results predominantly from the change in the Company's method of
accounting for revenues for license fees for third-party databases and
proprietary software as described in Note 2 to the consolidated financial
statements.
Revenues from database subscriptions and software increased from $27.1
million in 1995 to $30.8 million (an increase of 13%) primarily due to an
increase in the sale of network configurations and annual online contracts in
North America, Australia, Japan and various parts of Europe. Although such
trends continued in 1997, these revenues declined to $24.1 million in 1997 (a
decrease of 22%) principally due to the change in accounting.
Revenues from maintenance and other increase from $2.1 million in 1995
to $2.8 million in 1996 (an increase of 30%) and to $3.1 million in 1997 (an
increase of 13%). 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. The increases in maintenance and other
revenues from 1995 though 1997 are directly attributable to the increase in
network sales.
(See also pro forma presentation below)
Cost of revenues
The total cost of revenues increased from $9.0 million in 1995 to
$10.9 million in 1996 (an increase of 22%) and to $14.7 million in 1997 (an
increase of 35%). Such amounts represented 31%, 33% and 54% of total revenues
in 1995, 1996 and 1997, respectively. The percentage increase in cost of
revenues in 1996 was primarily due to an increase in the number of databases
with higher royalty rates. The increase in the percentage of total revenues in
1997 was due to the write-off of capitalized costs associated with the
full-text databases and IBS as described in Note 5 to the consolidated
financial statements. The percentage increase also reflects a continuation of
the trend in increases to the royalty rates.
The cost of database subscriptions and software represented 32%, 35%
and 60% of related revenues in 1995, 1996 and 1997, respectively. The
percentage in 1996 was primarily due to an increase in the number of databases
with higher royalty rates. The percentage increase in 1997 was primarily
related to the write off of amounts associated with full-text databases and
IBS.
23
<PAGE>
PRO FORMA PRESENTATION
As a result of the write-off of long-lived assets and the change in
accounting principle described above, the results of operations for the year
ended December 31, 1997 are not comparable with amounts from prior years. Set
forth below are pro forma data which assume that the Company's accounting for
license fees for third-party databases and proprietary software has always
conformed to the provisions of SOP 97-2. Write-offs charged to cost of revenues
and operating expenses are included in the pro forma amounts, and are noted in
footnotes to the table. As a result of the change in accounting, the results of
operations for the revenues, cost of revenues, and gross margin components will
be discussed on a pro forma basis as set forth in the table below. Operating
expenses, as can be noted in the table, do not differ on a reported versus pro
forma basis.
Presentation of Pro Forma Data
(In thousands, except per share amounts)
(unaudited)
Year Ended
December 31,
1995 1996 1997
Total Revenues
As reported 29,323 33,605 27,250
Pro forma 25,037 31,111 37,423
Total cost of revenues
As reported 8,965 10,944 14,743
Pro forma(1) 7,406 9,924 16,953
Gross profit
As reported 20,358 22,661 12,507
Pro forma(1) 17,631 21,187 20,470
Total operating expense
As reported 16,430 18,319 21,340
Pro forma(2) 16,430 18,319 21,340
Income (loss) from operations
As reported 3,928 4,342 (8,833)
Pro forma 1,201 2,868 (870)
Net income (loss)
As reported 2,469 2,756 (7,757)
Pro forma 943 1,873 (522)
Net income (loss) per
common share(3)
Basic
As reported 0.45 0.48 (1.29)
Pro forma 0.17 0.32 (0.09)
Diluted
As reported 0.35 0.39 (1.29)
Pro forma 0.13 0.26 (0.09)
(1) Pro forma total cost of revenues and gross profit for the year
ended December 31, 1997 include charges for the write-off of IBS ($276) and
full text database ($3,194).
(2) Pro forma total operating expense for the year ended December 31,
1997 include $828 for the write-off of long-lived assets described above.
(3) Excluding the effect of the write off of IBS and full text
databases, pro forma basic and diluted net income per common share for the year
ended December 31, 1997 would have been $0.38 and $0.32, respectively.
24
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Revenues
1997 compared to 1996
Total pro forma revenues increased 17% from $31.1 million in 1996 to
$37.4 million in 1997. The increase in total revenues resulted predominately
from increases in database subscriptions and software usage during these years
rather than from an increase in prices. Although the revenue growth was
worldwide, network sales in North America, Japan and Australia were
particularly strong during 1997.
Pro forma revenues from database subscriptions and software increased
20% from $28.4 million in 1996 to $34.1 million in 1997. 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. This revenue growth was primarily
attributable to an increase in sales of network configurations to medical and
academic institutions in North America and an increase in sales outside of
North America, primarily, Japan, Australia and Western Europe. The Company has
maintained a 93% retention rate of renewal subscription revenue worldwide
during the last three years.
Pro forma revenues from maintenance and other increased 19% from $
2.7 million in 1996 to $3.2 million in 1997. 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. The increase in these
revenues is directly attributable to the increase in sales of network
configurations discussed above.
1996 compared to 1995
Total pro forma revenues increased 24% from $25.0 million in 1995 to
$31.1 million in 1996. The increases in total revenue resulted predominately
from increases in database subscriptions and software usage during these years
rather than from an increase in prices.
Pro forma revenues from database subscriptions and software increased
26% from $22.6 million in 1995 to $28.4 million in 1996. The increase in these
revenues from 1995 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.
Pro forma revenues from maintenance and other increased 12.5% from
$2.4 million in 1995 to $ 2.7 million in 1996. The increase is 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.
25
<PAGE>
Cost of Revenues
1997 compared to 1996
The total pro forma cost of revenues was $9.9 million in 1996 and
$17.0 million in 1997, representing 32% and 45% of total pro forma revenues in
1996 and 1997, respectively. The $17.0 million total pro forma cost of revenues
for 1997 includes $3.5 million in write-offs of long-lived assets. Net of this
charge, total pro forma cost of revenues represent 36% of total pro forma
revenues for 1997. The percentage increase in cost of revenue was primarily due
to continued full-text keying costs of $1.8 million in the 4th quarter of 1997,
as well as an increase in the number of databases with higher royalty rates.
The pro forma cost of database subscriptions and software represented
35% and 49% of related pro forma revenues in 1996 and 1997, respectively. The
cost of database subscriptions and software consists primarily of royalties to
various information providers, and mastering, media and distribution costs. The
pro forma cost of database subscriptions and software includes the $3.5 million
in write-off of long-lived assets, as discussed above. Net of this charge, the
pro forma cost of revenues represent 39% of the related pro forma revenues in
1997. As discussed above the percentage increase is primarily due to expensing
full-text keying of $1.8 million during the 4th quarter, as well as an increase
in the number of databases with higher royalty rates.
1996 compared to 1995
The total pro forma cost of revenues was $7.4 million in 1995, and
$9.9 million in 1996, representing 30%, and 32% of total pro forma revenues in
1995, and 1996, respectively. The percentage increase in pro forma cost of
revenue was primarily due to an increase in the number of databases with higher
royalty rates.
The pro forma cost of database subscriptions and software represented
32% and 35% of related pro forma revenues in 1995, and 1996, respectively. The
cost of database subscriptions and software consists primarily of royalties to
various information providers, and mastering, media and distribution costs. The
percentage increase in pro forma cost of revenue was primarily due to an
increase in the number of databases with higher royalty rates.
26
<PAGE>
Gross Profit
The aggregate pro forma gross profit was $ 17.6 million in 1995, $21.2
million in 1996 and $20.5 million in 1997, representing pro forma gross margins
of 70%, 68% and 55% in 1995, 1996 and 1997, 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.
Excluding the write-off noted above, 1997 gross margin is 64%, which is lower
than previous years primarily due to 4th quarter expensing of full-text keying
costs as discussed above.
Sales and Marketing Expenses
1997 compared to 1996
Sales and marketing expenses increased 5% from $7.4 million in 1996 to
$7.7 million in 1997. Excluding the write off of IBS charged to sales and
marketing expense of $221,000, sales and marketing expense increased 2% to $7.5
million in 1997. Sales and marketing expenses as a percentage of pro forma
total revenues were 24 % and 21% during 1996 and 1997, respectively, and 20%
during 1997 excluding the write-offs. The decrease in sales and marketing
expense as a percentage of total pro forma revenues is due to the consolidation
of the Company's Amsterdam office into the UK office, as well as, a reduction
in staff in marketing and inside sales.
1996 compared to 1995
Sales and marketing expenses increased 24% from $5.9 million in 1995
to $7.4 million in 1996. The increase in sales and marketing expenses during
the period was 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. Sales and marketing expenses as a
percentage of total pro forma revenues were 24% during both 1995 and 1996.
Product Development
1997 compared to 1996
Product development expenses increased 26% from $5.6 million in 1996
to $7.1 million in 1997. Excluding the write off of IBS charged to product
development expenses of $386,000, product development expenses increased 19% to
$6.7 million in 1997. Product development expenses as a percentage of total pro
forma revenues were 18 % and 19% during 1996 and 1997, respectively, and 18%
during 1997, excluding write-offs. 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 increase in product development expenses is due to an increase
in staff associated with the ongoing full text project, as well as, a new
development group associated with the new clinical information product.
27
<PAGE>
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, 1997, 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.
1996 compared to 1995
Product development expenses decreased 1% from $5.7 million in 1995 to
$5.6 million in 1996. The decrease 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 pro forma revenues
were 23% and 18% in 1995 and 1996, respectively.
General and Administrative Expenses
1997 compared to 1996
General and administrative expenses increased 23% from $5.4 million in
1996 to $6.6 million in 1997. Excluding the write off of IBS charged to general
and administrative expense of $221,000, sales and marketing expense increased
19% to $6.4 million in 1997. General and administrative marketing expenses as a
percentage of total pro forma revenues were 17 % and 18% during 1996 and 1997,
respectively, and 17% during 1997 excluding the write-offs. The increase is
primarily due to an additional provision for doubtful accounts, $500,000,
during the 4th quarter of 1997 to reflect economic conditions in the Asian
markets. Even with the $500,000 increase in doubtful accounts, general and
administrative expenses, excluding write-offs remained constant as a percentage
of total pro forma revenues. This 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.
1996 compared to 1995
General and administrative expenses increased 10% from $4.9 million in
1995 to $5.4 million in1996. General and administrative expenses as a
percentage of total pro forma revenues were 19% and 17% during 1995 and 1996,
respectively. The percentage decrease from 1995 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.
28
<PAGE>
Provision for Income Taxes
The effective rate of income taxes was 40%, 40% and 8% in 1995, 1996
and 1997, respectively. Changes in the effective rate are described in Note 8
to the consolidated financial statements.
INTERNATIONAL OPERATIONS
The Company maintains sales offices in London, Amsterdam, Paris, Bonn,
Copenhagen, 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 27%, 32% and 34% of total revenues in
1995, 1996 and 1997, respectively. The increases were attributable to an
increase in the international sales force and size of the third-party
distributor network.
The Company follows similar pricing for both its domestic and foreign
operations. Revenues from foreign operations, however, are reported net of
commissions paid to 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.
The Company's sales are generally denominated in U.S. dollars. As a
result of the recent currency situation in certain Asian markets, the Company's
sales to Asia could be negatively impacted for a period of time.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash and cash equivalents of
approximately $1.3 million and highly liquid short-term investments and
marketable securities of approximately $9.5 million. Operating activities
provided the Company with $6.2 million in cash during the year ended December
31, 1997 as compared to $3.3 million during the same period in 1996. The
increase in cash flows is primarily a result of increased billings and
collections. The 1997 net loss, combined with the increase in other assets was
more than offset by the non-cash write-down of full-text database and
management information system and increase in unearned revenue resulting from
the adoption of SOP 97-2.
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 $6.2 million during
the year ended December 31, 1997, compared to using cash of $ 3.8 million
during the same period in 1996. The primary uses of cash in 1997 were the
purchase of $3.0 million of capital equipment, the purchase of $ 34.0 million
of short-term investments, net of $33.2 million of redemptions and the purchase
of $3.3 million of marketable securities. These uses were offset by proceeds
from a capital lease
29
<PAGE>
agreement entered into by the Company during the 4th quarter of 1997, of
$945,000. During 1996, the primary use of cash was the purchase of capital
equipment of $2.0 million, and the purchase of $21.0 million of short-term
investments, net of redemptions of $ 19.2 million. The Company invests excess
cash in short-term investments and marketable securities, held as available
for sale. These securities are high-grade investment quality and increase the
Company's return without significantly increasing investment risk. Capital
expenditures were $ 2.0 million for 1996 and $3.0 million for 1997,
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 1996 and 1997.
The Company is aggressively pursuing 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 investments in production require significant capital
resources. As more fully described in Note 5 to the condensed consolidated
financial statements, the Company is undertaking an alternative solution to the
abandoned IBS. Costs are estimated to be less than $1 million for this project.
However, it is the current belief of the Company that its available cash, cash
equivalents, short-term investments and marketable securities and expected
future cash flows from operations can finance these activities.
The Company's financing activities used $147,000 during the year ended
December 31, 1997 compared to providing $137,000 for the same period in 1996.
The exercise of stock options provided $267,000 during 1997. The Company has
authorized the repurchase of up to $3 million of its common stock and
repurchased 39,000 shares for $354,000 during 1997. Repayments of the capital
lease obligation used $60,000 during 1997. During 1996, $137,000 was provided
from the exercise of stock options.
Effective November 1, 1997, the Company entered into a line-of credit
agreement for $2.0 million collateralized by the Company's accounts
receivables, bearing interest at the bank's prime rate. The agreement expires
November 1, 1998. There were no borrowings on the line-of-credit during 1997.
YEAR 2000
Year 2000 compliance programs and information systems modifications
have been initiated in an attempt to ensure that the Company's products,
systems and key processes will remain functional. The Company expects to
achieve this objective either by modifying present systems, using existing
internal and external programming resources, or by installing new systems and
by monitoring supplier and other third-party interfaces. While there can be no
assurance that all such modifications will be successful, management does not
expect that either costs of modifications or consequences of any unsuccessful
modifications should have a material adverse effect on the financial position,
results of operations or liquidity of the Company.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, which prescribes standards for reporting comprehensive income and its
components. Comprehensive income consists of net income or loss for the current
period and other comprehensive income (income, expenses, gains and losses that
currently bypass the income statement and are reported directly in a separate
component of equity). SFAS 130 requires that components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. In addition, the FASB issued Statement No. 131,
("SFAS 131") Disclosures about Segments of an
30
<PAGE>
Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about its operating
segments in financial statements issued to shareholders for interim and annual
periods. The statement also requires additional disclosures with respect to
products and services, geographical areas of operations, and major customers.
SFAS 130 and SFAS 131 which are effective for fiscal years beginning after
December 15, 1997, expand or modify disclosures and will have no impact on the
Company's consolidated financial position, results of operations or cash flows.
On March 4, 1998, the Accounting Standards Executive Committee (AcSEC)
approved the issuance of Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". SOP 98-1, which
is effective for years beginning after December 15, 1998 (with earlier
application encouraged), provides improved guidance on the definition of
internal use software and specifies the criteria under which the cost of
internal-use software should be capitalized or expensed as incurred. The
Company has not determined the effect, which SOP 98-1 will have on its
consolidated financial position or results of operations.
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.
31
<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 June 3, 1998, 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.
32
<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
- ----------- -----------
<TABLE>
<S> <C>
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)
21 Subsidiaries of the Company. *(1)
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
</TABLE>
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.
(b) Reports on Form 8-K
None.
(c) Exhibits
33
<PAGE>
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.
34
<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)
March 31, 1998
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.
Signature Title Date
- --------- ----- ----
/s/ Mark L. Nelson President, March 31, 1998
- ---------------------- Chief Executive Officer
(Mark L. Nelson) (Principal Executive Officer)
and Director
Jeffrey A. Hoerle Chief Financial Officer March 31, 1998
- ---------------------- (Principal Financial and
(Jeffrey A. Hoerle) Accounting Officer)
/s/ Martin F. Kahn Chairman of the March 31, 1998
- ----------------------
(Martin F. Kahn) Board of Directors
/s/ Deborah M. Hull Chief Operating Officer March 31, 1998
- ---------------------- and Director
(Deborah M. Hull)
/s/ Harry Diakoff Director March 31, 1998
- ----------------------
(Harry Diakoff)
/s/ Gary Gottlieb Director March 31, 1998
- ----------------------
(Gary Gottlieb)
/s/ John J. Hanley Director March 31, 1998
- ----------------------
(John J. Hanley)
/s/ Carl Fischer Director March 31, 1998
- ----------------------
(Carl Fischer))
35
<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, 1996 and 1997........ F-2
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997................................ F-3
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 1995, 1996 and 1997.............. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.................................. F-5
Notes to Consolidated Financial Statements.......................... F-6
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts..................... S-1
36
<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, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. We have also
audited the financial statement schedule listed in the index on page 36. These
financial statements and financial statement schedule are the responsibility of
the management of the Company. 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 audits provide 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, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, 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.
As discussed in Note 2 to the financial statements, effective July 1,
1997, Ovid Technologies, Inc. changed its method of accounting for revenue
recognition to comply with Statement of Position 97-2.
COOPERS & LYBRAND L.L.P.
New York, New York
February 20, 1998,
except as to Note 14, for which the date is
March 27, 1998.
F-1
<PAGE>
OVID TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,426 $ 1,284
Short-term investments 5,382 6,209
Marketable securities, net - available for sale -- 3,305
Accounts receivable, less allowance for doubtful
accounts of $895 and $1,456, respectively 12,310 12,259
Prepaid royalties 185 4,260
Prepaid and other current assets 513 1,636
Deferred income taxes 298 1,145
Income taxes receivable 495 947
-------- --------
Total current assets 20,609 31,045
Equipment and leasehold improvements, net 3,216 3,208
Full text database, net 2,223 --
Deferred income taxes 307 759
Deposits and other assets 107 110
-------- --------
Total assets $ 26,462 $ 35,122
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,343 $ 3,977
Accrued expenses and other liabilities 3,146 4,896
Customer deposits 457 1,041
Income taxes payable 1,411 362
Unearned revenue 3,838 16,427
Current portion of long-term capital lease -- 308
Obligation under database subscriptions 656 351
-------- --------
Total current liabilities 11,851 27,362
Long-term capital lease, less current portion -- 577
-------- --------
Total liabilities 11,851 27,939
Commitments and contingencies (Note 14)
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;
5,894,832 and 6,103,977 shares issued and outstanding, respectively
59 61
Additional paid-in capital 8,688 9,467
Retained earnings (accumulated deficit) 5,792 (1,965)
Unrealized loss on marketable securities -- (1)
Foreign currency translation adjustment 72 (25)
Treasury stock, at cost, - and 39,000 shares -- (354)
-------- --------
Total stockholders' equity 14,611 7,183
-------- --------
Total liabilities and stockholders' equity $ 26,462 $ 35,122
======== ========
</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,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Database subscriptions and software $ 27,190 $ 30,823 $ 24,109
Maintenance and other 2,133 2,782 3,141
----------- ----------- -----------
Total revenues 29,323 33,605 27,250
----------- ----------- -----------
Cost of revenues:
Database subscriptions and software 8,653 10,779 14,470
Maintenance and other 312 165 273
----------- ----------- -----------
Total cost of revenues 8,965 10,944 14,743
----------- ----------- -----------
Gross profit 20,358 22,661 12,507
Operating expenses:
Sales and marketing 5,912 7,355 7,699
Product development 5,666 5,612 7,062
General and administrative 4,852 5,352 6,579
----------- ----------- -----------
Total operating expenses 16,430 18,319 21,340
----------- ----------- -----------
Income (loss) from operations 3,928 4,342 (8,833)
Interest and other income, net 194 253 401
----------- ----------- -----------
Income (loss) before income taxes 4,122 4,595 (8,432)
Provision (benefit) for income taxes 1,653 1,839 (675)
----------- ----------- -----------
Net income (loss) $ 2,469 $ 2,756 ($ 7,757)
=========== =========== ===========
Basic earnings (loss) per share $ .45 $ .48 ($ 1.29)
=========== =========== ===========
Diluted earnings (loss) per share $ .35 $ .39 ($ 1.29)
=========== =========== ===========
PRO FORMA DATA (UNAUDITED): (SEE NOTE 2)
Pro forma income (loss) from operations $ 1,201 $ 2,868 ($ 870)
----------- ----------- -----------
Pro forma net income (loss) $ 943 $ 1,873 ($ 522)
----------- ----------- -----------
Pro forma net income (loss) per common share
Basic $ .17 $ .32 ($ .09)
----------- ----------- -----------
Diluted $ .13 $ .26 ($ .09)
----------- ----------- -----------
Weighted average number of shares of common
Stock outstanding
Basic 5,530,676 5,773,861 6,017,427
=========== =========== ===========
Diluted 7,031,479 7,139,900 6,017,427
=========== =========== ===========
</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, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED UNREALIZED FOREIGN
ADDITIONAL EARNING LOSS ON CURRENCY
COMMON STOCK PAID-IN (ACCUMULATED MARKETABLE TRANSLATION TREASURY
SHARES AMOUNT CAPITAL DEFICIT) SECURITIES ADJUSTMENT STOCK TOTAL
------ ------ ------- -------- ---------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options and
related income tax benefit 248,145 2 779 781
Net (loss) (7,757) (7,757)
Unrealized loss on marketable
securities ($1) (1)
Translation adjustment (97) (97)
Treasury stock purchases (39,000) (354) (354)
--------- --- ------ ------- --- ---- ----- -------
Balance at December 31, 1997 6,103,977 $61 $9,467 ($1,965) (1) ($25) ($354) $ 7,183
========= === ====== ======= === ==== ===== =======
</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,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,469 $ 2,756 ($ 7,757)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Write-down of full-text database and management
information system -- -- 4,298
Loss on disposal of equipment -- -- 37
Depreciation and amortization 1,793 2,346 2,625
Provision for doubtful accounts 338 496 621
Deferred income tax benefit (6) (65) (1,298)
Changes in assets and liabilities:
(Increase) in accounts receivable (1,968) (3,490) (570)
(Increase) in full-text database (30) (1,220) (1,496)
(Increase) decrease in other assets (548) 956 (5,150)
Increase (decrease) in accounts payable 1,850 (359) 1,634
Increase (decrease) in other liabilities (534) 1,857 666
Increase in unearned revenue -- -- 12,590
-------- -------- --------
Cash provided by operating activities 3,364 3,277 6,200
-------- -------- --------
Cash flows from investing activities:
Purchase of short-term investments - held to maturity (12,771) (20,975) (33,997)
Purchase of marketable securities - available for sale -- -- (3,296)
Proceeds from maturities of marketable securities - held
to maturity
13,159 19,230 33,171
Proceeds from capital lease transaction -- -- 945
Capital expenditures (1,895) (2,018) (3,018)
-------- -------- --------
Cash used in investing activities (1,507) (3,763) (6,195)
-------- -------- --------
Cash flows from financing activities:
Repayment of capital lease obligation -- -- (60)
Proceeds from the exercise of stock options 93 137 267
Distributions to S Corporation stockholder (275) -- --
Purchase of treasury stock -- -- (354)
-------- -------- --------
Cash provided by (used in) financing activities (182) 137 (147)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,675 (349) (142)
Cash and cash equivalents, beginning of year 100 1,775 1,426
-------- -------- --------
Cash and cash equivalents, end of year $ 1,775 $ 1,426 $ 1,284
======== ======== ========
Supplementary information:
Cash paid:
Interest $ -- $ -- $ 10
Income taxes $ 1,886 $ 273 $ 2,048
</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 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 major medical and research
centers throughout the world.
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.
Revenue Recognition:
Effective July 1, 1997, the Company elected early adoption of the
provisions of Statement of Position ("SOP") 97-2, Software Revenue Recognition,
which was issued on October 27, 1997 by the Accounting Standards Executive
Committee of the AICPA. SOP 97-2, which supersedes SOP 91-1, significantly
changes the Company's recognition of license fees for third-party databases and
proprietary software. Prior to the adoption of SOP 97-2, the Company recognized
these revenues upon shipment. The Company's costs of fulfilling its obligations
under the terms of the database subscriptions, which are insignificant, were
accrued at the time of delivery. Under the provisions of SOP 97-2, license fees
for third-party databases and the Company's proprietary software are recognized
on a straight-line basis over the term of the contract, generally one year.
Royalty costs associated with the license fees for third-party databases and
fulfillment costs are also recognized over the same period.
Under its transitional provisions, SOP 97-2 specifically prohibits
retroactive application and requires prospective adoption only on transactions
entered into on or after the effective date. The effect of this accounting
change was to increase the loss before income taxes, net loss and net loss per
common share (both basic and fully diluted) by $6,125, $6,373 and $1.06,
respectively, in the year ended December 31, 1997.
Pro forma income (loss) from operations, pro forma net income (loss)
and pro forma net income (loss) per common share for the years ended December
31, 1995, 1996 and 1997, assuming the Company had always followed the
provisions of SOP 97-2 are presented on the consolidated statements of
operations. Further discussion, including additional pro forma effects
Continued
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
of the new accounting policy, is included in Management's Discussions and
Analysis of Financial Condition and Results of Operations.
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, 1997, no development costs have
been capitalized due to the uncertainty over future recoverability. The Company
continues to assess the treatment of its development costs but because of rapid
changes in hardware and software technology, future capitalization of
development costs is not anticipated. Software development expense for the
years ended December 31, 1995, 1996 and 1997 were $ 2,347, $ 2,542 and $3,722,
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. Investments
purchased with original maturity of more than three months are considered
short-term investments.
Investment in Marketable Securities:
Securities classified as available-for-sale are carried at market
value, with the unrealized gain or loss, net of tax, reflected as a separate
component of stockholder's equity. Gains and losses on the sale of
available-for sale securities are determined using the specific-identification
method. Securities classified as held-to-maturity are carried at amortized
cost. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
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.
Continued
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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. A valuation allowance is established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
Net Income (Loss) Per Share:
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which superseded
APB Opinion No. 15. Earnings per share for all periods presented has been
restated to reflect the adoption of SFAS 128. SFAS 128 requires companies to
present basic earnings per share, and if applicable, diluted earnings per
share, instead of primary and fully diluted earnings per share. Basic earnings
per share excludes dilution and is computed by dividing net earnings available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if options to issue common stock were exercised into
common stock.
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.
New Accounting Pronouncements:
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income, which prescribes standards for reporting comprehensive
income and its components. Comprehensive income consists of net income or loss
for the current period and other comprehensive income (income, expenses, gains
and losses that currently bypass the income statement and are reported directly
in a separate component of equity). SFAS 130 requires that components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Also in June 1997, the
FASB issued
Continued
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which requires publicly-held companies to report
financial and descriptive information about its operating segments in
financial statements issued to shareholders for interim and annual periods.
The statement also requires additional disclosures with respect to products
and services, geographical areas of operations, and major customers. SFAS 130
and SFAS 131, which are effective for fiscal years beginning after December
15, 1997, expand or modify disclosures and will have no impact on the
Company's consolidated financial position, results of operations or cash
flows.
In addition, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position No. 98-1 (SOP 98-1), Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use. The SOP was issued to
address diversity in practice regarding whether and under what conditions the
costs of internal-use software should be capitalized. SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. The Company
has not determined the effect which SOP 98-1 will have on its consolidated
financial position or results of operations.
3. INVESTMENTS:
Investments at December 31, are reflected in the balance sheet as
follows:
The cost and estimated market values of investments in marketable
securities at December 31, 1997, are as follows:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------- ---------- ---------- ------------
SECURITIES AVAILABLE-FOR-SALE:
Municiple and corporate bonds $ 3,296 $ 7 $ 8 $ 3,295
Accrued interest 10 10
------- ---- ---- -------
$ 3,306 $ 7 $ 8 $ 3,305
------- ---- ---- -------
Continued
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The cost and estimated market value of investments in marketable securities at
December 31, 1997, are as follows:
AVAILABLE-FOR-SALE
------------------------
ESTIMATED
MARKET
COST VALUE
---- ---------
Due in one year or less $ 517 $ 517
Due after one year through five years 1,395 1,394
Due after five years through ten years
Due after ten years 1,384 1,384
------- -------
$ 3,296 $ 3,295
======= =======
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements comprise:
December 31,
----------------
1996 1997
---- ----
Computers $6,960 $7,484
Furniture, fixtures and equipment 195 381
Leasehold improvements 496 960
------ ------
7,651 8,825
Less accumulated depreciation and amortization (4,435) (5,617)
------ ------
$3,216 $3,208
====== ======
Depreciation and amortization expense for the years ended December
31, 1995, 1996 and 1997 was $1,313, $1,779 and $2,099 respectively.
5. WRITE-OFF OF LONG-LIVED ASSETS:
In March 1994, the Company acquired certain assets and assumed certain
liabilities of the BRS Online component of InfoPro Technologies, Inc. Among the
assets acquired were certain full-text databases (the "BRS Databases") to which
$2,400 of the purchase price was allocated. At September 30, 1997, the net
carrying value of these databases was $621.
The BRS Databases continue to be offered by the Company and are
available to its customers; however, a continuing decline in licensing fees for
the BRS Databases during the third quarter of 1997 indicated that cash flows
from projected future sales will not recover the related net carrying value. As
a result, the Company charged the net book value to cost of revenues.
Continued
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
In 1996, the Company expanded its product offerings to include
full-text databases of selected publications. Pursuant to its agreements with
the various publishers, the cost of developing and converting full-text
database information from a print medium to a standard electronic format is
initially the responsibility of the Company. The agreements generally provide
that publishers will deliver the information in specified electronic format
before a certain date or will be responsible for the conversion costs. In
exchange for providing the information in a standard electronic format, the
publisher will receive a higher royalty on the license fees received by the
Company. Receipt of the information in a standard electronic format will
significantly reduce the Company's ongoing external conversion costs. Through
September 30, 1997, external conversion costs associated with the development
and conversion of this full-text database information from a print medium to a
standard electronic format were capitalized and amortized on a straight-line
basis over a period of five years, commencing in the period the database was
available for sale. At September 30, 1997, the net carrying value of these
database conversion costs was $2,573.
As a result of negotiations with publishers during the third quarter
of 1997, it became apparent that future royalties on full-text products will be
greater than anticipated. It also became apparent that the publishers' ability
to provide information electronically will be slower and related profitability
would be lower than previously anticipated. Although the Company continues to
believe that market acceptance of full-text products will happen, there is
sufficient confusion in the marketplace that users have delayed widespread
acceptance. As a result, the Company's penetration with its full-text products
has been slower than expected. Based upon a reforecast completed during the
third quarter of 1997, the Company determined that it cannot reasonably project
positive cash flow to be generated from this asset and has charged the net
carrying value to cost of revenues. In addition, future capitalization of
conversion costs will not occur until recovery is assured.
Management Information System
In January 1996, the Company undertook the development of an
information business system (IBS). Since the inception of the IBS project,
certain incremental development costs have been capitalized. As a result of an
independent review of IBS completed during the third quarter of 1997, the
Company determined that the design of IBS would no longer meet its needs.
Additionally, alternative information technology solutions have been identified
that will provide the desired functionality of IBS at a final cost which is
less than the cost to adjust and complete the IBS project. As a result, the
Company elected to abandon IBS and begin implementation of the alternative
solution. The carrying cost of IBS, $1,104, was charged to expense during the
third quarter of 1997 and allocated as follows:
Cost of revenues $ 276
Sales and marketing 221
Product development 386
General and administrative 221
------
Total $1,104
======
Continued
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
6. LEASES:
The Company has certain non-cancelable capital lease agreements for
computer equipment. The minimum future obligations under these leases for the
years ending December 31, are as follows:
1998 328
1999 328
2000 264
-----
Total minimum obligation 920
Less interest portion (35)
-----
Present value of minimum lease obligation 885
Less current portion (308)
-----
577
=====
Cost and accumulated depreciation of assets.recorded under capital
leases were $945 and $35 at December 31, 1997.
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, 1997 aggregate as follows:
1998 649
1999 670
2000 692
2001 711
2002 731
Thereafter 1,651
-----
Total future minimum lease payments 5,104
=====
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
$635, $719, and $710 respectively.
7. LINE-OF-CREDIT AGREEMENT:
Effective February 13, 1996, the Company entered a line-of-credit
agreement for $1,000 collateralized by the Company's accounts receivables,
bearing interest at the bank's prime rate plus 1%. There were no borrowings
under the agreement which was cancelable in writing by either party at any
time. The Company terminated the agreement on November 18, 1997.
Continued
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Effective November 1, 1997, the Company entered a line-of-credit
agreement for $2,000 collateralized by the Company's accounts receivable,
bearing interest at the bank's prime rate. There have been no borrowings under
this agreement as of December 31, 1997. There is no expiration set for this
agreement, however, it is cancelable in writing by either party at any time.
8. INCOME TAXES
Income (loss) before income taxes comprises:
1995 1996 1997
---- ---- ----
Domestic................. $3,466 $3,162 $(6,588)
Foreign................... 656 1,433 (1,844)
------ ------ --------
$4,122 $4,595 $(8,432)
====== ====== ========
The provision (benefit) for historical income taxes for the years
ended December 31, 1995, 1996 and 1997 is as follows:
1995 1996 1997
---- ---- ----
U.S. Federal income taxes ....
Current ...................... $ 1,077 $ 1,052 $ 248
Deferred ..................... 2 (26) (1,410)
------- ------- -------
1,079 $ 1,026 (1,162)
------- ------- -------
State and local income taxes .
Current ...................... 319 333 55
Deferred ..................... 1 (4) 106
------- ------- -------
320 329 161
------- ------- -------
Foreign income taxes ......... 254 484 326
------- ------- -------
$ 1,653 $ 1,839 $ (675)
======= ======= =======
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,
1995, 1996 and 1997 is as follows:
1995 1996 1997
---- ---- ----
U.S. Federal statutory rate .............. 34.0% 34.0% (34.0%)
State and local income taxes ............. 5.1 4.7 0.4
Foreign income taxes ..................... 1.1 -- 6.4
Change in valuation allowance
-- -- 18.2
Other .................................... (0.1) 1.3 1.0
----- ------ ------
40.1% 40.0% (8.0%)
===== ====== ======
Continued
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The components of the deferred income tax asset as of December 31,
1996 and 1997 are as follows:
1996 1997
---- ----
Deferred revenue ................... $ -- $ 1,533
Accounts receivable ................ 298 417
Accruals for operating expenses..... 209 753
Equipment and leasehold improvements 171 105
Full text database ................. (112) 0
Other .............................. 39 629
------- -------
605 3,437
Less valuation allowance ........... -- (1,533)
------- -------
$ 605 $ 1,904
======= =======
The portion of the deferred tax asset attributable to deferred revenue
at December 31, 1997 is full offset by a valuation allowance. The Company has
filed a request with the Internal Revenue Service for a change in the Company's
revenue recognition policy for tax reporting purposes. Should the Company
receive a favorable ruling, the valuation allowance would be reversed.
9. NET INCOME (LOSS) PER SHARE:
The following is a reconciliation of the number of shares
(denominator) used in the basic and diluted earnings per share computations:
1995 1996
Per Share Per Share
------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ------------ ---------
Basic EPS 5,530,676 $ .45 5,773,861 $ .48
Effect of dilutive stock
options 1,500,803 $ (.10) 1,366,039 $ (.09)
Diluted EPS 7,031,479 $ .35 7,139,900 $ .39
Options and warrants to purchase 1,814,866 shares of common stock at
prices ranging from $0.01 to $12.00 per share were outstanding at December 31,
1997, but were not included in the 1997 computation of diluted earnings per
share because the effect would have been antidilutive.
10. BUSINESS SEGMENT:
The Company operates in one industry segment consisting of the
development, marketing and support of search and retrieval software.
Continued
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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:
Year Ended December 31,
------------------------------
1995 1996 1997
---- ---- ----
Sales to unaffiliated customers:
United States ............................... $ 21,553 $ 22,930 $ 18,005
Europe ...................................... 4,305 6,078 4,472
Pacific Rim ................................. 3,465 4,597 4,773
-------- -------- --------
Total sales to unaffiliated customers $ 29,323 $ 33,605 $ 27,250
======== ======== ========
Operating income (loss):
United States ............................... $ 3,272 $ 2,858 $ (6,588)
Europe ...................................... 616 1,433 (97)
Pacific Rim ................................. 40 51 (1,747)
-------- -------- --------
Total operating income (loss) ..... $ 3,928 $ 4,342 $ (8,432)
======== ======== ========
Sales to unaffiliated customers for the United States include sales to
customers in Canada of $1,613, $1,953 and $1,539 for the years ended December
31, 1995, 1996 and 1997, 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,
-----------------
1996 1997
---- ----
Identifiable assets
United States ................... $21,083 $29,114
Europe .......................... 3,491 3,819
Pacific Rim ..................... 1,888 2,189
Total identifiable assets ..... $26,462 $35,122
======= =======
11. ACCRUED EXPENSES:
Accrued expenses comprise:
December 31,
--------------------
1996 1997
------- ------
Royalties................................... $ 1,510 $2,316
Employee compensation and benefits.......... 862 746
Other....................................... 774 1,834
------- ------
$ 3,146 $4,896
======= ======
Continued
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. 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 1,500,000 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 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, 1996 and 1997 would have been reduced to the
pro forma amounts indicated below:
Continued
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
Earnings Per Earnings Per Earnings Per
Share Share Share
Net Income Basic/Diluted Net Income Basic/Diluted Net (Loss) Basic/Diluted
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
As Reported $ 2,469 $ .45/.35 $ 2,756 $ .48/.39 $(7,757) $(1.29)/(1.29)
Pro Forma $ 2,398 $ .43/.34 $ 2,458 $ .43/.35 $(8,253) $(1.37)/(1.37)
</TABLE>
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, 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
---------
Granted ......................................... 307,700 $7.00 - $10.00 $7.98
Canceled ........................................ (31,622) $6.00 - $12.00 $8.15
Exercised ....................................... (248,145) $0.01 - $ 9.25 $1.18
Options outstanding - December 31, 1997 ......... 1,814,866 $0.01 - $12.00 $2.53
---------
Options exercisable - December 31, 1997 ......... 1,391,915 $0.01 - $12.00 $1.17
---------
</TABLE>
Continued
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following table summarized options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED REMAINING
EXERCISE PRICE SHARES AVERAGE CONTRACTUAL LIFE
-------------- ------ ------- ----------------
<S> <C> <C> <C>
$0.01 1,020,500 $0.01 2.7 years
$1.50 - 2.50 88,200 $1.67 5.8 years
$4.80-12.00 706,166 $7.68 8.7 years
--------- -----
Total options outstanding December 31, 1997 1,814,866 $2.53 5.2 Years
========= =====
WEIGHTED AVERAGE
WEIGHTED REMAINING
EXERCISE PRICE SHARES AVERAGE CONTRACTUAL LIFE
-------------- ------ ------- ----------------
$0.01 1,020,500 $0.01 2.7 years
$1.50 - 2.50 88,200 $1.67 5.8 years
$4.50-12.00 173,128 $7.74 7.84 years
--------- ----- ----------
Total options exercisable December 31, 1997 1,281,828 1.17 3.66 years
========= =====
</TABLE>
13. 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.
14. CONTINGENCIES:
On or about June 6, 1997, an action was commenced in the Circuit Court
of the 13th Judicial Circuit of the State of Florida against the Company by
PowerCerv Technologies Corporation ("PowerCerv"), a firm hired by the Company
to provide certain software and consulting services. On or about July 7, 1997
the Company removed the action to the United States District Court for the
Middle District of Florida. The complaint alleges counts for breach of
contract, open account, and tortious interference with contractual or business
relationships, PowerCerv seeks, among other things: $250 as liquidated damages
for the purported hiring by the Company of two former employees of PowerCerv;
approximately $62 for unpaid invoices; and an unspecified amount of other
damages on the tortious interference claim related thereto. This action was
settled in March 1998, and, in connection therewith, the Company paid to
PowerCerv an aggregate amount of $103.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<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
------ ------- ---------- ------
Description
- -----------
Allowance for doubtful accounts
<S> <C> <C> <C> <C>
1995............................. $450,000 338,000 300,000 488,000
1996............................. $488,000 496,000 89,000 895,000
1997............................. $895,000 621,000 60,000 1,456,000
</TABLE>
S-1
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the incorporation by reference in the registration
statement of Ovid Technologies, Inc. on Form S-8 (File No.33-90276) of our
report dated February 20, 1998, except as to Note 14, for which the date is
March 27, 1998, on our audits of the consolidated financial statements and
financial statement schedule of Ovid Technologies, Inc. as of December 31, 1996
and 1997, and for each of the three years ended December 31, 1997, which report
is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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0
0
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<INCOME-TAX> (675,000)
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<EPS-PRIMARY> (1.29)
<EPS-DILUTED> (1.29)
</TABLE>
