<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20509
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................. to ..................
Commission File number 0 - 24326
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Ovid Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13 - 3333107
-------- ------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
333 Seventh Avenue, New York, New York 10001
(Address of principal executive offices - Zip code)
(212) 563-3006
(Registrant's telephone number, including area code)
-------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was
required to file reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes .....X..... No .............
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class of Stock No. of Shares Outstanding Date
------------- ------------------------- ----
Common 6,278,980 July 31, 1998
<PAGE>
OVID TECHNOLOGIES, INC.
INDEX
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
December 31, 1997 and June 30, 1998 3
Condensed Consolidated Statements of Operations for
the three months ended June 30, 1997 and 1998 4
Condensed Consolidated Statements of Operations for
the six months ended June 30, 1997 and 1998 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibit 10 - Letter dated June 15, 1998 from Ovid Technologies, Inc.
to Mark L. Nelson 21
Exhibit 27 - Financial Data Schedule 22
</TABLE>
2
<PAGE>
OVID TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
---------------
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------
ASSETS: 1997 1998
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,284 $ 2,638
Short-term investments 6,209 1,613
Marketable securities - available for sale 3,305 7,063
Accounts receivable, less allowance for doubtful accounts
of $1,456 and $1,447 for 1997 and 1998, respectively 12,259 13,469
Prepaid royalties 4,260 6,532
Prepaid expenses and other current assets 3,728 3,807
----- -----
Total current assets 31,045 35,122
Equipment and leasehold improvements, net 3,208 3,270
Deferred income taxes 759 1,593
Deposits and other assets 110 504
------- -------
Total assets $35,122 $40,489
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,977 $ 2,136
Accrued expenses 4,896 5,100
Customer deposits 1,041 1,779
Income taxes payable 362 31
Unearned revenue 16,427 20,745
Current portion of long-term capital lease 308 473
Obligation under database subscriptions 351 --
------ ------
Total current liabilities 27,362 30,264
Long-term capital lease, less current portion 577 796
------ ------
Total liabilities 27,939 31,060
------ ------
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;
6,103,977 and 6,151,941 shares, respectively, issued and outstanding 61 62
Additional paid-in capital 9,467 10,151
Retained earnings (accumulated deficit) (1,965) 432
Accumulated other comprehensive income (26) (91)
Treasury stock, at cost, 39,000 and 97,000 shares, respectively (354) (1,125)
------- -------
Total stockholders' equity 7,183 9,429
------- -------
Total liabilities and stockholders' equity $35,122 $40,489
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE>
OVID TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
(Unaudited)
for the three months ended June 30,
---------
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Revenues:
Database subscriptions and software $8,977 $9,578
Maintenance and other 824 880
----- -------
Total revenues 9,801 10,458
----- -------
Cost of revenues:
Database subscriptions and software 3,215 4,017
Maintenance and other 51 29
----- -------
Total cost of revenues 3,266 4,046
----- -------
Gross profit 6,535 6,412
Operating expenses:
Sales and marketing 1,996 1,956
Product development 1,637 2,006
General and administrative 1,440 1,255
----- -----
Total operating expenses 5,073 5,217
----- -----
Income from operations 1,462 1,195
Interest and other income, net 79 159
----- -------
Income before income taxes 1,541 1,354
Provision (benefit) for income taxes 617 (325)
----- -------
Net income $ 924 $ 1,679
====== =======
Basic earnings per share $ .15 $ .27
====== =======
Diluted earnings per share $ .13 $ .22
====== =======
PRO FORMA DATA:
Pro forma total revenues $9,127 $11,210
Pro forma gross profit 6,174 6,942
Pro forma income from operations 1,101 1,725
Pro forma net income 648 1,131
Pro forma net income per common share:
Basic $ .11 $ .18
========= ======
Diluted $ .09 $ .15
========= ======
Weighted average number of shares of common stock outstanding:
Basic 5,986,623 6,139,016
========= =========
Diluted 7,292,334 7,708,697
========= =========
Total comprehensive income (see Note 4) $ 958 $ 1,628
====== =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE>
OVID TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
(Unaudited)
for the six months ended June 30,
---------
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Revenues:
Database subscriptions and software $16,651 $16,924
Maintenance and other 1,601 1,747
------ ------
Total revenues 18,252 18,671
------ ------
Cost of revenues:
Database subscriptions and software 6,003 7,536
Maintenance and other 109 147
------ ------
Total cost of revenues 6,112 7,683
------ ------
Gross profit 12,140 10,988
Operating expenses:
Sales and marketing 3,943 3,631
Product development 3,127 3,946
General and administrative 2,781 2,473
------ ------
Total operating expenses 9,851 10,050
------ ------
Income from operations 2,289 938
Interest and other income, net 142 287
------ ------
Income before income taxes 2,431 1,225
Provision (benefit) for income taxes 973 (1,172)
------ ------
Net income $ 1,458 $ 2,397
====== ======
Basic earnings per share $ .24 $ .39
====== ======
Diluted earnings per share $ .20 $ .32
====== ======
PRO FORMA DATA:
Pro forma total revenues $18,002 $21,839
Pro forma gross profit 12,194 13,277
Pro forma income from operations 2,343 3,227
Pro forma net income 1,497 2,108
Pro forma net income per common share:
Basic $ .25 $ .34
====== ======
Diluted $ .21 $ .28
====== ======
Weighted average number of shares of common stock outstanding:
Basic 5,954,052 6,123,427
========= =========
Diluted 7,247,343 7,594,231
========= =========
Total comprehensive income (see Note 4) $ 980 $ 2,332
====== ======
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE>
OVID TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
for the six months ended June 30,
----------
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,458 $ 2,397
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,147 883
Other, net 51 (882)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 1,014 (1,210)
(Increase) in other assets, net (370) (2,351)
(Decrease) in accounts payable (208) (1,840)
Increase in other liabilities, net 699 4,512
----- -----
Cash provided by operating activities 3,791 1,509
----- -----
Cash flows from investing activities:
Purchase of short-term investments (14,714) (3,596)
Proceeds from short-term investments 11,665 8,191
Purchase of marketable securities - available for sale -- (6,165)
Proceeds from sale of marketable securities - available for sale 2,408
--
Capital expenditures (1,322) (897)
Other -- 159
----- -----
Cash provided by (used in) investing activities (4,371) 100
----- -----
Cash flows from financing activities:
Repayment of capital lease obligation -- (170)
Proceeds from the exercise of stock options 79 685
Purchases of treasury stock -- (770)
----- -----
Cash provided by (used in) financing activities 79 (255)
----- -----
Increase (decrease) in cash and cash equivalents (501) 1,354
Cash and cash equivalents, beginning of the period 1,426 1,284
----- -----
Cash and cash equivalents, end of the period $ 925 $2,638
===== =====
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. Interim Financial Statements:
These condensed consolidated financial statements should be read in
conjunction with the Company's Form 10-K for the year ended December
31, 1997, as amended, and the Form 10-Q for the quarter ended March 31,
1998 and the historical consolidated financial statements and related
notes included therein. In the opinion of management, the accompanying
unaudited condensed financial statements include all adjustments,
consisting of only normal recurring accruals, necessary to present
fairly the condensed consolidated financial position, results of
operations and cash flows of the Company. Certain information and
footnote disclosure normally included in financial statements prepared
in conformity with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. Quarterly operating results are not
necessarily indicative of the results that would be expected for the
full year.
2. 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 ("AcSEC"). 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.
3. Net Income Per Share:
Earnings per share for all periods presented has been restated to
reflect the adoption of Statement of Financial Accounting Standards
No. 128, Earnings Per Share ("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.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
The following is a reconciliation of the number of shares
(denominator) used in the basic and diluted earnings per share
computations:
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 1997 June 30, 1998
Amount per Amount per
Shares share Shares share
-------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
Basic EPS 5,986,623 $ .15 6,139,016 $ .27
Effect of dilutive stock
options 1,305,711 $(.02) 1,569,681 $(.05)
Diluted EPS 7,292,334 $ .13 7,708,697 $ .22
</TABLE>
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1997 June 30, 1998
Amount per Amount per
Shares share Shares share
-------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Basic EPS 5,954,052 $ .24 6,123,427 $ .39
Effect of dilutive stock
options 1,293,291 $(.04) 1,470,804 $(.07)
Diluted EPS 7,247,343 $ .20 7,594,231 $ .32
</TABLE>
4. 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 is effective for financial
statements issued for periods beginning after December 15, 1997, and
accordingly has been adopted by the Company as presented on the
balance sheets and statements of operations.
Also in June 1997, the FASB issued 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 131 is effective for financial statements issued for
periods beginning after December 15, 1997 and for the interim periods
beginning in the
8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
second year of application, and requires restatement of earlier
periods presented. The Company is reviewing the effects of the
disclosure requirements of this new standard.
In addition, AcSEC issued SOP 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use, 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 is reviewing the effects of the disclosure
requirements of this new standard.
5. Provision for Income Taxes:
The Company recorded a tax benefit of $325 for the three months ended
June 30,1998, as compared to a provision of $617, for the same period
in 1997. For the six months ended June 30, 1998, the Company recorded
a tax benefit of $1,172 as compared to a provision of $973 for the
same period in 1997. The benefit for the three and six months ended
June 30, 1998 reflects the reversal of that portion of the valuation
allowance recorded against the Company's deferred tax asset, as
disclosed in the 1997 Form 10-K, that is no longer considered
necessary based on management's estimated 1998 taxable income. For the
three and six months ended June 30, 1997, the provision for taxes
represents a 40% effective tax rate.
6. Loan to Principal Stockholder:
Deposits and other long-term assets at June 30, 1998 include $395
loaned to the Company's principal stockholder. The unsecured loan
bears interest at the rate of 8% annually and is repayable on demand,
but in no event later than December 31, 1999. Loans of up to $2
million in the aggregate may be extended to such principal
stockholder.
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three and Six Months Ended June 30, 1998, as compared to
Three and Six Months Ended June 30, 1997
----------------
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. The Company continues to
gain new customers, as well as, to sell additional products to its existing
customer base. During the six months ended June 30, 1998, 270 new customer
accounts were added.
On a billings basis, Ovid's total sales increased 30% to $22.9 million during
the six months ended June 30, 1998 compared to $17.6 million for the same
period in 1997. Ovid experienced a significant increase in its online business
during the six months ended June 30, 1998 compared to the same period in 1997.
On a billings basis, Ovid's online fixed fee sales increased 410% to $6.1
million for the six months ended June 30, 1998, compared to $1.2 million for
the same period during 1997. Ovid's full text business also continued to
increase dramatically. On a billings basis, Ovid's full text sales increased
228% to $3.4 million for the six months ended June 30, 1998, compared to $1.0
million for the same period during 1997.
Ovid continued to increase its volume in its international markets during the
first six months of 1998. International markets accounted for over 44% of
Ovid's total billings during this period with a considerable portion
attributable to software sales in Japan, fixed fee sales in the United Kingdom
and Australia, and sales to new customers in Latin America.
Another important growth factor 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's
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
investment in the Clinical Information Products (CIP) group is ongoing and the
Company expects to release CIP's first product, Evidence Based Medicine
Reviews, in the third quarter. Products from CIP leverage Ovid's investment in
the medical community and broaden the breadth of information the Company
provides.
In combination with the growth drivers discussed above, the Company also
continues to gain operating leverage. On a pro forma basis, operating expenses
as a percentage of total revenues were 46.0% for the six months ended June 30,
1998, as compared to 54.7% for the comparable period in 1997.
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 had an initial negative
impact on reported revenues, with a corresponding increase in deferred
revenues; however, the change in revenue recognition is expected to decrease
the cyclical trends historically experienced by the Company.
CHANGE IN ACCOUNTING PRINCIPLE
As described in Note 2 to the financial statements, the Company adopted SOP
97-2, Software Revenue Recognition, effective July 1, 1997. Prior to the
adoption of SOP 97-2, the Company recognized license fees for third-party
databases and proprietary software upon shipment. Royalty obligations to
publishers were accrued at the time of shipment. Ovid's costs of fulfilling its
obligations under the terms of the license agreement, which are not
significant, were also accrued at the time of shipment. As a result of the
change, license fees for third-party databases and the Company's proprietary
software revenues for these products are recognized on a straight-line basis
over the term of the contract, generally one year. Royalty costs to publishers
and fulfillment costs are also recognized over the same period.
The transition provisions of SOP 97-2 specifically prohibit retroactive
application and require prospective adoption only on transactions entered into
on or after the effective date. As a result, the Company's reported revenues
have been negatively effected, although to a lessening extent, through June 30,
1998 at which time the transitional impact ended.
RESULTS OF OPERATIONS
Revenues
Three months ended June 30
- --------------------------
For the three months ended June 30, 1998, the Company's total revenues
increased 7% to $10.5 million versus $9.8 million for the comparable period in
1997.
Revenues from database subscriptions and software increased 7% to $9.6
million in the second quarter of 1998 from $9.0 million during the same period
of 1997. The increase is due primarily to worldwide growth of revenue from
fixed fee subscriptions to the Company's online service. This increase was
partially offset by a decrease in revenue from network data subscription and
software sales resulting from the change in the Company's method of accounting
for revenues for license
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
fees for third-party databases and proprietary software as described above and
in Note 2 to the condensed consolidated financial statements.
Maintenance revenues increased 7% to $0.9 million for the three months ended
June 30, 1998 from $0.8 million for the same period in 1997. The increase in
maintenance revenues is directly attributable to the increase in billings of
network sales, which have mandatory maintenance charges of 17% of the first
year's software fees. Maintenance revenues were not affected by the change in
method of accounting discussed above.
Six months ended June 30
- ------------------------
For the six months ended June 30, 1998, the Company's total revenues increased
2% to $18.7 million versus $18.3 million for the comparable period in 1997.
Revenues from database subscriptions and software increased 2% to $16.9 million
for the six months ended June 30, 1998 from $16.6 million during the same
period of 1997. The increase is due primarily to worldwide growth of revenue
from fixed fee subscriptions to the Company's online service. This increase was
partially offset by a decrease in revenue from network data subscription and
software sales resulting from the change in the Company's method of accounting
for revenues for license fees for third-party databases and proprietary
software as described above and in Note 2 to the condensed consolidated
financial statements.
Maintenance revenues increased 9% to $1.7 million for the six months ended June
30, 1998 from $1.6 million for the same period in 1997. The increase in
maintenance revenues is directly attributable to the increase in billings of
network sales, which have mandatory maintenance charges of 17% of the first
year's software fees. Maintenance revenues were not affected by the change in
method of accounting discussed above.
(see also pro forma presentation below)
Cost of Revenues
Three months ended June 30
- --------------------------
Cost of revenues increased 24% to $4.0 million in the second quarter of 1998
from $3.3 million for the same period in 1997. As a percent of revenues, total
cost of revenues increased to 39% for the second quarter of 1998 from 33% for
the same period of 1997. This increase was primarily due to an increase in data
conversion costs associated with the full-text product resulting from a change
in the method of accounting for these costs, as well as an increase in the
dollar expenditures. During the second quarter of 1997, these costs were being
capitalized and amortized over five years. In September 1997, the amounts
capitalized were written off, and the Company changed its accounting treatment
to expense as incurred. The increase in the dollar expenditures resulted from
data conversion costs for the addition of several new journals to the Company's
full-text offerings. An additional increase in cost of revenues is due to an
increase in royalty expense, as the Company has experienced an increasing
amount of database sales from for-profit data providers who require substantial
royalties. The Company expects this trend to continue as it is projected that a
significant amount of future sales are expected to be from these databases and
full text.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
Six months ended June 30
- ------------------------
Cost of revenues increased 26% to $7.7 million for the six months ended June
30, 1998 from $6.1 million for the same period in 1997. As a percent of
revenues, total cost of revenues increased to 41% for the six months ended June
30, 1998 from 33% for the same period of 1997. This increase was primarily due
to an increase in data conversion costs associated with the full-text product
resulting from a change in the method of accounting for these costs, as well as
an increase in the dollar expenditure. During the six months ended June 30,
1997, these costs were being capitalized and amortized over five years. In
September 1997, the amounts capitalized were written off, and the Company
changed its accounting treatment to expense as incurred. The increase in the
dollar expenditures resulted from data conversion costs for the addition of
several new journals to the Company's full-text offerings. An additional
increase in cost of revenues is due to an increase in royalty expense, as the
Company has experienced an increasing amount of database sales from for-profit
data providers who require substantial royalties. The Company expects this
trend to continue as it is projected that a significant amount of future sales
are expected to be from these databases and full text.
PRO FORMA PRESENTATION
As a result of the change in accounting principle described above, the results
of operations for the three and six months ended June 30, 1998 are not
comparable with results from the same periods in 1997. 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. As a result of the change in accounting, the Company's
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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
Presentation of Pro Forma Data
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Total revenues
As reported $ 9,801 $ 10,458 $ 18,252 $ 18,671
Pro forma 9,127 11,210 18,002 21,839
Total cost of revenues
As reported 3,266 4,046 6,112 7,683
Pro forma 2,953 4,268 5,808 8,562
Gross profit
As reported 6,535 6,412 12,140 10,988
Pro forma 6,174 6,942 12,194 13,277
Total operating expenses
As reported 5,073 5,217 9,851 10,050
Pro forma 5,073 5,217 9,851 10,050
Income from operations
As reported 1,462 1,195 2,289 938
Pro forma 1,101 1,725 2,343 3,227
Net income
As reported 924 1,679 1,458 2,397
Pro forma 648 1,131 1,497 2,108
Net income per
common share
Basic
As reported 0.15 0.27 0.24 0.39
Pro forma 0.11 0.18 0.25 0.34
Diluted
As reported 0.13 0.22 0.20 0.32
Pro forma 0.09 0.15 0.21 0.28
</TABLE>
RESULTS OF OPERATIONS
Pro Forma Revenues
Three months ended June 30
- --------------------------
For the three months ended June 30, 1998, the Company's total pro forma
revenues increased 23% to $11.2 million versus $9.1 million for the comparable
period in 1997.
Pro forma revenues from database subscriptions and software increased 25% to
$10.3 million in the second quarter of 1998 from $8.3 million during the same
period of 1997. The increase is primarily due to growth of online fixed fee
database subscriptions and, to a lesser extent, growth in network sales. Growth
in fixed fee sales has been strong throughout, especially in North America and
Australia.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
Pro forma maintenance revenues increased 7% to $0.9 million for the three
months ended June 30, 1998 from $0.8 million for the same period in 1997. The
increase in maintenance revenues is directly attributable to the increase in
network sales, which have mandatory maintenance charges of 17% of the first
year's software fees.
Six months ended June 30
- ------------------------
For the six months ended June 30, 1998, the Company's total pro forma revenues
increased 21% to $21.8 million versus $18.0 million for the comparable period
in 1997.
Pro forma revenues from database subscriptions and software increased 23% to
$20.1 million for the six months ended June 30, 1998 from $16.4 million during
the same period of 1997. The increase is primarily due to growth of online
fixed fee database subscriptions and, to a lesser extent, growth in network
sales. Growth in fixed fee sales has been strong throughout, especially in
North America, Australia and Europe. In addition, software sales in Japan
experienced strong growth during the first six months of 1998 compared to the
same period of 1997.
Pro forma maintenance revenues increased 9% to $1.8 million for the six months
ended June 30, 1998 from $1.6 million for the same period in 1997. The increase
in maintenance revenues is directly attributable to the increase in network
sales, which have mandatory maintenance charges of 17% of the first year's
software fees.
Pro Forma Cost of Revenues
Three months ended June 30
- --------------------------
Pro forma cost of revenues increased 45% to $4.3 million in the second quarter
of 1998 from $3.0 million for the same period in 1997. As a percent of total
pro forma revenues, total pro forma cost of revenues increased to 38% for the
second quarter of 1998 from 32% for the same period of 1997. This increase was
primarily due to an increase in data conversion costs associated with the
full-text product resulting from a change in the method of accounting for these
costs, as well as, an increase in the dollar expenditures. During the second
quarter of 1997, these costs were being capitalized and amortized over five
years. In September 1997, the amounts capitalized were written off, and the
Company changed its accounting treatment to expense as incurred. The increase
in the dollar expenditures resulted from data conversion costs for the addition
of several new journals to the Company's full-text offerings. An additional
increase in pro forma cost of revenues is due to an increase in royalty
expense, as the Company has experienced an increasing amount of database sales
from for profit data providers who require substantial royalties. The Company
expects this trend to continue as it is projected that a significant amount of
future sales are expected to be from these databases and full text.
Six months ended June 30
- ------------------------
Pro forma cost of revenues increased 47% to $8.6 million for the six months
ended June 30, 1998 from $5.8 million for the same period in 1997. As a percent
of total pro forma revenues, total pro forma cost of revenues increased to 39%
for the six months ended June 30, 1998 from 32% for the same period of 1997.
This increase was primarily due to an increase in data conversion costs
associated with the full-text product resulting from a change in the method of
accounting for these costs, as well as, an increase in the dollar expenditures.
During the six months ended June 30, 1997, these costs were being capitalized
and
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
amortized over five years. In September 1997, the amounts capitalized were
written off, and the Company changed its accounting treatment to expense as
incurred. The increase in the dollar expenditures resulted from data conversion
costs for the addition of several new journals to the Company's full-text
offerings. An additional increase in pro forma cost of revenues is due to an
increase in royalty expense, as the Company has experienced an increasing
amount of database sales from for profit data providers who require substantial
royalties. The Company expects this trend to continue as it is projected that a
significant amount of future sales are expected to be from these databases and
full text.
Pro Forma Gross Profit
Pro forma gross profit was $6.9 million for the quarter ended June 30, 1998,
compared with $6.2 million for the same period in 1997, representing 62% of pro
forma revenues for the second quarter of 1998 and 68% for the second quarter
1997. Pro forma gross profit was $13.3 million for the six months ended June
30, 1998, compared with $12.2 million for the same period in 1997, representing
61% of pro forma revenues for the six months ended June 30, 1998 and 68% for
the same period in 1997.
Sales and Marketing Expenses
Three months ended June 30
- --------------------------
Sales and marketing expenses remained constant at $2.0 million for the second
quarter of 1998 and 1997. Sales commissions increased for the second quarter of
1998 compared to the same period of 1997 due to increased billings. Savings
from the consolidation of the Company's Amsterdam office into the UK office, as
well as a reduction in staff in marketing and inside sales offset the increased
sales commissions. As a percentage of total pro forma revenues, sales and
marketing expenses decreased to 18% during the second quarter of 1998 from 22%
for the same period in 1997.
Six months ended June 30
- ------------------------
Sales and marketing expenses decreased 8% to $3.6 million during the six months
ended June 30, 1998 from $3.9 million for the same period in 1997. The decrease
in sales and marketing expenses 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. These savings were partially offset by increased
sales commissions due to higher billings compared to the same period in 1997.
As a percentage of total pro forma revenues, sales and marketing expenses
decreased to 17% during the six months ended June 30, 1998 from 22% for the
same period in 1997.
Product Development Expenses
Three months ended June 30
- --------------------------
Product development expenses increased 23% to $2.0 million during the second
quarter of 1998 from $1.6 million during the same period in 1997. The increase
in product development expense is primarily due to an increase in personnel
associated with the ongoing full text project, as well as with the new clinical
information product. As a percentage of total pro forma revenues, product
development expenses remained constant at 18% for the three months ended June
30, 1998 and 1997.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
Six months ended June 30
- ------------------------
Product development expenses increased 26% to $3.9 million during the six
months ended June 30, 1998 from $3.1 million during the same period in 1997.
The increase in product development expense is primarily due to an increase in
personnel associated with the ongoing full text project, as well as with the
new clinical information product. As a percentage of total pro forma revenues,
product development expenses increased to 18% for the six months ended June 30,
1998 from 17% for the same period in 1997.
General and Administrative Expenses
Three months ended June 30
- --------------------------
General and administrative expenses decreased 13% to $1.3 million in the second
quarter of 1998 from $1.4 million during the same period in 1997. The decrease
is due to legal fees during the three months ended June 30, 1997 related to the
Powercerv lawsuit described in Note 14 to the December 31, 1997 Form 10-K. As a
percentage of total pro forma revenues, general and administrative expenses
decreased to 11% in the second quarter of 1998 from 16% for the same period in
1997. The percent decrease is primarily attributable to the ability of the
Company to increase pro forma revenues through new sales and database
subscription renewals while controlling the growth of general and
administrative expenses.
Six months ended June 30
- ------------------------
General and administrative expenses decreased 11% to $2.5 million during the
six months ended June 30, 1998 from $2.8 million during the same period in
1997. The decrease is due to legal fees during the six months ended June 30,
1997 related to the Powercerv lawsuit described in Note 14 to the December 31,
1997 Form 10-K. As a percentage of total pro forma revenues, general and
administrative expenses decreased to 11% during the six months ended June 30,
1998 from 15% for the same period in 1997. The percent decrease is primarily
attributable to the ability of the Company to increase pro forma revenues
through new sales and database subscription renewals while controlling the
growth of general and administrative expenses.
Provision for Income Taxes
The Company recorded a tax benefit of $325,000 for the three months ended June
30, 1998, as compared to a provision of $617,000, for the same period in 1997.
For the six months ended June 30, 1998, the Company recorded a tax benefit of
$1,172,000 as compared to a provision of $973,000 for the same period in 1997.
The benefit for the three and six months ended June 30, 1998 reflects the
reversal of that portion of the valuation allowance recorded against the
deferred tax asset, as disclosed in the 1997 Form 10-K, that is no longer
necessary based on management's estimated 1998 income. For the three and six
months ended June 30, 1997, the provision for taxes represents a 40% effective
tax rate.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash and cash equivalents of approximately
$2.6 million and highly liquid short-term investments and marketable securities
of approximately $8.7 million. Operating activities provided $1.5 million in
cash during the six months ended June 30, 1998 as compared to providing $3.8
million during the same period in 1997. During the six months ended June 30,
1998, the cash provided by operating activities is a result of net income and
an increase in other liablities, offset partially by an increase in receivables
and a decrease in accounts payable. During the six months ended June 30, 1997
the cash provided by operating activities was a result of net income and a
decrease in accounts receivable and an increase in accounts payable.
The Company's investing activities provided the Company with cash of $100,000
during the first six months of 1998, compared to using cash of $4.4 million
during the same period in 1997. The primary source of cash in 1998 was the sale
or redemption of $10.6 million of short-term investments and marketable
securities, offset by $9.8 million of purchases of short-term investments and
marketable securities and $897,000 in capital expenditures. During the six
months ended June 30, 1997, the primary use of cash was the purchase of $14.7
million of short-term investments and $1.3 million in capital expenditures,
offset by redemptions of $11.7 million of short-term investments.
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 in the 1997 Form 10-K, the Company is undertaking an alternative
solution to the abandoned information business system. Costs are estimated to
be less than $1 million for this project. The Company currently believes 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 $255,000 during the six months ended
June 30, 1998 as compared to providing $79,000 during the same period in 1997.
During the six months ended June 30 1998, purchases of treasury stock of
$770,000 and repayments of a capital lease obligation of $170,000; offset by
cash from stock option exercises of $685,000 accounted for the use of cash.
During the six months ended June 30, 1997, $79,000 was provided by 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, and
bearing interest at the bank's prime rate. The agreement expires November 1,
1998. There were no borrowings outstanding on the line-of-credit at June 30,
1998.
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
18
<PAGE>
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 Commpany.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ovid Technologies, Inc.
----------------------------
(Registrant)
August 7, 1998 /s/ DEBORAH M. HULL
- -------------- -------------------------
Date Deborah M. Hull
Chief Operating Officer
August 7, 1998 /s/ JEFFREY A. HOERLE
- -------------- -------------------------
Date Jeffrey A. Hoerle
Chief Financial Officer
20
<PAGE>
[Letterhead of Ovid Technologies, Inc.]
Mark L. Nelson
President and CEO
Ovid Technology, Inc.
June 15, 1998
Dear Mark,
The following sets forth the agreement between you and Ovid Technologies, Inc.
(the Company):
As of May 1, 1998 there was a balance outstanding due by you to the company of
$146,914.86 representing amounts loaned to you. During May, additional loans
and interest charges of $76,244.05 were added bringing the May 31, 1998 balance
to $223,158.91. Interest is being charged at a rate of 8% per annum on the
outstanding principal balance. Interest will be calculated monthly and added to
the balance outstanding at the end of each month. Loans extended to you during
the month will be charged interest only for the days outstanding during that
month.
Borrowing under this agreement shall not exceed $2.0 million dollars. The
Company may demand repayment of all balances outstanding at any time. If
repayment has not been demanded previously, all outstanding balances are due
the Company on December 31, 1999.
Periodic repayments can be made at your discretion and will be credited to the
amount outstanding on the date received, and reduce the amount on which
interest is charged from that date.
A statement updating you on the balance of the amount owed the Company,
interest charges, current month's advances and repayments made will be sent you
after the end of each month.
For our records, please sign this letter where indicated below in
acknowledgement of these terms.
Thank you,
/s/ Jeffrey A. Hoerle
Jeffrey A. Hoerle
Chief Financial Officer
Accepted:
/s/ Mark L. Nelson
Mark L. Nelson
President and CEO
21
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PAGE>
OVID TECHNOLOGIES, INC.
FINANCIAL DATA SCHEDULE
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,638,000
<SECURITIES> 8,676,000
<RECEIVABLES> 14,916,000
<ALLOWANCES> 1,447,000
<INVENTORY> 0
<CURRENT-ASSETS> 35,122,000
<PP&E> 9,639,000
<DEPRECIATION> 6,369,000
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<CURRENT-LIABILITIES> 30,264,000
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<COMMON> 62,000
<OTHER-SE> 9,367,000
<TOTAL-LIABILITY-AND-EQUITY> 40,489,000
<SALES> 0
<TOTAL-REVENUES> 18,671,000
<CGS> 7,683,0000
<TOTAL-COSTS> 10,050,000
<OTHER-EXPENSES> 25,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,000
<INCOME-PRETAX> 1,225,000
<INCOME-TAX> (1,172,000)
<INCOME-CONTINUING> 2,397,000
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