<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 March 31, 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
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 6,247,093 April 30, 1998
<PAGE>
OVID TECHNOLOGIES, INC.
INDEX
--------
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1998 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
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 Matter to a Vote of Securities Holders:
None
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule 17
2
<PAGE>
OVID TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS: 1997 1998
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,284 $ 972
Short-term investments 6,209 100
Marketable securities - available for sale 3,305 7,284
Accounts receivable, less allowance for doubtful accounts
of $1,456 and $1,452 for 1997 and 1998, respectively 12,259 14,007
Prepaid royalties 4,260 5,712
Prepaid expenses and other current assets 3,728 3,751
-------- --------
Total current assets 31,045 31,826
Equipment and leasehold improvements, net 3,208 3,323
Deferred income taxes 759 1,232
Deposits and other assets 110 109
-------- --------
Total assets $ 35,122 $ 36,490
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,977 $ 3,339
Accrued expenses 4,896 3,755
Customer deposits 1,041 1,062
Income taxes payable 362 --
Unearned revenue 16,427 19,733
Current portion of long-term capital lease 308 348
Obligation under database subscriptions 351 176
-------- --------
Total current liabilities 27,362 28,413
Long-term capital lease, less current portion 577 573
-------- --------
Total liabilities 27,939 28,986
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 6,106,929 shares, respectively, issued and outstanding 61 62
Additional paid-in capital 9,467 9,853
Accumulated deficit (1,965) (1,246)
Cumulative comprehensive income (26) (40)
Treasury stock, at cost, 39,000 and 97,000 shares, respectively (354) (1,125)
-------- --------
Total stockholders' equity 7,183 7,504
-------- --------
Total liabilities and stockholders' equity $ 35,122 $ 36,490
======== ========
</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 March 31,
---------
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Revenues:
Database subscriptions and software $ 7,674 $ 7,346
Maintenance and other 778 867
----------- -----------
Total revenues 8,452 8,213
----------- -----------
Cost of revenues:
Database subscriptions and software 2,788 3,519
Maintenance and other 58 118
----------- -----------
Total cost of revenues 2,846 3,637
----------- -----------
Gross profit 5,606 4,576
Operating expenses:
Sales and marketing 1,948 1,676
Product development 1,490 1,939
General and administrative 1,341 1,218
----------- -----------
Total operating expenses 4,779 4,833
----------- -----------
Income (loss) from operations 827 (257)
Interest and other income, net 63 127
----------- -----------
Income (loss) before income taxes 890 (130)
Provision (benefit) for income taxes 356 (848)
----------- -----------
Net income $ 534 $ 718
=========== ===========
Basic earnings per share $ .09 $ .12
=========== ===========
Diluted earnings per share $ .07 $ .10
=========== ===========
PRO FORMA DATA:
Pro forma total revenues $ 8,875 $ 10,629
Pro forma gross profit 5,920 6,335
Pro forma income from operations 1,141 1,502
Pro forma net income $ 722 $ 978
Pro forma net income per common share
Basic $ .12 $ .16
=========== ===========
Diluted $ .10 $ .13
=========== ===========
Weighted average number of shares of common
stock outstanding
Basic 5,919,783 6,107,664
=========== ===========
Diluted 7,230,035 7,467,510
=========== ===========
Total comprehensive income (see Note 4) $ 507 $ 704
----------- -----------
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE>
OVID TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
for the three months ended March 31,
----------
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 534 $ 718
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 691 470
Other, net 34 (486)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 744 (1,748)
(Increase) in other assets, net (427) (1,475)
(Decrease) in accounts payable (668) (638)
Increase in other liabilities, net 1,346 1,636
------- -------
Cash provided by (used in) operating activities 2,254 (1,523)
------- -------
Cash flows from investing activities:
Purchase of short-term investments (6,159) (516)
Proceeds from short-term investments 4,124 6,625
Purchase of marketable securities - available for sale -- (4,875)
Proceeds from sale of marketable securities - available for sale -- 896
Capital expenditures (819) (572)
Proceeds from capital lease transaction -- 116
------- -------
Cash provided by (used in) investing activities (2,854) 1,674
------- -------
Cash flows from financing activities:
Repayment of capital lease obligation -- (80)
Proceeds from the exercise of stock options 28 387
Purchases of treasury stock -- (770)
------- -------
Cash provided by (used in) financing activities 28 (463)
------- -------
Decrease in cash and cash equivalents (572) (312)
Cash and cash equivalents, beginning of the period 1,426 1,284
------- -------
Cash and cash equivalents, end of the period $ 854 $ 972
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE>
NOTES TO 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 historical condensed consolidated
financial statements and related notes included therein. In the
opinion of management, the accompanying unaudited condensed financial
statements include all adjustments, consisting of only normal
recurring accruals, necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows
of the Company. Certain information and footnote disclosure normally
included in financial statements prepared in conformity with generally
accepted accounting principles have been condensed or omitted pursuant
to the Securities and Exchange Commission rules and regulations.
Quarterly operating results are not necessarily indicative of the
results that would be expected for the full year.
2. 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.
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.
(continued)
6
<PAGE>
NOTES TO 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
March 31, 1997 March 31, 1998
Per Share Per Share
--------------------- ---------------------
Shares Amount Shares Amount
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Basic EPS 5,919,783 $ .09 6,107,664 $ .12
Effect of dilutive stock
options 1,310,252 $(.02) 1,359,846 $(.02)
Diluted EPS 7,230,035 $ .07 7,467,510 $ .10
</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 sheet and statement 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
(continued)
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
second year of application, requires restatement of earlier periods
presented. The Company is reviewing the effects of the disclosure
requirements of this new standard.
In addition, the Accounting Standards Executive Committee 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.
5. Provision for Income Taxes:
The Company recorded a tax benefit of $848 for the first quarter of
1998, as compared to a provision of $356, for the same period in 1997.
The benefit for the first quarter of 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 first
quarter of 1997, the provision for taxes represents a 40% effective
tax rate.
(continued)
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1998, as compared to
Three Months Ended March 31, 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. On a billings basis, Ovid's
total sales increased 49% to $11.7 million during the first quarter of 1998
compared to $7.9 million for the same period in 1997. Ovid experienced a
significant increase in its online business during the first quarter of 1998
compared to the first quarter of 1997. On a billings basis, Ovid's online fixed
fee sales increased 1360% to $2.4 million for the three months ended March 31,
1998, compared to $164,000 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 almost 200% to $928,000 for the quarter ended March
31, 1998, compared to $312,000 for the same period during 1997.
The Company's investment in the international market continued to bring
positive results. Ovid gained its first large customer in Brazil, and
experienced revenue growth over 25% in a number of international regions. The
Company also had approximately 50% of its full text sales in the international
market during the first quarter.
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's investment in the
Clinical Information Products (CIP) group is ongoing and the Company expects to
release CIP's first product, Evidence Based Medicine, in the second quarter.
Products from CIP leverage Ovid's investment in the medical community and
broaden the breadth of information the Company provides.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 45.5% for the first quarter, as compared
to 53.8% for the comparable period one year ago.
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.
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 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
For the three months ended March 31, 1998, the Company's total revenues
decreased 3% to $8.2 million versus $8.5 million for the comparable period in
1997.
Revenues from database subscriptions and software decreased 4% to $7.3 million
in the first quarter of 1998 from $7.7 million during the same period of 1997.
The decrease 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.
Maintenance revenues increased 12% to $0.9 million for the three months ended
March 31, 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.
(see also pro forma presentation below)
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Cost of Revenues
Cost of revenues increased 28% to $3.6 million in the first quarter of 1998
from $2.8 million for the same period in 1997. As a percent of revenues, total
cost of revenues increased to 44% for the first quarter of 1998 from 34% in
1997. This increase was primarily due to an increase in data conversion costs
associated with the full-text product. During the first 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 these costs is
also due to an increase in the actual dollar expenditures for data conversion.
The addition of several new journals to the Company's full-text offerings has
resulted in higher expenditures for data conversion costs. 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 months ended March 31, 1998 are not comparable with
results from the same period 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 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.
11
<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
March 31,
1997 1998
<S> <C> <C>
Total Revenues
As reported $ 8,452 $ 8,213
Pro forma 8,875 10,629
Total cost of revenues
As reported 2,846 3,637
Pro forma 2,955 4,294
Gross profit
As reported 5,606 4,576
Pro forma 5,920 6,335
Total operating expense
As reported 4,779 4,833
Pro forma 4,779 4,833
Income (loss) from operations
As reported 827 (257)
Pro forma 1,141 1,502
Net income
As reported 534 718
Pro forma 722 928
Net income per
common share
Basic
As reported 0.09 0.12
Pro forma 0.12 0.16
Diluted
As reported 0.07 0.10
Pro forma 0.10 0.13
</TABLE>
RESULTS OF OPERATIONS
Pro Forma Revenues
For the three months ended March 31, 1998, the Company's total pro forma
revenues increased 20% to $10.6 million versus $8.9 million for the comparable
period in 1997.
Pro forma revenues from database subscriptions and software increased 20% to
$9.7 million in the first quarter of 1998 from $8.1 million during the same
period of 1997. The increase is primarily due to growth of online fixed fee
database subscriptions and growth in network sales, especially overseas.
Internationally, growth was strongest in Japan, Europe and the UK.
Pro forma maintenance revenues increased 12% to $0.9 million for the three
months ended March 31, 1998 from $0.8 million for the same period in 1997. The
increase in maintenance revenues is directly
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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
Pro forma cost of revenues increased 45% to $4.3 million in the first 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 40% for the
first quarter of 1998 from 33% for the first quarter of 1997. This increase was
primarily due to an increase in data conversion costs associated with the
full-text product. During the first quarter of 1997, these costs were
capitalized and amortized over five years. In September 1997, the Company
wrote-off the amounts capitalized, and changed its accounting treatment of the
costs to expense as incurred. The increase in these costs is also due to an
increase in the actual dollar expenditures for data conversion. The addition of
several new journals to the Company's full-text offerings has resulted in
higher expenditures for data conversion costs. 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, though at a lesser rate, 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 $6.3 million for the quarter ended March 31, 1998,
compared with $5.9 million for the same period in 1997, representing 60% of pro
forma revenues for the first quarter of 1998 and 67% for the first quarter
1997.
Sales and Marketing Expenses
Sales and marketing expenses decreased 14% to $1.7 million during the first
quarter of 1998 from $1.9 million for the same period in 1997. As a percentage
of total pro forma revenues, sales and marketing expenses decreased to 16%
during the first quarter of 1998 from 22% 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.
Product Development Expenses
Product development expenses increased 30% to $1.9 million during the first
quarter of 1998 from $1.5 million during the same period in 1997. As a
percentage of total pro forma revenues, product development expenses increased
to 18% for the three months ended March 31, 1998 from 17% for 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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
General and Administrative Expenses
General and administrative expenses decreased 9% to $1.2 million in the first
quarter of 1998 from $1.3 during the same period in 1997. As a percentage of
total pro forma revenues, general and administrative expenses decreased to 11%
in the first quarter of 1998 from 15% in the comparable period of 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 expenses.
Provision for Income Taxes
The Company recorded a tax benefit of $848,000 for the first quarter of 1998,
as compared to a provision of $356,000, for the same period in 1997. The
benefit for the first quarter of 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 first quarter of 1997, the provision for taxes
represents a 40% effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash and cash equivalents of
approximately $972,000 and highly liquid short-term investments and marketable
securities of approximately $7.4 million. Operating activities used $1.5
million in cash during the first three months of 1998 as compared to providing
$2.3 million during the same period in 1997. Increases in accounts receivable
and prepaid royalties along with decreases in accounts payable and current
liabilities, offset partially by an increase in deferred revenue, accounted for
the use of cash during the quarter.
The Company's investing activities provided the Company with cash of $1.7
million during the first three months of 1998, compared to using cash of $2.9
during the same period in 1997. The primary source of cash in 1998 was the sale
or redemption of $7.5 million of short-term investments and marketable
securities, offset by $5.4 million of purchases of short-term investments and
marketable securities and $572,000 in capital expenditures. During the first
quarter of 1997, the primary use of cash was the purchase of $6.2 million of
short-term investments and $819,000 in capital expenditures offset by $4.1
million of redemptions 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 10K, 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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The Company's financing activities used $463,000 during the first three months
of 1998 as compared to providing $28,000 during the same period in 1997. During
the first quarter of 1998, purchases of treasury stock of $770,000 and
repayments of capital lease obligation of $80,000; offset by cash from stock
option exercises of $387,000 accounted for the use of cash. During the first
quarter of 1997, $28,000 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 March 31,
1998.
15
<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)
May 11, 1998 /s/ DEBORAH M. HULL
- ------------ ------------------------------
Date Deborah M. Hull
May 11, 1998 /s/ JEFFREY HOERLE
- ------------ ------------------------------
Date Jeffrey Hoerle
16
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