OCLC Online Computer
Library Center, Inc. and
Subsidiaries
Consolidated Financial Statements as of
and for the Years Ended June 30, 2004 and
2003 and Independent Auditors’ Report
OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS’ REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS
ENDED JUNE 30, 2004 AND 2003:
Balance Sheets 2
Statements of Revenues, Expenses and Corporate Equity 3
Statements of Cash Flows 4- 5
Notes to Financial Statements 6- 16
INDEPENDENT AUDITORS’ REPORT
Board of Trustees
OCLC Online Computer Library Center, Inc.
We have audited the accompanying consolidated balance sheets of OCLC Online Computer Library
Center, Inc. and its subsidiaries ( the ��� Corporation”) as of June 30, 2004 and 2003, and the related
consolidated statements of revenues, expenses and corporate equity and of cash flows for the years then
ended. These financial statements are the responsibility of the Corporation’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. 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, such consolidated financial statements present fairly, in all material respects, the financial
position of the Corporation and its subsidiaries at June 30, 2004 and 2003, and the results of their
operations and their cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
September 2, 2004
Deloitte & Touche LLP
155 East Broad Street
18th Floor
Columbus, OH 43215- 3611
USA
Tel: 614- 221- 1000
Fax: 614- 229- 4647
www. deloitte. com
Member of
Deloitte Touche Tohmatsu
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OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
ASSETS 2004 2003
CURRENT ASSETS:
Cash and cash equivalents $ 26,480,300 $ 17,577,000
Short- term investments 7,939,200
Government securities 18,717,100 14,702,800
Corporate notes and bonds 19,410,300 17,427,800
Equity securities 69,316,500 62,470,900
Receivables— net 29,792,000 37,407,700
Prepaid expenses and other 8,472,900 8,632,500
Total current assets 180,128,300 158,218,700
FIXED ASSETS— At cost, less accumulated depreciation
and amortization 125,420,200 125,334,100
OTHER ASSETS 9,575,300 8,916,100
TOTAL $ 315,123,800 $ 292,468,900
LIABILITIES AND CORPORATE EQUITY
CURRENT LIABILITIES:
Current portion of long- term debt and capital leases $ 7,292,300 $ 6,786,700
Accounts payable 5,409,300 10,953,400
Accrued liabilities 14,148,900 14,183,700
Advance subscription payments 14,281,100 11,699,400
Unearned revenue 35,261,700 34,075,500
Total current liabilities 76,393,300 77,698,700
LONG- TERM DEBT AND CAPITAL LEASES—
Less current portion 68,325,300 60,259,100
OTHER NONCURRENT LIABILITIES 23,036,800 20,792,200
MINORITY INTEREST 9,190,200 8,383,200
CORPORATE EQUITY 138,178,200 125,335,700
TOTAL $ 315,123,800 $ 292,468,900
See notes to consolidated financial statements.
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OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REVENUES,
EXPENSES AND CORPORATE EQUITY
YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
REVENUES $ 190,649,300 $ 191,806,300
OPERATING EXPENSES:
Salaries, wages and related fringe benefits 84,529,900 88,179,400
Telecommunications and computer support 45,094,400 44,043,200
Selling, general and administrative 32,867,300 34,512,400
Depreciation and amortization 19,299,900 15,475,900
Building and utilities 5,892,900 5,326,900
Total operating expenses 187,684,400 187,537,800
EXCESS OF NET REVENUES OVER
OPERATING EXPENSES 2,964,900 4,268,500
OTHER INCOME ( EXPENSE):
Investment income ( expense) 6,873,000 ( 1,645,800)
Interest expense ( 3,078,300) ( 3,104,100)
Minority interest in excess of revenues over expenses of
majority- owned subsidiaries ( 159,300) ( 430,700)
Miscellaneous— net ( 186,500) ( 40,600)
Total other income ( expense) 3,448,900 ( 5,221,200)
EXCESS ( DEFICIT) OF REVENUES OVER EXPENSES 6,413,800 ( 952,700)
NET UNREALIZED GAIN ON INVESTMENTS 5,419,800 5,000,600
CHANGE IN VALUE OF INTEREST RATE
SWAP AGREEMENT 361,000 ( 376,100)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 647,900 1,950,500
INCREASE IN NET EQUITY 12,842,500 5,622,300
CORPORATE EQUITY— Beginning of year 125,335,700 119,713,400
CORPORATE EQUITY— End of year $ 138,178,200 $ 125,335,700
See notes to consolidated financial statements.
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OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
CASH PROVIDED BY ( USED IN) OPERATING ACTIVITIES:
Excess ( deficit) of revenues over expenses $ 6,413,800 $ ( 952,700)
Adjustments for non- cash items:
Depreciation and amortization 19,299,900 15,475,900
Minority interest in earnings of majority- owned subsidiaries 1 59,300 430,700
Realized ( gain) loss on sale of investments ( 4,609,900) 4,194,100
Loss on sale of fixed assets 1,882,300 24,000
Loss on sale of MetaText 11,300
Changes in assets and liabilities:
Decrease ( increase) in receivables 7,726,500 ( 3,111,900)
Decrease ( increase) in other assets 4 54,400 ( 2,171,000)
Increase ( decrease) in accounts payable ( 2,469,300) 1,890,900
Increase in accrued liabilities, unearned revenue and other 4,170,700 5,658,300
Cash provided by operating activities 33,027,700 21,449,600
CASH PROVIDED BY ( USED IN) FINANCING ACTIVITIES:
Payments on revenue bonds and capital leases ( 7,249,200) ( 23,193,400)
Proceeds from revenue bonds and capital leases 14,000,000 25,000,000
Premium received on debt issuance 1,223,300
Proceeds from line of credit 2,700,000
Payments on line of credit ( 2,700,000)
Debt issuance costs ( 16,400) ( 246,600)
Change in bond trust accounts— net 1 2,000 ( 11,200)
Cash provided by financing activities 6,746,400 2,772,100
CASH PROVIDED BY ( USED IN) INVESTING ACTIVITIES:
Purchases of investments ( 85,848,500) ( 50,548,900)
Proceeds from sale of investments 75,168,200 47,311,000
Purchases of fixed assets ( 10,246,800) ( 11,859,000)
Capitalization of internal use software ( 10,218,300) ( 12,835,000)
Acquisition of Libpac Ltd. ( excluding acquired cash of $ 1,019,600) ( 485,200)
Acquisition of CAPCON ( excluding acquired cash of $ 315,000) 3 15,000
Acquisition of Strata Preservation N. V. ( excluding acquired
cash of $ 846,800) 304,500
Proceeds from sale of MetaText 2,504,400
Other— net ( 278,900) ( 608,100)
Cash used in investing activities ( 31,594,500) ( 25,731,100)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 7 23,700 1,646,700
( Continued)
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OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
INCREASE IN CASH AND CASH EQUIVALENTS $ 8,903,300 $ 137,300
CASH AND CASH EQUIVALENTS— Beginning of year 17,577,000 17,439,700
CASH AND CASH EQUIVALENTS— End of year $ 26,480,300 $ 17,577,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 3,071,100 $ 3,157,300
Fixed asset additions financed by accounts payable $ 230,200 $ 3,307,900
Property acquired by capital lease $ 1,821,000 $ 1,147,500
Net unrealized gain on investments $ 5,419,800 $ 5,000,600
Change in fair value of interest rate swap agreement $ 361,000 $ ( 376,100)
Acquisitions:
Fair value of assets acquired $ 1,556,900 $ 1,388,300
Liabilities assumed ( 1,485,000) ( 966,600)
Minority interest ( 168,700)
Excess of cost over fair value of assets acquired 1,432,900 289,300
Cash paid $ 1,504,800 $ 542,300
Sale of MetaText:
Assets disposed $ 2,664,600
Liabilities transferred ( 148,900)
Loss on sale ( 11,300)
Cash received $ 2,504,400
See notes to consolidated financial statements. ( Concluded)
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OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
OCLC Online Computer Library Center, Inc. (“ OCLC”) is a non- profit corporation organized to
establish, maintain, and operate an international computerized network of bibliographic cataloging
services for libraries and to promote the evolution of library use. The accumulated excess of revenues
over expenses ( corporate equity) cannot be distributed to the members. OCLC’s corporate equity is
unrestricted. In the event of dissolution, the Board of Trustees is to adopt a plan for distribution of
remaining assets that is consistent with the purpose of OCLC. OCLC generally provides services to its
members on a contract basis. The significant accounting policies of OCLC and its subsidiaries are set
forth below:
Principles of Consolidation— The consolidated financial statements include the accounts of OCLC and
its wholly- owned for- profit subsidiaries, OCLC Educational Services, Inc. (“ OESI”), and OCLC
Information Distribution, Inc. (“ OID”) as well as its majority- owned subsidiaries, OCLC PICA B. V. and
Strata Preservation N. V. (“ Strata”). OCLC’s wholly- owned for- profit subsidiaries were inactive for the
year ended June 30, 2004 and OESI was dissolved on July 31, 2003. Operating revenues for OCLC’s
wholly- owned for- profit subsidiaries were $ 242,800, and expenses were $ 539,100, for the year ended
June 30, 2003. Intercompany transactions have been eliminated in consolidation. See Notes 7, 9, and 10
regarding the acquisition of CAPCON Library Network (“ CAPCON”), Strata Preservation N. V., and
Libpac, Ltd.
Cash and Cash Equivalents— All highly liquid debt investments with an original maturity of three
months or less at the time of purchase are considered cash equivalents, and are stated at cost, which
approximates market. Cash is primarily held in two banks.
Investments— Short- term investments consist of commercial paper and short- term government notes,
and are stated at cost, which approximates market. Government securities, corporate notes and bonds
and equity securities are stated at fair value. Fair values are based on market quotes.
Revenue Recognition— Member service revenues are recognized at the time services are provided, and
include member system service revenues, telecommunication revenues, and miscellaneous member
service revenues. Software license and consulting revenues are recognized at the time software is
shipped and services are provided, or according to contract terms in the case of customized installations
and system maintenance billings. Unearned revenue and advance subscription payments represent
monies advanced to OCLC by members and Networks and are recognized as revenues when the service
is provided. Member participation credits ( 2004—$ 5,835,100; 2003—$ 6,000,300) are issued to libraries
for services provided to OCLC for the benefit of the cooperative and are recorded as an expense rather
than a reduction of revenue.
Minority Interest— Minority interest represents the 40% of OCLC PICA B. V. owned by Stichting Pica
and 40% of Strata Preservation N. V. owned by Koninklijke Bibliotheek, the National Library of the
Netherlands ( see Note 9).
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Use of Estimates— The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires, in certain instances, the use of
estimates. Actual results could differ from these estimates.
Depreciation and Amortization— Depreciation is provided using straight- line and accelerated methods
at rates based on the estimated useful lives of the equipment and improvements ( 3 to 20 years) and
buildings ( 30 to 40 years). Costs incurred and premiums received in connection with the issuance of
revenue bonds are amortized and accreted, respectively, using the effective interest method over the
terms of the respective bonds.
Software and Goodwill— The cost of purchased software is capitalized and amortized using the straight-line
method over the estimated economic useful lives ( 3 to 15 years). OCLC capitalizes the costs
associated with purchased databases, enhancements, and certain internal use software costs once certain
criteria are met. These costs are amortized using the straight- line method ( 3 to 15 years). At each balance
sheet date, management compares the carrying value of capitalized software to the net realizable value of
the software, and the carrying value in excess of future discounted cash flows is expensed currently.
Goodwill, which represents the excess of purchase price over the fair value of assets acquired, is
amortized using the straight- line method ( 5 to 15 years). Net book value of goodwill was $ 2,538,300 and
$ 2,498,200 at June 30, 2004 and 2003, respectively.
Research and Development— Research and development costs ( principally salaries and related fringe
benefits), approximating $ 13,382,100 and $ 14,048,400 for fiscal 2004 and 2003, respectively, are
charged to operations as incurred.
Income and Other Taxes— OCLC is tax exempt under the appropriate sections of the Internal Revenue
Code and various sections of state and local tax statutes and, accordingly, no provision for federal, state,
or local income taxes is currently required for its operations. OCLC PICA B. V., Strata Preservation
N. V., OID and OESI are not exempt from federal, state, local, or foreign income taxes.
The asset and liability method is used for financial accounting and reporting of income taxes. Deferred
income tax assets and liabilities are computed annually for differences between the financial statement
and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based
on enacted laws and rates applicable to the periods in which differences are expected to affect taxable
income. Income tax expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities. Income tax expense for the years ended June 30,
2004 and 2003 was $ 838,800 and $ 660,500 respectively, and is included in selling, general, and
administrative expense.
Foreign Currency Translation— Branch offices, foreign subsidiaries and equity interests are based in
Canada, United Kingdom, France and the Netherlands. The local currency has been designated as the
functional currency for such operations. Income and expense items are translated at the average monthly
rate of exchange. Assets and liabilities are translated at the rate of exchange on the balance sheet dates
with the resultant translation gains or losses included as a separate component of corporate equity.
Corporate equity includes net cumulative translation gains of $ 3,006,600 and $ 2,358,700 at June 30,
2004 and 2003, respectively.
Self- Insurance Programs— OCLC uses various self- insurance plans for certain of its medical insurance
programs. The associated liability has been recorded in the consolidated financial statements based on
information currently available as to the estimated ultimate cost for incidents prior to the balance sheet
dates. Losses in excess of certain limits are insured with third- party insurance companies.
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2. INVESTMENTS
In accordance with Statement of Financial Accounting Standards (“ SFAS”) No. 124, Accounting for
Certain Investments Held by Not- For- Profit Organizations, debt and equity investments are carried at
their fair value with related unrealized gains and losses on the portfolio reflected in the change in net
equity. Realized gains and losses are included in investment income.
OCLC invests available cash in major banks, federal, state, and local government obligations and
investment grade debt and equity securities. Market risk is reduced by investing funds in maturities that
match anticipated short and long- term cash needs and by investing in diversified industries and markets,
both domestic and international. All investments are held in safekeeping by a trustee and are reflected in
the balance sheets as cash equivalents, short- term investments, government securities, corporate notes
and bonds, and equity securities.
In fiscal year 2001, OCLC adopted the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, to establish accounting and reporting requirements for derivative
instruments. See Note 4 for the impact on OCLC’s financial position.
Realized gains and losses related to investments are recorded using the specific identification method.
Net unrealized gains on the portfolio totaled $ 7,044,000 and $ 1,624,200 at June 30, 2004 and 2003,
respectively. The following schedule details investment returns for the years ended June 30:
2004 2003
Dividends and interest income $ 2,263,100 $ 2,548,300
Net realized gains ( losses) 4,609,900 ( 4,194,100)
Investment income ( expense) 6,873,000 ( 1,645,800)
Net unrealized gain on investments 5,419,800 5,000,600
Total net investment return $ 12,292,800 $ 3,354,800
In November 2003, the FASB issued EITF Issue No. 03- 1, The Meaning of Other- Than- Temporary
Impairment and Its Application to Certain Investments. This guidance requires additional disclosures of
investments having unrealized losses. The following table shows the gross unrealized losses and fair
value, aggregated by investment category and length of time those securities have been in a continuous
unrealized loss position, at June 30, 2004.
Description of Temporarily Fair Unrealized Fair Unrealized Fair Unrealized
Impaired Securities Value Losses Value Losses Value Losses
US Treasury obligations $ 5,010,800 $ ( 76,800) $ 1,649,100 $ ( 114,200) $ 6,659,900 $ ( 191,000)
Mortgage backed securities 1,777,800 ( 66,000) 170,700 ( 6,700) 1,948,500 ( 72,700)
Corporate bonds 9,854,600 ( 231,100) 748,100 ( 234,000) 10,602,700 ( 465,100)
Total debt securities 16,643,200 ( 373,900) 2,567,900 ( 354,900) 19,211,100 ( 728,800)
Common stock 13,728,200 ( 1,038,700) 2,070,800 ( 690,500) 15,799,000 ( 1,729,200)
Preferred stock 803,800 ( 35,700) 803,800 ( 35,700)
Total equity securities 14,532,000 ( 1,074,400) 2,070,800 ( 690,500) 16,602,800 ( 1,764,900)
Total temporarily impaired
securities $ 31,175,200 $ ( 1,448,300) $ 4,638,700 $ ( 1,045,400) $ 35,813,900 $( 2,493,700)
Less than 12 months 12 months or more Total
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OCLC reviews its portfolio for impairment and has reached the conclusion, in consultation with OCLC’s
investment advisors, that these impairments are temporary due to the current market conditions and
interest rates. The government securities are backed by the full faith of the US government and the
corporate notes and bonds are investment grade ( Standard & Poor rated triple B or better) and OCLC
knows of no individual holdings that are permanently impaired or have fallen below investment grade.
At June 30, 2004, the Corporation owns the following securities that had unrealized losses: 25 U. S.
Treasury obligations, nine mortgage securities, 171 corporate bonds, 90 common stock, and 18 preferred
stock.
3. FIXED ASSETS
Fixed assets include the following:
2004 2003
Land and improvements $ 10,279,400 $ 10,279,400
Buildings and improvements 60,111,700 59,513,200
Computer and telecommunications equipment 35,315,300 35,269,700
Databases 55,281,800 50,982,500
Intangibles including software and goodwill 55,674,000 45,722,600
Office furniture and equipment 23,428,000 23,679,600
Total 240,090,200 225,447,000
Less accumulated depreciation and amortization 114,670,000 100,112,900
Fixed assets— net $ 125,420,200 $ 125,334,100
June 30
Software development costs, related to internal use software, of $ 10,218,300 and $ 12,835,000 were
capitalized in 2004 and 2003, respectively.
Operating Leases— Certain buildings and equipment are rented under operating leases. Rental expense
for all leases was $ 1,698,500 and $ 1,324,700 for fiscal years 2004 and 2003, respectively. Future
minimum lease payments under existing non- cancelable lease commitments are as follows:
Fiscal Year
Ended June 30
2005 $ 1,339,400
2006 1,297,400
2007 1,168,200
2008 348,000
2009 224,400
Thereafter 45,700
Total $ 4,423,100
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4. LONG- TERM DEBT
In April 2003, OCLC issued $ 25,000,000 of Franklin County Revenue Bonds (“ 2003 bonds”). The
proceeds were used to refund the remaining portion of the 1993 Franklin County Revenue Bonds (“ 1993
bonds”), and to improve real property, acquire office systems, software, computers and other equipment,
and bibliographic and other databases. The bonds were issued at a premium of $ 1,223,000 which is
being accreted over the life of the bonds using the effective interest method.
In December 1998, OCLC issued $ 32,515,000 of Franklin County Revenue Bonds (“ 1998 bonds”). The
proceeds were used to advance refund and defease a portion of the 1991 Franklin County Revenue
Bonds (“ 1991 bonds”), and to improve real property, acquire office systems, software, computers and
other equipment, and bibliographic and other databases. The total 1991 bonds refunded were
$ 6,675,000.
Revenue Bonds— Revenue bonds outstanding are as follows:
2004 2003
Serial bonds:
1998 bonds, 4.00% to 4.70%, maturing
annually through October 1, 2012 $ 14,865,000 $ 17,165,000
2003 bonds, 3.00% to 5.00%, maturing
annually through April 15, 2013 19,730,000 21,545,000
Total serial bonds 34,595,000 38,710,000
Term bonds:
1998 bonds, 5.00% and 5.20%, maturing
October 1, 2016 and October 1, 2020 11,975,000 11,975,000
2003 bonds, 5.25%, maturing April 15, 2018 3,455,000 3,455,000
Total term bonds 15,430,000 15,430,000
Total revenue bonds outstanding $ 50,025,000 $ 54,140,000
June 30
Bond fund deposits for the 1998 serial bonds sufficient to cover the next principal payment will be made
annually to the trustee. Annual sinking fund deposits for redemption of the principal balance of the 1998
term bonds commence October 1, 2013, in amounts ranging from $ 1,375,000 in 2013 to $ 1,575,000 in
2020. Interest on the 1998 bonds is payable semi- annually to the trustee. The 1998 bonds are callable at
101% of par if redeemed between October 2008 and September 2009, and at par beginning October
2009.
Bond fund deposits for the 2003 serial bonds sufficient to cover the next principal payment are made
annually to the trustee. Annual sinking fund deposits for redemption of the principal balance of the 2003
term bonds commence April 15, 2014, in amounts ranging from $ 620,000 in 2014 to $ 765,000 in 2018.
Interest on the 2003 bonds is payable semi- annually to the trustee. The 2003 bonds are callable at par
beginning April 15, 2013.
All bond issues are unsecured. The indenture agreement and its supplements restrict, among other
things, the issuance of additional debt and the granting of security interests.
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Capitalized Leases— OCLC leases office and computer equipment and autos with an option to purchase
the equipment at a nominal cost at the termination of the lease. The outstanding balance was $ 1,497,400
and $ 715,300 at June 30, 2004 and 2003, respectively.
On October 26, 2001, the Corporation entered into a seven- year tax- exempt lease agreement through
Franklin County, Ohio for $ 16,000,000 with an effective interest rate of 4.11%. The lease is due
monthly in equal principal installments of $ 190,500 ( plus interest) and has a balance outstanding of
$ 10,095,200 and $ 12,190,500 at June 30, 2004 and 2003, respectively. The proceeds were used to
finance the acquisition and installation of office systems and equipment, computers, servers, related
peripheral equipment and software and bibliographic and other information databases.
The Corporation also simultaneously entered into a $ 16,000,000 interest rate swap agreement to manage
its exposure to the variability of cash flows primarily related to the interest rate changes on its borrowing
costs. The agreement is designated as a cash flow hedge at inception with a remaining maturity of seven
years. The Corporation adjusts the swap to market value through equity as the contract is effective in
offsetting the interest rate exposure of the forecasted interest rate payments hedged. Hedging
effectiveness is assessed periodically by comparing the fair market value of the agreement to similar
agreements maintained by the lending facility. The swap agreement had a total negative fair market
value of $ 177,900 and $ 538,900 at June 30, 2004 and 2003, respectively, which is reflected as a long-term
liability and charge to equity. As the interest rate protection agreement is with a major bank, the
Corporation does not expect to be subject to credit risk exposures.
On June 14, 2004, the Corporation entered into a seven- year tax- exempt lease agreement through
Franklin County, Ohio for $ 14,000,000 with an effective interest rate equal to the LIBOR Rate plus
1.75%, multiplied by 0.65 ( 1.86% at June 30, 2004). The lease is due monthly in equal principal
installments of $ 233,300 ( plus interest) starting July 2006 and has a balance outstanding of $ 14,000,000
at June 30, 2004. Interest only is due July 1, 2004 to July 1, 2006. The proceeds were used to finance the
acquisition and installation of office systems and equipment, computers, servers, related peripheral
equipment and software and bibliographic and other information databases.
Cost and accumulated depreciation of the leased equipment included in 2004 and 2003 fixed assets were
as follows:
2004 2003
Equipment, software and databases $ 32,694,300 $ 17,225,200
Less accumulated depreciation 5,824,000 3,241,300
Capitalized leased assets— net $ 26,870,300 $ 13,983,900
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The aggregate maturities of the revenue bonds and the capital lease obligations are as follows:
Fiscal Year
Ending June 30
2005 $ 7,292,300
2006 7,329,500
2007 9,749,000
2008 8,285,700
2009 7,080,900
2010 and later 35,880,200
Total $ 75,617,600
5. BANK LINE OF CREDIT
An unsecured revolving line of credit with a bank provided for total borrowings of up to $ 6,000,000
during fiscal years 2004 and 2003. Under the terms of the agreement, interest on amounts borrowed is
payable at the bank’s prime rate of interest. The line of credit expires in December 2004. During fiscal
2004, no borrowings were made under such line of credit. During fiscal 2003, a total of $ 2.7 million was
borrowed and subsequently repaid within a week of the borrowings.
6. EMPLOYEE BENEFIT PLANS
A noncontributory, defined contribution retirement plan covers all domestic OCLC employees who have
completed two years of service, except for employees of OCLC’s netLibrary division. Voluntary
contributory, defined contribution employee savings plans cover all full- time domestic OCLC
employees who have completed ninety days of service. In 2003, OCLC established a 457( b) non-qualified
voluntary contributory, defined contribution savings plan for key domestic employees with no
defined waiting period. The cost of these plans ( included in salaries, wages, and related fringe benefits)
was $ 4,427,400 and $ 4,474,700 for fiscal 2004 and 2003, respectively.
In 1998, OCLC established a non- qualified voluntary contributory savings plan for key domestic
employees and Board of Trustee members. OCLC purchases and holds ( reflected in other assets)
investment assets, recorded at fair value, equal to the participants’ voluntary contributions. Due to a
change in federal tax regulations, the plan was frozen effective May 1, 2002. In 2003, OCLC established
a 457( f) non- qualified deferred compensation plan for key domestic employees. The liability under these
plans was $ 5,591,900 and $ 4,526,600 ( reflected in Other Noncurrent Liabilities) at June 30, 2004 and
2003, respectively.
Foreign operations, including OCLC PICA B. V. and Strata Preservation N. V., maintain or participate in
separate retirement and defined contribution pension plans. Total contributions recorded under these
plans were $ 583,300 and $ 564,700 in fiscal years 2004 and 2003, respectively.
OCLC maintains a voluntary contributory plan providing postretirement health care and non-contributory
postretirement life insurance coverage for domestic employees. OCLC’s domestic
employees meeting certain age and service requirements at the time of their retirement are eligible to
participate. OCLC recognizes the cost of postretirement medical and life benefits as the employees
render service. These benefits are funded by OCLC when incurred.
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As of June 30, 2004 and 2003, relevant postretirement benefit information is summarized as follows:
2004 2003
Accumulated postretirement benefit obligation:
Retired participants $ 2,610,200 $ 1,370,900
Fully eligible active plan participants 850,000 2,382,400
Other active plan participants 8,078,400 8,636,000
Postretirement benefit obligation 11,538,600 12,389,300
Unrecognized net gain ( loss) from actuarial experience
different than that assumed and changes in assumptions 2,624,800 ( 127,200)
Unrecognized prior service cost ( 45,500) ( 50,000)
Accrued postretirement benefit obligation
( reflected in other noncurrent liabilities) $ 14,117,900 $ 12,212,100
Net postretirement benefit cost:
Service cost $ 1,332,800 $ 1,215,400
Interest cost 708,400 729,500
Net amortization 4,500 4,500
Total $ 2,045,700 $ 1,949,400
Contributions and benefits paid under the plan:
Benefits paid by OCLC $ 139,800 $ 47,200
Participant contributions 151,500 93,300
Total benefits paid $ 291,300 $ 140,500
Actuarial assumptions used in determining these amounts included a weighted average discount rate of
5.75% at June 30, 2004 and 2003, and an annual increase in medical and dental expense of 8.75% and
9.0%, respectively, declining to 6.25% and 6%, respectively, in 2009 and thereafter.
OCLC’s expected payment of benefits for its postretirement benefit plan in fiscal 2005 is $ 150,000. The
following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Fiscal Year
Ending June 30
2005 $ 270,500
2006 300,600
2007 333,800
2008 369,500
2009 407,800
2010 - 2014 2,781,100
An agreement with a former officer provides for certain benefit payments, which commenced upon
retirement. At June 30, 2004 and 2003, OCLC has a liability accrued of $ 1,119,200 and $ 1,164,100,
respectively, for the present value of the estimated future payments under this agreement.
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7. ACQUISITION OF CAPCON
On November 12, 2003, the Corporation entered into an agreement to purchase certain assets and
assume certain liabilities of CAPCON, a District of Columbia non- profit corporation. The purchase was
accounted for by the purchase method of accounting. Assets acquired and liabilities assumed were based
on their fair values at the date of acquisition. Goodwill, representing the excess of the fair value of the
liabilities assumed over the fair value of assets acquired, of $ 425,000 was recorded and subsequently
deemed fully impaired and expensed prior to June 30, 2004. CAPCON’s operations subsequent to the
date of the sale are included in the consolidated financial statements for the year ended June 30, 2004.
Its revenues for the seven and a half months ended June 30, 2004 were $ 1,980,200. The pro- forma
consolidated results for the fiscal year 2004, assuming the purchase had been made at the beginning of
the fiscal year, would not have been materially different from reported results.
8. SALE OF METATEXT
On August 9, 2002, OCLC sold the assets of its MetaText division to XanEdu, a division of Pro Quest
Information & Learning, for $ 2,504,400 in cash and recognized a loss of $ 11,300.
9. ACQUISITION OF STRATA PRESERVATION N. V.
On August 21, 2002, OCLC purchased 60% interest in Strata, a for- profit organization founded by the
Royal Library of the Netherlands for $ 542,300, to provide preservation microfilming for the European
Market. OCLC accounts for the majority ownership of Strata under the purchase method of accounting.
The results of Strata’s operations have been consolidated with those of OCLC since September 1, 2002.
The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition with a minority interest of $ 168,700. Goodwill, representing the
excess of cost over fair value of assets acquired, of $ 289,300 was recorded and is included in fixed
assets. Strata’s operations subsequent to the date of the sale are included in the consolidated financial
statements for the year ended June 30, 2003, and its revenues for the ten months ended June 30, 2003
were $ 817,500. The pro- forma consolidated results for the fiscal year 2003, assuming the acquisition
had been made at the beginning of the fiscal year, would not have been materially different from
reported results.
10 ACQUISITION OF LIBPAC, LTD.
On July 4, 2003, OCLC PICA B. V. acquired Libpac, Ltd. (“ Libpac”), an interlibrary loan requesting and
management system, to enhance their services in public libraries in the United Kingdom for $ 1,504,800.
OCLC PICA B. V. accounted for the purchase under the purchase method of accounting; accordingly,
the results of Libpac’s operations have been consolidated with those of OCLC PICA since July 4, 2003.
The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. Goodwill, representing the excess of cost over fair value of assets
acquired, of $ 1,007,900 was recorded and is included in fixed assets. Libpac’s operations subsequent to
the date of the sale are included in the consolidated financial statements for the year ended June 30,
2004, and its revenues for the twelve months ended June 30, 2004 were $ 471,200. The pro- forma
consolidated results for the fiscal year 2004, assuming the acquisition had been made at the beginning of
the fiscal year, would not have been materially different from reported results.
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11. INCOME TAXES
OCLC has a net deferred tax asset of $ 12,500,000 for domestic operating loss carryforwards. The net
deferred tax asset is fully offset by a valuation allowance due to the uncertainty of recoverability of these
items.
At June 30, 2004, domestic net operating loss carryforwards for income tax reporting purposes are
approximately $ 36,886,400. The domestic carryforwards expire through the fiscal year 2024.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires fair value disclosures
about substantially all balance sheet financial instruments. Certain assets and liabilities, the most
significant being fixed assets, do not meet the Statement’s definition of financial instruments and are
excluded from this disclosure. Similarly, corporate equity is not considered a financial instrument and is
also excluded from this disclosure. Many of the assets and liabilities subject to the disclosure
requirements are not actively traded, requiring fair values to be estimated by management. These
estimations necessarily involve the use of judgment about a variety of factors, including but not limited
to, materiality, relevancy of market prices of comparable instruments and appropriate discount rates. The
use of different market assumptions and/ or estimation methodologies may have a material effect on the
estimated fair value amounts.
The following table summarizes financial instruments at fair value that differ from carrying amounts as
of June 30, 2004 and 2003, but it is not intended to, and does not, represent the Corporation’s underlying
value nor is it indicative of the amounts that could be realized in a current market exchange of these
instruments:
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Liabilities:
Long- term debt $ 50,025,000 $ 51,650,400 $ 54,140,000 $ 58,051,800
Interest rate swap 177,900 177,900 538,900 538,900
2004 2003
The following methods and assumptions were used to estimate the fair value of each material class of
financial instruments:
Cash and Cash Equivalents, Investments, Receivables, Accrued and Other Liabilities ( excluding
postretirement benefit obligations and deferred compensation) and Accounts Payable— The carrying
amounts of these items are a reasonable estimate of their fair value.
Long- Term Debt and Interest Rate Swap— Fair values for these instruments have been calculated with
pricing models using current rate assumptions for debt with similar yields and maturities.
13. CONTINGENCIES
The Corporation is involved in various claims and legal actions in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have a material adverse effect
on the Corporation’s consolidated financial statements.
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14. SUBSEQUENT EVENT
On August 10, 2004, OCLC acquired the assets ( approximately $ 125,000) and assumed the liabilities
( approximately $ 125,000) of 24/ 7 Reference service from the Metropolitan Cooperative Library System,
a library cooperative located in Los Angeles, California. The 24/ 7 Reference Service will be combined
with OCLC’s QuestionPoint service to create a more powerful suite of virtual reference tools.
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