OCLC Online Computer
Library Center, Inc. and
Subsidiaries
Consolidated Financial Statements as of and
for the Years Ended June 30, 2007 and 2006,
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, 2007 AND 2006:
Balance Sheets 2
Statements of Revenues, Expenses, and Corporate Equity 3
Statements of Cash Flows 4– 5
Notes to Financial Statements 6– 18
INDEPENDENT AUDITORS’ REPORT
To the Board of Trustees of
OCLC Online Computer Library Center, Inc.:
We have audited the accompanying consolidated balance sheets of OCLC Online Computer Library
Center, Inc. and its subsidiaries ( collectively, the “ Corporation”) as of June 30, 2007 and 2006, and the
related consolidated statements of revenues, expenses, and corporate equity and cash flows for the years
then ended. These consolidated financial statements are the responsibility of the Corporation’s
management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, 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.
As discussed in Note 6 to the consolidated financial statements, the Corporation adopted FASB Statement
No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statements No. 87, 88, 106, and 132( R), effective June 30, 2007.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of the Corporation at June 30, 2007 and 2006, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally accepted in the United States
of America.
September 6, 2007
Deloitte & Touche LLP
155 East Broad Street
18th Floor
Columbus, OH 43215- 3611
USA
Tel: + 1 614 221 1000
Fax: + 1 614 229 4647
www. deloitte. com
Member of
Deloitte Touche Tohmatsu
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OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2007 AND 2006
2007 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,020,900 $ 30,387,700
Short- term investments 1,477,600 3,120,100
Government securities 29,876,700 25,754,500
Corporate notes and bonds 29,721,800 27,060,000
Equity securities 114,879,100 95,404,000
Receivables — net 42,142,100 39,498,900
Prepaid expenses and other 11,753,300 10,353,900
Total current assets 261,871,500 231,579,100
FIXED ASSETS — At cost — less accumulated depreciation
and amortization 132,301,400 130,564,600
OTHER ASSETS 11,453,500 9,870,900
TOTAL $ 405,626,400 $ 372,014,600
LIABILITIES AND CORPORATE EQUITY
CURRENT LIABILITIES:
Current portion of long- term debt and capital leases $ 10,349,400 $ 10,855,600
Accounts payable 7,846,800 6,111,000
Accrued liabilities 21,139,100 19,506,500
Advance subscription payments 10,878,900 12,593,900
Unearned revenue 70,705,000 57,499,400
Total current liabilities 120,919,200 106,566,400
LONG- TERM DEBT AND CAPITAL LEASES — Less
current portion 46,169,500 55,141,700
OTHER NONCURRENT LIABILITIES 22,724,500 25,715,200
MINORITY INTEREST 9,392,300 9,425,000
CORPORATE EQUITY 206,420,900 175,166,300
TOTAL $ 405,626,400 $ 372,014,600
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
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
REVENUES $ 234,949,700 $ 208,403,600
OPERATING EXPENSES:
Salaries, wages, and related fringe benefits 110,074,500 95,324,000
Telecommunications and computer support 47,939,300 47,880,500
Selling, general, and administrative 36,209,200 31,099,300
Depreciation and amortization 27,651,100 20,919,200
Building and utilities 8,418,900 7,068,300
Total operating expenses 230,293,000 202,291,300
EXCESS OF NET REVENUES OVER OPERATING EXPENSES 4,656,700 6,112,300
OTHER INCOME ( EXPENSE):
Investment income 18,808,100 15,783,200
Interest expense ( 3,204,600) ( 3,240,800)
Income taxes ( 1,029,400) ( 714,900)
Minority interest in earnings ( loss) of majority owned subsidiaries 466,900 ( 204,500)
Miscellaneous — net ( 174,100) ( 6,400)
Total other income 14,866,900 11,616,600
EXCESS OF REVENUES OVER EXPENSES 19,523,600 17,728,900
NET UNREALIZED GAIN ( LOSS) ON INVESTMENTS 6,253,200 ( 792,600)
CHANGE IN VALUE OF INTEREST RATE SWAP AGREEMENT ( 28,100) 100,400
POSTRETIREMENT BENEFIT PLAN ADJUSTMENT 4,773,300
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 732,600 706,200
INCREASE IN NET EQUITY 31,254,600 17,742,900
CORPORATE EQUITY — Beginning of year 175,166,300 157,423,400
CORPORATE EQUITY — End of year $ 206,420,900 $ 175,166,300
See notes to consolidated financial statements.
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OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Excess of revenues over expenses $ 19,523,600 $ 17,728,900
Adjustments for non- cash items:
Depreciation and amortization 27,651,100 20,919,200
Minority interest in earnings ( loss) of majority owned subsidiaries ( 466,900) 204,400
Realized gain on sale of investments ( 13,519,300) ( 11,330,700)
Loss on sale of fixed assets 140,300 220,900
Changes in assets and liabilities:
Increase in receivables ( 1,761,400) ( 872,100)
Decrease ( increase) in other assets ( 635,100) 62,200
Increase ( decrease) in accounts payable 1,131,200 ( 1,021,800)
Increase in accrued liabilities, unearned revenue, and other 7,804,400 9,769,100
Net cash provided by operating activities 39,867,900 35,680,100
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revenue bonds, long- term debt, and capital leases ( 11,636,100) ( 7,847,400)
Proceeds from long- term debt and capital leases 5,120,000
Proceeds from line of credit 1,783,500 3,283,400
Payments on line of credit ( 1,783,500) ( 3,283,400)
Dividends paid to minority partner ( 126,900)
Net cash used in financing activities ( 11,763,000) ( 2,727,400)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments ( 120,520,800) ( 125,393,000)
Proceeds from sale of investments 116,216,800 1 21,799,200
Purchases of fixed assets ( 13,709,200) ( 11,572,900)
Capitalization of internal use software ( 5,190,700) ( 4,678,000)
Acquisition of Openly Informatics ( 1,900,000)
Acquisition of Sisis ( excluding acquired cash of $ 909,700) ( 3,595,000)
Acquisition of FDI ( excluding acquired cash of $ 1,692,400) ( 7,220,700)
Acquisition of RLG ( excluding acquired cash of $ 673,100) 673,100
Acquisition of DiMeMa, Inc. ( excluding acquired cash of $ 228,700) ( 3,687,500)
Other — net ( 794,100) ( 676,100)
Net cash used in investing activities ( 27,012,400) ( 33,236,500)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 540,700 456,000
( Continued)
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OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
INCREASE IN CASH AND CASH EQUIVALENTS $ 1,633,200 $ 172,200
CASH AND CASH EQUIVALENTS — Beginning of year 30,387,700 30,215,500
CASH AND CASH EQUIVALENTS — End of year $ 32,020,900 $ 30,387,700
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 3,289,300 $ 3,208,900
Fixed asset additions financed by accounts payable $ 1,107,600 $ 634,200
Property acquired by capital lease $ 294,100 $ 18,600
Net unrealized gain ( loss) on investments $ 6,253,200 $ ( 792,600)
Change in fair value of interest rate swap agreement $ ( 28,100) $ 100,400
ACQUISITIONS:
Fair value of assets acquired $ 7,059,500 $ 7,867,100
Liabilities assumed ( 7,364,400) ( 4,696,700)
Excess of cost over fair value of assets acquired 4,221,100 12,147,400
Cash paid $ 3,916,200 $ 15,317,800
See notes to consolidated financial statements. ( Concluded)
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OCLC ONLINE COMPUTER LIBRARY CENTER, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
OCLC Online Computer Library Center, Inc. (“ OCLC” or the “ Corporation”) is a nonprofit
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 Information Distribution, Inc. (“ OID”), and
DiMeMa, Inc., as well as its 60% majority- owned subsidiary, OCLC PICA Group B. V. and
subsidiaries. Operating revenues for OCLC’s wholly owned for- profit subsidiaries were $ 162,000,
and expenses were $ 706,200, for the year ended June 30, 2007. OID was inactive for the year ended
June 30, 2006. Intercompany transactions have been eliminated in consolidation. See Notes 7, 8, 9,
10, and 11 regarding the acquisition of Sisis Informationssysteme GmbH, Fretwell- Downing Group
Ltd., Openly Informatics, Inc., The Research Library Group, Inc., and DiMeMa, Inc.
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 banker’s acceptances, 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 services to locate, acquire, catalog, lend, and preserve library materials. 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.
Certain revenues to acquire access to reference content on behalf of libraries are recorded net of
associated database acquisition costs. Unearned revenue and advance subscription payments
represent monies advanced to OCLC by members, participating libraries, and independent regional
service providers in the U. S. and are recognized as revenues when the service is provided.
Transaction based member participation credits ( 2007 — $ 6,904,500; 2006 — $ 6,070,500) 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.
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Minority Interest — Minority interest represents the 40% of OCLC PICA Group B. V. owned by
Stichting Pica and 40% of Strata Preservation N. V. owned by Koninklijke Bibliotheek, the National
Library of the Netherlands. On July 13, 2006, OCLC PICA Group B. V. declared a dividend of
250,000 Euros ($ 318,500 paid November 21, 2006) allocated to OCLC and Stichting Pica based on
their respective holdings. Minority interest in OCLC PICA Group B. V. was reduced accordingly for
$ 126,900.
Use of Estimates — The preparation of these consolidated 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 ( 1 to 15 years). Net book value
of goodwill was $ 10,503,300 and $ 12,614,800 at June 30, 2007 and 2006, respectively.
Research and Development — Research and development costs ( principally salaries and related
fringe benefits), approximating $ 20,321,700 and $ 15,609,000 for fiscal years 2007 and 2006,
respectively, are charged to operations as incurred.
Income and Other Taxes — OCLC is tax exempt in the United States of America 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 Group B. V., Strata Preservation N. V., OID, and DiMeMa, Inc., 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.
Foreign Currency Translation — Branch offices, foreign subsidiaries, and equity interests are
based in Canada, United Kingdom, France, the Netherlands, Germany, Switzerland, China, and
Australia. 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
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translation gains or losses included as a separate component of corporate equity. Corporate equity
includes net cumulative translation gains of $ 4,648,600 and $ 3,916,000 at June 30, 2007 and 2006,
respectively.
Self- Insurance Programs — OCLC uses various self- insurance plans for certain of its medical
insurance programs in the United States of America. The associated liability has been recorded in
the 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.
Reclassifications — Certain 2006 amounts have been reclassified to conform to the 2007
presentation.
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 trustees and are
reflected in the consolidated balance sheets as cash equivalents, short- term investments, government
securities, corporate notes and bonds, and equity securities.
Realized gains and losses related to investments are recorded using the specific identification
method. Net unrealized gains on the portfolio totaled $ 16,340,900 and $ 10,087,700 at June 30, 2007
and 2006, respectively. The following schedule details investment returns for the years ended June
30, 2007 and 2006:
2007 2006
Dividends and interest income $ 5,288,800 $ 4,452,500
Net realized gains 13,519,300 11,330,700
Investment income 18,808,100 15,783,200
Net change in unrealized gain ( loss) on investments 6,253,200 ( 792,600)
Total net investment return $ 25,061,300 $ 14,990,600
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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, 2007 and 2006:
Description of
Temporarily Fair Unrealized Fair Unrealized Fair Unrealized
Impaired Securities Value Losses Value Losses Value Losses
Government securities $ 7,727,900 $ ( 135,000) $ 10,175,800 $ ( 596,800) $ 17,903,700 $ ( 731,800)
Corporate notes and bonds 8,534,200 ( 198,200) 8,752,600 ( 349,600) 17,286,800 ( 547,800)
Total debt securities 16,262,100 ( 333,200) 18,928,400 ( 946,400) 35,190,500 ( 1,279,600)
Common stock 25,497,100 ( 1,906,700) 3,813,000 ( 494,000) 29,310,100 ( 2,400,700)
Preferred stock 20,500 ( 1,200) 20,500 ( 1,200)
Total equity securities 25,517,600 ( 1,907,900) 3,813,000 ( 494,000) 29,330,600 ( 2,401,900)
Total temporarily impaired
securities $ 41,779,700 $( 2,241,100) $ 22,741,400 $( 1,440,400) $ 64,521,100 $ ( 3,681,500)
Description of
Temporarily Fair Unrealized Fair Unrealized Fair Unrealized
Impaired Securities Value Losses Value Losses Value Losses
Government securities $ 15,234,500 $ ( 508,300) $ 5,901,000 $ ( 394,700) $ 21,135,500 $ ( 903,000)
Corporate notes and bonds 9,806,500 ( 330,700) 7,651,900 ( 512,300) 17,458,400 ( 843,000)
Total debt securities 25,041,000 ( 839,000) 13,552,900 ( 907,000) 38,593,900 ( 1,746,000)
Common stock 22,104,000 ( 2,181,300) 5,090,000 ( 670,800) 27,194,000 ( 2,852,100)
Preferred stock 184,100 ( 12,800) 184,100 ( 12,800)
Total equity securities 22,288,100 ( 2,194,100) 5,090,000 ( 670,800) 27,378,100 ( 2,864,900)
Total temporarily impaired
securities $ 47,329,100 $( 3,033,100) $ 18,642,900 $( 1,577,800) $ 65,972,000 $ ( 4,610,900)
2006
Less than 12 Months 12 Months or more Total
2007
Less than 12 Months 12 Months or more Total
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 U. S.
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, 2007, the Corporation owned the following securities that had
unrealized losses: 89 government securities, 314 corporate notes and bonds, 472 common stocks,
and 2 preferred stocks. At June 30, 2006, the Corporation owned the following securities that had
unrealized losses: 79 government securities, 270 corporate notes and bonds, and 188 common
stocks, and 5 preferred stocks.
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3. FIXED ASSETS
Fixed assets at June 30, 2007 and 2006, include the following:
2007 2006
Land and improvements $ 10,611,200 $ 10,279,400
Buildings and improvements 64,402,100 62,045,400
Computer and telecommunications equipment 43,689,200 39,411,900
Databases 67,718,800 63,483,400
Intangibles including software 74,334,000 62,814,000
Goodwill 20,570,400 17,685,500
Office furniture and equipment 22,747,900 23,120,200
Total 304,073,600 278,839,800
Less accumulated depreciation and amortization 171,772,200 148,275,200
Fixed assets — net $ 132,301,400 $ 130,564,600
Software development costs, related to internal use software, of $ 5,190,700 and $ 4,678,000 were
capitalized in 2007 and 2006, respectively. Cataloging credits of $ 3,645,500 and $ 5,168,400 were
capitalized in 2007 and 2006, respectively, and included in databases.
Operating Leases — Certain buildings and equipment are rented under operating leases. Rental
expense, net of sub- leases, for all leases was $ 2,680,300 and $ 2,186,500 for fiscal years 2007 and
2006, respectively. Future minimum lease payments under existing noncancelable lease
commitments are as follows:
Fiscal Years
Ended June 30
2008 $ 2,718,600
2009 1,827,400
2010 1,014,100
2011 859,400
2012 346,300
Total $ 6,765,800
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4. LONG- TERM DEBT AND CAPITAL LEASES
Long- term debt and capital leases at June 30, 2007 and 2006, consisted of the following:
2007 2006
Revenue bonds $ 36,765,000 $ 41,370,000
Other long- term debt 4,114,700 4,958,700
Capital leases 15,639,200 19,668,600
56,518,900 65,997,300
Less current maturities ( 10,349,400) ( 10,855,600)
Total $ 46,169,500 $ 55,141,700
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,
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 — At June 30, 2007 and 2006, revenue bonds outstanding are as follows:
2007 2006
Serial bonds:
1998 bonds, 4.30% to 4.70%, maturing
annually through October 1, 2012 $ 7,325,000 $ 9,970,000
2003 bonds, 5.00%, maturing
annually through April 15, 2013 14,010,000 15,970,000
Total serial bonds 21,335,000 25,940,000
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 $ 36,765,000 $ 41,370,000
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
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$ 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.
Other Long Term Debt — On May 2, 2005, Strata Preservation N. V. entered into a subordinated
loan for cash flow purposes with its minority partner, Konkinklijke Bibliotheek, for 240,000 Euros
($ 324,900 and $ 307,100 outstanding at June 30, 2007 and 2006, respectively) with interest ( rate of
7%) payable annually. The principal is payable within 15 days after May 2, 2008.
On October 10, 2005, OCLC PICA B. V. entered into a bank loan for the purposes of financing the
purchase of Fretwell- Downing Group Ltd. and subsidiaries (“ FDI”). The 4,000,000 Euro loan has an
effective interest rate equal to 1.5% above the 3 month Euribor rate ( total of 5.675% and 4.316% at
June 30, 2007 and 2006, respectively). The loan is due quarterly in equal principal installments of
200,000 Euros ( plus interest) starting January 1, 2006, and continuing through October 1, 2010, and
has a balance outstanding of 2,800,000 Euros ($ 3,789,800) and 3,600,000 Euros ($ 4,605,300) at
June 30, 2007 and 2006, respectively. The bank loan is secured by three million Euros of Corporate
Bonds. Concurrently, OCLC PICA B. V. entered into a derivative financial instrument to cap the
variable interest rate of the loan to a fixed rate of 5%. The maturity, payment dates, and other
fundamental terms match those of the loan. The derivative does not qualify for hedge accounting
and, therefore, changes in fair value are reported in income. The derivative had a total positive fair
value of 57,654 Euro ($ 78,100) and 35,100 Euro ($ 44,800) at June 30, 2007 and 2006, respectively.
In April 2002, FDI entered into a note payable bearing interest at an imputed rate of 4% to a former
majority shareholder of FDI for 36,100 Euros ($ 46,300 at June 30, 2006). The loan was paid in
April 2007.
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 $ 1,201,100 and $ 144,800 at June 30, 2007 and 2006, 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
$ 3,238,100 and $ 5,523,800 at June 30, 2007 and 2006, 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. OCLC follows the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, to establish accounting and reporting requirements for
derivative instruments. The agreement is designated as a cash flow hedge at inception with a
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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 positive fair net value of $ 11,000 and $ 39,100 at June 30, 2007 and 2006, respectively, which
is reflected as a long- term asset and change 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 ( total of 4.60% and 4.61% at June 30, 2007 and 2006, respectively). The
lease is due monthly in equal principal installments of $ 233,300 ( plus interest) starting July 2006
and has a balance outstanding of $ 11,200,000 and $ 14,000,000 at June 30, 2007 and 2006,
respectively. 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 2007 and 2006 fixed assets
were as follows:
2007 2006
Equipment, software, and databases $ 31,122,800 $ 30,581,300
Less accumulated depreciation 16,365,800 11,215,100
Capitalized leased assets — net $ 14,757,000 $ 19,366,200
The aggregate maturities of the revenue bonds, other long term debt, and the capital lease
obligations are as follows:
Fiscal Years
Ending June 30
2008 $ 10,349,400
2009 8,568,400
2010 7,412,900
2011 7,006,500
2012 3,815,000
2013 and later 19,366,700
Total $ 56,518,900
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 2007 and 2006. Under the terms of the agreement, interest on amounts borrowed
is payable at the bank’s prime rate of interest. During fiscal years 2007 and 2006, no borrowings
were made under such line of credit. The agreement expires December 31, 2007.
On October 10, 2005, OCLC PICA B. V. obtained a secured revolving line of credit with a bank
providing for total borrowings up to 3,000,000 Euros during fiscal year 2006. The line of credit
declines quarterly by 125,000 Euros beginning January 1, 2006, decreasing to a balance of 500,000
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Euros at October 2010. The line of credit available was 2,250,000 Euros ($ 3,045,400) and 2,750,000
Euros ($ 3,516,000) at June 30, 2007 and 2006, respectively. Under the terms of the agreement,
interest on amount borrowed is payable at an effective interest rate equal to 1.5% above the 3 month
Euribor rate ( 5.675% and 4.316% at June 30, 2007 and 2006, respectively). During fiscal 2007, a
total of 1,365,500 Euros ($ 1,783,500) were borrowed and subsequently repaid during 2007. During
fiscal 2006, a total of 2,681,500 Euros ($ 3,283,400) were borrowed and subsequently repaid during
2006.
6. EMPLOYEE BENEFIT PLANS
A noncontributory, defined contribution retirement plan covers all OCLC employees in the United
States of America who have completed two years of service. Voluntary contributory, defined
contribution employee savings plans cover all full- time domestic OCLC employees. In 2003, OCLC
established a 457( b) nonqualified 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 $ 5,074,600 and $ 4,491,000 for fiscal years 2007 and 2006,
respectively.
In 1998, OCLC established a nonqualified voluntary contributory savings plan for key domestic
employees and Board of Trustee members. OCLC purchases and holds 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)
nonqualified deferred compensation plan for key domestic employees. The assets and liabilities
under these plans were both $ 7,837,800 and $ 6,389,300 ( reflected in Other Assets and Other
Noncurrent Liabilities) at June 30, 2007 and 2006, respectively.
Foreign operations, including the OCLC Canada division and OCLC PICA Group B. V., maintain or
participate in separate retirement and defined contribution pension plans. Total contributions
recorded under these plans were $ 999,500 and $ 823,700 in fiscal years 2007 and 2006, respectively.
OCLC maintains a voluntary contributory plan providing postretirement health care and
noncontributory postretirement life insurance coverage for United States of America employees.
OCLC’s United States of America 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.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statements No. 87, 88, 106 and 132( R) (“ SFAS 158”). SFAS 158 requires
recognition of the funded status of a defined benefit postretirement plan in the statement of financial
position, recognition of the changes in funded status in the year in which changes occur through
corporate equity, and measurement of the funded status of a plan as of the date of its fiscal year- end,
with limited exceptions. OCLC adopted the recognition and disclosure provisions of SFAS 158 as of
June 30, 2007. In accordance with the adoption of the recognition and disclosure provisions of
SFAS 158, OCLC recorded the impact of the unrecognized net actuarial gain of $ 4,805,200 as a
reduction of liability and the impact of the unrecognized prior service cost of $ 31,900 as an
additional liability on OCLC’s balance sheet as of June 30, 2007. Consistent with the provisions of
SFAS 158, OCLC recorded corresponding amounts in corporate equity. The net amount, $ 4,773,300
was recognized in corporate equity. Gains of $ 331,100 and $ 4,500 of these prior services costs will
be amortized into net periodic benefit cost in 2008.
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The following table summarizes the incremental effect of applying SFAS 158 on the consolidated
financial statements as of June 30, 2007:
Before Application After Application
of SFAS 158 Adjustments of SFAS 158
Accrued liabilities ( current) $ 20,882,000 $ 257,100 $ 21,139,100
Other noncurrent liabilities 27,754,900 ( 5,030,400) 22,724,500
Corporate equity 201,647,600 4,773,300 206,420,900
Relevant postretirement benefit information as of June 30, 2007 and 2006, is summarized as
follows:
2007 2006
Accumulated postretirement benefit obligation:
Retired participants $ 2,193,500 $ 2,235,400
Fully eligible active plan participants 1,619,500 1,162,000
Other active plan participants 8,845,800 8,633,300
Postretirement benefit obligation 12,658,800 12,030,700
Unrecognized net gain from actuarial experience
different than that assumed and changes in assumptions 4,272,000
Unrecognized prior service cost ( 36,400)
Accrued postretirement benefit obligation
( reflected in other noncurrent liabilities) $ 12,658,800 $ 16,266,300
Net postretirement benefit cost:
Service cost $ 796,100 $ 775,800
Interest cost 743,900 589,500
Net amortization ( 220,800) ( 189,600)
Total $ 1,319,200 $ 1,175,700
Contributions and benefits paid under the plan:
Benefits paid by OCLC $ 153,400 $ 86,600
Participant contributions 241,900 224,500
Total benefits paid $ 395,300 $ 311,100
Actuarial assumptions used in determining these amounts included a weighted average discount rate
of 6.25% at June 30, 2007 and 2006, and an annual increase in medical and dental expense of
8.75%, declining to 6.25%, in 2013 and thereafter.
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OCLC’s expected payment of benefits for its postretirement benefit plan in fiscal 2008 is $ 257,100.
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid:
Fiscal Years
Ending June 30
2008 $ 318,800
2009 423,000
2010 495,500
2011 585,500
2012– 2016 3,717,500
An agreement with a former officer provides for certain benefit payments to the employee and
spouse, which commenced upon retirement. After the officer’s death, payments continue for the
surviving spouse. At June 30, 2007 and 2006, OCLC has a liability accrued of $ 1,333,500 and
$ 1,649,200, respectively, for the present value of the estimated future payments under this
agreement.
7. ACQUISITION OF SISIS
On July 1, 2005, OCLC PICA Group B. V. purchased library management systems provider Sisis
Informationssysteme GmbH and subsidiary (“ Sisis”) for 3,769,500 Euros ($ 4,504,700 at July 1,
2005). The acquisition was accounted for by the purchase method of accounting. The purchase price
was allocated to the assets acquired and liabilities assumed based on their fair values at the date of
acquisition. Goodwill, representing the excess of cost over fair value of assets acquired, of
3,145,200 Euros ($ 3,758,700) was recorded and is included in fixed assets. Sisis operations were
fully consolidated with PICA B. V. beginning July 1, 2005, and revenues of $ 5,379,800 were
included in OCLC’s consolidated results for the year ended June 30, 2006.
8. ACQUISITION OF FDI
On November 2, 2005, OCLC PICA Group B. V. purchased Fretwell- Downing Group Ltd. and
subsidiaries (“ FDI”), a provider of digital library solutions, for 7,383,600 Euros ($ 8,913,100 at
November 2, 2005). The purchase method of accounting was used to record the transaction.
Goodwill, representing the excess of cost over fair value of assets acquired, of 6,949,200 Euros
($ 8,388,700) was recorded and is included in fixed assets. FDI’s operations subsequent to the date of
the sale are included in the consolidated financial statements for the year ended June 30, 2006, and
its revenues for the eight months ended June 30, 2006, were $ 6,314,900. The pro- forma
consolidated results for the fiscal year 2006, assuming the purchase had been made at the beginning
of the fiscal year, would not have been materially different from reported results.
9. ACQUISITION OF OPENLY INFORMATICS
On January 1, 2006, OCLC acquired certain assets and related liabilities of Openly Informatics, Inc.,
a global knowledge base provider for $ 1,950,000. The purchase was accounted for by the purchase
method of accounting. Assets acquired of $ 1,958,100 and liabilities assumed of $ 8,100 were based
on their fair market values at the date of acquisition. Openly Informatics revenues subsequent to the
purchase date of $ 347,500 and related operating costs are included in the consolidated financial
statements for the year ended June 30, 2006. The pro- forma consolidated results for the fiscal year
2006, assuming the acquisition had been made in the beginning of the fiscal year, would not have
been materially different from reported results.
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10. ACQUISITION OF RLG
Effective July 1, 2006, OCLC combined operations with The Research Libraries Group, Inc.
(“ RLG”). The purchase was accounted for by the purchase method of accounting. The fair values of
assets acquired with the transaction were $ 3,022,300 and liabilities assumed were $ 7,243,400.
Goodwill, representing the excess of cost over fair value of assets acquired, of $ 4,221,100 was
recorded and expensed over its useful life of one year. RLG’s online products and services were
integrated with OCLC’s and a new RLG unit was created within OCLC Programs and Research.
RLG’s operations were fully consolidated with OCLC beginning July 1, 2006, and revenues of
$ 11,265,400 were included in OCLC’s consolidated results for the year ended June 30, 2007.
11. ACQUISITION OF DIMEMA
On August 14, 2006, OCLC through OID, acquired DiMeMa, Inc., the organization that developed
and supports CONTENTdm for $ 3,916,200. CONTENTdm software offers a complete set of tools
to store, manage, and deliver digital collections on the web. OCLC has distributed CONTENTdm
software since 2002 to libraries, cultural heritage, and other nonprofit organizations. The purchase
was accounted for by the purchase method of accounting. Assets acquired of $ 4,037,200 and
liabilities assumed of $ 121,000 were based on their fair market values at the date of acquisition.
DiMeMa revenues subsequent to the purchase date of $ 3,183,700 and related operating costs are
included in the consolidated financial statements for the year ended June 30, 2007. The pro- forma
consolidated results for the fiscal year 2007, assuming the acquisition had been made in the
beginning of the fiscal year, would not have been materially different from the reported results.
12. 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, 2007, domestic net operating loss carryforwards for income tax reporting purposes are
approximately $ 36,736,900. The domestic carryforwards expire through the fiscal year 2026.
13. 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.
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The following table summarizes financial instruments at fair value that differ from carrying amounts
as of June 30, 2007 and 2006, 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
Assets — Interest rate swap $ 11,000 $ 11,000 $ 39,100 $ 39,100
Liabilities — Long- term debt 40,879,700 41,606,200 46,328,600 47,131,000
2007 2006
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.
14. 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. At June 30, 2007 and 2006,
the Corporation has an estimated current liability accrued of $ 45,200 and $ 559,800, respectively,
related to service contracts in which the cost of delivery is anticipated to exceed the contracted
revenues.
15. SUBSEQUENT EVENTS
Effective July 1, 2007, OCLC PICA Group B. V. repurchased the outstanding shares from its
minority partner, Stichting Pica for 10,272,000 Euros ($ 13,353,600), effectively becoming a wholly
owned subsidiary of OCLC. On July 2, 2007, OCLC PICA Group B. V. entered into a bank loan for
the purpose of financing the purchase. The 6,000,000 Euro loan has an effective interest rate equal
to 0.9% above the 3 month Euribor rate ( total of 4.917%). The loan is due quarterly in equal
principal installments of 75,000 Euros ( plus interest) starting October 1, 2007 and continuing
through July 1, 2014, with a final payment of 3,900,000 Euros. The loan is secured by a mortgage of
8,000,000 Euros on a building, certain computers, equipment, and furniture and fixtures and
accounts receivable of OCLC PICA B. V. Simultaneously, OCLC PICA Group B. V. increased its
secured revolving line of credit with a bank providing for an additional 2,000,000 Euros. This
additional line of credit declines quarterly by 100,000 Euros beginning October 1, 2007 through July
1, 2012. Under the terms of the agreement, interest on amounts borrowed is payable at an effective
interest rate equal to 1.4% above the 3 month Euribor rate ( total of 5.417%).
* * * * * *
OCLC Consolidated Financial Statements
