Financial report

Management letter

The management of OCLC Online Computer Library Center, Inc. is responsible for OCLC’s financial reporting. The accompanying condensed consolidated financial statements and financial information included elsewhere in this report are derived from the audited consolidated financial statements that have been prepared in conformity with accounting principles generally accepted in the United States of America and include amounts that represent the best estimates and judgments of management. The audited consolidated financial statements appear at OCLC’s Web site: www.oclc.org/news/publications/financial.

To meet our financial reporting responsibility, OCLC maintains an effective system of internal accounting, operating and management policies, procedures and controls intended to provide reasonable assurance, at appropriate cost, that assets are safeguarded against loss or unauthorized use, and that transactions are executed, recorded and summarized with integrity in accordance with management’s authorization.

The consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors, in accordance with auditing standards generally accepted in the United States of America, and their unqualified report appears at OCLC’s Web site: www.oclc.org/news/publications/financial. The auditors provide an objective, independent review of management’s discharge of its financial reporting responsibilities insofar as they relate to the fairness of the Corporation’s reported financial condition and results of operations. Their audit includes procedures believed by them to provide reasonable assurance that the financial statements are free of material misstatement and includes consideration of the Corporation’s internal control structure over financial reporting for the purpose of expressing an opinion on the consolidated financial statements.

The Audit Committee of the Board, consisting entirely of outside trustees, meets regularly with management and Deloitte & Touche LLP and reviews audit plans and results as well as management’s actions taken to discharge responsibilities for accounting and internal controls.

Jay Jordan President and Chief Executive Officer OCLC	Ralph K. Frasier Chair, Audit Committee OCLC Board of Trustees	Rick J. Schwieterman Vice President Finance and Human Resources Treasurer OCLC

Financial review and management commentary

Introduction

OCLC is a nonprofit, membership, computer library service and research organization whose public purposes of furthering access to the world’s information and reducing library costs dominate its plans and activities. In support of these purposes, OCLC strives to maintain a strong financial base by operating in a business-like manner while utilizing a conservative, non-aggressive accounting philosophy in order to accommodate growth, upgrade technological platforms, conduct research and development and still subsidize worthwhile projects for the benefit of libraries and their users.

Fiscal 2003 results

In fiscal 2003, OCLC’s revenues were $191.8 million, an increase of 7.6 percent over fiscal 2002 revenues of $178.2 million. The loss in fiscal 2003 was $1.0 million compared to a contribution of $2.6 million in fiscal 2002. Fiscal 2003 results included a realized loss of $4.2 million from investment portfolio transactions compared with a realized portfolio loss of $700,000 the previous year reflecting the ongoing depressed stock market. Excluding realized portfolio losses, contribution was 1.7 percent of revenues compared to 1.9 percent in fiscal 2002. With the concurrence of the Board of Trustees and Members Council, OCLC strives to achieve an annual contribution of 4 to 6 percent of revenues to maintain long-term viability in pursuing its public purposes. OCLC recognizes that in some years the objective will be exceeded, and in other years not achieved (see chart below, “Contribution as a percentage of revenue”).

Libraries’ use of OCLC services remained strong. Revenues in cataloging services were $83.4 million, compared to $83.7 million the previous year. Resource sharing revenues were $37.9 million, up from $32.5 million the previous year. Revenues in reference services increased 5.3 percent to $45.6 million from $43.3 million the previous year.

The Gates Foundation

On May 2, 2002, the Bill & Melinda Gates Foundation awarded OCLC a three-year, $9 million grant to build WebJunction, (launched in May 2003) a new, Web-based public access computing portal for public libraries and other organizations that provide open access to information. During 2003, OCLC received $3.6 million in grant payments and spent $3.3 million to develop and introduce WebJunction.

Pricing actions, credits, subsidies and cooperative programs

OCLC’s chartered objective of reducing the rate of rise of library costs is a key element in its financial strategy. OCLC generates revenues from charges paid by libraries in the cooperative for their use of OCLC services. OCLC’s pricing is designed to recover costs and, as noted above, generate a contribution to equity (including interest and dividend income from the investment portfolio) sufficient to ensure the financial viability of the cooperative.

In recognition of the current economic downturn in the library community, OCLC will hold its U.S. prices at fiscal 2003 levels in fiscal 2004 and has implemented significant cost reduction programs to achieve a balanced operating plan for fiscal 2004. Over the last 10 years, OCLC has held its cumulative price increases substantially below the level of inflation that educational institutions have experienced (see chart below, “Percent change in HEPI and OCLC prices”).

In fiscal 2003, OCLC provided libraries with some $11.2 million in credits, incentives and cooperative programs, primarily for cataloging and resource sharing, to encourage the growth and quality of WorldCat. In the past 5 years, OCLC has provided libraries with more than $50 million in credits and subsidies (see chart below, “OCLC credits, subsidies & cooperative programs”). This is a clear indication of OCLC’s commitment to its public purposes.

International

On April 1, 2003 OCLC PICA, a 60 percent-owned subsidiary of OCLC, acquired the assets of OCLC’s operation in Birmingham, United Kingdom (formerly OCLC Europe, the Middle East & Africa). This action created a streamlined, integrated OCLC PICA to better serve approximately 4,300 libraries and other cultural organizations in Europe, the Middle East and Africa.

International participation in OCLC services continues to grow, with OCLC now serving 9,306 libraries in 83 countries and territories outside the United States. In fiscal 2003, OCLC’s international revenue increased 26.2 percent (see chart below, “International revenues by region”), largely due to OCLC PICA and the presence of a full year of international revenues from netLibrary, a division of OCLC that was acquired January 25, 2002.

Capital spending and policies

In fiscal 2003, capital spending was $28.2 million, up 8 percent from $26.1 million the previous year. Capital spending fluctuates from year to year depending on service growth, new product introductions and replacement cycles for systems and equipment. Over the last five years, capital expenditures have totaled $90.3 million, reflecting OCLC’s commitment to upgrading existing computer systems and supporting new library services (see chart below, “Capital expenditures”). Management expects that capital spending over the next three years will approach $75 million to support strategic initiatives.

OCLC conforms to financial accounting standards to capitalize a portion of the internal labor and external consulting costs to develop products and services, which has the effect of reducing expense and thus increasing contribution. Capitalized development costs in fiscal 2003 were $12.8 million, compared to $8.4 million in fiscal 2002, reflecting continued heavy investment in administrative systems, infrastructure improvements and new services, such as the Connexion cataloging service and the new technological platform for WorldCat.

Research and development

Total research and development expenditures for fiscal 2003 were $14.0 million, compared to $15.6 million the previous year and include expenses that were not capitalized. Included in the totals are OCLC PICA’s research and development expenditures of $2.8 million and netLibrary’s of $700,000. Over the last five years, OCLC has spent $69.5 million on research and development (see chart below, “Research & development”).

Employee recruiting and retention

Expenses for salaries, wages and related fringe benefits increased to $88.2 million from $85.2 million the previous year, reflecting the inflationary impact on health care costs and additional staff from the acquisition of netLibrary and Strata Preservation N.V. There was a $1.3 million nonrecurring expense in fiscal 2003 related to an early retirement and restructuring program. Total OCLC employees at the end of fiscal 2003 were 1,210 compared to 1,251 at the end of fiscal 2002.

Five-year review

Revenues have grown from $146.1 million in fiscal 1999 to $191.8 million in fiscal 2003, an increase of 31.3 percent (see chart on page 42, “Five-year review and selected financial data”). In the same period, corporate equity increased 2.5 percent from $122.3 million to $125.3 million.

Overall, staff productivity has remained high in the last five years, with the number of staff increasing by 11.1 percent, while revenues grew 31.3 percent (see chart below, “Staff productivity, revenue per employee”). During fiscal 2003, OCLC began using a workforce performance index developed by the Saratoga Institute that contains ten key performance measures, including revenue per employee.

Financial position

As of June 30, 2003, OCLC had assets of $292.5 million and corporate equity of $125.3 million.

Current assets, including the investment portfolio, totaled $158.2 million, an increase of $8.1 million from the previous year. The investment portfolio generates interest and dividend income to support operations. The balance of cash and investments at June 30, 2003 was $112.2 million, which includes net unrealized gains of $1.6 million, an improvement of $5 million versus net unrealized losses of $3.4 million contained within the balance the prior year. The cash and investment balance is maintained to fund $45.8 million of prepaid services and member deposits, while the remaining $66.4 million is available to fund long-term growth, operations, debt retirement and new product development.

OCLC’s current ratio of 2.0:1 compares favorably to the customary standard of 1:1. The debt service ratio of 1.6:1 is substantially higher than the 1.1:1 ratio required by OCLC bond agreements.

In summary, OCLC is financially well positioned to further access to the world’s information and reduce the rate of rise of library costs, and to fund investments required to support new strategic initiatives.

Subsequent events

Subsequent to the close of fiscal 2003, on July 4, 2003, OCLC PICA B.V. acquired V3.Web, an interlibrary loan requesting and management system for $1.5 million. This acquisition will allow OCLC PICA to enhance its services in public libraries in the United Kingdom.

Five-year review and selected financial data

Advisory committees | Financial report