U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
Commission File Number 0-22196
INNODATA CORPORATION
(Exact name of small business issuer
as specified in its charter)
DELAWARE
(State or other jurisdiction
of incorporation)
13-3475943
(I.R.S. Employer Identification No.)
56 PINE STREET
NEW YORK, NY 10005
(Address of principal executive offices)
(212) 277-9900
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes /X/
No / /
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of October 31, 1998 there were
1,473,819 shares of common stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
- -------- ----------------------
Item 1. Financial Statements
---------------------
See pages 2-6
Item 2. Management's Discussion and Analysis of Financial Condition
---------------------------------------------------------------
and Results of Operations
---------------------------
See pages 7-9
PART II. OTHER INFORMATION
- --------- ------------------
See page 10
<PAGE>
<TABLE>
<CAPTION>
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 3,478,906
Accounts receivable-net 2,812,636
Prepaid expenses and other current assets 644,382
Deferred income taxes 136,000
-----------
Total current assets 7,071,924
FIXED ASSETS-net 2,728,725
GOODWILL-net 389,376
OTHER ASSETS 279,670
-----------
TOTAL $10,469,695
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 80,959
Accounts payable and accrued expenses 1,816,489
Accrued salaries and wages 1,011,931
Taxes, other than income taxes 129,940
-----------
Total current liabilities 3,039,319
-----------
LONG-TERM DEBT, less current portion 29,009
-----------
DEFERRED INCOME TAXES PAYABLE 667,000
-----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized, 20,000,000 shares;
issued, 1,521,736 shares 15,217
Additional paid-in capital 8,870,731
Deficit (1,930,612)
-----------
6,955,336
Less: treasury stock - at cost; 47,917 shares (220,969)
-----------
Total stockholders' equity 6,734,367
-----------
TOTAL $10,469,695
===========
<FN>
See notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<S> <C> <C>
1998 1997
REVENUES $5,309,806 $ 5,269,068
---------- -----------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 3,534,891 4,121,444
Selling and administrative expenses 1,312,920 1,409,929
Unrealized loss on foreign currency contracts - 1,000,000
Interest expense 18,322 27,163
Interest income (25,551) (11,389)
---------- -----------
Total 4,840,582 6,547,147
---------- -----------
NET INCOME (LOSS) $ 469,224 $(1,278,079)
========== ===========
BASIC INCOME (LOSS) PER SHARE $.32 $(.85)
==== =====
DILUTED INCOME PER SHARE $.31
====
<FN>
See notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<S> <C> <C>
1998 1997
REVENUES $14,109,397 $15,288,521
----------- -----------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 9,624,379 12,578,606
Selling and administrative expenses 3,462,089 4,246,179
Restructuring costs and impairment of assets - 1,500,000
Unrealized (gain) loss on foreign currency contracts (487,458) 1,000,000
Interest expense 56,577 56,515
Interest income (64,796) (50,465)
----------- -----------
Total 12,590,791 19,330,835
----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 1,518,606 (4,042,314)
PROVISION FOR INCOME TAXES - 100,000
----------- -----------
NET INCOME (LOSS) $ 1,518,606 $(4,142,314)
=========== ===========
BASIC INCOME (LOSS) PER SHARE $1.03 $(2.76)
===== ======
DILUTED INCOME PER SHARE $1.01
=====
<FN>
See notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<S> <C> <C>
1998 1997
OPERATING ACTIVITIES:
Net income (loss) $1,518,606 $(4,142,314)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 913,180 1,045,831
Loss on disposal of fixed assets 29,634 -
Restructuring costs and impairment of assets - 1,500,000
Unrealized (gain) loss on foreign currency contracts (487,458) 1,000,000
Deferred income taxes - 400,000
Changes in operating assets and liabilities:
Accounts receivable 376,284 (358,508)
Prepaid expenses and other current assets 181,204 (34,972)
Other assets 77,524 (128,793)
Accounts payable and accrued expenses 679,368 505,417
Liability for foreign currency contracts (912,542) -
Taxes, other than income taxes (227,068) 20,319
---------- -----------
Net cash provided by (used in) operating activities 2,148,732 (193,020)
---------- -----------
INVESTING ACTIVITIES:
Expenditures for fixed assets (642,023) (750,505)
Proceeds from disposal of fixed assets 132,803 -
---------- -----------
Net cash used in investing activities (509,220) (750,505)
---------- -----------
FINANCING ACTIVITIES:
Proceeds from long term debt - 577,000
Payments of long-term debt (92,086) (731,239)
Purchase of treasury stock (38,372) (28,428)
---------- -----------
Net cash used in financing activities (130,458) (182,667)
---------- -----------
INCREASE (DECREASE) IN CASH 1,509,054 (1,126,192)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,969,852 2,097,193
---------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $3,478,906 $ 971,001
========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 13,501 $ 44,414
========== ===========
Income taxes $ - $ 400
========== ===========
<FN>
See notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position as
of September 30, 1998, and the results of operations for the three and nine
month periods ended September 30, 1998 and 1997 and of cash flows for the nine
months ended September 30, 1998 and 1997. The results of operations for the nine
months ended September 30, 1998 are not necessarily indicative of results that
may be expected for any other interim period or for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1997 included in
the Company's Annual Report on Form 10-KSB. The accounting policies used in
preparing these financial statements are the same as those described in the
December 31, 1997 financial statements.
2. The Company reached an agreement regarding foreign currency forward
contracts that were the source of a previously reported dispute with a bank in
the Philippines. The agreement resulted in a reduction of the estimated
liability previously provided by $487,000 that was recognized as income in the
second quarter of 1998.
3. During the second quarter of 1997 management implemented a plan to reduce
the Company's U.S. based overhead. The principal actions were to eliminate U.S.
production for the publishing division and merge the east and west coast imaging
operations into one facility on the west coast. The restructuring costs
consisted of estimated losses on leases and severance pay totaling approximately
$450,000, while the impairment costs consisted of a write-off of goodwill in
connection with the imaging business totaling approximately $700,000 and fixed
assets related to both the imaging and publishing businesses totaling
approximately $350,000.
4. The 1998 periods have no provision for taxes, as benefits of net
operating loss carryforwards were not previously recognized.
5. In June 1998, the Company repriced options to purchase 302,847 shares of
its common stock to prices ranging from $5.00 to $8.63. In July 1998 the Company
granted options to purchase 160,000 shares of its common stock at $6.00 per
share.
6. The Company's stockholders approved a one-for-three reverse stock split
that became effective on March 25, 1998. All share and per share information
reflects such split.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
INNODATA is a leading provider of Internet and on-line publishing services,
providing all the necessary steps for product development and data capture and
conversion to enable its customers to publish vast amounts of information via
the Internet and on-line. Innodata's customers represent an array of major
secondary electronic publishers of legal, scientific, educational and medical
information, as well as document-intensive companies repurposing their
proprietary information into electronic resources that can be referenced via
web-centric applications.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues from continuing lines of business for the three months ended
September 30, 1998 increased to $5,309,806 compared to $4,419,000 for the
similar period in 1997. The increase is primarily from new customers. Total
revenues for 1997 were $5,269,068, which included $850,000 from journal and book
pagination and medical transcription businesses that were discontinued. During
the third quarter of 1998 and 1997, one customer comprised of twelve affiliated
companies accounted for 18% and 13% of the Company's revenues, respectively. In
addition, a second customer accounted for 13% of the Company's revenues during
the third quarter of 1998. No other customer accounted for 10% or more of the
Company's revenues.
Direct operating expenses were $3,534,891 in the third quarter of 1998 and
$4,121,444 in the third quarter of 1997, a decrease of 14% in 1998 from 1997.
Direct operating expenses as a percentage of revenues decreased to 67% in the
1998 quarter compared with 78% in 1997. The decrease in direct operating
expenses as a percentage of revenues in 1998 was due principally to a
significant reduction in the value of pesos in the Philippines and the
elimination of journal and book page making services. Direct operating expenses
include primarily direct payroll, telecommunications, freight, computer
services, supplies and occupancy.
Selling and administrative expenses were $1,312,920 and $1,409,929 in the
third quarter of 1998 and 1997, respectively, representing a decrease of 7% in
1998 from 1997. Selling and administrative expense as a percentage of revenues
was 25% in 1998 compared with 27% in 1997. The decrease primarily reflects the
elimination of pagination services. The Company added new sales and technical
support staff at the end of the second quarter and in the third quarter of 1998,
which will increase selling costs in the future. Selling and administrative
expenses include management salaries, sales and marketing salaries, clerical and
administrative salaries, rent and utilities not included in direct costs,
marketing costs and administrative overhead.
In the third quarter of 1997, the Company recognized an unrealized loss of
$1,000,000 in connection with foreign currency contracts. The loss represents
the difference between the contract rate for Philippine pesos and the estimated
fair value at September 30, 1997. A settlement of these contracts was made in
1998. See nine month discussion below.
The 1998 period has no provision for taxes, as benefits of net operating
loss carryforwards were not previously recognized. The 1997 period has no tax
beneftis for the loss incurred.
Net income (loss) was $469,224 and $(1,278,079) in the third quarter of
1998 and 1997, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues from continuing lines of business for the nine months ended
September 30, 1998 increased to $14,109,397 compared to $13,424,000 for the
similar period in 1997. The increase is primarily from new customers. Total
revenues for 1997 were $15,288,521, which included $1,865,000 from journal and
book pagination and medical transcription businesses that were discontinued.
During the nine months ended September 30, 1998 and 1997, one customer comprised
of twelve affiliated companies accounted for 18% and 13% of the Company's
revenues, respectively. In addition, a second customer accounted for 12% of the
Company's revenues during the first nine months of 1998. No other customer
accounted for 10% or more of the Company's revenues.
Direct operating expenses were $9,624,379 for the nine months ended
September 30, 1998 and $12,578,606 for the similar period in 1997, a decrease of
23%. Direct operating expenses as a percentage of revenues decreased to 68% in
the 1998 period compared with 82% in 1997. The decrease in direct operating
expenses as a percentage of revenues in 1998 was due principally to a
significant reduction in the value of pesos in the Philippines and the
elimination of journal and book page making services.
Selling and administrative expenses were $3,462,089 and $4,246,179 for the
nine months ended September 30, 1998 and 1997, respectively, representing a
decrease of 18% in 1998 from 1997. Selling and administrative expense as a
percentage of revenues was 25% in 1998 compared with 28% in 1997. The decrease
primarily reflects the elimination of pagination services.
During the second quarter of 1997 management determined to reduce its U.S.
based overhead. The principal actions were to eliminate U.S. production for the
publishing division and merge the east and west coast imaging operations into
one facility on the west coast. The restructuring costs consisted of estimated
losses on leases and severance pay, while the impairment costs consisted of a
write-off of goodwill in connection with the imaging business and equipment in
connection with both the imaging and publishing businesses. The restructuring
and impairment costs totaled $1,500,000.
In the third quarter of 1997, the Company recognized an unrealized loss of
$1,000,000 in connection with foreign currency contracts. The loss represents
the difference between the contract rate for Philippine pesos and the estimated
fair value at September 30, 1997.
The Company reached an agreement regarding foreign currency forward
contracts that were the source of a dispute with a bank in the Philippines. The
agreement resulted in a reduction of the estimated liability previously provided
by $487,000 that was recognized as income in the second quarter of 1998.
The 1998 period has no provision for taxes, as benefits of net operating
loss carryforwards were not previously recognized. The tax expense in 1997
represents an increase in the valuation allowance. No tax benefits were
provided for losses incurred in 1997 based on management's evaluation of the
Company's international tax structure.
Net income (loss) was $1,518,606 and $(4,142,314) for the nine months ended
September 30, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $2,148,732 was provided by operating activities for the nine
months ended September 30, 1998, while net cash of $193,020 was used in
operating activities for the nine months ended September 30, 1997, principally
resulting from the loss incurred during the nine months ended September 30,
1997. Net cash of $509,220 and $750,505 was used in investing activities in 1998
and 1997, respectively, for the purchase of fixed assets in both years. Net cash
of $130,458 and $182,667 was used in financing activities in the 1998 and 1997
periods, respectively.
The Company opened its production facility in India in 1997. The Company
expects to make capital expenditures for this facility as well as for its
existing production facilities in the Philippines and Sri Lanka, and for
additional equipment for its U.S. operations. The Company estimates these
capital expenditures will aggregate approximately $1,000,000 during the next 12
months.
The Company has a line of credit with a bank in the amount of $1 million.
The line is collateralized by the assets of the Company. Interest is charged at
2% above the bank's prime rate and is due on demand. The line is believed to be
sufficient for the Company's cash requirements.
The Company relies on certain hardware, software and operating systems
(collectively, "Systems") for production, financial reporting and general
administration. The Company has been evaluating these Systems to identify
potential Year 2000 compliance problems and has been planning appropriate
remedial efforts and testing, where required. In addition, it has been
evaluating its external interfaces with customers and service suppliers to
coordinate Year 2000 compliance.
The Company has planned to replace older, non-compliant Systems components
as a means by which to obtain Year 2000 compliance and to obtain increased
functionality and efficiency. These new Systems components will cost
approximately $500,000, most of which will be capitalized as fixed assets. All
such historical costs have been funded out of existing cash and cash flows from
operations, and the Company expects that future costs will be funded similarly.
The Company has obtained compliance statements from each of its significant
service suppliers, most of which have provided positive assurances regarding
their compliance.
Based on currently available information, the Company expects to attain
Year 2000 compliance and institute appropriate final testing of its
modifications and replacements no later than June 30, 1999. The foregoing
notwithstanding, the Company plans to have in place contingency plans to deal
with the possibility that any component of the Systems fails to pass final
testing by such date. Such contingency plans may include, without limitation,
implementing substitute production Systems and obtaining services from
substitute vendors. The Company does not anticipate that the cost of effecting
Year 2000 compliance will have a material impact on the Company's financial
condition or results of operations. Nevertheless, achieving Year 2000
compliance is dependent upon many factors, some of which are not completely
within the Company's control. Should either one or more of the Company's
critical Systems components or one or more of its critical vendors fail to
achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected.
INFLATION, SEASONALITY AND PREVAILING ECONOMIC CONDITIONS
To date, inflation has not had a significant impact on the Company's
operations. The Company generally performs its work for its customers on a task
by task at-will basis, or under short-term contracts or contracts which are
subject to numerous termination provisions. The Company has flexibility in its
pricing due to the absence of long-term contracts. The Company's revenues are
not affected by seasonality.
Disclosures in this Form 10-QSB contain certain forward-looking statements,
including without limitation, statements concerning the Company's operations,
economic performance and financial condition, including in particular, Year 2000
information. These forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
words "believe," "expect," "anticipate" and other similar expressions generally
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties,
including without limitation, changes in external market factors, changes in the
Company's business or growth strategy or an inability to execute its strategy
due to changes in its industry or the economy generally, the emergence of new or
growing competitors, various other competitive factors and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission. Actual results could differ materially from
the results referred to in the forward-looking statements. In light of these
risks and uncertainties, there can be no assurance that the results referred to
in the forward-looking statements contained in this Form 10-QSB will in fact
occur. Additionally, the Company makes no commitment to disclose any revisions
to forward-looking statements, or any facts, events or circumstances after the
date hereof that may bear upon forward-looking statements.
<PAGE>
PART II. OTHER INFORMATION
- -------- ------------------
Item 1. Legal Proceedings. Not Applicable
------------------
Item 2. Changes in Securities. Not Applicable
-----------------------
Item 3. Defaults upon Senior Securities. Not Applicable
----------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
-----------------------------------------------------------
The following matters were voted on at the November 5, 1998 Annual Meeting
of Stockholders. The total shares voted were 1,463,372.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ELECTION OF DIRECTORS:
BROKER
NOMINEE FOR AGAINST ABSTAIN NON VOTES
- ----------------------------------- --------- ------- ------- ---------
Jack Abuhoff 1,445,104 18,268
Albert Drillick 1,445,237 18,135
E. Bruce Fredrikson 1,445,068 18,304
Barry Hertz 1,445,237 18,135
Martin Kaye 1,445,167 18,205
Morton Mackof 1,439,815 23,557
Todd Solomon 1,439,269 24,103
Stanley Stern 1,445,167 18,205
APPROVAL OF 1998 STOCK OPTION PLAN: 716,969 42,308 5,109 698,986
APPOINTMENT OF AUDITORS: 1,458,688 3,419 1,265
</TABLE>
Item 5. Other Information. None
------------------
Item 6. (a) Exhibits.
--------
Exhibit 27. Financial Data Schedule
(b) Form 8-K Report. No reports were filed during the quarter
-----------------
ended September 30, 1998
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNODATA CORPORATION
Date: 11/12/98 /s/
-------- ------------------------
Jack Abuhoff
President
Chief Executive Officer
Date: 11/12/98 /s/
-------- ------------------------
Martin Kaye
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,478,906
<SECURITIES> 0
<RECEIVABLES> 2,812,636
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,071,924
<PP&E> 2,728,725
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,469,695
<CURRENT-LIABILITIES> 3,039,319
<BONDS> 0
0
0
<COMMON> 15,217
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,469,695
<SALES> 0
<TOTAL-REVENUES> 14,109,397
<CGS> 0
<TOTAL-COSTS> 12,590,791
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,577
<INCOME-PRETAX> 1,518,606
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,518,606
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.01
</TABLE>
