U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1999
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.)
THREE UNIVERSITY PLAZA
HACKENSACK, NJ 07601
(Address of principal executive offices)
(201) 488-1200
(Issuer's telephone number)
Check whether the issuer (1) 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 common equity, as
of the latest practicable date: As of October 31, 1999 there were 4,948,323
shares of common stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
--------------------
See pages 2-7
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
See pages 8-12
PART ll. OTHER INFORMATION
- -------- -----------------
See page 13
<PAGE>
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
-----------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,526,926
Accounts receivable-net 5,466,654
Prepaid expenses and other current assets 1,204,675
Deferred income taxes 625,000
-----------
Total current assets 9,823,255
FIXED ASSETS-net 4,161,813
OTHER ASSETS 562,642
-----------
TOTAL $14,547,710
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 24,575
Accounts payable and accrued expenses 889,930
Accrued salaries and wages 1,806,214
Income and other taxes 231,515
-----------
Total current liabilities 2,952,234
-----------
LONG-TERM DEBT, less current portion 7,803
-----------
DEFERRED INCOME TAXES 425,000
-----------
STOCKHOLDERS' EQUITY (NOTE 5):
Common stock, $.01 par value; authorized, 20,000,000 shares;
issued, 5,055,447 shares 50,554
Additional paid-in capital 10,688,171
Retained earnings 644,917
-----------
11,383,642
Less: treasury stock-at cost; 144,249 shares (220,969)
-----------
Total stockholders' equity 11,162,673
-----------
TOTAL $14,547,710
===========
<FN>
See notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
-----------
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
REVENUES $19,709,688 $14,109,397
----------- -----------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 12,313,614 9,624,379
Selling and administrative expenses 4,920,670 3,462,089
Unrealized gain on foreign currency contracts - (487,458)
Interest income - net (77,601) (8,219)
---------- ----------
Total 17,156,683 12,590,791
----------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,553,005 1,518,606
PROVISION FOR INCOME TAXES 708,550 -
----------- -----------
NET INCOME $ 1,844,455 $ 1,518,606
============ ===========
BASIC INCOME PER SHARE $.40 $.34
==== ====
WEIGHTED AVERAGE SHARES 4,577,153 4,437,594
=========== ===========
DILUTED INCOME PER SHARE $.35 $.34
==== ====
WEIGHTED AVERAGE DILUTED SHARES 5,203,281 4,504,797
=========== ===========
<FN>
See notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
-----------
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
REVENUES $7,072,658 $5,309,806
---------- ----------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 4,707,098 3,534,891
Selling and administrative expenses 1,607,176 1,312,920
Interest income - net (22,099) (7,229)
---------- ----------
Total 6,292,175 4,840,582
----------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 780,483 469,224
PROVISION FOR INCOME TAXES 195,000 -
----------- ----------
NET INCOME $ 585,483 $ 469,224
========== ==========
BASIC INCOME PER SHARE $ .12 $ .11
=========== ===========
WEIGHTED AVERAGE SHARES 4,760,505 4,421,457
========== ===========
DILUTED INCOME PER SHARE $ .11 $ .10
========== ==========
WEIGHTED AVERAGE DILUTED SHARES 5,562,726 4,576,089
========== ==========
<FN>
See notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
-----------
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
OPERATING ACTIVITIES:
Net income $ 1,844,455 $1,518,606
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,172,934 913,180
Gain on foreign currency contracts - (487,458)
Loss on disposal of fixed assets - 29,634
Changes in operating assets and liabilities:
Accounts receivable (2,523,232) 376,284
Prepaid expenses and other current assets (688,048) 181,204
Other assets 91,328 77,524
Accounts payable and accrued expenses 720,497 679,368
Liability for foreign currency contracts - (912,542)
Income and other taxes 310,899 (227,068)
----------- ----------
Net cash provided by operating activities 928,833 2,148,732
----------- ----------
INVESTING ACTIVITIES:
Expenditures for fixed assets (2,696,195) (642,023)
Proceeds from disposal of fixed assets - 132,803
----------- ----------
Net cash used in investing activities (2,696,195) (509,220)
------------ -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 807,184 -
Purchase of treasury stock - (38,372)
Payments of long-term debt (48,429) (92,086)
---------- ---------
Net cash provided by (used in) financing
activities 758,755 (130,458)
---------- ----------
(DECREASE) INCREASE IN CASH (1,008,607) 1,509,054
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,535,533 1,969,852
------------ -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 2,526,926 $3,478,906
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,645 $ 13,501
Income taxes $ 278,000 $ -
<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, 1999 AND 1998
(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, 1999, the results of operations for the three and nine month
periods ended September 30, 1999 and 1998, and of cash flows for the nine months
ended September 30, 1999 and 1998. The results of operations for the nine months
ended September 30, 1999 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, 1998 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, 1998 financial statements.
2. The nine months ended September 30, 1998 has no provision for taxes due
to the utilization of net operating loss carryforwards. The provision for taxes
for the nine months ended September 30, 1999 was less than the statutory rate
due to certain tax holidays available in foreign countries in which the Company
operates.
3. During1999, the Company granted options to purchase 375,000 shares of its
common stock at prices ranging from $2.66 - 9.00 per share. During the nine
months ended September 30, 1999 options to purchase 435,243 shares of the
Company's common stock were exercised, resulting in proceeds of $807,184.
4. Segment Information.
The Company's operations are classified in two business segments: Internet and
on-line data conversion; and content management services and document imaging
services.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues
- --------
Internet and on-line services $18,806,333 $12,640,794 $6,785,411 $4,679,959
Document imaging services 903,355 1,468,603 287,247 629,847
----------- ----------- -------- ----------
Total consolidated $19,709,688 $14,109,397 $7,072,658 $5,309,806
=========== =========== ========== ==========
Income (loss) before income taxes
- ---------------------------------
Internet and on-line services $ 3,153,330 $ 2,377,768 $ 849,596 $ 926,311
Document imaging services (600,325) (859,162) (69,113) (457,087)
----------- ----------- ---------- ----------
Total consolidated $ 2,553,005 $ 1,518,606 $ 780,483 $ 469,224
=========== =========== ========== ==========
<FN>
</TABLE>
Internet and on-line data conversion and content management services provide all
the necessary steps for product development and data conversion to enable its
customers to disseminate vast amounts of information both on-line and via the
Internet. Its customers represent an array of major 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.
The document imaging services segment provides high volume backfile and
day-forward conversion of business documents, technical manuals, engineering
drawings, aperture cards, roll film, and microfiche, providing high quality
computer accessible images and indexing.
5. On August 17, 1999, the Company declared a three-for-one stock split in
the form of a stock dividend payable on September 9, 1999 to stockholders of
record on August 31, 1999. The financial statements and notes thereto have been
retroactively adjusted to reflect such stock split.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
INNODATA is a leading provider of Internet and online data conversion and
content management services, providing all the necessary steps from data capture
to product development to enable its customers to publish vast amounts of
information both online and via the Internet. Innodata's customers represent an
array of major 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, 1999 AND 1998
Revenues increased 33% to $7,072,658 for the three months ended September
30, 1999 compared to $5,309,806 for the similar period in 1998. Revenues from
the Internet and on-line data conversion and content management services segment
increased to $6,785,411 in 1999 from $4,679,959 in 1998, or 45%, principally
from new customers. During 1999, one customer accounted for 22% of the Company's
Internet and on-line data conversion and content management services revenue,
while another customer comprised of twelve affiliated companies, accounted for
20% of such revenues for the period during 1998. No other customer accounted
for 10% or more of the Company's revenues. Further, in 1999 and 1998, export
revenues, all of which were derived from European customers, accounted for 17%
and 24%, respectively, of such revenues. Revenues from the document imaging
services segment decreased to $287,247 in 1999 from $629,847 in 1998. The
decline in 1999 is due principally to the completion of a large one-time
project. During 1999 three customers accounted for 57%, 21% and 12% of the
Company's document imaging service revenues, respectively. During the same
period in 1998, one other customer accounted for 67% of such revenues. No other
customer accounted for 10% or more of such revenues.
Direct operating expenses were $4,707,098 in the third quarter of 1999 and
$3,534,891 in the third quarter of 1998, an increase of 33% in 1999 from 1998.
Direct operating expenses for the Internet and on-line data conversion and
content management services increased to $4,426,945 in 1999 from $2,707,594 in
1998, or 64%. Direct operating expenses as a percentage of revenues were 65% in
1999 and 58% in 1998. The percentage increase during the third quarter of 1999
was due to hiring and training of a significant number of production employees
to prepare for an anticipated increase in projects commencing in the fourth
quarter and next year. Direct operating expenses in the document imaging
services segment decreased to $280,153 in 1999 from $827,297 in 1998. The
decrease in 1999 was due principally to a staff reduction and reduced direct
costs on the lower revenues. Direct operating expenses include primarily direct
payroll, telecommunications, freight, computer services, supplies and occupancy.
Selling and administrative expenses were $1,607,176 and $1,312,920 in the
third quarter of 1999 and 1998, respectively, representing an increase of 22% in
1999 from 1998. Selling and administrative expenses as a percentage of revenues
were 23% in 1999 compared with 25% in 1998. The increased dollar amount is due
to commissions on the revenue increase and additional payroll costs of personnel
hired in the third and fourth quarter of 1998. 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 1999, the Internet and on-line data conversion and content management
services segment realized income before income taxes of $849,596, while the
document imaging services segment incurred a loss of $69,113. In 1998, the
Internet and on-line data conversion and content management services segment
realized income before income taxes of $926,311, while the document imaging
services segment incurred a loss of $457,087.
The 1998 period has no provision for taxes, as benefits of net operating
loss carry forwards were not previously recognized. The provision for taxes for
the three months ended September 30, 1999 was less than the statutory rate due
to certain tax holidays available in foreign countries in which the Company
operates.
As a result of the aforementioned items, the Company realized net income of
$585,483 in 1999 and $469,224 in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues increased 40% to $19,709,688 for the nine months ended September
30, 1999 compared to $14,109,397 for the similar period in 1998. Revenues from
the Internet and on-line data conversion and content management services segment
increased to $18,806,333 in 1999 from $12,640,794 in 1998, or 49%, principally
from new customers. During 1999, one customer accounted for 23% of the Company's
Internet and on-line data conversion and content management services revenue,
while another customer comprised of twelve affiliated companies, accounted for
21% of such revenues for the period during 1998. No other customer accounted
for 10% or more of the Company's revenues. Further, in 1999 and 1998, export
revenues, all of which were derived from European customers, accounted for 13%
and 15%, respectively, of such revenues. Revenues from the document imaging
services segment decreased to $903,355 in 1999 from $1,468,603 in 1998. During
1999 two customers accounted for 34% and 18% of the Company's document imaging
service revenues, respectively. During the same period in 1998, two other
customers accounted for 52% and 12% of such revenues. No other customer
accounted for 10% or more of such revenues.
Direct operating expenses were $12,313,614 for the nine months ended
September 30, 1999 and $9,624,379 for the similar period in 1998, an increase of
28% in 1999 from 1998. Direct operating expenses for the Internet and on-line
data conversion and content management services increased to $11,372,828 in 1999
from $7,925,887 in 1998, or 43%. Direct operating expenses as a percentage of
revenues decreased to 60% in the 1999 period compared with 63% in 1998. The
decrease as a percentage of revenues was due primarily to fixed costs that did
not increase proportionately with the increased revenues. Direct operating
expenses in the document imaging services segment decreased to $940,786 in 1999
from $1,698,492 in 1998. The decrease in 1999 was due principally to lower labor
costs for the reduced revenues.
Selling and administrative expenses were $4,920,670 and $3,462,089 for the
nine months ended September 30, 1999 and 1998, respectively, representing an
increase of 42% in 1999 from 1998. Selling and administrative expenses as a
percentage of revenues were 25% in 1999 and 1998. The increased dollar amount
is due to commissions on the revenue increase and additional payroll costs of
personnel hired in the third and fourth quarter of 1998.
The 1998 period has no provision for taxes, as benefits of net operating
loss carry forwards were not previously recognized. The provision for taxes for
the nine months ended September 30, 1999 was less than the statutory rate due to
certain tax holidays available in foreign countries in which the Company
operates.
Net income was $1,844,455 and $1,518,606 for the nine months ended
September 30, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $928,833 and $2,148,732 was provided by operating activities
for the nine months ended September 30, 1999 and 1998, respectively. The
decrease in 1999 was primarily due to an increase in accounts receivable. Net
cash of $2,696,195 and $509,220 was used in investing activities in 1999 and
1998, respectively. The increased expenditures in 1999 were primarily utilized
for expansion of production capacity. Net cash of $758,755 was provided by
financing activities in 1999, primarily from the exercise of stock options,
while net cash of $130,458 was used in financing activities for the same period
in 1998 for purchases of treasury stock and payments of debt.
The Company expects to make capital expenditures of approximately
$3,000,000 during the next 12 months, principally for continued production
facility expansion and equipment upgrades, which is expected to be funded from
operations and, if necessary, the line of credit discussed below. In addition,
in connection with a recently signed agreement containing potentially
significant production requirements, the Company may be required to build two
additional automated, consolidated offshore production facilities to perform
these services. The Company expects that the cost of such facilities would be
financed in part internally and in part from a combination of external sources,
including equipment financing from original equipment manufacturers and others,
and debt and equity financing.
The Company has a line of credit with a bank in the amount of $2 million.
The line is collateralized by accounts receivable. Interest is charged at 1/2%
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 replaced 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 is in close contact with each of its significant suppliers
concerning their Year 2000 readiness status. Suppliers of both products and
services are being monitored constantly to determine the necessity and level of
contingency for their contribution to our product or services.
Based on currently available information, the Company has substantially
completed its Year 2000 compliance process. The Company is currently in the
midst of the final testing phase of its contingency planning. 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. Nevertheless, achieving actual 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, including those vendors
providing services in foreign countries in which the Company has operations,
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 significantly 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
and market risk 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, including the Company's Forms 10-KSB, S-3
and S-8. 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.
<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 October 21, 1999 Annual Meeting
of Stockholders. The total shares voted were 4,248,015.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C> <C>
ELECTION OF DIRECTORS:
Jack Abuhoff 4,231,851 16,164
Albert Drillick 4,231,781 16,234
E. Bruce Fredrikson 4,231,851 16,164
Barry Hertz 4,231,851 16,164
Martin Kaye 4,231,851 16,164
Morton Mackof 4,231,781 16,234
Todd Solomon 4,231,851 16,164
Stanley Stern 4,231,781 16,234
APPOINTMENT OF AUDITORS: 4,232,469 6,000 9,546
</TABLE>
Item 5. Other Information. None
-----------------
Item 6. (a) Exhibits.
--------
Exhibit 27. Financial Data Schedule
(b) Form 8-K Report. None
---------------
<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: 11/12/99
-----------------------------------
Jack Abuhoff
President
Chief Executive Officer
Date: 11/12/99
-----------------------------------
Martin Kaye
Executive Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,526,926
<SECURITIES> 0
<RECEIVABLES> 5,466,654
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,823,255
<PP&E> 4,161,813
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,547,710
<CURRENT-LIABILITIES> 2,952,234
<BONDS> 0
0
0
<COMMON> 50,554
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,547,710
<SALES> 0
<TOTAL-REVENUES> 19,709,688
<CGS> 12,313,614
<TOTAL-COSTS> 17,156,683
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (77,601)
<INCOME-PRETAX> 2,553,005
<INCOME-TAX> 708,550
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,844,455
<EPS-BASIC> .40
<EPS-DILUTED> .35
</TABLE>
