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 JUNE 30, 1997
Commission File Number 0-22196
INNODATA CORPORATION
(Exact name of small business issuer
as specified in its charter)
DELAWARE 13-3475943
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
95 ROCKWELL PLACE
BROOKLYN, NY 11217
(Address of principal executive offices)
(718) 855-0044
(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 July 31, 1997 there were 4,496,010
shares of common stock outstanding.
1
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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See pages 2-6
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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See pages 7-9
PART II. OTHER INFORMATION
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See page 10
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(Unaudited)
-----------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,227,395
Accounts receivable-net 4,289,026
Prepaid expenses and other current assets 1,134,895
Deferred income taxes 136,000
-----------
Total current assets 6,787,316
FIXED ASSETS-net 3,190,034
GOODWILL-net 423,876
OTHER ASSETS 535,405
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TOTAL $10,936,631
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 595,752
Accounts payable and accrued expenses 1,725,528
Accrued salaries and wages 911,046
Taxes, other than income taxes 302,367
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Total current liabilities 3,534,693
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LONG-TERM DEBT-Less current portion 142,330
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DEFERRED INCOME TAXES PAYABLE 667,000
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized, 20,000,000 shares;
issued, 4,565,210 shares 45,652
Additional paid-in capital 8,832,496
Deficit (2,113,235)
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6,764,913
Less: treasury stock-69,200 shares at cost (172,305)
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Total stockholders' equity 6,592,608
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TOTAL $10,936,631
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<FN>
See notes to unaudited condensed consolidated financial statements.
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
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1997 1996
REVENUES $10,019,453 $10,840,679
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 8,457,162 8,033,998
Selling and administrative expenses 2,836,250 2,285,753
Restructuring costs and impairment of assets 1,500,000 -
Interest expense 29,352 19,610
Interest income (39,076) (62,444)
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Total 12,783,688 10,276,917
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(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (2,764,235) 563,762
PROVISION FOR INCOME TAXES 100,000 225,000
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NET (LOSS) INCOME $(2,864,235) $ 338,762
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(LOSS) INCOME PER SHARE $(.64) $.07
===== ====
<FN>
See notes to unaudited condensed consolidated financial statements.
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
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1997 1996
REVENUES $ 5,356,988 $5,250,261
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 4,443,520 4,144,712
Selling and administrative expenses 1,484,090 1,097,873
Restructuring costs and impairment of assets 1,500,000 -
Interest expense 20,344 14,732
Interest income (16,203) (28,250)
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Total 7,431,751 5,229,067
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(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (2,074,763) 21,194
PROVISION FOR INCOME TAXES 340,000 8,000
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NET (LOSS) INCOME $(2,414,763) $ 13,194
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(LOSS) INCOME PER SHARE $(.54) $ -
===== ===
<FN>
See notes to unaudited condensed consolidated financial statements.
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
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1997 1996
OPERATING ACTIVITIES:
Net (loss) income $(2,864,235) $ 338,762
Adjustments to reconcile net (loss) income to
net cash (used in)provided by
operating activities:
Depreciation and amortization 689,796 711,904
Restructuring costs and impairment of assets 1,500,000 -
Deferred income taxes 400,000 100,000
Changes in operating assets and liabilities:
Accounts receivable (570,743) 395,293
Prepaid expenses and other current assets (4,385) (468,835)
Other assets (62,980) (264,543)
Accounts payable and accrued expenses 286,576 488,560
Taxes, other than income taxes 23,798 11,698
Income taxes - (726,194)
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Net cash (used in) provided by
operating activities (602,173) 586,645
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INVESTING ACTIVITIES:
Expenditures for fixed assets (573,021) (600,217)
Payments in connection with acquisition - (410,646)
Redemption of short-term investments - 240,000
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Net cash used in investing activities (573,021) (770,863)
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FINANCING ACTIVITIES:
Proceeds from short-term debt - 212,285
Proceeds from long-term debt 463,000 -
Purchase of treasury stock (28,428) -
Payments of long-term debt (129,176) (179,197)
Proceeds from exercise of stock options - 46,311
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Net cash provided by
financing activities 305,396 79,399
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DECREASE IN CASH (869,798) (104,819)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 2,097,193 1,566,654
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CASH AND EQUIVALENTS, END OF PERIOD $ 1,227,395 $1,461,835
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 22,453 $ 17,223
Income taxes $ - $ 891,128
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<FN>
See notes to unaudited condensed consolidated financial statements.
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
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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 June 30, 1997, and the results of operations for the six and three month
periods ended June 30, 1997 and 1996 and of cash flows for the six months
ended June 30, 1997 and 1996. The results of operations for the six months
ended June 30, 1997 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, 1996 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, 1996 financial statements.
2. The Company is in default in connection with a financial covenant in
its revolving credit agreement and, accordingly, has reclassified $404,000 to
current portion of long-term debt. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
3. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which changes the methodology of calculating earnings per share. SFAS
No. 128 requires the disclosure of diluted earnings per share regardless of
its difference from basic earnings per share. The Company plans to adopt SFAS
No. 128 in December 1997. Early adoption is not permitted. Had the Company
adopted SFAS No. 128 as of June 30, 1997, it would not have had a material
affect on reported amounts.
4. 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 consist of estimated losses on leases and severance pay
totaling approximately $450,000, while the impairment costs consist 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
INNODATA is a worldwide electronic publishing services company
specializing in superior quality data conversion for Internet, CD-ROM, print
and online database publishers around the globe. Services include all the
necessary steps for product development and data capture: the highest accuracy
data entry (99.995%+), OCR, SGML and custom coding, hypertext linking, imaging
and document management systems, page composition, copyediting, indexing and
abstracting, and applications programming. The Company also offers medical
transcription services to health-care providers through its Statline division.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues increased 2% to $5,356,988 for the three months ended June 30,
1997 compared to $5,250,261 for the similar period in 1996. During the second
quarter of 1997 and 1996, one customer comprised of twelve affiliated
companies accounted for 14% and 24% of the Company's revenues, respectively.
No other customer accounted for 10% or more of the Company's revenues.
Direct operating expenses were $4,443,520 in the second quarter of 1997
and $4,144,712 in the second quarter of 1996, an increase of 7% in 1997 from
1996. Direct operating expenses as a percentage of revenues increased to 83%
in the 1997 quarter compared with 79% in 1996. The increase in direct
operating expenses as a percentage of revenues in 1997 was due principally to
higher fixed costs in the Company's U.S. based operations and increased labor
costs in the Philippines resulting from a collective bargaining agreement that
became effective on April 1, 1996. Direct operating expenses include
primarily direct payroll, telecommunications, freight, computer services and
supplies and occupancy.
Selling and administrative expenses were $1,484,090 and $1,097,873 in the
second quarter of 1997 and 1996, respectively, representing an increase of 35%
in 1997 from 1996. Selling and administrative expenses as a percentage of
revenues were 28% in 1997 compared with 21% in 1996. The dollar increase
primarily reflects the expansion of the Company's sales and marketing efforts
including additional personnel. 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.
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
consist of estimated losses on leases and severance pay, while the impairment
costs consist 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.
Net (loss) income was $(2,414,763) and $13,194 in the second quarter of
1997 and 1996, respectively. Net income was reduced significantly in 1997 due
to the increased costs discussed above and the restructuring charge and
impairment write-down.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues decreased 8% to $10,019,453 for the six months ended June 30,
1997 compared to $10,840,679 for the similar period in 1996. During the six
months ended June 30, 1997 and 1996, one customer comprised of twelve
affiliated companies accounted for 14% and 27% of the Company's revenues,
respectively, and in 1997, one other customer accounted for 10% of revenues.
No other customer accounted for 10% or more of the Company's revenues.
Direct operating expenses were $8,457,162 for the six months ended June
30, 1997 and $8,033,998 for the similar period in 1996, an increase of 5% in
1997 from 1996. Direct operating expenses as a percentage of revenues
increased to 84% in the 1997 period compared with 74% in 1996. The increase in
direct operating expenses as a percentage of revenues in 1997 was due
principally to higher fixed costs in the Company's U.S. based operations and
increased labor costs in the Philippines resulting from a collective
bargaining agreement that became effective on April 1, 1996.
Selling and administrative expenses were $2,836,250 and $2,285,753 for
the six months ended June 30, 1997 and 1996, respectively, representing an
increase of 24% in 1997 from 1996. Selling and administrative expenses as a
percentage of revenues was 28% in 1997 compared with 21% in 1996. The dollar
increase primarily reflects the expansion of the Company's sales and marketing
efforts, including additional employees.
See discussion for three months ended June 30, 1997 as to restructuring
and impairment costs.
The tax expense in 1997 represents an increase in the valuation
allowance. No tax benefits have been provided for losses incurred in 1997
based on management's evaluation of the Company's current international tax
structure.
Net (loss) income was $(2,864,235) and $338,762 for the six months ended
June 30, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $602,173 was used in operating activities for the six months
ended June 30, 1997, while net cash of $586,645 was provided by operating
activities for the six months ended June 30, 1996, principally resulting from
the loss incurred during the six months ended June 30, 1997. Net cash of
$573,021 and $770,863 was used in investing activities in 1997 and 1996,
respectively, for the purpose of purchasing fixed assets in both years, and
additionally, in 1996, for payments in connection with the acquisition of
International Imaging. These outlays were partially offset by the redemption
of certain short-term investments in 1996. Net cash of $305,396 and $79,399
was provided by financing activities in 1997 and 1996, respectively. In 1997,
the Company received proceeds from long-term borrowings provided from its
equipment purchase revolving credit agreement.
The Company has a commitment to purchase a perpetual license for certain
production process software for cash totaling $190,000 and 35,000 shares of
the Company's common stock. Payment is contingent upon the successful
completion and testing of the software, expected to occur during 1997.
In January 1997, the Company entered into a revolving credit agreement
with a bank providing for borrowings up to $1,000,000 for equipment purchases.
The borrowings will convert to a term loan payable over a three year period
commencing January 1998. During 1997 interest is payable at % over prime and
interest has been fixed on the term loan at 10.1% per annum. In addition, the
bank has provided a line of credit up to $2,000,000 based on eligible
receivables, as defined. Interest is payable at % over prime. The line of
credit is reviewed annually on June 30 and borrowings are collateralized by a
lien on the assets of the Company. As of June 30, 1997 the Company was in
default in connection with certain financial covenants contained in the
revolving credit agreement. The line of credit has not been renewed for the
next fiscal year. The Company is presently negotiating short-term financing
with the bank and is concurrently considering alternative sources of
financing.
The Company has opened a temporary production facility in India and
expects to open its permanent production facility in India in the fourth
quarter of 1997. In addition, the Company expects to make capital
expenditures on an ongoing basis for the expansion of 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 $1,500,000 during 1997.
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.
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings. Not Applicable
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Item 2. Changes in Securities. Not Applicable
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Item 3. Defaults upon Senior Securities. Not Applicable
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Item 4. Submission of Matters to a Vote of Security Holders. Not
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Applicable
Item 5. Other Information. None
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Item 6. (a) Exhibits.
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Exhibit 27. Financial Data Schedule
(b) Form 8-K Report. None
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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: 8/8/97 /s/
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Todd Solomon
President
Chief Executive Officer
Date: 8/8/97 /s/
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Martin Kaye
Chief Financial Officer
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