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, 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) 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, 1997 there
were 4,486,010 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
---------------------------------------------------------------
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
SEPTEMBER 30, 1997
(Unaudited)
-----------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 971,001
Accounts receivable-net 4,076,791
Prepaid expenses and other current assets 1,165,482
Deferred income taxes 136,000
-----------
Total current assets 6,349,274
FIXED ASSETS-net 3,022,283
GOODWILL-net 416,976
OTHER ASSETS 601,218
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TOTAL $10,389,751
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 145,481
Accounts payable and accrued expenses 1,677,016
Accrued salaries and wages 1,178,399
Estimated loss on foreign currency contracts 1,000,000
Taxes, other than income taxes 298,888
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Total current liabilities 4,299,784
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LONG-TERM DEBT, less current portion 104,538
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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 8,836,396
Deficit (3,391,314)
-----------
5,490,734
Less: treasury stock; 69,200 shares at cost (172,305)
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Total stockholders' equity 5,318,429
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TOTAL $10,389,751
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<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
-----------
1997 1996
REVENUES $ 5,269,068 $4,951,412
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 4,121,444 4,338,421
Selling and administrative expenses 1,409,929 1,290,181
Unrealized loss on foreign currency contracts 1,000,000 -
Interest expense 27,163 9,155
Interest income (11,389) (31,054)
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Total 6,547,147 5,606,703
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LOSS BEFORE BENEFIT FROM INCOME TAXES (1,278,079) (655,291)
BENEFIT FROM INCOME TAXES - (250,000)
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NET LOSS $(1,278,079) $ (405,291)
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LOSS PER SHARE $(.28) $(.09)
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<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
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1997 1996
REVENUES $15,288,521 $15,792,091
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 12,578,606 12,372,419
Selling and administrative expenses 4,246,179 3,575,934
Restructuring costs and impairment of assets 1,500,000 -
Unrealized loss on foreign currency contracts 1,000,000 -
Interest expense 56,515 28,765
Interest income (50,465) (93,498)
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Total 19,330,835 15,883,620
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LOSS BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES (4,042,314) (91,529)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 100,000 (25,000)
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NET LOSS $(4,142,314) $ (66,529)
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LOSS PER SHARE $(.92) $(.01)
===== =====
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
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1997 1996
OPERATING ACTIVITIES:
Net loss $(4,142,314) $ (66,529)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,045,831 1,013,776
Restructuring costs and impairment of assets 1,500,000 -
Unrealized loss on foreign currency contracts 1,000,000 -
Deferred income taxes 400,000 100,000
Changes in operating assets and liabilities:
Accounts receivable (358,508) 1,192,506
Prepaid expenses and other current assets (34,972) (839,678)
Other assets (128,793) (288,159)
Accounts payable and accrued expenses 505,417 748,907
Taxes, other than income taxes 20,319 15,122
Income taxes payable - (726,194)
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Net cash (used in) provided by operating activities (193,020) 1,149,751
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INVESTING ACTIVITIES:
Expenditures for fixed assets (750,505) (992,856)
Payments in connection with acquisition - (410,646)
Redemption of short term investments - 740,000
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Net cash used in investing activities (750,505) (663,502)
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FINANCING ACTIVITIES:
Proceeds from long term debt 577,000 -
Payments of long-term debt (731,239) (229,347)
Proceeds from short-term debt - 133,574
Purchase of treasury stock (28,428) -
Proceeds from exercise of stock options - 65,768
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Net cash used in financing activities (182,667) (30,005)
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(DECREASE) INCREASE IN CASH (1,126,192) 456,244
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 2,097,193 1,566,654
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CASH AND EQUIVALENTS, END OF PERIOD $ 971,001 $2,022,898
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SUPPLEMENTAL DISCLOSURES OF CASH
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 44,414 $ 35,143
Income taxes $ 400 $ 896,540
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12
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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 September 30, 1997, and the results of operations for the three and nine
month periods ended September 30, 1997 and 1996 and of cash flows for the nine
months ended September 30, 1997 and 1996. The results of operations for the
three and nine month periods ended September 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. 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 September 30, 1997, it would not have had a
material affect on reported amounts.
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 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.
4. As of September 30, 1997, the Company's wholly-owned subsidiary had
foreign currency forward contracts in Philippine pesos which had an estimated
fair value at that date approximately $1,000,000 less than the contractual
amount. While such contracts are presently in dispute, the Company recognized
the unrealized loss in the third quarter of 1997.
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 SEPTEMBER 30, 1997 AND 1996
Revenues increased 6% to $5,269,068 for the three months ended September
30, 1997 compared to $4,951,412 for the similar period in 1996. During the
third quarter of 1997 and 1996, one customer comprised of twelve affiliated
companies accounted for 13% and 19% of the Company's revenues, respectively.
No other customer accounted for 10% or more of the Company's revenues.
Direct operating expenses were $4,121,444 in the third quarter of 1997
and $4,338,421 in the third quarter of 1996, a decrease of 5% in 1997 from
1996. Direct operating expenses as a percentage of revenues decreased to 78%
in the 1997 quarter compared with 88% in 1996. The decrease in direct
operating expenses as a percentage of revenues in 1997 was due principally to
an increased revenue base to absorb fixed costs of production and, to a lesser
extent, a reduction in direct payroll costs. Direct operating expenses include
primarily direct payroll, telecommunications, freight, computer services and
supplies and occupancy.
Selling and administrative expense was $1,409,929 and $1,290,181 in the
third quarter of 1997 and 1996, respectively, representing an increase of 9%
in 1997 from 1996. Selling and administrative expense as a percentage of
revenues was 27% in 1997 compared with 26% 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.
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 incurred net losses of $(1,278,079) and $(405,291) for the
third quarter of 1997 and 1996, respectively. The increased loss in 1997 was
due principally to the estimated loss on foreign currency contracts.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues decreased 3% to $15,288,521 for the nine months ended September
30, 1997 compared to $15,792,091 for the similar period in 1996. During the
first nine months of 1997 and 1996, one customer comprised of twelve
affiliated companies accounted for 13% and 26% of the Company's revenues,
respectively. No other customer accounted for 10% or more of the Company's
revenues.
Direct operating expenses were $12,578,606 for the nine months ended
September 30, 1997 and $12,372,419 for the similar period in 1996, an increase
of 2%. Direct operating expenses as a percentage of revenues increased to 82%
in the 1997 period compared with 78% in 1996. The increase in direct operating
expenses as a percentage of revenues in 1997 was due principally to higher
fixed costs in the U.S based operations and increased labor costs in the
Philippines.
Selling and administrative expense was $4,246,179 and $3,575,934 for the
nine months ended September 30, 1997 and 1996, respectively, representing an
increase of 19% in 1997 from 1996. Selling and administrative expense as a
percentage of revenues was 28% in 1997 compared with 23% in 1996. The dollar
increase primarily reflects the expansion of the Company's sales and marketing
efforts, including additional employees.
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.
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 incurred net losses of $(4,142,314) and $(66,529) for the
first nine months of 1997 and 1996, respectively. The increased loss in 1997
was due to the restructuring costs, impairment of assets writedown and losses
on foreign currency contracts, as well as the lower revenues realized in that
period while experiencing increased costs as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $193,020 was used in operating activities for the nine months
ended September 30, 1997, while net cash of $1,149,751 was provided by
operating activities for the nine months ended September 30, 1996, principally
resulting from the loss incurred during the nine months ended September 30,
1997. Net cash of $750,505 and $663,502 was used in investing activities in
1997 and 1996, respectively, for the purchase of 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 $182,667 and $30,005
was used in financing activities in the 1997 and 1996 periods, respectively.
In 1996, the Company received proceeds from short-term borrowings and from the
exercise of stock options offset by payments of long-term debt.
The Company opened its new production facility in India. 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 United States 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 $2 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.
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 Applicable
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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. No reports were filed during the quarter
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ended September 30, 1997
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: 11/13/97 /s/
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Jack Abuhoff
President
Chief Executive Officer
Date: 11/13/97 /s/
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Martin Kaye
Chief Financial Officer