SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ Annual report under section 13 or 15(d) of the securities exchange act
of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
-----------------
/ / Transition report under section 13 or 15(d) of the securities exchange
act of 1934
COMMISSION FILE NUMBER 0-22196
INNODATA CORPORATION
(Name of small business issuer in its charter)
DELAWARE 13-3475943
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
95 ROCKWELL PLACE
BROOKLYN, NEW YORK 11217
(Address of principal executive offices) (Zip Code)
(718) 855-0044
(Issuer's telephone number)
\
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON
STOCK, $.01 PAR VALUE
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 twelve months (or for 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 / /
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year. $20,116,935
-----------
State the aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing price of the Company's Common Stock on
February 27, 1998 of $1.67 per share, after retroactive effect of a
one-for-three reverse stock split on March 25, 1998. $1,931,317
----------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
1,495,336 SHARES OF COMMON STOCK, $.01 PAR VALUE, AS OF FEBRUARY 28, 1998,
AFTER REVERSE STOCK SPLIT.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
[SEE INDEX TO EXHIBITS]
PART I
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ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
The Company was incorporated in Delaware in June 1988, maintains its
executive offices in New York City and employs a work force in other locations
in the U.S. and approximately 2,500 persons in the Philippines, India and Sri
Lanka. The Company is a worldwide electronic publishing services company
specializing in high 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, indexing and abstracting, and
applications programming. The Company also offers medical transcription
services to healthcare providers through its Statline division.
The Company intends to utilize its labor force to perform such additional
tasks in the high-tech information and related industries as may be
economically performed by large labor forces at competitive wage rates. As
technology develops in these industries, the Company will seek to employ
persons with advanced skills to exploit these areas of opportunity. At the
same time, the Company intends to diminish or eliminate areas of its business
which may become, or may be rendered, less important or obsolete by advancing
technology.
THE COMPANY'S SERVICES
DATA ENTRY AND CONVERSION
- ----------------------------
The Company's procedures for converting data to the required format depend on
the type of information the customer must use in its business, the manner in
which such information is used, the source of the data (e.g., microfilm,
microfiche, magnetic files or hard copy), turnaround time, and the customer's
updating and processing procedures. The Company typically performs some or
all of the following tasks:
a. Data Preparation and Coding
The customer's data is received at the Company's production facilities
either in hard copy by courier or electronically through scanning and
telecommunications equipment. Customers may elect to locate scanning
equipment on their premises or may choose to use equipment which is available
in the Company's New Jersey, California or United Kingdom offices. The source
data is coded with character strings or schemes which allow the customer to
readily process the finished product on its computers and/or to print the
finished product with defined composition. Customers may select various
coding schemes, including Standard Generalized Markup Language (SGML), which
is an international standard for electronic data formatting.
b. Data Entry
Coded material is keyed once or twice, as requested by the customer, by
separate groups of data entry personnel. The Company guarantees a higher
level of accuracy when the data is keyed twice. The two versions of the keyed
data are programmatically compared. Software automatically flags any
deficiencies for correction by the Company's editors. A "merged" version of
the keyed data is prepared. The Company also performs these services using
OCR technology, where appropriate.
c. Proofreading and Quality Control
The Company has developed a system for data quality audit. As a result,
each employee's work is measured both quantitatively and qualitatively.
For projects which require extremely high quality levels, each character that
is keyed is proofread at least twice. Such projects command a premium in
price. During the entire keying process, on-line spell checkers and syntax
verification programs are used to verify quality and accuracy.
d. Delivery of Converted Data
At this stage, the converted data may be returned to the Company's customers
for commercial or in-house processing. Completed data is compiled and
transmitted to the United States over the Company's dedicated communications
circuit. The Company's U.S. staff downloads the data onto tapes or diskettes
which are forwarded to each customer. The customer then loads the data into
its computer system for printing, publication of CD-ROM's, or dissemination
on-line. Alternatively, the customer may determine to use the data to produce
camera-ready copy for production of books and journals.
INDEXING AND ABSTRACTING
- --------------------------
The Company's indexers analyze and categorize articles, professional
papers or similar materials based on content and the selection of appropriate
descriptive terms from a list of predefined terms. Subscribers to databases
offered by the Company's customers consult the same list of predefined terms
in order to access information corresponding to an area of inquiry.
The Company's abstracting personnel summarize an entire document in a
short paragraph in order to allow a database subscriber to quickly determine
whether a given document contains information relevant to the topic being
researched. Abstracting requires an understanding of the document's subject
matter to ensure that the summary is complete and relevant.
Employees who perform indexing and abstracting work must be sufficiently
knowledgeable to understand, analyze and classify material on an extensive
array of subjects. Most of these employees have degrees and/or work
experience related to the specific material which they abstract.
IMAGING AND SCANNING CONVERSION
- ----------------------------------
The Company's Imaging Services division assists companies in successfully
integrating imaging and document management systems, CAD, and imaging
applications. It provides document management software, peripherals, or
complete systems depending on client requirements. It works to select the
appropriate document management system, workflow and viewing software that
would best suit the customer specifications and supports the latest in
state-of-the-art equipment from high-speed document scanners to large format
and film scanners. The capabilities of the Imaging Services division include
the scanning and indexing of all different types of business documents,
technical manuals, engineering drawings, 35mm aperture cards and microfilm.
MEDICAL TRANSCRIPTION SERVICES
- --------------------------------
The Company's Statline division provides medical transcription services to
health care providers by providing proprietary software to its customers to
establish data base information regarding medical records. The Company
provides a portion of such services from its off-shore facilities. The growth
of this business is dependent on the employment and training of qualified
medical transcriptionists in the United States and in its off-shore
facilities.
OCR AND SIMILAR TECHNOLOGIES
Optical Character Recognition ("OCR") involves first producing an image
which is a digital representation of a document and then using one of many OCR
engines to convert that image into a text file corresponding to the characters
on the page. The Company utilizes OCR technology where there are cost savings
to the Company and its customers, and seeks to utilize other new technologies
which may permit it to further automate its operations.
The Company recognizes that OCR and existing or as yet undeveloped
technologies could eventually render straight data entry obsolete.
Accordingly, advances in OCR or other technologies (such as voice recognition)
will increase the relative importance to the Company of its higher level
services such as indexing, abstracting, photocomposition and developing
document management systems, and of other opportunities which will arise as a
result of new technologies or other factors.
EQUIPMENT
The Company's U.S., Philippine and Indian facilities, as well as its
United Kingdom sales office, are interconnected by leased circuits. Each
facility is a local call on the other's PABX, and customers need only dial the
Hackensack, New Jersey office to be transferred, at no additional cost, to its
facilities. This leased circuit enables the Company to transmit data and
image documents to and from its facilities rather than by air courier which
can take up to five days.
SALES AND MARKETING
Sales and marketing functions are primarily conducted by the Company's
full-time sales personnel. Sales and marketing activities have consisted
primarily of exhibiting at trade shows in the United States and Europe, and by
seeking direct personal access to decision-makers. The Company has also
obtained visibility by way of articles published in the trade press. To date,
the Company has not conducted any significant advertising campaign in the
general media.
The Company's Imaging Services division has a reseller program that
allows qualified companies in document and records management, micrographics,
reprographics and CAD to resell conversion services. The division also works
with strategic document imaging systems vendors. The Imaging Services
division's traditional markets include Fortune 500 manufacturers, major
utilities, governmental departments, hospital medical records, litigation
support and commercial back-office applications.
COMPETITION
The Company's ability to compete favorably is, in significant part,
dependent upon its ability to control costs, react timely and appropriately to
short and long-term trends and competitively price its services. Firms
compete based on price, geographic location, quality and speed of turn-around,
as well as on the size of project and the complexity and level of work which
they can perform on an economic basis. Major competitors operating in the
Philippines are Saztec Philippines, Inc., Systems and Encoding Corporation
(Sencor), Unidata Corporation, ASEC International Phils., Inc., Equidata
Philippines, Inc., Data Solutions, Inc., Phil Database and Services, Inc. and
Direct Data Capture, Ltd. QHData and Beijing Formax are major competitors
that perform work in mainland China and APEX Data Services, Inc. performs work
primarily in India. Saztec International, Inc., First Image Data Input
division of First Financial Management Corporation and ASEC International,
Inc. are the Company's major competitors with operations in the United States.
There are also numerous other companies worldwide, with a concentration in
third world countries (including India, Mexico, Sri Lanka and the Caribbean
Basin) which may be regarded as competitive with the Company. The Company may
also be considered in competition with customers' and potential customers'
in-house personnel who may attempt to duplicate the Company's services.
The Company makes substantial efforts to maintain the quality of its work
force. The Company also competes on the basis of its perceived proximity to
its customers. Many offshore conversion companies do not maintain a presence
outside of the country in which their production facility is located. While
such companies are compelled to conduct business and service customers through
brokers or via fax and telephone calls, many of the Company's customer related
functions, including sales, delivery of completed data products and customer
service, are performed in the United States.
The Company's scanning conversion services conducted through its Imaging
Services division competes with numerous companies which may have
substantially greater financial, technical and other resources than the
Company. Firms compete based on price, geographic location, quality and speed
of turn-around, as well as on the size of project and the complexity and level
of work which they can perform on an economic basis. Major national
competitors include Wesco and Docucon. The Company may also be considered in
competition with customers' and potential customers' in-house personnel who
may attempt to duplicate the Company's services.
The Company's Statline transcription services division competes on the
basis of quality, speed of turn-around and price. It competes with many local
transcription services, including work-at-home individuals and medical care
providers' in-house staffs.
RESEARCH AND DEVELOPMENT
The Company has not made significant expenditures in 1997 and 1996 for
research and development, although expenditures were incurred in connection
with OCR technology developments and enhancing its networking and
telecommunications capabilities.
CUSTOMERS
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.
During 1997 and 1996, one customer that is 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.
Revenues from the European market increased to 22% of total revenues in 1997
from 19% in 1996.
FACTORS AFFECTING BUSINESS IN THE PHILIPPINES
While the major part of the Company's operations are carried on in the
Philippines, the Company's headquarters are in the United States and its
customers to date have all been located in North America and Europe. As a
result, the Company is not as affected by economic conditions in the
Philippines as it would be if it depended on revenues from sources internal to
the Philippines. However, such adverse economic factors as inflation,
external debt, negative balance of trade, political pressure to raise salaries
and underemployment may significantly impact the Company.
Certain aspects of the Philippine economy directly affect the Company.
While the political situation currently appears to be stable, business in the
Philippines was significantly disrupted by the political turmoil surrounding
the fall of the Marcos administration in the late 1980s. Further unrest
occurred during the Aquino administration. The Philippines remain vulnerable
to political unrest which could interfere with the Company's operations.
Political instability could also change the present satisfactory legal
environment for the Company through the imposition of restrictions on foreign
ownership, repatriation of funds, adverse labor laws, and the like.
Commencing April 1, 1995, the Philippine operations are conducted through
a wholly-owned subsidiary that has been granted an income tax holiday for a
four-year period. Accordingly, no income taxes will be payable on earnings
from operations of the subsidiary during such period, unless repatriated to
the U.S. Prior to April 1, 1995, as a U.S. corporation engaged in business
operations in the Philippines, the Company had been subject to both U.S. and
Philippine income tax with respect to the Philippine source income derived by
the Company. Under U.S. tax law, the U.S. foreign tax credit was available
(subject to various limitations) to reduce the burden of double taxation on
the Philippine source income of the Company.
The Company funds its operations in the Philippines through the transfer
of United States dollars to the Philippines only as needed and generally does
not maintain any significant amount of funds or monetary assets in Philippine
pesos. Since the Company does not have income generating customers in the
Philippines, the direction of currency flow is largely into the Philippines.
However, to the extent that the Company needs to bring currency out of the
Philippines in the course of its operations, it will be affected by currency
control regulations. Foreign currency or foreign exchange may only be
exported from the Philippines in accordance with the rules and regulations of
the Central Bank of the Philippines. Foreign investments which are made in
the Philippines and are duly registered with the Central Bank or with a
custodian bank duly designated by the foreign investor are entitled to full
and immediate capital repatriation and dividend and interest remittance
privilege without prior Central Bank approval. The Company's investment has
been registered with the Central Bank. However, there can be no assurance
that these regulations may not be altered in the future in a way that would be
unfavorable to the Company.
The Philippines has historically experienced high rates of inflation and
major fluctuations in exchange rate between the Philippine peso and the United
States dollar. Continuing inflation without corresponding devaluation of the
peso against the dollar, or any other increase in value of the peso relative
to the dollar, may have a material adverse effect on the Company's operations
and financial condition. From time to time, the Company has purchased futures
contracts for pesos at fixed prices, in order to ensure a stable cost of
services. In the second half of 1997 and the first part of 1998 these
contracts stabilized prices for the Company's services at a time when the peso
was significantly devalued. As a result, the Company was unable to enjoy the
benefits it would have otherwise received.
The Philippines is subject to relatively frequent earthquakes, volcanic
eruptions, floods and other natural disasters, which may disrupt the Company's
operations. However, the eruption of Mt. Pinatubo, which is 50 miles from
Manila, did not prevent the Company from fulfilling its customer orders,
although it did have to rely more heavily on electronic transmission of data
since the airports were closed, preventing the arrival and shipping of paper
documents and electronic storage disks. The Company has a facility in Cebu
City, which is located on a separate island 350 miles from Manila and which
also may serve as a disaster recovery site. The Company also has facilities
in Sri Lanka and India.
Power outages lasting for periods of as long as eight hours per day have
occurred. The Company's facilities in Manila and Cebu are equipped with
standby generators which have produced electric power during these outages;
however, there can be no assurance that the Company's operations will not be
adversely affected should municipal power production capacity deteriorate
further.
EMPLOYEES
As of February 28, 1998, the Company employed an aggregate of
approximately 50 persons in the United States and the United Kingdom, and
approximately 2,500 persons in the Philippines, Sri Lanka and India.
Employees at the Company's Manila facilities are members of a union. The
Company reached agreement in 1996 on a collective bargaining agreement which
provides for approximately 10% wage increases per annum plus one-half of any
government mandated increases for the five years ended March 31, 2001.
No other of the Company's employees are represented by any labor union.
The Company believes that its relations with its employees are satisfactory.
Production Staff; Recruitment and Training-Philippines
- ----------------------------------------------------------
The Philippines offers a well educated workforce trained in an English
language school system. Economic opportunity in the Philippines is not
commensurate with the level of education in the workforce. The overall
depressed economic conditions and low wage scale permit an educated
professional to enjoy a comfortable standard of living on an income that is
relatively low when compared to that in developed nations.
The Company's staff in the Philippines has a median age of approximately
25. A significant number of employees have college degrees. A substantial
middle management infrastructure, grown both from within the ranks of the
Company and through experienced hires, is in place. These managers are in
charge of departmental responsibilities, including personnel, public
relations, facilities, quality control, programming, systems and development.
The Company maintains a vigorous recruiting, screening and training
program. All applicants are given an extensive battery of written and
practical tests, many developed specifically by the Company, over a two day
period. The Company hires less than 10% of all applicants. Diagnostic tests
and equipment have allowed the Company to hire the brightest people available
rather than focusing solely on typing ability.
Once hired, the Company uses intensive efforts to train its employees and
to ensure that their skills are constantly upgraded. Training is performed
under close supervision by senior personnel. In addition, the Company has an
in-house training program for new employee applicants who have all the
requisite skills, excepting the speed of their performance. The course
consists of approximately three weeks of half-day sessions. Upon satisfactory
completion, full time employment is offered.
The Company seeks to maintain high levels of motivation and retention.
It offers its employees what it believes to be one of the most comprehensive
benefit packages available in the Philippines. This package includes
comprehensive medical insurance, eye care, food subsidies, a subsidized
general store and canteen, tuition credits, and free computer programming
classes. It maintains a modern and well appointed facility. It conducts
aggressive incentive programs tied to performance. It affords to its
employees the opportunity to advance.
Similar conditions and methods are in place at the Company's facilities
in India and Sri Lanka.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's Manila, Philippines premises are occupied under a five-year
lease which expires on December 31, 1998. The premises consist of a four
story, 45,000 square foot building with a separate cafeteria building. The
lease provides for monthly payments of approximately $30,000.
The Company's operations in the Philippines city of Cebu are conducted in
approximately 10,000 square feet of space leased through March 2001,
cancelable at the Company's option, at a monthly rental of approximately
$8,000.
The Company has a lease for a 12,000 square foot office and production
facility located in Hackensack, New Jersey. The lease provides for monthly
rental payments of approximately $16,000 through December 1999. In addition,
the Company leases a 6,000 square foot office and production facility in
California for approximately $5,000 per month. The lease expires February,
2002.
The Company leases its production facility in India and is obligated to
make payments aggregating approximately $150,000 per year for an initial term
of five years.
The Company believes that it maintains adequate fire, theft and liability
insurance for its facilities and that its facilities are adequate for its
present needs.
ITEM 3. LEGAL PROCEEDINGS.
There is no material litigation pending, other than in the ordinary
course of business, to which the Company is a party or of which any of its
property is the subject, except for an action brought by the Equitable Banking
Corporation on December 3, 1997 in a Regional Trial Court in Makati City,
Philippines against the Company. The action seeks to recover approximately
$1,000,000 in connection with certain foreign currency forward contracts.
Although these contracts are presently in dispute, the Company has recorded
this liability, as well as an estimate for contracts scheduled after the date
of this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were voted on at the December 18, 1997 Annual
Meeting of Stockholders. The total shares voted were 1,256,735, adjusted for
a one-for-three reverse stock split which became effective on March 25, 1998.
FOR WITHHELD
--------- --------
ELECTION OF DIRECTORS:
Jack Abuhoff 1,241,560 15,174
Albert Drillick 1,250,299 6,436
E. Bruce Fredrikson 1,250,194 6,541
Barry Hertz 1,247,135 9,599
Martin Kaye 1,250,177 6,557
Morton Mackof 1,245,260 11,474
Todd Solomon 1,245,030 11,704
Stanley Stern 1,250,099 6,636
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol "INOD." On February 28, 1998, there were 101 stockholders of
record of the Company's Common Stock based on information provided by the
Company's transfer agent. Virtually all of the Company's publicly held shares
are held in "street name" and the Company believes the actual number of
beneficial holders of its Common Stock to be approximately 1,500.
The following table sets forth the high and low sales prices on a
quarterly basis for the Company's Common Stock, as reported on Nasdaq, for the
two years ended December 31, 1997, after giving retroactive effect to a
one-for-three reverse stock split on March 25, 1998.
COMMON STOCK
SALE PRICES
1996 HIGH LOW
- -------------- ------------ -------
First Quarter 17-1/4 11-1/16
Second Quarter 13-7/8 10-1/8
Third Quarter 11-1/4 5-13/16
Fourth Quarter 7-1/8 3
1997
- --------------
First Quarter 4-1/2 3-3/16
Second Quarter 3-27/32 1-7/8
Third Quarter 3-3/4 2-1/4
Fourth Quarter 3-9/16 2-1/4
STOCK SPLIT
The Company filed an Information Statement, distributed to stockholders on
March 4, 1998, pursuant to which 56% of stockholders approved a one-for-three
reverse stock split effective on March 25, 1998. The table above and all other
share and per share amounts in this report reflect such split.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payment
of dividends, if any, on the Common Stock is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
REVENUES $20,116,935 $20,536,448 $20,767,405 $14,344,914 $9,619,722
----------- ----------- ----------- ----------- ----------
OPERATING COSTS AND EXPENSES
Direct operating costs 16,007,051 16,783,595 14,044,067 10,764,658 7,003,288
Selling and administrative 5,283,891 4,799,739 4,344,793 2,834,534 1,966,103
Costs resulting from project
Termination - - - 393,195 -
Restructuring costs and
impairment of assets 1,500,000 - - - -
Unrealized loss on foreign
currency contracts 1,400,000 - - - -
Interest expense 85,595 36,383 18,476 7,392 82,375
Interest income (59,384) (123,771) (151,319) (160,689) (89,767)
----------- ----------- ----------- ----------- ----------
Total 24,217,153 21,495,946 18,256,017 13,839,090 8,961,999
----------- ----------- ----------- ----------- ----------
(LOSS) INCOME BEFORE
INCOME TAXES (4,100,218) (959,498) 2,511,388 505,824 657,723
INCOME TAXES 100,000 (357,000) 1,000,000 199,000 215,000
----------- ----------- ----------- ----------- ----------
NET (LOSS) INCOME $(4,200,218) $ (602,498) $ 1,511,388 $ 306,824 $ 442,723
=========== =========== =========== =========== ==========
BASIC (LOSS) INCOME PER SHARE $(2.80) $(.40) $1.02 $.21 $.40
====== ===== ===== ==== ====
DILUTED (LOSS) INCOME PER SHARE $(2.80) $(.40) $.97 $.21 $.40
====== ===== ===== ==== ====
CASH DIVIDENDS PER SHARE - - - - -
====== ===== ===== ==== ====
AS OF DECEMBER 31, 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
WORKING CAPITAL $ 2,091,848 $ 4,774,121 $ 6,247,708 $ 4,972,682 $5,526,467
=========== =========== =========== =========== ==========
TOTAL ASSETS $10,029,247 $12,416,296 $12,538,694 $10,077,049 $9,014,247
=========== =========== =========== =========== ==========
LONG-TERM DEBT $ 79,604 $ 195,960 $ 92,180 $ 191,666 $ -
=========== =========== =========== =========== ==========
STOCKHOLDERS' EQUITY $ 5,254,133 $ 9,477,471 $ 9,747,655 $ 8,327,601 $7,877,512
=========== =========== =========== =========== ==========
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MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
The following discussion should be read in conjunction with the Audited
Financial Statements and related Notes thereto of the Company for the years
ended December 31, 1997, 1996, and 1995 included in Item 7 of this Form
10-KSB.
RESULTS OF OPERATIONS
General
Innodata is a worldwide electronic publishing services company
specializing in high 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, indexing and abstracting, and applications
programming. The Company also offers medical transcription services to
health-care providers through its Statline division.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues decreased 2% to $20,116,935 for the year ended December 31, 1997
compared to $20,536,448 for the similar period in 1996. Revenues from the
European market increased to 22% of total revenues in 1997 from 19% in 1996.
During 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 $16,007,051 for the year ended December
31, 1997 and $16,783,595 for the similar period in 1996, a decrease of 5%.
Direct operating expenses as a percentage of revenues decreased to 80% in 1997
compared to 82% in 1996. The decrease in direct operating expenses in 1997 was
due primarily to the devaluation of the Philippine peso. Direct operating
costs include primarily direct payroll, telecommunications, freight, computer
services, supplies and occupancy.
Selling and administrative expense was $5,283,891 and $4,799,739 for the
years ended December 31, 1997 and 1996, respectively, representing an increase
of 10% in 1997 from 1996. Selling and administrative expense as a percentage
of revenues was 26% in 1997 and 23% in 1996. The dollar increase primarily
reflects the expansion of the Company's sales and marketing efforts. Selling
and administrative expense includes 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.
The Company recognized an unrealized loss of $1,400,000 in connection
with foreign currency contracts which are currently in dispute. The loss
represents the difference between the contract rate for Philippine pesos and
the estimated fair value at December 31, 1997.
The Company did not recognize tax benefits in 1997 for losses incurred in
that year.
The Company incurred net losses of $(4,200,218) in 1997 and $(602,498) in
1996. The 1997 loss was greater than that incurred in 1996 due to the charges
set forth above, no benefit for income taxes and higher overhead.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues decreased 1% to $20,536,448 for the year ended December 31, 1996
compared to $20,767,405 for the similar period in 1995. The decrease in
revenues was due principally to a decrease in volume from existing customers,
net of approximately $846,000 of revenues from International Imaging which was
acquired in January 1996 and the addition of new customers. Revenues from the
European market increased to 19% of total revenues in 1996 from 18% in 1995.
Revenues have been primarily attributable to data entry and conversion
services which accounted for approximately 63% of the Company's revenues in
1996 and 72% of the Company's revenues in 1995. During 1996 and 1995, one
customer comprised of twelve affiliated companies, accounted for 24% and 29%
of the Company's revenues, respectively. No other customer accounted for 10%
or more of the Company's revenues.
Direct operating expenses were $16,783,595 for the year ended December
31, 1996 and $14,044,067 for the similar period in 1995, an increase of 20%.
Direct operating expenses as a percentage of revenues increased to 82% in 1996
compared to 68% in 1995. The increase in direct operating expenses in 1996 was
due to higher fixed costs in the Company's imaging services division of
approximately $700,000, principally resulting from the acquisition of
International Imaging, and increased payroll and related costs in the
Philippines of approximately $1,000,000 resulting principally from a
collective bargaining agreement that became effective on April 1, 1996. In
addition, costs related to telecommunications, occupancy costs and
depreciation in the U.S. based operations increased approximately $800,000.
Selling and administrative expense was $4,799,739 and $4,344,793 for the
years ended December 31, 1996 and 1995, respectively, representing an increase
of 10% in 1996 from 1995. Selling and administrative expense as a percentage
of revenues was 23% in 1996 and 21% in 1995. The dollar increase primarily
reflects the expansion of the Company's management team, and also reflects the
added overhead and sales related expenses of International Imaging acquired
during 1996.
Income tax (benefit) expense as a percentage of pre-tax income was (37)%
in 1996 and 40% in 1995.
Net (loss) income was $(602,498) in 1996 and $1,511,388 in 1995. Net
income was reduced significantly in 1996 due to the increased costs discussed
above with no commensurate increase in revenues.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $1,128,671 and $897,085 was provided by operating activities
for the years ended December 31, 1997 and 1996, respectively, principally
resulting from increased collection of accounts receivable. Net cash of
$1,015,088 and $401,919 was used in investing activities in 1997 and 1996,
respectively, for the purchase of fixed assets in both years, and
additionally, in 1996, $410,646 was used for payments in connection with the
acquisition of International Imaging. These outlays were substantially offset
by the redemption of certain short-term investments in 1996. Net cash of
$240,924 was used in financing activities in 1997 and $35,373 was provided by
financing activities in 1996. In 1996, the Company received proceeds from
short-term borrowings and from the exercise of stock options offset by
payments of long-term debt. In 1997, payments on borrowings exceeded proceeds
from borrowings.
The Company opened its new 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 $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.
The Company has initiated a program to prepare computer systems and
applications for the Year 2000. The Company expects to incur internal staff
costs as well as consulting and other expenses related to infrastructure and
facilities enhancements necessary to prepare the systems for the Year 2000. A
portion of such costs are not likely to be incremental costs to the Company,
but rather will represent the redeployment of existing information technology
resources. The Company is also communicating with customers and suppliers with
whom it conducts business to help identify and resolve the Year 2000 issue. It
is possible that if all aspects of the Year 2000 issues are not adequately
resolved by these parties, the Company's future business operations and, in
turn, its financial position and results of operations could be negatively
impacted. Management has not yet quantified the Year 2000 compliance and other
related expenses, however, management believes these costs will not have a
material affect on its financial position.
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.
ITEM 7. FINANCIAL STATEMENTS.
INNODATA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Reports II-7-8
Consolidated Balance Sheets as of December 31, 1997 and 1996 II-9
Consolidated Statements of Operations for the three years II-10
ended December 31, 1997
Consolidated Statements of Stockholders' Equity for the II-11
three years ended December 31, 1997
Consolidated Statements of Cash Flows for the three years II-12
ended,December 31, 1997
Notes to Consolidated Financial Statements II-13-21
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Innodata Corporation
Brooklyn, New York
We have audited the accompanying consolidated balance sheet of Innodata
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innodata
Corporation and subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year
then ended in conformity with generally accepted accounting principles.
Grant Thornton LLP
Parsippany, New Jersey
March 4, 1998
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Innodata Corporation
Brooklyn, New York
We have audited the accompanying consolidated balance sheet of Innodata
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innodata
Corporation and subsidiaries as of December 31, 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Margolin, Winer & Evens LLP
Garden City, New York
March 14, 1997
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,969,852 $ 2,097,193
Accounts receivable-net of allowance for doubtful
accounts of $195,000 in 1997
and $140,000 in 1996 (Note 10) 3,188,920 3,718,283
Prepaid expenses and other current assets 825,586 1,130,510
Deferred income taxes (Notes 1 and 3) 136,000 220,000
----------- -----------
TOTAL CURRENT ASSETS 6,120,358 7,165,986
FIXED ASSETS-NET (NOTES 1, 2 AND 11) 2,909,619 3,617,939
GOODWILL (NOTES 1 AND 11) 410,076 1,159,946
OTHER ASSETS 589,194 472,425
----------- -----------
TOTAL $10,029,247 $12,416,296
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 122,450 $ 208,298
Accounts payable and accrued expenses 1,507,866 1,279,519
Accrued salaries and wages 641,186 625,479
Estimated loss on foreign currency contracts (Note 6) 1,400,000 -
Taxes, other than income taxes 357,008 278,569
----------- -----------
TOTAL CURRENT LIABILITIES 4,028,510 2,391,865
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 5) 79,604 195,960
----------- -----------
DEFERRED INCOME TAXES (NOTES 1 AND 3) 667,000 351,000
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 6, 7 AND 8)
STOCKHOLDERS' EQUITY (NOTES 6, 7, 8 AND 12):
Common stock, $.01 par value-authorized 20,000,000 shares;
issued 1,521,736 shares 15,217 15,217
Additional paid-in capital 8,870,731 8,855,131
(Deficit) retained earnings (3,449,218) 751,000
----------- -----------
5,436,730 9,621,348
Less: treasury stock - at cost; 26,400 shares
in 1997 and 13,833 shares in 1996 (182,597) (143,877)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,254,133 9,477,471
----------- -----------
TOTAL $10,029,247 $12,416,296
=========== ===========
<FN>
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
REVENUES (NOTE 10) $20,116,935 $20,536,448 $20,767,405
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Direct operating costs 16,007,051 16,783,595 14,044,067
Selling and administrative expenses 5,283,891 4,799,739 4,344,793
Restructuring costs and impairment of assets (Note 11) 1,500,000 - -
Unrealized loss on foreign currency contracts (Note 6) 1,400,000 - -
Interest expense 85,595 36,383 18,476
Interest income (59,384) (123,771) (151,319)
----------- ----------- -----------
TOTAL 24,217,153 21,495,946 18,256,017
----------- ----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (4,100,218) (959,498) 2,511,388
PROVISION FOR INCOME TAXES (BENEFIT) (NOTES 1 AND 3) 100,000 (357,000) 1,000,000
----------- ----------- -----------
NET (LOSS) INCOME $(4,200,218) $ (602,498) $ 1,511,388
=========== =========== ===========
BASIC (LOSS) INCOME PER SHARE (NOTES 1 AND 9) $(2.80) $(.40) $1.02
====== ===== =====
DILUTED (LOSS) INCOME PER SHARE (NOTES 1 AND 9) $(2.80) $(.40) $.97
====== ===== =====
<FN>
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ADDITIONAL UNREALIZED (DEFICIT)
PAID-IN LOSS ON RETAINED TREASURY
SHARES AMOUNT CAPITAL SECURITIES EARNINGS STOCK TOTAL
--------- ------- ----------- ----------- ----------- --------- -----------
JANUARY 1, 1995 1,492,424 $14,924 $ 8,527,302 $ (56,735) $ (157,890) $ - $ 8,327,601
Net income - - - - 1,511,388 - 1,511,388
Unrealized gain on
available-for-sale
securities - - - 52,543 - - 52,543
Purchase of
treasury stock - - - - - (143,877) (143,877)
--------- ------- ----------- ----------- ----------- --------- -----------
DECEMBER 31, 1995 1,492,424 14,924 8,527,302 (4,192) 1,353,498 (143,877) 9,747,655
Net loss - - - - (602,498) - (602,498)
Issuance of
common stock
upon exercise
of stock
options 7,645 76 65,692 - - - 65,768
Issuance of
common stock
as partial
acquisition costs 21,667 217 193,736 - - - 193,953
Warrant costs
for consulting
arrangement - - 68,401 - - - 68,401
Redemption
of available-for-
sale securities - - - 4,192 - - 4,192
--------- ------- ----------- ----------- ----------- --------- -----------
DECEMBER 31, 1996 1,521,736 15,217 8,855,131 - 751,000 (143,877) 9,477,471
Net loss - - - - (4,200,218) - (4,200,218)
Warrant costs
for consulting
arrangement - - 15,600 - - - 15,600
Purchase of
treasury stock - - - - - (38,720) (38,720)
--------- ------- ----------- ----------- ----------- --------- -----------
DECEMBER 31, 1997 1,521,736 $15,217 $ 8,870,731 $ - $(3,449,218) $(182,597) $ 5,254,133
========= ======= =========== =========== =========== ========= ===========
<FN>
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ----------- -----------
OPERATING ACTIVITIES:
Net (loss) income $(4,200,218) $ (602,498) $ 1,511,388
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 1,321,555 1,372,731 972,669
Restructuring costs and impairment of assets 1,500,000 - -
Unrealized loss on foreign currency contracts 1,400,000 - -
Deferred income taxes 400,000 (150,000) 240,000
Changes in operating assets and liabilities:
Accounts receivable 529,363 1,380,498 (2,299,781)
Prepaid expenses and other current assets 304,924 (479,251) (462,274)
Other assets (116,769) (271,413) (46,957)
Accounts payable and accrued expenses (104,330) 187,764 (103,117)
Accrued salaries and wages 15,707 100,991 211,029
Taxes, other than income taxes 78,439 84,457 93,727
Income taxes payable - (726,194) 537,938
------------ ----------- -----------
Net cash provided by operating activities 1,128,671 897,085 654,622
------------ ----------- -----------
INVESTING ACTIVITIES:
Expenditures for fixed assets (1,015,088) (1,231,273) (1,193,973)
Payments in connection with acquisition - (410,646) -
Short-term investments - 1,240,000 -
------------ ----------- -----------
Net cash used in investing activities (1,015,088) (401,919) (1,193,973)
------------ ----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings 577,000 626,014 -
Proceeds from exercise of stock options - 65,768 -
Purchase of treasury stock (38,720) - (143,877)
Payments of borrowings (779,204) (656,409) (111,986)
Redemption of preferred stock - - (2,000)
------------ ----------- -----------
Net cash (used in) provided by financing activities (240,924) 35,373 (257,863)
------------ ----------- -----------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (127,341) 530,539 (797,214)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 2,097,193 1,566,654 2,363,868
------------ ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 1,969,852 $ 2,097,193 $ 1,566,654
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 85,595 $ 35,238 $ 14,963
Income taxes - 922,789 222,062
<FN>
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ---------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION - Innodata Corporation and
subsidiaries (the "Company") performs data entry, data conversion, scanning,
imaging and document management services, indexing and abstracting, and
typesetting services tailored to customer requirements. The Company also
offers medical transcription services to health care providers. The Company's
services are principally performed in production facilities located in the
Philippines, Sri Lanka, India and the United States. The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly-owned. All intercompany transactions and balances
have been eliminated in consolidation.
On March 25, 1998, a one-for-three reverse stock split becomes effective.
All share and per share amounts have been restated to reflect such stock
split.
USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION - Revenue is recognized in the period in which the
service is performed.
WORK-IN-PROCESS - Work-in-process, included in other current assets,
consists of actual labor and certain other costs incurred for uncompleted and
unbilled projects.
FOREIGN CURRENCY - The functional currency for the Company's production
operations located in the Philippines, India and Sri Lanka is U.S. dollars.
As such, transactions denominated in Philippine pesos, Indian and Sri Lanka
rupees were translated to U.S. dollars at rates which approximate those in
effect on transaction dates. Monetary assets and liabilities denominated in
foreign currencies at December 31, 1997 and 1996 were translated at the
exchange rate in effect as of those dates. In 1997, the Company recognized a
gain of $125,000 resulting from such foreign currency translation. Exchange
gains and losses in 1996 and 1995 resulting from such transactions were
immaterial.
STATEMENT OF CASH FLOWS - For financial statement purposes (including
cash flows), the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents. During 1996, the Company leased equipment under capital leases
for approximately $237,000. Supplemental disclosure of non-cash investing and
financing activities is as follows:
1996
Acquisition costs $ 563,771
Common stock issued (153,125)
---------
Payments in connection with acquisition $ 410,646
=========
DEPRECIATION - Depreciation is provided on the straight-line method over
the estimated useful lives of the related assets which are as follows:
ESTIMATED USEFUL
CATEGORY LIVES
Equipment 3-5 years
Furniture and fixtures 10 years
Leasehold improvements are amortized on the straight-line basis over the
shorter of their estimated useful lives or the lives of the leases.
INCOME TAXES - Deferred taxes are determined based on the difference
between the financial statement and tax basis of assets and liabilities, using
enacted tax rates, as well as any net operating loss or tax credit
carryforwards expected to reduce taxes payable in future years.
GOODWILL - Goodwill arising from acquisition costs exceeding net assets
acquired is being amortized on a straight-line basis over a 15 year period.
Management assesses the recoverability of the remaining unamortized costs
based principally upon a comparison of the carrying value of the asset to the
undiscounted expected future cash flows to be generated by the asset whenever
events or changes in circumstances indicate that the carrying amount may not
be recoverable. If management concludes that the asset is impaired, its
carrying value is adjusted to its net realizable value. See Note 11.
ACCOUNTING FOR STOCK-BASED COMPENSATION - The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," which became effective in
1996. As permitted by SFAS No. 123, the Company has elected to continue to
account for employee stock options under APB No. 25, "Accounting for Stock
Issued to Employees."
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has estimated the fair
value of financial instruments using available market information and other
valuation methodologies in accordance with SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." Management of the Company believes that
the fair value of financial instruments for which estimated fair value has not
been specifically presented is not materially different than the related
carrying value. Determinations of fair value are based on subjective data and
significant judgment relating to timing of payments and collections and the
amounts to be realized. Different assumptions and/or estimation methodologies
might have a material effect on the fair value estimates. Accordingly, the
estimates of fair value are not necessarily indicative of the amounts the
Company would realize in a current market exchange.
(LOSS) INCOME PER SHARE - In 1997, the Company adopted SFAS No. 128,
"Earnings Per Share," which requires public companies to present basic
earnings per share and, if applicable, diluted earnings per share. In
accordance with SFAS No.128, all comparative periods have been restated as of
December 31, 1997. Basic earnings per share is based on the weighted average
number of common shares outstanding without consideration of potential common
stock. Diluted earnings per share is based on the weighted average number of
common and potential common shares outstanding. The calculation takes into
account the shares that may be issued upon exercise of stock options, reduced
by the shares that may be repurchased with the funds received from the
exercise, based on average prices during the year. In addition, earnings
per share have been restated to reflect a one-for-three reverse stock split
that is effective on March 25, 1998.
2. FIXED ASSETS
Fixed assets, stated at cost less accumulated depreciation and
amortization, consist of the following:
DECEMBER 31, 1997 1996
Equipment $6,095,004 $6,092,985
Furniture and fixtures 372,566 375,465
Leasehold improvements 472,574 401,987
---------- ----------
Total 6,940,144 6,870,437
Less accumulated depreciation
and amortization 4,030,525 3,252,498
---------- ----------
$2,909,619 $3,617,939
========== ==========
As of December 31, 1997 and 1996, the net book value of fixed assets
located at the Company's production facilities in the Philippines, India and
Sri Lanka was approximately $1,600,000 and $1,513,000, respectively. In
addition, equipment financed by capital leases has a net book value of
$228,000 at December 31, 1997.
3. INCOME TAXES
The significant components of the provision for (benefit from) income
taxes are as follows:
1997 1996 1995
Current income tax expense (benefit):
Foreign $ - $ - $ 10,000
Federal (300,000) (159,000) 535,000
State and local - (48,000) 215,000
--------- --------- ----------
(300,000) (207,000) 760,000
Deferred income tax expense (benefit) 400,000 (150,000) 240,000
--------- --------- ----------
Provision for (benefit from) income taxes $ 100,000 $(357,000) $1,000,000
========= ========= ==========
Reconciliation of the U.S. statutory rate with the Company's effective
tax rate is summarized as follows:
1997 1996 1995
Federal statutory rate (34.0)% (34.0)% 34.0%
Effect of:
Valuation allowance 34.0 - -
State income taxes (net of federal
tax benefit) - (5.4) 6.1
Other 2.4 2.2 (0.3)
----- ----- ----
Effective rate 2.4% (37.2)% 39.8%
===== ====== ====
As of December 31, 1997 and 1996, the composition of the Company's net
deferred taxes is as follows:
1997 1996
Deferred income tax assets:
Allowances not currently deductible $ 247,000 $ 105,000
Expenses not deductible until paid 161,000 115,000
Net operating loss carryforward 500,000 700,000
--------- -----------
908,000 920,000
Less: valuation allowance (772,000) -
--------- -----------
136,000 920,000
--------- -----------
Deferred income tax liabilities:
Foreign source income, not taxable
unless repatriated (415,000) (815,000)
Depreciation and amortization (252,000) (236,000)
--------- -----------
(667,000) (1,051,000)
--------- -----------
Net deferred income tax liability $(531,000) $ (131,000)
========= ===========
The valuation allowance in 1997 reduces total deferred tax assets to an
amount management believes will likely be realized. The Company's net
operating loss carryforward for federal income tax purposes of approximately
$1,500,000 expires in 2012. These net operating losses may be limited to
annual use based on IRS regulations.
4. ACQUISITION
On January 2, 1996, the Company acquired certain assets of International
Imaging, Inc. ("II"). II is located in Azusa, California and provides imaging
and document management systems and scanning/conversion services. The
purchase price consisted of $40,000 cash and 16,667 shares of the Company's
restricted common stock. The Company also paid approximately $300,000 of II's
outstanding lease obligations.
5. LONG-TERM DEBT
Long-term debt is as follows:
1997 1996
Equipment leases, at 9.6% to 13.5% $226,335 $365,846
Acquisition notes - subordinated, at prime - 91,667
-------- --------
226,335 457,513
Less: deferred interest 24,281 53,255
-------- --------
Total 202,054 404,258
Less: current portion of long-term debt 122,450 208,298
-------- --------
Long-term debt $ 79,604 $195,960
======== ========
Aggregate maturities of long-term debt are as follows:
1998 $138,960
1999 61,306
2000 19,298
2001 6,771
--------
$226,335
========
6. COMMITMENTS AND CONTINGENT LIABILITIES
LINE OF CREDIT - 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 presently unused.
LEASES - The Company is obligated under various operating lease
agreements for office and production space. The agreements contain escalation
clauses and requirements that the Company pay taxes, insurance and maintenance
costs. The lease agreements for production space in the Philippines, which
expire through 2001, contain provisions pursuant to which the Company may
cancel the leases at any time. The annual rental for the leased space in the
Philippines is approximately $500,000. For the years ended December 31, 1997,
1996 and 1995, rent expense totaled approximately $940,000, $825,000 and
$500,000, respectively.
At December 31, 1997, future minimum annual rental commitments on
noncancellable leases are as follows:
1998 $ 357,000
1999 362,000
2000 170,000
2001 173,000
2002 40,000
----------
$1,102,000
==========
EMPLOYMENT AGREEMENTS - The Company entered into a three-year
employment agreement on August 19, 1997 pursuant to which a member of the
Company's Board is to serve as President and CEO of the Company. He will be
paid at the rate of $200,000 per annum with any bonuses and future increases
at the discretion of the Board of Directors. In addition, each December 31
during the term of the agreement he will receive 10,333 options to purchase
common stock of the Company at then prevailing market prices. In consideration
of the signing of the agreement he was granted five year options as follows:
10,000 options at $3.00 per share; 16,666 at $6.00; 23,333 at $9.00; 30,000 at
$12.00; and 33,333 at $21.00. The options are exercisable upon the earliest
to occur of (i) ninety days before the expiration of the five year term; (ii)
the date the market price is at least $7.50 for ten consecutive trading days;
or (iii) in the event of a sale of the Company where a third party acquires
more than 50% of the Company.
The Company had an employment agreement with its former President and
CEO. This agreement was replaced by a new three-year agreement expiring
September 30, 2000 that provides for a salary of $100,000 for the year ended
September 30, 1998 and $75,000 per annum thereafter. He will serve as Vice
Chairman of the Board and in executive capacities as designated by the CEO or
the Board of Directors.
OTHER COMMITMENTS - The Company has a commitment to purchase a perpetual
license for certain production process software for cash totaling $70,000 and
11,666 shares of the Company's common stock. Payment is contingent upon the
successful completion and testing of the software, expected to occur during
1998.
As of December 31, 1997, the Company's wholly-owned subsidiary has
foreign currency forward contracts to purchase $2,600,000 in Philippine pesos
on various dates through June 1998. These contracts, as well as certain
foreign currency contracts that became due during 1997 and remain unpaid, have
an estimated fair value at December 31, 1997 of approximately $1,400,000 less
than their contractual amount. The bank has brought an action in the
Philippines to recover such amounts. While such contracts are presently in
dispute, the Company recognized the total unrealized loss in 1997.
Employees at the Company's Manila facilities voted to join a union. The
Company has a collective bargaining agreement with the rank and file employees
at its Manila facility which provides for approximately 10% wage increases per
annum plus one-half of any government mandated increases through March 31,
2001.
PHILIPPINE PENSION REQUIREMENT - The Philippine government enacted
legislation requiring businesses to provide a lump-sum pension payment to
employees working at least five years and who are employed by the Company at
age 60. Those eligible employees are to receive approximately 59% of one
month's pay for each year of employment with the Company. The terms of the
collective bargaining agreement provide benefits similar to the government.
Based on actuarial assumptions and calculations in accordance with SFAS No.
87, "Employers' Accounting for Pensions," the liability for the future payment
is insignificant at December 31, 1997. Under the legislation, the Company is
not required to fund future costs, if any.
7. CAPITAL STOCK
COMMON STOCK AND REDEEMABLE WARRANTS - In August and September 1993 the
Company sold pursuant to a public offering 563,500 shares of its common stock
and certain warrants ("Redeemable Warrants") and realized net proceeds after
all expenses of the offering of $6,752,585. The Redeemable Warrants expired
on August 9, 1997.
In connection with the offering, the Company sold to the underwriter for
nominal consideration warrants to purchase up to 49,295 shares of common stock
at $23.43 per share through August 9, 1998. The underwriter's warrants contain
piggy-back registration rights for a period of seven years with respect to the
underlying securities and a demand registration right for a period of five
years for two registration filings, one of which is at the Company's expense.
PREFERRED STOCK - The Board of Directors is authorized to fix the terms,
rights, preferences and limitations of the preferred stock and to issue the
preferred stock in series which differ as to their relative terms, rights,
preferences and limitations. During 1995, the Company redeemed its Series A
and Series B preferred stock for an aggregate consideration of $2,000.
COMMON STOCK RESERVED - At December 31, 1997, the Company reserved for
issuance 767,948 shares of its common stock as follows: (a) 701,987 shares
pursuant to the Company's Stock Option Plans (including 120,333 options issued
to the Company's Chairman and its President which were not granted under the
plans); (b) 49,295 shares issuable upon exercise of underwriter's warrants;
and (c) 16,666 shares issuable upon exercise of warrants issued to
consultants.
8. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company adopted, with stockholder approval, 1993, 1994, 1995 and 1996
Stock Option Plans (the "1993 Plan," "1994 Plan," "1994 DD Plan," "1995 Plan"
and the "1996 Plan") which provide for the granting of options to purchase not
more than an aggregate of 87,500, 105,000, 17,500, 200,000 and 166,666 shares
of common stock, respectively, subject to adjustment under certain
circumstances. Such options may be incentive stock options ("ISOs") within
the meaning of the Internal Revenue Code of 1986, as amended, or options that
do not qualify as ISOs ("Non-Qualified Options").
The option exercise price per share may not be less than the fair market
value per share of common stock on the date of grant (110% of such fair market
value for an ISO, if the grantee owns stock possessing more than 10% of the
combined voting power of all classes of the Company's stock). Options may be
granted under the Stock Option Plan to all officers, directors and employees
of the Company and, in addition, Non-Qualified Options may be granted to other
parties who perform services for the Company. No options may be granted under
the 1993 Plan after April 30, 2003, under the 1994 Plan and 1994 DD Plan,
after May 19, 2004, under the 1995 Plan, after May 16, 2005 and under the 1996
Plan, after July 8, 2006.
The Plans may be amended from time to time by the Board of Directors of
the Company. However, the Board of Directors may not, without stockholder
approval, amend the Plans to increase the number of shares of common stock
which may be issued under the Plans (except upon changes in capitalization as
specified in the Plans), decrease the minimum exercise price provided in the
Plans or change the class of persons eligible to participate in the Plans.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation." Accordingly, no compensation expense has been recognized for
stock options granted to employees. Had compensation cost for the Company's
stock option grants been determined based on the fair value at the grant date
for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS No.
123, the Company's net loss would have been $(4,359,807), or $(2.90) per
share, in 1997, $(738,987), or $(.49) per share, in 1996 and net income would
have been $1,496,341, or $.96 per share, diluted, in 1995. The fair value of
options at date of grant was estimated using the Black-Scholes pricing model
with the following weighted average assumptions: expected life of four years;
risk free interest rate of 6.4% in 1997 and 1996, and 6.2% in 1995; expected
volatility of 40%; and a zero dividend yield. The effects of applying SFAS
No. 123 in this disclosure are not indicative of future disclosures. SFAS No.
123 does not apply to awards prior to 1995.
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED WEIGHTED FAIR
PER SHARE REMAINING AVERAGE AVERAGE VALUE,
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE DATE OF
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE GRANT
---------------- ------------ ----------- --------- ----------- --------- ---------
Balance 1/1/95 $ 7.89 - 9.75 140,121 3 $ 8.22
$ 12.60 - 17.85 44,200 3 $ 14.76
-----------
184,321 47,930 $ 10.98
==========
Canceled $ 7.89 - 13.89 (8,091)
Granted $ 10.14 - 13.89 91,516 4 $ 11.73 $ 4.71
-----------
Balance 12/31/95 $ 7.89 - 9.75 132,696 2 $ 8.25
$ 10.14 - 17.85 135,050 2 $ 12.93
-----------
267,746 120,098 $ 10.38
==========
Canceled $ 9.03 (166)
Granted $ 6.93 - 11.79 29,666 4 $ 9.18 $ 3.66
Exercised $ 7.89 - 9.03 (7,646)
-----------
Balance 12/31/96 $ 6.93 - 9.75 138,717 2 $ 8.13 111,513 $ 8.88
$ 10.14 - 17.85 150,883 2 $ 12.69 89,157 $ 13.17
----------- ----------
289,600 200,670
==========
Canceled $ 7.89 - 13.89 (48,883)
Granted $ 3.00 - 6.00 100,000 5 $ 3.63 $ 1.26
Granted $ 9.00 - 21.00 86,666 5 $ 13.44 $ .18
-----------
Balance 12/31/97 $ 3.00 - 9.75 246,192 4 $ 6.42 115,969 $ 8.16
$ 10.14 - 21.00 181,191 3 $ 14.10 93,996 $ 12.96
----------- ----------
427,383 209,965
============ ==========
The majority of options granted prior to 1997 become exercisable
one-third on each of the first three anniversary dates. Option grants in 1997
become exercisable the earlier of (i) ninety days before the expiration of the
five year term; (ii) the date the market price is at least $7.50 for ten
consecutive trading days; or (iii) in the event of a sale of the Company where
a third party acquires more than 50% of the Company.
WARRANTS
In connection with a consulting agreement on December 18, 1995, the
Company issued a warrant to purchase 16,666 shares at a price of $11.44 per
share. The warrant is exercisable commencing December 18, 1996 and expires in
2000.
9. (LOSS) INCOME PER SHARE
1997 1996 1995
Net (loss) income $(4,200,218) $ (602,498) $1,511,388
=========== ========== ==========
Weighted average common
shares outstanding 1,501,043 1,503,196 1,482,824
Dilutive effect of outstanding
warrants and options - - 75,172
----------- ---------- ----------
Adjusted for dilutive computation 1,501,043 1,503,196 1,557,996
=========== ========== ==========
Basic (loss) income per share $(2.80) $(.40) $1.02
====== ===== =====
Diluted (loss) income per share $(2.80) $(.40) $.97
====== ===== ====
Reference is made to Notes 7 and 8 with respect to options and warrants
That would have been dilutive in 1997 and 1996 had there not been a loss in
Those years.
10. REVENUES AND ACCOUNTS RECEIVABLE
During 1997, 1996 and 1995, one customer that is comprised of twelve
affiliated companies, accounted for 14%, 24% and 29% of the Company's
revenues, respectively. No other customer accounted for 10% or more of the
Company's revenues. Further, in 1997, 1996 and 1995, export revenues, all of
which were derived from European customers, accounted for 22%, 19% and 18%,
respectively, of total revenues.
A significant amount of the Company's revenues are derived from customers
in the publishing industry. Accordingly, the Company's accounts receivable
generally include significant amounts due from such customers.
11. RESTRUCTURING COSTS AND IMPAIRMENT OF ASSETS
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 $325,000, 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 $475,000.
12. SUBSEQUENT EVENT
The Company filed an Information Statement, distributed to stockholders
on March 4, 1998, pursuant to which 56% of stockholders approved a
one-for-three reverse stock split effective on March 25, 1998. All share and
per share amounts have been restated to reflect such split.
ITEM 8. CHANGE IN ACCOUNTANTS.
Margolin, Winer & Evens LLP ("MWE") was the principal auditor of the
Company for each of the three years in the period ended December 31, 1996. On
November 11, 1997 the Company and MWE agreed that MWE would not serve as
principal accountant for the year ended December 31, 1997.
MWE reports on the financial statements of the Company for the Company's
fiscal years ended December 31, 1996 and 1995 contained no adverse opinion,
disclaimer of opinion, modification, or qualification. During the two years
ended December 31, 1996 and the interim period through November 11, 1997,
there were no disagreements with MWE on any matter of accounting principles
and practices, financial statement disclosure, or audit scope and procedure,
which disagreement, if not resolved to the satisfaction of MWE, would have
caused it to make reference to the subject matter of the disagreement in
connection with its reports.
On November 12, 1997, the Company selected Grant Thornton LLP as its
auditor for the fiscal year ended December 31, 1997.
------
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
NAME AGE POSITION
- ----------------------- --- -----------------------------------------------
Barry Hertz 48 Chairman of the Board of Directors
Todd Solomon 36 Vice Chairman of the Board of Directors and
Consultant
Jack Abuhoff 36 President, Chief Executive Officer and Director
Martin Kaye 50 Executive Vice President, Chief Financial
Officer, Secretary and Director
William Schieffelin 49 Vice President - Business Development
Stephen Agress 36 Vice President - Finance
Jurgen Tanpho 33 Vice President - Operations
Dr. Albert Drillick 52 Director
Dr. E. Bruce Fredrikson 60 Director
Morton Mackof 50 Director
Stanley Stern 47 Director
BARRY HERTZ has been Chairman since 1988 and Chief Executive Officer of
the Company until August 1995. He founded Track Data Corporation ("Track") in
1981. He was Track's sole stockholder and Chief Executive Officer until its
merger (the "Merger") on March 31, 1996 with Global Market Information, Inc.
("Global"), a public company co-founded by Mr. Hertz, who was its Chairman and
Chief Executive Officer. Upon consummation of the Merger, Global changed its
name to Track Data Corporation ("TDC"). Mr. Hertz holds a B.S. degree in
mathematics from Brooklyn College (1971) and an M.S. degree in computer
science from New York University (1973).
TODD SOLOMON has been Vice Chairman and consultant to the Company since
his resignation as President and CEO on September 15, 1997. He served as
President and a Director of the Company since its founding by him in 1988. He
had been Chief Executive Officer since August 1995. Mr. Solomon was President
of Ruck Associates, an executive recruiting firm from 1986 until 1987. Mr.
Solomon holds an A.B. in history and physics from Columbia University (1986).
He was also a director of TDC until his resignation in December 1997.
JACK ABUHOFF was retained as President and CEO effective September 15,
1997. He has been a Director of the Company since its founding. From 1995 to
1997 he was Chief Operating Officer of CRC, an international systems
integration and outsourcing firm. From 1992 to 1994, he was employed by
Chadbourne & Parke, engaged in Sino-American technology joint ventures. He
practiced international corporate law with White & Case from 1986 to 1992. He
holds an A.B. degree from Columbia College (1983) and a J.D. degree from
Harvard Law School (1986).
MARTIN KAYE has been Chief Financial Officer of the Company since October
1993 and was elected Vice President - Finance in August 1995 and was elected
Executive Vice President in March 1998. He has been a Director since March
1995. He is a certified public accountant and serves as Vice President of
Finance and a Director of TDC. Mr. Kaye had been an audit partner with
Deloitte & Touche for more than five years until his resignation in 1993. Mr.
Kaye holds a B.B.A. in accounting from Baruch College (1970).
WILLIAM SCHIEFFELIN was elected Vice President - Business Development in
March 1998. He joined the Company in July 1996. Prior thereto, he was employed
by the Research Institute of America Group for seven years, serving most
recently as Vice President, Strategic Alliances. Mr. Schieffelin holds a B.A.
from Baylor University (1970) and a J.D. degree from the University of Texas
School of Law (1973).
STEPHEN AGRESS was elected Vice President - Finance in March 1998. He
served as Corporate Controller since joining the Company in August 1995. Mr.
Agress is a certified public accountant and had been a senior audit manager
with Deloitte & Touche for more than five years prior to his resignation in
1995. Mr. Agress holds a B.S. in accounting from Yeshiva University (1982).
JURGEN TANPHO was elected Vice President - Operations in March 1998. He
served in various management capacities since joining the Company in 1991,
most recently in the position of Assistant to the President of Manila
Operations. He holds a B.S. degree in industrial engineering from the
University of the Philippines (1981).
DR. ALBERT DRILLICK has been a Director of the Company since 1990. He
has served as a director of applications and senior systems analyst for TDC
for more than the past five years. He holds a Ph.D. degree in mathematics
from New York University Courant Institute (1971).
DR. E. BRUCE FREDRIKSON has been a Director of the Company since August
1993. He is currently a professor of finance at Syracuse University School of
Management where he has taught since 1966 and has previously served as
chairman of the finance department. Dr. Fredrikson has a B.A. in economics
from Princeton University and a M.B.A. and a Ph.D. in finance from Columbia
University. He is a director of Eagle Finance Corp., a company which acquires
and services non-prime automobile installment sales contracts. He is also an
independent general partner of Fiduciary Capital Partners, L.P. and Fiduciary
Capital Pension Partners, L.P. He is also a director of TDC.
MORTON MACKOF has been a Director of the Company since April 1993. He is
President and CEO of Third Millennium Technology Inc., a company involved in
information technology consulting and software development. He had been
executive vice president of Track since February 1991 and was elected its
President in December 1994, and since the Merger served as President of TDC.
He resigned as President in November 1996. From 1986 to 1991, he was
president of Medical Leasing of America, Inc. From 1981 to 1986 he was vice
president of sales with Fonar Corp. He holds a B.S. degree in electrical
engineering from Rensselaer Polytechnic Institute (1970) and did graduate work
in computer science. He is also a director of TDC.
STANLEY STERN has been a Director of the Company since August 1988. He
was chief operating officer of Track, and in predecessor positions, for more
than five years and since the Merger was Executive Vice President of TDC until
his resignation in December 1996. Mr. Stern holds a B.B.A. from Baruch
College (1973). He was also a director of TDC until his resignation in
September 1997.
There are no family relationships between or among any directors or
officers of the Company. A.S. Goldmen & Co., Inc., the underwriter of the
Company's initial public offering of its common stock, is entitled to
designate one member of the Board of Directors until August 9, 1998. No such
member has been elected to date. Directors are elected to serve until the
next annual meeting of stockholders and until their successors are elected and
qualified. Officers serve at the discretion of the Board.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Company believes that during the period from January 1, 1997 through
December 31, 1997 all officers, directors and greater than ten-percent
beneficial owners complied with Section 16(a) filing requirements.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
paid by the Company for services to the Company during the three fiscal years
ended December 31, 1997 to those executive officers whose aggregate cash and
cash equivalent compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------- NUMBER OF
NAME AND PRINCIPAL CALENDAR STOCK OPTIONS
POSITION YEAR SALARY BONUS AWARDED
Jack Abuhoff 1997 $ 37,500 $ - 114,500
President, CEO since
September 1997
Barry Hertz 1997 $ 50,000 $ - 13,333
Chairman 1996 50,000 - -
1995 - - 15,000
Todd Solomon 1997 $ 209,166 $ - 20,333
President, CEO through 1996 231,000 - 10,333
September 1997, Vice 1995 222,814 - 10,333
Chairman of the Board
and Consultant thereafter
The above compensation does not include certain insurance and other personal
benefits, the total value of which does not exceed as to any named officer,
the lesser of $50,000 or 10% of such person's cash compensation. The Company
has not granted any stock appreciation rights nor does it have any "long-term
incentive plans," other than its stock option plans.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
PERCENT OF EXPIR-
NUMBER TOTAL OPTIONS EXERCISE ATION
OF GRANTED TO PRICE EXPIR-
OPTIONS EMPLOYEES IN PER ATION
NAME GRANTED FISCAL YEAR SHARE DATE
Jack Abuhoff 114,500 61% * 9/2002
Barry Hertz 13,333 7% $ 3.00 12/2002
Todd Solomon 20,333 11% $ 3.00 10/2002
* 11,166 @ $3.00; 16,666 @ $6.00; 23,333 @ $9.00; 30,000 @ $12.00; and
33,333 @ $21.00
The options become exercisable the earlier of (i) ninety days before the
expiration of the five year term; (ii) the date the market price is at least
$7.50 for ten consecutive trading days; or (iii) in the event of a sale of the
Company where a third party acquires more than 50% of the Company.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR;
FISCAL YEAR END OPTION VALUES
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT IN-THE- MONEY
SHARES FISCAL YEAR OPTIONS AT
ACQUIRED END FISCAL YEAR
ON EXERCISABLE/ END EXERCISABLE/
NAME EXERCISE UNEXERCISABLE UNEXERCISABLE
Jack Abuhoff None 6,183/114,500 $-/$-
Barry Hertz None 32,000/18,333 $-/$-
Todd Solomon None 61,366/30,666 $-/$-
DIRECTORS COMPENSATION
Dr. E. Bruce Fredrikson and Jack Abuhoff were compensated at the rate of
$1,250 and $833 per month, respectively, plus out-of-pocket expenses for each
meeting attended. No other director is compensated for his services as
director. Further, Messrs. Fredrikson and Abuhoff received options to
purchase 2,333 and 1,166 shares, respectively, in 1997. In December 1997,
Stanley Stern replaced Jack Abuhoff as an independent director and is
compensated at the rate of $833 per month.
EMPLOYMENT AGREEMENTS
The Company entered into a three-year employment agreement with Jack
Abuhoff on August 19, 1997 pursuant to which Mr. Abuhoff serves as President
and CEO of the Company. Mr. Abuhoff will be compensated at the rate of
$200,000 per annum with any bonuses and future increases at the discretion of
the Board of Directors. In addition, each December 31 during the term of the
agreement Mr. Abuhoff will receive 10,333 options to purchase common stock of
the Company at then prevailing market prices. In consideration of the signing
of the agreement Mr. Abuhoff was granted five year options as follows: 10,000
options at $3.00 per share; 16,666 at $6.00; 23,333 at $9.00; 30,000 at
$12.00; and 33,333 at $21.00. The options are exercisable upon the earliest
to occur of (i) ninety days before the expiration of the five year term; (ii)
the date the market price is at least $7.50 for ten consecutive trading days;
or (iii) in the event of a sale of the Company where a third party acquires
more than 50% of the Company.
The Company had an employment agreement with Todd Solomon to serve as its
President and CEO. The agreement was to expire on September 30, 1999. Mr.
Solomon's annual compensation consisted of $231,000 plus a bonus of up to an
additional 15% based on performance criteria established by the Board of
Directors. Further, he was to receive options to purchase 10,333 shares in
each year and is eligible to receive up to an additional 10,000 shares in each
year based on performance, as determined by the Board of Directors. This
agreement was replaced by a three-year employment agreement with the Company
expiring September 30, 2000 that provides for a salary of $100,000 for the
year ended September 30, 1998 and $75,000 per annum thereafter. Mr. Solomon
will serve as Vice Chairman of the Board and in executive capacities as
designated by the CEO or the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of February 28, 1998 information
regarding the beneficial ownership of the Company's Common Stock based upon
the most recent information available to the Company for (i) each person known
by the Company to own beneficially more than five (5%) percent of the
Company's outstanding Common Stock, (ii) each of the Company's officers and
directors, and (iii) all officers and directors of the Company as a group.
Unless otherwise indicated, each stockholder's address is c/o Company, 95
Rockwell Place, Brooklyn, NY 11217.
SHARES OWNED
BENEFICIALLY (1)
AMOUNT
AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
Track Data Corporation (2) 214,748 14.4%
Barry Hertz (3) 249,548 16.3%
Todd Solomon (4) 241,349 15.5%
Martin Kaye (5) 20,166 1.3%
Jack Abuhoff (7) 6,183 *
Albert Drillick (7) 2,191 *
Dr. E. Bruce Fredrikson (6)
Syracuse University
School of Management
Syracuse, NY 13244 11,500 *
Morton Mackof (7) 2,191 *
Stanley Stern (7) 2,191 *
Heartland Advisors, Inc.
790 N. Milwaukee Street
Milwaukee, WI 53202 148,333 9.9%
All Officers and Directors
as a Group (8 persons)
(2)(3)(4)(5)(6)(7) 535,319 32.9%
* Less than 1%.
1. Except as noted otherwise, all shares are owned beneficially and of
record. Includes shares pursuant to options presently exercisable or which
are exercisable within 60 days. Based on 1,495,336 shares outstanding.
2. Consists of 214,748 shares owned by Track Data Corporation, which is
majority owned by Mr. Hertz.
3. Includes 214,748 shares owned by Track Data Corporation, which is
majority owned by Mr. Hertz, 2,800 shares held in a pension plan for the
benefit of Mr. Hertz and currently exercisable options to purchase 32,000
shares of Common Stock.
4. Includes currently exercisable options to purchase 61,366 shares of
Common Stock.
5. Includes currently exercisable options to purchase 16,833 shares of
Common Stock.
6. Includes currently exercisable options to purchase 8,166 shares of
Common Stock.
7. Consists of shares issuable upon exercise of currently exercisable
options granted under the Company's Stock Option Plans.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no material related party transactions.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits which are indicated as being included in previous filings are
incorporated herein by reference.
EXHIBIT DESCRIPTION FILED AS EXHIBIT
- ------- ------------------------------------------------ ---------------------------------------------------------------
3.1 Restated Certificate of Incorporation Exhibit 3.1 to Form SB-2 Registration Statement No. 33-62012
3.2 By-Laws Exhibit 3.2 to Form SB-2 Registration Statement No. 33-62012
4.2 Specimen of Common Stock certificate Exhibit 4.2 to Form SB-2 Registration Statement No. 33-62012
10.1 1994 Stock Option Plan Exhibit A to Definitive Proxy dated August 9, 1994
10.2 Contract of Lease with JM and Company, Inc. Exhibit 10.2 to Form 10-KSB for year ended December 31, 1993
10.3 Contract of Lease with Elcado Realty Corporation Exhibit 10.3 to Form SB-2 Registration Statement No. 33-62012
10.4 1993 Stock Option Plan Exhibit 10.4 to Form SB-2 Registration Statement No. 33-62012
10.5 Form of Indemnity Agreement with Directors Exhibit 10.5 to Form SB-2 Registration Statement No. 33-62012
10.6 Employment Agreement dated August 24, 1995 Exhibit 10.6 to Form 10-QSB for the Quarter ended September 30,
with Todd Solomon 1995
10.7 1994 Disinterested Directors Stock Option Plan Exhibit B to Definitive Proxy dated August 9, 1994
10.8 Contract of Sublease with Computer Leasing, Inc. Exhibit 10.11 to Form 10-KSB for year ended December 31, 1995
10.9 1995 Stock Option Plan Exhibit A to Definitive Proxy dated August 10, 1995
10.10 1996 Stock Option Plan Exhibit A to Definitive Proxy dated November 7, 1996
10.11 Employment Agreement dated August 19, 1997 Filed herewith
with Jack Abuhoff
21 Subsidiaries of Small Business Issuer Filed herewith
23.1 Consent of Grant Thornton LLP Filed herewith
23.2 Consent of Margolin, Winer & Evens LLP Filed herewith
27 Financial Data Schedule Filed herewith
(b) There were no reports on Form 8-K filed during the quarter ended
December 31, 1997.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INNODATA CORPORATION
By /s/
---
Barry Hertz
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- ----------------------- ------------------------------------ --------------
/s/ Chairman of the Board March 25, 1998
- -----------------------
Barry Hertz
/s/ President, Chief Executive Officer March 25, 1998
- -----------------------
Jack Abuhoff and Director
/s/ Vice Chairman of the Board March 25, 1998
- -----------------------
Todd Solomon
/s/ Executive Vice President (Principal March 25, 1998
- -----------------------
Martin Kaye Financial Officer), Director
/s/ Vice President - Finance (Principal March 25, 1998
- -----------------------
Stephen Agress Accounting Officer)
/s/ Director March 25, 1998
- -----------------------
Dr. Albert Drillick
/s/ Director March 25, 1998
- -----------------------
Dr. E. Bruce Fredrikson
/s/ Director March 25, 1998
- -----------------------
Morton Mackof
/s/ Director March 25, 1998
- -----------------------
Stanley Stern