U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
Commission File Number 0-22196
INNODATA CORPORATION
(Exact name of small business issuer as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
13-3475943
(I.R.S. Employer Identification No.)
95 ROCKWELL PLACE
BROOKLYN, NY 11217
(Address of principal executive offices)
(718) 855-0044
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No / /
State the number of shares outstanding of each of the issuer's common equity, as
of the latest practicable date: As of July 31, 1998 there were 1,473,819 shares
of common stock outstanding.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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See pages 2-6
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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See pages 7-9
PART ll. OTHER INFORMATION
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See page 10
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(Unaudited)
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ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,685,621
Accounts receivable-net 2,680,913
Prepaid expenses and other current assets 608,587
Deferred income taxes 136,000
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Total current assets 6,111,121
FIXED ASSETS-net 2,574,227
GOODWILL-net 396,276
OTHER ASSETS 586,107
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TOTAL $ 9,667,731
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 113,352
Accounts payable and accrued expenses 1,527,837
Accrued salaries and wages 775,605
Taxes, other than income taxes 275,317
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Total current liabilities 2,692,111
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LONG-TERM DEBT, less current portion 43,477
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DEFERRED INCOME TAXES 667,000
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized, 20,000,000 shares;
issued, 1,521,736 shares 15,217
Additional paid-in capital 8,870,731
Deficit (2,399,836)
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6,486,112
Less: treasury stock-at cost; 47,917 shares (220,969)
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Total stockholders' equity 6,265,143
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TOTAL $ 9,667,731
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<FN>
See notes to unaudited condensed consolidated financial statements.
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
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1998 1997
REVENUES $8,799,591 $10,019,453
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 6,089,488 8,457,162
Selling and administrative expenses 2,149,169 2,836,250
Gain on foreign currency contracts (Note 2) (487,458) -
Restructuring costs and impairment of assets - 1,500,000
Interest expense 38,255 29,352
Interest income (39,245) (39,076)
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Total 7,750,209 12,783,688
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INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,049,382 (2,764,235)
PROVISION FOR INCOME TAXES - 100,000
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NET INCOME (LOSS) $1,049,382 $(2,864,235)
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BASIC AND DILUTED INCOME (LOSS) PER SHARE $.71 $(1.91)
==== ======
<FN>
See notes to unaudited condensed consolidated financial statements.
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
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1998 1997
REVENUES $4,200,023 $ 5,356,988
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 3,009,806 4,443,520
Selling and administrative expenses 1,044,666 1,484,090
Gain on foreign currency contracts (Note 2) (487,458) -
Restructuring costs and impairment of assets - 1,500,000
Interest expense 19,128 20,344
Interest income (21,961) (16,203)
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Total 3,564,181 7,431,751
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INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 635,842 (2,074,763)
PROVISION FOR INCOME TAXES - 340,000
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NET INCOME (LOSS) $ 635,842 $(2,414,763)
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BASIC AND DILUTED INCOME (LOSS) PER SHARE $.43 $(1.61)
==== ======
<FN>
See notes to unaudited condensed consolidated financial statements.
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
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1998 1997
OPERATING ACTIVITIES:
Net income (loss) $1,049,382 $(2,864,235)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 549,161 689,796
Restructuring costs and impairment of assets - 1,500,000
Gain on foreign currency contracts (487,458) -
Loss on disposal of fixed assets 56,187 -
Deferred income taxes - 400,000
Changes in operating assets and liabilities:
Accounts receivable 508,007 (570,743)
Prepaid expenses and other current assets 233,008 (4,385)
Other assets 3,087 (62,980)
Accounts payable and accrued expenses 154,390 286,576
Liability for foreign currency contracts (912,542) -
Taxes, other than income taxes (81,691) 23,798
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Net cash provided by (used in) operating activities 1,071,531 (602,173)
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INVESTING ACTIVITIES:
Expenditures for fixed assets (362,406) (573,021)
Proceeds from disposal of fixed assets 106,250 -
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Net cash used in investing activities (256,156) (573,021)
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FINANCING ACTIVITIES:
Proceeds from long-term debt - 463,000
Purchase of treasury stock (38,372) (28,428)
Payments of long-term debt (61,234) (129,176)
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Net cash (used in) provided by financing activities (99,606) 305,396
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INCREASE (DECREASE) IN CASH 715,769 (869,798)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,969,852 2,097,193
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CASH AND EQUIVALENTS, END OF PERIOD $2,685,621 $ 1,227,395
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 9,884 $ 22,453
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Income taxes $ - $ -
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<FN>
See notes to unaudited condensed consolidated financial statements.
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
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1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position as
of June 30, 1998, and the results of operations for the three and six month
periods ended June 30, 1998 and 1997 and of cash flows for the six months ended
June 30, 1998 and 1997. The results of operations for the six months ended June
30, 1998 are not necessarily indicative of results that may be expected for any
other interim period or for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1997 included in
the Company's Annual Report on Form 10-KSB. The accounting policies used in
preparing these financial statements are the same as those described in the
December 31, 1997 financial statements.
2. The Company reached an agreement regarding foreign currency forward
contracts that were the source of a previously reported dispute with a bank in
the Philippines. The agreement resulted in a reduction of the estimated
liability previously provided by $487,000 that was recognized as income in the
second quarter of 1998.
3. During the second quarter of 1997 management implemented a plan to reduce
the Company's U.S. based overhead. The principal actions were to eliminate U.S.
production for the publishing division and merge the east and west coast imaging
operations into one facility on the west coast. The restructuring costs 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. The 1998 periods have no provision for taxes, as benefits of net operating
loss carryforwards were not previously recognized.
5. In June 1998, the Company repriced options to purchase 302,847 shares of
its common stock to prices ranging from $5.00 to $8.63. In July 1998 the Company
granted options to purchase 160,000 shares of its common stock at $6.00 per
share.
6. The Company's stockholders approved a one-for-three reverse stock split
that became effective on March 25, 1998. All share and per share information
reflects such split.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
INNODATA is a leading provider of Internet and on-line publishing services,
providing all the necessary steps for product development and data capture and
conversion to enable its customers to publish vast amounts of information via
the Internet and on-line. Innodata's customers represent an array of major
secondary electronic publishers of legal, scientific, educational and medical
information, as well as document-intensive companies repurposing their
proprietary information into electronic resources that can be referenced via
web-centric applications.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues decreased 22% to $4,200,023 for the three months ended June 30,
1998 compared to $5,356,988 for the similar period in 1997. The 1997 period
included approximately $900,000 from journal and book pagination and medical
transcription businesses that were discontinued. During the second quarter of
1998 and 1997, one customer comprised of twelve affiliated companies accounted
for 18% and 14% of the Company's revenues, respectively. No other customer
accounted for 10% or more of the Company's revenues.
Direct operating expenses were $3,009,806 in the second quarter of 1998 and
$4,443,520 in the second quarter of 1997, a decrease of 32% in 1998 from 1997.
Direct operating expenses as a percentage of revenues decreased to 72% in the
1998 quarter compared with 83% in 1997. The decrease in direct operating
expenses as a percentage of revenues in 1998 was due principally to a
significant reduction in the value of pesos in the Philippines and the
elimination of journal and book page making services. Direct operating expenses
include primarily direct payroll, telecommunications, freight, computer
services, supplies and occupancy.
Selling and administrative expenses were $1,044,666 and $1,484,090 in the
second quarter of 1998 and 1997, respectively, representing a decrease of 30% in
1998 from 1997. Selling and administrative expenses as a percentage of revenues
were 25% in 1998 compared with 28% in 1997. The decrease primarily reflects the
elimination of pagination services. The Company added new sales and technical
support staff at the end of the second quarter and in the third quarter of 1998
which will increase selling costs in the future. Selling and administrative
expenses include management salaries, sales and marketing salaries, clerical
and administrative salaries, rent and utilities not included in direct costs,
marketing costs and administrative overhead.
The Company reached an agreement regarding foreign currency forward
contracts that were the source of a previously reported dispute with a bank in
the Philippines. The agreement resulted in a reduction of the estimated
liability previously provided by $487,000 that was recognized as income in the
second quarter of 1998.
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 1998 period has no provision for taxes, as benefits of net operating
loss carryforwards were not previously recognized.
Net income (loss) was $635,842 and $(2,414,763) in the second quarter of
1998 and 1997, respectively.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues decreased 12% to $8,799,591 for the six months ended June 30, 1998
compared to $10,019,453 for the similar period in 1997. The 1997 period included
approximately $1,250,000 from journal and book pagination and medical
transcription businesses that were discontinued. During the six months ended
June 30, 1998 and 1997, one customer comprised of twelve affiliated companies
accounted for 18% and 14% of the Company's revenues, respectively, and in 1997,
one other customer accounted for 10% of revenues. No other customer accounted
for 10% or more of the Company's revenues.
Direct operating expenses were $6,089,488 for the six months ended June 30,
1998 and $8,457,162 for the similar period in 1997, a decrease of 28% in 1998
from 1997. Direct operating expenses as a percentage of revenues decreased to
69% in the 1998 period compared with 84% in 1997. The decrease in direct
operating expenses as a percentage of revenues in 1998 was due principally to a
significant reduction in the value of pesos in the Philippines and the
elimination of journal and book page making services.
Selling and administrative expenses were $2,149,169 and $2,836,250 for the
six months ended June 30, 1998 and 1997, respectively, representing a decrease
of 24% in 1998 from 1997. Selling and administrative expenses as a percentage
of revenues was 24% in 1998 compared with 28% in 1997. The decrease primarily
reflects the elimination of pagination services.
See discussion for three months ended June 30, 1998 and 1997 as to a gain
on foreign currency contracts and for restructuring and impairment costs.
The 1998 period has no provision for taxes, as benefits of net operating
loss carryforwards were not previously recognized. The tax expense in 1997
represents an increase in the valuation allowance. No tax benefits have been
provided for losses incurred in 1997 based on management's evaluation of the
Company's international tax structure.
Net income (loss) was $1,049,382 and $(2,864,235) for the six months ended
June 30, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $1,071,531 was provided by operating activities for the six
months ended June 30, 1998, while net cash of $602,173 was used in operating
activities for the six months ended June 30, 1997, principally resulting from
the loss incurred during the six months ended June 30, 1997. Net cash of
$256,156 and $573,021 was used in investing activities in 1998 and 1997,
respectively, for the purpose of purchasing fixed assets in both years. Net cash
of $99,606 was used in financing activities in 1998 and $305,396 was provided by
financing activities in 1997 from proceeds from long-term 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 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. None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNODATA CORPORATION
/s/ 8/12/98
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Jack Abuhoff
President
Chief Executive Officer
/s/ 8/12/98
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Martin Kaye
Executive Vice President