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, 1999
Commission File Number 0-22196
INNODATA CORPORATION
(Exact name of small business issuer as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
13-3475943
(I.R.S. Employer Identification No.)
THREE UNIVERSITY PLAZA
HACKENSACK, NJ 07601
(Address of principal executive offices)
(201) 488-1200
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No / /
State the number of shares outstanding of each of the issuer's common equity, as
of the latest practicable date: As of July 31, 1999 there were 1,507,823 shares
of common stock outstanding.
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1
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
--------------------
See pages 2-7
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
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See pages 8-11
PART ll. OTHER INFORMATION
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See page 12
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
-----------
ASSETS
CURRENT ASSETS:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . $ 3,649,292
Accounts receivable-net. . . . . . . . . . . . . . . . . . . 3,862,951
Prepaid expenses and other current assets. . . . . . . . . . 955,469
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 376,000
------------
Total current assets. . . . . . . . . . . . . . . . . 8,843,712
FIXED ASSETS-net. . . . . . . . . . . . . . . . . . . . . . . . 3,517,507
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . 398,324
------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,759,543
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt. . . . . . . . . . . . . . $ 32,821
Accounts payable and accrued expenses. . . . . . . . . . . . 1,094,078
Accrued salaries and wages . . . . . . . . . . . . . . . . . 1,502,090
Income and other taxes . . . . . . . . . . . . . . . . . . . 802,441
------------
Total current liabilities . . . . . . . . . . . . . . 3,431,430
------------
LONG-TERM DEBT, less current portion. . . . . . . . . . . . . . 6,441
------------
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 425,000
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized, 20,000,000 shares;
issued, 1,555,906 shares . . . . . . . . . . . . . . . . 15,559
Additional paid-in capital . . . . . . . . . . . . . . . . . 9,042,648
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 59,434
------------
9,117,641
Less: treasury stock-at cost; 48,083 shares . . . . . . . . (220,969)
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Total stockholders' equity. . . . . . . . . . . . . . 8,896,672
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TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,759,543
============
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
-----------
1999 1998
REVENUES . . . . . . . . . . . . . . . . $12,637,030 $8,799,591
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OPERATING COSTS AND EXPENSES:
Direct operating expenses . . . . . . 7,606,516 6,089,488
Selling and administrative expenses . 3,313,494 2,149,169
Gain on foreign currency contracts. . - (487,458)
Interest income - net . . . . . . . . (55,502) (990)
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Total. . . . . . . . . . . . . 10,864,508 7,750,209
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INCOME BEFORE PROVISION FOR INCOME TAXES 1,772,522 1,049,382
PROVISION FOR INCOME TAXES . . . . . . . 513,550 -
------------ -----------
NET INCOME . . . . . . . . . . . . . . . $ 1,258,972 $1,049,382
============ ===========
BASIC INCOME PER SHARE. . . . . . . . . $.84 $.71
==== =====
DILUTED INCOME PER SHARE . . . . . . . . $.75 $.71
===== =====
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
-----------
1999 1998
REVENUES . . . . . . . . . . . . . . . . $7,025,955 $4,200,023
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OPERATING COSTS AND EXPENSES:
Direct operating expenses . . . . . . 4,150,688 3,009,806
Selling and administrative expenses . 1,612,705 1,044,666
Gain on foreign currency contracts. . - (487,458)
Interest income - net . . . . . . . . (25,728) (2,833)
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Total. . . . . . . . . . . . . 5,737,665 3,564,181
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INCOME BEFORE PROVISION FOR INCOME TAXES 1,288,290 635,842
PROVISION FOR INCOME TAXES . . . . . . . 320,000 -
----------- -----------
NET INCOME . . . . . . . . . . . . . . . $ 968,290 $ 635,842
=========== ===========
BASIC INCOME PER SHARE . . . . . . . . . $.64 $.43
===== =====
DILUTED INCOME PER SHARE . . . . . . . . $.55 $.43
===== =====
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
-----------
1999 1998
OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,258,972 $1,049,382
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 718,108 549,161
Gain on foreign currency contracts . . . . . . . . . . . . - (487,458)
Loss on disposal of fixed assets . . . . . . . . . . . . . - 56,187
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (919,529) 508,007
Prepaid expenses and other current assets . . . . . . . (430,342) 233,008
Other assets. . . . . . . . . . . . . . . . . . . . . . (21,226) 3,087
Accounts payable and accrued expenses . . . . . . . . . 620,521 154,390
Liability for foreign currency contracts. . . . . . . . - (912,542)
Income and other taxes. . . . . . . . . . . . . . . . . 173,825 (81,691)
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Net cash provided by operating activities . . . . . 1,400,329 1,071,531
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INVESTING ACTIVITIES:
Expenditures for fixed assets . . . . . . . . . . . . . . . . (1,328,691) (362,406)
Proceeds from disposal of fixed assets. . . . . . . . . . . . - 106,250
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Net cash used in investing activities . . . . . . . (1,328,691) (256,156)
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FINANCING ACTIVITIES:
Proceeds from exercise of stock options . . . . . . . . . . . 83,666 -
Purchase of treasury stock. . . . . . . . . . . . . . . . . . - (38,372)
Payments of long-term debt. . . . . . . . . . . . . . . . . . (41,545) (61,234)
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Net cash provided by (used in) financing activities 42,121 (99,606)
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INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . 113,759 715,769
CASH AND EQUIVALENTS, BEGINNING OF PERIOD. . . . . . . . . . . . 3,535,533 1,969,852
------------ -----------
CASH AND EQUIVALENTS, END OF PERIOD. . . . . . . . . . . . . . . $ 3,649,292 $2,685,621
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 9,884
============ ===========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 201,000 $ -
============ ===========
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AMD SUBSIDARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
-----------
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position as
of June 30, 1999, the results of operations for the three and six month periods
ended June 30, 1999 and 1998, and of cash flows for the six months ended June
30, 1999 and 1998. The results of operations for the six months ended June 30,
1999 are not necessarily indicative of results that may be expected for any
other interim period or for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1998 included in
the Company's Annual Report on Form 10-KSB. The accounting policies used in
preparing these financial statements are the same as those described in the
December 31, 1998 financial statements.
2. The six months ended June 30, 1998 has no provision for taxes due to the
utilization of net operating loss carryforwards. The provision for taxes for
the second quarter of 1999 was less than the statutory rate due to certain tax
holidays available in foreign countries in which the Company operates.
3. In June 1999, the Company granted options to purchase 69,000 shares of
its common stock at $8.00 per share.
4. Segment Information.
The Company's operations are classified in two business segments; Internet and
on-line data conversion and content management services and document imaging
services.
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ----------- ----------- -----------
Revenues
- ---------------------------------
Internet and on-line services . . $12,020,922 $7,960,835 $6,826,577 $3,713,769
Document imaging services . . . . 616,108 838,756 199,378 486,254
------------ ----------- ----------- -----------
Total consolidated. . . . . . . . $12,637,030 $8,799,591 $7,025,955 $4,200,023
============ =========== =========== ===========
Income (loss) before income taxes
- ---------------------------------
Internet and on-line services . . $ 2,303,734 $1,444,464 $1,602,244 $ 882,965
Document imaging services . . . . (531,212) (395,082) (313,954) (247,123)
------------ ----------- ----------- -----------
Total consolidated. . . . . . . . $ 1,772,522 $1,049,382 $1,288,290 $ 635,842
============ =========== =========== ===========
Internet and on-line data conversion and content management services provide all
the necessary steps for product development and data conversion to enable its
customers to disseminate vast amounts of information both on-line and via the
Internet. Its customers represent an array of major electronic publishers of
legal, scientific, educational and medical information, as well as
document-intensive companies repurposing their proprietary information into
electronic resources that can be referenced via web-centric applications.
The document imaging services segment provides high volume backfile and
day-forward conversion of business documents, technical manuals, engineering
drawings, aperture cards, roll film, and microfiche, providing high quality
computer accessible images and indexing.
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, 1999 AND 1998
Revenues increased 67% to $7,025,955 for the three months period ended June
30, 1999 compared to $4,200,023 for the similar period in 1998. Revenues from
the Internet and on-line data conversion and content management services segment
increased to $6,826,577 in 1999 from $3,713,769 in 1998, or 84%, principally
from new customers. During 1999, one customer accounted for 22% of the Company's
Internet and on-line data conversion and content management services revenue,
while another customer comprised of twelve affiliated companies, accounted for
18% of revenues for the period during 1998. No other customer accounted for 10%
or more of the Company's revenues. Further, in 1999 and 1998, export revenues,
all of which were derived from European customers, accounted for 18% and 9%,
respectively, of such revenues. Revenues from the document imaging services
segment decreased to $199,378 in 1999 from $486,254 in 1998. The decline in 1999
is due principally to the completion of a large one-time project in 1998.
During 1999 two customers accounted for 68% and 11% of the Company's document
imaging service revenues, respectively. During the same period in 1998, three
other customers accounted for 56%, 18% and 10% of such revenues. No other
customer accounted for 10% or more of such revenues.
Direct operating expenses were $4,150,688 in the second quarter of 1999 and
$3,009,806 in the second quarter of 1998, an increase of 38% in 1999 from 1998.
Direct operating expenses for the Internet and on-line data conversion and
content management services increased to $3,859,986 in 1999 from $2,464,718 in
1998, or 57%. Direct operating expenses as a percentage of revenues decreased
to 59% in the 1999 quarter compared with 72% in 1998. The decrease as a
percentage of revenues was due primarily to fixed costs that did not increase
proportionately with the increased revenues. Direct operating expenses in the
document imaging services segment decreased to $290,702 in 1999 from $545,088 in
1998. The decrease in 1999 was due principally to a staff reduction and reduced
direct costs on the lower revenues. Direct operating expenses include primarily
direct payroll, telecommunications, freight, computer services, supplies and
occupancy.
Selling and administrative expenses were $1,612,705 and $1,044,666 in the
second quarter of 1999 and 1998, respectively, representing an increase of 54%
in 1999 from 1998. Selling and administrative expenses as a percentage of
revenues were 23% in 1999 compared with 25% in 1998. The increase primarily
reflects the payroll costs of additional sales and administrative personnel
hired at the end of the third quarter and in the fourth quarter of 1998, and
increased commissions on the revenue increase. Selling and administrative
expenses include management salaries, sales and marketing salaries, clerical and
administrative salaries, rent and utilities not included in direct costs,
marketing costs and administrative overhead.
In 1999, the Internet and on-line data conversion and content management
services segment realized income before income taxes of $1,602,244, while the
document imaging services segment incurred a loss of $313,954. In 1998, the
Internet and on-line data conversion and content management services segment
realized income before income taxes of $882,965, while the document imaging
services segment incurred a loss of $247,123.
The 1998 period has no provision for taxes, as benefits of net operating
loss carry forwards were not previously recognized.
As a result of the aforementioned items, the Company realized net income of
$968,290 in 1999 and $635,842 in 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues increased 43% to $12,637,030 for the six months ended June 30,
1999 compared to $8,799,591 for the similar period in 1998. Revenues from the
Internet and on-line data conversion and content management services segment
increased to $12,020,922 in 1999 from $7,960,835 in 1998, or 51%, principally
from new customers. During 1999, one customer accounted for 24% of the
Company's Internet and on-line data conversion and content management services
revenue, while another customer comprised of twelve affiliated companies,
accounted for 11% of revenues for the period during 1998. No other customer
accounted for 10% or more of the Company's revenues. Further, in 1999 and 1998,
export revenues, all of which were derived from European customers, accounted
for 20% and 15%, respectively, of such revenues. Revenues from the document
imaging services segment decreased to $616,108 in 1999 from $838,756 in 1998.
During 1999 one customer accounted for 37% of the Company's document imaging
service revenues, respectively. During the same period in 1998, three other
customers accounted for 41%, 11% and 10% of such revenues. No other customer
accounted for 10% or more of such revenues.
Direct operating expenses were $7,606,516 for the six months ended June 30,
1999 and $6,089,488 for the similar period in 1998, an increase of 25% in 1999
from 1998. Direct operating expenses for the Internet and on-line data
conversion and content management services increased to $6,945,886 in 1999 from
$5,218,293 in 1998, or 33%. Direct operating expenses as a percentage of
revenues decreased to 60% in the 1999 period compared with 69% in 1998. The
decrease as a percentage of revenues was due primarily to fixed costs that did
not increase proportionately with the increased revenues. Direct operating
expenses in the document imaging services segment decreased to $660,630 in 1999
from $871,195 in 1998. The decrease in 1999 was due principally to lower labor
costs for the reduced revenues.
Selling and administrative expenses were $3,313,494 and $2,149,169 for the
six months ended June 30, 1999 and 1998, respectively, representing an increase
of 54% in 1999 from 1998. Selling and administrative expenses as a percentage
of revenues was 26% in 1999 compared with 24% in 1998. The increase primarily
reflects the payroll costs of additional sales and administrative personnel
hired at the end of the third quarter and in the fourth quarter of 1998, and
increased commissions on the revenue increase.
The 1998 period has no provision for taxes, as benefits of net operating
loss carry forwards were not previously recognized. Net income was $1,258,972
and $1,049,382 for the six months ended June 30, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $1,400,329 and $1,071,531 was provided by operating activities
for the six months ended June 30, 1999 and 1998, respectively. Net cash of
$1,328,691 and $256,156 was used in investing activities in 1999 and 1998,
respectively. The increased expenditures in 1999 were primarily utilized for
expansion of production capacity. Net cash of $42,121was provided by financing
activities in 1999 from the exercise of stock options, while net cash of $99,606
was used in financing activities for the same period in 1998 for purchases of
treasury stock and payments of debt.
The Company expects to make capital expenditures of approximately
$2,000,000 for its production facilities in 1999, which is expected to be funded
from operations and, if necessary, the line of credit discussed below.
The Company has a line of credit with a bank in the amount of $1 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 relies on certain hardware, software and operating systems
(collectively, "Systems") for production, financial reporting and general
administration. The Company has been evaluating these Systems to identify
potential Year 2000 compliance problems and has been planning appropriate
remedial efforts and testing, where required. In addition, it has been
evaluating its external interfaces with customers and service suppliers to
coordinate Year 2000 compliance.
The Company has planned to replace older, non-compliant Systems components
as a means by which to obtain Year 2000 compliance and to obtain increased
functionality and efficiency. These new Systems components will cost
approximately $500,000, most of which will be capitalized as fixed assets. All
such historical costs have been funded out of existing cash and cash flows from
operations, and the Company expects that future costs will be funded similarly.
The Company is in close contact with each of its significant suppliers
concerning their Year 2000 readiness status. Suppliers of both products and
services are being monitored constantly to determine the necessity and level of
contingency for their contribution to our product or services.
Based on currently available information, the Company expects to attain
Year 2000 compliance on or about October 31, 1999. The Company is currently in
the midst of the final phase of its compliance program, the testing and
contingency phase. The foregoing notwithstanding, the Company plans to have in
place contingency plans to deal with the possibility that any component of the
Systems fails to pass final testing by such date. Such contingency plans may
include, without limitation, implementing substitute production Systems and
obtaining services from substitute vendors. The Company does not anticipate that
the cost of effecting Year 2000 compliance will have a material impact on the
Company's financial condition or results of operations. Nevertheless, achieving
Year 2000 compliance is dependent upon many factors, some of which are not
completely within the Company's control. Should either one or more of the
Company's critical Systems components or one or more of its critical vendors,
including those vendors providing services in foreign countries in which the
Company has operations, fail to achieve Year 2000 compliance, the Company's
business and its results of operations could be adversely affected.
INFLATION, SEASONALITY AND PREVAILING ECONOMIC CONDITIONS
To date, inflation has not had a significant impact on the Company's
operations. The Company generally performs its work for its customers on a task
by task at-will basis, or under short-term contracts or contracts which are
subject to numerous termination provisions. The Company has flexibility in its
pricing due to the absence of long-term contracts. The Company's revenues are
not significantly affected by seasonality.
Disclosures in this Form 10-QSB contain certain forward-looking statements,
including without limitation, statements concerning the Company's operations,
economic performance and financial condition, including in particular, Year 2000
and market risk information. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The words "believe," "expect," "anticipate" and other similar expressions
generally identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
their dates. These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties,
including without limitation, changes in external market factors, changes in the
Company's business or growth strategy or an inability to execute its strategy
due to changes in its industry or the economy generally, the emergence of new or
growing competitors, various other competitive factors and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission, including the Company's Forms 10-KSB, S-3
and S-8. Actual results could differ materially from the results referred to in
the forward-looking statements. In light of these risks and uncertainties, there
can be no assurance that the results referred to in the forward-looking
statements contained in this Form 10-QSB will in fact occur.
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
---------------------
Item 3. Defaults upon Senior Securities. Not Applicable
-------------------------------
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
Date: 8/12/99 /s/
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Jack Abuhoff
President
Chief Executive Officer
Date: 8/12/99 /s/
------- ----------------------------
Martin Kaye
Executive Vice President
Chief Financial Officer