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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, 1996
-----------------
/ / 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
REDEEMABLE WARRANTS
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. $20,536,448
-----------
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 28, 1997 of $1.25 per share. $3,271,173
----------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
4,523,710 SHARES OF COMMON STOCK, $.01 PAR VALUE, AS OF FEBRUARY 28, 1997.
---------
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
[SEE INDEX TO EXHIBITS]
PART I
------
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 2,700 persons in the Philippines 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 systems, page composition, copyediting, 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 in the Philippines 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,
Maryland 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.
TYPESETTING AND COMPOSITION
- -----------------------------
The Company offers composition and typesetting services which are managed
from its facility in Halethorpe, Maryland, with services performed in Maryland
and in the Philippines. The Company performs the entire process from data
capture of manuscripts to finished camera-ready copy.
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.
INTERNET TECHNICAL SUPPORT
- ----------------------------
The Company provides electronic technical support through a strategic alliance
with Softbank Services Group ("SSG"). The alliance combines internet based
services with proprietary software to create superior customer service. The
Company responds to both technical and customer service queries from internet
based end-users with skilled technical support personnel from its call center
facility in Manila, Philippines. Once determined, solutions are routed back
through the Company's high bandwidth overseas channel to SSG's software
system, and ultimately delivered to the end-user via internet e-mail.
ACQUISITIONS
On January 2, 1996 the Company acquired the business of International
Imaging, Inc. ("II"). II provides imaging and document management systems and
scanning/conversion services. The purchase price consisted of $40,000 cash
and 50,000 shares of the Company's restricted common stock. The Company also
paid approximately $300,000 of II's outstanding lease obligations. II's
revenues for the year ended December 31, 1995 were approximately $1,000,000.
On December 1, 1994, the Company acquired certain assets of Engineering
Images ("EI"). EI is a provider of imaging and document management systems
and scanning/conversion services. The purchase price consisted of $427,270
cash (including expenses of $27,270), three-year subordinated notes in the
aggregate principal amount of $300,000 payable in 36 equal monthly
installments commencing December 15, 1994 plus interest at the prime rate, and
56,764 restricted shares of the Company's common stock with piggy-back
registration rights valued at $200,000. The assets acquired consist
principally of certain fixed assets and goodwill.
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. and Philippine 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 either
Philippine facility. This leased circuit enables the Company to transmit data
and image documents to and from the Philippines, rather than by air courier
which can take up to five days. The Company also utilizes scanning equipment
in New Jersey, Halethorpe, Maryland and in the United Kingdom to facilitate
the transmission of information to the Philippines.
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. Smaller local competitors include
Drawing Management, Kruse Industries and Berhan Associates. 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 1996 for research
and development, although expenditures were incurred in connection with OCR
technology developments, enhancing its networking and telecommunications
capabilities and exploring new business ventures, including the internet
technical support business.
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 1996 and 1995, one customer that is 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.
Revenues from the European market increased to 19% of total revenues in 1996
from 18% in 1995.
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. For example, in the
first few months of 1994, the minimum wage rates in the Philippines increased
an aggregate of approximately 23%. Additional minimum wage increases have
also been mandated in 1997.
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.
As a United States corporation engaged in business operations in the
Philippines, through March 31, 1995 the Company had been subject to both U.S.
and Philippine income tax with respect to the Philippine source income derived
by the Company. In addition, the Philippine source income of the Company is
subject to other Philippine taxes such as the value-added tax and tax on the
repatriation of profits from the Philippine operations to the Company in the
United States. Under U.S. tax law, the U.S. foreign tax credit is available
(subject to various limitations) to reduce the burden of double taxation on
the Philippine source income of the Company. However, as a result of the
foreign tax credit limitation, the Company may only be entitled to claim a
foreign tax credit with respect to a portion of the income taxes payable in
the Philippines. In addition, the foreign tax credit is not available with
respect to any value added taxes or any other non-income taxes payable in the
Philippines. The Philippines and the United States entered into an Income Tax
Treaty effective October 16, 1982. The Company believes that such treaty has
no material adverse effect on the Company.
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.
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.
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 has an additional
facility in Sri Lanka and expects to open an additional facility in India in
1997.
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, 1997, the Company employed an aggregate of
approximately 100 persons in the United States and the United Kingdom, and
approximately 2,700 persons in the Philippines and Sri Lanka.
Employees at the Company's Manila facilities voted to join 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 24. A
significant number of employees have college degrees. A substantial middle
management infrastructure, grown both from within the ranks of the Company and
though 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's Manila, Philippines premises are occupied under a five-year
lease which expires on December 31, 1998 and which is cancelable at the
Company's option. 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 $27,000 in 1997 and $30,000 in 1998.
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
Maryland for approximately $7,000 per month. The lease expires February,
2002.
The Company has various short-term leases in Sri Lanka, California and
the United Kingdom with lease payments aggregating approximately $8,000 per
month.
The Company has entered into agreements to lease production facilities
currently under construction in India. Pursuant to its terms, upon completion
of the facilities, the Company will be 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 to which the Company is a party
or of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were voted on at the November 7, 1996 Annual
Meeting of Stockholders. The total shares voted were 3,848,466.
FOR AGAINST ABSTAIN WITHHELD NOT VOTED
--------- ------- ------- -------- ---------
ELECTION OF DIRECTORS:
Barry Hertz 3,820,209 28,257
Todd Solomon 3,715,577 132,889
Jack Abuhoff 3,718,364 130,102
Martin Kaye 3,824,364 24,102
Albert Drillick 3,820,759 27,707
E. Bruce Fredrikson 3,822,259 26,207
Morton Mackof 3,824,364 24,102
Stanley Stern 3,824,864 23,602
1996 STOCK OPTION PLAN 2,146,538 332,897 41,667 1,327,364
APPOINTMENT OF AUDITORS 3,826,928 11,202 10,336
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Redeemable Warrants are quoted on the
NASDAQ National Market System under the symbols "INOD" and "INODW",
respectively. On February 28, 1997, there were 100 stockholders of record of
the Company's Common Stock, and 54 holders of record of the Redeemable
Warrants 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 1,600.
The following tables set forth the high and low sales prices on a
quarterly basis for the Company's Common Stock and Redeemable Warrants, as
reported on NASDAQ NMS, for the two years ended December 31, 1996.
COMMON STOCK REDEEMABLE WARRANTS
SALE PRICES SALE PRICES
1995 HIGH LOW HIGH LOW
- -------------- ------------ ------- ------------------- ----
First Quarter 5 3/1/8 3/4 3/16
Second Quarter 5-3/8 3-1/4 13/16 3/8
Third Quarter 5 3-1/4 7/16 1/4
Fourth Quarter 5-1/8 3-3/4 7/16 7/32
1996
- --------------
First Quarter 5-3/4 3-11/16 7/16 3/16
Second Quarter 4-5/8 3-3/8 7/16 3/32
Third Quarter 3-3/4 1-15/16 1/4 3/32
Fourth Quarter 2-3/8 1 7/32 3/32
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, 1996 1995 1994 1993 1992
------------ ------------ ------------ ----------- ----------
REVENUES $20,536,448 $20,767,405 $14,344,914 $9,619,722 $5,893,383
------------ ------------ ------------ ----------- ----------
OPERATING COSTS AND EXPENSES
Direct operating costs 16,783,595 14,044,067 10,764,658 7,003,288 3,817,000
Costs resulting from project termination - - 393,195 - -
Selling and administrative 4,799,739 4,344,793 2,834,534 1,966,103 1,000,131
Interest expense 36,383 18,476 7,392 82,375 86,089
Interest and dividend income (123,771) (151,319) (160,689) (89,767) -
------------ ------------ ------------ ----------- ----------
Total 21,495,946 18,256,017 13,839,090 8,961,999 4,903,220
------------ ------------ ------------ ----------- ----------
(LOSS) INCOME BEFORE
INCOME TAXES (959,498) 2,511,388 505,824 657,723 990,163
INCOME TAXES (357,000) 1,000,000 199,000 215,000 315,000
------------ ------------ ------------ ----------- ----------
NET (LOSS) INCOME $ (602,498) $ 1,511,388 $ 306,824 $ 442,723 $ 675,163
============ ============ ============ =========== ==========
(LOSS) INCOME PER SHARE $ (.13) $ .32 $ .07 $ .13 $ .25
============ ============ ============ =========== ==========
CASH DIVIDENDS PER SHARE - - - - -
============ ============ ============ =========== ==========
AS OF DECEMBER 31, 1996 1995 1994 1993 1992
------------ ------------ ------------ ----------- ----------
WORKING CAPITAL $ 4,774,121 $ 6,247,708 $ 4,972,682 $5,526,467 $ 73,723
============ =========== ==========
TOTAL ASSETS $12,416,296 $12,538,694 $10,077,049 $9,014,247 $2,018,127
============ ============ ============ =========== ==========
LONG-TERM DEBT $ 195,960 $ 92,180 $ 191,666 $ - $ 209,068
============ ============ ============ =========== ==========
STOCKHOLDERS' EQUITY $ 9,477,471 $ 9,747,655 $ 8,327,601 $7,877,512 $ 682,204
============ ============ ============ =========== ==========
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, 1996, 1995 and 1994 included in Item 7 of this Form 10-KSB.
RESULTS OF OPERATIONS
General
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 systems, page composition, copyediting, indexing and
abstracting, and applications programming. The Company also offers medical
transcription services to health-care providers through its Statline division.
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.
Direct operating costs include primarily direct payroll, telecommunications,
freight, computer services, supplies and occupancy.
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. Selling and administrative expense includes management salaries,
sales and marketing salaries, clerical and administrative salaries, rent and
utilities not included in direct costs, trade shows, travel expense, and
administrative overhead.
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.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues increased 45% to $20,767,405 for the year ended December 31,
1995 compared to $14,344,914 for the similar period in 1994. The increase in
revenues was due principally to an increase in volume from existing customers,
to the addition of approximately $2,250,000 of revenues from Engineering
Images which was acquired in December 1994 and, to a lesser extent, the
addition of new customers. Revenues from the European market increased to 18%
of total revenues in 1995 from 16% in 1994. Revenues have been primarily
attributable to data entry and conversion services which accounted for
approximately 72% of the Company's revenues in 1995 and 82% of the Company's
revenues in 1994. During 1995 and 1994, one customer comprised of twelve
affiliated companies, accounted for 29% and 37% (14% from one of the companies
in 1994) of the Company's revenues, respectively. No other customer accounted
for 10% or more of the Company's revenues.
Direct operating expenses were $14,044,067 for the year ended December
31, 1995 and $10,764,658 for the similar period in 1994, an increase of 30%.
Direct operating expenses as a percentage of revenues decreased to 68% in 1995
compared to 75% in 1994. A wage increase was mandated in the Philippines in
1994. The effect of such increase has since been reduced primarily through
efficiencies in the production process. Further, significant costs were
incurred in 1994 from a single project outside of the Company's core business
that negatively impacted profits from July 1993 until its termination at the
end of March 1994. Costs associated with this project, primarily for payroll
and high speed telecommunication lines, exceeded revenues by approximately
$300,000 in 1994. In addition, the Company did not realize its normal margins
on work performed in connection with such revenues. The Company also incurred
expenses attributable to terminating this project of $393,195.
Selling and administrative expense was $4,344,793 and $2,834,534 for the
years ended December 31, 1995 and 1994, respectively, representing an increase
of 53% in 1995 from 1994. Selling and administrative expense as a percentage
of revenues was 21% in 1995 and 20% in 1994. The dollar increase primarily
reflects the expansion of the Company's sales and marketing efforts which
resulted in significant increases in revenue, and to a lesser extent also
reflects increases in general overhead as a result of the increased volume,
including additional employees. The dollar increase also reflects the added
overhead and sales related expenses of Engineering Images acquired in December
1994 of approximately $600,000.
Income tax expense as a percentage of pre-tax income was 40% in 1995 and
39% in 1994.
Net income was $1,511,388 in 1995 and $306,824 in 1994. The substantial
increase in 1995 is due principally to the increased revenues in 1995 and that
1994 was adversely impacted by the increased direct costs from the single
project discussed above and the expenses of termination of that project in
March 1994.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $897,085 in 1996 and
$654,622 in 1995. Net cash provided by operating activities for the year
ended December 31, 1996 was increased due to a decrease in accounts
receivable, offset by a loss from operations. Net cash used in investing
activities was $401,919 in 1996 and $1,193,973 in 1995. The decrease in 1996
was due to the acquisition of International Imaging utilizing cash of
$410,646, offset by proceeds from short-term investments of $1,240,000. In
1996, net cash provided by financing activities was $35,373 and, in 1995, net
cash of $257,863 was used in financing activities principally for the purchase
of treasury stock and payments of borrowings.
The Company has a commitment to purchase a perpetual license for certain
production process software for cash totaling $190,000 and 35,000 shares of
the Company's common stock. Payment is contingent upon the successful
completion and testing of the software, expected to occur during 1997.
In January 1997 the Company entered into a revolving credit agreement
with a bank providing for borrowings up to $1,000,000 for equipment purchases.
The borrowings will convert to a term loan payable over a three year period
commencing January 1998. During 1997 interest is payable at % over prime and
interest has been fixed on the term loan at 10.1% per annum. In addition, the
bank has provided a line of credit up to $2,000,000 based on eligible
receivables, as defined. Interest is payable at % over prime. The line of
credit is reviewed annually on June 30 and borrowings are collateralized by a
lien on the assets of the Company.
The Company expects to open a production facility in India in the second
half of 1997. In addition, the Company expects to make capital expenditures
on an ongoing basis for the expansion of its existing production facilities in
the Philippines and Sri Lanka and for additional equipment for its United
States operations. The Company estimates these capital expenditures will
aggregate approximately $1,500,000 during 1997.
INFLATION, SEASONALITY AND PREVAILING ECONOMIC CONDITIONS
To date, inflation has not had a significant impact on the Company's
operations. The Company generally performs its work for its customers on a
task by task at-will basis, or under short-term contracts or contracts which
are subject to numerous termination provisions. The Company has flexibility
in its pricing due to the absence of long-term contracts. The Company's
revenues are not significantly affected by seasonality.
ITEM 7. FINANCIAL STATEMENTS.
INNODATA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report II-7
Consolidated Balance Sheets as of December 31, 1996 and 1995 II-8
Consolidated Statements of Operations for the three years ended II-9
December 31, 1996
Consolidated Statements of Stockholders' Equity for the three years ended II-10
December 31, 1996
Consolidated Statements of Cash Flows for the three years ended II-11
December 31, 1996
Notes to Consolidated Financial Statements II-12-22
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Innodata Corporation
Brooklyn, New York
We have audited the accompanying consolidated balance sheets of Innodata
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three 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 1995, and the results
of their operations and their cash flows for each of the three 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, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,097,193 $ 1,566,654
Accounts receivable-net of allowance for doubtful accounts of $140,000
in 1996 and $175,000 in 1995 (Note 10) 3,718,283 5,057,028
Short-term investments (Note 2) - 1,259,784
Prepaid expenses and other current assets 1,130,510 638,101
Deferred income taxes (Notes 1 and 4) 220,000 72,000
------------ ------------
TOTAL CURRENT ASSETS 7,165,986 8,593,567
FIXED ASSETS-NET (NOTES 1 AND 3) 3,617,939 2,965,596
GOODWILL (NOTES 1 AND 5) 1,159,946 782,270
OTHER ASSETS 472,425 197,261
------------ ------------
TOTAL $12,416,296 $12,538,694
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Notes 5 and 6) $ 208,298 $ 87,500
Accounts payable and accrued expenses 1,279,519 813,565
Accrued salaries and wages 625,479 524,488
Taxes, other than income taxes 278,569 194,112
Income taxes payable (Notes 1 and 4) - 726,194
------------ ------------
TOTAL CURRENT LIABILITIES 2,391,865 2,345,859
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION (NOTES 5 AND 6) 195,960 92,180
------------ ------------
DEFERRED INCOME TAXES (NOTES 1 AND 4) 351,000 353,000
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 7, 8 AND 9)
STOCKHOLDERS' EQUITY (NOTES 2, 5, 8 AND 9):
Common stock, $.01 par value-authorized 20,000,000 shares;
issued 4,565,210 shares in 1996 and 4,477,273 shares in 1995 45,652 44,773
Additional paid-in capital 8,824,696 8,497,453
Unrealized loss on available-for-sale securities - (4,192)
Retained earnings 751,000 1,353,498
------------ ------------
9,621,348 9,891,532
Less: treasury stock - at cost; 41,500 shares (143,877) (143,877)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,477,471 9,747,655
------------ ------------
TOTAL $12,416,296 $12,538,694
============ ============
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
REVENUES (NOTE 10) $20,536,448 $20,767,405 $14,344,914
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Direct operating costs 16,783,595 14,044,067 10,764,658
Costs resulting from project termination (Note 11) - - 393,195
Selling and administrative expenses 4,799,739 4,344,793 2,834,534
Interest expense 36,383 18,476 7,392
Interest income (123,771) (151,319) (160,689)
------------ ------------ ------------
TOTAL 21,495,946 18,256,017 13,839,090
------------ ------------ ------------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (959,498) 2,511,388 505,824
(BENEFIT) PROVISION FOR INCOME TAXES (NOTES 1 AND 4) (357,000) 1,000,000 199,000
------------ ------------ ------------
NET (LOSS) INCOME $ (602,498) $ 1,511,388 $ 306,824
============ ============ ============
(LOSS) INCOME PER SHARE (NOTE 1) $ (.13) $ .32 $ .07
============ ============ ============
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
---COMMON STOCK--- ADDITIONAL UNREALIZED
------------------ PAID-IN LOSS ON RETAINED TREASURY
SHARES AMOUNT CAPITAL SECURITIES EARNINGS STOCK
--------- ------- ----------- ------------ ------------ ----------
JANUARY 1, 1994 4,210,000 $42,100 $ 6,984,445 $ - $ 850,967 $ -
Net income - - - - 306,824 -
Unrealized loss on
available-for-sale
securities - - - (56,735) - -
Payment of 5%
stock dividend 210,509 2,105 1,313,576 - (1,315,681) -
Issuance of common stock
as partial acquisition cost 56,764 568 199,432 - - -
--------- ------- ----------- ------------ ------------ ----------
DECEMBER 31, 1994 4,477,273 44,773 8,497,453 (56,735) (157,890) -
Net income - - - - 1,511,388 -
Unrealized gain on
available-for-sale
securities - - - 52,543 - -
Purchase of treasury stock - - - - - (143,877)
--------- ------- ----------- ------------ ------------ ----------
DECEMBER 31, 1995 4,477,273 44,773 8,497,453 (4,192) 1,353,498 (143,877)
Net loss - - - - (602,498) -
Issuance of common stock
upon exercise of stock
options 22,937 229 65,539 - - -
Issuance of common stock
as partial acquisition costs 65,000 650 193,303 - - -
Warrant costs for
consulting arrangement - - 68,401 - - -
Redemption of available-
for-sale securities - - - 4,192 - -
--------- ------- ----------- ------------ ------------ ----------
DECEMBER 31, 1996 4,565,210 $45,652 $ 8,824,696 $ - $ 751,000 $(143,877)
========= ======= =========== ============ ============ ==========
TOTAL
-----------
JANUARY 1, 1994 $7,877,512
Net income 306,824
Unrealized loss on
available-for-sale
securities (56,735)
Payment of 5%
stock dividend -
Issuance of common stock
as partial acquisition cost 200,000
-----------
DECEMBER 31, 1994 8,327,601
Net income 1,511,388
Unrealized gain on
available-for-sale
securities 52,543
Purchase of treasury stock (143,877)
-----------
DECEMBER 31, 1995 9,747,655
Net loss (602,498)
Issuance of common stock
upon exercise of stock
options 65,768
Issuance of common stock
as partial acquisition costs 193,953
Warrant costs for
consulting arrangement 68,401
Redemption of available-
for-sale securities 4,192
-----------
DECEMBER 31, 1996 $9,477,471
===========
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $ (602,498) $ 1,511,388 $ 306,824
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 1,372,731 972,669 717,300
Deferred income taxes (150,000) 240,000 41,000
Changes in operating assets and liabilities:
Accounts receivable 1,380,498 (2,299,781) (696,539)
Prepaid expenses and other current assets (479,251) (462,274) 137,572
Other assets (271,413) (46,957) (115,782)
Accounts payable and accrued expenses 187,764 (103,117) 313,990
Accrued salaries and wages 100,991 211,029 119,409
Taxes, other than income taxes 84,457 93,727 30,997
Income taxes payable (726,194) 537,938 42,004
------------ ------------ ------------
Net cash provided by operating activities 897,085 654,622 896,775
------------ ------------ ------------
INVESTING ACTIVITIES:
Expenditures for fixed assets (1,231,273) (1,193,973) (773,485)
Payments in connection with acquisitions (410,646) - (527,270)
Short-term investments 1,240,000 - -
------------ ------------ ------------
Net cash used in investing activities (401,919) (1,193,973) (1,300,755)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 626,014 - -
Proceeds from exercise of stock options 65,768 - -
Purchase of treasury stock - (143,877) -
Payments of borrowings (656,409) (111,986) (234,686)
Redemption of preferred stock - (2,000) -
------------ ------------ ------------
Net cash provided by (used in) financing activities 35,373 (257,863) (234,686)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 530,539 (797,214) (638,666)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 1,566,654 2,363,868 3,002,534
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF YEAR $ 2,097,193 $ 1,566,654 $ 2,363,868
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 35,238 $ 14,963 $ 6,253
============ ============ ============
Income taxes $ 922,789 $ 222,062 $ 116,000
============ ============ ============
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ---------------------------------------------------
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 systems, indexing and abstracting, and
typesetting and composition 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 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. Track Data Corporation owns
approximately 28% of the Company and shares certain management.
The financial statements have been prepared in conformity with generally
accepted accounting principles, which requires the use of management's
estimates.
REVENUE RECOGNITION - Revenue is recognized in the period in which the
service is performed. The Company's typesetting and composition service
projects are generally performed over four to six month periods. Revenues
from these projects are recognized using the percentage of completion method.
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 and Sri Lanka is U.S. dollars. As such,
transactions denominated in Philippine pesos 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, 1996 and 1995 were translated at the exchange rate
in effect as of those dates. Exchange gains and losses resulting from these
transactions were immaterial. In addition, the Company periodically enters
into contracts to purchase foreign currency as a hedge against a portion of
its foreign production costs. Gains and losses resulting from these contracts
are included as a component of the related transactions.
CASH AND EQUIVALENTS - 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 1995 1994
Acquisition costs $ 563,771 $ - $1,027,270
Notes issued - - (300,000)
Common stock issued (153,125) - (200,000)
---------- ----- -----------
Payments in connection with acquisitions $ 410,646 - $ 527,270
========== ===== ===========
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.
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 - (Loss) income per share is computed based on
the weighted average number of shares outstanding. In 1995, pursuant to the
modified treasury stock calculation method, the calculation includes the
effects of the assumed exercise of all outstanding options and warrants, the
repurchase of 20% of the outstanding shares of the Company, and after giving
effect to assumed interest earned on the net proceeds from the exercise and
repurchase. The number of common and common equivalent shares utilized in the
per share computations were 4,509,588, 5,456,266 and 4,425,239 in 1996, 1995
and 1994, respectively. Outstanding options and warrants were not considered
in 1996 and 1994 as they would have been antidilutive in 1996 and were not
dilutive in 1994.
2. SHORT-TERM INVESTMENTS
At December 31, 1995, short-term investments consisted of corporate debt
securities due in 1996. These securities were classified as
available-for-sale. At December 31, 1995, the fair market value of such
securities was less than their net cost by approximately $4,000, and a
valuation allowance was established as a reduction of stockholders' equity.
3. FIXED ASSETS
Fixed assets, stated at cost less accumulated depreciation and
amortization, consist of the following:
DECEMBER 31,
1996 1995
Equipment $6,092,985 $4,401,308
Furniture and fixtures 375,465 316,697
Leasehold improvements 401,987 308,563
---------- ----------
Total 6,870,437 5,026,568
Less accumulated depreciation
and amortization 3,252,498 2,060,972
---------- ----------
$3,617,939 $2,965,596
========== ==========
As of December 31, 1996 and 1995, the net book value of fixed assets
located at the Company's production facilities in the Philippines and Sri
Lanka was approximately $1,513,000 and $1,476,000, respectively. In addition,
equipment financed by capital leases has a net book value of $337,000 at
December 31, 1996.
4. INCOME TAXES
The significant components of the (benefit from) provision for income
taxes are as follows:
1996 1995 1994
Current income tax (benefit) expense:
Foreign $ - $ 10,000 $ 60,000
Federal (159,000) 535,000 69,000
State and local (48,000) 215,000 29,000
---------- ---------- --------
(207,000) 760,000 158,000
Deferred income tax (benefit) expense (150,000) 240,000 41,000
---------- ---------- --------
(Benefit from) provision for income taxes $(357,000) $1,000,000 $199,000
========== ========== ========
Reconciliation of the U.S. statutory rate with the Company's effective
tax rate is summarized as follows:
1996 1995 1994
Federal statutory rate (34.0)% 34.0% 34.0%
Effect of:
State income taxes (net of federal tax benefit) (5.4) 6.1 3.8
Other 2.2 (0.3) 1.5
------- ----- -----
Effective rate (37.2)% 39.8% 39.3%
======= ===== =====
As of December 31, 1996 and 1995, the composition of the Company's net
deferred taxes is as follows:
1996 1995
Deferred income tax assets:
Allowances not currently deductible $ 105,000 $ 72,000
Expenses not deductible until paid 115,000 -
Net operating loss carryforward 700,000 -
------------ ----------
920,000 72,000
------------ ----------
Deferred income tax liabilities:
Foreign source income, not taxable
unless repatriated (815,000) (235,000)
Depreciation and amortization (236,000) (118,000)
------------ ----------
(1,051,000) (353,000)
------------ ----------
Net deferred income tax liability $ (131,000) $(281,000)
============ ==========
The Company's net operating loss carryforward of approximately $1,750,000
expires in 2011.
5. ACQUISITIONS
On December 1, 1994, the Company acquired certain assets of Engineering
Images ("EI"), an unaffiliated partnership. EI is a provider of imaging and
document management systems and scanning/conversion services. The purchase
price consisted of $427,270 cash (including expenses of $27,270), three-year
subordinated notes in the aggregate principal amount of $300,000 payable in 36
equal monthly installments commencing December 15, 1994 plus interest at the
prime rate (8.25% at December 31, 1996), and 56,764 restricted shares of the
Company's common stock with piggy-back registration rights valued at $200,000.
The assets acquired consist principally of certain fixed assets and goodwill.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of EI are included since the date of acquisition.
Further, in January 1994, the Company acquired the medical transcription
business of Statline, Inc. for approximately $100,000 cash, principally
consisting of fixed assets.
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 50,000 shares of the Company's
restricted common stock. The Company also paid approximately $300,000 of II's
outstanding lease obligations. II's revenues for the year ended December 31,
1995 were approximately $1,000,000.
6. LONG-TERM DEBT
Long-term debt is as follows:
1996 1995
Equipment leases, at 9.6% to 13.5% $365,846 $ -
Acquisition notes - subordinated, at prime 91,667 179,680
-------- --------
457,513 179,680
Less: deferred interest 53,255 -
-------- --------
Total 404,258 179,680
Less: current portion of long-term debt 208,298 87,500
-------- --------
Long-term debt $195,960 $ 92,180
======== ========
Aggregate maturities of long-term debt are as follows:
1997 $236,855
1998 139,038
1999 55,458
2000 19,043
2001 7,119
$457,513
========
7. COMMITMENTS AND CONTINGENT LIABILITIES
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, 1996,
1995 and 1994, rent expense totaled approximately $825,000, $500,000 and
$408,000, respectively.
At December 31, 1996, future minimum annual rental commitments on
noncancellable leases are as follows:
1997 $314,000
1998 275,000
1999 275,000
2000 80,000
--------
$944,000
========
EMPLOYMENT AGREEMENTS - The Company has an employment agreement with its
President that expires on September 30, 1999, pursuant to which he receives
annual compensation consisting of $231,000 plus a bonus of up to an additional
15% based upon performance criteria, and options to purchase 31,000 shares of
the Company's common stock in each year of the agreement at the market price
of the common stock at each date of grant. In addition, if certain
performance criteria are achieved, he is eligible to receive, on an annual
basis, options to purchase up to an additional 30,000 shares of common stock.
Furthermore, if the President is employed on September 30, 1999 and the
Company has met certain earnings criteria, as defined, for a period of 30 days
ending October 30, 1999, he may "put" up to 400,000 shares of the Company's
common stock owned by him, to the Company at $5.00 per share. If the "put" is
exercised, payment is to be made in equal monthly installments over a three
year period.
OTHER COMMITMENTS - The Company has a commitment to purchase a perpetual
license for certain production process software for cash totaling $190,000 and
35,000 shares of the Company's common stock. Payment is contingent upon the
successful completion and testing of the software, expected to occur during
1997. In addition, the Company has contracts to purchase an aggregate of
$1,500,000 of Philippine pesos on various dates through February 1997.
The Company has entered into agreements to lease production facilities
currently under construction in India. Upon completion of the facilities, the
Company will be obligated to make payments aggregating approximately $150,000
per year for an initial term of five years.
Employees at the Company's Manila facilities voted to join 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.
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, 1996. Under the legislation, the Company is
not required to fund future costs, if any.
8. CAPITAL STOCK
COMMON STOCK DIVIDEND - On August 9, 1994 the Board of Directors declared
a 5% stock dividend to holders of record on August 25, 1994, payable on
September 19, 1994. All share and per share information have been adjusted to
reflect such dividend.
COMMON STOCK AND REDEEMABLE WARRANTS - In August and September 1993 the
Company sold pursuant to a public offering 1,610,000 shares (1,690,500 after
dividend) of its common stock at $5.00 per share and 2,415,000 warrants
("Redeemable Warrants") at $.10 per warrant and realized net proceeds after
all expenses of the offering of $6,752,585. From August 10, 1994 until August
9, 1997 the holders may exchange four Redeemable Warrants for 1.05 shares of
common stock upon payment of $6.68 per whole share. No fractional shares will
be issued. The warrants are redeemable by the Company at $.10 per warrant
upon 30 days prior written notice, provided the closing bid price of the
common stock equals or exceeds $9.50 per share for 20 trading days within a
period of 30 consecutive trading days.
In connection with the offering, the Company sold to the underwriter for
nominal consideration warrants to purchase up to 147,887 shares of common
stock at $7.81 per share and 210,000 warrants at $.157 per warrant to purchase
55,015 shares of common stock at $6.68 per share through August 9, 1998. The
warrants are substantially identical to the Redeemable Warrants, except they
are not redeemable. 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, 1996, the Company reserved for
issuance 2,878,637 shares of its common stock as follows: (a) 1,728,063 shares
pursuant to the Company's Stock Option Plans (including 21,000 options issued
to the Company's Chairman which were not granted under the plans); (b) 632,672
shares upon conversion of Redeemable Warrants; (c) 202,902 shares issuable
upon exercise of underwriter's warrants; and (d) 315,000 shares issuable upon
exercise of warrants issued to consultants.
9. 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 262,500, 315,000, 52,500, 600,000 and 500,000 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 1996 and 1995 consistent with the provisions of SFAS No. 123,
the Company's net loss would have been $(738,987), or $(.16) per share, in
1996 and net income would have been $1,496,341, or $.32 per share, 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 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 1/1/94 $ 4.76 - 7.38 262,763 4 $ 5.15
Canceled $ 4.76 (8,400)
Repriced $ 4.76 - 7.38 (241,763)
Repriced $ 2.63 - 3.01 199,763 3 $ 2.86
Repriced $ 4.33 - 5.63 42,000 3 $ 5.31
Granted $ 2.63 - 3.25 220,600 5 $ 2.63
Granted $ 4.20 - 5.95 78,000 5 $ 4.73
------------
Balance 12/31/94 $ 2.63 - 3.25 420,363 4 $ 2.74
$ 4.20 - 5.95 132,600 4 $ 4.92
------------
552,963 143,791 $ 3.66
Canceled $ 2.63 - 4.63 (24,275)
Granted $ 3.38 - 4.63 274,550 5 $ 3.91 $ 1.57
------------
Balance 12/31/95 $ 2.63 - 3.25 398,088 3 $ 2.75
$ 3.38 - 5.95 405,150 3 $ 4.31
------------
803,238 360,295 $ 3.46
Canceled $ 3.01 (500)
Granted $ 2.31 - 3.93 89,000 5 $ 3.06 $ 1.22
Exercised $ 2.63 - 3.01 (22,937)
------------
Balance 12/31/96 $ 2.31 - 3.25 416,151 3 $ 2.71 334,541 $ 2.96
$ 3.38 - 5.95 452,650 3 $ 4.23 267,473 $ 4.39
-----------
868,801 602,014
============ ===========
The majority of options become exercisable one-third on each of the first
three anniversary dates.
WARRANTS
In February 1995, the Company entered into financial consulting
arrangements with an entity and two individuals pursuant to which the
consultants are to assist the Company for a two year period in merger and
acquisition transactions and developing financial strategies and plans. Two
of the consultants were granted warrants to purchase 150,000 and 50,000
shares, respectively, at $4.50 per share exercisable in 25% cumulative
quarterly increments commencing April 1995 and expiring on December 31, 1997.
Another consultant was granted warrants to purchase 65,000 shares at $4.00 per
share exercisable in 25% cumulative increments commencing September 1, 1995
and expiring on December 31, 1997. All warrants contain demand and piggyback
registration rights after the warrants first become exercisable.
In addition, in connection with a consulting agreement on December 18,
1995, the Company issued a warrant to purchase 50,000 shares at a price of
$3.8125 per share. The warrant is exercisable commencing December 18, 1996
and expires in 2000.
10. REVENUES AND ACCOUNTS RECEIVABLE
During 1996, 1995 and 1994, one customer that is comprised of twelve
affiliated companies, accounted for 24%, 29% and 37% (14% from one of the
companies), of the Company's revenues, respectively. No other customer
accounted for 10% or more of the Company's revenues. Further, in 1996, 1995
and 1994, export revenues, all of which were derived from European customers,
accounted for 19%, 18% and 16%, 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. COSTS RESULTING FROM PROJECT TERMINATION
Costs resulting from project termination represent the provision for
expenses and losses that were attributable to the termination in 1994 of an
unprofitable project that commenced in 1993.
12. SUBSEQUENT EVENT
In January 1997, the Company entered into a revolving credit agreement
with a bank providing for borrowings up to $1,000,000 for equipment purchases.
The borrowings will convert to a term loan payable over a three year period
commencing January 1998. During 1997 interest is payable at % over prime and
interest has been fixed on the term loan at 10.1% per annum. In addition, the
bank has provided a line of credit up to $2,000,000 based on eligible
receivables, as defined. Interest is payable at % over prime. The line of
credit is reviewed annually on June 30 and borrowings are collateralized by a
lien on the assets of the Company.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Not reviewed by independent accountants.
(in thousands, except per share)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1994
Revenues $ 3,088 $ 3,414 $ 3,702 $ 4,141
Net (loss) income (355) 134 244 284
Net (loss) income per share $ (.08) $ .03 $ .06 $ .06
1995
Revenues $ 4,442 $ 5,219 $ 5,532 $ 5,574
Net income 316 372 408 415
Net income per share $ .07 $ .08 $ .09 $ .08
1996
Revenues $ 5,590 $ 5,250 $ 4,951 $ 4,745
Net income (loss) 326 13 (405) (536)
Net income (loss) per share $ .07 $ - $ (.09) $ (.11)
ITEM 8. CHANGE IN ACCOUNTANTS.
None.
------
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 47 Chairman of the Board of Directors
Todd Solomon 35 President, Chief Executive Officer and Director
Martin Kaye 49 Vice President - Finance, Secretary and Director
Jack Abuhoff 35 Director
Dr. Albert Drillick 51 Director
Dr. E. Bruce Fredrikson 59 Director
Morton Mackof 49 Director
Stanley Stern 46 Director
BARRY HERTZ has been Chairman since 1988 and Chief Executive Officer of
the Company until August 1995. He is involved in the strategic planning and
management of the Company. 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. Track was a principal stockholder of Global, a
company engaged in the financial information services market. 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 President and a Director of the Company since its
founding by him in 1988. He was appointed as Chief Executive Officer in
August 1995. He is responsible for the day to day operations of the Company
world wide. 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 is also a director of TDC.
MARTIN KAYE has been Chief Financial Officer of the Company since October
1993 and was elected Vice President - Finance in August 1995. He was
appointed as a Director in 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).
JACK ABUHOFF has been a Director of the Company since 1990. He is
currently Managing Director of CRC, an international computer technology
consulting firm. Until 1994, he was employed as an attorney by Chadbourne &
Parke. He has practiced law for more than the past five years. He holds an
A.B. degree from Columbia College (1983) and a J.D. degree from Harvard Law
School (1986).
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
had been executive vice president of Track since February 1991 and its
President since December 1994 until his resignation 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
has served as chief operating officer of Track, and in predecessor positions,
for more than five years and since the Merger serves as Executive Vice
President of TDC. Mr. Stern holds a B.B.A. from Baruch College (1973). He is
also a director of TDC.
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 public offering of its common stock on August 10, 1993, is entitled
to designate one member of the Board of Directors for five years expiring on
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, 1996 through
December 31, 1996 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, 1996 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
Barry Hertz 1996 $ 50,000 $ - -
Chairman 1995 - - 45,000
1994 - - 45,000
21,000(A)
Todd Solomon 1996 $ 231,000 $ - 31,000
President, CEO 1995 222,814 - 31,000
1994 175,000 - 74,350
78,750(A)
A) Options granted 1993 and repriced in 1994.
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 plan.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
NUMBER OF PERCENT OF TOTAL OPTIONS EXPIR-
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE PRICE ATION
NAME GRANTED FISCAL YEAR PER SHARE DATE
Todd Solomon 31,000 35% $ 2.313 10/2001
The options become exercisable one-third on each of the first three
anniversary dates.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR;
FISCAL YEAR END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES ACQUIRED OPTIONS AT FISCAL YEAR END MONEY OPTIONS AT FISCAL YEAR END
NAME ON EXERCISE EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
Barry Hertz None 66,000/45,000 $ -/$-
Todd Solomon None 138,649/76,451 $ -/$-
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 7,000 and 3,500 shares, respectively, in 1996.
EMPLOYMENT AGREEMENT
The Company has an employment agreement with Todd Solomon, its President
and Chief Executive Officer. The agreement expires on September 30, 1999.
Mr. Solomon's annual compensation consists of $231,000 plus a bonus of up to
an additional 15% based on performance criteria established by the Board of
Directors. Further, he is to receive options to purchase 31,000 shares in
each year and is eligible to receive up to an additional 30,000 shares in each
year based on performance, as detemined by the Board of Directors. In
addition, if Mr. Solomon is employed on September 30, 1999, and provided the
Company has achieved certain earnings criteria during the four years ended
September 30, 1999, then during the month of October 1999, Mr. Solomon may
"put" up to 400,000 shares of the Company's common stock owned by him to the
Company at $5.00 per share to be paid over a three-year period.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of February 28, 1997 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) 1,366,825 30.2%
Barry Hertz (3) 1,310,244 28.5%
Todd Solomon (4) 678,596 14.6%
Martin Kaye (5) 33,833 *
Jack Abuhoff (5)
263 W. 93 Street
New York, NY 10025 18,550 *
Albert Drillick (5) 6,575 *
Dr. E. Bruce Fredrikson (5)
Syracuse University
School of Management
Syracuse, NY 13244 24,500 *
Morton Mackof (5) 6,575 *
Stanley Stern (5) 6,575 *
All Officers and Directors
as a Group (8 persons)
(2)(3)(4)(5) 2,208,029 45.8%
______________________________
* 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.
2. Consists of 1,244,244 shares owned by Track Data Corporation, which is
majority owned by Mr. Hertz, and 122,581 shares which are owned by the Track Data
Corporation Employee 401K Savings Plan.
3. Includes 1,244,244 shares owned by Track Data Corporation, which is
majority owned by Mr. Hertz, and currently exercisable options to purchase 66,000
shares of Common Stock.
4. Includes currently exercisable options to purchase 138,649 shares of
Common Stock.
5. 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 ASEXHIBIT
- ------- ------------------------------------------------ ---------------------------------------------------------------
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
4.1 Form of Redeemable Warrant Agreement between Exhibit 4.1 to Form SB-2 Registration Statement No. 33-62012
the Company and the Warrant Agent
4.2 Specimens of Common Stock and Redeemable Exhibit 4.2 to Form SB-2 Registration Statement No. 33-62012
Warrant certificates
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 Agreement dated July 13, 1992 between the Exhibit 10.7 to Form SB-2 Registration Statement No. 33-62012
Company and West Publishing Co.
10.9 Form of Financial Advisory and Consulting Exhibit 10.8 to Form SB-2 Registration Statement No. 33-62012
Agreement
10.10 Agreement of Purchase and Sale of Engineering Exhibit 10.10 to Form 8-K dated as of December 1, 1994
Images dated December 1, 1994
10.11 Contract of Sublease with Computer Leasing, Inc. Exhibit 10.11 to Form 10-KSB for year ended December 31, 1995
10.12 1995 Stock Option Plan Exhibit A to Definitive Proxy dated August 10, 1995
10.13 1996 Stock Option Plan Exhibit A to Definitive Proxy dated November 7, 1996
10.14 Revolving Credit Agreement Filed herewith
11 Statement re Computation of Per Share Earnings Filed herewith
21 Subsidiaries of Small Business Issuer Filed herewith
23 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, 1996.
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, 1997
- -----------------------
Barry Hertz
/s/ President, Chief Executive Officer March 25, 1997
- -----------------------
Todd Solomon and Director
/s/ Vice President - Finance (Principal March 25, 1997
- -----------------------
Martin Kaye Accounting and Financial Officer),
Director
/s/ Director March 25, 1997
- -----------------------
Jack Abuhoff
/s/ Director March 25, 1997
- -----------------------
Dr. Albert Drillick
/s/ Director March 25, 1997
- -----------------------
Dr. E. Bruce Fredrikson
/s/ Director March 25, 1997
- -----------------------
Morton Mackof
/s/ Director March 25, 1997
- -----------------------
Stanley Stern