U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 Commission File Number 0-22196 INNODATA CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3475943 (State or other jurisdiction (I.R.S. Employer of incorporation) 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 Securities Exchange Act of 1934 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, 2001 there were approximately 21,402,000 shares of common stock outstanding. PART I. FINANCIAL INFORMATION Item 1. Financial Statements See pages 2-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations See pages 8-11 Item 3. Quantitative and Qualitative Disclosures about Market Risk See page 12 PART ll. OTHER INFORMATION See page 13 INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) <TABLE> <CAPTION> <S> <C> <C> June 30, December 31, 2001 2000 ---------- ------------ (Unaudited) Derived from audited financial statements ASSETS CURRENT ASSETS: Cash and equivalents $ 5,623 $ 9,040 Accounts receivable-net 9,185 5,799 Prepaid expenses and other current assets 828 1,194 Deferred income taxes 500 839 ------- ------- Total current assets 16,136 16,872 PROPERTY AND EQUIPMENT - NET 11,653 9,464 OTHER ASSETS 2,221 1,610 ------- ------- TOTAL $30,010 $27,946 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 3,207 $ 3,196 Accrued salaries and wages 3,737 3,060 Income and other taxes 1,045 1,111 ------- ------- Total current liabilities 7,989 7,367 ------- ------- DEFERRED INCOME TAXES PAYABLE 1,243 1,263 ------- ------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized 75,000,000 shares; issued, 21,705,000 and 21,688,000 shares at June 30, 2001 and December 31, 2000, respectively. 217 217 Additional paid-in capital 12,381 12,239 Retained earnings 9,874 7,081 ------- ------- 22,472 19,537 Less: treasury stock - at cost; 334,000 shares at June 30, 2001 and 577,000 shares at December 31, 2000, respectively. (1,694) (221) -------- -------- Total stockholders' equity 20,778 19,316 ------- ------- TOTAL $30,010 $27,946 ======= ======= </TABLE> See notes to unaudited condensed consolidated financial statements INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED JUNE 30, 2001 AND 2000 (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> <S> <C> <C> 2001 2000 ---- ---- REVENUES $13,782 $ 9,712 ------- ------- OPERATING COSTS AND EXPENSES: Direct operating expenses 11,598 7,488 Selling and administrative expenses 2,122 1,628 Interest income - net (58) (18) ------- ------- Total 13,662 9,098 ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES 120 614 PROVISION FOR INCOME TAXES 10 185 ------- ------- NET INCOME $110 $429 ==== ==== BASIC INCOME PER SHARE $.01 $.02 ==== ==== WEIGHTED AVERAGE SHARES OUTSTANDING 21,277 20,186 ======= ======= DILUTED INCOME PER SHARE $ - $.02 ==== ==== ADJUSTED DILUTIVE SHARES OUTSTANDING 25,206 22,718 ======= ======= </TABLE> See notes to unaudited condensed consolidated financial statements INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> <S> <C> <C> 2001 2000 ---- ---- REVENUES $31,840 $18,551 ------- ------- OPERATING COSTS AND EXPENSES: Direct operating expenses 23,521 14,429 Selling and administrative expenses 4,285 3,176 Interest income - net (151) (36) ------- ------- Total 27,655 17,569 ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES 4,185 982 PROVISION FOR INCOME TAXES 1,392 295 ------- ------- NET INCOME $ 2,793 $ 687 ======= ======= BASIC INCOME PER SHARE $.13 $.03 ==== ==== WEIGHTED AVERAGE SHARES OUTSTANDING 21,252 20,119 ======= ======= DILUTED INCOME PER SHARE $.11 $.03 ==== ==== ADJUSTED DILUTIVE SHARES OUTSTANDING 25,236 22,818 ======= ======= </TABLE> See notes to unaudited condensed consolidated financial statements INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (In thousands) (Unaudited) <TABLE> <CAPTION> <S> <C> <C> 2001 2000 ---- ----- OPERATING ACTIVITIES: Net income $ 2,793 $ 687 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,146 1,288 Deferred income taxes 319 (45) Changes in operating assets and liabilities: Accounts receivable (3,386) 303 Prepaid expenses and other current assets 366 (390) Other assets (709) (63) Accounts payable and accrued expenses 11 (246) Accrued salaries and wages 677 614 Income and other taxes (66) (6) ------- ------- Net cash provided by operating activities 2,151 2,142 ------- ------- INVESTING ACTIVITIES: Capital expenditures (4,237) (2,222) ------- ------- FINANCING ACTIVITIES: Purchase of treasury stock (1,639) - Proceeds from short term borrowings - 500 Proceeds from exercise of stock options 308 172 Payments of long-term debt - (25) ------- ------- Net cash (used in) provided by financing activities (1,331) 647 ------- ------- (DECREASE) INCREASE IN CASH (3,417) 567 CASH AND EQUIVALENTS, BEGINNING OF PERIOD 9,040 3,380 ------- ------ CASH AND EQUIVALENTS, END OF PERIOD $5,623 $3,947 ====== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ - $ 24 ====== ====== Income taxes $1,294 $ 240 ====== ====== </TABLE> See notes to unaudited condensed consolidated financial statements INNODATA CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (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, 2001, the results of operations for the three and six months ended June 30, 2001 and 2000, and of cash flows for the six months ended June 30, 2001 and 2000. The results of operations for the six months ended June 30, 2001 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, 2000 included in the Company's Annual Report on Form 10-K. The accounting policies used in preparing these financial statements are the same as those described in the December 31, 2000 financial statements. 2. An analysis of the changes in each caption of stockholders' equity for the six months ended June 30, 2001 (in thousands) is as follows. <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> Additional Common Stock Paid-in Retained Treasury Shares Amount Capital Earnings Stock Total ------ ------ ---------- -------- -- ----- ----- January 1, 2001 21,688 $217 $12,239 $7,081 $ (221) $19,316 Net income - - - 2,793 - 2,793 Issuance of common stock upon exercise of stock options 530 5 303 - - 308 Purchase of treasury stock - - - - (1,639) (1,639) Retirement of treasury stock (513) (5) (161) - 166 - ------ ---- ------- ------ ------- -------- June 30, 2001 21,705 $217 $12,381 $9,874 $(1,694) $20,778 ====== ==== ======= ====== ======== ======= </TABLE> During the six months ended June 30, 2001, the Company granted options to purchase 1,262,000 shares of its common stock at $5.43 to $6.57 per share and 15,000 shares of its common stock at $3.75 to $5.06 per share. 3. Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted earnings per share is based on the weighted average number of common and potential common shares outstanding. The difference between weighted average common shares outstanding and adjusted dilutive shares outstanding represents the dilutive effect of outstanding options. The basis of the earnings per share computation for the three and six months ended June 30 (in thousands, except per share amounts) is as follows: <TABLE> <CAPTION> <S> <C> <C> <C> <C> Three Months Six Months ------------ ---------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income $110 $429 $2,793 $687 ==== ==== ====== ==== Weighted average common shares outstanding 21,277 20,186 21,252 20,119 Dilutive effect of outstanding options 3,929 2,532 3,984 2,699 ------ ------ ------ ------ Adjusted for dilutive computation 25,206 22,718 25,236 22,818 ====== ====== ====== ====== Basic income per share $.01 $.02 $.13 $.03 ==== ==== ==== ==== Diluted income per share $ - $.02 $.11 $.03 ==== ==== ==== === </TABLE> 4. The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the Company's financial statements. 5. In May 2001, the Company entered into an agreement with its then Chairman of the Board pursuant to which he will continue to serve as a part-time employee at a salary of $2,000 per month for five years. In addition, the Company paid him $400,000 in exchange for a six year non-compete agreement. 6. On February 28, 2001 the Company declared a 2 for 1 stock split in the form of a stock dividend, which was paid on March 23, 2001. Prior periods have been restated to reflect the stock split. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company Innodata Corporation ("Innodata" or the "Company") is a leading provider of digital content outsourcing services. It provides a host of content conversion and management solutions to online and Internet-based publishers, content aggregators and syndicates, B2B and e-commerce firms and industry. Through its XML Content Factory, the Company provides large-scale XML content conversions and enhancement services. The Company's outsourcing solutions typically draw upon one or more of the following specific services: data conversion, content architecture, content management, XML services, metadata creation, editorial enhancement, software development, and consulting services. Through the provision of these services, Innodata provides all the necessary steps to enable its clients to create and distribute vast amounts of digital information via the Internet, intranet, extranet, and other digital media. Innodata's clients range from leading Global 1000 companies and new media companies to some of the largest and most prestigious publishers of digital content. Its clients are predominantly located in North America and Europe. Innodata services these clients principally through a North American Solutions Center located in New Jersey. In addition, Innodata operates production facilities strategically located in Asia. Results of Operations Three Months Ended June 30, 2001 and 2000 Revenues increased 42% to $13,782,000 for the three months ended June 30, 2001 compared to $9,712,000 for the similar period in 2000, principally resulting from a client which accounted for approximately 30% of the Company's revenues in the current period. One other client accounted for 28% and 38% of the Company's revenues in 2001 and 2000, respectively. Revenues from this client are expected to decline significantly during the next few quarters. In addition, in 2001 and 2000, export revenues, substantially all of which were derived from European clients, accounted for 14% and 10%, respectively, of the Company's revenues. Direct operating expenses were $11,598,000 in the second quarter of 2001 and $7,488,000 in the second quarter of 2000, an increase of 55%. Direct operating expenses as a percentage of revenues were 84% in 2001 and 77% in 2000. The dollar increase in 2001 is principally due to costs incurred for the increased revenues. In addition, during the three months ended June 30, 2001, the Company incurred approximately $1 million in labor costs on a new project for which no revenues were earned. The increase as a percent of sales results primarily from labor costs incurred on a new project for which no revenues were recognized as well as increased direct operating costs without a corresponding percentage increase in revenues. The increase was partially offset by a decline in the value of the foreign currencies of countries in which the Company's production facilities are located. Direct operating expenses include primarily direct payroll, telecommunications, depreciation, equipment lease costs, computer services, supplies and occupancy. Selling and administrative expenses were $2,122,000 and $1,628,000 in the second quarter of 2001 and 2000, respectively, an increase of 30%. The increase is primarily attributable to an increase in management and administrative payroll,facility administrative overhead and increased sales and marketing costs associated with the Company's continued growth. Selling and administrative expenses as a percentage of revenues decreased to 15% in 2001, from 17% in 2000 due primarily to an increase in revenues without a corresponding percentage increase in such expenses. Selling and administrative expenses primarily include management and administrative salaries, sales and marketing costs, and administrative overhead. In 2001, the Company's effective income tax rate was 8%, compared to 30% for 2000. The decrease is primarily attributable to an increase in taxable income in tax jurisdictions in which the Company has a tax holiday. As a result of the aforementioned items, the Company realized net income of $110,000 in 2001 and $429,000 in 2000. Six Months Ended June 30, 2001 and 2000 Revenues increased 72% to $31,840,000 for the six months ended June 30, 2001 compared to $18,551,000 for the similar period in 2000. The increase principally resulted from sales to two clients, one of which accounted for 47% and 35% of the Company's revenues in 2001 and 2000, respectively. The second client, for which work commenced in the third quarter of 2000, accounted for 18% of the Company's revenues for the six months ended June 30, 2001. In addition, export revenues, substantially all of which were derived from European clients, accounted for 11% of the Company's revenues in the 2001 and 2000 periods. Direct operating expenses were $23,521,000 for the six months ended June 30, 2001 and $14,429,000 for the six months ended June 30, 2000, an increase of 63%. Direct operating expenses as a percentage of revenues were 74% in 2001 and 78% in 2000. The dollar increase in 2001 is principally due to costs incurred for the increased revenues. In addition, during the six months ended June 30, 2001, the Company incurred approximately $1 million in labor costs on a new project for which no revenues were earned. The decrease as a percent of sales results primarily from a decline in the value of the foreign currencies of countries in which the Company's production facilities are located, offset by increased direct operating costs without a corresponding percentage increase in revenues. Selling and administrative expenses were $4,285,000 and $3,176,000 for the six months ended June 30, 2001 and 2000, respectively, an increase of 35%. The increase is primarily attributable to an increase in management and administrative payroll, facility administrative overhead and increased selling and marketing costs associated with the Company's continued growth. Selling and administrative expenses as a percentage of revenues decreased to 13% in the 2001 period from 17% in the 2000 period due primarily to an increase in revenues without a corresponding percentage increase in such expenses. In 2001, the Company's effective income tax rate increased to 33% from 30% For the six months ended June 30, 2000. The increase is primarily attributable to an increase in taxable income in tax jurisdictions in which a tax holiday is not available to the Company. As a result of the aforementioned items, the Company realized net income of $2,793,000 in 2001 and $687,000 in 2000. Liquidity and Capital Resources Selected measures of liquidity and capital resources are as follows: <TABLE> <CAPTION> <S> <C> <C> June 30, 2001 December 31, 2000 ------------- ----------------- Cash and Cash Equivalents $5,623,000 $9,040,000 Working Capital $8,147,000 $9,505,000 Stockholders' Equity Per Common Share* $.97 $.91 </TABLE> *Represents total stockholders' equity divided by the actual number of common shares outstanding (which excludes treasury stock). Net Cash Provided By Operating Activities During the six months ended June 30, 2001, net cash provided by operating activities was $2,151,000 as compared to $2,142,000 used in operating activities in the 2000 comparative period. The increase was primarily due to: - - an increase in net income of $2,106,000; - - an increase of approximately $1,222,000 in non-cash charges to net income, resulting principally from an increase in depreciation and amortization; - - a decrease in prepaid expenses and other current assets, primarily resulting from the reduction of deferred production costs; Partially offset by: - - an increase in accounts receivable; primarily due to increased revenues and the timing of collections. Net Cash Used in Investing Activities In the six months ended June 30, 2001, the Company spent approximately $4,237,000 for capital expenditures, compared to approximately $2,222,000 in the six months ended June 30, 2000. For the remainder of 2001, management presently expects to make capital expenditures of between two million and three million dollars. Such capital expenditures include anticipated costs to complete the renovation, re-engineering and expansion project at two of the Company's facilities; capital investment in additional production technologies, including capital costs to complete a new XML Solutions Factory; and normal ongoing capital investments. Net Cash Provided By Financing Activities In the six months ended June 30, 2001, net cash used by financing activities totaled approximately $1,331,000 primarily due to the repurchase of 270,000 shares of the Company's common stock compared to $647,000 provided by financing activities in the comparable period in 2000, which was primarily due to short term borrowings of $500,000. Availability of Funds The Company has a line of credit with a bank in the amount of $3 million, None of which was borrowed at July 31, 2001. The line is collateralized by accounts receivable. Interest is charged at 1/2% above the bank's prime rate and is due on demand. Management believes that existing cash, internally generated funds and short term bank borrowings will be sufficient for reasonably anticipated working capital and capital expenditure requirements during the next 12 months. The Company funds its foreign expenditures from its U.S. corporate headquarters on an as-needed basis. 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 clients under project-specific contracts, requirements-based contracts or long-term contracts. Contracts are typically subject to numerous termination provisions. The Company's revenues are not significantly affected by seasonality. Disclosures in this Form 10-Q contain certain forward-looking statements, including without limitation, statements concerning the Company's operations, economic performance and financial condition. 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, the ability and willingness of the Company's clients and prospective clients to execute business plans which give rise to increased requirements for digital content services, 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 and technological factors and other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. 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-Q will in fact occur. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest rate change market risk with respect to its credit facility with a financial institution which is priced based on the prime rate of interest. At June 30, 2001, there were no borrowings under the credit facility. To the extent the Company utilizes all or a portion of its line of credit, changes in the prime interest rate during fiscal 2001 will have a positive or negative effect on the Company's interest expense. The Company has operations in foreign countries. While it is exposed to foreign currency fluctuations, the Company presently has no financial instruments in foreign currency and does not maintain funds in foreign currency beyond those necessary for operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Not Applicable 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. The following matters were voted on at the July 31, 2001 Annual Meeting of Stockholders. The total shares voted were 20,584,088. <TABLE> <CAPTION> <S> <C> <C> <C> <C> Election of Directors Nominee For Withheld Against Abstain - ----------------------- --- -------- ------- ------- Jack Abuhoff 19,875,615 708,473 - - Todd Solomon 20,516,738 67,350 - - Dr. Charles F. Goldfarb 20,512,650 71,438 - - Abraham Biderman 20,514,202 69,886 - - John R. Marozsan 20,512,458 71,630 - - Haig S. Bagerdjian 20,512,450 71,638 - - 2001 Stock Option Plan 18,631,172 - 1,891,783 61,133 Appointment of Auditors 20,396,465 - 41,918 145,705 </TABLE> Item 5. Other Information. Not Applicable Item 6. (a) Exhibits. None (b) Form 8-K Report. During the three months ended June 30, 2001, a Form 8-K was filed dated as of June 13, 2001 announcing that the Company's Annual Meeting of Stockholders will be held on July 31, 2001. 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 <TABLE> <CAPTION> <S> <C> <C> Date: August 14, 2001 /s/ --------------- -------------------------- Jack Abuhoff Chairman of the Board and Chief Executive Officer Date: August 14, 2001 /s/ --------------- -------------------------- Stephen Agress Vice President - Finance Chief Accounting Officer </TABLE>