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 September 30, 2000 Commission File Number 0-22196 INNODATA CORPORATION (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation) 13-3475943 (I.R.S. Employer Identification No.) Three University Plaza Hackensack, NJ 07601 (Address of principal executive offices) (201) 488-1200 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / State the number of shares outstanding of each of the issuer's common equity, as of the latest practicable date: As of November 1, 2000 there were 5,122,386 shares of common stock outstanding. PART I. FINANCIAL INFORMATION Item 1. Financial Statements See pages 3-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations See pages 7-11 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 <TABLE> <CAPTION> <S> <C> <C> September 30, December 31, 2000 1999 --------------- -------------- Derived from audited financial Unaudited statements ASSETS CURRENT ASSETS: Cash and equivalents $ 4,332,581 $ 3,380,242 Accounts receivable-net 6,117,232 5,247,428 Prepaid expenses and other current assets 611,014 396,743 Deferred income taxes 748,000 540,000 ------------- ------------- Total current assets 11,808,827 9,564,413 PROPERTY AND EQUIPMENT - net 7,069,036 4,891,992 OTHER ASSETS 1,215,956 1,189,472 ------------- ------------- TOTAL $ 20,093,819 $ 15,645,877 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ - $ 19,629 Accounts payable and accrued expenses 1,995,243 1,553,585 Accrued salaries and wages 2,488,086 1,529,753 Income and other taxes 1,300,125 495,628 ------------- ------------- Total current liabilities 5,783,454 3,598,595 ------------- ------------- LONG-TERM DEBT, less current portion - 5,188 ------------- ------------- DEFERRED INCOME TAXES PAYABLE 238,000 390,000 ------------- ------------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized, 20,000,000 shares; issued, 5,235,636 and 5,133,943 shares at September 30, 2000 and December 31, 1999, respectively 52,357 51,339 Additional paid-in capital 11,172,256 10,908,538 Retained earnings 3,068,721 913,186 ------------- ------------- 14,293,334 11,873,063 Less: treasury stock - at cost; 144,249 shares (220,969) (220,969) ------------- ------------- Total stockholders' equity 14,072,365 11,652,094 ------------- ------------- TOTAL $ 20,093,819 $ 15,645,877 ============= ============= See notes to unaudited condensed consolidated financial statements </TABLE> INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited) <TABLE> <CAPTION> <S> <C> <C> 2000 1999 ----------- ---------- REVENUES $13,039,189 $7,072,658 ----------- ---------- OPERATING COSTS AND EXPENSES: Direct operating expenses 9,226,370 4,707,098 Selling and administrative expenses 1,732,425 1,607,176 Interest income - net (16,761) (22,099) ----------- ---------- Total 10,942,034 6,292,175 ----------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES 2,097,155 780,483 PROVISION FOR INCOME TAXES 629,000 195,000 ----------- ---------- NET INCOME $ 1,468,155 $ 585,483 =========== ========== BASIC INCOME PER SHARE $.29 $.12 =========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING 5,083,450 4,760,505 =========== ========== DILUTED INCOME PER SHARE $.25 $.11 =========== ========== ADJUSTED DILUTIVE SHARES OUTSTANDING 5,883,009 5,562,726 =========== ========== See notes to unaudited condensed consolidated financial statements </TABLE> INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited) <TABLE> <CAPTION> <S> <C> <C> 2000 1999 ----------- ----------- REVENUES $31,590,202 $19,709,688 ----------- ----------- OPERATING COSTS AND EXPENSES: Direct operating expenses 23,655,288 12,313,614 Selling and administrative expenses 4,908,516 4,920,670 Interest income - net (53,137) (77,601) ----------- ----------- Total 28,510,667 17,156,683 ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 3,079,535 2,553,005 PROVISION FOR INCOME TAXES 924,000 708,550 ----------- ----------- NET INCOME $ 2,155,535 $ 1,844,455 =========== =========== BASIC INCOME PER SHARE $.43 $.40 =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 5,047,829 4,577,153 =========== =========== DILUTED INCOME PER SHARE $.37 $.35 =========== =========== ADJUSTED DILUTIVE SHARES OUTSTANDING 5,764,100 5,203,281 =========== =========== See notes to unaudited condensed consolidated financial statements </TABLE> INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited) <TABLE> <CAPTION> <S> <C> <C> 2000 1999 ------------ ------------ OPERATING ACTIVITIES: $ 2,155,535 $ 1,844,455 Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,126,199 1,172,934 Deferred income taxes (360,000) - Changes in operating assets and liabilities: Accounts receivable (869,804) (2,523,232) Prepaid expenses and other current assets (349,271) (688,048) Other assets (94,884) 91,328 Accounts payable and accrued expenses 441,658 (405,417) Accrued salaries and wages 958,333 956,606 Income and other taxes 804,497 480,207 ----------- ----------- Net cash provided by operating activities 4,812,263 928,833 ----------- ----------- INVESTING ACTIVITIES: Capital expenditures (4,099,843) (2,696,195) ----------- ----------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 264,736 807,184 Payments of long-term debt (24,817) (48,429) ----------- ---------- Net cash provided by financing activities 239,919 758,755 ----------- ---------- INCREASE (DECREASE) IN CASH 952,339 (1,008,607) CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,380,242 3,535,533 ----------- ----------- CASH AND EQUIVALENTS, END OF PERIOD $ 4,332,581 $ 2,526,926 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 36,173 $ 4,645 =========== =========== Income taxes $ 350,000 $ 278,000 =========== =========== See notes to unaudited condensed consolidated financial statements </TABLE> INNODATA CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (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 September 30, 2000, the results of operations for the three and nine month periods ended September 30, 2000 and 1999, and of cash flows for the nine months ended September 30, 2000 and 1999. The results of operations for the nine months ended September 30, 2000 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, 1999 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, 1999 financial statements. 2. During the nine months ended September 30, 2000, options to purchase 101,693 shares of the Company's common stock were exercised, resulting in proceeds of $264,736. 3. In the nine months ended September 30, 2000, the Company granted options to purchase 338,600 shares of its common stock at $6.25 to $9.00 per share, and in October 2000, granted options to purchase 350,000 shares of its common stock. 4. 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 warrants and options. 5. On November 7, 2000 the Company declared a 2 for 1 stock split in the form of a stock dividend, payable on December 1, 2000 to stockholders of record on November 21, 2000. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company Innodata is a leading provider of digital content outsourcing services. The Company offers a "single solution" for companies needing to create high-value, large-scale Web content. The Company's digital content outsourcing services include strategic and technical consulting for content initiatives across multiple digital channels; content architecture services; data conversion; metadata creation; and digital content management. Its goal is to help its clients meet the challenge posed by the Internet - to publish massive quantities of high value-added information on the Web. Innodata does this by creating customized solutions for each of its clients, freeing them to focus on their own core businesses. 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. The Company recently entered into several key strategic client partnerships that may contribute significantly to revenue growth in the current and upcoming years. Innodata's 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. On June 19, 2000, Innodata officially inaugurated its new "XML Content Factory" located in Mandaue, the Philippines. The plant features a variety of proprietary and third party editing and content management tools for creating large volume, high quality information repositories based on Extensible Markup Language (XML) technology. Results of Operations Three Months Ended September 30, 2000 and 1999 Revenues increased 84% to $13,039,189 for the three months ended September 30, 2000 compared to $7,072,658 for the similar period in 1999, principally resulting from a strategic alliance agreement which accounted for approximately 57% of the Company's revenues in the current period. One other client accounted for 22% of the Company's revenues during 1999. No other client accounted for 10% or more of such revenues. Further, in 2000 and 1999, export revenues, substantially all of which were derived from European clients, accounted for 11% and 17%, respectively, of the Company's revenues. Direct operating expenses were $9,226,370 in the third quarter of 2000 and $4,707,098 in the third quarter of 1999, an increase of 96%. Direct operating expenses as a percentage of revenues were 71% in 2000 and 67% in 1999. The dollar increase in 2000 is principally due to costs incurred for the increased revenues. Direct operating expenses as a percent of revenues increased by 4 percentage points in 2000, resulting from additional costs incurred principally for the new XML Content Factory (including start-up costs) (which accounted for approximately 10 percentage points), offset by a decline in the value of the foreign currencies of countries in which the Company's production facilities are located (which resulted in a cost reduction of approximately 6 percentage points). Selling and administrative expenses were $1,732,425 and $1,607,176 in the third quarter of 2000 and 1999, respectively. Selling and administrative expenses as a percentage of revenues decreased to 13% in the 2000 quarter from 23% in the 1999 quarter due primarily to an increase in revenues without a corresponding increase in such expenses. Selling and administrative expenses primarily include management and administrative salaries, sales and marketing costs, and administrative overhead. In 2000, the Company's effective income tax rate increased to 30% from 25% for the three months ended September 30, 1999. 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 $1,468,155 in 2000 and $585,483 in 1999. Nine Months Ended September 30, 2000 and 1999 Revenues increased 60% to $31,590,202 for the nine months ended September 30, 2000 compared to $19,709,688 for the similar period in 1999, principally resulting from a strategic alliance agreement which accounted for approximately 44% of the Company's revenues in the current period. One other client accounted for 23% of the Company's revenues during 1999. No other client accounted for 10% or more of such revenues. Further, in 2000 and 1999, export revenues, all of which were derived from European clients, accounted for 11% and 13%, respectively, of the Company's revenues. Direct operating expenses were $23,655,288 during the first nine months of 2000 and $12,313,614 for the comparable period in 1999, an increase of 92%. Direct operating expenses as a percentage of revenues were 75% in 2000 and 62% in 1999. The dollar increase in 2000 is principally due to costs incurred for the increased revenues. Direct operating expenses as a percent of revenues increased by 13 percentage points for the nine months ended September 30, 2000, resulting from additional costs incurred principally for the new XML Content Factory (including start-up costs) (which accounted for approximately 17 percentage points), offset by a decline in the value of the foreign currencies of countries in which the Company's production facilities are located (which resulted in a cost reduction of approximately 4 percentage points). Selling and administrative expenses were $4,908,516 and $4,920,670 in the first nine months of 2000 and 1999, respectively. Selling and administrative expenses as a percentage of revenues were 16% in the 2000 period compared with 25% in the 1999 period due primarily to the increase in revenues without a corresponding increase in such expenses. As a result of the aforementioned items, the Company realized net income of $2,155,535 in 2000 and $1,844,455 in 1999. Liquidity and Capital Resources Selected measures of liquidity and capital resources are as follows: <TABLE> <CAPTION> <S> <C> <C> September 30, 2000 December 31, 1999 ------------------- ------------------ Cash and Cash Equivalents $4,333,000 $3,380,000 Working Capital $6,025,000 $5,966,000 Stockholders' Equity Per Common Share* $2.76 $2.34 </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 nine months ended September 30, 2000, net cash provided by operating activities was $4,812,000 as compared to $929,000 in the 1999 comparative period. The increase was primarily due to: - - an increase of approximately $593,000 in non-cash charges to net income, resulting principally from a $953,000 increase in depreciation and amortization net of $360,000 in non-cash credits; - - an increase in net collections of accounts receivable, primarily due to timing of collections; - - an increase in accounts payable and accrued expenses, primarily due to the timing of payments and the increased growth of operations; and - - an increase in accrued salaries and wages, primarily due to increased production headcount and payroll; Partially offset by: - - an increase in prepaid expenses and other current assets primarily attributable to the growth of operations and the new facility. Net Cash Used in Investing Activities In the nine months ended September 30, 2000, the Company spent approximately $4,100,000 for capital expenditures, compared to approximately $2,696,000 in the nine months ended September 30, 1999. During the nine months ended September 30, 2000, the Company spent approximately $2.8 million for capital expenditures in connection with the creation of its new XML Content Factory. Such capital costs consist primarily of network and cabling costs, computer servers and storage, software licenses, leasehold improvement costs, and peripheral equipment. Management presently expects to make capital expenditures of between $7 million and $9 million during the next 9 months. Such capital expenditures include costs required to complete the XML Content Factory infrastructure; costs of exercising the option to purchase presently leased computer workstations; anticipated costs to renovate and re-engineer the Company's Manila facility infrastructure; capital investment in additional production technologies; and normal ongoing capital investments. Capital expenditures in the comparable period in 1999 were primarily utilized for expansion of production capacity required to meet the growth in revenues, and for the replacement of computer equipment not Year 2000 compliant. Net Cash Provided By Financing Activities In the nine months ended September 30, 2000, net cash provided by financing activities totaled approximately $240,000 compared to $759,000 in the comparable period in 1999. The change was primarily due to a decrease in proceeds from the exercise of stock options. 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 October 31, 2000. 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'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 of the Company's customers to continue to execute their 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 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. 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 September 30, 2000, there were no borrowings under the credit facility. Changes in the prime interest rate during fiscal 2000 will have a positive or negative effect on the Company's interest expense. Such exposure will increase accordingly should the Company maintain higher levels of borrowing during 2000. 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. Not Applicable Item 5. Other Information. None Item 6. (a) Exhibits. Exhibit 27. Financial Data Schedule (b) Form 8-K Report. None 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: November 10, 2000 /s/ -------------------------- Jack Abuhoff President Chief Executive Officer Date: November 10, 2000 /s/ --------------------------- Martin Kaye Executive Vice President Chief Financial Officer Date: November 10, 2000 /s/ --------------------------- Stephen Agress Vice President - Finance Principal Accounting Officer </TABLE>