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)
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
======= =======
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)
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
======= =======
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)
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
======= =======
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)
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
====== ======
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.
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
====== ==== ======= ====== ======== =======
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:
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
==== ==== ==== ===
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:
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
*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.
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
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
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