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, 2001
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 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 October 31, 2001 there were approximately
21,404,000 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)
September 30, December 31,
2001 2000
--------------- --------------
(Unaudited) Derived from
audited
financial
statements
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 3,247 $ 9,040
Accounts receivable-net 9,760 5,799
Prepaid expenses and other current assets 746 1,194
Deferred income taxes 800 839
-------- -------
Total current assets 14,553 16,872
PROPERTY AND EQUIPMENT - NET 11,147 9,464
OTHER ASSETS 3,639 1,610
-------- -------
TOTAL $29,339 $27,946
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,319 $ 3,196
Accrued salaries and wages 3,570 3,060
Income and other taxes 1,336 1,111
------- -------
Total current liabilities 7,225 7,367
------- -------
DEFERRED INCOME TAXES PAYABLE 1,243 1,263
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
75,000,000 shares; issued, 21,674,000 and
21,688,000 shares, respectively. 217 217
Additional paid-in capital 12,379 12,239
Retained earnings 9,914 7,081
------- -------
22,510 19,537
Less: treasury stock - at cost;
270,000 and 577,000 shares, respectively. (1,639) (221)
------- -------
Total stockholders' equity 20,871 19,316
------- -------
TOTAL $29,339 $27,946
======= =======
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands, except per share amounts)
(Unaudited)
2001 2000
------- -------
REVENUES $13,849 $13,039
------- -------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 11,315 9,226
Selling and administrative expenses 2,021 1,732
Provision for doubtful accounts 500 -
Interest income - net (27) (16)
------- -------
Total 13,809 10,942
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 40 2,097
PROVISION FOR INCOME TAXES - 629
------- -------
NET INCOME $ 40 $ 1,468
======= =======
BASIC INCOME PER SHARE $- $.07
==== ===
WEIGHTED AVERAGE SHARES OUTSTANDING 21,404 20,334
======= =======
DILUTED INCOME PER SHARE $- $.06
==== ====
ADJUSTED DILUTIVE SHARES OUTSTANDING 23,977 23,532
======= =======
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands, except per share amounts)
(Unaudited)
2001 2000
-------- --------
REVENUES $45,689 $31,590
------- --------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 34,836 23,655
Selling and administrative expenses 6,306 4,908
Provision for doubtful accounts 500 -
Interest income - net (178) (53)
------- -------
Total 41,464 28,510
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,225 3,080
PROVISION FOR INCOME TAXES 1,392 924
------- -------
NET INCOME $ 2,833 $ 2,156
======= =======
BASIC INCOME PER SHARE $.13 $.11
==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING 21,303 20,191
======= =======
DILUTED INCOME PER SHARE $.11 $.09
===== ====
ADJUSTED DILUTIVE SHARES OUTSTANDING 24,817 23,056
======= =======
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands)
(Unaudited)
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net income $ 2,833 $ 2,156
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 3,397 2,126
Deferred income taxes 19 (360)
Provision for doubtful accounts 500 -
Changes in operating assets and liabilities:
Accounts receivable (4,461) (870)
Prepaid expenses and other current assets 448 (349)
Other assets (2,151) (95)
Accounts payable and accrued expenses (877) 442
Accrued salaries and wages 510 958
Income and other taxes 225 804
------- -------
Net cash provided by operating activities 443 4,812
------- -------
INVESTING ACTIVITIES:
Capital expenditures (4,958) (4,100)
------- -------
FINANCING ACTIVITIES:
Purchase of treasury stock (1,639) -
Proceeds from exercise of stock options 361 265
Payments of long-term debt - (25)
------- -------
Net cash (used in) provided by financing activities (1,278) 240
------- -------
(DECREASE) INCREASE IN CASH (5,793) 952
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 9,040 3,380
------- -------
CASH AND EQUIVALENTS, END OF PERIOD $ 3,247 $ 4,332
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ - $ 36
======= =======
Income taxes $ 1,344 $ 350
======= =======
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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 September 30, 2001, the results of operations for the three
and nine months ended September 30, 2001 and 2000, and of cash flows for
the nine months ended September 30, 2001 and 2000. The results of
operations for the nine months ended September 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
nine months ended September 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 - - - 2,833 - 2,833
Issuance of
common stock
upon exercise
of stock options 563 6 355 - - 361
Purchase of
treasury stock - - - - (1,639) (1,639)
Retirement of
treasury stock (577) (6) (215) - 221 -
------ ---- ------- ------ ------- -------
September 30, 2001 21,674 $217 $12,379 $9,914 $(1,639) $20,871
====== ==== ======= ====== ======= =======
During the nine months ended September 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 31,000 shares of its common stock at $3.05 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 nine
months ended September 30 (in thousands, except per share amounts) is as
follows:
Three Months Nine Months
------------ -------------
2001 2000 2001 2000
---- ---- ----- -------
Net income $ 40 $1,468 $2,833 $ 2,156
==== ====== ====== =======
Weighted average common shares outstanding 21,404 20,334 21,303 20,191
Dilutive effect of outstanding options 2,573 3,198 3,514 2,865
------ ------ ------ ------
Adjusted for dilutive computation 23,977 23,532 24,817 23,056
====== ====== ====== ======
Basic income per share $- $.07 $.13 $.11
==== ==== ==== ====
Diluted income per share $- $.06 $.11 $.09
==== ==== ==== ====
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.
7. On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS
142 is effective for fiscal years beginning after December 15, 2001. The
new rules mandate that all business combinations use the purchase method of
accounting; that goodwill, as well as other intangible assets with
indefinite lives, not be amortized; and that intangible assets, including
goodwill, be tested for impairment annually and whenever there is an
impairment indicator. Currently, the Company is not impacted by these
changes, but may be in the future if the Company acquires intangible assets
such as goodwill through an acquisition.
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 September 30, 2001 and 2000
Revenues increased 6% to $13,849,000 for the three months ended September
30, 2001 compared to $13,039,000 for the similar period in 2000. One client,
for which work commenced during the third quarter of 2000, accounted for
approximately 37% of the Company's revenues in the current period. One other
client accounted for 13% and 57% of the Company's revenues in 2001 and 2000,
respectively. Revenues from this second client are expected to decline
significantly in the fourth quarter. In addition, in 2001 and 2000, export
revenues, substantially all of which were derived from European clients,
accounted for 15% and 11%, respectively, of the Company's revenues.
Direct operating expenses were $11,315,000 in the third quarter of 2001 and
$9,226,000 in the third quarter of 2000, an increase of 23%. Direct operating
expenses as a percentage of revenues were 82% in 2001 and 71% in 2000. The
increase in 2001 is primarily attributable to a combination of additional fixed
costs for available capacity, and, to a lesser extent to additional labor and
other variable production costs, which the Company elected to carry in third
quarter in order to preserve capacity for new projects. Direct operating
expenses include primarily direct payroll, telecommunications, depreciation,
equipment lease costs, computer services, supplies and occupancy.
Selling and administrative expenses were $2,021,000 and $1,732,000 in the
third quarter of 2001 and 2000, respectively, an increase of 17%. Selling and
administrative expenses as a percentage of revenues increased to 15% in 2001,
from 13% in 2000. The increase is primarily attributable to an increase in
management and administrative payroll, facility administrative overhead and
increased sales and marketing costs. Selling and administrative expenses
primarily include management and administrative salaries, sales and marketing
costs, and administrative overhead.
In 2001, the Company added $500,000 to the provision for doubtful accounts
to reflect the uncertainty associated with fully collecting from certain early
stage clients.
As a result of the aforementioned items, the Company realized net income of
$40,000 in 2001 and $1,468,000 in 2000.
Nine Months Ended September 30, 2001 and 2000
Revenues increased 45% to $45,689,000 for the nine months ended September
30, 2001 compared to $31,590,000 for the similar period in 2000. The increase
principally resulted from sales to two clients. One client, for which work
commenced in the third quarter of 2000, accounted for 24% of the Company's
revenues for the nine months ended September 30, 2001. A second client
accounted for 37% and 44% of the Company's revenues in 2001 and 2000,
respectively. Revenues from this second client are expected to decline
significantly in the fourth quarter. In addition, in 2001 and 2000, export
revenues, substantially all of which were derived from European clients,
accounted for 13% and 11%, respectively, of the Company's revenues.
Direct operating expenses were $34,836,000 for the nine months ended
September 30, 2001 and $23,655,000 for the nine months ended September 30, 2000,
an increase of 47%. Direct operating expenses as a percentage of revenues were
76% in 2001 and 75% in 2000. The dollar increase in 2001 is principally due to
costs incurred for increased revenues.
Selling and administrative expenses were $6,306,000 and $4,908,000 for the
nine months ended September 30, 2001 and 2000, respectively, an increase of 28%.
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 14% in the 2001
period from 16% in the 2000 period due primarily to an increase in revenues
without a corresponding percentage increase in such expenses.
In 2001, the Company added $500,000 to the provision for doubtful accounts
to reflect the uncertainty associated with fully collecting from certain early
stage clients.
In 2001, the Company's effective income tax rate increased to 33% from 30%
for the nine months ended September 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
$2,833,000 in 2001 and $2,156,000 in 2000.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources are as follows:
September 30, 2001 December 31, 2000
------------------ -----------------
Cash and Cash Equivalents $3,247,000 $9,040,000
Working Capital $7,328,000 $9,505,000
Stockholders' Equity Per Common Share* $.98 $.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 nine months ended September 30, 2001, net cash provided by
operating activities was $443,000 as compared to $4,812,000 provided by
operating activities in the 2000 comparative period, a decrease of $4,369,000.
The decrease was primarily due to the net effect of the following:
- - an increase in accounts receivable primarily due to the timing of billing
and collections;
- - a decrease in accounts payable and accrued expenses primarily due to the
timing of payments; and
- - an increase in other assets, which consists primarily of a customer
receivable that has been classified as long-term;
Partially offset by:
- - an increase in net income of $677,000;
- - an increase of approximately $2,150,000 in non-cash charges to net income,
resulting principally from an increase in depreciation and amortization and
other non-cash charges; and
- - a decrease in prepaid expenses and other current assets, resulting
primarily from the reduction of deferred production costs.
Net Cash Used in Investing Activities
In the nine months ended September 30, 2001, the Company spent
approximately $4,958,000 for capital expenditures, compared to approximately
$4,100,000 in the nine months ended September 30, 2000. For the remainder of
2001, management presently expects to make capital expenditures of between
$500,000 and $1,000,000. 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,
and normal ongoing capital investments.
Net Cash Provided By Financing Activities
In the nine months ended September 30, 2001, net cash used in financing
activities totaled approximately $1,278,000 primarily due to the repurchase of
270,000 shares of the Company's common stock compared to $240,000 provided by
financing activities in the comparable period in 2000, which resulted primarily
from the proceeds 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 November 1, 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 September 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. Not Applicable
Item 5.Other Information. Not Applicable
Item 6.(a) Exhibits. None
(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
Date: November 13, 2001 /s/
------------------------------
Jack Abuhoff
Chairman of the Board and
Chief Executive Officer
Date: November 13, 2001 /s/
------------------------------
Stephen Agress
Vice President - Finance
Chief Accounting Officer