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, 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 July 31, 2000 there were 5,073,278 shares
of common stock outstanding.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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See pages 2-7
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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See pages 8-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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See page 11
PART ll. OTHER INFORMATION
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See page 12
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, December 31,
2000 1999
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Derived from
audited
financial
ASSETS Unaudited statements
CURRENT ASSETS:
Cash and equivalents $ 3,947,399 $ 3,380,242
Accounts receivable-net 4,944,864 5,247,428
Prepaid expenses and other current
assets 697,126 396,743
Deferred income taxes 555,000 540,000
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Total current assets 10,144,389 9,564,413
PROPERTY AND EQUIPMENT -net 5,961,857 4,891,992
OTHER ASSETS 1,207,360 1,189,472
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TOTAL $17,313,606 $15,645,877
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowings $ 500,000 $ -
Current portion of long-term debt - 19,629
Accounts payable and accrued expenses 1,308,148 1,553,585
Accrued salaries and wages 2,143,777 1,529,753
Income and other taxes 489,907 495,628
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Total current liabilities 4,441,832 3,598,595
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LONG-TERM DEBT, less current portion - 5,188
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DEFERRED INCOME TAXES PAYABLE 360,000 390,000
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
authorized, 20,000,000 shares;
issued, 5,195,778 and 5,133,943
shares at June 30, 2000 and
December 31, 1999, respectively. 51,959 51,339
Additional paid-in capital 11,080,218 10,908,538
Retained earnings 1,600,566 913,186
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12,732,743 11,873,063
Less: treasury stock -
at cost; 144,249 shares (220,969) (220,969)
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Total stockholders' equity 12,511,774 11,652,094
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TOTAL $17,313,606 $15,645,877
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</TABLE>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
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2000 1999
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REVENUES $18,551,013 $12,637,030
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 14,428,918 7,606,516
Selling and administrative expenses 3,176,092 3,313,494
Interest income - net (36,377) (55,502)
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Total 17,568,633 10,864,508
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INCOME BEFORE PROVISION FOR INCOME TAXES 982,380 1,772,522
PROVISION FOR INCOME TAXES 295,000 513,550
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NET INCOME $ 687,380 $ 1,258,972
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BASIC INCOME PER SHARE $.14 $.28
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WEIGHTED AVERAGE SHARES OUTSTANDING 5,029,823 4,485,428
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DILUTED INCOME PER SHARE $.12 $.25
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ADJUSTED DILUTIVE SHARES OUTSTANDING 5,704,450 5,023,559
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</TABLE>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
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2000 1999
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REVENUES $9,711,731 $7,025,955
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 7,487,543 4,150,688
Selling and administrative expenses 1,627,630 1,612,705
Interest income - net (17,693) (25,728)
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Total 9,097,480 5,737,665
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INCOME BEFORE PROVISION FOR INCOME TAXES 614,251 1,288,290
PROVISION FOR INCOME TAXES 185,000 320,000
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NET INCOME $ 429,251 $ 968,290
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BASIC INCOME PER SHARE $.09 $.21
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WEIGHTED AVERAGE SHARES OUTSTANDING 5,046,529 4,516,233
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DILUTED INCOME PER SHARE $.08 $.18
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ADJUSTED DILUTIVE SHARES OUTSTANDING 5,679,410 5,262,789
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</TABLE>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
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2000 1999
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OPERATING ACTIVITIES:
Net income $ 687,380 $1,258,972
Adjustments to reconcile net
income to net cash
provided by operating activities:
Depreciation and amortization 1,288,315 718,108
Deferred income taxes
Changes in operating assets and liabilities: (45,000) -
Accounts receivable 302,564 (919,529)
Prepaid expenses and other current assets (390,383) (430,342)
Other assets (63,488) (21,226)
Accounts payable and accrued expenses 368,587 620,521
Income and other taxes (5,721) 173,825
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Net cash provided by
operating activities 2,142,254 1,400,329
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INVESTING ACTIVITIES:
Capital expenditures (2,222,580) (1,328,691)
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FINANCING ACTIVITIES:
Proceeds from short term borrowings 500,000 -
Proceeds from exercise of stock options 172,300 83,666
Payments of long-term debt (24,817) (41,545)
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Net cash provided by
financing activities 647,483 42,121
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INCREASE IN CASH 567,157 113,759
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,380,242 3,535,533
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CASH AND EQUIVALENTS, END OF PERIOD $ 3,947,399 $3,649,292
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SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 23,785 $ -
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Income taxes $ 240,000 $ 201,000
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</TABLE>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
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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, 2000, the results of operations for the three and six month periods
ended June 30, 2000 and 1999, and of cash flows for the six months ended June
30, 2000 and 1999. The results of operations for the six months ended June 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 six months ended June 30, 2000, options to purchase 61,835
shares of the Company's common stock were exercised, resulting in proceeds of
$172,300.
3. In June 2000, the Company granted options to purchase 313,600 shares of
its common stock at $6.25 per share, and in July 2000, granted options to
purchase 10,000 shares of its common stock at $8.75 per share.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company
Innodata is a premier provider of Internet and online data conversion,
content architecture, and content management services. 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 represent an array of major electronic publishers and
Internet content providers, as well as document-intensive companies repurposing
proprietary information into electronic resources that can be referenced via
web-centric applications. The Company recently entered into several key
strategic client partnerships that are expected to produce significant 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 Southeast 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 June 30, 2000 and 1999
Revenues increased 38% to $9,711,731 for the three months ended June 30, 2000
compared to $7,025,955 for the similar period in 1999, principally resulting
from a strategic alliance agreement which accounted for approximately 38% of the
Company's revenues in the current period. One other client accounted for 14%
and 21%, respectively, of the Company's revenues during 2000 and 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 10% and 17%, respectively, of the Company's revenues.
The Company expects continued revenue growth principally as a result of the
above mentioned strategic alliance agreement, other recently signed outsourcing
agreements, and further XML content outsourcing projects.
Direct operating expenses were $7,487,543 in the second quarter of 2000 and
$4,150,688 in the second quarter of 1999, an increase of 80%. Direct operating
expenses as a percentage of revenues were 77% in 2000 and 59% in 1999. The
increase in 2000 is due to costs incurred for increased revenues, as well as
additional fixed and variable costs incurred for the new XML Content Factory,
including training costs for new production employees required to meet the
anticipated growth in revenues. The total increase in direct operating expenses
in 2000 was partially offset by a decline in the value of the foreign currencies
of countries in which the Company's production facilities are located. Such
foreign currency decline had the effect of decreasing direct operating costs by
approximately 7%. Direct operating expenses primarily include overseas payroll,
occupancy, telecommunications, depreciation, computer and other supplies, and
leased equipment.
Selling and administrative expenses were $1,627,630 and $1,612,705 in the
second quarter of 2000 and 1999, respectively. Selling and administrative
expenses as a percentage of revenues decreased to 17% 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 June 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
$429,251 in 2000 and $968,290 in 1999.
Six Months Ended June 30, 2000 and 1999
Revenues increased 47% to $18,551,013 for the six months ended June 30,
2000 compared to $12,637,030 for the similar period in 1999, principally
resulting from a strategic alliance agreement which accounted for approximately
35% of the Company's revenues in the current period. One other client accounted
for 12% and 22%, respectively, of the Company's revenues during 2000 and 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 19%, respectively, of the Company's revenues.
Direct operating expenses were $14,428,918 during the first six months of
2000 and $7,606,516 for the comparable period in 1999, an increase of 90%.
Direct operating expenses as a percentage of revenues were 78% in 2000 and 60%
in 1999. The increase in 2000 is due to costs incurred for the increased
revenues, as well as additional fixed and variable costs incurred for the new
XML Content Factory, including training costs for new production employees
required to meet the anticipated growth in revenues. The total increase in
direct operating expenses in 2000 was partially offset by a decline in the value
of the foreign currencies of countries in which the Company's production
facilities are located. Such foreign currency decline had the effect of
decreasing direct operating costs by approximately 6%.
Selling and administrative expenses were $3,176,092 and $3,313,494 in the
first six months of 2000 and 1999, respectively, representing a decrease of 4%.
The decrease in dollars in 2000 was due principally to the elimination of costs
associated with the Company's document imaging services which was phased out in
1999. Selling and administrative expenses as a percentage of revenues were 17%
in the 2000 period compared with 26% 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
$687,380 in 2000 and $1,258,972 in 1999.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources are as follows:
June 30, 2000 December 31, 1999
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Cash and Cash Equivalents $3,947,000 $3,380,000
Working Capital $5,703,000 $5,966,000
Stockholders' Equity Per Common Share* $2.48 $2.34
*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, 2000, net cash provided by operating
activities was $2,142,000 as compared to $1,400,000 in the 1999 comparative
period. The increase was primarily due to:
- an increase of approximately $525,000 in non-cash charges to net income,
principally from the increase in depreciation and amortization;
- a decrease in accounts receivable, primarily due to timing of collections;
and
- an increase in accrued salaries and wages, primarily due to increased
production headcount and payroll;
Partially offset by:
- a decrease in net income;
- a decrease in accounts payable and other accrued expenses, primarily due
to timing of payments; and
- 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 six months ended June 30, 2000, the Company spent approximately
$2,223,000 for capital expenditures, compared to approximately $1,329,000 in the
six months ended June 30, 1999. During the six months ended June 30, 2000, the
Company spent approximately $1.7 million in connection with the ongoing
construction 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 periphery equipment.
Management presently expects to make capital expenditures of between $5
million and $6 million dollars during the next 12 months. Such capital
expenditures include costs required to further expand the XML Content Factory
and costs of exercising the option to purchase presently leased computer
workstations; anticipated costs to renovate and re-engineer the Company's Manila
facility; capital investment in additional production technologies; and normal
ongoing capital expenditures.
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 six months ended June 30, 2000, net cash provided by financing
activities totaled approximately $647,000 compared to $42,000 in the comparable
period in 1999. The change was primarily due to short term bank borrowings of
$500,000 and an $89,000 increase in proceeds from the exercise of stock options.
Short term borrowings are primarily for purposes of providing liquidity to meet
short term operating obligations in foreign countries. The Company funds its
foreign expenditures from its U.S. corporate headquarters on an as-needed basis.
Availability of Funds
The Company has a line of credit with a bank in the amount of $2 million,
of which $500,000 was borrowed as of July 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.
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 June 30, 2000, $500,000 was borrowed 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
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Item 1. Legal Proceedings. Not Applicable
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Item 2. Changes in Securities. Not Applicable
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Item 3. Defaults upon Senior Securities. Not Applicable
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Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable
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Item 5. Other Information. None
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Item 6. (a) Exhibits.
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Exhibit 27. Financial Data Schedule
(b) Form 8-K Report. None
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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
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Date: August 11, 2000 /s/
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Jack Abuhoff
President
Chief Executive Officer
Date: August 11, 2000 /s/
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Martin Kaye
Executive Vice President
Chief Financial Officer
Date: August 11, 2000 /s/
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Stephen Agress
Vice President - Finance
Principal Accounting Officer
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