Innodata
Annual Report 2000

Plain-text annual report

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K(Mark One)/x/ Annual report under section 13 or 15(d) of the securities exchange act of1934 For the fiscal year ended December 31, 2000/ / Transition report under section 13 or 15(d) of the securities exchange actof 1934Commission file number 0-22196 INNODATA CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) Three University Plaza Hackensack, New Jersey (Address of principal executive offices) 07601 (Zip Code) (201) 488-1200 (Registrant's telephone number) 13-3475943 (I.R.S. Employer Identification No.)Securities registered under Section 12(b) of the Exchange Act: NoneSecurities registered under Section 12(g) of the Exchange Act: Common Stock,$.01 par valueIndicate by check mark whether the Registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe past twelve months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes /x/ No / /Indicate by check mark if disclosure of delinquent filers in response to Item405 of Regulation S-K is not contained herein, and will not be contained, to thebest of Registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. /x/State the aggregate market value of the voting stock held by non-affiliates ofthe registrant based on the closing price of the Company's Common Stock onFebruary 28, 2001 of $5.00 per share. $82,043,000State the number of shares outstanding of each of the issuer's classes of commonequity, as of the latest practicable date. 21,134,252 shares of common stock, $.01 par value, as of February 28, 2001. DOCUMENTS INCORPORATED BY REFERENCE [SEE INDEX TO EXHIBITS] PART IItem 1. Description of Business.General Innodata Corporation ("Innodata" or the "Company") is a leading provider ofdigital content outsourcing services. It provides a host of content conversionand management solutions to online and Internet-based publishers, contentaggregators and syndicates, B2B and e-commerce firms and a growing number ofInternet portals as well as non-Internet firms. Through its XML Content Factory,the Company provides large-scale XML content conversions and enhancementservices. The Company's outsourcing solutions typically draw upon one or more ofthe following specific services: data conversion, content architecture, contentmanagement, XML services, metadata creation, editorial enhancement, softwaredevelopment, and consulting services. Through the provision of these services,Innodata provides all the necessary steps to enable its clients to create anddistribute vast amounts of digital information via the Internet, intranet,extranet, and other digital media. The Company is leveraging its strong heritage in data conversion and editorial services and is extending it to facilitate XML content managementsolutions. Since 2000, Innodata has delivered XML solutions that enable contentpublishers to rapidly deploy large-scale XML repositories, reducing new producttime to market and time to revenue. The Company was incorporated in Delaware in June 1988, and operates fromits North American Solutions Center in Hackensack, New Jersey; its EnterpriseSupport Services Center in Manila, the Philippines; its XML Content Factory inMandaue, the Philippines; and its content production and R&D/applicationsdevelopment facilities in: Manila, the Philippines; Cebu, the Philippines;Legaspi, the Philippines; Noida, India; Delhi, India; and Colombo, Sri Lanka.Industry Background XML (Extensible Markup Language) technology has reshaped the market forelectronic content publishing, unleashing substantial new revenue opportunitiesfor digital content owners of all types. Whether the objective is to driveonline transactions or sell subscription-based information services, XML iscreating new opportunities to drive revenue. Given that content is thecornerstone of XML, XML-izing content is the prerequisite for content owners toparticipate in these new revenue opportunities. Through the functionality of XML, content publishers can participate in emerging revenue-producing business models involving content syndication;application-driven, dynamic content delivery; and the spontaneous synthesis ofdata into interactive "web services". In addition, the technology enablescontent owners to repurpose content into derivative products quickly andefficiently, which means faster reaction to market opportunities. In order to participate in these business opportunities, content owners areforced to confront the challenge of building massive XML content. Competitivepressures are expected to accelerate this investment. Jupiter Communications hasstated that, "As XML saturation reaches critical mass, noncompliant sites willfind it increasingly difficult to negotiate content partnerships" and will "risklosing critical audience share and being locked out of lucrative contentpartnerships." Yet the complexity of large-scale XML transformations posessignificant technical and logistical obstacles. Moreover, there is a shortageof XML-savvy technical talent and information architects to guide thesetransformations. Other business drivers exist, as well. For example, the market expectscontent publishers to deliver ever-increasing quantities of online informationquickly, adding rich media functionality and other kinds of enhancement totraditional full text-based online products. Typically, given the inelasticityof the subscription-based pricing models under which many content ownersoperate, these market expectations threaten to erode content owners' margins. To tap the new business opportunities that XML facilitates, to obtain access to leverageable technical know-how, to maintain the flexibility andmarket focus to produce high-demand products, and to protect profit margins by reducing cost,content owners are increasingly receptive to outsourcing solutions. Many of the Company's clients, in fact, have chosen to focus internalresources on strategic initiatives (e.g., product definition, content acquisition and marketing), declaring content management-related activities (e.g., contentcreation, conversion and enrichment) non-strategic - albeit mission-critical - and susceptible to outsourcing. The Company focuses its marketing efforts primarily on content publishersand information providers in the following vertical markets: knowledgeservices/eLearning/distance learning; scientific/technical/medical; legal andfinancial (including regulatory and tax); e-book publishing; general web portalsand content aggregators; and B2B/online marketplaces. At the same time, other types of companies (ranging from manufacturingfirms to professional firms) are confronting strategies for transacting businessover the Internet, creating content-driven, integrated vertical portals("vortals"). Others create and distribute product catalogs, parts catalogs, andtechnical documentation, or archive and share B2B and e-commerce data. Stillothers create and publish maintenance manuals, research materials, and otherdocuments, or seek to mine value from legacy data, implementing electronicknowledge management initiatives as a way of mitigating the cost of isolatedislands of information, and redundancies and duplication in work efforts. Thesecompanies view the Web as a viable publishing environment for enablingunprecedented information access to knowledge workers through a variety ofWeb-enabled devices. According to Zona Research, "XML has found a place inindustries as diverse as medicine, insurance, electronic component trading hubs,petrochemicals, forestry and finance, to name a few." All of these verticalsrepresent current or potential markets for the Company's services.Corporate Strategy The increased acceptance of outsourcing by electronic publishers, and themove to XML, in particular, has created a significant opportunity to createfull-service solutions for creating and managing content and for XML-izing largerepositories of Web-publishable information. The Company believes that there isan infinite number of textual, audio, and video data sources that will be madeavailable on the Web by electronic publishers, and that many informationpublishers and content owners will desire to outsource this effort. The Companyintends to enter into strategic outsourcing agreements with clients requiringlarge-scale XML transformations and content management solutions. The Companyintends to target publishers and information providers; knowledge services andeLearning companies; Internet content portals; e-content vendors; and rich mediaowners; and corporations with B2B, and knowledge management initiatives. Specifically, Innodata plans to dominate the growing market for XML contentcreation and content management services by:(1) Further leveraging existing and emerging technologies to createincreasingly efficient tools for creating large-scale XML content repositories;(2) Maintaining the Company's position as the de facto supplier oflarge-scale XML content services, while extending our leadership in XMLarchitecture and XML consulting;(3) Entering into additional high-profile client partnerships forlarge-scale XML content services;(4) Growing vertically-aligned sales and consulting operations in NorthAmerica and Europe;(5) Designing highly tailored service offerings to meet the unique needs oftargeted vertical markets;(6) Responding to opportunities to provide increased value-added services toour clients; and(7) Expanding our delivery capabilities to embrace new technologyinitiatives that are strategic for our clients. Additionally, the Company plans to extend its service offerings into otherstrategic areas consistent with its vision statement as the de facto provider ofdigital content outsourcing solutions.Close Relationships With Clients Innodata views the long-term partnerships with its clients as a criticalelement in its historical and future success. Innodata provides services to awide variety of content owners. Our clients include many of the largest and mosthighly regarded electronic publishers, Fortune 500, and Global 1000 companies.Some of our clients are traditional online publishers who acquire or syndicateinformation from a variety of sources, repackage the content and resell it totargeted groups of end users (e.g., Elsevier Science to libraries, Lexis-Nexisand Westlaw to attorneys, etc.). Others of our clients are new to onlinepublishing (e.g., Questia Media, Bell & Howell), having developed novelelectronic information offerings geared to the new possibilities offered byemerging technologies such as XML. To continue to meet the needs of existing and prospective clients in a timely fashion, Innodata works directly with its clients to identify and developnew and improved service offerings. To promote a close and continuing relationship with clients, the Company sells through its North American Solutions Center and provides 24/7 project support through its Client Service Centers. The Company generally performs its work for its clients under project-specific contracts, requirements-based contracts or long-term contracts. Contracts aretypically subject to numerous termination provisions. Innodata is from time to time required by clients to enter into non-disclosure agreements pursuant to which Innodata agrees, inter alia, not to disclose its clients. Reasons for requiring such arrangements vary, but typically involve a preference on the part of the client not to publicize itsoutsourcing strategy or to telegraph to competitors a new product development initiative.Recurring Business The Company's marketing, pricing, and support strategies are focused on thegeneration of both one-time and recurring revenues. Many of the Company'sclients are involved in publishing content that requires regular updating orenhancement, which provides Innodata with recurring business.Comprehensive Service Offering The Company's comprehensive service offering distinguishes the Company fromits competitors. Many competitors offer only a single service, such as datacapture, but do not offer the full complement of specialized services largeorganizations require in order to build large-scale XML repositories or developand manage on-line/Internet content. Innodata provides a broad range ofcontent-related services (including information architecture and consultingservices, applications development, metadata development, taxonomy development,topic maps development, etc.) to enable its clients to publish massive contentdatabases quickly and economically and to obtain the full benefit of emergingtechnologies such as XML. Consulting and Support Through its Consulting Services Group, the Company offers clientsvendor-neutral conversion and consulting services for XML (Extensible MarkupLanguage), SGML (Standard Generalized Markup Language), and HTML (HypertextMarkup Language) implementations. The Consulting Services Group has considerableexperience in the design and delivery of content architectures and contentmanagement systems that are extensible, scalable, and easily integrated,addressing unique business or industry requirements for content functionality. In addition, the Consulting Services Group offers specialized programming and conversion application development, document analysis, DTD architectureanalysis and design, XML topic maps development and taxonomy/controlled vocabulary development. The Company operates two Client Support Centers, one located at its North American Solutions Center in New Jersey and one located at its Enterprise Support Services Center in the Philippines. Seamlessly linked over a proprietaryfiber-optic wide area network, the Client Support Centers offer clients 24/7hotline project support and remote dial-in services for data transmission. Data Conversion For clients that deploy electronic data for online information retrieval,Internet distribution, intranet, extranet, permanent archives, or printing ondemand, Innodata converts large-scale data (ranging from hardcopy and papercollections to a variety of legacy-formatted data and proprietary electronicformatted data) to a variety of output formats (including XML and XMLderivatives, HTML, SGML, Open eBook (OeB), Microsoft Reader (.LIT), Rocket eBook(.RB), and PDF). The Company specializes in large-scale, richly-tagged XMLconversions through its XML Content Factory in Mandaue, the Philippines. To accomplish these tasks, Innodata utilizes high-speed scanning; a varietyof commercial and proprietary OCR/ICR (optical/intelligent character recognition)applications; structured workflow processes; and proprietary applications and tools designed to create highly accurate, highly consistent data. Innodata's systems enable multiple production processes to be performed simultaneously at one or more of its production sites. Innodata's conversion engineers use proprietary technology for dataenhancement and validation, and create automated procedures - utilizing industrystandards such as Omnimark, DynaText, Adept, etc. - to ensure validated SGML andXML structure for legacy data files. Innodata's editorial specialists enhance the structured files by addinghyperlinks, tagging and inserting electronic markers. The Company maintains astaff of experienced engineers and programmers who develop and employ customconversion filters and parsers for this purpose. Innodata's applications development efforts have focused on the particularchallenge of creating large-scale, tag-intensive XML from unstructured orsemi-structured sources, providing "intelligence" to content as part of theconversion process. Two of Innodata's conversion facilities have been accorded ISO 9003 and9002 Certifications. The ISO 9000-series certification program is aninternationally recognized marque of quality assurance and process conformity.Regularly scheduled ISO audits assure a high degree of staff acuity to thedocumented processes and serve to build accountability within all levels of theCompany's delivery organizations. Increasingly, clients rely on their vendors'conformity to documented processes and promised quality levels when makingpurchasing decisions. Innodata's adoption of the ISO program has resulted insuch processes having become engrained in its operating culture, which in turnservices as a major contributor to generating and maintaining client confidencein Innodata's ability to make deliveries as promised. Content and Metadata Development; Data Enhancement Innodata's teams of editorial and content specialists provide a variety ofcontent enhancement services. These services include taxonomy and controlledvocabulary development, hyperlinking development, and indexing and abstracting.Innodata's editorial and content specialists are typically highly educatedprofessionals with extensive training and backgrounds in fields related to thecontent with which they work. These fields include, most notably, biology,chemistry, medicine, pharmacology, genetic engineering, electrical engineering,chemical engineering, and law.Sales and Marketing Sales and marketing functions are primarily conducted by Innodata'sfull-time direct sales force. Sales and marketing activities have consistedprimarily of exhibiting at trade shows in the United States and Europe, andseeking direct personal access to decision-makers at existing and prospectiveclients. The Company has also obtained visibility by way of articles publishedin the trade press and on the Company's web site. To date, Innodata has notconducted any significant advertising campaign in the general media. The direct sales effort is closely supported by consulting personnel fromthe Company's Consulting Services Group. These individuals assist the salesforce in understanding the technical needs of clients and providing responses tothese needs, including demonstrations, prototypes, pricing quotations, and timeestimates.Competition There is no significant direct competition providing the particular rangeand combination of services as Innodata. The Company does, however, encounterdirect competition from a number of public and private companies that offer someof the specific services offered by Innodata. In terms of XML data conversion,companies compete based on the basis of quality, accuracy and consistency, aswell as ability to deliver large-scale, tag-intensive requirements quickly.Innodata's ability to compete favorably is, therefore, dependent upon itsability to react appropriately to short and long-term trends, harness newtechnology, and deliver large-scale requirements quickly. Versaware, Inc., SPI,Inc., and Jouve, S.A. compete for XML content creation business. With respect tocontent management, competitors include Cylex, Texterity, and Breakaway. Withrespect to XML and related consulting services, Mulberry Technologies,Bertelsmann Industry Services, Textuality, Thomas Technology Solutions, Inc.,DataChannel, Jouve Data Management, ArchiTag, and KPMG Consulting providecompetitive services. Innodata's outsourcing services also compete with clients'and potential clients' "in-sourcing" personnel, who may attempt to duplicate theCompany's services using in-house staff. We believe that the principalcompetitive factors in the market for digital content outsourcing services arequality, scalability, technological leverage, XML expertise, and completeness ofsolution.Research and Development Innodata increasingly relies upon the integration of advanced technologiesto differentiate itself from others. Accordingly, we plan to develop newproprietary applications with which to perform our services and to continue toevaluate new technologies. During fiscal year 2000, Innodata significantlyincreased investment in the development and integration of proprietaryapplications for use in the XML Content Factory. Applications development waspredominantly associated with improving accuracy, consistency, and speed ofcomplex XML tagging for large-scale requirements. We intend to make furtherinvestments in applications development and integration in order to respond tomarket opportunities. In 2000, all research and development expenditures werecharged as development expenses.Employees As of February 28, 2001, the Company employed an aggregate of approximately25 persons in the United States, and approximately 14,000 persons in fourproduction facilities in the Philippines, one production facility in Sri Lanka,and one production facility in India. Certain employees at the Company's Manilafacility are members of a union. The Company reached agreement in 1996 on acollective bargaining agreement, which provides for approximately 12 percentwage increases per annum plus one-half of any government mandated increases forthe five years ending March 31, 2001. The Company is currently negotiating a newcollective bargaining agreement with leadership of this union. While the Companyanticipates that an agreement will be reached, there can be no assurances thatthis will be the case. On a percentage basis, union membership at the Manilafacility accounts for approximately 6.7% of the Company's workforce. While astrike or job action would likely disrupt operations temporarily, the Companybelieves that the disruption could likely be managed by shifting worktemporarily or permanently to another of its production facilities. No otheremployees are represented by a labor union, and the Company believes that itsrelations with its employees are satisfactory. At all its locations, the Company enforces vigorous policies to protect itsemployees against sexual harassment, discrimination based on age, race, genderor sexual orientation. The average age of Innodata employees is 25 years.Fifty-three percent of our staff is female. Most of our employees have graduatedfrom at least a two-year college program. Many of our employees hold advanceddegrees in law, business, technology, medicine, and social sciences. We provide employees a range of amenities, including internet cafes, whereemployees can surf the web during breaks; on-site, Company-subsidizedrestaurants; and on-site stores where employees can purchase dry goods andgroceries on credit, arranging purchases from their PCs over a corporateintranet. To retain our qualified personnel, Innodata offers highly competitive basesalaries that are supplemented by results-based incentives. Senior managementreceives bonuses and stock options. Our compensation structure is coupled withan extensive benefits package that includes comprehensive health insurancecoverage, canteen and grocery subsidies, paid holiday leaves, continuingeducation programs, clothing and optical allowances, and a retirement program.Moreover, Innodata provides overtime premiums, holiday pay, bereavement andbirthday leaves, as well as maternity and paternity benefits.Risk Factors The nature of Innodata's business, as well as the Company's strategy, thesize and location of its facilities, and other factors entail a certain amountof risk. These risks may include, but are not limited to, the following:Risks of Continued Growth Innodata has grown rapidly in recent periods, and this growth may notcontinue. Organic growth will require us to develop new client relationships andexpand existing ones, improve our operational and information systems andfurther expand our capacity. We plan to further expand our capacity by enlargingour facilities and by adding new facilities and/or equipment. Such expansioninvolves significant risks. For example: the Company may not be able to attractand retain the management personnel and skilled employees necessary to supportexpanded operations; the Company may not efficiently and effectively integratenew operations, expand existing ones and manage geographically dispersedoperations; the Company may incur cost overruns; the Company may encounterconstruction delays, equipment delays or shortages, labor shortages anddisputes, and production start-up problems that could adversely affect ourgrowth and our ability to meet clients' delivery schedules; the Company may notbe able to obtain funds for this expansion; and the Company may not be able toobtain loans or operating leases with attractive terms. In addition, the Company expects to incur new fixed operating expensesassociated with its expansion efforts, including increases in depreciationexpense, rental expense, and overall increases in cost of sales. If theCompany's revenues do not increase sufficiently to offset these expenses, ouroperating results may be adversely affected. Risks of Acquisitions Acquisitions may represent a significant portion of the Company's growthstrategy, and the Company intends to pursue attractive acquisitionopportunities. Acquisitions involve a number of risks and challenges. Theseinclude, but are not limited to: diversion of management's attention; the needto integrate acquired operations; potential loss of key employees and clients ofthe acquired companies; lack of experience operating in the geographic market ofthe acquired business; and an increase in expenses and working capitalrequirements. To integrate acquired operations, the Company must implement managementinformation systems and operating systems and assimilate and manage thepersonnel of the acquired operations. The difficulties of this integration maybe further complicated by geographic distances. The integration of acquiredbusinesses may not be successful and could result in disruption to other partsof our business. Any of these and other factors could adversely affect our ability toachieve anticipated levels of profitability at acquired operations or realizeother anticipated benefits of an acquisition. Furthermore, any futureacquisitions may require the Company to incur debt or conduct equity financing,which could increase our leverage or be dilutive to our existing shareholders.No assurance can be given that we will consummate any acquisitions in thefuture. Variability of Client Requirements and Operating Results A number of our significant client contracts are requirements-based.Clients may cancel their production requirements, change their productionrequirements or delay their production requirements for a number of reasons.Cancellations, reductions or delays by a significant client or by a group ofclients would adversely affect our results of operations. In addition, otherfactors may contribute to fluctuations in our results of operations. Thesefactors include: the timing of client orders; the volume of these ordersrelative to our capacity; market acceptance of clients' new products; the timingof our expenditures in anticipation of future orders; the Company'seffectiveness in managing manufacturing processes; changes in economicconditions; and local factors and events that may affect our production volume(such as local holidays) or unforeseen events (e.g., earthquakes, storms, civilunrest). Innodata makes significant decisions based on our estimates of clientrequirements, including decisions about the levels of business that the Companywill seek and accept, production schedules, equipment procurement, personnelhiring, and other resource acquisition. The nature of our clients' commitmentsand the possibility of changes in demand for their products may reduce theCompany's ability to estimate accurately future client requirements. Onoccasion, clients may require rapid increases in production, which can stressour resources. Although we have increased our content conversion capacity andplan further increases, there can be no assurance the Company will havesufficient capacity at any given time to meet all of our clients' demands. Inaddition, because many of the Company's costs and operating expenses arerelatively fixed, a reduction in client demand can adversely affect our margins. Client Concentration; Dependence on the Online Information Industry One client accounted for 54% of the Company's revenues in 2000. One otherclient accounted for 17% of the Company's revenues in 1999. During 1998, oneother client that is comprised of twelve affiliated companies, accounted for 19%of the Company's revenues and one other client accounted for 12% of theCompany's revenues. No other client accounted for 10% or more of the Company'srevenues. Further, in 2000, 1999 and 1998, export revenues, all of which werederived from European customers, accounted for 10%, 20% and 20%, respectively,of the Company's revenues. A significant amount of the Company's revenues arederived from clients in the publishing industry. Accordingly, the Company'saccounts receivable generally include significant amounts due from such clients. Factors affecting the online publishing, B2B, and e-commerce industry ingeneral could have a material adverse effect on our clients and, as a result, onthe Company's performance. Such factors include: the inability of our clients toadapt to rapidly changing technology and evolving industry standards, theinability of our clients to develop and market their products, some of which arenew and untested; and, recessionary periods in our clients' markets. If clients'products become obsolete or fail to gain widespread commercial acceptance, theCompany's business may be materially and adversely affected. Risk of Increased Taxes We have structured our operations in a manner designed to maximize incomein countries where tax incentives have been extended to encourage foreigninvestment or where income tax rates are low. Our taxes could increase if thesetax incentives are not renewed upon expiration, or tax rates applicable to usare increased. Substantially all of the services provided by our Asiansubsidiaries are performed on behalf of clients based in North America andEurope. We believe that profits from our Asian operations are not sufficientlyconnected to jurisdictions in North America or Europe to give rise to incometaxation there. However, tax authorities in jurisdictions in North America andEurope could challenge the manner in which profits are allocated among oursubsidiaries, and we may not prevail in any such challenge. If our Asian profitsbecame subject to income taxes in such other jurisdictions, our worldwideeffective tax rate could increase. Risks of Competition The markets for XML data conversion, other kinds of data conversion,content management, content enhancement, and consulting services are extremelycompetitive and include many companies, several of which have achievedsignificant market share, as well as the internal data conversion staff employedby current and prospective clients. Risks of International Operations While the major part of the Company's operations are carried on in thePhilippines, India, and Sri Lanka, the Company's headquarters are in the UnitedStates and its clients are primarily located in North America and Europe. As aresult, the Company is not as affected by economic conditions overseas as itwould be if it depended on revenues from sources internal to those countries.However, such adverse economic factors as inflation, external debt, negativebalance of trade, and underemployment may significantly impact the Company. Certain aspects of overseas economies directly affect the Company. Overseasoperations remain vulnerable to political unrest, which could interfere with theCompany's operations. Political instability could also change the presentsatisfactory legal environment for the Company through the imposition ofrestrictions on foreign ownership, repatriation of funds, adverse labor laws,and the like. The Indian operations are conducted through a wholly-owned subsidiary thathas been granted an income tax holiday through December 31, 2004. Accordingly,no income taxes will be payable on earnings from operations of the subsidiaryduring such period, unless repatriated to the U.S. The Company funds its overseas operations through transfers of U.S. dollarsonly as needed and generally does not maintain any significant amount of fundsor monetary assets overseas. To the extent that the Company needs to bringcurrency to the United States from its overseas operations, it may be affectedby currency control regulations. The Philippines is subject to relatively frequent earthquakes, volcaniceruptions, floods, and other natural disasters, which may disrupt the Company'soperations. Further, power outages lasting for periods of as long as eight hoursper day have occurred. The Company's facilities are equipped with standbygenerators which have produced electric power during these outages; however,there can be no assurance that the Company's operations will not be adverselyaffected should municipal power production capacity deteriorate further. The geographical distances between Asia, the Americas, and Europe createlogistical and communications challenges which the Company must overcome. Risks of Currency Fluctuations and Hedging Operations The Philippines has historically experienced high rates of inflation andmajor fluctuations in exchange rate between the Philippine peso and the U.S.dollar. Continuing inflation without corresponding devaluation of the pesoagainst the dollar, or any other increase in value of the peso relative to thedollar, may have a Since 1997, the Company has not purchased foreign currencyfutures contracts for pesos. However, the company may choose to do so in thefuture. Dependence of Key Personnel Our success depends to a large extent upon the continued services of ourkey executives and skilled personnel. Several of our officers and key employeesare bound by employment or non-competition agreements. However, there can be noassurance that we will retain our officers and key employees. The Company couldbe materially and adversely affected by the loss of such personnel. Volatility of Market Price of Common Stock The stock market in recent years has experienced significant price andvolume fluctuations that have affected the market prices for the common stock oftechnology and Internet-related companies. Such fluctuations have often beenunrelated to or disproportionately impacted by the operating performance of suchcompanies. The market for the Company's common stock may be subject to similarfluctuations. Factors such as fluctuations in the Company's operating results,announcements of new contracts, partnerships, acquisitions and alliances,technological innovations or events affecting other companies in the Internet ortechnology industry generally, as well as currency fluctuations and generalmarket conditions, may have a significant effect on the market price of theCompany's common stock.Item 2. Description of Property. The Company's services are primarily performed at its Hackensack, NJcorporate headquarters and six overseas production facility complexes, includingits new 100,000 square foot XML Content Factory complex, located in Mandaue, thePhilippines. Other locations include a three building complex occupyingapproximately 60,000 square feet in Manila, the Philippines, as well asfacilities in Cebu City and Legaspi City, the Philippines, Metro Delhi, Indiaand Colombo, Sri Lanka. All facilities are leased for terms expiring on variousdates through 2009, and many are cancelable at the Company's option. Annualrental payments on property leases currently approximate $1,700,000. Subsequent to December 31, 2000, the Company leased a premises in Delhi,India to house its new XML Software Factory. The Company believes that it maintains adequate fire, theft and liabilityinsurance for its facilities and that its facilities are adequate for itspresent needs.Item 3. Legal Proceedings. There is no material litigation pending to which the Company is a party orof which any of its property is the subject.Item 4. Submission of Matters to a Vote of Security Holders. The Company held its Annual Meeting of Stockholders on December 14, 2000.The following are the results of the voting (the following amounts are adjustedto reflect the two-for-one stock dividend paid on December 7, 2000 as well asthe two-for-one stock dividend declared on February 28, 2001). The total sharesvoted were 19,923,992. Election of Directors Nominee For Against Abstain Not Voted ------- ---- ------- ------- ---------- Jack Abuhoff 19,153,584 - 193,412 - Dr. Charles F. Goldfarb 19,153,584 - 193,412 - E. Bruce Fredrikson 19,153,584 - 193,412 - Barry Hertz 19,153,584 - 193,412 - Martin Kaye 19,153,584 - 193,412 - Todd Solomon 19,153,584 - 193,412 - Abraham Biderman 19,153,584 - 193,412 -2000 Stock Option Plan 8,297,084 733,812 70,692 10,245,408Appointment of Auditors: 19,296,716 28,864 21,416 - Because the matter of the 2000 Stock Option Plan did not receive the voterequired to approve this matter, the vote was adjourned until January 11, 2001,at which meeting the vote required to approve this matter was still not achievedand the Stock Option plan was not approved. At a Special Meeting of Stockholders held on February 27, 2001, thestockholders approved the increase in authorized shares to 75 million shares of$.01 par value Common Stock. The results of the vote (adjusted to reflect thetwo-for-one stock dividend declared on February 28, 2001) are as follows: For Against Abstain ---------- ------- -------Increase Authorized Shares 19,697,992 300,104 5,408 PART IIItem 5. Market for Common Equity and Related Stockholder Matters. The Company's Common Stock is quoted on the Nasdaq National Market Systemunder the symbol "INOD." On February 28, 2001, there were 108 stockholders ofrecord of the Company's Common Stock based on information provided by theCompany's transfer agent. Virtually all of the Company's publicly held sharesare held in "street name" and the Company believes the actual number ofbeneficial holders of its Common Stock to be approximately 4,000. The following table sets forth the high and low sales prices on a quarterlybasis for the Company's Common Stock, as reported on Nasdaq, for the two yearsended December 31, 2000, after giving retroactive effect to a three-for-onestock dividend paid on September 9, 1999, a two-for-one stock dividend paid onDecember 7, 2000 and a two-for-one stock dividend payable on March 23, 2001. Common Stock Sale Prices 1999 High Low ---- ------- ---- First Quarter 1 7/16 Second Quarter 1--3/8 11/16 Third Quarter 3--1/4 11/16 Fourth Quarter 3--5/8 1--1/2 2000 High Low ---- ---- --- First Quarter 4--3/16 2 Second Quarter 2--3/8 1--5/16 Third Quarter 3--1/8 1--7/8 Fourth Quarter 5--5/8 2--3/16Dividends The Company has never paid cash dividends on its Common Stock and does notanticipate that it will do so in the foreseeable future. The future payment ofdividends, if any, on the Common Stock is within the discretion of the Board ofDirectors and will depend on the Company's earnings, its capital requirementsand financial condition and other relevant factors. The Company paid athree-for-one stock dividend on September 9, 1999, a two-for-one stock dividendon December 7, 2000 and on February 28, 2001 declared a two-for-one stockdividend payable on March 23, 2001.Item 6. Selected Financial Data Year ended December 31, 2000 1999 1998 1997 1996 ---------- ---------- ------------ ------------ ------------REVENUES $50,731,476 $27,490,138 $19,593,353 $20,116,935 $20,536,448 ----------- ----------- ----------- ------------ ------------OPERATING COSTS AND EXPENSES Direct operating costs 34,457,884 17,853,702 13,068,660 16,007,051 16,783,595 Selling and administrative 7,247,901 6,783,313 4,982,127 5,283,891 4,799,739 Restructuring costs, impairment of assets and other - - 133,141 1,500,000 - (Gain) loss on settlement of currency contracts - - (487,458) 1,400,000 - Interest expense 42,883 10,542 77,594 85,595 36,383 Interest income (154,406) (111,143) (98,391) (59,384) (123,771) -------- -------- ---------- ----------- ----------- Total 41,594,262 24,536,414 17,675,673 24,217,153 21,495,946 ------------ ----------- ---------- ----------- -----------INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 9,137,214 2,953,724 1,917,680 (4,100,218) (959,498)INCOME TAXES (BENEFIT) 2,969,000 841,000 (332,000) 100,000 (357,000) ----------- ----------- ----------- ----------- -----------NET INCOME (LOSS) $ 6,168,214 $ 2,112,724 $ 2,249,680 $(4,200,218) $ (602,498) =========== =========== =========== =========== ===========BASIC INCOME (LOSS) PER SHARE $.30 $.11 $.13 $(.23) $(.03) ==== ==== ==== ===== =====DILUTED INCOME (LOSS) PER SHARE $.26 $.10 $.12 $(.23) $(.03) ==== ==== ==== ===== =====CASH DIVIDENDS PER SHARE - - - - - =========== =========== =========== =========== ===========WORKING CAPITAL $ 9,505,865 $ 5,965,818 $ 4,749,101 $ 2,091,848 $ 4,774,121 =========== =========== =========== =========== ===========TOTAL ASSETS $27,946,037 $15,645,877 $10,595,508 $10,029,247 $12,416,296 =========== =========== =========== =========== ===========LONG-TERM DEBT - $ 5 ,188 $ 24,089 $ 79,604 $ 195,960 =========== =========== =========== =========== ===========STOCKHOLDERS' EQUITY $19,316,435 $11,652,094 $ 7,485,438 $ 5,254,133 $ 9,477,471 =========== =========== =========== =========== ===========Item 7. Management's Discussion And Analysis of Financial Condition and Resultsof OperationsResults of OperationsYears Ended December 31, 2000 and 1999 Revenues increased 85% to $50,731,476 for the year ended December 31, 2000compared to $27,490,138 for the similar period in 1999 principally resultingfrom a client which accounted for approximately 54% of the Company's revenue in2000. One other client accounted for 17% of the Company's revenues in 1999. Noother customer accounted for 10% or more of the Company's revenues. Further, in2000 and 1999, export revenues, substantially all of which were derived fromEuropean clients, accounted for 10% and 20%, respectively. Direct operating expenses were $34,457,884 for the year ended December 31,2000 and $17,853,702 for the similar period in 1999, an increase of 93%. Directoperating expenses as a percentage of revenues were 68% in 2000 and 65% in 1999.The dollar increase in 2000 is principally due to costs related to the increasedrevenues. Direct operating expenses as a percent of revenues increased by 3percentage points in 2000, resulting from additional costs incurred principallyfor the new XML Content Factory (including start-up costs) (which accounted forapproximately 9 percentage points) offset by a decline in the value of theforeign currencies of countries in which the Company's production facilities arelocated (which resulted in a cost reduction of approximately 6 percentagepoints). Direct operating expenses include primarily direct payroll,telecommunications, depreciation, equipment lease costs, computer services,supplies and occupancy. Selling and administrative expense was $7,247,901 and $6,783,313 for theyears ended December 31, 2000 and 1999, respectively, representing an increaseof 7% in 2000 from 1999. Selling and administrative expense as a percentage ofrevenues decreased to 14% in 2000 from 25% in 1999 due primarily to an increasein revenues without a corresponding increase in such expenses. Selling andadministrative expense includes management and administrative salaries, salesand marketing costs and administrative overhead. In 2000, income taxes were lower as a percentage of income before incometaxes than the federal statutory rate due primarily to certain overseas incomethat will not be taxed unless repatriated due to tax holidays granted to theCompany. As a result of the aforementioned items, the Company realized net income of$6,168,214 in 2000 and $2,112,724 in 1999.Years Ended December 31, 1999 and 1998 Until the end of 1999 when the document imaging services segment was phasedout, the Company operated in two business segments; Internet and on-line digitalcontent outsourcing services, and document imaging services. Revenues increased 40% to $27,490,138 for the year ended December 31, 1999compared to $19,593,353 for the similar period in 1998. Revenues from theInternet and on-line digital content outsourcing services segment increased 52%to $26,459,447 in 1999 from $17,401,346 in 1998. The increase was dueprincipally to new projects from existing and new clients. During 1998, oneclient that is comprised of twelve affiliated companies, accounted for 21% ofthe Company's Internet and on-line digital content outsourcing servicesrevenues. One other client accounted for 17% and 13% of such revenues in 1999and 1998, respectively. No other client accounted for 10% or more of suchrevenues. Further, in 1999 and 1998, export revenues, all of which were derivedfrom European clients, accounted for 21% and 22%, respectively, of suchrevenues. Revenues from the document imaging services segment decreased to$1,030,691 in 1999 from $2,192,007 in 1998. During 1999, three clientsaccounted for 30%, 16% and 12%, respectively, of such revenues. During 1998,one other client accounted for 53% of the Company's document imaging servicerevenues. No other client accounted for 10% or more of such revenues. Direct operating expenses were $17,853,702 for the year ended December 31,1999 and $13,068,660 for the similar period in 1998, an increase of 37%. Directoperating expenses for the Internet and on-line digital content outsourcingservices increased to $16,712,563 in 1999 from $10,701,569 in 1998, or 56%.Direct operating expenses as a percentage of revenues were 63% in 1999 and 61%in 1998. The increase in 1999 is due to costs incurred for the increasedrevenues, as well as training costs for new production employees required tomeet the anticipated growth in revenues. Direct operating expenses in thedocument imaging services segment decreased to $1,141,139 in 1999 from$2,367,091 in 1998. The decrease in 1999 was due principally to management'sefforts to address decreasing revenues. Selling and administrative expense was $6,783,313 and $4,982,127 for theyears ended December 31, 1999 and 1998, respectively, representing an increaseof 36% in 1999 from 1998. Selling and administrative expense as a percentage ofrevenues was 25% in 1999 and 1998. The increase primarily reflects the additionof sales and technical support staff, as well as increased commissionscommensurate with increased revenues. In the fourth quarter of 1998, management determined that its plans tosignificantly increase the revenues of the document imaging services segmentwere not realized. It was determined that the remaining goodwill associatedwith the business could not be recovered. Accordingly, the remaining unamortizedamount of $382,000 was written off at December 31, 1998. Further, certainestimated liabilities for restructuring and other items totaling $249,000 weredeemed in excess of actual amounts payable and were recognized as a gain in thefourth quarter of 1998. In the second quarter of 1998, the Company reached an agreement regardingcertain disputed currency contracts. This resulted in a reduction of anestimated liability previously provided by $487,000 that was recognized as again. In 1999, the Internet and on-line digital content outsourcing servicessegment realized income before income taxes of $3,523,682, while the documentimaging services segment incurred a loss of $569,958. In 1998, the Internet andon-line digital content outsourcing services segment realized income beforeincome taxes of $3,151,928, while the document imaging services segment incurreda loss of $1,234,248, including a write-off of goodwill in the amount of$382,000. In 1999, income taxes were lower as a percentage of income before incometaxes than the federal statutory rate due to certain overseas income that willnot be taxed due to tax holidays granted to the Company. The Companyrecognized a benefit from income taxes in 1998 from a reduction in the taxvaluation allowance and a utilization of net operating loss carryforwards thatwere not recognized as tax benefits in 1997 for losses incurred in that year. As a result of the aforementioned items, the Company realized net income of$2,112,724 in 1999 and $2,249,680 in 1998.Liquidity and Capital ResourcesSelected measures of liquidity and capital resources are as follows: December 31, 2000 December 31, 1999 ------------------ ------------------Cash and Cash Equivalents $9,040,000 $3,380,000Working Capital $9,506,000 $5,966,000Stockholders' Equity Per Common Share* $.91 $.58 *Represents total stockholders' equity divided by the actual number ofcommon shares outstanding (which excludes treasury stock).Net Cash Provided By Operating Activities During the year ended December 31, 2000, net cash provided by operatingactivities was $12,387,000 as compared to $2,878,000 in the 1999 comparativeperiod. The increase was primarily due to:- an increase of approximately $1,617,000 in non-cash charges to net income,resulting principally from a $1,162,000 increase in depreciation andamortization, an increase of $773,000 in deferred taxes, net of a decrease of$277,000 in tax benefits from the exercise of options.- an increase in net collections of accounts receivable, primarily due totiming of collections;- an increase in accounts payable and accrued expenses, primarily due to thetiming of payments and the increased growth of operations;- an increase in accrued salaries and wages, primarily due to increasedproduction headcount and payroll; and- an increase in income and other taxes, primarily due to increasedprovisions for income taxes. Partially offset by:- an increase in prepaid expenses and other assets primarily attributable tothe growth of operations and the new facility.Net Cash Used in Investing Activities In the year ended December 31, 2000, the Company spent approximately$7,403,000 for capital expenditures, compared to approximately $3,891,000 in1999. In 2000, the Company spent approximately $4.0 million for capitalexpenditures in connection with the creation of its new XML Content Factory.Such capital costs consist primarily of network and cabling costs, computerservers and storage, workstations, software licenses, leasehold improvementcosts, and peripheral equipment. Management presently expects to make capital expenditures of approximately$8 million during the next year. Such capital expenditures include anticipatedcosts to renovate, re-engineer and expand two of the Company's facilities; costsof exercising the option to purchase presently leased computer workstations;capital investment in additional production technologies, including capitalcosts to create a new XML Software Factory; and normal ongoing capitalinvestments. Capital expenditures in the comparable period in 1999 were primarilyutilized for expansion of production capacity required to meet the growth inrevenues, and for the replacement of computer equipment not Year 2000 compliant.Net Cash Provided By Financing Activities In the year ended December 31, 2000, net cash provided by financingactivities totaled approximately $676,000 compared to $857,000 in the comparableperiod in 1999. The change was primarily due to a decrease in proceeds from theexercise 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 December 31, 2000. The line is collateralized byaccounts receivable. Interest is charged at 1/2% above the bank's prime rate andis due on demand. Management believes that existing cash, internally generated funds andshort term bank borrowings will be sufficient for reasonably anticipated workingcapital and capital expenditure requirements during the next 12 months. TheCompany funds its foreign expenditures from its U.S. corporate headquarters onan as-needed basis.Inflation, Seasonality and Prevailing Economic Conditions To date, inflation has not had a significant impact on the Company'soperations. The Company generally performs its work for its clients underproject-specific contracts, requirements-based contracts or long-term contracts.Contracts are typically subject to numerous termination provisions. TheCompany's revenues are not significantly affected by seasonality. Disclosures in this Form 10-K contain certain forward-looking statements,including without limitation, statements concerning the Company's operations,economic performance and financial condition. These forward-looking statementsare made pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. The words "believe," "expect," "anticipate" andother similar expressions generally identify forward-looking statements. Readersare cautioned not to place undue reliance on these forward-looking statements,which speak only as of their dates. These forward-looking statements are basedlargely on the Company's current expectations and are subject to a number ofrisks and uncertainties, including without limitation, changes in externalmarket factors, the ability of the Company's customers to continue to executetheir business plans which give rise to increased requirements for dataconversion, changes in the Company's business or growth strategy or an inabilityto execute its strategy due to changes in its industry or the economy generally,the emergence of new or growing competitors, various other competitive factorsand other risks and uncertainties indicated from time to time in the Company'sfilings with the Securities and Exchange Commission. Actual results could differmaterially from the results referred to in the forward-looking statements. Inlight of these risks and uncertainties, there can be no assurance that theresults referred to in the forward-looking statements contained in this Form10-K will in fact occur.Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest rate change market risk with respect toits credit facility with a financial institution which is priced based on theprime rate of interest. At December 31, 2000, there were no outstandingborrowings under the credit facility. Changes in the prime interest rate duringfiscal 2001 will have a positive or negative effect on the Company's interestexpense. Such exposure will increase accordingly should the Company maintainhigher levels of borrowing during 2001.The Company has operations in foreign countries. While it is exposed to foreigncurrency fluctuations, the Company presently has no financial instruments inforeign currency and does not maintain funds in foreign currency beyond thosenecessary for operations.Item 8. Financial Statements. INNODATA CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS PAGE ----- Independent Auditors' Report II-9Consolidated Balance Sheets as of December 31, 2000 and 1999 II-10Consolidated Statements of Income for the three years ended December 31, 2000 II-11Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2000 II-12Consolidated Statements of Cash Flows for the three years ended December 31, 2000 II-13Notes to Consolidated Financial Statements II-14-24INDEPENDENT AUDITORS' REPORTBoard of Directors and StockholdersInnodata CorporationHackensack, New JerseyWe have audited the accompanying consolidated balance sheets of InnodataCorporation and subsidiaries as of December 31, 2000 and 1999, and the relatedconsolidated statements of income, stockholders' equity and cash flows for eachof the three years in the period ended December 31, 2000. These financialstatements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits.We conducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of InnodataCorporation and subsidiaries as of December 31, 2000 and 1999, and theconsolidated results of their operations and their consolidated cash flows foreach of the three years in the period ended December 31, 2000 in conformity withaccounting principles generally accepted in the United States of America./S/ Grant Thornton LLPNew York, New YorkFebruary 23, 2001(Except for Note 5 as to which the date is February 28, 2001) INNODATA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 2000 1999 ASSETSCURRENT ASSETS: Cash and equivalents $ 9,040,207 $ 3,380,242 Accounts receivable-net of allowance for doubtful accounts of $884,000 in 2000 and $580,000 in 1999 5,799,102 5,247,428 Prepaid expenses and other current assets 1,194,158 396,743 Deferred income taxes 839,000 540,000 ----------- ----------- Total current assets 16,872,467 9,564,413 PROPERTY AND EQUIPMENT - NET 9,464,056 4,891,992 OTHER ASSETS 1,609,514 1,189,472 ----------- -----------TOTAL $27,946,037 $15,645,877 =========== ===========LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES: Current portion of long-term debt $ - $ 19,629 Accounts payable 3,196,112 1,553,585 Accrued salaries and wages 3,060,282 1,529,753 Income and other taxes 1,110,208 495,628 ----------- ----------- Total current liabilities 7,366,602 3,598,595 ----------- -----------LONG-TERM DEBT, less current portion - 5,188 ----------- -----------DEFERRED INCOME TAXES 1,263,000 390,000 ----------- -----------COMMITMENTS AND CONTINGENT LIABILITIESSTOCKHOLDERS' EQUITY: Common stock, $.01 par value- authorized 75,000,000 shares; issued - 21,688,214 shares in 2000 and 20,535,772 shares in 1999 216,882 205,356 Additional paid-in capital 12,239,122 10,754,521 Retained earnings 7,081,400 913,186 ----------- ----------- 19,537,404 11,873,063 Less: treasury stock - at cost; 576,996 shares (220,969) (220,969) ----------- ----------- Total stockholders' equity 19,316,435 11,652,094 ----------- -----------TOTAL $27,946,037 $15,645,877 =========== =========== INNODATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999 and 1998 2000 1999 1998 REVENUES $50,731,476 $27,490,138 $19,593,353 ----------- ----------- -----------OPERATING COSTS AND EXPENSES Direct operating costs 34,457,884 17,853,702 13,068,660 Selling and administrative expenses 7,247,901 6,783,313 4,982,127 Impairment of assets and other - - 133,141 Gain on foreign currency contracts - - (487,458) Interest expense 42,883 10,542 77,594 Interest income (154,406) ( 111,143) (98,391) ----------- ----------- ----------- Total 41,594,262 24,536,414 17,675,673 ----------- ----------- -----------INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES 9,137,214 2,953,724 1,917,680 PROVISION FOR (BENEFIT FROM) INCOME TAXES 2,969,000 841,000 (332,000) ----------- ----------- -----------NET INCOME $ 6,168,214 $ 2,112,724 $ 2,249,680 =========== =========== ===========BASIC INCOME PER SHARE $.30 $.11 $.13 ==== ==== ====DILUTED INCOME PER SHARE $.26 $.10 $.12 ==== ==== ==== INNODATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 and 1998 Additional Retained Common Stock Paid-in Earnings Treasury Shares Amount Capital (Deficit) Stock TotalJanuary 1, 1998 18,260,832 $182,608 $ 8,703,340 $(3,449,218) $(182,597) $ 5,254,133 Net income - - - 2,249,680 - 2,249,680 Issuance of common stock upon exercise of stock options 79,992 800 19,197 - - 19,997 Purchase of treasury stock - - - - (38,372) (38,372) ---------- -------- ----------- ---------- --------- -----------December 31, 1998 18,340,824 183,408 8,722,537 (1,199,538) (220,969) 7,485,438 Net income - - - 2,112,724 - 2,112,724 Issuance of common stock upon exercise of stock options 2,054,956 20,548 892,913 - - 913,461 Issuance of common stock for software development 139,992 1,400 67,196 - - 68,596 Income tax benefit from exercise of stock options - - 1,071,875 - - 1,071,875 ---------- -------- ----------- ---------- --------- -----------December 31, 1999 20,535,772 205,356 10,754,521 913,186 (220,969) 11,652,094  Net income - - - 6,168,214 - 6,168,214 Issuance of common stock upon exercise of stock options and warrants 1,152,442 11,526 689,601 - - 701,127 Income tax benefit from exercise of stock options - - 795,000 - - 795,000 ---------- -------- ----------- ---------- --------- -----------December 31, 2000 21,688,214 $216,882 $12,239,122 $7,081,400 $(220,969) $19,316,435 ========== ======== =========== ========== ========= =========== INNODATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 and 1998 2000 1999 1998 OPERATING ACTIVITIES: Net income $ 6,168,214 $ 2,112,724 $ 2,249,680 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,959,060 1,797,031 1,322,721 Tax benefit from exercise of options 795,000 1,071,875 - Restructuring costs, impairment of assets and other - - 133,141 Loss (gain) on disposal of fixed assets 30,447 71,630 (74,399) (Gain) on foreign currency contracts - - (487,458) Deferred income taxes 574,000 (199,000) (482,000) Changes in operating assets and liabilities: Accounts receivable (551,674) (2,304,006) 419,834 Prepaid expenses and other current assets (977,415) (326,131) 120,459 Other assets (409,034) (73,565) 23,660 Accounts payable and accrued expenses 1,653,394 258,238 (76,805) Liability for foreign currency contracts - - (912,542) Accrued salaries and wages 1,530,529 680,145 208,422 Income and other taxes payable 614,580 (210,855) 102,300 ----------- ----------- ----------- Net cash provided by operating activities 12,387,101 2,878,086 2,547,013 ----------- ----------- -----------INVESTING ACTIVITIES: Capital expenditures (7,403,446) (3,890,848) (1,024,622) Proceeds from disposal of property and equipment - - 182,912 ----------- ----------- ----------- Net cash used in investing activities (7,403,446) (3,890,848) (841,710) ----------- ----------- -----------FINANCING ACTIVITIES: Payments of borrowings (24,817) (55,990) (121,247) Proceeds from exercise of stock options 701,127 913,461 19,997 Purchase of treasury stock - - (38,372) ----------- ----------- ----------- Net cash provided by (used in) financing activities 676,310 857,471 (139,622) ----------- ----------- -----------INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,659,965 (155,291) 1,565,681 CASH AND EQUIVALENTS, BEGINNING OF YEAR 3,380,242 3,535,533 1,969,852 ----------- ----------- -----------CASH AND EQUIVALENTS, END OF YEAR $ 9,040,207 $ 3,380,242 $ 3,535,533 =========== =========== ===========SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 42,883 $ 10,542 $ 32,524 Income taxes $ 1,018,000 $ 310,698 $ -  INNODATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 and 19981. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Basis of Presentation - Innodata Corporation and subsidiaries(the "Company") is a leading provider of digital content outsourcing services, specializing in XML transformations and content enhancement, offering a "singlesolution" for companies needing to create high-value, large scale web and on-line content. The Company's services are performed in production facilitieslocated in the Philippines, Sri Lanka, India and the United States. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates - In preparing financial statements in conformity withgenerally accepted accounting principles, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and revenues and expenses during the reportingperiod. Actual results could differ from those estimates. Revenue Recognition - Revenue is recognized in the period in which servicesare performed and delivered. Deferred Production Costs - Deferred production costs consist of actuallabor and certain other costs incurred for uncompleted and unbilled services.Included in prepaid expenses and other current assets at December 31, 2000 and1999 are deferred production costs totaling $876,000 and $46,000, respectively. Foreign Currency - The functional currency for the Company's productionoperations located in the Philippines, India and Sri Lanka is U.S. dollars. Assuch, transactions denominated in Philippine pesos, Indian and Sri Lanka rupeeswere translated to U.S. dollars at rates which approximate those in effect ontransaction dates. Monetary assets and liabilities denominated in foreigncurrencies at December 31, 2000 and 1999 were translated at the exchange rate ineffect as of those dates. Exchange losses resulting from such transactions in2000 totaled approximately $180,000. Exchange gains and losses in 1999 and 1998resulting from such transactions were immaterial. Statement of Cash Flows - For financial statement purposes (including cashflows), the Company considers all highly liquid debt instruments purchased withan original maturity of three months or less to be cash equivalents. Depreciation - Depreciation is provided on the straight-line method overthe estimated useful lives of the related assets which are as follows: Estimated Useful Category LivesEquipment 3-5 yearsFurniture and fixtures 5-10 years Leasehold improvements are amortized on the straight-line basis over theshorter of their estimated useful lives or the lives of the leases. Income Taxes - Deferred taxes are determined based on the differencebetween the financial statement and tax bases of assets and liabilities, usingenacted tax rates, as well as any net operating loss or tax credit carryforwardsexpected to reduce taxes payable in future years. Accounting for Stock-Based Compensation - The Financial AccountingStandards Board issued Statement of Financial Accounting Standards ("SFAS") No.123, "Accounting for Stock-Based Compensation," which became effective in 1996.As permitted by SFAS No. 123, the Company has elected to continue to account foremployee stock options under APB No. 25, "Accounting for Stock Issued toEmployees." Fair Value of Financial Instruments - The Company has estimated the fairvalue of financial instruments using available market information and othervaluation methodologies in accordance with SFAS No. 107, "Disclosures About FairValue of Financial Instruments." Management of the Company believes that thefair value of financial instruments for which estimated fair value has not beenspecifically presented, primarily cash and accounts receivable, is notmaterially different than the related carrying value. Determinations of fairvalue are based on subjective data and significant judgment relating to timingof payments and collections and the amounts to be realized. Differentassumptions and/or estimation methodologies might have a material effect on thefair value estimates. Accordingly, the estimates of fair value are notnecessarily indicative of the amounts the Company would realize in a currentmarket exchange. Income Per Share - Basic earnings per share is based on the weightedaverage number of common shares outstanding without consideration of potentialcommon stock. Diluted earnings per share is based on the weighted average numberof common and potential common shares outstanding. The calculation takes intoaccount the shares that may be issued upon exercise of stock options, reduced bythe shares that may be repurchased with the funds and tax benefits received fromthe exercise, based on average prices during the year.2. PROPERTY AND EQUIPMENT Property and equipment, stated at cost less accumulated depreciation andamortization, consist of the following: December 31, 2000 1999Equipment $12,447,297 $ 9,522,707Furniture and fixtures 724,893 501,768Leashold improvements 2,047,891 1,045,865 ----------- ----------- Total 15,220,081 11,070,340Less accumulated depreciation and amortization 5,756,025 6,178,348 ----------- ----------- $ 9,464,056 $ 4,891,992 =========== =========== As of December 31, 2000 and 1999, the net book value of property andequipment located at the Company's production facilities in the Philippines,India and Sri Lanka was approximately $9,046,000 and $4,217,000, respectively.3. INCOME TAXES The significant components of the provision for (benefit from) income taxesare as follows: 2000 1999 1998 Current income tax expense: Foreign $ 61,000 $ - $ 50,000 Federal 2,040,000 884,000 55,000 State and local 294,000 156,000 45,000 ---------- ---------- --------- 2,395,000 1,040,000 150,000 Deferred income tax expense (benefit) 574,000 (199,000) (482,000) ---------- ---------- ---------Provision for (benefit from) income taxes $2,969,000 $ 841,000 $(332,000) ========== ========== ========= During 1998, the Company utilized approximately $1,100,000 of net operatingloss carryforwards, resulting in a tax benefit of $375,000. Reconciliation of the U.S. statutory rate with the Company's effective taxrate is summarized as follows: 2000 1999 1998 Federal statutory rate 34.0% 34.0% 34.0%Effect of: Valuation allowance - - (35.0) Utilization of net operating loss carryforwards not previously recognized - - (19.5) State income taxes (net of federal tax benefit) 1.6 0.1 1.6 Effect of foreign tax holiday, net of foreign income not deemed permanently reinvested (3.4) (8.1) - Foreign taxes 0.7 - 2.6 Other (0.4) 2.5 (1.0) ---- ---- -----Effective rate 32.5% 28.5% (17.3)% ==== ==== ===== As of December 31, 2000 and 1999, the composition of the Company's netdeferred income taxes is as follows: 2000 1999 Deferred income tax assets: Allowances not currently deductible $ 726,000 $ 355,000 Expenses not deductible until paid 113,000 60,000 Net operating loss carryforwards - 225,000 ----------- --------- 839,000 640,000 Less: valuation allowance - (100,000) ----------- --------- 839,000 540,000 ----------- ---------Deferred income tax liabilities: Foreign source income, not taxable until repatriated (1,500,000) (415,000) Depreciation and amortization 237,000 25,000 ----------- --------- (1,263,000) (390,000) ----------- ---------Net deferred income tax (liability)/asset $ (424,000) $ 150,000 =========== =========4. COMMITMENTS AND CONTINGENT LIABILITIES Line of Credit - The Company has a line of credit with a bank in the amountof $3 million. The line is collateralized by accounts receivable. Interest ischarged at 1/2% above the bank's prime rate and is due on demand. The line wasunused at December 31, 2000. Leases - The Company is obligated under various operating lease agreementsfor office and production space. The agreements contain escalation clauses andrequirements that the Company pay taxes, insurance and maintenance costs. Thelease agreements for production space in the Philippines, which expire through2007, contain provisions pursuant to which the Company may cancel the leases atany time. The annual rental for the leased space in the Philippines isapproximately $950,000. For the years ended December 31, 2000, 1999 and 1998,rent expense for office and production space totaled approximately $1,600,000,$850,000 and $700,000, respectively. In addition, the Company leases certain equipment under short-termoperating lease agreements. Pursuant to the lease agreements, the Company hasthe option to purchase some or all of the equipment at fixed amounts. For theyear ended December 31, 2000, rent expense for equipment totaled approximately$900,000. At December 31, 2000, future minimum annual rental commitments onnon-cancellable leases (excluding equipment leases with terms less than oneyear) are as follows: 2001 $ 570,0002002 500,0002003 295,0002004 295,000Thereafter 1,600,000 ---------- $3,260,000 ========== Litigation - In response to an arbitration proceeding brought by theCompany against a former customer to collect past due amounts for servicesperformed, the former customer has filed an amended answer with counterclaimsalleging in substance breach of contract and warranty. These counterclaims seekcompensatory damages of not less than $1,000,000 and punitive damages of$500,000. The amended answer was filed by the former customer after the NewYork State Supreme Court granted the Company's petition to compel arbitration.Management believes that the counterclaims are without merit, and intends tovigorously pursue its claims against the former customer. In addition, the Company is subject to various other legal proceedings andclaims which arise in the ordinary course of business. While the outcome of these matters is currently not determinable,management believes their outcome will not have a material adverse effect on theCompany's financial statements. Foreign Currency - The Company's production facilities are located in thePhilippines, India and Sri Lanka. To the extent that the currencies of thesecountries fluctuate, the Company is subject to risks of changing costs ofproduction after pricing is established for certain customer projects. However,most significant contracts contain provisions for price renegotiation. Other Commitments - The Company has a collective bargaining agreement withcertain employees at its Manila facility which provides for approximately 12%wage increases per annum plus one-half of any government mandated increasesthrough March 31, 2001. Philippine Pension Requirement - The Philippine government enactedlegislation requiring businesses to provide a lump-sum pension payment toemployees working at least five years and who are employed by the Company at age60. Those eligible employees are to receive approximately 59% of one month'spay for each year of employment with the Company. The terms of the collectivebargaining agreement provide benefits similar to the government. Based onactuarial assumptions and calculations in accordance with SFAS No. 87, "Employers' Accounting for Pensions," the liability for the future payment is insignificant at December 31, 2000. Under the legislation, the Company is not required to fund future costs, if any.5. CAPITAL STOCK Common Stock - Effective March 25, 1998, the Company's stockholdersapproved a one-for-three reverse stock split. On September 9, 1999 and December7, 2000, the Company paid a three-for-one and a two-for-one stock dividend,respectively. On February 28, 2001, the Company declared a two-for-one stockdividend payable on March 23, 2001, and the stockholders increased the number ofcommon shares the Company is authorized to issue to 75,000,000. The financialstatements and notes thereto, including all share and per share amounts, havebeen restated to reflect all such splits. Preferred Stock - The Board of Directors is authorized to fix the terms,rights, preferences and limitations of the preferred stock and to issue thepreferred stock in series which differ as to their relative terms, rights,preferences and limitations. Common Stock Reserved - At December 31, 2000, the Company reserved forissuance 8,942,884 shares of common stock pursuant to the Company's Stock OptionPlans (including 1,099,164 options issued to the Company's Chairman and itsPresident which were not granted under the plans).6. STOCK OPTIONS The Company adopted, with stockholder approval, 1993, 1994, 1995, 1996 and1998 Stock Option Plans (the "1993 Plan," "1994 Plan," "1994 DD Plan," "1995Plan," "1996 Plan" and the "1998 Plan") which provide for the granting ofoptions to purchase not more than an aggregate of 1,050,000, 1,260,000, 210,000,2,400,000, 1,999,992 and 3,600,000 shares of common stock, respectively, subjectto adjustment under certain circumstances. Such options may be incentive stockoptions ("ISOs") within the meaning of the Internal Revenue Code of 1986, asamended, or options that do not qualify as ISOs ("Non-Qualified Options"). The option exercise price per share may not be less than the fair marketvalue per share of common stock on the date of grant (110% of such fair marketvalue for an ISO, if the grantee owns stock possessing more than 10% of thecombined voting power of all classes of the Company's stock). Options may begranted under the Stock Option Plan to all officers, directors and employees ofthe Company and, in addition, Non-Qualified Options may be granted to otherparties who perform services for the Company. No options may be granted underthe 1993 Plan after April 30, 2003, under the 1994 Plan and 1994 DD Plan, afterMay 19, 2004, under the 1995 Plan, after May 16, 2005, under the 1996 Plan,after July 8, 2006 and under the 1998 Plan, after July 8, 2008. The Plans may be amended from time to time by the Board of Directors of theCompany. However, the Board of Directors may not, without stockholder approval,amend the Plans to increase the number of shares of common stock which may beissued under the Plans (except upon changes in capitalization as specified inthe Plans), decrease the minimum exercise price provided in the Plans or changethe class of persons eligible to participate in the Plans. The Company has adopted the disclosure-only provisions of SFAS No. 123,"Accounting for Stock Based Compensation." Accordingly, no compensation expensehas been recognized for stock options granted to employees. Had compensationcost for the Company's stock option grants been determined based on the fairvalue at the grant date for awards in 2000, 1999 and 1998 consistent with theprovisions of SFAS No. 123, the Company's net income would have been $5.7million or $.28 per share, basic, and $.25 per share, diluted in 2000, $1.8million, or $.10 per share, basic, and $.08 per share, diluted, in 1999, and$1.5 million, or $.08 per share, basic and diluted, in 1998. The fair value of options at date of grant was estimated using the Black-Scholes pricing model with the following weighted average assumptions: expected life of four years; risk free interest rate of 6% in 2000, 5% in 1999 and 1998, expected volatility of 115% in 2000 and 107% in 1999 and 1998; and a zero dividend yield. The effects of applying SFAS No. 123 in this disclosure are not indicative of futuredisclosures. Weighted Weighted Average Per Share Average Weighted Weighted Fair Range of Remaining Average Average Value, Exercise Number Contractual Exercise Number Exercise Date of Prices Outstanding Life Price Exercisable Price GrantBalance 1/1/98 $0.25 - 0.81 2,954,304 4 $0.53 1,391,628 $0.68 $0.85 - 1.75 2,174,292 3 $1.17 1,127,952 $1.08 ---------- --------- 5,128,596 2,519,580 ========= Canceled $0.31 - 0.88 (1,936,392) Canceled $0.95 - 1.75 (1,950,516) Granted $0.25 - 0.53 2,115,588 5 $0.46 $0.33 Granted and Repriced $0.42 - 0.72 3,207,120 2 $0.53 $0.22 Granted and Repriced $1.38 399,996 3 $1.29 $0.17 Exercised $0.25 (79,992) ----------Balance 12/31/98 $0.25 - 0.75 6,446,604 3 $0.47 1,169,952 $0.34 $1.19 - 1.49 437,796 2 $1.31 37,800 $1.47 ---------- --------- 6,884,400 1,207,752 ========= Cancelled $0.25 - 0.57 (425,388) 3 $0.38 Granted $0.67 - 2.00 1,249,200 5 $1.05 $0.82 Exercised $0.25 - 0.75 (1,946,956) $0.48 ----------Balance 12/31/99 $0.25 - 0.47 1,321,320 2 $0.34 1,321,320 $0.34 $0.50 - 0.75 3,645,740 3 $0.58 2,056,940 $0.57 $1.19 - 2.00 794,196 2 $1.62 437,796 $1.31 ---------- --------- 5,761,256 3,816,056 ========= Cancelled $0.35 - $2.00 (267,840) 5 $0.85 Granted $1.57 - $2.69 2,729,600 $1.97 $1.58 Exercised $0.25 - $2.00 (902,440) $0.61 ---------Balance 12/31/00 $0.25 - $0.47 1,019,640 2 $0.34 1,019,640 $0.34 $0.50 - $0.75 2,858,632 3 $0.58 2,429,632 $0.56 $1.29 399,996 2 $1.29 399,996 $1.29 $1.56 - $2.25 2,699,108 4 $1.90 295,984 $1.73 $2.50 - $2.69 343,200 5 $2.52 - - ---------- --------- 7,320,576 4,145,252 ========== ========= Subsequent to December 31, 2000, the Company granted options to purchase1,142,000 shares at $5.44 per share.8. SEGMENT REPORTING Until December 31, 1999 when the Company phased out its document imagingservices, the Company's operations were classified in two business segments;Internet and on-line digital content outsourcing services, and document imagingservices. Internet and on-line digital content outsourcing services provide all thenecessary steps for product development and data conversion to enable itsclients to create and disseminate vast amounts of information both on-line andvia the Internet. Its clients represent an array of Internet content providersand major electronic publishers of legal, scientific, educational, and medicalinformation, as well as document-intensive companies repurposing theirproprietary information into electronic resources that can be referenced viaweb-centric applications. In 1999 and 1998, one client accounted for 17% and 13%, respectively, ofthe Company's digital content outsourcing services' revenues. In addition,during 1998, one client that is comprised of twelve affiliated companies,accounted for 21% of such revenues. Further, in 1999 and 1998, export revenues,all of which were derived from European clients, accounted for 21% and 22%,respectively, of such revenues. The document imaging services segment provided high volume backfile andday-forward conversion of business documents, technical manuals, engineeringdrawings, aperture cards, roll film, and microfiche, providing high qualitycomputer accessible images and indexing. 1999 1998 RevenuesDigital content outsourcing services $26,459,447 $17,401,346 Document imaging services 1,030,691 2,192,007 ----------- -----------Total consolidated $27,490,138 $19,593,353 =========== ===========Income (loss) before income taxesDigital content outsourcing services $ 3,523,682 $ 3,151,928(a)Document imaging services (569,958) (1,234,248)(b) ----------- -----------Total consolidated $ 2,953,724 $ 1,917,680 =========== ===========(a) Includes gain on foreign currency contracts and reversal of previouslyestimated liabilities of $736,000.(b) Includes write off of goodwill of $382,000. 1999 1998Total assetsDigital content outsourcing services $15,437,090 $ 9,520,116Document imaging services 208,787 1,075,392 ----------- -----------Total consolidated $15,645,877 $10,595,508 =========== ===========Capital expendituresDigital content outsourcing services $ 3,881,870 $ 980,218Document imaging services 8,978 44,404 ----------- -----------Total consolidated $ 3,890,848 $ 1,024,622 =========== ===========Depreciation and amortizationDigital content outsourcing services $ 1,660,801 $ 1,116,445Document imaging services 136,230 206,276 ----------- -----------Total consolidated $ 1,797,031 $ 1,322,721 =========== =========== In 2000, one client accounted for 54% of the Company's total revenues, andexport revenues, most of which were derived from European clients, accounted for10% of revenues. A significant amount of the Company's revenues are derivedfrom clients in the publishing industry. Accordingly, the Company's accountsreceivable generally include significant amounts due from such clients.9. INCOME PER SHARE 2000 1999 1998Net income $ 6,168,214 $ 2,112,724 $ 2,249,680 =========== =========== ===========Weighted average common shares outstanding 20,261,644 18,701,488 17,740,896Dilutive effect of outstanding warrants and options 3,016,339 2,592,264 376,692 ----------- ----------- -----------Adjusted for dilutive computation 23,277,983 21,293,752 18,117,588 =========== =========== ===========Basic income per share $.30 $.11 $.13 ==== ==== ====Diluted income per share $.26 $.10 $.12 ==== ==== ====10. IMPAIRMENT OF ASSETS AND OTHER In the fourth quarter of 1998, management determined that the goodwillassociated with the document imaging services business could not be recovered.Accordingly, the unamortized amount of $382,000 was written off at December 31,1998. Further, certain estimated liabilities for restructuring and other itemsaccrued in 1997 totaling $249,000 were deemed in excess of actual amountspayable and were recognized as income in the fourth quarter of 1998.11. FOREIGN CURRENCY CONTRACTS In the second quarter of 1998, the Company reached an agreement inconnection with foreign currency contracts that were in dispute. This resultedin a reduction of the estimated liability previously provided by $487,000 thatwas recognized as a gain.12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) First Second Third Fourth Quarter Quarter Quarter Quarter (in thousands, except per share)2000Revenues $8,839 $9,712 $13,039 $19,141Net income 258 429 1,468 4,013Net income per share $.01 $.02 $.07 $.19Diluted net income per share $.01 $.02 $.06 $.16 1999Revenues $5,611 $7,026 $7,073 $7,780Net income 291 968 585 269Net income per share $.02 $.05 $.03 $.01Diluted net income per share $.02 $.05 $.03 $.01 PART IIIItem 10. Directors, Executive Officers, Promoters and Control Persons;Compliance with Section 16(a) of the Exchange Act.Officers and Directors The officers and directors of the Company are as follows: Name Age Position---- --- --------Barry Hertz 51 Chairman of the Board of DirectorsJack Abuhoff 39 President, Chief Executive Officer and DirectorTodd Solomon 39 Vice Chairman of the Board of Directors and ConsultantMartin Kaye 53 Executive Vice President, Chief Financial Officer, Secretary and DirectorStephen Agress 39 Vice President - FinanceJurgen Tanpho 36 Vice President - OperationsJan Palmen 46 Vice President - SalesKlaas Brouwer 34 Vice President - TechnologyAbraham Biderman 52 DirectorDr. E. Bruce Fredrikson 63 DirectorDr. Charles F. Goldfarb 61 Director Barry Hertz has been Chairman since 1988 and Chief Executive Officer of theCompany until August 1995. He founded Track Data Corporation ("Track") in 1981.He was Track's sole stockholder and Chief Executive Officer until its merger(the "Merger") on March 31, 1996 with Global Market Information, Inc.("Global"), a public company co-founded by Mr. Hertz, who was its Chairman andChief Executive Officer. Upon consummation of the Merger, Global changed itsname to Track Data Corporation ("TDC"). Mr. Hertz holds a B.S. degree inmathematics from Brooklyn College (1971) and an M.S. degree in computer sciencefrom New York University (1973). Jack Abuhoff has served as President and CEO since September 15, 1997. Hehas been a Director of the Company since its founding. From 1995 to 1997 he wasChief Operating Officer of Charles River Corporation, an international systemsintegration and outsourcing firm. From 1992 to 1994, he was employed byChadbourne & Parke, and engaged in Sino-American technology joint ventures withGoldman Sachs. He practiced international corporate law with White & Case from1986 to 1992. He holds an A.B. degree from Columbia College (1983) and a J.D.degree from Harvard Law School (1986). Todd Solomon has been Vice Chairman and consultant to the Company since hisresignation as President and CEO on September 15, 1997. He served as Presidentand a Director of the Company since its founding by him in 1988. He had beenChief Executive Officer since August 1995. Mr. Solomon was President of RuckAssociates, an executive recruiting firm from 1986 until 1987. Mr. Solomonholds an A.B. in history and physics from Columbia University (1986). Martin Kaye has been Chief Financial Officer of the Company since October1993, and was elected Executive Vice President in March 1998. He has been aDirector since March 1995. He is a certified public accountant and serves asVice President of Finance and a Director of TDC. Mr. Kaye had been an auditpartner with Deloitte & Touche for more than five years until his resignation in1993. Mr. Kaye holds a B.B.A. in accounting from Baruch College (1970). Stephen Agress was elected Vice President - Finance in March 1998. Heserved as Corporate Controller since joining the Company in August 1995. Mr.Agress is a certified public accountant and had been a senior audit manager withDeloitte & Touche for more than five years prior to his resignation in 1995. Mr.Agress holds a B.S. in accounting from Yeshiva University (1982). Jurgen Tanpho was elected Vice President - Operations in March 1998. Heserved in various management capacities since joining the Company in 1991, mostrecently in the position of Assistant to the President of Manila Operations. Heholds a B.S. degree in industrial engineering from the University of thePhilippines (1986). Jan Palmen was elected Vice President - Sales in February 1999. Mr. Palmenwas chief operating officer at SPI Technologies, Inc., a leading competitor ofthe Company, from 1995 through 1998. Prior to SPI, he was general manager,production for Reed/Elsevier from 1991 through 1995. He was also a member of thesteering committee for global SGML implementation. Before that, he spent threeyears with United Dutch Publishers as head of sales and production and two yearswith a global management consultancy company as a strategic consultant. He holdsa M.B.A. degree (1979) in marketing, economics and logistics management and aB.B.A. degree (1976) in economics and marketing, both from Erasmus University inAmsterdam. Klaas Brouwer was elected Vice President - Technology in July 2000. He wasAssistant Vice President for Technology from September 1998 until June 2000.Mr. Brouwer was Chief Technical Officer and Special Projects Division Manager atSPI Technologies, Inc., a leading competitor of the Company, from 1996 through1998. From 1993 up to 1996, he served as IT Manager and member of theManagement Team of Elsevier Science, responsible for the implementation ofSoftware Development, LAN, WAN and Data Centers. Mr. Brouwer holds a BachelorsDegree in Information Technology from the Noordelijke Hogeschool Leeuwarden, aleading university in the Netherlands (1993). Abraham Biderman has been a Director of the Company since October 2000. Heis Executive Vice President of Lipper & Company, Inc., a diversified financialservices and money management firm, which he joined in 1990. He is alsoManaging Director of the Lipper Funds, Inc., a mutual fund family comprised ofthree publicly traded mutual funds, and of the Lipper Prime AssetManagement/Lipper Leumi Asset Management, a provider of asset managementservices to foreign investors. Prior thereto, he served as special advisor tothe Deputy Mayor and then the Mayor during New York City's Koch Administration.From January 1988 through December 1989, Mr. Biderman was Commissioner of NewYork City's Department of Housing, Preservation and Development. Prior thereto,he served as Commissioner of New York City's Department of Finance and asChairman of New York City's Employee Retirement System. Mr. Biderman is aDirector of the Municipal Assistance Corporation of the City of New York, amember of the Housing Committee of the Real Estate Board of New York, a Directorof the New York City Public/Private Initiatives, Inc., a Director of M-PhaseTechnologies, Inc., a company that manufactures and markets high-bandwidthtelecommunications products incorporating DSL technology, and is also on theboards of numerous not-for-profit and philanthropic organizations. Mr. Bidermanis a certified public accountant and graduated with a B.A. in Investment Bankingfrom Brooklyn College (1970). Dr. E. Bruce Fredrikson has been a Director of the Company since August1993. He is currently a Professor of Finance at Syracuse University School ofManagement where he has taught since 1966 and has previously served as Chairmanof the Finance Department. Dr. Fredrikson has a B.A. in economics fromPrinceton University and a M.B.A. and a Ph.D. in finance from ColumbiaUniversity. He is also an independent general partner of Fiduciary CapitalPartners, L.P. and Fiduciary Capital Pension Partners, L.P. He is also aDirector of TDC. Dr. Charles F. Goldfarb has been a Director of the Company since October2000. Dr. Goldfarb invented SGML (Standard Generalized Markup Language) in 1974and later led the team that developed it into the International Standard (ISO8879) on which the World Wide Web's HTML (HyperText Markup Language) and XML(Extensible Markup Language) are based. HTML is an SGML application, while XMLis a Web-optimized subset of SGML. Dr. Goldfarb has served as Editor of the SGMLInternational Standard for 20 years, and is a consultant to developers of SGMLand XML applications and products. He is co-author of "The XML Handbook ThirdEdition" (Prentice-Hall, 2001), the first edition of which was rated the top XMLbook of 1998 by Amazon.com. He also authored "The SGML Handbook" (OxfordUniversity Press, 1990), cited by "Seybold Report" as the definitive referenceon SGML, and "The SGML Buyer's Guide: A Unique Guide to Determining YourRequirements and Choosing the Right SGML" and "XML Products and Services"(Prentice-Hall, 1998). He is Series Editor of Prentice-Hall's "Charles F.Goldfarb Series on Open Information Management" and "The Definitive XML Seriesfrom Charles F. Goldfarb." He has been profiled in "Forbes," "Web Techniques,""Red Herring," and other publications. He holds the Graphic CommunicationsAssociation's first International SGML Award and the Printing Industries ofAmerica's Gutenberg Award, and is an Honorary Fellow of the Society forTechnical Communication. Dr. Goldfarb earned an A.B. degree from ColumbiaCollege (1960) and a J.D. at Harvard Law School (1964). There are no family relationships between or among any directors orofficers of the Company. Directors are elected to serve until the next annualmeeting of stockholders and until their successors are elected and qualified.Officers serve at the discretion of the Board.Compliance with Section 16(a) of the Exchange Act. The Company believes that during the period from January 1, 2000 throughDecember 31, 2000 all officers, directors and greater than ten-percentbeneficial owners complied with Section 16(a) filing requirements.Item 11. Executive Compensation.Executive Compensation The following table sets forth information with respect to compensationpaid by the Company for services to the Company during the three fiscal yearsended December 31, 2000 to those executive officers whose aggregate cash andcash equivalent compensation exceeded $100,000. SUMMARY COMPENSATION TABLE Annual Compensation Number ofName and Principal Calendar Stock OptionsPosition Year Salary Bonus AwardedJack Abuhoff 2000 $297,892 $ 75,000 1,020,000President and CEO 1999 250,000 50,000 180,000 1998 200,000 20,000 249,996 (A) 1,134,168Barry Hertz 2000 $ 75,000 $ - 250,000Chairman 1999 75,000 - 180,000 1998 75,000 - 168,000 (A) 444,000Todd Solomon 2000 $ 75,000 $ - 176,000Vice Chairman of the Board 1999 75,000 - 126,000and Consultant 1998 93,750 - 126,000 (A) 860,388Stephen Agress 2000 $164,800 $ 24,720 100,000Vice President - Finance 1999 160,000 - 72,000Jan Palmen 2000 $138,000 $115,719 140,000Vice President - Sales 1999 110,000 38,000 72,000Jurgen Tanpho 2000 $102,724 $ 15,409 100,000 Vice President - OperationsKlaas Brouwer 2000 $ 92,950 $ 25,097 100,000 Vice President - Technology(A) Options granted in prior years and repriced in 1998The above compensation does not include certain insurance and other personalbenefits, the total value of which does not exceed as to any named officer, thelesser of $50,000 or 10% of such person's cash compensation. The Company hasnot granted any stock appreciation rights nor does it have any "long-termincentive plans," other than its stock option plans. OPTION GRANTS IN LAST FISCAL YEAR Individual Grants Potential Realized Value at Assumed Percent of Total Annual Rates of Number of Options Granted Exercise Stock Appreciation for Options to Employees in Price Expiration Option TermName Granted Fiscal Year Per Share Date 5% 10%Jack Abuhoff 1,020,000 37% $1.57 - $2.25 6/05 - 10/05 $2,712,098 $3,422,334Barry Hertz 250,000 9% 1.57 6/05 500,941 632,125Todd Solomon 176,000 6% 1.57 6/05 352,662 445,016Stephen Agress 100,000 4% 1.57 6/05 200,376 252,850Jan Palmen 140,000 5% 1.57 - 2.25 6/05 - 10/05 315,242 397,796Jurgen Tanpho 100,000 4% 1.57 6/05 200,376 252,850Klaas Brouwer 100,000 4% 1.57 6/05 200,376 252,850The options become exercisable on a linear basis over 48 months. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR; FISCAL YEAR END OPTION VALUES Number Value of Unexercised Shares of Unexercised In-the-Money Options Acquired Value Options at Fiscal Year End at Fiscal Year EndName on Exercise Realized Exercisable/Unexercisable Exercisable/UnexercisableJack Abuhoff 126,996 $470,560 1,444,106/1,073,542 $6,855,307/$3,778,472Barry Hertz 240,000 $847,900 418,454/303,542 $2,030,272/$1,275,972Todd Solomon 123,996 $242,930 897,658/213,334 $4,528,466/$896,545Stephen Agress 39,996 $58,944 206,584/121,416 $1,011,485/$510,386Jan Palmen 36,000 $172,620 50,584/161,416 $231,485/$640,386Jurgen Tanpho 15,998 $61,952 225,928/121,416 $1,108,198/$510,386Klaas Brouwer - - 62,584/121,416 $291,110/$510,386Directors Compensation Dr. E. Bruce Fredrikson was compensated at the rate of $1,250 per month,plus out-of-pocket expenses for each meeting attended. In addition, commencingNovember 2000, Dr. Charles F. Goldfarb was compensated at a rate of $2,000 permonth, plus out-of-pocket expenses for each meeting attended. In addition, Mr.Goldfarb received approximately $15,000 for certain special assignments. Noother director is compensated for his services as director. Further, in 2000,Messrs. Fredrikson, Biderman and Goldfarb received options to purchase 60,000,80,000 and 120,000 shares, respectively, (after giving retroactive effect to atwo-for-one stock split declared on February 28, 2001). The Company has an arrangement with Todd Solomon, its former President andCEO, that provides for a salary of $75,000 per annum. He serves as ViceChairman of the Board and in executive capacities as designated by the CEO orthe Board of Directors.Compensation Committee Interlocks and Insider Participation For the Company's fiscal year ended December 31, 2000, Messrs. Hertz,Abuhoff and Kaye were officers of the Company and were members of the Board ofDirectors (there is no compensation committee). Mr. Hertz is Chairman and CEOof Track Data and Mr. Kaye is chief financial officer and a director of TrackData. Dr. Fredrikson is also a director of Track Data.Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as of February 28, 2001, informationregarding the beneficial ownership of the Company's Common Stock based upon themost recent information available to the Company for (i) each person known bythe Company to own beneficially more than five (5%) percent of the Company'soutstanding Common Stock, (ii) each of the Company's officers and directors, and(iii) all officers and directors of the Company as a group. Unless otherwiseindicated, each stockholder's address is c/o Company, 3 University Plaza,Hackensack, NJ 07601. Shares Owned Beneficially (1) Amount and NatureName and Address of of BeneficialBeneficial Owner Ownership Percent of ClassTrack Data Corporation (2) 2,176,972 10.3%Barry Hertz (3) 2,669,858 12.4%Todd Solomon (4) 3,016,488 13.7%Jack Abuhoff (5) 1,692,224 7.5%Martin Kaye (6) 551,328 2.6%Stephen Agress (7) 423,672 2.0%Jurgen Tanpho (8) 250,258 1.2%Jan Palmen (9) 63,916 * Klaas Brouwer (10) 91,916 * Dr. E. Bruce Fredrikson (11)Syracuse UniversitySchool of ManagementSyracuse, NY 13244 158,988 * Abraham Biderman - * Dr. Charles F. Goldfarb 800 * All Officers and Directorsas a Group (11 persons)(3)(4)(5)(6)(7)(8)(9)(10)(11) 8,919,448 35.3%______________________________* Less than 1%.1. Except as noted otherwise, all shares are owned beneficially and of record.Includes shares pursuant to options presently exercisable or which are exercisablewithin 60 days. Based on 21,134,252 shares outstanding.2. Consists of 2,176,972 shares owned by Track Data Corporation ("TDC").3. Includes 2,176,972 shares owned by TDC, which is principally owned by Mr.Hertz, 33,600 shares held in a pension plan for the benefit of Mr. Hertz andcurrently exercisable options to purchase 439,286 shares of Common Stock.4. Includes currently exercisable options to purchase 912,324 shares of CommonStock.5. Includes currently exercisable options to purchase 1,577,228 shares of CommonStock.6. Includes currently exercisable options to purchase 511,332 shares of CommonStock.7. Includes 182,040 shares owned of record and currently exercisable options topurchase 214,916 shares of Common Stock. Also includes exercisable options topurchase 26,716 shares of Common Stock by his wife. Mr. Agress disclaims beneficialownership in shares attributable to his wife.8. Includes currently exercisable options to purchase 234,260 shares of CommonStock.9. Consists of shares issuable upon exercise of currently exercisable optionsgranted under the Company's Stock Option Plans.10. Includes currently exercisable options to purchase 70,916 shares of CommonStock.11. Includes currently exercisable options to purchase 142,992 shares of CommonStock.Item 13. Certain Relationships and Related Transactions. There were no material related party transactions. PART IVItem 14. Exhibits and Reports on Form 8-K(a) Exhibits which are indicated as being included in previous filings areincorporated herein by reference. Exhibit Description Filed as Exhibit------- ----------- -----------------------3.1 Restated Certificate of Incorporation Exhibit 3.1 to Form SB-2 Registration Statement No. 33-620123.2 By-Laws Exhibit 3.2 to Form SB-2 Registration Statement No. 33-620124.2 Specimen of Common Stock certificate Exhibit 4.2 to Form SB-2 Registration Statement No. 33-6201210.1 1994 Stock Option Plan Exhibit A to Definitive Proxy dated August 9, 199410.2 1993 Stock Option Plan Exhibit 10.4 to Form SB-2 Registration Statement No. 33-6201210.3 Form of Indemnity Agreement with Directors Exhibit 10.5 to Form SB-2 Registration Statement No. 33-6201210.4 1994 Disinterested Directors Stock Option Plan Exhibit B to Definitive Proxy dated August 9, 199410.5 1995 Stock Option Plan Exhibit A to Definitive Proxy dated August 10, 199510.6 1996 Stock Option Plan Exhibit A to Definitive Proxy dated November 7, 199610.7 1998 Stock Option Plan Exhibit A to Definitive Proxy dated November 5, 199821 Subsidiaries of the registrant Filed herewith23 Consent of Grant Thornton LLP Filed herewith(b) There were no reports on Form 8-K filed during the quarter ended December 31, 2000. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized. INNODATA CORPORATION By /s/ ------------------------ Barry Hertz Chairman of the Board In accordance with the Exchange Act, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated. Signature Title Date--------- ------ ----- /s/ Chairman of the Board March 29, 2001----------------------- Barry Hertz /s/ President, Chief Executive Officer March 29, 2001----------------------- and Director Jack Abuhoff /s/ Vice Chairman of the Board March 29, 2001----------------------- Todd Solomon /s/ Executive Vice President (Principal March 29, 2001----------------------- Martin Kaye Financial Officer), Director /s/ Vice President - Finance (Principal March 29, 2001----------------------- Stephen Agress Accounting Officer) /s/ Director March 29, 2001----------------------- Abraham Biderman /s/ Director March 29, 2001----------------------- Dr. E. Bruce Fredrikson Director March 29, 2001----------------------- Dr. Charles Goldfarb Exhibit 21 Subsidiaries State or other Name under jurisdiction of which subsidiaryName of Subsidiary incorporation conducts business --------------- ------------------Innodata Philippines, Inc.* Philippines SameInnodata India (Private) Limited* India SameInnodata Mandaue, Inc.* Philippines SameInnodata Lanka (Private) Limited* Sri Lanka Same* Wholly-owned by Innodata Asia Holdings, Limited which is 100% owned by Innodata Corporation. Exhibit 23CONSENT OF INDEPENDENT AUDITORSWe have issued our report dated February 23, 2001 (except for Note 5 as to whichthe date is February 28, 2001) accompanying the consolidated financialstatements included in the Annual Report of Innodata Corporation on Form 10-Kfor the year ended December 31, 2000. We hereby consent to the incorporation byreference of said reports in the Registration Statements of Innodata Corporationon Form S-8 (Registration No. 33-85530, dated October 21, 1994, Registration No.333-3464, dated April 18, 1996, Registration No. 33-63085, dated September 9,1998 and Registration No. 333-82185, dated July 2, 1999) and on Form S-3(Registration No. 33-62012, dated April 11, 1996, Registration No. 333-91649,dated January 6, 2000 and Registration No. 333-51400, dated January 2, 2001)./s/ Grant Thornton LLPNew York, New YorkFebruary 23, 2001

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