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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 of
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
/ / Transition report under section 13 or 15(d) of the securities exchange
act of 1934
COMMISSION FILE NUMBER 0-22196
INNODATA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3475943
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
THREE UNIVERSITY PLAZA
HACKENSACK, NEW JERSEY 07601
(Address of principal executive offices) (Zip Code)
(201) 488-1200
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
$.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes / / No /x/
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. $25,100,000
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
21,436,000 SHARES OF COMMON STOCK, $.01 PAR VALUE, AS OF FEBRUARY 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
[SEE INDEX TO EXHIBITS]
PART I
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 statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words "intend", "believe," "expect,"
"anticipate" and other similar expressions generally identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates.
These forward-looking statements are based largely on the Company's current
expectations, and are subject to a number of risks and uncertainties, including
without limitation, continuation or worsening of present depressed market
conditions, changes in external market factors, the ability and willingness of
the Company's clients and prospective clients to execute business plans which
give rise to requirements for digital content and professional services in
knowledge processing, difficulty in integrating and deriving synergies from
acquisitions, potential undiscovered liabilities of companies that Innodata
acquires, changes in the Company's business or growth strategy, the emergence of
new or growing competitors, various other competitive and technological factors,
risks and uncertainties described under "Risk Factors", and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
Actual results could differ materially from the results referred to in the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the results referred to in the forward-looking statements
contained in this Form 10-K will in fact occur. We make no commitment to revise
or update any forward-looking statements in order to reflect events or
circumstances after the date any such statement is made.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
We deliver content manufacturing and XML- related digital asset services to
online information providers and companies in the telecommunications,
technology, healthcare, defense, and Internet commerce sectors. We have over 100
active clients, including Amazon.com, Dow Jones & Company, Lockheed Martin
Corporation, ProQuest Company, Reed Elsevier, Reuters, Simon & Schuster, The
Thomson Corporation, and Wolters Kluwer.
We operate through three divisions. Our Content Division aggregates,
converts, tags and editorially enhances digital content - services we refer to
collectively as "content manufacturing" services. We offer content manufacturing
services as a comprehensive outsourcing solution and individually as discrete
activities. The Content Division also transforms data to Extensible Markup
Language (XML). Our Systems Division offers system design, custom application
development, consulting services, and systems integration conforming to XML and
related standards. Our Training Division provides a broad range of introductory
as well as advanced curricula and training on XML and other knowledge management
standards.
Our content manufacturing clients often have time-critical outsourcing
needs, with content that requires regular updating or enhancement. We typically
service these needs through multi-year contracts or relationships.
Substantially all of our 2002 revenue was derived from clients that used our
services for more than one year, and approximately 70% of our 2002 revenue was
derived from clients that used our services more than two years.
Our XML transformation clients typically engage us to assist in building
new, large-scale XML-compliant information repositories or in transforming
large-scale legacy electronic information repositories to XML-compliant
information repositories. Our XML Content Factory is the largest dedicated
factory purpose-built to create XML content.
We are headquartered in Hackensack, New Jersey and have two other offices
in North America, seven production facilities in the Philippines, India, and Sri
Lanka, and a technology development center in India. Our largest production
facility is the XML Content Factory, in Mandaue, the Philippines. Our wide area
network and communications systems enable multiple production processes to be
performed simultaneously at various of our production facilities.
We use server-based information technology to operate through a structured
workflow using advanced tools. We drive efficiency and quality by using advanced
manufacturing and management techniques including total quality management and
statistical process control.
Content Manufacturing and Outsourcing
By capitalizing on the benefits of our scale and specialization, we aim to
be a strategic long-term provider of comprehensive content manufacturing
services that complement our customers' in-house capabilities and enable them to
respond to market challenges. Our business strategy is to expand our client base
and enhance our service offerings in this area.
A critical component of our content manufacturing and outsourcing services
is the conversion of hardcopy and paper collections and legacy-formatted data to
a variety of output formats including XML and XML derivatives, HTML, SGML, Open
eBook (OeB), Microsoft Reader (.LIT), Rocket eBook (.RB), and PDF. For this
purpose, we use high-speed scanning; a variety of commercial and proprietary
OCR/ICR (optical/intelligent character recognition) applications; structured
workflow processes; and proprietary applications and tools designed to create
accurate, consistent markup and data. We use proprietary technology for data
enhancement and validation, and create automated procedures - utilizing industry
standards-aware software tools such as Omnimark, XMetaL, Epic, etc. - to ensure
validated SGML and XML markup.
Another critical component of our content manufacturing and outsourcing
services is the enhancement of content. Our engineers and programmers develop
custom conversion filters and parsers for this purpose. Our subject matter
experts in fields such as law, education, science, medicine, and engineering
provide taxonomy and controlled vocabulary development, hyperlinking, tagging,
general editorial services, and indexing and abstracting.
We typically price our services on a resource-utilization basis or
quantity-delivered basis.
XML Transformation
Content publishers seek to migrate to XML-based publishing systems in order
to save money and save time by creating a single data store from which to create
multiple information products (as opposed to having to build a separate data
store for each information product). In addition, publishers who maintain their
content in XML can syndicate content and spontaneously synthesize data into
interactive "web services." XML content transformation is the prerequisite for
content owners to accomplish these outcomes.
To transform content to XML, tags are inserted within the content to give
the content meaning which computers can read. Our proprietary technology
includes production-grade, auto-tagging applications that utilize pattern
recognition based on comprehensive rule sets and heuristic online databases. The
technology enables mass creation or conversion of XML content from complex,
unstructured information.
We also translate desktop publishing documents (QuarkXPress, PDF, MS Word,
etc.) to XML variants, from which we generate multiple file formats (HTML, OeB,
PDF, proprietary eBook formats, etc.) to support multiple channels of
distribution.
We typically price these services based on units of data produced or
transformed.
XML Systems and Training
Clients who use our XML systems engineering and consulting services
typically require publishing systems or performance support / process automation
systems that enable multiple authors to collaborate on content and enable
multiple products to be generated from single-source XML assemblies. Our Systems
Division provides full-service consulting and information system design and
systems integration to configure, improve, and validate these and other software
systems and technologies. Services are provided in ISO, IEC, ANSI, IETF, and W3C
standards.
Our Training Division provides clients with professional training,
courseware, and briefings in XML and other formal public standards.
We typically price these services on a fixed-fee turnkey basis.
BUSINESS STRATEGY
We seek to capitalize on the increased willingness of companies in our
markets to explore outsourcing as a way of reducing expenses associated with
content manufacture while reserving internal resources to focus on strategic
core competencies such as high-level editorial processes, product development,
and publishing. We also seek to respond to our customers' increased interest in
publishing information from a single repository to multiple channels (i.e., web,
print, CD, print-on-demand, PDA) and to re-use existing digital assets to
quickly create new products.
We believe that there is a vast quantity of textual, audio, and video data
sources that will be made available on the Web by electronic publishers, and
that many of them will choose XML and its related standards as the underlying
technology. We intend to be the partner of choice for clients requiring
large-scale XML transformations as well as XML systems development and training.
We intend to target publishers and information providers, knowledge service
and eLearning companies, Internet content portals, information aggregators,
e-content vendors, rich media owners, and corporations with online commerce and
knowledge management initiatives.
Specifically, we plan to drive content manufacturing and outsourcing
opportunities by:
Expanding existing client relationships and developing long-term
relationships with new clients who have recurring requirements for
content manufacturing and outsourcing services;
Leveraging our subject matter expertise, world-wide data manufacturing
capabilities, and information technology infrastructure to drive
substantial cost savings for clients while decreasing their product
latency and enabling them to launch products more quickly in response
to market opportunities; and
Offering custom-tailored XML-based business solutions using a variety
of proprietary and third-party licensed software on multiple hardware
and systems software platforms and domestic and international
workforces.
We aim to be a leader in the market for XML content transformation,
systems, and training by:
Further leveraging existing and emerging technologies to create
increasingly efficient tools for creating large-scale XML content
repositories;
Maintaining our position as the preferred supplier of large-scale XML
content services, while extending our leadership in XML architecture
and XML consulting;
Entering into additional high-profile client partnerships for
large-scale XML content services; and
Continuing to take an active role in developing key structured
information standards.
Furthermore, we plan to:
Extend our service offerings into other strategic areas consistent
with our position as a leading provider of digital asset services and
solutions;
Design customized service offerings to meet the unique needs of
targeted vertical markets;
Respond to opportunities to provide increased value-added services to
our clients;
Expand our delivery capabilities to embrace new technology initiatives
that are strategic for our clients; and
Cultivate and maintain a significant client and project base to create
economies of scale that enable us to achieve competitive costs.
Close Relationships With Clients
Innodata views its long-term partnership with our clients as a critical
element in its historical and future success.
To continue to meet the needs of existing and prospective clients in a
timely fashion, Innodata works directly with its clients to identify and develop
new and improved service offerings. To promote a close and continuing
relationship with clients, we sell through our North American Solutions Center
and provide 24/7 project support through our Asia-based customer service center.
We generally perform our work for our clients under project-specific
contracts, requirements-based contracts, or long-term contracts. Contracts are
typically subject to numerous termination provisions.
One client accounted for 30% and 27% of the Company's revenues for the
years ended December 31, 2002 and 2001 respectively and a second client
accounted for 16% of the Company's revenues for the year ended December 31,
2002. One other client, which substantially curtailed operations, accounted for
30% and 54% of the Company's revenues in the years ended December 31, 2001 and
2000, respectively. No other client accounted for 10% or more of revenues
during this period. Further, in 2002, 2001, and 2000, export revenues,
substantially all of which were derived from European clients, accounted for
23%, 13%, and 10%, respectively, of the Company's revenues.
We are from time to time required by clients to enter into non-disclosure
agreements pursuant to which we agree not to disclose their identity or the
nature of our relationship with them. Reasons for requiring such arrangements
vary, but typically involve a preference on the part of the client not to
publicize its outsourcing strategy or to telegraph to competitors a new product
development initiative.
Comprehensive Service Offering
Our comprehensive service offering distinguishes us from our competitors.
Many competitors offer only a single service, such as data capture, but do not
offer the full complement of specialized services large organizations require in
order to build large-scale XML repositories or manufacture large-scale digital
content. Innodata provides a broad range of content-related services to enable
its clients to obtain the full benefit of outsourcing within a seamless
operational framework premised on our accountability to our clients.
Innovative Technology-Based Solutions
We have invested substantially in our manufacturing infrastructure in order
to ensure clients a reliable and highly redundant infrastructure and to enable
us to employ the latest tools to drive significant process efficiencies.
INFORMATION AS TO OPERATING SEGMENTS
The applicable information on operating segments of the Company for the
three years ended December 31, 2002 and at the end of each year, are included in
Note 8 to the Company's financial statements.
SALES AND MARKETING
Our full-time direct sales force primarily conducts sales and marketing
functions. Sales and marketing activities consist primarily of exhibiting at
trade shows in the United States and Europe, and seeking direct personal access
to decision-makers at existing and prospective clients. We have also obtained
visibility by way of articles published in the trade press, through
participation in industry conferences and standards organizations, and by
speaking engagements at industry events. To date, Innodata has not conducted any
significant advertising campaign in the general media.
Consulting personnel from our new project analysis group closely support
the direct sales effort. These individuals assist the sales force in
understanding the technical needs of clients and providing responses to these
needs, including demonstrations, prototypes, pricing quotations, and time
estimates. In addition, account managers from our customer service group
support our direct sales effort by providing ongoing project-level post-sale
support to customers.
COMPETITION
The markets for our services are highly competitive. The most significant
competitive factors are quality and reliability of services, price of services,
scope and scale, quality of supporting services, and technical competence. We
are not aware of any single competitor that provides the same range of services
as we do, and we believe that we have created significant differentiation
relative to our quality of services as well as our scope of services and scale
of services. However, our industry is highly fragmented and we face significant
competition in each of our service areas.
In terms of content manufacturing/outsourcing, we believe we compete
successfully by offering high quality services and favorable pricing by
leveraging our technical skills, process knowledge, and economies of scale.
Competition is highly fragmented and depends on the specific service provided.
We have substantially greater resources than most of our competitors, resulting
in greater breadth of services as well as scope and scale. Thus, we have a
greater ability to obtain client contracts where the undertaking required is
technically sophisticated, sizable in scope or scale, or requires significant
investment. Our outsourcing services also compete with clients' and potential
clients' "in-sourcing" personnel, who may attempt to duplicate our services
using in-house staff.
In terms of XML data transformation, companies compete on the basis of
quality, accuracy, price, and consistency, as well as ability to deliver
large-scale, tag-intensive requirements quickly. Innodata's ability to compete
favorably is, therefore, dependent upon its ability to react appropriately to
short and long-term trends, harness new technology, and deliver large-scale
requirements quickly. SPI, Inc. and Jouve, S.A. among others, compete for the
XML content creation business.
With respect to XML systems and consulting, Thomas Technology Solutions,
Inc., Bearing Point (formerly KPMG Consulting), and Booz Allen Hamilton are
among those providing competitive services. In addition, we must frequently
compete with our clients' own internal information technology capability.
RESEARCH AND DEVELOPMENT
We maintain a research and development capability to evaluate, on an
ongoing basis, advances in computer software, hardware and peripherals, computer
networking, telecommunication systems and Internet-related technologies as they
relate to our business and to develop and install enhancements to our
proprietary systems. During the last two fiscal years, we invested heavily in
the development and integration of proprietary applications for use in our XML
Content Factory. Applications development was predominantly associated with
improving accuracy, consistency, and speed of complex XML tagging for
large-scale requirements. We intend to make further investments in applications
development and integration in order to respond to market opportunities. For the
three years ended December 31, 2002, all research and development expenditures
were charged as development expenses.
EMPLOYEES
As of February 28, 2003, we employed an aggregate of approximately 70
persons in the United States, and approximately 7,000 persons in five production
facilities in the Philippines, one production facility in Sri Lanka, one
production facility in India, and a software development center in India. No
employees are currently represented by a labor union and we believe that our
relations with our employees are satisfactory.
At all of our locations, we enforce vigorous policies to protect our
employees against sexual harassment and discrimination based on age, race,
gender or sexual orientation. The average age of our employees is approximately
25 to 30 years. Most of our employees have graduated from at least a two-year
college program. Many of our employees hold advanced degrees in law, business,
technology, medicine, and social sciences.
To retain our qualified personnel, Innodata offers highly competitive base
salaries that are supplemented by results-based incentives. Senior management is
eligible for bonuses and stock options. Our compensation structure is coupled
with an extensive benefits package that includes comprehensive health insurance
coverage, canteen and grocery subsidies, paid holiday leaves, continuing
education programs, clothing and optical allowances, and a retirement program.
Moreover, Innodata provides overtime premiums, holiday pay, bereavement and
birthday leaves, as well as maternity and paternity benefits.
RISK FACTORS
The nature of our business, as well as our strategy, the size and location
of our facilities, and other factors entail a certain amount of risk. These
risks may include, but are not limited to, the following:
RISK OF CONTINUATION OR WORSENING OF PRESENT MARKET CONDITIONS
The current economic uncertainty has curtailed business initiatives by our
clients and potential clients. To address this sales challenge and to reduce
the percentage of total revenue that are often non-recurring, we have begun to
refocus our sales force to emphasize our content manufacturing outsourcing
services. Nevertheless, a material recovery in revenues and earnings will in
substantial part depend on removal of the current uncertainty and a return to
more vigorous economic growth.
RISKS OF EXPANDED OPERATIONS
We have expanded our operations rapidly in recent years. As a result, we
have incurred new fixed operating expenses associated with our expansion
efforts, including increases in depreciation expense, rental expense, and
overall increases in cost of sales. In order to capitalize on this investment,
we need to develop new client relationships and expand existing ones. If our
revenues do not increase sufficiently to offset these expenses, our operating
results may be adversely affected.
RISKS OF ACQUISITIONS
Acquisitions involve a number of risks and challenges. These include, but
are not limited to: diversion of management's attention; the need to integrate
acquired operations; potential loss of key employees and clients of the acquired
companies; lack of experience operating in the market of the acquired business;
and an increase in expenses and working capital requirements.
To integrate acquired operations, we must implement management information
systems and operating systems and assimilate and manage the personnel of the
acquired operations. Geographic distances may further complicate integration.
The integration of acquired businesses may not be successful and could result in
disruption to other parts of our business.
Any of these and other factors could adversely affect our ability to
achieve anticipated levels of profitability of acquired operations or realize
other anticipated benefits of an acquisition. Furthermore, any future
acquisitions may require us to incur debt or obtain additional equity financing,
which could increase our leverage or be dilutive to our existing shareholders.
No assurance can be given that we will consummate any additional acquisitions in
the future.
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 production
requirements, or delay their production requirements for a number of reasons.
Cancellations, reductions, or delays by a significant client or by a group of
clients would adversely affect our results of operations. In addition, other
factors may contribute to fluctuations in our results of operations. These
factors include: the timing of client orders; the volume of these orders
relative to our capacity; market acceptance of clients' new products; the timing
of our expenditures in anticipation of future orders; our effectiveness in
managing manufacturing processes; changes in economic conditions; and local
factors and events that may affect our production volume (such as local
holidays) or unforeseen events (e.g., earthquakes, storms, civil unrest).
We make significant decisions based on our estimates of client
requirements, including decisions about the levels of business that we will seek
and accept, production schedules, equipment procurement, personnel hiring, and
other resource acquisition. The nature of our clients' commitments and the
possibility of changes in demand for their products may reduce our ability to
estimate accurately future client requirements. On occasion, clients may require
rapid increases in production, which can stress our resources. Although we have
increased our content conversion capacity and plan further increases, there can
be no assurance we will have sufficient capacity at any given time to meet all
of our clients' demands. In addition, because many of our costs and operating
expenses are relatively fixed, a reduction in client demand can adversely affect
our margins.
VARIABILITY OF QUARTERLY OPERATING RESULTS
We expect our revenues and operating results to vary from quarter to
quarter. Such variations are likely to be caused by many factors that are, to
some extent, outside our control, including: mix and timing of client projects;
completing client projects; timing of new contracts; and one-time non-recurring
and unusual charges.
Accordingly, we believe that quarter-to-quarter comparisons of operating
results for preceding quarters are not necessarily meaningful. You should not
rely on the results of one quarter as an indication of our future performance.
CLIENT CONCENTRATION; DEPENDENCE ON THE ONLINE INFORMATION INDUSTRY
One client accounted for 30% and 27% of the Company's revenues for the
years ended December 31, 2002 and 2001, respectively, and a second client
accounted for 16% of the Company's revenues for the year ended December 31,
2002. One other client, which substantially curtailed operations, accounted for
30% and 54% of the Company's revenues in the years ended December 31, 2001 and
2000, respectively. No other client accounted for 10% or more of revenues
during this period. Further, in 2002, 2001, and 2000, export revenues,
substantially all of which were derived from European clients, accounted for
23%, 13%, and 10%, respectively, of the Company's revenues. A significant
amount of our revenues are derived from clients in the online information
industry. Accordingly, our accounts receivable generally include significant
amounts due from such clients. In addition, as of December 31, 2002,
approximately 33% of the Company's accounts receivable was from foreign
(principally European) clients. On occasion, we may lose a client as a result
of a business failure, contract expiration, or the selection of another service
provider. We cannot guarantee that we will be able to retain long-term
relationships or secure renewals of short-term relationships with our major
clients in the future. Moreover, revenue derived from certain of our
relationships depend upon the level of services we perform, which may vary from
period to period depending on client requirements.
Factors affecting the online information industry generally could have a
material adverse effect on our clients and, as a result, on our performance.
Such factors include: the inability of our clients to adapt to rapidly changing
technology and evolving industry standards, the inability of our clients to
develop and market their products, some of which are new and untested; and,
recessionary periods in our clients' markets. If clients' products become
obsolete or fail to gain widespread commercial acceptance, our business may be
materially and adversely affected.
RISK OF INCREASED TAXES
We have structured our operations in a manner designed to maximize income
in countries where tax incentives have been extended to encourage foreign
investment or where income tax rates are low. Our taxes could increase if these
tax incentives are not renewed upon expiration, or tax rates applicable to us
are increased. Substantially all of the services provided by our Asian
subsidiaries are performed on behalf of clients based in North America and
Europe. We believe that profits from our Asian operations are not sufficiently
connected to jurisdictions in North America or Europe to give rise to income
taxation there. However, tax authorities in jurisdictions in North America and
Europe could challenge the manner in which profits are allocated among our
subsidiaries, and we may not prevail in any such challenge. If our Asian profits
became subject to income taxes in such other jurisdictions, our worldwide
effective tax rate could increase.
RISKS OF COMPETITION
The markets for our services are extremely competitive and fragmented. As a
result of this highly competitive environment, we may lose customers or have
difficulty in acquiring new customers and our results of operations may be
adversely affected. A significant source of competition for us is the in-house
capability of our target client base. There can be no assurance that these
clients will outsource more of their needs or that such businesses will not
bring in-house services that they currently outsource.
RISKS OF INTERNATIONAL OPERATIONS
While the major part of our operations are carried on in the Philippines,
India, and Sri Lanka, our headquarters are in the United States and our clients
are primarily located in North America and Europe. As a result, we are not as
affected by economic conditions overseas as we would be if we depended on
revenues from sources internal to those countries. However, such adverse
economic factors as inflation, external debt, negative balance of trade, and
underemployment may significantly impact us.
Certain aspects of overseas economies directly affect us. Overseas
operations remain vulnerable to political unrest, which could interfere with our
operations. Political instability could also change the present satisfactory
legal environment for us through the imposition of restrictions on foreign
ownership, repatriation of funds, adverse labor laws, and the like.
Our Indian operations are conducted through wholly-owned subsidiaries that
have been granted an income tax holiday through March 31, 2006. Accordingly,
minimal income taxes will be payable on earnings from operations of the
subsidiaries during such period, unless repatriated to the U.S.
We fund our overseas operations through transfers of U.S. dollars only as
needed and generally do not maintain any significant amount of funds or monetary
assets overseas. To the extent that we need to bring currency to the United
States from our overseas operations, we may be affected by currency control
regulations.
The Philippines is subject to relatively frequent earthquakes, volcanic
eruptions, floods, and other natural disasters, which may disrupt our
operations. Further, power outages lasting for periods of as long as eight hours
per day have occurred. Our facilities are equipped with standby generators that
have produced electric power during these outages; however, there can be no
assurance that our operations will not be adversely affected should municipal
power production capacity deteriorate.
The geographical distances between Asia, the Americas, and Europe create
logistical and communications challenges which we must overcome.
The Philippines has ongoing problems with Muslim insurgents. The Abu Sayyaf
group of kidnappers, which is purported to have ties to the Al Qaeda terrorist
organization, is concentrated on Basilan Island, an island far away from our
facilities, and the government has stepped up activities to eradicate the group.
There can be no assurances that these efforts will be successful or that the
group will not attempt to disrupt activities or commit terrorist acts in other
areas.
RISKS OF CURRENCY FLUCTUATIONS AND HEDGING OPERATIONS
The Philippines has historically experienced high rates of inflation and
major fluctuations in exchange rate between the Philippine peso and the U.S.
dollar. Continuing inflation without corresponding devaluation of the peso
against the dollar, or any other increase in value of the peso relative to the
dollar, may have a material adverse effect on our operations and financial
condition. Since 1997, we have not purchased foreign currency futures contracts
for pesos. However, we may choose to do so in the future.
DEPENDENCE ON KEY PERSONNEL
Our success depends to a large extent upon the continued services of our
key executives and skilled personnel. Several of our officers and key employees
are bound by employment or non-competition agreements. However, there can be no
assurance that we will retain our officers and key employees. We could be
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 and
volume fluctuations that have affected the market prices for the common stock of
technology and Internet-related companies. Such fluctuations have often been
unrelated to or disproportionately impacted by the operating performance of such
companies. The market for our common stock may be subject to similar
fluctuations. Factors such as fluctuations in our operating results,
announcements of new contracts, partnerships, acquisitions and alliances,
technological innovations or events affecting other companies in the Internet or
technology industry generally, as well as currency fluctuations and general
market conditions, may have a significant effect on the market price of our
common stock.
ITEM 2. DESCRIPTION OF PROPERTY.
Our services are primarily performed from our Hackensack, New Jersey
corporate headquarters, two other North American offices, and seven overseas
production facilities, including our 100,000 square foot XML Content Factory
complex located in Mandaue, the Philippines. In addition, we have a software
development facility in Gurgaon, India. All facilities are leased for terms
expiring on various dates through 2010, and many are cancelable at our option.
Annual rental payments on property leases are expected to approximate
$1,600,000.
We believe that we maintain adequate fire, theft and liability insurance
for our facilities and that our facilities are adequate for our present needs.
ITEM 3. LEGAL PROCEEDINGS.
In connection with the cessation of all operations at certain foreign
subsidiaries, certain former employees have filed various illegal dismissal
actions in the Philippines seeking, among other remedies, reinstatement of
employment, payment of back wages and damages approximating one million dollars.
Outside counsel has advised management that under the circumstances, the Company
is not legally obligated to pay severance to such terminated employees. Based
upon the advice of counsel, management believes the actions are substantially
without merit and intends to defend the actions vigorously.
In addition, one of the foreign subsidiaries which ceased operations has
been presented with a tentative tax assessment by the Philippine Bureau of
Internal Revenue for an amount approximating $400,000, plus applicable interest
and penalties. Management believes the tentative assessment is principally
without substance and any amounts that the Company estimates might ultimately be
paid in settlement (which are not expected to be material) have been accrued.
In addition, the Company is subject to various legal proceedings and claims
which arise in the ordinary course of business.
While management currently believes that that ultimate outcome of all these
proceedings will not have a material adverse effect on the Company's financial
position or overall trends in results of operations, litigation is subject to
inherent uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the operating results of the period
in which the ruling occurs. In addition, the estimate of potential impact on
the Company's financial position or overall results of operations for the above
legal proceedings could change in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
See Part II, Item 4 of Form 10-Q for September 30, 2002 as to results of
voting at our Annual Meeting held on October 1, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Innodata Corporation (The "Company") Common Stock is quoted on the Nasdaq
National Market System under the symbol "INOD." On February 28, 2003, there were
114 stockholders of record of the Company's Common Stock based on information
provided by the Company's transfer agent. Virtually all of the Company's
publicly held shares are held in "street name" and the Company believes the
actual number of beneficial holders of its Common Stock to be approximately
4,000.
The following table sets forth the high and low sales prices on a quarterly
basis for the Company's Common Stock, as reported on Nasdaq, for the two years
ended December 31, 2002, after giving retroactive effect to a three-for-one
stock dividend paid on September 9, 1999, a two-for-one stock dividend paid on
December 7, 2000 and a two-for-one stock dividend paid on March 23, 2001.
COMMON STOCK
SALE PRICES
2001 HIGH LOW
---- ---- -----
First Quarter $7.78 $3.91
Second Quarter 9.25 3.05
Third Quarter 3.98 1.26
Fourth Quarter 3.73 1.98
2002 HIGH LOW
---- ---- -----
First Quarter $3.30 $1.81
Second Quarter 2.60 1.05
Third Quarter 1.50 0.75
Fourth Quarter 1.07 0.60
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payment of
dividends, if any, on the Common Stock is within the discretion of the Board of
Directors and will depend on the Company's earnings, its capital requirements
and financial condition and other relevant factors. The Company paid a
three-for-one stock dividend on September 9, 1999, a two-for-one stock dividend
on December 7, 2000, and a two-for-one stock dividend on March 23, 2001.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information setting forth securities authorized for issuance under equity
compensation plans is provided in Part III, Item 12 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------
REVENUES $36,385 $58,278 $50,731 $27,490 $19,593
------- ------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Direct operating costs 32,005 44,354 34,458 17,854 13,069
Selling and administrative 10,038 8,337 7,248 6,783 4,982
Provision for doubtful accounts - 2,942 - - -
Restructuring costs and
asset impairment 244 865 - - 133
(Gain) loss on settlement
of currency contracts - - - - (488)
Interest expense 29 9 43 10 77
Interest income (89) (216) (155) (111) (98)
------- ------- ------- ------- -------
Total 42,227 56,291 41,594 24,536 17,675
------- ------- ------- ------- -------
(LOSS) INCOME BEFORE (BENEFIT FROM)
PROVISION FOR INCOME TAXES (5,842) 1,987 9,137 2,954 1,918
(BENEFIT FROM)
PROVISION FOR INCOME TAXES (677) 639 2,969 841 (332)
------- ------- ------- ------- -------
NET (LOSS) INCOME $(5,165) $ 1,348 $ 6,168 $ 2,113 $ 2,250
======= ======= ======= ======= =======
BASIC (LOSS) INCOME PER SHARE $(.24) $.06 $.30 $.11 $.13
===== ==== ==== ==== ====
DILUTED (LOSS) INCOME PER SHARE $(.24) $.05 $.26 $.10 $.12
===== ==== ==== ==== ====
CASH DIVIDENDS PER SHARE - - - - -
======= ======= ======== ======= =======
DECEMBER 31, 2002 2001 2000 1999 1998
------- ------- -------- -------- --------
WORKING CAPITAL $ 8,570 $ 8,854 $ 9,505 $ 5,966 $ 4,749
======= ======= ======== ======= =======
TOTAL ASSETS $22,697 $30,094 $27,946 $15,646 $10,596
======= ======= ======== ======= ========
LONG-TERM DEBT - - - $ 5 $ 24
======= ======= ======== ======= ========
STOCKHOLDERS' EQUITY $15,569 $20,362 $19,316 $11,652 $ 7,485
======= ======= ======= ======= ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenues decreased 38% to $36,385,000 for the year ended December 31, 2002
compared to $58,278,000 for the similar period in 2001. Revenues from the
content services segment decreased 43% to $33,089,000 for the year ended
December 31, 2002 compared to $57,825,000 for the similar period in 2001. The
decrease principally resulted from the loss in revenues from one client which
substantially curtailed operations, which accounted for approximately $17
million of the Company's content services segment revenues in 2001, and from the
decline in revenues from a second client, whose projects were substantially
completed in 2002. Revenues from the Company's systems and training segment
were $3,296,000 for the year ended December 31, 2002 and $453,000 for the one
month period from December 1, 2001 (date of acquisition) to December 31, 2001.
One client accounted for 30% and 27% of the Company's revenues for the year
ended December 31, 2002 and 2001 respectively and a second client accounted for
16% of the Company's revenues for the year ended December 31, 2002. One other
client, which substantially curtailed operations, accounted for 30% of the
Company's revenues in the year ended December 31, 2001. No other client
accounted for 10% or more of revenues during this period. Further, in the year
ended December 31, 2002 and 2001, export revenues, substantially all of which
were derived from European clients, accounted for 23% and 13%, respectively, of
the Company's revenues.
In early 2001, a significant portion of the Company's revenue increase came
from XML transformation projects by early-stage companies that had raised
significant venture capital to pursue digital library and e-business
initiatives. The downturn in the technology industry in 2001 resulted in a
falloff of revenues from companies in this industry sector. The economic
downturn also caused many blue-chip publishers to curtail discretionary spending
and new initiatives on XML transformation projects. To address this sales
challenge and to reduce the percentage of total revenue that are often
non-recurring, the Company has begun to refocus its sales force to emphasize its
content outsourcing services.
Direct operating expenses were $32,005,000 for the year ended December 31,
2002 and $44,354,000 for the year ended December 31, 2001, a decrease of 28%.
Direct operating expenses as a percentage of revenues were 88% in 2002 and 76%
in 2001. Direct operating expenses for the content services segment were
$28,053,000 and $44,039,000 in the year ended December 31, 2002 and 2001,
respectively, a decrease of 36%. Direct operating expenses as a percentage of
revenues for the content services segment were 85% and 76% in the year ended
December 31, 2002 and 2001, respectively. The dollar decrease for the content
services segment in the 2002 period is principally due to a reduction in labor
costs associated with lower revenues, and to reductions in fixed costs
associated with the Company's cost reduction initiatives. The percentage
increase for the content services segment in the 2002 period is primarily
attributable to the decrease in revenues without a corresponding decrease in
non-labor costs. Labor costs as a percentage of revenue remained consistent.
Direct operating expenses for the Company's systems and training segment were
$3,952,000, or 120% of systems and training segment revenues, for the year ended
December 31, 2002 and $315,000, or 70% of revenues, for the month of December
2001. Direct operating expenses primarily include direct payroll,
telecommunications, depreciation, equipment maintenance and upgrade costs,
computer services, supplies and occupancy.
Selling and administrative expenses were $10,038,000 and $8,337,000 in the
year ended December 31, 2002 and 2001, respectively, an increase of 20%. Selling
and administrative expenses for the content services segment were $8,525,000 and
$8,227,000 for the year ended December 31, 2002 and 2001, respectively, an
increase of 4%. The increase for the content services segment is primarily due
to a non-cash compensation charge of approximately $500,000, and an increase in
selling and marketing costs of approximately $684,000, offset by a 14% reduction
in general and administrative expenses. Selling and administrative expenses
as a percentage of revenues for the content services segment increased to 26% in
the 2002 period from 19% in the 2001 period due primarily to the decrease in
revenues without a corresponding decrease in such expenses. Selling and
administrative expenses for the systems and training segment were $1,513,000, or
46% of sales, in the year ended December 31, 2002 compared to $110,000, or 24%
of sales, for the one month period December 2001. Selling and administrative
expenses primarily include management and administrative salaries, sales and
marketing costs, and administrative overhead.
For the year ended December 31, 2001, the Company provided an allowance for
doubtful accounts of approximately $2.6 million representing the remaining
balance due at December 31, 2001 from a client that accounted for 30% of its
2001 revenues because the client has reported an inability to raise further
operating funds required to make payment. In addition, in 2001 the Company
provided approximately $350,000 for other client bad debts incurred in the
ordinary course of business.
During the fourth quarter 2001, the Company commenced certain actions to
reduce production operations at a wholly owned Asian subsidiary that was
operating at a loss and to reduce overall excess capacity in Asia. Such
activities, which culminated in the cessation and closure of all operations at
the subsidiary and included employee layoffs, were completed in 2002. In
addition, during 2002, the Company closed a second facility, resulting in the
write-off of property and equipment associated with the closed facility totaling
approximately $244,000. Such write-off of equipment has been classified as
Restructuring Costs and Asset Impairment for the year ended December 31, 2002.
Included in Restructuring Costs and Asset Impairment for the year ended December
31, 2001 are estimated facility closure costs, including employee related costs,
approximating $600,000, and the write-off of leasehold improvement costs
totaling approximately $265,000. In 2002, the Company paid approximately
$350,000 in closing costs.
For the year ended December 31, 2002, the income tax benefit was lower as a
percentage of pre-tax loss than the federal statutory rate due primarily to
certain overseas foreign source losses for which no tax benefit is available.
YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenues increased 15% to $58,278,000 for the year ended December 31, 2001
compared to $50,731,000 for the similar period in 2000. Sales to one client who
accounted for $27.4 million (54%) of the Company's revenues in 2000 declined by
approximately $10 million in 2001. The Company replaced this shortfall in 2001
by a $14.4 million increase in revenues from another client and net increases in
revenues from various other new and existing clients. As a result, total
revenues in 2001 increased by $7.5 million from 2000.
One client accounted for 30% and 54% of the Company's revenues in 2001 and
2000, respectively. One other client accounted for 27% of the Company's revenues
in 2001. No other client accounted for 10% or more of the Company's revenues.
Further, in 2001 and 2000, export revenues, the vast majority of which were
derived from European customers, accounted for 13% and 10%, respectively, of the
Company's revenues.
In 2000 and early 2001, a significant portion of the Company's revenue
increase came from XML transformation projects by early-stage companies that had
raised significant venture capital to pursue digital library and e-business
initiatives. The downturn in the technology industry in 2001 resulted in a
falloff of revenues from companies in this industry sector. Furthermore, the
economic downturn that became evident late in 2001 resulted in many blue-chip
publishers that had shown increased interest in XML transformation projects
electing to curtail discretionary spending and slow down new initiatives. To in
part address this sales challenge, the Company began to refocus its sales force
to emphasize its content manufacturing/outsourcing services.
Direct operating expenses were $44,354,000 for the year ended December 31,
2001 and $34,458,000 for the year ended December 31, 2000, an increase of 29%.
Direct operating expenses as a percentage of revenues were 76% in 2001 and 68%
in 2000. The dollar increase in 2001, approximately 60% of which is comprised of
an increase in labor costs, is principally due to costs incurred for increased
revenues. The percentage increase in 2001 is principally attributable to an
increase in fixed and certain labor costs incurred for increased production
capacity which was underutilized during the second half of 2001. Direct
operating expenses include primarily direct payroll, telecommunications,
depreciation, equipment lease costs, computer services, supplies and occupancy.
Selling and administrative expenses were $8,337,000 and $7,248,000 for the
years ended December 31, 2001 and 2000, respectively, representing an increase
of 15%. The increase is primarily attributable to an increase in selling and
marketing costs, travel costs and facility administrative overhead associated
with the Company's continued growth. Selling and administrative expenses as a
percentage of revenues were 14% in both the 2001 and 2000 periods. Selling and
administrative expense includes management and administrative salaries, sales
and marketing costs and administrative overhead.
The Company provided an allowance for doubtful accounts of approximately
$2.6 million representing the remaining balance due at December 31, 2001 from a
client that accounted for 30% of its 2001 revenues because the client has
reported an inability to raise further operating funds required to make payment.
In addition, the Company provided approximately $350,000 for other client bad
debts incurred in the ordinary course of business.
During the fourth quarter 2001, the Company took certain actions to reduce
production operations at a wholly owned Asian subsidiary that was operating at a
loss and to reduce overall excess capacity in Asia. Such activities included the
termination of leases and employee layoffs. Included in Restructuring Costs and
Asset Impairment for the year ended December 31, 2001 are estimated facility
closure costs, including employee related costs, approximating $600,000, and the
write-off of leasehold improvement costs totaling approximately $265,000.
LIQUIDITY AND CAPITAL RESOURCES
Selected measures of liquidity and capital resources are as follows:
December 31, 2002 December 31, 2001
----------------- -----------------
Cash and Cash Equivalents $7,255,000 $6,267,000
Working Capital 8,570,000 8,854,000
Stockholders' Equity Per Common Share* $.73 $.95
* Represents total stockholders' equity divided by the actual number of
common shares outstanding (which excludes treasury stock).
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities was $3,050,000 and $4,840,000 for
the years ended December 31, 2002 and 2001, respectively, a decrease of
approximately $1,790,000. The decrease was primarily due to a decrease in net
income of $6.5 million and a decrease in non-cash charges of $2.9 million
partially offset by an increase in net changes in operating assets and
liabilities of $7.7 million (principally accounts receivable). In addition,
approximately $900,000 of the $3,050,000 cash provided by operating activities
for the year ended December 31, 2002 resulted from the sale of certain
value-added tax credits held by the Company. These tax credits had been
included as other assets on the balance sheet on December 31, 2001.
Accounts Receivable totaled $3,253,000 at December 31, 2002 representing
approximately 52 days of sales outstanding, compared to $7,846,000, or 61 days,
at December 31, 2001. The decrease in accounts receivable resulted principally
from a decrease in sales, and from more accelerated collections. In addition,
refundable income taxes increased to $1,491,000 at December 31, 2002 from
$509,000 at December 31, 2001 due primarily to tax refunds available resulting
from losses incurred in 2002 which are available for carryback to prior years.
NET CASH USED IN INVESTING ACTIVITIES
As a result of the capital investments made during 2001 and 2000, the need
for new equipment has been diminished in comparison with both such periods.
Accordingly, in the year ended December 31, 2002, the Company spent
approximately $1,162,000 for capital expenditures, compared to approximately
$5,568,000 in the year ended December 31, 2001. In addition, in the year ended
December 31, 2001, the Company acquired the operating assets and assumed certain
designated liabilities of the ISOGEN International operating division of
DataChannel, Inc. The purchase price, including acquisition costs, consisted of
$796,000 in cash, two acquisition promissory notes which were paid in 2002, each
for $325,000, plus an additional $68,000. At present, the Company anticipates
capital spending for 2003 to range between $1.5 million and $2 million.
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
In the year ended December 31, 2002, net cash used in financing activities
totaled approximately $900,000 primarily due to the repayment of two acquisition
promissory notes totaling $650,000 in connection with the acquisition of the
ISOGEN International operating division. In addition, the Company repurchased
340,000 shares of the Company's common stock for $360,000 in 2002, compared to
$1,639,000 in 2001.
AVAILABILITY OF FUNDS
The Company has a $4 million line of credit with a bank pursuant to which
it may borrow up to 80% of eligible accounts receivable. Eligible accounts
receivable, which excludes foreign receivables as well as receivables
outstanding in excess of 90 days, approximated $1.2 million at December 31,
2002. The line, which is due on demand and was unused at December 31, 2002, is
collateralized by accounts receivable. Interest is charged at 1/2% above the
bank's prime rate. The line expires on May 31, 2003.
Management believes that existing cash, internally generated funds and
short term bank borrowings will be sufficient for reasonably anticipated working
capital and capital expenditure requirements during the next 12 months. The
Company funds its foreign expenditures from its U.S. corporate headquarters on
an as-needed basis.
INFLATION, SEASONALITY AND PREVAILING ECONOMIC CONDITIONS
To date, inflation has not had a significant impact on the Company's
operations. The Company generally performs its work for its clients under
project-specific contracts, requirements-based contracts or long-term contracts.
Contracts are typically subject to numerous termination provisions. The
Company's revenues are not significantly affected by seasonality.
CRITICAL ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
------------------------------------------
Management's discussion and analysis of its results of operations and
financial condition is based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to accounts receivable.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Allowance for Doubtful Accounts
-------------------------------
The Company records an allowance for doubtful accounts for estimated losses
resulting from the inability of its clients to make required payments. If the
financial condition of the Company's clients were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
necessary.
Revenue Recognition
-------------------
Revenue is recognized in the period in which services are performed and
delivered.
Depreciation
------------
Depreciation is provided on the straight-line method over the estimated
useful lives of the related assets, which is two to five years. Leasehold
improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the lives of the leases.
Income Taxes
------------
Deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates, as
well as any net operating loss or tax credit carryforwards expected to reduce
taxes payable in future years. A valuation allowance is provided when it is
more likely than not that some or all of a deferred tax asset will not be
realized. Unremitted earnings of foreign subsidiaries have been included in the
consolidated financial statements without giving effect to the United States
taxes that may be payable on distribution to the United States to the extent
such earnings are not anticipated to be remitted to the United States.
Goodwill and Other Intangible Assets
------------------------------------
SFAS 142 requires that goodwill be tested for impairment at the reporting
unit level (segment or one level below a segment) on an annual basis and between
annual tests in certain circumstances. Application of the goodwill impairment
test requires judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit.
Accounting for Stock-Based Compensation
---------------------------------------
The Company accounts for stock-based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. In general, no
stock-based employee compensation cost is reflected in the results of
operations, unless options granted under those plans have an exercise price that
is less than the market value of the underlying common stock on the date of
grant.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Costs Associated with Exit or Disposal Activities
----------------------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 requires that
liabilities associated with the exit or disposal activity be recognized only
when the liability is incurred. SFAS No. 146 is effective for exit and disposal
activities that are initiated after December 31, 2002. The Company does not
expect SFAS No. 146 to have a material impact upon its financial statements.
Accounting For Stock-Based Compensation Transition and Disclosure
-----------------------------------------------------------------
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS No. 148), which amends SFAS No.
123. SFAS No. 148 provides alternate methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
compensation, and requires enhanced disclosure about the method used and the
effect of the method used on requested results. Under SFAS No. 148, stock-based
compensation disclosures must be included with the summary of significant
accounting policies and made both quarterly and annually. The Company does not
plan to adopt the fair value method of accounting for stock-based compensation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate change market risk with respect to
its credit facility with a financial institution, which is priced based on the
prime rate of interest. At December 31, 2002, there were no outstanding
borrowings under the credit facility. Changes in the prime interest rate during
2003 will have a positive or negative effect on the Company's interest expense.
Such exposure will increase accordingly should the Company utilize its line of
credit during 2003.
The Company has operations in foreign countries. While it is exposed to
foreign currency fluctuations, the Company presently has no financial
instruments in foreign currency and does not maintain funds in foreign currency
beyond those necessary for operations.
ITEM 8. FINANCIAL STATEMENTS.
INNODATA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report II-11
Consolidated Balance Sheets as of
December 31, 2002 and 2001 II-12
Consolidated Statements of Operations for the
three years ended December 31, 2002 II-13
Consolidated Statement of Stockholders' Equity
for the three years ended December 31, 2002 II-14
Consolidated Statements of Cash Flows for the
three years ended December 31, 2002 II-15
Notes to Consolidated Financial Statements II-16-28
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Innodata Corporation
We have audited the accompanying consolidated balance sheets of Innodata
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innodata
Corporation and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
We have also audited Schedule II for each of the three years in the period ended
December 31, 2002. In our opinion, this schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein.
/s/
- -----------------------
Grant Thornton LLP
New York, New York
March 7, 2003
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
2002 2001
-------- -------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 7,255 $ 6,267
Accounts receivable-net of allowance
for doubtful accounts of $1,254,000
in 2002 and $1,853,00 in 2001 3,253 7,846
Prepaid expenses and other current assets 706 469
Refundable income taxes 1,491 509
Deferred income taxes 1,501 1,793
------- -------
TOTAL CURRENT ASSETS 14,206 16,884
PROPERTY AND EQUIPMENT - NET 6,707 10,236
OTHER ASSETS 1,109 2,351
GOODWILL 675 623
------- -------
TOTAL $22,697 $30,094
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Acquisition notes payable $ - $ 650
Accounts payable 647 1,468
Accrued expenses 2,008 1,407
Accrued salaries and wages 2,526 3,770
Income and other taxes 455 735
------- -------
TOTAL CURRENT LIABILITIES 5,636 8,030
------- -------
DEFERRED INCOME TAXES 1,492 1,702
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-authorized
75,000,000 shares; issued - 22,046,000 shares
in 2002 and 21,716,000 shares in 2001 220 217
Additional paid-in capital 14,084 13,355
Retained earnings 3,264 8,429
------- -------
17,568 22,001
Less: treasury stock - at cost; 610,000 and
270,000 shares in 2002
and 2001 respectively (1,999) (1,639)
------- -------
TOTAL STOCKHOLDERS' EQUITY 15,569 20,362
------- -------
TOTAL 22,697 $30,094
======= =======
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001 2000
-------- ------- --------
REVENUES $36,385 $58,278 $50,731
------- -------- -------
OPERATING COSTS AND EXPENSES
Direct operating costs 32,005 44,354 34,458
Selling and administrative expenses 10,038 8,337 7,248
Provision for doubtful accounts - 2,942 -
Restructuring costs and asset impairment 244 865 -
Interest expense 29 9 43
Interest income (89) (216) (155)
------- ------- -------
TOTAL 42,227 56,291 41,594
------- ------- --------
(LOSS) INCOME BEFORE (BENEFIT FROM)
PROVISION FOR INCOME TAXES (5,842) 1,987 9,137
(BENEFIT FROM) PROVISION FOR INCOME TAXES (677) 639 2,969
------- ------- -------
NET (LOSS) INCOME $(5,165) $ 1,348 $ 6,168
======= ======= =======
BASIC (LOSS) INCOME PER SHARE $(.24) $.06 $.30
===== ==== ====
DILUTED (LOSS) INCOME PER SHARE $(.24) $.05 $.26
===== ==== ====
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
ADDITIONAL RETAINED
COMMON STOCK PAID-IN EARNINGS TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) STOCK TOTAL
------ ------ ---------- ---------- ------- --------
JANUARY 1, 2000 20,536 $205 $10,755 $ 913 $ (221) $11,652
Net income - - - 6,168 - 6,168
Issuance of common stock
upon exercise of stock
options and warrants 1,152 12 689 - - 701
Income tax benefit
from exercise of
stock options - - 795 - - 795
------ ---- ---------- ------ ------- -------
DECEMBER 31, 2000 21,688 217 12,239 7,081 (221) 19,316
Net income - - - 1,348 - 1,348
Issuance of common
stock upon exercise
of stock options 605 6 384 - - 390
Purchase of treasury stock - - - - (1,639) (1,639)
Retirement of treasury stock (577) (6) (215) - 221 -
Income tax benefit
from exercise of
stock options - - 947 - - 947
------ ---- ------- ------ ------ -------
DECEMBER 31, 2001 21,716 217 13,355 8,429 (1,639) 20,362
Net loss - - - (5,165) - (5,165)
Issuance of common
stock upon exercise
of stock options 318 3 107 - - 110
Purchase of treasury stock - - - - (360) (360)
Non-cash compensation 12 - 523 - - 523
Income tax benefit
from exercise of
stock options - - 99 - - 99
------ ---- ------- ------ ------- -------
DECEMBER 31, 2002 22,046 $220 $14,084 $3,264 $(1,999) $15,569
====== ==== ======= ====== ======= =======
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
2002 2001 2000
-------- -------- --------
OPERATING ACTIVITIES:
Net (loss) income $(5,165) $ 1,348 $ 6,168
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 5,228 4,790 2,989
Non-cash compensation 523 - -
Provision for doubtful accounts - 2,942 -
Tax benefit from exercise of stock options 99 947 795
Restructuring costs and asset impairment 244 865 -
Deferred income taxes 30 (463) 574
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable 4,593 (3,913) (552)
Prepaid expenses and other current assets (680) 545 (977)
Refundable income taxes (982) (509) -
Other assets 894 (723) (409)
Accounts payable (811) (907) 1,064
Accrued expenses 601 365 589
Accrued salaries and wages (1,244) (71) 1,531
Income and other taxes (280) (376) 615
------- ------- -------
Net cash provided by operating activities 3,050 4,840 12,387
------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures (1,162) (5,568) (7,403)
Payments in connection with acquisition - (796) -
------- ------- -------
Net cash used in investing activities (1,162) (6,364) (7,403)
------- ------- -------
FINANCING ACTIVITIES:
Payment of acquisition notes (650) - (25)
Proceeds from exercise of stock options 110 390 701
Purchase of treasury stock (360) (1,639) -
------- ------- -------
Net cash (used in) provided by financing activities (900) (1,249) 676
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 988 (2,773) 5,660
CASH AND EQUIVALENTS, BEGINNING OF YEAR 6,267 9,040 3,380
------- ------- -------
CASH AND EQUIVALENTS, END OF YEAR $ 7,255 $ 6,267 $ 9,040
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 261 $ 1,513 $ 1,018
Interest expense $ 29 $ - $ -
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION - Innodata Corporation and subsidiaries
(the "Company") is a leading provider of digital asset services and solutions.
Innodata delivers content manufacturing / outsourcing, XML transformation, and
XML (and related standards-based) systems engineering and training through
offices located both in the U.S. and Asia. 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 with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION - Revenue is recognized in the period in which services
are performed and delivered.
FOREIGN CURRENCY - The functional currency for the Company's production
operations located in the Philippines, India and Sri Lanka is U.S. dollars. As
such, transactions denominated in Philippine pesos, Indian and Sri Lanka rupees
were translated to U.S. dollars at rates which approximate those in effect on
transaction dates. Monetary assets and liabilities denominated in foreign
currencies at December 31, 2002 and 2001 were translated at the exchange rate in
effect as of those dates. Exchange losses resulting from such transactions in
2002 totaled approximately $59,000. Exchange gains resulting from such
transactions in 2001 totaled approximately $75,000. Exchange losses in 2000
resulting from such transactions totaled $180,000.
STATEMENT OF CASH FLOWS - For financial statement purposes (including cash
flows), the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Supplemental disclosure of non-cash investing activities in 2001 (in thousands)
is as follows:
Acquisition costs $1,514
Acquisition notes issued (650)
Other amounts payable (68)
------
Payments in connection with acquisition $ 796
======
DEPRECIATION - Depreciation is provided on the straight-line method over
the estimated useful lives of the related assets, which is two to five years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of their estimated useful lives or the lives of the leases.
GOODWILL AND OTHER INTANGIBLE ASSETS - SFAS 142 requires that goodwill be
tested for impairment at the reporting unit level (segment or one level below a
segment) on an annual basis and between annual tests in certain circumstances.
Application of the goodwill impairment test requires judgment, including the
identification of reporting units, assigning assets and liabilities to reporting
units, assigning goodwill to reporting units, and determining the fair value of
each reporting unit. Significant judgments required to estimate the fair value
of reporting units include estimating future cash flows, determining appropriate
discount rates and other assumptions. Changes in these estimates and
assumptions could materially affect the determination of fair value for each
reporting unit.
INCOME TAXES - Deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities, using
enacted tax rates, as well as any net operating loss or tax credit carryforwards
expected to reduce taxes payable in future years. A valuation allowance is
provided when it is more likely than not that some or all of a deferred tax
asset will not be realized. Unremitted earnings of foreign subsidiaries have
been included in the consolidated financial statements without giving effect to
the United States taxes that may be payable on distribution to the United States
to the extent such earnings are not anticipated to be remitted to the United
States.
ACCOUNTING FOR STOCK-BASED COMPENSATION - At December 31, 2002, the Company
has various stock-based employee compensation plans, which are described more
fully in Note 7. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. In general, no stock-based employee
compensation cost is reflected in the results of operations, unless options
granted under such plans have an exercise price less than the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
YEAR ENDED DECEMBER 31, 2002 2001 2000
(in thousands, except per share amounts)
Net (loss) income, as reported $(5,165) $1,348 $6,168
Deduct: Total stock-based employee
compensation determined under fair value
based method, net of related tax effects 1,997 2,185 664
------- ------ ------
Pro forma net (loss) income $(7,162) $ (837) $5,504
======= ====== ======
(Loss) income per share:
Basic - as reported $(.24) $.06 $.30
===== ==== ====
Basic - pro forma $(.33) $(.04) $.27
===== ===== ====
Diluted - as reported $(.24) $.05 $.26
===== ===== ====
Diluted - pro forma $(.33) $(.04) $.24
===== ===== ====
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has estimated the fair
value of financial instruments using available market information and other
valuation methodologies in accordance with SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." Management of the Company believes that the
fair value of financial instruments for which estimated fair value has not been
specifically presented, primarily cash and accounts receivable, is not
materially different than the related carrying value. Determinations of fair
value are based on subjective data and significant judgment relating to timing
of payments and collections and the amounts to be realized. Different
assumptions and/or estimation methodologies might have a material effect on the
fair value estimates. Accordingly, the estimates of fair value are not
necessarily indicative of the amounts the Company would realize in a current
market exchange.
ACCOUNTS RECEIVABLE - The majority of the Company's accounts receivable are
due from secondary publishers and information providers. Credit is extended
based on evaluation of a clients' financial condition and project terms and,
generally, collateral is not required. Accounts receivable are generally due
within 30 days and are stated at amounts due from customers net of an allowance
for doubtful accounts. Accounts outstanding longer than the contractual payment
terms are considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company's previous loss history, the client's
current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes-off accounts
receivable when they become uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful accounts.
INCOME (LOSS) PER SHARE - Basic earnings per share is based on the weighted
average number of common shares outstanding without consideration of potential
common stock. Diluted earnings per share is based on the weighted average
number of common and, if dilutive, potential common shares outstanding. The
calculation takes into account the shares that may be issued upon exercise of
stock options, reduced by the shares that may be repurchased with the funds and
tax benefits received from the exercise, based on average prices during the
year.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES - In June
2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS No. 146). SFAS No. 146 requires that liabilities
associated with the exit or disposal activity be recognized only when the
liability is incurred. SFAS No. 146 is effective for exit and disposal
activities that are initiated after December 31, 2002. The Company does not
expect SFAS No. 146 to have a material impact upon its financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost less accumulated depreciation and
amortization (in thousands), consist of the following:
DECEMBER 31, 2002 2001
Equipment $16,136 $16,805
Furniture and office equipment 1,037 961
Leashold improvements 2,314 2,360
------- -------
Total 19,487 20,126
Less accumulated depreciation
and amortization 12,780 9,890
------- -------
$ 6,707 $10,236
======= =======
As of December 31, 2002 and 2001, the net book value of property and
equipment located at the Company's production facilities in the Philippines,
India, and Sri Lanka was approximately $6,361,000 and $9,812,000, respectively.
3. ACQUISITION
As of December 1, 2001, the Company acquired the operating assets, and
assumed certain designated liabilities, of the ISOGEN International operating
division of DataChannel, Inc. ISOGEN International ("ISOGEN") helps clients
across a variety of industries with the design, architecture, implementation,
integration and deployment of the systems that they use to manage information.
It specializes in consulting and training in the knowledge-processing
technologies of XML (Extensible Markup Language), SGML (Standard Generalized
Markup Language), and other standards.
The purchase price, including acquisition costs, consisted of $796,000 in
cash, two acquisition promissory notes, each for $325,000, plus an additional
$68,000 payable September 30, 2002 subject to realization of certain events. The
promissory notes accrued interest at a rate of 7% per annum, and were paid in
2002.
The acquisition was accounted for by the purchase method of accounting in
accordance with SFAS No. 141 'Business Combinations' and, accordingly, the
consolidated statements of operations include the results of the acquired
business beginning December 1, 2001. A summary of the assets acquired and
liabilities assumed in the acquisition (in thousands) is as follows:
Accounts receivable $1,077
Property and equipment 90
Other assets 7
Liabilities assumed (335)
-------
Net tangible assets acquired 839
Purchase price 1,514
-------
Goodwill $ 675
=======
During the quarter ended September 30, 2002, additional adjustments were
made to the purchased assets of ISOGEN resulting in an increase in goodwill of
$52,000.
4. INCOME TAXES
The significant components of the (benefit from) provision for income taxes
(in thousands) are as follows:
2002 2001 2000
Current income tax (benefit) expense:
Foreign $ 97 $ (7) $ 61
Federal (827) 906 2,040
State and local 23 203 294
------ ------- ------
(707) 1,102 2,395
Deferred income tax expense (benefit) 30 (463) 574
------ ------- ------
(Benefit from) provision for income taxes $(677) $ 639 $2,969
====== ======= ======
Reconciliation of the U.S. statutory rate with the Company's effective tax
rate is summarized as follows:
2002 2001 2000
Federal statutory rate (35.0)% 35.0% 34.0%
Effect of:
State income taxes (net of federal tax benefit) 0.6 1.8 1.6
Foreign source losses for which no tax benefit
is available 23.8 - -
Effect of foreign tax holiday, net of foreign
income not deemed permanently reinvested (3.4) (5.3) (3.4)
Foreign taxes - 0.9 0.7
Other 2.4 (0.2) (0.4)
----- ---- ----
Effective rate (11.6)% 32.2% 32.5%
====== ==== ====
As of December 31, 2002 and 2001, the composition of the Company's net
deferred income taxes (in thousands) is as follows:
2002 2001
Deferred income tax assets:
Allowances not currently deductible $ 1,435 $ 1,711
Depreciation and amortization 230 170
Equity compensation not currently deductible 150 -
Expenses not deductible until paid 66 82
------- -------
1,881 1,963
------- -------
Deferred income tax liabilities:
Foreign source income, not taxable
until repatriated (1,872) (1,872)
------- -------
Net deferred asset $ 9 $ 91
======= =======
Net deferred income tax asset - current $ 1,501 $ 1,793
Net deferred income tax liability - non-current (1,492) (1,702)
------- -------
Net deferred income tax asset $ 9 $ 91
======= =======
5. COMMITMENTS AND CONTINGENT LIABILITIES
LINE OF CREDIT - The Company has a $4 million line of credit with a bank
pursuant to which it may borrow up to 80% of eligible accounts receivable. The
line, which is due on demand and was unused at December 31, 2002, is
collateralized by accounts receivable. Interest is charged at 1/2% above the
bank's prime rate. The line of credit expires on May 31, 2003.
LEASES - The Company is obligated under various operating lease agreements
for office and production space. The agreements contain escalation clauses and
requirements that the Company pay taxes, insurance and maintenance costs. The
lease agreements for production space in most overseas facilities, which expire
through 2010, contain provisions pursuant to which the Company may cancel the
leases upon three months notice, generally subject to forfeiture of security
deposit. The annual rental for the cancelable leased space is approximately
$1,200,000. For the years ended December 31, 2002, 2001 and 2000, rent expense
for office and production space totaled approximately $2,100,000, $1,900,000 and
$1,600,000, respectively.
In addition, the Company leases certain equipment under short-term
operating lease agreements. For the years ended December 31, 2002, 2001 and
2000, rent expense for equipment totaled approximately $46,000, $400,000 and
$900,000, respectively.
At December 31, 2002, future minimum annual rental commitments on
non-cancelable leases (excluding equipment leases with terms less than one year)
(in thousands) are as follows:
2003 $460
2004 350
2005 320
2006 320
2007 320
Thereafter 640
----
2,410
=====
LITIGATION AND FOREIGN TAX ASSESSMENTS - In connection with the cessation
of all operations at certain foreign subsidiaries (Note 10), certain former
employees have filed various illegal dismissal actions in the Philippines
seeking, among other remedies, reinstatement of employment, payment of back
wages and damages approximating one million dollars. Outside counsel has
advised management that under the circumstances, the Company is not legally
obligated to pay severance to such terminated employees. Based upon the advice
of counsel, management believes the actions are substantially without merit and
intends to defend the actions vigorously.
In addition, one of the foreign subsidiaries which ceased operations has
been presented with a tentative tax assessment by the Philippine Bureau of
Internal Revenue for an amount approximating $400,000, plus applicable interest
and penalties. Management believes the tentative assessment is principally
without substance and any amounts that might ultimately be paid in settlement
(which is not expected to be material) have been accrued.
In addition, the Company is subject to various legal proceedings and claims
which arise in the ordinary course of business.
While management currently believes that that ultimate outcome of all these
proceedings will not have a material adverse effect on the Company's financial
position or overall trends in results of operations, litigation is subject to
inherent uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the operating results of the period
in which the ruling occurs. In addition, the estimate of potential impact on
the Company's financial position or overall results of operations for the above
legal proceedings could change in the future.
FOREIGN CURRENCY - The Company's production facilities are located in the
Philippines, India and Sri Lanka. To the extent that the currencies of these
countries fluctuate, the Company is subject to risks of changing costs of
production after pricing is established for certain customer projects. However,
most significant contracts contain provisions for price renegotiation.
EMPLOYMENT AGREEMENTS - In connection with the acquisition of ISOGEN, the
Company entered into a three year employment agreement with its co-founder to
serve as the division's President. Pursuant to the agreement, he will be
compensated at a rate of $200,000 per annum for the first year, subject to
annual review for discretionary annual increases thereafter, and will be
eligible to receive an annual cash bonus, the amount of which will be based upon
meeting certain goals. In addition, he was granted an option to purchase 150,000
shares of the Company's common stock at $4.00 per share, and was issued 11,587
unregistered shares of the Company's common stock. Compensation expense of
approximately $10,000 was recorded in the year ended December 31, 2002 as
selling and administrative expenses pursuant to the stock issuance.
In May 2001, the Company entered into an agreement with its then Chairman
of the Board pursuant to which he will continue to serve as a part-time employee
at a salary of $2,000 per month for five years. In addition, the Company paid
him $400,000 in exchange for a six year non-compete agreement, which is included
in other assets and is being amortized over the term of the agreement. On
December 31, 2002, the unamoritized balance was $289,000.
PHILIPPINE PENSION REQUIREMENT - The Philippine government enacted
legislation requiring businesses to provide a lump-sum pension payment to
employees working at least five years and who are employed by the Company at age
60. Those eligible employees are to receive approximately 60% of one month's pay
for each year of employment with the Company. The liability for the future
payment is insignificant at December 31, 2002. Under the legislation, the
Company is not required to fund future costs, if any.
INDEMNIFICATIONS - The Company is obligated under certain circumstances to
indemnify directors and certain officers against costs and liabilities incurred
in actions or threatened actions brought against such individual because such
individuals acted in the capacity of director and / or officer of the Company.
In addition, the Company has contracts with certain clients pursuant to which
the Company has agreed to indemnify the client for certain specified and limited
claims. These indemnification obligations are in the ordinary course of
business and, in many cases, do not include a limit on a maximum potential
future payments. As of December 31, 2002, the Company has not recorded a
liability for any obligations arising as a result of these indemnifications.
LIENS - In connection with the procurement of tax incentives at one of the
company's foreign subsidiaries, the foreign zoning authority was granted a first
lien on the subsidiary's property and equipment. As of December 31, 2002, such
equipment had a book value of $570,000.
6. CAPITAL STOCK
COMMON STOCK - On each of December 7, 2000 and March 23, 2001, the Company
paid two-for-one stock dividends. In addition, in 2001 the stockholders
increased the number of common shares the Company is authorized to issue to
75,000,000. The financial statements and notes thereto, including all share and
per share amounts, have been 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 the
preferred stock in series which differ as to their relative terms, rights,
preferences and limitations.
STOCKHOLDER RIGHTS PLAN - On December 16, 2002, the Board of Directors
adopted a Stockholder Rights Plan ("Rights Plan") in which one right ("Right")
was declared as a dividend for each share of the Company's common stock
outstanding. The purpose of the plan is to deter a hostile takeover of the
Company. Each Right entitles its holders to purchase, under certain conditions,
one one-thousandth of a share of newly authorized Series C Participating
Preferred Stock ("Preferred Stock"), with one one-thousandth of a share of
Preferred Stock intended to be the economic and voting equivalent of one share
of the Company's common stock. Rights will be exercisable only if a person or
group acquires beneficial ownership of 15% (25% in the case of specified
executive officers of the Company) or more of the Company's common stock or
commences a tender or exchange offer, upon the consummation of which such person
or group would beneficially own such percentage of the common stock. Upon such
an event, the Rights enable dilution of the acquiring person's or group's
interest by providing that other holders of the Company's common stock may
purchase, at an exercise price of $4.00, the Company's common stock having a
market value of $8.00 based on the then market price of the Company's common
stock, or at the discretion of the Board of Directors, Preferred Stock, having
double the value of such exercise price. The Company will be entitled to redeem
the Rights at $.001 per right under certain circumstances set forth in the
Rights Plan. The Rights themselves have no voting power and will expire on
December 26, 2012, unless earlier exercised, redeemed or exchanged.
COMMON STOCK RESERVED - At December 31, 2002, the Company reserved for
issuance approximately 9,870,000 shares of common stock pursuant to the
Company's stock option plans (including an aggregate of 1,057,164 options issued
to the Company's current and to its prior Chairman which were not granted
pursuant to stockholder approved stock option plans).
TREASURY STOCK - During the years ended December 31, 2002 and 2001, the
Company repurchased 340,000 shares and 270,000 shares, respectively, of its
common stock at a cost of $360,000 and $1,639,000, respectively.
In August 2002, the Board of Directors authorized the repurchase of up to
$1.5 million of the Company's common stock, of which approximately $1,140,000
remains available for repurchase under the program at December 31, 2002.
7. STOCK OPTIONS
The Company adopted, with stockholder approval, 1993, 1994, 1994
Disinterested Director, 1995, 1996, 1998, 2001, and 2002 Stock Option Plans (the
"1993 Plan," "1994 Plan," "1994 DD Plan," "1995 Plan," "1996 Plan," "1998 Plan,"
"2001 Plan," and "2002 Plan") which provide for the granting of options to
purchase not more than an aggregate of 1,050,000, 1,260,000, 210,000, 2,400,000,
1,999,992, 3,600,000, 900,000, and 950,000 shares of common stock, respectively,
subject to adjustment under certain circumstances. Such options may be incentive
stock options ("ISOs") within the meaning of the Internal Revenue Code of 1986,
as amended, or options that do not qualify as ISOs ("Non-Qualified Options").
The option exercise price per share may not be less than the fair market
value per share of common stock on the date of grant (110% of such fair market
value for an ISO, if the grantee owns stock possessing more than 10% of the
combined voting power of all classes of the Company's stock). Options may be
granted under the Stock Option Plan to all officers, directors, and employees of
the Company and, in addition, Non-Qualified Options may be granted to other
parties who perform services for the Company. No options may be granted under
the 1993 Plan after April 30, 2003; under the 1994 Plan and 1994 DD Plan after
May 19, 2004; under the 1995 Plan after May 16, 2005; under the 1996 Plan after
July 8, 2006; under the 1998 Plan after July 8, 2008; under the 2001 Plan after
May 31, 2011; and under the 2002 Plan until after June 30, 2012.
The Plans may be amended from time to time by the Board of Directors of the
Company. However, the Board of Directors may not, without stockholder approval,
amend the Plans to increase the number of shares of common stock which may be
issued under the Plans (except upon changes in capitalization as specified in
the Plans), decrease the minimum exercise price provided in the Plans or change
the 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, to the extent the
exercise price of options granted to employees is equal to or greater than the
market value of the underlying common stock on the date of grant, compensation
expense is not recognized for stock options granted to employees. Had
compensation cost for the Company's stock option grants been determined based on
the fair value at the grant date for awards in 2002, 2001, and 2000, consistent
with the provisions of SFAS No. 123, the Company would have reflected a net loss
of approximately $7.1 million or $(.33) basic and diluted in 2002; a net loss of
$837,000 or $(.04) per share, basic and diluted, in 2001; and net income of $5.5
million or $.27 per share, basic, and $.24 per share, diluted in 2000. 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 3.5% in 2002, 5% in 2001, and 6% in 2000,
expected volatility of 119% in 2002, 118% in 2001, and 115% in 2000; and a zero
dividend yield.
The following table presents information related to stock options for 2002,
2001 and 2000.
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
PER SHARE REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------------- ------------ ------------ --------- ----------- --------
Balance 1/1/00 $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) $0.85
Granted $1.57 - 2.69 2,729,600 $1.97
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
=========
Cancelled $2.00 - 6.10 (156,127) $3.83
Granted $3.05 - 6.57 1,292,200 $5.42
Exercised $0.25 - 4.00 (605,357) $0.71
---------
Balance 12/31/01 $0.25 - 0.47 979,644 1 $0.35 979,644 $0.35
$0.50 - 0.75 2,406,818 2 $0.58 2,406,818 $0.58
$1.29 399,996 1 $1.29 399,996 $1.29
$1.56 - 2.25 2,564,992 4 $1.89 928,903 $1.87
$2.50 - 2.69 277,642 4 $2.50 80,519 $2.50
$3.05 - 4.60 29,200 4 $3.70 0 -
$5.43 - 5.89 1,180,000 4 $5.45 0 -
$6.00 - 6.57 13,000 4 $6.21 0 -
--------- ---------
7,851,292 4,795,880
=========
Cancelled $0.25 - 6.22 (489,482) $1.29
Granted $1.00 - 4.60 220,750 $3.64
Exercised $0.25 - 0.50 (317,676) $0.35
---------
Balance 12/31/02 $0.25 - 0.47 445,668 2 $0.41 445,668 $0.41
$0.50 - 0.75 2,347,922 2 $0.59 2,347,922 $0.59
$1.00 - 1.29 409,996 5 $1.28 399,996 $1.28
$1.56 - 2.25 2,421,548 3 $1.88 1,524,469 $1.87
$2.50 228,800 3 $2.50 124,026 $2.50
$3.00 - 4.60 232,950 5 $3.74 12,105 $3.68
$5.43 - 5.89 1,170,000 4 $5.45 544,855 $5.45
$6.00 - 6.57 8,000 4 $6.24 3,416 $6.25
--------- ---------
7,264,884 5,402,457
========= =========
Generally, options granted vest over a four year period and have a five
year life. The weighted average fair value as of the date of grant for options
granted in 2002, 2001 and 2000 is $3.64, $4.25 and $1.58, respectively.
In September 2002, the Company extended the expiration date of options to
the Chief Executive Officer to purchase 6,672, 248,496, 360,000, 399,996 and
123,996 shares of its common stock at $.42, $.50, $.58, $1.29 and $.25 per
share, respectively. In connection with this transaction, compensation expense
of approximately $513,000 was recorded in the year ended December 31, 2002 based
upon the difference between the exercise price and the market price of the
underlying common stock on the date the options were extended. No compensation
expense was recognized in connection with stock option grants for the years
ended December 31, 2001 and 2000, since the exercise price of options granted in
those years equaled or exceeded the market value of the underlying common stock
on the date of grant. Compensation expense is included as a component of
selling and administrative expenses.
8. SEGMENT REPORTING AND CONCENTRATIONS
As a result of the acquisition of ISOGEN International in December 2001,
the Company's management currently monitors its operations through two reporting
segments: (1) content services and (2) systems integration and training. The
content services operating segment aggregates, converts, tags and editorially
enhances digital content and performs XML transformations. The Company offers
such services as a comprehensive outsourcing solution and individually as
discrete activities. The Company's systems integration and training operating
segment offers system design, custom application development, consulting
services, and systems integration conforming to XML and related standards and
provides a broad range of introductory as well as advanced curricula and
training on XML and other knowledge management standards.
2002 2001
(in thousands)
Revenues
- --------
Content services $33,089 $57,825
Systems and training services 3,296 453
------- -------
Total consolidated $36,385 $58,278
======= =======
(Loss) income before income taxes (a)
- -------------------------------------
Content services $(3,649) $ 1,959
Systems and training services (2,193) 28
------- -------
Total consolidated $(5,842) $ 1,987
======= =======
(a) Corporate overhead has not been allocated to the systems and training
services segment.
DECEMBER 31,
-------------
2002 2001
------ ------
(IN THOUSANDS)
Total assets
- ------------
Content services $20,721 $28,414
Systems and training services 1,976 1,680
------- -------
Total consolidated $22,697 $30,094
======= =======
One client accounted for 30% and 27% of the Company's revenues for the
years ended December 31, 2002 and 2001 respectively, and a second client
accounted for 16% of the Company's revenues for the year ended December 31,
2002. One other client, which substantially curtailed operations, accounted for
30% and 54% of the Company's revenues in the years ended December 31, 2001 and
2000, respectively. No other client accounted for 10% or more of revenues
during this period. Further, in the years ended December 31, 2002, 2001 and
2000, export revenues, substantially all of which were derived from European
clients, accounted for 23%, 13%, and 10%, respectively, of the Company's
revenues.
A significant amount of the Company's revenues are derived from clients in
the publishing industry. Accordingly, the Company's accounts receivable
generally include significant amounts due from such clients. In addition, as of
December 31, 2002, approximately 33% of the Company's accounts receivable was
from foreign (principally European) clients.
9. (LOSS) INCOME PER SHARE
2002 2001 2000
(in thousands, except per share amounts)
Net (loss) income $(5,165) $ 1,348 $ 6,168
======= ======= =======
Weighted average common shares outstanding 21,489 21,332 20,262
Dilutive effect of outstanding options - 3,312 3,016
------- ------- -------
Adjusted for dilutive computation 21,489 24,644 23,278
======= ======= =======
Basic (loss) income per share $(.24) $.06 $.30
===== ==== ====
Diluted (loss) income per share $(.24) $.05 $.26
===== ==== ====
Diluted net loss per share in 2002 does not include potential common shares
derived from stock options because they are antidilutive. The number of
antidilutive securities excluded from the dilutable loss per share calculation
were 1,542,000 for the year ended December 31, 2002.
10. RESTRUCTURING COSTS AND ASSET IMPAIRMENT
During the fourth quarter 2001, the Company commenced certain actions to
reduce production operations at a wholly owned Asian subsidiary that was
operating at a loss and to reduce overall excess capacity in Asia. Such
activities, which culminated in the cessation and closure of all operations at
such subsidiary and included employee layoffs, were completed in 2002. In
addition, during 2002 the Company closed a second facility, resulting in the
write-off of property and equipment associated with the closed facility totaling
approximately $244,000. Such write-off of equipment has been classified as
Restructuring Costs and Asset Impairment for the year ended December 31, 2002.
Included in Restructuring Costs and Asset Impairment for the year ended
December 31, 2001 are estimated facility closure costs, including employee
related costs, approximating $600,000, and the write-off of leasehold
improvement costs totaling approximately $265,000. In 2002, the Company paid
approximately $350,000 in closing costs.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(in thousands, except per share)
2002
Revenues $12,556 $10,389 $ 7,278 $ 6,162
Net income (loss) 243 (899) (2,521) (1,988)
Net income (loss) per share $.01 $(.04) $(.12) $(.09)
Diluted net income (loss) per share $.01 $(.04) $(.12) $(.09)
2001
Revenues $18,058 $ 13,782 $ 13,849 $ 12,589
Net income (loss) 2,683 110 40 (1,485)
Net income (loss) per share $.13 $.01 $ - $(.07)
Diluted net income (loss) per share $.11 $ - $ - $(.07)
PART III
ITEM 10. DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES
The directors and officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Jack Abuhoff 41 Chairman of the Board of Directors,
Chief Executive Officer and President
Todd Solomon 41 Vice Chairman of the Board of Directors
and Consultant
Dr. Charles F. Goldfarb 63 Director
John R. Marozsan 61 Director
Haig S. Bagerdjian 47 Director
Louise C. Forlenza 53 Director
George Kondrach 50 President - ISOGEN International, LLC
Stephen Agress 41 Vice President - Finance
Klaas Brouwer 36 Vice President - Technology
Al Girardi 37 Vice President - Strategic Communications
Ashok Mishra 47 Vice President - Project Delivery
Jan Palmen 48 Vice President - Sales
Jurgen Tanpho 38 Vice President - Operations
Amy R. Agress 38 Secretary and Corporate Counsel
JACK ABUHOFF has served as President and CEO since September 15, 1997. He
has been a Director of the Company since its founding. From 1995 to 1997 he was
Chief Operating Officer of Charles River Corporation, an international systems
integration and outsourcing firm. From 1992 to 1994, he was employed by
Chadbourne & Parke, and engaged in Sino-American technology joint ventures with
Goldman Sachs. He practiced international corporate law with White & Case from
1986 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 his
resignation as President and CEO on September 15, 1997. He served as President
and 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 Ruck
Associates, an executive recruiting firm from 1986 until 1987. Mr. Solomon holds
an A.B. in history and physics from Columbia University (1986).
DR. CHARLES F. GOLDFARB has been a Director of the Company since October
2000. Dr. Goldfarb invented SGML (Standard Generalized Markup Language) in 1974
and later led the team that developed it into the International Standard (ISO
8879) on which the World Wide Web's HTML (HyperText Markup Language) and XML
(Extensible Markup Language) are based. HTML is an SGML application, while XML
is a Web-optimized subset of SGML. Dr. Goldfarb served as Editor of the SGML
International Standard for 20 years, and is a consultant to developers of SGML
and XML applications and products. He is co-author of "The XML Handbook " and
author of "The SGML Handbook" (Oxford University Press, 1990). He has been
profiled in "Forbes," "Web Techniques," "Red Herring," and other publications.
He holds the Printing Industries of America's Gutenberg Award, and is an
Honorary Fellow of the Society for Technical Communication. Dr. Goldfarb earned
an A.B. degree from Columbia College (1960) and a J.D. at Harvard Law School
(1964).
JOHN R. MAROZSAN has been a Director of the Company since June 2001. Mr.
Marozsan retired in 1999 as President, Chief Executive Officer and as a member
of the Executive Committee of CCH Incorporated, a leading provider of tax and
business law information. In addition, he was a member of the Board of
Directors of Wolters Kluwer U.S., of which CCH is a wholly owned subsidiary.
Prior to joining CCH in 1996, Mr. Marozsan was President and CEO of Aspen
Publishers, Inc., also a Wolters Kluwer U.S. company. Aspen Publishers,
Gaithersburg, MD, develops and markets print and electronic books, loose-leaf
reporting services, journals and newsletters for business professionals. Before
becoming President and CEO in 1986, he spent 10 years in a number of management
positions at Aspen, including Editor-in-Chief and Publisher. Mr. Marozsan
received a B.S. degree in Physics from Trenton State College (1967), and an M.A.
from Harvard University (1970).
HAIG S. BAGERDJIAN has been a Director of the Company since June 2001. He
is the Executive Vice President for Syncor International Corporation (Nasdaq:
SCOR), and the President and Chief Executive Officer for Syncor Overseas Ltd.,
its international division. Syncor is an international provider of
high-technology healthcare services primarily for radiopharmacy and medical
imaging segments of the healthcare industry, with annual sales of over $700
million. Mr. Bagerdjian joined Syncor in 1991 as an Associate General Counsel
and Assistant Secretary, became Vice President, Secretary and General Counsel in
January 1995, and was appointed Senior Vice President, Business Development, in
October 1996. He also served as Chief Legal Officer from June 1998 until June
1999, Chairman and CEO of Syncor Pharmaceuticals, Inc. from January 1999 until
February 2001 and Secretary from January 1995 until January 2001. Mr. Bagerdjian
received a B.A. in International Relations and Slavic Languages and Literature,
and Certificates in Russian Studies, Strategic Defense and National Security,
from the University of Southern California in 1983, and a J.D. from Harvard Law
School in 1986. He is admitted to the State Bar of California. Mr. Bagerdjian
has also served as a director of Advanced Machine Vision Corporation (Nasdaq:
AMVC) and currently serves as Chairman of the Board of Point.360 (Nasdaq: PTSX).
LOUISE C. FORLENZA has, for the past 10 years, provided audit consultancy,
management advisory, and tax planning services to a diverse group of corporate
clients. From 1987 through 1992, she was the Chief Financial Officer and Chief
Operating Officer of Intercontinental Exchange Partners, an international
foreign exchange company, and served as a Director and as chair of its
International Audit Committee. Prior to joining Intercontinental, she was the
Chief Financial Officer of Bierbaum-Martin, a foreign exchange firm. Ms.
Forlenza is a Director and Audit Committee chair of Medical Documents
International Inc., a provider of medical information, and served as a Director
and chair of the Finance Committee at A&M Foods. She participates actively in
various not-for-profit and philanthropic organizations including as benefit
chair for Greenwich Hospital and finance committee for The Acting Company, a New
York City based promoter of arts and literacy founded in 1972 by actor John
Houseman. Ms. Forlenza is a certified public accountant and served on the
faculty of the accounting department of Iona College having graduated with a
B.B.A. in Accounting from Iona College (1971).
GEORGE KONDRACH was appointed President of the Company's ISOGEN
International, LLC wholly-owned subsidiary on December 10, 2001. Mr. Kondrach,
who in 1991 co-founded ISOGEN International, served as its Chairman until April
1999 when ISOGEN was acquired by DataChannel, Inc. Since 1999 and until ISOGEN
was acquired by the Company in December 2001, Mr. Kondrach served in various
executive management capacities with DataChannel, most recently as Senior Vice
President of Solutions Architecture. He holds a B.S. degree in biology from
Southern Methodist University (1975).
STEPHEN AGRESS was elected Vice President - Finance in March 1998. He
served as Corporate Controller since joining the Company in August 1995. Mr.
Agress is a certified public accountant and had been a senior audit manager with
Deloitte & Touche for more than five years prior to his resignation in 1995. Mr.
Agress holds a B.S. in accounting from Yeshiva University (1982).
KLAAS BROUWER was elected Vice President - Technology in July 2000. He was
Assistant Vice President for Technology from September 1998 until June 2000. Mr.
Brouwer was Chief Technical Officer and Special Projects Division Manager at SPI
Technologies, Inc., a leading competitor of the Company, from 1996 through 1998.
From 1993 up to 1996, he served as IT Manager and member of the Management Team
of Elsevier Science, responsible for the implementation of Software Development,
LAN, WAN and Data Centers. Mr. Brouwer holds a Bachelors Degree in Information
Technology from the Noordelijke Hogeschool Leeuwarden, a leading university in
the Netherlands (1993).
AL GIRARDI joined the Company as Vice President - Strategic Communications
in July 2002. Prior to joining the Company, Mr. Girardi was Vice President,
Marketing, Communications & Brand Strategy at Antenna Software, a developer of
web-based, wireless CRM software applications from February 2000 to January
2002. From February 1999 to January 2000, Mr. Girardi was Managing Director of
the Corporate Branding Practice at Bozell Sawyer Miller (now Weber Shandwick), a
leading worldwide strategic communications company, whose clients included
General Electric, Moster.com, Unisys and Fujitsu. Prior to that, Mr. Girardi
was Vice President, Corporate and Financial Communications for Grey
Communications International. Mr. Girardi holds a B.A. from Vassar College
(1987) and an MSJ from Northwestern University (1991).
ASHOK MISHRA was elected Vice President - Project Delivery in October 2001
after serving as AVP - Project Delivery from November 2000 to September 2001 and
General Manager of India operations from 1997 to October 2000. Prior to joining
Innodata in 1997, Mr. Mishra was Deputy General Manager Switching Production in
ITI Ltd, a premier Telecom manufacturer in India, where he held various
management positions in Production, Planning, Process and Quality areas between
1977 to 1997. Mr. Mishra holds Bachelor of Technology degree in Mechanical
Engineering from Pantnagar University (1976), Component Manufacturing Technical
Training from Alcatel France (1985) and condensed MBA course from Indian
Institute of Management Banglore (1995).
JAN PALMEN was elected Vice President - Sales in February 1999. Mr. Palmen
was chief operating officer at SPI Technologies, Inc., a leading competitor of
the 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 the
steering committee for global SGML implementation. Before that, he spent three
years with United Dutch Publishers as head of sales and production and two years
with a global management consultancy company as a strategic consultant. He holds
a M.B.A. degree (1979) in marketing, economics and logistics management and a
B.B.A. degree (1976) in economics and marketing, both from Erasmus University in
Amsterdam.
JURGEN TANPHO was elected Vice President - Operations in March 1998. He
served in various management capacities since joining the Company in 1991,
including the position of Assistant to the President. He holds a B.S. degree in
industrial engineering from the University of the Philippines (1986).
AMY R. AGRESS was elected Secretary in June 2001 and has served as the
Innodata's Corporate Counsel since 1998. Prior to joining Innodata, she was an
associate at a general practice law firm in Manhattan. Ms. Agress holds a J.D.
degree from Fordham University School of Law (1989) and a B.A. degree from New
York University (1986).
There are no family relationships between or among any directors or
officers of the Company, except for Mr. Agress and Ms. Agress, who are husband
and wife. Directors are elected to serve until the next annual meeting 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, 2002 through
December 31, 2002 all executive officers, directors and greater than ten-percent
beneficial owners complied with Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
paid by the Company for services to the Company during the three fiscal years
ended December 31, 2002 to the Company's Chief Executive Officer and to those
other executive officers whose aggregate salary and bonus in 2002 exceeded
$100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------- NUMBER OF
NAME AND POSITION CALENDAR STOCK OPTIONS
YEAR SALARY BONUS AWARDED
Jack Abuhoff 2002 $315,600 $ - 1,139,160 (a)
Chairman of the Board of 2001 315,600 - -
Directors, Chief Executive 2000 297,892 75,000 1,020,000
Officer and President
George Kondrach 2002 $200,000 $ 10,660 150,000
President - 2001 16,667 - -
ISOGEN International, LLC
Subsidiary
Stephen Agress 2002 $169,000 $ - -
Vice President - Finance 2001 169,000 - 100,000
2000 164,800 24,720 100,000
Klaas Brouwer 2002 $101,400 $ - -
Vice President - Technology 2001 101,400 - 100,000
2000 92,950 25,097 100,000
Jan Palmen 2002 $156,000 $ 72,338 -
Vice President - Sales 2001 156,000 40,817 100,000
2000 138,000 115,719 140,000
Jurgen Tanpho 2002 $105,716 $ - -
Vice President - Operations 2001 105,716 - 100,000
2000 102,724 15,409 100,000
(a) Represents options granted in 1997 for which the expiration date was
extended from 2002 to 2007.
The above compensation does not include certain other personal benefits, the
total value of which does not exceed as to any named officer, the lesser of
$50,000 or 10% of such person's cash compensation. The Company has not granted
any stock appreciation rights nor does it have any "long-term incentive plans,"
other than its stock option plans.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZED
PERCENT OF VALUE AT ASSUMED
TOTAL OPTIONS ANNUAL RATES OF
NUMBER OF GRANTED TO STOCK APPRECIATION
OPTIONS EMPLOYEES EXERCISE EXPIRATION FOR OPTION TERM
NAME GRANTED IN FISCAL YEAR PRICE DATE 5% 10%
Jack Abuhoff 6,672 (a) -% $0.42 9/07 $ 7,000 $ 10,000
Jack Abuhoff 248,496 (a) 18% $0.50 9/07 $253,000 $352,000
Jack Abuhoff 360,000 (a) 26% $0.58 9/07 $338,000 $481,000
Jack Abuhoff 399,996 (a) 29% $1.29 9/07 $ 92,000 $251,000
Jack Abuhoff 123,996 (a) 9% $0.25 12/07 $157,000 $207,000
George Kondrach 150,000 (b) 11% $4.00 3/07 $ - $ -
(a) Represents options granted in 1997 for which the expiration date was
extended from 2002 to 2007.
(b) 25% of the options vest on March 31, 2003; thereafter, the remainder vest
on a linear basis over 36 months.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR;
FISCAL YEAR END OPTION VALUES
SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
ACQUIRED VALUE OPTIONS AT FISCAL YEAR END MONEY OPTIONS AT FISCAL YEAR END
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
Jack Abuhoff 20,988 21,407 2,049,942/446,718 $467,398/$-
George Kondrach - - - /150,000 -/-
Stephen Agress - - 278,407/89,593 65,040/-
Klaas Brouwer - - 194,407/89,593 26,040/-
Jan Palmen - - 204,070/107,930 20,880/-
Jurgen Tanpho - - 326,083/89,593 86,971/-
DIRECTORS COMPENSATION
Messrs. Bagerdjian and Marozsan and Ms. Forlenza are compensated at the
rate of $1,250 per month, plus out-of-pocket expenses for each meeting attended.
In addition, on June 11, 2001, Messrs. Bagerdjian and Marozsan were each granted
options to purchase 40,000 shares at an exercise price of $5.59 per share.
Dr. Charles F. Goldfarb is compensated at a rate of $2,000 per month, plus
out-of-pocket expenses for each meeting attended. In addition, Dr. Goldfarb
received approximately $1,250 and $29,000 in fees for certain special
assignments in 2002 and 2001, respectively, and was granted options in 2001 to
purchase 40,000 shares at an exercise price of $5.44 per share.
The Company has an arrangement with Mr. Todd Solomon, its former President
and CEO, that provides for a salary of $75,000 per annum. In addition, Mr.
Solomon was granted options in 2001 to purchase 176,000 shares at an exercise
price of $5.44 per share. Mr. Solomon serves as Vice Chairman of the Board and
in certain capacities as designated by the CEO or the Board of Directors.
Mr. Barry Hertz was paid at a rate of $75,000 per annum for services
performed as Chairman of the Board of Directors until his resignation on May 7,
2001. In addition, Mr. Hertz received options to purchase 250,000 shares at an
exercise price of $5.44 per share in 2001.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Through September 10, 2002, the compensation committee comprised of Messrs.
Bagerdjian, Solomon, and Marozsan, none of whom are currently executive officers
of the Company. The Company has an arrangement with Mr. Solomon, who served as
President and Chief Executive Officer of the Company through September 1977,
which provides for a current salary of $75,000 per annum. On September 11,
2002, Mr. Solomon resigned as a member of the Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth the aggregate information for the Company's
equity compensation plans in effect as of December 31, 2002:
NUMBER OF
SECURITIES TO BE ISSUED WEIGHTED-AVERAGE NUMBER OF SECURITIES
UPON EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE FOR
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
(A) (B) (C)
Equity compensation
plans approved
by security holders 6,207,000 $2.19 2,605,000
Equity compensation
plans not approved
by security holders 1,057,000(1) $0.83 -
--------- ----- ---------
Total 7,264,000 $1.99 2,605,000
========= ===== =========
(1) Consists of (i) stock options to purchase 42,000 shares of common stock
granted to the Company's former Chairman pursuant to an agreement entered
into in 1993, and (ii) stock options to purchase 1,015,164 shares of common
stock granted to the Company's current Chairman pursuant to an agreement
entered into at time of hire.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 2003, certain
information regarding the beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934) of the Company's Common Stock based upon
the most recent information available to the Company for (i) each person known
by the Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's directors, (iii) each of
the Company's Executive Officers whose total annual salary and bonus
compensation exceeded $100,000 in 2002 and (iv) all Executive Officers and
Directors of the Company as a group. Unless otherwise indicated, each
stockholder's address is c/o Company, Three University Plaza, Hackensack, New
Jersey 07601.
SHARES OWNED BENEFICIALLY(1)
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
Track Data Corporation (2) 1,893,356 8.8%
DIRECTORS:
Todd Solomon (3) 3,018,805 13.6%
Jack Abuhoff (4) 2,270,913 9.6%
Charles Goldfarb (5) 83,298 *
John R. Marozsan (6) 13,333 *
Haig S. Bagerdjian (6) 23,333 *
Louise C. Forlenza 2,500 *
NAMED EXECUTIVE OFFICERS:
Stephen Agress (7) 591,606 2.7%
Jurgen Tanpho (8) 390,413 1.8%
Klaas Brouwer (9) 232,071 1.1%
Jan Palmen (10) 224,067 1.0%
George Kondrach (11) 67,452 *
All Executive Officers and Directors
as a Group (12 persons) (12) 6,936,747 27.0%
________________________
* Less than 1%.
1. Unless otherwise indicated, (i) each person has sole investment and voting
power with respect to the shares indicated and (ii) the shares indicated
are currently outstanding shares. For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares as
of a given date which such person has the right to acquire within 60 days
after such date. For purposes of computing the percentage of outstanding
shares held by each person or group of persons named above on a given date,
any security which such person or persons has the right to acquire within
60 days after such date is deemed to be outstanding for the purpose of
computing the percentage ownership of such person or persons, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Subject to the foregoing, the percentages
are calculated based on 21,435,386 shares outstanding.
2. The address of Track Data Corporation ("TDC") is 95 Rockwell Place,
Brooklyn, New York 11217. TDC is controlled by Barry Hertz, its Chairman
and principal shareholder. The information above does not include 33,600
shares held in a pension plan for the benefit of Mr. Hertz and exercisable
options held by Mr. Hertz to purchase 539,677 shares of Common Stock.
Including such stock options and shares, Mr. Hertz and TDC combined are
beneficial owners of 2,466,633 shares of common stock, representing 11% of
the total shares outstanding.
3. Includes currently exercisable options to purchase 790,645 shares of Common
Stock.
4. Includes currently exercisable options to purchase 2,134,929 shares of
Common Stock.
5. Includes currently exercisable options to purchase 82,498 shares of Common
Stock.
6. Includes currently exercisable options to purchase 13,333 shares of Common
Stock.
7. Includes (i) currently exercisable options held by Mr. Agress to purchase
295,071 shares of Common Stock and (ii) currently exercisable options held
by his wife to purchase 54,495 shares of Common Stock. Mr. Agress disclaims
beneficial ownership in the shares attributable to his wife.
8. Includes currently exercisable options to purchase 342,747 shares of Common
Stock.
9. Includes currently exercisable options to purchase 211,071 shares of Common
Stock.
10. Consists of shares currently issuable upon exercisable options granted
under the Company's stock option plans.
11. Includes currently exercisable options to purchase 40,625 shares of
Common Stock
12. Includes currently exercisable options to purchase 4,167,275 shares of
Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In May 2001, the Company entered into an agreement with Mr. Barry Hertz,
its then Chairman of the Board, pursuant to which he is continuing to serve as a
part-time employee at a salary of $2,000 per month for five years. In addition,
the Company paid him at that time $400,000 in exchange for a six year
non-compete agreement.
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Accounting Officer, of the effectiveness of the design and the operation of our
"disclosure controls and procedures" (as such term is defined in Rules 13a-14(c)
under the Securities Exchange Act of 1934). This evaluation took place as of a
date within 90 days prior to the filing date of this annual report ("Evaluation
Date"). Based on such evaluation, our Chief Executive Officer and Chief
Accounting Officer have concluded that, as of the Evaluation Date, the
disclosure controls and procedures are reasonably designed and effective to
ensure that (i) information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and (ii) such information is accumulated and communicated to the our
management, including our Chief Executive Officer and Chief Accounting Officer,
as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in
our internal controls or in other factors that could significantly affect such
controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits which are indicated as being included in previous filings are
incorporated herein by reference.
EXHIBIT DESCRIPTION FILED AS EXHIBIT
- ------- ----------- ----------------
3.1 Restated Certificate of Incorporation Exhibit 3.1 to Form SB-2 Registration
Statement No. 33-62012
3.2 Form of Amended and Restated By-Laws Exhibit 3.1 to Form 8-K dated
December 16, 2002
3.3 Form of Certificate of Designation of Filed as Exhibit A to Exhibit 4.1
Series C Participating Preferred Stock to Form 8-K dated December 16, 2002
4.2 Specimen of Common Stock certificate Exhibit 4.2 to Form SB-2 Registration
Statement No. 33-62012
4.3 Form of Rights Agreement, dated as of Exhibit 4.1 to Form 8-K dated
December 16, 2002 between Innodata Corporation December 16, 2002
and American Stock Transfer & Trust Co., as
Rights Agent
10.1 1994 Stock Option Plan Exhibit A to Definitive Proxy dated
August 9, 1994
10.2 1993 Stock Option Plan Exhibit 10.4 to Form SB-2 Registration
Statement No. 33-62012
10.3 Form of Indemnification Agreement Filed herewith
10.4 1994 Disinterested Directors Stock Option Plan Exhibit B to Definitive Proxy
dated August 9, 1994
10.5 1995 Stock Option Plan Exhibit A to Definitive Proxy
dated August 10, 1995
10.6 1996 Stock Option Plan Exhibit A to Definitive Proxy dated
November 7, 1996
10.7 1998 Stock Option Plan Exhibit A to Definitive Proxy dated
November 5, 1998
10.8 2001 Stock Option Plan Exhibit A to Definitive Proxy dated
June 29, 2001
10.9 2002 Stock Option Plan Exhibit A to Definitive Proxy dated
September 3, 2002
21 Significant subsidiaries of the registrant Filed herewith
23 Consent of Grant Thornton LLP Filed herewith
99.1 Certification Pursuant to 18 U.S.C. Section Filed herewith
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section Filed herewith
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Form 8-K Report. During the three months ended December 31, 2002, a Form
8-K was filed dated as of December 16, 2002, announcing under Item 5 the
adoption of Amended and Restated By-laws for the Company and the adoption
of a stockholder Rights Agreement.
(d) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNODATA CORPORATION
By /s/
------------------------------------------
Jack Abuhoff
Chairman of the Board of Directors,
Chief Executive Officer and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
/s/
- ------------------------------------
Jack Abuhoff Chairman of the Board of Directors, March 26, 2003
Chief Executive Officer and President
/s/
- ------------------------------------ Vice Chairman of the Board of March 26, 2003
Todd Solomon Directors and Consultant
/s/
- ------------------------------------
Stephen Agress Vice President - Finance March 26, 2003
Chief Accounting Officer (Principal
Accounting and Financial Officer)
/s/
- ------------------------------------
Haig S. Bagerdjian Director March 26, 2003
/s/
- ------------------------------------
Louise C. Forlenza Director March 26, 2003
/s/
- ------------------------------------
Dr. Charles F. Goldfarb Director March 26, 2003
/s/
- ------------------------------------
John R. Marozsan Director March 26, 2003
CERTIFICATIONS
I, Jack Abuhoff, certify that:
1. I have reviewed this annual report on Form 10-K of Innodata Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 26, 2003
/s/
-------------------------------------
Jack Abuhoff
Chairman of the Board,
Chief Executive Officer and President
I, Stephen Agress, certify that:
1. I have reviewed this annual report on Form 10-K of Innodata Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 26, 2003
/s/
------------------------------------
Stephen Agress
Vice President, Finance and
Chief Accounting Officer
INNODATA CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
Activity in the Company's allowance for doubtful accounts for the years ended
December 31, 2002, 2001 and 2000 was as follows:
ADDITIONS
----------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
PERIOD BEGINNING OF PERIOD COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- ------ ------------------- ------------------ -------------- ---------- -------------
2002 $1,853 $ - $ - $ (599) $1,254
2001 $ 884 $2,942 $ - $(1,973) $1,853
2000 $ 580 $ 304 $ - $ - $ 884