U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File Number 0-22196
INNODATA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
13-3475943
(I.R.S. Employer Identification No.)
Three University Plaza
Hackensack, NJ 07601
(Address of principal executive offices)
(201) 488-1200
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
State the number of shares outstanding of each of the issuer's common equity, as
of the latest practicable date: As of October 31, 2002 there were approximately
21,435,000 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
--------------------
See pages 2-9
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
See pages 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
See pages 15-16
Item 4. Controls and Procedures
-----------------------
See page 16
PART ll. OTHER INFORMATION
- -------- -----------------
See page 17
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
2002 2001
--------------- ------------
Unaudited Derived from
audited
financial
statements
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 8,787 $ 6,267
Accounts receivable-net 3,534 7,846
Prepaid expenses and other current assets 1,867 978
Deferred income taxes 1,525 1,793
------- -------
Total current assets 15,713 16,884
PROPERTY AND EQUIPMENT - NET 7,444 10,236
OTHER ASSETS 1,072 2,351
GOODWILL 675 623
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TOTAL $24,904 $30,094
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Acquisition notes payable $ - $ 650
Accounts payable and accrued expenses 2,218 2,875
Accrued salaries and wages 3,064 3,770
Income and other taxes 271 735
------- -------
Total current liabilities 5,553 8,030
------- -------
DEFERRED INCOME TAXES PAYABLE 1,723 1,702
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
75,000,000 shares; issued, 21,926,000 and
21,716,000 shares at September 30, 2002 and
December 31, 2001, respectively. 219 217
Additional paid-in capital 14,066 13,355
Retained earnings 5,252 8,429
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19,537 22,001
Less: treasury stock - at cost; 520,000
and 270,00 shares at September 30, 2002
and December 31, 2001, respectively. (1,909) (1,639)
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Total stockholders' equity 17,628 20,362
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TOTAL $24,904 $30,094
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<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(In thousands, except per share amounts)
(Unaudited)
2002 2001
-------- --------
REVENUES $ 7,278 $13,849
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 7,124 11,315
Selling and administrative expenses 2,740 2,021
Provision for doubtful accounts - 500
Interest income - net (13) (27)
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Total 9,851 13,809
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(LOSS) INCOME BEFORE BENEFIT FROM INCOME TAXES (2,573) 40
BENEFIT FROM INCOME TAXES (52) -
------- -------
NET (LOSS) INCOME $(2,521) $ 40
======= =======
BASIC (LOSS) INCOME PER SHARE $(.12) $-
===== ====
WEIGHTED AVERAGE SHARES OUTSTANDING 21,733 21,404
======= =======
DILUTED (LOSS) INCOME PER SHARE $(.12) $-
===== ====
ADJUSTED DILUTIVE SHARES OUTSTANDING 21,733 23,977
====== =======
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(In thousands, except per share amounts)
(Unaudited)
2002 2001
-------- --------
REVENUES $30,223 $45,689
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 25,668 34,836
Selling and administrative expenses 7,810 6,306
Provision for doubtful accounts - 500
Interest income - net (34) (178)
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Total 33,444 41,464
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(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (3,221) 4,225
(BENEFIT FROM) PROVISION FOR INCOME TAXES (44) 1,392
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NET (LOSS) INCOME $(3,177) $ 2,833
======= =======
BASIC (LOSS) INCOME PER SHARE $(.15) $.13
======= ======
WEIGHTED AVERAGE SHARES OUTSTANDING 21,589 21,303
======= =======
DILUTED (LOSS) INCOME PER SHARE $(.15) $.11
===== ====
ADJUSTED DILUTIVE SHARES OUTSTANDING 21,589 24,817
======= =======
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(In thousands)
(Unaudited)
2002 2001
-------- -------
OPERATING ACTIVITIES:
Net (loss) income $(3,177) $ 2,833
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization 4,050 3,397
Non-cash compensation 523 -
Tax benefit from exercise of stock options 110 -
Deferred income taxes 237 19
Provision for doubtful accounts - 500
Changes in operating assets and liabilities:
Accounts receivable 4,312 (4,461)
Prepaid expenses and other current assets (1,206) 448
Other assets 947 (2,151)
Accounts payable and accrued expenses (657) (877)
Accrued salaries and wages (706) 510
Income and other taxes (464) 225
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Net cash provided by operating activities 3,969 443
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INVESTING ACTIVITIES:
Capital expenditures (609) (4,958)
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FINANCING ACTIVITIES:
Payment of acquisition notes (650) -
Purchase of treasury stock (270) (1,639)
Proceeds from exercise of stock options 80 361
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Net cash used in financing activities (840) (1,278)
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INCREASE (DECREASE) IN CASH 2,520 (5,793)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 6,267 9,040
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CASH AND EQUIVALENTS, END OF PERIOD $ 8,787 $ 3,247
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 29 $ -
======= ========
Income taxes $ 224 $ 1,344
======= ========
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position as of September 30, 2002, the results of operations for the three
and nine months ended September 30, 2002 and 2001, and the cash flows for
the nine months ended September 30, 2002 and 2001. The results of
operations for the nine months ended September 30, 2002 are not necessarily
indicative of results that may be expected for any other interim period or
for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 2001 included
in the Company's Annual Report on Form 10-K. The accounting policies used
in preparing these financial statements are the same as those described in
the December 31, 2001 financial statements.
2. An analysis of the changes in each caption of stockholders' equity for the
nine months ended September 30, 2002 (in thousands) is as follows.
Additional
Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ------- -------- ----- -----
January 1, 2002 21,716 $217 $13,355 $8,429 $(1,639) $20,362
Net loss - - - (3,177) - (3,177)
Issuance of
common stock
upon exercise
of stock options 198 2 78 - - 80
Tax benefit
from exercise
of stock
options - - 110 - - 110
Purchase of
treasury stock - - - - (270) (270)
Non-cash
compensation 12 - 523 - - 523
------ ---- ------ ------ ------- -------
September
30, 2002 21,926 $219 $14,066 $5,252 $(1,909) $17,628
====== ==== ======= ====== ======= =======
3. Basic earnings per share is based on the weighted average number of common
shares outstanding without consideration of potential common stock. Diluted
earnings per share is based on the weighted average number of common and
potential common shares outstanding. The difference between weighted
average common shares outstanding and adjusted dilutive shares outstanding
represents the dilutive effect of outstanding options.
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 1,172,000 and 1,821,000 for the three and nine months
ended September 30, 2002, respectively.
The basis of the earnings per share computation for the three and nine
months ended September 30, 2002 and 2001 (in thousands, except per share
amounts) is as follows:
Three Months Nine Months
-------------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Net (loss) income $(2,521) $40 $(3,177) $2,833
======= === ======= ======
Weighted average common shares outstanding 21,733 21,404 21,589 21,303
Dilutive effect of outstanding options - 2,573 - 3,514
------- ------ ------ ------
Adjusted for dilutive computation 21,733 23,977 21,589 24,817
======= ====== ======= ======
Basic (loss) income per share ($.12) $- ($.15) $.13
===== === ===== ====
Diluted (loss) income per share ($.12) $- ($.15) $.11
===== === ====== ====
4. The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business, as well as actions brought by certain
former employees of a foreign subsidiary which was closed as part of the
Company's cost reduction initiatives which commenced in 2001. In the
opinion of management, the amount of ultimate liability with respect to
these actions will not materially affect the Company's results of
operations and financial condition.
5. As a result of the acquisition of ISOGEN International in December 2001,
the Company's operations are now classified into 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.
Three Months Nine Months
------------------- -------------------
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
Revenues
- --------
Content services $ 6,969 $13,849 $27,568 $45,689
Systems and training services 309 - 2,655 -
------- ------- ------- -------
Total consolidated $ 7,278 $13,849 $30,223 $45,689
======= ======= ======= =======
(Loss) income before income taxes (a)
- -------------------------------------
Content services $(1,460) $ 40 $(1,501) $ 4,225
Systems and training services (1,113) - (1,720) -
------- ------- -------- -------
Total consolidated $(2,573) $ 40 $(3,221) $ 4,225
======= ======= ======== =======
(a) Corporate overhead has not been allocated to the systems and training
services segment.
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
Total assets
- ------------
Content services $23,873 $28,414
Systems and training services 1,031 1,680
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Total consolidated $24,904 $30,094
======= =======
6. During the nine months ended September 30, 2002, the Company granted
options to an officer, to purchase 153,750 shares of its common stock at
$4.00 per share; and to employees, to purchase 3,000 shares of its common
stock at $4.60 per share and 4,000 shares of its common stock at $3.75 per
share. In addition, the Company issued 11,587 shares of its common stock
pursuant to an employment agreement with an officer of the Company.
Compensation expense of approximately $10,000 was recorded in the third
quarter as selling and administrative expenses.
7. 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 third quarter as
selling and administrative expenses.
8. During the nine months ended September 30, 2002, 250,000 shares of the
Company's common stock were purchased at a cost of $270,000.
9. 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.
10. In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
addresses accounting for restructuring and similar costs. SFAS No. 146
supersedes previous accounting guidance, principally Emerging Issues Task
Force Issue No. 94-3. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly SFAS
No. 146 may affect the timing of recognizing future restructuring costs as
well as the amount recognized. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Management
believes that the adoption of SFAS No. 146 will not have a material impact
on its results of operations or financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
Innodata Corporation ("Innodata" or the "Company") is a leading provider of
digital content outsourcing services. It delivers content manufacturing and
XML-related digital asset services to online information providers and companies
in the telecommunications, technology, healthcare, defense, and Internet
commerce sectors. It has 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.
Commencing with the acquisition of ISOGEN International in December 2001,
the Company operates through three divisions. Its Content Division aggregates,
converts, tags and editorially enhances digital content - services the Company
refers to collectively as "content manufacturing" services. The Company offers
content manufacturing services as a comprehensive outsourcing solution and
individually as discrete activities. The Content Division also transforms data
to Extensible Markup Language (XML). The Company's Systems Division offers
system design, custom application development, consulting services, and systems
integration conforming to XML and related standards. The Company's Training
Division provides a broad range of introductory as well as advanced curricula
and training on XML and other knowledge management standards.
For financial reporting purposes, the Company's operations have been
classified into two reporting segments: (1) content services and (2) systems
integration and training. Prior to the acquisition of ISOGEN International in
December 2001, the Company operated as a single segment.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 and 2001
Revenues decreased 47% to $7,278,000 for the three months ended September
30, 2002 compared to $13,849,000 for the similar period in 2001. Revenues from
the content services segment decreased 50% to $6,969,000 for the three months
ended September 30, 2002 compared to $13,849,000 for the similar period in 2001.
The decrease principally resulted from a $4.2 million decline in revenues from
two clients (including the client referred to below that accounted for 31% of
the Company's revenues in the three months ended September 30, 2002) whose
projects were substantially completed in the quarter, and a $1.8 million decline
in revenues from a client which substantially curtailed its operations.
Revenues from the Company's systems and training segment were $309,000 for the
three months ended September 30, 2002.
One client accounted for 31% and 37%, respectively, of revenues for the
three months ended September 30, 2002 and 2001, a second client accounted for
20% of the revenues in the three months ended September 30, 2002, and a third
client accounted for 13% of revenues in the three months ended September 30,
2001. No other client accounted for 10% or more of revenues during the third
quarter of 2002 or the third quarter of 2001. Further, for the three months
ended September 30, 2002 and 2001, export revenues, substantially all of which
were derived from European clients, accounted for 28% and 15%, 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. 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. Recently, the Company announced that it has
commenced work on new content outsourcing and XML data conversion projects with
estimated total potential revenues of $17 million.
Direct operating expenses were $7,124,000 in the third quarter of 2002 and
$11,315,000 in the third quarter of 2001, a decrease of 37%. Direct operating
expenses for the content services segment were $6,115,000 in the third quarter
of 2002 and $11,315,000 in the third quarter of 2001, a decrease of 46%. Direct
operating expenses as a percentage of revenues for the content services segment
were 88% and 82% in the third quarter 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 a 13 percentage point increase in non-labor costs as a
percentage of revenues resulting from the decline in revenues without a
corresponding decrease in such costs. This overall increase was partially
offset by a 7 percentage point decrease in labor costs as a percentage of
revenue resulting in part from restructuring and cost reduction activities.
Direct operating expenses for the Company's systems and training segment were
$1,009,000, or 327% of systems and training segment revenue, for the three
months ended September 30, 2002. Direct operating expenses primarily include
direct payroll, telecommunications, depreciation, equipment lease costs,
computer services, supplies and occupancy.
Selling and administrative expenses were $2,740,000 and $2,021,000 in the
third quarter of 2002 and 2001, respectively, an increase of 36%. The overall
increase is primarily due to a non-cash compensation charge of approximately
$500,000 (described in 7 to the Condensed Consolidated Financial Statements, and
to selling and marketing costs of the ISOGEN International Division, which was
acquired in December 2001. The overall increase was partially offset by a
$160,000 decrease in other administrative costs. Selling and administrative
expenses for the content services segment were $2,336,000 and $2,021,000 in the
third quarter of 2002 and 2001, respectively, an increase of 16%. Selling and
administrative expenses as a percentage of revenues for the content services
segment increased to 34% in the third quarter 2002 from 15% in the similar
period in 2001 due primarily to the decrease in revenues without a corresponding
decrease in such expenses. Selling and administrative expenses for the
Company's systems and training segment were $404,000, or 131% of revenue, in the
third quarter of 2002. Selling and administrative expenses primarily include
management and administrative salaries, sales and marketing costs, and
administrative overhead.
In the third quarter 2001, the Company added $500,000 to the provision for
doubtful accounts to reflect the uncertainty associated with fully collecting
from certain early stage clients.
In the third quarter 2002, the income tax benefit was substantially lower
as a percentage of the loss before income taxes than the U.S. Federal statutory
tax rate, principally due to a non-cash compensation charge of approximately
$500,000, which is not deductible for income tax purposes, and to losses
attributable to certain overseas subsidiaries not subject to income taxes.
Nine Months Ended September 30, 2002 and 2001
Revenues decreased 34% to $30,223,000 for the nine months ended September
30, 2002 compared to $45,689,000 for the similar period in 2001. Revenues from
the content services segment decreased 40% to $27,568,000 for the nine months
ended September 30, 2002 compared to $45,689,000 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 the nine months
ended September 30, 2001. Revenues from the Company's systems and training
segment were $2,655,000 for the nine months ended September 30, 2002.
One client accounted for 35% and 24% of the Company's revenues for the nine
months ended September 30, 2002 and 2001, respectively. Revenues from this
client have principally resulted from a project which has been substantially
completed during the third quarter of 2002. Two other clients accounted for 13%
and 12%, respectively, of revenues for the nine months ended September 30, 2002
and one other client accounted for 37% of the Company's revenues in the nine
months ended September 30, 2001. No other client accounted for 10% or more of
revenues during this period. Further, in the nine months ended September 30,
2002 and 2001, export revenues, substantially all of which were derived from
European clients, accounted for 20% and 13%, 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. 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. Recently, the Company announced that it has
commenced work on new content outsourcing and XML data conversion projects with
estimated total potential revenues of $17 million.
Direct operating expenses were $25,668,000 and $34,836,000 in the nine
months ended September 30, 2002 and 2001, respectively, a decrease of 26%.
Direct operating expenses for the content services segment were $22,552,000 and
$34,836,000 in the nine months ended September 30, 2002 and 2001, respectively,
a decrease of 35%. Direct operating expenses as a percentage of revenues for
the content services segment were 82% and 76% in the nine months ended September
30, 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 a 10
percentage point increase in non-labor costs as a percentage of revenues
resulting from the decline in revenues without a corresponding decline in fixed
operating costs. This overall increase was partially offset by a 5 percentage
point decrease in labor costs as a percentage of revenue resulting primarily
from restructuring and cost reduction activities. Direct operating expenses for
the Company's systems and training segment were $3,116,000, or 117% of systems
and training segment revenues, for the nine months ended September 30, 2002.
Direct operating expenses primarily include direct payroll, telecommunications,
depreciation, equipment lease costs, computer services, supplies and occupancy.
Selling and administrative expenses were $7,810,000 and $6,306,000 in the
nine months ended September 30, 2002 and 2001, respectively, an increase of 24%.
The overall increase is primarily due to a non-cash compensation charge of
approximately $500,000, and to selling and marketing costs of the ISOGEN
International Division, which was acquired in December 2001. Selling and
administrative expenses for the content services segment were $6,576,000 and
$6,306,000 for the nine months ended September 30, 2002 and 2001, respectively,
an increase of 4%. Selling and administrative expenses as a percentage of
revenues for the content services segment increased to 24% in the 2002 period
from 14% 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 $1,234,000, or 46% of sales, in the
nine months ended September 30, 2002. Selling and administrative expenses
primarily include management and administrative salaries, sales and marketing
costs, and administrative overhead.
In the nine months ended September 30, 2001, the Company added $500,000 to
the provision for doubtful accounts to reflect the uncertainty associated with
fully collecting from certain early stage clients.
In the nine months ended September 30, 2002, the income tax benefit was
substantially lower as a percentage of the loss before income taxes than the
U.S. Federal statutory tax rate, principally due to a non-cash compensation
charge of approximately $500,000, which is not deductible for income tax
purposes, and to losses attributable to certain overseas subsidiaries not
subject to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Selected measures of liquidity and capital resources are as follows:
September 30, 2002 December 31, 2001
------------------- ------------------
Cash and Cash Equivalents $8,787,000 $6,267,000
Working Capital $10,160,000 $8,854,000
Stockholders' Equity Per Common Share* $.83 $.95
<FN>
*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 $3,969,000 and $443,000 for
the nine months ended September 30, 2002 and 2001, respectively, an increase of
approximately $3,526,000. The increase was primarily due to an increase in net
changes in operating assets and liabilities of $8.5 million (principally
accounts receivable) offset by a decrease in net income of $6 million. In
addition, approximately $900,000 of the $3,969,000 cash provided by operating
activities for the nine months ended September 30, 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, 2002.
Accounts Receivable totaled $3,534,000 at September 30, 2002 representing
approximately 45 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,
prepaid expenses and other current assets increased to $1,867,000 at September
30, 2002 from $978,000 at December 31, 2001 due primarily to increases in tax
refunds receivable and to increases in various prepaid expenses.
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 nine months ended September 30, 2002, the Company spent
approximately $609,000 for capital expenditures, compared to approximately
$4,958,000 in the nine months ended September 30, 2001.
Net Cash Used in Financing Activities
In the nine months ended September 30, 2002, net cash used in financing
activities totaled approximately $840,000 compared to $1,278,000 in the
comparable period in 2001. In 2002, the Company repaid two notes it delivered
in connection with the acquisition of ISOGEN International totaling $650,000 and
repurchased shares of its common stock for $270,000. In 2001, cash used in
financing activities was principally attributable to $1.6 million used to
repurchase shares of the Company's common stock, offset in part by proceeds from
exercise of stock options totaling $361,000.
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. The line, which is due
on demand, is collateralized by accounts receivable. Interest is charged at 1/2%
above the bank's prime rate. There were no outstanding borrowings as of
September 30, 2002.
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.
FORWARD-LOOKING STATEMENTS
Disclosures in this Form 10-Q contain certain forward-looking statements,
including without limitation, statements concerning the Company's operations,
economic performance and financial condition. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words "believe," "expect," "anticipate" and
other similar expressions generally identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. These forward-looking statements are based
largely on the Company's current expectations, and are subject to a number of
risks and uncertainties, including without limitation, changes in external
market factors, the ability and willingness of the Company's clients and
prospective clients to execute business plans which give rise to requirements
for digital content services 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, and other
risks and uncertainties indicated from time to time in the Company's filings
with the Securities and Exchange Commission. Actual results could differ
materially from the results referred to in the forward-looking statements. In
light of these risks and uncertainties, there can be no assurance that the
results referred to in the forward-looking statements contained in this Form
10-Q will in fact occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate change market risk with respect to
its credit facility with a financial institution which is priced based on the
prime rate of interest. At September 30, 2002, there were no borrowings under
the credit facility. To the extent the Company utilizes all or a portion of its
line of credit, changes in the prime interest rate will have a positive or
negative effect on the Company's interest expense.
The Company has operations in foreign countries. While it is exposed to
foreign currency fluctuations, the Company presently has no financial
instruments in foreign currency and does not maintain funds in foreign currency
beyond those necessary for operations.
ITEM 4. 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 quarterly 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 II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings. Not Applicable
-----------------
Item 2. Changes in Securities. Not Applicable
---------------------
Item 3. Defaults upon Senior Securities. Not Applicable
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The following matters were voted on at the October 1, 2002
Annual Meeting of Stockholders. The total shares voted were
20,871,137.
Election of Directors
Nominee For Withheld Against Abstain
-------- ---------- -------- --------- -------
Jack Abuhoff 20,138,770 732,367 - -
Todd Solomon 20,201,836 669,301 - -
Dr. Charles F. Goldfarb 20,201,386 669,751 - -
John R. Marozsan 20,201,121 670,016 - -
Haig S. Bagerdjian 20,198,871 672,266 - -
Louise C. Forlenza 20,197,671 673,466 - -
2002 Stock Option Plan 18,479,172 - 2,218,389 173,576
Appointment of Auditors 20,688,324 - 111,557 71,256
Item 5. Other Information. Not Applicable
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Item 6. (a) Exhibits.
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99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Form 8-K Report. None
---------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNODATA CORPORATION
Date: November 12, 2002 /s/
--------------------
Jack Abuhoff
Chairman of the Board of Directors,
Chief Executive Officer and President
Date: November 12, 2002 /s/
--------------------
Stephen Agress
Vice President Finance
Chief Accounting Officer
CERTIFICATIONS
I, Jack Abuhoff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Innodata Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly report whether or not 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: November 12, 2002
/s/
-------------------------------
Jack Abuhoff
Chairman of the Board,
Chief Executive Officer and President
I, Stephen Agress, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Innodata Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly report whether or not 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: November 12, 2002
/s/
--------------------------------
Stephen Agress
Vice President, Finance and
Chief Accounting Officer