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 March 31, 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. EmployerIdentification 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 April 30, 2002 there were approximately 21,586,000 shares of common stock outstanding. PART I. FINANCIAL INFORMATION Item 1. Financial Statements See pages 2-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations See pages 8-11 Item 3. Quantitative and Qualitative Disclosures about Market Risk See page 11 PART ll. OTHER INFORMATION See page 12 INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) <TABLE> <CAPTION> <S> <C> <C> March 31, December 31, 2002 2001 ------------- -------------- Unaudited Derived from audited financial statements ASSETS CURRENT ASSETS: Cash and equivalents $ 7,300 $ 6,267 Accounts receivable-net 7,946 7,846 Prepaid expenses and other current assets 1,340 978 Deferred income taxes 1,793 1,793 ------- ------- Total current assets 18,379 16,884 PROPERTY AND EQUIPMENT - NET 9,099 10,236 OTHER ASSETS 1,985 2,351 GOODWILL 623 623 ------- ------- TOTAL $30,086 $30,094 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Acquisition notes payable $ 650 $ 650 Accounts payable and accrued expenses 2,293 2,875 Accrued salaries and wages 4,180 3,770 Income and other taxes 653 735 ------- ------- Total current liabilities 7,776 8,030 ------- ------- DEFERRED INCOME TAXES PAYABLE 1,702 1,702 ------- ------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized 75,000,000 shares; issued, 21,725,000 and 21,716,000 shares at March 31, 2002 and December 31, 2001 respectively 217 217 Additional paid-in capital 13,358 13,355 Retained earnings 8,672 8,429 ------- ------ 22,247 22,001 Less: treasury stock - at cost; 270,000 shares (1,639) (1,639) ------- ------- Total stockholders' equity 20,608 20,362 ------- ------- TOTAL $30,086 $30,094 ======= ======= <FN> See notes to unaudited condensed consolidated financial statements </TABLE> INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> <S> <C> <C> 2002 2001 -------- -------- REVENUES $12,556 $18,058 ------- ------- OPERATING COSTS AND EXPENSES: Direct operating expenses 9,739 11,923 Selling and administrative expenses 2,483 2,163 Interest income - net (4) (93) ------- ------- Total 12,218 13,993 ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES 338 4,065 PROVISION FOR INCOME TAXES 95 1,382 ------- ------- NET INCOME $ 243 $ 2,683 ======= ======= BASIC INCOME PER SHARE $.01 $.13 ==== ==== WEIGHTED AVERAGE SHARES OUTSTANDING 21,450 21,228 ======= ======= DILUTED INCOME PER SHARE $.01 $.11 ==== ==== ADJUSTED DILUTIVE SHARES OUTSTANDING 23,901 25,266 ======= ======== <FN> See notes to unaudited condensed consolidated financial statements </TABLE> INNODATA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (In thousands) (Unaudited) <TABLE> <CAPTION> <S> <C> <C> 2002 2001 ------- -------- OPERATING ACTIVITIES: Net income $ 243 $ 2,683 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,434 1,094 Deferred income taxes - 119 Changes in operating assets and liabilities: Accounts receivable (100) (1,999) Prepaid expenses and other current assets (358) 546 Other assets 198 (335) Accounts payable and accrued expenses (582) (95) Accrued salaries and wages 410 (37) Income and other taxes (82) 652 ------ ------- Net cash provided by operating activities 1,163 2,628 ------ ------- INVESTING ACTIVITIES: Capital expenditures (133) (1,578) ------ ------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 3 149 ------ ------- INCREASE IN CASH 1,033 1,199 CASH AND EQUIVALENTS, BEGINNING OF PERIOD 6,267 9,040 ------ ------- CASH AND EQUIVALENTS, END OF PERIOD $7,300 $10,239 ====== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 9 $ 654 ====== ======= <FN> See notes to unaudited condensed consolidated financial statements </TABLE> INNODATA CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 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 March 31, 2002, the results of operations for the three months ended March 31, 2002 and 2001, and the cash flows for the three months ended March 31, 2002 and 2001. The results of operations for the three months ended March 31, 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 three months ended March 31, 2002 (in thousands) is as follows. <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> 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 income - - - 243 - 243 Issuance of common stock upon exercise of stock options 9 - 3 - - 3 ------ ---- ------- ------ ------- ------- March 31, 2002 21,725 $217 $13,358 $8,672 $(1,639) $20,608 ====== ==== ======= ====== ======= ======= </TABLE> 3. Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted earnings per share is based on the weighted average number of common and potential common shares outstanding. The difference between weighted average common shares outstanding and adjusted dilutive shares outstanding represents the dilutive effect of outstanding options. The basis of the earnings per share computation for the three months ended March 31, 2002 and 2001 (in thousands, except per share amounts) is as follows: <TABLE> <CAPTION> <S> <C> <C> Three Months 2002 2001 ------- ------- Net income $ 243 $ 2,683 ======= ======= Weighted average common shares outstanding 21,450 21,228 Dilutive effect of outstanding options 2,451 4,038 ------- ------- Adjusted for dilutive computation 23,901 25,266 ======= ======= Basic income per share $.01 $.13 === ==== Diluted income per share $.01 $.11 ==== ==== </TABLE> 4. The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the Company's financial statements. 5. 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. <TABLE> <CAPTION> <S> <C> <C> Three Months Ended March 31, 2002 2001 ----------------------------- (in thousands) Revenues - -------- Content services $10,921 $18,058 Systems and training services 1,635 - ------- ------- Total consolidated $12,556 $18,058 ======= ======= Income before income taxes (a) - ------------------------------ Content services $ 227 $ 4,065 Systems and training services 111 - ------- ------- Total consolidated $ 338 $ 4,065 ======= ======= <FN> (a) Corporate overhead has not been allocated to the systems and training services segment. </TABLE> <TABLE> <CAPTION> <S> <C> <C> March 31, December 31, 2002 2001 ---------- ------------ (in thousands) Total assets - ------------ Content services $27,924 $30,094 Systems and training services 2,162 - ------- ------- Total consolidated $30,086 $30,094 ======= ======= </TABLE> 6. On April 2, 2002, the Company issued a $280,000 standby letter of credit, which expires on October 31, 2002. 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. The results of the Training Division, which are below the level required for reporting as a separate segment, have been combined with the results of the Systems Division due to the nature of services provided. Prior to the acquisition of ISOGEN International in December 2001, the Company operated as a single segment. Results of Operations Three Months Ended March 31, 2002 and 2001 Revenues decreased 30% to $12,556,000 for the three months ended March 31, 2002 compared to $18,058,000 for the similar period in 2001. Revenues from the content services segment decreased 40% to $10,921,000 for the three months ended March 31, 2002 compared to $18,058,000 for the similar period in 2001. The decline principally resulted from the loss in revenues from one client that accounted for $11 million of the Company's content services segment revenues in the first quarter of 2001, and the loss in revenues from two smaller clients, both of which substantially curtailed operations, that accounted for approximately $700,000 of first quarter 2001 revenues. The Company replaced this shortfall in part by a $4.7 million increase in revenues from two other clients. Revenues from the Company's systems and training segment were $1,635,000 for the three months ended March 31, 2002. For the three months ended March 31, 2002, two clients accounted for 35% and 15%, respectively, of the Company's revenues. For the three months ended March 31, 2001, one other client accounted for 61% of the Company's revenues. This other client did not account for revenues in 2002. No other client accounted for 10% or more of revenues. Further, in 2002 and 2001, export revenues, substantially all of which were derived from European clients, accounted for 16% and 10%, respectively, of the Company's revenues. Direct operating expenses were $9,739,000 in the first quarter of 2002 and $11,923,000 in the first quarter of 2001, a decrease of 18%. Direct operating expenses for the content services segment were $8,649,000 in the first quarter of 2002 and $11,923,000 in the first quarter of 2001, a decrease of 27%. Direct operating expenses as a percentage of revenues for the content services segment were 79% in 2002 and 66% in 2001. The dollar decrease for the content services segment in 2002 is principally due to a reduction in labor costs associated with lower revenues. The percentage increase for the content services segment in 2002 is primarily attributable to the decline in revenues without a corresponding decline in fixed operating costs. Direct operating expenses for the Company's systems and training segment were $1,090,000 for the three months ended March 31, 2002. Direct operating expenses primarily include direct payroll, telecommunications, depreciation, equipment lease costs, computer services, supplies and occupancy. Selling and administrative expenses were $2,483,000 and $2,163,000 in the first quarter of 2002 and 2001, respectively. The increase is primarily due to selling and marketing costs of the ISOGEN International Division, which was acquired in December 2001. Selling and administrative expenses as a percentage of revenues increased to 20% in 2002 from 12% in the 2001 quarter due primarily to the decrease in revenues without a corresponding decrease in such expenses. Selling and administrative expenses primarily include management and administrative salaries, sales and marketing costs, and administrative overhead. Liquidity and Capital Resources Selected measures of liquidity and capital resources are as follows: <TABLE> <CAPTION> <S> <C> <C> March 31, 2002 December 31, 2001 -------------- ----------------- Cash and Cash Equivalents $ 7,300,000 $6,267,000 Working Capital $10,603,000 $8,854,000 Stockholders' Equity Per Common Share* $.96 $.95 <FN> *Represents total stockholders' equity divided by the actual number of common shares outstanding (which excludes treasury stock). </TABLE> Net Cash Provided By Operating Activities Net cash provided by operating activities was $1,163,000 and $2,628,000 for the three months ended March 31, 2002 and 2001, respectively, a decrease of approximately $1.5 million. The decrease was primarily due a $2.4 million decrease in net income, partially offset by $754,000 in net changes in operating assets and liabilities and a $221,000 increase in depreciation and other non-cash charges to net income. Net Cash Used in Investing Activities As a result of the decline in revenues and associated reduction in production capacity, the need for new equipment has been diminished in comparison with the prior two years. Accordingly, in the three months ended March 31, 2002, the Company spent approximately $133,000 for capital expenditures, compared to approximately $1,578,000 in the three months ended March 31, 2001. Net Cash Provided By Financing Activities In the three months ended March 31, 2002, net cash provided by financing activities totaled approximately $3,000 compared to $149,000 in the comparable period in 2001. The change was primarily due to a decrease in the proceeds from the exercise of stock options. 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 and was unused at March 31, 2002, is collateralized by accounts receivable. Interest is charged at 1/2% above the bank's prime rate. On April 2, 2002, the Company issued a $280,000 standby letter of credit which expires on October 31, 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. 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 March 31, 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 during fiscal 2002 will have a positive or negative effect on the Company's interest expense. The Company has operations in foreign countries. While it is exposed to foreign currency fluctuations, the Company presently has no financial instruments in foreign currency and does not maintain funds in foreign currency beyond those necessary for operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Not Applicable Item 2. Changes in Securities. Not Applicable Item 3. Defaults upon Senior Securities. Not Applicable Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable Item 5. Other Information. Not Applicable Item 6. (a) Exhibits. None (b) Form 8-K Report. None SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INNODATA CORPORATION <TABLE> <CAPTION> <S> <C> <C> Date: May 14, 2002 /s/ ------------ ----------------------------------- Jack Abuhoff Chairman of the Board of Directors, Chief Executive Officer and President Date: May 14, 2002 /s/ ------------ ----------------------------------- Stephen Agress Vice President - Finance Chief Accounting Officer </TABLE>