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 1934COMMISSION 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: NONESecurities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $.01 PAR VALUEIndicate by check mark whether the Registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe past twelve months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes /x/ No / /Indicate by check mark if disclosure of delinquent filers in response to Item405 of Regulation S-K is not contained herein, and will not be contained, to thebest of Registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. /x/Indicate by check mark whether the registrant is an accelerated filer (asdefined in Exchange Act Rule 12b-2).Yes / / No /x/State the aggregate market value of the voting and non-voting common equity heldby non-affiliates computed by reference to the price at which the common equitywas last sold, or the average bid and asked price of such common equity, as ofthe last business day of the registrant's most recently completed second fiscalquarter. $25,100,000State the number of shares outstanding of each of the issuer's classes of commonequity, 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 statementsare made pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. The words "intend", "believe," "expect,""anticipate" and other similar expressions generally identify forward-lookingstatements. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of their dates. These forward-looking statements are based largely on the Company's currentexpectations, and are subject to a number of risks and uncertainties, includingwithout limitation, continuation or worsening of present depressed marketconditions, changes in external market factors, the ability and willingness ofthe Company's clients and prospective clients to execute business plans whichgive rise to requirements for digital content and professional services inknowledge processing, difficulty in integrating and deriving synergies fromacquisitions, potential undiscovered liabilities of companies that Innodataacquires, changes in the Company's business or growth strategy, the emergence ofnew or growing competitors, various other competitive and technological factors,risks and uncertainties described under "Risk Factors", and other risks anduncertainties indicated from time to time in the Company's filings with theSecurities and Exchange Commission. Actual results could differ materially from the results referred to in theforward-looking statements. In light of these risks and uncertainties, there canbe no assurance that the results referred to in the forward-looking statementscontained in this Form 10-K will in fact occur. We make no commitment to reviseor update any forward-looking statements in order to reflect events orcircumstances after the date any such statement is made.ITEM 1. DESCRIPTION OF BUSINESS.GENERAL We deliver content manufacturing and XML- related digital asset services toonline information providers and companies in the telecommunications,technology, healthcare, defense, and Internet commerce sectors. We have over 100active clients, including Amazon.com, Dow Jones & Company, Lockheed MartinCorporation, ProQuest Company, Reed Elsevier, Reuters, Simon & Schuster, TheThomson Corporation, and Wolters Kluwer. We operate through three divisions. Our Content Division aggregates,converts, tags and editorially enhances digital content - services we refer tocollectively as "content manufacturing" services. We offer content manufacturingservices as a comprehensive outsourcing solution and individually as discreteactivities. The Content Division also transforms data to Extensible MarkupLanguage (XML). Our Systems Division offers system design, custom applicationdevelopment, consulting services, and systems integration conforming to XML andrelated standards. Our Training Division provides a broad range of introductoryas well as advanced curricula and training on XML and other knowledge managementstandards. Our content manufacturing clients often have time-critical outsourcingneeds, with content that requires regular updating or enhancement. We typicallyservice these needs through multi-year contracts or relationships.Substantially all of our 2002 revenue was derived from clients that used ourservices for more than one year, and approximately 70% of our 2002 revenue wasderived from clients that used our services more than two years. Our XML transformation clients typically engage us to assist in buildingnew, large-scale XML-compliant information repositories or in transforminglarge-scale legacy electronic information repositories to XML-compliantinformation repositories. Our XML Content Factory is the largest dedicatedfactory purpose-built to create XML content. We are headquartered in Hackensack, New Jersey and have two other officesin North America, seven production facilities in the Philippines, India, and SriLanka, and a technology development center in India. Our largest productionfacility is the XML Content Factory, in Mandaue, the Philippines. Our wide area network and communications systems enable multiple production processes to beperformed simultaneously at various of our production facilities. We use server-based information technology to operate through a structuredworkflow using advanced tools. We drive efficiency and quality by using advancedmanufacturing and management techniques including total quality management andstatistical process control.Content Manufacturing and Outsourcing By capitalizing on the benefits of our scale and specialization, we aim tobe a strategic long-term provider of comprehensive content manufacturingservices that complement our customers' in-house capabilities and enable them torespond to market challenges. Our business strategy is to expand our client baseand enhance our service offerings in this area. A critical component of our content manufacturing and outsourcing servicesis the conversion of hardcopy and paper collections and legacy-formatted data toa variety of output formats including XML and XML derivatives, HTML, SGML, OpeneBook (OeB), Microsoft Reader (.LIT), Rocket eBook (.RB), and PDF. For thispurpose, we use high-speed scanning; a variety of commercial and proprietaryOCR/ICR (optical/intelligent character recognition) applications; structuredworkflow processes; and proprietary applications and tools designed to createaccurate, consistent markup and data. We use proprietary technology for dataenhancement and validation, and create automated procedures - utilizing industrystandards-aware software tools such as Omnimark, XMetaL, Epic, etc. - to ensurevalidated SGML and XML markup. Another critical component of our content manufacturing and outsourcingservices is the enhancement of content. Our engineers and programmers developcustom conversion filters and parsers for this purpose. Our subject matterexperts in fields such as law, education, science, medicine, and engineeringprovide taxonomy and controlled vocabulary development, hyperlinking, tagging,general editorial services, and indexing and abstracting. We typically price our services on a resource-utilization basis orquantity-delivered basis.XML Transformation Content publishers seek to migrate to XML-based publishing systems in orderto save money and save time by creating a single data store from which to createmultiple information products (as opposed to having to build a separate datastore for each information product). In addition, publishers who maintain theircontent in XML can syndicate content and spontaneously synthesize data intointeractive "web services." XML content transformation is the prerequisite forcontent owners to accomplish these outcomes. To transform content to XML, tags are inserted within the content to givethe content meaning which computers can read. Our proprietary technologyincludes production-grade, auto-tagging applications that utilize patternrecognition based on comprehensive rule sets and heuristic online databases. Thetechnology 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 ofdistribution. We typically price these services based on units of data produced ortransformed.XML Systems and Training Clients who use our XML systems engineering and consulting servicestypically require publishing systems or performance support / process automationsystems that enable multiple authors to collaborate on content and enablemultiple products to be generated from single-source XML assemblies. Our SystemsDivision provides full-service consulting and information system design andsystems integration to configure, improve, and validate these and other softwaresystems and technologies. Services are provided in ISO, IEC, ANSI, IETF, and W3Cstandards. 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 ourmarkets to explore outsourcing as a way of reducing expenses associated withcontent manufacture while reserving internal resources to focus on strategiccore competencies such as high-level editorial processes, product development,and publishing. We also seek to respond to our customers' increased interest inpublishing information from a single repository to multiple channels (i.e., web,print, CD, print-on-demand, PDA) and to re-use existing digital assets toquickly create new products. We believe that there is a vast quantity of textual, audio, and video datasources that will be made available on the Web by electronic publishers, andthat many of them will choose XML and its related standards as the underlyingtechnology. We intend to be the partner of choice for clients requiringlarge-scale XML transformations as well as XML systems development and training. We intend to target publishers and information providers, knowledge serviceand eLearning companies, Internet content portals, information aggregators,e-content vendors, rich media owners, and corporations with online commerce andknowledge 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 criticalelement in its historical and future success. To continue to meet the needs of existing and prospective clients in atimely fashion, Innodata works directly with its clients to identify and developnew and improved service offerings. To promote a close and continuingrelationship with clients, we sell through our North American Solutions Centerand provide 24/7 project support through our Asia-based customer service center. We generally perform our work for our clients under project-specificcontracts, requirements-based contracts, or long-term contracts. Contracts aretypically subject to numerous termination provisions. One client accounted for 30% and 27% of the Company's revenues for theyears ended December 31, 2002 and 2001 respectively and a second clientaccounted for 16% of the Company's revenues for the year ended December 31,2002. One other client, which substantially curtailed operations, accounted for30% and 54% of the Company's revenues in the years ended December 31, 2001 and2000, respectively. No other client accounted for 10% or more of revenuesduring this period. Further, in 2002, 2001, and 2000, export revenues,substantially all of which were derived from European clients, accounted for23%, 13%, and 10%, respectively, of the Company's revenues. We are from time to time required by clients to enter into non-disclosureagreements pursuant to which we agree not to disclose their identity or thenature of our relationship with them. Reasons for requiring such arrangementsvary, but typically involve a preference on the part of the client not topublicize its outsourcing strategy or to telegraph to competitors a new productdevelopment 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 notoffer the full complement of specialized services large organizations require inorder to build large-scale XML repositories or manufacture large-scale digitalcontent. Innodata provides a broad range of content-related services to enableits clients to obtain the full benefit of outsourcing within a seamlessoperational framework premised on our accountability to our clients. Innovative Technology-Based Solutions We have invested substantially in our manufacturing infrastructure in orderto ensure clients a reliable and highly redundant infrastructure and to enableus 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 thethree years ended December 31, 2002 and at the end of each year, are included inNote 8 to the Company's financial statements.SALES AND MARKETING Our full-time direct sales force primarily conducts sales and marketingfunctions. Sales and marketing activities consist primarily of exhibiting attrade shows in the United States and Europe, and seeking direct personal accessto decision-makers at existing and prospective clients. We have also obtainedvisibility by way of articles published in the trade press, throughparticipation in industry conferences and standards organizations, and byspeaking engagements at industry events. To date, Innodata has not conducted anysignificant advertising campaign in the general media. Consulting personnel from our new project analysis group closely supportthe direct sales effort. These individuals assist the sales force inunderstanding the technical needs of clients and providing responses to theseneeds, including demonstrations, prototypes, pricing quotations, and timeestimates. In addition, account managers from our customer service groupsupport 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 significantcompetitive factors are quality and reliability of services, price of services,scope and scale, quality of supporting services, and technical competence. Weare not aware of any single competitor that provides the same range of servicesas we do, and we believe that we have created significant differentiationrelative to our quality of services as well as our scope of services and scaleof services. However, our industry is highly fragmented and we face significantcompetition in each of our service areas. In terms of content manufacturing/outsourcing, we believe we competesuccessfully by offering high quality services and favorable pricing byleveraging 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, resultingin greater breadth of services as well as scope and scale. Thus, we have agreater ability to obtain client contracts where the undertaking required istechnically sophisticated, sizable in scope or scale, or requires significantinvestment. Our outsourcing services also compete with clients' and potentialclients' "in-sourcing" personnel, who may attempt to duplicate our servicesusing in-house staff. In terms of XML data transformation, companies compete on the basis ofquality, accuracy, price, and consistency, as well as ability to deliverlarge-scale, tag-intensive requirements quickly. Innodata's ability to competefavorably is, therefore, dependent upon its ability to react appropriately toshort and long-term trends, harness new technology, and deliver large-scalerequirements quickly. SPI, Inc. and Jouve, S.A. among others, compete for theXML content creation business. With respect to XML systems and consulting, Thomas Technology Solutions,Inc., Bearing Point (formerly KPMG Consulting), and Booz Allen Hamilton areamong those providing competitive services. In addition, we must frequentlycompete with our clients' own internal information technology capability.RESEARCH AND DEVELOPMENT We maintain a research and development capability to evaluate, on anongoing basis, advances in computer software, hardware and peripherals, computernetworking, telecommunication systems and Internet-related technologies as theyrelate to our business and to develop and install enhancements to ourproprietary systems. During the last two fiscal years, we invested heavily inthe development and integration of proprietary applications for use in our XMLContent Factory. Applications development was predominantly associated withimproving accuracy, consistency, and speed of complex XML tagging forlarge-scale requirements. We intend to make further investments in applicationsdevelopment and integration in order to respond to market opportunities. For thethree years ended December 31, 2002, all research and development expenditureswere charged as development expenses.EMPLOYEES As of February 28, 2003, we employed an aggregate of approximately 70persons in the United States, and approximately 7,000 persons in five productionfacilities in the Philippines, one production facility in Sri Lanka, oneproduction facility in India, and a software development center in India. Noemployees are currently represented by a labor union and we believe that ourrelations with our employees are satisfactory. At all of our locations, we enforce vigorous policies to protect ouremployees against sexual harassment and discrimination based on age, race,gender or sexual orientation. The average age of our employees is approximately25 to 30 years. Most of our employees have graduated from at least a two-yearcollege 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 basesalaries that are supplemented by results-based incentives. Senior management iseligible for bonuses and stock options. Our compensation structure is coupledwith an extensive benefits package that includes comprehensive health insurancecoverage, canteen and grocery subsidies, paid holiday leaves, continuingeducation programs, clothing and optical allowances, and a retirement program. Moreover, Innodata provides overtime premiums, holiday pay, bereavement andbirthday leaves, as well as maternity and paternity benefits.RISK FACTORS The nature of our business, as well as our strategy, the size and locationof our facilities, and other factors entail a certain amount of risk. Theserisks 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 ourclients and potential clients. To address this sales challenge and to reducethe percentage of total revenue that are often non-recurring, we have begun torefocus our sales force to emphasize our content manufacturing outsourcingservices. Nevertheless, a material recovery in revenues and earnings will insubstantial part depend on removal of the current uncertainty and a return tomore vigorous economic growth. RISKS OF EXPANDED OPERATIONS We have expanded our operations rapidly in recent years. As a result, wehave incurred new fixed operating expenses associated with our expansionefforts, including increases in depreciation expense, rental expense, andoverall increases in cost of sales. In order to capitalize on this investment,we need to develop new client relationships and expand existing ones. If ourrevenues do not increase sufficiently to offset these expenses, our operatingresults may be adversely affected. RISKS OF ACQUISITIONS Acquisitions involve a number of risks and challenges. These include, butare not limited to: diversion of management's attention; the need to integrateacquired operations; potential loss of key employees and clients of the acquiredcompanies; 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 informationsystems and operating systems and assimilate and manage the personnel of theacquired operations. Geographic distances may further complicate integration.The integration of acquired businesses may not be successful and could result indisruption to other parts of our business. Any of these and other factors could adversely affect our ability toachieve anticipated levels of profitability of acquired operations or realizeother anticipated benefits of an acquisition. Furthermore, any futureacquisitions 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 inthe 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 productionrequirements, or delay their production requirements for a number of reasons.Cancellations, reductions, or delays by a significant client or by a group ofclients would adversely affect our results of operations. In addition, otherfactors may contribute to fluctuations in our results of operations. Thesefactors include: the timing of client orders; the volume of these ordersrelative to our capacity; market acceptance of clients' new products; the timingof our expenditures in anticipation of future orders; our effectiveness inmanaging manufacturing processes; changes in economic conditions; and localfactors and events that may affect our production volume (such as localholidays) or unforeseen events (e.g., earthquakes, storms, civil unrest). We make significant decisions based on our estimates of clientrequirements, including decisions about the levels of business that we will seekand accept, production schedules, equipment procurement, personnel hiring, andother resource acquisition. The nature of our clients' commitments and thepossibility of changes in demand for their products may reduce our ability toestimate accurately future client requirements. On occasion, clients may requirerapid increases in production, which can stress our resources. Although we haveincreased our content conversion capacity and plan further increases, there canbe 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 operatingexpenses are relatively fixed, a reduction in client demand can adversely affectour margins. VARIABILITY OF QUARTERLY OPERATING RESULTS We expect our revenues and operating results to vary from quarter toquarter. Such variations are likely to be caused by many factors that are, tosome extent, outside our control, including: mix and timing of client projects;completing client projects; timing of new contracts; and one-time non-recurringand unusual charges. Accordingly, we believe that quarter-to-quarter comparisons of operatingresults for preceding quarters are not necessarily meaningful. You should notrely 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 theyears ended December 31, 2002 and 2001, respectively, and a second clientaccounted for 16% of the Company's revenues for the year ended December 31,2002. One other client, which substantially curtailed operations, accounted for30% and 54% of the Company's revenues in the years ended December 31, 2001 and2000, respectively. No other client accounted for 10% or more of revenuesduring this period. Further, in 2002, 2001, and 2000, export revenues,substantially all of which were derived from European clients, accounted for23%, 13%, and 10%, respectively, of the Company's revenues. A significantamount of our revenues are derived from clients in the online informationindustry. Accordingly, our accounts receivable generally include significantamounts 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 resultof a business failure, contract expiration, or the selection of another serviceprovider. We cannot guarantee that we will be able to retain long-termrelationships or secure renewals of short-term relationships with our majorclients in the future. Moreover, revenue derived from certain of ourrelationships depend upon the level of services we perform, which may vary fromperiod to period depending on client requirements. Factors affecting the online information industry generally could have amaterial adverse effect on our clients and, as a result, on our performance.Such factors include: the inability of our clients to adapt to rapidly changingtechnology and evolving industry standards, the inability of our clients todevelop and market their products, some of which are new and untested; and,recessionary periods in our clients' markets. If clients' products becomeobsolete or fail to gain widespread commercial acceptance, our business may bematerially and adversely affected. RISK OF INCREASED TAXES We have structured our operations in a manner designed to maximize incomein countries where tax incentives have been extended to encourage foreigninvestment or where income tax rates are low. Our taxes could increase if thesetax incentives are not renewed upon expiration, or tax rates applicable to usare increased. Substantially all of the services provided by our Asiansubsidiaries are performed on behalf of clients based in North America andEurope. We believe that profits from our Asian operations are not sufficientlyconnected to jurisdictions in North America or Europe to give rise to incometaxation there. However, tax authorities in jurisdictions in North America andEurope could challenge the manner in which profits are allocated among oursubsidiaries, and we may not prevail in any such challenge. If our Asian profitsbecame subject to income taxes in such other jurisdictions, our worldwideeffective tax rate could increase. RISKS OF COMPETITION The markets for our services are extremely competitive and fragmented. As aresult of this highly competitive environment, we may lose customers or havedifficulty in acquiring new customers and our results of operations may beadversely affected. A significant source of competition for us is the in-housecapability of our target client base. There can be no assurance that theseclients will outsource more of their needs or that such businesses will notbring 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 clientsare primarily located in North America and Europe. As a result, we are not asaffected by economic conditions overseas as we would be if we depended onrevenues from sources internal to those countries. However, such adverseeconomic factors as inflation, external debt, negative balance of trade, andunderemployment may significantly impact us. Certain aspects of overseas economies directly affect us. Overseasoperations remain vulnerable to political unrest, which could interfere with ouroperations. Political instability could also change the present satisfactorylegal environment for us through the imposition of restrictions on foreignownership, repatriation of funds, adverse labor laws, and the like. Our Indian operations are conducted through wholly-owned subsidiaries thathave been granted an income tax holiday through March 31, 2006. Accordingly,minimal income taxes will be payable on earnings from operations of thesubsidiaries during such period, unless repatriated to the U.S. We fund our overseas operations through transfers of U.S. dollars only asneeded and generally do not maintain any significant amount of funds or monetaryassets overseas. To the extent that we need to bring currency to the UnitedStates from our overseas operations, we may be affected by currency controlregulations. The Philippines is subject to relatively frequent earthquakes, volcaniceruptions, floods, and other natural disasters, which may disrupt ouroperations. Further, power outages lasting for periods of as long as eight hoursper day have occurred. Our facilities are equipped with standby generators thathave produced electric power during these outages; however, there can be noassurance that our operations will not be adversely affected should municipalpower production capacity deteriorate. The geographical distances between Asia, the Americas, and Europe createlogistical and communications challenges which we must overcome. The Philippines has ongoing problems with Muslim insurgents. The Abu Sayyafgroup of kidnappers, which is purported to have ties to the Al Qaeda terroristorganization, is concentrated on Basilan Island, an island far away from ourfacilities, and the government has stepped up activities to eradicate the group.There can be no assurances that these efforts will be successful or that thegroup will not attempt to disrupt activities or commit terrorist acts in otherareas. RISKS OF CURRENCY FLUCTUATIONS AND HEDGING OPERATIONS The Philippines has historically experienced high rates of inflation andmajor fluctuations in exchange rate between the Philippine peso and the U.S.dollar. Continuing inflation without corresponding devaluation of the pesoagainst the dollar, or any other increase in value of the peso relative to thedollar, may have a material adverse effect on our operations and financialcondition. Since 1997, we have not purchased foreign currency futures contractsfor 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 ourkey executives and skilled personnel. Several of our officers and key employeesare bound by employment or non-competition agreements. However, there can be noassurance that we will retain our officers and key employees. We could bematerially and adversely affected by the loss of such personnel. VOLATILITY OF MARKET PRICE OF COMMON STOCK The stock market in recent years has experienced significant price andvolume fluctuations that have affected the market prices for the common stock oftechnology and Internet-related companies. Such fluctuations have often beenunrelated to or disproportionately impacted by the operating performance of suchcompanies. The market for our common stock may be subject to similarfluctuations. 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 ortechnology industry generally, as well as currency fluctuations and generalmarket 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 Jerseycorporate headquarters, two other North American offices, and seven overseasproduction facilities, including our 100,000 square foot XML Content Factorycomplex located in Mandaue, the Philippines. In addition, we have a softwaredevelopment facility in Gurgaon, India. All facilities are leased for termsexpiring 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 insurancefor 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 foreignsubsidiaries, certain former employees have filed various illegal dismissalactions in the Philippines seeking, among other remedies, reinstatement ofemployment, payment of back wages and damages approximating one million dollars.Outside counsel has advised management that under the circumstances, the Companyis not legally obligated to pay severance to such terminated employees. Basedupon the advice of counsel, management believes the actions are substantiallywithout merit and intends to defend the actions vigorously. In addition, one of the foreign subsidiaries which ceased operations hasbeen presented with a tentative tax assessment by the Philippine Bureau ofInternal Revenue for an amount approximating $400,000, plus applicable interestand penalties. Management believes the tentative assessment is principallywithout substance and any amounts that the Company estimates might ultimately bepaid in settlement (which are not expected to be material) have been accrued. In addition, the Company is subject to various legal proceedings and claimswhich arise in the ordinary course of business. While management currently believes that that ultimate outcome of all theseproceedings will not have a material adverse effect on the Company's financialposition or overall trends in results of operations, litigation is subject toinherent uncertainties. Were an unfavorable ruling to occur, there exists thepossibility of a material adverse impact on the operating results of the periodin which the ruling occurs. In addition, the estimate of potential impact onthe Company's financial position or overall results of operations for the abovelegal 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 ofvoting at our Annual Meeting held on October 1, 2002. PART IIITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Innodata Corporation (The "Company") Common Stock is quoted on the NasdaqNational Market System under the symbol "INOD." On February 28, 2003, there were114 stockholders of record of the Company's Common Stock based on informationprovided by the Company's transfer agent. Virtually all of the Company'spublicly held shares are held in "street name" and the Company believes theactual number of beneficial holders of its Common Stock to be approximately4,000. The following table sets forth the high and low sales prices on a quarterlybasis for the Company's Common Stock, as reported on Nasdaq, for the two yearsended December 31, 2002, after giving retroactive effect to a three-for-onestock dividend paid on September 9, 1999, a two-for-one stock dividend paid onDecember 7, 2000 and a two-for-one stock dividend 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 0.60DIVIDENDS The Company has never paid cash dividends on its Common Stock and does notanticipate that it will do so in the foreseeable future. The future payment ofdividends, if any, on the Common Stock is within the discretion of the Board ofDirectors and will depend on the Company's earnings, its capital requirementsand financial condition and other relevant factors. The Company paid athree-for-one stock dividend on September 9, 1999, a two-for-one stock dividendon December 7, 2000, and 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 equitycompensation 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 RESULTSOF OPERATIONSRESULTS OF OPERATIONSYEARS ENDED DECEMBER 31, 2002 AND 2001 Revenues decreased 38% to $36,385,000 for the year ended December 31, 2002compared to $58,278,000 for the similar period in 2001. Revenues from thecontent services segment decreased 43% to $33,089,000 for the year endedDecember 31, 2002 compared to $57,825,000 for the similar period in 2001. Thedecrease principally resulted from the loss in revenues from one client whichsubstantially curtailed operations, which accounted for approximately $17million of the Company's content services segment revenues in 2001, and from thedecline in revenues from a second client, whose projects were substantiallycompleted in 2002. Revenues from the Company's systems and training segmentwere $3,296,000 for the year ended December 31, 2002 and $453,000 for the onemonth 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 yearended December 31, 2002 and 2001 respectively and a second client accounted for16% of the Company's revenues for the year ended December 31, 2002. One otherclient, which substantially curtailed operations, accounted for 30% of theCompany's revenues in the year ended December 31, 2001. No other clientaccounted for 10% or more of revenues during this period. Further, in the yearended December 31, 2002 and 2001, export revenues, substantially all of whichwere derived from European clients, accounted for 23% and 13%, respectively, ofthe Company's revenues. In early 2001, a significant portion of the Company's revenue increase camefrom XML transformation projects by early-stage companies that had raisedsignificant venture capital to pursue digital library and e-businessinitiatives. The downturn in the technology industry in 2001 resulted in afalloff of revenues from companies in this industry sector. The economicdownturn also caused many blue-chip publishers to curtail discretionary spendingand new initiatives on XML transformation projects. To address this saleschallenge and to reduce the percentage of total revenue that are oftennon-recurring, the Company has begun to refocus its sales force to emphasize itscontent 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 ofrevenues for the content services segment were 85% and 76% in the year endedDecember 31, 2002 and 2001, respectively. The dollar decrease for the contentservices segment in the 2002 period is principally due to a reduction in laborcosts associated with lower revenues, and to reductions in fixed costsassociated with the Company's cost reduction initiatives. The percentageincrease for the content services segment in the 2002 period is primarilyattributable to the decrease in revenues without a corresponding decrease innon-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 endedDecember 31, 2002 and $315,000, or 70% of revenues, for the month of December2001. 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 theyear ended December 31, 2002 and 2001, respectively, an increase of 20%. Sellingand 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, anincrease of 4%. The increase for the content services segment is primarily dueto a non-cash compensation charge of approximately $500,000, and an increase inselling and marketing costs of approximately $684,000, offset by a 14% reductionin general and administrative expenses. Selling and administrative expensesas a percentage of revenues for the content services segment increased to 26% inthe 2002 period from 19% in the 2001 period due primarily to the decrease inrevenues without a corresponding decrease in such expenses. Selling andadministrative expenses for the systems and training segment were $1,513,000, or46% 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 administrativeexpenses primarily include management and administrative salaries, sales andmarketing costs, and administrative overhead. For the year ended December 31, 2001, the Company provided an allowance fordoubtful accounts of approximately $2.6 million representing the remainingbalance due at December 31, 2001 from a client that accounted for 30% of its2001 revenues because the client has reported an inability to raise furtheroperating funds required to make payment. In addition, in 2001 the Companyprovided approximately $350,000 for other client bad debts incurred in theordinary course of business. During the fourth quarter 2001, the Company commenced certain actions toreduce production operations at a wholly owned Asian subsidiary that wasoperating at a loss and to reduce overall excess capacity in Asia. Suchactivities, which culminated in the cessation and closure of all operations atthe subsidiary and included employee layoffs, were completed in 2002. Inaddition, during 2002, the Company closed a second facility, resulting in thewrite-off of property and equipment associated with the closed facility totalingapproximately $244,000. Such write-off of equipment has been classified asRestructuring Costs and Asset Impairment for the year ended December 31, 2002.Included in Restructuring Costs and Asset Impairment for the year ended December31, 2001 are estimated facility closure costs, including employee related costs,approximating $600,000, and the write-off of leasehold improvement coststotaling 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 apercentage of pre-tax loss than the federal statutory rate due primarily tocertain 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, 2001compared to $50,731,000 for the similar period in 2000. Sales to one client whoaccounted for $27.4 million (54%) of the Company's revenues in 2000 declined byapproximately $10 million in 2001. The Company replaced this shortfall in 2001by a $14.4 million increase in revenues from another client and net increases inrevenues from various other new and existing clients. As a result, totalrevenues in 2001 increased by $7.5 million from 2000. One client accounted for 30% and 54% of the Company's revenues in 2001 and2000, respectively. One other client accounted for 27% of the Company's revenuesin 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 theCompany's revenues. In 2000 and early 2001, a significant portion of the Company's revenueincrease came from XML transformation projects by early-stage companies that hadraised significant venture capital to pursue digital library and e-businessinitiatives. The downturn in the technology industry in 2001 resulted in afalloff of revenues from companies in this industry sector. Furthermore, theeconomic downturn that became evident late in 2001 resulted in many blue-chippublishers that had shown increased interest in XML transformation projectselecting to curtail discretionary spending and slow down new initiatives. To inpart address this sales challenge, the Company began to refocus its sales forceto 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 ofan increase in labor costs, is principally due to costs incurred for increasedrevenues. The percentage increase in 2001 is principally attributable to anincrease in fixed and certain labor costs incurred for increased productioncapacity which was underutilized during the second half of 2001. Directoperating 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 theyears ended December 31, 2001 and 2000, respectively, representing an increaseof 15%. The increase is primarily attributable to an increase in selling andmarketing costs, travel costs and facility administrative overhead associatedwith the Company's continued growth. Selling and administrative expenses as apercentage of revenues were 14% in both the 2001 and 2000 periods. Selling andadministrative expense includes management and administrative salaries, salesand 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 aclient that accounted for 30% of its 2001 revenues because the client hasreported an inability to raise further operating funds required to make payment.In addition, the Company provided approximately $350,000 for other client baddebts incurred in the ordinary course of business. During the fourth quarter 2001, the Company took certain actions to reduceproduction operations at a wholly owned Asian subsidiary that was operating at aloss and to reduce overall excess capacity in Asia. Such activities included thetermination of leases and employee layoffs. Included in Restructuring Costs andAsset Impairment for the year ended December 31, 2001 are estimated facilityclosure costs, including employee related costs, approximating $600,000, and thewrite-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 $6,267,000Working Capital 8,570,000 8,854,000Stockholders' 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 ofapproximately $1,790,000. The decrease was primarily due to a decrease in netincome of $6.5 million and a decrease in non-cash charges of $2.9 millionpartially offset by an increase in net changes in operating assets andliabilities of $7.7 million (principally accounts receivable). In addition,approximately $900,000 of the $3,050,000 cash provided by operating activitiesfor the year ended December 31, 2002 resulted from the sale of certainvalue-added tax credits held by the Company. These tax credits had beenincluded as other assets on the balance sheet on December 31, 2001. Accounts Receivable totaled $3,253,000 at December 31, 2002 representingapproximately 52 days of sales outstanding, compared to $7,846,000, or 61 days,at December 31, 2001. The decrease in accounts receivable resulted principallyfrom 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 resultingfrom 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 needfor new equipment has been diminished in comparison with both such periods.Accordingly, in the year ended December 31, 2002, the Company spentapproximately $1,162,000 for capital expenditures, compared to approximately$5,568,000 in the year ended December 31, 2001. In addition, in the year endedDecember 31, 2001, the Company acquired the operating assets and assumed certaindesignated liabilities of the ISOGEN International operating division ofDataChannel, Inc. The purchase price, including acquisition costs, consisted of$796,000 in cash, two acquisition promissory notes which were paid in 2002, eachfor $325,000, plus an additional $68,000. At present, the Company anticipatescapital 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 activitiestotaled approximately $900,000 primarily due to the repayment of two acquisitionpromissory notes totaling $650,000 in connection with the acquisition of theISOGEN International operating division. In addition, the Company repurchased340,000 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 whichit may borrow up to 80% of eligible accounts receivable. Eligible accountsreceivable, which excludes foreign receivables as well as receivablesoutstanding 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, iscollateralized by accounts receivable. Interest is charged at 1/2% above thebank's prime rate. The line expires on May 31, 2003. Management believes that existing cash, internally generated funds andshort term bank borrowings will be sufficient for reasonably anticipated workingcapital and capital expenditure requirements during the next 12 months. TheCompany funds its foreign expenditures from its U.S. corporate headquarters onan as-needed basis.INFLATION, SEASONALITY AND PREVAILING ECONOMIC CONDITIONS To date, inflation has not had a significant impact on the Company'soperations. The Company generally performs its work for its clients underproject-specific contracts, requirements-based contracts or long-term contracts.Contracts are typically subject to numerous termination provisions. TheCompany's revenues are not significantly affected by seasonality.CRITICAL ACCOUNTING POLICIES Basis of Presentation and Use of Estimates ------------------------------------------ Management's discussion and analysis of its results of operations andfinancial condition is based upon the Company's consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. On an on-going basis, theCompany evaluates its estimates, including those related to accounts receivable.Management bases its estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions. Allowance for Doubtful Accounts ------------------------------- The Company records an allowance for doubtful accounts for estimated lossesresulting from the inability of its clients to make required payments. If thefinancial condition of the Company's clients were to deteriorate, resulting inan impairment of their ability to make payments, additional allowances may benecessary. Revenue Recognition ------------------- Revenue is recognized in the period in which services are performed anddelivered. Depreciation ------------ Depreciation is provided on the straight-line method over the estimateduseful lives of the related assets, which is two to five years. Leaseholdimprovements are amortized on a straight-line basis over the shorter of theirestimated useful lives or the lives of the leases. Income Taxes ------------ Deferred taxes are determined based on the difference between the financialstatement and tax bases of assets and liabilities, using enacted tax rates, aswell as any net operating loss or tax credit carryforwards expected to reducetaxes payable in future years. A valuation allowance is provided when it ismore likely than not that some or all of a deferred tax asset will not berealized. Unremitted earnings of foreign subsidiaries have been included in theconsolidated financial statements without giving effect to the United Statestaxes that may be payable on distribution to the United States to the extentsuch 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 reportingunit level (segment or one level below a segment) on an annual basis and betweenannual tests in certain circumstances. Application of the goodwill impairmenttest requires judgment, including the identification of reporting units,assigning assets and liabilities to reporting units, assigning goodwill toreporting units, and determining the fair value of each reporting unit.Significant judgments required to estimate the fair value of reporting unitsinclude estimating future cash flows, determining appropriate discount rates andother assumptions. Changes in these estimates and assumptions could materiallyaffect the determination of fair value for each reporting unit. Accounting for Stock-Based Compensation --------------------------------------- The Company accounts for stock-based compensation plans under therecognition and measurement principles of APB Opinion No. 25, Accounting forStock Issued to Employees, and related Interpretations. In general, nostock-based employee compensation cost is reflected in the results ofoperations, unless options granted under those plans have an exercise price thatis less than the market value of the underlying common stock on the date ofgrant.RECENT ACCOUNTING PRONOUNCEMENTS Accounting for Costs Associated with Exit or Disposal Activities ---------------------------------------------------------------- In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associatedwith Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 requires thatliabilities associated with the exit or disposal activity be recognized onlywhen the liability is incurred. SFAS No. 146 is effective for exit and disposalactivities that are initiated after December 31, 2002. The Company does notexpect 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-BasedCompensation - Transition and Disclosure (SFAS No. 148), which amends SFAS No.123. SFAS No. 148 provides alternate methods of transition for a voluntarychange to the fair value based method of accounting for stock-basedcompensation, and requires enhanced disclosure about the method used and theeffect of the method used on requested results. Under SFAS No. 148, stock-basedcompensation disclosures must be included with the summary of significantaccounting policies and made both quarterly and annually. The Company does notplan 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 toits credit facility with a financial institution, which is priced based on theprime rate of interest. At December 31, 2002, there were no outstandingborrowings under the credit facility. Changes in the prime interest rate during2003 will have a positive or negative effect on the Company's interest expense.Such exposure will increase accordingly should the Company utilize its line ofcredit during 2003. The Company has operations in foreign countries. While it is exposed toforeign currency fluctuations, the Company presently has no financialinstruments in foreign currency and does not maintain funds in foreign currencybeyond those necessary for operations.ITEM 8. FINANCIAL STATEMENTS. INNODATA CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS PAGE ----Independent Auditors' Report II-11Consolidated Balance Sheets as ofDecember 31, 2002 and 2001 II-12Consolidated Statements of Operations for thethree years ended December 31, 2002 II-13Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2002 II-14Consolidated Statements of Cash Flows for thethree years ended December 31, 2002 II-15Notes to Consolidated Financial Statements II-16-28INDEPENDENT AUDITORS' REPORT Board of Directors and StockholdersInnodata CorporationWe have audited the accompanying consolidated balance sheets of InnodataCorporation and subsidiaries as of December 31, 2002 and 2001, and the relatedconsolidated statements of operations, stockholders' equity and cash flows foreach of the three years in the period ended December 31, 2002. These financialstatements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits.We conducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of InnodataCorporation and subsidiaries as of December 31, 2002 and 2001, and theconsolidated results of their operations and their consolidated cash flows foreach of the three years in the period ended December 31, 2002 in conformity withaccounting principles generally accepted in the United States of America.We have also audited Schedule II for each of the three years in the period endedDecember 31, 2002. In our opinion, this schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly, in allmaterial respects, the information therein. /s/-----------------------Grant Thornton LLPNew York, New YorkMarch 7, 2003 INNODATA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (DOLLARS IN THOUSANDS) 2002 2001 -------- -------ASSETSCURRENT 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' EQUITYCURRENT 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 LIABILITIESSTOCKHOLDERS' 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 20001. 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, andXML (and related standards-based) systems engineering and training throughoffices located both in the U.S. and Asia. The consolidated financial statementsinclude the accounts of the Company and its subsidiaries, all of which arewholly owned. All intercompany transactions and balances have been eliminated inconsolidation. USE OF ESTIMATES - In preparing financial statements in conformity withgenerally accepted accounting principles, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and revenues and expenses during the reportingperiod. Actual results could differ from those estimates. REVENUE RECOGNITION - Revenue is recognized in the period in which servicesare performed and delivered. FOREIGN CURRENCY - The functional currency for the Company's productionoperations located in the Philippines, India and Sri Lanka is U.S. dollars. Assuch, transactions denominated in Philippine pesos, Indian and Sri Lanka rupeeswere translated to U.S. dollars at rates which approximate those in effect ontransaction dates. Monetary assets and liabilities denominated in foreigncurrencies at December 31, 2002 and 2001 were translated at the exchange rate ineffect as of those dates. Exchange losses resulting from such transactions in2002 totaled approximately $59,000. Exchange gains resulting from suchtransactions in 2001 totaled approximately $75,000. Exchange losses in 2000resulting from such transactions totaled $180,000. STATEMENT OF CASH FLOWS - For financial statement purposes (including cashflows), the Company considers all highly liquid debt instruments purchased withan original maturity of three months or less to be cash equivalents.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 overthe estimated useful lives of the related assets, which is two to five years.Leasehold improvements are amortized on a straight-line basis over the shorterof their estimated useful lives or the lives of the leases. GOODWILL AND OTHER INTANGIBLE ASSETS - SFAS 142 requires that goodwill betested for impairment at the reporting unit level (segment or one level below asegment) 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 reportingunits, assigning goodwill to reporting units, and determining the fair value ofeach reporting unit. Significant judgments required to estimate the fair valueof reporting units include estimating future cash flows, determining appropriatediscount rates and other assumptions. Changes in these estimates andassumptions could materially affect the determination of fair value for eachreporting unit. INCOME TAXES - Deferred taxes are determined based on the differencebetween the financial statement and tax bases of assets and liabilities, usingenacted tax rates, as well as any net operating loss or tax credit carryforwardsexpected to reduce taxes payable in future years. A valuation allowance isprovided when it is more likely than not that some or all of a deferred taxasset will not be realized. Unremitted earnings of foreign subsidiaries havebeen included in the consolidated financial statements without giving effect tothe United States taxes that may be payable on distribution to the United Statesto the extent such earnings are not anticipated to be remitted to the UnitedStates. ACCOUNTING FOR STOCK-BASED COMPENSATION - At December 31, 2002, the Companyhas various stock-based employee compensation plans, which are described morefully in Note 7. The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and related Interpretations. In general, no stock-based employeecompensation cost is reflected in the results of operations, unless optionsgranted under such plans have an exercise price less than the market value ofthe underlying common stock on the date of grant. The following tableillustrates the effect on net income and earnings per share if the Company hadapplied 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 $6,168Deduct: 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 fairvalue of financial instruments using available market information and othervaluation methodologies in accordance with SFAS No. 107, "Disclosures About FairValue of Financial Instruments." Management of the Company believes that thefair value of financial instruments for which estimated fair value has not beenspecifically presented, primarily cash and accounts receivable, is notmaterially different than the related carrying value. Determinations of fairvalue are based on subjective data and significant judgment relating to timingof payments and collections and the amounts to be realized. Different assumptions and/or estimation methodologies might have a material effect on thefair value estimates. Accordingly, the estimates of fair value are notnecessarily indicative of the amounts the Company would realize in a currentmarket exchange. ACCOUNTS RECEIVABLE - The majority of the Company's accounts receivable aredue from secondary publishers and information providers. Credit is extendedbased on evaluation of a clients' financial condition and project terms and,generally, collateral is not required. Accounts receivable are generally duewithin 30 days and are stated at amounts due from customers net of an allowancefor doubtful accounts. Accounts outstanding longer than the contractual paymentterms are considered past due. The Company determines its allowance byconsidering a number of factors, including the length of time trade accountsreceivable are past due, the Company's previous loss history, the client'scurrent ability to pay its obligation to the Company, and the condition of thegeneral economy and the industry as a whole. The Company writes-off accountsreceivable when they become uncollectible, and payments subsequently received onsuch receivables are credited to the allowance for doubtful accounts. INCOME (LOSS) PER SHARE - Basic earnings per share is based on the weightedaverage number of common shares outstanding without consideration of potentialcommon stock. Diluted earnings per share is based on the weighted averagenumber of common and, if dilutive, potential common shares outstanding. Thecalculation takes into account the shares that may be issued upon exercise ofstock options, reduced by the shares that may be repurchased with the funds andtax benefits received from the exercise, based on average prices during theyear. ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES - In June2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit orDisposal Activities (SFAS No. 146). SFAS No. 146 requires that liabilitiesassociated with the exit or disposal activity be recognized only when theliability is incurred. SFAS No. 146 is effective for exit and disposalactivities that are initiated after December 31, 2002. The Company does notexpect 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 andamortization (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 andequipment 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, andassumed certain designated liabilities, of the ISOGEN International operatingdivision of DataChannel, Inc. ISOGEN International ("ISOGEN") helps clientsacross 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-processingtechnologies of XML (Extensible Markup Language), SGML (Standard GeneralizedMarkup Language), and other standards. The purchase price, including acquisition costs, consisted of $796,000 incash, two acquisition promissory notes, each for $325,000, plus an additional$68,000 payable September 30, 2002 subject to realization of certain events. Thepromissory notes accrued interest at a rate of 7% per annum, and were paid in2002. The acquisition was accounted for by the purchase method of accounting inaccordance with SFAS No. 141 'Business Combinations' and, accordingly, theconsolidated statements of operations include the results of the acquiredbusiness beginning December 1, 2001. A summary of the assets acquired andliabilities 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 weremade 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 2000Current income tax (benefit) expense: Foreign $ 97 $ (7) $ 61 Federal (827) 906 2,040 State and local 23 203 294 ------ ------- ------ (707) 1,102 2,395Deferred 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 taxrate 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 netdeferred 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 bankpursuant to which it may borrow up to 80% of eligible accounts receivable. Theline, which is due on demand and was unused at December 31, 2002, iscollateralized by accounts receivable. Interest is charged at 1/2% above thebank's prime rate. The line of credit expires on May 31, 2003. LEASES - The Company is obligated under various operating lease agreementsfor office and production space. The agreements contain escalation clauses andrequirements that the Company pay taxes, insurance and maintenance costs. Thelease agreements for production space in most overseas facilities, which expirethrough 2010, contain provisions pursuant to which the Company may cancel theleases upon three months notice, generally subject to forfeiture of securitydeposit. The annual rental for the cancelable leased space is approximately$1,200,000. For the years ended December 31, 2002, 2001 and 2000, rent expensefor 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-termoperating lease agreements. For the years ended December 31, 2002, 2001 and2000, rent expense for equipment totaled approximately $46,000, $400,000 and$900,000, respectively. At December 31, 2002, future minimum annual rental commitments onnon-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 cessationof all operations at certain foreign subsidiaries (Note 10), certain formeremployees have filed various illegal dismissal actions in the Philippinesseeking, among other remedies, reinstatement of employment, payment of backwages and damages approximating one million dollars. Outside counsel hasadvised management that under the circumstances, the Company is not legallyobligated to pay severance to such terminated employees. Based upon the adviceof counsel, management believes the actions are substantially without merit andintends to defend the actions vigorously. In addition, one of the foreign subsidiaries which ceased operations hasbeen presented with a tentative tax assessment by the Philippine Bureau ofInternal Revenue for an amount approximating $400,000, plus applicable interestand penalties. Management believes the tentative assessment is principallywithout 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 claimswhich arise in the ordinary course of business. While management currently believes that that ultimate outcome of all theseproceedings will not have a material adverse effect on the Company's financialposition or overall trends in results of operations, litigation is subject toinherent uncertainties. Were an unfavorable ruling to occur, there exists thepossibility of a material adverse impact on the operating results of the periodin which the ruling occurs. In addition, the estimate of potential impact onthe Company's financial position or overall results of operations for the abovelegal proceedings could change in the future. FOREIGN CURRENCY - The Company's production facilities are located in thePhilippines, India and Sri Lanka. To the extent that the currencies of thesecountries fluctuate, the Company is subject to risks of changing costs ofproduction after pricing is established for certain customer projects. However,most significant contracts contain provisions for price renegotiation. EMPLOYMENT AGREEMENTS - In connection with the acquisition of ISOGEN, theCompany entered into a three year employment agreement with its co-founder to serve as the division's President. Pursuant to the agreement, he will becompensated at a rate of $200,000 per annum for the first year, subject toannual review for discretionary annual increases thereafter, and will beeligible to receive an annual cash bonus, the amount of which will be based uponmeeting certain goals. In addition, he was granted an option to purchase 150,000shares of the Company's common stock at $4.00 per share, and was issued 11,587unregistered shares of the Company's common stock. Compensation expense ofapproximately $10,000 was recorded in the year ended December 31, 2002 asselling and administrative expenses pursuant to the stock issuance. In May 2001, the Company entered into an agreement with its then Chairmanof the Board pursuant to which he will continue to serve as a part-time employeeat a salary of $2,000 per month for five years. In addition, the Company paidhim $400,000 in exchange for a six year non-compete agreement, which is includedin other assets and is being amortized over the term of the agreement. OnDecember 31, 2002, the unamoritized balance was $289,000. PHILIPPINE PENSION REQUIREMENT - The Philippine government enactedlegislation requiring businesses to provide a lump-sum pension payment toemployees working at least five years and who are employed by the Company at age60. Those eligible employees are to receive approximately 60% of one month's payfor each year of employment with the Company. The liability for the futurepayment is insignificant at December 31, 2002. Under the legislation, theCompany is not required to fund future costs, if any. INDEMNIFICATIONS - The Company is obligated under certain circumstances toindemnify directors and certain officers against costs and liabilities incurredin actions or threatened actions brought against such individual because suchindividuals acted in the capacity of director and / or officer of the Company.In addition, the Company has contracts with certain clients pursuant to whichthe Company has agreed to indemnify the client for certain specified and limitedclaims. These indemnification obligations are in the ordinary course ofbusiness and, in many cases, do not include a limit on a maximum potentialfuture payments. As of December 31, 2002, the Company has not recorded aliability for any obligations arising as a result of these indemnifications. LIENS - In connection with the procurement of tax incentives at one of thecompany's foreign subsidiaries, the foreign zoning authority was granted a firstlien on the subsidiary's property and equipment. As of December 31, 2002, suchequipment had a book value of $570,000.6. CAPITAL STOCK COMMON STOCK - On each of December 7, 2000 and March 23, 2001, the Companypaid two-for-one stock dividends. In addition, in 2001 the stockholdersincreased the number of common shares the Company is authorized to issue to75,000,000. The financial statements and notes thereto, including all share andper 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 thepreferred stock in series which differ as to their relative terms, rights,preferences and limitations. STOCKHOLDER RIGHTS PLAN - On December 16, 2002, the Board of Directorsadopted a Stockholder Rights Plan ("Rights Plan") in which one right ("Right")was declared as a dividend for each share of the Company's common stockoutstanding. The purpose of the plan is to deter a hostile takeover of theCompany. Each Right entitles its holders to purchase, under certain conditions,one one-thousandth of a share of newly authorized Series C ParticipatingPreferred Stock ("Preferred Stock"), with one one-thousandth of a share ofPreferred Stock intended to be the economic and voting equivalent of one shareof the Company's common stock. Rights will be exercisable only if a person orgroup acquires beneficial ownership of 15% (25% in the case of specifiedexecutive officers of the Company) or more of the Company's common stock orcommences a tender or exchange offer, upon the consummation of which such personor group would beneficially own such percentage of the common stock. Upon suchan event, the Rights enable dilution of the acquiring person's or group'sinterest by providing that other holders of the Company's common stock maypurchase, at an exercise price of $4.00, the Company's common stock having amarket value of $8.00 based on the then market price of the Company's commonstock, or at the discretion of the Board of Directors, Preferred Stock, havingdouble the value of such exercise price. The Company will be entitled to redeemthe Rights at $.001 per right under certain circumstances set forth in theRights 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 forissuance approximately 9,870,000 shares of common stock pursuant to theCompany's stock option plans (including an aggregate of 1,057,164 options issuedto the Company's current and to its prior Chairman which were not grantedpursuant to stockholder approved stock option plans). TREASURY STOCK - During the years ended December 31, 2002 and 2001, theCompany repurchased 340,000 shares and 270,000 shares, respectively, of itscommon 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 $1,140,000remains available for repurchase under the program at December 31, 2002.7. STOCK OPTIONS The Company adopted, with stockholder approval, 1993, 1994, 1994Disinterested 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 topurchase 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 incentivestock 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 marketvalue per share of common stock on the date of grant (110% of such fair marketvalue for an ISO, if the grantee owns stock possessing more than 10% of thecombined voting power of all classes of the Company's stock). Options may begranted under the Stock Option Plan to all officers, directors, and employees ofthe Company and, in addition, Non-Qualified Options may be granted to otherparties who perform services for the Company. No options may be granted underthe 1993 Plan after April 30, 2003; under the 1994 Plan and 1994 DD Plan afterMay 19, 2004; under the 1995 Plan after May 16, 2005; under the 1996 Plan afterJuly 8, 2006; under the 1998 Plan after July 8, 2008; under the 2001 Plan afterMay 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 theCompany. However, the Board of Directors may not, without stockholder approval,amend the Plans to increase the number of shares of common stock which may beissued under the Plans (except upon changes in capitalization as specified inthe Plans), decrease the minimum exercise price provided in the Plans or changethe class of persons eligible to participate in the Plans. The Company has adopted the disclosure-only provisions of SFAS No. 123,"Accounting for Stock Based Compensation." Accordingly, to the extent theexercise price of options granted to employees is equal to or greater than themarket value of the underlying common stock on the date of grant, compensationexpense is not recognized for stock options granted to employees. Hadcompensation cost for the Company's stock option grants been determined based onthe fair value at the grant date for awards in 2002, 2001, and 2000, consistentwith the provisions of SFAS No. 123, the Company would have reflected a net lossof 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 $5.5million or $.27 per share, basic, and $.24 per share, diluted in 2000. The fairvalue of options at date of grant was estimated using the Black-Scholes pricingmodel with the following weighted average assumptions: expected life of fouryears; 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 zerodividend 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) $0.85Granted $1.57 - 2.69 2,729,600 $1.97Exercised $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) $3.83Granted $3.05 - 6.57 1,292,200 $5.42Exercised $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) $1.29Granted $1.00 - 4.60 220,750 $3.64Exercised $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 fiveyear life. The weighted average fair value as of the date of grant for optionsgranted 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 tothe Chief Executive Officer to purchase 6,672, 248,496, 360,000, 399,996 and123,996 shares of its common stock at $.42, $.50, $.58, $1.29 and $.25 pershare, respectively. In connection with this transaction, compensation expenseof approximately $513,000 was recorded in the year ended December 31, 2002 basedupon the difference between the exercise price and the market price of theunderlying common stock on the date the options were extended. No compensationexpense was recognized in connection with stock option grants for the yearsended December 31, 2001 and 2000, since the exercise price of options granted inthose years equaled or exceeded the market value of the underlying common stockon the date of grant. Compensation expense is included as a component ofselling 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 reportingsegments: (1) content services and (2) systems integration and training. Thecontent services operating segment aggregates, converts, tags and editoriallyenhances digital content and performs XML transformations. The Company offerssuch services as a comprehensive outsourcing solution and individually asdiscrete activities. The Company's systems integration and training operatingsegment offers system design, custom application development, consultingservices, and systems integration conforming to XML and related standards andprovides a broad range of introductory as well as advanced curricula andtraining on XML and other knowledge management standards. 2002 2001 (in thousands)Revenues--------Content services $33,089 $57,825Systems and training services 3,296 453 ------- -------Total consolidated $36,385 $58,278 ======= =======(Loss) income before income taxes (a)-------------------------------------Content services $(3,649) $ 1,959Systems 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 $28,414Systems 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 theyears ended December 31, 2002 and 2001 respectively, and a second clientaccounted for 16% of the Company's revenues for the year ended December 31,2002. One other client, which substantially curtailed operations, accounted for30% and 54% of the Company's revenues in the years ended December 31, 2001 and2000, respectively. No other client accounted for 10% or more of revenuesduring this period. Further, in the years ended December 31, 2002, 2001 and2000, export revenues, substantially all of which were derived from Europeanclients, accounted for 23%, 13%, and 10%, respectively, of the Company's revenues. A significant amount of the Company's revenues are derived from clients inthe publishing industry. Accordingly, the Company's accounts receivablegenerally include significant amounts due from such clients. In addition, as ofDecember 31, 2002, approximately 33% of the Company's accounts receivable wasfrom 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 20,262Dilutive 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 sharesderived from stock options because they are antidilutive. The number ofantidilutive securities excluded from the dilutable loss per share calculationwere 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 toreduce production operations at a wholly owned Asian subsidiary that wasoperating at a loss and to reduce overall excess capacity in Asia. Suchactivities, which culminated in the cessation and closure of all operations atsuch subsidiary and included employee layoffs, were completed in 2002. Inaddition, during 2002 the Company closed a second facility, resulting in thewrite-off of property and equipment associated with the closed facility totalingapproximately $244,000. Such write-off of equipment has been classified asRestructuring Costs and Asset Impairment for the year ended December 31, 2002. Included in Restructuring Costs and Asset Impairment for the year endedDecember 31, 2001 are estimated facility closure costs, including employeerelated costs, approximating $600,000, and the write-off of leaseholdimprovement costs totaling approximately $265,000. In 2002, the Company paidapproximately $350,000 in closing costs.11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER (in thousands, except per share) 2002Revenues $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)2001Revenues $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 IIIITEM 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 PresidentTodd Solomon 41 Vice Chairman of the Board of Directors and ConsultantDr. Charles F. Goldfarb 63 DirectorJohn R. Marozsan 61 DirectorHaig S. Bagerdjian 47 DirectorLouise C. Forlenza 53 DirectorGeorge Kondrach 50 President - ISOGEN International, LLCStephen Agress 41 Vice President - FinanceKlaas Brouwer 36 Vice President - TechnologyAl Girardi 37 Vice President - Strategic CommunicationsAshok Mishra 47 Vice President - Project DeliveryJan Palmen 48 Vice President - SalesJurgen Tanpho 38 Vice President - OperationsAmy R. Agress 38 Secretary and Corporate Counsel JACK ABUHOFF has served as President and CEO since September 15, 1997. Hehas been a Director of the Company since its founding. From 1995 to 1997 he wasChief Operating Officer of Charles River Corporation, an international systemsintegration and outsourcing firm. From 1992 to 1994, he was employed byChadbourne & Parke, and engaged in Sino-American technology joint ventures withGoldman Sachs. He practiced international corporate law with White & Case from1986 to 1992. He holds an A.B. degree from Columbia College (1983) and a J.D.degree from Harvard Law School (1986). TODD SOLOMON has been Vice Chairman and consultant to the Company since hisresignation as President and CEO on September 15, 1997. He served as President and a Director of the Company since its founding by him in 1988. He had beenChief Executive Officer since August 1995. Mr. Solomon was President of RuckAssociates, an executive recruiting firm from 1986 until 1987. Mr. Solomon holdsan A.B. in history and physics from Columbia University (1986). DR. CHARLES F. GOLDFARB has been a Director of the Company since October2000. Dr. Goldfarb invented SGML (Standard Generalized Markup Language) in 1974and later led the team that developed it into the International Standard (ISO8879) on which the World Wide Web's HTML (HyperText Markup Language) and XML(Extensible Markup Language) are based. HTML is an SGML application, while XMLis a Web-optimized subset of SGML. Dr. Goldfarb served as Editor of the SGMLInternational Standard for 20 years, and is a consultant to developers of SGMLand XML applications and products. He is co-author of "The XML Handbook " andauthor of "The SGML Handbook" (Oxford University Press, 1990). He has beenprofiled in "Forbes," "Web Techniques," "Red Herring," and other publications.He holds the Printing Industries of America's Gutenberg Award, and is anHonorary Fellow of the Society for Technical Communication. Dr. Goldfarb earnedan 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 memberof the Executive Committee of CCH Incorporated, a leading provider of tax andbusiness law information. In addition, he was a member of the Board ofDirectors 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 AspenPublishers, Inc., also a Wolters Kluwer U.S. company. Aspen Publishers,Gaithersburg, MD, develops and markets print and electronic books, loose-leafreporting services, journals and newsletters for business professionals. Beforebecoming President and CEO in 1986, he spent 10 years in a number of managementpositions at Aspen, including Editor-in-Chief and Publisher. Mr. Marozsanreceived 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. Heis 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 ofhigh-technology healthcare services primarily for radiopharmacy and medicalimaging segments of the healthcare industry, with annual sales of over $700million. Mr. Bagerdjian joined Syncor in 1991 as an Associate General Counseland Assistant Secretary, became Vice President, Secretary and General Counsel inJanuary 1995, and was appointed Senior Vice President, Business Development, inOctober 1996. He also served as Chief Legal Officer from June 1998 until June1999, Chairman and CEO of Syncor Pharmaceuticals, Inc. from January 1999 untilFebruary 2001 and Secretary from January 1995 until January 2001. Mr. Bagerdjianreceived 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 LawSchool in 1986. He is admitted to the State Bar of California. Mr. Bagerdjianhas 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 corporateclients. From 1987 through 1992, she was the Chief Financial Officer and ChiefOperating Officer of Intercontinental Exchange Partners, an internationalforeign exchange company, and served as a Director and as chair of itsInternational Audit Committee. Prior to joining Intercontinental, she was theChief Financial Officer of Bierbaum-Martin, a foreign exchange firm. Ms.Forlenza is a Director and Audit Committee chair of Medical DocumentsInternational Inc., a provider of medical information, and served as a Directorand chair of the Finance Committee at A&M Foods. She participates actively invarious not-for-profit and philanthropic organizations including as benefitchair for Greenwich Hospital and finance committee for The Acting Company, a NewYork City based promoter of arts and literacy founded in 1972 by actor JohnHouseman. Ms. Forlenza is a certified public accountant and served on thefaculty of the accounting department of Iona College having graduated with aB.B.A. in Accounting from Iona College (1971). GEORGE KONDRACH was appointed President of the Company's ISOGENInternational, LLC wholly-owned subsidiary on December 10, 2001. Mr. Kondrach,who in 1991 co-founded ISOGEN International, served as its Chairman until April1999 when ISOGEN was acquired by DataChannel, Inc. Since 1999 and until ISOGENwas acquired by the Company in December 2001, Mr. Kondrach served in various executive management capacities with DataChannel, most recently as Senior VicePresident of Solutions Architecture. He holds a B.S. degree in biology fromSouthern Methodist University (1975). STEPHEN AGRESS was elected Vice President - Finance in March 1998. Heserved as Corporate Controller since joining the Company in August 1995. Mr.Agress is a certified public accountant and had been a senior audit manager withDeloitte & Touche for more than five years prior to his resignation in 1995. Mr.Agress holds a B.S. in accounting from Yeshiva University (1982). KLAAS BROUWER was elected Vice President - Technology in July 2000. He wasAssistant Vice President for Technology from September 1998 until June 2000. Mr.Brouwer was Chief Technical Officer and Special Projects Division Manager at SPITechnologies, 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 Teamof Elsevier Science, responsible for the implementation of Software Development,LAN, WAN and Data Centers. Mr. Brouwer holds a Bachelors Degree in InformationTechnology from the Noordelijke Hogeschool Leeuwarden, a leading university inthe Netherlands (1993). AL GIRARDI joined the Company as Vice President - Strategic Communicationsin July 2002. Prior to joining the Company, Mr. Girardi was Vice President,Marketing, Communications & Brand Strategy at Antenna Software, a developer ofweb-based, wireless CRM software applications from February 2000 to January2002. From February 1999 to January 2000, Mr. Girardi was Managing Director ofthe Corporate Branding Practice at Bozell Sawyer Miller (now Weber Shandwick), aleading worldwide strategic communications company, whose clients includedGeneral Electric, Moster.com, Unisys and Fujitsu. Prior to that, Mr. Girardiwas Vice President, Corporate and Financial Communications for GreyCommunications 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 2001after serving as AVP - Project Delivery from November 2000 to September 2001 andGeneral Manager of India operations from 1997 to October 2000. Prior to joiningInnodata in 1997, Mr. Mishra was Deputy General Manager Switching Production inITI Ltd, a premier Telecom manufacturer in India, where he held variousmanagement positions in Production, Planning, Process and Quality areas between1977 to 1997. Mr. Mishra holds Bachelor of Technology degree in MechanicalEngineering from Pantnagar University (1976), Component Manufacturing TechnicalTraining from Alcatel France (1985) and condensed MBA course from IndianInstitute of Management Banglore (1995). JAN PALMEN was elected Vice President - Sales in February 1999. Mr. Palmenwas chief operating officer at SPI Technologies, Inc., a leading competitor ofthe Company, from 1995 through 1998. Prior to SPI, he was general manager,production for Reed/Elsevier from 1991 through 1995. He was also a member of thesteering committee for global SGML implementation. Before that, he spent threeyears with United Dutch Publishers as head of sales and production and two yearswith a global management consultancy company as a strategic consultant. He holdsa M.B.A. degree (1979) in marketing, economics and logistics management and aB.B.A. degree (1976) in economics and marketing, both from Erasmus University inAmsterdam. JURGEN TANPHO was elected Vice President - Operations in March 1998. Heserved in various management capacities since joining the Company in 1991,including the position of Assistant to the President. He holds a B.S. degree inindustrial engineering from the University of the Philippines (1986). AMY R. AGRESS was elected Secretary in June 2001 and has served as theInnodata's Corporate Counsel since 1998. Prior to joining Innodata, she was anassociate 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 NewYork University (1986). There are no family relationships between or among any directors orofficers of the Company, except for Mr. Agress and Ms. Agress, who are husbandand wife. Directors are elected to serve until the next annual meeting ofstockholders and until their successors are elected and qualified. Officersserve 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 throughDecember 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 compensationpaid by the Company for services to the Company during the three fiscal yearsended December 31, 2002 to the Company's Chief Executive Officer and to thoseother 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 AWARDEDJack Abuhoff 2002 $315,600 $ - 1,139,160 (a)Chairman of the Board of 2001 315,600 - -Directors, Chief Executive 2000 297,892 75,000 1,020,000Officer and PresidentGeorge Kondrach 2002 $200,000 $ 10,660 150,000President - 2001 16,667 - -ISOGEN International, LLCSubsidiaryStephen Agress 2002 $169,000 $ - -Vice President - Finance 2001 169,000 - 100,000 2000 164,800 24,720 100,000Klaas Brouwer 2002 $101,400 $ - -Vice President - Technology 2001 101,400 - 100,000 2000 92,950 25,097 100,000Jan Palmen 2002 $156,000 $ 72,338 -Vice President - Sales 2001 156,000 40,817 100,000 2000 138,000 115,719 140,000Jurgen 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, thetotal 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 grantedany 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 TERMNAME GRANTED IN FISCAL YEAR PRICE DATE 5% 10%Jack Abuhoff 6,672 (a) -% $0.42 9/07 $ 7,000 $ 10,000Jack Abuhoff 248,496 (a) 18% $0.50 9/07 $253,000 $352,000Jack Abuhoff 360,000 (a) 26% $0.58 9/07 $338,000 $481,000Jack Abuhoff 399,996 (a) 29% $1.29 9/07 $ 92,000 $251,000Jack Abuhoff 123,996 (a) 9% $0.25 12/07 $157,000 $207,000George 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 ENDNAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLEJack 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 therate 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 grantedoptions 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, plusout-of-pocket expenses for each meeting attended. In addition, Dr. Goldfarbreceived approximately $1,250 and $29,000 in fees for certain specialassignments in 2002 and 2001, respectively, and was granted options in 2001 topurchase 40,000 shares at an exercise price of $5.44 per share. The Company has an arrangement with Mr. Todd Solomon, its former Presidentand 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 exerciseprice of $5.44 per share. Mr. Solomon serves as Vice Chairman of the Board andin 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 servicesperformed 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 officersof the Company. The Company has an arrangement with Mr. Solomon, who served asPresident 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'sequity 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 UNDERPLAN 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 2,605,000Equity 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, certaininformation regarding the beneficial ownership (as defined in Rule 13d-3 underthe Securities Exchange Act of 1934) of the Company's Common Stock based uponthe most recent information available to the Company for (i) each person knownby the Company to own beneficially more than five (5%) percent of the Company'soutstanding Common Stock, (ii) each of the Company's directors, (iii) each ofthe Company's Executive Officers whose total annual salary and bonuscompensation exceeded $100,000 in 2002 and (iv) all Executive Officers andDirectors of the Company as a group. Unless otherwise indicated, eachstockholder's address is c/o Company, Three University Plaza, Hackensack, NewJersey 07601. SHARES OWNED BENEFICIALLY(1) AMOUNT AND NATURENAME AND ADDRESS OF OF BENEFICIALBENEFICIAL 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 Directorsas 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 Stock12. 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 apart-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 yearnon-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 theparticipation of our management, including our Chief Executive Officer and ChiefAccounting 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 adate within 90 days prior to the filing date of this annual report ("EvaluationDate"). Based on such evaluation, our Chief Executive Officer and ChiefAccounting Officer have concluded that, as of the Evaluation Date, thedisclosure controls and procedures are reasonably designed and effective toensure that (i) information required to be disclosed by us in the reports wefile 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 andforms, and (ii) such information is accumulated and communicated to the ourmanagement, 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 inour internal controls or in other factors that could significantly affect suchcontrols. PART IVITEM 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. 33-620123.2 Form of Amended and Restated By-Laws Exhibit 3.1 to Form 8-K dated December 16, 20023.3 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, 20024.2 Specimen of Common Stock certificate Exhibit 4.2 to Form SB-2 Registration Statement No. 33-620124.3 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 Agent10.1 1994 Stock Option Plan Exhibit A to Definitive Proxy dated August 9, 199410.2 1993 Stock Option Plan Exhibit 10.4 to Form SB-2 Registration Statement No. 33-6201210.3 Form of Indemnification Agreement Filed herewith10.4 1994 Disinterested Directors Stock Option Plan Exhibit B to Definitive Proxy dated August 9, 199410.5 1995 Stock Option Plan Exhibit A to Definitive Proxy dated August 10, 199510.6 1996 Stock Option Plan Exhibit A to Definitive Proxy dated November 7, 199610.7 1998 Stock Option Plan Exhibit A to Definitive Proxy dated November 5, 199810.8 2001 Stock Option Plan Exhibit A to Definitive Proxy dated June 29, 200110.9 2002 Stock Option Plan Exhibit A to Definitive Proxy dated September 3, 200221 Significant subsidiaries of the registrant Filed herewith23 Consent of Grant Thornton LLP Filed herewith99.1 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 registrantcaused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized. 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 onthe 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, 2003Todd 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 CERTIFICATIONSI, 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; and6. 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 PresidentI, 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; and6. 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 endedDecember 31, 2002, 2001 and 2000 was as follows: ADDITIONS ---------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE ATPERIOD BEGINNING OF PERIOD COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD------ ------------------- ------------------ -------------- ---------- -------------2002 $1,853 $ - $ - $ (599) $1,2542001 $ 884 $2,942 $ - $(1,973) $1,8532000 $ 580 $ 304 $ - $ - $ 884 EXHIBIT 21 SIGNIFICANT SUBSIDIARIES NAME UNDER STATE OR OTHER WHICH SUBSIDIARY JURISDICTION OF CONDUCTSNAME OF SUBSIDIARY INCORPORATION BUSINESS------------------ ---------------- ----------------Isogen International, LLC Delaware SameInnodata India (Private) Limited India SameInnodata XML Content Factory, Inc. Philippines SameInnodata Lanka (Private) Limited Sri Lanka Same EXHIBIT 23CONSENT OF INDEPENDENT AUDITORSWe have issued our report dated March 7, 2003 accompanying the consolidatedfinancial statements and schedules included in the Annual Report of InnodataCorporation on Form 10-K for the year ended December 31, 2002. We hereby consentto the incorporation by reference of said reports in the Registration Statementsof Innodata Corporation on Form S-8 (Registration No. 33-85530, dated October21, 1994, Registration No. 333-3464, dated April 18, 1996, Registration No.33-63085, dated September 9, 1998 and Registration No. 333-82185, dated July 2,1999) and on Form S-3 (Registration No. 33-62012, dated April 11, 1996,Registration No. 333-91649, dated January 6, 2000 and Registration No.333-51400, dated January 2, 2001). /s/-------------------------Grant Thornton LLPNew York, New YorkMarch 7, 2003 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Innodata Corporation (the"Company") on Form 10-K for the quarter ended December 31, 2002 as filed withthe Securities and Exchange Commission on the date hereof (the "Report"), I,Jack Abuhoff, Chief Executive Officer of the Company, certify, pursuant to 18U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002,that to the best of my knowledge:1. the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ ------------------------------------- Jack Abuhoff Chairman of the Board, Chief Executive Officer and President March 26, 2003 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Innodata Corporation (the"Company") on Form 10-K for the quarter ended December 31, 2002 as filed withthe Securities and Exchange Commission on the date hereof (the "Report"), I,Stephen Agress, Principal Financial Officer of the Company, certify, pursuant to18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002,that to the best of my knowledge:1. the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ ----------------------------------- Stephen Agress Vice President, Finance and Chief Accounting Officer March 26, 2003 EXHIBIT 10.3 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT is entered into as of this 16th day ofDecember, 2002, by and between Innodata Corporation, a Delaware corporation (the"Company"), and (NAME), residing at (ADDRESS) ("Indemnitee"). RECITALS A. The Company is aware that because of the increased exposure tolitigation costs, talented and experienced persons are increasingly reluctant toserve or continue serving as directors and officers of corporations unless theyare protected by comprehensive liability insurance and indemnification. B. The statutes and judicial decisions regarding the duties ofdirectors and officers are often difficult to apply, ambiguous, or conflicting,and therefore fail to provide such directors and officers with adequate guidanceregarding the proper course of action. C. The Board of Directors of the Company (the "Board") has concludedthat, in order to retain and attract talented and experienced individuals toserve as officers and directors of the Company and its subsidiaries and toencourage such individuals to take the business risks necessary for the successof the Company and its subsidiaries, the Company should contractually indemnifyits officers and directors, and the officers and directors of its subsidiaries,in connection with claims against such officers and directors in connection withtheir services to the Company and its subsidiaries, and has further concludedthat the failure to provide such contractual indemnification could bedetrimental to the Company, its subsidiaries and stockholders. NOW, THEREFORE, the parties, intending to be legally bound, hereby agree asfollows: 1. Definitions. (a) Agent. "Agent" with respect to the Company means any person who isor was a director, officer, employee or other agent of the Company or aSubsidiary of the Company; or is or was serving at the request of, for theconvenience of, or to represent the interests of, the Company or a Subsidiary ofthe Company as a director, officer, employee or agent of another entity orenterprise; or was a director, officer, employee or agent of a predecessorcorporation (or other predecessor entity or enterprise) of the Company or aSubsidiary of the Company, or was a director, officer, employee or agent ofanother enterprise at the request of, for the convenience of, or to representthe interests of such predecessor. (b) Expenses. "Expenses" means all direct and indirect costs of anytype or nature whatsoever (including, without limitation, all attorneys' fees,costs of investigation and related disbursements) incurred by the Indemnitee inconnection with the investigation, settlement, defense or appeal of a Proceedingcovered hereby or the establishment or enforcement of a right to indemnificationunder this Agreement. (c) Proceeding. "Proceeding" means any threatened, pending, orcompleted claim, suit or action, whether civil, criminal, administrative,investigative or otherwise. (d) Subsidiary. "Subsidiary" means any corporation or other entity ofwhich more than 10% of the outstanding voting securities or other votinginterests is owned directly or indirectly by the Company, and one or more otherSubsidiaries, taken as a whole. 2. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees with Indemnitee that,subject to Section 2(b), the Company shall obtain and maintain in full force andeffect directors' and officers' liability insurance ("D&O Insurance") inreasonable amounts as the Board of Directors shall determine from establishedand reputable insurers, but no less than the amounts in effect upon initialprocurement of the D&O Insurance. In all policies of D&O Insurance, Indemniteeshall be named as an insured. (b) Notwithstanding the foregoing, the Company shall have no obligationto obtain or maintain D&O Insurance if the Company determines in good faith thatthe premium costs for such insurance are (i) disproportionate to the amount ofcoverage provided after giving effect to exclusions, and (ii) substantially moreburdensome to the Company than the premiums charged to the Company for itsinitial D&O Insurance. 3. Mandatory Indemnification. The Company shall defend, indemnify andhold harmless Indemnitee: (a) Third Party Actions. If Indemnitee is a person who was or is aparty, or is threatened to be made a party, to any Proceeding (other than anaction by or in the right of the Company) by reason of the fact that Indemniteeis or was or is claimed to be an Agent of the Company, or by reason of anythingdone or not done by Indemnitee in any such capacity, or by reason of the factthat Indemnitee personally guaranteed any obligation of the Company at any time,against any and all Expenses and liabilities or any type whatsoever (including,but not limited to, legal fees, judgments, fines, ERISA excise taxes orpenalties, and amounts paid in settlement) incurred by such person in connectionwith the investigation, defense, settlement or appeal of such Proceeding, solong as the Indemnitee acted in good faith and in a manner the Indemniteereasonably believed to be in or not opposed to the best interests of theCompany, or, with respect to any criminal action or Proceeding, had noreasonable cause to believe such person's conduct was unlawful. (b) Derivative Actions. If Indemnitee is a person who was or is a party, or is threatened to be made a party, to any Proceeding by or in the rightof the Company by reason of the fact that he is or was an Agent of the Company,or by reason of anything done or not done by him in any such capacity, againstany and all Expenses and liabilities of any type whatsoever (including, but notlimited to, legal fees, judgments, fines, ERISA excise taxes or penalties, andamounts paid in settlement) incurred by him in connection with theinvestigation, defense, settlement or appeal of such Proceeding, so long as theIndemnitee acted in good faith and in a manner he reasonably believed to be inor not opposed to the best interests of the Company; except that noindemnification under this subsection shall be made, and Indemnitee shall repayall amounts previously advanced by the Company, in respect of any claim, issueor matter for which such person is judged in a final, non-appealable decision tobe liable to the Company by a court of competent jurisdiction due to willfulmisconduct in the performance of his duties to the Company, unless and only tothe extent that the court in which such Proceeding was brought or the Court ofChancery of Delaware shall determine that Indemnitee is fairly and reasonablyentitled to indemnity. (c) Actions Where Indemnitee Is Deceased. If Indemnitee is a person who was or is a party, or is threatened to be made a party, to any Proceeding byreason of the fact that he is or was an Agent of the Company, or by reason ofanything done or not done by him in any such capacity, and prior to, during thependency of, or after completion of, such Proceeding, the Indemnitee shall die,then the Company shall defend, indemnify and hold harmless the estate, heirs andlegatees of the Indemnitee against any and all Expenses and liabilities incurredby or for such persons or entities in connection with the investigation,defense, settlement or appeal of such Proceeding on the same basis as providedfor the Indemnitee in Sections 3(a) and 3(b) above. The Expenses and liabilities covered hereby shall be net of any payments byD&O Insurance carriers or others. 4. Partial Indemnification. If Indemnitee is found under Section 3, 6or 9 hereof not to be entitled to indemnification for all of the Expensesrelating to a Proceeding, the Company shall indemnify the Indemnitee for anyportion of such Expenses not specifically precluded by the operation of suchSection 3, 6 or 9. 5. Indemnification Procedures; Mandatory Advancement of Expenses. (a) Promptly after receipt by Indemnitee of notice to him or her of thecommencement or threat of any Proceeding covered hereby, Indemnitee shall notifythe Company of the commencement or threat thereof, provided that any failure toso notify shall not relieve the Company of any of its obligations hereunder. (b) If, at the time of the receipt of a notice pursuant to Section 5(a) above, the Company has D&O Insurance in effect, the Company shall giveprompt notice of the Proceeding or claim to its insurers in accordance with the procedures set forth in the applicable policies. The Company shall thereaftertake all necessary or desirable action to cause such insurers to pay all amountspayable as a result of such Proceeding in accordance with the terms of suchpolicies. (c) Indemnitee shall be entitled to retain one or more counsel from time to time selected by it in its sole discretion to act as its counsel in andfor the investigation, defense, settlement or appeal of each Proceeding. TheCompany shall not waive any privilege or right available to Indemnitee in anysuch Proceeding. (d) The Company shall bear all fees and Expenses (including invoices for advance retainers) of such counsel, and all fees and Expenses invoiced byother persons or entities, in connection with the investigation, defense,settlement or appeal of each such Proceeding. Such fees and Expenses arereferred to herein as "Covered Expenses." (e) Until a determination to the contrary under Section 6 hereof is made, the Company shall advance all Covered Expenses in connection with eachProceeding. If required by law, as a condition to such advances, Indemniteeshall, at the request of the Company, agree to repay such amounts advanced if itshall ultimately be determined by a final order of a court that Indemnitee isnot entitled to be indemnified by the Company by the terms hereof or underapplicable law. (f) Each advance to be made hereunder shall be paid by the Company toIndemnitee within 10 days following delivery of a written request therefor byIndemnitee to the Company. (g) The Company acknowledges the potentially severe damage to Indemniteeshould the Company fail timely to make such advances to Indemnitee. 6. Determination of Right to Indemnification. (a) To the extent Indemnitee has been successful on the merits orotherwise in defense of any Proceeding, claim, issue or matter covered hereby,Indemnitee need not repay any of the Expenses advanced in connection with theinvestigation, defense or appeal of such Proceeding. (b) If Section 6(a) is inapplicable, the Company shall remain obligatedto indemnify Indemnitee, and Indemnitee need not repay Expenses previouslyadvanced, unless the Company, by motion before a court of competentjurisdiction, obtains an order for preliminary or permanent relief suspending ordenying the obligation to advance or indemnify for Expenses. (c) Notwithstanding a determination by a court that Indemnitee is notentitled to indemnification with respect to a specific Proceeding, Indemniteeshall have the right to apply to the Court of Chancery of Delaware for thepurpose of enforcing Indemnitee's right to indemnification pursuant to thisAgreement. (d) Notwithstanding any other provision in this Agreement to thecontrary, the Company shall indemnify Indemnitee against all Expenses incurredby Indemnitee in connection with any Proceeding under Section 6(b) or 6(c) andagainst all Expenses incurred by Indemnitee in connection with any otherProceeding between the Company and Indemnitee involving the interpretation orenforcement of the rights of Indemnitee under this Agreement unless a court ofcompetent jurisdiction finds that each of the material claims and/or defenses ofIndemnitee in any such Proceeding were frivolous or made in bad faith. 7. Certificate of Incorporation and By-Laws. The Company agrees thatthe Company's Certificate of Incorporation and By-laws in effect on the datehereof shall not be amended to reduce, limit, hinder or delay (i) the rights ofIndemnitee granted hereby, or (ii) the ability of the Company to indemnifyIndemnitee as required hereby. The Company further agrees that it shallexercise the powers granted to it under its Certificate of Incorporation, itsBy-laws and by applicable law to indemnify Indemnitee to the fullest extentpossible as required hereby. 8. Witness Expenses. The Company agrees to compensate Indemnitee forthe reasonable value of his or her time spent, and to reimburse Indemnitee forall Expenses (including attorneys' fees and travel costs) incurred by him orher, in connection with being a witness, or if Indemnitee is threatened to bemade a witness, with respect to any Proceeding, by reason of his or her servingor having served as an Agent of the Company. 9. Exceptions. Notwithstanding any other provision hereunder to thecontrary, the Company shall not be obligated pursuant to the terms of thisAgreement: (a) Claims Initiated by Indemnitee. To indemnify or advance Expensesto Indemnitee with respect to Proceedings or claims initiated or broughtvoluntarily by Indemnitee and not by way of defense (other than Proceedingsunder Section 6(b) or Section 6(c) or brought to establish or enforce a right toindemnification under this Agreement or the provisions of the Company'sCertificate of Incorporation or By-laws unless a court of competent jurisdictiondetermines that each of the material assertions made by Indemnitee in suchProceeding were not made in good faith or were frivolous). (b) Unauthorized Settlements. To indemnify Indemnitee under thisAgreement for any amounts paid in settlement of a Proceeding covered herebywithout the prior written consent of the Company to such settlement. 10. Non-exclusivity. This Agreement is not the exclusive arrangementbetween the Company and Indemnitee regarding the subject matter hereof and shallnot diminish or affect any other rights which Indemnitee may have under anyprovision of law, the Company's Certificate of Incorporation or By-laws, underother agreements, or otherwise. 11. Continuation After Term. Indemnitee's rights hereunder shallcontinue after the Indemnitee has ceased acting as a director or Agent of theCompany and the benefits hereof shall inure to the benefit of the heirs,executors and administrators of Indemnitee. 12. Interpretation of Agreement. This Agreement shall be interpretedand enforced so as to provide indemnification to Indemnitee to the fullestextent now or hereafter permitted by law. 13. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the other provisions ofthe Agreement shall not in any way be affected or impaired thereby, and to thefullest extent possible, the provisions of this Agreement shall be construed oraltered by the court so as to remain enforceable and to provide Indemnitee withas many of the benefits contemplated hereby as are permitted under law. 14. Counterparts, Modification and Waiver. This Agreement may besigned in counterparts. This Agreement constitutes a separate agreement betweenthe Company and Indemnitee and may be supplemented or amended as to Indemniteeonly by a written instrument signed by the Company and Indemnitee, with suchamendment binding only the Company and Indemnitee. All waivers must be in awritten document signed by the party to be charged. No waiver of any of theprovisions of this Agreement shall be implied by the conduct of the parties. Awaiver of any right hereunder shall not constitute a waiver of any other righthereunder. 15. Notices. All notices, demands, consents, requests, approvals andother communications required or permitted hereunder shall be in writing andshall be deemed to have been properly given if hand delivered (effective uponreceipt or when refused), or if sent by a courier freight prepaid (effectiveupon receipt or when refused), in the case of the Company, at the addresseslisted below, or to such other addresses as the parties may notify each other inwriting. To Company: Amy R. Agress, Esq. Corporate Counsel Innodata Corporation Three University Plaza Hackensack, New Jersey 07601 With a copy to: Oscar D. Folger, Esq. 521 Fifth Avenue New York, NY 10175 To Indemnitee: At the Indemnitee's residence address and facsimile number on the records of the Company from time to time. 16. Evidence of Coverage. Upon request by Indemnitee, the Companyshall provide evidence of the liability insurance coverage required by thisAgreement. The Company shall promptly notify Indemnitee of any change in theCompany's D&O Insurance coverage. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have entered into thisIndemnification Agreement effective as of the date first above written. Innodata Corporation By :______________________ Jack S. Abuhoff Chairman and CEO (NAME) _________________________
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