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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-22196
INNODATA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3475943
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Three University Plaza
Hackensack, New Jersey 07601
(Address of principal executive offices) (Zip Code)
(201) 488-1200
(Registrant's telephone number)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12B-2).
YES / / NO /X/
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE.
21,572,000 shares of common stock, $.01 par value, as of July 31, 2003.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
-------------------
See pages 2-11
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
See pages 12-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
See page 19
Item 4. Controls and Procedures
-----------------------
See pages 19-20
PART ll. OTHER INFORMATION
- -------- -----------------
See page 21
1
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2003 2002
---- ----
Unaudited Derived from
audited
financial
statements
-------- --------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 5,787 $ 7,255
Accounts receivable-net 5,216 3,253
Refundable income taxes 1,467 1,491
Prepaid expenses and other current assets 776 706
Deferred income taxes 1,492 1,501
-------- --------
Total current assets 14,738 14,206
PROPERTY AND EQUIPMENT - NET 5,915 6,707
OTHER ASSETS 852 1,109
GOODWILL 675 675
-------- --------
TOTAL $ 22,180 $ 22,697
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,057 $ 2,655
Accrued salaries and wages 2,894 2,526
Income and other taxes 427 455
-------- --------
Total current liabilities 6,378 5,636
-------- --------
DEFERRED INCOME TAXES PAYABLE 1,291 1,492
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 75,000,000 shares; issued, 22,217,000
and 22,046,000 shares at June 30, 2003 and December 31, 2002, respectively 222 220
Additional paid-in capital 14,820 14,084
Retained earnings 1,515 3,264
-------- --------
16,557 17,568
Less: treasury stock - at cost; 645,000 and 610,000 shares at June 30, 2003 and
December 31, 2002 respectively (2,046) (1,999)
-------- --------
Total stockholders' equity 14,511 15,569
-------- --------
TOTAL $ 22,180 $ 22,697
======== ========
See notes to unaudited condensed consolidated financial statements
2
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands, except per share amounts)
(Unaudited)
- --------------------------------------------------------------------------------
2003 2002
-------- --------
REVENUES $ 8,056 $ 10,389
-------- --------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 6,408 8,805
Selling and administrative expenses 2,513 2,587
Interest income - net (6) (17)
-------- --------
Total 8,915 11,375
-------- --------
LOSS BEFORE BENEFIT FROM INCOME TAXES (859) (986)
BENEFIT FROM INCOME TAXES (223) (87)
-------- --------
NET LOSS $ (636) $ (899)
======== ========
BASIC LOSS PER SHARE $ (.03) $ (.04)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 21,466 21,586
======== ========
DILUTED LOSS PER SHARE $ (.03) $ (.04)
======== ========
ADJUSTED DILUTIVE SHARES OUTSTANDING 21,466 21,586
======== ========
See notes to unaudited condensed consolidated financial statements
3
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands, except per share amounts)
(Unaudited)
- --------------------------------------------------------------------------------
2003 2002
-------- --------
REVENUES $ 14,709 $ 22,945
-------- --------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 12,233 18,544
Selling and administrative expenses 4,559 5,070
Interest income - net (15) (21)
-------- --------
Total 16,777 23,593
-------- --------
LOSS BEFORE (BENEFIT FROM) PROVISION FOR INCOME TAXES (2,068) (648)
(BENEFIT FROM) PROVISION FOR INCOME TAXES (319) 8
-------- --------
NET LOSS $ (1,749) $ (656)
======== ========
BASIC LOSS PER SHARE $ (.08) $ (.03)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 21,451 21,518
======== ========
DILUTED LOSS PER SHARE $ (.08) $ (.03)
======== ========
ADJUSTED DILUTIVE SHARES OUTSTANDING 21,451 21,518
======== ========
See notes to unaudited condensed consolidated financial statements
4
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands)
(Unaudited)
- --------------------------------------------------------------------------------
2003 2002
------- -------
OPERATING ACTIVITIES:
Net loss income $(1,749) $ (656)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,131 2,819
Deferred income taxes (192) 120
Non-cash compensation 650 --
Tax benefit from exercise of stock options 3 --
Changes in operating assets and liabilities:
Accounts receivable (1,963) 2,778
Refundable income taxes 24 --
Prepaid expenses and other current assets (370) (396)
Other assets 224 (90)
Accounts payable and accrued expenses 402 (640)
Accrued salaries and wages 368 96
Income and other taxes (28) 11
------- -------
Net cash (used in) provided by operating activities (500) 4,042
------- -------
INVESTING ACTIVITIES:
Capital expenditures (1,006) (248)
------- -------
FINANCING ACTIVITIES:
Payment of acquisition notes -- (325)
Proceeds from exercise of stock options 38 61
------- -------
Net cash provided by (used in) financing activities 38 (264)
------- -------
(DECREASE) INCREASE IN CASH (1,468) 3,530
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 7,255 6,267
------- -------
CASH AND EQUIVALENTS, END OF PERIOD $ 5,787 $ 9,797
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 2 $ 218
======= =======
See notes to unaudited condensed consolidated financial statements
5
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
- --------------------------------------------------------------------------------
1. Innodata Corporation and subsidiaries (the "Company") is a provider of
digital asset services and solutions. Innodata delivers content
manufacturing / outsourcing, XML transformation, and XML (and related
standards-based) systems engineering and training through offices located
both in the U.S. and Asia. The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly
owned. All intercompany transactions and balances have been eliminated in
consolidation.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2003, the results of operations for the three and
six months ended June 30, 2003 and 2002, and the cash flows for the six
months ended June 30, 2003 and 2002. The results of operations for the six
months ended June 30, 2003 are not necessarily indicative of results that
may be expected for any other interim period or for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 2002 included
in the Company's Annual Report on Form 10-K. The accounting policies used
in preparing these financial statements are the same as those described in
the December 31, 2002 financial statements.
2. An analysis of the changes in each caption of stockholders' equity for the
six months ended June 30, 2003 (in thousands) is as follows.
Additional
Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
-------- -------- -------- -------- -------- --------
January 1, 2003 22,046 $ 220 $ 14,084 $ 3,264 $ (1,999) $ 15,569
Net loss -- -- -- (1,749) -- (1,749)
Issuance of common stock
upon exercise of stock options 171 2 83 -- (47) 38
Tax benefit from exercise
of options -- -- 3 -- -- 3
Non-cash compensation -- -- 650 -- -- 650
-------- -------- -------- -------- -------- --------
June 30, 2003 22,217 $ 222 $ 14,820 $ 1,515 $ (2,046) $ 14,511
======== ======== ======== ======== ======== ========
6
3. Basic loss per share is based on the weighted average number of common
shares outstanding without consideration of potential common stock. Diluted
loss per share is based on the weighted average number of common and
potential common shares outstanding. The difference between weighted
average common shares outstanding and adjusted dilutive shares outstanding
represents the dilutive effect of outstanding options.
Diluted net loss per share does not include potential common shares derived
from stock options because they are antidilutive. The number of
antidilutive securities excluded from the dilutable loss per share
calculation was 723,000 and 683,000 for the three and six months ended June
30, 2003, respectively.
The basis of the earnings per share computation for the three and six
months ended June 30, 2003 and 2002 (in thousands, except per share
amounts) is as follows:
Three Months Six Months
------------ ----------
2003 2002 2003 2002
---- ---- ---- ----
Net loss income $ (636) $ (899) $ (1,749) $ (656)
======= ======= ======== ========
Weighted average common shares outstanding 21,466 21,586 21,451 21,518
Dilutive effect of outstanding options -- -- -- --
------- ------- -------- --------
Adjusted for dilutive computation 21,466 21,586 21,451 21,518
======= ======= ======== ========
Basic loss income per share $ (.03) $ (.04) $ (.08) $ (.03)
======= ======= ======== ========
Diluted loss income per share $ (.03) $ (.04) $ (.08) $ (.03)
======= ======= ======== ========
4. The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the Company's financial statements.
5. The Company's operations are classified into two reporting segments: (1)
content services and (2) systems integration and training. The content
services operating segment aggregates, converts, tags and editorially
enhances digital content and performs XML transformations. The Company
offers such services as a comprehensive outsourcing solution and
individually as discrete activities. The Company's systems integration and
training operating segment offers system design, custom application
development, consulting services, and systems integration conforming to XML
and related standards and provides a broad range of introductory as well as
advanced curricula and training on XML and other knowledge management
standards.
7
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Revenues
- --------
Content services $ 6,590 $ 9,678 $ 12,361 $ 20,599
Systems and training services 1,466 711 2,348 2,346
--------------- --------------- --------------- ---------------
Total consolidated $ 8,056 $ 10,389 $ 14,709 $ 22,945
=============== =============== =============== ===============
(Loss) income before income taxes (a)
- -------------------------------------
Content services $ (1,052) $ (206) $ (1,968) $ 87
Systems and training services 193 (780) (100) (735)
--------------- --------------- --------------- ---------------
Total consolidated $ (859) $ (986) $ (2,068) $ (648)
=============== =============== =============== ===============
June 30, December 31,
2003 2002
---- ----
(in thousands)
Total assets
------------
Content services $ 19,813 $ 20,721
Systems and training services 2,367 1,976
--------------- ---------------
Total consolidated $ 22,180 $ 22,697
=============== ===============
(a) In 2002, corporate overhead was not allocated to the systems and
training services segment. In 2003, corporate overhead has been allocated
to the systems and training services segment based upon a percentage of
consolidated sales. For comparative purposes, income before income taxes
for the three and six months ended June 30, 2002 has been reclassified to
allocate corporate overhead using a method consistent with 2003.
6. In the three and six months ended June 30, 2003, the income tax benefit was
substantially lower as a percentage of the loss before income taxes than
the U.S. Federal statutory tax rate, principally due to losses attributable
to certain overseas subsidiaries not subject to income taxes, and certain
domestic losses for which tax benefits may not be available.
7. The Company has a $1 million line of credit with a bank, which, in August
2003, the Company secured by purchasing a $1 million certificate of
deposit. Interest is charged at the bank's alternate base rate. The line
expires on May 31, 2004. On April 15, 2003, the Company issued a $280,000
standby letter of credit related to software purchases, which expires on
October 31, 2003.
8. The Company has various stock-based employee compensation plans, which it
accounts for under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. In general, no stock-based employee compensation cost is
reflected in the results of operations, unless options granted under such
plans have an exercise price less than the market value of the underlying
common stock on the date of grant. The following table illustrates the
effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
8
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except (in thousands, except
per share amounts) per share amounts)
Net loss as reported $ (636) $ (899) $ (1,749) $ (656)
Deduct: Total stock-based employee
compensation determined under fair value
based method, net of related tax effects (1,527) (609) (2,146) (1,219)
Add: Compensation expense included in
the determination of net income as
reported, net of related tax effects,
related to the extension of stock options 455 -- 455 --
-------- -------- -------- ---------
Pro forma net loss $ (1,708) $ (1,508) $ (3,440) $ (1,875)
======== ======== ======== =========
Loss income per share:
Basic - as reported $ (.03) $ (.04) $ (.08) $ (.03)
======== ======== ======== =========
Basic - pro forma $ (.08) $ (.07) $ (.16) $ (.09)
======== ======== ======== =========
Diluted - as reported $ (.03) $ (.04) $ (.08) $ (.03)
======== ======== ======== =========
Diluted - pro forma $ (.08) $ (.07) $ (.16) $ (.09)
======== ======== ======== =========
9. In the second quarter 2003, the Company extended the expiration date of
options ranted to certain officers, directors and employees, substantially
all of which were vested, to purchase 315,000, 566,000, 522,000 and
133,000 shares of its common stock at $.47, $.50, $.67 and $2.00,
respectively. In connection with the extension, the option holders agreed
not to sell shares of stock acquired upon exercise of the extended options
for designated periods of time ending between June 2004 to March 2005. In
connection with this transaction, compensation expense of approximately
$650,000 was recorded in second quarter of 2003 based upon the difference
between the exercise price and the market price of the underlying common
stock on the date the options were extended. Compensation expense is
included as a component of selling and administrative.
10. In connection with the cessation of all operations at certain foreign
subsidiaries, certain former employees have filed various illegal
dismissal actions in the Philippines seeking, among other remedies,
reinstatement of employment, payment of back wages and damages
approximating one million dollars. Outside counsel has advised management
that under the circumstances, the Company is not legally obligated to pay
severance to such terminated employees. Based upon the advice of counsel,
management believes the actions are substantially without merit and
intends to defend the actions vigorously.
In addition, one of the foreign subsidiaries which ceased operations has
been presented with a tentative tax assessment by the Philippine Bureau of
Internal Revenue for an amount approximating $400,000, plus applicable
interest and penalties. Management believes the tentative assessment is
principally without substance and any amounts that might ultimately be
paid in settlement (which is not expected to be material) have been
accrued.
9
In addition, the Company is subject to various legal proceedings and claims
which arise in the ordinary course of business.
While management currently believes that that ultimate outcome of all these
proceedings will not have a material adverse effect on the Company's
financial position or overall trends in results of operations, litigation
is subject to inherent uncertainties. Were an unfavorable ruling to occur,
there exists the possibility of a material adverse impact on the operating
results of the period in which the ruling occurs. In addition, the estimate
of potential impact on the Company's financial position or overall results
of operations for the above legal proceedings could change in the future.
11. The Company's production facilities are located in the Philippines, India
and Sri Lanka. To the extent that the currencies of these countries
fluctuate, the Company is subject to risks of changing costs of production
after pricing is established for certain customer projects. However, most
significant contracts contain provisions for price renegotiation.
12. The Company is obligated under certain circumstances to indemnify directors
and certain officers against costs and liabilities incurred in actions or
threatened actions brought against such individual because such individual
acted in the capacity of director and / or officer of the Company. In
addition, the Company has contracts with certain clients pursuant to which
the Company has agreed to indemnify the client for certain specified and
limited claims. These indemnification obligations are in the ordinary
course of business and, in many cases, do not include a limit on maximum
potential future payments. As of June 30, 2003, the Company has not
recorded a liability for any obligations arising as a result of these
indemnifications.
13. In connection with the procurement of tax incentives at one of the
company's foreign subsidiaries, the foreign zoning authority was granted a
first lien on the subsidiary's property and equipment. As of June 30, 2003,
such equipment had a book value of approximately $600,000.
14. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 requires that
liabilities associated with the exit or disposal activity be recognized
only when the liability is incurred. SFAS No. 146 is effective for exit and
disposal activities that are initiated after December 31, 2002. The Company
does not expect SFAS No. 146 to have a material impact upon its financial
statements.
15. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS No. 148), which amends SFAS
No. 123. SFAS No. 148 provides alternate methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based compensation, and requires enhanced disclosure about the method
used and the effect of the method used on reported results. Under SFAS No.
148, stock-based compensation disclosures must be included with the summary
of significant accounting policies and made both quarterly and annually.
The Company does not plan to adopt the fair value method of accounting for
stock-based compensation.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company
Disclosures in this Form 10-Q contain certain forward-looking statements,
including without limitation, statements concerning the Company's operations,
economic performance and financial condition. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words "intend", "believe," "expect,"
"anticipate" and other similar expressions generally identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates.
These forward-looking statements are based largely on the Company's current
expectations, and are subject to a number of risks and uncertainties, including
without limitation, continuation or worsening of present depressed market
conditions, changes in external market factors, the ability and willingness of
the Company's clients and prospective clients to execute business plans which
give rise to requirements for digital content and professional services in
knowledge processing, difficulty in integrating and deriving synergies from
acquisitions, potential undiscovered liabilities of companies that the Company
acquires, changes in the Company's business or growth strategy, the emergence of
new or growing competitors, various other competitive and technological factors,
and other risks and uncertainties indicated from time to time in the Company's
filings with the Securities and Exchange Commission.
Actual results could differ materially from the results referred to in the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the results referred to in the forward-looking statements
contained in this Form 10-Q will in fact occur. We make no commitment to revise
or update any forward-looking statements in order to reflect events or
circumstances after the date any such statement is made.
The Company
Innodata Corporation ("Innodata" or the "Company") is a leading provider of
digital content outsourcing services. It delivers content manufacturing and XML-
related digital asset services to online information providers and companies in
the telecommunications, technology, healthcare, defense, and Internet commerce
sectors. It has over 100 active clients, including Amazon.com, Dow Jones &
Company, Lockheed Martin Corporation, ProQuest Company, Reed Elsevier, Reuters,
Simon & Schuster, The Thomson Corporation, and Wolters Kluwer.
The Company operates through three divisions. Its Content Division
aggregates, converts, tags and editorially enhances digital content - services
the Company refers to collectively as "content manufacturing" services. The
Company offers content manufacturing services as a comprehensive outsourcing
solution and individually as discrete activities. The Content Division also
transforms data to Extensible Markup Language (XML). The Company's Systems
Division offers system design, custom application development, consulting
services, and systems integration conforming to XML and related standards. The
Company's Training Division provides a broad range of introductory as well as
advanced curricula and training on XML and other knowledge management standards.
11
For financial reporting purposes, the Company's operations have been
classified into two reporting segments: (1) content services and (2) systems
integration and training. The results of the Training Division, which are below
the level required for reporting as a separate segment, have been combined with
the results of the Systems Division due to the nature of services provided.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Revenues decreased 22% to $8,056,000 for the three months ended June 30,
2003 compared to $10,389,000 for the similar period in 2002. Revenues from the
content services segment decreased 32% to $6,591,000 for the three months ended
June 30, 2003 compared to $9,678,000 for the similar period in 2002. The
decrease principally reflects the decline in revenues of approximately $5
million from two clients whose largest projects were substantially completed in
2002. The shortfall was replaced in part by increased revenue from a third
client of approximately $1.7 million. Revenues from the Company's systems and
training segment were $1,465,000 for the three months ended June 30, 2003 and
$711,000 for the similar period in 2002. The increase was principally
attributable to an increase in the quantity and size of system integration
projects booked in 2003.
One client, comprising multiple entities and divisions worldwide, accounted
for 37% and 11% of the Company's revenues for the three months ended June 30,
2003 and 2002, respectively. One other client, whose projects were substantially
completed in 2002, accounted for 39% of the Company's revenues in the three
months ended June 30, 2002. A third client accounted for 11% of the Company's
revenues in the 2002 period. Further, in the three months ended June 30, 2003
and 2002, revenues from clients located in foreign countries (principally
Europe), accounted for 48% and 18%, respectively, of the Company's revenues.
Direct operating expenses were $6,408,000 and $8,805,000 for the three
months ended June 30, 2003 and 2002, respectively, a decrease of 27%. Direct
operating expenses as a percentage of revenues were 80% in 2003 and 85% in 2002.
Direct operating expenses for the content services segment were $5,574,000 and
$7,789,000 in the three months ended June 30, 2003 and 2002, respectively, a
decrease of 28%. Direct operating expenses as a percentage of revenues for the
content services segment were 85% and 80% in the three months ended June 30,
2003 and 2002, respectively. The dollar decrease for the content services
segment in the 2003 period was principally due to a reduction in labor costs
associated with lower revenues, and to reductions in fixed costs associated with
the Company's cost reduction initiatives. The percentage increase for the
content services segment was primarily attributable to higher production labor
costs as a percent of revenues. Direct operating expenses primarily include
direct payroll, telecommunications, depreciation, equipment lease costs,
computer services, supplies and occupancy.
12
Direct operating expenses for the Company's systems and training segment
were $834,000 and $1,016,000 for the three months ended June 30, 2003 and 2002,
respectively. Direct operating expenses as a percent of revenues for the
Company's systems and training segment were 57% and 143% in the three months
ended June 30, 2003 and 2002, respectively. The dollar decrease in the 2003
period was principally due to a reduction in labor costs associated with the
Company's cost reduction initiatives that were implemented during the second
half of 2002. The decrease as a percent of revenues for the systems and training
segment was primarily attributable to the increase in revenues without a
corresponding increase in direct operating expenses.
Selling and administrative expenses were $2,513,000 and $2,587,000 for the
three months ended June 30, 2003 and 2002, respectively. Selling and
administrative expenses for the three months ended June 30, 2003 include a
non-cash compensation charge of approximately $650,000 (described in note 9 to
the Condensed Consolidated Financial Statements). Excluding this charge, overall
selling and administrative expenses for the three months ended June 30, 2003
would have decreased by approximately $724,000, or 28%, from the similar period
in 2002. This decrease was primarily attributable to our cost reduction
initiatives that were implemented during the second half of 2002. Selling and
administrative expenses primarily include management and administrative
salaries, sales and marketing costs, and administrative overhead.
Selling and administrative expenses for the content services segment were
$2,075,000 and $2,179,000 for the three months ended June 30, 2003 and 2002,
respectively, a decrease of 5%. The reasons for the decline are described above.
Selling and administrative expenses as a percentage of revenues for the content
services segment increased to 31% in the 2003 period from 23% in the 2002 period
primarily due to the non-cash compensation charge (of which $585,000 was
attributable to the content services segment) described above. Excluding the
non-cash compensation charge, selling and administrative expenses as a
percentage of revenues for the content services segment would have been 23% in
both the 2003 and 2002 periods.
Selling and administrative expenses for the systems and training segment
were $438,000, or 30% of revenues, in the three months ended June 30, 2003
compared to $408,000, or 57% of revenues, for three months ended June 30, 2002.
The decrease in selling and administrative expenses as a percent of revenues was
primarily attributable to the increase in revenues without a corresponding
increase in direct operating expenses.
In the second quarter 2003, the income tax benefit as a percentage of the
loss before income taxes was 26%, which is lower than the U.S. Federal statutory
tax rate principally due to losses attributable to certain overseas subsidiaries
not subject to income taxes, and certain domestic losses for which tax benefits
may not be available.
13
Six Months Ended June 30, 2003 and 2002
Revenues decreased 36% to $14,709,000 for the six months ended June 30,
2003 compared to $22,945,000 for the similar period in 2002. Revenues from the
content services segment decreased 40% to $12,362,000 for the six months ended
June 30, 2003 compared to $20,599,000 for the similar period in 2002. The
decrease principally reflects the decline in revenues of approximately $11
million from two clients whose largest projects were substantially completed in
2002. The shortfall was replaced in part by increased revenue from a third
client of approximately $2.7 million. Revenues from the Company's systems and
training segment were $2,347,000 for the six months ended June 30, 2003 and
$2,346,000 for the similar period in 2002.
One client, comprising multiple entities and divisions worldwide, accounted
for 36% and 11% of the Company's revenues for the six months ended June 30, 2003
and 2002, respectively. Two other clients, whose projects were substantially
completed in 2002, accounted for 37% and 15% of the Company's revenues in the
six months ended June 30, 2002. Further, in the six months ended June 30, 2003
and 2002, revenues from clients located in foreign countries (principally
Europe), accounted for 47% and 17%, respectively, of the Company's revenues.
Direct operating expenses were $12,233,000 and $18,544,000 for the six
months ended June 30, 2003 and 2002, respectively, a decrease of 34%. Direct
operating expenses as a percentage of revenues were 83% in 2003 and 81% in 2002.
Direct operating expenses for the content services segment were $10,587,000 and
$16,438,000 in the six months ended June 30, 2003 and 2002, respectively, a
decrease of 36%. Direct operating expenses as a percentage of revenues for the
content services segment were 86% and 80% in the six months ended June 30, 2003
and 2002, respectively. The dollar decrease for the content services segment in
the 2003 period was principally due to a reduction in labor costs associated
with lower revenues, and to reductions in fixed costs associated with the
Company's cost reduction initiatives. The percentage increase for the content
services segment was primarily attributable to higher production labor costs as
a percent of sales, and to the decrease in revenues without a corresponding
decrease in management and fixed non-labor costs. Direct operating expenses
primarily include direct payroll, telecommunications, depreciation, equipment
lease costs, computer services, supplies and occupancy.
Direct operating expenses for the Company's systems and training segment
were $1,646,000 and $2,106,000 for the six months ended June 30, 2003 and 2002,
respectively. Direct operating expenses as a percent of revenues for the
Company's systems and training segment were 70% and 90% in the three months
ended June 30, 2003 and 2002, respectively. The dollar decrease and the decrease
as a percent of revenues in the 2003 period were principally due to a reduction
in labor costs associated with the company's cost reduction initiatives that
were implemented during the second half of 2002.
14
Selling and administrative expenses were $4,559,000 and $5,070,000 for the
six months ended June 30, 2003 and 2002, respectively, a decrease of 10%.
Selling and administrative expenses for the six months ended June 30, 2003
include a non-cash compensation charge of approximately $650,000 (described in
note 9 to the Condensed Consolidated Financial Statements). Excluding this
charge, overall selling and administrative expenses for the six months ended
June 30, 2003 would have decreased by $1,161,000, or 23%, from the similar
period in 2002. This decrease was primarily attributable to our cost reduction
initiatives that were implemented during the second half of 2002. Selling and
administrative expenses primarily include management and administrative
salaries, sales and marketing costs, and administrative overhead.
Selling and administrative expenses for the content services segment were
$3,758,000 and $4,240,000 for the six months ended June 30, 2003 and 2002,
respectively, a decrease of 11%. The reasons for the decline are described
above. Selling and administrative expenses as a percentage of revenues for the
content services segment increased to 34% in the 2003 period from 21% in the
2002 period primarily due to the non-cash compensation charge (of which $585,000
was attributable to the content services segment) described above. Excluding the
non-cash compensation charge, selling and administrative expenses as a
percentage of revenues for the content services segment would have been 26% in
the 2003 period, compared to 21% in the 2002 period. This increase as a
percentage of sales was primarily attributable to the decrease in revenues
without a corresponding decrease in such expenses.
Selling and administrative expenses for the systems and training segment
were $801,000, or 34% of revenues, in the six months ended June 30, 2003
compared to $830,000, or 35% of revenues, for six months ended June 30, 2002.
In the six months ended June 30, 2003, the income tax benefit as a
percentage of the loss before income taxes was 15%, which is substantially lower
than the U.S. Federal statutory tax rate principally due to losses attributable
to certain overseas subsidiaries not subject to income taxes, and certain
domestic losses for which tax benefits may not be available.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources are as follows:
June 30, 2003 December 31, 2002
------------- -----------------
Cash and Cash Equivalents $5,787,000 $7,255,000
Working Capital 8,360,000 8,570,000
Stockholders' Equity Per Common Share* $.67 $.73
* Represents total stockholders' equity divided by the actual number of
common shares outstanding (which excludes treasury stock).
Net Cash (Used In) Provided By Operating Activities
- ---------------------------------------------------
Net cash used in operating activities was $500,000 in the six months ended
June 30, 2003 compared to $4,042,000 provided by operating activities for the
six months ended June 30, 2002, a decrease of approximately $4.5 million. The
decrease was primarily due to a decrease in net income of $1.1 million, a
decrease in non-cash charges of approximately $350,000 and a net increase in
changes in operating assets and liabilities of $3.1 million. The $3.1 million
net increase in operating assets and liabilities was principally comprised of a
$4.7 million change in accounts receivable, partially offset by a $1 million
change in accounts payable and accrued expenses.
15
Accounts receivable totaled $5,216,000 at June 30, 2003, representing
approximately 56 days of sales outstanding, compared to $3,253,000, or 52 days,
at December 31, 2002. The increase in accounts receivable resulted principally
from higher revenues in the months of May and June that were not collected as of
June 30, 2003.
A significant amount of the Company's revenues are derived from clients in
the publishing industry. Accordingly, the Company's accounts receivable
generally include significant amounts due from such clients. In addition, as of
June 30, 2003, approximately 50% of the Company's accounts receivable was from
foreign (principally European) clients, and 38% of accounts receivable was due
from the Company's largest customer.
Net Cash Used in Investing Activities
- -------------------------------------
During the six months ended June 30, 2003, the Company spent approximately
$1,006,000 for capital expenditures, compared to approximately $248,000 in the
six months ended June 30, 2002. For the remainder of 2003, the Company
anticipates spending an additional $2.0 million, with similar capital spending
levels possible in 2004. Such 2003 past and anticipated capital spending relates
to project requirement specific equipment for certain new projects, normal
ongoing equipment upgrades and replacement, and costs related to the purchase
and implementation of new management information systems.
Availability of Funds
- ---------------------
The Company replaced its expired line of credit with a $1 million bank line
of credit which is secured by a $1 million certificate of deposit. Interest is
charged at the bank's alternate base rate. The line expires on May 31, 2004. The
Company has not borrowed against the line in 2003.
On April 15, 2003, the Company issued a $280,000 standby letter of credit
related to software license purchases which expires on October 31, 2003.
Management believes that existing cash and internally generated funds will
be sufficient for reasonably anticipated working capital and capital expenditure
requirements during the next 12 months. The Company funds its foreign
expenditures from its U.S. corporate headquarters on an as-needed basis.
INFLATION, SEASONALITY AND PREVAILING ECONOMIC CONDITIONS
To date, inflation has not had a significant impact on the Company's
operations. The Company generally performs its work for its clients under
project-specific contracts, requirements-based contracts or long-term contracts.
Contracts are typically subject to numerous termination provisions. The
Company's revenues are not significantly affected by seasonality.
16
CRITICAL ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
------------------------------------------
Management's discussion and analysis of its results of operations and
financial condition is based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to accounts receivable.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Allowance for Doubtful Accounts
-------------------------------
The Company records an allowance for doubtful accounts for estimated losses
resulting from the inability of its clients to make required payments. If the
financial condition of the Company's clients were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
necessary.
Revenue Recognition
-------------------
Revenue is recognized in the period in which services are performed and
delivered.
Depreciation
------------
Depreciation is provided on the straight-line method over the estimated
useful lives of the related assets, which is two to five years. Leasehold
improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the lives of the leases.
Income Taxes
------------
Deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates, as
well as any net operating loss or tax credit carryforwards expected to reduce
taxes payable in future years. A valuation allowance is provided when it is more
likely than not that some or all of a deferred tax asset will not be realized.
Unremitted earnings of foreign subsidiaries have been included in the
consolidated financial statements without giving effect to the United States
taxes that may be payable on distribution to the United States to the extent
such earnings are not anticipated to be remitted to the United States.
17
Goodwill and Other Intangible Assets
------------------------------------
SFAS 142 requires that goodwill be tested for impairment at the reporting
unit level (segment or one level below a segment) on an annual basis and between
annual tests in certain circumstances. Application of the goodwill impairment
test requires judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit.
Accounting for Stock-Based Compensation
---------------------------------------
The Company accounts for stock-based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. In general, no
stock-based employee compensation cost is reflected in the results of
operations, unless options granted under those plans have an exercise price that
is less than the market value of the underlying common stock on the date of
grant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate change market risk with respect to
its credit facility with a financial institution which is priced based on the
bank's alternate bank rate. At June 30, 2003, there were no borrowings under the
credit facility. To the extent the Company utilizes all or a portion of its line
of credit, changes in the interest rate during fiscal 2003 will have a positive
or negative effect on the Company's interest expense.
The Company has operations in foreign countries. While it is exposed to
foreign currency fluctuations, the Company presently has no financial
instruments in foreign currency and does not maintain funds in foreign currency
beyond those necessary for operations.
Item 4. Controls and Procedures
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Accounting Officer, of the effectiveness of the design and the operation of our
"disclosure controls and procedures" (as such term is defined in Rules 13a-14(c)
under the Securities Exchange Act of 1934) as of June 30, 2003. This evaluation
took place as of a date within 90 days prior to the filing date of this
quarterly report. Based on such evaluation, our Chief Executive Officer and
Chief Accounting Officer have concluded that, as of June 30, 2003, the
disclosure controls and procedures are reasonably designed and effective to
ensure that (i) information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and (ii) such information is accumulated and communicated to the our
management, including our Chief Executive Officer and Chief Accounting Officer,
as appropriate to allow timely decisions regarding required disclosure.
18
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings. Not Applicable
-----------------
Item 2. Changes in Securities. Not Applicable
---------------------
Item 3. Defaults upon Senior Securities. Not Applicable
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable
---------------------------------------------------
Item 5. Other Information. Not Applicable
-----------------
Item 6. (a) Exhibits.
--------
10.10 Form of lockup for options extended in the second quarter
of 2003.
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a) under the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer required by Rule
13a-14(a) under the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer required by Rule
13a-14(b) under the Securities Exchange Act of 1934.
32.2 Certification of Principal Financial Officer required by Rule
13a-14(b) under the Securities Exchange Act of 1934.
(b) Form 8-K Report.
----------------
During the quarter for which this report is filed, the Company
furnished a current report on Form 8-K dated May 14, 2003 which reported the
Company's results for the first quarter ended March 31, 2003 under Item 9.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNODATA CORPORATION
Date: August 13, 2003 /s/ Jack Abuhoff
--------------- ---------------------------------------------
Jack Abuhoff
Chairman of the Board of Directors,
Chief Executive Officer and President
Date: August 13, 2003 /s/ Stephen Agress
--------------- ---------------------------------------------
Stephen Agress
Vice President - Finance
Chief Accounting Officer