Back to GetFilings.com
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 March 31, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-22196
INNODATA ISOGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3475943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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.
21,969,388 shares of common stock, $.01 par value, as of April 30, 2004.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
See pages 2-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
See pages 10-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See page 16
Item 4. Controls and Procedures
See page 17
PART ll. OTHER INFORMATION
See page 18
1
INNODATA ISOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
2004 2003
----------- -----------
Unaudited Derived from
audited
financial
statements
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 10,316 $ 5,051
Cash and equivalents - restricted 1,000 1,000
Accounts receivable-net 7,945 8,497
Refundable income taxes -- 1,075
Prepaid expenses and other current assets 1,136 999
Deferred income taxes 483 1,421
----------- -----------
Total current assets 20,880 18,043
PROPERTY AND EQUIPMENT - NET 5,380 5,628
OTHER ASSETS 839 800
GOODWILL 675 675
----------- -----------
TOTAL $ 27,774 $ 25,146
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,498 $ 2,451
Accrued salaries and wages 3,338 2,865
Income and other taxes 607 598
Current portion of capital lease obligations 150 146
----------- -----------
Total current liabilities 6,593 6,060
----------- -----------
DEFERRED INCOME TAXES PAYABLE 1,417 1,410
----------- -----------
OBLIGATIONS UNDER CAPITAL LEASE 231 272
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 75,000,000 shares;
issued 22,554,000 and 22,535,000 shares at March 31, 2004
and December 31, 2003 respectively 226 226
Additional paid-in capital 15,462 15,413
Retained earnings 5,819 3,739
----------- -----------
21,507 19,378
Less: treasury stock - at cost; 584,000 shares (1,974) (1,974)
----------- -----------
Total stockholders' equity 19,533 17,404
----------- -----------
TOTAL $ 27,774 $ 25,146
=========== ===========
See notes to unaudited condensed consolidated financial statements
2
INNODATA ISOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(In thousands, except per share amounts)
(Unaudited)
- --------------------------------------------------------------------------------
2004 2003
-------- --------
REVENUES $ 12,157 $ 6,653
-------- --------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 7,775 5,825
Selling and administrative expenses 2,254 2,046
Bad debt recovery - net (963) --
Interest expense (income) - net 1 (9)
-------- --------
Total 9,067 7,862
-------- --------
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES 3,090 (1,209)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 1,010 (96)
-------- --------
NET INCOME (LOSS) $ 2,080 $ (1,113)
======== ========
BASIC INCOME (LOSS) PER SHARE $ .09 $ (.05)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 21,952 21,436
======== ========
DILUTED INCOME (LOSS) PER SHARE $ .08 $ (.05)
======== ========
ADJUSTED DILUTIVE SHARES OUTSTANDING 24,527 21,436
======== ========
See notes to unaudited condensed consolidated financial statements
3
INNODATA ISOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 and 2003
(In thousands)
(Unaudited)
- --------------------------------------------------------------------------------
2004 2003
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 2,080 $ (1,113)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,046 1,049
Non-cash compensation 13 --
Tax benefit from exercise of stock options 14 --
Deferred income taxes 945 (13)
Changes in operating assets and liabilities:
Accounts receivable 552 (1,277)
Refundable income taxes 1,075 79
Prepaid expenses and other current assets (314) (166)
Other assets (56) 233
Accounts payable and accrued expenses 47 (120)
Accrued salaries and wages 473 180
Income and other taxes 9 (54)
-------- --------
Net cash provided by (used in) operating
activities 5,884 (1,202)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (604) (288)
-------- --------
FINANCING ACTIVITIES:
Payment of obligations under capital lease (37) --
Proceeds from exercise of stock options 22 --
-------- --------
Net cash used in financing activities (15) --
-------- --------
INCREASE (DECREASE) IN CASH 5,265 (1,490)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 5,051 7,255
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 10,316 $ 5,765
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4 --
======== --------
Income taxes $ 15 $ 2
======== ========
See notes to unaudited condensed consolidated financial statements
4
INNODATA ISOGEN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
- --------------------------------------------------------------------------------
1. Innodata Isogen, Inc. and subsidiaries (the "Company"), is a leading
provider of digital asset services and solutions. The Company's solutions
encompass both the manufacture of content (for which the Company provides
services such as digitization, imaging, data conversion, XML and markup
services, metadata creation, advanced classification services, editorial
and knowledge services) as well as the design, implementation, integration
and deployment of the systems used to manage content (for which the
Company provides custom application development, consulting and training.)
through offices located both in the U.S. and Asia. The consolidated
financial statements include the accounts of Innodata Isogen, Inc. 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 March 31, 2004, the results of operations and the cash
flows for the three months ended March 31, 2004 and 2003. The results of
operations for the three months ended March 31, 2004 and 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,
2003 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, 2003 financial statements.
2. An analysis of the changes in each caption of stockholders' equity for the
three months ended March 31, 2004 and 2003 (in thousands) is as follows.
Additional
Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
January 1, 2004 22,535 $ 226 $ 15,413 $ 3,739 $ (1,974) $ 17,404
Net income -- -- -- 2,080 -- 2,080
Issuance of common stock
upon exercise of stock options 19 -- 22 -- -- 22
Tax benefit from exercise
of options -- -- 14 -- -- 14
Non-cash compensation -- -- 13 -- -- 13
-------- -------- -------- -------- -------- --------
March 31, 2004 22,554 $ 226 $ 15,462 $ 5,819 $ (1,974) $ 19,533
======== ======== ======== ======== ======== ========
January 1, 2003 22,046 $ 220 $ 14,084 $ 3,264 $ (1,999) $ 15,569
Net Loss -- -- -- (1,113) -- (1,113)
-------- -------- -------- -------- -------- --------
March 31, 2003 22,046 $ 220 $ 14,084 $ 2,151 $ (1,999) $ 14,456
======== ======== ======== ======== ======== ========
Basic income (loss) per share is based on the weighted average number of
common shares outstanding without consideration of potential common stock.
Diluted income (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. Options
to purchase 1.3 million shares of common stock in 2004 and 4.4 million
shares of common stock in 2003 were outstanding but not included in the
computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and
therefore, the effect would have been antidilutive. In addition, for 2003,
diluted net loss per share does not include 642,000 potential common
shares derived from stock options because they are antidilutive.
6
The basis of the earnings (loss) per share computation for the three
months ended March 31, 2004 and 2003 (in thousands, except per share
amounts) is as follows:
Three Months
2004 2003
-------- --------
Net income (loss) $ 2,080 $ (1,113)
-------- --------
Weighted average common shares outstanding 21,952 21,436
Dilutive effect of outstanding options 2,575 --
-------- --------
Adjusted for dilutive computation 24,527 21,436
======== ========
Basic income (loss) per share $ .09 $ (.05)
======== ========
Diluted income (loss) per share $ .08 $ (.05)
======== ========
3. 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.
Three months ended
March 31,
2004 2003
------- ---------
(in thousands, except
per share amounts)
Net income (loss) as reported $ 2,080 $ (1,113)
Deduct: Total stock-based employee
compensation determined under fair value
based method, net of related tax effects (515) (619)
------- ---------
Pro forma net income (loss) $ 1,565 $ (1,732)
======= =========
Income (loss) per share:
Basic - as reported $ .09 $ (.05)
======= =========
Basic - pro forma $ .07 $ (.08)
======= =========
Diluted - as reported $ .08 $ (.05)
======= =========
Diluted - pro forma $ .06 $ (.08)
======= =========
4. The Company's operations are classified into two reporting segments: (1)
content services and (2) professional services. The content services
operating segment aggregates, converts, tags and editorially enhances
digital content and performs XML transformations. The Company's
7
professional services 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.
Commencing October 1, 2003, the Company unified its selling and marketing
activities for its content and professional services segments. As such,
substantially all selling and administrative costs are no longer
segregated by separate segment. For the three months ended March 31, 2004,
selling and administrative expenses were allocated to each of the
operating segments based upon the percentage of revenues each segment
contributes to consolidated revenues.
Three Months
Ended March 31,
2004 2003
-------- --------
(in thousands)
Revenues
Content services $ 8,821 $ 5,771
Professional services 3,336 882
-------- --------
Total consolidated $ 12,157 $ 6,653
======== ========
Income (loss) before income taxes
Content services $ 1,884 $ (916)
Professional services 1,206 (293)
-------- --------
Total consolidated $ 3,090 $ (1,209)
======== ========
March 31, December 31
2004 2003
-------- --------
(in thousands)
Total assets
Content services $ 23,080 $ 20,986
Professional services 4,694 4,160
-------- --------
Total consolidated $ 27,774 $ 25,146
======== ========
5. Restricted cash at March 31, 2004 represents a 90 day certificate of
deposit, which collateralizes a $1 million bank line of credit.
6. The Company has a $1 million line of credit with a bank, which, is secured
by a $1 million certificate of deposit. Interest is charged at the bank's
alternate base rate (4% at March 31, 2004). The line expires on May 31,
2004.
7. In the three months ended March 31, 2004, the provision for income taxes
as a percentage of income before income taxes was 33%, which is lower than
the U.S. Federal statutory tax rate, principally due to certain overseas
income which is neither subject to foreign income taxes because of tax
holidays granted to the Company, nor subject to tax in the U.S. unless
repatriated. In addition, the provision for income taxes for the three
months ended March 31, 2004 includes a provision for state and local
8
income taxes of approximately $150,000. In the three months ended March
31, 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.
8. In January 2004, the Company reached a settlement agreement and received
$1,000,000 cash from a former client as full satisfaction of a $2.6
million dollar remaining outstanding balance that the Company had fully
written off as a bad debit in 2001. The $1,000,000 receipt, net of $37,000
in recovery costs, is reflected as bad debt recovery income in the
statement of operations for the three months ended March 31, 2004.
9. In connection with the cessation of all operations at certain foreign
subsidiaries, certain former employees have filed various actions in the
Philippines relating to their dismissal 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, the Company is subject to various legal proceedings and
claims which arise in the ordinary course of business.
While management currently believes that the 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.
10. 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.
11. 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 March 31, 2004, the
Company is not aware of liability for any obligations arising as a result
of these indemnifications.
9
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, worsening of present 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 Isogen, Inc. (the "Company") is a leading provider of digital
asset services and solutions. The Company's solutions encompass both the
manufacture of content (for which the Company provides services such as
digitization, imaging, data conversion, XML and markup services, metadata
creation, advanced classification services, editorial and knowledge services) as
well as the design, implementation, integration and deployment of the systems
used to manage contant (for which the Company provides custom application
development, consulting and training) through offices located both in the US and
Asia. The Company has approximately 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's management currently monitors its operations through two
reporting segments: (1) content services and (2) professional services (formerly
referred to as systems integration and training). The content services operating
segment aggregates, converts, tags and editorially enhances digital content and
10
performs XML transformations. The Company's professional services 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.
Results of Operations
Three Months Ended March 31, 2004 and 2003
Revenues increased 83% to $12,157,000 for the three months ended March 31,
2004 compared to $6,653,000 for the similar period in 2003. Revenues from the
content services segment increased 53% to $8,821,000 for the three months ended
March 31, 2004 compared to $5,771,000 for the similar period in 2003. The
increase was principally due to increased revenues from four existing clients
and one client added late in 2003.
Revenues from the Company's professional services segment increased 278%
to $3,336,000 for the three months ended March 31, 2004 compared to $882,000 for
the similar period in 2003. The increase was principally attributable to an
increase in the quantity and size of systems integration and consulting
projects. For the three months ended March 31, 2004, revenues from four clients
accounted for approximately 84% of professional services segment revenues; in
the similar period in 2003, two clients accounted for approximately 46% of
professional services segment revenues.
One client, comprising multiple entities and divisions worldwide,
accounted for 23% and 33% of the Company's revenues for the three months ended
March 31, 2004 and 2003, respectively. A second client also accounted for 23% of
the Company's revenues for the three months ended March 31, 2004. Further, in
the three months ended March 31, 2004 and 2003, revenues from clients located in
foreign countries (principally Europe), accounted for 36% and 45%, respectively,
of the Company's revenues.
During the quarter, the Company provided approximately 50% of its services
under project-based arrangements and provided the balance of its services under
outsourcing-type arrangements. Both types of services are typically subject to
client requirements, and many are terminable upon notice. Outsourcing
arrangements tend to continue for relatively longer periods, while revenues for
project-based work vary depending on the size and completion dates of specific
projects. The company seeks wherever possible to counterbalance periodic
declines in revenues on completion of large projects by entering into
arrangements for new projects with the same client or others. The Company has
refocused its sales force to seek to increase the relative percentage of
services that the Company performs on an outsourcing basis.
Direct operating expenses were $7,775,000 and $5,825,000 for the three
months ended March 31, 2004 and 2003, respectively, an increase of 33%. Direct
operating expenses as a percentage of revenues were 64% in 2004 and 88% in 2003.
Direct operating expenses for the content services segment were $6,226,000 and
$5,014,000 in the three months ended March 31, 2004 and 2003, respectively, an
11
increase of 24%. Direct operating expenses as a percentage of revenues for the
content services segment were 71% and 87% in the three months ended March 31,
2004 and 2003, respectively. The dollar increase for the content services
segment in the 2004 period was principally due to increases in costs for the
increased revenues. The decrease as a percent of sales for the content services
segment in the 2004 period was principally due to lower production labor cost as
a percent of revenues, and to a 53% increase in revenues compared to a 21%
increase fixed non-labor costs. Direct operating expenses primarily include
direct payroll, telecommunications, depreciation, computer services, supplies
and occupancy.
Direct operating expenses for the Company's professional services segment
were $1,549,000 and $811,000 for the three months ended March 31, 2004 and 2003,
respectively, an increase of 91%. Direct operating expenses as a percent of
revenues for the Company's professional services segment were 46% and 92% in the
three months ended March 31, 2004 and 2003, respectively. The dollar increase
for the professional services segment in the 2004 period was principally due to
increases in personnel and related costs for the increased revenues. The
decrease as a percent of revenues for the professional services segment in the
2004 period was primarily attributable to the increase in utilization of
professional services resources in the three months ended March 31, 2004 as a
result of the increase in revenues.
Commencing October 1, 2003, the Company unified its selling and marketing
activities for it content and professional services segments. As such,
substantially all selling and administrative costs are no longer segregated by
separate segment. For segment reporting purposes, selling and administrative
expenses for the three months ended March 31, 2004 were allocated to each of the
operating segments based upon the percentage of revenues each segment
contributed to consolidated revenues.
Selling and administrative expenses were $2,250,000 and $2,046,000 for the
three months ended March 31, 2004 and 2003, respectively, an increase of 10%.
This increase was primarily attributable to increases in selling and marketing
costs, which are expected to continue to grow modestly as the Company expands it
sales force and marketing activities. Selling and administrative expenses as a
percentage of revenues decreased to 19% in the 2004 period compared to 31% in
the 2003 period. This decrease as a percent of sales was primarily attributable
to an increase in sales without a corresponding increase in selling and
administrative costs. Selling and administrative expenses primarily include
management and administrative salaries, sales, marketing cost, and
administrative overhead.
In January 2004, the Company reached a settlement agreement and received
$1,000,000 cash from a former client as full satisfaction of a $2.6 million
dollar remaining outstanding balance that the Company had fully written off as a
bad debit in 2001. The $1,000,000 receipt, net of $37,000 in recovery costs, is
reflected as bad debt recovery income in the statement of operations for the
three months ended March 31, 2004.
In the three months ended March 31, 2004, the provision for income taxes
as a percentage of income before income taxes was 33%, which is lower than the
U.S. Federal statutory tax rate, principally due to certain overseas income
which is neither subject to foreign income taxes because of tax holidays granted
12
to the Company nor subject to tax in the U.S. unless repatriated. In addition,
the provision for income taxes for the three months ended March 31, 2004
included a provision for state and local income taxes of approximately $150,000.
In the three months ended March 31, 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.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources are as follows:
March 31, 2004 December 31, 2003
-------------- -----------------
Cash and Cash Equivalents $10,316,000 $5,051,000
Working Capital $14,287,000 $11,983,000
Stockholders' Equity Per Common Share* $.89 $.79
* Represents total stockholders' equity divided by the actual number of
common shares outstanding (which excludes treasury stock).
Net Cash Provided By (Used In) Operating Activities
Net cash provided by operating activities was $5,884,000 in the three
months ended March 31, 2004, compared to $1,202,000 used in operating activities
for the three months ended March 31, 2003, an increase of approximately $7
million. The net cash provided by operating activities in the 2004 period is
principally due to net income approximating $2.1 million, non-cash charges
approximating $2 million and a $1.0 million tax refund.
Accounts receivable totaled $7,945,000 at March 31, 2004, representing
approximately 55 days of sales outstanding, compared to $8,497,000, or 71 days,
at December 31, 2003. The decrease in days outstanding resulted from significant
accounts receivable collections during the first quarter of 2004.
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
March 31, 2004, approximately 25% of the Company's accounts receivable was from
foreign (principally European) clients, and approximately 45% of accounts
receivable were due from two clients.
Net Cash Used in Investing Activities
During the three months ended March 31, 2004, the Company spent
approximately $604,000 for capital expenditures, compared to approximately
$288,000 in the three months ended March 31, 2003. During the next 12 months,
the Company currently anticipates capital spending levels to be in the $3
million range. Such first quarter 2004 and anticipated capital spending relates
13
principally to normal ongoing equipment upgrades, to project requirement
specific equipment for certain new projects, and for improvements in
infrastructure.
Availability of Funds
The Company has 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 4% at March 31, 2004). The line expires on May 31, 2004. No loans were
outstanding at March 31, 2004.
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.
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 establishes credit terms for new clients based upon
management's review of their credit information and project terms, and performs
ongoing credit evaluations of its customers, adjusting credit terms when
management believes appropriate based upon payment history and an assessment of
their current credit worthiness. The Company records an allowance for doubtful
accounts for estimated losses resulting from the inability of its clients to
make required payments. The Company determines its allowance by considering a
14
number of factors, including the length of time trade accounts receivable are
past due, the Company's previous loss history, the client's current ability to
pay its obligation to the Company, and the condition of the general economy and
the industry as a whole. While credit losses have generally been within
expectations and the provisions established, the Company cannot guarantee that
credit loss rates in the future will be consistent with those experienced in the
past. In addition, there is credit exposure if the financial condition of one of
the Company's major clients were to deteriorate. In the event that 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 for content manufacturing and outsourcing services is recognized
in the period in which services are performed and delivered.
The Company recognizes revenues from custom application and systems
integration development which requires significant production, modification or
customization of software in accordance with Statement of Position ("SOP") No.
97-2 "Software Revenue Recognition" and SOP No. 81-1 "Accounting for Performance
of Construction-Type and Certain Production-Type Contracts". Revenue for such
contracts billed under fixed fee arrangements is recognized using the
percentage-of-completion method under contract accounting as services are
performed or output milestones are reached. The percentage completed is measured
either by the percentage of labor hours incurred to date in relation to
estimated total labor hours or in consideration of achievement of certain output
milestones, depending on the specific nature of each contract. For arrangements
in which percentage-of completion accounting is used, the Company records cash
receipts from customers and billed amounts due from customers in excess of
recognized revenue as billings in excess of revenues earned on contracts in
progress (which is included in accounts receivable). Revenue for contracts
billed on a time and materials basis is recognized as services are performed.
Property and Equipment
Property and equipment is depreciated on the straight-line method over the
estimated useful lives of the related assets, which is generally 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. The Company
makes estimates regarding the useful lives of these assets and any changes in
actual lives could result in material changes in the net book value of these
assets. The Company evaluates the recoverability of long-lived assets whenever
adverse events or changes in business climate indicate that the expected
undiscounted future cash flows from the related asset may be less than
previously anticipated. If the net book value of the related asset exceeds the
undiscounted future cash flows of the asset, the carrying amount would be
reduced to the present value of its expected future cash flows and an impairment
loss would be recognized. This analysis requires the Company to make significant
estimates and assumptions, and changes in facts and circumstances could result
in material changes in the carrying value of the assets and the related
depreciation expense.
15
Income Taxes
Deferred taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates, as well as any net operating loss or tax credit carryforwards expected to
reduce taxes payable in future years. A valuation allowance is provided when it
is more likely than not that some or all of a deferred tax asset will not be
realized. Unremitted earnings of foreign subsidiaries have been included in the
consolidated financial statements without giving effect to the United States
taxes that may be payable on distribution to the United States to the extent
such earnings are not anticipated to be remitted to the United States.
Goodwill and Other Intangible Assets
Statement of Financial Accounting Standard ("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 (4% at March 31, 2004). The company has not borrowed
against this line in 2004. To the extent the Company utilizes all or a portion
of its line of credit, changes in the interest rate during fiscal 2004 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.
16
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Principal Financial Officer to allow timely decisions
regarding required disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures which, by their
nature, can provide only reasonable assurance regarding management's control
objectives. Management, including the Company's Chief Executive Officer along
with the Company's Principal Financial Officer, concluded that the Company's
disclosure controls and procedures are effective in reaching the level of
reasonable assurance regarding management's control objectives.
The Company has carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer along with the Company's Principal Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the
foregoing, as of March 31, 2004, the Company's Chief Executive Officer along
with the Company's Principal Financial Officer, concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's Exchange Act reports.
There has been no change during the Company's fiscal quarter ended March 31,
2004 in the Company's internal control over financial reporting that was
identified in connection with the foregoing evaluation which has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
17
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.
31.1 Certificate of Chief Executive Officer and Principal Financial
Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
(b) Form 8-K Report.
During the quarter for which this report is filed, the Company
furnished a current report on Form 8-K dated March 18, 2004 which reported the
Company's results for the three months and year ended December 31, 2003 under
Items 7 and 12.
18
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 ISOGEN, INC.
Date: May 14, 2004 /s/ Jack Abuhoff
------------ ----------------------------------------
Jack Abuhoff
Chairman of the Board of Directors,
Chief Executive Officer and President
Date: May 14, 2004 /s/ Stephen Agress
------------ ----------------------------------------
Stephen Agress
Vice President - Finance
Chief Accounting Officer