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, 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
(State or other jurisdiction of incorporation or organization)
13-3475943
(I.R.S. Employer Identification No.)
THREE UNIVERSITY PLAZA HACKENSACK, NEW JERSEY
(Address of principal executive offices)
07601
(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.
21,456,000 SHARES OF COMMON STOCK, $.01 PAR VALUE, AS OF APRIL 30, 2003.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
--------------------
See pages 2-9
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
See pages 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
See page 15
Item 4. Controls and Procedures
-----------------------
See page 15
PART ll. OTHER INFORMATION
- -------- -----------------
See page 16
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
-------------- --------------
Unaudited Derived from
audited
financial
statements
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 5,765 $ 7,255
Accounts receivable-net 4,530 3,253
Prepaid expenses and other current assets 728 706
Refundable income taxes 1,412 1,491
Deferred income taxes 1,500 1,501
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Total current assets 13,935 14,206
PROPERTY AND EQUIPMENT - NET 6,104 6,707
OTHER ASSETS 859 1,109
GOODWILL 675 675
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TOTAL $21,573 $22,697
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,532 $ 2,655
Accrued salaries and wages 2,706 2,526
Income and other taxes 401 455
------- -------
Total current liabilities 5,639 5,636
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DEFERRED INCOME TAXES PAYABLE 1,478 1,492
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COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
authorized 75,000,000 shares; issued
22,046,000 shares at March 31, 2003 and
December 31, 2002, respectively 220 220
Additional paid-in capital 14,084 14,084
Retained earnings 2,151 3,264
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16,455 17,568
Less: treasury stock - at
cost; 610,000 shares (1,999) (1,999)
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Total stockholders' equity 14,456 15,569
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TOTAL $21,573 $22,697
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<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
2003 2002
-------- --------
REVENUES $ 6,653 $12,556
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OPERATING COSTS AND EXPENSES:
Direct operating expenses 5,825 9,739
Selling and administrative expenses 2,046 2,483
Interest (income) - net (9) (4)
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Total 7,862 12,218
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(LOSS) INCOME BEFORE (BENEFIT FROM) PROVISION
FOR INCOME TAXES (1,209) 338
(BENEFIT FROM) PROVISION FOR INCOME TAXES (96) 95
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NET (LOSS) INCOME $(1,113) $ 243
======= =======
BASIC (LOSS) INCOME PER SHARE $(.05) $.01
===== ====
WEIGHTED AVERAGE SHARES OUTSTANDING 21,436 21,450
======= =======
DILUTED (LOSS) INCOME PER SHARE $(.05) $.01
===== ====
ADJUSTED DILUTIVE SHARES OUTSTANDING 21,436 23,901
======= =======
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS)
(Unaudited)
2003 2002
-------- -------
OPERATING ACTIVITIES:
Net (loss) income $(1,113) $ 243
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,049 1,434
Deferred income taxes (13) -
Changes in operating assets and liabilities:
Accounts receivable (1,277) (100)
Prepaid expenses and other current assets (166) (299)
Refundable income taxes 79 (59)
Other assets 233 198
Accounts payable and accrued expenses (120) (582)
Accrued salaries and wages 180 410
Income and other taxes (54) (82)
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Net cash (used in) provided by operating activities (1,202) 1,163
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INVESTING ACTIVITIES:
Capital expenditures (288) (133)
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FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 3
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(DECREASE) INCREASE IN CASH (1,490) 1,033
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 7,255 6,267
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CASH AND EQUIVALENTS, END OF PERIOD $ 5,765 $7,300
======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 2 $ 9
======== ======
<FN>
See notes to unaudited condensed consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
1. Innodata Corporation and subsidiaries (the "Company") is a leading 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 March 31, 2003, the results of operations for the three
months ended March 31, 2003 and 2002, and the cash flows for the three
months ended March 31, 2003 and 2002. The results of operations for the
three months ended March 31, 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
three months ended March 31, 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 - - - (1,113) - (1,113)
------ ---- ------- ------- ------- -------
MARCH 31, 2003 22,046 $220 $14,084 $ 2,151 $(1,999) $14,456
====== ==== ======= ======= ======= =======
3. Basic (loss) earnings per share is based on the weighted average number of
common shares outstanding without consideration of potential common stock.
Diluted (loss) earnings per share is based on the weighted average number
of common and potential common shares outstanding. The difference between
weighted average common shares outstanding and adjusted dilutive shares
outstanding represents the dilutive effect of outstanding options.
Diluted net loss per share does not include potential common shares derived
from stock options because they are antidilutive. The number of
antidilutive securities excluded from the dilutable loss per share
calculation were 642,000 for the three months ended March 31, 2003.
The basis of the earnings per share computation for the three months ended
March 31, 2003 and 2002 (in thousands, except per share amounts) is as
follows:
THREE MONTHS
--------------
2003 2002
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Net (loss) income $(1,113) $ 243
======= =======
Weighted average common shares outstanding 21,436 21,450
Dilutive effect of outstanding options - 2,451
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Adjusted for dilutive computation 21,436 23,901
======= ======
Basic (loss) income per share $(.05) $.01
===== ====
Diluted (loss) income per share $(.05) $.01
===== ====
4. 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.
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
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(in thousands)
Revenues
--------
Content services $ 5,771 $10,921
Systems and training services 882 1,635
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Total consolidated $ 6,653 $12,556
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(Loss) income before income taxes (a)
-------------------------------------
Content services $ (916) $ 293
Systems and training services (293) 45
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Total consolidated $(1,209) $ 338
======= =======
<FN>
(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 months ended March 31, 2002 has been reclassified to allocate
corporate overhead using a method consistent with 2003.
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
(in thousands)
Total assets
------------
Content services $19,749 $20,721
Systems and training services 1,824 1,976
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Total consolidated $21,573 $22,697
======= =======
5. In the first quarter 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.
6. On April 15, 2003, the Company issued a $280,000 standby letter of credit
related to software purchases, which expires on October 31, 2003.
7. 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,
----------------------------
2003 2002
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(in thousands, except per share amounts)
Net (loss) income, as reported $(1,113) $ 243
Deduct: Total stock-based employee
compensation determined under fair value
based method, net of related tax effects (619) (609)
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Pro forma net loss $(1,732) $(366)
======= =====
(Loss) income per share:
Basic - as reported $(.05) $.01
===== ====
Basic - pro forma $(.08) $(.02)
===== =====
Diluted - as reported $(.05) $.01
===== ====
Diluted - pro forma $(.08) $(.02)
===== =====
8. 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.
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.
9. 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.
10. 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, 2003, the Company has not
recorded a liability for any obligations arising as a result of these
indemnifications.
11. 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 March 31,
2003, such equipment had a book value of approximately $600,000.
12. 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.
13. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
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 MARCH 31, 2003 AND 2002
Revenues decreased 47% to $6,653,000 for the three months ended March 31,
2003 compared to $12,556,000 for the similar period in 2002. Revenues from the
content services segment decreased 47% to $5,771,000 for the three months ended
March 31, 2003 compared to $10,921,000 for the similar period in 2002. The
decrease principally resulted from the loss in revenues of approximately $5.8
million from two clients whose projects were substantially completed in 2002.
The shortfall was replaced in part by increased revenue from a third client of
approximately $1.0 million. Revenues from the Company's systems and training
segment were $882,000 for the three months ended March 31, 2003 and $1,635,000
for the similar period in 2002. The decrease is principally attributable to the
completion of a significant project in the first quarter of 2002.
One client accounted for 33% of the Company's revenues for the three months
ended March 31, 2003. One other client, whose projects were substantially
completed in 2002, accounted for 35% of the Company's revenues in the three
months ended March 31, 2002. A third client accounted for 15% of the Company's
revenues in the 2002 period. Further, in the three months ended March 31, 2003
and 2002, export revenues, substantially all of which were derived from European
clients, accounted for 45% and 16%, respectively of the Company's revenues.
Direct operating expenses were $5,825,000 and $9,739,000 for the three
months ended March 31, 2003 and 2002, respectively, a decrease of 40%. Direct
operating expenses as a percentage of revenues were 88% in 2003 and 78% in 2002.
Direct operating expenses for the content services segment were $5,014,000 and
$8,649,000 in the three months ended March 31, 2003 and 2002, respectively, a
decrease of 42%. Direct operating expenses as a percentage of revenues for the
content services segment were 87% and 79% in the three months ended March 31,
2003 and 2002, respectively. The dollar decrease for the content services
segment in the 2003 period is principally due to a reduction in labor costs
associated with lower revenues, and to reductions in fixed costs associated with
the Company's cost reduction initiatives. The percentage increase for the
content services segment is primarily attributable 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
$811,000, or 92% of systems and training segment revenues, for the three months
ended March 31, 2003 and $1,090,000, or 67% of revenues, for the three months
ended March 31, 2002. The increase as a percent of sales for the systems and
training segment was primarily attributable to a decrease in revenue without a
corresponding reduction in such costs.
Selling and administrative expenses were $2,046,000 and $2,483,000 for the
three months ended March 31, 2003 and 2002, respectively, a decrease of 18%.
Selling and administrative expenses for the content services segment were
$1,682,000 and $2,060,000 for the three months ended March 31, 2003 and 2002,
respectively, a decrease of 4%. The decrease for the content services segment is
primarily due to a reduction in administrative expenses as a result of our cost
reduction initiatives. Selling and administrative expenses as a percentage of
revenues for the content services segment increased to 29% in the 2003 period
from 19% in the 2002 period due primarily to the decrease in revenues without a
corresponding decrease in such expenses. Selling and administrative expenses
for the systems and training segment were $364,000, or 41% of revenues, in the
three months ended March 31, 2003 compared to $423,000, or 26% of revenues, for
three months ended March 31, 2002. The increase in selling and administrative
expenses as a percent of revenues is primarily attributable to the decrease in
revenues without a corresponding decrease in such expenses. Selling and
administrative expenses primarily include management and administrative
salaries, sales and marketing costs, and administrative overhead.
In the first quarter 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, 2003 December 31, 2002
--------------- -----------------
Cash and Cash Equivalents $5,765,000 $7,255,000
Working Capital 8,296,000 8,570,000
Stockholders' Equity Per Common Share* $.67 $.73
<FN>
*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 $1,202,000 in the three months
ended March 31, 2003 compared to $1,163,000 provided by operating activities for
the three months ended March 31, 2002, a decrease of approximately $2,365,000.
The decrease was primarily due to a decrease in net income of $1.4 million, a
decrease in non-cash charges of $400,000 and a net increase in operating assets
and liabilities of $611,000 (principally accounts receivable).
Accounts receivable totaled $4,530,000 at March 31, 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 month of March that were not collected as of March
31, 2003.
NET CASH USED IN INVESTING ACTIVITIES
During the three months ended March 31, 2003, the Company spent
approximately $288,000 for capital expenditures, compared to approximately
$133,000 in the three months ended March 31, 2002.
AVAILABILITY OF FUNDS
The Company has a $4 million line of credit with a bank pursuant to which
it may borrow up to 80% of eligible accounts receivable. Eligible accounts
receivable, which excludes foreign receivables as well as receivables
outstanding in excess of 90 days, approximated $1.7 million as of March 31,
2003. The line, which is due on demand and was unused at March 31, 2003, is
collateralized by accounts receivable. Interest is charged at 1/2% above the
bank's prime rate. The line expires on May 31, 2003, and the Company does not
anticipate that the line will be renewed.
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.
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.
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
prime rate of interest. At March 31, 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 prime 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
(a) Evaluation of Disclosure Controls and Procedures.
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Accounting Officer, of the effectiveness of the design and the operation of our
"disclosure controls and procedures" (as such term is defined in Rules 13a-14(c)
under the Securities Exchange Act of 1934). This evaluation took place as of a
date within 90 days prior to the filing date of this quarterly report
("Evaluation Date"). Based on such evaluation, our Chief Executive Officer and
Chief Accounting Officer have concluded that, as of the Evaluation Date, the
disclosure controls and procedures are reasonably designed and effective to
ensure that (i) information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and (ii) such information is accumulated and communicated to the our
management, including our Chief Executive Officer and Chief Accounting Officer,
as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in
our internal controls or in other factors that could significantly affect such
controls.
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings. Not Applicable
-----------------
Item 2. Changes in Securities. Not Applicable
---------------------
Item 3. Defaults upon Senior Securities. Not Applicable
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Not
---------------------------------------------------
Applicable
Item 5. Other Information. Not Applicable
-----------------
Item 6. (a) Exhibits. None
--------
(b) Form 8-K Report. None
---------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNODATA CORPORATION
Date: May 15, 2003 /s/
------------ -------------------------------
Jack Abuhoff
Chairman of the Board,
Chief Executive Officer and President
Date: May 15, 2003 /s/
------------ -------------------------------
Stephen Agress
Vice President, Finance
Chief Accounting Officer
CERTIFICATIONS
I, Jack Abuhoff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Innodata Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003
/s/
-------------------------------
Jack Abuhoff
Chairman of the Board,
Chief Executive Officer and President
I, Stephen Agress, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Innodata Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003
/s/
-------------------------------
Stephen Agress
Vice President, Finance
Chief Accounting Officer