UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
þ Annual
report under section 13 or 15(d)
of the securities exchange act of 1934
For
the fiscal year ended December
31, 2009
o 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)
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Delaware
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13-3475943
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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Three
University Plaza
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Hackensack,
New Jersey
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07601
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(Address
of principal executive offices)
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(Zip
Code)
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(201)
371-8000
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(Registrant's
telephone number)
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Securities
registered under Section 12(b) of the Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock $.01 par value
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The
Nasdaq Stock Market, LLC
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Securities registered under Section
12(g) of the Exchange Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No
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Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No
þ
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
past 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 þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
þ
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant (based on the closing price reported on the Nasdaq Stock
Market on June 30, 2009) was $95,149,175.
The
number of outstanding shares of the registrant’s common stock, $.01 par value,
as of February 28, 2010 was 25,379,246.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s definitive proxy statement for the 2010 Annual Meeting of
Stockholders are incorporated by reference in Items 10,11,12,13 and 14 of Part
III of this Form 10-K.
INNODATA
ISOGEN, INC
Form
10-K
For
the Year Ended December 31, 2009
TABLE
OF CONTENTS
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Page
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Part
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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8
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Item
1B.
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Unresolved
Staff Comments
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16
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Item
2.
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Properties
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16
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Item
3.
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Legal
Proceedings
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16
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4. |
Reserved |
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17 |
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Part
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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18
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Item
6.
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Selected
Financial Data
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19
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risks
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33
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Item
8.
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Financial
Statements and Supplementary Data
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34
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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34
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Item
9A.
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Controls
and Procedures
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34
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Report
of Management on Internal Control over Financial Reporting
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35
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Report
of Independent Registered Public Accounting Firm
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36
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Item
9B.
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Other
Information
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37
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| Part
III |
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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38
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Item
11.
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Executive
Compensation
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38
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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38
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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38
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Item
14.
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Principal
Accounting Fees and Services
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38
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| Part
IV |
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Item
15.
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Exhibits,
Financial Statement Schedules
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39
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Signatures
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40
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PART I
Disclosures
in this Form 10-K contain certain forward-looking statements, including without
limitation, statements concerning our 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 “estimate,” “believe,” “expect,” and
“anticipate” and other similar expressions generally identify forward-looking
statements, which speak only as of their dates.
These
forward-looking statements are based largely on our current expectations, and
are subject to a number of risks and uncertainties, including without
limitation, the primarily at-will nature of the Company’s contracts with its
customers; and the ability of customers to reduce, delay or cancel projects,
including projects that the Company regards as recurring; continuing revenue
concentration in a limited number of clients; continuing reliance on
project-based work; inability to replace projects that are completed, cancelled
or reduced; depressed market conditions; changes in external market factors; the
ability and willingness of our 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 we acquire; changes in our business or growth strategy; the emergence
of new or growing competitors; various other competitive and technological
factors; and other risks and uncertainties set forth under “Risk
Factors.”
Our
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 release will occur.
We
undertake no obligation to update or review any guidance or other
forward-looking information, whether as a result of new information, future
developments or otherwise.
Item
1. Description of Business.
Business
Overview
We
provide knowledge process outsourcing (“KPO”) services, as well as publishing
and related information technology (“IT”) services, that help leading media,
publishing and information services companies create, manage and maintain their
products. We also provide our services to companies in other
information-intensive industries, such as information technology, manufacturing,
aerospace, defense, government, law and intelligence.
We help
our clients lower costs, realize productivity gains and improve operations,
enabling them to compete more effectively in demanding global
markets.
Our
publishing services include digitization, conversion, composition, data modeling
and XML encoding. Our KPO services include research and analysis,
authoring, copy-editing, abstracting, indexing and other content creation
activities. We often combine publishing services and KPO services within a
single client engagement, providing an end-to-end content supply chain
solution.
Our staff
of IT systems professionals design, implement, integrate and deploy systems and
technologies used to improve the efficiency of authoring, managing and
distributing content.
We use a
distributed global resource model. Our onshore workforce (consisting of
consultants, information architects, solution architects, and program managers)
works from our North American and European offices, as well as from client
sites. Our distributed global workforce (consisting of encoders, graphic
artists, project managers, programmers, data architects performing publishing
services, and advanced degree holders such as physicians, attorneys, MBAs and
engineers who perform our KPO services) deliver those services from our ten
offshore facilities in India, the Philippines, Sri Lanka and
Israel.
For
fiscal 2009, our revenue was $79.3 million, representing an increase of 6% over
2008, and our income before income taxes was $8.3 million, an
increase of approximately 49% compared to income before income taxes in 2008 of
$5.5 million. For fiscal 2008, our revenue was $75.0 million, representing an
increase of 11% over 2007, and our income before income taxes was $5.5 million,
as compared to income before income taxes in 2007 of $4.5 million, representing
an increase of approximately 23%.
Services that are ongoing in nature
generate what we regard as recurring revenues. Services that terminate upon
completion of a defined task generate what we regard as project, or
non-recurring, revenues. Approximately 65% of our revenues were recurring in the
fiscal year ended December 31, 2009 as compared to 68% in the fiscal year ended
December 31, 2008 and 61% in the fiscal year ended December 31,
2007.
Our business is organized and managed
around three vectors: a vertical industry focus, a horizontal service/process
focus, and a focus on supportive operations.
Our vertically-aligned groups
understand our clients’ businesses and strategic initiatives and are able to
help them meet their goals. With respect to media, publishing and information
services, for example, we have continued to hire experts out of that sector to
establish solutions and services tailored to companies in that sector. They work
with many of the world’s leading media, publishing and information services
companies, dealing with challenges involving new product creation, product
maintenance, digitization, content management and content creation.
Our service/process-aligned groups are
comprised of engineering and delivery personnel responsible for creating the
most efficient and cost-effective custom workflows. These workflows integrate
proprietary and third-party technologies, while harnessing the benefits of a
globally distributed workforce. They are responsible for executing our client
engagements in accordance with our service-level agreements and ensuring client
satisfaction.
Our support groups are responsible for
managing a diverse group of enabling functions, including human resources and
recruiting, global technology infrastructure and physical infrastructure and
facilities.
Our
Opportunity
Media, publishing and information
services companies, as well as companies in other content-intensive sectors, are
increasingly seeking ways to reduce content costs as well as to accelerate
delivery times and improve quality. Increasingly, they view outsourcing, along
with technology and process re-engineering, as crucial strategies for
accomplishing these objectives.
The trend toward outsourcing has
accelerated in recent years. Businesses are outsourcing their internal processes
– often to offshore providers – to improve productivity and manage costs. By
leveraging offshore talent, companies are increasingly boosting their profits,
productivity, quality levels, business value and performance. As
outsourcing to offshore providers has become more accepted, a growing number of
organizations have become more confident in making the decision to outsource
business operations to Asia and other high-value labor markets. Moreover, the
notion of what can be outsourced and the benefits that can be achieved via
outsourcing continue to expand. Client demands are evolving toward higher
value-added and more complex services, including research and analysis,
editorial tasks and other knowledge-based functions. This trend is driven by
competitive pressures as well as by advances in technology.
The KPO market is relatively young and
is expected to continue expanding. An increasing number of companies are
outsourcing high-end knowledge work as they seek to gain cost-savings and
operational efficiencies and access the highly talented workforce in the
Philippines, India and other countries. Universities in those countries are
graduating thousands of qualified lawyers, doctors and scientists each year. As
technology makes it possible to move vast amounts of data across the globe at
relatively low cost, it is now quite cost effective for companies to tap into
this labor pool.
With respect to information and content
processes, there is growing awareness that labor cost reduction is only part of
the solution. Advances in technologies for creating, managing, finding, sharing
and delivering content (including text analytics, semantic technologies and
search technologies) have enabled what were previously manual tasks to become
either fully or partially automated.
As a
result, content-driven companies, like media, publishing and information
services companies, are increasingly relying on service providers, such as
Innodata Isogen, to provide both outsourcing and related IT services.
To meet this demand, we have assembled
dedicated teams of scientists, doctors, lawyers and other subject matter
experts, armed with an in-depth understanding of complex technical material. For
increasing numbers of clients, we are becoming an extended part of their work
teams, helping them enhance and create content, write technical documentation
and deliver research and analysis
services utilizing global resources as well as advanced
technologies.
Our
Services
We believe that we have developed an
effective set of core competencies that enable us to help information-intensive
companies reduce their operating costs, realize benefits of scale and flexible
cost structures and achieve significant process improvements. Our business model
combines a global offshore staff, on-site staff and technologists who integrate
internally-developed and best-in-class third party products to continually
improve the efficiency of our processes.
We provide a broad and expanding range
of publishing services, knowledge process outsourcing services and engineering
and consulting services.
Publishing Services – Our
publishing services include activities such as digitization, conversion,
composition, data modeling and XML encoding. Typically, we bill
clients for services based upon the units of information we produce and
deliver.
We are helping customers take advantage
of the fast-growing eBook market by converting books into eBook-ready formats.
One of our customers, for example, is a global eBook retailer that offers a
catalog of over two million books on nearly any consumer device including
dedicated readers, laptops, Blackberries, iPhones and other emerging smart
devices. We also work with several of the leading device manufacturers in the
market.
We are
also helping leading publishers of scientific, technical and medical journals
aggregate content, copy-edit author submissions and compose journal pages for
both online and print publication. For one such publisher, seeking to build one
of the world’s largest databases of scientific journal citations and references,
we created records of nearly 15,000 journal titles going back almost 13 years,
encoded in a way that supports integrated web searches and seamless
linking.
Knowledge Processing Outsourcing
(KPO) Services – Our KPO services specifically target processes that
demand advanced information analysis and interpretation, as well as judgment and
decision-making. For information and media companies, these services include
content creation and enhancement, analytics, taxonomy and controlled vocabulary
development, hyperlinking, indexing, abstracting, technical writing and editing,
copy-editing and general editorial services, including the provision of synopses
and annotations. These services cover a wide spectrum of disciplines,
including medicine, law, engineering, management, finance, science and the
humanities. To provide these services, we have organized knowledge
teams that consist of educated and highly trained people with expertise in
relevant subjects. We typically price our knowledge services based on
the quantity delivered or resources utilized.
For example, we support several
providers of medical informatics products and clinical decision support
systems. Our physicians and health care professionals create content
for these systems by analyzing the latest medical journal articles and
conference proceedings.
In many of our engagements, we perform
end-to-end services that combine publishing and KPO services, using advanced
technologies, to provide fully outsourced content supply chain
solutions. For example, under a long-term engagement, we maintain a
leading bibliographic citations database, managing, on behalf of our client, a
continuing production process in which we first aggregate, digitize and convert
data from multiple sources and then have healthcare professionals perform
analyses of the data and create derivative data for inclusion in the client
database. Our engineering staff continues to drive the automation of
several of these underlying processes.
We are also using our KPO delivery
capabilities that we use to support information companies as a springboard to
enable us to enter new markets and provide new services. For example,
we are using our legal subject matter experts who deliver KPO services to media,
publishing and information services companies to also provide select KPO
services - such as research and document review - to corporate law offices and
law firms.
In 2007, we launched a new
KPO business area to provide technical communications services to
clients. This unit started as a technical writing service and has
expanded to include technical editing, e-learning, mobile and micro learning,
translation and marketing communication services. The team has expanded
significantly since its inception to include project managers, writers and
editors who work from multiple locations across China, the Philippines, Sri
Lanka, India, Israel and the United States.
For
example, we are providing technical writing services to a leading global
technology manufacturer. By co-locating teams in China and India where this
client manufactures equipment, and our production centers in other Asian
locales, we have helped the company generate quality documentation – ensuring
that its customers use its products effectively – while also reducing our
client’s overall costs.
We are
also providing round-the-clock writing, editing, e-learning and troubleshooting
documentation for one of the biggest video game companies in the world using our
resources in the US, Israel, Philippines and India.
Technology
Services — Both our publishing services and KPO services are
supported by our technology engineering teams, comprised of solution architects,
analysts, programmers and systems integrators. A number of our
engineering staff have played leadership roles in the development of structured
information standards such as Standard General Markup Language (SGML),
Extensible Markup Language (XML), as well as XML-based standards such as Darwin
Typing Information Architecture (DITA) and S1000D.
Our technologists build the workflow
and tools that we utilize internally for projects that we perform for clients on
an outsourced basis. They also provide services directly to
clients.
Their
role in outsourced projects is to improve efficiency and
quality. They continually design and develop productivity tools to
automate manual processes and improve the consistency and quality of our work
product. These tools include categorization engines that utilize pattern
recognition algorithms based on comprehensive rule sets and related heuristics,
data extraction tools that automatically retrieve specific types of information
from large data sources, and workflow systems that enable various tasks and
activities to be performed across our multiple facilities.
When working directly for clients, our
engineers provide IT services (which include systems integration, custom
application development, applications maintenance, tool evaluation and training)
which are typically provided on a project basis that does not generate
significant amounts of recurring revenue. Clients who use these
services typically require publishing, performance support or process automation
systems that enable information to be created, managed and distributed utilizing
the most cost efficient and effective technologies.
For example, we helped the world’s
leading software company create automated processes for reducing the cost of
creating online help information. Our engineering staff created the systems that
are used by one of the world’s largest manufacturers of computers and
peripherals to create and publish multi-lingual product support and technical
information. It also collaborated with Lockheed Martin to build a content
management system and digital asset management system for the F-35 Joint Strike
Fighter program. For a leading electronic publisher of financial data, it
automated the process of extracting and normalizing detailed financial
information from public company filings. Our staff defines client
requirements (often working on-site at clients during this process), write
specifications and design, develop, test and integrate technologies. Projects
vary in size and duration.
To better support an ongoing engagement
with a $10 billion information services company, our engineering staff developed
a machine-aided indexing solution that uses lemmatization (the process that
determines the most crucial term in a sentence to reflect its meaning and
context) and semantically-driven natural language analysis to deliver precision
and recall at 95% accuracy. Once the text is tokenized or assigned a value
according to the words in a particular sentence, a set of rules and linguistic
filters are then used to identify candidate term phrases within the text. The
system also extracts terms and ranks them based on the decreasing likelihood of
accuracy against a thesaurus that applies simple string matching. This
automation enables us to add millions of additional topics to the publisher’s
database, which may then be further enhanced by our editorial
teams.
Consulting
Services —
In addition to our publishing, KPO and IT services, our consulting
practice works with clients at a strategic business and technology level to
address new challenges and optimize their business processes. The practice has
primary services that span content supply chain optimization, technology
architecture and strategy, global sourcing, product and market strategy and
development, and the deployment of content technologies.
For
example, we worked with a leading specialist health information publisher to
optimize their business process across technology, workflow, sourcing and
organizational dimensions. Another customer, one of the world’s largest
information media businesses, deep in the implementation of a game-changing
technology replatforming, has a team of our consultants engaged in helping them
implement this program successfully. At one of the leading publishing houses, we
helped transform production processes, reducing the cost of product fabrication
by 40%.
Clients
Two clients generated approximately
44%, 47% and 49% of our total revenues in the fiscal years ended December 31,
2009, 2008 and 2007, respectively. Revenues from clients located in foreign
countries (principally in Europe) accounted for 21%, 21% and 23% of our total
revenues for each of these respective fiscal years.
We have
long-standing relationships with many of our clients. We have been continually
providing services to our top two clients for over nine years. Many of our
clients are recurring clients, meaning that they have continued to provide
additional projects to us after their initial engagement. Our track record of
delivering high-quality services helps us to solidify client relationships and
gain increased business from our existing clients. As a result, our history of
client retention enables us to derive a significant proportion of revenue from
repeat clients.
A substantial portion of the services
we provide to our clients is subject solely to their
requirements. Our agreements with clients are in most cases
terminable on 30 to 90 days' notice.
Competitive
Strengths
Our vertical
expertise. We are primarily focused on the media, publishing
and information services vertical market. We maintain a staff of highly
skilled experts to provide a range of end-to-end business solutions. In
addition, we utilize our underlying domain experts in law, medicine, finance and
engineering to provide additional value-added KPO services directly to these
sectors.
Our global delivery
model. We have operations in seven countries in North
America, Europe and Asia. We provide services to our clients through a
comprehensive global delivery model that integrates both local and global
resources to obtain the best economic results. For example, we create high-end
website content using teams from India, the Philippines and Israel that together
constitute a global workflow. We use a similar approach in providing technical
writing services to a large telecommunications company, virtually joining
resources from the United States, the Philippines and China. Our offshore
outsourcing centers are ISO 9001:2000 certified and our engineering and IT
facility in Noida, India meets ISO/IEC 27001:2005 specifications.
Our proven track record and reputation. By consistently
providing high-quality services, we have achieved a track record of project
successes. This track record is embodied by our reputation as a leader in the
KPO marketplace, especially within the media, publishing and information
services sector. This reputation or brand provides an assurance of expertise,
quality execution and risk mitigation.
Our focus on technology and
engineering. Rather than simply relying on labor cost
arbitrage to create value for clients, our engineering team optimizes efficiency
by integrating proprietary and best-in-class third party tools into our
workflows. In addition, our engineering team provides work directly to our
clients, helping them achieve improved efficiencies within their own
operations.
Our long-term relationships with
clients. We have long-term relationships with many of our
clients, who frequently retain us for additional projects after a successful
initial engagement. We believe there are significant opportunities for
additional growth with our existing clients, and we seek to expand these
relationships by increasing the depth and breadth of the services we provide.
This strategy allows us to use our in-depth client-specific knowledge to provide
more fully integrated KPO services and develop closer relationships with those
clients.
Our ability to
scale. We have demonstrated the ability to expand our teams
and facilities to meet the needs of our clients. By virtue of the significant
numbers of professional staff working on projects, we are able to build teams
for new engagements quickly. We have also demonstrated the ability to hire and
train people quickly.
Our internal
infrastructure. We utilize established facilities, technology
and communications infrastructure to support our business model. We own
and operate some of the most advanced content production facilities in the
world, which are linked by multi-redundant data connections. Our Wide Area
Network – along with our Local Area Networks, Storage Area Networks and data
centers – is configured with full redundancy, often with more than one backup to
ensure 24x7 availability. Our infrastructure is built to accommodate
advanced tools, processes and technologies that support our content and
technical experts.
Our focus on
quality. We believe strongly in quality throughout our
organization. We maintain independent quality assurance capabilities in all
geographies where we operate. Our quality teams are compliant and
certified to the ISO 9000:2000 quality management system standards.
Sales
and Marketing
We market and sell our services
directly through our professional staff, senior management and direct sales
personnel operating out of our corporate headquarters in Hackensack, New Jersey,
just outside New York City, our Dallas, Texas office and our Paris, France
office. We have four executive-level business development and marketing
professionals, and during 2009, we maintained approximately 11 full-time sales
and marketing personnel. We also deploy solutions architects, technical support
experts and consultants who support the development of new clients and new
client engagements. These resources work within teams (both permanent and ad
hoc) that provide support to clients.
Our sales professionals identify and
qualify prospects, securing direct personal access to decision makers at
existing and prospective clients. They facilitate interactions between client
personnel and our service teams to better define ways in which we can assist
clients with their goals. For each prospective client engagement, we assemble a
team of our senior employees drawn from various disciplines within our Company.
The team members assume assigned roles in a formalized process, using their
combined knowledge and experience to understand the client’s goals and
collaborate with the client on a solution.
Sales activities include the design and
generation of presentations and proposals, account and client relationship
management and the organization of account activities.
Personnel from our project analysis
group and our engineering services group closely support our direct sales
effort. These individuals assist the sales force in understanding the
technical needs of clients and providing responses to these needs, including
demonstrations, prototypes, pricing quotations and time estimates. In addition,
account managers from our customer service group support our direct sales effort
by providing ongoing project-level support to our clients.
Our marketing organization is
responsible for developing and increasing the visibility and awareness of our
brand and our service offerings, defining and communicating our value
proposition, generating qualified, early-stage leads and furnishing effective
sales support tools.
Primary marketing outreach activities
include event marketing (including exhibiting at trade shows, conferences and
seminars), direct and database marketing; public and media relations (including
speaking engagements and active participation in industry and technical standard
bodies), and web marketing (including integrated marketing campaigns, search
engine optimization, search engine marketing and the maintenance and continued
development of external websites).
Research
and Development
We did not incur any research and
development costs in each of the three years ended December 31,
2009.
Competition
The market for publishing services and
related KPO and IT services is highly competitive, fragmented and
intense. Our major competitors include Apex CoVantage, Aptara,
Cenveo, Infosys, HCL Technologies, MacMillan India, SPI Technologies and Thomson
Digital.
We compete successfully by offering
high-quality services and favorable pricing that leverages our technical skills,
IT infrastructure, process knowledge, offshore model and economies of
scale. Our competitive advantages are especially attractive to
clients for undertakings that are technically sophisticated, require “high-end”
talent, are sizable in scope or scale, are continuing, or that require a highly
fail-safe environment with technology redundancy.
As a provider of these services, we
also compete with in-house personnel at existing or prospective clients who may
attempt to duplicate our services in-house.
Locations
We are headquartered in Hackensack, New
Jersey, just outside New York City. We have additional offices in Dallas, Texas;
Paris, France; and Beijing, China. We have ten production facilities in the
Philippines, India, Sri Lanka and Israel. We were incorporated in Delaware in
1988.
Employees
As of December 31, 2009, we employed
approximately 60 persons in the United States and Europe and over 7,000 persons
in ten production facilities in the Philippines, India, Sri Lanka and
Israel. Most of our employees have graduated from at least a two-year
college program. Many of our employees hold advanced degrees in law, business,
technology, medicine and social sciences. No employees are currently
represented by a labor union, and we believe that our relations with our
employees are satisfactory.
Corporate
Information
Our principal executive offices are
located at Three University Plaza, Hackensack, New Jersey 07601, and our
telephone number is (201) 371-8000. Our website is www.innodata-isogen.com, and
information contained on our website is not included as a part of, or
incorporated by reference into, this Annual Report on Form
10-K. There we make available, free of charge, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports as soon as reasonably practicable after we
electronically file that material with, or furnish it to, the Securities and
Exchange Commission (SEC). Our SEC reports can be obtained through the Investor
Relations section of our website or from the Securities and Exchange Commission
at www.sec.gov.
Item
1A. Risk Factors.
We
have historically relied on a very limited number of clients that have accounted
for a significant portion of our revenues, and our results of operations could
be adversely affected if were to lose one or more of these significant
clients.
We have historically relied on a very
limited number of clients that have accounted for a significant portion of our
revenues. Two clients generated approximately 44%, 47% and 49% of our
revenues in the fiscal years ended December 31, 2009, 2008 and 2007,
respectively. We may lose any of these, or our other major clients, as a result
of our failure to meet or satisfy our clients’ requirements, the completion or
termination of a project or engagement, or the client’s selection of another
service provider.
In addition, the volume of work
performed for our major clients may vary from year to year, and services they
require from us may change from year to year. If the volume of work performed
for our major clients varies or if the services they require from us change, our
revenues and results of operations could be adversely affected, and we may incur
a loss from operations. Our services are typically subject to client
requirements, and in most cases are terminable upon 30 to 90 days’
notice.
A
significant portion of our services is provided on a non-recurring basis for
specific projects, and our inability to replace large projects when they are
completed or otherwise terminated has adversely affected, and could in the
future adversely affect, our revenues and results of operations.
We provide a portion of our services
for specific projects that generate revenues that terminate on completion of a
defined task, and we regard these revenues as
non-recurring. Non-recurring revenues derived from these
project-based arrangements accounted for approximately 35%, 32% and 39% of our
total revenues in the fiscal years ended December 31, 2009, 2008 and 2007,
respectively. While we seek, wherever possible, on completion or termination of
large projects, to counterbalance periodic declines in revenues with new
arrangements to provide services to the same client or others, our inability to
obtain sufficient new projects to counterbalance any decreases in such work may
adversely affect our future revenues and results of operations.
A
large portion of our accounts receivable is payable by a limited number of
clients; the inability of any of these clients to pay its accounts receivable
would adversely affect our results of operations.
Several significant clients account for
a large percentage of our accounts receivable. If any of these
clients were unable, or refused, for any reason, to pay our accounts receivable,
our financial condition and results of operations would be adversely affected.
As of December 31, 2009, 31% or $3.6 million, of our accounts
receivable was due from two clients. In the fourth quarter of 2009,
we recorded a provision for doubtful accounts of approximately $1.2 million on
one of our customer balances.
In
addition, we evaluate the financial condition of our clients and usually bill
and collect on relatively short cycles. We maintain specific allowances against
doubtful receivables. Actual losses on client balances could differ from those
that we currently anticipate and, as a result, we might need to adjust our
allowances. There is no guarantee that we will accurately assess the
creditworthiness of our clients. Macroeconomic conditions, such as the continued
credit crisis and related turmoil in the global financial system, could also
result in financial difficulties, including limited access to the credit
markets, insolvency or bankruptcy, for our clients, and, as a result, could
cause clients to delay payments to us, request modifications to their payment
arrangements that could increase our receivables balance, or default on their
payment obligations to us. If we are unable to collect timely from our
customers, our cash flows could be adversely affected.
Quarterly
fluctuations in our revenues and results of operations could make financial
forecasting difficult and could negatively affect our stock price.
We have experienced, and expect to
continue to experience, significant fluctuations in our quarterly revenues and
results of operations. During the past eight quarters, our income
(loss) before income taxes ranged from a loss of approximately
$(3.2) million in the fourth quarter of 2009 to a profit of approximately
$5.1 million in the first quarter of 2009.
We experience fluctuations in our
revenue and earnings as we replace and begin new projects, which may have some
normal start up delays, or we may be unable to replace a project entirely. These and other factors
may contribute to fluctuations in our results of operations from quarter to
quarter.
A high percentage of our operating
expenses, particularly personnel and rent, are relatively fixed in advance of
any particular quarter. As a result, unanticipated variations in the number and
timing of our projects, or in employee wage levels and utilization rates, may
cause us to significantly underutilize our production capacity and employees,
resulting in significant variations in our operating results in any particular
quarter, and have resulted in losses.
The
economic environment and pricing pressures could negatively impact our revenues
and operating results.
Due to
the intense competition involved in the outsourcing and information technology
services, we generally face pricing pressures from our clients. Our ability to
maintain or increase pricing is restricted as clients generally expect to
receive volume discount or special pricing incentives as we do more business
with them; moreover, our large customers may exercise pressure for discounts
outside of agreed terms.
In
addition, a significant portion of our revenues was derived from customers
located in the U.S. and Europe. If the U.S. or European economy continues to
weaken or slow, pricing for our services may be depressed, which may adversely
impact our revenues and profitability.
If
our clients are not satisfied with our services, they may terminate our
contracts with them or our services, which could have an adverse impact on our
business.
Our
business model depends in large part on our ability to attract additional work
from our base of existing clients. Our business model also depends on
relationships our account teams develop with our clients so that we can
understand our clients’ needs and deliver solutions and services that are
tailored to those needs. If a client is not satisfied with the quality of work
performed by us, or with the type of services or solutions delivered, then we
could incur additional costs to address the situation, the profitability of that
work might be impaired, and the client’s dissatisfaction with our services could
damage our ability to obtain additional work from that client. In particular,
clients that are not satisfied might seek to terminate existing contracts, which
would mean that we could incur costs for the services performed with no
associated revenue upon termination of a contract. This could also direct future
business to our competitors. In addition, negative publicity related to our
client services or relationships, regardless of its accuracy, may further damage
our business by affecting our ability to compete for new contracts with current
and prospective clients.
Our
business will suffer if we fail to develop new services and enhance our existing
services in order to keep pace with the rapidly evolving technological
environment or provide new service offerings, which may not
succeed.
The
outsourcing, information technology and consulting services industries is
characterized by rapid technological change, evolving industry standards,
changing customer preferences and new product and service introductions. Our
future success will depend on our ability to develop solutions that keep pace
with changes in the markets in which we provide services. We cannot assure you
that we will be successful in developing new services, addressing evolving
technologies on a timely or cost-effective basis or, if these services are
developed, that we will be successful in the marketplace. In addition, we cannot
assure you that products, services or technologies developed by others will not
render our services non-competitive or obsolete. Our failure to address these
developments could have a material adverse effect on our business, results of
operations and financial condition.
We
depend on third-party technology in the provision of our services.
We rely upon certain software that we
license from third parties, including software integrated with our internally
developed software used in the provision of our services. These third-party
software licenses may not continue to be available to us on commercially
reasonable or competitive terms, if at all. The loss of, or inability
to maintain or obtain any of these software licenses, could result in delays in
the provision of our services until we develop, identify, license and integrate
equivalent software. Any delay in the provision of our services could damage our
business and adversely affect our results of operations.
We
compete in highly competitive markets that have low barriers to
entry.
The markets for our services are highly
competitive and fragmented. We compete successfully against our
competitors in the future, however some of our competitors have longer operating
histories, significantly greater financial, human, technical and other resources
and greater name recognition than we do. If we fail to be competitive
with these companies in the future, we may lose market share, which could
adversely affect our revenues and results of operations.
There are relatively few barriers
preventing companies from competing with us. We do not own any patented
technology that would preclude or inhibit others from entering our market. As a
result, new market entrants also pose a threat to our business. We
also compete with in-house personnel at current and prospective clients, who may
attempt to duplicate our services using their own personnel. We cannot assure
you that our clients will outsource more of their needs to us in the future, or
that they will not choose to provide internally the services that they currently
obtain from us. If we are not able to compete effectively, our
revenues and results of operations could be adversely affected.
We may fail to attract and retain
enough sufficiently trained employees to support our operations, as competition
for highly skilled personnel is significant. These factors could have a material
adverse effect on our business, results of operations, financial condition and
cash flows.
The
outsourcing industry relies on large numbers of skilled employees, and our
success depends to a significant extent on our ability to attract, hire, train
and retain qualified employees. The outsourcing industry, including our Company,
experiences high employee attrition. Increased competition for these
professionals, in the outsourcing industry or otherwise, could have an adverse
effect on us. A significant increase in the attrition rate among employees with
specialized skills could decrease our operating efficiency and
productivity.
In
addition, our ability to maintain and renew existing engagements and obtain new
businesses will depend, in large part, on our ability to attract, train and
retain personnel with skills that enable us to keep pace with growing demands
for outsourcing, evolving industry standards and changing client preferences.
Our failure to attract, train and retain personnel with the qualifications
necessary to fulfill the needs of our existing and future clients or to
assimilate new employees successfully could have a material adverse effect on
our business, results of operations, financial condition and cash
flows.
Disruptions
in telecommunications, system failures, data corruption or virus attacks could
harm our ability to execute our global resource model, which could result in
client dissatisfaction and a reduction of our revenues.
We use a
distributed global resource model. Our onshore workforce provide services from
our North American and European offices, as well as from client sites; and our
offshore workforce provide services from our ten overseas production facilities
in the Philippines, India, India, Sri Lanka and Israel. All our global
facilities are linked with a telecommunications network that uses multiple
service providers. We may not be able to maintain active voice and data
communications between our various facilities and our clients' sites at all
times due to disruptions in these networks, system failures, data corruption or
virus attacks. Any significant failure in our ability to communicate could
result in a disruption in business, which could hinder our performance or our
ability to complete client projects on time. This, in turn, could lead to client
dissatisfaction and an adverse effect on our business, results of operations and
financial condition.
Our
international operations subject us to risks inherent in doing business on an
international level, any of which could increase our costs and hinder our
growth.
The major part of our operations is
carried on in the Philippines, India, Sri Lanka and Israel, while our
headquarters are in the United States and our clients are primarily located in
North America and Europe. While we do not depend on revenues from
sources internal to the countries in which we operate, we are nevertheless
subject to certain adverse economic factors relating to overseas economies
generally, including inflation, external debt, a negative balance of trade and
underemployment. Other risks associated with our international
business activities include:
•
difficulties in staffing international projects and managing international
operations, including overcoming logistical and communications
challenges;
• local
competition, particularly in the Philippines, India and Sri
Lanka;
• imposition
of public sector controls;
• trade
and tariff restrictions;
• price
or exchange controls;
• currency
control regulations;
• foreign
tax consequences;
• labor
disputes and related litigation and liability;
• limitations
on repatriation of earnings; and
• the
burdens of complying with a wide variety of foreign laws and
regulations.
One or more of these factors could
adversely affect our business and results of operations.
Our
international operations subject us to currency exchange fluctuations, which
could adversely affect our results of operations.
To date, most of our revenues have been
denominated in U.S. dollars, while a significant portion of our expenses,
primarily labor expenses in the Philippines, India, Sri Lanka and Israel, is
incurred in the local currencies of countries in which we
operate. For financial reporting purposes, we translate all
non-United States denominated transactions into dollars in accordance with
accounting principles generally accepted in the United States. As a
result, we are exposed to the risk that fluctuations in the value of these
currencies relative to the dollar could increase the dollar cost of our
operations and therefore adversely affect our results of
operations.
The Philippines and India have at times
experienced high rates of inflation as well as major fluctuations in the
exchange rate between the Philippine peso and the U.S. dollar and the Indian
rupee and the U.S. dollar. Continuing inflation without a corresponding
devaluations of the peso and rupee against the dollar, or any other increase in
the value of the peso or rupee relative to the dollar, could adversely affect
our results of operations.
There is no guarantee that our
financial results will not be adversely affected by currency exchange rate
fluctuations or that any efforts by us to engage in foreign currency hedging
activities will be effective. Finally, as most of our expenses are incurred in
currencies other than those in which we bill for the related services, any
increase in the value of certain foreign currencies against the U.S. dollar
could increase our operating costs.
In
the event that the government of India, the Philippines or the government of
another country changes its tax policies, rules and regulations, our tax expense
may increase and affect our effective tax rates.
We are
subject to income taxes in both the U.S. and numerous foreign jurisdictions. We
are subject to the continual examination by tax authorities in India and the
Company assesses the likelihood of outcomes resulting from these examinations to
determine the adequacy of its provision for income taxes. Although we believe
our tax estimates are reasonable, the final determination of tax audits could be
materially different than what is reflected in historical income tax provisions
and accruals, and could result in a material effect on the Company’s income tax
provision, net income or cash flows in the period or period for which that
determination is made. If additional taxes are assessed, it could have an
adverse impact on our financial results.
In
addition, unanticipated changes in the tax rates, tax laws or the interpretation
in tax laws in the jurisdiction where we operate, could affect our future
results of operations.
Our
operating results may be adversely affected by our use of derivative financial
instruments.
We have
entered into a series of foreign currency forward contracts that are designated
as cash flow hedges. These contracts are intended to partially offset the impact
of the movement of the exchange rates on future operating costs of our Asian
subsidiaries. The hedging strategies that we have implemented or may implement
to mitigate foreign currency exchange rate risks may not reduce or completely
offset our exposure to foreign exchange rate fluctuations and may expose our
business to unexpected market, operational and counterparty credit risks.
Accordingly, we may incur losses from our use of derivative financial
instruments that could have a material adverse affect on our business, results
of operations and financial condition.
Regulations
of the Internal Revenue Service may impose significant U.S. income taxes on our
subsidiaries in the Philippines.
Our subsidiaries incorporated in the
Philippines were domesticated in Delaware as limited liability
companies. In August 2004, the Internal Revenue Service promulgated
regulations, effective August 12, 2004, that treat certain companies
incorporated in foreign jurisdictions and also domesticated as Delaware limited
liability companies as U.S. corporations for U.S. federal income tax
purposes. We have affected certain filings with the Secretary of
State of the State of Delaware to ensure that these subsidiaries are no longer
domesticated in Delaware. As a result, commencing
January 1, 2005, these subsidiaries are no longer treated as U.S.
corporations for U.S. federal income tax purposes under the regulations, and
furthermore, are not subject to U.S. federal income taxes commencing as of such
date.
In the preamble to such regulations,
the IRS expressed its view that dual registered companies described in the
preceding paragraph are also treated as U.S. corporations for U.S. federal
income tax purposes for periods prior to August 12, 2004. In 2006,
the IRS issued its final regulations, stating that neither the temporary
regulations nor these final regulations are retroactive. Further,
additional guidance was released by the IRS which clarified that the regulations
upon which we relied were not binding on pre-existing entities until May
2006. For periods prior to this date (i.e., prior to August 12, 2004)
these final regulations apply, and the classification of dually chartered
entities is governed by the pre-existing regulations. As such, we
believe that our historic treatment of these subsidiaries as not having been
required to pay taxes in the United States for the period prior to August 12,
2004 is correct, and we have made no provision for U.S. taxes in our financial
statements for these entities for the periods prior to August 12,
2004.
However, we cannot assure you that the
Internal Revenue Service will not assert other positions with respect to the
foregoing matters, including positions with respect to our treatment of the tax
consequences of the termination of the status of our Philippine subsidiaries as
Delaware limited liability companies that, if successful, could increase
materially our liability for U.S. federal income taxes.
If
certain tax authorities in North America and Europe challenge the manner in
which we allocate our profits, our net income could decrease.
Substantially all of the services
provided by our Asian subsidiaries are performed on behalf of clients based in
North America and Europe. We believe that profits from our Asian operations are
not sufficiently connected to jurisdictions in North America or Europe to give
rise to income taxation in those jurisdictions. Tax authorities in
any of our jurisdictions could, however, challenge the manner in which we
allocate our profits among our subsidiaries, and we may not prevail in this type
of challenge. If such a challenge were successful, our worldwide effective tax
rate could increase, thereby decreasing our net income.
An
expiration or termination of our preferential tax rate incentives could
adversely affect our results of operations.
We currently benefit from the
preferential tax rate incentives in the Philippines and Sri Lanka which
provide that we pay reduced income taxes in those jurisdictions for a fixed
period of time that varies depending on the jurisdiction. An expiration or
termination of these incentives could substantially increase our worldwide
effective tax rate, thereby decreasing our net income and adversely affecting
our results of operations.
Our
earnings may be adversely affected if we change our intent not to repatriate
earnings in Asia or if such earnings become subject to U.S. tax on a current
basis.
We had
previously intended to remit $5.1 million of our foreign earnings to the U.S.
These earnings represent a portion of our foreign profits earned prior to 2002.
In 2009, we made a reassessment of our plans to remit such foreign earnings and
determined that these earnings will be indefinitely reinvested in our foreign
subsidiaries. Thus, we no longer accrue incremental U.S. taxes on foreign
earnings as these earnings are considered to be indefinitely reinvested outside
of the United States. While we have no plans to do so, events may occur in the
future that could effectively force us to change our current intent not to
repatriate our foreign earnings. If we change our intent and repatriate such
earnings, we will have to accrue the applicable amount of taxes associated with
such earnings and pay taxes at a substantially higher rate than our effective
income tax rate in 2009. These increased taxes could have a material adverse
effect on our business, results of operations and financial
condition.
In early
2009, President Obama’s administration announced a number of tax-related
legislative proposals that would, among other things, seek to effectively tax
certain profits of U.S. companies earned abroad. Although the President did not
include several of these proposals in the budget he announced in early 2010,
Congress could consider any of these measures at any time. If enacted into law,
and depending on their precise terms, these proposals could increase our tax
rate and tax payments, and have a material adverse effect on our business,
results of operations and financial condition.
Anti-outsourcing
legislation, if adopted, could adversely affect our business, financial
condition and results of operations and impair our ability to service our
customers.
The issue
of outsourcing of services abroad by U.S. companies is a topic of political
discussion in the United States. Measures aimed at limiting or restricting
outsourcing by U.S. companies are under discussion in Congress and in numerous
state legislatures. While no substantive anti-outsourcing legislation has been
introduced to date, given the ongoing debate over this issue, the introduction
of such legislation is possible. If introduced, our business, financial
condition and results of operations could be adversely affected and our ability
to service our customers could be impaired.
Our
growth could be hindered by visa restrictions.
Occasionally,
we have employees from our other facilities visit or transfer to the United
States to meet our clients and work on projects at clients sites. Any visa
restrictions or new legislation putting a restriction on issuing visas could
affect our business.
Immigration
and visa laws and regulations in the United States and other countries are
subject to legislative and administrative changes as well as changes in the
application of standards. Immigration and visa laws and regulations can be
significantly affected by political forces and levels of economic activity. Our
international expansion strategy and our business, results of operations and
financial condition may be materially adversely affected if legislative or
administrative changes to immigration or visa laws and regulations impair our
ability to staff projects with our professionals who are not citizens of the
country where the work is to be performed.
Political
uncertainty, political unrest and terrorism in the Philippines, India, Sri Lanka
and Israel could adversely affect business conditions in those regions, which in
turn could disrupt our business and results of operations.
We
conduct the majority of our operations in the Philippines, India, Sri Lanka and
Israel. These countries and regions remain vulnerable to disruptions from
political uncertainty, political unrest and terrorist acts.
The
Philippines continues to experience problems associated with an on-going
communist insurgency and an Islamic-separatist one. It also has the Abu
Sayyaf Group, an Islamic-separatist group engaged in bombings and kidnappings
which is purported to be have ties to the Al Qaeda terrorist organization.
While the locations affected by these groups are not near our facilities and
operations, the nature of the risk does not preclude incidents from occurring
anywhere in the country.
India has
experienced terrorist attacks on its population centers. In addition to
the toll caused by these incidents, the allegations that these attacks are
organized by Pakistan may result in the heightening of tensions and the
attendant risks of military confrontation.
The
conclusion of the civil war in Sri Lanka last year is a welcome
development. However, the concern is that activities may shift towards
asymmetrical warfare and terrorist attacks on population centers.
Since
September 2000, there has been a high level of violence between Israel and the
Palestinians. Hamas, an Islamist movement responsible for many attacks,
including missile strikes, against Israelis, won the majority of the seats in
the Parliament of the Palestinian Authority in January 2006 and took control of
the entire Gaza Strip, by force, in June 2007. Hamas has launched hundreds of
missiles from the Gaza Strip against Israeli population centers. This led to an
armed conflict between Israel and the Hamas during December 2008 and January
2009.
Any
damage to our network and/or information systems would damage our ability to
provide service, in whole or in part, and/or otherwise damage our
operation and could have an adverse effect on our business, financial
condition or results of operations. Further political tensions brought about by
any of these groups and escalation of hostilities could adversely affect our
operations based in these countries and therefore adversely affect our revenues
and results of operations.
Terrorist
attacks or a war could adversely affect our results of operations.
Terrorist attacks, such as the attacks
of September 11, 2001 in the United States and the attacks in Mumbai, India
in November 2008, and other acts of violence or war, such as the conflict in
Iraq, could affect us or our clients by disrupting normal business practices for
extended periods of time and reducing business confidence. In
addition, these attacks may make travel more difficult and may effectively
curtail our ability to serve our clients' needs, any of which could adversely
affect our results of operations.
We
are the subject of continuing litigation, including litigation by certain of our
former employees.
We are
subject to various legal proceedings and claims that arise in the ordinary
course of business.
In
addition, the Supreme Court of the Republic of the Philippines has refused to
review a decision of the Court of Appeals in Manila against a Philippines
subsidiary of the Company that is inactive and has no material assets, and
purportedly also against Innodata Isogen, Inc., that orders the reinstatement of
certain former employees of the subsidiary to their former positions and also
orders the payment of back wages and benefits that aggregate approximately $7.5
million. Based on consultation with legal counsel, the Company believes that
recovery against the Company is nevertheless unlikely.
While we
currently believe that the ultimate outcome of 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.
Substantial recovery against the Company in the above referenced Philippines
actions could have a material adverse impact on the Company, and unfavorable
rulings or recoveries in the other proceedings could have a material adverse
impact on the operating results of the period in which the ruling or recovery
occurs. In addition, our 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. See “Legal Proceedings”.
Failure
to remediate the material weaknesses in our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could
have a material adverse effect on our business and stock price.
We
identified a material weakness in our internal control over financial reporting
for the fiscal years ended December 31, 2008 and 2009. We identified that we had
errors in the computation of deferred tax assets and related income tax benefit.
Accordingly, we amended our Form 10-K for 2008 and Form 10-Q for September 30,
2009, to correct such errors. Although the errors were detected in December
2009, the mitigating controls were implemented after the end of the year and,
therefore, we have determined that further tests are required before we consider
the material weakness remediated. As defined by the Public Company Accounting
Oversight Board Auditing Standard No. 5, a material weakness is a deficiency or
a combination of deficiencies over financial reporting such that there is a
reasonable possibility that a material misstatement of the annual or the interim
financial statements will not be prevented or detected. Our failure to
successfully remediate the material weakness could cause us to fail to meet our
reporting obligations and produce timely and reliable financial information.
Additionally such failure could cause investors to lose confidence in our
reported financial information, which could have a negative impact on our
financial condition and stock price.
It
is unlikely that we will pay dividends.
We have not paid any cash dividends
since our inception and do not anticipate paying any cash dividends in the
foreseeable future. We expect that our earnings, if any, will be used
to finance our growth.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
Our services are primarily performed
from our Hackensack, New Jersey headquarters, our Dallas, Texas office, and ten
overseas production facilities in the Philippines, India, Sri Lanka and Israel,
all of which are leased. The square footage of all our leased properties is
approximately 450,000.
We currently lease property sufficient
for our business operations, although we may need to lease additional property
in the future. We also believe that we will be able to obtain suitable
additional facilities on commercially reasonable terms on an “as needed”
basis.
Item
3. Legal Proceedings.
The
Supreme Court of the Republic of the Philippines has refused to review a
decision of the Court of Appeals in Manila against a Philippines subsidiary of
the Company that is inactive and has no material assets, and purportedly also
against Innodata Isogen, Inc., that orders the reinstatement of certain former
employees of the subsidiary to their former positions and also orders the
payment of back wages and benefits that aggregate approximately $7.5 million.
Based on consultation with legal counsel, the Company believes that recovery
against the Company is nevertheless unlikely.
The Court
of Appeals decision was rendered in Case Nos. CA-G.R. SP No. 93295 Innodata
Employees Association (IDEA), Eleanor Tolentino, et al. vs. Innodata
Philippines, Inc., et al., and CA-G.R. SP No. 90538 Innodata Philippines, Inc.
vs. Honorable Acting Secretary Manuel G. Imson, et al. 28 June 2007). Matters
relating to execution of this decision are on file with the Department of Labor
and Employment National Labor Relations Commission, Republic of the Philippines
(NLRC-NCR-Case No.07-04713-2002, et al., Innodata Employees Association (IDEA)
and Eleanor A. Tolentino, et al. vs. Innodata Philippines, Inc., et al), and the
Department of Labor and Employment Office of the Secretary of Labor and
Employment, Republic of the Philippines (Case No. OS-AJ-0015-2001, In Re: Labor
Dispute at Innodata Philippines, Inc.)
The
Company is also subject to various legal proceedings and claims which arise in
the ordinary course of business.
While
management currently believes that the ultimate outcome of 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. Substantial recovery against the Company in the above referenced
Philippines actions could have a material adverse impact on the Company, and
unfavorable rulings or recoveries in the other proceedings could have a material
adverse impact on the operating results of the period in which the ruling or
recovery occurs.
Item
4. Reserved.
PART II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Innodata Isogen, Inc. (the “Company”)
Common Stock is quoted on the Nasdaq National Market System under the symbol
“INOD.” On February 19, 2010, there were 91 stockholders of record of
the Company’s Common Stock based on information provided by the Company's
transfer agent. Virtually all of the Company’s publicly held shares
are held in “street name” and the Company believes the actual number of
beneficial holders of its Common Stock to be 4,819.
The following table sets forth the high
and low sales prices on a quarterly basis for the Company's Common Stock, as
reported on Nasdaq, for the two years ended December 31, 2009.
|
|
|
Common Stock
|
|
| |
|
Sale Prices
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
6.55 |
|
|
$ |
4.19 |
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
|
5.10 |
|
|
|
2.70 |
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter
|
|
|
3.30 |
|
|
|
2.30 |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
2.65 |
|
|
|
1.32 |
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
3.78 |
|
|
$ |
1.85 |
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
|
5.47 |
|
|
|
3.15 |
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter
|
|
|
8.79 |
|
|
|
4.26 |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
8.49 |
|
|
|
4.97 |
|
Dividends
The Company has never paid cash
dividends on its Common Stock and does not anticipate that it will do so in the
foreseeable future. The future payment of dividends, if any, on the
Common Stock is within the discretion of the Board of Directors and will depend
on the Company's earnings, its capital requirements and financial condition and
other relevant factors.
Securities
Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the
aggregate information for the Company's equity compensation plans in effect as
of December 31, 2009:
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities to be Issued
|
|
|
Weighted-Average
|
|
|
Number of Securities
|
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Remaining Available For
|
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Future Issuance Under
|
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Equity Compensation Plans
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders (1)
|
|
|
1,847,000 |
|
|
$ |
2.63 |
|
|
|
1,851,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,847,000 |
|
|
$ |
2.63 |
|
|
|
1,851,000 |
|
(1) 2009 Stock Option Plan, approved by
the stockholders, see Note 9 to Consolidated Financial Statements, contained
elsewhere herein.
Purchase
of Equity Securities
In May 2008, our Board of Directors
authorized the repurchase of up to $2.0 million of our common stock. There is no
expiration date associated with the program. During the year ended December 31,
2009, we did not repurchase any shares of our common stock. During the year
ended December 31, 2008, we repurchased 606,000 shares of our common stock at a
cost of approximately $1.9 million. Approximately $0.1 million remains available
for repurchase under the program as of December 31, 2009. This authorization
replaced a prior authorization made in August 2006.
|
Item
6.
|
Selected
Financial Data.
|
The
following table sets forth our selected consolidated historical financial data
as of the dates and for the periods indicated. Our selected consolidated
financial data set forth below as of December 31, 2009 and 2008 and for
each of the three years in the period ended December 31, 2009 has been
derived from the audited financial statements included elsewhere herein. Our
selected consolidated financial data set forth below as of December 31,
2007, 2006 and 2005 and for the years ended December 31, 2006 and 2005 are
derived from the audited financial statements not included elsewhere herein. Our
selected consolidated financial information for 2009, 2008 and 2007 should be
read in conjunction with the Consolidated Financial Statements and the Notes and
“Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” which are included elsewhere in this Annual Report
on Form 10-K.
|
|
|
Year Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands, except per share data)
|
|
| |
|
|
|
|
STATEMENT
OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
79,329 |
|
|
$ |
75,001 |
|
|
$ |
67,731 |
|
|
$ |
40,953 |
|
|
$ |
42,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
operating expenses
|
|
|
54,761 |
|
|
|
53,173 |
|
|
|
48,229 |
|
|
|
34,316 |
|
|
|
30,920 |
|
|
Selling
and administrative expenses
|
|
|
16,318 |
|
|
|
16,486 |
|
|
|
15,633 |
|
|
|
14,713 |
|
|
|
13,684 |
|
|
|
|
|
71,079 |
|
|
|
69,659 |
|
|
|
63,862 |
|
|
|
49,029 |
|
|
|
44,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
8,250 |
|
|
|
5,342 |
|
|
|
3,869 |
|
|
|
(8,076 |
) |
|
|
(2,552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
28 |
|
|
|
56 |
|
|
|
33 |
|
|
|
7 |
|
|
|
18 |
|
|
Interest
income
|
|
|
(58 |
) |
|
|
(262 |
) |
|
|
(678 |
) |
|
|
(683 |
) |
|
|
(457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for (benefit from) income taxes
|
|
|
8,280 |
|
|
|
5,548 |
|
|
|
4,514 |
|
|
|
(7,400 |
) |
|
|
(2,113 |
) |
|
Provision
for (benefit from) income taxes
|
|
|
967 |
|
|
|
(1,110 |
) |
|
|
(52 |
) |
|
|
(77 |
) |
|
|
(462 |
) |
|
Net
income (loss)
|
|
$ |
7,313 |
|
|
$ |
6,658 |
|
|
$ |
4,566 |
|
|
$ |
(7,323 |
) |
|
$ |
(1,651 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.30 |
|
|
$ |
.27 |
|
|
$ |
.19 |
|
|
$ |
(.30 |
) |
|
$ |
(.07 |
) |
|
Diluted
|
|
$ |
.28 |
|
|
$ |
.26 |
|
|
$ |
.18 |
|
|
$ |
(.30 |
) |
|
$ |
(.07 |
) |
|
Cash
dividends per share
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$ |
32,589 |
|
|
$ |
21,881 |
|
|
$ |
16,329 |
|
|
$ |
14,292 |
|
|
$ |
21,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
53,565 |
|
|
$ |
44,459 |
|
|
$ |
38,449 |
|
|
$ |
30,329 |
|
|
$ |
37,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term obligations
|
|
$ |
1,199 |
|
|
$ |
1,671 |
|
|
$ |
2,128 |
|
|
$ |
1,564 |
|
|
$ |
548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
$ |
40,985 |
|
|
$ |
29,262 |
|
|
$ |
23,230 |
|
|
$ |
19,009 |
|
|
$ |
26,814 |
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion should be read
in conjunction with our consolidated financial statements and the related notes
included elsewhere in this report. In addition to historical information, this
discussion includes forward-looking information that involves risks and
assumptions which could cause actual results to differ materially from
management’s expectations. See “Forward-Looking Statements” included elsewhere
in this report.
Executive
Overview
We provide a broad and expanding range
of knowledge process outsourcing services as well as publishing and related
information technology services that help companies create and manage
information more effectively and economically. Our solutions enable
organizations to find new ways to transform inefficient business processes,
improve operations and reduce costs.
The
following table sets forth, for the period indicated, certain financial data
expressed for the three years ended December 31, 2009:
(Dollars
in millions)
|
|
|
Years Ended December 31,
|
|
|
|
|
2009
|
|
|
% of revenue
|
|
|
2008
|
|
|
% of revenue
|
|
|
2007
|
|
|
% of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
79.3 |
|
|
|
100.0 |
% |
|
$ |
75.0 |
|
|
|
100.0 |
% |
|
$ |
67.7 |
|
|
|
100.0 |
% |
|
Direct
operating costs
|
|
|
54.7 |
|
|
|
69.0 |
% |
|
|
53.2 |
|
|
|
70.9 |
% |
|
|
48.2 |
|
|
|
71.2 |
% |
|
Selling
and administrative expenses
|
|
|
16.3 |
|
|
|
20.6 |
% |
|
|
16.5 |
|
|
|
22.0 |
% |
|
|
15.6 |
|
|
|
23.0 |
% |
|
Income
from operations
|
|
|
8.3 |
|
|
|
10.4 |
% |
|
|
5.3 |
|
|
|
7.1 |
% |
|
|
3.9 |
|
|
|
5.8 |
% |
|
Other
(income) expense
|
|
|
- |
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
|
Income
before provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(benefit
from) income taxes
|
|
|
8.3 |
|
|
|
|
|
|
|
5.5 |
|
|
|
|
|
|
|
4.5 |
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
1.0 |
|
|
|
|
|
|
|
(1.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
Net
income
|
|
$ |
7.3 |
|
|
|
|
|
|
$ |
6.6 |
|
|
|
|
|
|
$ |
4.6 |
|
|
|
|
|
Revenues
Our publishing services include
digitization, conversion, composition, data modeling and XML encoding, and KPO
services include research and analysis, authoring, copy-editing, abstracting,
indexing and other content creation activities. Our IT system professionals
support the design, implementation, integration and deployment of digital
systems used to author, manage and distribute content. Services that we
anticipate a client will require for an indefinite period generate what we
regard as recurring revenues. Services that are provided for a specific project
generate revenues that terminate on completion of a defined task, and we regard
these revenues as non-recurring. We price our publishing services and KPO
services based on the quantity delivered or resources utilized and we recognize
revenue in the period in which the services are performed and delivered.
A substantial majority of our IT professional services is provided on a
project basis that generates non-recurring revenues. We price our professional
services on an hourly basis for actual time and expense incurred, or on a
fixed-fee turn-key basis. Revenues for contracts billed on a
time-and-materials basis are recognized as services are
performed. Revenues under fixed-fee contracts, which are not
significant to the overall revenues, are recognized on the percentage of
completion method of accounting, as services are performed or milestones are
achieved.
Recurring revenues comprised 65%, 68%
and 61% of total revenues for the years ended December 31, 2009, 2008 and 2007,
respectively. We have historically relied on a very limited number of
clients that have accounted for a significant portion of our revenues. Two
clients generated approximately 44%, 47% and 49% of our total revenues in the
fiscal years ended December 31, 2009, 2008 and 2007, respectively. We
may lose any of these, or our other major clients, as a result of our failure to
meet or satisfy our clients’ requirements, the completion or termination of a
project or engagement, or the client’s selection of another service provider. We
may also experience significant volume fluctuation.
In addition, the revenues we generate
from our major clients may decline or grow at a slower rate in future periods
than in the past. If we lose any of our significant clients, our
revenues and results of operations could be adversely affected, and we may incur
a loss from operations. Our services are typically subject to client
requirements, and in most cases are terminable upon 30 to 90 days’
notice.
Refer to
“Risk Factors.”
Direct
Operating Costs
Direct operating costs consist of
direct payroll, occupancy costs, depreciation and amortization, travel,
telecommunications, computer services and supplies, and other direct expenses
that are incurred in providing services to our clients.
Selling
and Administrative Expenses
Selling and administrative expenses
consist of management and administrative salaries, sales and marketing costs,
new services research and related software development, professional fees and
consultant costs and other administrative overhead costs.
Results
of Operations
Year
Ended December 31, 2009 Compared to the Year Ended December 31,
2008
Revenues
Revenues
were $79.3 million for the year ended December 31, 2009 compared to
$75.0 million for the similar period in 2008, an increase of approximately
6%. The $4.3 million increase in revenues was principally
attributable to higher revenues from three clients, and was partially offset by
a decrease in revenues from two clients. The change in revenue reflects an
increase of $7.9 million from non-recurring project revenue and a decline of
$3.6 million in recurring revenue.
Two
clients generated approximately 44% and 47% of our revenues in the fiscal years
ended December 31, 2009 and 2008, respectively. Further, for the years ended
December 31, 2009 and 2008, revenues from clients located in foreign countries
(principally in Europe) accounted for 21% of our total revenues.
For the
year ended December 31, 2009, approximately 65% of our revenue was recurring and
35% was non-recurring, compared with 68% and 32%, respectively, for the year
ended December 31, 2008.
Direct
Operating Costs
Direct operating costs were
$54.7 million and $53.2 million for the years ended December 31,
2009 and 2008, respectively, an increase of approximately 3%. Direct
operating costs as a percentage of revenues was 69% for the year ended
December 31, 2009 and 71% for the year ended December 31,
2008.
The increase in direct operating costs
was principally attributable to an increase in wage rates and variable labor
(management and production personnel) costs, compensation cost of new hires in
our consulting and technology group, benefit costs and other operating costs in
support of increased revenue. The increase in direct operating costs was
partially offset by cost savings from restructuring activity undertaken in
December 2008 and a favorable impact from foreign exchange rates of
approximately $3.0 million in direct operating costs resulting from a
strengthening of the U.S. dollar against the Philippine peso and Indian rupee.
In addition, direct operating costs in 2009 reflect $0.3 million in gains from
the settlement of foreign currency forward contracts, compared with $1.1 million
in losses from the settlement of these foreign currency forward contracts in
2008. Direct operating expenses as a percentage of revenues was lower in 2009,
compared to 2008, principally due to higher revenues and less than proportional
increases in fixed costs and favorable foreign exchange rates.
Selling
and Administrative Expenses
Selling and administrative expenses
were $16.3 million and $16.5 million for the years ended
December 31, 2009 and 2008, respectively, a decline of 1%. Selling and
administrative expenses as a percentage of revenues was 21% and 22% for the
years ended December 31, 2009 and 2008, respectively. The lower
percentage reflects sustained cost levels on a higher revenue base.
The
decrease in selling and administrative expenses principally reflects cost
reductions resulting from a restructuring program undertaken in December 2008,
the favorable impact of foreign exchange rates, and a decrease in marketing
costs and other administrative costs. These benefits were partially offset by an
increase in the provision for doubtful accounts, approximately $1.2
million, for one of our customers and the compensation costs of new sales
executives.
If no
effect were given to the $1.2 million provision for doubtful accounts, which was
recorded for one of our customers, selling and administrative expenses would
have decreased by approximately 8% in 2009 as compared to 2008 and, as a
percentage of revenues, would have been 19% in 2009, compared to 22% in
2008.
Restructuring
Costs
As part of our overall cost reduction
plan to reduce operating costs, in December 2008, we announced a restructuring
plan that reduced our global work force by approximately 260 employees. The
majority of these employees was based in Asia and terminated by December 31,
2008.
In connection with the restructuring,
we recorded in 2008, a one-time charge of approximately $0.5 million ($0.3
million in direct operating costs and $0.2 million in selling and administrative
expenses) representing severance and other personnel-related expenses. We paid $265,000 of the
total restructuring charges by December 31, 2008 and paid the remaining balance
of $210,000 in 2009.
Income
Taxes
For the
year ended December 31, 2009, we recorded a provision for income taxes primarily
for our foreign subsidiaries, which was partially offset by the benefit recorded
for the U.S. entity. Certain foreign subsidiaries enjoyed a tax holiday in 2009.
The income tax holiday for one of our Philippine subsidiaries expired in May
2009 and the income tax holiday for one of our Indian subsidiaries expired in
March 2009. As of December 31, 2009, none of our foreign subsidiaries enjoy tax
holidays. In addition, certain of our foreign subsidiaries enjoy preferential
tax rates. Certain overseas income is not subject to tax in the U.S. unless
repatriated.
We had
previously recorded a deferred tax liability on approximately $5.1 million of
foreign earnings, which we intended to remit to the U.S. These earnings
represent a portion of our foreign profits earned prior to 2002. In 2009, we
made a reassessment of our plans to remit such foreign earnings and determined
that these earnings would be indefinitely reinvested in our foreign
subsidiaries. As a result of the change in our intent, we reduced our deferred
tax liabilities related to undistributed foreign earnings by approximately $2.0
million. This reversal of deferred tax liabilities resulted in a tax benefit,
which completely offset the provision for income tax recorded for the U.S.
entity. Beginning in 2002, 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,
because such earnings are not anticipated to be remitted to the United States.
If such earnings were to be distributed, we may be subject to United States
income taxes that may not be fully offset by foreign tax credits.
For the
year ended December 31, 2008, the benefit from income taxes resulted primarily
from the reversal of a valuation allowance previously recorded on the U.S.
portion of deferred tax assets. We recorded no provision for U.S. income taxes,
other than for alternative minimum tax, because we utilized net operating losses
for which we had previously recorded a valuation allowance against the
corresponding deferred tax asset. The income tax benefit was partially reduced
by the provision for foreign income taxes attributable to overseas
subsidiaries.
In assessing the realization of
deferred tax assets, we consider whether it is more likely than not that all or
some portion of the deferred tax assets will not be realizable. The ultimate
realization of the deferred tax assets is dependent upon the generation of
future taxable income during the periods in which temporary differences are
deductible and net operating losses are available. We consider many factors when
assessing the likelihood of future realization of the deferred tax assets,
including our recent cumulative earnings experience by taxing jurisdiction,
expectation of future taxable income, the carryforward periods available to us
for tax reporting purposes, and other relevant factors. Based upon management’s
assessment and the available evidence, in 2008 we reversed the entire portion of
the valuation allowance previously recorded on the U.S. portion of deferred tax
assets, resulting in a non-cash tax benefit amounting to $2.4 million. The
decline in the valuation allowance in 2008 also resulted from the utilization of
net operating losses. We utilized approximately $5.8 million and $3.8 million of
net operating losses for the years ended December 31, 2009 and 2008,
respectively. The remaining valuation allowance at December 31, 2009 and 2008
represents the allowance we have established on deferred tax assets of our
foreign subsidiaries.
Pursuant
to an income tax audit by the Indian Bureau of Taxation, in March 2006, one of
our Indian subsidiaries received a tax assessment approximating $0.3 million,
including interest through December 31, 2009, for the fiscal tax year ended
March 31, 2003. We disagree with the basis of the tax assessment, and
have filed an appeal against the assessment, which we will
contest vigorously. The Indian Bureau of Taxation has also completed an
audit of our Indian subsidiary’s income tax return for the fiscal tax year ended
March 31, 2004. The ultimate outcome was favorable, and there was no
tax assessment imposed for the fiscal tax year ended March 31, 2004.
In December 2008 and December 2009, the Indian subsidiary received a tax
assessment from the India Bureau of Taxation for the fiscal years ended March
31, 2005 and 2006, respectively, each approximating $0.3 million, including
interest through December 31, 2009. We disagree with the basis of the tax
assessments, have filed an appeal against the assessments and will contest it
vigorously. In 2009, the Indian Bureau of Taxation commenced an audit
of our subsidiary’s income tax return for the fiscal year ended 2008. The
ultimate outcome cannot be determined at this time. As we are continually
subject to tax audit by the Indian bureau of Taxation, we assessed the
likelihood of an unfavorable assessment for the fiscal year 2008 and recorded an
additional tax provision amounting to $323,000, including interest through
December 31, 2009.
We had
unrecognized tax benefits of $1.3 million and $0.8 million at December 31, 2009
and 2008, respectively. The portion of unrecognized tax benefits relating to
interest and penalties was $0.4 million and $0.2 million at December 31, 2009
and 2008, respectively. The unrecognized tax benefits as of December 31, 2009
and 2008, respectively, if recognized, would have an impact on our effective tax
rate.
We are
subject to various tax audits and claims which arise in the ordinary course of
business. Management currently believes that the ultimate outcome of these
audits and claims will not have a material adverse effect on our consolidated
financial position or results of operations.
Net
Income
We
generated net income of $7.3 million in 2009 compared with net income of
$6.7 million in 2008. The positive change was principally attributable to
the increase in gross margins resulting from increased revenues, favorable
foreign exchange rates, a net favorable impact on the settlement of foreign
currency forward contracts, lower selling and administrative expenses as a
percentage of revenues, and overall cost savings from restructuring activity
undertaken in December 2008. These were partially offset by compensation
costs related to the hiring of new sales executives and an increase in the
provision for doubtful accounts, approximately $1.2 million, for one of our
customers. The positive change was also attributable to the reversal of
the deferred tax liability, based on the intent to reinvest $5.1 million of
foreign earnings indefinitely, offset by the reversal of a valuation allowance
previously recorded on the U.S. portion of deferred tax assets, amounting to
$2.4 million in 2008 and a decrease in interest income on available cash as a
result of the decline in interest rates.
Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007
Revenues
Revenues
were $75.0 million for the year ended December 31, 2008 compared to
$67.7 million for the similar period in 2007, an increase of approximately
11%. The $7.3 million increase in revenues reflects a $9.7 million increase
from recurring revenue and a decline of $2.4 million from non-recurring project
revenue.
Four
clients generated approximately 57% and 61% of our revenues in the fiscal year
ended December 31, 2008 and 2007, respectively. Further, for the year ended
December 31, 2008 and 2007, revenues from clients located in foreign countries
(principally in Europe) accounted for 21% and 23% respectively, of our
total revenues.
For the
year ended December 31, 2008, approximately 68% of our revenue was recurring and
the 32% balance was non-recurring, compared with 61% and 39%,
respectively, for the year ended December 31, 2007. The increase in the
percentage of recurring revenues is due to ongoing growth in existing client
relationships.
Direct
Operating Costs
Direct operating costs were
$53.1 million and $48.2 million for the years ended December 31,
2008 and 2007, respectively, an increase of approximately 10%. Direct
operating costs as a percentage of revenues was 70% for the year ended
December 31, 2008 and 71% for the year ended December 31,
2007.
The increase in direct operating costs
reflects higher compensation, benefit costs and other operating costs in support
of increased revenue, the impact of foreign exchange rates of approximately $1.1
million in direct operating costs resulting from a weakened U.S. dollar against
the Philippine peso and Indian rupee as well as approximately $1.1 million in
losses from the settlement of forward contracts.
If no
effect were given to the approximately $1.1 million resulting from foreign
exchange fluctuation and $1.1 million of losses resulting from the settlement of
foreign currency forward contracts, direct operating costs would have increased
by approximately 6% in 2008 as compared to 2007 and, as a percentage of
revenues, would have been 68% in 2008, compared to 72% in 2007.
Selling
and Administrative Expenses
Selling and administrative expenses
were $16.5 million and $15.6 million for the years ended
December 31, 2008 and 2007, respectively, an increase of approximately
5%. Selling and administrative expenses as a percentage of revenues
was 22% and 23% for the years ended December 31, 2008 and 2007,
respectively. The lower percentage reflects sustained cost levels on
a higher revenue base.
The increase in selling and
administrative expenses principally reflects increased sales and administrative
payroll and payroll related costs.
Restructuring
Costs
As part of our overall cost reduction
plan to reduce operating costs, in December 2008, we announced a restructuring
plan reducing our global work force by approximately 260 employees. The majority
of these employees was based in Asia and terminated by December 31,
2008.
In connection with the restructuring,
we recorded a one-time charge of approximately $0.5 million ($0.3 million
in direct operating costs and $0.2 million in selling and
administrative expenses) representing severance and other personnel-related
expenses.
Income
Taxes
For the
year ended December 31, 2008, the benefit from income taxes resulted primarily
from the reversal of a valuation allowance previously recorded on the U.S.
portion of deferred tax assets. We recorded no provision for U.S. income taxes,
other than for alternative minimum tax, because we utilized net operating losses
for which we had previously recorded a valuation allowance against the
corresponding deferred tax asset. The income tax benefit was partially reduced
by the provision for foreign income taxes attributable to overseas
subsidiaries.
For the year ended
December 31, 2007, the benefit from income taxes represented a
deferred tax benefit arising due to the nature of timing differences in certain
overseas entities. In addition, certain overseas income was neither subject
to foreign income taxes because of tax holidays granted to us, nor subject to
tax in the U.S. unless repatriated. No provision for income taxes, other than
alternative minimum tax, was recorded for our U.S. entity primarily due to
utilization of net operating losses for which a valuation allowance was
previously recorded against the corresponding deferred tax asset. In 2007, we
recorded a benefit for the refund of taxes paid and interest from the IRS
amounting to $395,000 and $60,000, respectively, which was the outcome of the
final regulation from the IRS resulting in termination of the status of our
Philippine subsidiaries as Delaware limited liability companies (Refer to “Risk
Factors”).
In assessing the realization of
deferred tax assets, we consider whether it is more likely than not that all or
some portion of the deferred tax assets will not be realizable. The
ultimate realization of the deferred tax assets is dependent upon the generation
of future taxable income during the periods in which temporary differences are
deductible and net operating losses are available. We consider many factors when
assessing the likelihood of future realization of the deferred tax assets,
including our recent cumulative earnings experience by taxing jurisdiction,
expectation of future taxable income, the carryforward periods available to us
for tax reporting purposes, and other relevant factors. Based upon management’s
assessment and the available evidence, in 2008 we reversed the entire portion of
the valuation allowance previously recorded on the U.S. portion of deferred tax
assets resulting in a non-cash tax benefit amounting to $2.4 million. The
decline in the valuation allowance in 2008 also resulted from the utilization of
net operating losses. In 2008, we utilized $3.8 million of net operating losses.
The remaining valuation allowance at December 31, 2008 represents the portion we
have established on deferred tax assets of our foreign
subsidiaries.
We had
previously intended to remit to the United States approximately $5.1 million of
foreign earnings for which we recorded a deferred tax liability. These earnings
represented a portion of our foreign profits earned prior to 2002. Beginning in
2002, unremitted earnings of foreign subsidiaries were included in the
consolidated financial statements without giving effect to the United States
taxes that may have been payable on distribution to the United States, because
such earnings were not anticipated to be remitted to the United
States.
Pursuant
to an income tax audit by the Indian Bureau of Taxation, in March 2006, one of
our Indian subsidiaries received a tax assessment approximating $434,000,
including interest through December 31, 2008, for the fiscal tax year ended
March 31, 2003. We disagree with the basis of the tax assessment, and
have filed an appeal against the assessment, which we will
contest vigorously. The Indian Bureau of Taxation has also completed an
audit of our Indian subsidiary’s income tax return for the fiscal tax year ended
March 31, 2004. The ultimate outcome was favorable, and there was no
tax assessment imposed for the fiscal tax year ended March 31, 2004.
In December 2008, we received a final tax assessment from the India Bureau of
Taxation for the fiscal year ended March 31, 2005 for which we have provided
adequate tax provision, including interest through December 31, 2008. We
disagree with the basis of the tax assessment; we have filed an appeal against
the assessment and will contest it vigorously. In 2008, the Indian Bureau of
Taxation commenced an audit of our subsidiary’s income tax return for
the fiscal year ended 2006. The ultimate outcome cannot be determined at this
time.
We had
unrecognized tax benefits of $840,000 and $740,000 at December 31, 2008 and
2007, respectively. The portion of unrecognized tax benefits relating to
interest and penalties was $253,000 and $153,000 at December 31, 2008 and 2007,
respectively. As of December 31, 2008 and 2007 respectively, $664,000 and
$564,000 of our unrecognized tax benefits, if recognized, would have an impact
on our effective tax rate.
We are
subject to various tax audits and claims which arise in the ordinary course of
business. Management currently believes that the ultimate outcome of these
audits and claims will not have a material adverse effect on our consolidated
financial position or results of operations.
Net
Income
We
generated net income of $6.7 million in 2008 compared with net income of
$4.6 million in 2007. The change was principally attributable to the
increase in gross margin resulting from increased revenues and lower selling and
administrative expenses as a percentage of revenues, a reversal of a valuation allowance
previously recorded on the U.S. portion of
the deferred tax assets amounting to $2.4 million, offset by a decrease
in interest income on available cash as a result of decline in interest rates,
and an increase in foreign effective tax rates resulting in increase in income
taxes attributable to our overseas subsidiaries.
Liquidity
and Capital Resources
Selected measures of liquidity and
capital resources, expressed in thousands, are as follows:
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
26,480 |
|
|
$ |
13,875 |
|
|
$ |
14,751 |
|
|
Working
capital
|
|
|
32,589 |
|
|
|
21,881 |
|
|
|
16,329 |
|
At December 31, 2009 we had cash and
cash equivalents of $26.5 million. We have used, and plan to use, such cash for
(i) expansion of existing operations; (ii) general corporate purposes, including
working capital; and (iii) possible business acquisitions. As of December 31,
2009, we had no third party debt and had working capital of approximately $32.6
million as compared to working capital of approximately $21.9 million at
December 31, 2008. Accordingly, we do not anticipate any near-term liquidity
issues. Cash balances are held at leading commercial banks in bank
deposits.
Our quarterly operating results are
also subject to certain seasonal fluctuations. We generally experience lower
revenue in the first quarter as we replace projects that were brought to an end
in the fourth quarter and we begin new projects, which may have some normal
start up delays during the first quarter. These and other seasonal factors may
contribute to fluctuations in our results of operations from quarter to
quarter.
Net
Cash Provided By Operating Activities
Cash provided by our operating
activities in 2009 was $12.1 million resulting from a net income of $7.3
million, adjustments for non-cash items of $5.1 million and $0.3 million used
for working capital. Adjustments for non-cash items principally consisted of
$3.7 million for depreciation and amortization, $1.4
million provision for doubtful accounts, of which $1.2 million was
recorded for one of our customers and the remaining $0.2 million for other
customers, $0.6 million for net change in deferred taxes and $0.2 million for
pension costs. Working capital activities primarily consisted of a source of
cash of $0.9 million as a result of payment on accounts receivable, a use of
cash of $0.4 million for an increase in prepaid expenses and other current
assets, representing various prepayments made and timing of payment and a use of
cash amounting to $0.6 million in income and other taxes and payment of accrued
salaries, wages and other benefits.
Cash provided by our operating
activities in 2008 was $4.5 million resulting from a net income of $6.7 million,
adjustments for non-cash items of $2.0 million and $4.2 million used for working
capital. Adjustments for non-cash items primarily consisted of $3.7 million for
depreciation and amortization, $2.7 million for deferred taxes primarily
resulting from a reversal of valuation allowance for the U.S. entity amounting
to $2.4 million and $0.4 million for pension costs. Working capital activities
primarily consisted of a use of cash of $3.7 million for an increase in accounts
receivable primarily related to an increase in revenue and use of cash of $0.6
million for decline in accounts payable and accrued expenses representing the
timing of expenditures and payments.
Cash provided by our operating
activities in 2007 was $6 million resulting from a net income of $4.6 million,
adjustments for non-cash items of $3.9 million and $2.5 million used for working
capital. Adjustments for non-cash items primarily consisted of $3.2 million for
depreciation and amortization and $0.7 million for pension costs. Working
capital activities primarily consisted of a use of cash of $4.2 million for an
increase in accounts receivable primarily related to an increase in revenue, a
source of cash of $1.0 million of an increase in accounts payable due to timing
of expenditure, a source of cash of $1.7 million for an increase in accrued
salaries and wages due to an increase in the number of employees and higher
labor rates in support of higher revenue volume and a use of cash of $1.5
million due to payment of minimum withholding taxes on the net settlement of
stock options exercised by our Chairman and CEO.
At December 31, 2009, our days’ sales
outstanding were approximately 60 days as compared to 62 days as of December 31,
2008 and 52 days as of December 31, 2007.
Net
Cash Used in Investing Activities
During 2009, 2008 and 2007, cash used
in our investing activities was $2.2 million, $2.5 million and $4.4 million,
respectively, for capital expenditures. Capital expenditures in 2009 related
principally to the purchasing of routine technology equipment and software.
Capital spending in 2008 related principally to the purchasing of routine
technology equipment and facility upgrades. Furthermore, in 2008 and 2007, we
acquired certain computer and communications equipment approximating $0.1
million and $0.8 million, respectively, through finance leases (non-cash).
During the next twelve months, we anticipate that capital expenditures for
ongoing technology, hardware, equipment and infrastructure upgrades will
approximate $3.0 to $4.0 million, a portion of which we may
finance.
Net
Cash Provided by (Used in) Financing Activities
Cash from financing activities was
principally driven by employee stock option exercises. Cash proceeds received
from the exercise of stock options amounted to approximately $3.5 million, $0.1
million and $0.5 million in 2009, 2008 and 2007, respectively. In addition,
total payment of long term obligations approximated $0.8 million, $1.1 million
and $0.8 million for 2009, 2008 and 2007, respectively.
In March 2008, we renewed a vendor
agreement, which had expired in February 2008, to acquire certain additional
software licenses and to receive support and subsequent software upgrades on
these and other currently owned software licenses through February 2011, for a
total cost of approximately $1.7 million, representing a non-cash investing and
financing activity. In conjunction with this agreement, we paid approximately
$0.6 million, in each of 2009 and 2008. The agreement, which expired in February
2008, was originally entered in February 2005 for a total cost of approximately
$1.6 million. In conjunction with this agreement, we paid the balance of $0.6
million in 2007.
In May 2008, we announced that our
Board of Directors authorized the repurchase of up to $2 million of our common
stock. In 2008, we acquired approximately 606,000 shares of our common stock for
approximately $1.9 million at a volume weighted average price of $3.08 per
share. No shares
were repurchased in 2009.
As we operate in a number of countries
around the world, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and may have a material adverse impact on our consolidated financial
results. Our primary exposure relates to non-U.S. based operating expenses in
Philippines, India and Israel. Our U.S. Corporate headquarters has historically
funded expenditures for our foreign subsidiaries. We are exposed to foreign
exchange risk and therefore we use foreign currency forward contracts to
mitigate our exposure to fluctuating future cash flows arising from changes in
foreign exchange rates. We may continue to enter
into these or other such instruments in the future,
to reduce foreign currency exposure to appreciation or depreciation in the value
of these foreign currencies.
Other than the aforementioned forward
contracts, we have not engaged in any hedging activities nor have we entered
into off-balance sheet transactions, arrangements or other relationships with
unconsolidated entities or other persons that are likely to affect liquidity or
the availability of our requirements for capital resources.
Future
Liquidity and Capital Resource Requirements
We have a
$7.0 million line of credit pursuant to which we may borrow up to 80% of
eligible accounts receivable. Borrowings under the credit line bear interest at
the bank’s alternate base rate plus 0.5% or LIBOR plus 3%. The line, which
expires in June 2010, is collateralized by our accounts receivable. We have no
outstanding obligations under this credit line as of December 31, 2009. We plan
on renewing the line of credit in the second quarter of 2010.
We believe that our existing cash and
cash equivalents, funds generated from our operating activities and funds
available under our credit facility will provide sufficient sources of liquidity
to satisfy our financial needs for the next twelve months. However, if
circumstances change, we may need to raise debt or additional equity capital in
the future. We have historically funded our foreign expenditures from our U.S.
Corporate headquarters on an as-needed basis.
Contractual
Obligations
The table below summarizes our
contractual obligations (in thousands) at December 31, 2009, and the effect that
those obligations are expected to have on our liquidity and cash flows in future
periods.
|
|
|
Payments Due by Period
|
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
After
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
$ |
161 |
|
|
$ |
126 |
|
|
$ |
35 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Non-cancelable
operating leases
|
|
|
2,559 |
|
|
|
793 |
|
|
|
1,134 |
|
|
|
632 |
|
|
|
- |
|
|
Long-term
vendor obligations
|
|
|
550 |
|
|
|
550 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations
|
|
$ |
3,270 |
|
|
$ |
1,469 |
|
|
$ |
1,169 |
|
|
$ |
632 |
|
|
$ |
- |
|
Future expected obligations under our
pension benefit plans have not been included in the contractual cash obligations
table above.
Inflation,
Seasonality and Prevailing Economic Conditions
Our most significant costs are the
salaries and related benefits of our employees in Asia. We are exposed to higher
inflation in wage rates in the countries we operate. We generally
perform work for our clients under project-specific contracts,
requirements-based contracts or long-term contracts. We must adequately
anticipate wage increases, particularly on our fixed-price contracts. There can
be assurance that we will be able to recover cost increases through increases in
the prices that we charge for our services to our customers.
Our quarterly operating results are
subject to certain fluctuations. We experience fluctuations
in our revenue and earnings as we replace and begin new projects, which may have
some normal start up delays, or we may be unable to replace a project entirely.
These and other factors may contribute to fluctuations in our operating
results from quarter to quarter. In addition, as some of our Asian facilities
are closed during holidays in the fourth quarter, we typically incur higher
wages due to overtime that reduces our margins.
Critical
Accounting Policies and Estimates
Basis
of Presentation and Use of Estimates
Our
discussion and analysis of our results of operations, liquidity and capital
resources are based on our consolidated financial statements which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates and judgments, including those related to revenue recognition,
allowance for doubtful accounts and billing adjustments, long-lived assets,
goodwill, valuation of deferred tax assets, value of securities underlying
stock-based compensation, litigation accruals, pension benefits, valuation of
derivative instruments and estimated accruals for various tax exposures. We base
our estimates on historical and anticipated results and trends and on various
other assumptions that we believe are reasonable under the circumstances,
including assumptions as to future events. These estimates form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. By their nature, estimates are subject
to an inherent degree of uncertainty. Actual results may differ from our
estimates and could have a significant adverse effect on our consolidated
results of operations and financial position. We believe the following critical
accounting policies affect our more significant estimates and judgments in the
preparation of our consolidated financial statements.
Allowance
for Doubtful Accounts
We establish credit terms for new
clients based upon management’s review of their credit information and project
terms, and perform ongoing credit evaluations of our clients, adjusting credit
terms when management believes appropriate, based upon payment history and an
assessment of their current credit worthiness. We record an allowance
for doubtful accounts for estimated losses resulting from the inability of our
clients to make required payments. We determine this allowance by
considering a number of factors, including the length of time trade accounts
receivable are past due, our previous loss history, our estimate of the client’s
current ability to pay its obligation to us, 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, we cannot
guarantee that credit loss rates in the future will be consistent with those
experienced in the past. In addition, we will have credit exposure if
the financial condition of one of our major clients were to
deteriorate. In the event that the financial condition of our clients
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be necessary.
Revenue
Recognition
We recognize revenue in the period in
which we perform services and deliver in accordance with Staff Accounting
Bulletin 104.
We recognize IT professional services
revenues from custom applications and systems integration development which
require significant production, modification or customization of software in a
manner similar to accounting for performance of construction-type and certain
production-type contracts. We recognize revenue
for such services billed under fixed-fee arrangements, which are not significant
to our overall revenues, using the percentage-of-completion method under
contract accounting as we perform services or reach output
milestones. We measure the percentage completed 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, we record 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). Revenues from fixed-fee projects
accounted for less than 10% of our total revenue for each of the three years in
the period ended December 31, 2009. We recognize revenue billed
on a time-and-materials basis as we perform the services.
Long-lived
Assets
We assess the recoverability of our
long-lived assets, which consist primarily of fixed assets and intangible assets
with finite useful lives, whenever events or changes in circumstance indicate
that the carrying value may not be recoverable. The following factors, if
present, may trigger an impairment review: (i)
significant underperformance relative to expected
historical or projected future operating results;
(ii) significant negative industry or economic trends; (iii)
significant decline in our stock price for a sustained
period; and (iv) a change in our market
capitalization relative to net book value. If the recoverability of these assets
is unlikely because of the existence of one or more of the
above-mentioned factors, we perform an impairment analysis using a
projected discounted cash flow method. We must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of these respective assets. If these estimates or related assumptions
change in the future, we may be required to record an impairment charge.
Impairment charges would be included
in general and administrative expenses in our
statements of operations, and would result in reduced carrying
amounts of the related assets on our balance sheets. We did not
recognize an impairment in any of our long-lived assets during each of the three
years in the period ended December 31, 2009.
Income
Taxes
We determine our deferred taxes based
on the difference between the financial statement and tax basis 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. We provide a valuation allowance when it is more likely than
not that all or some portion of the deferred tax assets will not be
realized. We provide a valuation allowance for net operating loss
carryforwards which may not be realized and for deferred tax assets in foreign
jurisdictions which may not be realized because of our current tax holidays.
While we consider future taxable income in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize
the deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax assets would increase income in the period such
determination was made. Change in valuation allowance from period to period are
included in our tax provision in the period of change. We had previously
recorded a deferred tax liability on approximately $5.1 million of foreign
earnings, which represents a portion of foreign profits earned prior to 2002. In
2009, we made a reassessment on the remittances of such foreign earnings and
determined that these earnings will be indefinitely reinvested in our foreign
subsidiaries. Beginning in 2002, 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 because such earnings are not anticipated to be remitted to the
United States.
In
addition we have provided for an accrual for potential tax obligations resulting
from income tax audits and other potential tax obligations.
We
adopted an accounting standard on income taxes regarding uncertain tax positions
on January 1, 2007. The adoption did not have an effect on our results of
operations or financial position. We recognize interest and penalties related to
uncertain tax positions in income tax expense in our consolidated statement of
operations.
Goodwill
and Other Intangible Assets
We test goodwill annually for
impairment using a two-step fair value based test. The first step of
the goodwill impairment test, used to identify potential impairment, compares
the fair value of a reporting unit with its carrying amount, including goodwill.
If the carrying amount of the reporting unit exceeds its fair value, the second
step of the goodwill impairment test must be performed to measure the amount of
the impairment loss, if any. If impairment is determined, we will recognize
additional charges to operating expenses in the period in which they are
identified, which would result in a reduction of operating results and a
reduction in the amount of goodwill. Our most recent test for impairment was
conducted as of September 30, 2009, in which the estimated fair values of the
reporting unit exceeded its carrying amount, including goodwill. As
such, no impairment was identified or recorded.
Accounting
for Stock-Based Compensation
We are authorized to grant stock
options to officers, directors and employees of the Company under various Stock
Option Plans approved by stockholders.
We measure and recognize stock-based
compensation expense for all share-based payment awards made to employees and
directors based on estimated fair value at the grant date and is recognized over
the requisite service period. Determining the fair value of stock-based awards
at the grant date requires judgment, including estimating the expected term of
stock options and the expected volatility of our stock. The fair value is
determined using the Black-Scholes option-pricing model. We recorded stock-based
compensation expense of approximately $204,000, $220,000 and $174,000 for the
years ended December 31, 2009, 2008 and 2007, respectively.
Legal
Proceedings
We are
subject to various legal proceedings and claims which arise in the ordinary
course of business. Our legal reserves related to these
proceedings and claims are based on a determination of whether or not a loss is
probable. We review outstanding claims and proceedings with external counsel to
assess probability and estimates of loss. The reserves are adjusted if
necessary. If circumstances change, we may be required to record adjustments
that could be material to our reported financial condition and results of
operations.
Pensions
Recent
Accounting Pronouncements
In the
third quarter of 2009, we adopted the Financial Accounting Standards Board
(“FASB”) “Accounting Standards
Codification” (“ASC”).
The ASC is the single official source of authoritative, nongovernmental
GAAP, other than guidance issued by the SEC. The adoption of the ASC did not
have any impact on our consolidated financial statements included
herein.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, an update to fair
value measurements and disclosures. This update provides amendments that reduce
potential ambiguity in financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides clarification that in
circumstances, in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the valuation techniques described in the
update. This update was effective for our annual financial statements
for the year ended December 31, 2009. The adoption of this update did not have
any impact on our consolidated financial statements.
In
October 2009, FASB issued an amendment to its accounting guidance on revenue
arrangements with multiple deliverables. This new accounting guidance addresses
the unit of accounting for arrangements involving multiple deliverables and how
consideration should be allocated to separate units of accounting, when
applicable. This guidance will be effective for fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. We are currently
evaluating the impact of this guidance on our consolidated financial
statements.
In
January 2010, FASB issued an amendment regarding improving disclosures about
fair value measurements. This new guidance requires some new disclosures and
clarifies some existing disclosure requirements about fair value measurement.
The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances and settlements in
the roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. The adoption of this
guidance is not expected to have an impact on our consolidated financial
statements.
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
Interest
rate risk
We are exposed to interest rate change
market risk with respect to our credit line with a financial institution which
is priced based on the bank’s alternate base rate (3.25% at December 31, 2009)
plus 0.5% or LIBOR (0.25% at December 31, 2009) plus 2.5%. We have
not borrowed under this line in 2009. We plan on renewing the line of
credit in the second quarter of 2010. To the extent we utilize all or a portion
of this line of credit, changes in the interest rate will have a positive or
negative effect on our interest expense.
Foreign
currency risk
We have operations in several
international markets that are subject to foreign currency fluctuations.
Although the majority of our contracts are denominated in U.S. dollars, a
substantial portion of the costs incurred to render services under these
contracts is incurred in the local currencies of several international markets
where we carry on our operations. Our significant operations are based in the
Philippines, India and Israel where revenues are generated in U.S. dollars and
the corresponding expenses are generated in Philippine pesos, Indian rupees and
Israeli shekels.
To
mitigate the exposure of fluctuating future cash flows due to changes in foreign
exchange rates, we entered into foreign currency forward contracts. These
foreign currency forward contracts were entered into with a maximum term of
twelve months and have an aggregate notional amount of approximately $36.3
million as of December 31, 2009. We may continue to enter these or other such
instruments in the future to reduce foreign currency exposure to appreciation or
depreciation in the value of these foreign currencies.
The
impact of foreign currency fluctuations will continue to present economic
challenges to us and could negatively impact our overall results of operations.
A 1% appreciation in the U.S. dollar’s value relating to the hedged currencies
would decrease the forward contracts’ fair value by approximately $0.4 million
as of December 31, 2009. Similarly, a 1% depreciation in the U.S. dollar’s value
relative to the hedged currencies would increase the forward contracts’ fair
value by approximately $0.4 million. Any increase or decrease in the fair value
of our currency exchange rate sensitive forward contracts, if utilized, would be
substantially offset by a corresponding decrease or increase in the fair value
of the hedged underlying cash flows.
Other
than the aforementioned forward contracts, we have not engaged in any hedging
activities nor have we entered into off-balance sheet transactions or
arrangements.
As of December 31, 2009, our foreign
locations held cash totaling approximately $11.4 million.
|
Item
8.
|
Financial
Statements and Supplementary Data.
|
See Financial Statements and Financial
Statement Index commencing on page F-1 herein.
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
|
Item
9A.
|
Controls
and Procedures.
|
Evaluation of Disclosure Controls and
Procedures
We
maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
Under
the supervision and with the participation of our management, including our
Chief Executive Officer and our Chief Financial Officer, we conducted an
evaluation of the effectiveness of our disclosure controls and procedures, as
defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our
Chief Executive Officer and our Chief Financial Officer concluded that, as of
December 31, 2009, our disclosure controls and procedures were not effective.
The Company had determined that it had errors in the computation of deferred tax
assets and related income tax benefit. Accordingly, the Company amended its Form
10-K for 2008 and Form 10-Q for September 30, 2009, to correct such errors and
included descriptions of the material weakness (as defined in Exchange Act Rules
13a-15(f) and 15-d-15(f)) in internal control identified and the controls and
procedures instituted and implemented over the tax process.
Changes
in Internal Control over Financial Reporting
There
have been no changes in the Company’s internal controls over financial reporting
(as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act)
during the last fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting, other than those made to designed to remediate
the material weakness, as described below. We identified a material weakness in
our internal control over financial reporting and have described the changes to
our internal controls over financial reporting designed to remediate this
material weakness.
Report
of Management on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of our financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for preparation
of our financial statements; providing reasonable assurance that receipts and
expenditures of company assets are made in accordance with management
authorization; and providing reasonable assurance that unauthorized acquisition,
use or disposition of company assets that could have a material effect on our
financial statements would be prevented or detected on a timely basis. Because
of its inherent limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our management concluded that the
Company’s internal control over financial reporting was not effective as of
December 31, 2009, due to existence of a material weakness, as described
below.
In the
course of making our assessment of the effectiveness of internal control over
financial reporting, we identified a material weakness in our internal control
over financial reporting. The preparation and review process for the calculation
of the tax provision was inadequate, which led to errors in the computation of
deferred tax assets and related income tax benefit. Although the errors were
detected in December 2009, the mitigating controls were implemented after the
end of the year and, therefore, we have determined that further tests are
required of the mitigating controls before we can consider the material weakness
remediated. Over the
next year, we will continue to focus on our internal controls over accounting
for income taxes, and we have implemented procedures designed to detect or
prevent this error from occurring in the future. The Company implemented further
enhancements to policies and procedures relating to tax account reconciliations
and analysis and a control requiring an outside tax advisor and consulting firm
to review our quarterly as well as annual tax provision calculations. We have
discussed these actions with our audit committee and believe that such enhanced
procedures will prospectively mitigate this material
weakness.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009, was audited by J.H. Cohn LLP, our independent registered
public accounting firm, as stated in their report appearing
below.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders of Innodata Isogen, Inc.:
We have
audited Innodata Isogen, Inc. and Subsidiaries’ (“Innodata”) internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Innodata’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Report of Management on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
effectiveness of Innodata’s internal control over financial reporting based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, assessing the risk that
a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk and performing such
other procedures as we consider necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. A material
weakness has been identified and included in management’s assessment relating to
inadequate controls over the Company’s income tax provision preparation and
review process. This material weakness was considered in determining the nature,
timing and extent of audit tests applied in our audit of the 2009 consolidated
financial statements, and this report does not affect our report dated March 10,
2010, on those financial statements.
In our
opinion, because of the effects of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2009 based on the COSO criteria.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of December
31, 2009 and 2008, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years then ended and 2009 and 2008
financial statement schedule, of Innodata Isogen, Inc. and Subsidiaries’ and our
report dated March 10, 2010, expressed an unqualified opinion
thereon.
/s/J.H.
Cohn LLP
Roseland,
New Jersey
March 10,
2010
Item
9B. Other information.
None.
PART III
Item
10. Directors, Executive Officers and Corporate
Governance.
The
information called for by Item 10 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2009 fiscal year.
The
Company has a code of ethics that applies to all of its employees, officers, and
directors, including its principal executive officer, principal financial and
accounting officer, and controller. The text of the Company’s code of
ethics is posted on its website at www.innodata-isogen.com. The Company intends
to disclose future amendments to, or waivers from, certain provisions of the
code of ethics for executive officers and directors in accordance with
applicable Nasdaq and SEC requirements.
Item
11. Executive Compensation.
The
information called for by Item 11 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2009 fiscal year.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The
information called for by Item 12 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2009 fiscal year.
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
The
information called for by Item 13 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2009 fiscal year.
Item
14. Principal Accounting Fees and Services.
The
information called for by Item 14 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2009 fiscal year.
PART
IV
Item
15. Exhibits, Financial Statement Schedules.
(a)
1. Financial
Statements. See Item 8. Index to Financial
Statements.
2. Financial
Statement Schedules. Schedule II – Valuation and Qualifying
Accounts.
3. Exhibits
– See Exhibit Index attached hereto and incorporated by reference
herein.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
INNODATA
ISOGEN, INC.
|
|
|
|
|
By
|
/s/ Jack Abuhoff
|
|
|
Jack
Abuhoff
|
|
|
Chairman
of the Board,
|
|
|
Chief
Executive Officer and
President
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Jack Abuhoff
|
|
Chairman
of the Board,
|
|
March
11, 2010
|
|
Jack
Abuhoff
|
|
Chief
Executive Officer and President
|
|
|
|
|
|
|
|
|
|
/s/ O’Neil Nalavadi
|
|
Senior
Vice President,
|
|
March
11, 2010
|
|
O’Neil
Nalavadi
|
|
Chief
Financial Officer
|
|
|
|
|
|
and
Principal Accounting Officer
|
|
|
|
|
|
|
|
|
|
/s/ Todd Solomon
|
|
Director
|
|
March
11, 2010
|
|
Todd
Solomon
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Louise C. Forlenza
|
|
Director
|
|
March
11, 2010
|
|
Louise
C. Forlenza
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Haig S. Bagerdjian
|
|
Director
|
|
March
11, 2010
|
|
Haig
S. Bagerdjian
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Stewart R. Massey
|
|
Director
|
|
March
11, 2010
|
|
Stewart
R. Massey
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Anthea C. Stratigos
|
|
Director
|
|
March
11, 2010
|
|
Anthea
C. Stratigos
|
|
|
|
|
Item
8. Financial Statements.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
PAGE
|
|
|
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
|
F-2,
F-3
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
|
F-4
|
|
|
|
|
|
Consolidated
Statements of Operations for the three years ended December 31,
2009
|
|
F-5
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity for the three years ended December 31,
2009
|
|
F-6
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31,
2009
|
|
F-7
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-8
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders of Innodata Isogen, Inc.:
We have
audited the accompanying consolidated balance sheets of Innodata Isogen, Inc.
and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the years then
ended. Our audits of the basic consolidated financial statements included the
2009 and 2008 financial statement schedule listed in the index appearing under
Item 15. These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits. The consolidated financial
statements and financial statement schedule for the year ended December 31,
2007, were audited by other auditors whose report dated March 11, 2008 expressed
an unqualified opinion on those statements and financial statement
schedule.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the 2009 and 2008 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Innodata
Isogen, Inc. and Subsidiaries as of December 31, 2009 and 2008, and their
results of operations and cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related 2009 and 2008 financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Innodata Isogen Inc. and Subsidiaries’ internal
control over financial reporting as of December 31, 2009 based on criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organization of the Treadway Commission (COSO) and our report
dated March 10, 2010, expressed an adverse opinion thereon.
/s/ J.H.
Cohn LLP
Roseland,
New Jersey
March 10,
2010
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
We have
audited the accompanying consolidated statements of operations, stockholders’
equity, and cash flows of Innodata Isogen, Inc. and subsidiaries (the “Company”)
for the year ended December 31, 2007. Our audit of the basic
financial statements included the financial statement schedule listed in the
index appearing under Item 15. These financial statements and
financial statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of Innodata Isogen,
Inc. and subsidiaries for the year ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ GRANT
THORNTON LLP
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2009 AND 2008
(in
thousands, except share data)
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
26,480 |
|
|
$ |
13,875 |
|
|
Accounts
receivable-net of allowance for doubtful accounts of $1,808 and $466 at
December 31, 2009 and 2008, respectively
|
|
|
11,741 |
|
|
|
14,017 |
|
|
Prepaid
expenses and other current assets
|
|
|
3,899 |
|
|
|
2,246 |
|
|
Deferred
income taxes
|
|
|
1,763 |
|
|
|
3,189 |
|
|
Total
current assets
|
|
|
43,883 |
|
|
|
33,327 |
|
|
Property
and equipment, net
|
|
|
5,559 |
|
|
|
6,726 |
|
|
Other
assets
|
|
|
2,505 |
|
|
|
2,825 |
|
|
Deferred
income taxes
|
|
|
943 |
|
|
|
906 |
|
|
Goodwill
|
|
|
675 |
|
|
|
675 |
|
|
Total
assets
|
|
$ |
53,565 |
|
|
$ |
44,459 |
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,261 |
|
|
$ |
1,053 |
|
|
Accrued
expenses
|
|
|
2,293 |
|
|
|
2,540 |
|
|
Accrued
salaries, wages and related benefits
|
|
|
5,022 |
|
|
|
5,289 |
|
|
Income
and other taxes
|
|
|
1,339 |
|
|
|
1,649 |
|
|
Current
portion of long term obligations
|
|
|
892 |
|
|
|
915 |
|
|
Deferred
income taxes
|
|
|
487 |
|
|
|
- |
|
|
Total
current liabilities
|
|
|
11,294 |
|
|
|
11,446 |
|
|
Deferred
income taxes
|
|
|
87 |
|
|
|
2,080 |
|
|
Long
term obligations
|
|
|
1,199 |
|
|
|
1,671 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
Serial
preferred stock; 5,000,000 shares authorized, none
outstanding
|
|
|
- |
|
|
|
- |
|
|
Common
stock, $.01 par value; 75,000,000 shares authorized; 26,167,000 shares
issued and 25,379,000 outstanding at December 31, 2009; and 24,907,000
shares issued and 24,119,000 outstanding at December 31,
2008
|
|
|
262 |
|
|
|
249 |
|
|
Additional
paid-in capital
|
|
|
20,267 |
|
|
|
16,614 |
|
|
Retained
earnings
|
|
|
21,159 |
|
|
|
13,846 |
|
|
Accumulated
other comprehensive income
|
|
|
1,486 |
|
|
|
742 |
|
|
|
|
|
43,174 |
|
|
|
31,451 |
|
|
Less:
treasury stock, 788,000 shares at cost
|
|
|
(2,189 |
) |
|
|
(2,189 |
) |
|
Total
stockholders’ equity
|
|
|
40,985 |
|
|
|
29,262 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
53,565 |
|
|
$ |
44,459 |
|
See notes
to consolidated financial statements.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
(In
thousands, except per share amounts)
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
79,329 |
|
|
$ |
75,001 |
|
|
$ |
67,731 |
|
|
Operating
costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
operating costs
|
|
|
54,761 |
|
|
|
53,173 |
|
|
|
48,229 |
|
|
Selling
and administrative expenses
|
|
|
16,318 |
|
|
|
16,486 |
|
|
|
15,633 |
|
|
|
|
|
71,079 |
|
|
|
69,659 |
|
|
|
63,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
8,250 |
|
|
|
5,342 |
|
|
|
3,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
28 |
|
|
|
56 |
|
|
|
33 |
|
|
Interest
income
|
|
|
(58 |
) |
|
|
(262 |
) |
|
|
(678 |
) |
|
Income
before provision for (benefit from) income taxes
|
|
|
8,280 |
|
|
|
5,548 |
|
|
|
4,514 |
|
|
Provision
for (benefit from) income taxes
|
|
|
967 |
|
|
|
(1,110 |
)) |
|
|
(52 |
) |
|
Net
income
|
|
$ |
7,313 |
|
|
$ |
6,658 |
|
|
$ |
4,566 |
|
|
Income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$ |
.30 |
|
|
$ |
.27 |
|
|
$ |
.19 |
|
|
Diluted:
|
|
$ |
.28 |
|
|
$ |
.26 |
|
|
$ |
.18 |
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
24,613 |
|
|
|
24,390 |
|
|
|
24,142 |
|
|
Diluted:
|
|
|
25,764 |
|
|
|
25,137 |
|
|
|
25,327 |
|
See notes
to consolidated financial statements.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2007
|
|
|
23,905 |
|
|
|
241 |
|
|
|
17,225 |
|
|
|
2,622 |
|
|
|
(760 |
) |
|
|
(319 |
) |
|
|
19,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,566 |
|
|
|
- |
|
|
|
- |
|
|
|
4,566 |
|
|
Issuance
of common stock upon exercise of stock options
|
|
|
794 |
|
|
|
8 |
|
|
|
447 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
455 |
|
|
Payment
of minimum withholding taxes on net settlement of stock
options
|
|
|
- |
|
|
|
- |
|
|
|
(1,523 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,523 |
) |
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
174 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
174 |
|
|
Pension
liability adjustments, net of taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
549 |
|
|
|
- |
|
|
|
549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
24,699 |
|
|
|
249 |
|
|
|
16,323 |
|
|
|
7,188 |
|
|
|
(211 |
) |
|
|
(319 |
) |
|
|
23,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,658 |
|
|
|
- |
|
|
|
- |
|
|
|
6,658 |
|
|
Issuance
of common stock upon exercise of stock options
|
|
|
26 |
|
|
|
- |
|
|
|
71 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
71 |
|
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
220 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
220 |
|
|
Pension
liability adjustments, net of taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
953 |
|
|
|
- |
|
|
|
953 |
|
|
Purchase
of treasury stock
|
|
|
(606 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,870 |
) |
|
|
(1,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
24,119 |
|
|
|
249 |
|
|
|
16,614 |
|
|
|
13,846 |
|
|
|
742 |
|
|
|
(2,189 |
) |
|
|
29,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,313 |
|
|
|
- |
|
|
|
- |
|
|
|
7,313 |
|
|
Issuance
of common stock upon exercise of stock options
|
|
|
1,260 |
|
|
|
13 |
|
|
|
3,449 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,462 |
|
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
204 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
204 |
|
|
Pension
liability adjustments, net of taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(75 |
) |
|
|
- |
|
|
|
(75 |
) |
|
Change
in fair value of derivatives, net of taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
819 |
|
|
|
- |
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
25,379 |
|
|
$ |
262 |
|
|
$ |
20,267 |
|
|
$ |
21,159 |
|
|
$ |
1,486 |
|
|
$ |
(2,189 |
) |
|
$ |
40,985 |
|
See notes
to consolidated financial statements.
INNODATA
ISOGEN INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
(In
thousands)
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,313 |
|
|
$ |
6,658 |
|
|
$ |
4,566 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,713 |
|
|
|
3,702 |
|
|
|
3,156 |
|
|
Provision
for doubtful accounts
|
|
|
1,364 |
|
|
|
339 |
|
|
|
57 |
|
|
Stock-based
compensation
|
|
|
204 |
|
|
|
220 |
|
|
|
174 |
|
|
Deferred
income taxes
|
|
|
(607 |
) |
|
|
(2,656 |
) |
|
|
(87 |
) |
|
Pension
cost
|
|
|
223 |
|
|
|
439 |
|
|
|
667 |
|
|
Loss
on sale of equipment
|
|
|
176 |
|
|
|
- |
|
|
|
- |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
912 |
|
|
|
(3,683 |
) |
|
|
(4,246 |
) |
|
Prepaid
expenses and other current assets
|
|
|
(353 |
) |
|
|
204 |
|
|
|
(976 |
) |
|
Refundable
income taxes
|
|
|
- |
|
|
|
453 |
|
|
|
609 |
|
|
Other
assets
|
|
|
(234 |
) |
|
|
(206 |
) |
|
|
(147 |
) |
|
Accounts
payable
|
|
|
208 |
|
|
|
(920 |
) |
|
|
986 |
|
|
Accrued
expenses
|
|
|
(247 |
) |
|
|
313 |
|
|
|
258 |
|
|
Payment
of minimum withholding taxes on net settlement of stock
options
|
|
|
- |
|
|
|
- |
|
|
|
(1,523 |
) |
|
Accrued
salaries, wages and related benefits
|
|
|
(267 |
) |
|
|
45 |
|
|
|
1,745 |
|
|
Income
and other taxes
|
|
|
(310 |
) |
|
|
(404 |
) |
|
|
758 |
|
|
Net
cash provided by operating activities
|
|
|
12,095 |
|
|
|
4,504 |
|
|
|
5,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(2,168 |
) |
|
|
(2,452 |
) |
|
|
(4,449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
of long-term obligations
|
|
|
(784 |
) |
|
|
(1,129 |
) |
|
|
(849 |
) |
|
Proceeds
from exercise of stock options
|
|
|
3,462 |
|
|
|
71 |
|
|
|
455 |
|
|
Purchase
of treasury stock
|
|
|
- |
|
|
|
(1,870 |
) |
|
|
- |
|
|
Net
cash provided by (used in) financing activities
|
|
|
2,678 |
|
|
|
(2,928 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
12,605 |
|
|
|
(876 |
) |
|
|
1,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
13,875 |
|
|
|
14,751 |
|
|
|
13,597 |
|
|
Cash
and cash equivalents, end of year
|
|
$ |
26,480 |
|
|
$ |
13,875 |
|
|
$ |
14,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
2,194 |
|
|
$ |
1,099 |
|
|
$ |
325 |
|
|
Cash
paid for interest
|
|
$ |
28 |
|
|
$ |
56 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of equipment utilizing capital leases
|
|
$ |
- |
|
|
$ |
81 |
|
|
$ |
770 |
|
|
Vendor
financed software licenses acquired
|
|
$ |
- |
|
|
$ |
1,650 |
|
|
$ |
- |
|
See notes
to consolidated financial statements
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Description
of Business and Summary of Significant Accounting
Policies
|
Description of
Business-Innodata Isogen, Inc. and subsidiaries (the “Company”), is
a leading provider of knowledge process outsourcing (KPO) services as well as
publishing and related information technology services that help organizations
create, manage and maintain their products. Publishing services include
digitization, conversion, composition, data modeling and XML encoding, and KPO
services include research and analysis, authoring, copy-editing, abstracting,
indexing and other content creation activities. The Company’s staff of IT
systems professionals design, implements, integrates and deploys systems and
technologies used to improve the efficiency of authoring, managing and
distributing content.
Principles of Consolidation and Basis
of Presentation-The consolidated financial statements include the
accounts of Innodata Isogen, Inc. and its subsidiaries, all of which are wholly
owned. All significant intercompany transactions and balances have been
eliminated in consolidation.
The Company has evaluated subsequent
events through the date and time the financial statements were issued. No
material subsequent events have occurred since December 31, 2009 that would
require recognition or disclosure in these consolidated financial
statements.
Use of Estimates-In preparing
financial statements in conformity with accounting principles generally accepted
in the United States of America, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include those related to revenue recognition, allowance for doubtful
accounts and billing adjustments, long-lived assets, goodwill, valuation of
deferred tax assets, value of securities underlying stock-based compensation,
litigation accruals, pension benefits, valuation of derivative instruments and
estimated accruals for various tax exposures.
Revenue Recognition-Revenue is
recognized in the period in which services are performed and delivery has
occurred and when all the criteria of Staff Accounting Bulletin 104 have been
met.
The Company recognizes its IT
professional services revenues from custom application and systems integration
development which requires significant production, modification or customization
of software in a manner similar to accounting for performance of construction
type and certain production type contracts. Revenue from such
services billed under fixed-fee arrangements, which are not significant to the
overall revenue, 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). Revenues from fixed-fee projects accounted for less than
10% of our total revenue for each of the three years in the period ended
December 31, 2009. Revenue billed on a time and materials basis
is recognized as services are performed.
Foreign Currency
Translation-The functional currency for the Company’s production
operations located in the Philippines, India, Sri Lanka and Israel is U.S.
dollars. As such, transactions denominated in Philippine pesos,
Indian and Sri Lankan rupees and Israeli shekels were translated to U.S. dollars
at rates which approximate those in effect on transaction dates. Monetary assets
and liabilities denominated in foreign currencies at December 31, 2009 and
2008 were translated at the exchange rate in effect as of those dates.
Nonmonetary assets, liabilities, and stockholders’ equity are translated at the
appropriate historical rates. Included in direct operating costs are exchange
losses (gains) resulting from such transactions of approximately $256,000,
$(190,000) and $925,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments- In the
first quarter of 2009, the Company adopted a recent accounting standard on
derivatives and hedging, which requires enhanced qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
the fair value amounts of gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements.
The
Company has designated its derivative (foreign currency forward contracts) as a
cash flow hedge. Accordingly, the effective portion of the derivative’s gain or
loss is initially reported as a component of accumulated other comprehensive
income or loss and is subsequently reclassified to earnings when the hedge
exposure affects earnings. The Company formally documents all relationships
between hedging instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedging activities.
Cash Equivalents-For financial
statement purposes (including cash flows), the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Property and
Equipment-Property and equipment are stated at cost and are 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. Certain assets under capital leases are
amortized over the lives of the respective leases or the estimated useful lives
of the assets, whichever is shorter.
Long-lived Assets-Management
assesses the recoverability of its long-lived assets, which consist primarily of
fixed assets and intangible assets with finite useful lives, whenever events or
changes in circumstance indicate that the carrying value may not be recoverable.
The following factors, if present, may trigger an impairment review:
(i) significant underperformance
relative to expected historical or projected
future operating results; (ii) significant negative industry
or economic trends; (iii) significant decline in the Company’s stock
price for a sustained period; and (iv) a change in
the Company’s market capitalization relative to net book value. If the
recoverability of these assets is unlikely
because of the existence of one or more of the
above-mentioned factors, an impairment analysis is performed initially
using a projected undiscounted cash flow method. Management must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of these respective assets. If these estimates or related
assumptions change in the future, the Company may be required to record an
impairment charge. Impairment charges, which would be based on discounted cash
flows, would be included in general and administrative
expenses in the Company’s statements of
operations, and would result in reduced carrying amounts of the
related assets on the Company’s balance sheets. No
impairment charges were recorded in the three years ended December 31,
2009.
Goodwill and Other Intangible
Assets-Goodwill represents the excess purchase price paid over the fair
value of net assets acquired. The Company tests its goodwill on an annual basis
using a two-step fair value based test. The first step of the goodwill
impairment test, used to identify potential impairment, compares the fair value
of a reporting unit, with its carrying amount, including goodwill. If the
carrying amount of the reporting unit exceeds its fair value, the second step of
the goodwill impairment test must be performed to measure the amount of the
impairment loss, if any. If impairment is determined, the Company will recognize
additional charges to operating expenses in the period in which they are
identified, which would result in a reduction of operating results and a
reduction in the amount of goodwill.
In the annual impairment test conducted
by the Company on September 30, 2009, 2008 and 2007 the estimated fair values of
the reporting unit exceeded its carrying amount, including
goodwill. As such, no impairment was identified or
recorded.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes-Deferred taxes
are determined based on the difference between the financial statement and tax
basis 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 all or some portion of the deferred tax assets will not be
realized. While the Company considers future taxable income in assessing the
need for the valuation allowance, in the event that the Company would determine
that it would be able to realize the deferred tax assets in the future in excess
of its net recorded amount, an adjustment to the deferred tax assets would
increase income in the period such determination was made. Change in valuation
allowance from period to period is included in the Company’s tax provision in
the period of change. The Company had previously recorded a deferred tax
liability on approximately $5.1 million of foreign earnings, which represents a
portion of foreign profits earned prior to 2002. In 2009, the Company made a
reassessment on the remittances of such foreign earnings and determined that
these earnings will be indefinitely reinvested in its foreign subsidiaries.
Beginning in 2002, 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
because such earnings are not anticipated to be remitted to the United
States.
On
January 1, 2007, the Company adopted an accounting standard on income taxes
regarding uncertain tax positions. The adoption did not have an effect on the
results of operations or financial position of the Company. The Company
recognizes interest and penalties related to uncertain tax positions in income
tax expense in the consolidated statement of operations.
Accounting for Stock-Based
Compensation –
The Company measures and recognizes stock-based compensation expense for all
share-based payment awards made to employees and directors based on estimated
fair value at the grant date. The stock-based compensation expense is recognized
over the requisite service period. The fair value is determined using the
Black-Scholes option-pricing model.
The stock-based compensation expense
related to the Company’s various stock option plans was allocated as follows (in
thousands):
|
|
|
Years Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
operating costs
|
|
$ |
13 |
|
|
$ |
46 |
|
|
$ |
74 |
|
|
Selling
and adminstrative expenses
|
|
|
191 |
|
|
|
174 |
|
|
|
100 |
|
|
Total
stock-based compensation
|
|
$ |
204 |
|
|
$ |
220 |
|
|
$ |
174 |
|
Fair
Value of Financial Instruments- The carrying
amounts of financial instruments, including cash and cash equivalents, accounts
receivable and accounts payable approximated their fair value as of December 31,
2009 and 2008, because of the relative short maturity of these
instruments.
Fair
value measurements and disclosures defines fair value as the price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
The
Company adopted an update made to fair value measurements and disclosures on
January 1, 2009, which delayed the effective date of the accounting
standard for all non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value on a recurring basis (at
least annually). This update did not have any impact on the Company’s
consolidated financial statements.
The
accounting standard establishes a fair value hierarchy that prioritizes the
inputs used to measure fair value into three levels. The three levels are
defined as follows:
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
·
|
Level 1: Unadjusted
quoted price in active market for identical assets and
liabilities.
|
|
|
·
|
Level 2: Observable
inputs other than those included in Level
1.
|
|
|
·
|
Level 3: Unobservable
inputs reflecting management’s own assumptions about the inputs used in
pricing the asset or
liability.
|
Accounts Receivable-The
majority of the Company’s accounts receivable are due from secondary publishers
and information providers. 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
number of factors, including the length of time trade accounts receivable are
past due (accounts outstanding longer than the payment terms are considered 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.
Concentration of Credit
Risk-The Company maintains its cash with high quality financial
institutions, located primarily in the United States. To the extent
that such cash exceeds the maximum insurance levels, the Company is
uninsured. The Company has not experienced any losses in such
accounts.
Income per Share- Basic income per
share is computed using the weighted-average number of common shares outstanding
during the year. Diluted income per share is computed by considering the impact
of the potential issuance of common shares, using the treasury stock method, on
the weighted average number of shares outstanding.
Pension-The Company records
annual pension costs based on calculations, which include various actuarial
assumptions including discount rates, compensation increases and other
assumptions involving demographic factors. The Company reviews its actuarial
assumptions on an annual basis and makes modifications to the assumptions based
on current rates and trends. The Company believes that the assumptions used in
recording its pension obligations are reasonable based on its experience, market
conditions and inputs from its actuaries.
Deferred revenue-Deferred
revenue represents payments received from customers in advance of providing
services and amounts deferred if conditions for revenue recognition have not
been met. Included in accrued expenses on the accompanying consolidated balance
sheets as of December 31, 2009 and 2008 is deferred revenue amounting to $0.9
million and $1.3 million, respectively.
Reclassifications-Certain
reclassifications have been made to the prior years’ consolidated financial
statements to conform to the current year’s presentation.
Recent
Accounting Pronouncements-In the
third quarter of 2009, the Company adopted the Financial Accounting Standards
Board (“FASB”) “Accounting
Standards Codification” (“ASC”). The ASC is the single
official source of authoritative, nongovernmental generally accepted accounting
principles (“GAAP”), other than guidance issued by the SEC. The adoption of the
ASC did not have any impact on the consolidated financial statements included
herein.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, an update to fair
value measurements and disclosures. This update provides amendments that reduce
potential ambiguity in financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides clarification that in
circumstances, in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the valuation techniques described in the
update. This update became effective for the Company’s annual
financial statements for the year ending December 31, 2009. The adoption of this
update did not have any impact on the Company’s consolidated financial
statements.
In
October 2009, the FASB issued an amendment to its accounting guidance on revenue
arrangements with multiple deliverables. This new accounting guidance addresses
the unit of accounting for arrangements involving multiple deliverables and how
consideration should be allocated to separate units of accounting, when
applicable. This guidance will be effective for fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. The Company is currently
evaluating the impact of this guidance on its consolidated financial
statements.
In
January 2010, the FASB issued an amendment regarding improving disclosures about
fair value measurements. This new guidance requires some new disclosures and
clarifies some existing disclosure requirements about fair value measurement.
The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances and settlements in
the roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. The adoption of this
guidance is not expected to have an impact on the Company’s consolidated
financial statements.
|
|
2.
|
Property
and equipment
|
Property and equipment, which include
amounts recorded under capital leases, are stated at cost less accumulated
depreciation and amortization (in thousands), and consist of the
following:
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$ |
19,574 |
|
|
$ |
18,831 |
|
|
Software
|
|
|
3,931 |
|
|
|
3,671 |
|
|
Furniture
and office equipment
|
|
|
1,967 |
|
|
|
1,878 |
|
|
Leasehold
improvements
|
|
|
4,181 |
|
|
|
4,149 |
|
|
Total
|
|
|
29,653 |
|
|
|
28,529 |
|
|
Less
accumulated depreciation and amortization
|
|
|
(24,094 |
) |
|
|
(21,803 |
) |
|
|
|
$ |
5,559 |
|
|
$ |
6,726 |
|
Depreciation and amortization expense
of property and equipment was approximately $3.1 million, $3.1 million and $2.6
million for each of the three years in the period ended December 31,
2009.
At December 31, 2009 and 2008,
equipment under capital leases had a gross cost of approximately $1.6 million.
Accumulated depreciation of equipment under capital leases was $1.3 million and
$1.0 million for 2009 and 2008, respectively. Amortization of assets under
capital leases is included under depreciation and amortization
expense.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The significant components of the
provision for (benefit from) income taxes for each of the three years in the
period ended December 31, 2009 are as follows (in thousands):
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
income tax expense:
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$ |
1,476 |
|
|
$ |
1,531 |
|
|
$ |
441 |
|
|
Federal
|
|
|
55 |
|
|
|
72 |
|
|
|
(359 |
) |
|
State
and local
|
|
|
27 |
|
|
|
20 |
|
|
|
(54 |
) |
|
|
|
|
1,558 |
|
|
|
1,623 |
|
|
|
28 |
|
|
Deferred
income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
- |
|
|
|
(342 |
) |
|
|
(103 |
) |
|
Federal
|
|
|
(496 |
) |
|
|
(1,839 |
) |
|
|
31 |
|
|
State
and local
|
|
|
(95 |
) |
|
|
(552 |
) |
|
|
(8 |
) |
|
|
|
|
(591 |
) |
|
|
(2,733 |
) |
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
$ |
967 |
|
|
$ |
(1,110 |
) |
|
$ |
(52 |
) |
The
reconciliation of the U.S. statutory rate with the Company’s effective tax rate
for each of the three years ended December 31 is summarized as
follows:
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
statutory rate Effect of:
|
|
|
34.0
|
% |
|
|
34.0
|
% |
|
|
34.0
|
% |
|
State
income taxes (net of federal tax benefit)
|
|
|
3.5 |
|
|
|
6.3 |
|
|
|
(11.3 |
) |
|
Taxes
on foreign income at rates that differ from U.S. statutory
rate
|
|
|
(9.2 |
) |
|
|
6.9 |
|
|
|
(2.5 |
) |
|
Reversal
of deferred tax liability relating to unrepatriated foreign
earnings
|
|
|
(23.9 |
) |
|
|
- |
|
|
|
- |
|
|
Change
in valuation allowance on deferred tax assets
|
|
|
0.8 |
|
|
|
(68.2 |
) |
|
|
(4.8 |
) |
|
Increase
in unrecognized tax benefits
|
|
|
7.5 |
|
|
|
1.8 |
|
|
|
- |
|
|
IRS
refund for foreign subsidiaries
|
|
|
- |
|
|
|
- |
|
|
|
(8.7 |
) |
|
Other
|
|
|
(1.0 |
) |
|
|
(0.8 |
) |
|
|
(7.8 |
) |
|
Effective
rate
|
|
|
11.7
|
% |
|
|
(20.0 |
)
% |
|
|
(1.1 |
)
% |
No tax benefits related to stock option
exercises were recorded for each of the three years in the period ended
December 31, 2009 due to net operating loss
carryforwards.
Deferred tax assets and liabilities are
classified as current or non-current according to the classification of the
related asset or liability. Significant components of the Company’s
deferred tax assets and liabilities as of December 31, are as follows (in
thousands):
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
Allowances
not currently deductible
|
|
$ |
822 |
|
|
$ |
267 |
|
|
Depreciation
and amortization
|
|
|
401 |
|
|
|
297 |
|
|
Equity
compensation not currently deductible
|
|
|
200 |
|
|
|
265 |
|
|
Net
operating loss carryforwards
|
|
|
314 |
|
|
|
2,455 |
|
|
Expenses
not deductible until paid
|
|
|
823 |
|
|
|
836 |
|
|
Tax
credit carryforwards
|
|
|
236 |
|
|
|
26 |
|
|
Other
|
|
|
42 |
|
|
|
17 |
|
|
Total
gross deferred income tax assets before valuation
allowance
|
|
|
2,838 |
|
|
|
4,163 |
|
|
Valuation
allowance
|
|
|
(132 |
) |
|
|
(68 |
) |
|
Net
deferred income tax assets
|
|
|
2,706 |
|
|
|
4,095 |
|
| |
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign
source income, not taxable until repatriated
|
|
|
- |
|
|
|
(1,981 |
) |
|
Derivatives
|
|
|
(481 |
) |
|
|
- |
|
|
Other
|
|
|
(93 |
) |
|
|
(99 |
) |
|
Totals
|
|
|
(574 |
) |
|
|
(2,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$ |
2,132 |
|
|
$ |
2,015 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred income tax asset-current
|
|
$ |
1,763 |
|
|
$ |
3,189 |
|
|
Net
deferred income tax asset-long term
|
|
|
943 |
|
|
|
906 |
|
|
Net
deferred income tax liability-current
|
|
|
(487 |
) |
|
|
- |
|
|
Net
deferred income tax liability-non-current
|
|
|
(87 |
) |
|
|
(2,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
deferred income tax assets
|
|
$ |
2,132 |
|
|
$ |
2,015 |
|
In assessing the realization of
deferred tax assets, management considers whether it is more likely than not
that all or some portion of the deferred tax assets will not be
realizable. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible and net operating losses are
available. In 2008, the Company considered many factors when assessing the
likelihood of future realization of the deferred tax assets, including the
Company’s cumulative earnings experience by taxing jurisdiction, expectation of
future taxable income, the carryforward periods available for tax reporting
purposes, and other relevant factors. Based upon management’s
assessment and the available evidence, in 2008 the Company reversed the entire
portion of the valuation allowance previously recorded on the U.S. portion of
deferred tax assets resulting in a non-cash tax benefit amounting to $2.4
million. The decline in valuation allowance in 2008 also resulted from the
utilization of net operating losses. The remaining valuation allowance at
December 31, 2009 and 2008 represents the portion the Company has established on
deferred tax assets of its foreign subsidiaries.
The Company had previously
recorded a deferred tax liability on approximately $5.1 million of foreign
earnings, which it intended to remit to the U.S. These earnings represent
a portion of the Company’s foreign profits earned prior to 2002. In 2009, the
Company made a reassessment on the remittances of such foreign earnings and
determined that these earnings will be indefinitely reinvested in its foreign
subsidiaries. As a result of the change in assertion, the Company reduced its
deferred tax liabilities related to undistributed foreign earnings by
approximately $2.0 million. Beginning in 2002, 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 because such earnings are not anticipated to be remitted to
the United States. Undistributed earnings of
foreign subsidiaries amount to $17.7 million at December 31, 2009. These
earnings are considered to be indefinitely reinvested, and, accordingly, no
provision for U.S. Federal or state income taxes has been
made.
The Company had established a valuation
allowance of approximately $3.7 million at December 31, 2007. The net
change in the total valuation allowance for the years ended December 31, 2009,
2008 and 2007 was an increase (decline) of $0.1 million, $(3.7) million and $0.3
million, respectively. The Company utilized approximately $5.8 million, $3.8
million and $2.1 million of net operating loss carryforwards for the years ended
December 31, 2009, 2008 and 2007, respectively.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
United States and foreign components of
income before income taxes for each of the three years ended December
31, (in thousands) are as follows:
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
3,919 |
|
|
$ |
3,455 |
|
|
$ |
2,750 |
|
|
Foreign
|
|
|
4,361 |
|
|
|
2,093 |
|
|
|
1,764 |
|
|
Total
|
|
$ |
8,280 |
|
|
$ |
5,548 |
|
|
$ |
4,514 |
|
Certain of the Company’s foreign
subsidiaries were subject to tax holidays in the past. The income tax holiday of
one of the Philippine subsidiaries expired in May 2009 and of one of the Indian
subsidiaries expired in March 2009. As of December 31, 2009, there
were no foreign subsidiaries, which are subject to tax holidays. Due to the tax
holidays, the income tax rate for these subsidiaries was substantially reduced,
the tax benefit from which was approximately $153,000, $378,000 and $95,000 for
each of the three years in the period ended December 31, 2009,
respectively. In addition, certain of the Company’s foreign subsidiaries are
subject to preferential tax rates.
At December 31, 2009, the Company had
U.S. Federal and New Jersey state net operating loss carryforwards available of
approximately $4.5 million and $6.5 million, respectively. These net operating
loss carryforwards expire at various times through 2026. Stock option
exercises resulted in tax deductions in excess of previously recorded benefits
based on the option value at the time of grant (a “windfall”). Although these
benefits were reflected in the net operating losses, the additional tax benefit
associated with the windfall is not recognized until the deduction reduces taxes
payable. Accordingly, since the tax benefit did not reduce the current taxes
payable due to net operating losses, these windfall tax benefits were not
reflected in the deferred tax assets for 2009 and 2008. Windfalls included in
net operating losses but not reflected in deferred tax assets as of December 31,
2009 were approximately $4.0 million.
On January 1, 2007, the Company adopted
an accounting standard on income taxes regarding uncertain tax positions. The
adoption did not have an effect on the results of operations or financial
position of the Company.
The Company had unrecognized tax
benefits of $1.3 million and $0.8 million at December 31, 2009 and 2008,
respectively. The portion of unrecognized tax benefits relating to interest and
penalties was $0.4 million and $0.2 million at December 31, 2009 and 2008,
respectively. The unrecognized tax benefits as of December 31, 2009 and 2008,
respectively, if recognized, would have an impact on the Company’s effective tax
rate.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table represents a roll forward of the Company’s unrecognized tax
benefits (amounts in thousands):
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
840 |
|
|
$ |
740 |
|
|
Increases
for tax position in prior years
|
|
|
470 |
|
|
|
|
|
|
Decrease
for tax position in prior years
|
|
|
(176 |
) |
|
|
|
|
|
Interest
accrual
|
|
|
169 |
|
|
|
100 |
|
|
Balance
at end of year
|
|
$ |
1,303 |
|
|
$ |
840 |
|
The Company is subject to U.S. federal
income tax as well as income tax in various states and foreign jurisdictions. In
the third quarter of 2007, the IRS completed the audit for the Company’s 2004
and 2005 income tax returns, which resulted in a decrease to the Company’s net
operating loss carryforward of approximately $70,000. The Company is no longer
subject to examination by federal and New Jersey taxing authorities for years
prior to 2006. Various foreign subsidiaries currently have open tax years
ranging from 2004 through 2008.
Pursuant
to an income tax audit by the Indian Bureau of Taxation in March 2006, one of
the Company’s Indian subsidiaries received a tax assessment approximating
$339,000, including interest through December 31, 2009, for the fiscal tax year
ended March 31, 2003. Management disagrees with the basis of the tax
assessment, and has filed an appeal against the assessment, which it will
contest vigorously. The Indian Bureau of Taxation has also completed an
audit of the Company’s Indian subsidiary’s income tax return for the fiscal tax
year ended March 31, 2004. The ultimate outcome was favorable, and
there was no tax assessment imposed for the fiscal tax year ended
March 31, 2004. In December 2008 and December 31, 2009, the Indian
subsidiary received a final tax assessment for the fiscal year ended March 31,
2005 and March 31, 2006 from the Indian Bureau of Taxation approximating
$340,000 and $294,000, respectively including interest through December 31,
2009. Management disagrees with the basis of these tax assessments, and has
filed an appeal against the assessments, which it will contest vigorously. In
2009, the Indian Bureau of Taxation commenced an audit of this subsidiary’s
income tax return for the fiscal year ended 2008. The ultimate outcome cannot be
determined at this time. As the Company is continually subject to tax audit by
the Indian bureau of Taxation, the Company assessed the likelihood of an
unfavorable assessment for the fiscal year 2008 and recorded an additional tax
provision amounting to $323,000, including interest through December 31,
2009.
Total long-term obligations as of
December 31, 2009 and 2008 consist of the following:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Vendor
obligations
|
|
|
|
|
|
|
|
Capital
lease obligations (1)
|
|
$ |
161 |
|
|
$ |
453 |
|
|
Deferred
lease payments
|
|
|
185 |
|
|
|
89 |
|
|
Microsoft
license (2)
|
|
|
550 |
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
Pension
obligations
|
|
|
|
|
|
|
|
|
|
Accrued
pension liability
|
|
|
1,195 |
|
|
|
944 |
|
|
|
|
|
2,091 |
|
|
|
2,586 |
|
|
Less:
Current portion of long-term obligations
|
|
|
892 |
|
|
|
915 |
|
|
Totals
|
|
$ |
1,199 |
|
|
$ |
1,671 |
|
(1) In 2008, the
Company financed the acquisition of certain computer and communication
equipment. The capital lease obligations bear interest at rates ranging from 6%
to 12% and are payable over two to three years.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) In
March 2008, the Company renewed a vendor agreement, where the original agreement
had expired in February 2008, to acquire certain additional software licenses
and to receive support and subsequent software upgrades on these and other
currently owned software licenses through February 2011. Pursuant to this
agreement, the Company is obligated to pay $137,500 on a quarterly basis over
the term of the agreement. The total cost was allocated to the following asset
accounts in 2008 (in thousands):
|
Prepaid
expenses and other current assets
|
|
$ |
496 |
|
|
Other
assets
|
|
|
992 |
|
|
Property
and equipment
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
$ |
1,650 |
|
Amortization
expense was approximately $0.6 million, $0.6 million and $0.5 million for each
of the three years in the period ended December 31, 2009.
The
future minimum lease payments required under the capital leases aggregates $0.2
million as December 31, 2009.
|
|
5.
|
Commitments
and contingencies
|
Line of
Credit- The Company
has a $7.0 million line of credit pursuant to which it may borrow up to 80%
of eligible accounts receivable. Borrowings under the credit line bear interest
at the bank’s alternate base rate plus 0.5% or LIBOR plus 2.5%. The line, which
expires in June 2010, is collateralized by the Company’s accounts receivable.
The Company has no outstanding obligations under this credit line as of December
31, 2009. The Company plans on renewing the line of credit in the second quarter
of 2010.
Leases-The Company is
obligated under various operating lease agreements for office and production
space. Certain agreements contain escalation clauses and requirements that the
Company pay taxes, insurance and maintenance costs. Company leases that include
escalated lease payments are expensed on a straight-line basis over the
non-cancelable base lease period.
Lease agreements for production space
in most overseas facilities, which expire through 2030, contain provisions
pursuant to which the Company may cancel the leases with a minimal notice
period, generally subject to forfeiture of security deposit. For each of the
three years in the period ended December 31, 2009, rent expense,
principally for office and production space, totaled approximately $3.0 million,
$3.0 million and $2.6 million, respectively.
In addition, the Company leases certain
equipment under short-term operating lease agreements. For each of the three
years in the period ended December 31, 2009, rent expense for equipment
totaled approximately $59,000, $70,000 and $207,000, respectively.
Future minimum lease payments, by year
and in the aggregate, under non-cancelable operating leases with initial or
remaining terms of one year or more as of December 31, 2009 (in thousands) are
as follows:
|
Years Ending December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
$ |
793 |
|
|
2011
|
|
|
682 |
|
|
2012
|
|
|
452 |
|
|
2013
|
|
|
313 |
|
|
2014
|
|
|
319 |
|
|
|
|
|
|
|
|
Total minimum lease
payments
|
|
$ |
2,559 |
|
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
– The Supreme Court of the
Republic of the Philippines has refused to review a decision of the Court of
Appeals in Manila against a Philippines subsidiary of the Company that is
inactive and has no material assets, and purportedly also against Innodata
Isogen, Inc., that orders the reinstatement of certain former employees of the
subsidiary to their former positions and also orders the payment of back wages
and benefits that aggregate approximately $7.5 million. Matters relating to
execution of this decision are on file with the Department of Labor and
Employment National Labor Relations Commission, Republic of the Philippines, and
the Department of Labor and Employment office of the Secretary of Labor and
Employment, Republic of the Philippines. Based on consultation with legal
counsel, the Company believes that recovery against the Company is nevertheless
unlikely.
The
Company is also subject to various legal proceedings and claims which arise in
the ordinary course of business.
While
management currently believes that the ultimate outcome of 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. Substantial recovery against the Company in the above referenced
Philippines actions could have a material adverse impact on the Company, and
unfavorable rulings or recoveries in the other proceedings could have a material
adverse impact on the operating results of the period in which the ruling or
recovery occurs. In addition, the Company’s 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.
Foreign Currency-The Company’s
production facilities are located in the Philippines, India, Sri Lanka and
Israel. 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.
Indemnifications-The Company
is obligated under certain circumstances to indemnify directors, certain
officers and employees against costs and liabilities incurred in actions or
threatened actions brought against such individuals because such individuals
acted in the capacity of director and/or officer or fiduciary of the Company. In
addition, the Company has contracts with certain clients pursuant to whom the
Company has agreed to indemnify the client for certain specified and limited
claims. These indemnification obligations occur in the ordinary course of
business and, in many cases do not include a limit on potential maximum future
payments. As of December 31, 2009, the Company has not recorded a liability
for any obligations arising as a result of these indemnifications.
Liens-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 December 31, 2009, the net book value of the
property and equipment was $0.7 million.
U.S. Defined Contribution Pension
Plan - The Company has a defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code, pursuant to which
substantially all of its U.S. employees are eligible to participate after
completing six months of service. Participants may elect to contribute a portion
of their compensation to the plan. Under the plan, the Company has the
discretion to match a portion of participants’ contributions. The Company
intends to match approximately $84,000 to the plan for the year ended December
31, 2009. For the years ended December 31, 2008 and 2007, the Company’s
matching contributions were approximately $119,000 and $123,000,
respectively.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Non-U.S. Pension benefits
– The accounting standard for pensions requires an employer to recognize a
net liability or asset and an offsetting adjustment to accumulated other
comprehensive income to report the funded status of defined benefit pension and
other post-retirement benefit plans.
Most of the non-U.S. subsidiaries
provide for government mandated defined pension benefits. For certain
of these subsidiaries, vested eligible employees are provided a lump sum payment
upon retiring from the Company at a defined age. The lump sum amount
is based on the salary and tenure as of retirement date. Other non-U.S
subsidiaries provide for a lump sum payment to vested employees on retirement,
death, incapacitation or termination of employment, based upon the salary and
tenure as of the date employment ceases. The liability for such defined benefit
obligations is determined and provided on the basis of actuarial valuations. As
of December 31, 2009, these plans are unfunded. Pension expense for foreign
subsidiaries totaled approximately $223,000, $439,000 and $667,000 for each of
the three years in the period ended December 31, 2009.
The following table summarizes the
amounts recognized in accumulated other comprehensive income, net of taxes (in
thousands):
|
|
|
Years Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of transition obligation
|
|
$ |
99 |
|
|
$ |
92 |
|
|
$ |
83 |
|
|
Actuarial
gain
|
|
|
(174 |
) |
|
|
861 |
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(75 |
) |
|
$ |
953 |
|
|
$ |
549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
in accumulated other comprehensive income not yet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reflected
in net periodic pension cost, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
gain
|
|
$ |
1,153 |
|
|
$ |
1,327 |
|
|
|
|
|
|
Transition
obligation
|
|
|
(486 |
) |
|
|
(585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
667 |
|
|
$ |
742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
in accumulated other comprehensive income expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
be
amortized in 2010 net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
gain
|
|
$ |
211 |
|
|
|
|
|
|
|
|
|
|
Transition
obligation
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
117 |
|
|
|
|
|
|
|
|
|
The following table sets out the status
of the non-U.S pension benefits and the amounts (in thousands) recognized in the
Company’s consolidated financial statements.
Benefit
Obligations:
|
Change
in the Benefit Obligation:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Projected
benefit obligation at beginning of the year
|
|
$ |
1,072 |
|
|
$ |
1,860 |
|
|
$ |
1,580 |
|
|
Service
cost
|
|
|
210 |
|
|
|
314 |
|
|
|
404 |
|
|
Interest
cost
|
|
|
105 |
|
|
|
151 |
|
|
|
121 |
|
|
Actuarial
loss (gain)
|
|
|
24 |
|
|
|
(1,022 |
) |
|
|
(442 |
) |
|
Foreign
currency exchange rate changes
|
|
|
23 |
|
|
|
(170 |
) |
|
|
259 |
|
|
Benefits
paid
|
|
|
(42 |
) |
|
|
(61 |
) |
|
|
(62 |
) |
|
Projected
benefit obligation at end of year
|
|
$ |
1,392 |
|
|
$ |
1,072 |
|
|
$ |
1,860 |
|
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Components
of Net Periodic Pension Cost:
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
210 |
|
|
$ |
314 |
|
|
$ |
404 |
|
|
Interest
cost
|
|
|
105 |
|
|
|
151 |
|
|
|
121 |
|
|
Actuarial
(gain) loss recognized
|
|
|
(92 |
) |
|
|
(26 |
) |
|
|
142 |
|
|
Net
periodic pension cost
|
|
$ |
223 |
|
|
$ |
439 |
|
|
$ |
667 |
|
The accumulated benefit obligation,
which represents benefits earned to date, was approximately $0.6 million and
$0.5 million at December 31, 2009 and 2008, respectively.
Actuarial assumptions for all non-U.S.
plans are described below. The discount rates are used to measure the
year end benefit obligations and the earnings effects for the subsequent
year.
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Discount
rate
|
|
|
7.2%-12 |
% |
|
|
7.6%-12 |
% |
|
|
8%-10 |
% |
|
Rate
of increase in compensation levels
|
|
|
7%-10 |
% |
|
|
7%-10 |
% |
|
|
10%-13 |
% |
Estimated
Future Benefit Payments:
The following benefit payments, which
reflect expected future service, as appropriate, are expected to be paid (in
thousands):
|
Years Ending December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
$ |
45 |
|
|
2011
|
|
|
58 |
|
|
2012
|
|
|
62 |
|
|
2013
|
|
|
73 |
|
|
2014
|
|
|
85 |
|
|
2015
to 2019
|
|
$ |
1,101 |
|
As part of the overall cost reduction
plan to reduce operating costs, in December 2008 the Company announced a
restructuring plan that reduced its global work force by approximately 260
employees, the majority of whom were based in Asia. Most employees were
terminated by December 31, 2008.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the restructuring,
the Company recorded in 2008, a one-time charge of approximately $475,000 in the
consolidated statement of operations for severance and other personnel-related
expenses. Of the total restructuring charges, $255,000 was allocated to direct
operating costs and $220,000 was allocated to selling and administrative
expenses. As of December 31, 2008, the Company paid $265,000 of the total
restructuring charges and paid the remaining balance of $210,000 in
2009.
Common Stock -
The Company is authorized to issue 75,000,000 shares of common
stock. Each share of common stock has one vote. Subject to preferences that may
be applicable to any outstanding shares of preferred stock, the holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors. No common stock dividends have been declared
to date.
Preferred Stock – The Company
is authorized to issue 5,000,000 shares of preferred stock. The Board
of Directors is authorized to fix the terms, rights, preferences and limitations
of the preferred stock and to issue the preferred stock in series which differ
as to their relative terms, rights, preferences and limitations.
Stockholder Rights Plan - On
December 16, 2002, the Board of Directors adopted a Stockholder Rights Plan
(“Rights Plan”) in which one right (“Right”) was declared as a dividend for each
share of the Company’s common stock outstanding. The purpose of the plan is to
deter a hostile takeover of the Company. Each Right entitles its holders to
purchase, under certain conditions, one one-thousandth of a share of newly
authorized Series C Participating Preferred Stock (“Preferred Stock”), with
one one-thousandth of a share of Preferred Stock intended to be the economic and
voting equivalent of one share of the Company’s common stock. Rights will be
exercisable only if a person or group acquires beneficial ownership of 15% (25%
in the case of specified executive officers of the Company) or more of the
Company’s common stock or commences a tender or exchange offer, upon the
consummation of which such person or group would beneficially own such
percentage of the common stock. Upon such an event, the Rights enable dilution
of the acquiring person’s or group’s interest by providing that other holders of
the Company’s common stock may purchase, at an exercise price of $4.00, the
Company’s common stock having a market value of $8.00 based on the then market
price of the Company’s common stock, or at the discretion of the Board of
Directors, Preferred Stock, having double the value of such exercise price. The
Company will be entitled to redeem the Rights at $.001 per Right under certain
circumstances set forth in the Rights Plan. The Rights themselves have no voting
power and will expire on December 26, 2012, unless earlier exercised,
redeemed or exchanged.
Common Stock Reserved - As of
December 31, 2009, the Company had reserved for issuance approximately
3,698,000 shares of common stock pursuant to the Company’s stock option
plans.
Treasury Stock - In May 2008,
the Company announced that the Board of Directors authorized the repurchase of
up to $2.0 million of its common stock. There is no expiration date associated
with the program. During the year ended December 31, 2009, the Company did not
repurchase any shares of its common stock. During the year ended December 31,
2008, the Company repurchased 606,000 shares of its common stock at a cost of
approximately $1.9 million. Approximately $0.1 million remains available for
repurchase under the program as of December 31, 2009. This authorization
replaced a prior authorization made in August 2006.
The
Company adopted, with stockholder approval, the Innodata Isogen, Inc. 2009 Stock
Plan (the “2009 Plan”). The maximum number of shares of common stock that may be
delivered under the 2009 Plan is (i) 1,000,000 shares of common stock, plus (ii)
835,834, shares of common stock that were available for issuance under the
Company’s 2001 and 2002 Stock Option Plans (the “Prior Plans”) as of the
effective date of the 2009 Plan, plus (iii) any shares subject to an award or
portion of any award under the Prior Plans that were outstanding as of the
effective date of the 2009 Plan that expire or terminate unexercised, become
unexercisable or are forfeited or otherwise terminated, surrendered or canceled
as to any shares without the delivery of shares of common stock or other
consideration, subject to adjustment for certain specified changes to the
Company's capital structure. No further grants may be made under the Prior
Plans.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
All
directors, officers and other employees, and other persons who provide services
to the Company, are eligible to participate in the 2009 Plan. The 2009 Plan
provides for the grants of stock options (which may be incentive stock options
within the meaning of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options). The stock options granted may have a maximum term
of up to ten years. The 2009 Plan also provides for awards of stock appreciation
rights, restricted stock awards, stock units and performance
grants.
The
Company’s Board of Directors may amend, alter, suspend, discontinue, or
terminate the 2009 Plan or any portion thereof at any time; provided that no
such amendment, alteration, suspension, discontinuation or termination shall be
made without stockholder approval, if such approval is necessary to comply with
any tax or regulatory requirement applicable to the 2009 Plan; and provided
further that any such amendment, alteration, suspension, discontinuance or
termination that would impair the rights of any participant or any holder or
beneficiary of any award theretofore granted shall not to that extent be
effective without the consent of the affected participant, holder or
beneficiary. Notwithstanding the foregoing, the Board of Directors may
unilaterally amend the 2009 Plan and outstanding awards without participant
consent, as it deems necessary or appropriate, to ensure compliance with
applicable securities laws and provisions of the Internal Revenue Code of
1986.
The fair value of stock options is
estimated on the date of grant using the Black-Scholes option pricing model. The
weighted average fair values of the options granted and weighted average
assumptions are as follows:
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2009 (1)
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
$ |
— |
|
|
$ |
2.46 |
|
|
$ |
2.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
— |
|
|
|
3.61 |
% |
|
|
4.61 |
% |
|
Expected
life (years)
|
|
|
— |
|
|
|
8.00 |
|
|
|
8.00 |
|
|
Expected
volatility factor
|
|
|
— |
|
|
|
97 |
% |
|
|
122 |
% |
|
Expected
dividends
|
|
|
— |
|
|
None
|
|
|
None
|
|
(1) There
were no options granted in 2009.
The Company estimates the risk-free
interest rate using the U.S. Treasury yield curve for periods equal to the
expected term of the options in effect at the time of grant. The expected term
of options granted is based on a combination of vesting schedules, term of the
options and historical experience. Expected volatility is based on historical
volatility of the Company’s common stock. The Company uses an expected dividend
yield of zero since it has never declared or paid any dividends on its capital
stock.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of option activity under the
Plans as of December 31, 2009, and changes during the year then ended is
presented below:
|
|
|
Number of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average Remaining
Contractual Term (years)
|
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2009
|
|
|
3,173,111 |
|
|
$ |
2.68 |
|
|
|
|
|
|
|
|
Granted
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,259,747 |
) |
|
|
2.75 |
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(66,584 |
) |
|
|
2.63 |
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
1,846,780 |
|
|
$ |
2.63 |
|
|
|
4.26 |
|
|
$ |
5,839,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2009
|
|
|
1,824,280 |
|
|
$ |
2.62 |
|
|
|
4.23 |
|
|
$ |
5,790,800 |
|
The total compensation cost related to
non-vested stock options not yet recognized as of December 31, 2009
totaled approximately $55,000. The weighted-average period over which
these costs will be recognized is twenty months.
Because
of the Company’s net operating loss carryforwards, no tax benefits resulting
from the exercise of stock options have been recorded, thus there was no effect
on cash flows from operating or financing activities.
The total intrinsic value of options
exercised for each of the three years in the period ended
December 31, 2009 was approximately $4.0 million, $0.1 million and
$4.3 million, respectively.
The stock options granted have a
maximum term of up to ten years and generally vest over a four year
period.
On
September 12, 2007, the Company’s Chairman and CEO (the “CEO”) exercised
1,139,160 stock options at a total exercise price of $882,844. The CEO paid the
exercise price by surrendering to the Company 229,310 of the shares of common
stock he would have otherwise received on the option exercise. In addition, the
CEO surrendered 395,695 shares to the Company in consideration of the payment by
the Company on his behalf of $1,523,426 of the Company’s minimum withholding tax
requirement payable in respect of the option exercise. Because the payment value
attributable to the surrendered shares upon settlement does not exceed the fair
value of the option, no compensation cost was recognized at the date of
settlement. In connection with this transaction, the Company issued a net total
of 514,155 shares of common stock to the CEO.
The
components of comprehensive income are as follows (in thousands):
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,313 |
|
|
$ |
6,658 |
|
|
$ |
4,566 |
|
|
Pension
liability adjustment, net of taxes
|
|
|
(75 |
) |
|
|
953 |
|
|
|
549 |
|
|
Unrealized
gain from derivatives, net of taxes
|
|
|
819 |
|
|
|
— |
|
|
|
— |
|
|
Comprehensive
income
|
|
$ |
8,057 |
|
|
$ |
7,611 |
|
|
$ |
5,115 |
|
Accumulated
other comprehensive income as reflected in the consolidated balance sheets
consists of changes in pension liability adjustments, net of taxes and changes
in fair value of derivatives, net of taxes.
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
11.
|
Segment
reporting and concentrations
|
In 2007,
the Company commenced a reorganization of its management and operating
structure. Prior to 2007, the Company’s operations were classified into two
operating segments: (1) content-related BPO and KPO services and (2) IT
professional services. In this reorganization, management merged the
content-related BPO services and IT professional services segments (ceasing to
monitor its operations by these two segments). With this reorganization, the
Company consists of one business unit that generates revenues and expenses. The
Company’s chief operating decision maker reviews the full operating results of
the entire Company at the consolidated level. Thus, the Company's current
operating segment structure reflects the way the chief operating decision maker
looks at the overall Company to evaluate performance and make executive
decisions (including the allocation of resources) about the business. There is
no end to end responsibility or management other than at the consolidated level,
and discrete financial information is available at the consolidated level. Thus
the Company has had one operating segment since 2007.
The
Company’s services revenues are generated principally from its production
facilities located in the Philippines, India, Sri Lanka and
Israel. The Company does not depend on revenues from sources internal
to the countries in which the Company operates; nevertheless, the Company is
subject to certain adverse economic and political risks relating to overseas
economies in general, such as inflation, currency fluctuations and regulatory
burdens.
Long-lived assets as of December 31,
2009 and 2008, respectively by geographic region are comprised of:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
United
States
|
|
$ |
1,152 |
|
|
$ |
1,372 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
countries:
|
|
|
|
|
|
|
|
|
|
Philippines
|
|
|
2,927 |
|
|
|
3,379 |
|
|
India
|
|
|
1,284 |
|
|
|
1,675 |
|
|
Sri
Lanka
|
|
|
592 |
|
|
|
654 |
|
|
Israel
|
|
|
279 |
|
|
|
321 |
|
|
Total
foreign
|
|
|
5,082 |
|
|
|
6,029 |
|
|
|
|
$ |
6,234 |
|
|
$ |
7,401 |
|
Two
clients generated approximately 44%, 47% and 49% of the Company’s total revenues
in the fiscal year ended December 31, 2009, 2008 and 2007, respectively. No
other client accounted for 10% or more of revenues during these periods.
Further, in the years ended December 31, 2009, 2008 and 2007, revenues from
non-US clients accounted for 21%, 21% and 23%, respectively, of the Company's
revenues.
Revenues
for each of the three years in the period ended December 31, by geographic
region (determined based upon customer’s domicile), are as follows:
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
62,932 |
|
|
$ |
59,042 |
|
|
$ |
52,017 |
|
|
The
Netherlands
|
|
|
6,150 |
|
|
|
7,564 |
|
|
|
9,070 |
|
|
Other
- principally Europe
|
|
|
10,247 |
|
|
|
8,395 |
|
|
|
6,644 |
|
|
|
|
$ |
79,329 |
|
|
$ |
75,001 |
|
|
$ |
67,731 |
|
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
December 31, 2009, approximately 37% of the Company's accounts receivable
was from foreign (principally European) clients and 31% of accounts receivable
was due from two clients. As of December 31, 2008, approximately 22% of the
Company's accounts receivable was from foreign (principally European) clients
and 51% of accounts receivable was due from two clients. No other clients
accounts for 10% or more of the receivables as of December 31, 2009 and
2008.
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,313 |
|
|
$ |
6,658 |
|
|
$ |
4,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
24,613 |
|
|
|
24,390 |
|
|
|
24,142 |
|
|
Dilutive
effect of outstanding options
|
|
|
1,151 |
|
|
|
747 |
|
|
|
1,185 |
|
|
Adjusted
for dilutive computation
|
|
|
25,764 |
|
|
|
25,137 |
|
|
|
25,327 |
|
Basic income per share is computed
using the weighted-average number of common shares outstanding during the year.
Diluted income per share is computed by considering the impact of the potential
issuance of common shares, using the treasury stock method, on the weighted
average number of shares outstanding.
Options to purchase 1.1 million shares
of common stock in 2008 were outstanding but not included in the computation of
diluted income 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. All options outstanding were included in the computation
of diluted net income per share in 2009 and 2007 as the exercise price was lower
than the average market price.
|
13.
|
Quarterly
Financial Data (Unaudited)
|
The
quarterly results of operations are summarized below:
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
|
(in thousands, except per share amounts)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
21,815 |
|
|
$ |
21,635 |
|
|
$ |
19,107 |
|
|
$ |
16,772 |
|
|
Net
income (loss)
|
|
$ |
3,581 |
|
|
$ |
3,204 |
|
|
$ |
1,296 |
|
|
$ |
(768 |
) |
|
Basic
net income (loss) per share
|
|
$ |
.15 |
|
|
$ |
.13 |
|
|
$ |
.05 |
|
|
$ |
(.03 |
) |
|
Diluted
net income (loss) per share
|
|
$ |
.15 |
|
|
$ |
.13 |
|
|
$ |
.05 |
|
|
$ |
(.03 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
18,400 |
|
|
$ |
17,870 |
|
|
$ |
18,333 |
|
|
$ |
20,398 |
|
|
Net
income
|
|
$ |
833 |
|
|
$ |
36 |
|
|
$ |
1,108 |
|
|
$ |
4,681 |
|
|
Basic
net income per share
|
|
$ |
.03 |
|
|
$ |
- |
|
|
$ |
.05 |
|
|
$ |
.19 |
|
|
Diluted
net income per share
|
|
$ |
.03 |
|
|
$ |
- |
|
|
$ |
.05 |
|
|
$ |
.19 |
|
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In the
first quarter of 2009, the Company adopted a recent accounting standard on
derivatives and hedging, which requires enhanced qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
the fair value amounts of gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements.
The
Company has a large portion of its operations in international markets that are
subject to foreign currency fluctuations. The most significant foreign currency
exposures occur when revenue and associated accounts receivable are collected in
one currency and expenses incurred in order to generate that revenue in another
currency. The Company’s primary exchange rate exposure relates to payroll, other
payroll costs and operating expenses in the Philippines, India and
Israel.
To manage
its exposure to fluctuations in foreign currency exchange rates, the Company
entered into foreign currency forward contracts, authorized under Company
policies, with counterparties that were highly rated financial institutions. The
Company utilized non-deliverable forward contracts expiring within twelve months
to reduce its foreign currency risk.
The
Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking hedge transactions. The Company does not hold or issue derivatives
for trading purposes. All derivatives are recognized at their fair value and
classified based on the instrument’s maturity date. The total notional amount
for outstanding derivatives as of December 31, 2009 was $36.3 million, which is
comprised of cash flow hedges denominated in U.S. dollars.
As of
December 31, 2008, there were no outstanding foreign currency forward contracts
or other derivative instruments.
The
following table presents the fair value of derivative instruments included
within the consolidated balance sheet as of December 31, 2009 (in
thousands):
|
|
|
Asset Derivative
|
|
Liability Derivative
|
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts
|
|
Prepaid
expenses and other current assets
|
|
$ |
1,300
|
|
Accrued
expenses
|
|
$ |
—
|
|
The
effect of foreign currency forward contracts designated as cash flow hedges on
the consolidated statements of operations for 2009 were as follows (in
thousands):
|
Net
gain recognized in OCI (1)
|
|
$ |
1,300 |
|
|
Net
gain reclassified from accumulated OCI into income (2)
|
|
$ |
275 |
|
|
Net
gain (loss) recognized in income (3)
|
|
$ |
— |
|
|
(1)
|
Net
change in the fair value of the effective portion classified in other
comprehensive income ("OCI").
|
|
(2)
|
Effective
portion classfied as direct operating
costs.
|
|
(3)
|
There
were no ineffective portions for the period
presented.
|
INNODATA
ISOGEN, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
15.
|
Financial
Instruments
|
The
following table sets forth the financial instruments as of December 31, 2009
that the Company measured at fair value, on a recurring basis by level, within
the fair value hierarchy (in thousands). As required by the standard, assets
measured at fair value are classified in their entirety based on the lowest
level of input that is significant to their fair value measurement.
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
— |
|
|
$ |
1,300 |
|
|
$ |
— |
|
The Level
2 assets contain foreign currency forward contracts. Fair value is determined
based on the observable market transactions of spot and forward rates. The fair
value of these contracts as of December 31, 2009 is included in prepaid expenses
and other current assets in the accompanying consolidated balance
sheets.
INNODATA
ISOGEN, INC. AND SUBSIDIARES
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars
in Thousands)
Activity
in the Company's allowance for doubtful accounts for the years ended December
31, 2009, 2008 and 2007 was as follows:
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
Costs and
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
Period
|
|
Beginning of Period
|
|
|
Expenses
|
|
|
Other Accounts
|
|
|
Deductions
|
|
|
End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
466 |
|
|
$ |
1,364 |
|
|
$ |
- |
|
|
$ |
(22 |
) |
|
$ |
1,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
127 |
|
|
$ |
341 |
|
|
$ |
- |
|
|
$ |
(2 |
) |
|
$ |
466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
70 |
|
|
$ |
57 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
127 |
|
Exhibits
which are indicated as being included in previous filings are incorporated
herein by reference.
|
Exhibit
|
|
Description
|
|
Filed as Exhibit
|
| |
|
|
|
|
|
3.1
(a)
|
|
Restated
Certificate of Incorporation filed on April 29, 1993
|
|
Filed
as Exhibit 3.1(a) to our Form 10-K for the year ended December 31,
2003
|
| |
|
|
|
|
|
3.1
(b)
|
|
Certificate
of Amendment of Certificate of Incorporation of Innodata Corporation filed
on March 1, 2001
|
|
Filed
as Exhibit 3.1(b) to our Form 10-K for the year ended December 31,
2003
|
| |
|
|
|
|
|
3.1
(c)
|
|
Certificate
of Amendment of Certificate of Incorporation of Innodata Corporation Filed
on November 14, 2003
|
|
Filed
as Exhibit 3.1(c) to our Form 10-K for the year ended December 31,
2003
|
| |
|
|
|
|
|
3.2
|
|
Form
of Amended and Restated By-Laws
|
|
Exhibit
3.1 to Form 8-K dated December 16, 2002
|
| |
|
|
|
|
|
3.3
|
|
Form
of Certificate of Designation of Series C Participating Preferred
Stock
|
|
Filed
as Exhibit A to Exhibit 4.1 to Form 8-K dated December 16,
2002
|
| |
|
|
|
|
|
4.2
|
|
Specimen
of Common Stock certificate
|
|
Exhibit
4.2 to Form SB-2 Registration Statement No. 33-62012
|
| |
|
|
|
|
|
4.3
|
|
Form
of Rights Agreement, dated as of December 16, 2002 between Innodata
Corporation and American Stock Transfer and Trust Co., as Rights
Agent
|
|
Exhibit
4.1 to Form 8-K dated December 16, 2002
|
| |
|
|
|
|
|
10.1
|
|
1994
Stock Option Plan
|
|
Exhibit
A to Definitive Proxy dated August 9, 1994
|
| |
|
|
|
|
|
10.2
|
|
1993
Stock Option Plan
|
|
Exhibit
10.4 to Form SB-2 Registration Statement No. 33-62012
|
| |
|
|
|
|
|
10.3
|
|
Form
of Indemnification Agreement between us and our directors and one of our
Officers
|
|
Exhibit
10.3 to Form 10-K for the year ended December 31, 2002
|
| |
|
|
|
|
|
10.4
|
|
1994
Disinterested Directors Stock Option Plan
|
|
Exhibit
B to Definitive Proxy dated August 9, 1994
|
| |
|
|
|
|
|
10.5
|
|
1995
Stock Option Plan
|
|
Exhibit
A to Definitive Proxy dated August 10, 1995
|
| |
|
|
|
|
|
10.6
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|
1996
Stock Option Plan
|
|
Exhibit
A to Definitive Proxy dated November 7, 1996
|
| |
|
|
|
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|
10.7
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|
1998
Stock Option Plan
|
|
Exhibit
A to Definitive Proxy dated November 5,
1998
|
|
10.8
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|
2001
Stock Option Plan
|
|
Exhibit
A to Definitive Proxy dated June 29, 2001
|
| |
|
|
|
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|
10.9
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|
2002
Stock Option Plan
|
|
Exhibit
A to Definitive Proxy dated September 3, 2002
|
| |
|
|
|
|
|
10.10
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|
Employment
Agreement dated as of January 1, 2004 with George Kondrach
|
|
Filed
as Exhibit 10.10 to our Form 10-K for the year ended December 31,
2003
|
| |
|
|
|
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|
10.11
|
|
Letter
Agreement dated as of August 9, 2004, by and between us and The Bank of
New York
|
|
Filed
as Exhibit 10.2 to Form S-3 Registration statement No.
333-121844
|
| |
|
|
|
|
|
10.12
|
|
Employment
Agreement dated as of December 22,2005 22, 2005, by and between us and
Steven L. Ford
|
|
Exhibit
10.1 to Form 8-K dated December 28, 2005
|
| |
|
|
|
|
|
10.13
|
|
Form
of 2001 Stock Option Plan Grant Letter, Dated December 22,
2005
|
|
Exhibit
10.2 to Form 8-K dated December 28, 2005
|
| |
|
|
|
|
|
10.14
|
|
Form
of 1995 Stock Option Agreement
|
|
Exhibit
10.4 to Form 8-K dated December 15, 2005
|
| |
|
|
|
|
|
10.15
|
|
Form
of 1998 Stock Option Agreement for Directors
|
|
Exhibit
10.5 to Form 8-K dated December 15, 2005
|
| |
|
|
|
|
|
10.16
|
|
Form
of 1998 Stock Option Agreement for Officers
|
|
Exhibit
10.6 to Form 8-K dated December 15, 2005
|
| |
|
|
|
|
|
10.17
|
|
Form
of 2001 Stock Option Agreement
|
|
Exhibit
10.7 to Form 8-K dated December 15,
2005
|
|
10.18
|
|
Form
of new vesting and lock-up agreement for each of Haig Bagerdjian, Louise
Forlenza, John Marozsan and Todd Solomon
|
|
Exhibit
10.8 to Form 8-K dated December 15, 2005
|
|
|
|
|
|
|
|
10.19
|
|
Form
of new vesting and lock-up agreement for Jack Abuhoff
|
|
Exhibit
10.9 to Form 8-K dated December 15, 2005
|
|
|
|
|
|
|
|
10.20
|
|
Form
of new vesting and lock-up agreement for George Kondrach
|
|
Exhibit
10.10 to Form 8-K dated December 15, 2005
|
| |
|
|
|
|
|
10.21
|
|
Form
of new vesting and lock-up agreement for Stephen Agress
|
|
Exhibit
10.11 to Form 8-K dated December 15, 2005
|
|
|
|
|
|
|
|
10.22
|
|
Form
of 2001 Stock Option Plan Grant Letter, dated December 31, 2005, for
Messrs. Abuhoff, Agress and Kondrach
|
|
Exhibit
10.2 to Form 8-K dated January 5, 2006
|
|
|
|
|
|
|
|
10.23
|
|
Form
of 2001 Stock Option Plan Grant Letter, dated December 31, 2005, for
Messrs. Bagerdjian and Marozsan and Ms. Forlenza
|
|
Exhibit
10.3 to Form 8-K dated January 5, 2006
|
| |
|
|
|
|
|
10.24
|
|
Transition
Agreement Dated as of September 29, 2006 with Stephen
Agress
|
|
Exhibit
10.1 to Form 8-K dated October 3, 2006
|
|
|
|
|
|
|
|
10.25
|
|
Form
of Stock Option Modification Agreement With Stephen Agress
|
|
Exhibit
10.2 to Form 8-K dated October 3, 2006
|
|
|
|
|
|
|
|
10.26
|
|
Employment
Agreement dated as of February 1, 2006 with Jack Abuhoff
|
|
Exhibit
10.2 to Form 8-K dated April 27, 2006
|
|
|
|
|
|
|
|
10.27
|
|
Employment
Agreement dated as of January 1, 2007 with Ashok
Mishra
|
|
Exhibit
10.1 to Form 10-Q for the quarter ended June 30,2007
|
|
|
|
|
|
|
|
10.28
|
|
Innodata
Isogen Incentive Compensation Plan
|
|
Exhibit
10.1 to Form 8-K dated February 13, 2008
|
| |
|
|
|
|
|
10.29
|
|
Form
of 2002 Stock Option Plan Grant Letter, dated August 13, 2008, for Messrs.
Bagerdjian, Marozsan and Woodward, and Ms. Forlenza
|
|
Exhibit
10.1 to Form 10-Q for the quarter ended September 30,
2008
|
| |
|
|
|
|
|
10.30
|
|
Amended
and Restated Employment Agreement dated as of December 24, 2008 with Jack
S. Abuhoff
|
|
Exhibit
10.1 to Form 8-K dated December 30, 2008
|
| |
|
|
|
|
|
10.31
|
|
Employment
Agreement dated as of March 25, 2009 with Jack Abuhoff
|
|
Exhibit
10.1 to Form 8-K dated March 25, 2009
|
| |
|
|
|
|
|
10.32
|
|
Separation
Agreement and General Release dated as of April 27, 2009 with Steven
Ford
|
|
Exhibit
10.1 to Form 8-K dated April 27, 2009
|
|
|
|
|
|
|
|
10.33
|
|
2009
Stock Option Plan
|
|
Annex
A to Definitive Proxy dated April 28, 2009
|
|
|
|
|
|
|
|
10.34
|
|
Employment
Agreement dated as of November 9, 2009 with O’Neil
Nalavadi
|
|
Exhibit
10.1 to Form 8-K dated October 11, 2009
|
| |
|
|
|
|
|
16
|
|
Letter
of Grant Thornton regarding change in certifying
accountant.
|
|
Exhibit
4.01 to Form 8-K dated September 12, 2008
|
|
|
|
|
|
|
|
21
|
|
Significant
subsidiaries of the registrant
|
|
Filed
herewith
|
|
|
|
|
|
|
|
23
|
|
Consent
of J.H. Cohn LLP
|
|
Filed
herewith
|
|
23.1
|
|
Consent
of Grant Thornton LLP
|
|
Filed
herewith
|
|
|
|
|
|
|
|
31.1
|
|
Certificate
of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
|
|
|
|
|
|
|
31.2
|
|
Certificate
of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
Filed
herewith
|
|
|
|
|
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed
herewith
|
|
|
|
|
|
|
|
32.2
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed
herewith
|