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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-22196
INNODATA ISOGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3475943
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Three University Plaza
Hackensack, New Jersey 07601
(Address of principal executive offices) (Zip Code)
(201) 488-1200
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value
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 |X| No |_|
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. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. $72,400,000
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
22,693,138 shares of common stock, $.01 par value, as of February 28, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
[SEE INDEX TO EXHIBITS]
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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, continuing revenue concentration in a limited number of clients,
continuing reliance on project-based work, worsening of 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 that 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 indicated from time to time in our filings with the Securities and
Exchange Commission.
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.
General
Innodata Isogen is a leading provider of business services that help
organizations create, manage, use and distribute information more effectively
and economically. We provide outsourced content services and content-related
information technology (IT) professional services. Our outsourced content
services focus on fabrication services and knowledge services. Fabrication
services include digitization, imaging, data conversion, XML and mark-up
services, as well as language translation and content creation services. XML, or
Extensible Markup Language, is a universally accepted notation for identifying
information elements in documents, and is designed to meet the challenges of
large-scale electronic publishing. Knowledge services include content
enhancement, taxonomy, controlled vocabulary development, hyperlinking, mark-up
indexing, abstracting and general editorial services. Our IT professional
services focus on the design, implementation, integration and deployment of
systems used to author, manage and distribute content.
We believe our integrated offering of outsourced content services and IT
professional services allows us to offer our clients a suite of comprehensive
and sophisticated technology-based solutions that span the entire content supply
chain, which is the series of integrated activities needed to create, manage,
use and distribute information.
In 2004, we provided our services to approximately 100 clients in four
content-intensive sectors. Organizations within each of these sectors, which are
listed below, face a distinct set of challenges in creating, managing, using and
distributing information more effectively and economically:
o publishing, media and information services, including EBSCO and Reed
Elsevier;
o Global 2000 enterprises, including Hamilton Sundstrand and Lockheed
Martin;
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o educational and cultural institutions, including Cornell University
and Harvard Business School Publishing; and
o government agencies, including several U.S. intelligence agencies.
We typically service our clients in multi-year relationships.
Approximately 76% of our largest 25 clients by revenues in the year ended
December 31, 2004 have been clients in each year since 2001.
We provide outsourced content services for business processes that we
anticipate will continue for an indefinite period and therefore generate what we
regard as recurring revenues. We derived 47% and 53% of our revenues from these
engagements for the years ended December 31, 2004 and 2003, respectively.
We are headquartered in Hackensack, New Jersey, just outside New York
City. We have two additional solutions centers in North America, seven
production facilities in Asia (the Philippines, India and Sri Lanka) and a
technology and tools development center in India. We were incorporated in
Delaware in 1988.
Innodata Isogen's Services
Our services encompass both outsourced content services that focus on
fabrication services and knowledge services and information technology (IT)
professional services that focus on the design, implementation, integration and
deployment of systems used to author, manage and distribute content. We define
content as all forms of unstructured data, including text, formatted text such
as HTML, high-fidelity information such as XML, interactive and /or dynamic Web
pages, images, graphics animation, video and sound files.
Outsourced Content Services
Our outsourced content services focus on fabrication services and
knowledge services. We undertake fabrication projects for enterprises deploying
content management solutions, and we build customized content products for
online publishers and information providers. In addition, we provide outsourced
services for content-intensive enterprises and information service providers.
The services we provide may vary in size and duration. Outsourced content
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 also provide outsourced content services for business
processes that we anticipate will continue for an indefinite period and
therefore generate what we regard as recurring revenue.
Our methodology typically involves building customized workflow management
tools and content authoring tools that we operate on advanced technology
platforms in our content processing facilities. We typically gather data from
multiple sources, normalize disparate data formats, digitize non-digital assets
and create XML files that are uploaded to a client's digital warehouse. As part
of this process, we may engineer links that enable cross-referencing among
digital assets, index data assets to an organizational structure, such as
taxonomy or ontology, copyedit content or author content synopsis and abstracts.
Fabrication Services. Our fabrication services include digitization, imaging,
data conversion, XML and mark-up services, as well as language translation and
content creation services. We use leading-edge technologies to capture our
clients' relevant content and convert it into XML and other related mark-up
standards. These technologies include high-speed scanning; a variety of
commercial and proprietary optical/intelligent character recognition, or
OCR/ICR, applications; structured workflow processes; and proprietary
applications and tools designed to create meaningful, accurate and consistent
data.
To convert the captured content to XML, tags are inserted within the
content to provide a marker that computers can process. Our proprietary
technology includes production-grade, auto-tagging applications that utilize
pattern recognition algorithms based on comprehensive rule sets and heuristic
online databases. This technology enables the mass creation or conversion of XML
content from complex, unstructured data or content.
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We price our translation and content conversion services based on the
quantity delivered or resources utilized.
As an example, a major educational publisher sought to build the
definitive digital archive of leading newspapers in North America. On behalf of
this client, we digitized production runs of major world newspapers, providing
full page viewing, as well as threaded articles with searchable digital text.
The process included treating the digital images with the latest digital
technology to visually repair the original images.
Knowledge Services. Our knowledge services add value to a client's content and
these services include content enhancement, taxonomy, controlled vocabulary
development, hyperlinking, mark up indexing, abstracting and general editorial
services, including the provision of synopses and annotations. We also provide
research services that cover a wide spectrum of expertise, including medicine,
law, basic sciences, applied sciences, humanities, engineering, management and
finance. We have organized knowledge teams to provide these services, each of
which consists of a number of educated and highly trained people with expertise
in the relevant subject. We typically price our knowledge services based on the
quantity delivered or resources utilized.
As an example, a major publisher of scientific, technical and medical
information sought 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 supported integrated
web searches and seamless linking. Under a long-term engagement, we maintain the
database with daily updates, managing on behalf of our client a production
process in which we aggregate, digitize, convert and enhance data.
IT Professional Services
Our IT professional services focus on the design, implementation,
integration and deployment of systems used to author, manage and distribute
content. These services include:
o consulting;
o systems integration;
o custom application development; and
o other IT professional services, including application maintenance
support, evaluation and implementation and training.
Clients that use our IT professional services typically require
publishing, performance support or process automation systems that enable
multiple authors to collaborate on content and enable multiple products to be
generated from single-source XML repositories. Our IT professional services
undertake a standards-based approach to development and integration.
Projects vary in size and duration. Our IT professional services are
typically provided on a project basis that involves a defined task that, upon
completion, does not generate any significant amount of continuing revenues.
Each project typically involves all aspects of the software development process,
including defining, designing, prototyping, programming, module integration and
installation of the custom application. We typically work on-site at clients to
develop specifications and define requirements and to interact with end-users of
the application. Detailed design, implementation and testing are generally
performed at our Dallas and Austin, Texas offices, as well as offshore at our
Gurgaon, India office.
I-3
Consulting. We offer consulting services that focus on evaluating, advising,
creating, overseeing or reviewing processes and/or technology designs that are
necessary for a client to improve its management, use or distribution of
information. We assist our clients by first understanding their business
objectives and then analyzing and recommending the appropriate hardware and
software specifications, as well as process and engineering changes that will
fulfill these objectives. Our consultants have a broad mix of functional and
industry expertise. Our highly skilled process analysts, workflow architects and
project managers enable clients to outsource to us their entire content
operations, and thereby enhance the client's ability to manage, use and
distribute the content.
As an example, a major defense contractor was awarded a multi-billion
dollar military contract to build a new war plane. The military required that
the technical documentation be delivered in electronic format and be useable by
field technicians using handheld PDAs, as well as by pilots in the cockpit. The
defense contractor hired us to recommend an XML-based publishing approach. Over
several months, our team made several recommendations and redesigned the
client's core business processes and systems architecture to achieve its
objectives, including the ability to support high-volume, link-intensive data.
We were then engaged by the client to develop the system. The completed system
provided an end-to-end workflow that included link management, support for
complex graphics, customized backend databases to support fast search and
retrieval and customized user interfaces.
Systems Integration. Our systems integration services include the integration of
disparate authoring tools, content/knowledge management systems and composition
tools into an overall IT infrastructure, and often also include the development
of software that enhances the compatibility among various components of the
overall IT infrastructure. We also undertake the management of programs and
vendors during this process. Many of our systems integration projects involve
organizations that are migrating to XML and other standards-based publishing
systems or are seeking to integrate disparate data sources into a common
environment. Our IT projects often include content analysis and the development
of information architectures.
For example, one of the world's most successful IT equipment manufacturers
was faced with the challenge of producing increasingly complex technical
documentation faster, in more languages and across multiple platforms, as well
as in print. This was necessary because of shortening product life cycles and
the desire to market products in remote global markets. Over a 12-month period,
our team of information architects and developers provided strategy and process
consulting, product evaluation and information engineering services. We
addressed complex content authoring, translation and localization and document
rendition requirements. The result was a completely re-engineered
standards-based product documentation system that enabled our client to easily
revise and re-use content and translate that content into 35 languages
seamlessly. We improved our client's time-to-market by significantly reducing
the turnaround time for documentation and revisions and substantially reduced
its overall product documentation-related costs. Our team of two domestic
project managers and five offshore developers continue to provide the client
ongoing systems enhancement and maintenance under a long-term engagement.
Custom Application Development. Our custom application development services help
our clients create new applications and enhance the functionalities of our
clients' existing software applications. We perform system design and software
coding and run pilots, while transition planning, user training and deployment
activities are performed at the client's site. Our application development
services span the entire range of client server and Internet technologies. Our
IT professional services staff are experts at XML and related information
standards, as well as emerging computing platforms. Our programmers are skilled
in a wide range of programming languages, as well as a diverse set of
application program interfaces, applications servers and database technologies.
As an example, a client in the information services industry needed to
build an enterprise-scale publishing platform for a new online information
service utilizing the latest knowledge processing technologies. Our team of
onshore and offshore technologists designed and built the platform over a period
of several months, including authoring and classification workflow systems,
backend database and user interface. Our content services department aggregated,
digitized and enhanced multiple gigabytes of data for the successful product
pilot. Our single program manager coordinated the efforts of our IT professional
services team, our outsourced content services team and other vendors on-site at
the client.
I-4
Other IT Professional Services. We assist our clients in the evaluation and
implementation of software packages developed by third party vendors. We
specialize in enterprise content management systems developed by several
vendors, including: Documentum, Content@, XHive Corporation and Vasont Systems;
and document authoring systems developed by vendors including Arbortext and
Blast Radius; publishing tools developed by vendors including TopLeaf, Antenna
House and FrameMaker; as well as various content analysis and extraction tools.
We provide support for our client's content-related applications, ensuring
that systems remain operational and responsive to changing user requirements. In
doing so, we are often able to enhance processes and improve service levels.
Through our domestic, on-site and offshore delivery model, we are able to
provide a range of support services to our clients.
We also provide clients professional training, courseware and continuing
education in XML and other structural information services.
Clients
We view our relationship with our clients as a critical element of our
historical success and an important basis for our future growth. We work
directly with existing and prospective clients to identify and refine their
objectives and to design, implement, integrate and deploy new and improved
service solutions to satisfy those objectives. We believe we provide high
quality, value-added services to our clients on a timely basis and have
developed a close relationship with them as a result. To enhance those
relationships, we provide project support 24 hours a day, seven days a week,
through our Asia-based customer service center, and we maintain sales, service
and strategic support in North America and Europe in proximity to the operations
of most of our clients.
We offer our services to approximately 100 businesses and organizations in
four content-intensive sectors. The following sets forth a selected list of our
clients in the four content-intensive sectors that we serve:
o Publishing, media and information services:
EBSCO; John Wiley & Sons; McGraw-Hill; ProQuest; Reed Elsevier;
Thomson and Wolters Kluwer;
o Global 2000 enterprises:
Amazon.com; Bausch & Lomb; Boeing; Hamilton Sundstrand; John Deere;
Lockheed Martin and Primerica;
o Educational and cultural institutions:
CAB International; Cornell University; Harvard Business School
Publishing and The Smithsonian Institution; and
o Government agencies:
The Federal Reserve Board and several U.S. intelligence agencies.
Outsourced content 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 also provide outsourced content services for
business processes that we anticipate will continue for an indefinite period and
therefore generate what we regard as recurring revenue.
Approximately 76% of our largest 25 clients by revenues in the year ended
December 31, 2004 have been clients in each year since 2001.
I-5
One client accounted for 23%, 33% and 17% of our total revenues for the
years ended December 31, 2004, 2003 and 2002, respectively. One other client
accounted for 31% and 30% of our revenues for the years ended December 31, 2004
and 2002, respectively. No other client accounted for 10% or more of our total
revenues during these periods. Revenues from clients located in foreign
countries (principally in Europe) accounted for 30%, 47% and 23% of our total
revenues for the years ended December 31, 2004, 2003 and 2002, respectively.
Some of our clients require us to enter into nondisclosure agreements
pursuant to which we agree not to disclose their identities or the nature of our
relationship. Typically these arrangements are required because the client does
not want to publicize its outsourcing strategy or a new product development
initiative before it is introduced in the market.
Sales and Marketing
We currently have four executive-level business development professionals
and five full-time sales personnel and are planning to increase our full-time
salesperson headcount to between 10 and 12 in 2005. Historically, our sales
efforts depended heavily on senior management. We are transitioning to a more
structured direct sales model in which we implement additional sales
infrastructure, add dedicated sales support personnel and add additional sales
persons. In this model, our executive-level business development professionals
will continue to manage key client relationships through targeted interaction
with our clients' senior management, while sales professionals will be
responsible for identifying prospective clients and the execution of day-to-day
sales strategies.
Our sales organization is responsible for qualifying and otherwise
pursuing prospects, securing direct personal access to decision-makers at
existing and prospective clients and obtaining orders for our services and
solutions. Our sales professionals work directly with clients to identify their
requirements and with our engineering teams to define the solutions that best
fit our clients' specific needs.
Sales activities include the design and generation of presentations and
proposals, account and client relationship management and the organization of
account activities.
Consulting 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, post-sale support to our clients.
We constantly seek to expand the nature and scope of our engagements with
existing clients by increasing the volume of our business and extending the
breadth and value of services offered. For existing clients, our sales personnel
and our on-site project personnel proactively identify client needs and work
with our sales team to structure solutions to address those needs.
Our marketing organization is responsible for:
o developing and increasing the visibility and awareness of our brand
and our service offerings;
o defining and communicating our value proposition; and
o generating leads and furnishing effective sales support tools.
Over the past 12 months, we have improved our brand management and
enhanced our lead generation capability. In addition, we have created a partner
program pursuant to which we have formed collaborative relationships with
selected leading software vendors and service providers in many of our key
markets. We believe that our partner program is an important way for our sales
force to generate more and better quality leads. Furthermore, the partner
program helps us gain technical insights that allow us to evaluate better the
effectiveness of the various tools that we recommend to our clients.
I-6
Primary marketing outreach activities include:
o event marketing (including exhibiting at trade shows, conferences
and seminars);
o direct and database marketing;
o public and media relations (including speaking engagements and
active participation in industry and technical standard bodies); and
o web marketing (including search engine optimization, search engine
marketing and the maintenance and continued development of external
web sites).
Competition
The markets for our services are highly competitive. The most significant
competitive factors are:
o experience and expertise;
o quality and reliability of services;
o price of services;
o the scope and scale of service offerings;
o the quality of supporting services;
o retention of highly skilled employees; and
o technical competence.
Our ability to compete favorably is dependent upon our ability to react
appropriately to short- and long-term trends, harness new technology and deliver
large-scale requirements.
With respect to outsourced content services, competition is highly
fragmented and intense; however, we believe we compete successfully by offering
high quality services and favorable pricing by leveraging our technical skills,
IT infrastructure, process knowledge, offshore model and economies of scale.
SPI Technologies, Apex CoVantage, Techbooks and Jouve, among others,
compete with us in providing content services. However, we are not aware of any
single competitor that provides the same comprehensive range of outsourced
content services as we do, and we believe that we have created significant
differentiation as a result of:
o our specific business process expertise and the greater resources
that we provide to our clients;
o the high quality and reliability of our services; and
o the scope and scale of our services.
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Thus, we believe we are well positioned to obtain client contracts when
the undertaking required is technically sophisticated, sizable in scope or
scale, or when clients require a highly fail-safe environment with technology
redundancy. We also believe that the timeliness with which we provide our
services enables our clients to reduce the time it takes for them to release
their products to the market, thereby providing a competitive advantage to the
client.
With respect to our IT professional services, a number of large and
mid-sized technology and business consulting practices offer content-related
integration and consulting services as part of their broad and generalized
offerings. Major companies such as IBM, EDS, Bearing Point, Accenture, Booz
Allen and others compete for entire content supply chain dollars, though few, if
any, focus exclusively on our niche. There are fewer firms, most with lesser
capacity, with a narrower strategic focus on the content supply chain, such as
Thomas Technology Solutions and RivCom.
As a provider of outsourced content services and IT professional services,
we also compete at times with in-house personnel at existing or prospective
clients who may attempt to duplicate our services using in-house personnel.
Some of our competitors have longer operating histories, significantly
greater financial, human, technical and other resources and greater name
recognition than we do, and we cannot assure you that we will continue to
compete effectively with them.
Employees
As of February 28, 2005, we employed an aggregate of approximately 85
persons in the United States and Europe and 7,400 persons in five production
facilities in the Philippines, one production facility in Sri Lanka, one
production facility in India and a technology and tools development center in
India. 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.
We take great pride in our company culture and values, which are extremely
service oriented. We have designed processes to foster consistent employee
behavior that promotes our clients' successes and delivers dependable outcomes.
At the same time, we promote operating efficiencies. Within our IT professional
services team, we have assembled what we believe is a highly talented group of
technologists. Our culture is non-hierarchical, encouraging the iteration of
ideas to address complex technical challenges. We have developed specialized
internal software applications to facilitate meaningful communication among
employees.
To retain our qualified personnel, we offer competitive base salaries that
are supplemented by results-based incentives. Senior managers are eligible for
bonuses and stock options. Our compensation structure is coupled with an
extensive benefits package, tailored by region, which can include comprehensive
health insurance coverage, paid vacation and holiday leaves, allowances and
continuing education programs.
No employees are currently represented by a labor union, and we believe
that our relations with our employees are satisfactory.
Item 2. Description of Property.
Our services are primarily performed from our Hackensack, New Jersey
headquarters, our Dallas and Austin, Texas offices, and seven overseas
facilities, all of which are leased. In addition, we have a technology and tools
development facility in Gurgaon, India, which is also leased. The square footage
of all our leased properties is approximately 218,000. Rental payments on
property leases were approximately $1,725,000 in 2004.
I-8
Item 3. Legal Proceedings.
The Innodata Employees Association (IDEA), Jomarie Deles and other
complainants have sued one of our Philippines subsidiaries, and have purported
also to sue us and certain of our officers and directors, in Innodata
Philippines Employees Association (IDEA) v Innodata Philippines, Inc. (filed
July 27, 2001 at the National Conciliation and Mediation Board of the Philippine
Department of Labor and Employment in Manila); Innodata Employees Association
(IDEA), Jomarie Deles, et al v. Innodata Philippines, Inc. (filed July 1, 2002
in the National Labor Relations Commission of the Republic of the Philippines in
Manila); and in related cases and proceedings filed in the Philippines Supreme
Court, the Philippine Court of Appeals and the Philippines Department of Labor
and Employment. Complainants seek to require reinstatement of employment and to
recover back wages for an allegedly illegal facility closing on June 7, 2002
based on the terms of a collective bargaining agreement with this subsidiary. We
have prevailed in substantially all stages of this litigation to date, although
several appeals by complainants are still pending. If complainants' claims had
merit they could be entitled to back wages of up to $5.0 million for the period
from June 7, 2002 to June 6, 2005, consistent with prevailing jurisprudence.
After consultation with counsel, we believe that the complainants' claims are
without merit and we intend to defend against them vigorously.
In addition, we are subject to various legal proceedings and claims which
arise in the ordinary course of business. While we currently believe that the
ultimate outcome of these proceedings will not have a material adverse affect on
our financial condition or results of operations, litigation is subject to
inherent uncertainties. Were an unfavorable ruling to occur, it could have a
material adverse effect on our financial condition and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
I-9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Innodata Isogen, Inc. (the "Company") Common Stock is quoted on the Nasdaq
National Market System under the symbol "INOD." On February 28, 2005, there were
115 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 approximately
4,500.
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, 2004.
Common Stock
Sale Prices
2003 High Low
---- ---- ---
First Quarter $ 1.09 $ 0.73
Second Quarter 1.47 0.84
Third Quarter 2.60 1.11
Fourth Quarter 4.96 2.42
2004 High Low
---- ---- ---
First Quarter $ 4.95 $ 3.09
Second Quarter 4.20 2.80
Third Quarter 4.60 3.15
Fourth Quarter 9.99 3.28
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.
II-1
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, 2004:
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 6,011,000 $2.62 1,424,000
Equity compensation plans
not approved by security holders 1,015,000 (1) $0.84 --
--------- ----- ---------
Total 7,026,000 $2.36 1,424,000
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(1) Consists of stock options to purchase 1,015,164 shares of common stock
granted to the Company's current Chairman pursuant to an agreement entered
into at time of hire.
II-2
Item 6. Selected Financial Data (In thousands, except per share amounts).
Year Ended December 31,
-----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
REVENUES $ 53,949 $ 36,714 $ 36,385 $ 58,278 $ 50,731
--------- --------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Direct operating expenses 33,050 27,029 32,005 44,354 34,458
Selling and administrative 10,205 8,898 10,038 8,337 7,248
Terminated offering costs 625 -- -- -- --
Provision for doubtful accounts -- -- -- 2,942 --
Bad debt recovery, net (963) -- -- -- --
Restructuring costs and asset impairment -- -- 244 865 --
Interest expense 25 9 29 9 43
Interest income (87) (30) (89) (216) (155)
--------- --------- --------- --------- ---------
Total 42,855 35,906 42,227 56,291 41,594
========= ========= ========= ========= =========
INCOME (LOSS) BEFORE PROVISION
FOR (BENEFIT FROM) INCOME
TAXES 11,094 808 (5,842) 1,987 9,137
PROVISION FOR (BENEFIT FROM)
INCOME TAXES 3,237 333 (677) 639 2,969
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 7,857 $ 475 $ (5,165) $ 1,348 $ 6,168
========= ========= ========= ========= =========
INCOME (LOSS) PER SHARE:
Basic $ .35 $ .02 $ (.24) $ .06 $ .30
========= ========= ========= ========= =========
Diluted $ .32 $ .02 $ (.24) $ .05 $ .26
========= ========= ========= ========= =========
Cash dividends per share -- -- -- -- --
--------- --------- --------- --------- ---------
December 31,
------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
WORKING CAPITAL $ 22,209 $ 11,983 $ 8,570 $ 8,854 $ 9,505
========= ========= ========= ========= =========
TOTAL ASSETS $ 37,211 $ 25,146 $ 22,697 $ 30,094 $ 27,946
========= ========= ========= ========= =========
LONG TERM DEBT $ 150 $ 272 -- -- --
========= ========= ========= ========= =========
STOCKHOLDERS' EQUITY $ 26,737 $ 17,404 $ 15,569 $ 20,362 $ 19,316
========= ========= ========= ========= =========
II-3
Item 7. Management's Discussion and Analysis Of Financial Condition and Results
Of Operations.
Revenues
We derive the majority of our revenues from outsourced content services.
These services consist of fabrication and knowledge services. Outsourced content
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 also provide outsourced content services for business
processes that we anticipate will continue for an indefinite period and
therefore generate what we regard as recurring revenues. We price our outsourced
content services based on the quantity delivered or resources utilized. Revenues
for outsourced content services are recognized in the period in which the
services are performed and delivered.
We also derive a portion of our revenues from IT professional services. A
substantial majority of our IT professional services is provided on a project
basis that generates non-recurring revenues. These services consist of
consulting, systems integration, custom application development and other
professional services. 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 are recognized on the percentage
of completion method of accounting as services are performed or milestones are
achieved.
Recurring revenues consisted of 47% and 53% of total revenues for the
years ended December 31, 2004 and 2003, respectively. The substantial majority
of our recurring revenues is derived from outsourced content services. A small
portion of our recurring revenues is derived from the application maintenance
agreements related to our IT professional services. Non-recurring revenues vary
depending on the size and completion dates of specific projects.
While we seek, wherever possible, to counterbalance periodic declines in
revenues on completion of large projects with new arrangements to provide
services to the same client or others, we may not be able to avoid declines in
revenues when large projects are completed. Our inability in any period to
obtain sufficient new projects to counterbalance any decreases in such work will
adversely affect our revenues and results of operations for the period. By way
of example, we expect a decline in year-over-year revenues in the first half of
2005, principally because we expect that revenues from existing projects and new
projects will not be sufficient to offset the decline in revenues resulting from
projects that were concluded, terminated or delayed.
We have historically relied on a very limited number of clients that have
accounted for a significant portion of our revenues. One client accounted for
23%, 33% and 17% of our total revenues for the years ended December 31, 2004,
2003 and 2002, respectively. One other client accounted for 31% and 30% of our
revenues for the years ended December 31, 2004 and 2002, respectively. We may
lose any of these or our other major clients as a result of:
o our failure to meet or satisfy our clients' requirements;
o the completion or termination of a project or engagement; or
o the selection of another service provider.
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.
II-4
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 net income ranged from a loss of approximately $1.1
million to a profit of approximately $3.1 million. Numerous factors, some of
which are beyond our control, may affect our quarterly results of operations,
including completions, terminations, cancellations or deferrals of projects or
engagements; the size, mix, timing and terms and conditions of client projects;
variations in the duration, size and scope of our projects or engagements;
market acceptance of our clients' new products and services; our ability to
manage costs; local factors and events that affect our production volume, such
as local holidays; unforeseen events, such as earthquakes, storms and civil
unrest; currency exchange fluctuations; changes in pricing policies by us or our
competitors; the introduction of new services by us or our competitors; and
acquisition and integration costs related to possible acquisitions of other
businesses.
Our quarterly operating results are also subject to certain seasonal
fluctuations. Our fourth and first quarters include the months of December and
January, when billable services activity by professional staff, as well as
engagement decisions by clients, may be reduced due to client budget planning
cycles. Demand for our services generally may be lower in the fourth quarter due
to reduced activity during the holiday season and fewer working days for our
Philippines-based staff during this period. These and other seasonal factors may
contribute to fluctuations in our results of operations from quarter to quarter.
Direct Operating Costs
Direct operating costs for both our outsourced content services and IT
professional services consist of direct payroll, occupancy costs, depreciation,
telecommunications, computer services and supplies. We intend to reduce direct
operating costs of our IT professional services as a percentage of revenues from
our IT professional services by increasing our offshore IT professional services
staff.
Selling and Administrative Expenses
Selling and administrative expenses for both our outsourced content
services and IT professional services consist of management and administrative
salaries, sales and marketing costs and administrative overhead. We anticipate
selling and administrative expenses to increase in absolute terms as we continue
to grow our business. Commencing October 1, 2003, we unified our selling and
related activities for our outsourced content services and IT professional
services segments. As such, selling and corporate administrative costs are not
segregated by, nor are they allocated to, operating segments for periods
commencing January 1, 2004.
Results of Operations
Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003
Revenues
Revenues were $53.9 million for the year ended December 31, 2004 compared
to $36.7 million for the similar period in 2003.
One client accounted for 23% and 33% of our total revenues for the years
ended December 31, 2004 and 2003, respectively. A second client accounted for
31% of our revenues for the year ended December 31, 2004. No other client
accounted for 10% or more of our total revenues for these periods. Further, for
the years ended December 31, 2004 and 2003, revenues from clients located in
foreign countries (principally in Europe) accounted for 30% and 47% of our total
revenues, respectively.
Revenues from outsourced content services increased 46% to $43.7 million
for the year ended December 31, 2004 from $30.0 million for the similar period
in 2003. The increase was primarily due to increased revenues from several new
projects. Of the $43.7 million of revenues for the year ended December, 31,
2004, approximately $13.8 million, or 31%, resulted from new projects,
substantially all of which were for existing clients.
II-5
Revenues from IT professional services increased 52% to $10.2 million for
the year ended December 31, 2004 from $6.7 million for the similar period in
2003. This increase was primarily due to increased revenues from new projects.
Approximately $9.5 million, or 93%, of revenues from IT professional services
for the year ended December 31, 2004 resulted from new projects, a majority of
which were for existing clients.
For the year ended December 31, 2004, approximately 53% of our revenue was
non-recurring and the 47% balance was recurring, compared with 47% and 53%,
respectively, for the year ended December 31, 2003.
Direct Operating Costs
Direct operating costs were $33.1 million and $27.0 million for the years
ended December 31, 2004 and 2003, respectively, an increase of 23%. Direct
operating costs as a percentage of revenues were 61% for the year ended December
31, 2004 and 74% for the year ended December 31, 2003.
Direct operating costs for outsourced content services were $27.5 million
and $23.0 million for the years ended December 31, 2004 and 2003, respectively,
an increase of 19%. Direct operating costs of outsourced content services as a
percentage of revenues from outsourced content services were 63% and 77% for the
years ended December 31, 2004 and 2003, respectively. The dollar increase for
the content services segment in the 2004 period was principally due to increases
in both labor and non-labor costs as a result of increased revenues. The
decrease in direct operating costs of outsourced content services as a
percentage of revenues from outsourced content services for the 2004 period was
principally due to lower labor costs as a percentage of revenues resulting from
improved process efficiencies and aggressive project cost management, as well as
a 46% increase in revenues compared to a 12% increase in fixed non-labor costs.
Direct operating costs for IT professional services were $5.6 million and
$4.0 million for the years ended December 31, 2004 and 2003 respectively. Direct
operating costs of IT professional services as a percentage of revenues from IT
professional services were 54% and 59% for the years ended December 31, 2004 and
2003, respectively. The dollar increase in direct operating costs of IT
professional services for the 2004 period was principally due to increases in
personnel and related costs. The decrease in direct operating costs of IT
professional services as a percentage of revenues from IT professional services
for the 2004 period was primarily attributable to increased resource utilization
resulting in a 4% decrease in non-labor costs as a percentage of revenues from
IT professional services, and a one percent decrease in direct labor costs as a
percentage of revenues.
Selling and Administrative Expenses
Selling and administrative expenses were $10.2 million and $8.9 million
for the years ended December 31, 2004 and 2003, respectively, an increase of
15%. Selling and administrative expenses as a percentage of revenues were 19%
and 24% for the years ended December 31, 2004 and 2003, respectively. Selling
and administrative expenses for the year ended December 31, 2003 include a
non-cash compensation charge of approximately $650,000. Excluding this charge,
selling and administrative expenses for the year ended December 31, 2004 would
have increased by approximately $2.0 million, or 24%, from the similar period in
2003. Approximately $1.7 million of the increase in selling and administrative
expenses relates to increases in selling and marketing costs, primarily
attributable to the hiring of additional business development, management and
sales support personnel, as well as to increased marketing programs and
activities.
Other
On January 5, 2005, we announced our intent to raise funds and filed a
registration statement on Form S-3 to register 4,250,000 shares of our common
stock, plus 3,250,000 shares of common stock currently held by certain of our
directors and officers. On March 23, 2005, we terminated the offering and as
such, in the fourth quarter 2004, expensed approximately $625,000 of offering
costs.
In January 2004, we reached a settlement agreement with and received $1.0
million in cash from a former client in full satisfaction of a $2.6 million
outstanding balance that we had fully written off as a bad debt in 2001. The
$1.0 million receipt, net of $37,000 in recovery costs, is reflected as bad debt
recovery for the year ended December 31, 2004.
II-6
For the year ended December 31, 2004, the provision for income taxes as a
percentage of income was 29%. The 2004 provision is lower than the U.S. Federal
statutory rate, principally due to certain overseas income which is neither
subject to foreign income taxes because of tax holidays granted to us, nor
subject to tax in the U.S. unless repatriated.
In August 2004, the IRS promulgated regulations, effective August 12,
2004, that had the effect of making certain of our overseas entities taxable in
the United States for U.S. federal income tax purposes. As a result, in the
fourth quarter 2004, we provided approximately $450,000 for U.S. income taxes
attributable to these applicable overseas entities. In addition, in December
2004, we effected certain filings in Delaware to ensure that these subsidiaries
will not be treated as U.S. corporations for U.S. federal income tax purposes as
of the date of filing and as such, will not be subject to U.S. federal income
taxes commencing January 1, 2005.
The provision for income taxes for the year ended December 31, 2003 is
higher as a percentage of pre-tax income than the federal statutory rate due
primarily to foreign and state income taxes, and to certain foreign source
losses for which no tax benefit is available, partially offset by the effect of
income in tax jurisdictions currently under tax holiday.
Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002
Revenues
Revenues were $36.7 million for the year ended December 31, 2003 compared
to $36.4 million for the similar period in 2002.
One client accounted for 33% and 17% of our total revenues for the years
ended December 31, 2003 and 2002, respectively. A second client accounted for
30% of our revenues for the year ended December 31, 2002. No other client
accounted for 10% or more of our total revenues for these periods. Further, for
the years ended December 31, 2003 and 2002, revenues from clients located in
foreign countries (principally in Europe) accounted for 47% and 23% of our total
revenues, respectively.
Revenues from outsourced content services decreased 9% to $30.0 million
for the year ended December 31, 2003 from $33.1 million for the similar period
in 2002. The decrease was primarily due to the decline in revenues of
approximately $11.0 million from two clients whose largest projects were
substantially completed in 2002. The shortfall was replaced in part by a $9.0
million increase in revenues from three existing clients.
Revenues from IT professional services increased 104% to $6.7 million for
the year ended December 31, 2003 from $3.3 million for the similar period in
2002. The increase was primarily due to an increase in the quantity and size of
system integration projects for both new and existing clients. Approximately
$5.2 million, or 78%, of revenues from IT professional services for the year
ended December 31, 2003 resulted from new projects, a majority of which were for
existing clients.
For the year ended December 31, 2003, approximately 47% of our total
revenues was non-recurring and the 53% balance was recurring, compared with 58%
and 42%, respectively, for the year ended December 31, 2002.
Direct Operating Costs
Direct operating costs were $27.1 million and $32.0 million for the years
ended December 31, 2003 and 2002, respectively, a decrease of 16%. Direct
operating costs as a percentage of revenues were 74% for the year ended December
31, 2003 and 88% for the year ended December 31, 2002.
II-7
Direct operating costs for outsourced content services were $23.1 million
and $28.0 million for the years ended December 31, 2003 and 2002, respectively,
a decrease of 18%. Direct operating costs of outsourced content services as a
percentage of revenues from outsourced content services were 77% and 85% for the
years ended December 31, 2003 and 2002, respectively. The dollar decline, as
well as the decline in such costs as a percentage of revenues from outsourced
content services in the 2003 period, were primarily due to a reduction in labor
and in fixed costs associated with our cost reduction initiatives.
Direct operating costs for IT professional services were $4.0 million in
each of the years ended December 31, 2003 and 2002. Direct operating costs of IT
professional services as a percentage of revenues from IT professional services
were 59% and 120% for the years ended December 31, 2003 and 2002, respectively.
The decrease in direct operating costs of IT professional services as a
percentage of IT professional services revenues was primarily attributable to
increased resource utilization and fixed cost leverage.
Selling and Administrative Expenses
Selling and administrative expenses were $8.9 million and $10.0 million
for the years ended December 31, 2003 and 2002, respectively, a decrease of 11%.
Selling and administrative expenses as a percentage of revenues were 24% and 28%
for the years ended December 31, 2003 and 2002, respectively. The decrease in
selling and administrative expenses is primarily attributable to the cost
reduction initiatives that were implemented during the second half of 2002.
Other
In early 2002, we closed a facility in Asia, resulting in the write-off of
property and equipment associated with the closed facility totaling
approximately $244,000. This write-off of equipment was classified as
restructuring costs and asset impairment for the year ended December 31, 2002.
For the year ended December 31, 2003, the provision for income taxes was
41% of pre-tax income, compared to a 12% benefit from income taxes as a
percentage of pre-tax loss for the year ended December 31, 2002. The provision
for income taxes for the year ended December 30, 2003 is higher as a percentage
of pre-tax income than the federal statutory rate due primarily to foreign and
state income taxes and to certain foreign source losses for which no tax benefit
is available, partially offset by the effect of income in tax jurisdictions
currently under tax holiday. For the year ended December 31, 2002, the income
tax benefit was lower as a percentage of pre-tax loss than the federal statutory
rate primarily as a result of certain overseas foreign source losses for which
no tax benefit is available.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources, expressed in
thousands are as follows:
December 31, 2004 December 31, 2003
----------------- -----------------
Cash and Cash Equivalents $20,663 $ 6,051
Working Capital 22,209 11,983
Net Cash Provided By Operating Activities
Net cash provided by operating activities was $15.7 million for the year
ended December 31, 2004 compared to $.7 million provided by operating activities
for the year ended December 31, 2003, an increase of approximately $15.0
million. The net cash provided by operating activities for the 2004 period is
principally due to net income approximating $7.9 million, non-cash charges
approximating $4.8 million, and changes in operating assets and liabilities of
$3.0 million.
II-8
Accounts receivable totaled $8.0 million at December 31, 2004,
representing approximately 57 days of sales outstanding, compared to $8.5
million, or 71 days, at December 31, 2003. The decrease in days outstanding
resulted from increased accounts receivable collections during 2004.
A significant amount of our revenues is derived from clients in the
publishing industry. Accordingly, our accounts receivable generally include
significant amounts due from such clients. In addition, as of December 31, 2004,
approximately 27% of our accounts receivable was from foreign (principally
European) clients, and 69% of accounts receivable was due from two clients.
Net Cash Used in Investing Activities
For the year ended December 31, 2004, we spent approximately $2.1 million
for capital expenditures, compared to approximately $2.4 million for the year
ended December 31, 2003. Capital spending in 2004 and 2003 related principally
to normal ongoing equipment upgrades, project requirement specific equipment,
and for improvements in infrastructure. We expect that the capital expenditures
for these purposes will approximate $3.0 million in 2005, excluding any
potential capital expenditures related to future facilities expansion.
Availability of Funds
We have a $5.0 million line of credit pursuant to which we may borrow up
to 80% of eligible accounts receivable at the bank's alternate base rate plus
1/2% or LIBOR plus 3%. The line, which expires in May, 2005, is secured by our
accounts receivable. There are no amounts outstanding under this facility.
We believe that existing cash and internally generated funds will be
sufficient for our reasonably anticipated working capital and capital
expenditure requirements during the next 12 months. We fund our foreign
expenditures from our U.S. corporate headquarters on an as-needed basis.
Contractual Obligations
The table below reflects our contractual cash obligations, expressed in
thousands, at December 31, 2004.
Payments Due by Period
----------------------
Contractual Obligations Total Less than 1-3 years 4-5 years After
- ----------------------- ----- 1 year --------- --------- 5 years
------ -------
Capital lease obligations $ 355 $ 199 $ 156 $ -- $ --
Non-cancelable operating leases 2,203 460 1,286 457 --
------ --------- --------- --------- -------
Total contractual cash obligations $2,558 $ 659 $ 1,442 $ 457 $ --
====== ========= ========= ========= =======
Inflation, Seasonality and Prevailing Economic Conditions
To date, inflation has not had a significant impact on our operations. We
generally perform work for our clients under project-specific contracts,
requirements-based contracts or long-term contracts. Contracts are typically
subject to numerous termination provisions.
Our quarterly operating results are subject to certain seasonal
fluctuations. Our fourth and first quarters include the months of December and
January, when billable services activity by professional staff, as well as
engagement decisions by clients, may be reduced due to client budget planning
cycles. Demand for our services generally may be lower in the fourth quarter due
to reduced activity during the holiday season and fewer working days for our
Philippines-based staff during this period. These and other seasonal factors may
contribute to fluctuations in our operating results from quarter to quarter.
II-9
Critical Accounting Policies and Estimates
Basis of Presentation and Use of Estimates
Management's discussion and analysis of its results of operations and
financial condition is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to accounts receivable. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Allowance for Doubtful Accounts
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 customers, 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 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 for content manufacturing and outsourcing services in
the period in which we perform services and deliver in accordance with Staff
Accounting Bulletin 104.
We recognize IT professional services revenue from custom application and
systems integration development which requires significant production,
modification or customization of software in accordance with Statement of
Position ("SOP") No. 97-2 "Software Revenue Recognition" and in a manner similar
to SOP No. 81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts". We recognize revenue for such services billed under
fixed fee arrangements 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 ended December 31, 2004, respectively. We receive revenue billed on a time
and materials basis as we perform the services.
Property and Equipment
Property and equipment is stated at cost and is depreciated on the
straight-line method over the estimated useful lives of the related assets,
which is generally two to five years. Leasehold improvements are amortized on a
straight-line basis over the shorter of their estimated useful lives or the
lives of the leases.
II-10
Long-lived Assets
We account for long lived assets under Statement of Financial Accounting
Standards ("SFAS") 144, Accounting for the Impairment or Disposal of 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.
Income Taxes
We determine our deferred taxes based on the difference between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates, as well as any net operating loss or tax credit carryforwards expected to
reduce taxes payable in future years. We provide a valuation allowance when it
is more likely than not that some or all of a deferred tax asset will not be
realized. Unremitted earnings of foreign subsidiaries have been included in the
consolidated financial statements without giving effect to the United States
taxes that may be payable on distribution to the United States to the extent
such earnings are not anticipated to be remitted to the United States.
Goodwill and Other Intangible Assets
SFAS 142 requires that we test goodwill 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.
Accounting for Stock-Based Compensation
We account for our stock options issued to employees and outside directors
pursuant to Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees" and has adopted the disclosure requirements of SFAS
No. 123, "Accounting for Stock-Based Compensation", and SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123". Accordingly, in 2004, we have not
recognized compensation expense in connection with the issuance of stock
options.
Significant New Accounting Pronouncements Not Yet Adopted
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment",
which is a revision of SFAS No. 123 and supersedes Accounting Principles Board
("APB") Opinion No. 25. SFAS No. 123 (R) requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair
value on the date of grant, and to be expensed over the applicable vesting
period. Pro forma disclosure of the income statement effects of share-based
payments is no longer an alternative.
II-11
SFAS No. 123 (R) is effective for all stock-based awards granted on or after
July 1, 2005. In addition, companies must also recognize compensation expense
related to any awards that are not fully vested as of the effective date.
Compensation expense for the unvested awards will be measured based on the fair
value of the awards previously calculated in developing the pro forma
disclosures in accordance with the provisions of SFAS No. 123. We are currently
evaluating SFAS No. 123 (R), including the method of adoption, and expect its
adoption will result in increased compensation expense in the future.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 ("FAS
109-1"), "Application of FASB Statement No. 109, `Accounting for Income Taxes,'
to the Tax Deduction on Qualified Production Activities provided by the American
Jobs Creation Act of 2004." The American Jobs Creation Act, or AJCA, creates a
temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing an 85% dividend received deduction for certain
qualified dividends from controlled foreign corporations. FAS 109-1 clarifies
that this tax deduction should be accounted for as a special tax deduction in
accordance with Statement 109. Our evaluation of the AJCA with respect to the
additional deduction is still in process and we expect to complete the
evaluation process in 2005. As such, we cannot reasonably estimate the income
tax effect of any such repatriation at the present time.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. This Statement amends APB No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have a material impact on our financial position and
results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market 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 (5.25% at December 31, 2004) plus 1/2% or LIBOR (2.44% at
December 31, 2004) plus 3%. We have not borrowed under this line in 2004. 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.
We have operations in foreign countries. While we are exposed to foreign
currency fluctuations, we presently have no financial instruments in foreign
currency and do not maintain significant funds in foreign currency beyond those
necessary for operations.
II-12
Item 8. Financial Statements.
INNODATA ISOGEN, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm II-14
Consolidated Balance Sheets as of December 31, 2004 and 2003 II-15
Consolidated Statements of Operations for the three years ended
December 31, 2004 II-16
Consolidated Statement of Stockholders' Equity for the three years ended
December 31, 2004 II-17
Consolidated Statements of Cash Flows for the three years ended
December 31, 2004 II-18
Notes to Consolidated Financial Statements II-19
II-13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Innodata
Isogen, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America.
We have also audited Schedule II for each of the three years in the period
ended December 31, 2004. In our opinion, this schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information therein.
Grant Thornton LLP
Edison, New Jersey
March 9, 2005
II-14
INNODATA ISOGEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(Dollars in Thousands)
2004 2003
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,663 $ 5,051
Cash and cash equivalents-restricted -- 1,000
Accounts receivable-net of allowance for doubtful accounts of $135 and $1,219 at
December 31, 2004 and 2003 respectively 8,019 8,497
Prepaid expenses and other current assets 1,757 999
Refundable income taxes -- 1,075
Deferred income taxes 645 1,421
-------- --------
Total current assets 31,084 18,043
PROPERTY AND EQUIPMENT-NET 4,559 5,628
OTHER ASSETS 893 800
GOODWILL 675 675
-------- --------
TOTAL $ 37,211 $ 25,146
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,449 $ 1,299
Accrued expenses 1,963 1,152
Accrued salaries, wages and related benefits 3,979 2,865
Income and other taxes 1,304 598
Current portion of capital lease obligations 180 146
-------- --------
Total current liabilities 8,875 6,060
-------- --------
DEFERRED INCOME TAXES 1,449 1,410
-------- --------
OBLIGATIONS UNDER CAPITAL LEASE 150 272
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Serial preferred stock; 5,000,000 shares authorized, none outstanding -- --
Common stock, $.01 par value; 75,000,000 shares authorized; 22,679,000 and 22,535,000 shares
issued; 22,679,000 and 21,951,000 outstanding as of December 31, 2004 and 2003, respectively 227 226
Additional paid-in capital 14,914 15,413
Retained earnings 11,596 3,739
-------- --------
26,737 19,378
Less: treasury stock-at cost; 584,000 shares at December 31, 2003 -- (1,974)
-------- --------
Total stockholders' equity 26,737 17,404
-------- --------
TOTAL $ 37,211 $ 25,146
======== ========
See notes to consolidated financial statements
II-15
INNODATA ISOGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
(In thousands, except per share amounts)
2004 2003 2002
---- ---- ----
REVENUES $ 53,949 $ 36,714 $ 36,385
-------- -------- --------
OPERATING COSTS AND EXPENSES
Direct operating costs 33,050 27,029 32,005
Selling and administrative expenses 10,205 8,898 10,038
Terminated offering costs 625 -- --
Bad debt recovery - net (963) -- --
Restructuring costs and asset impairment -- -- 244
Interest expense 25 9 29
Interest income (87) (30) (89)
-------- -------- --------
Total 42,855 35,906 42,227
-------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES 11,094 808 (5,842)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 3,237 333 (677)
-------- -------- --------
NET INCOME (LOSS) $ 7,857 $ 475 $ (5,165)
======== ======== ========
INCOME PER SHARE:
Basic: $ .35 $ .02 $ (.24)
======== ======== ========
Diluted: $ .32 $ .02 $ (.24)
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic: 22,288 21,570 21,489
======== ======== ========
Diluted: 24,817 22,966 21,489
======== ======== ========
See notes to consolidated financial statements
II-16
INNODATA ISOGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
(In thousands)
Additional
Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ---------- -------- -------- -----
January 1, 2002 21,716 217 13,355 8,429 (1,639) 20,362
Net loss -- -- -- (5,165) -- (5,165)
Issuance of common stock upon exercise of stock options 318 3 107 -- -- 110
Purchase of treasury stock -- -- -- -- (360) (360)
Non-cash equity compensation 12 -- 523 -- -- 523
Income tax benefit from exercise of stock options -- -- 99 -- -- 99
------- -------- -------- -------- -------- -------
December 31, 2002 22,046 220 14,084 3,264 (1,999) 15,569
Net income -- -- -- 475 -- 475
Issuance of common stock upon exercise of stock options 515 6 565 -- -- 571
Retirement of treasury stock (26) -- (25) -- 25 --
Income tax benefit from exercise of stock options -- 132 -- -- 132
Non-cash equity compensation -- -- 657 -- -- 657
------- -------- -------- -------- -------- -------
December 31, 2003 22,535 226 15,413 3,739 (1,974) 17,404
Net income -- -- -- 7,857 -- 7,857
Issuance of common stock upon exercise of stock options 728 7 1,075 -- -- 1,082
Retirement of treasury stock (584) (6) (1,968) -- 1,974 --
Income tax benefit from exercise of stock options -- -- 358 -- -- 358
Non-cash equity compensation -- -- 36 -- -- 36
------- -------- -------- -------- -------- -------
December 31, 2004 22,679 $ 227 $ 14,914 $ 11,596 $ -0- $26,737
======= ======== ======== ======== ======== =======
See notes to consolidated financial statements
II-17
INNODATA ISOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
(In thousands)
2004 2003 2002
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 7,857 $ 475 $ (5,165)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 3,924 4,528 5,228
Non-cash compensation 36 657 523
Loss on disposal of fixed assets -- 147 --
Restructuring costs and asset impairment -- -- 244
Deferred income taxes 815 (2) 30
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 478 (5,244) 4,593
Prepaid expenses and other current assets (1,495) (947) (680)
Refundable income taxes 1,075 416 (982)
Other assets (160) 242 894
Accounts payable 150 652 (811)
Accrued expenses 811 (856) 601
Accrued salaries and wages 1,114 339 (1,244)
Income and other taxes 1,064 275 (181)
-------- -------- --------
Net cash provided by operating activities 15,669 682 3,050
-------- -------- --------
INVESTING ACTIVITIES:
Decrease (increase) in restricted cash 1,000 (1,000) --
Capital expenditures (2,051) (2,408) (1,162)
-------- -------- --------
Net cash used in investing activities (1,051) (3,408) (1,162)
-------- -------- --------
FINANCING ACTIVITIES:
Payments of obligations under capital lease (88) (49) --
Payment of acquisition notes -- -- (650)
Proceeds from exercise of stock options 1,082 571 110
Purchase of treasury stock -- -- (360)
-------- -------- --------
Net cash provided by (used in) financing activities 994 522 (900)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,612 (2,204) 988
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,051 7,255 6,267
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 20,663 $ 5,051 $ 7,255
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 1,237 $ 417 $ 261
-------- -------- --------
Interest expense $ 25 $ 23 $ 29
-------- -------- --------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment utilizing capital leases $ 66 $ 467 $ --
-------- -------- --------
See notes to consolidated financial statements
II-18
INNODATA ISOGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
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 business services that help organizations
create, manage, use and distribute information more effectively and
economically. The Company provides outsourced content services and
content-related information technology (IT) professional services. The Company's
outsourced content services focus on fabrication services and knowledge
services. Fabrication services include digitization and data conversion
services, content creation and XML services. Knowledge services include content
enhancement, hyperlinking, indexing and general editorial services. The
Company's IT professional services focus on the design, implementation,
integration and deployment of systems used to author, manage and distribute
content.
Principles of Consolidation-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.
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.
Revenue Recognition-Revenue for content manufacturing and outsourcing
services is recognized in the period in which services are performed and
delivery has occurred in accordance with Staff Accounting Bulletin 104.
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 accordance with
Statement of Position ("SOP") No. 97-2 "Software Revenue Recognition" and in a
manner similar to SOP No. 81-1 "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts". Revenue for such services billed under
fixed fee arrangements is recognized using the percentage-of-completion method
under contract accounting as services are performed or output milestones are
reached. The percentage completed is measured either by the percentage of labor
hours incurred to date in relation to estimated total labor hours or in
consideration of achievement of certain output milestones, depending on the
specific nature of each contract. For arrangements in which percentage-of
completion accounting is used, the Company records cash receipts from customers
and billed amounts due from customers in excess of recognized revenue as
billings in excess of revenues earned on contracts in progress (which is
included in accounts receivable). Revenues from fixed-fee projects accounted for
less than 10% of our total revenue for each of the three years ended December
31, 2004, respectively. Revenue billed on a time and materials basis is
recognized as services are performed.
Foreign Currency-The functional currency for the Company's production
operations located in the Philippines, India and Sri Lanka is U.S. dollars. As
such, transactions denominated in Philippine pesos, Indian and Sri Lanka rupees
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, 2004 and 2003 were translated at the exchange rate in
effect as of those dates. Exchange gains and losses resulting from such
transactions were not material in 2004, 2003 and 2002.
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.
II-19
Property and Equipment-Property and equipment is stated at cost and is
depreciated on the straight-line method over the estimated useful lives of the
related assets, which is generally two to five years. Leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful
lives or the lives of the leases.
Long-lived Assets-The Company accounts for long lived assets under
Statement of Financial Accounting Standards ("SFAS") 144, Accounting for the
Impairment or Disposal of 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
using a projected discounted 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 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.
Goodwill and Other Intangible Assets-Goodwill primarily includes the
excess purchase price paid over the fair value of net assets acquired. Effective
July 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS 142, 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.
Income Taxes-Deferred taxes are determined based on the difference between
the financial statement and tax bases of assets and liabilities, using enacted
tax rates, as well as any net operating loss or tax credit carryforwards
expected to reduce taxes payable in future years. A valuation allowance is
provided when it is more likely than not that some or all of a deferred tax
asset will not be realized. Unremitted earnings of foreign subsidiaries have
been included in the consolidated financial statements without giving effect to
the United States taxes that may be payable on distribution to the United States
to the extent such earnings are not anticipated to be remitted to the United
States.
Accounting for Stock-Based Compensation-The Company accounts for its stock
options issued to employees and outside directors pursuant to Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation", and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123". Accordingly, in 2004, no compensation expense has been
recognized in connection with the issuance of stock options.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation using the assumptions described in
note 7, stock options.
II-20
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
(in thousands,
except per share amounts)
Net income (loss), as reported $ 7,857 $ 475 $ (5,165)
Deduct: Total stock-based employee compensation
determined under fair value based method, net of related
tax effects (3,200) (3,193) (2,315)
Add: Compensation expense included in the determination
of net income (loss) as reported, net of related tax effects,
related to the extension of stock options -- 455 318
------- ------- ---------
Pro forma net income (loss) $ 4,657 $(2,263) $ (7,162)
======= ======= =========
Income (loss) per share:
Basic-as reported $ .35 $ .02 $ (.24)
======= ======= =========
Basic-pro forma $ .21 $ (.10) $ (.33)
======= ======= =========
Diluted-as reported $ .32 $ .02 $ (.24)
======= ======= =========
Diluted-pro forma $ .19 $ (.10) $ (.33)
======= ======= =========
Fair Value of Financial Instruments-The carrying amounts of financial
instruments, including cash and cash equivalents, accounts receivable and
accounts payable approximated fair value as of December 31, 2004 and 2003
because of the relative short maturity of these instruments.
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 (Loss) Per Share- Basic earnings (loss) per share is computed by
dividing income (loss) available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted earnings (loss)
per share is computed by dividing income (loss) available to common shareholders
by the weighted-average number of common shares outstanding during the period
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. The
dilutive effect of the outstanding options is reflected in diluted earnings
(loss) per share by application of the treasury stock method.
II-21
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment",
which is a revision of SFAS No. 123 and supersedes Accounting Principles Board
("APB") Opinion No. 25. SFAS No. 123 (R) requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair
value on the date of grant, and to be expensed over the applicable vesting
period. Pro forma disclosure of the income statement effects of share-based
payments is no longer an alternative. SFAS No. 123 (R) is effective for all
stock-based awards granted on or after July 1, 2005. In addition, companies must
also recognize compensation expense related to any awards that are not fully
vested as of the effective date. Compensation expense for the unvested awards
will be measured based on the fair value of the awards previously calculated in
developing the pro forma disclosures in accordance with the provisions of SFAS
No. 123. The Company is currently evaluating SFAS No. 123 (R), including the
method of adoption, and expects its adoption will result in increased
compensation expense in the future.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 ("FAS
109-1"), "Application of FASB Statement No. 109, `Accounting for Income Taxes,'
to the Tax Deduction on Qualified Production Activities provided by the American
Jobs Creation Act of 2004." The American Jobs Creation Act, or AJCA, creates a
temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing an 85% dividend received deduction for certain
qualified dividends from controlled foreign corporations. FAS 109-1 clarifies
that this tax deduction should be accounted for as a special tax deduction in
accordance with Statement 109. The Company's evaluation of the AJCA with respect
to the additional deduction is still in process and is expected to be completed
during 2005. As such, the Company cannot reasonably estimate the income tax
effect of any such repatriation at the present time.
2. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost less accumulated depreciation and
amortization (in thousands), consist of the following:
December 31,
------------
2004 2003
---- ----
Equipment $15,204 $14,608
Furniture and office equipment 977 820
Leasehold improvements 2,433 2,342
------- -------
Total 18,614 17,770
Less accumulated depreciation and amortization 14,055 12,142
------- -------
$ 4,559 $ 5,628
======= =======
Depreciation expense was approximately $3,120,000, $3,807,000 and
$4,380,000 for the three years ended December 31, 2004, respectively.
In 2003, the Company entered into a three year lease for certain equipment
located in one of its Philippine facilities. The equipment was capitalized at
its fair market value of approximately $641,000, which represented the present
value of the minimum lease payments plus trade-in value of exchanged equipment
of $175,000. The loss on such trade-in approximated $58,000.
At December 31, 2004 and 2003, equipment under capital leases had a net
book value of approximately $312,000 and $587,000, respectively.
II-22
3. INCOME TAXES
The significant components of the provision for (benefit from) income
taxes for each of the three years ended December 31, 2004 (in thousands) are as
follows:
2004 2003 2002
---- ---- ----
Current income tax expense (benefit):
Foreign $ 174 $ 29 $ 97
Federal 1,943 230 (827)
State and local 305 76 23
------ ------ ------
2,422 335 (707)
Deferred income tax expense (benefit) provision 815 (2) 30
------ ------ ------
Provision for (benefit from) income taxes $3,237 $ 333 $ (677)
====== ====== ======
The reconciliation of the U.S. statutory rate with the Company's effective
tax rate for each of the three years ended December 31 2004 is summarized as
follows:
2004 2003 2002
---- ---- ----
Federal statutory rate 35.0% 35.0% (35.0)%
Effect of:
State income taxes (net of federal tax benefit) 2.5 5.9 0.6
Foreign source losses for which no tax benefit is available 1.5 7.3 23.8
Foreign entities subject to US federal income taxes 4.3 -- --
Effect of foreign tax holiday, net of foreign income
not deemed permanently reinvested (12.3) (24.0) (3.4)
Taxes on foreign income at rates that differ from US
statutory rate (1.4) 7.6 --
Non deductible compensation -- 5.9 --
Other (0.4) 3.5 2.4
----- ----- -----
Effective rate 29.2% 41.2% (11.6)%
===== ===== =====
II-23
As of December 31, 2004 and 2003, the composition of the Company's net
deferred income taxes (in thousands) is as follows:
2004 2003
---- ----
Deferred income tax assets:
Allowances not currently deductible $ 192 $ 1,358
Depreciation and amortization 32 114
Equity compensation not currently deductible 375 348
Expenses not deductible until paid 469 63
------- -------
1,068 1,883
------- -------
Deferred income tax liabilities:
Foreign source income, not taxable until repatriated (1,872) (1,872)
------- -------
Net deferred (liability) asset $ (804) $ 11
======= =======
Net deferred income tax asset-current 645 1,421
Net deferred income tax liability-non-current (1,449) (1,410)
------- -------
Net deferred income tax (liability) asset $ (804) $ 11
======= =======
United States and foreign components of income (loss) before income taxes
for each of the three years ended December 31, 2004 (in thousands) are as
follows:
2004 2003 2002
---- ---- ----
United States $ 6,731 $ 565 $(2,806)
Foreign 4,363 243 (3,036)
------- ------- -------
Total $11,094 $ 808 $(5,842)
======= ======= =======
Certain of the Company's foreign subsidiaries are subject to tax holidays
for various periods ranging from 2005 to 2014, pursuant to which the income tax
rate for these subsidiaries is substantially reduced. Unless renewed, as the tax
holidays expire, the Company's overall effective tax rate will be negatively
impacted. The tax benefit for tax holidays was approximately $900,000, $300,000
and $600,000 for each of the three years ended December 31, 2004, respectively.
In August 2004, the Internal Revenue Service ("IRS") promulgated
regulations, effective August 12, 2004, that treated certain of the Company's
subsidiaries that are incorporated in foreign jurisdictions and also
domesticated as Delaware limited liability companies as U.S. corporations for
U.S. federal income tax purposes. In the preamble to such regulations, the IRS
expressed its view that dual registered companies described in the preceding
sentence are also treated as U.S. corporations for U.S. federal income tax
purposes for periods prior to August 12, 2004. Notwithstanding this view, the
Company believes that its 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 intends to vigorously defend its treatment if
challenged. As such, the Company has made no provision for U.S. taxes in its
financial statements for these entities for the periods prior to August 12,
2004. However, if challenges by the IRS were ultimately successful, the
Company's potential U.S. federal income tax liability could approximate
II-24
$2.5 million, excluding interest and potential penalties. Furthermore, the
Company cannot be assured that the IRS will not assert other positions with
respect to the foregoing matters that, if successful, could increase materially
the Company's liability for U.S. federal income taxes. In December 2004, the
Company effected certain filings in Delaware to ensure that these subsidiaries
will not be treated as U.S. corporations for U.S. federal income tax purposes as
of the date of filing and as such, will not be subject to U.S. federal income
taxes commencing January 1, 2005.
4. COMMITMENTS AND CONTINGENT LIABILITIES
Line of Credit-The Company has a $5 million line of credit pursuant to
which it may borrow up to 80% of eligible accounts receivable at the bank's
alternate base rate plus 1/2% or LIBOR plus 3%. The line, which expires in May,
2005, is secured by the Company's accounts receivable. The Company has not
borrowed against its credit line in 2004.
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 straight-lined over the
non-cancelable base lease period in accordance with SFAS 13.
Lease agreements for production space in most overseas facilities, which
expire through 2011, contain provisions pursuant to which the Company may cancel
the leases with a minimal notice period, generally subject to forfeiture of
security deposit. The annual rental for the cancelable leased space is
approximately $1,100,000. For the years ended December 31, 2004, 2003 and 2002,
rent expense for office and production space totaled approximately $1,725,000,
$1,700,000 and $2,100,000, respectively.
In addition, the Company leases certain equipment under short-term capital
and operating lease agreements. For the years ended December 31, 2004, 2003 and
2002, rent expense for equipment totaled approximately $47,000, $36,000 and
$46,000, respectively.
At December 31, 2004, future minimum annual rental commitments on
non-cancelable leases (excluding operating leases with terms less than one year)
(in thousands) are as follows:
Leases Operating Leases Capital
- ------ ---------------- -------
2005 $460 $199
2006 502 138
2007 417 18
2008 367 --
2009 367 --
Thereafter 90 --
------ -----
$2,203 355
======
Less: Amounts representing interest (7% - 9% per annum) 25
-----
Present value of minimum lease payments $330
=====
Litigation -In connection with the cessation of all operations at certain
foreign subsidiaries, certain former employees have filed various actions
against certain of the Company's Philippine subsidiaries, and have purported to
also sue the Company and certain of its officers and directors, seeking to
require reinstatement of employment and to recover back wages for an allegedly
illegal facility closing on June 7, 2002 based on the terms of a collective
bargaining agreement with this subsidiary. The Company has prevailed in
substantially all stages of this litigation to date, although several appeals by
complainants are still pending.
II-25
If the complainants' claims had merit, they could be entitled to back wages of
up to $5.0 million for the period from June 7, 2002 to June 6, 2005, consistent
with prevailing jurisprudence. Based upon consultation with legal counsel,
management believes the claims are without merit and is defending against them
vigorously.
In addition, the Company is subject to various legal proceedings and
claims which arise in the ordinary course of business.
While management currently believes that the ultimate outcome of all these
proceedings will not have a material adverse effect on the Company's financial
position or overall trends in results of operations, litigation is subject to
inherent uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the operating results of the period
in which the ruling occurs. In addition, the estimate of potential impact on the
Company's financial position or overall results of operations for the above
legal proceedings could change in the future.
Foreign Currency-The Company's production facilities are located in the
Philippines, India and Sri Lanka. To the extent that the currencies of these
countries fluctuate, the Company is subject to risks of changing costs of
production after pricing is established for certain customer projects. However,
most significant contracts contain provisions for price renegotiation.
Employment Agreements-On January 1, 2004, the Company entered into a four
year employment agreement with the co-founder of ISOGEN, an entity the Company
acquired in 2001, to serve as Executive Vice President of the Company. Pursuant
to the agreement, he will be compensated at a rate of $250,000 per annum for the
first year, subject to annual review for discretionary annual increases
thereafter, and will be eligible to receive an annual cash bonus, the amount of
which will be based upon meeting certain goals. In addition, on November 10,
2003, he was granted an option to purchase 200,000 shares of the Company's
common stock at $3.35 per share. In connection with his previous employment
agreement, in 2002 the executive was granted an option to purchase 150,000
shares of the Company's common stock at $4.00 per share, and was issued 11,587
unregistered shares of the Company's common stock. Compensation expense of
approximately $10,000 was recorded in the year ended December 31, 2002 as
selling and administrative expenses pursuant to the stock issuance.
In May 2001, the Company entered into an agreement with its then Chairman
of the Board pursuant to which he will continue to serve as a part-time employee
at a salary of $2,000 per month for five years. In addition, the Company paid
him $400,000 in exchange for a six year non-compete agreement, which is included
in other assets and is being amortized over the term of the agreement. On
December 31, 2004, the unamortized balance was $155,000.
Indemnifications-The Company is obligated under certain circumstances to
indemnify directors and certain officers against costs and liabilities incurred
in actions or threatened actions brought against such individual because such
individuals acted in the capacity of director and /or officer of the Company. In
addition, the Company has contracts with certain clients pursuant to which the
Company has agreed to indemnify the client for certain specified and limited
claims. These indemnification obligations are in the ordinary course of business
and, in many cases, do not include a limit on a maximum potential future
payments. As of December 31, 2004, 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, 2004, such
equipment had a book value of $670,000.
5. RETIREMENT PLANS
The Company has a defined contribution plan qualified under Section 401(k)
of the Internal Revenue Code. Substantially all of its U.S. employees are
eligible to participate after completing three months of service.
II-26
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 $75,000
to the plan for the fiscal year ended December 31, 2004. For the fiscal years
ended December 31, 2003 and 2002, the Company's matching contributions were
approximately $48,000 and $50,000 respectively.
Most of the Company's foreign subsidiaries maintain unfunded retirement
plans consistent with local practices and requirements. Retirement-related
expenses for foreign subsidiaries totaled approximately $205,000, $124,000 and
$38,000 for the three years ended December 31, 2004, 2003 and 2002,
respectively. As of December 31, 2004, accrued retirement costs for foreign
subsidiaries totaled approximately $470,000.
6. CAPITAL STOCK
The Company is authorized to issue 75,000,000 shares of common stock and
5,000,000 shares of preferred stock. Each share of common stock has one vote.
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, 2004, the Company had reserved
for issuance approximately 8,450,000 shares of common stock pursuant to the
Company's stock option plans (including an aggregate of 1,015,164 options issued
to the Company's Chairman which were not granted pursuant to stockholder
approved stock option plans).
Treasury Stock-During the year ended December 31, 2002, the Company
repurchased 340,000 shares of its common stock at a cost of $360,000. In 2004,
the Company retired 584,000 shares of its treasury stock.
In August 2002, the Board of Directors authorized the repurchase of up to
$1.5 million of the Company's common stock, of which approximately $1,140,000
remains available for repurchase under the program at December 31, 2004.
7. STOCK OPTIONS
The Company adopted, with stockholder approval, 1995, 1996, 1998, 2001,
and 2002 Stock Option Plans (the "1995 Plan," "1996 Plan," "1998 Plan," "2001
Plan," and "2002 Plan") which provide for the granting of options to purchase
not more than an aggregate of 2,400,000, 1,999,992, 3,600,000, 900,000, and
950,000 shares of common stock, respectively, subject to adjustment under
certain circumstances. Such options may be incentive stock options ("ISOs")
within the meaning of the Internal Revenue Code of 1986, as amended, or options
that do not qualify as ISOs ("Non-Qualified Options").
II-27
The option exercise price per share may not be less than the fair market
value per share of common stock on the date of grant (110% of such fair market
value for an ISO, if the grantee owns stock possessing more than 10% of the
combined voting power of all classes of the Company's stock). Options may be
granted under the Stock Option Plan to all officers, directors, and employees of
the Company and, in addition, Non-Qualified Options may be granted to other
parties who perform services for the Company. No options may be granted under
the 1995 Plan after May 16, 2005; under the 1996 Plan after July 8, 2006; under
the 1998 Plan after July 8, 2008; under the 2001 Plan after May 31, 2011; and
under the 2002 Plan after June 30, 2012.
The Plans may be amended from time to time by the Board of Directors of
the Company. However, the Board of Directors may not, without stockholder
approval, amend the Plans to increase the number of shares of common stock which
may be issued under the Plans (except upon changes in capitalization as
specified in the Plans), decrease the minimum exercise price provided in the
Plans or change the class of persons eligible to participate in the Plans.
The fair value of options at date of grant was estimated using the
Black-Scholes pricing model with the following weighted average assumptions:
expected lives ranging between four to four and one-half years for options
granted in 2004, six years for options granted in 2003 and four years for
options granted in 2002; risk free interest rate of 3.19% in 2004, 4.2% in 2003
and 3.5% in 2002; expected volatility of 114% in 2004, 140% in 2003 and 119% in
2002; and a zero dividend rate in each of the three years ended December 31,
2004.
The following table presents information related to stock options for
2004, 2003 and 2002.
Weighted Weighted
Average Average
Number Exercise Number Exercise
Outstanding Price Exercisable Price
----------- ----- ----------- -----
Balance 1/1/02 7,851,292 $ 1.84 4,795,880 $ 0.88
======== =========== ========
Cancelled (489,482) $ 1.29
Granted 220,750 $ 3.64
Exercised (317,676) $ 0.35
--------- --------
Balance 12/31/02 7,264,884 $ 1.99 5,402,457 $ 1.53
======== =========== ========
Cancelled (127,176) $ 2.42
Granted 1,002,000 $ 3.40
Exercised (550,328) $ 1.14
--------- --------
Balance 12/31/03 7,589,380 $ 2.34 5,780,204 $ 1.83
======== =========== ========
Cancelled (49,174) $ 1.55
Granted 214,000 $ 3.74
Exercised (728,274) $ 1.48
--------- --------
Balance 12/31/04 7,025,932 $ 2.36 5,985,748 $ 2.14
========= ======== =========== ========
II-28
Weighted
Per Share Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
Balance 12/31/04 $0.25 - 0.47 445,668 7 $ 0.41 445,668 $ 0.41
$0.50 - 0.75 1,625,061 7 $ 0.57 1,625,061 $ 0.57
$1.29 - 1.56 1,401,342 1 $ 1.48 1,401,342 $ 1.48
$2.00 - 2.50 1,021,911 2 $ 2.24 1,021,911 $ 2.24
$3.00 - 4.60 1,393,750 8 $ 3.53 422,050 $ 3.58
$5.43 - 5.89 1,130,200 1 $ 5.45 1,062,300 $ 5.45
$6.00 - 6.57 8,000 1 $ 6.24 7,416 $ 6.24
--------- --------- --------- --------
7,025,932 $ 2.36 5,985,748 $ 2.14
========= ========= ========= ========
Options granted prior to 2003 vest over a four year period and have a five
year life. In 2004, substantially all options granted vest over a four year
period and have a ten year life. The weighted average fair value of the
underlying common stock as of the date of grant for options granted in 2004,
2003 and 2002 is $3.74, $3.21 and $3.62, respectively.
In 2003, the Company extended the expiration date of options granted to
certain officers, directors and employees, substantially all of which were
vested, to purchase 315,000, 566,000, 522,000 and 133,000 shares of its common
stock at $.47, $.50, $.67 and $2.00, respectively. In connection with the
extension, the option holders agreed not to sell shares of stock acquired upon
exercise of the extended options for designated periods of time ending between
June 2004 to March 2005. In connection with this transaction, compensation
expense of approximately $650,000 was recorded in the second quarter of 2003
based upon the difference between the exercise price and the market price of the
underlying common stock on the date the options were extended. Compensation
expense is included as a component of selling and administrative expenses.
In 2002, the Company extended the expiration date of options to the Chief
Executive Officer to purchase 6,672, 248,496, 360,000, 399,996 and 123,996
shares of its common stock at $.42, $.50, $.58, $1.29 and $.25, per share,
respectively. In connection with this transaction, compensation expense of
approximately $513,000 was recorded in the third quarter as selling and
administrative expenses. In addition, the Company issued 11,587 shares of its
common stock pursuant to an employment agreement with an officer of the Company.
Compensation expense of approximately $10,000 was recorded in the third quarter
of 2002 as selling and administrative expenses.
8. SEGMENT REPORTING AND CONCENTRATIONS
The Company's operations are classified into two reporting segments: (1)
outsourced content services and (2) IT professional services. The outsourced
content services segment focuses on fabrication services and knowledge services.
Fabrication services include digitization and data conversion services, content
creation and XML services. Knowledge services include content enhancement,
hyperlinking, indexing and general editorial services. The IT professional
services segment focuses on the design, implementation, integration and
deployment of systems used to author, manage and distribute content. The
Company's outsourced content services revenues are generated principally from
its production facilities located in the Philippines, India and Sri Lanka. 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.
Commencing October 1, 2003, the Company unified its selling and related
activities for its content and professional services segments. As such, selling
and corporate administrative costs are not segregated by, nor are they allocated
to, operating segments. The income (loss) before income taxes, by operating
segment has been reclassified for comparative purposes.
II-29
2004 2003 2002
---- ---- ----
(in thousands)
Revenues:
Outsourced content services $ 43,701 $ 29,977 $ 33,089
IT Professional services 10,248 6,737 3,296
-------- -------- --------
Total consolidated $ 53,949 $ 36,714 $ 36,385
======== ======== ========
Depreciation and amortization:
Outsourced client services $ 3,547 $ 4,157 $ 4,892
IT Professional services 92 79 78
Selling and corporate administration 285 292 258
-------- -------- --------
Total consolidated $ 3,924 $ 4,528 $ 5,228
======== ======== ========
Income (loss) before income taxes:
Outsourced content services $ 16,116 $ 6,576 $ 5,037
IT Professional services 4,671 2,778 (655)
Selling and corporate administration (9,693) (8,546) (10,224)
-------- -------- --------
Total consolidated $ 11,094 $ 808 $ (5,842)
======== ======== ========
December 31,
------------
2004 2003
---- ----
(in thousands)
Total assets
Outsourced content services $15,937 $12,330
IT Professional services 2,033 3,533
Corporate (includes corporate cash) 19,241 9,283
------- -------
Total consolidated $37,211 $25,146
======= =======
Long-lived assets:
Long-lived assets as of December 31, 2004 and 2003, respectively by
geographic region are comprised of:
2004 2003
---- ----
(in thousands)
United States $1,756 $1,739
------ ------
Foreign countries:
Philippines 2,626 3,430
India 827 1,134
Sri Lanka 180 202
------ ------
Total foreign 3,633 4,766
------ ------
$5,389 $6,505
====== ======
One client accounted for 23%, 33% and 17% of the Company's revenues for
the years ended December 31, 2004, 2003 and 2002, respectively. One other client
accounted for 31% and 30% of the Company's revenues for the year ended December
31, 2004 and 2002, respectively. No other client accounted for 10% or more of
revenues during these periods. Further, in the years ended December 31, 2004,
2003 and 2002, revenues to non-US clients accounted for 30%, 47%, and 23%,
respectively, of the Company's revenues.
II-30
Revenues for the three years ended December 31, 2004, 2003 and 2002 by
geographic region are as follows:
2004 2003 2002
---- ---- ----
(in thousands)
United States $37,842 $19,582 $28,142
The Netherlands 12,648 12,147 5,767
Other - principally Europe 3,459 4,985 2,476
------- ------- -------
$53,949 $36,714 $36,385
======= ======= =======
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, 2004, approximately 27% of the Company's accounts receivable was
from foreign (principally European) clients and 69% of accounts receivable was
due from two clients.
9. INCOME (LOSS) PER SHARE
2004 2003 2002
---- ---- ----
(in thousands, except per share amounts)
Net income (loss) $ 7,857 $ 475 $ (5,165)
======== ======== ========
Weighted average common shares outstanding 22,288 21,570 21,489
Dilutive effect of outstanding options 2,529 1,396 --
-------- -------- --------
Adjusted for dilutive computation 24,817 22,966 21,489
======== ======== ========
Basic income (loss) per share $ .35 $ .02 $ (.24)
======== ======== ========
Diluted income (loss) per share $ .32 $ .02 $ (.24)
======== ======== ========
Basic income (loss) per share is based on the weighted average number of
common shares outstanding without consideration of potential common stock.
Diluted income (loss) per share is based on the weighted average number of
common and potential common shares outstanding. The difference between weighted
average common shares outstanding and adjusted dilutive shares outstanding
represents the dilutive effect of outstanding options. Options to purchase
1,337,000 shares of common stock at December 31, 2003 were outstanding but not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and therefore, the effect would have been antidilutive. Such shares excluded at
December 31, 2004 were insignificant. In addition, diluted net loss per share in
2002 does not include potential common shares derived from stock options because
they are antidilutive. The number of antidilutive securities excluded from the
dilutable loss per share calculation were 1,542,000 for the year ended December
31, 2002.
10. RESTRUCTURING COSTS AND ASSET IMPAIRMENT
During the fourth quarter 2001, the Company commenced certain actions to
reduce production operations at a wholly owned Asian subsidiary that was
operating at a loss and to reduce overall excess capacity in Asia. Such
activities, which culminated in the cessation and closure of all operations at
such subsidiary and included employee layoffs, were completed in 2002. In
addition, during 2002 the Company closed a second facility, resulting in the
write-off of property and equipment associated with the closed facility totaling
approximately $244,000. Such write-off of equipment has been classified as
Restructuring Costs and Asset Impairment for the year ended December 31, 2002.
II-31
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
2004
Revenues $ 12,157 $ 12,354 $ 15,927 $ 13,511
Net income 2,080 1,577 3,103 1,097
Net income per share $ .09 $ .07 $ .14 $ .05
Diluted net income per share $ .08 $ .06 $ .13 $ .04
2003
Revenues $ 6,653 $ 8,056 $ 11,184 $ 10,821
Net income (loss) (1,113) (636) 1,490 734
Net income (loss) per share $ (.05) $ (.03) $ .07 $ .03
Diluted net income (loss) per share $ (.05) $ (.03) $ .06 $ .03
12. OTHER
For the year ended December 31, 2001, the Company provided an allowance
for doubtful accounts of approximately $2.6 million representing the remaining
balance due at December 31, 2001 from a client that accounted for 30% of its
2001 revenues because the client has reported an inability to raise further
operating funds required to make payment. In January 2004, the Company reached a
settlement with this client to pay $1,000,000 cash as full satisfaction of the
outstanding balance due to the Company. The $1,000,000 receipt, net of $37,000
in recovery costs is reflected as bad debt recovery income for the year ended
December 31, 2004.
The Company announced its intent to raise funds and filed a registration
statement on Form S-3 to register 4,250,000 shares of its common stock, plus
3,250,000 shares of common stock currently held by certain directors and
officers of the Company. On March 23, 2005, the Company terminated the offering
and, as such, in the fourth quarter 2004, expensed approximately $625,000 of
offering costs.
II-32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Item 9A. Controls and Procedures.
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and
Principal Financial Officer, of the effectiveness of the design and the
operation of our "disclosure controls and procedures" (as such term is defined
in Rules 13a-15(e) under the Securities Exchange Act of 1934) as of December 31,
2004 ("Evaluation Date"). Based on such evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of the Evaluation Date, the
disclosure controls and procedures are reasonably designed and effective to
ensure that (i) information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and (ii) such information is accumulated and communicated to our
management, including our Chief Executive Officer and Principal Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal controls over financial reporting in
connection with the evaluation required by paragraph (d) of Rules 13a-15 or
15d-15 under the Exchange Act that occurred during our last fiscal quarter that
materially affected or are reasonably likely to materially affect the internal
controls over financial reporting.
II-33
PART III
Item 10. Directors, Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.
The information called for by Item 10 is incorporated by reference from
the Company's definitive proxy statement for the 2005 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 2004 fiscal year.
The information concerning the Company's Executive Officers required by
this Item is incorporated by reference to the Company's proxy statement under
the heading "Executive Officers". The information concerning the Company's
Directors required by this Item is incorporated by reference to the Company's
proxy statement under the heading "Election of Directors". Information
concerning compliance by the Company's officers, Directors and 10% stockholders
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to the information contained in the Company's Proxy Statement under
the heading "Compliance with Section 16(a) of the Exchange Act." Information
regarding the presence of an audit committee financial expert required by this
Item is incorporated by reference to the Company's Proxy Statement under the
heading "Committees of the Board of Directors."
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.
Executive Compensation
The information called for by Item 11 is incorporated by reference from
the Company's definitive proxy statement for the 2005 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 2004 fiscal year. Information
appearing under the captions "Compensation Committee Report on Executive
Compensation"; "Report of the Audit Committee" and "Stock Performance Graph" to
be included in the Company's 2005 Proxy Statement is not incorporated herein by
this reference.
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 2005 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 2004 fiscal year.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 is incorporated by reference from
the Company's definitive proxy statement for the 2005 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 2004 fiscal year.
III-1
Item 14. Principal Accountant Fees and Services.
The information called for by Item 14 is incorporated by reference from
the Company's definitive proxy statement for the 2005 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 2004 fiscal year.
III-2
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements. See Item 8. Index to Financial Statements.
2. Financial Statement Schedules. Schedule II - Valuation and Qualifying
Accounts
3. Exhibits
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 Filed as Exhibit 3.1(a) to our Form 10-K for the year ended
on April 29, 1993 December 31, 2003
3.1 (b) Certificate of Amendment of Certificate of Filed as Exhibit 3.1(b) to our Form 10-K for the year ended
Incorporation of Innodata Corporation filed December 31, 2003
on March 1, 2001
3.1 (c) Certificate of Amendment of Certificate of Filed as Exhibit 3.1(c) to our Form 10-K for the year ended
Incorporation of Innodata Corporation December 31, 2003
Filed on November 14, 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 Filed as Exhibit A to Exhibit 4.1 to Form 8-K dated
Series C Participating Preferred Stock 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 Exhibit 4.1 to Form 8-K dated December 16, 2002
December 16, 2002 between Innodata
Corporation and American Stock Transfer
& Trust Co., as Rights Agent
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 Filed as Exhibit 10.3 to Form 10-K dated December 31, 2002
Between us and our directors and one of our
officers
10.4 1994 Disinterested Directors Stock Option Exhibit B to Definitive Proxy dated August 9, 1994
Plan
10.5 1995 Stock Option Plan Exhibit A to Definitive Proxy dated August 10, 1995
10.6 1996 Stock Option Plan Exhibit A to Definitive Proxy dated November 7, 1996
10.7 1998 Stock Option Plan Exhibit A to Definitive Proxy dated November 5, 1998
10.8 2001 Stock Option Plan Exhibit A to Definitive Proxy dated June 29, 2001
10.9 2002 Stock Option Plan Exhibit A to Definitive Proxy dated September 3, 2002
10.10 Employment Agreement dated as of Filed as Exhibit 10.10 to our Form 10-K for the year ended
January 1, 2004 with George Kondrach December 31, 2003
10.11 Letter Agreement dated as of August 9, 2004, Filed as Exhibit 10.2 to Form S-3 Registration statement
by and between us and The Bank of New York No. 333-121844
21 Significant subsidiaries of the registrant Filed herewith
IV-1
Exhibit Description Filed as Exhibit
- ------- ----------- ----------------
23 Consent of Grant Thornton LLP Filed herewith
31.1 Certificate of Chief Executive Officer and Filed herewith
Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section Filed herewith
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section Filed herewith
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.1 Schedule II Valuation and Qualifying Accounts Filed herewith
IV-2
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 Jack Abuhoff
-------------------------------------------
Jack Abuhoff
Chairman of the Board of Directors,
Chief Executive Officer and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
Jack Abuhoff Chairman of the Board of Directors, March 25, 2005
- ---------------------------------------- Chief Executive Officer and President
Jack Abuhoff
Todd Solomon Vice Chairman of the Board of March 25, 2005
- ---------------------------------------- Directors and Consultant
Todd Solomon
Stephen Agress Vice President - Finance March 25, 2005
- ---------------------------------------- Chief Accounting Officer (Principal
Stephen Agress Accounting and Financial Officer)
Haig S. Bagerdjian Director March 25, 2005
- ----------------------------------------
Haig S. Bagerdjian
Louise C. Forlenza Director March 25, 2005
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Louise C. Forlenza
Charles F. Goldfarb Director March 25, 2005
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Dr. Charles F. Goldfarb
John R. Marozsan Director March 25, 2005
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John R. Marozsan