III

Business Context and Reporting Period

Company: Information Services Group, Inc. (ISG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: ISG operates as a fact-based sourcing advisory firm specializing in the assessment, evaluation, negotiation, and management of service contracts, primarily for IT infrastructure, software applications, and IT-enabled business processes. The company serves Forbes Global 2000 corporations across the Americas, Europe, and Asia Pacific.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. The significant operating and net losses are primarily driven by non-cash impairment charges.

Material Changes vs. Prior Period

• Revenue: For the nine months ended September 30, 2010, revenue increased 2% to $100.41 million compared to $98.28 million in the prior year. This was driven by a 6% increase in Americas revenue and a 45% increase in Asia Pacific revenue, partially offset by a 14% decline in Europe.
• Impairment Charges: The company recorded a significant non-cash goodwill impairment charge of $46.59 million and an intangible assets impairment charge of $5.90 million for the quarter and nine months ended September 30, 2010. No such charges were recorded in the comparable 2009 periods.
• Operating Expenses: Total operating expenses increased 5% year-over-year for the nine-month period to $97.14 million. Direct costs rose 11% due to increased use of outside contractors and higher compensation levels, while SG&A expenses decreased slightly by 1%.
• Debt: The company made a $2.0 million principal repayment on its term loan in March 2010, reducing the outstanding balance to $69.8 million. Interest expense decreased 34% year-over-year for the nine-month period due to reduced debt levels.

Guidance, Outlook, Risks, and Unusual Items

• Impairment Drivers: The impairment charges were triggered by a significant decline in market capitalization and challenging economic conditions affecting the sourcing industry. Management utilized a discounted cash flow model assuming revenue growth of approximately 3% per year and a 15% discount rate.
• Debt Covenant Amendment: On September 27, 2010, lenders agreed to amend the total leverage ratio covenant through December 30, 2010, and exclude up to $5.0 million of restructuring charges from EBITDA calculations through December 31, 2011. This amendment prevented a required $5.0 million principal payment.
• Future Outlook: Management will reevaluate goodwill and intangible assets during the scheduled annual impairment test in the fourth quarter of 2010. Further declines in market capitalization or economic conditions could result in additional impairment charges.
• Risks: Key risks include continued global recession impacts, foreign currency exchange rate fluctuations (42% of revenue is international), and concentration of credit risk (top 20 clients accounted for 44% of 2009 revenue).

Investor Verification Checklist

• Verify the sustainability of revenue growth in the Americas and Asia Pacific regions versus the decline in Europe.
• Confirm the status of the debt covenant amendment and the company's ability to meet leverage ratios without further principal payments or amendments by year-end.
• Monitor the fourth-quarter annual impairment test results for potential additional non-cash charges to goodwill or intangible assets.
• Assess the impact of foreign currency translation on future earnings given the high percentage of international revenue.
• Review the company's cash burn rate and liquidity position relative to its $69.8 million long-term debt obligation.