UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 000-29239
INFORTE CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-3909334
(State of incorporation) (IRS Employer Identification No.)
150 North Michigan Avenue, Suite 3400, Chicago, Illinois 60601 (Address
of principal executive offices, including ZIP code)
(312) 540-0900
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
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 preceding 12 months (or for such shorter period that the registrant was
required to file such reports) Yes X No ___, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
The number of shares outstanding of the Registrant's Common Stock as of March
31, 2002 was 11,802,025.
INFORTE CORP.
INDEX
Page No.
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PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001, June 30, 2001,
September 30, 2001, December 31, 2001
and March 31, 2002 1
Consolidated Statements of Income - Three months ended
March 31, 2001 and 2002 2
Consolidated Statements of Cash Flows - Three months ended
March 31, 2001 and 2002 3
Notes to Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-17
Item 3. Qualitative and Quantitative Disclosure About Market Risk 17
PART II. Other Information
Item 1 Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3 Defaults of Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INFORTE CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31,
2001 2001 2001 2001 2002
-------- -------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $44,123 $61,849 $27,202 $20,208 $26,404
Short-term marketable securities 34,684 17,780 22,417 32,669 27,195
Accounts receivable 7,684 8,422 8,191 6,539 7,251
Allowance for doubtful accounts (1,150) (1,150) (1,150) (1,150) (1,000)
-------- -------- -------- -------- --------
Accounts receivable, net 6,534 7,272 7,041 5,389 6,251
Prepaid expenses and other current assets 2,170 2,291 1,736 2,008 1,949
Income taxes recoverable - - - - -
Deferred income taxes 909 910 940 1,621 1,550
-------- -------- -------- -------- --------
Total current assets 88,420 90,102 59,336 61,895 63,349
Computers, purchased software and property 4,599 4,683 4,177 3,777 3,662
Less accumulated depreciation and amortization 1,831 2,208 2,022 1,916 2,040
-------- -------- -------- -------- --------
Computers, purchased software and property, net 2,768 2,475 2,155 1,861 1,622
Long-term marketable securities 5,293 5,620 27,091 22,241 21,677
Deferred income taxes 504 580 690 462 482
-------- -------- -------- -------- --------
Total assets $96,985 $98,777 $89,272 $86,459 $87,130
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 534 $ 628 $ 753 $ 400 $ 970
Income taxes payable 454 419 547 167 179
Accrued expenses 4,600 5,018 5,674 5,524 5,169
Deferred revenue 7,316 8,119 9,801 8,165 8,564
-------- -------- -------- -------- --------
Total current liabilities 12,904 14,184 16,775 14,256 14,882
Stockholders' equity:
Common stock, $0.001 par value
authorized- 50,000,000 shares;
issued and outstanding (net of treasury stock)-
11,802,025 as of Mar 31, 2002 13 13 12 12 12
Additional paid-in capital 74,717 75,000 75,424 77,916 78,305
Cost of common stock in treasury (1,519,902
shares as of Mar 31, 2002) (472) (472) (13,170) (14,502) (14,771)
Retained earnings 9,687 9,806 9,914 8,561 8,697
Accumulated other comprehensive income 136 246 317 216 5
-------- -------- -------- -------- --------
Total stockholders' equity 84,081 84,593 72,497 72,203 72,248
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity $96,985 $98,777 $89,272 $86,459 $87,130
======== ======== ======== ======== ========
See notes to consolidated financial statements
1
INFORTE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2002
---------- ----------
(Unaudited) (Unaudited)
Revenues
Revenue before reimbursements (net revenue) $14,051 $ 9,434
Reimbursements 1,739 1,467
--------- ---------
Total Revenue 15,790 10,901
Operating expenses:
Project personnel and related expenses 7,397 5,002
Reimbursed expenses 1,739 1,467
Sales and marketing 1,859 1,518
Recruiting, retention and training 924 374
Management and administrative 3,447 3,003
--------- ---------
Total operating expenses 15,366 11,364
Operating income (loss) 424 (463)
Interest income, net and other 1,013 564
--------- ---------
Income before income taxes 1,437 101
Income tax expense (benefit) 503 (35)
--------- ---------
Net income $ 934 $ 136
========= =========
Earnings per share:
-Basic $0.07 $0.01
-Diluted $0.07 $0.01
Weighted average common shares outstanding:
-Basic 12,720 11,655
-Diluted 13,700 12,213
See notes to consolidated financial statements
2
INFORTE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS ENDED
MARCH 31,
=========================
2001 2002
========== ==========
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income $ 934 $ 136
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 431 396
Non-cash compensation 75 -
Deferred income taxes (171) 51
Changes in operating assets and liabilities
Accounts receivable 2,702 (862)
Prepaid expenses and other current assets (265) 61
Accounts payable (48) 570
Income taxes 2,000 12
Accrued expenses and other (3,102) (413)
Deferred revenue (1,258) 399
======== ========
Net cash provided by operating activities 1,298 350
Cash flows from investing activities
Decrease in marketable securities 652 5,736
Purchases of property and equipment (201) (61)
======== ========
Net cash provided by investing activities 451 5,675
Cash flows from financing activities
Stock option and purchase plans 450 389
Purchase of common stock (472) (211)
======== ========
Net cash provided by (used in) financing
activities (22) 178
======== ========
Effect of changes in exchange rates on cash 4 (7)
Net increase in cash and cash equivalents 1,731 6,196
Cash and cash equivalents, beg. of period 42,392 20,208
======== ========
Cash and cash equivalents, end of period $44,123 $26,404
======== ========
See notes to consolidated financial statements
3
Inforte Corp.
Notes to consolidated financial statements
(Unaudited)
March 31, 2001
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Inforte Corp. ("Inforte") pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete consolidated financial
statements and should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2001 included in
Inforte's annual report Form 10K (File No. 000-29239). The balance sheet at
December 31, 2001 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying consolidated financial statements reflect
all adjustments (consisting solely of normal, recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of results for
the interim periods presented. The results of operations for the three month
period ended March 31, 2002 are not necessarily indicative of the results to be
expected for the full fiscal year. Certain previously reported amounts have been
reclassified to conform with current presentation format.
(2) COST OF COMMON STOCK IN TEASURY
During the quarter ended March 31, 2002, Inforte repurchased 27,200 shares of
stock for $0.3 million at an average price of $9.86. Of the shares repurchased,
22,000 were settled in the quarter for a total of $0.2 million. On January 24,
2001, the board of directors approved a $25.0 million stock repurchase program
and as of March 31, 2002, $10.2 million remained authorized for repurchase.
(3) NET INCOME PER COMMON SHARE
Inforte computes basic earnings per share by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per common share
is computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents then outstanding.
Three Months Ended March 31,
----------------------------
2001 2002
----------------------------
(unaudited)
Basic weighted average shares 12,719,821 11,655,048
Effect of dilutive stock options 979,761 558,295
----------------------------
Diluted common and common
equivalent shares 13,699,582 12,213,343
============================
(4) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), establishes standards for reporting comprehensive income.
Comprehensive income includes net income as currently reported under generally
accepted accounting principles, and also considers the effect of additional
economic events that are not required to be recorded in determining net income,
but rather are reported as a separate component of stockholders' equity. The
Company reports foreign currency translation gains and losses, and unrealized
gains and losses on investments, as components of comprehensive income. Total
comprehensive loss was $76,204 for the three months ended March 31, 2002 and
total comprehensive income was $984,661 for the three months ended March 31,
2001.
(5) INCOME TAXES
Inforte's effective tax rate for the March 2002 quarter was a benefit of 35.1%
compared to an expense of 35.0% for the March 2001 quarter. The negative
effective rate in 2002 is due to an operating loss for the quarter which
includes interest income, a portion of which is tax advantaged.
4
(6) CONTINGINCIES
Inforte Corp. and Philip S. Bligh, Stephen C.P. Mack and Nick Padgett, officers
of Inforte, have been named as defendants in Mary C. Best v. Inforte Corp.;
Goldman, Sachs & Co.; Salomon Smith Barney, Inc.; Philip S. Bligh; Stephen C.P.
Mack and Nick Padgett, Case No. 01 CV 10836, filed on November 30, 2001 in
Federal Court in the Southern District of New York. The case is also known as
In re Inforte Corp Initial Public Offering Securities Litigation. The named
plaintiff in this case was previously Brian Padgett. An Amended Class Action
Complaint for Violations of the Federal Securities Laws was filed on April 19,
2002. The amended complaint seeks certification of a class of purchasers of
Inforte Corp. stock, unspecified damages, interest, attorneys' and expert
witness fees and other costs. The amended complaint alleges violations of
federal securities laws in connection with our initial public offering (IPO)
occurring in February 2000. The complaint does not allege any claims relating to
any alleged misrepresentations or omissions with respect to our business. We
believe that we and our officers have defenses to the claims and we intend to
vigorously defend the lawsuit.
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with our consolidated
financial statements, together with the notes to those statements, included
elsewhere in this Form 10-Q. The following discussion contains forward-looking
statements that involve risks, uncertainties, and assumptions such as statements
of our plans, objectives, expectations and intentions. Our actual results may
differ materially from those discussed in these forward-looking statements
because of the risks and uncertainties inherent in future events that include,
but are not limited to, those identified under the caption "Risk Factors"
appearing in this 10-Q as well as factors discussed elsewhere in this Form 10-Q.
Actual results may differ from forward-looking results for a number of reasons,
including but not limited to, Inforte's ability to: (i) effectively forecast
demand and profitably match our resources with the demand during the current
economic downturn; (ii) attract and retain clients and satisfy our clients'
expectations; (iii) recruit and retain qualified professionals; (iv) reliably
forecast net revenue when information technology services spending is less
certain overall, and in particular when spending at current clients and with our
alliance partners, our two main revenue lead sources, is less certain; (v)
accurately estimate the time and resources necessary for the delivery of our
services; and (vi) build and maintain marketing relationships with leading
software vendors. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, or projected. All
forward-looking statements included in this document are made as of the date
hereof, based on information available to Inforte on the date thereof, and
Inforte assumes no obligation to update any forward-looking statements.
Overview
Strategic technology consultancy Inforte Corp. helps clients create strategies
and implement technologies that capture, manage and integrate customer and other
demand information into all aspects of the value chain, enabling companies to
become more demand driven and demand responsive. We assist our clients in
navigating through and succeeding in ever-changing economic environments by
putting into action business and technology strategies that lower cost and drive
revenue. Inforte's client advocacy approach and rigorous delivery methodologies
have garnered the trust of Global 2000 clients, produced industry-leading
project-efficiency metrics and helped Inforte earn references from 100 percent
of its clients. Founded in 1993, Inforte is headquartered in Chicago and has
offices in Atlanta, Dallas, London, Los Angeles, New York and San Francisco.
Inforte works with clients to determine how they can best design and implement
demand chain management solutions to effectively capitalize on the latest
information technology. The majority of revenue is from professional services
performed on a fixed-price basis; however, we also perform services on a
time-and-materials basis. Typically, the first portion of an engagement involves
a strategy project or a discovery phase lasting 30 to 60 days, which we perform
on a fixed-price basis. This work enables us to determine with our clients the
scope of successive phases for design and implementation, which in total
generally last three to nine months, and to decide whether we will perform these
additional phases for a fixed price or on a time-and-materials basis. Whether we
use fixed pricing or time-and-material pricing depends upon our assessment of
the project's risk, and how precisely our clients are able to define the scope
of activities they wish us to perform. Fixed prices are based on estimates from
senior personnel in our consulting organization who project the length of the
engagement, the number of people required to complete the engagement and the
skill level and billing rates of those people. We then adjust the fixed price
based on various qualitative risk factors such as the aggressiveness of the
delivery deadline and the technical complexity of the solution.
We ask clients to pay 25%-50% of our fixed-price projects in advance to enable
us to secure a project team in a timeframe that is responsive to the client's
needs. We bill the remainder in advance of the work performed based upon a
predetermined billing schedule over the course of the engagement. We recognize
net revenue from fixed-price contracts on the percentage-of-completion method,
based on the ratio of costs incurred to total estimated costs. Amounts billed
before we perform services are classified as deferred revenue. We bill
time-and-materials projects twice per month on the 15th and last day of each
month. We recognize time-and-materials net revenue as we perform the services.
Through 2001, we did not include in our revenues the reimbursable expenses we
charge to our clients, on either fixed-price or time-and-material projects, as
we believe this is the most meaningful presentation of our income statement. In
November 2001, the Financial Accounting Standards Board's Emerging Issues Task
Force issued Topic D-103, "Income Statement Characterization of Reimbursements
6
Received for `Out-of-Pocket' Expenses Incurred" stating these costs should be
characterized as revenue in the income statement if billed to customers. In the
March 31, 2002 quarter, we included reimbursable expenses in revenue and expense
and we have reclassified prior periods in the comparative consolidated financial
statements as now required by the Financial Accounting Standards Board.
Our revenues and earnings may fluctuate from quarter to quarter based on factors
within and outside of our control. These include:
o The variability in market demand for strategic technology professional
services and our ability to win business;
o The degree of competitive pricing;
o The length of the sales cycle associated with our service offerings;
o The number, size and scope of our projects;
o The efficiency with which we deliver projects and use our people;
o The compensation that we pay our people; and
o Our ability to keep expenses within budget.
If net revenue do not increase at a rate at least equal to increases in
expenses, our results of operations could be materially and adversely affected.
RESULTS OF OPERATIONS
---------------------
The following table sets forth the percentage of net revenues of certain items
included in Inforte's statement of income:
% of Net Revenue
Three months ended
March 31,
2001 2002
Revenues
Revenue before reimbursements (net revenue) 100.0% 100.0%
Reimbursements 12.4 15.6
----- -----
Total Revenue 112.4 115.6
----- -----
Operating expenses:
Project personnel and
related expenses 52.6 53.0
Reimbursements 12.4 15.6
Sales and marketing 13.2 16.1
Recruiting, retention
and training 6.6 4.0
Management and administrative 24.5 31.8
---- ----
Total operating expenses * 109.4 120.5
----- -----
Operating income 3.0 -4.9
Interest income, net and other 7.2 6.0
---- ---
Pretax income 10.2 1.1
Income tax expense (benefit) 3.6 -0.4
--- ---
Net income 6.6% 1.4%
==== ====
*Total operating expenses,
excluding reimbursements 97.0% 104.9%
7
Three months ended March 31, 2001 and 2002
------------------------------------------
Net Revenue. Net revenue excludes costs incurred that are billed to our clients.
Net revenue decreased 33% to $9.4 million for the quarter ended March 31, 2002
from $14.1 million for quarter ended March 31, 2001. Although we have
historically experienced growth in our revenues, the market for strategic
technology consulting services has decreased significantly over the last 15
months due to the slower growth rate of the U.S. economy and the negative impact
that heightened economic uncertainty has on information technology spending. For
the quarter ended March 31, 2002, we had 30 significant clients with each of
these clients contributing $1.2 million to revenue on average on an annualized
basis. We had 40 significant clients during the quarter ended March 31, 2001,
each contributing $1.4 million to revenue on average on an annualized basis.
Sequentially, revenue declined 11% to $9.4 million in the March 2002 quarter
from $10.5 million in the December 2001 quarter. This sequential decline
resulted from few new project wins from late October through the end of January.
As a result, as existing projects and revenue streams ended throughout fourth
quarter 2001 and first quarter 2002, replacement and revenue streams were not
always available, and net revenue declined sequentially. Project wins increased
in February and March 2002, and we believe these wins should allow our second
quarter 2002 net revenue to equal or exceed our first quarter 2002 net revenue.
Our revenue forecast does not indicate presently that this relative sequential
strength will carry into the third quarter 2002, thus we believe net revenue
could decline sequentially after the second quarter 2002. Accordingly, we expect
net revenue to be $9.5 million for the June 2002 quarter and $8.5 million for
the September 2002 quarter and all quarters going forward until information
technology spending rebounds. We believe that such a rebound will not likely
occur until a broad-based revenue-driven corporate profit recovery occurs.
Project personnel and related expenses. Project personnel and related expenses
consist primarily of compensation and fringe benefits for our professional
employees who deliver consulting services and non-reimbursable project costs.
All labor costs for project personnel are included in project personnel and
related expenses. These expenses decreased 32% to $5.0 million for the quarter
ended March 31, 2002, from $7.4 million for quarter ended March 31, 2001. The
decrease relates to recent reductions in consulting headcount. We employed 191
consultants on March 31, 2002, down from 324 one year earlier. Project personnel
and related expenses represented 53.0% of net revenue for the quarter ended
March 31, 2002, similar to 52.6% for the quarter ended March 31, 2001.
Since client research indicated that information technology spending was likely
to remain at minimal levels during 2001, in June 2001 Inforte offered a
six-to-nine-month voluntary leave of absence program and a voluntary resignation
program to employees in underutilized areas. There were 90 people who
participated in the programs. Individuals who selected the leave of absence
program are receiving compensation at 20%-25% of regular pay if they remain
available to return to full-time service. Individuals who chose the voluntary
resignation package received pay through the end of August 2001. All costs
related to resigning employees were included either in our June 2001 quarter
results or our September 2001 quarter results. Salary costs for employees on
leave of absence are expensed as incurred and included in the quarter ended
March 2002. The costs of these programs will go to zero by the end of the June
2002 quarter. In October 2001 and in January 2002, Inforte again offered
voluntary programs similar to the June 2001 program, however these latter
programs were smaller in scope, involving approximately 20 and 30 people,
respectively.
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, benefits and travel costs for employees in the market development
and practice development groups and costs to execute marketing programs. Sales
and marketing expenses decreased 18% to $1.5 million for the quarter ended March
2002 from $1.9 million in the same period in 2001. The spending decrease was due
to lower travel expenses, lower discretionary marketing expenses, lower
marketing headcount, and lower sales commission expense due to lower revenue.
Sales and marketing expenses as a percentage of net revenue increased to 16.1%
for the quarter ended March 31, 2002 from 13.2% for the quarter ended March 31,
2001. The increase in these expenses is due to the lower revenue base. We expect
our June 2002 quarterly spending on sales and marketing to remain similar as a
percentage of net revenue to the March 2002 quarter level.
Recruiting, retention, and training. Recruiting, retention and training expenses
consist of compensation, benefits and travel costs for personnel engaged in
human resources; costs to recruit new employees; costs of human resources
programs; and training costs. These expenses decreased 60% to $0.4 million for
8
the quarter ended March 31, 2002 from $0.9 million in the first quarter of 2001.
The decline was due to lower human resources headcount, and less spending on
retention and training activities due to lower overall headcount. Total
headcount as of March 31, 2002 was 258, down from 428 one year earlier. As a
percentage of revenue, recruiting, retention and training expenses declined to
4.0% from 6.6% in the prior year period, as we reduced expenses faster than the
rate of revenue decline. The first quarter 2002 expense percentage was below the
5%-7% range we experienced throughout each quarter in 2001. We believe that
future expense percentages for recruiting, retention and training are more
likely to be in the 5%-7% level than to remain at 4%.
Management and administrative. Management and administrative expenses consist
primarily of compensation, benefits and travel costs for management, finance,
information technology and facilities personnel, together with rent, tele-
communications, audit, and legal costs, and depreciation and amortization of
capitalized computers, purchased software and property. These expenses decreased
13% to $3.0 million for the quarter ended March 31, 2002 from $3.4 million for
the same period in 2001. The decrease in expenses was due to lower spending on
information technology, executive travel, and reduced management and
administrative headcount. As a percentage of net revenue, management and
administrative expenses were 31.8% in the quarter ended March 31, 2002, up from
24.5% for the quarter ended March 31, 2001, as spending decreased at a slower
rate than revenue declined. We expect our June 2002 quarterly spending on
management and administrative to remain similar to the dollar level in the March
2002 quarter.
Interest income, net and other. During the quarter ended March 31, 2002,
interest income, net and other was $0.6 million, down from $1.0 million for the
quarter ended March 31, 2001. The decrease was due to lower market interest
rates and lower average cash balances due to Inforte's stock buy back program.
During the twelve months ended March 31, 2002, Inforte repurchased $14.2 million
of stock under its stock buy back program.
Income tax expense, Inforte's effective tax rate for the March 2002 quarter was
a benefit of 35.1% compared to an expense of 35.0% for the March 2001 quarter.
The negative rate in 2002 is due to an operating loss for the quarter, combined
with positive interest income, some of which is tax advantaged. More precisely,
the first quarter 2002 income tax benefit was the sum of a) the operating loss
times a 38% tax rate and b) interest income, net and other times a reduced tax
rate of 25%. Our present expectation, which may change as the year progresses,
is that the year-to-date income tax expense (benefit) at the end of each quarter
in 2002 will be calculated similarly to the first quarter 2002 calculation, with
a 38% tax rate on year-to-date operating income (loss) and a 25% tax rate on
year-to-date interest income, net and other. The tax rate on interest income,
net and other may vary from the 25% level in future quarters if the proportion
of tax-advantaged marketable securities in our investment portfolio changes.
Liquidity and capital resources. Cash and cash equivalents increased from $20.2
million as of December 31, 2001 to $26.4 million at March 31, 2002. Short-term
marketable securities decreased from $32.7 million as of December 31, 2001 to
$27.2 million as of March 31, 2002. Long-term marketable securities decreased
from $22.2 million as of December 31, 2001 to $21.7 million as of March 31,
2002. Short-term and long-term marketable securities are entirely conservative
available-for-sale securities consisting of commercial paper, U.S. government or
municipal notes and bonds, corporate bonds and corporate auction preferreds. In
total, cash and cash equivalents, short-term and long-term marketable securities
increased from $75.1 million to $75.3 million during the quarter ended March 31,
2002, an increase of $0.2 million.
During the March 2002 quarter, Inforte's cash flow from operations was positive
$0.4 million and capital expenditures were $0.1 million, resulting in $0.3
million of free cash flow. Financing activities resulted in a cash inflow of
$0.2 million, consisting of positive $0.4 million from employees participating
in stock purchase and stock option plans and negative $0.2 million used to
purchase Inforte common stock through our stock buy back program.
During the March 2002 quarter, Inforte repurchased 27,200 shares of stock for
$0.3 million at an average price of $9.86. Of the shares purchased, 5,200 were
settled in the month of April for $0.1 million. The board approved a $25.0
million stock repurchase program on January 24, 2001 and as of March 31, 2002,
$10.2 million remained authorized for repurchase. As of March 31, 2002, Inforte
had 11,802,025 shares outstanding and $75.3 million in cash and marketable
securities, resulting in $6.38 of cash and marketable securities per basic
share. As of March 31, 2002, the public float (shares not held by executive
officers and directors) totaled 6.5 million shares or 55% of total outstanding
shares.
9
Inforte believes that its current cash, cash equivalents and marketable
securities will be sufficient to meet working capital and capital expenditure
requirements for the foreseeable future.
All highly liquid investments with maturities of three months or less when
purchased are considered cash equivalents. Cash and cash equivalent balances
consist of obligations of U.S. banks, high-grade commercial paper and other high
quality, short-term obligations of U.S. companies. Short-term and long-term
marketable securities are available-for-sale securities which are recorded at
fair market value. The difference between amortized cost and fair market value,
net of tax effect, is shown as a separate component of stockholders' equity. The
cost of securities available-for-sale is adjusted for amortization of premiums
and discounts to maturity. Interest and amortization of premiums and discounts
for all securities are included in interest income.
Revenues pursuant to fixed-fee contracts are generally recognized as services
are rendered on the percentage-of-completion method of accounting based on the
ratio of costs incurred to total estimated costs. The cumulative impact of any
revision in estimates of the percent complete is reflected in the period in
which the changes become known. Revenues pursuant to time-and-material contracts
are generally recognized as services are performed. Amounts billed prior to
rendering services are classified as deferred revenue.
Financial Accounting Standards Board's Emerging Issues Task Force Topic D-103,
"Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred" states these costs should be characterized as
revenue in the income statement if billed to customers. Beginning in 2002, we
report reimbursable expenses as a separate line in revenue and expense and have
reclassified prior periods in the comparative consolidated financial statements
as now required by the Financial Accounting Standards Board.
An allowance for doubtful accounts is maintained for potential credit losses.
The amount of the reserve is established analyzing all client accounts to
determine credit risk. Criteria considered include slow payment history, no
payment history, poor financial condition of the client and the size of the
outstanding balance from the client.
10
Inforte has several operating leases which have contractual obligations for
future payments. There are no other contractual obligations which require future
cash obligations or other commitments. The table below identifies all future
commitments.
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Contractual Obligations Payments Due by Period
--------------------------------------------------------------------------------------------------
Total Q2-Q4 2002 2003-2004 2005 and
beyond
--------------------------------------------------------------------------------------------------
Long-term debt 0 0 0 0
Capital lease obligations 0 0 0 0
Operating leases 9,693 1,835 4,807 3,051
Unconditional purchase obligations 0 0 0 0
Other long-term obligations 0 0 0 0
Total contractual cash obligations 0 0 0 0
--------------------------------------------------------------------------------------------------
Inforte Corp. has a wholly owned subsidiary, Inforte Investments Inc., a
Delaware corporation, which functions as a holding company for Inforte Corp.'s
investments. Inforte Investments Inc. has no operations other than holding
investments of Inforte Corp. and no contractual commitments requiring future
cash obligations. The financial position and results of operations for Inforte
Investments Inc. are consolidated, in accordance with generally accepted
accounting principles, in the consolidated financial statements reported in this
document.
Risk Factors
In addition to other information in this Form 10-Q, the following risk factors
should be carefully considered in evaluating Inforte and its business because
such factors currently may have a significant impact on Inforte's business,
operating results and financial condition. As a result of the risk factors set
forth below and elsewhere in this Form 10-Q, and the risk factors discussed in
Inforte's other Securities and Exchange Commission filings, actual results could
differ materially from those projected in any forward-looking statements.
RISKS RELATED TO INFORTE
If we are unable to accurately forecast our quarterly revenue our profitability
may be reduced or eliminated.
The level of spending by clients and potential clients on information technology
in the United States has slowed and become less certain. We believe the
uncertainty stems from the rapid slowing of growth in Gross Domestic Product in
the United States that began in the second half of calendar 2000. In some cases
the uncertainty has reduced the overall number and size of projects available
for bid. In other cases the uncertainty has resulted in project deferrals,
project scope reductions or limited follow-on projects at existing clients.
While our revenue forecast methods are sophisticated and have proven accurate
historically, we believe the recent environment adds greater risk and
uncertainty to our forecasts. If we fail to accurately forecast revenue, our
actual results may differ materially from the amounts planned, and our
profitability may be reduced or eliminated.
If we fail to identify and successfully transition to the latest and most
demanded solutions or keep up with an evolving industry, we will not compete
successfully for clients and our profits may decrease.
We focus on providing our clients solutions that employ the latest technologies.
If we fail to identify the latest solutions, or if we identify but fail to
successfully transition our business to solutions with growing demand, our
reputation and our ability to compete for clients and the best employees could
suffer. If we cannot compete successfully for
11
clients, our revenues may decrease. Also, if our projects do not involve the
latest and most demanded solutions, they would generate lower fees.
Because our market changes constantly, some of the most important challenges
facing us are the need to:
o effectively use the latest technologies;
o continue to develop our strategic and technical expertise;
o influence and respond to emerging industry standards and other
technological changes;
o identify and effectively market solutions with growing demand during a
period of slower technological advancement and adoption.
o enhance our current services; and
o develop new services that meet changing customer needs.
All of these challenges must be met in a timely and cost-effective manner. We
cannot assure you that we will succeed in effectively meeting these challenges,
especially during a substantial economic slowdown or a recession when right
sizing the business for lower demand diverts resources and senior management's
attention.
If we fail to satisfy our clients' expectations, our existing and continuing
business could be adversely affected.
If we fail to satisfy the expectations of our clients, we could damage our
reputation and our ability to retain existing clients and attract new clients.
In addition, if we fail to perform our engagements, we could be liable to our
clients for breach of contract. Although most of our contracts limit the amount
of any damages to the fees we received, we could still incur substantial cost,
negative publicity, and diversion of management resources to defend a claim, and
as a result, our business results could suffer.
We may be unable to hire and retain employees who are highly skilled, which
would impair our ability to perform client services, generate revenue and
achieve profitability.
If we are unable to hire and retain highly-skilled individuals, our ability to
retain existing business and compete for new business will be harmed.
Individuals who have the experience and expertise to market, sell and perform
the services we provide to our clients are limited and competition for these
individuals is intense. To attract and retain these individuals, we invest a
significant amount of time and money. In addition, we expect that both bonus
payments and equity ownership will be an important component of overall employee
compensation. In the current economic and market environment, overall bonus
payments have been reduced significantly, increasing the risk that key employees
will leave Inforte. Also, if our stock price does not increase over time, it may
be more difficult to retain employees who have been compensated with stock
options. Options granted to employees from the IPO date, February 17, 2000,
through March 31, 2002 have exercise prices of $8.56 to $71.81. The average
exercise price of all options outstanding at March 31, 2002 is $15.81. Since the
current market price for Inforte stock has recently been below this average
strike price, it may be more difficult to retain employees. If key employee
retention rates grow to unacceptable levels because compensation is not at
competitive rates, Inforte may increase the level of stock option grants or cash
compensation. These actions would reduce earnings per share and may cause
Inforte to become unprofitable.
If we fail to adequately manage rapid changes in demand, our profitability and
cash flow may be reduced or eliminated.
If we cannot keep pace with the rapid changes in demand, we will be unable to
effectively match resources with demand, and maintain high client satisfaction,
which may eliminate our profitability and our ability to achieve positive cash
flow from operations. Our business grew dramatically from 1993 through 2000. For
example, our net revenue increased from $13.4 million in 1998, to $30.1 million
in 1999 and to $63.8 million in 2000. As a result of the current U.S. economic
environment and overcapacity in our industry however, net revenue in 2001 was
$47.7 million, a 25% decline compared to 2000. For 2002, industry demand is
highly dependent on the macroeconomic environment, which heavily influences our
12
clients' level of information technology services spending and competition among
service providers. The level of information technology spending is subject to
rapid positive and negative changes. If the level of spending declines further,
we may not be profitable or achieve positive cash flow from operations in 2002.
Currently, we expect net revenue to be $9.5 million in the second quarter of
2002 and $8.5 million in the last two quarters of 2002, to total $36 million for
2002. If, on the other hand, our growth exceeds our expectations, our current
resources and infrastructure may be inadequate to handle the growth. Also, our
senior management team has limited collective experience managing a public
company or a business the current size of Inforte and our management team has
limited collective experience managing a business during an economic slowdown or
recession.
If our marketing relationships with software vendors deteriorate, we would lose
their client referrals.
We currently have marketing relationships with software vendors, including
Ariba, i2, Siebel and Vignette. Although we have historically received a large
number of business leads from these software vendors to implement their
products, they are not required to refer business to us and they may terminate
these relationships at any time. If our relationships with these software
vendors deteriorate, we may lose their client leads and our ability to develop
new clients could be negatively impacted. Any decrease in our ability to obtain
clients may cause a reduction in our net revenues.
If we are unable to rapidly integrate third-party software, we may not be able
to deliver solutions to our clients on a timely basis, resulting in lost
revenues and potential liability.
In providing client services, we recommend that our clients use software
applications from a variety of third-party vendors. If we are unable to
implement and integrate this software in a fully functional manner for our
clients, we may experience difficulties that could delay or prevent the
successful development, introduction or marketing of services. Software often
contains errors or defects, particularly when first introduced or when new
versions or enhancements are released. Despite internal testing and testing by
current and potential clients, our current and future solutions may contain
serious defects due to third-party software or software we develop or customize
for clients. Serious defects or errors could result in liability for damages,
lost revenues or a delay in implementation of our solutions.
Our revenues could be negatively affected by the loss of a large client or our
failure to collect a large account receivable.
At times, we derive a significant portion of our revenue from large projects for
a limited number of varying clients. In the March 2002 quarter, three clients
each accounted for over 10% of net revenue, with our five largest clients
accounting for 50% of net revenue and our ten largest clients accounting for 70%
of net revenue. Although these large clients vary from time to time and our
long-term revenues do not rely on any one client, our revenues could be
negatively affected if we were to lose one of these clients or if we were to
fail to collect a large account receivable.
In addition, many of our contracts are short-term and provide that our clients
can reduce or cancel our services without incurring any penalty. If our clients
reduce or terminate our services, we would lose revenue and would have to
reallocate our employees and our resources to other projects to attempt to
minimize the effects of that reduction or termination. Accordingly,
terminations, including any termination by a major client, could adversely
impact our revenues. During 2002 we believe the uncertain economic environment
increases the probability that services may be reduced or canceled.
If we estimate incorrectly the time required to complete our projects, we will
lose money on fixed-price contracts.
A majority of our contracts are fixed-price contracts, rather than contracts in
which the client pays us on a time and materials basis. We must estimate the
number of hours and the materials required before entering into a fixed-price
contract. Our future success will depend on our ability to continue to set rates
and fees accurately and to maintain targeted rates of employee utilization and
project quality. If we fail to accurately estimate the time and the resources
required for a project, any required increase in the time and resources to
complete the project could cause our profits to decline.
Fluctuations in our quarterly revenues and operating results due to cyclical
client demand may lead to reduced prices for our stock.
13
Our quarterly revenues and operating results have fluctuated significantly in
the past and we expect them to continue to fluctuate significantly in the
future. Historically, we have experienced our greatest sequential growth during
the first and second quarters. We typically experience significantly lower
sequential growth in the third and fourth quarters. We attribute this to the
budgeting cycles of our customers, most of whom have calendar-based fiscal years
and as a result are more likely to initiate projects during the first half of
the year. In 2001, this traditional seasonal pattern was overwhelmed by a
cyclical decline in information technology spending, causing our net revenue to
decline sequentially in each quarter of 2001. More recently, in February and
March 2002, we did experience an increase in demand which should allow our net
revenue in the second quarter 2002 to equal or exceed the first quarter 2002
level. We believe this increase in demand is seasonal and we do not belive a
cyclical recovery in information technology spending is underway. This existence
of both seasonal and cyclical effects does make it more difficult to predict
demand, and if we are unable to predict client demand accurately in a slower
growth or distressed economic environment, our expenses may be disproportionate
to our revenue on a quarterly basis and our stock price may be adversely
affected.
Others could claim that we infringe on their intellectual property rights, which
may result in substantial costs, diversion of resources and management
attention, and harm to our reputation.
A portion of our business involves the development of software applications for
specific client engagements. Although we believe that our services do not
infringe on the intellectual property rights of others, we may be the subject of
claims for infringement, which even if successfully defended could be costly and
time-consuming. An infringement claim against us could materially and adversely
affect us in that we may:
o experience a diversion of our financial resources and management
attention;
o incur damages and litigation costs, including attorneys' fees;
o be enjoined from further use of the intellectual property;
o be required to obtain a license to use the intellectual property,
incurring licensing fees;
o need to develop a non-infringing alternative, which could be costly and
delay projects; and
o have to indemnify clients with respect to losses incurred as a result of
our infringement of the intellectual property.
Because we are newer and smaller than many of our competitors, we may not have
the resources to effectively compete, causing our revenues to decline.
Many of our competitors have longer operating histories, larger client bases,
longer relationships with clients, greater brand or name recognition, and
significantly greater financial, technical, marketing, and public relations
resources than we do. We may be unable to compete with full-service consulting
companies, including the past and current consulting divisions of the largest
global accounting firms, who are able to offer their clients a wider range of
services. If our clients decide to take their information technology
professional services projects to these companies, our revenues may decline. It
is possible that in uncertain economic times our clients may prefer to work with
larger firms to a greater extent than normal. In addition, new professional
services companies may provide services similar to ours at a lower price, which
could cause our revenues to decline.
Our expansion and growth internationally could negatively affect our business.
In the March 2002 quarter, international net revenue exceeded 20% of net
revenue. As our international net revenue grows, we face additional risks that
we do not face domestically. Such risks include longer customer payment cycles,
adverse taxes and compliance with local laws and regulations. Further, the
effects of fluctuations in currency exchange rates may adversely affect the
results of operations. Finally, there are indications that the U.S. economic
slowdown is spreading to the rest of the world, which could limit our ability to
obtain international net revenue going forward. These risk factors, as well as
others not cited here, may negatively impact our business.
14
RISKS RELATED TO OUR INDUSTRY
If the rate of adoption of advanced information technology slows substantially,
our revenues may decrease.
We market our services primarily to firms that want to adopt information
technology that provides an attractive return on investment or helps provides a
sustainable competitive advantage. Our revenues could decrease if companies
decide not to integrate the latest technologies into their businesses due to
economic factors, governmental regulations, financial constraints or other
reasons.
Inforte's market research suggests that the level information technology
spending in the United States is closely linked with the growth rate of the
Gross Domestic Product (GDP). The recent slowdown in the GDP growth rate has
caused a slower rate of adoption of advanced information technology by our
target clients. We expect information technology spending and Inforte revenue to
be highly dependent on the health of the US economy.
If the supply of information technology companies and personnel continues to
exceed demand, this may adversely impact the pricing of our projects and our
ability to win business.
Beginning in the second half of 2000 many firms in our industry announced
significant employee layoffs and lower rates of utilization of billable
personnel. An oversupply of technology professionals may reduce the price
clients are willing to pay for our services. An oversupply may also increase the
talent pool for potential clients who may choose to complete projects in-house
rather than use an outside consulting firm such as Inforte. Lower utilization
rates increase the likelihood that a competitor will reduce their price to
secure business in order to improve their utilization rate. The extent to which
pricing and our ability to win business may be impacted is a function of both
the magnitude and duration of the supply and demand imbalance in our industry.
15
RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK
Our stock price could be extremely volatile, like many technology stocks.
The market prices of securities of technology companies, particularly
information technology services companies, have been highly volatile. We expect
continued high volatility in our stock price, with prices at times bearing no
relationship to Inforte's operating performance.
Inforte's average trading volume during the March 2002 quarter averaged
approximately 32,000 shares per day. On any particular day, Inforte's trading
volume can be less than 10,000 shares which increase the potential for volatile
stock prices.
Volatility of our stock price could result in expensive class action litigation.
If our common stock suffers from volatility like the securities of other
technology companies, we have a greater risk of further securities class action
litigation claims. One such claim is pending presently. Litigation could result
in substantial costs and could divert our resources and senior management's
attention. This could harm our productivity and profitability.
Officers and directors own a significant percentage of outstanding shares and,
as a group, may control a vote of stockholders.
As of March 31, 2002 the executive officers and directors set forth below, own
approximately 44.2% of the outstanding shares of our common stock and own
individually the percentage set forth opposite their names:
o Philip S. Bligh 20.8%
o Stephen C.P. Mack 17.4%
o Nick Padgett 6.1%
If the stockholders listed above act or vote together with other employees who
own significant shares of our common stock they will have the ability to control
the election of our directors and the approval of any other action requiring the
approval of our stockholders, including any amendments to the certificate of
incorporation and mergers or sales of all or substantially all assets, even if
the other stockholders perceive that these actions are not in their best
interests.
Over time, the influence or control executive officers have on a stockholder
vote will decrease as officers supplement below-market salaries and diversify
overall equity wealth with sales of Inforte stock. As permitted by SEC Rule
10b5-1, Inforte executive officers have or may set up a predefined, structured
stock trading program. The trading program allows brokers acting on behalf of
company insiders to trade company stock while the insiders may be aware of
material, non-public information, if the transaction is performed according to a
pre-existing contract, instruction or plan that was established with the broker
when the insider was not aware of any material, non-public information.
The authorization of preferred stock, a staggered board of directors and
supermajority voting requirements will make a takeover attempt more difficult,
even if the takeover would be favorable for stockholders.
Inforte's certificate of incorporation and bylaws may have the effect of
deterring, delaying or preventing a change in control of Inforte. For example,
our charter documents provide for:
o the ability of the board of directors to issue preferred stock and
to determine the price and other terms, including preferences and
voting rights, of those shares without stockholder approval;
o the inability of our stockholders to act by written consent or to call a
special meeting;
16
o advance notice provisions for stockholder proposals and nominations to
the board of directors;
o a staggered board of directors, with three-year terms, which will
lengthen the time needed to gain control of the board of directors; and
o supermajority voting requirements for stockholders to amend
provisions of the charter documents described above.
We are also subject to Delaware law. Section 203 of the Delaware General
Corporation Law prohibits us from engaging in a business combination with any
significant stockholder for a period of three years from the date the person
became a significant stockholder unless, for example, our board of directors
approved the transaction that resulted in the stockholder becoming an interested
stockholder. Any of the above could have the effect of delaying or preventing
changes in control that a stockholder may consider favorable.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In all categories of cash, cash equivalents and short-term and long-term
marketable securities, Inforte invests only in highly liquid securities of high
credit quality. All investments bear a minimum Standard & Poor's rating of A1,
Moody's investor service rating of P1, or equivalent. Inforte believes that it
does not have any material market risk exposure with respect to financial
instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Inforte Corp. and Philip S. Bligh, Stephen C.P. Mack and Nick Padgett, officers
of Inforte, have been named as defendants in Mary C. Best v. Inforte Corp.;
Goldman, Sachs & Co.; Salomon Smith Barney, Inc.; Philip S. Bligh; Stephen C.P.
Mack and Nick Padgett, Case No. 01 CV 10836, filed on November 30, 2001 in
Federal Court in the Southern District of New York. The case is also known as
In re Inforte Corp Initial Public Offering Securities Litigation. The named
plaintiff in this case was previously Brian Padgett. An Amended Class Action
Complaint for Violations of the Federal Securities Laws was filed on April 19,
2002. The amended complaint seeks certification of a class of purchasers of
Inforte Corp. stock, unspecified damages, interest, attorneys' and expert
witness fees and other costs. The amended complaint alleges violations of
federal securities laws in connection with our initial public offering (IPO)
occurring in February 2000. The complaint does not allege any claims relating to
any alleged misrepresentations or omissions with respect to our business. We
believe that we and our officers have defenses to the claims and we intend to
vigorously defend the lawsuit.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
17
Item 4. Submission of Matter to a Vote of Security Holders
Inforte held its Annual Meeting of Stockholders on April 25, 2002. For more
information on the following proposals, refer to the company's proxy statement
dated March 22, 2002, the relevant portions of which are incorporated herein by
reference.
(1) The stockholders elected each of the two nominees to the Board of Directors
for a three-year term:
DIRECTOR FOR AGAINST
----------------- ---------- ---------
Stephen C.P. Mack 9,026,562 1,815,574
Al Ries 10,819,821 22,315
(2) The stockholders ratified the appointment of Ernst & Young LLP as
independent certified public accountants of the company:
For 10,797,517
Against 42,007
Abstain 2,612
-----------
Total 10,842,136
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Inforte Corp.
By: /s/ NICK PADGETT
May 15, 2002 ---------------------------------
Nick Padgett,
Chief Financial Officer
19