Inforte Corp. Form 10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
 
  FORM 10-K  
 
 

    (Mark One)

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 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 No. 000-29239

INFORTE CORP.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
36-3909334
(I.R.S. Employer
Identification Number)

150 North Michigan Avenue
Suite 3400, Chicago, Illinois 60601

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (312) 540-0900

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 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 preceding 12 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 pursuant 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 on Part III of this Form 10-K or any amendment to this Form 10-K. |_|

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X|

     The aggregate market value of the registrant’s 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, is $63,572,965.

     Certain portions of the Registrant’s definitive proxy statement dated March 22, 2003 for the Annual Meeting of Stockholders to be held April 30, 2003 are incorporated by reference into Part III of this report.



Inforte Corp.
Form 10-K
December 31, 2002

Table of Contents

Item   Page No.
Part I            
  
1.    Business    1   
2.    Properties    10   
3.    Legal Proceedings    10   
4.    Submission of Matters to a Vote of Security Holders    11   
4A.    Executive Officers of the Registrant    11   
  
Part II   
  
5.    Market for Registrant’s Common Equity and Related Stockholder Matters    12   
6.    Selected Consolidated Financial Data    13   
7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    15   
7A.    Quantitative and Qualitative Disclosures About Market Risk    26   
8.    Consolidated Financial Statements and Supplementary Data    26   
9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    44   
  
Part III   
  
10.    Directors and Executive Officers of the Registrant    44   
11.    Executive Compensation    44   
12.    Security Ownership of Certain Beneficial Owners and Management    44   
13.    Certain Relationships and Related Transactions    44   
14.    Controls and Procedures    44   
  
Part IV   
  
15.    Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K    45   
  
      SIGNATURES    46   


PART I

ITEM 1. BUSINESS

     The information in this document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained in this document that are not of historical fact, are intended to be, and are, “forward-looking statements,” which involve known and unknown risks. We generally use the following terms and similar expressions to identify forward-looking statements: “anticipate,” “believe,” “estimate,” “expect,” “intend, “may,” “plan,” “potential,” “should, “could” and “will.” Our actual results could differ materially from those indicated by the forward-looking statements made in this report. Accordingly, you should not place undue reliance on these forward-looking statements.

     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. Additionally, we do not assume responsibility for the accuracy or completeness of these statements. We are under no duty to update any of the forward-looking statements in this document to conform these statements to actual results or to changes in our expectations.

Overview

     Inforte is a customer and demand management consultancy. We help clients increase profitability by maximizing the effectiveness of their customer-facing initiatives. Inforte consultants deliver strategy, process and technology solutions that enhance visibility across our clients’ enterprise, making their customer interactions more strategic and lucrative.

     Our client base consists primarily of Global 2000 companies. Representative clients in the past year included Blue Cross & Blue Shield of Illinois, BMC Software, BNP Paribas, California State Automobile Association, CUNA Mutual, Dow Corning, Experian, The Hartford, Home Depot, John H. Harland, Lexis-Nexis, Moore, Option One Mortgage, Prudential, PSS World Medical, Royal Automobile Club, Sabre, Sprint, Toshiba and Wrigley.

     Inforte has grown entirely through organic means since its inception in September 1993 rather than through mergers or acquisitions. Historically, we have funded our growth primarily through internally generated free cash flow and we have continued to generate positive free cash flow since becoming a public company in February 2000. As of December 31, 2002, we employed 229 people in our offices in Atlanta, Chicago, Dallas, London, Los Angeles, New York and San Francisco.

Industry Background

     A fluctuating economic environment has created many challenges for companies seeking growth, optimal profitability and increased efficiencies in highly competitive and rapidly changing markets. In order to achieve these goals in any economic environment, companies need to integrate, manage and better respond to customer demand. Customer and demand management solutions apply well-established forecasting techniques, allowing companies to trust the results, communicate them consistently and design an organization that systematically responds to demand.

     The analysis, design and implementation of an effective customer and demand management solution requires special skills and expertise that many companies do not possess. These special skills include the ability to:

    Identify the vital planning information that companies need to manage their business better in response to demand changes;

    Integrate planning processes and systems across business functions;

    Develop integrated, demand-driven approaches to planning and executing operations;

    Drive profitability from customers by linking customer-facing strategies to the back office; and

    Implement the technology required to support these solutions.

     The availability of high-quality professionals experienced in creating, implementing and integrating these strategic and technological solutions is limited. It is often inefficient and difficult for companies seeking to implement their own demand solutions to hire, train and retain in-house personnel. As a result, businesses engage professional services firms to help them design and implement these strategies and solutions.

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Inforte Services & Solutions

     Inforte’s offerings include the following types of services:

     Operational Strategy. Inforte helps clients establish customer-related operational strategies that support their strategic positioning. These customer strategies may relate to Customer Relationship Management (CRM) programs; product, service or distribution channel approaches; or operational excellence initiatives, such as a demand responsiveness strategy. Inforte helps clients develop new operating strategies or improve on existing ones by validating, refining and building our clients’ value propositions to their customers, conducting competitive analysis, developing customer value and customer segmentation approaches, developing benefits or return on investment models and creating branding or marketing strategies.

     Process Design. Inforte helps clients develop a detailed design of their desired business processes in preparation for planned organizational and technology changes. Inforte recognizes that driving sustainable process change is difficult to accomplish, and we draw upon our significant depth of experience to design business processes that are practical and adoptable. Inforte provides the support needed to ensure that a process is adopted after introduction. We assist clients with the implementation planning, key metrics identification and organizational change planning activities that are integral to the successful deployment of redesigned processes.

     Technology Delivery. Inforte’s technology delivery services identify, define and implement initiatives to meet a specific set of business objectives. Inforte creates a technology roadmap for its clients, assessing the clients’ existing technology infrastructure and applications along with current and planned projects. Inforte creates a gap analysis to identify initiatives needed to implement the required business capabilities. Inforte identifies and uses the latest application software packages and technology to design and build solutions for clients to interact with their customers effectively.

     Program Management. Inforte enhances the successful delivery of projects through the establishment of a Program Management Office (PMO) to define, deploy and support common processes, techniques and tools to be used by all projects throughout the program.

     Organizational Change. Inforte helps clients plan for the organizational changes that may be required to enact and sustain new or modified operational strategies, processes or technology. Inforte conducts a thorough assessment of its client’s current leadership, structure, culture and workforce to determine the organization’s readiness for change. This assessment produces a prioritized list of initiatives that address organization-wide and individual-level activities required to support the successful deployment of integrated solutions within the organization.

     Customer and Demand Management Solutions. We combine our operational strategy, process design, technology delivery, program management and organizational change services to deliver customer and demand management solutions that address client business problems. These customer solutions help clients drive profitability from all customer interactions, and allow clients to maximize existing and future Customer Relationship Management (CRM) investments by extending CRM strategy from the front-office throughout the enterprise. We help our clients focus enterprise-wide decision-making processes around a true understanding of what their market demand is likely to be. We increase our clients’ knowledge of their customers and help them plan profit-driving marketing and sales activities around that knowledge. We assist our clients with their customer segmentation approaches, customer differentiation programs and marketing campaign management.

     Methodology and Tools. Our proprietary approach to planning and delivering projects, Velocity to Value (V2V), has produced industry leading project efficiency metrics to help ensure we deliver projects on time and within budget. We believe our client advocacy approach and our rigorous delivery methodologies have helped us to achieve high levels of client satisfaction.

     All Inforte projects are governed by our V2V project delivery methodology. We structure and price our projects in shorter, multiple phases to ensure that each phase meets the client’s business objectives.

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     To continuously maintain the high level of advanced technological skills among our staff, Inforte identifies, captures, organizes and disseminates our knowledge capital internally through an intranet-based system we call the Inforte Collaborative Environment, or ICE.

     Collaborative Client Involvement. We believe our solutions are successful because they are developed in collaboration with our clients. Because the ultimate success of any project will depend upon the client’s ability to effectively operate and support the related strategies, processes and technology on an ongoing basis, our co-management approach is designed to include substantial client participation in all phases of the project. This enables the client to have a thorough understanding of what has been done, how it was completed and why it was performed. The collaborative environment is further supported by allowing clients to access project deliverables through our ICE intranet. We believe our co-management philosophy differs from that of many service providers, who limit the client’s role in project delivery. We believe our collaborative knowledge transfer philosophy has contributed to consistently high project success rates and client satisfaction.

Inforte Strategy

     Inforte’s strategy is to focus on one specific solution area, customer and demand management solutions. Inforte is a specialist in this area, we are not a generalist covering multiple solution areas. Inforte believes that by being a focused specialist, with all of our time, thinking, experience, intellectual capital and effort expended on one solution area, we can offer our clients best-in-world capabilities within that area. We think that our capabilities will compare favorably with competitors, who may be larger and may have more resources, but who are unfocused and have not developed a specialty. Elements supporting this strategy are:

     Maintain customer and demand management solutions focus. Inforte helps clients increase profitability by maximizing the effectiveness of their customer-facing initiatives. Inforte consultants deliver strategy, process and technology solutions that enhance visibility across our clients’ enterprise, making their customer interactions more strategic and lucrative. We believe our focus enhances our ability to generate assignments from existing and new clients, achieve high margins, maintain our position of technological and thought leadership and provide challenging assignments to our employees.

     Ensure Continued Client Satisfaction. Inforte strives to ensure high client satisfaction. We survey clients each quarter to assess their satisfaction and link management compensation to these results. Our quarterly surveys ask clients open-ended questions on measurements they consider important and ask them to numerically score us on these factors. For comparability purposes, our client surveys also request numerical scores on nine set factors, including expertise, project management skills, business understanding, price and responsiveness.

     Continue to Attract and Retain High Quality Personnel. Inforte’s strategic focus requires that we retain highly motivated, intelligent people of exceptional quality. We believe the best way to continue to attract and retain highly qualified personnel is to provide an intellectually challenging environment, an opportunity to personally impact our company’s future and a strong corporate culture.

     Continue Superior External and Internal Business Execution. Inforte is committed to outstanding internal and external execution to deliver superior results for our clients and for our investors. We believe that our high gross margin relative to peer companies indicates our ability to deliver fixed fee projects on time and on budget to a degree greater than other consulting firms. We believe that our record of continued positive free cash flow and profitable performance during a severe industry downturn where many peer companies are losing money or going bankrupt demonstrates our ability to execute well in any environment. We believe that our record of always delivering on the revenue and earnings guidance we set for the current quarter at the time when we release the prior quarter’s results, with no pre-announcements, shows our superior forecasting ability relative to other companies.

     Inforte emphasizes continuous improvement of our client delivery expertise, including our V2V methodology, knowledge management and other internal processes to compete effectively in the future. We continue to refine the systems and processes that comprise our internal infrastructure, which we consider to be advanced for a company of our size.

Clients

     Our client base consists primarily of Global 2000 companies. Representative clients are listed in the “Overview.” During 2002 our top five clients equaled 37 percent of total revenue and our top ten clients equaled 58 percent of total revenue. No single customer has provided Inforte with over 10 percent of our annual revenue since 1997. To most effectively address the needs of our customers and the market environments of their businesses, we are organized along vertical industries.

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Sales and Marketing

     Inforte markets with a team-selling approach that combines dedicated sales professionals, senior client executives and specific subject matter experts, strategists or senior delivery personnel. We believe our team model is superior to a traditional professional services sales model where one individual must manage the sales process in addition to providing the services. Our dedicated sales professionals focus primarily on selling to new customers, while our client executives focus primarily on maintaining and extending relationships with existing customers.

     We use a proprietary sales and marketing methodology called SAMM to capture detailed information on sales opportunities. SAMM is based on a heavily customized customer relationship management system to track potential contracts at each stage of our sales cycle. We project revenue based on a probability analysis of each sales opportunity, allowing us to manage continually our staffing needs and spending plans.

     Our market development efforts are designed to build Inforte’s brand name and recognition in the marketplace and generate leads for new business. Our activities include strategic direct marketing programs, seminars and briefings that target corporate executives, public speaking opportunities, attendance at industry conferences, regular meetings with industry analysts, public relations programs, electronic brochures and use of web site properties such as inforte.com.

     We complement our internal sales and marketing processes with select formalized industry alliances. We co-market and share leads with software vendors with whom we have strategic, non-exclusive marketing relationships. We also work with other software vendors with whom we do not have formalized relationships.

People

     Our headcount was 122 people at the end of 1998, 257 people at the end of 1999, 442 people at the end of 2000, 294 people at the end of 2001 and 229 employees as of December 31, 2002. Of these, 172 are consultants, 22 are in sales and marketing, including 14 quota-based sales personnel, 5 are in human resources and 30 are management or administrative personnel. None of our employees are represented by a labor union, and we believe our employee relations are good.

Competition

     We compete in the strategy and technology professional services market, which is highly competitive. Despite the elimination of many players over the past two years, competition remains intense due to restrained spending on information technology in a tough economic environment. We expect intense competition to continue. We believe that our competitors fall into several categories, including the following:

    The successor organizations to the Big 5 consulting firms: Accenture, BearingPoint, Braxton Consulting, Cap Gemini Ernst & Young and IBM Business Consulting Services

    Technology consulting firms such as Answerthink, Braun Consulting, DiamondCluster and Sapient

    Strategy consulting firms such as Bain, Booz

    Allen & Hamilton, Boston Consulting Group and McKinsey

    Professional services divisions of application software vendors

    Internal information technology departments of current and potential clients

    Indian offshore development firms such as Cognizant Technology, Infosys Technologies, Satyam Computer Services, Tata Consultancy Services and Wipro

    Large  systems integration or outsourcing firms such as Computer Sciences, EDS, and Unisys.

     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. However, we believe that only a few of our competitors have the focus and possess all of the skills necessary to offer the comprehensive customer and demand management strategies and solutions that we provide.

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     There are relatively low barriers to entry into the strategy and technology professional services market. Existing or future competitors may develop or offer services that are comparable or superior to ours at a lower price, which could cause our revenues to decline.

Risk Factors

     In addition to other information in this Form 10-K, 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-K, 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 IT spending growth by current and potential clients in the United States has slowed and become less certain. We believe the uncertainty stems from the 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, longer decision making cycles or limited follow-on projects at existing clients. With fewer opportunities available in the market, competition on some opportunities has become more intense. While our revenue forecast methods are sophisticated and have proven accurate historically, we believe the current 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.

     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 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:

    develop new services that meet changing customer needs;

    identify and effectively market solutions with growing demand during a period of slower technological advancement and adoption;

    enhance our current services;

    continue to develop our strategic expertise;

    effectively use the latest technologies; and

    influence and respond to emerging industry standards and other technological changes.

     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 when adjusting the size of 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 adequately on our engagements, we could be liable to our clients for breach of contract. Although most of our contracts limit the amount of any damages based upon the fees we receive 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.

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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 maintain 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 successfully sold and delivered services similar to those we provide to our clients are limited and competition for these individuals is intense. Further, in the current depressed spending environment, individuals who were previously successful may no longer be successful. Identifying individuals who will succeed in this environment is extraordinarily difficult. 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 below target, 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 December 31, 2002 have exercise prices of $4.76 to $71.81. The average exercise price of all options outstanding at December 31, 2002 is $13.82. 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 turnover 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 net income (loss) 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 free cash flow. Our business grew dramatically from 1993 through 2000. For example, our net revenue increased by 100% or more for seven consecutive years, reaching $63.8 million in 2000. As a result of the current depressed IT spending environment and overcapacity in our industry however, net revenue has declined in each of the last two years, dropping to $40.4 million. If the level of spending declines further, we may not be profitable or achieve positive free cash flow. If, on the other hand, our growth exceeds our expectations, our current resources and infrastructure may be inadequate to handle the growth.

If our marketing relationships with software vendors deteriorate, we would lose their client referrals. If these vendors continue to increase their professional services revenue, our revenue could be adversely affected.

     We currently have marketing relationships with software vendors, including Siebel and Vignette. Although we have historically received a large number of business leads from these and other 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.

     Historically our software partners have primarily relied on licensing fees and maintenance contracts to generate revenue. However, more recently as software licensed sales have declined, software vendors have sought to supplement their revenue through increased implementation services for their software. This business strategy puts us in competition with our software partners on some deals, reducing client leads and our ability to develop new clients and revenue.

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.

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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. During 2002 our five largest clients accounted for 37% of net revenue and our ten largest clients accounted for 58% of net revenue. Frequently we have one or more clients in a quarter accounting for over 10% 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 our top clients or if we were to fail to collect a large account receivable.

     In addition, many of our contracts are short-term and our clients may be able to 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. 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.

     Historically, 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.

     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 did allow our net revenue in the second quarter 2002 to exceed the first quarter 2002 level. We believe that increase in demand was due to positive seasonal effects, while the subsequent lower revenue in the third quarter 2002 was due to negative seasonal effects. 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:

    experience a diversion of our financial resources and management attention;

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    incur damages and litigation costs, including attorneys’ fees;

    be enjoined from further use of the intellectual property;

    be required to obtain a license to use the intellectual property, incurring licensing fees;

    need to develop a non-infringing alternative, which could be costly and delay projects; and

    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 former 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 IT strategy and technology 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.

     For the year ended 2002, our international net revenue exceeded 20% of our total net revenue. We face additional risks internationally 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, as the U.S. economic slowdown has spread to the rest of the world, our ability to obtain international net revenue going forward will likely be reduced. These risk factors, as well as others not cited here, may negatively impact our business.

If clients view offshore development as a viable alternative to our service offerings, our pricing and revenue may be negatively affected.

     Gradually, over the past two decades, numerous IT service firms have been founded in countries such as India, which have well-educated and technically trained English-speaking workforces available at wage rates that are only a fraction of U.S. and European wages rates. Additionally, some larger clients have established internal IT operations at offshore locations. While traditionally we have not competed with offshore development, presently this form of development is seeing rapid and increasing acceptance in the market, especially for routine and repetitive types of development. While offshore development has greater risk due to distance, geopolitical and cultural issues, we believe its lower cost advantage will likely overwhelm these risks. Inforte does not currently intend to establish offshore development capabilities as some of our competitors have done. Instead, we intend to continue our ongoing evolution toward more valued and more differentiated service offerings — including more organizational strategy, process design and organizational change consulting — which are difficult for offshore developers to replicate. If we are unable to evolve our service offerings, or if the rate of acceptance of offshore development advances even faster than we anticipate, then our pricing and our revenue may be negatively affected.

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 of information technology spending in the United States is closely linked with the growth rate of the Gross Domestic Product (GDP). The slowdown in the U.S. GDP growth rate that began in the second half of 2000 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 U.S. economy. We believe that corporate revenue-driven profit growth must resume for IT spending to improve. If the overall level of business capital investment remains depressed or declines further, this may cause our revenue to decline further.

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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.

Geopolitical instability may cause our revenues to decrease.

     Our clients often avoid large IT spending commitments during periods of geopolitical instability and economic uncertainty. The war with Iraq, the possibility of terrorists attacking the United States’ interests, or geopolitical concerns in other areas such as North Korea may cause clients to freeze their decision making processes. This would slow demand for our services and would negatively impact our revenue.

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 2002 averaged approximately 38,000 shares per day. On any particular day, Inforte’s trading volume can be less than 1,000 shares, increasing 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 5, 2003 our executive officers and directors own over 47% of the outstanding shares of our common stock. The largest owners and their percentage ownership are set forth below:

  • Philip S. Bligh   22.3%

  • Stephen C.P. Mack   17.3%

  • Nick Padgett   6.5%

     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 stockholder approval, 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.

     Our stock repurchase program has had the effect of increasing the concentration of insider ownership. If we make further repurchases, insider ownership could increase further.

9


     Over time, the influence or control executive officers have on a stockholder vote may 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 during company blackout periods or 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 during a non-blackout period and when the insider was not aware of any material, non-public information. Inforte executive officers may also trade company stock outside of plans set up under SEC Rule 10b5-1, however such trades would be subject to company blackout periods and insider trading rules.

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:

    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;

    the inability of our stockholders to act by written consent or to call a special meeting;

    advance notice provisions for stockholder proposals and nominations to the board of directors;

    a staggered board of directors, with three-year terms, which will lengthen the time needed to gain control of the board of directors; and

    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 2. PROPERTIES

     Our headquarters are located in Chicago, Illinois. Senior management, sales, marketing, human resources and administrative personnel, as well as the Chicago-based consultants use this facility. We have two subleases for a total of 50,765 square feet in Chicago. The primary sublease for 33,065 square feet expires in December 2005 with no option to renew. The secondary sublease for 17,700 square feet expires in June 2006 with no option to renew. We have regional offices for our regional personnel. We lease 22,529 square feet in Irvine, California and this lease term expires in July 2006 with an option to renew. We lease 4,480 square feet in Irving, Texas and this lease term expires in May 2005 with an option to renew. We have also entered into various short-term leases for professional office space in San Mateo, California, Jersey City, New Jersey, Alpharetta, Georgia, and London, England.

ITEM 3. 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. An amended class action complaint was filed on April 19, 2002. The amended complaint alleges violations of federal securities laws in connection with our initial public offering occurring in February 2000 and seeks certification of a class of purchasers of Inforte stock, unspecified damages, interest, attorneys’ and expert witness fees and other costs. The amended complaint does not allege any claims relating to any alleged misrepresentations or omissions with respect to our business. The individual defendants (Messrs. Bligh, Mack and Padgett) have been dismissed from the case without prejudice pursuant a stipulated dismissal and a tolling agreement. We have moved to dismiss the plaintiff’s case. On February 19, 2002, the Court granted this motion in part, denied it in part and ordered that discovery in the case may commence. The Court dismissed with prejudice the plaintiff’s purported claim against Inforte under Section 10(b) of the Securites Exchanges Act of 1934, but left in place the plaintiff’s claim under Section 11 of the Securites Act of 1933.

10


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table provides information with respect to our executive officers:

Name Age   Position  
Philip S. Bligh   35   Chief Executive Officer and Chairman  
Stephen C.P. Mack   37   Chief Operating Officer, President and Director  
Nick Padgett   36   Chief Financial Officer and Director  

     Philip S. Bligh co-founded Inforte and has served as chairman of the board of directors of Inforte since inception in September 1993. Mr. Bligh also currently serves as chief executive officer. Before founding Inforte, Mr. Bligh served in various technology consulting roles for Accenture from October 1988 to February 1991 and as a project manager for Systems Software Associates, an enterprise software provider, from April 1991 through Inforte’s founding. Mr. Bligh holds a B.S. in chemical engineering from University College London, England.

     Stephen C.P. Mack joined Inforte in October 1994 and has served as a director since that time. Mr. Mack is currently Inforte’s chief operating officer and president. Before joining Inforte, from February 1988 to October 1994, Mr. Mack worked at Accenture, where he was, most recently, a project manager responsible for the design and implementation of enterprise-wide operational and decision support systems for large, multinational corporations. Mr. Mack holds a Master’s degree in engineering and management from the University of Birmingham, England.

     Nick Padgett has served as Inforte’s chief financial officer since December 1997. Mr. Padgett has been a director of Inforte since its founding in September 1993. Before joining Inforte, Mr. Padgett served as an equity research analyst for William Blair & Company, from August 1994 to December 1997. Before William Blair, Mr. Padgett served in various technology consulting roles for Accenture from June 1988 to September 1992. Mr. Padgett holds an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth College and a B.S. in computer science from Western Illinois University.

11


ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock is traded on the NASDAQ National Market under the symbol “INFT.” Our initial public offering of stock was February 17, 2000 at $32.00 per share. The price range reflected in the table below, is the highest and lowest closing sale price for our stock as reported by the NASDAQ National Market during each quarter the stock had been publicly traded. Our present policy is to retain earnings, if any, to finance future growth. We have never paid cash dividends, although we may consider doing so if the double taxation of dividends in the United States is reduced or eliminated. In January 2001, Inforte announced that the board of directors approved a stock repurchase program that allows Inforte to buy up to $25 million of Inforte shares. The program was completed in August 2002. The board of directors approved an additional $5.0 million stock repurchase program on August 22, 2002. We stated at that time that we had no present plans to make additional repurchases of stock, and as of December 31, 2002, we have made no repurchases under this second program. As of March 5, 2003, there were approximately 3,213 stockholders, including stockholders of record and holders in street name, and the price per share of our common stock was $6.24.

   Three Months Ended
  
   Mar. 31,
2001

   Jun. 30,
2001

   Sep. 30,
2001

   Dec. 31,
2001

   Mar. 31,
2002

   Jun. 30,
2002

   Sep. 30,
2002

   Dec. 31,
2002

  
Price range per share:                                                      
   Low       $ 7.69    $ 7.74    $ 9.26    $ 8.98    $ 9.30    $ 8.70    $ 5.12    $ 4.76   
   High       $ 23.00    $ 14.68    $ 12.80    $ 14.00    $ 13.71    $ 12.00    $ 10.68    $ 8.00   

     The following table sets forth Inforte’s securities authorized for issuance under equity compensation plans as of December 31, 2002.

Plan category
   Number of securities to be
issued upon exercise of
outstanding options

   Weighted average
exercise price of
outstanding options

   Number of securities
available for future
issuance under equity
compensation plans(1)

Equity compensation plans approved by                                    
   security shareholders       2,789,264          $13.82          2,306,141   
Equity compensation plans not approved                                    
   by security shareholders                           
Total       2,789,264          $13.82          2,306,141   
                                         

  (1)   Includes 1,593,662 in shares available under Inforte’s 1997 Incentive Stock Option Plan, 365,000 shares available under the 1995 Incentive Stock Option Plan and 347,479 shares available under Inforte’s Employee Stock Purchase Plan. For the 1997 Incentive Stock Option Plan Inforte has reserved an aggregate of 4,000,000 shares of common stock for issuance, plus annual increases beginning in 2001 equal to the lesser of: (1) 1,000,000 shares, (2) 5% of the total shares of common stock outstanding or (3) a number determined by the Board of Directors. For the 1995 Incentive Stock Option Plan Inforte has reserved an aggregate of 4,900,000 shares for issuance. There is no provision in the 1995 plan to increase the number of shares available for granting. For the Employee Stock Purchase Plan, Inforte has reserved 200,000 shares for issuance, plus annual increases beginning in 2001 equal to the lesser of (1) 400,000 shares, (2) 2% of the total shares of common stock outstanding or (3) a number determined by the Board of Directors. The Purchase Plan became effective upon the completion of the Company’s initial public offering, in February 2000.

12


ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The consolidated statement of operations data for the years ended 2000, 2001 and 2002 and the balance sheet data as of December 31, 2001 and 2002 are derived from our audited consolidated financial statements, which are included elsewhere in this Form 10-K. The consolidated statement of operations data for the years ended 1998 and 1999 and the balance sheet data as of December 31, 1998, 1999, and 2000 are derived from our audited consolidated financial statements, which are not included in this Form 10-K.

   Year ended December 31,
  
   1998
   1999
   2000
   2001
   2002
  
   (in thousands, except per share data)   
Consolidated Statement of Operations Data                                    
Revenue before reimbursements (net revenue)       $ 13,447    $ 30,088    $ 63,839    $ 47,736    $ 40,355   
Operating expenses:      
   Project personnel and related expenses          6,830       12,846       28,182       26,334       19,934   
   Sales and marketing          1,467       4,949       8,584       7,073       6,052   
   Recruiting, retention and training          1,165       2,987       6,360       2,869       1,222   
   Management and administrative          2,692       5,617       12,831       13,207       12,884   
   Non-cash, non-recurring stock compensation      
      expense                            1,374         
 
 
 
 
 
 
      Total operating expenses          12,154       26,399       55,957       50,858       40,092   
 
 
 
 
 
 
Operating income (loss)          1,293       3,689       7,882    $ (3,122 )    263   
Interest income, net and other          23       147       3,387       3,433       2,124   
 
 
 
 
 
 
Income before income taxes          1,316       3,836       11,269       311       2,387   
Income tax expense                1,287       4,395       503       672   
 
 
 
 
 
 
Net income (loss)       $ 1,316    $ 2,549    $ 6,874    $ (192 ) $ 1,715   
 
 
 
 
 
 
Net income (loss) per share:      
   Basic                         $ 0.57    $ (0.02 ) $ 0.15   
 
 
 
 
   Diluted                         $ 0.51    $ (0.02 ) $ 0.15   
 
 
 
 
Weighted Average common shares outstanding:      
   Basic                            12,051       12,472       11,315   
 
 
 
 
   Diluted                            13,501       12,472       11,647   
 
 
 
 
Reconciliation of net income on a GAAP      
   basis to Non-GAAP supplemental net      
   income:      
Net income (loss)          1,316       2,549                (192 )         
Add:      
   Non-cash, non-recurring stock compensation      
      expense(1)                                     1,374            
Subtract:      
   Tax effect of converting to C-corp. from      
      S-corp.(2)          (539 )    (255 )                        
 
 
 
 
Non-GAAP supplemental net income       $ 777    $ 2,294             $ 1,182            
 
 
 
 
Non-GAAP supplemental net income (loss) per      
   share:      
   Basic       $ 0.14    $ 0.27                              
 
 
 
   Diluted       $ 0.08    $ 0.21                              
 
 
 
Weighted-average common shares outstanding:      
   Basic          5,517       8,636                              
 
 
 
   Diluted          10,143       10,786                              
 
 
 

13


   Year ended December 31,
  
   1998
   1999
   2000
   2001
   2002
  
   (in thousands, except per share data)   
Balance Sheet Data (at period end):                                    
Cash and short-term and long-term marketable      
   securities       $ 2,698    $ 3,792    $ 82,997    $ 75,117    $ 67,345   
Working capital          1,006       793       65,318       47,639       46,506   
Total assets          5,581       12,957       99,903       86,459       76,070   
Long-term debt, net of current portion                                    
Stockholders’ equity          1,661       2,301       83,044       72,203       64,731   


  (1)   In 2001 Inforte incurred a non-cash, non-recurring stock compensation expense of $1,374 for a performance-based option, which is recognized as an expense under GAAP. This option was granted in 1997 with an exercise price equal to the fair market value at the time of the grant and with vesting based on achieving specified corporate performance criteria. Once vesting is probable (the “measurement date”) GAAP requires recording of an expense equal to the difference between fair market value on the measurement date and exercise price times the number of shares granted under the option. With typical time based vesting criteria the measurement date equals the grant date and no expense is recorded normally. Even though the vesting criteria on this performance-based option were more difficult to achieve than the criteria on a normal time-based option — making the option less valuable from the employee’s perspective and more advantageous from Inforte’s perspective — GAAP results in lower earnings with this performance-based option than if the option were time based.

  The Non-GAAP supplemental information shows results excluding the non-cash, non-recurring stock compensation expense described in the previous paragraph. This Non-GAAP supplemental information is a non-GAAP financial measure that may not conform to similarly titled measures reported by other companies. We present this Non-GAAP supplemental information to allow for comparability of our results for this period with the results of other periods. The stock compensation expense from this performance-based option did not occur in prior periods and will not occur in future periods. We believe that comparability of results from different periods is reduced significantly without this Non-GAAP supplemental presentation, considering the magnitude of the stock compensation expense relative to our normal level of operating expenses. In addition to providing comparability, we believe the Non-GAAP supplemental information corrects for an anomalous situation where GAAP earnings are lower with this performance-based option than with a time-based option even though Inforte is economically better off with the performance-based option since it has more difficult to achieve vesting criteria. The stock compensation expense had no impact on income tax expense.

  (2)   In 1999, Inforte was a C corporation; however, the conversion from a sub-chapter S corporation to a C corporation on January 1, 1999 resulted in a tax benefit for accounting purposes due to the recording of deferred tax benefits, increasing net income (loss) per share. The Non-GAAP supplemental net income (loss) per share for the year ended December 31, 1999 reflects the net income (loss) per share Inforte would have reported without the one-time conversion to a C corporation.

  During the three years ended December 31, 1998, Inforte operated as a sub-chapter S corporation under the Internal Revenue Code and in some of the states in which we did business. As a result, any taxable earnings or loss flowed through to Inforte stockholders. The Non-GAAP supplemental net income data for 1998 assumes that Inforte was subject to income tax had we always operated as a C corporation.

14


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     You should read the following discussion in conjunction with “Selected Financial Data” and our consolidated financial statements, together with the notes to those statements, included elsewhere in this Form 10-K. The following discussions 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, particularly those identified in “Risk Factors.”

OVERVIEW

     Inforte is a customer and demand management consultancy that helps clients improve customer interactions, revenue forecasting and profitability. Inforte creates strategies and implements technology solutions that enhance visibility, optimize customer and channel profitability, and integrate demand information with supply and resource planning processes. Inforte has applied a client advocacy approach and rigorous delivery methodologies to help garner references from 100 percent of its Global 2000 client base. Founded in 1993, Inforte is headquartered in Chicago and has offices in Atlanta, Dallas, London, Los Angeles, New York and San Francisco.

     The majority of our revenue historically 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, how precisely our clients are able to define the scope of activities they wish us to perform and client preference. 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, the technical complexity of the solution and the value of the solution delivered to the client.

     We typically 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 typically bill the remainder in advance of the work.

15


Results of Operations

     The following table sets forth the percentage of net revenue of certain items included in Inforte’s Non-GAAP supplemental(1) consolidated statement of operations:

   Year ended December 31,
  
   2000
   2001
   2002
  
Revenue before reimbursements (net revenue)          100.0 %    100.0 %    100.0 %
Operating expenses:      
   Project personnel and related expenses          44.1       55.2       49.4   
   Sales and marketing          13.4       14.8       15.0   
   Recruiting, retention and training          10.0       6.0       3.0   
   Management and administrative          20.1       27.7       31.9   
 
 
 
 
Total operating expenses          87.7       103.7       99.3   
 
 
 
 
Operating income (loss)          12.3       (3.7 )    0.7   
Interest income, net and other          5.3       7.2       5.3   
 
 
 
 
Income before income taxes          17.7       3.5       5.9   
Income tax expense          6.9       1.1       1.7   
 
 
 
 
Net income          10.8 %    2.5 %    4.2 %
 
 
 
 
Reconciliation of net income on a Non-GAAP      
   supplemental basis to GAAP net income:      
Non-GAAP supplemental net income                   2.5 %         
 
 
Subtract: Non-cash, non-recurring stock      
   compensation expense(1)                   (2.9 )         
 
 
GAAP basis net loss                   (0.4 )%         
 
 


  (1)   In 2001 Inforte incurred a non-cash, non-recurring stock compensation expense of $1,374 for a performance-based option, which is recognized as an expense under GAAP. This option was granted in 1997 with an exercise price equal to the fair market value at the time of the grant and with vesting based on achieving specified corporate performance criteria. Once vesting is probable (the “measurement date”) GAAP requires recording of an expense equal to the difference between fair market value on the measurement date and exercise price times the number of shares granted under the option. With typical time based vesting criteria the measurement date equals the grant date and no expense is recorded normally. Even though the vesting criteria on this performance-based option were more difficult to achieve than the criteria on a normal time-based option — making the option less valuable from the employee’s perspective and more advantageous from Inforte’s perspective — GAAP results in lower earnings with this performance-based option than if the option were time based.

  The Non-GAAP supplemental information shows results excluding the non-cash, non-recurring stock compensation expense described in the previous paragraph. This Non-GAAP supplemental information is a non-GAAP financial measure that may not conform to similarly titled measures reported by other companies. We present this Non-GAAP supplemental information to allow for comparability of our results for this period with the results of other periods. The stock compensation expense from this performance-based option did not occur in prior periods and will not occur in future periods. We believe that comparability of results from different periods is reduced significantly without this Non-GAAP supplemental presentation, considering the magnitude of the stock compensation expense relative to our normal level of operating expenses. In addition to providing comparability, we believe the Non-GAAP supplemental information corrects for an anomalous situation where GAAP earnings are lower with this performance-based option than with a time-based option even though Inforte is economically better off with the performance-based option since it has more difficult to achieve vesting criteria. The stock compensation expense had no impact on income tax expense.

16


Non-GAAP Supplemental Quarterly Results of Operations(1)

     The following tables set forth certain unaudited quarterly results of operations of Inforte for 2001 and 2002. The quarterly operating results are not necessarily indicative of future results of operations.

  Three Months Ended (unaudited)
 
  Mar. 31,
2001

  Jun. 30,
2001

  Sep. 30,
2001

  Dec. 31,
2001

 
Revenue before reimbursements (net revenue)     $ 14,051,153   $ 12,537,832   $ 10,600,439   $ 10,546,182  
Operating expenses:    
   Project personnel and related expenses       7,396,824     7,378,815     5,876,560     5,681,583  
   Sales and marketing       1,858,591     2,129,456     1,804,975     1,280,368  
   Recruiting, retention and training       924,081     709,957     596,767     638,551  
   Management and administrative       3,447,453     3,098,569     3,083,137     3,577,892  
 
 
 
 
 
Total operating expenses       13,626,949     13,316,797     11,361,439     11,178,394  
 
 
 
 
 
Operating income (loss)       424,204     (778,965 )   (761,000 )   (632,212 )
Interest income, net, and other       1,013,331     898,435     870,372     651,298  
 
 
 
 
 
Income before income taxes       1,437,535     119,470     109,372     19,086  
Income tax expense       503,134              
 
 
 
 
 
Net income     $ 934,401   $ 119,470   $ 109,372   $ 19,086  
 
 
 
 
 
Net income (loss) per share:    
   Diluted     $ 0.07   $ 0.01   $ 0.01        
 
 
 
 
Weighted-average common shares outstanding:    
   Diluted       13,699,582     13,632,087     13,521,401        
 
 
 
 
Reconciliation of net income on a Non-GAAP    
   supplemental basis to GAAP net income:    
Non-GAAP supplemental net income                       $ 19,086  
Subtract: Non-cash, non-recurring stock    
   compensation expense(1)                         (1,374,000 )
 
GAAP basis net loss                       $ (1,354,914 )
 
 


  (1)   In 2001 Inforte incurred a non-cash, non-recurring stock compensation expense of $1,374 for a performance-based option, which is recognized as an expense under GAAP. This option was granted in 1997 with an exercise price equal to the fair market value at the time of the grant and with vesting based on achieving specified corporate performance criteria. Once vesting is probable (the “measurement date”) GAAP requires recording of an expense equal to the difference between fair market value on the measurement date and exercise price times the number of shares granted under the option. With typical time based vesting criteria the measurement date equals the grant date and no expense is recorded normally. Even though the vesting criteria on this performance-based option were more difficult to achieve than the criteria on a normal time-based option — making the option less valuable from the employee’s perspective and more advantageous from Inforte’s perspective — GAAP results in lower earnings with this performance-based option than if the option were time based.

  The Non-GAAP supplemental information shows results excluding the non-cash, non-recurring stock compensation expense described in the previous paragraph. This Non-GAAP supplemental information is a non-GAAP financial measure that may not conform to similarly titled measures reported by other companies. We present this Non-GAAP supplemental information to allow for comparability of our results for this period with the results of other periods. The stock compensation expense from this performance-based option did not occur in prior periods and will not occur in future periods. We believe that comparability of results from different periods is reduced significantly without this Non-GAAP supplemental presentation, considering the magnitude of the stock compensation expense relative to our normal level of operating expenses. In addition to providing comparability, we believe the Non-GAAP supplemental information corrects for an anomalous situation where GAAP earnings are lower with this performance-based option than with a time-based option even though Inforte is economically better off with the performance-based option since it has more difficult to achieve vesting criteria. The stock compensation expense had no impact on income tax expense.

17


   Three Months Ended (unaudited)
  
   Mar. 31,
2001

   Jun. 30,
2001

   Sep. 30,
2001

   Dec. 31,
2001

  
As a percentage of net revenue:                              
Revenue before reimbursements (net revenue)          100.0 %    100.0 %    100.0 %    100.0 %
Operating expenses:      
   Project personnel and related expenses          52.6 %    58.9 %    55.4 %    53.9 %
   Sales and marketing          13.2 %    17.0 %    17.0 %    12.1 %
   Recruiting, retention and training          6.6 %    5.7 %    5.6 %    6.1 %
   Management and administrative          24.5 %    24.7 %    29.1 %    33.9 %
 
 
 
 
 
Total operating expenses          97.0 %    106.2 %    107.2 %    106.0 %
 
 
 
 
 
Operating income (loss)          3.0 %    (6.2 )%    (7.2 )%    (6.0 )%
Interest income, net, and other          7.2 %    7.2 %    8.2 %    6.2 %
 
 
 
 
 
Income before income taxes          10.2 %    1.0 %    1.0 %    0.2 %
Income tax expense          3.6 %    0.0 %    0.0 %    0.0 %
 
 
 
 
 
Net income          6.6 %    1.0 %    1.0 %    0.2 %
 
 
 
 
 
Reconciliation of net income on a Non-GAAP      
   supplemental basis to GAAP net income:      
Non-GAAP supplemental net income                                     0.2 %
Subtract: Non-cash, non-recurring stock      
   compensation expense(1)                                     (13.0 )%
GAAP basis net loss                                     (12.8 )%
  
  


  (1)   In 2001 Inforte incurred a non-cash, non-recurring stock compensation expense of $1,374 for a performance-based option, which is recognized as an expense under GAAP. This option was granted in 1997 with an exercise price equal to the fair market value at the time of the grant and with vesting based on achieving specified corporate performance criteria. Once vesting is probable (the “measurement date”) GAAP requires recording of an expense equal to the difference between fair market value on the measurement date and exercise price times the number of shares granted under the option. With typical time based vesting criteria the measurement date equals the grant date and no expense is recorded normally. Even though the vesting criteria on this performance-based option were more difficult to achieve than the criteria on a normal time-based option — making the option less valuable from the employee’s perspective and more advantageous from Inforte’s perspective — GAAP results in lower earnings with this performance-based option than if the option were time based.

  The Non-GAAP supplemental information shows results excluding the non-cash, non-recurring stock compensation expense described in the previous paragraph. This Non-GAAP supplemental information is a non-GAAP financial measure that may not conform to similarly titled measures reported by other companies. We present this Non-GAAP supplemental information to allow for comparability of our results for this period with the results of other periods. The stock compensation expense from this performance-based option did not occur in prior periods and will not occur in future periods. We believe that comparability of results from different periods is reduced significantly without this Non-GAAP supplemental presentation, considering the magnitude of the stock compensation expense relative to our normal level of operating expenses. In addition to providing comparability, we believe the Non-GAAP supplemental information corrects for an anomalous situation where GAAP earnings are lower with this performance-based option than with a time-based option even though Inforte is economically better off with the performance-based option since it has more difficult to achieve vesting criteria. The stock compensation expense had no impact on income tax expense.

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   Three Months Ended (unaudited)
  
   Mar. 31,
2002

   Jun. 30,
2002

   Sep. 30,
2002

   Dec. 31,
2002

  
Revenue before reimbursements (net revenue)       $ 9,434,014    $ 11,371,795    $ 9,606,752    $ 9,942,304   
Operating expenses:      
   Project personnel and related expenses          5,001,725       5,328,686       4,546,313       5,057,316   
   Sales and marketing          1,517,606       1,811,746       1,620,580       1,101,748   
   Recruiting, retention and training          374,448       356,985       294,420       196,307   
   Management and administrative          3,004,236       3,968,641       2,910,575       3,000,281   
  
  
  
  
  
Total operating expenses          9,898,015       11,466,058       9,371,888       9,355,652   
  
  
  
  
  
Operating income (loss)          (464,001 )    (94,263 )    234,864       586,652   
Interest income, net, and other          564,329       567,828       534,867       456,849   
  
  
  
  
  
Income before income taxes          100,328       473,565       769,731       1,043,501   
Income tax expense (benefit)          (35,250 )    117,493       246,314       343,740   
  
  
  
  
  
Net income       $ 135,578    $ 356,072    $ 523,417    $ 699,761   
  
  
  
  
  
Net income (loss) per share      
   Diluted       $ 0.01    $ 0.03    $ 0.05    $ 0.06   
  
  
  
  
  
Weighted-average common shares outstanding:      
   Diluted          12,213,343       12,132,150       11,297,985       10,918,968   
  
  
  
  
  

   Three Months Ended (unaudited)
  
   Mar. 31,
2002

   Jun. 30,
2002

   Sep. 30,
2002

   Dec. 31,
2002

  
As a percentage of net revenue:      
Revenue before reimbursements (net revenue)          100.0 %    100.0 %    100.0 %    100.0 %
Operating expenses:      
   Project personnel and related expenses          53.0 %    46.9 %    47.3 %    50.9 %
   Sales and marketing          16.1 %    15.9 %    16.9 %    11.1 %
   Recruiting, retention and training          4.0 %    3.1 %    3.1 %    2.0 %
   Management and administrative          31.8 %    34.9 %    30.3 %    30.2 %
  
  
  
  
  
Total operating expenses          104.9 %    100.8 %    97.6 %    94.1 %
  
  
  
  
  
Operating income (loss)          (4.9 )%    (0.8 )%    2.4 %    5.9 %
Interest income, net, and other          6.0 %    5.0 %    5.6 %    4.6 %
  
  
  
  
  
Income before income taxes          1.1 %    4.2 %    8.0 %    10.5 %
Income tax expense (benefit)          (0.4 )%    1.0 %    2.6 %    3.5 %
  
  
  
  
  
Net income          1.4 %    3.1 %    5.4 %    7.0 %
  
  
  
  
  

Years ended December 31, 2001 and 2002

     Net revenue. Net revenue excludes reimbursable expenses that are billed to our clients. Net revenue decreased $7.4 million or 15% to $40.4 million for the year ended December 31, 2002 from $47.7 million for the year ended December 31, 2001. We attribute this decline in net revenue to the slow growth rate of the U.S. economy and the negative impact that economic uncertainty has had on information technology (IT) spending. These factors have depressed the market for strategic technology services over the last 24 months. For the year ended December 31, 2002, we had 29 significant clients with each of these clients contributing $1.3 million to net revenue on average. We had 43 significant clients during the year ended December 31, 2001, each contributing $1.0 million to net revenue on average. We have not had a client accounting for more than 10% of our net revenue since 1997.

     Project personnel and related expenses. Project personnel and related expenses consist primarily of compensation and 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. Project personnel and related expenses decreased $6.4 million or 24% to $19.9 million for the year ended December 31, 2002, from $26.3 million for the year ended December 31, 2001. The decrease results from reductions in consulting headcount. We employed 172 and 217 consultants on December 31, 2002 and 2001, respectively. Further, project personnel and related expenses declined due to a $550,000 reduction in the allowance for doubtful accounts during 2002. Our allowance for doubtful accounts was $0.6 million as of December 31, 2002, compared to $1.15 million as of December 31, 2001. The revised allowance for doubtful accounts balance more accurately reflects our exposure to loss from non-paying customers, due to an overall reduction in business activity. This reduction was not due to any write-off of a specific customer account.

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     Project personnel and related expenses represented 49.4% of net revenue for the year ended December 31, 2002, compared to 55.2% for the year ended December 31, 2001. This decrease is due to consulting headcount declining at a faster rate than the rate of net revenue decline. Net revenue per consultant was $214,000 in the year ended December 31, 2002, up from $173,000 in the year ended December 31, 2001. The increase in net revenue per consultant versus the prior year results from higher consultant utilization as excess consulting capacity was reduced, offset slightly by a small decline in our effective hourly rate

     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. Approximately 90 people participated in the programs. Individuals who selected the leave of absence program received compensation at 20%–25% of regular pay if they remained 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 were expensed as incurred and included in the quarters ended September 2001 through June 2002 with the amounts declining in the later quarters. 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. In the fourth quarter 2002, Inforte enacted a further headcount reduction program, affecting approximately 20 individuals. All costs for this program were expensed in fourth quarter 2002.

     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 and expenses decreased $1.0 million or 14% to $6.1 million for the year ended December 31, 2002 from $7.1 million in 2001. This decrease is due to lower headcount in this area, resulting in lower salary and benefit costs and a decrease in travel expense. Total sales and marketing headcount was 31 as of December 31, 2000, 26 as of December 31, 2001 and 22 as of December 31, 2002. Sales and marketing expenses as a percentage of net revenue was stable in 2002 at 15.0% versus 14.8% in 2001.

     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. Recruiting, retention and training expenses decreased by $1.6 million or 57% to $1.2 million for the year ended December 31, 2002 from $2.9 million for the year ended December 31, 2001. The decrease in spending is due primarily to less training activity due to lower company-wide headcount and reduced headcount for employees engaged in recruiting, retention and training. Total employees declined from 442 as of December 31, 2000 to 294 as of December 31, 2001 to 229 as of December 31, 2002. Total recruiting retention and training headcount was 18 as of December 31, 2000, 9 as of December 31, 2001 and 5 as of December 31, 2002. Also, in the current economic environment of higher unemployment, recruiting efforts require fewer expenses, such as recruiting finder fees, signing bonuses, relocation allowances and employee referral bonuses to identify and attract qualified candidates. Recruiting, retention and training expenses as a percentage of net revenue decreased to 3.0% for the year ended December 31, 2002 from 6.0% in 2001.

     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, telecommunications, audit, legal, business insurance, and depreciation and amortization of capitalized computers, purchased software and property. Management and administrative expenses decreased $0.3 million or 2% to $12.9 million for the year ended December 31, 2002 from $13.2 million in 2001 For the year ended December 31, 2002, management and administrative expenses increased as a percent of revenue to 31.9% from 27.7% in the prior year period, as net revenue declined at a greater rate than management and administrative expenses. During 2002 some management and administrative areas had lower expenses relative to 2001, while other areas had higher expenses. Expense reductions related primarily to lower headcount and lower facilities costs. Total management and administrative headcount declined from 53 as of December 31, 2000 to 42 as of December 31, 2001 and 30 as of December 31, 2002. Lease expense in 2002 is lower than lease expense in 2001 due to a write-down of $1.1 million in 2001 for abandoned lease space which we are currently working to sublet. The 2001 charge was determined based on future lease obligations less estimated sublease income. During 2002 we recorded an additional charge of $0.6 million to lease expense as our estimate of sublease income has decreased due to a reduction in the rental price of office space. Offsetting the overall reduction in management and administrative salary expense were increased costs for variable executive compensation resulting from improved operating income, severance costs related to senior management terminations and start-up costs for new practice areas. Business insurance costs also increased significantly.

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     Interest income, net and other. During the year ended December 31, 2002, interest income, net and other decreased $1.3 million, or 38% to $2.1 million. The decrease was due to the reinvestment of matured securities into similar type securities at lower market interest yields and also due to the lower average cash balances as a result of Inforte’s stock buyback program.

     Income tax expense. Income tax expense for the year ended December 31, 2002 was 28.2% of pre-tax income versus income tax expense of 161.5% of pre-tax income in 2001. The unusually high tax rate for 2001 results primarily from expenses not deductible for income tax purposes including the non-cash, non-recurring stock compensation expense. Excluding the non-cash, non-recurring stock compensation expense, effective income tax expense was 29.9% of pre-tax income in 2001. The decrease of the tax rate in 2002 versus 2001, excluding the non-cash, non-recurring stock compensation expense, reflects the adjustment of certain estimates for non-deductible expenses and state and internal tax obligations. This decrease is partially offset by the tax effect of having less interest income from tax exempt and tax advantaged investments. The 2002 income tax expense was the sum of a) operating income times a 41.6% combined federal and state tax rate and b) interest income, net and other times a reduced tax rate of 26.5%.

Years ended December 31, 2000 and 2001

     Net revenues. Net revenue excludes reimbursable expenses that are billed to our clients. Net revenue decreased $16.1 million or 25% to $47.7 million for the year ended December 31, 2001 from $63.8 million for the year ended December 31, 2000. We attribute this decline in net revenue to the U.S. recession in 2001 and the negative impact that heightened economic uncertainty had on information technology spending. For the year ended December 31, 2001, we had 43 significant clients with each of these clients contributing $1.0 million to net revenue on average. We had 43 significant clients during the year ended December 31, 2000, each contributing $1.3 million to net revenue on average. We have not had a client accounting for more than 10% of our net revenue since 1997. On a quarterly basis in 2000, revenue followed typical seasonal patterns with higher sequential growth during the first half of 2000. This pattern did not hold in 2001, however, as revenue declined sequentially each quarter due to the U.S. recession and the technology spending slowdown.

     Project personnel and related expenses. Project personnel and related expenses decreased $1.8 million or 7% to $26.3 million for the year ended December 31, 2001, from $28.2 million for year ended December 31, 2000. The decrease results from reductions in consulting headcount, primarily in the third quarter of 2001. We employed 217 and 340 consultants on December 31, 2001 and 2000, respectively. Further, project personnel and related expenses declined in 2001 as there was no expense to increase the allowance for doubtful account in 2001. In 2000, due to increased business activity, we increased the allowance for doubtful accounts from $0.6 million as of December 31, 1999 to $1.15 million as of December 31, 2000, resulting in $550,000 of project personnel and related expenses in 2000 that were not present in 2001.

     Project personnel and related expenses represented 55.2% of net revenue for the year ended December 31, 2001, compared to 44.1% for the year ended December 31, 2001. This increase is due to net revenue declining at a higher rate than the rate of expense declines. Net revenue per consultant was $173,000 in the year ended December 31, 2001, down from $214,000 in the year ended December 31, 2000. The decline in net revenue per consultant versus the prior year results primarily from lower consultant utilization and secondarily from a slightly lower effective hourly rate due to more price sensitivity in the consulting market.

     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. Approximately 90 people participated in the programs.

21


Individuals who selected the leave of absence program received compensation at 20%–25% of regular pay if they remained 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 were expensed as incurred and included in the quarters ended September 2001 and December 2001. In October 2001, Inforte again offered voluntary programs similar to the June 2001 program, however this program was smaller in scope, involving approximately 20 people.

     Sales and marketing. Sales and marketing expenses decreased $1.5 million or 18% to $7.1 million for the year ended December 31, 2001 from $8.6 million in 2000. Factors causing the spending decrease include lower sales bonuses because of lower revenue during the year, reduced market development spending in 2001 by our partners resulting in less co-marketing expenses related to those partnerships, and lower spending on discretionary marketing activities. These decreases were partially offset by a higher average number of commissioned salespeople in 2001 compared to 2000. Sales and marketing expenses as a percentage of net revenue increased to 14.8% for the year ended December 31, 2001 from 13.4% in 2000.

     Recruiting, retention and training. Recruiting, retention and training expenses decreased by $3.5 million or 55% to $2.9 million for the year ended December 31, 2001 from $6.4 million in the year of 2000. The decrease in spending is due primarily to reduced recruiting activities and the lower costs associated with recruiting finder fees, signing bonuses, relocation allowances, employee referral bonuses and candidate travel. Other factors causing spending to decline include less spending on company-wide meetings and other employee events and less training activity due to lower headcount and fewer new hires. As a percentage of net revenue, recruiting, retention and training dropped to 6.0% in 2001 from 10.0% in 2000.

     Management and administrative. Management and administrative expense increased 3% to $13.2 million in 2001 from $12.8 million in 2000. For the year ended December 31, 2001, management and administrative expenses increased as a percent of net revenue to 27.7% from 20.1% in the prior year period, as revenue declined and expenses increased slightly. We reduced spending in most departments in 2001. Additionally, executive bonus compensation was lower in 2001. These declines, however, were offset by costs associated with our effort to consolidate office space at the Chicago location where Inforte had multiple contractual rental commitments. Estimated costs for the consolidation of facilities consist of contractual rental commitments for office space being vacated and related costs in addition to future depreciation of the related leasehold improvements, offset by estimated sub-lease income. The total charge related to this reduction of office space in 2001 was $1.1 million.

     Interest income, net and other. During the year ended December 31, 2001, interest income, net and other was $3.4 million, similar to the amount in the year ended December 31, 2000. The negative effect of lower interest rates in 2001 was offset by the higher average cash and marketable securities balances we maintained in 2001 as compared to 2000.

     Income tax expense. Income tax expense for the year ended December 31, 2001 was 161.5% of pre-tax income versus income tax expense of 39.0% of pre-tax income in 2000. This unusually high tax rate for 2001 results primarily from expenses not deductible for income tax purposes including the non-cash, non-recurring stock compensation expense. Excluding the non-cash, non-recurring stock compensation expense, effective income tax expense was 29.9% of pre-tax income in 2001. The decrease of the tax rate, excluding the non-cash, non-recurring stock compensation expense, in 2001 versus 2000 reflects the increase in tax-free and tax-advantaged investment earnings as a percentage of total pre-tax book income.

Liquidity and Capital Resources

     Cash and cash equivalents decreased from $20.2 million as of December 31, 2001 to $19.2 million as of December 31, 2002. Short-term marketable securities decreased from $32.7 million as of December 31, 2001 to $31.3 million as of December 31, 2002. Long-term marketable securities decreased from $22.2 million as of December 31, 2001 to $16.8 million as of December 31, 2002. Short-term and long-term marketable securities are 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 decreased from $75.1 million to $67.3 million during the quarter ended December 31, 2002.

22


     During 2002, Inforte’s cash flow from operations was positive $2.4 million and capital expenditures were $0.2 million, resulting in $2.2 million of positive free cash flow (cash flow from operation minus capital expenditures). Financing activities resulted in a cash outflow of $9.5 million, resulting from $10.5 million used for stock repurchases and $1.0 received from employees participating in stock purchase and stock option plans.

     In January 2001, Inforte announced that the board of directors approved a stock repurchase program that allows Inforte to buy up to $25 million of Inforte shares. The program was completed in August 2002. The board of directors approved an additional $5.0 million stock repurchase program on August 22, 2002. We stated at that time that we had no present plans to make additional repurchases of stock, and as of December 31, 2002, we have made no repurchases under this second program. On December 31, 2002, Inforte had 10,799,386 shares outstanding and $67.3 million in cash and marketable securities, resulting in $6.24 of cash and marketable securities per basic share. As of December 31, 2002, the public float (shares not held by executive officers and directors) totaled 5.7 million shares or 53% of total outstanding shares.

     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. and U.K. 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 that 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.

     Inforte has several operating leases that have contractual cash obligations for future payments. There are no other contractual obligations that require future cash obligations or other commitments. The table below identifies all future commitments.

   Payments Due by Period
  
Contractual Obligations
   Total
   2003
   2004
   2005
   2006
  
   (in thousands)   
Long-term debt                                    
Capital lease obligations                                    
Operating leases       $ 7,907       2,400       2,463       2,475       569   
Unconditional purchase obligations                                    
Other long-term obligations                                    
  
  
  
  
  
  
Total contractual cash obligations       $ 7,907       2,400       2,463       2,475       569   
  
  
  
  
  
  
                                                        

Critical Accounting Policies

     Revenue recognition, losses on fixed-price contracts, deferred revenue. We recognize revenue when all of the following four criteria are met: persuasive evidence exists that we have an agreement, service has been rendered, our price is fixed or determinable and collectibility is reasonably assured. We recognize net revenue from fixed-price contracts based on the ratio of hours incurred to total estimated hours. The cumulative impact of any change in estimated hours to complete is reflected in the period in which the changes become known. We recognize time-and-materials net revenue as we perform the services.

     Reimbursed expenses. In November 2001, the Financial Accounting Standards Board’s Emerging Issues Task Force issued Topic 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” stating these costs should be characterized as revenue in the income statement if billed to customers. For each quarter beginning with 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 required by the Financial Accounting Standards Board. This reclassification had no effect on current or previously reported net income (loss) per share. For presentation purposes, we show two components of total revenue: 1) revenue before reimbursements, which we call net revenue, consisting of revenue for performing consulting services; and 2) reimbursements, consisting of reimbursements we receive from clients for out-of-pocket expenses incurred. We believe net revenue is a more meaningful representation of our economic activity than total revenue since it excludes pass-through, zero-margin expense reimbursements.

23


     Allowance for doubtful accounts. 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. In establishing a client’s creditworthiness we consider whether the client has a deteriorating or poor financial condition, limited financial resources, poor or no payment history, a large relative accounts receivable balance or a non-U.S. location.

     Stock compensation. At December 31, 2002, Inforte has three stock-based employee compensation plans, which are described more fully in footnote 9 of the Consolidated Financial Statements. We account for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) related to options issued to employees. All options granted under our plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

     Bonus accruals. We have several bonus programs that are based on individual and company performance. Revenue bonuses are earned based on individual or roll up revenue credit assigned to salespeople, client executives, other senior delivery personnel and senior management. Margin bonuses are earned by all employees based on company or business unit operating income performance. In addition, senior management may award discretionary bonuses. All of these bonuses are expensed in the period in which they are earned. A corresponding accrual is included on the balance sheet in accrued expenses until the bonus is paid.

     Income Taxes We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”), which requires the recognition of deferred income taxes based upon the tax consequences of temporary differences between financial reporting and income tax reporting by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized.

     In connection with the preparation of our consolidated financial statements, we are required to estimate our income tax liability for each of the tax jurisdictions in which we operate. This process involves estimating our actual current income tax expense and assessing temporary differences resulting from differing treatment of certain income or expense items for income tax reporting and financial reporting purposes. We also recognize as deferred tax assets the expected future tax benefits of net operating loss carry forwards. In evaluating the realizability of deferred tax assets associated with net operating loss carry forwards, we consider, among other things, expected future taxable income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future tax benefits. Changes in, among other things, income tax legislation, statutory income tax rates or future taxable income levels could materially impact the our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.

Recently Issued Accounting Pronouncements

     In 2002 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated With Exit or Disposal Activities”. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between this Statement and Issue 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. Adoption of this statement is required for exit or disposal activity initiated after December 31, 2002. Any exit or disposal activity which has been completed or has already been committed to as of December 31, 2002 is accounted for under EITF 94-3. Currently, Inforte does not have any new exit or disposal activity that will occur after December 31, 2002, beyond the exit of a portion of our office space at our Chicago location, which will continue to be accounted under Issue 94-3. Thus we do not believe that the adoption of this statement at present has an effect on Inforte’s results of operations or financial position.

24


     In July 2000, the Financial Accounting Standards Board’s Emerging Issues Task Force issued abstract 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This abstract addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Under this abstract, companies which have multiple revenue generating activities are required to segment their activities into separate units of accounting for revenue recognition purposes. For example, a company that engages a client to integrate an enterprise-wide software application and manage the ongoing maintenance of that application in a production environment, would have to separate the project into phases and recognize revenue for those phases under the FASB and SEC pronouncement that is appropriate for each phase. This abstract has not been finalized by the EITF, and any further changes may affect Inforte’s reporting of revenue. However, under the current abstract, we believe that Inforte’s revenue generating activities are all similar in nature, and thus would not require separate accounting treatment.

     In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock Based Compensation—Transition and Disclosure”. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We do not intend to adopt the fair value method, thus the sections of this statement which address transition to the fair value method, will not affect the presentation of our consolidated financial statements. However, we report pro forma disclosures in accordance with SFAS 123, in the notes to the annual financial statements, and thus, these pro forma disclosures will now be provided on a quarterly basis.

25


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

     During 2002, our international revenues were over 20% of our total net revenue. We face additional risks internationally 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, as the U.S. economic slowdown has spread to the rest of the world, our ability to obtain international revenue going forward could be limited.

Interest Rate Risk

     As of December 31, 2002 Inforte’s total short-term and long-term marketable securities equaled $67.3 million. During 2002, interest income represented 89% of Inforte’s pre-tax income. As a result, fluctuations in interest rates can have a significant impact on our net income (loss) per share. We estimate that the impact on interest income from a 1 percentage point change in interest rates could change our annual net income (loss) per share by approximately $0.05 per diluted share. Our estimate is calculated using December 31, 2002 investment balances and fourth quarter 2002 diluted weighted average shares outstanding.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

     The following consolidated financial statements, and the related notes thereto, of Inforte and the Report of Independent Auditors are filed as a part of this Form 10-K.

Page
Report of Independent Auditors    27   
 
Balance Sheets    28   
 
Consolidated Statements of Operations    29   
 
Statements of Stockholders’ Equity    30   
 
Statements of Cash Flows    31   
 
Notes to the Consolidated Financial Statements    32   

26


REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Inforte Corp.

     We have audited the accompanying balance sheets of Inforte Corp. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inforte Corp. at December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
January 21, 2003

27


INFORTE CORP.
CONSOLIDATED BALANCE SHEETS

  December 31,
 
  2001
  2002
 
Assets                  
Current assets:      
   Cash and cash equivalents       $ 20,207,793    $ 19,185,820   
   Short-term marketable securities          32,669,067       31,340,299   
   Accounts receivable, less allowance for doubtful accounts of $1,150,000      
      at December 31, 2001 and $600,000 at December 31, 2002          5,388,567       4,499,960   
   Prepaid expenses and other current assets          1,323,364       1,098,219   
   Interest receivable on investment securities          685,618       496,599   
   Deferred income taxes          1,620,989       1,224,005   
  
  
  
      Total current assets          61,895,398       57,844,902   
Computers, purchased software and property, net          1,860,945       1,077,827   
Long-term marketable securities          22,240,526       16,819,270   
Deferred income taxes          462,384       328,113   
  
  
  
      Total assets       $ 86,459,253    $ 76,070,112   
  
  
  
Liabilities and stockholders’ equity      
Current liabilities:      
   Accounts payable       $ 399,933    $ 240,361   
   Income taxes payable          167,208       291,170   
   Accrued expenses          4,416,283       5,194,683   
   Accrued loss on disposal of leased property          1,107,841       1,126,229   
   Deferred revenue          8,164,685       4,486,727   
  
  
  
      Total current liabilities          14,255,950       11,339,170   
Stockholders’ equity:      
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none      
   issued and outstanding at December 31, 2001 and 2002                  
   Common stock, $0.001 par value in 2000; authorized — 50,000,000      
      shares; issued and outstanding — 11,591,564 as of December 31,      
      2001 and 10,799,386 as of December 31, 2002          11,592       10,799   
   Additional paid-in capital          77,916,384       79,192,280   
   Cost of common stock in treasury, 1,492,702 as of December 31,      
      2001 and 2,720,823 shares as of December 31, 2002          (14,502,306 )    (24,997,277 )
   Retained earnings          8,561,346       10,276,174   
   Accumulated other comprehensive income          216,287       248,966   
  
  
  
      Total stockholders’ equity          72,203,303       64,730,942   
  
  
  
      Total liabilities and stockholders’ equity       $ 86,459,253    $ 76,070,112   
  
  
  

The accompanying notes are an integral part of these consolidated financial statements.

28


INFORTE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS

   Year ended December 31,
  
   2000
   2001
   2002
  
Revenues:                        
   Revenue before reimbursements (net revenue)       $ 63,838,960    $ 47,735,606    $ 40,354,865   
   Reimbursements          10,064,187       6,259,841       5,697,018   
  
  
  
  
      Total Revenues          73,903,147       53,995,447    $ 46,051,883   
Operating expenses:      
   Project personnel and related expenses          28,182,001       26,333,782       19,934,040   
   Reimbursed expenses          10,064,187       6,259,841       5,697,018   
   Sales and marketing          8,583,729       7,073,390       6,051,680   
   Recruiting, retention and training          6,360,341       2,869,356       1,222,160   
   Management and administrative          12,830,506       13,207,051       12,883,733   
   Non-cash, non-recurring stock compensation      
      expense (see footnote 2)                1,374,000         
  
  
  
  
      Total operating expenses          66,020,764       57,117,420       45,788,631   
  
  
  
  
Operating income (loss)          7,882,383       (3,121,973 )    263,252   
Interest income, net and other          3,386,406       3,433,436       2,123,873   
  
  
  
  
Income before income taxes          11,268,789       311,463       2,387,125   
Income tax expense          4,394,829       503,134       672,297   
  
  
  
  
Net income (loss)       $ 6,873,960    $ (191,671 ) $ 1,714,828   
  
  
  
  
Net income (loss) per share:      
   Basic       $ 0.57    $ (0.02 ) $ 0.15   
  
  
  
  
   Diluted       $ 0.51    $ (0.02 ) $ 0.15   
  
  
  
  
Weighted Average common shares outstanding:      
   Basic          12,050,560       12,472,070       11,314,602   
  
  
  
  
   Diluted          13,501,447       12,472,070       11,647,477   
  
  
  
  

The accompanying notes are an integral part of these consolidated financial statements.

29


INFORTE CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

  Common Stock
  Additional         Accumulated
Other
  Total  
  Number
of Shares

  Amount
  Paid-In
Capital

  Treasury
Stock

  Retained
Earnings

    Comprehensive
Income

  Stockholders’
Equity

 
Balance at January 1, 2000          9,721,154    $ 9,721    $ 411,886    $    $ 1,879,057       $       $ 2,300,664   
   Stock option and purchase      
      plans          681,772       682       4,448,654                               4,449,336   
   Proceeds from public offering          2,300,000       2,300       66,857,951                               66,860,251   
   Compensation recognized      
      related to stock options                      50,000                               50,000   
   Tax benefit of disqualifying      
      dispositions of stock      
      options                      2,423,714                               2,423,714   
   Comprehensive income:      
      Foreign currency      
         Translation adjustments                                           9,088          9,088   
      Unrealized gain on      
         available-for-sale      
         securities                                           76,851          76,851   
      Net income                                  6,873,960                   6,873,960   
  
  
   Comprehensive Income                                                    6,959,899   
  
  
  
  
  
     
     
  
Balance at December 31, 2000          12,702,926    $ 12,703    $ 74,192,205    $    $ 8,753,017       $ 85,939       $ 83,043,864   
   Stock option and purchase      
      plans          381,340       382       1,319,317                               1,319,699   
   Compensation recognized      
      related to stock options                      1,549,000                               1,549,000   
   Tax benefit of disqualifying      
      dispositions of stock      
      options                      855,862                               855,862   
   Purchase of common stock      
      for treasury          (1,492,702 )    (1,493 )          (14,502,306 )                      (14,503,799 )
   Comprehensive income:      
      Foreign currency translation      
         adjustments                                           (26,509 )       (26,509 )
      Unrealized gain on      
         available-for-sale      
         securities                                           156,857          156,857   
      Net loss                                  (191,671 )                (191,671 )
  
  
   Comprehensive loss                                                    (61,323 )
  
  
  
  
  
     
     
  
Balance at December 31, 2001          11,591,564    $ 11,592    $ 77,916,384    $ (14,502,306 ) $ 8,561,346       $ 216,287       $ 72,203,303   
   Stock option and purchase      
      plans          435,943       435       952,616                               953,051   
   Tax benefit of disqualifying      
      dispositions of stock      
      options                      323,280                               323,280   
   Purchase of common stock      
      for treasury          (1,228,121 )    (1,228 )          (10,494,971 )                      (10,496,199 )
   Comprehensive income:      
      Foreign currency translation      
         adjustments                                           111,997          111,997   
      Unrealized loss on      
         available-for-sale      
         securities                                           (79,318 )       (79,318 )
      Net income                                  1,714,828                   1,714,828   
  
  
   Comprehensive income (loss)                                                    1,747,507   
  
  
  
  
  
     
     
  
Balance at December 31, 2002          10,799,386    $ 10,799    $ 79,192,280    $ (24,997,277 ) $ 10,276,174       $ 248,966       $ 64,730,942   
  
  
  
  
  
     
     
  

The accompanying notes are an integral part of these consolidated financial statements.

30


INFORTE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS

   Year ended December 31,
  
   2000
   2001
   2002
  
Cash flows from operating activities                        
Net income (loss)       $ 6,873,960    $ (191,671 ) $ 1,714,828   
Adjustments to reconcile net income (loss) to net cash      
   provided by operating activities:      
   Depreciation and amortization          1,225,187       1,682,601       1,456,483   
   Non-cash stock compensation          50,000       1,549,000         
   Deferred income taxes          (569,427 )    (841,887 )    531,255   
   Changes in operating assets and liabilities:      
      Accounts receivable          (2,911,545 )    3,847,228       888,607   
      Prepaid expenses and other current assets          (1,224,373 )    (103,046 )    414,164   
      Accounts payable          (769,881 )    (182,658 )    (159,572 )
      Income taxes          566,433       2,568,839       447,242   
      Accrued expenses and other          3,580,291       (2,178,342 )    796,788   
      Deferred revenue          3,703,476       (409,370 )    (3,677,958 )
 
 
 
 
Net cash provided by operating activities          10,524,121       5,740,694       2,411,837   
 
 
 
 
Cash flows from investing activities      
(Purchases of) Proceeds from marketable securities          (40,549,732 )    (14,368,642 )    6,186,245   
Purchases of property and equipment          (2,693,211 )    (387,257 )    (242,178 )
 
 
 
 
Net cash (used in) provided by investing activities          (43,242,943 )    (14,755,899 )    5,944,067   
 
 
 
 
Cash flows from financing activities      
Proceeds from issuance of common stock          66,860,251               
Stock option and purchase plans          4,449,336       1,319,699       953,051   
Purchase of common stock                (14,503,799 )    (10,496,199 )
 
 
 
 
Net cash provided (used in) by financing activities          71,309,587       (13,184,100 )    (9,543,148 )
 
 
 
 
Effect of change in exchange rates on cash          9,088       15,218       165,271   
 
 
 
 
Net increase (decrease) in cash and cash equivalents          38,599,853       (22,184,087 )    (1,021,973 )
Cash and cash equivalents, beginning of year          3,792,027       42,391,880       20,207,793   
 
 
 
 
Cash and cash equivalents, end of year       $ 42,391,880    $ 20,207,793    $ 19,185,820
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

31


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business

     Inforte is a customer and demand management consultancy that helps clients improve customer interactions, revenue forecasting and profitability. Inforte creates strategies and implements technology solutions that enhance visibility, optimize customer and channel profitability, and integrate demand information with supply and resource planning processes.

     Throughout 2002, Inforte Corp. owned a wholly owned subsidiary, Inforte Investments Inc., a Delaware corporation, which functioned as a holding company for Inforte Corp.’s investments. Inforte Investments Inc. had no operations other than holding investments of Inforte Corp. and no contractual commitments requiring future cash obligations.

     Inforte Investments Inc. has been dissolved effective December 31, 2002, and all its assets have been reverted back to the parent company, Inforte Corp.

2. Significant Accounting Policies

Cash and Cash Equivalents

     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. and U.K. banks, high-grade commercial paper and other high quality, short-term obligations of U.S. companies. At December 31, 2001 and 2002, Inforte classified its cash equivalent investments, totaling approximately $13.3 million and $13.4 million, respectively, as available-for-sale. These investments are stated at amortized costs, which approximates fair value.

Accounts receivable, net

     Accounts receivable balances are presented on the Consolidated Balance Sheets net of the allowance for doubtful accounts of $600,000 and $1,150,000 at December 31, 2002 and 2001, respectively. The reduction in the allowance for doubtful accounts of $550,000 during 2002 results in a balance that more accurately reflects the company’s exposure to loss from non-paying customers as overall business activity has declined. This change in estimate was not due to any write-off of a specific customer account.

Financial Instruments

     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. Realized gains and losses from sales of available-for-sale securities were $19,560 in 2001 and were not material in 2002. At December 31, 2001 and 2002, unrealized gains were $233,708 and $237,523, respectively, and were accounted for in other comprehensive income.

Principles of consolidation

     The consolidated financial statements include the accounts of Inforte and its fully-owned subsidiaries. All significant intercompany accounts have been eliminated.

32


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Computers, Purchased Software, and Property

     Computers, purchased software, and property are stated at cost. Inforte provides for depreciation and amortization using the straight-line method over their estimated useful lives as follows:

Asset Classification
    Estimated Useful Life
 
Office furniture       3–5 years  
Computers and equipment       2–3 years  
Purchased software       2–3 years  
Leasehold improvements       Estimated useful life or life of
lease, whichever is shorter
 
             

     Significant improvements are capitalized and depreciated. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the results of operations.

Revenue Recognition

     We recognize revenue when all of the following four criteria are met: persuasive evidence exists that we have an agreement, service has been rendered, our price is fixed or determinable and collectibility is reasonably assured. We recognize net revenue from fixed-price contracts based on the ratio of hours incurred to total estimated hours. The cumulative impact of any change in estimated hours to complete is reflected in the period in which the changes become known. We recognize time-and-materials net revenue as we perform the services.

     In November 2001, the Financial Accounting Standards Board’s Emerging Issues Task Force issued Topic 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” stating these costs should be characterized as revenue in the income statement if billed to customers. For each quarter beginning with 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 required by the Financial Accounting Standards Board. This reclassification had no effect on current or previously reported net income (loss) per share. For presentation purposes, we show two components of total revenue: 1) revenue before reimbursements, which we call net revenue, consisting of revenue for performing consulting services; and 2) reimbursements, consisting of reimbursements we receive from clients for out-of-pocket expenses incurred

Stock-Based Compensation

     Inforte accounts for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) related to options and warrants issued to employees. For options issued to employees during the years ended December 31, 2002, 2001 and 2000, no stock-based employee compensation is reflected in net income in the accompanying consolidated statements of operations, as all such options had an exercise price equal to the market value of the underlying common stock on the date of the grant. Had we applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation during the years ended December 31, 2002, 2001 and 2000, net income and net income (loss) per share would have been as follows:

33


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

   Year Ended December 31
  
   2000
   2001
   2002
  
Net income (loss), as reported       $ 6,873,960    $ (191,671 ) $ 1,714,828   
Add: Stock-based compensation expense recorded, net of      
   related tax effects                1,374,000         
 
 
 
 
Deduct: Total stock-based compensation expense      
   determined under fair value based method for all      
   awards, net of related tax effects          (3,654,963 )    (5,437,671 )    (5,659,459 )
 
 
 
 
Pro forma net income (loss)       $ 3,218,997    $ (4,255,342 ) $ (3,944,631 )
 
 
 
 
Net income (loss), per share:      
   Basic — as reported       $ 0.57    $ (0.02 ) $ 0.15   
 
 
 
 
   Basic — pro forma       $ 0.27    $ (0.34 ) $ (0.35 )
 
 
 
 
   Diluted — as reported       $ 0.51    $ (0.02 ) $ 0.15   
 
 
 
 
   Diluted — pro forma       $ 0.24    $ (0.34 ) $ (0.35 )
 
 
 
 

     There are two exceptions where compensation expense was recorded. In 2000, compensation expense for $50,000 relates to stock options that were granted to a member of the Board of Directors for consulting services. In 2001, the compensation expense related to options is $1,549,000, of which $1,374,000 was for a performance-based stock option and the remaining $175,000 was for the aforementioned stock options granted to a member of the Board of Directors for consulting services. We have listed the performance-based stock option expense as a separate line of the consolidated statements of operations due its magnitude and non-recurring nature. Note that this expense would otherwise be included entirely in the management and administrative expense line. The exercise price on all of these options grants equaled fair market value at the time of grant.

Income taxes

     Deferred income taxes are provided on all differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements based upon enacted statutory tax rates in effect in the periods when such differences are expected to reverse.

Net income (loss) per share

     Basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net earnings (loss) per share excludes potential common shares if the effect is antidilutive. Potential common shares are composed of common stock issuable upon the exercise of stock options.

Comprehensive Income

     Comprehensive income includes net income as currently reported under accounting principles generally accepted in the United States and also considers the effect of additional economic events that are not required to be recorded in determining net income but are rather reported as a separate component of stockholders’ equity. Inforte reports foreign currency translation adjustments and unrealized gains and losses on marketable securities as components of comprehensive income.

Foreign Currency Translation

     Assets and liabilities of the Company’s foreign operations are translated into United States dollars at the exchange rate in effect at the balance sheet date while income and expenses are translated at the weighted-average exchange rate for the year. Translation adjustments are classified as a separate component of stockholders’ equity.

34


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not significant during the periods presented.

Concentration of Credit Risk

     Inforte’s financial instruments consist of cash and cash equivalents, short-term and long-term marketable securities, accounts receivable and accounts payable. At December 31, 2001 and 2002, the fair value of these instruments approximated their consolidated financial statement carrying amounts.

     Inforte performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Inforte maintains an allowance for potential credit losses, and such losses have been within management’s expectations.

     For the year ended December 31, 2000, one customer accounted for 1% of revenue and 11% of accounts receivable at December 31, 2000. For the year ended December 31, 2001, two customers accounted for 9% and 1%, respectively, of revenue and 17% and 16%, respectively, of accounts receivable at December 31, 2001. For the year ended December 31, 2002, two customers accounted for 9% and 2%, respectively, of revenue and 19% and 10%, respectively, of accounts receivable at December 31, 2002.

Use of Accounting Estimates

     The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Advertising Costs

     Inforte expenses the cost of advertising as incurred. Such costs are included in sales and marketing in the consolidated statements of operations. In the years 2000, 2001 and 2002 advertising costs were immaterial.

Reclassifications

     Certain 2001 balances have been reclassified to conform to 2002 financial statement presentation.

3. Financial Instruments

     The portfolio of short-term and long-term marketable securities (including cash and cash equivalents) consisted of the following:

   Year ended December 31, 2001
Year ended December 31, 2002
  
   Amortized
Cost

   Gross
Unrealized
Gains (Losses)

   Fair Market
Value

   Amortized
Cost

   Gross
Unrealized
Gains (Losses)

   Fair Market
Value

  
Cash       $ 6,860,511    $    $ 6,860,511    $ 5,785,820    $    $ 5,785,820   
Commercial paper          8,992,282             8,992,282                              
Municipal notes/bonds          23,647,797       124,445       23,772,242       16,400,000       8,355       16,408,355   
Corporate bonds          14,712,542       87,349       14,799,891       17,921,103       161,041       18,082,144   
Corporate auction preferreds          14,800,925       (925 )    14,800,000       17,000,000             17,000,000   
U.S. government agencies          5,869,622       22,838       5,892,460       10,000,943       68,127       10,069,070   
  
  
  
  
  
  
  
         $ 74,883,679    $ 233,707    $ 75,117,386    $ 67,107,866    $ 237,523    $ 67,345,389   
  
  
  
  
  
  
  

35


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Financial Instruments (Continued)

     Inforte considers all marketable securities with maturities of one year or less as of December 31, 2001 or December 31, 2002 to be short term. Long-term marketable securities consist of marketable securities with remaining maturities of greater than twelve months.

     Contractual maturities of investments in debt securities (excluding commercial paper) at December 31, 2001 and 2002:

   Year ended December 31, 2001
Year ended December 31, 2002
   Amortized Cost
   Fair Market
Value

   Amortized Cost
   Fair Market
Value

  
Less than one year       $ 25,147,991    $ 25,269,067    $ 28,327,991    $ 28,440,299   
Due in 1—2 years          13,212,348       13,303,066       5,993,112       6,050,200   
 
 
 
 
 
Investment in debt securities       $ 38,360,339    $ 38,572,133    $ 34,321,103    $ 34,490,499   
 
 
 
 
 

4. Accrued loss on disposal of leased property

     During 2001 Inforte took major steps to reduce its costs to better align its overall cost structure and organization with anticipated demand for its services. These steps included consolidating office space at the Chicago location where Inforte had multiple contractual rental commitments. Estimated costs for the consolidation of Chicago facilities consist of contractual rental commitments for office space being vacated and unamortized leasehold improvements related to this space less estimated sub-lease income. The total reduction of office space resulting from this consolidations of our Chicago office space was approximately 17,770 square feet, all of which were vacated as of December 31, 2001. Total charges related to this reduction of office space in 2001 and 2002 were $1,107,841 and $605,062, respectively. These charges were recorded as a component of Management and Administrative expenses in the 2001 and 2002 Consolidated Statement of Operations. At December 31, 2001 and 2002 the Company recorded $1,107,841 and $1,126,229 as Accrued Expenses on the Consolidated Balance Sheet. If we vacate additional space, if future sub-lease income is less than estimated, or if we are unable to sub-lease our vacated space, additional charges in future periods will be necessary.

5. Computers, Purchased Software, and Property

     Computers, purchased software and property at December 31 consist of the following:

   2001
   2002
  
Office furniture       $ 328,126    $ 294,737   
Computers and equipment          1,816,031       1,057,104   
Leasehold improvements          796,524       803,520   
Purchased software          835,951       701,470   
  
  
  
            3,776,632       2,856,831   
Less: Accumulated depreciation and amortization          1,915,687       1,779,004   
  
  
  
         $ 1,860,945    $ 1,077,827   
  
  
  

36


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Income Taxes and Distribution to Shareholders

     Federal taxes paid were $3,470,215 in 2000 and there were no federal taxes paid in 2001 and 2002. State income taxes paid were $974,066 and $61,372 in 2000 and 2001, respectively, and there were no state taxes paid in 2002.

     Income tax expense (credit) for the years ended December 31, 2000, 2001 and 2002 consists of the following:

  2000
  2001
  2002
 
Current:                        
   Federal       $ 4,348,692    $ 1,134,400    $ 169,062   
   State          615,564       65,431       21,979   
   Foreign                100,000       (50,000 )
 
 
 
 
      Total current provision          4,964,256       1,299,831       141,041   
Deferred:      
   Federal          (498,819 )    (773,465 )    470,138   
   State          (70,608 )    (23,232 )    61,118   
 
 
 
 
      Total deferred provision (credit)          (569,427 )    (796,697 )    531,256   
 
 
 
 
      Total provision for income taxes       $ 4,394,829    $ 503,134    $ 672,297   
 
 
 
 

     The reconciliation of income taxes computed using the federal statutory rate of 35% for the years ended December 31, 2000, 2001 and 2002 is as follows:

  2000
  2001
  2002
 
  (in thousands)  
Federal statutory income tax       $ 3,944    $ 110    $ 834   
State income tax, net of federal tax benefit          763       122       109   
Nondeductible expenses          330       165       59   
Tax exempt and tax advantaged interest income          (710 )    (578 )    (280 )
Non-deductible stock compensation expense                551         
Effect of international taxes                100       (50 )
Other          67       33         
 
 
 
 
         $ 4,394    $ 503    $ 672   
 
 
 
 

     The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 2001 and 2002 are as follows:

  December 31,
 
  2001
  2002
 
Deferred income tax assets:                  
   Allowance for doubtful accounts       $ 459,425    $ 237,300   
   Accrued loss on lease          442,582       445,424   
   Book over tax depreciation          242,514       126,447   
   Accrued bonuses, vacation and health insurance costs          510,315       294,237   
   Other          208,667       247,044   
   Deferred rent          219,870       201,665   
 
 
 
      Total deferred tax assets       $ 2,083,373    $ 1,552,117   
 
 
 

37


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Net Income (Loss) per Share

     The following table sets forth the computation of basic and diluted net income (loss) per share.

  Year ended December 31,
 
  2000
  2001
  2002
 
Numerator                  
Numerator for basic and diluted net income (loss) per    
   common share:    
   Net income (loss)     $ 6,873,960   $ (191,671 ) $ 1,714,828  
 
 
 
 
Denominator    
Denominator for basic earnings per common share:    
   Weighted-average shares       12,050,560     12,472,070     11,314,602  
 
 
 
 
Effect of dilutive securities:    
   Employee stock options       1,450,887         332,875  
 
 
 
 
Denominator for diluted earnings per common share:    
   Adjusted weighted-average shares       13,501,447     12,472,070     11,647,477  
 
 
 
 
Weighted-average anti-dilutive stock options       217,993     1,304,652     1,642,286  
 
 
 
 

     The following table sets forth common stock equivalents that are not included in the diluted net income per share calculation above because to do so would be antidilutive for the periods indicated:

   Year ended December 31,
  
   2000
   2001
   2002
  
Weighted average effect of common stock                        
   equivalents:      
   Employee stock options                802,244         
 
 
 
 

8. Related Party Transactions

     Transactions with related parties are entered into only upon approval by a majority of the independent directors of Inforte and only with terms comparable to those that would be available from unaffiliated parties.

     In October 2000, Inforte granted 62,500 options to a non-employee member of the Board of Directors, in exchange for consulting services. The options were granted at the fair market value of the Inforte stock on the grant date and vest as services are completed. The options expire at the end of ten years. These options were accounted for under SFAS 123, and the total expense to be recorded over the service period equals $400,000, the estimated fair value of the services provided.

38


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Stockholders’ Equity

Stock Option and Incentive Plans

     The 1995 Incentive Stock Option Plan (the “1995 Plan”) provides for the issuance of incentive stock options and nonqualified stock options to officers and other key employees of Inforte. Inforte has reserved an aggregate of 4,900,000 shares for issuance under the 1995 Plan, of which 365,000 were available for grant as of December 31, 2002. As of December 31, 2002, Inforte does not intend to issue any additional options under the 1995 Plan.

     On December 31, 1997, the stockholders approved the 1997 Incentive Compensation Plan (the “1997 Plan”), which permits the grant of stock options and other stock awards to employees and directors of Inforte.

     On December 1, 1999, the stockholders approved the Amended and Restated Inforte Corp. 1997 Incentive Compensation Plan. Inforte has reserved an aggregate of 4,000,000 shares of common stock for issuance through the amended 1997 Plan, plus annual increases beginning in 2001 equal to the lesser of: (1) 1,000,000 shares, (2) 5% of the total shares of common stock outstanding or (3) a number determined by the Board of Directors. Of the shares of common stock available under this 1997 Plan, 1,593,662 were available for grant as of December 31, 2002. The 1997 Plan authorizes the grant of both incentive and nonqualified stock options, and further authorizes the grant of stock appreciation rights independently of or with respect to options granted or outstanding. Stock options generally have 10-year terms and vest in accordance with provisions determined by the Board of Directors. A restricted stock program, performance program and bonus shares program have also been established under the 1997 Plan. Awards under the restricted stock program and performance program are earned over a period of time upon the achievement of certain criteria. Restricted share grants may not be sold or otherwise disposed of until the restrictions lapse. Performance shares are payable in cash, common stock, or a combination thereof when earned. Bonus shares allow participants to elect to receive shares of common stock in lieu of a portion or all of cash bonuses paid by Inforte. Stock appreciation rights and restricted stock have not been granted as of December 31, 2002.

     A combined summary of stock option information from the 1995 Plan and the 1997 Plan follows:

   Number
of Shares

   Weighted Average
Exercise Price

  
Outstanding on December 31, 1999          1,929,046      $ 2.76     
Granted          1,295,980         30.32     
Exercised          (501,367 )      1.13     
Canceled          (132,222 )      18.12     
 
 
 
Outstanding on December 31, 2000          2,591,437         16.07     
Granted          1,003,418         12.22     
Exercised          (267,339 )      1.82     
Canceled          (453,943 )      17.66     
 
 
 
Outstanding on December 31, 2001          2,873,573         15.80     
Granted          1,036,326         9.84     
Exercised          (391,938 )      1.68     
Canceled          (728,697 )      22.50     
 
 
 
Outstanding on December 31, 2002          2,789,264      $ 13.82     
 
 
 
Exercisable at December 31, 2002          950,429      $ 15.77     
Weighted average fair value of options granted during      
   twelve months ended December 31, 2002                  $ 5.36     

39


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Stockholders’ Equity (Continued)

   Year ended December 31,
  
   2000
   2001
   2002
  
Shares available for grant under 1995 Plan and 1997 Plan          1,686,713       1,601,042       1,958,662   
 
 
 
 

   Options Outstanding
Options Exercisable
Range of Exercise Prices
  Number of
Options

   Weighted
Average
Remaining
Life
(in years)

   Weighted
Average
Exercise
Price

   Exercisable
Options at
12/31/02

   Weighted
Average
Exercise
Price

  
$0.05-$3.50          153,223       5.9    $ 1.18       115,281    $ 0.97   
$3.51-$7.75          384,338       7.4       7.01       195,830       7.00   
$7.76-$11.00          832,524       9.4       9.70       139,805       10.25   
$11.01-$13.97          963,999       8.6       12.54       250,261       12.80   
$13.98-$32.00          264,702       7.3       30.16       136,700       30.65   
$32.01-$71.81          190,478       7.4       39.52       112,552       41.55   
 
 
 
 
 
 
Total          2,789,264       8.3    $ 13.82       950,429    $ 15.77   
                                                        

     In December 1999, the Company adopted the Employee Stock Purchase Plan (the “Purchase Plan”) reserving 200,000 shares for issuance, plus annual increases beginning in 2001 equal to the lesser of (1) 400,000 shares, (2) 2% of the total shares of common stock outstanding or (3) a number determined by the Board of Directors. The Purchase Plan became effective upon the completion of the Company’s initial public offering, in February 2000. The Purchase Plan permits eligible employees to purchase common stock, through payroll deductions at a price equal to 85% of the fair market value of the common stock at either the beginning or the end of each offering period, whichever is lower. For the years ended December 31, 2000, 2001 and 2002, 180,099, 144,000 and 44,001 shares, respectively, were purchased under the Purchase Plan with weighted average prices of $21.57, $7.31 and $6.70 per share, respectively. In December of 2002 the Purchase Plan was modified to establish the purchase price at 92% of fair market value at the date of purchase for any new enrollees of the Purchase Plan on or after December 31, 2002.

     To date, Inforte has granted options with exercise prices equal to market value on the grant date.

     In 2001 Inforte incurred a non-cash, non-recurring stock compensation expense of $1,374,000 for a performance-based option with an exercise price equal to fair market value at the time of grant. As the entire intrinsic value of this option was recorded in the fourth quarter of 2001, there will be no future expense from this option. Excluding this non-cash expense, which had no effect on income tax expense, net income would have been $1,182,329 for 2001.

     The fair value of stock options used to compute pro forma net income and pro forma net income per share is the estimated present value at grant date using the Black Scholes option pricing model for option grants issued on or after February 17, 2000 and the minimum value method on option grants issued prior to February 17, 2000. The option pricing models assumptions were:

  2000
  2001
  2002
Dividend yield          0%          0%          0%
Volatility        80%        80%        65%
Risk-free interest rate    5.06%–6.36%    3.75%–4.89%    2.49%–4.66%
Weighted-average expected option life (in years)    4.0    4.0    4.0

     Pro forma net income and net income (loss) per share assuming we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation during the years ended December 31, 2002, 2001 and 2000, are disclosed in Note 2.

40


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Lease Commitments

     Inforte leases certain office facilities under noncancelable operating leases that expire at various dates through 2006.

     At December 31, 2002, Inforte was obligated for future minimum lease payments under operating leases that have initial or remaining non-cancelable terms in excess of one year, as follows:

2003      $ 2,400,400  
2004        2,462,532  
2005        2,475,099  
2006        568,795  
 
 
Total minimum lease payments     $ 7,906,826  
 
 

     Rent expense for operating leases was $1,706,267, $3,362,463 and $2,679,019 for the years ended December 31, 2000, 2001 and 2002, respectively.

11. Benefit Plan

     Inforte sponsors a 401(k) savings plan covering all employees. Inforte has not made any matching or discretionary contributions to the plan. We do not consider administrative costs during 2000, 2001 and 2002 related to this plan to be material.

12. Common Stock in Treasury

     During 2002, Inforte repurchased 1,228,121 shares of its common stock for $10.5 million at an average price of $8.55. In total, during 2001 and 2002, Inforte repurchased 2,720,823 shares of its common stock for $25.0 million at an average price of $9.19. Inforte’s Board Of Directors approved a $25.0 million stock repurchase program on January 24, 2001 and as of December 31, 2002 the entire amount authorized had been repurchased. The Board approved an additional $5.0 million stock repurchase program on August 22, 2002, although we stated at that time that we had no present plans to make additional repurchases of stock. The entire $5.0 million remains authorized for repurchase as of December 31, 2002.

41


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Quarterly Financial Results (unaudited)

     The following tables set forth certain unaudited quarterly results of operations of Inforte for 2001 and 2002. The quarterly operating results are not necessarily indicative of future results of operations.

     The net loss of $1,354,914 in the fourth quarter 2001 resulted from a non-cash, non-recurring stock compensation expense of $1,374,000 for a performance-based option with an exercise price equal to fair market value at the time of the grant. This option did not have any expense associated with it in the first three quarters of 2001, nor will there be any expense from this option after fourth quarter 2001. Excluding this non-cash expense, which had no effect on income tax expense, net income would have been $19,086 for the fourth quarter 2001 and $1,182,329 for the full year 2001.

   Three Months Ended (unaudited)
  
   Mar. 31,
2001

   Jun. 30,
2001

   Sep. 30,
2001

   Dec. 31,
2001

  
Revenues:                              
   Revenue before reimbursements (net      
      revenue)       $ 14,051,153    $ 12,537,832    $ 10,600,439    $ 10,546,182   
   Reimbursements          1,739,092       1,492,821       1,526,846       1,501,082   
  
  
  
  
  
Total revenues          15,790,245       14,030,653       12,127,285       12,047,264   
Operating expenses:      
   Project personnel and related expenses          7,396,824       7,378,815       5,876,560       5,681,583   
   Reimbursed expenses          1,739,092       1,492,821       1,526,846       1,501,082   
   Sales and marketing          1,858,591       2,129,456       1,804,975       1,280,368   
   Recruiting, retention and training          924,081       709,957       596,767       638,551   
   Management and administrative          3,447,453       3,098,569       3,083,137       3,577,892   
   Non-cash, non-recurring, stock      
      compensation expense                            1,374,000   
  
  
  
  
  
Total operating expenses          15,366,041       14,809,618       12,888,285       14,053,476   
  
  
  
  
  
Operating income (loss)          424,204       (778,965 )    (761,000 )    (2,006,212 )
Interest income, net, and other          1,013,331       898,435       870,372       651,298   
  
  
  
  
  
Income before income taxes          1,437,535       119,470       109,372       (1,354,914 )
Income tax expense          503,134                     
  
  
  
  
  
Net income (loss)       $ 934,401    $ 119,470    $ 109,372    $ (1,354,914 )
  
  
  
  
  
Net income (loss) per share:      
   Diluted(1)       $ 0.07    $ 0.01    $ 0.01    $ (0.12 )
  
  
  
  
  
Weighted-average common shares outstanding:      
   Diluted          13,699,582       13,632,087       13,521,401       11,604,596   
  
  
  
  
  

42


INFORTE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Quarterly Financial Results (unaudited) (Continued)

   Three Months Ended (unaudited)
  
   Mar. 31,
2002

   Jun. 30,
2002

   Sep. 30,
2002

   Dec. 31,
2002

  
Revenues:                              
   Revenue before reimbursements (net      
      revenue)       $ 9,434,014    $ 11,371,795    $ 9,606,752    $ 9,942,304   
   Reimbursements          1,467,118       1,434,779       1,341,663       1,453,458   
  
  
  
  
  
Total revenues          10,901,132       12,806,574       10,948,415       11,395,762   
Operating expenses:      
   Project personnel and related expenses          5,001,725       5,328,686       4,546,313       5,057,316   
   Reimbursed expenses          1,467,118       1,434,779       1,341,663       1,453,458   
   Sales and marketing          1,517,606       1,811,746       1,620,580       1,101,748   
   Recruiting, retention and training          374,448       356,985       294,420       196,307   
   Management and administrative          3,004,236       3,968,641       2,910,575       3,000,281   
  
  
  
  
  
Total operating expenses          11,365,133       12,900,837       10,713,551       10,809,110   
  
  
  
  
  
Operating income (loss)          (464,001 )    (94,263 )    234,864       586,652   
Interest income, net, and other          564,329       567,828       534,867       456,849   
  
  
  
  
  
Income before income taxes          100,328       473,565       769,731       1,043,501   
Income tax expense (benefit)          (35,250 )    117,493       246,314       343,740   
  
  
  
  
  
Net income       $ 135,578    $ 356,072    $ 523,417    $ 699,761   
  
  
  
  
  
Net income (loss) per share      
   Diluted       $ 0.01    $ 0.03    $ 0.05    $ 0.06   
  
  
  
  
  
Weighted-average common shares outstanding:      
   Diluted          12,213,343       12,132,150       11,297,985       10,918,968   
  
  
  
  
  


  (1)   Sum of quarters does not equal year due to differences in average shares outstanding.

14. Segment Reporting

     Inforte engages in business activities in one operating segment, which provides consulting services on both a fixed-price, fixed-time frame and a time-and-materials basis. Inforte’s services are delivered to clients in North America and Europe, and Inforte’s long-lived assets are located in North America and Europe. Domestic and foreign operating revenues are based on the location of customers. Long-lived assets consist of property, plant and equipment, software, furniture and fixtures and leasehold improvements (net of accumulated depreciation). During the year ended December 31, 2002, Inforte’s European operations had $8,481,492 of revenues and $9,620 of long-lived assets at December 31, 2002. During the year ended December 31, 2001, this segment had $5,022,922 of revenues and $27,782 of long-lived assets at December 31, 2001. In 2000 operating revenues and long-lived assets related to foreign operations were immaterial.

15. Changes in Securities and Use of Proceeds

     On February 28, 2000, Inforte closed its offering of an aggregate of 2,300,000 shares of its Common Stock at an offering price of $32.00 per share. Net proceeds to Inforte, of $66,860,251 were invested in cash and marketable securities for general corporate use.

43


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information concerning Inforte’s directors is incorporated herein by reference to Inforte’s definitive proxy statement with respect to its 2003 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K. Information concerning Inforte’s executive officers is included in Part I of this report under the caption “Executive Officers of the Registrant.”

ITEM 11. EXECUTIVE COMPENSATION

     Information concerning executive compensation is incorporated herein by reference to Inforte’s definitive proxy statement with respect to its 2003 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information concerning ownership of Inforte’s stock is incorporated herein by reference to Inforte’s definitive proxy statement with respect to its 2003 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information concerning certain relationships and related transactions involving Inforte’s directors and executive officers is incorporated herein by reference to Inforte’s definitive proxy statement with respect to its 2003 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 14. CONTROLS AND PROCEEDURES

     Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.

Changes in Internal Controls

     No significant changes were made in the Corporation’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

44


PART IV

ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Financial Statements

     Inforte’s financial statements included in Item 8 of this report are listed in the index preceding the financial statements.

Statement Schedules and Reports on Form 8-K
Financial Statement Schedules

     (i) Schedule II -- Valuation and Qualifying Accounts.

Exhibits

3.1   Certificate of Incorporation. Incorporated herein by reference to Exhibit 3 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

3.3   Amended and Restated Bylaws dated January 30, 2003.

H 10.3   Amended and Restated 1995 Incentive Stock Option Plan. Incorporated herein by reference to Exhibit 10.3 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

H 10.4   Amended and Restated 1997 Incentive Compensation Plan. Incorporated herein by reference to Exhibit 10.4 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

H 10.5   Form of Stock Option Agreement. Incorporated herein by reference to Exhibit 10.5 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

10.6   Amended and Restated 1999 Employee Stock Purchase Plan. Incorporated herein by reference to Exhibit 10.6 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

H 10.7   Form of Director/Officer Indemnification Agreement. Incorporated herein by reference to Exhibit 10.7 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

23.1   Consent of Independent Auditors.

99.1   Section 906 certification of the Chief Executive Officer

99.2   Section 906 certification of the Chief Financial Officer

     Management or compensatory plan or arrangement required to be filed pursuant to item 14(c) of Form 10-K.

Reports on Form 8-K

     Form 8-K filed November 5, 2002 (Item 9 Regulation FD Disclosure for reporting change in directors)

45


SIGNATURE PAGE

     Pursuant to the requirements of Section 13 or 15(d) 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 on March 7, 2003.

INFORTE CORP.

By /s/ Philip S. Bligh
————————————————————————
Philip S. Bligh, Chief Executive Officer & Chairman

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature   Title   Date
 
 
/s/ Philip S. Bligh
Philip S. Bligh
  Chief Executive Officer & Chairman   March 7, 2003
 
 
/s/ Stephen C. P. Mack
Stephen C. P. Mack
  Chief Operating Officer, President & Director   March 7, 2003
 
 
/s/ Nick Padgett
Nick Padgett
  Chief Financial Officer & Director   March 7, 2003
 
 
/s/ Harvey H. Bundy, III
Harvey H. Bundy, III
  Director   March 7, 2003
 
 
/s/ Ray C. Kurzweil
Ray C. Kurzweil
  Director   March 7, 2003
 
 
/s/ Michael E. Porter
Michael E. Porter
  Director   March 7, 2003
 
 
/s/ Al Ries
Al Ries
  Director   March 7, 2003
 
 
/s/ Steven Getto
Steven Getto
  Controller   March 7, 2003

46


CERTIFICATIONS

I, Philip Bligh, certify that:

  1.   I have reviewed this annual report on Form 10-K of Inforte Corp.;

  2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

  3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

  (a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

  (b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

  (c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

  (a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

  (b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

  6.   The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



March 7, 2003
  By:   /s/ Philip S. Bligh
Philip S. Bligh,
Chief Executive Officer
 

47


I, Nick Padgett, certify that:

  1.   I have reviewed this annual report on Form 10-K of Inforte Corp.;

  2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

  3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

  (a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

  (b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

  (c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

  (a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

  (b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

  6.   The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



March 7, 2003
  By:   /s/ Nick Padgett
Nick Padgett,
Chief Financial Officer
 

48


SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

INFORTE CORP.

   Additions
        
Description
   Balance at
Beginning
of Period

   Charged
to Costs
and
Expenses

   Charged
to Other
Accounts

   Deductions
   Balance at
End of
Period

  
Year ended December 31, 2000                                                   
   Reserves and allowances deducted from asset      
      accounts      
   Allowance for doubtful accounts       $ 600,000    $ 550,000    $    $    $ 1,150,000   
Year ended December 31, 2001      
   Reserves and allowances deducted from asset      
      accounts      
   Allowance for doubtful accounts       $ 1,150,000    $    $    $    $ 1,150,000   
Year ended December 31, 2002      
   Reserves and allowances deducted from asset      
      accounts      
   Allowance for doubtful accounts       $ 1,150,000    $    $    $ 550,000 * $ 600,000   
                                                        

*   Reduction in the allowance for doubtful accounts during 2002 due to an overall reduction in business activity. Recorded as a reduction in project personnel and related expenses during 2002. This reduction was not due to any write-off of a specific customer account.

49


EXHIBIT INDEX

3.1   Certificate of Incorporation. Incorporated herein by reference to Exhibit 3 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

3.3   Amended and Restated Bylaws dated January 30, 2003.

H 10.3   Amended and Restated 1995 Incentive Stock Option Plan. Incorporated herein by reference to Exhibit 10.3 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

H 10.4   Amended and Restated 1997 Incentive Compensation Plan. Incorporated herein by reference to Exhibit 10.4 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

H 10.5   Form of Stock Option Agreement. Incorporated herein by reference to Exhibit 10.5 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

10.6   Amended and Restated 1999 Employee Stock Purchase Plan. Incorporated herein by reference to Exhibit 10.6 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

H 10.7   Form of Director/Officer Indemnification Agreement. Incorporated herein by reference to Exhibit 10.7 to Inforte’s Form S-1, as amended, Registration No. 333-92325.

23.1   Consent of Independent Auditors.

99.1   Section 906 certification of the Chief Executive Officer

99.2   Section 906 certification of the Chief Financial Officer

     Management or compensatory plan or arrangement required to be filed pursuant to item 14(c) of Form 10-K.