UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 000-29239
INFORTE CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-3909334
(State of incorporation) (IRS Employer Identification No.)
150 North Michigan Avenue, Suite 3400, Chicago, Illinois 60601
(Address of principal executive offices, including ZIP code)
(312) 540-0900
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) Yes X No ___, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
The number of shares outstanding of the Registrant's Common Stock as of March
31, 2001 was 12,734,028.
INFORTE CORP.
INDEX
Page No.
-------
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance sheets - December 31, 2000 and
March 31, 2001 1
Statements of income - Three months ended
March 31, 2000 and 2001 2
Statements of cash flows - Three months ended
March 31, 2000 and 2001 3
Notes to financial statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-13
Item 3. Qualitative and Quantitative Disclosure About Market Risk 13
PART II. Other Information
Item 1 Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3 Defaults of Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INFORTE CORP.
BALANCE SHEETS
DECEMBER 31, MARCH 31,
2000 2001
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 42,391,880 $44,122,977
Short-term marketable securities 26,220,945 34,684,374
Accounts receivable 10,385,795 7,684,129
Allowance for doubtful accounts (1,150,000) (1,150,000)
---------- ----------
Accounts receivable, net 9,235,795 6,534,129
Prepaid expenses and other current assets 1,905,936 2,171,259
Income taxes recoverable 1,545,769 -
Deferred income taxes 876,581 908,537
---------- ----------
Total current assets 82,176,906 88,421,276
Computers, purchased software and property 4,535,670 4,599,496
Less accumulated depreciation and amortization 1,558,503 1,830,949
--------- ----------
Computers, purchased software and property, net 2,977,167 2,768,547
Long-term marketable securities 14,383,998 5,292,945
Deferred income taxes 364,905 503,820
--------- ----------
Total assets $99,902,976 96,986,588
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 582,591 $ 534,134
Income taxes payable - 454,451
Accrued expenses 7,702,466 4,600,253
Deferred revenue 8,574,055 7,316,310
---------- ----------
Total current liabilities 16,859,112 12,905,148
Stockholders' equity:
Common stock, $0.001 par value
authorized- 50,000,000 shares;
issued and outstanding- 12,702,926 as of December 31, 2000
12,734,028 as of March 31, 2001 12,703 12,734
Additional paid-in capital 74,192,205 74,717,495
Treasury stock (58,500 shares as of March 31, 2001) - (472,406)
Retained earnings 8,753,017 9,687,418
Accumulated other comprehensive income 85,939 136,199
---------- -----------
Total stockholders' equity 83,043,864 84,081,440
---------- -----------
Total liabilities and stockholders' equity $ 99,902,976 $96,986,588
========== ==========
See notes to financial statements.
3
INFORTE CORP.
STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 2001
---------- ----------
(Unaudited) (Unaudited)
Revenues $12,290,000 $14,051,153
Operating expenses:
Project personnel and related expenses 5,408,772 7,396,824
Sales and marketing 1,561,941 1,858,591
Recruiting, retention and training 1,406,296 924,081
Management and administrative 2,443,543 3,447,453
--------- ----------
Total operating expenses 10,820,552 13,626,949
Operating income 1,469,448 424,204
Interest income, net and other 340,501 1,013,331
--------- ----------
Income before income taxes 1,809,949 1,437,535
Income tax expense 778,344 503,134
--------- ----------
Net income $1,031,605 $ 934,401
========= ==========
Earnings per share:
-Basic $0.10 $0.07
-Diluted $0.08 $0.07
Weighted average common shares outstanding:
-Basic 10,767,891 12,719,821
-Diluted 12,431,917 13,699,582
See notes to financial statements
4
INFORTE CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 2001
---------- ----------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income $ 1,031,605 $ 934,401
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 229,612 431,561
Non-cash compensation - 75,000
Deferred income taxes (36,393) (170,871)
Changes in operating assets and liabilities
Accounts receivable (3,892,296) 2,701,666
Prepaid expenses and other current assets (560,699) (265,323)
Accounts payable 724,466 (48,457)
Income taxes 527,797 2,000,220
Accrued expenses and other (1,515) (3,102,213)
Deferred revenue 3,209,764 (1,257,745)
--------- ----------
Net cash provided by operating activities 1,232,341 1,298,239
Cash flows from operating activities
(Increase)/Decrease in marketable
securities (16,542,418) 652,415
Purchases of property and equipment (496,573) (201,007)
---------- ---------
Net cash provided by (used in) investing
activities (17,038,991) 451,408
Cash flows from financing activities
Proceeds from issuance of common stock 66,860,251 -
Stock option and purchase plans 667,675 450,321
Purchase of treasury stock - (472,406)
---------- ---------
Net cash provided by (used in) financing
activities 67,527,926 (22,085)
---------- ----------
Effect of changes in exchange rates on cash - 3,535
Net increase in cash and cash equivalents 51,721,276 1,731,097
Cash and cash equivalents, beg. of period 3,792,027 42,391,880
---------- ----------
Cash and cash equivalents, end of period $55,513,303 $44,122,977
========== ==========
See notes to financial statements
5
Inforte Corp.
Notes to financial statements
(Unaudited)
March 31, 2001
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Inforte
Corp. ("Inforte") pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 2000 included in Inforte's annual report Form 10K (File No.
333-92325). The balance sheet at December 31, 2000 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying financial statements reflect
all adjustments (consisting solely of normal, recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of results for
the interim periods presented. The results of operations for the three month
periods ended March 31, 2001 are not necessarily indicative of the results to be
expected for the full fiscal year. Certain previously reported amounts have been
reclassified to conform with current presentation format.
(2) NET INCOME PER COMMON SHARE
Inforte computes basic earnings per share by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per common share
is computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents then outstanding.
Three Months Ended March 31,
--------------------------
2000 2001
--------------------------
(unaudited)
Basic weighted average shares 10,767,891 12,719,821
Effect of dilutive stock options 1,664,026 979,761
--------------------------
Diluted common and common
equivalent shares 12,431,917 13,699,582
==========================
(3) SHORT-TERM AND LONG-TERM MARKETABLE SECURITIES
Inforte considers all investments with maturities of one year or less from the
respective balance sheet dates to be short-term marketable securities and all
investments with maturities greater than one year from the balance sheet dates
to be long-term marketable securities. In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," Inforte has categorized its marketable securities as
"available-for-sale."
(4) INCOME TAXES
Inforte's effective tax rate for the March 2001 quarter was 35% compared to 43%
for the March 2000 quarter. The lower rate in 2001 is due to the higher
percentage of pretax income in 2001 resulting from interest income versus
operating income. Generally, a significant portion of Inforte's marketable
securities are tax advantaged and reduce the effective tax rate for interest,
resulting in interest income having a lower tax rate than operating income. The
tax rate for the remainder of 2001 may decline from the March 2001 35% rate if
interest income continues to provide the majority of taxable income and we
continue to invest significantly in tax-advantaged investments.
(5) STOCKHOLDERS' EQUITY
During the March 2001 quarter, Inforte repurchased 58,500 shares of stock for a
total cost of $472,406.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with our financial
statements, together with the notes to those statements, included elsewhere in
this Form 10-Q. The following discussion contains forward-looking statements
that involve risks, uncertainties, and assumptions such as statements of our
plans, objectives, expectations and intentions. Our actual results may differ
materially from those discussed in these forward-looking statements because of
the risks and uncertainties inherent in future events that include, but are not
limited to, those identified under the caption "Risk Factors" appearing in this
10Q as well as factors discussed elsewhere in this Form 10-Q. Actual results may
differ from forward-looking results for a number of reasons, including but not
limited to, Inforte's ability to: (i) effectively forecast demand and profitably
match our resources with the demand; (ii) attract and retain clients and satisfy
our clients' expectations; (iii) recruit and retain qualified professionals;
(iv) reliably forecast demand when information technology services spending is
less certain; (v) accurately estimate the time and resources necessary for the
delivery of our services; and (vi) build and maintain marketing relationships
with leading software vendors. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. All forward-looking statements included in this document are made as
of the date hereof, based on information available to Inforte on the date
thereof, and Inforte assumes no obligation to update any forward-looking
statements.
Overview
Strategic technology consultancy Inforte Corp. helps create long-term return on
investment and sustainable advantages for clients by capitalizing on the
convergence of business strategy and technology across the value chain. Inforte
delivers strategic technology consulting, comprehensive demand chain management
solutions, plus solutions that optimize supply chain integration. Inforte's
client advocacy approach and rigorous delivery methodologies have garnered the
trust of Global 2000 clients, produced industry-leading project-efficiency
metrics and helped Inforte earn references from 100 percent of its clients.
Since our inception in September 1993, we have followed an organic growth model
with all growth generated internally rather than through mergers or
acquisitions. As of March 31, 2001, we employed 428 people in our offices in
Atlanta, Chicago, Dallas, London, Los Angeles, New York and San Francisco.
Reflecting the importance we place on employee motivation and ownership, each of
our employees is a stock or option holder.
The majority of our revenues are from professional services performed on a
fixed-price basis; however, we also perform services on a time-and-materials
basis. Typically, the first portion of an engagement involves a strategy project
or a discovery phase lasting 30 to 60 days, which we perform on a fixed-price
basis. This work enables us to determine with our clients the scope of
successive phases for design and implementation, which in total generally last
three to nine months, and to decide whether we will perform these additional
phases for a fixed price or on a time-and-materials basis. Whether we use fixed
pricing or time-and-material pricing depends upon our assessment of the
project's risk, and how precisely our clients are able to define the scope of
activities they wish us to perform. Fixed prices are based on estimates from
senior personnel in our consulting organization who project the length of the
engagement, the number of people required to complete the engagement, and the
skill level and billing rates of those people. We then adjust the fixed price
based on various qualitative risk factors such as the aggressiveness of the
delivery deadline and the technical complexity of the solution.
We ask clients to pay 25%-50% of our fixed-price projects in advance to enable
us to secure a project team in a timeframe that is responsive to the client's
needs. We bill the remainder in advance of the work performed based upon a
predetermined billing schedule over the course of the engagement. We do not
perform work under milestone-based billing schedules. We recognize revenues from
fixed-price contracts on the percentage-of-completion method, based on the ratio
of costs incurred to total estimated costs. Amounts billed before we perform
7
services are classified as deferred revenue. We bill time-and-materials projects
twice per month on the 15th and last day of each month. We recognize
time-and-materials revenues as we perform the services. We do not include in our
revenues the reimbursable expenses we charge to our clients, on either
fixed-price or time-and-material projects.
Our revenues and earnings may fluctuate from quarter to quarter based on factors
within and outside of our control. These include:
o the variability in market demand for information technology
professional services;
o the growth rate of the U.S. economy and the impact that relative
economic strength or weakness has on information technology services
spending;
o the seasonal spending by our clients
o the length of the sales cycle associated with our service offerings;
o the number, size, and scope of our projects;
o the efficiency with which we deliver projects and use our people;
o the compensation that we pay our people; and
o our ability to keep discretionary expenses within budget.
If revenues do not increase at a rate at least equal to increases in expenses,
our results of operations could be materially and adversely affected.
RESULTS OF OPERATIONS
---------------------
The following table sets forth the percentage of revenues of certain items
included in Inforte's statement of income:
% of Revenue
Three months ended March 31,
2000 2001
Revenues 100.0 100.0
Operating expenses:
Project personnel and
related expenses 44.0 52.6
Sales and marketing 12.7 13.2
Recruiting, retention
and training 11.4 6.6
Management and administrative 19.9 24.5
Total operating expenses 88.0 97.0
Operating income 12.0 3.0
Interest income, net and other 2.8 7.2
Pretax income 14.7 10.2
Income tax expense 6.3 3.6
Net income 8.4 6.6
Three months ended March 31, 2000 and 2001
------------------------------------------
Revenues. Revenues increased 14% to $14.1 million for the quarter ended March
31, 2001 from $12.3 million for quarter ended March 31, 2000. This growth
reflects the increase in the average revenue per client. For the quarter ended
March 31, 2001, we had 40 significant clients with each of these clients
contributing $1.4 million to revenue on average on an annualized basis. We had
45 significant clients during the quarter ended March 31, 2000, each
contributing $1.1 million to revenue on average on an annualized basis.
Sequentially, revenue declined 19% to $14.1 million in the March 2001 quarter
from $17.4 million in the December 2000 quarter. The decline is not typical for
8
our business, which has historically experienced stronger sequential growth
rates in the first half of the year when most clients have access to new budget
money. The sequential revenue trend reflects the slower growth rate of the U.S.
economy and the negative impact that heightened economic uncertainty has on
information technology (IT) spending. Given the current economic environment, we
expect revenue for each quarter going forward in 2001 to equal $12.5 million to
$14.0 million.
Project personnel and related expenses. Project personnel and related expenses
consist primarily of compensation and fringe benefits for our professional
employees who deliver consulting services and non-reimbursable project costs.
All labor costs for project personnel are included in project personnel and
related expenses. These expenses increased 37% to $7.4 million for the quarter
ended March 31, 2001, from $5.4 million for quarter ended March 31, 2000. The
increase was due to the hiring of additional consulting professionals. We
employed 324 consultants on March 31, 2001, up from 250 one year earlier.
Project personnel and related expenses represented 52.6% of revenues for the
quarter ended March 31, 2001, compared to 44.0% for the quarter ended March 31,
2000. The increase as a percentage of revenues was due to higher employee
compensation in the March 2001 quarter, while revenue per consultant declined,
primarily due to lower utilization. Revenue per consultant was $167,000 in the
March 2001 quarter, down from $215,000 during the March 2000 quarter. Over the
past two quarters, utilization has fallen below our target range of 70-80%. We
expect utilization to remain below our target range for the next few quarters,
unless we note a substantial positive change in the U.S. economy with a related
increase in overall IT spending by our clients. We expect our 2001 quarterly
spending on project personnel and related expenses to remain similar or increase
as a percentage of revenue from the March 2001 quarter level.
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, benefits and travel costs for employees in the market development,
practice development and client development groups and costs to execute
marketing programs. Sales and marketing expenses increased 19% to $1.9 million
for the quarter ended March 31, 2001 from $1.6 million in the same period in
2000. The spending increase was due to the growth in our practice development
and client development sales forces and increased marketing personnel. Sales and
marketing expenses as a percentage of revenues increased to 13.2% for the
quarter ended March 31, 2001 from 12.7% in the first quarter of 2000 as
headcount growth exceeded the rate of revenue growth. We expect our 2001
quarterly spending on sales and marketing to remain similar or increase as a
percentage of revenue from the March 2001 quarter level.
Recruiting, retention, and training. Recruiting, retention and training expenses
consist of compensation, benefits and travel costs for personnel engaged in
human resources; costs to recruit new employees; costs of human resources
programs; and training costs, including travel and labor costs. These expenses
decreased by 34% to $0.9 million for the quarter ended March 31, 2001 from $1.4
million in the first quarter of 2000. The decline was due to a lower hiring rate
in 2001 versus 2000, reducing recruiting expenses. During the March 2000 quarter
total employees grew by 27% to 326. In the March 2001 quarter total employees
declined 3% to 428. Unless we experience a significant change in customer
demand, we expect our 2001 quarterly spending on recruiting, retention and
training to remain similar to, or possibly decline from, the March 2001 quarter
dollar level.
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, and legal costs, and depreciation and amortization of
capitalized computers, purchased software and property. These expenses increased
41% to $3.5 million for the quarter ended March 31, 2001 from $2.4 million for
the same period in 2000. As a percentage of revenue, management and
administrative expenses were 24.5% in the quarter ended March 31, 2001, up from
19.9% for the quarter ended March 31, 2000 as staff and facilities spending grew
more rapidly than the rate of revenue growth.
Liquidity and Capital Resources. Cash and marketable securities increased from
$83.0 million as of December 31, 2000 to $84.1 million at March 31, 2001. This
increase is from cash provided by operating activities of $1.3 million, and from
stock option and purchase plans of $0.5 million, offset by purchases of treasury
stock of $0.5 million and capital expenditures of $0.2 million.
9
Capital expenditures were primarily for computer equipment and software. We
expect that capital expenditures will remain near this minimal level until
overall customer demand in our industry begins to grow again.
As of March 31, 2001 our accounts receivable (less deferred revenue) equaled
negative 5 days of sales outstanding. However, since December 31, 1997, days of
sales outstanding have been as high as 41 days. We believe our current days of
sales outstanding is unsustainably low, and we expect it will rise going
forward. We do not, however, expect it to rise above normal industry levels of
current days of sales outstanding and believe that we will have adequate cash
flow to manage our working capital needs in the ordinary course of business.
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.
Risk Factors
In addition to other information in this Form 10-Q, the following risk factors
should be carefully considered in evaluating Inforte and its business because
such factors currently may have a significant impact on Inforte's business,
operating results and financial condition. As a result of the risk factors set
forth below and elsewhere in this Form 10-Q, and the risk factors discussed in
Inforte's other Securities and Exchange Commission filings, and in Inforte's
earnings releases, actual results could differ materially from those projected
in any forward-looking statements.
RISKS RELATED TO INFORTE
If we fail to identify and successfully transition to the latest and most
advanced solutions or keep up with an evolving industry, we will not compete
successfully for clients and our profits may decrease.
We focus on providing our clients solutions that employ the latest technologies.
If we fail to identify the latest and most advanced solutions, or if we identify
but fail to successfully transition our business to these advanced solutions,
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 advanced
solutions, they would generate lower fees.
Because our market changes rapidly, some of the most important challenges facing
us are the need to:
o effectively use advanced technologies;
o continue to develop our strategic and technical expertise;
o influence and respond to emerging industry standards and other
technological changes;
o enhance our current services; and
o develop new services that meet changing customer needs.
All of these challenges must be met in a timely and cost-effective manner. We
cannot assure you that we will succeed in effectively meeting these challenges.
If we fail to satisfy our clients' expectations, our existing and continuing
business could be adversely affected.
10
If we fail to satisfy the expectations of our clients, we could damage our
reputation and our ability to retain existing clients and attract new clients.
In addition, if we fail to perform our engagements, we could be liable to our
clients for breach of contract. Although most of our contracts limit the amount
of any damages to the fees we received, we could still incur substantial cost,
negative publicity, and diversion of management resources to defend a claim, and
as a result, our business results could suffer.
If we are unable to accurately forecast our quarterly revenue our profitability
may be reduced.
Recently, the level of spending by clients and potential clients on information
technology in the United States has become less certain. We believe the
uncertainty stems from the rapid slowing of growth in Gross Domestic Product in
the United States that began in the second half of calendar 2000. In some cases
the uncertainty has reduced the overall number of projects available for bid. In
other cases the uncertainty has resulted in project deferrals, project scope
reductions or limited follow-on projects at existing clients. While our revenue
forecast methods are sophisticated and have proven accurate historically, we
believe the recent environment adds greater risk and uncertainty to our
forecasts. If we fail to accurately forecast revenue, our actual results may
differ materially from the amounts planned, and our profitability may be
reduced.
We may be unable to hire and retain employees who are highly skilled, which
would impair our ability to perform client services, generate revenue and
achieve profitability
If we are unable to hire and retain highly-skilled individuals, our ability to
retain existing business and compete for new business will be harmed.
Individuals who have the experience and expertise to perform the services we
provide to our clients are limited and competition for these individuals is
intense. To attract and retain these individuals, we invest a significant amount
of time and money. In addition, we expect that an important component of overall
compensation for our employees will continue to be equity. If our stock price
does not increase over time, it may be more difficult to retain employees who
have been compensated with stock options. Options granted to employees from the
IPO date, February 17, 2000, through March 31, 2001 total 1.3 million shares.
These recent option grants have exercise prices of $8.56 to $71.82 with an
average exercise price of $29.74. 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 employee retention rates grow to unacceptable levels
because compensation is not at competitive rates, Inforte may increase the level
of stock option grants or cash compensation. These actions would reduce earnings
per share and may cause Inforte to become unprofitable.
If we fail to adequately manage rapid changes in our growth rate, our
profitability and cash flow may be reduced or eliminated.
If we cannot keep pace with the rapid changes in our growth rate, we will be
unable to effectively match resources with demand, and maintain high client
satisfaction, which may eliminate our profitability and our ability to achieve
positive cash flow from operations. Our business has grown dramatically over the
past several years. For example, our revenue has increased from $13.4 million in
1998, to $30.1 million in 1999 and to $63.8 million in 2000. As a result of the
current U.S. economic environment and overcapacity in our industry, however, we
expect revenue in 2001 to decline compared to 2000. For 2001 and 2002, our
growth rate is highly dependent on the macroeconomic environment, which heavily
influences our clients' level of IT services spending. The level of IT spending
is subject to rapid positive and negative changes. If the level of IT services
spending declines further, we may not be profitable or achieve positive cash
flow from operations in 2001 or 2002. If our growth exceeds our expectations,
our current resources and infrastructure may be inadequate to handle the growth.
Also, our senior management team has limited collective experience managing a
public company or a business the current size of Inforte. Additionally, our
management team has limited collective experience managing a business during an
economic slowdown or recession.
If our marketing relationships with software vendors deteriorate, we would lose
their client referrals.
11
We currently have marketing relationships with software vendors, including
Ariba, Blue Martini, i2, Siebel, and Vignette. Although we have historically
received a large number of business leads from these software vendors to
implement their products, they are not required to refer business to us and they
may terminate these relationships at any time. If our relationships with these
software vendors deteriorate, we may lose their client leads and our ability to
develop new clients could be negatively impacted. Any decrease in our ability to
obtain clients may cause a reduction in our revenues.
If we are unable to rapidly integrate third-party software, we may not deliver
solutions to our clients on a timely basis, resulting in lost revenues and
potential liability.
In providing client services, we recommend that our clients use software
applications from a variety of third-party vendors. If we are unable to
implement and integrate this software in a fully functional manner for our
clients, we may experience difficulties that could delay or prevent the
successful development, introduction, or marketing of services. Software often
contains errors or defects, particularly when first introduced or when new
versions or enhancements are released. Despite internal testing and testing by
current and potential clients, our current and future solutions may contain
serious defects due to third-party software or software we develop or customize
for clients. Serious defects or errors could result in liability for damages,
lost revenues, or a delay in implementation of our solutions.
Our revenues could be negatively affected by the loss of a large client or our
failure to collect a large account receivable.
At times, we derive a significant portion of our revenue from large projects for
a limited number of varying clients. In 1998, our five largest clients accounted
for 36% of revenue and our ten largest clients accounted for 56% of revenue. In
1999, our five largest clients accounted for 36% of revenue and our ten largest
clients accounted for 55% of revenue. In 2000, our five largest clients
accounted for 31% of revenue and our ten largest clients accounted for 46% of
revenue. Although these large clients vary from time to time and our long-term
revenues do not rely on any one client, our revenues could be negatively
affected if we were to lose one of these clients or if we were to fail to
collect a large account receivable.
In addition, many of our contracts are short-term and provide that our clients
can reduce or cancel our services without incurring any penalty. If our clients
reduce or terminate our services, we would lose revenue and would have to
reallocate our employees and our resources to other projects to attempt to
minimize the effects of that reduction or termination. Accordingly,
terminations, including any termination by a major client, could adversely
impact our revenues. During 2001 we believe the uncertain economic environment
increases the probability that services may be reduced or canceled.
If we estimate incorrectly the time required to complete our projects, we will
lose money on fixed-price contracts.
A majority of our contracts are fixed-price contracts, rather than contracts in
which the client pays us on a time and materials basis. We must estimate the
number of hours and the materials required before entering into a fixed-price
contract. Our future success will depend on our ability to continue to set rates
and fees accurately and to maintain targeted rates of employee utilization and
project quality. If we fail to accurately estimate the time and the resources
required for a project, any required increase in the time and resources to
complete the project could cause our profits to decline.
Fluctuations in our quarterly revenues and operating results due to cyclical
client demand may lead to reduced prices for our stock.
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
12
and as a result are more likely to incur the expense of our services during the
first half of the year. During 2001, we do not expect this normal seasonal
growth pattern, and have adjusted our recruiting and spending plans accordingly.
Our cautious expectations for 2001 are based upon slower U.S. economic growth
that began in the second half of 2000 and business trends during the first four
months of 2001. If we are unable to predict the cyclical client demand in a
slower growth or distressed economic environment, our expenses may be
disproportionate to our revenue on a quarterly basis and our stock price may be
adversely affected.
Others could claim that we infringe on their intellectual property rights, which
may result in substantial costs, diversion of resources and management
attention, and harm to our reputation.
A portion of our business involves the development of software applications for
specific client engagements. Although we believe that our services do not
infringe on the intellectual property rights of others, we may be the subject of
claims for infringement, which even if successfully defended could be costly and
time-consuming. An infringement claim against us could materially and adversely
affect us in that we may:
o experience a diversion of our financial resources and management attention;
o incur damages and litigation costs, including attorneys' fees;
o be enjoined from further use of the intellectual property;
o be required to obtain a license to use the intellectual property, incurring
licensing fees;
o need to develop a non-infringing alternative, which could be costly and
delay projects; and
o have to indemnify clients with respect to losses incurred as a result of
our infringement of the intellectual property.
Because we are newer and smaller than many of our competitors, we may not have
the resources to effectively compete, causing our revenues to decline.
Many of our competitors have longer operating histories, larger client bases,
longer relationships with clients, greater brand or name recognition, and
significantly greater financial, technical, marketing, and public relations
resources than we do. We may be unable to compete with the full-service
consulting companies, including the consulting divisions of the largest global
accounting firms, who are able to offer their clients a wider range of services.
If our clients decide to take their information technology professional services
projects to these companies, our revenues may decline. It is possible that in
uncertain economic times our clients may prefer to work with larger firms to a
greater extent than normal. In addition, new professional services companies may
provide services similar to ours at a lower price, which could cause our
revenues to decline.
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 Internet-based
information technology that provides an attractive return on investment or helps
provides a sustainable competitive advantage. Our revenues could decrease if
companies decide not to integrate the latest technologies into their businesses
due to economic factors, governmental regulations, financial constraints, or
other reasons.
Inforte's market research suggests that the level information technology
spending in the United States is closely linked with the growth rate of the
Gross Domestic Product (GDP). The recent slowdown in the GDP growth rate has
caused a slower rate of adoption of advanced information technology by our
target clients. We expect information technology spending and Inforte revenue to
be highly dependent on the health of the US economy.
13
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 utilization rates 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.
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.
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 could be subject to securities class action litigation
similar to that which has been brought against companies following periods of
volatility in the market price of their common stock. 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, control a vote of stockholders.
As of March 31, 2001 the executive officers and directors set forth below, own
approximately 45% of the outstanding shares of our common stock and own
individually the percentage set forth opposite their names:
o Philip S. Bligh 20.8%
o Stephen C.P. Mack 18.5%
o Nick Padgett 5.2%
If the stockholders listed above act or vote together with other employees who
own significant shares of our common stock they will have the ability to control
the election of our directors and the approval of any other action requiring the
approval of our stockholders, including any amendments to the certificate of
incorporation and mergers or sales of all or substantially all assets, even if
the other stockholders perceive that these actions are not in their best
interests.
The authorization of preferred stock, a staggered board of directors and
supermajority voting requirements will make a takeover attempt more difficult,
even if the takeover would be favorable for stockholders.
Inforte's certificate of incorporation and bylaws may have the effect of
deterring, delaying or preventing a change in control of Inforte. For example,
our charter documents provide for:
o the ability of the board of directors to issue preferred stock and to
determine the price and other terms, including preferences and voting
rights, of those shares without stockholder approval;
14
o the inability of our stockholders to act by written consent or to call a
special meeting;
o advance notice provisions for stockholder proposals and nominations to the
board of directors;
o a staggered board of directors, with three-year terms, which will lengthen
the time needed to gain control of the board of directors; and
o supermajority voting requirements for stockholders to amend provisions of
the charter documents described above.
We are also subject to Delaware law. Section 203 of the Delaware General
Corporation Law prohibits us from engaging in a business combination with any
significant stockholder for a period of three years from the date the person
became a significant stockholder unless, for example, our board of directors
approved the transaction that resulted in the stockholder becoming an interested
stockholder. Any of the above could have the effect of delaying or preventing
changes in control that a stockholder may consider favorable.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In all categories of cash, cash equivalents and short-term and long term
marketable securities, Inforte invests only in securities of high credit
quality. All investments bear a minimum Standard & Poor's rating of A1, Moody's
investor service rating of P1, or equivalent. Inforte believes that it does not
have any material market risk exposure with respect to financial instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8K
Inforte filed a filed a Form 8-K on January 31, 2001, announcing that
on January 24, 2001 the board of directors approved a stock repurchase
program that allows the company to buy up to $25 million of Inforte
shares. The program has no expiration date and will be used to make
periodic purchases at the company's discretion to offset the dilutive
impact from the company's stock option and employee stock purchase
programs.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Inforte Corp.
By: /s/ NICK PADGETT
April 24, 2001 ---------------------------------
Nick Padgett,
Chief Financial Officer
16