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 September 30, 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
September 30, 2001 was 11,686,397.
INFORTE CORP.
INDEX
Page No.
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PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance sheets - September 30, 2000, December 31,
2000, March 31, 2001, June 30, 2001 and
September 30, 2001 1
Statements of income - Three months and nine months ended
September 30, 2000 and 2001 2
Statements of cash flows - Three months and nine months
ended September 30, 2000 and 2001 3
Notes to financial statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-16
Item 3. Qualitative and Quantitative Disclosure About Market Risk 16
PART II. Other Information
Item 1 Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3 Defaults of Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INFORTE CORP.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
2000 2000 2001 2001 2001
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $38,226,516 $42,391,880 $44,122,977 $61,849,485 $27,202,368
Short-term marketable securities 27,167,323 26,220,945 34,684,374 17,780,403 22,416,685
Accounts receivable 13,606,517 10,385,795 7,684,129 8,422,075 8,191,271
Allowance for doubtful accounts (1,150,000) (1,150,000) (1,150,000) (1,150,000) (1,150,000)
---------- ---------- ---------- ---------- ----------
Accounts receivable, net 12,456,517 9,235,795 6,534,129 7,272,075 7,041,271
Prepaid expenses and other current assets 1,668,845 1,905,936 2,171,259 2,289,957 1,737,018
Income taxes recoverable - 1,545,769 - - -
Deferred income taxes 841,171 876,581 908,537 909,900 939,992
---------- ---------- ---------- ---------- ----------
Total current assets 80,360,372 82,176,906 88,421,276 90,101,820 59,337,334
Computers, purchased software and property 3,844,265 4,535,670 4,599,496 4,683,404 4,177,497
Less accumulated depreciation and amortization 1,204,195 1,558,503 1,830,949 2,208,291 2,022,472
--------- --------- ---------- ---------- ----------
Computers, purchased software and property, net 2,640,070 2,977,167 2,768,547 2,475,113 2,155,025
Long-term marketable securities 14,442,823 14,383,998 5,292,945 5,620,450 27,090,506
Deferred income taxes 77,166 364,905 503,820 579,999 690,001
--------- --------- ---------- ---------- ----------
Total assets $97,520,431 $99,902,976 $96,986,588 $98,777,382 $89,272,866
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 325,319 $ 582,591 $ 534,134 $ 627,841 $ 752,536
Income taxes payable 677,837 - 454,451 418,859 547,252
Accrued expenses 7,045,741 7,702,466 4,600,253 5,017,654 5,674,271
Deferred revenue 11,899,327 8,574,055 7,316,310 8,119,189 9,800,750
---------- ---------- ---------- ---------- ----------
Total current liabilities 19,948,224 16,859,112 12,905,148 14,183,543 16,774,809
Stockholders' equity:
Common stock, $0.001 par value
authorized- 50,000,000 shares;
issued and outstanding (net of treasury stock) -
11,686,397 as of Sept. 30, 2001 12,570 12,703 12,734 12,871 11,687
Additional paid-in capital 70,732,687 74,192,205 74,717,495 75,000,002 75,423,628
Treasury stock (1,355,702 shares as of Sept. 30 2001) - - (472,406) (472,406) (13,170,202)
Retained earnings 6,812,981 8,753,017 9,687,418 9,806,888 9,916,260
Accumulated other comprehensive income 13,969 85,939 136,199 246,484 316,684
---------- ---------- ----------- ---------- ----------
Total stockholders' equity 77,572,207 83,043,864 84,081,440 84,593,839 72,498,057
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $97,520,431 $99,902,976 $96,986,588 $98,777,382 $89,272,866
========== ========== ========== ========== ==========
See notes to financial statements
1
INFORTE CORP.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 2001 2000 2001
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $17,790,784 $10,600,439 $46,473,946 $37,189,424
Operating expenses:
Project personnel and related expenses 7,910,215 5,876,560 20,442,497 20,652,199
Sales and marketing 2,359,848 1,804,975 6,150,699 5,793,022
Recruiting, retention and training 1,731,123 596,767 5,237,746 2,230,805
Management and administrative 3,525,504 3,083,137 8,849,882 9,629,159
--------- ---------- ---------- ----------
Total operating expenses 15,526,690 11,361,439 40,680,824 38,305,185
Operating income 2,264,094 (761,000) 5,793,122 (1,115,761)
Interest income, net and other 1,053,800 870,372 2,295,280 2,782,138
--------- ---------- ---------- ----------
Income before income tax 3,317,894 109,372 8,088,402 1,666,377
Income tax expense 1,244,994 - 3,154,478 503,134
--------- ---------- ---------- ----------
Net income $ 2,072,900 $ 109,372 $ 4,933,924 $ 1,163,243
========= ========== ========== ==========
Earnings per share:
-Basic $ 0.17 $ 0.01 $ 0.42 $ 0.09
-Diluted $ 0.15 $ 0.01 $ 0.37 $ 0.09
Weighted average common shares
outstanding:
-Basic 12,459,701 12,778,087 11,858,703 12,764,405
-Diluted 13,946,224 13,521,401 13,398,673 13,620,456
See notes to financial statements
2
INFORTE CORP.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 2001 2000 2001
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash flows from operating activities
Net income $2,072,900 $ 109,372 $ 4,933,924 $ 1,163,243
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 350,651 409,770 818,049 1,244,429
Non-cash compensation - 75,000 - 150,000
Deferred income taxes (15,895) (140,094) (246,278) (388,507)
Changes in operating assets and liabilities
Accounts receivable (1,316,386) 230,804 (6,132,267) 2,194,524
Prepaid expenses and other current assets (253,322) 552,939 (987,282) 168,918
Accounts payable (703,419) 124,695 (1,027,153) 169,945
Income taxes payable 115,798 128,393 366,325 2,093,021
Accrued expenses and other 1,372,949 (230,491) 2,923,566 (2,915,303)
Deferred revenue 1,511,237 1,681,561 7,028,748 1,226,695
--------- ---------- ---------- ----------
Net cash provided by operating activities 3,134,513 2,941,949 7,677,632 5,106,965
Cash flows from investing activities
Increase in marketable securities (18,156,894) (26,103,051) (41,612,578) (8,780,684)
Purchases of property and equipment (1,059,434) (63,558) (1,955,371) (350,624)
--------- --------- ---------- ----------
Net cash used in investing
activities (19,216,328) (26,166,609) (43,567,949) (9,131,308)
Cash flows from financing activities
Proceeds from issuance of common stock - - 66,860,251 -
Proceeds from stock option and purchase
plans 1,410,846 348,739 3,463,399 1,081,704
Purchase of treasury stock - (11,791,718) - (12,264,124)
--------- ---------- ---------- ----------
Net cash provided (used in) by financing
activities 1,410,846 (11,442,979) 70,323,650 (11,182,420)
--------- ---------- ---------- ----------
Effect of changes in exchange rates on cash 1,156 20,522 1,156 17,251
Increase (decrease) in cash and cash
equivalents (14,669,813) (34,647,117) 34,434,489 (15,189,512)
Cash and cash equivalents, beg. of period 52,896,329 61,849,485 3,792,027 42,391,880
--------- ---------- ---------- ----------
Cash and cash equivalents, end of period $38,226,516 $27,202,368 $38,226,516 $27,202,368
========== ========== ========== ==========
See notes to financial statements
3
Inforte Corp.
Notes to financial statements
(Unaudited)
September 30, 2001
(1) BASIS OF PRESENTATION
The accompanying un-audited 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 and
nine month periods ended September 30, 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) TEASURY STOCK
During the September 2001 quarter, Inforte repurchased 1,297,202 shares of stock
for $12.7 million at an average price of $9.79. Of the shares repurchased,
96,000 were settled in the month of October for $0.9 million. During the March
2001 quarter, Inforte repurchased 58,500 shares for $0.5 million at an average
price of $8.08. The board approved a $25.0 million stock repurchase program on
January 24, 2001 and as of September 30, 2001, $11.8 million remained authorized
for repurchase.
(3) NET INCOME PER COMMON SHARE
Inforte computes basic earnings per share by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per common share
is computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents then outstanding.
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------- -------------------------
2000 2001 2000 2001
-------------------------- -------------------------
(unaudited) (unaudited)
Basic weighted average shares 12,459,701 12,778,087 11,858,703 12,764,405
Effect of dilutive stock options 1,486,523 743,314 1,539,970 856,051
-------------------------- ------------------------
Diluted common and common
equivalent shares 13,946,224 13,521,401 13,398,673 13,620,456
========================== ========================
(4) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), establishes standards for reporting comprehensive income.
Comprehensive income includes net income as currently reported under generally
accepted accounting principles, and also considers the effect of additional
economic events that are not required to be recorded in determining net income,
but rather are reported as a separate component of stockholders' equity. The
Company reports foreign currency translation gains and losses, and unrealized
gains and losses on investments, as components of comprehensive income. Total
comprehensive income was $179,572 and $1,393,988 for the three months and nine
months ended September 30, 2001 and $2,079,237 and $4,947,893 for the three
months and nine months ended September 30, 2000.
4
(5) COST TO EXIT LEASED OFFICE SPACE
Since client research indicates that information technology spending is likely
to remain at minimal levels for at least the remainder of 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
facilities comprise 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
reduction of office space resulting from these office consolidations was
approximately 17,770 square feet, all of which were vacated as of September 30,
2001. The total charge related to this reduction of office space in the third
quarter of 2001 was $256,550. This charge is reported as management and
administrative expense on the Income Statement, and as accrued expenses on the
Balance Sheet. While we believe the current charge is sufficient to represent
future net cash out flows, if future sub-lease income is less than estimated,
additional charges in future periods will be necessary. Further, if we are
unable to sub-lease our vacated office space, additional charges in future
periods will be necessary.
(6) INCOME TAXES
Inforte's effective tax rate for the September 2001 quarter was 0.0% compared to
37.5% for the September 2000 quarter. The lower rate in 2001 is related to the
results of operations being near break-even. Income tax expense in a quarter is
the amount necessary to bring year-to-date income tax expense to the proper
level. Year-to-date, Inforte's effective tax rate is 30.2%, compared to 39.0%
for the nine-month period ending September 30, 2000. The decrease in the
effective tax rate is a result of a 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 quarterly tax rate for the remainder of 2001 may
remain volatile if interest income continues to provide the majority of taxable
income, and operating results continue to remain near break-even.
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with our 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 during the current economic downturn; (ii)
attract and retain clients and satisfy our clients' expectations; (iii) recruit
and retain qualified professionals; (iv) reliably forecast revenue, particularly
for clients in the insurance, financial services, or software and technology
businesses, and those based in or near New York, since these firms may discover
financial liabilities or experience business delays resulting from the September
11 terrorist attacks, or delays resulting from the negative impact the attacks
may have on the overall economy (v) reliably forecast revenue when information
technology services spending is less certain overall, and in particular when
spending at current clients and with our alliance partners, our two main revenue
lead sources, is less certain; (vi) accurately estimate the time and resources
necessary for the delivery of our services; and (vii) 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 September 30, 2001, we employed 298 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, a discovery phase or diagnostic 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
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
6
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 % of Revenue
Three months ended Nine months ended
September 30, September 30
2000 2001 2000 2001
Revenues 100.0 100.0 100.0 100.0
Operating expenses:
Project personnel and
related expenses 44.5 55.4 44.0 55.5
Sales and marketing 13.3 17.0 13.2 15.6
Recruiting, retention
and training 9.7 5.6 11.3 6.0
Management and administrative 19.8 29.1 19.0 25.9
Total operating expenses 87.3 107.2 87.5 103.0
Operating income 12.7 -7.2 12.5 -3.0
Interest income, net and other 5.9 8.2 4.9 7.5
Pretax income 18.6 1.0 17.4 4.5
Income tax expense 7.0 0.0 6.8 1.4
Net income 11.7 1.0 10.6 3.1
Three months ended September 30, 2000 and 2001
----------------------------------------------
Revenues. Revenues decreased 40% to $10.6 million for the quarter ended
September 30, 2001 from $17.8 million for quarter ended September 30, 2000. For
the nine months ended September 30, 2001, revenues decreased 20% to $37.2
million from $46.5 million for the nine months ended September 30, 2000.
Although we have historically experienced growth in our revenues, the market for
strategic technology consulting services has decreased significantly this year
due to the slower growth rate of the U.S. economy and the negative impact that
heightened economic uncertainty has on information technology spending. For the
quarter ended September 30, 2001, we had 41 significant clients with each of
these clients contributing $1.0 million to revenue on average on an annualized
basis. We had 50 significant clients during the quarter ended September 30,
2000, each contributing $1.4 million to revenue on average on an annualized
basis. Sequentially, revenue declined 15% to
7
$10.6 million in the September 2001 quarter from $12.5 million in the June 2001
quarter. Although we typically experience lower sequential growth rates in the
second half of the year, this decline is not typical for our business and can
also be attributed to the slower growth rate of the U.S. economy and the
negative impact heightened economic uncertainty has had on information
technology spending. Given the current economic environment, we expect revenue
for the December 2001 quarter to equal $10.0 million. Until we see a sustained
turn in the economy and a sustained increase in information technology spending,
we are forecasting revenue of $10.0 million per quarter in 2002.
Project personnel and related expenses. Project personnel and related expenses
consist primarily of compensation and fringe benefits for our professional
employees who deliver consulting services and non-reimbursable project costs.
All labor costs for project personnel are included in project personnel and
related expenses. These expenses decreased 26% to $5.9 million for the quarter
ended September 30, 2001, from $7.9 million for quarter ended September 30,
2000. The decrease relates to recent reductions in consulting headcount. We
employed 216 consultants on September 30, 2001, down from 348 one year earlier.
These costs for the nine month period ending September 2001 increased by 1% over
the prior year to $20.7 million from $20.4 million during the same period of the
prior year. While ending number of billable consultants was down sharply at
September 30, 2001 compared to September 30, 2000, the average headcount
decrease was relatively flat. The average number of billable consultants
decreased 8% to 282 in the nine month period ending September 30, 2001 from 306
one year earlier. The effect of lower headcount was offset by salary increases,
which occurred in July 2000.
Project personnel and related expenses represented 55.4% of revenues for the
quarter ended September 30, 2001, compared to 44.5% for the quarter ended
September 30, 2000. Revenue per consultant was $189,000 in the September 2001
quarter, down from $210,000 during the September 2000 quarter. The decline in
revenue per consultant versus the prior year results from a lower hourly rate
due to more price sensitivity in the consulting market. Project personnel and
related expenses represented 55.5% of revenues for the nine months ended
September 30, 2001, compared to 44.0% for the same period in 2000. This increase
is due to the lower revenue base.
Since client research indicates that information technology spending is likely
to remain at minimal levels for at least the remainder of 2001, in June 2001
Inforte offered a six-to-nine-month voluntary leave of absence program and a
voluntary resignation program to employees in underutilized areas. There were 90
people who participated in the programs. Individuals who selected the leave of
absence program are receiving compensation at 20%-25% of regular pay if they
remain available to return to full-time service. Individuals who chose the
voluntary resignation package received pay through the end of August 2001. All
costs related to resigning employees were included either in our June 2001
quarter results or our September 2001 quarter results. Salary costs for
employees on leave of absence are expensed as incurred and included in the
quarter ended September 2001. The costs of these programs will be less in future
quarters, and will go to zero by the end of the June 2002 quarter.
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, benefits and travel costs for employees in the market development
and practice development groups and costs to execute marketing programs. Sales
and marketing expenses decreased 24% to $1.8 million for the quarter ended
September 2001 from $2.4 million in the same period in 2000. Year to date, these
expenses decreased 6% to $5.8 million from $6.2 million in the prior year. The
spending decrease was due to lower discretionary marketing expenses and lower
sales commission expense due to lower revenue. Sales and marketing expenses as a
percentage of revenues increased to 17.0% for the quarter ended September 30,
2001 from 13.3% in the third quarter of 2000. For the nine months ended
September 30, the expense as a percent of revenue increased from 13.2% in 2000
to 15.6% in 2001. This increase in these expenses is due to the lower revenue
base. We expect our December 2001 quarterly spending on sales and marketing to
remain similar to the September 2001 quarter dollar level.
Recruiting, retention, and training. Recruiting, retention and training expenses
consist of compensation, benefits and travel costs for personnel engaged in
human resources; costs to recruit new employees; costs of human resources
programs; and training costs. These expenses decreased 66% to $0.6 million for
the quarter ended September 30, 2001 from $1.7 million in the third quarter of
2000. Year to date, these expenses decreased 57% to $2.2 million from $5.2
million in the prior year. The decline was due to a slower hiring rate in 2001
versus 2000, reducing recruiting expenses and training expenses. During the
September 2000 quarter, total employees grew by 7% to 438. In the quarter ended
September 30, 2001, total employees declined 27% to 298. We expect our December
2001 quarterly spending on recruiting, retention and training to remain similar
to the September 2001 quarter dollar level.
8
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 decreased
13% to $3.1 million for the quarter ended September 30, 2001 from $3.5 million
for the same period in 2000. The decrease in expenses was due to lower spending
on information technology, executive travel, and executive bonus compensation
partially offset by higher facilities expense. As a percentage of revenue,
management and administrative expenses were 29.1% in the quarter ended September
30, 2001, up from 19.8% for the quarter ended September 30, 2000, as spending
decreased at a slower rate than revenue declined. Year to date, these expenses
increased 9% to $9.6 million from $8.8 million in the prior year. As a percent
of revenue, management and administrative expenses were 25.9% for the nine
months ended September 2001, compared to 19.0% for the same period ending
September 2000. In the December 2001 quarter we expect to incur a non-cash
compensation charge if certain performance-based option criteria are met as of
December 31, 2001. At the current stock price, the charge would be approximately
$1.0 million or $0.08 per diluted share. Due to this expected non-cash charge,
our December 2001 quarterly management and administrative expense is likely to
increase from the September 2001 quarter dollar level.
Liquidity and capital resources. Cash and marketable securities decreased from
$85.3 million as of June 30, 2001 to $76.7 million at September 30, 2001. This
decrease results from the purchase of $11.8 million in treasury stock, partially
offset by cash from operating activities of $2.9 million, and from stock option
and purchase plans of $0.3 million.
During the September 2001 quarter, Inforte repurchased 1,297,202 shares of stock
for $12.7 million at an average price of $9.79. Of the shares purchased, 96,000
were settled in the month of October for $0.9 million. The board approved a
$25.0 million stock repurchase program on January 24, 2001 and as of September
30, 2001, $11.8 million remained authorized for repurchase. As of September 30,
2001, Inforte had 11,686,397 shares outstanding and $76.7 million in cash and
marketable securities, resulting in $6.56 of cash and marketable securities per
diluted share. At the end of the June 2001 quarter, cash and marketable
securities per share were $6.62 per diluted share. As of September 30, 2001, the
public float (shares not held by executive officers and directors) totaled 6.1
million shares or 52% 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.
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:
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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.
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.
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If we are unable to accurately forecast our quarterly revenue our profitability
may be reduced or eliminated.
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 both bonus payments and equity
ownership will be an important component of overall employee compensation. In
the current economic and market environment, overall bonus payments have been
reduced significantly, increasing the risk that key employees will leave
Inforte. Also, if our stock price does not increase over time, it may be more
difficult to retain employees who have been compensated with stock options.
Options granted to employees from the IPO date, February 17, 2000, through
September 30, 2001 have exercise prices of $8.56 to $71.81 with an average
exercise price of $22.99. 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 demand, our profitability and
cash flow may be reduced or eliminated.
If we cannot keep pace with the rapid changes in demand, we will be unable to
effectively match resources with demand, and maintain high client satisfaction,
which may eliminate our profitability and our ability to achieve positive cash
flow from operations. Our business 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, industry demand
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 2002. If, on the other hand, our growth exceeds our expectations,
our current resources and infrastructure may be inadequate to handle the growth.
Also, our senior management team has limited collective experience managing a
public company or a business the current size of Inforte. 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.
We currently have marketing relationships with software vendors, including
Ariba, i2, Siebel, and Vignette. Although we have historically received a large
number of business leads from these software vendors to implement their
products, they are not required to refer business to us and they may terminate
these relationships at any time. If our relationships with these software
vendors deteriorate, we may lose their client leads and our ability to develop
new clients could be negatively impacted. Any decrease in our ability to obtain
clients may cause a reduction in our revenues.
If we are unable to rapidly integrate third-party software, we may not be able
to deliver solutions to our clients on a timely basis, resulting in lost
revenues and potential liability.
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In providing client services, we recommend that our clients use software
applications from a variety of third-party vendors. If we are unable to
implement and integrate this software in a fully functional manner for our
clients, we may experience difficulties that could delay or prevent the
successful development, introduction, or marketing of services. Software often
contains errors or defects, particularly when first introduced or when new
versions or enhancements are released. Despite internal testing and testing by
current and potential clients, our current and future solutions may contain
serious defects due to third-party software or software we develop or customize
for clients. Serious defects or errors could result in liability for damages,
lost revenues, or a delay in implementation of our solutions.
Our revenues could be negatively affected by the loss of a large client or our
failure to collect a large account receivable.
At times, we derive a significant portion of our revenue from large projects for
a limited number of varying clients. In the September 2001 quarter, our five
largest clients accounted for 37% of revenue and our ten largest clients
accounted for 62% 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 and 2002 we believe the uncertain economic
environment increases the probability that services may be reduced or canceled.
If we estimate incorrectly the time required to complete our projects, we will
lose money on fixed-price contracts.
A majority of our contracts are fixed-price contracts, rather than contracts in
which the client pays us on a time and materials basis. We must estimate the
number of hours and the materials required before entering into a fixed-price
contract. Our future success will depend on our ability to continue to set rates
and fees accurately and to maintain targeted rates of employee utilization and
project quality. If we fail to accurately estimate the time and the resources
required for a project, any required increase in the time and resources to
complete the project could cause our profits to decline.
Fluctuations in our quarterly revenues and operating results due to cyclical
client demand may lead to reduced prices for our stock.
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 incur the expense of our services during the
first half of the year. During 2001 and 2002, we do not expect this normal
seasonal growth pattern, and have adjusted our recruiting and spending plans
accordingly. Our cautious expectations for 2001 and 2002 are based upon slower
U.S. economic growth that began in the second half of 2000 and business trends
during 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,
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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.
Our expansion and growth internationally could negatively affect our business.
In both the June 2001 quarter and the September 2001 quarter, our international
revenues were over 10% of our total revenues. As our international revenue
grows, we face additional risks that we do not face domestically. Such risks
include longer customer payment cycles, adverse taxes, compliance with local
laws and regulations. Further, the effects of fluctuations in currency exchange
rates may adversely affect the results of operations. Finally, there are
indications that the U.S. economic slowdown is spreading to the rest of the
world, which could limit our ability to obtain international revenue going
forward. These risk factors, as well as others not cited here, may negatively
impact our business.
RISKS RELATED TO OUR INDUSTRY
If the rate of adoption of advanced information technology slows substantially,
our revenues may decrease.
We market our services primarily to firms that want to adopt information
technology that provides an attractive return on investment or helps provides a
sustainable competitive advantage. Our revenues could decrease if companies
decide not to integrate the latest technologies into their businesses due to
economic factors, governmental regulations, financial constraints, or other
reasons.
Inforte's market research suggests that the level information technology
spending in the United States is closely linked with the growth rate of the
Gross Domestic Product (GDP). The recent slowdown in the GDP growth rate has
caused a slower rate of adoption of advanced information technology by our
target clients. We expect information technology spending and Inforte revenue to
be highly dependent on the health of the US economy.
We expect that the terrorist attacks on September 11 of this year may have some
impact on our business. Our clients, particularly those in the insurance,
financial services, or software and technology businesses and those based in or
near New York, may discover financial liabilities or experience business delays
resulting from the attacks, or resulting from the impact the attacks may have on
the overall economy or demand in a particular industry.
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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 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.
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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 2001 has averaged approximately 95,000
shares per day. On any particular day, Inforte's trading volume can be less than
20,000 shares which increase the potential for volatile stock prices.
Volatility of our stock price could result in expensive class action litigation.
If our common stock suffers from volatility like the securities of other
technology companies, we 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, may control a vote of stockholders.
As of September 30, 2001 the executive officers and directors set forth below,
own approximately 47.1% of the outstanding shares of our common stock and own
individually the percentage set forth opposite their names:
o Philip S. Bligh 22.2%
o Stephen C.P. Mack 19.3%
o Nick Padgett 5.6%
If the stockholders listed above act or vote together with other employees who
own significant shares of our common stock they will have the ability to control
the election of our directors and the approval of any other action requiring the
approval of our stockholders, including any amendments to the certificate of
incorporation and mergers or sales of all or substantially all assets, even if
the other stockholders perceive that these actions are not in their best
interests.
Over time, the influence or control executive officers have on a stockholder
vote will decrease as officers supplement below-market salaries and diversify
overall equity wealth with sales of Inforte stock. As permitted by SEC Rule
10b5-1, Inforte executive officers have or may set up a predefined, structured
stock trading program. The trading program allows brokers acting on behalf of
company insiders to trade company stock while the insiders may be aware of
material, non-public information, if the transaction is performed according to a
pre-existing contract, instruction or plan that was established with the broker
when the insider was not aware of any material, non-public information.
The authorization of preferred stock, a staggered board of directors and
supermajority voting requirements will make a takeover attempt more difficult,
even if the takeover would be favorable for stockholders.
Inforte's certificate of incorporation and bylaws may have the effect of
deterring, delaying or preventing a change in control of Inforte. For example,
our charter documents provide for:
o the ability of the board of directors to issue preferred stock and
to determine the price and other terms, including preferences and
voting rights, of those shares without stockholder approval;
o the inability of our stockholders to act by written consent or to call a
special meeting;
o advance notice provisions for stockholder proposals and nominations to
the board of directors;
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o a staggered board of directors, with three-year terms, which will
lengthen the time needed to gain control of the board of directors; and
o supermajority voting requirements for stockholders to amend
provisions of the charter documents described above.
We are also subject to Delaware law. Section 203 of the Delaware General
Corporation Law prohibits us from engaging in a business combination with any
significant stockholder for a period of three years from the date the person
became a significant stockholder unless, for example, our board of directors
approved the transaction that resulted in the stockholder becoming an interested
stockholder. Any of the above could have the effect of delaying or preventing
changes in control that a stockholder may consider favorable.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In all categories of cash, cash equivalents and short-term and long-term
marketable securities, Inforte invests only in highly liquid securities of high
credit quality. All investments bear a minimum Standard & Poor's rating of A1,
Moody's investor service rating of P1, or equivalent. Inforte believes that it
does not have any material market risk exposure with respect to financial
instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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
None
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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
November 14, 2001 ---------------------------------
Nick Padgett,
Chief Financial Officer
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