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 June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 000-29239
INFORTE CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-3909334
(State of incorporation) (IRS Employer Identification No.)
150 North Michigan Avenue, Suite 3400, Chicago, Illinois 60601 (Address
of principal executive offices, including ZIP code)
(312) 540-0900
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) Yes X No ___, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
The number of shares outstanding of the Registrant's Common Stock as of June 30,
2002 was 11,591,465.
INFORTE CORP.
INDEX
Page No.
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PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2001,
September 30, 2001, December 31, 2001, March 31, 2002
and June 30, 2002 3
Consolidated Statements of Income - Three months and
six months ended June 30, 2001 and 2002 4
Consolidated Statements of Cash Flows - Three months and
six months ended June 30, 2001 and 2002 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-21
Item 3. Qualitative and Quantitative Disclosure About Market Risk 21
PART II. Other Information
Item 1 Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3 Defaults of Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit 99.1 Written Statement of the Chief Executive Officer
Exhibit 99.2 Written Statement of the Chief Financial Officer
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INFORTE CORP.
CONSOLIDATED BALANCE SHEETS
(000's)
JUN 30, SEP 30, DEC 31, MAR 31, JUN 30,
2001 2001 2001 2002 2002
-------- -------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 61,849 $ 27,202 $ 20,208 $ 26,404 $ 15,295
Short-term marketable securities 17,780 22,417 32,669 27,195 37,311
Accounts receivable 8,422 8,191 6,539 7,251 5,576
Allowance for doubtful accounts (1,150) (1,150) (1,150) (1,000) (850)
-------- -------- -------- -------- --------
Accounts receivable, net 7,272 7,041 5,389 6,251 4,726
Prepaid expenses and other current assets 2,291 1,736 2,008 1,949 2,045
Deferred income taxes 910 940 1,621 1,550 1,493
-------- -------- -------- -------- --------
Total current assets 90,102 59,336 61,895 63,349 60,870
Computers, purchased software and property 4,683 4,177 3,777 3,662 3,232
Less accumulated depreciation and amortization 2,208 2,022 1,916 2,040 1,798
-------- -------- -------- -------- --------
Computers, purchased software and property, net 2,475 2,155 1,861 1,622 1,434
Long-term marketable securities 5,620 27,091 22,241 21,677 20,146
Deferred income taxes 580 690 462 482 707
-------- -------- -------- -------- --------
Total assets $98,777 $89,272 $86,459 $87,130 $83,157
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 628 $ 753 $ 400 $ 970 $ 317
Income taxes payable 419 547 167 179 677
Accrued expenses 5,018 5,674 5,524 5,169 6,584
Deferred revenue 8,119 9,801 8,165 8,564 5,460
-------- -------- -------- -------- --------
Total current liabilities 14,184 16,775 14,256 14,882 13,038
Stockholders' equity:
Common stock, $0.001 par value
authorized- 50,000,000 shares;
issued and outstanding (net of treasury stock)-
11,591,465 as of June 30, 2002 13 12 12 12 12
Additional paid-in capital 75,000 75,424 77,916 78,305 78,680
Cost of common stock in treasury (1,830,802
shares as of June 30, 2002) (472) (13,170) (14,502) (14,771) (17,810)
Retained earnings 9,806 9,914 8,561 8,697 9,053
Accumulated other comprehensive income 246 317 216 5 184
-------- -------- -------- -------- --------
Total stockholders' equity 84,593 72,497 72,203 72,248 70,119
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity $ 98,777 $ 89,272 $ 86,459 $ 87,130 $ 83,157
======== ======== ======== ======== ========
See notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2002 2001 2002
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Revenue before reimbursements(net revenue) $ 12,538 $ 11,372 $ 26,589 $ 20,806
Reimbursements 1,493 1,435 3,232 2,902
--------- ---------- ---------- ----------
Total Revenues 14,031 12,807 29,821 23,708
Operating expenses:
Project personnel and related expenses 7,379 5,329 14,776 10,331
Reimbursed expenses 1,493 1,435 3,232 2,902
Sales and marketing 2,129 1,812 3,988 3,330
Recruiting, retention and training 710 357 1,634 731
Management and administrative 3,099 3,969 6,546 6,972
--------- ---------- ---------- ----------
Total operating expenses 14,810 12,902 30,176 24,266
Operating loss (779) (95) (355) (558)
Interest income, net and other 898 568 1,911 1,132
--------- ---------- ---------- ----------
Income before income tax 119 473 1,556 574
Income tax expense - 117 503 82
--------- ---------- ---------- ----------
Net income $ 119 $ 356 $ 1,053 $ 492
========= ========== ========== ==========
Earnings per share:
- -Basic $ 0.01 $ 0.03 $ 0.08 $ 0.04
- -Diluted $ 0.01 $ 0.03 $ 0.08 $ 0.04
Weighted average common shares outstanding:
- -Basic 12,795 11,745 12,757 11,700
- -Diluted 13,632 12,132 13,670 12,173
See notes to consolidated financial statements
4
INFORTE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2001 2002 2001 2002
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash flows from operating activities
Net income $ 119 $ 356 $ 1,053 $ 492
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 405 396 837 792
Non-cash compensation - - 75 -
Deferred income taxes (77) (168) (248) (117)
Changes in operating assets and liabilities
Accounts receivable (738) 1,525 1,964 663
Prepaid expenses and other current assets (121) (96) (386) (35)
Accounts payable 94 (653) 45 (83)
Income taxes (36) 498 1,964 510
Accrued expenses and other 417 1,396 (2,685) 983
Deferred revenue 803 (3,104) (455) (2,705)
---------- ---------- ---------- ----------
Net cash provided by operating activities 866 150 2,164 500
Cash flows from investing activities
(Increase)/Decrease in marketable
securities 16,670 (8,602) 17,322 (2,866)
Purchases of property and equipment (86) (101) (287) (162)
---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities 16,584 (8,703) 17,035 (3,028)
Cash flows from financing activities
Proceeds from stock option and purchase
plans 283 375 733 764
Purchase of treasury stock - (3,020) (472) (3,231)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities 283 (2,645) 261 (2,467)
---------- ---------- ---------- ----------
Effect of changes in exchange rates on cash (7) 89 (3) 82
Increase (decrease) in cash and cash
equivalents 17,726 (11,109) 19,457 (4,913)
Cash and cash equivalents, beg. of period 44,123 26,404 42,392 20,208
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 61,849 $ 15,295 $ 61,849 $ 15,295
========== ========== ========== ==========
See notes to consolidated financial statements
5
Notes to consolidated financial statements
(Unaudited)
June 30, 2002
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Inforte Corp. ("Inforte") pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete consolidated financial
statements and should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2001 included in
Inforte's annual report Form 10K (File No. 000-29239). The balance sheet at
December 31, 2001 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying consolidated financial statements reflect
all adjustments (consisting solely of normal, recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of results for
the interim periods presented. The results of operations for the six-month
period ended June 30, 2002 are not necessarily indicative of the results to be
expected for the full fiscal year. Certain previously reported amounts have been
reclassified to conform with current presentation format.
(2) COST OF COMMON STOCK IN TEASURY
During the quarter ended June 30, 2002, Inforte repurchased 310,900 shares of
common stock for $3.0 million at an average price of $9.78. Of the shares
repurchased, 302,300 were settled in the quarter for a total of $3.0 million. On
January 24, 2001, the board of directors approved a $25.0 million stock
repurchase program and as of June 30, 2002, $7.2 million remained authorized for
repurchase.
(3) NET INCOME PER COMMON SHARE
Inforte computes basic earnings per share by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per common share
is computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents then outstanding.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2002 2001 2002
-------------------------- --------------------------
(unaudited) (unaudited)
Basic weighted average shares 12,794,667 11,745,014 12,757,451 11,700,279
Effect of dilutive stock options 837,420 387,136 912,289 472,407
-------------------------- --------------------------
Diluted common and common
equivalent shares 13,632,087 12,132,150 13,669,740 12,172,686
========================== =========================
(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 $535,946 and $459,741 for the three and six months
ended June 30, 2002 and $229,755 and $1,214,416 for the three months and
six-months ended June 30, 2001.
6
(5) CONTINGINCIES
Inforte Corp. and Philip S. Bligh, Stephen C.P. Mack and Nick Padgett, officers
of Inforte, have been named as defendants in Mary C. Best v. Inforte Corp.;
Goldman, Sachs & Co.; Salomon Smith Barney, Inc.; Philip S. Bligh; Stephen C.P.
Mack and Nick Padgett, Case No. 01 CV 10836, filed on November 30, 2001 in
Federal Court in the Southern District of New York. The case is also known as
In re Inforte Corp Initial Public Offering Securities Litigation. The named
plaintiff in this case was previously Brian Padgett. An Amended Class Action
Complaint for Violations of the Federal Securities Laws was filed on April 19,
2002. The amended complaint seeks certification of a class of purchasers of
Inforte Corp. stock, unspecified damages, interest, attorneys' and expert
witness fees and other costs. The amended complaint alleges violations of
federal securities laws in connection with our initial public offering (IPO)
occurring in February 2000. Each of the defendants in the case has moved to
dismiss the plaintiff's case. The court has not yet ruled on the motions. The
complaint does not allege any claims relating to any alleged misrepresentations
or omissions with respect to our business. We believe that we and our officers
have defenses to the claims and we intend to vigorously defend the lawsuit.
(6) SEGMENT REPORTING
Inforte engages in business activities in one operating segment, which provides
consulting services primarily on a fixed-price, fixed-time frame basis.
Inforte's services are delivered to clients in North America and Europe, and
Inforte's long-lived assets are located in North America and Europe. Domestic
and foreign operating revenues are based on the location of customers.
Long-lived assets consist of property, plant and equipment, software, furniture
and fixtures and leasehold improvements (net of accumulated depreciation).
Inforte's European operations had $4,614,203 and $2,145,534 of revenues for the
six months ending June 30 2002 and 2001, respectively, and $2,506,694 and
$1,416,541 of revenues for the three months ending June 30 2002 and 2001,
respectively. Long-lived assets were $116,790 and $80,931 as of June 30 2002 and
2001, respectively.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with our consolidated
financial statements, together with the notes to those statements, included
elsewhere in this Form 10-Q. The following discussion contains forward-looking
statements that involve risks, uncertainties, and assumptions such as statements
of our plans, objectives, expectations and intentions. Our actual results may
differ materially from those discussed in these forward-looking statements
because of the risks and uncertainties inherent in future events that include,
but are not limited to, those identified under the caption "Risk Factors"
appearing in this 10-Q as well as factors discussed elsewhere in this Form 10-Q.
Actual results may differ from forward-looking results for a number of reasons,
including but not limited to, Inforte's ability to: (i) effectively forecast
demand and profitably match resources with the demand during a period where
information technology spending is depressed and when economic and geopolitical
uncertainty is heightened throughout the world; (ii) attract and retain clients
and satisfy our clients' expectations; (iii) recruit and retain qualified
professionals; (iv) accurately estimate the time and resources necessary for the
delivery of our services; (v) build and maintain marketing relationships with
leading software vendors; and (vi) navigate the possibility of a smaller number
of clients, with associated higher revenue concentration. 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
Customer and demand management consultancy Inforte Corp. helps clients improve
customer interactions, revenue forecasting, management and profitability.
Inforte creates strategies and implements technology solutions that enhance
visibility, optimize customer and channel profitability, and integrate demand
information with supply and resource planning processes. Inforte has applied a
client advocacy approach and rigorous delivery methodologies to help garner
references from 100 percent of its Global 2000 client base. Founded in 1993,
Inforte is headquartered in Chicago and has offices in Atlanta, Dallas, London,
Los Angeles, New York and San Francisco.
The majority of our revenue is from professional services performed on a
fixed-price basis; however, we also perform services on a time-and-materials
basis. Typically, the first portion of an engagement involves a strategy project
or a discovery phase lasting 30 to 60 days, which we perform on a fixed-price
basis. This work enables us to determine with our clients the scope of
successive phases for design and implementation, which in total generally last
three to nine months and to decide whether we will perform these additional
phases for a fixed price or on a time-and-materials basis. Whether we use fixed
pricing or time-and-material pricing depends upon our assessment of the
project's risk, and how precisely our clients are able to define the scope of
activities they wish us to perform. Fixed prices are based on estimates from
senior personnel in our consulting organization who project the length of the
engagement, the number of people required to complete the engagement and the
skill level and billing rates of those people. We then adjust the fixed price
based on various qualitative risk factors such as the aggressiveness of the
delivery deadline and the technical complexity of the solution.
We ask clients to pay 25%-50% of our fixed-price projects in advance to enable
us to secure a project team in a timeframe that is responsive to the client's
needs. We bill the remainder in advance of the work performed based upon a
predetermined billing schedule over the course of the engagement. We bill
time-and-materials projects twice per month on the 15th and last day of the
month.
8
We recognize net revenue from fixed-price contracts on the percentage-of-
completion method, based on the ratio of costs incurred to total estimated
costs. We recognize time-and-materials net revenue as we perform the services.
For some clients, we have a requirement that cash collection must occur prior to
net revenue recognition. This requirement is in addition to the regular
requirement that net revenue be recognizable under either the percent of
completion method for fixed-price contracts or as services are performed under
time-and-materials contracts. We typically use cash-based revenue recognition
for clients with one of the following characteristics: deteriorating or poor
financial condition, limited financial resources, poor or no payment history, or
a non-US location. Amounts billed before we perform the services or before we
recognize revenue are classified as deferred revenue.
Through 2001, we did not include in our revenues the reimbursable expenses we
charge to our clients, on either fixed-price or time-and-material projects, as
we believe this is the most meaningful presentation of our income statement. In
November 2001, the Financial Accounting Standards Board's Emerging Issues Task
Force issued Topic D-103, "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred" stating these costs should be
characterized as revenue in the income statement if billed to customers. For
each quarter beginning with the March 31, 2002 quarter, we included reimbursable
expenses in revenue and expense and we have reclassified prior periods in the
comparative consolidated financial statements as required by the Financial
Accounting Standards Board.
Our revenues and earnings may fluctuate from quarter to quarter based on factors
within and outside of our control. These include:
* The variability in market demand for strategic technology professional
services and our ability to win business;
* The degree of competitive pricing;
* The length of the sales cycle associated with our service offerings;
* The number, size and scope of our projects;
* The efficiency with which we deliver projects and use our people;
* The compensation that we pay our people; and
* Our ability to keep expenses within budget.
If net revenue do not increase at a rate at least equal to increases in
expenses, our results of operations could be materially and adversely affected.
9
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the percentage of net revenues of certain items
included in Inforte's statement of income:
% of Net Revenue % of Net Revenue
Three months ended Six months ended
June 30, June 30,
2001 2002 2001 2002
Revenues
Revenue before reimbursements (net revenue) 100.0% 100.0% 100.0% 100.0%
Reimbursements 11.9 12.6 12.2 13.9
----- ----- ----- -----
Total Revenue 111.9 112.6 112.2 113.9
----- ----- ----- -----
Operating expenses:
Project personnel and
related expenses 58.9 46.9 55.6 49.7
Reimbursements 11.9 12.6 12.2 13.9
Sales and marketing 17.0 15.9 15.0 16.0
Recruiting, retention
and training 5.7 3.1 6.1 3.5
Management and administrative 24.7 34.9 24.6 33.5
---- ---- ---- ----
Total operating expenses * 118.1 113.5 113.5 116.6
----- ------ ----- -----
Operating loss -6.2 -0.8 -1.3 -2.7
Interest income, net and other 7.2 5.0 7.2 5.4
---- ---- ---- ----
Pretax income 1.0 4.2 5.9 2.8
Income tax expense (benefit) 0.0 1.0 1.9 0.4
--- --- --- ---
Net income 1.0% 3.1% 4.0% 2.4%
==== ==== ==== ====
*Total operating expenses,
excluding reimbursements 106.2% 100.8% 101.3% 102.7%
Six months and three months ended June 30, 2001 and 2002
- --------------------------------------------------------
Net revenue. Net revenue excludes reimbursable expenses that are billed to our
clients. Net revenue decreased 9% to $11.4 million for the quarter ended June
30, 2002 from $12.5 million for the quarter ended June 30, 2001. For the six
months ended June 30, 2002, net revenue decreased 22% to $20.8 million from
$26.6 million for the six months ended June 30, 2001. Although we have
historically experienced growth in our revenues, the market for strategic
technology consulting services has decreased significantly over the last 18
months due to the slower growth rate of the U.S. economy and the negative impact
that heightened economic uncertainty has on information technology spending. For
the quarter ended June 30, 2002, we had 30 significant clients with each of
these clients contributing $1.5 million to revenue on average on an annualized
basis. We had 35 significant clients during the quarter ended June 30, 2001,
each contributing $1.4 million to revenue on average on an annualized basis.
Sequentially, net revenue increased 21% to $11.4 million in the June 2002
quarter from $9.4 million in the March 2002 quarter. Historically our business
has experienced stronger sequential growth in the first half of the year,
compared to the sequential growth in the second half of the year. We believe
this seasonal pattern stems from the calendar year cycle of most clients, and
their access to new budget money in the first half of the year. This trend did
not occur in the first two quarters of 2001 due to the U.S. recession. While our
revenue is lower relative to the same period last year, we believe the seasonal
effects of our business have returned. Positive seasonality contributed to our
sequential growth in the second quarter, while negative seasonality combined
with a continuing depressed information
10
technology (IT) spending environment will hamper growth in the second half of
2002. In our second quarter 2002 earnings release on July 12, 2002, we set net
revenue guidance for future quarters as follows: $7.2 million to $8.0 million
for the third quarter 2002, $8.0 million for the fourth quarter 2002, and $8.5
million for the first quarter 2003 and each quarter beyond. We believe that
revenue-driven corporate profit growth must occur before broad-based growth in
IT spending resumes.
Project personal and related expenses. Project personnel and related expenses
consist primarily of compensation and benefits for our professional employees
who deliver consulting services and non-reimbursable costs. All labor costs for
project personnel are included in project personnel and related expenses. These
expenses decreased 28% to $5.3 million for the quarter ended June 30, 2002 from
$7.4 million for the quarter ended June 30, 2001. Year-to-date, these costs
decreased 30% to $10.3 million for the six months ended June 30, 2001 from $14.8
million for the six months ended June 30, 2001. These decreases resulted from
reductions in consulting headcount. We employed 186 consultants on June 30,
2002, down from 305 one year earlier. Project and personnel related expenses
represented 46.9% of net revenue for the quarter ended June 30, 2002, compared
to 58.9% for the quarter ended June 30, 2001. Year-to-date, these expenses were
49.7% for the first half of 2002 down from 55.6% at June 30, 2001. These
expenses declined as a percent of net revenue both for the quarter and
year-to-date as we reduced expenses by a greater magnitude than the rate of
revenue decline from the past year period.
Since client research indicated that information technology spending was likely
to remain at minimal levels during 2001, in June 2001 Inforte offered a
six-to-nine-month voluntary leave of absence program and a voluntary resignation
program to employees in underutilized areas. There were 90 people who
participated in the programs. Individuals who selected the leave of absence
program received 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
were expensed as incurred and included in the quarters through June 2002. No
further costs related to these initial programs remain as of June 30, 2002. In
October 2001 and in January 2002, Inforte again offered voluntary programs
similar to the June 2001 programs, however these latter programs were smaller in
scope, involving approximately 20 and 30 people, respectively.
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, benefits, bonus and travel costs for employees in the market
development and practice development groups and costs to execute marketing
programs. Sales and marketing expenses decreased 15% to $1.8 million for the
quarter ended June 2002 from $2.1 million in quarter ended June 2001. As a
percent of revenue, these expenses declined to 15.9% for the quarter ended June
30, 2002 from 17.0% from the quarter ended June 30, 2001. These decreases are
due to lower sales and marketing headcount. Year-to-date these expenses
decreased 17% to $3.3 million for the six months ended June 30, 2002 from $4.0
million in the prior period. As a percent of net revenue, these expenses
increased on a year-to-date basis to 16.0% for the six months ended June 30,
2002 from 15.0% for the six months ended June 30, 2001, as we reduced expenses
at a lesser rate than the rate of revenue decline from the prior year period.
The spending decrease on a year-to-date basis was again due to lower sales and
marketing headcount, which declined from 32 on June 30, 2001 to 26 on June 30,
2002. We expect sales and marketing expenses on an absolute basis during the
quarter ending September 30, 2002 to be at similar levels to the quarter ended
June 30, 2002. However as a percent of net revenue, we expect these costs to
increase in the quarter ending September 30, 2002 compared to the quarter ended
June 30, 2002.
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 resource
programs; and training costs, including travel and labor costs. These expenses
decreased 50% to $357,000 for the quarter ended June 30, 2002 from $710,000 for
the quarter ended
11
June 30, 2001. As a percent of net revenue these costs decreased to 3.1% in the
quarter ended June 30, 2002 from 5.7% in the quarter ended June 30, 2001, as we
reduced expenses by a greater magnitude than the rate of revenue decline from
the prior period. Year-to-date, recruiting, retention and training decreased 55%
to $731,000 for the six months ended June 30, 2002 from $1.6 million for the six
months ended June 30, 2001. As a percent of net revenue, these costs decreased
to 3.5% for the six months ended June 30, 2002 from 6.1% for the same period
last year. These costs decreased due to lower human resources headcount and less
spending on retention and training activities due to lower overall headcount.
Recruiting, retention and training headcount was 7 as of June 30, 2002, down
from 19 as of June 30, 2001. Total headcount was 257 as June 30, 2002, down from
406 as of June 30, 2001. We expect recruiting, retention and training costs to
be at similar levels in the quarter ending September 30, 2002 compared to the
quarter ended June 30, 2002.
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
28% to $3.9 million for the quarter ended June 30, 2002, from $3.1 million for
the quarter ended June 30, 2001. As a percent of net revenue, management and
administrative expenses were 34.9% for the quarter ended June 30, 2002, up from
24.7% for the quarter ended June 30, 2001. Management and administrative
expenses increased 7% to $7.0 million for the six months ended June 30, 2002
from $6.5 million for the same time period one year earlier. As a percent of net
revenue, management and administrative expenses increased to 33.5% for the six
months ended June 30, 2002 up from 24.6% for the six months ended June 30, 2001.
These increases in management and administrative expense are primarily due to
costs associated with our effort to consolidate office space at the Chicago
location where Inforte has multiple contractual rental commitments. Estimated
costs for the consolidation of facilities consist of contractual rental
commitments for office space being vacated and related costs, offset by
estimated sub-lease income. In the June 2002 quarter, we lowered our estimate of
the expected sub-lease income. If future sub-lease income is less than estimated
or if we are unable to sub-lease our vacated space, additional charges in future
periods will be necessary. The charge related to the office space consolidation
was $0.6 million in the June 2002 quarter, bringing the cumulative charges for
office space consolidation since the September 2001 quarter to $1.7 million. We
expect management and administrative expenses to decrease on an absolute basis
during the quarter ending September 30, 2002. However as a percent of net
revenue, we expect these costs to be at similar levels in the quarter ending
September 30, 2002 compared to the quarter ended June 30, 2002.
Interest income, net and other. During the quarter ended June 30, 2002, interest
income, net and other was $0.6 million, down from $0.9 million for the quarter
ended June 30, 2001. The decrease was due to the reinvestment of matured
securities into similar type securities at lower market interest yields and also
due to the lower average cash balances as a result of Inforte's stock buyback
program. Since inception of this stock buy-back program in the March 2001
quarter we have repurchased $17.8 million of common stock.
Income tax expense. Inforte's effective tax rate for the June 2002 quarter was
24.7% compared to a rate of 0.0% for the June 2001 quarter. The increase in the
effective tax rate is a result of a lower operating loss in the June 2002
quarter. The year-to-date 2002 income tax expense through June 30, 2002 was the
sum of a) the year-to-date operating loss times a 38% combined federal and state
tax rate and b) year-to-date interest income, net and other times a reduced tax
rate of 26%. The second quarter 2002 income tax expense represented the
difference between the year-to-date income tax expense at June 30, 2002 and
year-to-date income tax expense at March 31, 2002. Our present expectation,
which may change as the year progresses, is that the year-to-date income tax
expense (benefit) at the end of each quarter in 2002 will be calculated
similarly with a 38% tax rate on year-to-date operating income (loss) and a 26%
tax rate on year-to-date interest income, net and other. The tax rate on
interest income, net and other will vary from the 26% level in future quarters
as
12
the proportion of tax-advantaged marketable securities in our investment
portfolio changes.
Liquidity and capital resources. Cash and cash equivalents decreased from $20.2
million as of December 31, 2001 to $15.3 million as of June 30, 2002. Short-term
marketable securities increased from $32.7 million as of December 31, 2001 to
$37.3 million as of June 30, 2002. Long-term marketable securities decreased
from $22.2 million as of December 31, 2001 to $20.1 million as of June 30, 2002.
Short-term and long-term marketable securities are available-for-sale securities
consisting of commercial paper, U.S. government or municipal notes and bonds,
corporate bonds and corporate auction preferreds. In total, cash and cash
equivalents, short-term and long-term marketable securities decreased by $2.3
million from $75.1 million to $72.8 million during the quarter ended June 30,
2002.
During the June 2002 quarter, Inforte's cash flow from operations was positive
$0.1 million and capital expenditures were $0.1 million, resulting in slightly
positive free cash flow (cash flow from operation minus capital expenditures).
Financing activities resulted in a cash outflow of $2.6 million, consisting of
negative $3.0 million used to purchase Inforte common stock through our stock
buyback program and positive $0.4 million from employees participating in stock
purchase and stock option plans.
During the June 2002 quarter, Inforte repurchased 310,900 shares of stock for
$3.0 million at an average price of $9.78. Of the shares purchased, 302,300 were
settled in the quarter for a total of $3.0 million. Our board of directors
approved a $25.0 million stock repurchase program on January 24, 2001 and as of
June 30, 2002, $7.2 million remained authorized for repurchase. As of June 30,
2002, Inforte had 11,591,465 shares outstanding and $72.8 million in cash and
marketable securities, resulting in $6.28 of cash and marketable securities per
basic share. As of June 30, 2002, the public float (shares not held by executive
officers and directors) totaled 6.4 million shares or 55% of total outstanding
shares.
Inforte believes that its current cash, cash equivalents and marketable
securities will be sufficient to meet working capital and capital expenditure
requirements for the foreseeable future.
All highly liquid investments with maturities of three months or less when
purchased are considered cash equivalents. Cash and cash equivalent balances
consist of obligations of U.S. banks, high-grade commercial paper and other high
quality, short-term obligations of U.S. companies. Short-term and long-term
marketable securities are available-for-sale securities that are recorded at
fair market value. The difference between amortized cost and fair market value,
net of tax effect, is shown as a separate component of stockholders' equity. The
cost of securities available-for-sale is adjusted for amortization of premiums
and discounts to maturity. Interest and amortization of premiums and discounts
for all securities are included in interest income.
13
Inforte has several operating leases which have contractual cash obligations for
future payments. There are no other contractual obligations which require future
cash obligations or other commitments. The table below identifies all future
commitments.
Contractual Obligations Payments Due by Period
- ------------------------------------------------------------------------------------------------
Total Q3-Q4 2002 2003-2004 2005 and
beyond
- ------------------------------------------------------------------------------------------------
Long-term debt 0 0 0 0
Capital lease obligations 0 0 0 0
Operating leases 9,088 1,181 4,863 3,044
Unconditional purchase obligations 0 0 0 0
Other long-term obligations 0 0 0 0
Total contractual cash obligations 9,088 1,181 4,863 3,044
- ------------------------------------------------------------------------------------------------
Inforte Corp. has a wholly owned subsidiary, Inforte Investments Inc., a
Delaware corporation, which functions as a holding company for Inforte Corp.'s
investments. Inforte Investments Inc. has no operations other than holding
investments of Inforte Corp. and no contractual commitments requiring future
cash obligations. The financial position and results of operations for Inforte
Investments Inc. are consolidated, in accordance with generally accepted
accounting principles, in the consolidated financial statements reported in this
document.
Critical accounting policies. We recognize net revenue from fixed-price
contracts on the percentage-of-completion method, based on the ratio of costs
incurred to total estimated costs. We recognize time-and-materials net revenue
as we perform the services. For some clients, we have a requirement that cash
collection must occur prior to net revenue recognition. This requirement is in
addition to the regular requirement that net revenue be recognizable under
either the percent of completion method for fixed-price contracts or as services
are performed under time-and-materials contracts. We typically use cash-based
revenue recognition for clients with one of the following characteristics:
deteriorating or poor financial condition, limited financial resources, poor or
no payment history, or a non-US location. Amounts billed before we perform the
services or before we recognize revenue are classified as deferred revenue.
In November 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force issued Topic D-103, "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred" stating these
costs should be characterized as revenue in the income statement if billed to
customers. For each quarter beginning with the March 31, 2002 quarter, we
included reimbursable expenses in revenue and expense and we have reclassified
prior periods in the comparative consolidated financial statements as required
by the Financial Accounting Standards Board.
An allowance for doubtful accounts is maintained for potential credit losses.
The amount of the reserve is established analyzing all client accounts to
determine credit risk. Criteria considered include slow payment history, no
payment history, poor financial condition of the client and the size of the
outstanding balance from the client.
14
Risk Factors
In addition to other information in this Form 10-Q, the following risk factors
should be carefully considered in evaluating Inforte and its business because
such factors currently may have a significant impact on Inforte's business,
operating results and financial condition. As a result of the risk factors set
forth below and elsewhere in this Form 10-Q, and the risk factors discussed in
Inforte's other Securities and Exchange Commission filings, actual results could
differ materially from those projected in any forward-looking statements.
RISKS RELATED TO INFORTE
If we are unable to accurately forecast our quarterly revenue, our profitability
may be reduced or eliminated.
The level of spending by clients and potential clients on information technology
in the United States has slowed and become less certain. We believe the
uncertainty stems from the rapid slowing of growth in Gross Domestic Product in
the United States that began in the second half of calendar 2000. In some cases
the uncertainty has reduced the overall number and size of projects available
for bid. In other cases the uncertainty has resulted in project deferrals,
project scope reductions or limited follow-on projects at existing clients.
While our revenue forecast methods are sophisticated and have proven accurate
historically, we believe the recent environment adds greater risk and
uncertainty to our forecasts. If we fail to accurately forecast revenue, our
actual results may differ materially from the amounts planned, and our
profitability may be reduced or eliminated.
If we fail to identify and successfully transition to the latest and most
demanded solutions or keep up with an evolving industry, we will not compete
successfully for clients and our profits may decrease.
We focus on providing our clients solutions that employ the latest technologies.
If we fail to identify the latest solutions, or if we identify but fail to
successfully transition our business to solutions with growing demand, our
reputation and our ability to compete for clients and the best employees could
suffer. If we cannot compete successfully for clients, our revenues may
decrease. Also, if our projects do not involve the latest and most demanded
solutions, they would generate lower fees.
Because our market changes constantly, some of the most important challenges
facing us are the need to:
* effectively use the latest technologies;
* continue to develop our strategic and technical expertise;
* influence and respond to emerging industry standards and other
technological changes;
* identify and effectively market solutions with growing demand during a
period of slower technological advancement and adoption.
* enhance our current services; and
* develop new services that meet changing customer needs.
All of these challenges must be met in a timely and cost-effective manner. We
cannot assure you that we will succeed in effectively meeting these challenges,
especially during a substantial economic slowdown or a recession when right
sizing the business for lower demand diverts resources and senior management's
attention.
15
If we fail to satisfy our clients' expectations, our existing and continuing
business could be adversely affected.
If we fail to satisfy the expectations of our clients, we could damage our
reputation and our ability to retain existing clients and attract new clients.
In addition, if we fail to perform our engagements, we could be liable to our
clients for breach of contract. Although most of our contracts limit the amount
of any damages to the fees we received, we could still incur substantial cost,
negative publicity, and diversion of management resources to defend a claim, and
as a result, our business results could suffer.
We may be unable to hire and retain employees who are highly skilled, which
would impair our ability to perform client services, generate revenue and
achieve profitability.
If we are unable to hire and retain highly-skilled individuals, our ability to
retain existing business and compete for new business will be harmed.
Individuals who have the experience and expertise to market, sell and perform
the services we provide to our clients are limited and competition for these
individuals is intense. To attract and retain these individuals, we invest a
significant amount of time and money. In addition, we expect that both bonus
payments and equity ownership will be an important component of overall employee
compensation. In the current economic and market environment, overall bonus
payments have been reduced significantly, increasing the risk that key employees
will leave Inforte. Also, if our stock price does not increase over time, it may
be more difficult to retain employees who have been compensated with stock
options. Options granted to employees from the IPO date, February 17, 2000,
through June 30, 2002 have exercise prices of $8.56 to $71.81. The average
exercise price of all options outstanding at June 30, 2002 is $14.91. Since the
current market price for Inforte stock has recently been below this average
strike price, it may be more difficult to retain employees. If key employee
retention rates grow to unacceptable levels because compensation is not at
competitive rates, Inforte may increase the level of stock option grants or cash
compensation. These actions would reduce earnings per share and may cause
Inforte to become unprofitable.
If we fail to adequately manage rapid changes in demand, our profitability and
cash flow may be reduced or eliminated.
If we cannot keep pace with the rapid changes in demand, we will be unable to
effectively match resources with demand, and maintain high client satisfaction,
which may eliminate our profitability and our ability to achieve positive cash
flow from operations. Our business grew dramatically from 1993 through 2000. For
example, our net revenue increased from $13.4 million in 1998, to $30.1 million
in 1999 and to $63.8 million in 2000. As a result of the current U.S. economic
environment and overcapacity in our industry however, net revenue in 2001 was
$47.7 million, a 25% decline compared to 2000. For 2002, industry demand is
highly dependent on the macroeconomic environment, which heavily influences our
clients' level of information technology services spending and competition among
service providers. The level of information technology spending is subject to
rapid positive and negative changes. If the level of spending declines further,
we may not be profitable or achieve positive cash flow from operations in 2002.
Currently, we expect net revenue to be $7.2 million to $8.0 million in the third
quarter of 2002 and $8.0 million in the fourth quarter of 2002, to total $36.0
million to $36.8 million for 2002. If, on the other hand, our growth exceeds our
expectations, our current resources and infrastructure may be inadequate to
handle the growth. Also, our senior management team has limited collective
experience managing a public company or a business the current size of Inforte
and our management team has limited collective experience managing a business
during an economic slowdown or recession.
If our marketing relationships with software vendors deteriorate, we would lose
their client referrals.
We currently have marketing relationships with software vendors, including
Ariba, i2, Siebel and Vignette. Although we have historically received a large
number of
16
business leads from these software vendors to implement their
products, they are not required to refer business to us and they may terminate
these relationships at any time. If our relationships with these software
vendors deteriorate, we may lose their client leads and our ability to develop
new clients could be negatively impacted. Any decrease in our ability to obtain
clients may cause a reduction in our net revenues.
If we are unable to rapidly integrate third-party software, we may not be able
to deliver solutions to our clients on a timely basis, resulting in lost
revenues and potential liability.
In providing client services, we recommend that our clients use software
applications from a variety of third-party vendors. If we are unable to
implement and integrate this software in a fully functional manner for our
clients, we may experience difficulties that could delay or prevent the
successful development, introduction or marketing of services. Software often
contains errors or defects, particularly when first introduced or when new
versions or enhancements are released. Despite internal testing and testing by
current and potential clients, our current and future solutions may contain
serious defects due to third-party software or software we develop or customize
for clients. Serious defects or errors could result in liability for damages,
lost revenues or a delay in implementation of our solutions.
Our revenues could be negatively affected by the loss of a large client or our
failure to collect a large account receivable.
At times, we derive a significant portion of our revenue from large projects for
a limited number of varying clients. In the June 2002 quarter, one client
accounted for over 10% of net revenue, with our five largest clients accounting
for 43% of net revenue and our ten largest clients accounting for 67% of net
revenue. Although these large clients vary from time to time and our long-term
revenues do not rely on any one client, our revenues could be negatively
affected if we were to lose one of these clients or if we were to fail to
collect a large account receivable.
In addition, many of our contracts are short-term and provide that our clients
can reduce or cancel our services without incurring any penalty. If our clients
reduce or terminate our services, we would lose revenue and would have to
reallocate our employees and our resources to other projects to attempt to
minimize the effects of that reduction or termination. Accordingly,
terminations, including any termination by a major client, could adversely
impact our revenues. During 2002 we believe the uncertain economic environment
increases the probability that services may be reduced or canceled.
If we estimate incorrectly the time required to complete our projects, we will
lose money on fixed-price contracts.
A majority of our contracts are fixed-price contracts, rather than contracts in
which the client pays us on a time and materials basis. We must estimate the
number of hours and the materials required before entering into a fixed-price
contract. Our future success will depend on our ability to continue to set rates
and fees accurately and to maintain targeted rates of employee utilization and
project quality. If we fail to accurately estimate the time and the resources
required for a project, any required increase in the time and resources to
complete the project could cause our profits to decline.
Fluctuations in our quarterly revenues and operating results due to cyclical
client demand may lead to reduced prices for our stock.
Our quarterly revenues and operating results have fluctuated significantly in
the past and we expect them to continue to fluctuate significantly in the
future. Historically, we have experienced our greatest sequential growth during
the first and second quarters. We typically experience significantly lower
sequential growth in the third and fourth quarters. We attribute this to the
budgeting cycles of our customers, most of whom have calendar-based fiscal years
and as a result are more likely to initiate projects during the first half of
the year. In 2001,
17
this traditional seasonal pattern was overwhelmed by a cyclical decline in
information technology spending, causing our net revenue to decline sequentially
in each quarter of 2001. More recently, in February and March 2002, we did
experience an increase in demand which did allow our net revenue in the second
quarter 2002 to exceed the first quarter 2002 level. We believe this increase in
demand is seasonal and we do not believe a cyclical recovery in information
technology spending is underway. This existence of both seasonal and cyclical
effects does make it more difficult to predict demand, and if we are unable to
predict client demand accurately in a slower growth or distressed economic
environment, our expenses may be disproportionate to our revenue on a quarterly
basis and our stock price may be adversely affected.
Others could claim that we infringe on their intellectual property rights, which
may result in substantial costs, diversion of resources and management
attention, and harm to our reputation.
A portion of our business involves the development of software applications for
specific client engagements. Although we believe that our services do not
infringe on the intellectual property rights of others, we may be the subject of
claims for infringement, which even if successfully defended could be costly and
time-consuming. An infringement claim against us could materially and adversely
affect us in that we may:
* experience a diversion of our financial resources and management
attention;
* incur damages and litigation costs, including attorneys' fees;
* be enjoined from further use of the intellectual property;
* be required to obtain a license to use the intellectual property,
incurring licensing fees;
* need to develop a non-infringing alternative, which could be costly and
delay projects; and
* have to indemnify clients with respect to losses incurred as a
result of our infringement of the intellectual property.
Because we are newer and smaller than many of our competitors, we may not have
the resources to effectively compete, causing our revenues to decline.
Many of our competitors have longer operating histories, larger client bases,
longer relationships with clients, greater brand or name recognition, and
significantly greater financial, technical, marketing, and public relations
resources than we do. We may be unable to compete with full-service consulting
companies, including the past and current consulting divisions of the largest
global accounting firms, who are able to offer their clients a wider range of
services. If our clients decide to take their information technology
professional services projects to these companies, our revenues may decline. It
is possible that in uncertain economic times our clients may prefer to work with
larger firms to a greater extent than normal. In addition, new professional
services companies may provide services similar to ours at a lower price, which
could cause our revenues to decline.
Our expansion and growth internationally could negatively affect our business.
In the June 2002 quarter, international net revenue exceeded 20% of net revenue.
As our international net revenue grows, we face additional risks that we do not
face domestically. Such risks include longer customer payment cycles, adverse
taxes and compliance with local laws and regulations. Further, the effects of
fluctuations in currency exchange rates may adversely affect the results of
operations. Finally, there are indications that the U.S. economic slowdown is
spreading to the rest of the world, which could limit our ability to obtain
international net revenue going
18
forward. These risk factors, as well as others not cited here, may negatively
impact our business.
If clients view offshore development as a viable alternative to our service
offerings, our pricing and revenue may be negatively affected.
Gradually, over the past two decades, numerous IT service firms have been
founded in countries such as India, which have well-educated and technically
trained English-speaking workforces available at wage rates that are only a
fraction of US and European wages rates. Additionally, some larger clients have
established internal IT operations at offshore locations. While traditionally we
have not competed with offshore development, presently this form of development
is seeing increasing acceptance in the market, especially for routine and
repetitive types of development. Offshore development is more risky for clients
due to distance, geopolitical, and cultural issues, however it does have the
advantage of lower cost. Inforte does not currently intend to establish offshore
development capabilities as some of our competitors have done. Instead, we
intend to continue our ongoing evolution toward more valued and more
differentiated service offerings-including more strategy and process
consulting-which are difficult for offshore developers to replicate. If we are
unable to evolve our service offerings, or if the rate of acceptance of offshore
development advances faster than we anticipate, then our pricing and our revenue
may be negatively affected.
RISKS RELATED TO OUR INDUSTRY
If the rate of adoption of advanced information technology slows substantially,
our revenues may decrease.
We market our services primarily to firms that want to adopt information
technology that provides an attractive return on investment or helps provides a
sustainable competitive advantage. Our revenues could decrease if companies
decide not to integrate the latest technologies into their businesses due to
economic factors, governmental regulations, financial constraints or other
reasons.
Inforte's market research suggests that the level information technology
spending in the United States is closely linked with the growth rate of the
Gross Domestic Product (GDP). The recent slowdown in the GDP growth rate has
caused a slower rate of adoption of advanced information technology by our
target clients. We expect information technology spending and Inforte revenue to
be highly dependent on the health of the US economy.
If the supply of information technology companies and personnel continues to
exceed demand, this may adversely impact the pricing of our projects and our
ability to win business.
Beginning in the second half of 2000 many firms in our industry announced
significant employee layoffs and lower rates of utilization of billable
personnel. An oversupply of technology professionals may reduce the price
clients are willing to pay for our services. An oversupply may also increase the
talent pool for potential clients who may choose to complete projects in-house
rather than use an outside consulting firm such as Inforte. Lower utilization
rates increase the likelihood that a competitor will reduce their price to
secure business in order to improve their utilization rate. The extent to which
pricing and our ability to win business may be impacted is a function of both
the magnitude and duration of the supply and demand imbalance in our industry.
19
RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK
Our stock price could be extremely volatile, like many technology stocks.
The market prices of securities of technology companies, particularly
information technology services companies, have been highly volatile. We expect
continued high volatility in our stock price, with prices at times bearing no
relationship to Inforte's operating performance.
Inforte's average trading volume during the June 2002 quarter averaged
approximately 45,000 shares per day. On any particular day, Inforte's trading
volume can be less than 1,000 shares which increase the potential for volatile
stock prices.
Volatility of our stock price could result in expensive class action litigation.
If our common stock suffers from volatility like the securities of other
technology companies, we have a greater risk of further securities class action
litigation claims. One such claim is pending presently. Litigation could result
in substantial costs and could divert our resources and senior management's
attention. This could harm our productivity and profitability.
Officers and directors own a significant percentage of outstanding shares and,
as a group, may control a vote of stockholders.
As of June 30, 2002 the executive officers and directors set forth below, own
approximately 44.2% of the outstanding shares of our common stock and own
individually the percentage set forth opposite their names:
* Philip S. Bligh 21.1%
* Stephen C.P. Mack 17.0%
* Nick Padgett 6.1%
If the stockholders listed above act or vote together with other employees who
own significant shares of our common stock they will have the ability to control
the election of our directors and the approval of any other action requiring the
approval of our stockholders, including any amendments to the certificate of
incorporation and mergers or sales of all or substantially all assets, even if
the other stockholders perceive that these actions are not in their best
interests.
Over time, the influence or control executive officers have on a stockholder
vote will decrease as officers supplement below-market salaries and diversify
overall equity wealth with sales of Inforte stock. As permitted by SEC Rule
10b5-1, Inforte executive officers have or may set up a predefined, structured
stock trading program. The trading program allows brokers acting on behalf of
company insiders to trade company stock during company blackout periods or while
the insiders may be aware of material, non-public information, if the
transaction is performed according to a pre-existing contract, instruction or
plan that was established with the broker during a non-blackout period and when
the insider was not aware of any material, non-public information. Inforte
executive officers may also trade company stock outside of plans set up under
SEC rule 10b5-1, however such trades would be subject to company blackout
periods and insider trading rules.
The authorization of preferred stock, a staggered board of directors and
supermajority voting requirements will make a takeover attempt more difficult,
even if the takeover would be favorable for stockholders.
20
Inforte's certificate of incorporation and bylaws may have the effect of
deterring, delaying or preventing a change in control of Inforte. For example,
our charter documents provide for:
* the ability of the board of directors to issue preferred stock and to
determine the price and other terms, including preferences and voting
rights, of those shares without stockholder approval;
* the inability of our stockholders to act by written consent or to call
a special meeting;
* advance notice provisions for stockholder proposals and nominations to
the board of directors;
* a staggered board of directors, with three-year terms, which will
lengthen the time needed to gain control of the board of directors; and
* supermajority voting requirements for stockholders to amend provisions
of the charter documents described above.
We are also subject to Delaware law. Section 203 of the Delaware General
Corporation Law prohibits us from engaging in a business combination with any
significant stockholder for a period of three years from the date the person
became a significant stockholder unless, for example, our board of directors
approved the transaction that resulted in the stockholder becoming an interested
stockholder. Any of the above could have the effect of delaying or preventing
changes in control that a stockholder may consider favorable.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In all categories of cash, cash equivalents and short-term and long-term
marketable securities, Inforte invests only in highly liquid securities of high
credit quality. All investments bear a minimum Standard & Poor's rating of A1,
Moody's investor service rating of P1, or equivalent. Inforte believes that it
does not have any material market risk exposure with respect to financial
instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Inforte Corp. and Philip S. Bligh, Stephen C.P. Mack and Nick Padgett, officers
of Inforte, have been named as defendants in Mary C. Best v. Inforte Corp.;
Goldman, Sachs & Co.; Salomon Smith Barney, Inc.; Philip S. Bligh; Stephen C.P.
Mack and Nick Padgett, Case No. 01 CV 10836, filed on November 30, 2001 in
Federal Court in the Southern District of New York. The case is also known as
In re Inforte Corp Initial Public Offering Securities Litigation. The named
plaintiff in this case was previously Brian Padgett. An Amended Class Action
Complaint for Violations of the Federal Securities Laws was filed on April 19,
2002. The amended complaint seeks certification of a class of purchasers of
Inforte Corp. stock, unspecified damages, interest, attorneys' and expert
witness fees and other costs. The amended complaint alleges violations of
federal securities laws in connection with our initial public offering (IPO)
occurring in February 2000. Each of the defendants in the case has moved to
dismiss the plaintiff's case. The court has not yet ruled on the motions. The
complaint does not allege any claims relating to any alleged misrepresentations
or omissions with respect to our business. We believe that we and our officers
have defenses to the claims and we intend to vigorously defend the lawsuit.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
21
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 Written Statement of the Chief Executive Officer
Exhibit 99.2 Written Statement of the Chief Financial Officer
Reports on Form 8-K
None
22
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
August 14, 2002 ---------------------------------
Nick Padgett,
Chief Financial Officer
23