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, 2003
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), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
The number of shares outstanding of the Registrant's Common Stock as of
September 30, 2003 was 10,945,512.
INFORTE CORP.
INDEX
Page No.
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PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2002,
December 31, 2002, March 31, 2003, June 30, 2003
and September 30, 2003 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 2002 and 2003 4
Consolidated Statements of Cash Flows - Three months
and nine months ended September 30, 2002 and 2003 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Qualitative and Quantitative Disclosure About Market Risk 18
Item 4. Controls and Procedures 18
PART II. Other Information
Item 1 Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3 Defaults of Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit 31 Section 302 certification of the Chief Executive Officer 22
Exhibit 31 Section 302 certification of the Chief Financial Officer 23
Exhibit 32 Section 906 certification of the Chief Executive Officer
and Chief Financial Officer 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INFORTE CORP.
CONSOLIDATED BALANCE SHEETS
(000's)
SEPT 30, DEC 31, MAR 31, JUN 30, SEPT 30,
2002 2002 2003 2003 2003
-------- -------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 14,992 $ 19,186 $ 26,543 $ 30,167 $ 22,114
Short-term marketable securities 32,044 31,340 25,090 16,854 27,866
Accounts receivable 5,388 5,100 4,160 4,499 5,094
Allowance for doubtful accounts (700) (600) (575) (550) (525)
-------- -------- -------- -------- --------
Accounts receivable, net 4,688 4,500 3,585 3,949 4,569
Prepaid expenses and other current assets 1,435 1,099 1,353 1,223 1,009
Interest receivable on investment
securities 488 497 425 404 469
Deferred income taxes 1,435 1,224 1,476 1,203 953
-------- -------- -------- -------- --------
Total current assets 55,082 57,846 58,472 53,800 56,980
Computers, purchased software and property 3,074 2,857 2,849 2,278 2,091
Less accumulated depreciation and amortization 1,853 1,779 1,871 1,440 1,334
-------- -------- -------- -------- --------
Computers, purchased software and property, net 1,221 1,078 978 838 757
Long-term marketable securities 18,947 16,819 15,919 19,268 17,237
Deferred income taxes 629 328 336 352 350
-------- -------- -------- -------- --------
Total assets $ 75,879 76,071 75,705 74,258 75,324
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 155 $ 240 1,443 471 887
Income taxes payable 800 291 948 585 357
Accrued expenses 4,941 5,195 3,475 3,193 3,312
Accrued loss on disposal of
leased property 1,395 1,126 1,012 924 681
Deferred revenue 5,028 4,487 3,659 3,229 3,539
-------- -------- -------- -------- --------
Total current liabilities 12,319 11,339 10,537 8,402 8,776
Stockholders' equity:
Common stock, $0.001 par value
authorized- 50,000,000 shares;
issued and outstanding (net of treasury stock)-
10,945,512 as of Sept. 30, 2003 11 11 11 11 11
Additional paid-in capital 78,742 79,192 79,216 79,427 79,658
Cost of common stock in treasury (2,720,823
shares as of Sept. 30, 2003) (24,997) (24,997) (24,997) (24,997) (24,997)
Retained earnings 9,577 10,277 10,722 11,182 11,629
Accumulated other comprehensive income 227 249 216 233 247
-------- -------- -------- -------- --------
Total stockholders' equity 63,560 64,732 65,168 65,856 66,548
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity $ 75,879 76,071 75,705 74,258 75,324
======== ======== ======== ======== ========
See notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Revenue before reimbursements (net revenue) $ 9,607 $ 7,720 $ 30,413 $ 24,094
Reimbursements 1,342 1,359 4,244 3,404
--------- ---------- --------- ----------
Total Revenues 10,949 9,079 34,657 27,498
Operating expenses:
Project personnel and related expenses 4,546 4,107 14,877 12,424
Reimbursed expenses 1,342 1,359 4,244 3,404
Sales and marketing 1,621 1,040 4,951 3,702
Recruiting, retention and training 294 183 1,025 476
Management and administrative 2,911 2,135 9,883 7,057
--------- ---------- --------- ----------
Total operating expenses 10,714 8,824 34,980 27,063
Operating income (loss) 235 255 (323) 435
Interest income, net and other 535 257 1,667 1,084
--------- ---------- --------- ----------
Income before income tax 770 512 1,344 1,519
Income tax expense 246 65 328 167
--------- ---------- --------- ----------
Net income $ 524 $ 447 $ 1,016 $ 1,352
========= ========== ========= ==========
Earnings per share:
- -Basic $ 0.05 $ 0.04 $ 0.09 $ 0.12
- -Diluted $ 0.05 $ 0.04 $ 0.09 $ 0.12
Weighted average common shares outstanding:
- -Basic 11,092 10,915 11,495 10,881
- -Diluted 11,298 11,055 11,888 10,993
See notes to consolidated financial statements
4
INFORTE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2002 2003 2002 2003
---------- --------- ----------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash flows from operating activities
Net income $ 524 $ 447 $ 1,016 $ 1,352
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 333 364 1,125 1,024
Non-cash compensation - - - (75)
Deferred income taxes 136 252 19 249
Changes in operating assets and liabilities
Accounts receivable 38 (620) 701 (69)
Prepaid expenses and other current assets 122 148 87 168
Accounts payable (162) 416 (245) 647
Income taxes 123 (228) 633 66
Accrued expenses and other (171) (124) 812 (2,328)
Deferred revenue (432) 310 (3,137) (948)
-------- -------- -------- --------
Net cash provided by operating activities 511 965 1,011 86
Cash flows from investing activities
(Increase)/Decrease in marketable
securities 6,374 (9,189) 3,508 2,484
Purchases of property and equipment (16) (94) (178) (301)
-------- -------- -------- --------
Net cash provided by (used in)
investing activities 6,358 (9,283) 3,330 2,183
Cash flows from financing activities
Proceeds from stock option and purchase
plans 61 231 825 541
Purchase of treasury stock (7,265) - (10,496) -
-------- -------- -------- --------
Net cash provided by (used in) financing
activities (7,204) 231 (9,671) 541
-------- -------- -------- --------
Effect of changes in exchange rates on cash 32 34 114 118
Increase (decrease) in cash and cash
equivalents (303) (8,053) (5,216) 2,928
Cash and cash equivalents, beg. of period 15,295 30,167 20,208 19,186
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 14,992 $ 22,114 $ 14,992 $ 22,114
======== ======== ======== ========
See notes to consolidated financial statements
5
Notes to consolidated financial statements
(Unaudited)
September 30, 2003
(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, 2002 included in
Inforte's annual report Form 10-K (File No. 000-29239). The balance sheet at
December 31, 2002 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 nine-month
period ended September 30, 2003 are not necessarily indicative of the results to
be expected for the full fiscal year. Certain previously reported amounts have
been reclassified to conform with current presentation format.
(2) NET INCOME PER COMMON SHARE
Inforte computes basic earnings per share by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per common share
is computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents outstanding.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2003 2002 2003
-------------------------- --------------------------
(unaudited) (unaudited)
Basic weighted average shares 11,091,832 10,915,317 11,495,235 10,880,583
Effect of dilutive stock options 206,153 139,929 393,026 111,974
-------------------------- --------------------------
Diluted common and common
equivalent shares 11,297,985 11,055,246 11,888,261 10,992,557
========================== ==========================
(3) 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. Inforte
reports foreign currency translation gains and losses, and unrealized gains and
losses on investments, as components of comprehensive income. Total
comprehensive income was $460,477 and $1,348,789 for the three and nine months
ended September 30, 2003 and $565,561 and $1,025,302 for the three and nine
months ended September 30, 2002.
(4) CONTINGENCIES
Inforte; Philip S. Bligh and Stephen C.P. Mack, officers of Inforte; and Nick
Padgett, a former officer 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"). The Case is among more than 300 putative class actions against certain
issuers, their officers and directors, and underwriters with respect to such
issuers' initial public offerings, coordinated as In re Initial Public Offering
Securities Litigation, 21 MC 92 (SAS) (collectively, the "Multiple IPO
Litigation"). An amended class action complaint was filed in the Case on April
19, 2002. The amended complaint in the Case alleges violations of federal
securities laws in connection with Inforte's initial public offering occurring
in February 2000 and seeks certification of a class of purchasers of Inforte
stock, unspecified
6
damages, interest, attorneys' and expert witness fees and other costs. The
amended complaint does not allege any claims relating to any alleged
misrepresentations or omissions with respect to our business. The individual
defendants (Messrs. Bligh, Mack and Padgett) have been dismissed from the case
without prejudice pursuant a stipulated dismissal and a tolling agreement. We
have moved to dismiss the plaintiff's case. On February 19, 2002, the Court
granted this motion in part, denied it in part and ordered that discovery in the
case may commence. The Court dismissed with prejudice the plaintiff's purported
claim against Inforte under Section 10(b) of the Securities Exchange Act of
1934, but left in place the plaintiff's claim under Section 11 of the Securities
Act of 1933.
Inforte has entered into a Memorandum of Understanding (the "MOU"), along with
most of the other defendant issuers in the Multiple IPO Litigation, whereby such
issuers and their officers and directors (including Inforte and Messrs. Bligh,
Mack and Padgett) will be dismissed with prejudice from the Multiple IPO
Litigation, subject to the satisfaction of certain conditions. Under the terms
of the MOU, neither Inforte nor any of its formerly named individual defendants
admit any basis for liability with respect to the claims in the Case. The MOU
provides that insurers for Inforte and the other defendant issuers participating
in the settlement will pay approximately $1 billion to settle the Multiple IPO
Litigation, except that no such payment will occur until claims against the
underwriters are resolved and such payment will be paid only if the recovery
against the underwriters for such claims is less than $1 billion and then only
to the extent of any shortfall. Under the terms of the MOU, neither Inforte nor
any of its named directors will pay any amount of the settlement. The MOU
further provided that participating defendant issuers will assign certain claims
they may have against the defendant underwriters in connection with the Multiple
IPO Litigation. The MOU is subject to the satisfaction of certain conditions,
including, among others, approval of the court and the issuers' insurers.
Inforte has been named as a co-defendant in a lawsuit captioned Braun
Consulting, Inc. v. Inforte Corporation and Scott A. Stawski, filed in July 2003
in the Circuit Court of Cook County, Illinois. Braun Consulting, Inc. ("Braun")
has alleged that Inforte intentionally interfered with Mr. Stawski's employment
agreement with Braun and aided and abetted Mr. Stawski's alleged breach of his
employment agreement and alleged misappropriation of Braun's trade secrets.
Braun is seeking injunctive relief and an unspecified amount of money damages.
Inforte intends to vigorously defend the action.
(5) SEGMENT REPORTING
Inforte engages in business activities in one operating segment, which provides
consulting services either on a fixed-price, fixed-timeframe basis or on a
time-and-materials basis. Inforte's services are delivered to clients in North
America and Europe, and Inforte's long-lived assets are located in North America
and Europe. Domestic and foreign operating revenues are based on the location of
customers. Long-lived assets consist of property, plant and equipment, software,
furniture and fixtures and leasehold improvements (net of accumulated
depreciation). Inforte's European operations had $4,820,553 and $6,473,199 of
revenues for the nine months ending September 30, 2003 and 2002, respectively,
and $1,467,405 and $1,858,996 of revenues for the three months ending September
30, 2003 and 2002, respectively. Long-lived assets were $33,124 and $107,634 as
of September 30, 2003 and 2002, respectively.
(6) STOCK BASED COMPENSATION
Inforte accounts for stock-based employee compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and have adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123") related to options. For options issued to employees during the
three and the nine months ending September 30, 2002 and 2003 no stock-based
employee compensation is reflected in net income in the accompanying
consolidated statements of operations, as all such options had an exercise price
equal to the market value of the underlying common stock on the date of grant.
Had we applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation during the three and the nine months ended September 30,
2002 and 2003, net income and net income per share would have been as follows:
7
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net income, as reported $ 523,417 $ 446,395 $ 1,015,067 $ 1,350,783
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects (1,569,789) (1,481,971) (4,355,216) (4,082,644)
Pro forma net loss $ (1,046,372) $ (1,035,576) $ (3,340,150) $ (2,731,861)
=========== =========== =========== ===========
Net income, per share:
Basic-- as reported 0.05 0.04 0.09 0.12
=========== =========== =========== ===========
Basic-- pro forma (0.09) (0.09) (0.29) (0.25)
=========== =========== =========== ===========
Diluted-- as reported 0.05 0.04 0.09 0.12
=========== =========== =========== ===========
Diluted-- pro forma (0.09) (0.09) (0.29) (0.25)
=========== =========== =========== ===========
8
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 worldwide economic and
geopolitical uncertainty is high; (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 while occasionally competing with their professional services
organizations; (vi) compete with emerging alternative economic models for
delivery, such as offshore development; and (vii) identify and successfully
offer the solutions that clients demand, as well as other factors discussed from
time to time in our other Securities and Exchange Commission filings. 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
Inforte is a customer strategy and solutions consultancy that helps clients
improve performance by tying together customer and corporate strategy. Inforte
combines strong business and operational planning with innovative software
solutions to ensure its Global 2000 client base serves the right customers in
the right ways to generate the greatest return. Founded in 1993, Inforte is
headquartered in Chicago and has offices in Atlanta, Dallas, London, Los
Angeles, New York and San Francisco.
We perform professional services on both a fixed-price and 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 may perform on a
fixed-price basis. This work enables us to determine with our clients the scope
of successive phases for design and implementation, which in total generally
last three to nine months, and to decide whether we will perform these
additional phases for a fixed price or on a time-and-materials basis. Whether we
use fixed pricing or time-and-material pricing depends upon our assessment of
the project's risk, how precisely our clients are able to define the scope of
activities they wish us to perform and client preference. Fixed prices are based
on estimates from senior personnel in our consulting organization who project
the length of the engagement, the number of people required to complete the
engagement and the skill level and billing rates of those people. We then adjust
the fixed price based on various qualitative risk factors such as the
aggressiveness of the delivery deadline, the technical complexity of the
solution and the value of the solution delivered to the client. We typically ask
clients to pay 25%-50% of our fixed-price projects in advance to enable us to
secure a project team in a timeframe that is responsive to the client's needs.
We typically bill the remainder in advance of the work.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the percentage of net revenues of certain items
included in Inforte's statement of income:
9
% of Net Revenue % of Net Revenue
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
2002 2003 2002 2003
Revenues
Revenue before reimbursements (net revenue) 100.0% 100.0% 100.0% 100.0%
Reimbursements 14.0 17.6 14.0 14.1
----- ----- ----- -----
Total Revenue 114.0 117.6 114.0 114.1
----- ----- ----- -----
Operating expenses:
Project personnel and
related expenses 47.3 53.2 48.9 51.6
Reimbursements 14.0 17.6 14.0 14.1
Sales and marketing 16.9 13.5 16.3 15.4
Recruiting, retention
and training 3.1 2.4 3.4 2.0
Management and administrative 30.3 27.7 32.5 29.3
---- ---- ---- ----
Total operating expenses * 111.5 114.3 115.0 112.3
----- ----- ----- -----
Operating income (loss) 2.4 3.3 (1.1) 1.8
Interest income, net and other 5.6 3.3 5.5 4.5
---- ---- ---- ----
Pretax income 8.0 6.6 4.4 6.3
Income tax expense 2.6 0.8 1.1 0.7
--- --- --- ---
Net income 5.5% 5.8% 3.3% 5.6%
==== ==== ==== ====
*Total operating expenses,
excluding reimbursements 97.6% 96.7% 101.1% 98.2%
Nine and three months ended September 30, 2003 and 2002
- -------------------------------------------------------
Net revenue. Net revenue excludes reimbursable expenses that are billed to our
clients. Net revenue decreased 20% to $7.7 million for the quarter ended
September 30, 2003 from $9.6 million for the quarter ended September 30, 2002.
Net revenue decreased 21% to $24.1 million for the nine months ended September
30, 2003 from $30.4 million for the nine months ended September 30, 2002. We
attribute this decline in revenues to the slow growth rate of U.S. and European
economies and the negative impact that economic uncertainty has had on
information technology (IT) spending. These factors have depressed the market
for strategic technology services since late 2000. For the quarter ended
September 30, 2003, we had 28 significant clients with each of these clients
contributing $1.1 million to revenue on average on an annualized basis. For the
quarter ended September 30, 2002, we had 30 significant clients with each of
these clients contributing $1.2 million to revenue on average on an annualized
basis.
Sequentially, net revenue of $7.7 million in the September 2003 quarter was
similar to net revenue of $8.1 million in the June 2003 quarter. We believe that
revenue-driven corporate profit growth must occur before broad-based growth in
IT spending resumes.
Project personnel and related expenses. Project personnel and related expenses
consist primarily of compensation and benefits for our professional employees
who deliver consulting services, non-reimbursable costs and any estimated
revisions for our allowance for doubtful accounts. All labor costs for project
personnel are included in project personnel and related expenses. These expenses
decreased 10% to $4.1 million for the quarter ended September 30, 2003 from $4.5
million for the quarter ended September 30, 2002. These decreases resulted from
reductions in consulting headcount. Year to date, project personnel and related
expenses were $12.4 million, a 16% decline from $14.9 million for the nine
months of 2002. We employed 148 consultants on September 30, 2003, down from 188
one year earlier. Project personnel and related expenses represented 53.2% of
net revenue for the quarter ended September 30, 2003, up from 47.3% for the
quarter ended September 30, 2002, as revenue declined at a greater rate than
10
billable headcount. Similarly, for the nine months ended September 30, 2003,
project personnel and related expenses represented 51.6% of net revenue up from
48.9% in the prior year period.
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 36% to $1.0 million, or 13.5%
of net revenue, for the quarter ended September 30, 2003 from $1.6 million, or
16.9% of net revenue, in quarter ended September 30, 2002. This percentage
decline is due to the cutback in marketing activities and sales headcount that
decreased at a rate higher than revenue. Sales and marketing expenses decreased
by 25% to $3.7 million for the nine months ended September 30, 2003 from $5.0
million for the nine months ended September 30, 2002. Year to date, sales and
marketing expenses were 15.4% of net revenue which is consistent with 16.3% of
net revenue for the nine months ended September 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. These expenses decreased 38% to $183,000 for the
quarter ended September 30, 2003 from $294,000 for the quarter ended September
30, 2002. As a percent of net revenue, these costs decreased to 2.4% in the
quarter ended September 30, 2003 from 3.1% in the quarter ended September 30,
2002. Year to date, recruiting, retention and training costs fell by 54% from
$1.0 million for the nine months ended September 30, 2002 to $476,000 for the
nine months ended September 30, 2003. As a percent of net revenue, these costs
decreased to 2.0% in the nine months ended September 30, 2003 from 3.4% for the
nine months ended September 30, 2002. The decrease in spending results primarily
from lower recruiting costs and secondarily from less human resources spending
due to lower company-wide headcount. In the current economic environment of
higher unemployment, recruiting efforts require fewer expenses such as
recruiting finder fees, signing bonuses, relocation allowances and employee
referral bonuses to identify and attract qualified candidates. Total headcount
was 187 as of September 30, 2003, down from 248 as of September 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, legal, business insurance and depreciation and
amortization of capitalized computers, purchased software and property. These
expenses decreased 27% to $2.1 million for the quarter ended September 30, 2003,
from $2.9 million for the quarter ended September 30, 2002. As a percent of net
revenue, management and administrative expenses were 27.7% for the quarter ended
September 30, 2003, down from 30.3% for the quarter ended September 30, 2002, as
management and administrative expenses declined at a greater rate than did
revenue. Year to date, management and administrative expenses fell 29% to $7.1
million for the nine months ended September 30, 2003 from $9.9 million for the
nine months ended September 30, 2002. As a percent of revenue, management and
administrative expenses fell to 29.3% for the nine months ended September 30,
2003 from 32.5% for the nine months ended September 30, 2002. Lower management
and administrative expenses for both the three months and the nine months ending
September 30, 2003 were due to expense declines in three areas: fewer
non-billable personnel, lower facilities expenses as leases for vacated space
were expensed in the first half of 2002, previously vacated office space was
rented out in the third quarter of 2003 and lower information technology costs
from declining depreciation and telecom expense. In the third quarter of 2003 we
sublet a portion of previously vacated space in our Chicago office. This sublet
resulted in the reversal of a formerly recognized loss, which has reduced
management and administrative expenses by $145,000.
Interest income, net and other. During the quarter ended September 30, 2003,
interest income, net and other was $257,000, down from $535,000 for the quarter
ended September 30, 2002. Sequentially, interest income, net and other declined
by 37% from $406,000 in the quarter ending June 30, 2003 to $257,000 in the
quarter ended September 30, 2003. These decreases were 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. We expect interest income, net and other to decline
further to around $240,000 in the fourth quarter of 2003 due to the continuing
process of reinvesting maturing securities at lower interest rates.
Income tax expense. Inforte's effective tax rate for the September 2003 quarter
was 12.7% compared to a rate of 31.9% for the September 2002 quarter. The
decrease in the effective income tax rate primarily results from our reduction
of income tax expense by $125,000 to
11
account for an estimated reduction of income tax liabilities, offset in part by
a drop in the third quarter of 2003 tax-exempt interest income as a percentage
of pretax book income. The year to date September 30, 2003 effective tax rate
was 11.0% as compared to 24.4% for the same period in 2002. During the year-to-
date period to September 30, 2003 we reduced income tax expense by $375,000 to
account for an estimated reduction of income tax liabilities. This reduction of
the effective tax rate for the nine months ended September 30, 2003 occurred
despite taxes on positive operating income instead of a tax benefit from an
operating loss in the prior year period.
Liquidity and capital resources. Cash and cash equivalents decreased from $30.2
million on June 30, 2003 to $22.1 million on September 30, 2003. Short-term
marketable securities increased from $16.9 million to $27.9 million over the
same period. Long-term marketable securities decreased from $19.3 million to
$17.2 million during the third quarter of 2003. In total, cash and cash
equivalents, short-term and long-term marketable securities increased from $66.3
million to $67.2 million from June 30, 2003 to September 30, 2003. 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.
During the September 2003 quarter, Inforte's cash flow from operations was
positive $1.0 million and capital expenditures were $94,000, resulting in a
positive $0.9 million free cash flow (cash flow from operation minus capital
expenditures). Additionally, financing activities resulted in a cash inflow of
$231,000 from employees participating in stock purchase and stock option plans.
For the nine month period ending September 30, 2003, cash and cash equivalents
rose by $2.9 million from $19.2 million on December 31, 2002 to $22.1 million on
September 30, 2003. Short-term marketable securities fell by $3.5 million from
$31.3 million on December 31, 2002 to $27.9 million on September 30, 2003.
Long-term marketable securities increased by $0.4 million from $16.8 million on
December 31, 20002 to $17.2 million on September 30, 2003.
Cash flow from operations for the nine months ending September 30, 2003 was
positive $86,000. Capital expenditures for the nine months ending September 30,
2003 were $301,000, resulting in a free cash flow of negative $215,000.
Additionally, financing activities resulted in a cash inflow of $541,000 from
employee participating in stock purchase and stock option plans.
Our board of directors approved a $25.0 million stock repurchase program on
January 24, 2001 and as of August 2002, the entire amount authorized was
repurchased. The board of directors approved an additional $5.0 million stock
repurchase program on August 22, 2002, although we stated at that time that we
had no present plans to make additional repurchases of stock. The entire $5.0
million remains authorized for repurchase as of September 30, 2003. At quarter
end, Inforte had 10,945,512 shares outstanding and $67.2 million in cash and
marketable securities, resulting in $6.14 of cash and marketable securities per
basic share. As of September 30, 2003, the public float (shares not held by
executive officers and directors) totaled 6.4 million shares or 59% of total
outstanding shares.
Inforte believes that its current cash, cash equivalents and marketable
securities will be sufficient to meet working capital and capital expenditure
requirements for the foreseeable future.
All highly liquid investments with maturities of three months or less when
purchased are considered cash equivalents. Cash and cash equivalent balances
consist of obligations of U.S. and U.K. banks, high-grade commercial paper and
other high quality, short-term obligations of U.S. companies. Short-term and
long-term marketable securities are available-for-sale securities that are
recorded at fair market value. The difference between amortized cost and fair
market value, net of tax effect, is shown as a separate component of
stockholders' equity. The cost of available-for-sale securities is adjusted for
amortization of premiums and discounts to maturity. Interest and amortization of
premiums and discounts for all securities are included in interest income.
Inforte has several operating leases that have contractual cash obligations for
future payments. There are no other contractual obligations that require future
cash obligations or other commitments. The table below identifies all future
commitments.
12
Contractual
Obligations Payments Due by Period
- ---------------------------------------------------------------------------------------------------------------
Total Q4 2003 2004 2005 2006
- ---------------------------------------------------------------------------------------------------------------
Long-term debt 0 0 0 0 0
Capital lease obligations 0 0 0 0 0
Operating leases 6,110 603 2,463 2,475 569
Unconditional purchase obligations 0 0 0 0 0
Other long-term obligations 0 0 0 0 0
Total contractual cash obligations 6,110 603 2,463 2,475 569
- ---------------------------------------------------------------------------------------------------------------
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 IT spending growth by current and
potential clients in recent years has become less certain. We believe the
uncertainty stems from the slowing of growth in Gross Domestic Product that
began in the United States in the second half of calendar 2000, in addition to
the overhang that exists from large technology investments relating to Y2K and
the Internet. In some cases the uncertainty has reduced the overall number and
size of projects available for bid. In other cases the uncertainty has resulted
in project deferrals, project scope reductions, longer decision making cycles or
limited follow-on projects at existing clients. With fewer opportunities
available in the market, competition on some opportunities has become more
intense. While our revenue forecast methods are sophisticated and have proven
accurate historically, we believe the current environment adds greater risk and
uncertainty to our forecasts. If we fail to accurately forecast revenue, our
actual results may differ materially from the amounts planned, and our
profitability may be reduced or eliminated.
If we fail to identify and successfully transition to the latest and most
demanded solutions or keep up with an evolving industry, we will not compete
successfully for clients and our profits may decrease. If we fail to identify
the latest solutions or delivery models, or if we identify but fail to
successfully transition our business to solutions with growing demand, our
reputation and our ability to compete for clients and the best employees could
suffer. If we cannot compete successfully for clients, our revenues may
decrease. Also, if our projects do not involve the latest and most demanded
solutions, they would generate lower fees. Because our market changes
constantly, some of the most important challenges facing us are the need to:
develop new services that meet changing customer needs either organically, or
through acquisitions or other business combinations; identify and effectively
market solutions with growing demand during a period of slower technological
advancement and adoption; enhance our current services; continue to develop our
strategic expertise; and effectively utilize the latest technologies.
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.
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
13
reputation and our ability to retain existing clients and attract new clients.
In addition, if we fail to perform adequately on our engagements, we could be
liable to our clients for breach of contract. Although most of our contracts
limit the amount of any damages based upon the fees we receive we could still
incur substantial cost, negative publicity, and diversion of management
resources to defend a claim, and as a result, our business results could suffer.
We may be unable to hire and retain employees who are highly skilled, which
would impair our ability to perform client services, generate revenue and
maintain profitability. If we are unable to hire and retain highly-skilled
individuals, our ability to retain existing business and compete for new
business will be harmed. Individuals who have successfully sold and delivered
services similar to those we provide to our clients are limited and competition
for these individuals is intense. Further, in the current depressed spending
environment, individuals who were previously successful may no longer be
successful. Identifying individuals who will succeed in this environment is
extraordinarily difficult. To attract and retain these individuals we invest a
significant amount of time and money. In addition, we expect that both bonus
payments and equity ownership will be an important component of overall employee
compensation. In the current economic and market environment, overall bonus
payments have been below target, increasing the risk that key employees will
leave Inforte. Also, if our stock price does not increase over time, it may be
more difficult to retain employees who have been compensated with stock options.
If key employee turnover rates grow to unacceptable levels because compensation
is not at competitive rates, Inforte may increase the level of cash or stock
compensation. These actions would reduce net income per share and may cause
Inforte to become unprofitable.
If we fail to adequately manage rapid changes in demand, our profitability and
cash flow may be reduced or eliminated. If we cannot keep pace with the rapid
changes in demand, we will be unable to effectively match resources with demand,
and maintain high client satisfaction, which may eliminate our profitability and
our ability to achieve positive free cash flow. Our business grew dramatically
from 1993 through 2000. For example, our net revenue increased by 100% or more
for seven consecutive years, reaching $63.8 million in 2000. As a result of the
current depressed IT spending environment and overcapacity in our industry
however, net revenue has declined in each of the last two years, dropping to
$40.4 million in 2002, and is likely to decline again in 2003. If the level of
client spending declines further, we may not be profitable or achieve positive
free cash flow. If, on the other hand, our growth exceeds our expectations, our
current resources and infrastructure may be inadequate to handle the growth.
If our marketing relationships with software vendors deteriorate, we would lose
their client referrals. If these vendors continue to increase their professional
services revenue, our revenue could be adversely affected. We currently have
marketing relationships with software vendors such as Siebel Systems. We have
historically received a large number of business leads from numerous software
vendors to implement their products, however they are not required to refer
business to us and either party may terminate these relationships at any time.
If our relationships with these software vendors deteriorate, we may lose their
client leads and our ability to develop new clients could be negatively
impacted. Any decrease in our ability to obtain clients may cause a reduction in
our net revenues. Historically our software partners have primarily relied on
licensing fees and maintenance contracts to generate revenue. However, more
recently as software licensed sales have declined, software vendors have sought
to supplement their revenue through increased implementation services for their
software. This business strategy puts us in competition with our software
partners on some deals, reducing client leads and our ability to develop new
clients and revenue.
If we are unable to rapidly integrate third-party software, we may not be able
to deliver solutions to our clients on a timely basis, resulting in lost
revenues and potential liability. In providing client services, we recommend
that our clients use software applications from a variety of third-party
vendors. If we are unable to implement and integrate this software in a fully
functional manner for our clients, we may experience difficulties that could
delay or prevent the successful development, introduction or marketing of
services. 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
14
clients. During the third quarter of 2003 we had three clients that contributed
10% or more of our net revenue. These clients accounted for 41% of net revenue
while the five and ten largest clients accounted for 54% and 71% respectively.
Although these large clients vary from time to time and our long-term revenues
do not rely on any one client, our revenues could be negatively affected if we
were to lose one of our top clients or if we were to fail to collect a large
account receivable. In addition, many of our contracts are short-term and our
clients may be able to reduce or cancel our services without incurring any
penalty. If our clients reduce or terminate our services, we would lose revenue
and would have to reallocate our employees and our resources to other projects
to attempt to minimize the effects of that reduction or termination.
Accordingly, terminations, including any termination by a major client, could
adversely impact our revenues. We believe the uncertain economic environment
increases the probability that services may be reduced or canceled.
If we estimate incorrectly the time required to complete our projects, we could
lose money on fixed-price contracts. Historically, a majority of our contracts
are fixed-price contracts, rather than contracts in which the client pays us on
a time-and-materials basis. We must estimate the number of hours and the
materials required before entering into a fixed-price contract. Our future
success will depend on our ability to continue to set rates and fees accurately
and to maintain targeted rates of employee utilization and project quality. If
we fail to accurately estimate the time and the resources required for a
project, any required increase in the time and resources to complete the project
could cause our profits to decline.
Fluctuations in our quarterly revenues and operating results due to cyclical
client demand may lead to reduced prices for our stock. Our quarterly revenues
and operating results have fluctuated significantly in the past and we expect
them to continue to fluctuate significantly in the future. Historically, we have
signed more client contracts during the first and second quarters than during
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 the first
quarter of 2002, we did experience an increase in demand which did allow our net
revenue in the second quarter 2002 to exceed the first quarter 2002 level. We
believe that increase in demand was due to positive seasonal effects, while the
subsequent lower revenue in the third quarter 2002 was due to negative seasonal
effects. However, the declines in revenue during the three quarters of 2003 seem
to indicate that the positive seasonal effects to date in 2003 have been offset
by the continuing weakness in information technology spending. This existence of
both seasonal and cyclical effects does make it more difficult to predict
demand, and if we are unable to predict client demand accurately in a slower
growth or distressed economic environment, our expenses may be disproportionate
to our revenue on a quarterly basis and our stock price may be adversely
affected.
Others could claim that we infringe on their intellectual property rights, which
may result in substantial costs, diversion of resources and management
attention, and harm to our reputation. A portion of our business involves the
development of software applications for specific client engagements. Although
we believe that our services do not infringe on the intellectual property rights
of others, we may be the subject of claims for infringement, which even if
successfully defended could be costly and time-consuming. An infringement claim
against us could materially and adversely affect us in that we may:
o experience a diversion of our financial resources and management
attention;
o incur damages and litigation costs, including attorneys' fees;
o be enjoined from further use of the intellectual property;
o be required to obtain a license to use the intellectual property,
incurring licensing fees;
o need to develop a non-infringing alternative, which could be costly
and delay projects; and
o have to indemnify clients with respect to losses incurred as a result
of our infringement of the intellectual property.
Because we are newer and smaller than many of our competitors, we may not have
the resources to effectively compete, causing our revenues to decline. Many of
our competitors have longer operating histories, larger client bases, longer
relationships with clients, greater brand or name recognition, and significantly
greater financial, technical, marketing, and public relations resources than we
do. We may be unable to compete with full-service consulting companies,
including the former consulting divisions of the largest global accounting
firms, who are able to offer their clients a wider range of services. If our
clients decide to take their IT strategy and technology projects to these
companies, our revenues may decline. It is possible that in uncertain economic
times our clients may prefer to work with larger firms to a
15
greater extent than normal. In addition, new professional services companies may
provide services similar to ours at a lower price, which could cause our
revenues to decline.
Our expansion and growth internationally could negatively affect our business.
For the quarter ended September 30, 2003, our international net revenue was 19%
of our total net revenue. We face additional risks internationally that we do
not face domestically. Such risks include longer customer payment cycles,
adverse taxes and compliance with local laws and regulations. Further, the
effects of fluctuations in currency exchange rates may adversely affect the
results of operations. Finally, as the U.S. economic slowdown has spread to the
rest of the world, our ability to obtain international net revenue going forward
will likely be reduced. These risk factors, as well as others not cited here,
may negatively impact our business.
As offshore development becomes accepted as a viable alternative to doing work
domestically, our pricing and revenue may be negatively affected. Gradually,
over the past several decades, numerous IT service firms have been founded in
countries such as India, which have well-educated and technically trained
English-speaking workforces available at wage rates that are only a fraction of
U.S. and European wages rates. Additionally, some larger clients have
established internal IT operations at offshore locations. While traditionally we
have not competed with offshore development, presently this form of development
is seeing rapid and increasing acceptance in the market, especially for routine
and repetitive types of development. While offshore development has greater risk
due to distance, geopolitical and cultural issues, we believe its lower cost
advantage will likely overwhelm these risks. If we are unable to evolve our
service offerings to a more differentiated position or if the rate of acceptance
of offshore development advances even faster than we anticipate, then our
pricing and our revenue may be negatively affected.
Recent changes in the executive team and strategic modifications in business
structure could lead to inferior financial results if this transition does not
occur smoothly. On July 25, 2003 Inforte filed a Form 8-K with the Securities
and Exchange Commission announcing strategic changes for growth which, among
other things, included simplification of the current business structure and
changes in Inforte's executive management team. Should these changes adversely
affect relationships with current partners and clients, or lead to higher
turnover rates we may be unable to maintain the present level of profitability.
Current or future legislative and regulatory requirements, such as the
Sarbanes-Oxley Act of 2002, may lead to increased insurance, accounting, legal
and other costs, which may cause our profitability to decline. We have already
switched some supplier relationships, including our audit and tax advisor
relationship to mitigate these cost increases, and other relationships are under
review. On September 8, 2003, the Audit Committee of the Board of Directors
approved (1) the dismissal of Ernst & Young LLP (E&Y) as the Company's
independent accountants, effective November 15, 2003, and (2) the replacement of
E&Y with Grant Thornton LLP as the Company's independent accountants, commencing
upon the dismissal of E&Y.
RISKS RELATED TO OUR INDUSTRY
If the rate of adoption of advanced information technology slows further, our
revenues may decrease further. 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 continue to decrease if companies remain reticent to integrate the latest
technologies into their businesses due to economic factors, governmental
regulations, financial constraints or other reasons. Inforte's market research
suggests that the level of information technology spending in the United States
is closely linked with the growth rate of the Gross Domestic Product (GDP). The
slowdown in the U.S. GDP growth rate that began in the second half of 2000 has
caused a slower rate of adoption of advanced information technology by our
target clients. We expect information technology spending and Inforte revenue to
be highly dependent on the health of the U.S. economy. We believe that corporate
revenue driven profit growth must resume for IT spending to improve. If the
overall level of business capital investment remains depressed or declines, our
revenue may decline further.
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.
16
Lower utilization rates increase the likelihood that a competitor will reduce
their price to secure business in order to improve their utilization rate. The
extent to which pricing and our ability to win business may be impacted is a
function of both the magnitude and duration of the supply and demand imbalance
in our industry.
Geopolitical instability may cause our revenues to decrease. Our clients often
avoid large IT spending commitments during periods of geopolitical instability
and economic uncertainty. The aftermath of the war in Iraq, the possibility of
terrorists attacking the United States' interests, or geopolitical concerns in
other areas such as North Korea may cause clients to freeze their decision
making processes. This would slow demand for our services and would negatively
impact our revenue.
RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK
Our stock price could be extremely volatile, like many technology stocks. The
market prices of securities of technology companies, particularly information
technology services companies, have been highly volatile. We expect continued
high volatility in our stock price, with prices at times bearing no relationship
to Inforte's operating performance. Inforte's average trading volume during the
second quarter of 2003 averaged approximately 54,000 shares per day. On any
particular day, however, Inforte's trading volume can be less than 5,000 shares,
increasing the potential for volatile stock prices.
Volatility of our stock price could result in expensive class action litigation.
If our common stock suffers from volatility like the securities of other
technology companies, we have a greater risk of further securities class action
litigation claims. We have had one such claim to date. 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, 2003 our
executive officers and directors own over 41% of the outstanding shares of our
common stock. The largest owners and their percentage ownership are set forth
below:
o Philip S. Bligh 21.8%
o Stephen C.P. Mack 15.4%
o Nick Padgett 3.4%
If the stockholders listed above act or vote together with other employees who
own significant shares of our common stock, they will have the ability to
control the election of our directors and the approval of any other action
requiring stockholder approval, including any amendments to the certificate of
incorporation and mergers or sales of all or substantially all assets, even if
the other stockholders perceive that these actions are not in their best
interests.
Our stock repurchase program has had the effect of increasing the concentration
of insider ownership. If we make further repurchases, insider ownership could
increase further.
Over time, the influence or control executive officers have on a stockholder
vote may decrease as officers supplement below-market salaries and diversify
overall equity wealth with sales of Inforte stock. As permitted by SEC Rule
10b5-1, Inforte executive officers have or may set up a predefined, structured
stock trading program. The trading program allows brokers acting on behalf of
company insiders to trade company stock during company blackout periods or while
the insiders may be aware of material, non public information, if the
transaction is performed according to a pre-existing contract, instruction or
plan that was established with the broker during a non-blackout period and when
the insider was not aware of any material, non-public information. Inforte
executive officers may also trade company stock outside of plans set up under
SEC Rule 10b5-1, however such trades would be subject to company blackout
periods and insider trading rules.
On July 25, 2003, we announced that Nick Padgett was resigning his executive
officer and director duties effective October 10, 2003. As a result of this
change, Mr. Padgett has sold and may continue to sell some portion of his
Inforte holdings.
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
17
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; advance notice provisions for
stockholder proposals and nominations to the board of
directors;
o a staggered board of directors, with three-year terms, which
will lengthen the time needed to gain control of the board of
directors; and;
o supermajority voting requirements for stockholders to amend
provisions of the charter documents described above.
We are also subject to Delaware law. Section 203 of the Delaware General
Corporation Law prohibits us from engaging in a business combination with any
significant stockholder for a period of three years from the date the person
became a significant stockholder unless, for example, our board of directors
approved the transaction that resulted in the stockholder becoming an interested
stockholder. Any of the above could have the effect of delaying or preventing
changes in control that a stockholder may consider favorable.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In all categories of cash, cash equivalents and short-term and long-term
marketable securities, Inforte invests only in highly liquid securities of high
credit quality. All short-term investments bear a minimum Standard & Poor's
rating of A1 or Moody's investor service rating of P1. All long-term investments
bear a minimum Standard & Poor's rating of A or Moody's investor service rating
of A2.
Inforte has a large cash and marketable securities balance that generates
substantial interest income. During 2002 and year-to-date in 2003, the majority
of Inforte's pretax income was from interest income. Declining short-term market
interest rates will have a significant impact on Inforte's profitability as
interest income drops. Thus, a drop in short-term market interest rates will
increase the revenue level required to be profitable, and increases the risk
that Inforte will lose money.
Item 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of Inforte's management, including Inforte's Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of Inforte's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that these disclosure controls and procedures were effective as of the end of
the period covered by this report.
Changes in Control Procedures
No significant changes were made in Inforte's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Inforte; Philip S. Bligh and Stephen C.P. Mack, officers of Inforte; and Nick
Padgett, a former officer 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"). The Case is among more than 300 putative class actions against certain
issuers, their officers and directors, and underwriters with respect to such
issuers' initial public offerings, coordinated as In re Initial Public Offering
Securities Litigation, 21 MC 92 (SAS) (collectively, the "Multiple IPO
Litigation"). An amended class action complaint was filed in the Case on April
19, 2002. The amended complaint in the Case alleges violations of federal
securities laws in connection with Inforte's initial public offering occurring
in February 2000 and seeks certification of a class of purchasers of Inforte
stock, unspecified damages, interest, attorneys' and expert witness fees and
other costs. The amended complaint does not allege any claims relating to any
alleged misrepresentations or omissions with respect to our business. The
individual defendants (Messrs. Bligh, Mack and Padgett) have been dismissed from
the case without prejudice pursuant a stipulated dismissal and a tolling
agreement. We have moved to dismiss the plaintiff's case. On February 19, 2002,
the Court granted this motion in part, denied it in part and ordered that
discovery in the case may commence. The Court dismissed with prejudice the
plaintiff's purported claim against Inforte under Section 10(b) of the
Securities Exchange Act of 1934, but left in place the plaintiff's claim under
Section 11 of the Securities Act of 1933.
Inforte has entered into a Memorandum of Understanding (the "MOU"), along with
most of the other defendant issuers in the Multiple IPO Litigation, whereby such
issuers and their officers and directors (including Inforte and Messrs. Bligh,
Mack and Padgett) will be dismissed with prejudice from the Multiple IPO
Litigation, subject to the satisfaction of certain conditions. Under the terms
of the MOU, neither Inforte nor any of its formerly named individual defendants
admit any basis for liability with respect to the claims in the Case. The MOU
provides that insurers for Inforte and the other defendant issuers participating
in the settlement will pay approximately $1 billion to settle the Multiple IPO
Litigation, except that no such payment will occur until claims against the
underwriters are resolved and such payment will be paid only if the recovery
against the underwriters for such claims is less than $1 billion and then only
to the extent of any shortfall. Under the terms of the MOU, neither Inforte nor
any of its named directors will pay any amount of the settlement. The MOU
further provided that participating defendant issuers will assign certain claims
they may have against the defendant underwriters in connection with the Multiple
IPO Litigation. The MOU is subject to the satisfaction of certain conditions,
including, among others, approval of the court and the issuers' insurers.
Inforte has been named as a co-defendant in a lawsuit captioned Braun
Consulting, Inc. v. Inforte Corporation and Scott A. Stawski, filed in July 2003
in the Circuit Court of Cook County, Illinois. Braun Consulting, Inc. ("Braun")
has alleged that Inforte intentionally interfered with Mr. Stawski's employment
agreement with Braun and aided and abetted Mr. Stawski's alleged breach of his
employment agreement and alleged misappropriation of Braun's trade secrets.
Braun is seeking injunctive relief and an unspecified amount of money damages.
Inforte intends to vigorously defend the action.
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
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Exhibit
-------------- -------
31 Certification by Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31 Certification by Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
and Rule 13a-14(a) and 15d-14(a) under the
Securities and Exchange Act of 1934.
32 Written statement of the Chief Executive Officer
and Chief Financial Officer pursuant to 18 U.S.C.
ss.1350.
(b) Reports on Form 8-K
In a Report on Form 8-K filed on July 11, 2003, Inforte reported, under Item 12,
"Results of Operation and Financial Condition," the issuance of a release
regarding earnings for the second quarter of 2003.
In a Report on Form 8-K filed on July 25, 2003, Inforte reported, under Item 9,
"Regulation FD Disclosure," certain changes in management and strategic changes
for growth.
In a Report on Form 8-K filed on September 8, 2003, Inforte reported, under Item
4, "Changes in Registrant's Certifying Accountant," the approval by the Board of
Directors of (1) the dismissal of Ernst & Young LLP (E&Y) as the Company's
independent accountants, effective November 15, 2003, and (2) the replacement of
E&Y with Grant Thornton LLP as the Company's independent accountants, commencing
upon the dismissal of E&Y.
In a Report on Form 8-K filed on October 10, 2003, Inforte reported, under Item
12, "Results of Operation and Financial Condition," the issuance of a release
regarding earnings for the third quarter of 2003.
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SIGNATURE
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 Heyes
November 12, 2003 ---------------------------------
Nick Heyes,
Chief Financial Officer
21