| FORM 10-K | ||
| (Mark One) |
| |X| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |_| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
INFORTE CORP.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
36-3909334 (I.R.S. Employer Identification Number) |
150 North Michigan Avenue
Suite 3400, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference on Part III of this Form 10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, is $63,572,965.
Certain portions of the Registrant’s definitive proxy statement dated March 22, 2003 for the Annual Meeting of Stockholders to be held April 30, 2003 are incorporated by reference into Part III of this report.
The information in this document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained in this document that are not of historical fact, are intended to be, and are, “forward-looking statements,” which involve known and unknown risks. We generally use the following terms and similar expressions to identify forward-looking statements: “anticipate,” “believe,” “estimate,” “expect,” “intend, “may,” “plan,” “potential,” “should, “could” and “will.” Our actual results could differ materially from those indicated by the forward-looking statements made in this report. Accordingly, you should not place undue reliance on these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. Additionally, we do not assume responsibility for the accuracy or completeness of these statements. We are under no duty to update any of the forward-looking statements in this document to conform these statements to actual results or to changes in our expectations.
Inforte is a customer and demand management consultancy. We help clients increase profitability by maximizing the effectiveness of their customer-facing initiatives. Inforte consultants deliver strategy, process and technology solutions that enhance visibility across our clients’ enterprise, making their customer interactions more strategic and lucrative.
Our client base consists primarily of Global 2000 companies. Representative clients in the past year included Blue Cross & Blue Shield of Illinois, BMC Software, BNP Paribas, California State Automobile Association, CUNA Mutual, Dow Corning, Experian, The Hartford, Home Depot, John H. Harland, Lexis-Nexis, Moore, Option One Mortgage, Prudential, PSS World Medical, Royal Automobile Club, Sabre, Sprint, Toshiba and Wrigley.
Inforte has grown entirely through organic means since its inception in September 1993 rather than through mergers or acquisitions. Historically, we have funded our growth primarily through internally generated free cash flow and we have continued to generate positive free cash flow since becoming a public company in February 2000. As of December 31, 2002, we employed 229 people in our offices in Atlanta, Chicago, Dallas, London, Los Angeles, New York and San Francisco.
A fluctuating economic environment has created many challenges for companies seeking growth, optimal profitability and increased efficiencies in highly competitive and rapidly changing markets. In order to achieve these goals in any economic environment, companies need to integrate, manage and better respond to customer demand. Customer and demand management solutions apply well-established forecasting techniques, allowing companies to trust the results, communicate them consistently and design an organization that systematically responds to demand.
The analysis, design and implementation of an effective customer and demand management solution requires special skills and expertise that many companies do not possess. These special skills include the ability to:
| • | Identify the vital planning information that companies need to manage their business better in response to demand changes; |
| • | Integrate planning processes and systems across business functions; |
| • | Develop integrated, demand-driven approaches to planning and executing operations; |
| • | Drive profitability from customers by linking customer-facing strategies to the back office; and |
| • | Implement the technology required to support these solutions. |
The availability of high-quality professionals experienced in creating, implementing and integrating these strategic and technological solutions is limited. It is often inefficient and difficult for companies seeking to implement their own demand solutions to hire, train and retain in-house personnel. As a result, businesses engage professional services firms to help them design and implement these strategies and solutions.
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Inforte’s offerings include the following types of services:
Operational Strategy. Inforte helps clients establish customer-related operational strategies that support their strategic positioning. These customer strategies may relate to Customer Relationship Management (CRM) programs; product, service or distribution channel approaches; or operational excellence initiatives, such as a demand responsiveness strategy. Inforte helps clients develop new operating strategies or improve on existing ones by validating, refining and building our clients’ value propositions to their customers, conducting competitive analysis, developing customer value and customer segmentation approaches, developing benefits or return on investment models and creating branding or marketing strategies.
Process Design. Inforte helps clients develop a detailed design of their desired business processes in preparation for planned organizational and technology changes. Inforte recognizes that driving sustainable process change is difficult to accomplish, and we draw upon our significant depth of experience to design business processes that are practical and adoptable. Inforte provides the support needed to ensure that a process is adopted after introduction. We assist clients with the implementation planning, key metrics identification and organizational change planning activities that are integral to the successful deployment of redesigned processes.
Technology Delivery. Inforte’s technology delivery services identify, define and implement initiatives to meet a specific set of business objectives. Inforte creates a technology roadmap for its clients, assessing the clients’ existing technology infrastructure and applications along with current and planned projects. Inforte creates a gap analysis to identify initiatives needed to implement the required business capabilities. Inforte identifies and uses the latest application software packages and technology to design and build solutions for clients to interact with their customers effectively.
Program Management. Inforte enhances the successful delivery of projects through the establishment of a Program Management Office (PMO) to define, deploy and support common processes, techniques and tools to be used by all projects throughout the program.
Organizational Change. Inforte helps clients plan for the organizational changes that may be required to enact and sustain new or modified operational strategies, processes or technology. Inforte conducts a thorough assessment of its client’s current leadership, structure, culture and workforce to determine the organization’s readiness for change. This assessment produces a prioritized list of initiatives that address organization-wide and individual-level activities required to support the successful deployment of integrated solutions within the organization.
Customer and Demand Management Solutions. We combine our operational strategy, process design, technology delivery, program management and organizational change services to deliver customer and demand management solutions that address client business problems. These customer solutions help clients drive profitability from all customer interactions, and allow clients to maximize existing and future Customer Relationship Management (CRM) investments by extending CRM strategy from the front-office throughout the enterprise. We help our clients focus enterprise-wide decision-making processes around a true understanding of what their market demand is likely to be. We increase our clients’ knowledge of their customers and help them plan profit-driving marketing and sales activities around that knowledge. We assist our clients with their customer segmentation approaches, customer differentiation programs and marketing campaign management.
Methodology and Tools. Our proprietary approach to planning and delivering projects, Velocity to Value (V2V), has produced industry leading project efficiency metrics to help ensure we deliver projects on time and within budget. We believe our client advocacy approach and our rigorous delivery methodologies have helped us to achieve high levels of client satisfaction.
All Inforte projects are governed by our V2V project delivery methodology. We structure and price our projects in shorter, multiple phases to ensure that each phase meets the client’s business objectives.
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To continuously maintain the high level of advanced technological skills among our staff, Inforte identifies, captures, organizes and disseminates our knowledge capital internally through an intranet-based system we call the Inforte Collaborative Environment, or ICE.
Collaborative Client Involvement. We believe our solutions are successful because they are developed in collaboration with our clients. Because the ultimate success of any project will depend upon the client’s ability to effectively operate and support the related strategies, processes and technology on an ongoing basis, our co-management approach is designed to include substantial client participation in all phases of the project. This enables the client to have a thorough understanding of what has been done, how it was completed and why it was performed. The collaborative environment is further supported by allowing clients to access project deliverables through our ICE intranet. We believe our co-management philosophy differs from that of many service providers, who limit the client’s role in project delivery. We believe our collaborative knowledge transfer philosophy has contributed to consistently high project success rates and client satisfaction.
Inforte’s strategy is to focus on one specific solution area, customer and demand management solutions. Inforte is a specialist in this area, we are not a generalist covering multiple solution areas. Inforte believes that by being a focused specialist, with all of our time, thinking, experience, intellectual capital and effort expended on one solution area, we can offer our clients best-in-world capabilities within that area. We think that our capabilities will compare favorably with competitors, who may be larger and may have more resources, but who are unfocused and have not developed a specialty. Elements supporting this strategy are:
Maintain customer and demand management solutions focus. Inforte helps clients increase profitability by maximizing the effectiveness of their customer-facing initiatives. Inforte consultants deliver strategy, process and technology solutions that enhance visibility across our clients’ enterprise, making their customer interactions more strategic and lucrative. We believe our focus enhances our ability to generate assignments from existing and new clients, achieve high margins, maintain our position of technological and thought leadership and provide challenging assignments to our employees.
Ensure Continued Client Satisfaction. Inforte strives to ensure high client satisfaction. We survey clients each quarter to assess their satisfaction and link management compensation to these results. Our quarterly surveys ask clients open-ended questions on measurements they consider important and ask them to numerically score us on these factors. For comparability purposes, our client surveys also request numerical scores on nine set factors, including expertise, project management skills, business understanding, price and responsiveness.
Continue to Attract and Retain High Quality Personnel. Inforte’s strategic focus requires that we retain highly motivated, intelligent people of exceptional quality. We believe the best way to continue to attract and retain highly qualified personnel is to provide an intellectually challenging environment, an opportunity to personally impact our company’s future and a strong corporate culture.
Continue Superior External and Internal Business Execution. Inforte is committed to outstanding internal and external execution to deliver superior results for our clients and for our investors. We believe that our high gross margin relative to peer companies indicates our ability to deliver fixed fee projects on time and on budget to a degree greater than other consulting firms. We believe that our record of continued positive free cash flow and profitable performance during a severe industry downturn where many peer companies are losing money or going bankrupt demonstrates our ability to execute well in any environment. We believe that our record of always delivering on the revenue and earnings guidance we set for the current quarter at the time when we release the prior quarter’s results, with no pre-announcements, shows our superior forecasting ability relative to other companies.
Inforte emphasizes continuous improvement of our client delivery expertise, including our V2V methodology, knowledge management and other internal processes to compete effectively in the future. We continue to refine the systems and processes that comprise our internal infrastructure, which we consider to be advanced for a company of our size.
Our client base consists primarily of Global 2000 companies. Representative clients are listed in the “Overview.” During 2002 our top five clients equaled 37 percent of total revenue and our top ten clients equaled 58 percent of total revenue. No single customer has provided Inforte with over 10 percent of our annual revenue since 1997. To most effectively address the needs of our customers and the market environments of their businesses, we are organized along vertical industries.
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Inforte markets with a team-selling approach that combines dedicated sales professionals, senior client executives and specific subject matter experts, strategists or senior delivery personnel. We believe our team model is superior to a traditional professional services sales model where one individual must manage the sales process in addition to providing the services. Our dedicated sales professionals focus primarily on selling to new customers, while our client executives focus primarily on maintaining and extending relationships with existing customers.
We use a proprietary sales and marketing methodology called SAMM to capture detailed information on sales opportunities. SAMM is based on a heavily customized customer relationship management system to track potential contracts at each stage of our sales cycle. We project revenue based on a probability analysis of each sales opportunity, allowing us to manage continually our staffing needs and spending plans.
Our market development efforts are designed to build Inforte’s brand name and recognition in the marketplace and generate leads for new business. Our activities include strategic direct marketing programs, seminars and briefings that target corporate executives, public speaking opportunities, attendance at industry conferences, regular meetings with industry analysts, public relations programs, electronic brochures and use of web site properties such as inforte.com.
We complement our internal sales and marketing processes with select formalized industry alliances. We co-market and share leads with software vendors with whom we have strategic, non-exclusive marketing relationships. We also work with other software vendors with whom we do not have formalized relationships.
Our headcount was 122 people at the end of 1998, 257 people at the end of 1999, 442 people at the end of 2000, 294 people at the end of 2001 and 229 employees as of December 31, 2002. Of these, 172 are consultants, 22 are in sales and marketing, including 14 quota-based sales personnel, 5 are in human resources and 30 are management or administrative personnel. None of our employees are represented by a labor union, and we believe our employee relations are good.
We compete in the strategy and technology professional services market, which is highly competitive. Despite the elimination of many players over the past two years, competition remains intense due to restrained spending on information technology in a tough economic environment. We expect intense competition to continue. We believe that our competitors fall into several categories, including the following:
| • | The successor organizations to the Big 5 consulting firms: Accenture, BearingPoint, Braxton Consulting, Cap Gemini Ernst & Young and IBM Business Consulting Services |
| • | Technology consulting firms such as Answerthink, Braun Consulting, DiamondCluster and Sapient |
| • | Strategy consulting firms such as Bain, Booz |
| • | Allen & Hamilton, Boston Consulting Group and McKinsey |
| • | Professional services divisions of application software vendors |
| • | Internal information technology departments of current and potential clients |
| • | Indian offshore development firms such as Cognizant Technology, Infosys Technologies, Satyam Computer Services, Tata Consultancy Services and Wipro |
| • | Large systems integration or outsourcing firms such as Computer Sciences, EDS, and Unisys. |
Many of our competitors have longer operating histories, larger client bases, longer relationships with clients, greater brand or name recognition and significantly greater financial, technical, marketing and public relations resources than we do. However, we believe that only a few of our competitors have the focus and possess all of the skills necessary to offer the comprehensive customer and demand management strategies and solutions that we provide.
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There are relatively low barriers to entry into the strategy and technology professional services market. Existing or future competitors may develop or offer services that are comparable or superior to ours at a lower price, which could cause our revenues to decline.
In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating Inforte and its business because such factors currently may have a significant impact on Inforte’s business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere in this Form 10-K, and the risk factors discussed in Inforte’s other Securities and Exchange Commission filings, actual results could differ materially from those projected in any forward-looking statements.
If we are unable to accurately forecast our quarterly revenue, our profitability may be reduced or eliminated.
The level of IT spending growth by current and potential clients in the United States has slowed and become less certain. We believe the uncertainty stems from the slowing of growth in Gross Domestic Product in the United States that began in the second half of calendar 2000. In some cases the uncertainty has reduced the overall number and size of projects available for bid. In other cases the uncertainty has resulted in project deferrals, project scope reductions, longer decision making cycles or limited follow-on projects at existing clients. With fewer opportunities available in the market, competition on some opportunities has become more intense. While our revenue forecast methods are sophisticated and have proven accurate historically, we believe the current environment adds greater risk and uncertainty to our forecasts. If we fail to accurately forecast revenue, our actual results may differ materially from the amounts planned, and our profitability may be reduced or eliminated.
If we fail to identify and successfully transition to the latest and most demanded solutions or keep up with an evolving industry, we will not compete successfully for clients and our profits may decrease.
If we fail to identify the latest solutions, or if we identify but fail to successfully transition our business to solutions with growing demand, our reputation and our ability to compete for clients and the best employees could suffer. If we cannot compete successfully for clients, our revenues may decrease. Also, if our projects do not involve the latest and most demanded solutions, they would generate lower fees.
Because our market changes constantly, some of the most important challenges facing us are the need to:
| • | develop new services that meet changing customer needs; |
| • | identify and effectively market solutions with growing demand during a period of slower technological advancement and adoption; |
| • | enhance our current services; |
| • | continue to develop our strategic expertise; |
| • | effectively use the latest technologies; and |
| • | influence and respond to emerging industry standards and other technological changes. |
All of these challenges must be met in a timely and cost-effective manner. We cannot assure you that we will succeed in effectively meeting these challenges, especially during a substantial economic slowdown when adjusting the size of the business for lower demand diverts resources and senior management’s attention.
If we fail to satisfy our clients’ expectations, our existing and continuing business could be adversely affected.
If we fail to satisfy the expectations of our clients, we could damage our reputation and our ability to retain existing clients and attract new clients. In addition, if we fail to perform adequately on our engagements, we could be liable to our clients for breach of contract. Although most of our contracts limit the amount of any damages based upon the fees we receive we could still incur substantial cost, negative publicity, and diversion of management resources to defend a claim, and as a result, our business results could suffer.
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We may be unable to hire and retain employees who are highly skilled, which would impair our ability to perform client services, generate revenue and maintain profitability.
If we are unable to hire and retain highly-skilled individuals, our ability to retain existing business and compete for new business will be harmed. Individuals who have successfully sold and delivered services similar to those we provide to our clients are limited and competition for these individuals is intense. Further, in the current depressed spending environment, individuals who were previously successful may no longer be successful. Identifying individuals who will succeed in this environment is extraordinarily difficult. To attract and retain these individuals, we invest a significant amount of time and money. In addition, we expect that both bonus payments and equity ownership will be an important component of overall employee compensation. In the current economic and market environment, overall bonus payments have been below target, increasing the risk that key employees will leave Inforte. Also, if our stock price does not increase over time, it may be more difficult to retain employees who have been compensated with stock options. Options granted to employees from the IPO date, February 17, 2000, through December 31, 2002 have exercise prices of $4.76 to $71.81. The average exercise price of all options outstanding at December 31, 2002 is $13.82. Since the current market price for Inforte stock has recently been below this average strike price, it may be more difficult to retain employees. If key employee turnover rates grow to unacceptable levels because compensation is not at competitive rates, Inforte may increase the level of stock option grants or cash compensation. These actions would reduce net income (loss) per share and may cause Inforte to become unprofitable.
If we fail to adequately manage rapid changes in demand, our profitability and cash flow may be reduced or eliminated.
If we cannot keep pace with the rapid changes in demand, we will be unable to effectively match resources with demand, and maintain high client satisfaction, which may eliminate our profitability and our ability to achieve positive free cash flow. Our business grew dramatically from 1993 through 2000. For example, our net revenue increased by 100% or more for seven consecutive years, reaching $63.8 million in 2000. As a result of the current depressed IT spending environment and overcapacity in our industry however, net revenue has declined in each of the last two years, dropping to $40.4 million. If the level of spending declines further, we may not be profitable or achieve positive free cash flow. If, on the other hand, our growth exceeds our expectations, our current resources and infrastructure may be inadequate to handle the growth.
If our marketing relationships with software vendors deteriorate, we would lose their client referrals. If these vendors continue to increase their professional services revenue, our revenue could be adversely affected.
We currently have marketing relationships with software vendors, including Siebel and Vignette. Although we have historically received a large number of business leads from these and other software vendors to implement their products, they are not required to refer business to us and they may terminate these relationships at any time. If our relationships with these software vendors deteriorate, we may lose their client leads and our ability to develop new clients could be negatively impacted. Any decrease in our ability to obtain clients may cause a reduction in our net revenues.
Historically our software partners have primarily relied on licensing fees and maintenance contracts to generate revenue. However, more recently as software licensed sales have declined, software vendors have sought to supplement their revenue through increased implementation services for their software. This business strategy puts us in competition with our software partners on some deals, reducing client leads and our ability to develop new clients and revenue.
If we are unable to rapidly integrate third-party software, we may not be able to deliver solutions to our clients on a timely basis, resulting in lost revenues and potential liability.
In providing client services, we recommend that our clients use software applications from a variety of third-party vendors. If we are unable to implement and integrate this software in a fully functional manner for our clients, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of services.
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Software often contains errors or defects, particularly when first introduced or when new versions or enhancements are released. Despite internal testing and testing by current and potential clients, our current and future solutions may contain serious defects due to third-party software or software we develop or customize for clients. Serious defects or errors could result in liability for damages, lost revenues or a delay in implementation of our solutions.
Our revenues could be negatively affected by the loss of a large client or our failure to collect a large account receivable.
At times, we derive a significant portion of our revenue from large projects for a limited number of varying clients. During 2002 our five largest clients accounted for 37% of net revenue and our ten largest clients accounted for 58% of net revenue. Frequently we have one or more clients in a quarter accounting for over 10% of net revenue. Although these large clients vary from time to time and our long-term revenues do not rely on any one client, our revenues could be negatively affected if we were to lose one of our top clients or if we were to fail to collect a large account receivable.
In addition, many of our contracts are short-term and our clients may be able to reduce or cancel our services without incurring any penalty. If our clients reduce or terminate our services, we would lose revenue and would have to reallocate our employees and our resources to other projects to attempt to minimize the effects of that reduction or termination. Accordingly, terminations, including any termination by a major client, could adversely impact our revenues. We believe the uncertain economic environment increases the probability that services may be reduced or canceled.
If we estimate incorrectly the time required to complete our projects, we will lose money on fixed-price contracts.
Historically, a majority of our contracts are fixed-price contracts, rather than contracts in which the client pays us on a time-and-materials basis. We must estimate the number of hours and the materials required before entering into a fixed-price contract. Our future success will depend on our ability to continue to set rates and fees accurately and to maintain targeted rates of employee utilization and project quality. If we fail to accurately estimate the time and the resources required for a project, any required increase in the time and resources to complete the project could cause our profits to decline.
Fluctuations in our quarterly revenues and operating results due to cyclical client demand may lead to reduced prices for our stock.
Our quarterly revenues and operating results have fluctuated significantly in the past and we expect them to continue to fluctuate significantly in the future. Historically, we have experienced our greatest sequential growth during the first and second quarters. We typically experience significantly lower sequential growth in the third and fourth quarters. We attribute this to the budgeting cycles of our customers, most of whom have calendar-based fiscal years and as a result are more likely to initiate projects during the first half of the year. In 2001, this traditional seasonal pattern was overwhelmed by a cyclical decline in information technology spending, causing our net revenue to decline sequentially in each quarter of 2001. More recently, in February and March 2002, we did experience an increase in demand which did allow our net revenue in the second quarter 2002 to exceed the first quarter 2002 level. We believe that increase in demand was due to positive seasonal effects, while the subsequent lower revenue in the third quarter 2002 was due to negative seasonal effects. This existence of both seasonal and cyclical effects does make it more difficult to predict demand, and if we are unable to predict client demand accurately in a slower growth or distressed economic environment, our expenses may be disproportionate to our revenue on a quarterly basis and our stock price may be adversely affected.
Others could claim that we infringe on their intellectual property rights, which may result in substantial costs, diversion of resources and management attention, and harm to our reputation.
A portion of our business involves the development of software applications for specific client engagements. Although we believe that our services do not infringe on the intellectual property rights of others, we may be the subject of claims for infringement, which even if successfully defended could be costly and time-consuming. An infringement claim against us could materially and adversely affect us in that we may:
| • | experience a diversion of our financial resources and management attention; |
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| • | incur damages and litigation costs, including attorneys’ fees; |
| • | be enjoined from further use of the intellectual property; |
| • | be required to obtain a license to use the intellectual property, incurring licensing fees; |
| • | need to develop a non-infringing alternative, which could be costly and delay projects; and |
| • | have to indemnify clients with respect to losses incurred as a result of our infringement of the intellectual property. |
Because we are newer and smaller than many of our competitors, we may not have the resources to effectively compete, causing our revenues to decline.
Many of our competitors have longer operating histories, larger client bases, longer relationships with clients, greater brand or name recognition, and significantly greater financial, technical, marketing, and public relations resources than we do. We may be unable to compete with full-service consulting companies, including the former consulting divisions of the largest global accounting firms, who are able to offer their clients a wider range of services. If our clients decide to take their IT strategy and technology projects to these companies, our revenues may decline. It is possible that in uncertain economic times our clients may prefer to work with larger firms to a greater extent than normal. In addition, new professional services companies may provide services similar to ours at a lower price, which could cause our revenues to decline.
Our expansion and growth internationally could negatively affect our business.
For the year ended 2002, our international net revenue exceeded 20% of our total net revenue. We face additional risks internationally that we do not face domestically. Such risks include longer customer payment cycles, adverse taxes and compliance with local laws and regulations. Further, the effects of fluctuations in currency exchange rates may adversely affect the results of operations. Finally, as the U.S. economic slowdown has spread to the rest of the world, our ability to obtain international net revenue going forward will likely be reduced. These risk factors, as well as others not cited here, may negatively impact our business.
If clients view offshore development as a viable alternative to our service offerings, our pricing and revenue may be negatively affected.
Gradually, over the past two decades, numerous IT service firms have been founded in countries such as India, which have well-educated and technically trained English-speaking workforces available at wage rates that are only a fraction of U.S. and European wages rates. Additionally, some larger clients have established internal IT operations at offshore locations. While traditionally we have not competed with offshore development, presently this form of development is seeing rapid and increasing acceptance in the market, especially for routine and repetitive types of development. While offshore development has greater risk due to distance, geopolitical and cultural issues, we believe its lower cost advantage will likely overwhelm these risks. Inforte does not currently intend to establish offshore development capabilities as some of our competitors have done. Instead, we intend to continue our ongoing evolution toward more valued and more differentiated service offerings — including more organizational strategy, process design and organizational change consulting — which are difficult for offshore developers to replicate. If we are unable to evolve our service offerings, or if the rate of acceptance of offshore development advances even faster than we anticipate, then our pricing and our revenue may be negatively affected.
If the rate of adoption of advanced information technology slows substantially, our revenues may decrease.
We market our services primarily to firms that want to adopt information technology that provides an attractive return on investment or helps provides a sustainable competitive advantage. Our revenues could decrease if companies decide not to integrate the latest technologies into their businesses due to economic factors, governmental regulations, financial constraints or other reasons.
Inforte’s market research suggests that the level of information technology spending in the United States is closely linked with the growth rate of the Gross Domestic Product (GDP). The slowdown in the U.S. GDP growth rate that began in the second half of 2000 has caused a slower rate of adoption of advanced information technology by our target clients. We expect information technology spending and Inforte revenue to be highly dependent on the health of the U.S. economy. We believe that corporate revenue-driven profit growth must resume for IT spending to improve. If the overall level of business capital investment remains depressed or declines further, this may cause our revenue to decline further.
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If the supply of information technology companies and personnel continues to exceed demand, this may adversely impact the pricing of our projects and our ability to win business.
Beginning in the second half of 2000, many firms in our industry announced significant employee layoffs and lower rates of utilization of billable personnel. An oversupply of technology professionals may reduce the price clients are willing to pay for our services. An oversupply may also increase the talent pool for potential clients who may choose to complete projects in-house rather than use an outside consulting firm such as Inforte. Lower utilization rates increase the likelihood that a competitor will reduce their price to secure business in order to improve their utilization rate. The extent to which pricing and our ability to win business may be impacted is a function of both the magnitude and duration of the supply and demand imbalance in our industry.
Geopolitical instability may cause our revenues to decrease.
Our clients often avoid large IT spending commitments during periods of geopolitical instability and economic uncertainty. The war with Iraq, the possibility of terrorists attacking the United States’ interests, or geopolitical concerns in other areas such as North Korea may cause clients to freeze their decision making processes. This would slow demand for our services and would negatively impact our revenue.
Our stock price could be extremely volatile, like many technology stocks.
The market prices of securities of technology companies, particularly information technology services companies, have been highly volatile. We expect continued high volatility in our stock price, with prices at times bearing no relationship to Inforte’s operating performance.
Inforte’s average trading volume during 2002 averaged approximately 38,000 shares per day. On any particular day, Inforte’s trading volume can be less than 1,000 shares, increasing the potential for volatile stock prices.
Volatility of our stock price could result in expensive class action litigation.
If our common stock suffers from volatility like the securities of other technology companies, we have a greater risk of further securities class action litigation claims. One such claim is pending presently. Litigation could result in substantial costs and could divert our resources and senior management’s attention. This could harm our productivity and profitability.
Officers and directors own a significant percentage of outstanding shares and, as a group, may control a vote of stockholders.
As of March 5, 2003 our executive officers and directors own over 47% of the outstanding shares of our common stock. The largest owners and their percentage ownership are set forth below:
| • Philip S. Bligh | 22.3% |
| • Stephen C.P. Mack | 17.3% |
| • Nick Padgett | 6.5% |
If the stockholders listed above act or vote together with other employees who own significant shares of our common stock, they will have the ability to control the election of our directors and the approval of any other action requiring stockholder approval, including any amendments to the certificate of incorporation and mergers or sales of all or substantially all assets, even if the other stockholders perceive that these actions are not in their best interests.
Our stock repurchase program has had the effect of increasing the concentration of insider ownership. If we make further repurchases, insider ownership could increase further.
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Over time, the influence or control executive officers have on a stockholder vote may decrease as officers supplement below-market salaries and diversify overall equity wealth with sales of Inforte stock. As permitted by SEC Rule 10b5-1, Inforte executive officers have or may set up a predefined, structured stock trading program. The trading program allows brokers acting on behalf of company insiders to trade company stock during company blackout periods or while the insiders may be aware of material, non-public information, if the transaction is performed according to a pre-existing contract, instruction or plan that was established with the broker during a non-blackout period and when the insider was not aware of any material, non-public information. Inforte executive officers may also trade company stock outside of plans set up under SEC Rule 10b5-1, however such trades would be subject to company blackout periods and insider trading rules.
The authorization of preferred stock, a staggered board of directors and supermajority voting requirements will make a takeover attempt more difficult, even if the takeover would be favorable for stockholders.
Inforte’s certificate of incorporation and bylaws may have the effect of deterring, delaying or preventing a change in control of Inforte. For example, our charter documents provide for:
| • | the ability of the board of directors to issue preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; |
| • | the inability of our stockholders to act by written consent or to call a special meeting; |
| • | advance notice provisions for stockholder proposals and nominations to the board of directors; |
| • | a staggered board of directors, with three-year terms, which will lengthen the time needed to gain control of the board of directors; and |
| • | supermajority voting requirements for stockholders to amend provisions of the charter documents described above. |
We are also subject to Delaware law. Section 203 of the Delaware General Corporation Law prohibits us from engaging in a business combination with any significant stockholder for a period of three years from the date the person became a significant stockholder unless, for example, our board of directors approved the transaction that resulted in the stockholder becoming an interested stockholder. Any of the above could have the effect of delaying or preventing changes in control that a stockholder may consider favorable.
Our headquarters are located in Chicago, Illinois. Senior management, sales, marketing, human resources and administrative personnel, as well as the Chicago-based consultants use this facility. We have two subleases for a total of 50,765 square feet in Chicago. The primary sublease for 33,065 square feet expires in December 2005 with no option to renew. The secondary sublease for 17,700 square feet expires in June 2006 with no option to renew. We have regional offices for our regional personnel. We lease 22,529 square feet in Irvine, California and this lease term expires in July 2006 with an option to renew. We lease 4,480 square feet in Irving, Texas and this lease term expires in May 2005 with an option to renew. We have also entered into various short-term leases for professional office space in San Mateo, California, Jersey City, New Jersey, Alpharetta, Georgia, and London, England.
Inforte Corp. and Philip S. Bligh, Stephen C.P. Mack and Nick Padgett, officers of Inforte, have been named as defendants in Mary C. Best v. Inforte Corp.; Goldman, Sachs & Co.; Salomon Smith Barney, Inc.; Philip S. Bligh; Stephen C.P. Mack and Nick Padgett, Case No. 01 CV 10836, filed on November 30, 2001 in Federal Court in the Southern District of New York. The case is also known as In re Inforte Corp. Initial Public Offering Securities Litigation. An amended class action complaint was filed on April 19, 2002. The amended complaint alleges violations of federal securities laws in connection with our initial public offering occurring in February 2000 and seeks certification of a class of purchasers of Inforte stock, unspecified damages, interest, attorneys’ and expert witness fees and other costs. The amended complaint does not allege any claims relating to any alleged misrepresentations or omissions with respect to our business. The individual defendants (Messrs. Bligh, Mack and Padgett) have been dismissed from the case without prejudice pursuant a stipulated dismissal and a tolling agreement. We have moved to dismiss the plaintiff’s case. On February 19, 2002, the Court granted this motion in part, denied it in part and ordered that discovery in the case may commence. The Court dismissed with prejudice the plaintiff’s purported claim against Inforte under Section 10(b) of the Securites Exchanges Act of 1934, but left in place the plaintiff’s claim under Section 11 of the Securites Act of 1933.
10
Not applicable.
The following table provides information with respect to our executive officers:
| Name | Age | Position | |||
|---|---|---|---|---|---|
| Philip S. Bligh | 35 | Chief Executive Officer and Chairman | |||
| Stephen C.P. Mack | 37 | Chief Operating Officer, President and Director | |||
| Nick Padgett | 36 | Chief Financial Officer and Director | |||
Philip S. Bligh co-founded Inforte and has served as chairman of the board of directors of Inforte since inception in September 1993. Mr. Bligh also currently serves as chief executive officer. Before founding Inforte, Mr. Bligh served in various technology consulting roles for Accenture from October 1988 to February 1991 and as a project manager for Systems Software Associates, an enterprise software provider, from April 1991 through Inforte’s founding. Mr. Bligh holds a B.S. in chemical engineering from University College London, England.
Stephen C.P. Mack joined Inforte in October 1994 and has served as a director since that time. Mr. Mack is currently Inforte’s chief operating officer and president. Before joining Inforte, from February 1988 to October 1994, Mr. Mack worked at Accenture, where he was, most recently, a project manager responsible for the design and implementation of enterprise-wide operational and decision support systems for large, multinational corporations. Mr. Mack holds a Master’s degree in engineering and management from the University of Birmingham, England.
Nick Padgett has served as Inforte’s chief financial officer since December 1997. Mr. Padgett has been a director of Inforte since its founding in September 1993. Before joining Inforte, Mr. Padgett served as an equity research analyst for William Blair & Company, from August 1994 to December 1997. Before William Blair, Mr. Padgett served in various technology consulting roles for Accenture from June 1988 to September 1992. Mr. Padgett holds an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth College and a B.S. in computer science from Western Illinois University.
11
Our common stock is traded on the NASDAQ National Market under the symbol “INFT.” Our initial public offering of stock was February 17, 2000 at $32.00 per share. The price range reflected in the table below, is the highest and lowest closing sale price for our stock as reported by the NASDAQ National Market during each quarter the stock had been publicly traded. Our present policy is to retain earnings, if any, to finance future growth. We have never paid cash dividends, although we may consider doing so if the double taxation of dividends in the United States is reduced or eliminated. In January 2001, Inforte announced that the board of directors approved a stock repurchase program that allows Inforte to buy up to $25 million of Inforte shares. The program was completed in August 2002. The board of directors approved an additional $5.0 million stock repurchase program on August 22, 2002. We stated at that time that we had no present plans to make additional repurchases of stock, and as of December 31, 2002, we have made no repurchases under this second program. As of March 5, 2003, there were approximately 3,213 stockholders, including stockholders of record and holders in street name, and the price per share of our common stock was $6.24.
| Three Months Ended |
||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mar. 31, 2001 |
Jun. 30, 2001 |
Sep. 30, 2001 |
Dec. 31, 2001 |
Mar. 31, 2002 |
Jun. 30, 2002 |
Sep. 30, 2002 |
Dec. 31, 2002 |
|||||||||||||||||||
| Price range per share: | ||||||||||||||||||||||||||
| Low | $ | 7.69 | $ | 7.74 | $ | 9.26 | $ | 8.98 | $ | 9.30 | $ | 8.70 | $ | 5.12 | $ | 4.76 | ||||||||||
| High | $ | 23.00 | $ | 14.68 | $ | 12.80 | $ | 14.00 | $ | 13.71 | $ | 12.00 | $ | 10.68 | $ | 8.00 | ||||||||||
The following table sets forth Inforte’s securities authorized for issuance under equity compensation plans as of December 31, 2002.
| Plan category |
Number of securities to be issued upon exercise of outstanding options |
Weighted average exercise price of outstanding options |
Number of securities available for future issuance under equity compensation plans(1) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity compensation plans approved by | |||||||||||||
| security shareholders | 2,789,264 | $13.82 | 2,306,141 | ||||||||||
| Equity compensation plans not approved | |||||||||||||
| by security shareholders | — | — | — | ||||||||||
| Total | 2,789,264 | $13.82 | 2,306,141 | ||||||||||
| (1) | Includes 1,593,662 in shares available under Inforte’s 1997 Incentive Stock Option Plan, 365,000 shares available under the 1995 Incentive Stock Option Plan and 347,479 shares available under Inforte’s Employee Stock Purchase Plan. For the 1997 Incentive Stock Option Plan Inforte has reserved an aggregate of 4,000,000 shares of common stock for issuance, plus annual increases beginning in 2001 equal to the lesser of: (1) 1,000,000 shares, (2) 5% of the total shares of common stock outstanding or (3) a number determined by the Board of Directors. For the 1995 Incentive Stock Option Plan Inforte has reserved an aggregate of 4,900,000 shares for issuance. There is no provision in the 1995 plan to increase the number of shares available for granting. For the Employee Stock Purchase Plan, Inforte has reserved 200,000 shares for issuance, plus annual increases beginning in 2001 equal to the lesser of (1) 400,000 shares, (2) 2% of the total shares of common stock outstanding or (3) a number determined by the Board of Directors. The Purchase Plan became effective upon the completion of the Company’s initial public offering, in February 2000. |
12
The following selected financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The consolidated statement of operations data for the years ended 2000, 2001 and 2002 and the balance sheet data as of December 31, 2001 and 2002 are derived from our audited consolidated financial statements, which are included elsewhere in this Form 10-K. The consolidated statement of operations data for the years ended 1998 and 1999 and the balance sheet data as of December 31, 1998, 1999, and 2000 are derived from our audited consolidated financial statements, which are not included in this Form 10-K.
| Year ended December 31, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1998 |
1999 |
2000 |
2001 |
2002 |
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| (in thousands, except per share data) | |||||||||||||||||
| Consolidated Statement of Operations Data | |||||||||||||||||
| Revenue before reimbursements (net revenue) | $ | 13,447 | $ | 30,088 | $ | 63,839 | $ | 47,736 | $ | 40,355 | |||||||
| Operating expenses: | |||||||||||||||||
| Project personnel and related expenses | 6,830 | 12,846 | |||||||||||||||