UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________.
Commission File No. 000-29239
INFORTE
CORP.
(Exact
name of registrant as specified in its charter)
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Delaware |
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36-3909334 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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150 North Michigan Avenue |
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(Address of principal executive offices) (Zip Code) |
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Registrant’s telephone number, including area code: (312) 540-0900 |
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Securities registered pursuant to Section 12(b) of the Act: None |
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Securities registered pursuant to Section 12(g) of the Act: |
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Common Stock, $.001 par value |
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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 o
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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o 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 $45,881,512.
The number of shares of the Registrant’s common shares, par value $0.001 per share, outstanding as of March 3, 2004 was 11,011,643.
Certain portions of the Registrant’s definitive proxy statement dated March 24, 2004 for the Annual Meeting of Stockholders to be held April 28, 2004 are incorporated by reference into Part III of this report.
Inforte Corp.
Form 10-K
December 31, 2003
Table of Contents
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Market for Registrant’s Common Equity and Related Stockholder Matters |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management |
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Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K |
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ITEM 1. |
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.
Overview
Inforte Corp. 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 client base serves the right customers in the right ways to generate the greatest return.
Our client base consists primarily of Global 2000 companies. Representative clients in the past year included Argent Mortgage Company, AutoTrader.com, Avery Dennison, BP, Chicago Symphony Orchestra, Diageo, Guardian Life Insurance, PerkinElmer, SouthStar Energy Services, Tribune Company, Unilever Best Foods, Uniprise and WesCorp.
Inforte has grown through organic means rather than through mergers or acquisitions from its inception in 1993 through 2003. 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. In March 2004 acquired COMPENDIT, Inc., a leading provider of SAP Business Intelligence implementation consulting services. This acquisition enhanced Inforte’s ability to offer analytics and business intelligence solutions through COMPENDIT’s services partnership with SAP. As of December 31, 2003, we employed 189 people in our offices in Atlanta, Chicago, Dallas, London, Los Angeles, New York and San Francisco.
Inforte was incorporated in Delaware in 1999 and our stock is traded on the NASDAQ National Market under the symbol “INFT.” Our Internet address is http://www.inforte.com. Material contained on our website is not incorporated by reference into this annual report.
Industry Background
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 develop a customer strategy that is highly integrated and aligned with its business strategy and goals. An effective customer strategy applies well-established customer relationship management (CRM), marketing management and business intelligence techniques to proven technology solutions, allowing companies to design organizations that systematically execute on business goals, communicate consistently and generate the results that success requires.
The analysis, design and implementation of effective CRM, marketing strategy and business intelligence solutions require special skills and expertise that many companies do not possess. These special skills include the ability to:
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Identify the vital planning information that companies need to manage their business better in response to demand changes; |
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Integrate planning processes and systems across business functions; |
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Develop integrated, demand-driven approaches to planning and executing operations; |
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Drive profitability from customers by linking customer-facing strategies to the back office; and |
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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 customer 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 Services & Solutions
Customer Strategy and Solutions. We deliver customer strategy and solutions that tightly align with client business strategy and goals. These customer solutions help clients generate the greatest returns 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 customer 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 business intelligence initiatives, customer segmentation approaches, customer differentiation programs and marketing management.
Marketing Strategy & Solutions. Through the Marketing Strategy & Solutions practice, Inforte helps clients 1) architect their brand to drive sales to precisely targeted customer segment, 2) analyze CRM-based information to improve marketing investment effectiveness (ROI), 3) develop and implement brand-centered pricing strategies to improve results, 4) reengineer marketing processes to drive costs and frustration out of execution, 5) leverage customer/consumer behavioral data to reinvent target segments and marketing investment approaches, and 6) evaluate, design, and implement marketing tools and technologies.
Customer Intelligence. One of the most critical challenges for organizations, business intelligence allows a company’s management and its staff to base strategic and operational decisions on facts instead of hypothesis and conjecture. Customer Intelligence focuses on leveraging Business Intelligence for customer-related issues like retention, mix, marketing performance, customer service impact, and sales analytics. Inforte helps clients to assess their current analytical, reporting and data architecture challenges and then implement the requirements, architecture and processes to improve business intelligence capabilities. The result is fast and accurate access, analysis and dissemination of an organization’s key information assets to drive actionable plans to meet critical business objectives.
Service Lines. To effectively deliver on Inforte’s strategy and solution offerings, we deliver the following services:
Operational Strategy. Inforte helps firms establish operational strategies that support their desired strategic positioning. The strategies may be customer-focused (e.g., Customer Relationship Management/CRM or customer centric), product- or service-driven strategies (e.g., product/channel strategies), and/or strategies to achieve operational excellence. Inforte helps clients develop new operating strategies or improve on existing ones by validating, refining and building value propositions, conducting competitive analysis, developing customer value/segmentation approaches, developing benefits or ROI models, and creating branding or marketing strategies.
Process Design. By developing a detailed design of the “to-be” business processes, an organization can positively impact organizational and technology changes that follow. Inforte takes a pragmatic view of this. We recognize that driving sustainable process change is difficult to accomplish, and we draw upon significant depth of experience to design business processes that are practical and adoptable. Inforte provides the support needed to ensure that a process is rolled out and adopted. Implementation planning, key metrics and organizational change planning are integral to the successful deployment of redesigned processes.
Program Management. Inforte can enhance the successful delivery of projects through the implementation of disciplined program management techniques. This includes the establishment of a Program Management Office (PMO) to define, deploy and support common processes, techniques, and tools that are used by all projects throughout the program.
Organizational Change. Concurrent with the design of a client’s Operating Model, companies must plan for the organizational changes that may be required to enact and sustain the business. Determining the organization’s readiness for change requires a thorough assessment of its current leadership, structure, culture, and workforce. Organization Change Planning begins with this assessment and produces a prioritized list of initiatives that address macro (holistic, organization-wide) and micro (the individual perspective) level activities required to support the successful deployment of integrated solutions within the organization.
Technology Delivery. Inforte’s technology delivery service line involves the identification, definition, and sequencing of a series of technology-focused initiatives to meet a specific set of business goals. Frequently starting with the development of a technology roadmap, Inforte’s technology delivery is anchored in the company’s strategic plan, its operating model and an understanding of the required business capabilities, current processes, and organizational structures.
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 Strategy
Inforte’s strategy is to focus on consulting in one area of business, we have chosen to focus on customer related strategies, processes and solutions. Inforte is an expert in this area, we focus all of our activity systems, experience building, intellectual capital development, tool and methodology creation, training and professional development in this area. We offer our clients best-in-world capabilities, we believe we compare more favorably than our competitors, who may be larger and may have more resources than us, but who are unfocused and have not developed a specialty.
Our growth focus for 2004 is to:
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Deepen our focus in Customer Strategy and Solutions, by offering a broader set of services and solutions to our most strategic clients and by developing a broader array of offerings within our core industries; |
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Build further depth in our new practice areas of Marketing Strategy and Solutions and Customer and Business Intelligence; |
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Develop new industry practices areas; our main focus is build our Federal Sector business but we will also further develop our Life Sciences/Pharma and Consumer Packaged Goods practices; |
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Build a Global Delivery Model, we will set up an office in India and build out the infrastructure and offerings to be able to offer our customers a differentiated service for technology delivery; and |
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Develop new and complementary offerings through acquisitions and mass hires. |
The underlying principles supporting this strategy are:
Maintain customer strategy and 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 attract and 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 consistently delivering on 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.
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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.
Clients
Our client base consists primarily of Global 2000 companies. Representative clients are listed in the “Overview.” During 2003 our top five clients equaled 51 percent of total revenue and our top ten clients equaled 68 percent of total revenue. No single customer has provided Inforte with over 10 percent of annual revenue for the five years ending December 31, 2002, and two customers contributed more than 10 percent of annual revenue in 2003.
Sales and Marketing
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 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 and complementary services firms with whom we have strategic, non-exclusive marketing relationships. We also work with other software vendors with whom we do not have formalized relationships.
People
Our headcount was 257 people at the end of 1999, 442 people at the end of 2000, 294 people at the end of 2001, 229 employees as of December 31, 2002 and 189 employees as of December 31, 2003. Of these, 151 are consultants, 14 are in sales and marketing, including 11 quota-based sales personnel, 5 are in human resources and 19 are management or administrative personnel. None of our employees are represented by a labor union, and we believe our employee relations are good.
Competition
We compete in the strategy and technology professional services market, which is highly competitive. Despite the elimination of many competitors over the past two years, competition remains intense due to restrained spending on consulting and 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:
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The successor organizations to the Big 5 consulting firms: Accenture, BearingPoint, Deloitte Consulting/Braxton, Cap Gemini Ernst & Young and IBM Business Consulting Services |
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Technology consulting firms such as Answerthink, Braun Consulting, DiamondCluster, and Sapient |
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Niche service providers supporting CRM-related technology, such as Akibia, Extraprise and Headstrong |
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Strategy consulting firms such as Bain, Booz Allen & Hamilton, Boston Consulting Group and McKinsey |
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Professional services divisions of application software vendors |
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Internal information technology departments of current and potential clients |
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Indian offshore development firms such as Cognizant Technology, Infosys Technologies, Satyam Computer Services, Tata Consultancy Services and Wipro |
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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
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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 strategies and solutions that we provide.
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.
Risk Factors
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.
RISKS RELATED TO INFORTE
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:
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develop new services that meet changing customer needs; |
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identify and effectively market solutions with growing demand during a period of slower technological advancement and adoption; |
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enhance our current services; |
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continue to develop our strategic expertise; |
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effectively use the latest technologies; and |
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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.
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
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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, 2003 have exercise prices of $4.76 to $71.81. The average exercise price of all options outstanding at December 31, 2003 is $12.16. 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 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 Information Technology (IT) spending environment and overcapacity in our industry however, net revenue has declined in each of the last three years, dropping to $32.7 million in 2003. 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 Systems, Inc., Vignette and Unica. 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.
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 2003 our five largest clients accounted for 51% of net revenue and our ten largest clients accounted for 68% of net revenue. In the same year we had two clients contributing more than 10% of annual net revenue and 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,
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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.
A portion 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.
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. 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.
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. In 2003, our net revenue declined sequentially for the first three quarters of the year. We believe our traditional seasonal pattern was overwhelmed by geopolitical events that took place early in 2003, the most notable of these events being the war in Iraq. 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:
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experience a diversion of our financial resources and management attention; |
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incur damages and litigation costs, including attorneys’ fees; |
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be enjoined from further use of the intellectual property; |
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be required to obtain a license to use the intellectual property, incurring licensing fees; |
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need to develop a non-infringing alternative, which could be costly and delay projects; and |
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have to indemnify clients with respect to losses incurred as a result of our infringement of the intellectual property. |
7
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 2003, our international net revenue was 20% of total net revenue. There are additional risks associated with international operations, which we do not face domestically and we may assume even higher levels of such risk as we expand our ventures in Europe and India. Risk factors associated with international operations 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 revenues may be reduced in the future. These risk factors, among 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. In addition, on December 5, 2003, Inforte announced the hiring of new President and Chief Operating Officer, David Sutton, and the stepping down of Stephen Mack, both effective on that date. Should these changes in the executive team 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. The replacement of E&Y with Grant Thornton LLP was based on economic reasons related to possible future fees escalation in current and forthcoming engagements of the Company’s independent accountants.
We may not be able to integrate successfully the business of recently acquired COMPENDIT, Inc. with Inforte’s business.
While we believe that our recently closed acquisition of COMPENDIT, Inc., a leading provider of SAP Business Intelligence implementation consulting services, will enhance our ability to offer analytics and business intelligence solutions to our costumers, the Inforte and COMPENDIT businesses may not be integrated successfully because of the potential loss during the post-closing period of key employees, customers or service partners or for other reasons. Failure to integrate COMPENDIT’s business successfully could result in an inability to realize certain synergies of the acquisition, which, in turn, may negatively impact our operating results.
8
RISKS RELATED TO OUR INDUSTRY
If the rate of adoption of advanced information technology slows substantially, our revenues may decrease.
We market our services primarily to firms that want to adopt information technology that provides an attractive return on investment or helps provide 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.
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 possibility of terrorists attacking the United States’ interests or geopolitical concerns in other areas such as the Middle East and North Korea may cause clients to freeze or slow 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 2003 averaged approximately 40,000 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 3, 2004 our executive officers and directors beneficially own over 40% of the outstanding shares of our common stock. The largest owners and their percentage ownership are set forth below:
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• |
Philip S. Bligh |
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21.7 |
% |
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• |
Stephen C.P. Mack |
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15.2 |
% |
9
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, the percentage of 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.
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:
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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; |
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the inability of our stockholders to act by written consent or to call a special meeting; |
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advance notice provisions for stockholder proposals and nominations to the board of directors; |
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a staggered board of directors, with three-year terms, which will lengthen the time needed to gain control of the board of directors; and |
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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.
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ITEM 2. |
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, Alpharetta, Georgia, New York and London, England.
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ITEM 3. |
Inforte, Philip S. Bligh, an officer of Inforte, and Stephen C.P. Mack and Nick Padgett, both former 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”). 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
10
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.
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ITEM 4. |
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.
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ITEM 4A. |
The following table provides information with respect to our executive officers:
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Age |
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Position |
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Philip S. Bligh |
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36 |
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Chief Executive Officer and Chairman |
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David A. Sutton |
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40 |
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Chief Operating Officer and President |
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Nick Heyes |
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39 |
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Chief Financial Officer and Secretary |
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.
David A. Sutton was appointed a President and Chief Operating Officer of Inforte Corp. in December 2003. A leading authority on Enterprise Marketing Management, Mr. Sutton has led numerous business strategy, marketing strategy and transformation engagements for Global 2000 companies and government agencies, including Coca-Cola, Department of Defense, Georgia-Pacific, Intuit, Internal Revenue Service, JP Morgan Chase, Miller Brewing, Texaco and Toshiba. Prior to Inforte, Mr. Sutton served as Senior Vice President of Strategic Services at CSC Index Inc. and prior to that served on various consulting positions with Booz Allen Hamilton management consultants. Mr. Sutton holds an MBA from George Washington University and a Bachelor’s degree from the University of Virginia.
Nick Heyes has served as Inforte’s chief financial officer since October 2003. Mr. Heyes also served Inforte as an executive vice president since October 1999 with comprehensive operational experience, including overall responsibility for the U.S. consulting organization, general manager of the technology business unit, and head of delivery operations and human resources. Prior to joining Inforte Mr. Heyes was an associate partner at Accenture. Mr. Heyes holds Bachelor’s and Master’s degrees in engineering and management from Birmingham University in the United Kingdom.
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ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
Our common stock is traded on the NASDAQ National Market under the symbol “INFT.” The price range reflected in the table below is the high and low sales price for our stock as reported by the NASDAQ National Market during each quarter of the last two years. 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. 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, 2003, we have made no repurchases under this second program. As of March 3, 2004, there were approximately 3,009 stockholders, including stockholders of record and holders in street name, and the closing price of Inforte shares of common stock as reported by the NASDAQ National was $10.53.
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Three Months Ended |
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Jun. 30, |
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Dec. 31, |
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Jun. 30, |
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Sep. 30, |
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Price range per share: |
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Low |
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$ |
8.11 |
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$ |
8.62 |
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$ |
4.99 |
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$ |
4.75 |
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$ |
5.20 |
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$ |
5.90 |
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$ |
7.00 |
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$ |
7.90 |
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High |
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$ |
14.10 |
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$ |
12.05 |
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$ |
10.83 |
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$ |
8.31 |
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$ |
8.00 |
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$ |
8.25 |
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$ |
10.25 |
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$ |
10.73 |
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12
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ITEM 6. |
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 2001, 2002 and 2003 and the balance sheet data as of December 31, 2002 and 2003 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 1999 and 2000 and the balance sheet data as of December 31, 1999, 2000 and 2001 are derived from our audited consolidated financial statements, which are not included in this Form 10-K.
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Year ended December 31, |
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2003 |
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(in thousands, except per share data) |
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