UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 000-29239
INFORTE CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-3909334
(State of incorporation) (IRS Employer Identification No.)
150 North Michigan Avenue, Suite 3400, Chicago, Illinois 60601 (Address
of principal executive offices, including ZIP code)
(312) 540-0900
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No ___, and (2) has
been subject to such filing requirements for the past 90 days. Yes ___ No X.
The number of shares outstanding of the Registrant's Common Stock as of
May 5, 1999 was 12,341,921
1
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INFORTE CORP.
INDEX
Page No.
-------
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance sheets - December 31, 1999 and
March 31, 2000 3
Statements of income - Three months ended
March 31, 1999 and 2000 4
Statements of cash flows - Three months ended
March 31, 1999 and 2000 5
Notes to financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Qualitative and Quantitative Disclosure About Market Risk 10
PART II. Other Information
Item 1 Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3 Defaults of Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
Exhibit 27.1
Exhibit 99.1
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
INFORTE CORP.
BALANCE SHEETS
(Unaudited)
<CAPTION>
December 31 March 31
1999 2000
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,792,027 $ 55,513,303
Short-term investments - 16,535,070
Accounts receivable 6,924,250 10,966,546
Allowance for doubtful accounts (600,000) (750,000)
Prepaid expenses and
other current assets 681,563 1,242,262
Deferred income taxes 652,293 706,449
----------- ------------
Total current assets 11,450,133 84,213,630
Computers, purchased
software, and property 2,165,022 2,661,595
Less accumulated depreciation
and amortization 677,519 902,303
----------- ------------
Computers, purchased software,
and property, net 1,487,503 1,759,292
Deferred income taxes 19,766 2,003
----------- ------------
Total assets $ 12,957,402 $ 85,974,925
=========== ============
Liabilities and stockholders' equity Current liabilities:
Accounts payable $1,352,472 $2,076,938
Income taxes payable 311,512 839,309
Accrued expenses 4,122,175 4,120,660
Deferred revenue 4,870,579 8,080,343
---------- ----------
Total current liabilities 10,656,738 15,117,250
Stockholders' equity:
Common stock, $0.001 par value
authorized-50,000,000 shares;
issued and outstanding- 9,721,154 as
of December 31, 1999; 12,320,981
as of March 31, 2000. 9,721 12,321
Additional paid-in capital 411,886 67,937,212
Retained earnings 1,879,057 2,910,662
Accumulated other comprehensive income - (2,520)
---------- ----------
Total stockholders' equity 2,300,664 70,857,675
---------- ----------
Total liabilities and stockholders' equity $12,957,402 $85,974,925
========== ==========
</TABLE>
See notes to financial statements
3
<PAGE>
<TABLE>
INFORTE CORP.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended March 31,
1999 2000
---- ----
<S> <C> <C>
Revenues $ 4,857,239 $ 12,290,000
Operating expenses:
Project personnel and
related expenses 2,272,593 5,408,772
Sales and marketing 803,267 1,561,941
Recruiting, retention,
and training 433,462 1,406,296
Management and administrative 826,931 2,443,543
----------- -----------
Total operating expenses 4,336,253 10,820,552
----------- -----------
Operating income 520,986 1,469,448
Interest income, net and other 28,210 340,501
----------- -----------
Pretax income 549,196 1,809,949
Income tax expense (benefit) (36,499) 778,344
----------- -----------
Net income $ 585,695 $ 1,031,605
=========== ===========
Pro forma income tax expense 219,319 778,344
----------- -----------
Pro forma net income $ 329,877 $ 1,031,605
=========== ===========
Pro forma earnings per share:
- - Basic $ 0.04 $ 0.10
- - Diluted $ 0.03 $ 0.08
Weighted average common shares outstanding:
- - Basic 8,375,000 10,767,891
- - Diluted 10,522,899 12,431,917
</TABLE>
See notes to financial statements
4
<PAGE>
<TABLE>
INFORTE CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three months ended March 31,
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 585,695 $ 1,031,605
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 101,704 229,612
Deferred income taxes (504,303) (36,393)
Changes in operating assets and liabilities:
Accounts receivable (1,976,133) (3,892,296)
Prepaid expenses and other current assets (49,334) (560,699)
Accounts payable 106,004 724,466
Income taxes payable 379,804 527,797
Accrued expenses and other (259,337) (1,515)
Deferred revenue 2,103,039 3,209,764
----------- ------------
Net cash provided by operating
activities 487,139 1,232,341
Cash flows from investing activities
Note receivable - Stockholder (42,514) -
Purchase of short-term investments - (16,542,418)
Purchases of property and equipment (121,869) (496,573)
----------- ------------
Net cash used in investing activities (164,383) (17,038,991)
Cash flows from financing activities
Principal payments on note payable
- Former stockholder (10,058) -
Proceeds from issuance of common stock - 67,313,049
Proceeds from the exercise of stock options - 214,877
----------- ------------
Net cash provided by (used in) financing
activities (10,058) 67,527,926
----------- ------------
Increase in cash and cash equivalents 312,698 51,721,276
Cash and cash equivalents, beg.of period 2,698,110 3,792,027
----------- ------------
Cash and cash equivalents, end of period $ 3,010,808 $ 55,513,303
=========== ============
</TABLE>
See notes to financial statements
5
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Inforte Corp.
Notes to financial statements
(Unaudited)
March 31, 2000
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Inforte Corp. ("Inforte") pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the financial statements and notes
thereto for the year ended December 31, 1999 included in Inforte's Registration
Statement on Form S-1 (File No. 333-92325). The balance sheet at December 31,
1999 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accompanying financial statements reflect all adjustments (consisting solely of
normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of results for the interim periods presented.
The results of operations for the three month period ended March 31, 2000 are
not necessarily indicative of the results to be expected for the full fiscal
year.
(2) NET INCOME PER COMMON SHARE
Inforte computes basic earnings per share ("Basic EPS") by dividing net
income by the weighted average number of common shares outstanding. Diluted net
income per common share ("Diluted EPS") is computed by dividing net income by
the weighted average number of common shares and dilutive common share
equivalents then outstanding.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 2000
------------------------------
(unaudited)
<S> <C> <C>
Basic weighted average shares 8,375,000 10,767,891
Effect of dilutive stock options 2,147,899 1,664,026
------------------------------
Diluted common and common equivalent shares 10,522,899 12,431,917
==============================
</TABLE>
(3) SHORT-TERM AND LONG-TERM INVESTMENTS
Inforte considers all investments with original maturities of less than one
year from the respective balance sheet dates to be short-term investments and
all investments with maturities greater than one year from the balance sheet
dates to be long-term investments. In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," Inforte has categorized its marketable securities as
"available-for-sale."
(4) PRO FORMA INCOME TAXES
Prior to 1999 Inforte was operating as a subchapter S Corporation. As a
subchapter S Corporation, Inforte was not subject to federal income taxes;
rather such income was included in the taxable income of stockholders. The pro
forma income tax expense, net income and earnings per share for 1999 are stated
on a pro forma basis to reflect what would have been reported without the
one-time conversion to a C Corporation from a subchapter S Corporation in 1999.
(5) STOCK HOLDERS' EQUITY
On February 17, 2000 the Securities and Exchange Commission declared
the Company's Registration Statement on Form S-1 (File No. 333-92325) covering
an aggregate of 2,300,000 shares of common stock at an offering price of $32.00
per share effective. Net proceeds to the Company from the sale of 2,300,000
shares, after deducting underwriting discounts and commissions of $5,152,000 and
offering expenses of $1,587,749 were $66,860,251.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with our
financial statements, together with the notes to those statements, included
elsewhere in this Form 10-Q. The following discussion contains forward-looking
statements that involve risks, uncertainties, and assumptions such as statements
of our plans, objectives, expectations, and intentions. Our actual results may
differ materially from those discussed in these forward-looking statements
because of the risks and uncertainties inherent in future events that include,
but are not limited to, those identified under the caption "Risk Factors"
appearing on pages 6-11 in our prospectus dated February 17, 2000, and
incorporated herein by reference, as well as factors discussed elsewhere in this
Form 10-Q. Actual results may differ from forward-looking results for a number
of reasons, including but not limited to, Inforte's ability to: (i) effectively
train professional staff with advanced technology and business strategy skills;
(ii) attract and retain clients and satisfy our clients' expectations; (iii)
recruit and retain qualified professionals; (iv) accurately estimate the time
and resources necessary for the delivery of our services; and (v) build and
maintain marketing relationships with leading software vendors. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, or projected. All forward-looking statements included in
this document are made as of the date hereof, based on information available to
Inforte on the date thereof, and Inforte assumes no obligation to update any
forward-looking statements.
Overview
Inforte Corp. is a leading eBusiness integrator that focuses on velocity --
delivering better, faster eBusiness strategies and solutions to clients that
empower them to compete successfully in the Internet economy. Inforte offers the
unique combination of eStrategy, business-to-consumer and business-to-business
eCommerce, supply-chain integration, and premier customer experience design and
management capabilities required to build end-to-end eBusiness solutions that
are integrated across clients' value chains. Inforte's client-advocacy approach
and delivery methodology, "Velocity to Value", has enabled Inforte to achieve
100 % client referenceability and industry-leading project efficiency metrics.
Founded in 1993, Inforte has offices in Chicago, Dallas, Los Angeles and San
Francisco, and 100% of its employees are owners.
The majority of our revenues are from professional services performed on a
fixed-price basis; however, we also perform services on a time-and-materials
basis. Typically, the first portion of an engagement involves a strategy project
or a discovery phase lasting 30 to 60 days, which we perform on a fixed-price
basis. This work enables us to determine with our clients the scope of
successive phases for design and implementation, which in total generally last
three to nine months, and to decide whether we will perform these additional
phases for a fixed price or on a time-and-materials basis. Whether we use fixed
pricing or time-and-material pricing depends upon our assessment of the
project's risk, and how precisely our clients are able to define the scope of
activities they wish us to perform. Fixed prices are based on estimates from
senior personnel in our consulting organization who project the length of the
engagement, the number of people required to complete the engagement, and the
skill level and billing rates of those people. We then adjust the fixed price
based on various qualitative risk factors such as the aggressiveness of the
delivery deadline and the technical complexity of the solution.
We ask clients to pay 25%-50% of our fixed-price projects in advance to enable
us to secure a project team in a timeframe that is responsive to the client's
needs. We bill the remainder in advance of the work performed based upon a
predetermined billing schedule over the course of the engagement. We normally
will not agree to milestone-based billing schedules. We recognize revenues from
fixed-price contracts on the percentage-of-completion method, based on the ratio
of costs incurred to total estimated costs. Amounts billed before we perform
services are classified as deferred revenue. We bill time-and-materials projects
twice per month on the 15th and last day of each month. We recognize
time-and-materials revenues as we perform the services. We do not include in our
revenues the reimbursable expenses we charge to our clients, on either
fixed-price or time-and-material projects.
Our revenues and earnings may fluctuate from quarter to quarter based on factors
within and outside of our control. These include:
o the variability in market demand for Internet professional services;
7
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o the length of the sales cycle associated with our service offerings;
o the number, size, and scope of our projects;
o the efficiency with which we deliver projects and use our people;
o the compensation that we pay our people; and
o our ability to keep discretionary expenses within budget.
If revenues do not increase at a rate at least equal to increases in expenses,
our results of operations could be materially and adversely affected. 1.
8
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RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the percentage of revenues of certain items
included in Inforte's statement of income:
% of Revenue
Three months ended March 31,
1999 2000
Revenues 100.0 100.0
Operating expenses:
Project personnel and
related expenses 46.8 44.0
Sales and marketing 16.5 12.7
Recruiting, retention,
and training 8.9 11.4
Management and administrative 17.0 19.9
Total operating expenses 89.3 88.0
Operating income 10.7 12.0
Interest income, net and other 0.6 2.8
Pro forma income tax expense 4.5 6.3
Pro forma net income 6.8 8.4
Quarter Ended March 31, 2000 and 1999
- -------------------------------------
Revenues. Revenues increased 153% to $12.3 million for the quarter ended March
31, 2000 from $4.9 million for quarter ended March 31, 1999. This growth
reflected increases in the number of client engagements and in average revenue
per client. For the quarter ended March 31, 2000 we had 45 significant clients
with each of these clients contributing $1.1 million to revenue on average on an
annualized basis. We had 27 significant clients during the quarter ended March
31, 1999, each contributing $0.7 million to revenue on average on an annualized
basis.
Project personnel and related expenses. Project personnel and related expenses
consist primarily of compensation and fringe benefits for our professional
employees who deliver consulting services and non-reimbursable project costs.
All labor costs for project personnel are included in project personnel and
related expenses, with the exception of the time spent attending training
classes. Internal projects or unassigned time between projects are not
considered training costs, and thus appear in project personnel and related
expenses. These expenses increased 138% to $5.4 million for the quarter ended
March 31, 2000 from $2.3 million for quarter ended March 31, 1999. The increase
was due to the hiring of additional consulting professionals. We employed 250
consultants on March 31, 2000, up from 112 one year earlier. Project personnel
and related expenses represented 44.0% of revenues for the quarter ended March
31, 2000, compared to 46.8% in 1999. The decrease as a percentage of revenues
was due to rising revenue per consultant that increased to $215,000 for the
quarter ended March 31, 2000 from $192,000 in the comparable quarter in 1999
calculated on an annualized basis. The increase in revenue per consultant is due
to price increases consistent with those in our industry, offset by lower
utilization. We are actively managing to bring utilization levels down and we
expect that project personnel and related expenses will increase as a percentage
of revenue going forward. We therefore do not expect revenue per consultant to
increase at the same rate going forward as it has historically.
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, benefits, and travel costs for employees in the market
development, practice development, and client development groups and costs to
execute marketing programs. Sales and marketing expenses increased 94% to $1.6
million for the quarter ended March 31, 2000 from $0.8 million in the same
period in 1999. Of the dollar spending increase, approximately 60% was due to
increased sales spending related to the growth in our practice development and
client development salesforces, with the remainder due to increased marketing
activities to develop the Inforte brand. Sales and marketing expenses as a
percentage of revenues decreased to 12.7% for the quarter
9
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ended March 31, 2000 from 16.5% in the first quarter of 1999. We deliberately
grew sales and marketing expenses at a faster rate than the rate of revenue
growth in 1999. Having made these investments in 1999, we intend to grow sales
and marketing expenses at a slower rate than the rate of revenue growth in 2000.
Recruiting, retention, and training. Recruiting, retention, and training
expenses consist of compensation, benefits, and travel costs for personnel
engaged in human resources; costs to recruit new employees; costs of human
resources programs; and training costs, including travel and labor costs. These
expenses increased by 224% to $1.4 million for the quarter ended March 31, 2000
from $0.4 million in the first quarter of 1999. Of the dollar spending increase,
approximately 50% was due to increased recruiting spending related to the
ongoing increase in our number of employees, with the remainder due to increased
spending on human resources programs and training activities. Recruiting,
retention, and training expenses as a percentage of revenues increased to 11.4%
for the March 2000 quarter from 8.9% in the March 1999 quarter as hiring
occurred at a more rapid rate than the rate of revenue growth.
Management and administrative. Management and administrative expenses
consist primarily of compensation, benefits, and travel costs for management,
finance, information technology, and facilities personnel, together with rent,
telecommunications, audit, and legal costs, and depreciation and amortization of
capitalized computers, purchased software, and property. These expenses
increased 195% to $2.4 million for the quarter ended March 31, 2000 from $0.8
million for the same period in 1999. This increase occurred in all areas cited
above due to the ongoing growth of our business. Management and administrative
expenses as a percentage of revenues increased to 19.9% for the quarter ended
March 31, 2000 from 17.0% for the same period in 1999, as facilities and
technology expenses grew more rapidly than the rate of revenue growth.
Liquidity and Capital Resources. Cash and cash equivalents increased from
$3.8 million as of December 31, 1999 to $55.5 million at March 31, 2000.
Short-term investments increased from zero as of December 31, 1999 to $16.5
million as of March 31, 2000. In total cash and cash equivalents and short-term
investments increased from $3.8 million to $72.0 million during the quarter
ended March 31, 2000, a rise of $68.2 million. This increase is from the net
proceeds of $66.9 million from the issuance of 2,300,000 shares of common stock
in Inforte's initial public offering on February 17, 2000 and from cash provided
from operating activities of $1.2 million during the quarter ended March 31,
2000.
As of March 31, 2000 our accounts receivable (less deferred revenue) equaled 16
days of sales outstanding; however since December 31, 1997, days of sales
outstanding have been as high as 41 days. We believe our current days of sales
outstanding is unsustainably low, and we expect it will rise going forward. We
do not, however, expect it to rise above normal industry levels of current days
of sales outstanding and believe that we will have adequate cash flow to manage
our working capital needs in the ordinary course of business.
Capital expenditures for each of the quarters ended March 31, 2000 and 1999 were
$497,000 and $122,000, respectively. These expenditures were primarily for
computer equipment and software, leasehold improvements, and office furniture.
We expect that capital expenditures will continue to increase to the extent we
continue to increase our headcount or expand our operations.
We have a $2.5 million line of credit with Citibank, N.A. which bears interest
at the prime rate, which was 9.0% at March 31, 2000. The line of credit is
secured by substantially all our assets. No amounts were outstanding under the
line of credit at March 31, 2000 or December 31, 1999.
Inforte believes that its current cash, cash equivalents, and short-term
investments will be sufficient to meet working capital and capital expenditure
requirements for the foreseeable future.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In all categories of cash, cash equivalents and short-term investments,
Inforte invests only in securities of high credit quality. All investments bear
a minimum Standard & Poor's rating of A1, Moody's investor service rating of P1,
or equivalent. Inforte believes that it does not have any material market risk
exposure with respect to financial instruments.
10
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PART II. OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On February 17, 2000 the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File No. 333-92325) covering an
aggregate of 2,300,000 shares of common stock at an offering price of $32.00 per
share effective. The managing underwriters for the offering were Goldman Sachs &
Co., Salomon Smith Barney and William Blair & Company. Net proceeds to the
Company from the sale of 2,300,000 shares, after deducting underwriting
discounts and commissions of $5,152,000 and offering expenses of $1,587,749 were
$66,860,251. None of the offering expenses were paid directly or indirectly to
any officer or director of the Company. However, Edgar D. Jannotta, who became a
director of the Company upon closing of the offering, is a senior partner in
William Blair & Company. The Company has invested the net proceeds in short-
term, interest bearing, investment grade obligations pending their use for
general corporate purposes.
Items 3. Defaults upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
On February 8, 2000, prior to Inforte's initial public offering, we held
our annual meeting of shareholders for the election of directors. The board of
directors solicited proxies for election of its nominees. At the meeting
7,960,000 shares (81.9%) of Inforte's outstanding common stock were represented
in person or by proxy. The remaining 1,761,154 shares did not vote. The board's
nominees and the voting results are as follows:
For Against Abstain
--- ------- -------
CLASS I - Term Expires 2001
- ---------------------------
Nick Padgett 7,960,000 0 0
Raymond C. Kurzweil 7,960,000 0 0
CLASS II - Term Expires 2002
- ----------------------------
Stephen C.P. Mack 7,960,000 0 0
Al Ries 7,960,000 0 0
CLASS III - Term Expires 2003
- -----------------------------
Philip S. Bligh 7,960,000 0 0
Edgar D. Jannotta 7,960,000 0 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial data schedule.
99.1 Risk Factors discussion appearing on pages 6-11 of Inforte's
Form S-1 (Registration No. 333-92325).
(b) Reports on Form 8K
Inforte did not files any reports on Form 8-K during the three months
ended March 31, 2000
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Inforte Corp.
By: /s/ NICK PADGETT
May 15, 2000 ---------------------------------
Nick Padgett,
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED 3/31/00 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. INVENTORY
INCLUDES PREPAID EXPENSES, CURRENT DEFERRED TAXES AND OTHER CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT INCLUDES NON-CURRENT DEFERRED TAXES
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 55,513,303
<SECURITIES> 16,535,070
<RECEIVABLES> 10,966,546
<ALLOWANCES> (750,000)
<INVENTORY> 1,948,711
<CURRENT-ASSETS> 84,213,630
<PP&E> 2,663,598
<DEPRECIATION> 902,303
<TOTAL-ASSETS> 85,974,925
<CURRENT-LIABILITIES> 15,117,250
<BONDS> 0
0
0
<COMMON> 12,321
<OTHER-SE> 70,845,354
<TOTAL-LIABILITY-AND-EQUITY> 85,974,925
<SALES> 0
<TOTAL-REVENUES> 12,290,000
<CGS> 0
<TOTAL-COSTS> 5,408,772
<OTHER-EXPENSES> 5,411,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (340,501)
<INCOME-PRETAX> 1,809,949
<INCOME-TAX> 778,344
<INCOME-CONTINUING> 1,031,605
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,031,605
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.08)
</TABLE>
Exhibit 99.1
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. If any of the following risks occur, our business, results
of operations, or financial condition could be materially adversely affected,
the trading price of our common stock could decline and you could lose all or
part of your investment.
Risks Related to Inforte
If we fail to identify and successfully transition to the latest and most
advanced solutions or keep up with an evolving industry, we will not compete
successfully for clients and our profits may decrease.
We focus on providing our clients solutions that employ the latest
technologies. If we fail to identify the latest and most advanced solutions, or
if we identify but fail to successfully transition our business to these
advanced solutions, our reputation and our ability to compete for clients and
the best employees could suffer. If we cannot compete successfully for clients,
our revenues may decrease. Also, if our projects do not involve the latest and
most advanced solutions, they would generate lower fees.
Because our market changes rapidly, some of the most important challenges
facing us are the need to:
. effectively use advanced technologies;
. continue to develop our strategic and technical expertise;
. influence and respond to emerging industry standards and other
technological changes;
. enhance our current services; and
. develop new services that meet changing customer needs.
All of these challenges must be met in a timely and cost-effective manner.
We cannot assure you that we will succeed in effectively meeting these
challenges.
If we fail to satisfy our clients' expectations, our existing and continuing
business could be adversely affected.
Our sales and marketing strategy emphasizes our belief that any client we
have ever worked for would give us a positive reference. Therefore, if we fail
to satisfy the expectations of our clients, we could damage our reputation and
our ability to retain existing clients and attract new clients. In addition, if
we fail to perform our engagements, we could be liable to our clients for breach
of contract. Although most of our contracts limit the amount of any damages to
the fees we received, we could still incur substantial cost, negative publicity,
and diversion of management resources to defend a claim, and as a result, our
business results could suffer.
We may be unable to hire and retain employees who are highly skilled in Internet
technology, which would impair our ability to perform client services.
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. Due to
the recent growth of the Internet, and in particular electronic commerce,
individuals who are highly skilled in this industry are limited. Individuals who
have the experience and expertise to perform the services we provide to our
clients are even more limited. Consequently, competition for these individuals
is intense. To attract these individuals, we invest a significant amount of time
and money. As competition for these highly-skilled individuals further
intensifies, we may need to increase compensation in order to attract and retain
qualified employees.
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In addition, we expect that an important component of overall compensation
for our employees will continue to be equity. It is possible that this component
of our compensation package would be considered less attractive once we are a
public company. In addition, if our stock price does not increase after this
offering, it may be more difficult to retain employees who have been compensated
with stock options.
If we fail to adequately manage our growth, our profitability may be reduced.
If we cannot keep pace with our rapid growth, we will be unable to maintain
high client satisfaction, reducing our profitability. Our business has grown
dramatically over the past several years. For example, our revenue has increased
from $5.1 million in 1997, to $13.4 million in 1998, to $30.1 million in 1999.
We have also expanded our geographic scope to four locations in three states
since our inception and expect to open additional offices. If our growth exceeds
our expectations, our current managerial resources and infrastructure may be
inadequate to handle our rapid growth. Also, our senior management team has
limited collective experience managing a business the current size of Inforte or
a public company.
If our marketing relationships with software vendors deteriorate, we would lose
their client referrals.
We currently have marketing relationships with software vendors, including
Blue Martini, Concur, Genesys, i2, Microsoft, Siebel, and Vignette. Although we
have historically received a large number of business leads from these software
vendors to implement their products, they are not required to refer business to
us and they may terminate these relationships at any time. If our relationships
with these software vendors deteriorate, we may lose their client leads and our
ability to develop new clients could be negatively impacted. Any decrease in our
ability to obtain clients may cause a reduction in our revenues.
If we are unable to rapidly integrate third-party software, we may not deliver
solutions to our clients on a timely basis, resulting in lost revenues and
potential liability.
In providing client services, we recommend that our clients use software
applications from a variety of third-party vendors. If we are unable to
implement and integrate this software in a fully functional manner for our
clients, we may experience difficulties that could delay or prevent the
successful development, introduction, or marketing of services. Software often
contains errors or defects, particularly when first introduced or when new
versions or enhancements are released. Despite internal testing and testing by
current and potential clients, our current and future solutions may contain
serious defects due to third-party software or software we develop or customize
for clients. Serious defects or errors could result in liability for damages,
lost revenues, or a delay in implementation of our solutions.
Our revenues could be negatively affected by the loss of a large client or our
failure to collect a large account receivable.
At times, we derive a significant portion of our revenue from large projects
for a limited number of varying clients. In 1998, our five largest clients
accounted for 36% of revenue and our ten largest clients accounted for 56% of
revenue. In 1999, our five largest clients accounted for 36% of revenue and our
ten largest clients accounted for 55% of revenue. Although these large clients
vary from time to time and our long-term revenues do not rely on any one client,
our revenues could be negatively affected if we were to lose one of these
clients or if we were to fail to collect a large account receivable.
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In addition, many of our contracts are short-term and provide that our
clients can reduce or cancel our services without incurring any penalty. If our
clients reduce or terminate our services, we would lose revenue and would have
to reallocate our employees and our resources to other projects to attempt to
minimize the effects of that reduction or termination. Accordingly,
terminations, including any termination by a major client, could adversely
impact our revenues.
If we estimate incorrectly the time required to complete our projects, we will
lose money on fixed-price contracts.
A majority of our contracts are fixed-price contracts, rather than contracts
in which the client pays us on a time and materials basis. We must estimate the
number of hours and the materials required before entering into a fixed-price
contract. Our future success will depend on our ability to continue to set rates
and fees accurately and to maintain targeted rates of employee utilization and
project quality. If we fail to accurately estimate the time and the resources
required for a project, any required increase in the time and resources to
complete the project could cause our profits to decline.
Fluctuations in our quarterly revenues and operating results due to cyclical
client demand may lead to reduced prices for our stock.
Our quarterly revenues and operating results have fluctuated significantly
in the past and we expect them to continue to fluctuate significantly in the
future. Historically, we have experienced our greatest sequential growth during
the first and second quarters. We typically experience significantly lower
sequential growth in the third and fourth quarters. We attribute this to the
budgeting cycles of our customers, most of whom have calendar-based fiscal years
and as a result are more likely to incur the expense of our services during the
first half of the year. Our headcount and spending budgets in the first half of
the year reflect this increase in anticipated demand. If in any year, our
sequential growth in the first half is less than we anticipate, our expenses
would be disproportionately high relative to our revenues. Therefore, our
profitability could be reduced and our stock price 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 the attention of
management personnel;
. 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.
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Because we are newer and smaller than many of our competitors, we may not have
the resources to effectively compete, causing our revenues to decline.
Many of our competitors have longer operating histories, larger client
bases, longer relationships with clients, greater brand or name recognition, and
significantly greater financial, technical, marketing, and public relations
resources than we do. We may be unable to compete with the full-service
consulting companies entering the Internet professional services market,
including the consulting divisions of the "Big Five" accounting firms, who are
able to offer their clients a wider range of services. If our clients decide to
take their Internet professional services projects to these companies, our
revenues may decline. In addition, new Internet professional services companies
may provide services similar to ours at a lower price, which could cause our
revenues to decline.
Risks Related to Our Industry
If the rate of adoption of Internet-based solutions slows substantially, our
revenues may decrease.
We market our services primarily to firms that want to adopt Internet-based
technologies to transform the way in which they do business. Our revenues could
decrease if companies decide not to integrate Internet technology into their
businesses due to governmental regulations, financial constraints, or other
reasons.
In addition, the IDC study which we refer to in "Prospectus Summary--Our
Market Opportunity" on page 4 and "Business--Industry Background" on page 23
projects significant growth in our market. This study assumes that the worldwide
market for electronic commerce services is being driven by the adoption of
Internet technology by corporations and the number of Internet users online and
that the United States represents the largest part of this projected growth.
This study also assumes that there will be a shortage in personnel with adequate
technical skills and an increase in the complexity of Internet projects, that
Internet projects will become more strategic to businesses, and that Internet
projects will become increasingly linked to internal operations. However, the
growth in the United States market for electronic commerce services may be
limited. IDC recognizes that this growth may be affected by an economic
slowdown, an increase in the use of package software by corporations to permit
them to develop more projects in-house, and the increased costs of using
Internet professional services firms. Accordingly, there can be no assurance
that the market for Internet professional services will be as large as market
research firms predict.
Risks Related to the Offering and Ownership of Our Common Stock
Our stock price could be extremely volatile, like many Internet-related stocks.
Recently, the market prices of securities of technology companies,
particularly Internet-related companies, have been highly volatile. In addition,
the market prices for stocks of Internet-related and technology companies,
particularly following an initial public offering, frequently reach levels that
bear no relationship to the operating performance of these companies. These
market prices generally are not sustainable and are subject to wide variations.
If our common stock trades to unsustainably high levels following this offering,
it will likely thereafter experience material declines.
Volatility of our stock price could result in expensive class action litigation.
If our common stock suffers from volatility like the securities of other
technology companies, we could be subject to securities class action litigation
similar to that which has been brought against companies following periods of
volatility in the market price of their common stock. Litigation could result in
substantial costs and could divert our resources and senior management's
attention. This could harm our productivity and profitability.
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Because we have no immediate plans for the proceeds of this offering nor do we
require them for current operations, we will use them at our discretion in the
future, without stockholder approval.
We expect to use the proceeds of this offering for general corporate
purposes. We have no specific plan for the use of the proceeds, nor can we tell
you that you will agree with our use of the proceeds. Stockholders will not have
the right to approve or disapprove of our use of proceeds. Pending their use, we
intend to invest the net proceeds from this offering in short-term, investment
grade securities or money market instruments.
Substantial amounts of our total outstanding shares are restricted from
immediate resale but may be sold into the market in the near future. This could
cause our stock price to drop, even if our business is doing well.
The federal securities laws impose restrictions on the ability of
stockholders who acquired their shares before this offering to resell their
shares if the resale has not been registered. Also, our directors, executive
officers, stockholders, and major option holders have agreed not to sell their
shares for a period of 180 days after the date of this prospectus. However, when
restrictions on sales by insiders end, the market price of our stock could drop
significantly if the holders of restricted shares sell them or are perceived by
the market as intending to sell them.
Upon completion of this offering, we will have outstanding 11,721,154 shares
of common stock, based on shares outstanding as of December 31, 1999, assuming
no exercise of the underwriters' over-allotment option. Of these shares, the
2,000,000 sold in this offering will be freely tradeable. Of the remaining
9,721,154 shares, approximately 9,676,250 will be subject to 180 day lock-up
agreements. Upon expiration of these agreements, these shares will generally be
freely tradeable, subject to meeting the holding period and other requirements
of Rule 144 or Rule 701, exemptions permitting public resale of restricted
securities. Following the completion of this offering, we intend to register up
to 4,000,000 shares of common stock reserved for issuance under our stock option
plans of which 84,490 options were exercisable as of December 31, 1999. We also
intend to register up to 200,000 shares of common stock reserved for issuance
under our employee stock purchase plan. Upon issuance of the shares under these
plans, all of such shares may be immediately sold.
Our officers and directors will own 66.5% of our outstanding shares after this
offering and will, as a group, be able to control a vote of stockholders.
Immediately following this offering, assuming no exercise of the over-
allotment option, the executive officers and directors set forth below, will own
approximately 67.4% of the outstanding shares of our common stock and will own
individually the percentage set forth opposite their names:
. Philip S. Bligh 26.5%
. Stephen C.P. Mack 26.5%
. Ronald G. Meyer 7.7%
. Nick Padgett 6.4%
If the stockholders listed above act or vote together, they will have the
ability to control the election of our directors and the approval of any other
action requiring the approval of our stockholders, including any amendments to
our certificate of incorporation and mergers or sales of all or substantially
all of our assets, even if the other stockholders perceive that these actions
are not in their best interests.
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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.
Our 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.
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