form10_k2007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
one)
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x
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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, 2007
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o
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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Commission
file number 001-15169
PERFICIENT,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
(State or other jurisdiction
of
incorporation
or organization)
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No.
74-2853258
(I.R.S.
Employer Identification No.)
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1120
South Capital of Texas Highway, Building 3, Suite 220
Austin,
Texas 78746
(Address
of principal executive offices)
(512)
531-6000
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class:
Common
Stock, $0.001 par value
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Name of each exchange
on which registered:
The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Sec.229.405 of this chapter) 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 in Part III of this Form 10-K
or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer
o
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Accelerated
filer
þ
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Non-accelerated filer
o
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Smaller reporting
company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o No
þ
The
aggregate market value of the voting stock held by non-affiliates of the Company
was approximately $568.0 million on June 30, 2007 based on the last
reported sale price of the Company's common stock on The NASDAQ Stock Market LLC
on June 30, 2007.
As of
February 27, 2008, there were 31,908,566 shares of Common Stock
outstanding.
Portions
of the definitive proxy statement in connection with the 2008 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 2008, are incorporated by reference in Part III of this
Form 10-K.
PART
I
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Item
1.
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Business.
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1 |
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Item
1A.
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Risk
Factors.
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9 |
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Item
1B.
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Unresolved
Staff Comments.
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15 |
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Item
2.
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Properties.
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16 |
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Item
3.
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Legal
Proceedings.
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16 |
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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16 |
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PART
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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17 |
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Item
6.
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Selected
Financial Data.
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18 |
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
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19 |
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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29 |
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Item
8.
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Financial
Statements and Supplementary Data.
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30 |
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Item
9.
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure.
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55 |
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Item
9A.
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Controls
and Procedures.
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55 |
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Item
9B.
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Other
Information.
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56 |
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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57 |
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Item
11.
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Executive
Compensation.
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59 |
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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59 |
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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59 |
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Item
14.
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Principal
Accounting Fees and Services.
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59 |
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules.
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60 |
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Overview
We are an
information technology consulting firm serving Forbes Global 2000 (“Global
2000”) and other large enterprise companies with a primary focus on the United
States. We help our clients gain competitive advantage by using Internet-based
technologies to make their businesses more responsive to market opportunities
and threats, strengthen relationships with their customers, suppliers and
partners, improve productivity and reduce information technology costs. We
design, build and deliver business-driven technology solutions using third party
software products developed by our partners. Our solutions include custom
applications, portals and collaboration, eCommerce, online customer management,
enterprise content management, business intelligence, business integration,
mobile technology, technology platform implementations and service oriented
architectures. Our solutions enable clients to meet the changing demands of an
increasingly global, Internet-driven and competitive marketplace.
Through
our experience in developing and delivering business-driven technology solutions
for a large number of Global 2000 clients, we have acquired significant domain
expertise that we believe differentiates our firm. We use expert project teams
that we believe deliver high-value, measurable results by working
collaboratively with clients and their partners through a user-centered,
technology-based and business-driven solutions methodology. We believe this
approach enhances return-on-investment for our clients by significantly reducing
the time and risk associated with designing and implementing business-driven
technology solutions.
We are
expanding through a combination of organic growth and acquisitions. We believe
that information technology consulting is a fragmented industry and that there
are a substantial number of privately held information technology consulting
firms in our target markets that, if acquired, can be strategically beneficial
and accretive to earnings over time. We have a track record of successfully
identifying, executing and integrating acquisitions that add strategic value to
our business. Since April 2004, we have acquired and integrated 12 information
technology consulting firms, four of which were acquired in 2007. We believe
that we can achieve significantly faster growth in revenues and profitability
through a combination of organic growth and acquisitions than we could through
organic growth alone.
We
believe we have built one of the leading independent information technology
consulting firms in the United States. We serve our customers from our network
of 18 offices throughout North America. In addition, we have over 500 colleagues
who are part of “national” business units, who travel extensively to serve
clients throughout North America and Europe. Our future growth plan includes
expanding our business with a primary focus on the United States, both through
expansion of our national travel practices and through opening new offices, both
organically and through acquisitions. In 2007, 2006 and 2005, 99% of our
revenues were derived from clients in the United States while 1% of our revenues
were derived from clients in Canada and Europe. Over 98% of our total assets
were located in the United States in 2007 with the remainder located in Canada,
China, and India. During 2006, over 99% of our total assets were located in the
United States with the remainder located in Canada.
We place
strong emphasis on building lasting relationships with clients. Over the past
three years ending December 31, 2007, an average of 78% of revenues was derived
from clients who continued to utilize our services from the prior year,
excluding from the calculation for any single period revenues from acquisitions
completed in that year. We have also built meaningful partnerships with software
providers, most notably IBM, whose products we use to design and implement
solutions for our clients. These partnerships enable us to reduce our cost of
sales and sales cycle times and increase success rates through leveraging our
partners' marketing efforts and endorsements.
Industry
Background
A number
of factors are shaping the information technology industry and, in particular,
the market for our information technology consulting services:
United States Economic
Recovery. The years 2001 and 2002 saw a protracted downturn in
information technology spending as a result of an economic recession in the
United States and the collapse of the Internet “bubble.” The information
technology consulting industry began to experience a recovery in the second half
of 2003, which continued through the first half of 2007. As we enter
2008, it appears that the United States economy is beginning to experience a
slowdown in growth. It is clear that the slowdown will have an effect
on the information technology consulting industry in general and on demand for
our services in particular, but the amount of that impact is uncertain.
According to the most recent forecast from independent market research firm
Forrester Research, total information technology services spending in North
America is expected to rise 5.2% in 2008.
Need to Rationalize Complex,
Heterogeneous Enterprise Technology Environments. Over the past 15 years,
the information systems of many Global 2000 and large enterprise companies have
evolved from traditional mainframe-based systems to include distributed
computing environments. This evolution has been driven by the benefits offered
by distributed computing, including lower incremental technology costs, faster
application development and deployment, increased flexibility and improved
access to business information. Organizations have also widely installed
enterprise resource planning (ERP), supply chain management (SCM), and customer
relationship management (CRM), applications in order to streamline internal
processes and enable communication and collaboration.
As a
result of investment in these different technologies, organizations now have
complex enterprise technology environments with incompatible technologies and
high costs of integration. These increases in complexity, cost and risk,
combined with the business and technology transformation caused by the
commercialization of the Internet, have created demand for information
technology consultants with experience in enabling the integration of disparate
platforms and leveraging Internet-based technologies to support business and
technology goals.
Increased Competitive
Pressures. The marketplace continues to become increasingly global,
Internet-driven and competitive. To gain and maintain a competitive advantage in
this environment, Global 2000 and large enterprise companies seek real-time
access to critical business applications and information that enables quality
business decisions based on the latest possible information, flexible business
processes and systems that respond quickly to market opportunities, improved
quality and lower cost customer care through online customer self-service and
provisioning, reduced supply chain costs and improved logistics through
processes and systems integrated online to suppliers, partners and distributors
and increased employee productivity through better information flow and
collaboration.
Enabling
these business goals requires integrating, automating and extending business
processes, technology infrastructure and software applications end-to-end within
an organization and with key partners, suppliers and customers. This requires
the ability not only to integrate the disparate information resource types,
databases, legacy mainframe applications, packaged application software, custom
applications, trading partners, people and Web services, but also to manage the
business processes that govern the interactions between these resources so that
organizations can engage in “real-time business.” Real-time business refers to
the use of current information in business to execute critical business
processes.
These
factors are driving increased spending on software and related consulting
services in the areas of application integration, middleware and portals (AIMP),
as these segments play critical roles in the integration between new and
existing systems and the extension of those systems to customers, suppliers and
partners via the Internet. Companies are expected to increase software spending
on integration broker suites, enterprise portal services, application platform
suites and message-oriented middleware. As companies increase spending on
software, their overall spending on services will also increase, often by a
multiplier of each dollar spent on software.
Quarterly Fluctuations. Our
quarterly operating results are subject to seasonal fluctuations. The first and
fourth quarters are impacted by professional staff vacation and holidays, as
well as the timing of buying decisions by clients. Our results will also
fluctuate, in part, based on whether we succeed in counterbalancing periodic
declines in services revenues when a project or engagement is completed or
cancelled by entering into arrangements to provide additional services to the
same or other clients. Software sales are seasonal as well, with generally
higher software demand during the third and fourth quarter. These and other
seasonal factors may contribute to fluctuations in our operating results from
quarter-to-quarter.
Competitive
Strengths
We
believe our competitive strengths include:
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Domain Expertise. We
have acquired significant domain expertise in a core set of
business-driven technology solutions and software platforms. These
solutions include custom applications, portals and collaboration,
eCommerce, customer relationship management, enterprise content
management, business intelligence, business integration, mobile technology
solutions, technology platform implementations and service oriented
architectures and enterprise service bus. The platforms in which we have
significant domain expertise and on which these solutions are built
include IBM WebSphere, TIBCO BusinessWorks, Microsoft.NET, Oracle-Seibel,
BEA (acquired by Oracle), Cognos (acquired by IBM) and Documentum, among
others.
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Delivery Model and
Methodology. We believe our significant domain expertise enables us
to provide high-value solutions through expert project teams that deliver
measurable results by working collaboratively with clients through a
user-centered, technology-based and business-driven solutions methodology.
Our eNable Methodology, a unique and proven execution process map we
developed, allows for repeatable, high quality services delivery. The
eNable Methodology leverages the thought leadership of our senior
strategists and practitioners to support the client project team and
focuses on transforming our clients' business processes to provide
enhanced customer value and operating efficiency, enabled by Web
technology. As a result, we believe we are able to offer our clients the
dedicated attention that small firms usually provide and the delivery and
project management that larger firms usually
offer.
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Client Relationships.
We have built a track record of quality solutions and client satisfaction
through the timely, efficient and successful completion of numerous
projects for our clients. As a result, we have established long-term
relationships with many of our clients who continue to engage us for
additional projects and serve as references for us. Over the past three
years ending December 31, 2007, an average of 78% of revenues was derived
from clients who continued to utilize our services from the prior year,
excluding from the calculation for any revenues from acquisitions
completed in that year.
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Vendor Partnerships and
Endorsements. We have built meaningful partnerships with software
providers, including IBM, whose products we use to design and implement
solutions for our clients. These partnerships enable us to reduce our cost
of sales and sales cycle times and increase win rates by leveraging our
partners' marketing efforts and endorsements. We also serve as a sales
channel for our partners, helping them market and sell their software
products. We are a Premier IBM business partner, a TeamTIBCO partner, a
Microsoft Gold Certified Partner, a Certified Oracle Partner, and an EMC
Documentum Select Services Team Partner. Our partners have
recognized our partnership with several awards. Most recently,
the Company was honored with IBM’s Information Management 2007 Most
Distinguished Partner (North America) Award and IBM’s Lotus 2008 Most
Distinguished Partner (North America)
Award.
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Geographic Focus. We
believe we have built one of the leading independent information
technology consulting firms in the United States. We serve our clients
from our network of 18 offices throughout North America. In addition, we
have over 500 colleagues who are part of “national” business units, who
travel extensively to serve clients primarily in the United States. Our
future growth plan includes expanding our business throughout the United
States through expansion of our national travel practices, both
organically and through acquisition. We believe our network provides a
competitive platform from which to expand
nationally.
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Offshore Capability. We
own a CMMI Level 4 certified global development center in Hangzhou, China
that was acquired in September 2007. This facility is staffed with
Perficient colleagues who provide offshore custom application development,
quality assurance and testing services. Additionally, we have a
relationship with an offshore development facility in Bitola, Macedonia.
Through this facility we contract with a team of professionals with
expertise in IBM, TIBCO and Microsoft technologies and with
specializations that include application development, adapter and
interface development, quality assurance and testing, monitoring and
support, product development, platform migration, and portal development.
In addition to our offshore capabilities, we employ a substantial number
of foreign nationals in the United States on H1-B visas. Also
in 2007, we acquired a recruiting facility in Chennai, India, to continue
to grow our base of H1-B foreign national
colleagues.
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Our Solutions
We help
clients gain competitive advantage by using Internet-based technologies to make
their businesses more responsive to market opportunities and threats, strengthen
relationships with customers, suppliers and partners, improve productivity and
reduce information technology costs. Our business-driven technology solutions
enable these benefits by developing, integrating, automating and extending
business processes, technology infrastructure and software applications
end-to-end within an organization and with key partners, suppliers and
customers. This provides real-time access to critical business applications and
information and a scalable, reliable, secure and cost-effective technology
infrastructure that enables clients to:
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give
managers and executives the information they need to make quality business
decisions and dynamically adapt their business processes and systems to
respond to client demands, market opportunities or business
problems;
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improve
the quality and lower the cost of customer acquisition and care through
Web-based customer self-service and
provisioning;
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reduce
supply chain costs and improve logistics by flexibly and quickly
integrating processes and systems and making relevant real-time
information and applications available online to suppliers, partners and
distributors;
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increase
the effectiveness and value of legacy enterprise technology infrastructure
investments by enabling faster application development and deployment,
increased flexibility and lower management costs;
and
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increase
employee productivity through better information flow and collaboration
capabilities and by automating routine processes to enable focus on unique
problems and opportunities.
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Our
business-driven technology solutions include the following:
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Custom applications. We
design, develop, implement and integrate custom application solutions that
deliver enterprise-specific functionality to meet the unique requirements
and needs of our clients. Perficient's substantial experience with
platforms including J2EE, .Net and open-source - plus our flexible
delivery structure - enables enterprises of all types to leverage
cutting-edge technologies to meet business-driven
needs.
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Enterprise portals and
collaboration. We design, develop, implement and integrate secure
and scalable enterprise portals for our clients and their customers,
suppliers and partners that include searchable data systems, collaborative
systems for process improvement, transaction processing, unified and
extended reporting and content management and
personalization.
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eCommerce. We design,
develop and implement secure and reliable ecommerce infrastructures that
dynamically integrate with back-end systems and complementary applications
that provide for transaction volume scalability and sophisticated content
management.
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Customer relationship
management (CRM). We design, develop and implement advanced CRM
solutions that facilitate customer acquisition, service and support,
sales, and marketing by understanding our customers' needs through
interviews, facilitated requirements gathering sessions and call center
analysis, developing an iterative, prototype driven solution and
integrating the solution to legacy processes and
applications.
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Enterprise content management
(ECM). We design, develop and implement ECM solutions that enable
the management of all unstructured information regardless of file type or
format. Our ECM solutions can facilitate the creation of new content
and/or provide easy access and retrieval of existing digital assets from
other enterprise tools such as enterprise resource planning (ERP),
customer relationship management or legacy applications. Perficient's ECM
solutions include Enterprise Imaging and Document Management, Web Content
Management, Digital Asset Management, Enterprise Records Management,
Compliance and Control, Business Process Management and Collaboration and
Enterprise Search.
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Business intelligence.
We design, develop and implement business intelligence solutions that
allow companies to interpret and act upon accurate, timely and integrated
information. By classifying, aggregating and correlating data into
meaningful business information, business intelligence solutions help our
clients make more informed business decisions. Our business intelligence
solutions allow our clients to transform data into knowledge for quick and
effective decision making and can include information strategy, data
warehousing and business analytics and
reporting.
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Business integration.
We design, develop and implement business integration solutions that allow
our clients to integrate all of their business processes end-to-end and
across the enterprise. Truly innovative companies are extending those
processes, and eliminating functional friction, between the enterprise and
core customers and partners. Our business integration solutions can extend
and extract core applications, reduce infrastructure strains and cost,
Web-enable legacy applications, provide real-time insight into business
metrics and introduce efficiencies for customers, suppliers and
partners.
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Mobile technology
solutions. We design, develop and implement mobile technology
solutions that deliver wireless capabilities to carriers, Mobile Virtual
Network Operators (MVNO), Mobile Virtual Network Enablers (MVNE), and the
enterprise. Perficient's expertise with wireless technologies such as SIP,
MMS, WAP, and GPRS are coupled with our deep expertise in mobile content
delivery. Our secure and scalable solutions can include mobile content
delivery systems; wireless value-added services including SIP, IMS, SMS,
MMS and Push-to-Talk; custom developed applications to pervasive devices
including Symbian, WML, J2ME, MIDP, Linux; and customer care solutions
including provisioning, mediation, rating and billing.
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Technology platform
implementations. We design, develop and implement technology
platform implementations that allow our clients to establish a robust,
reliable Internet-based infrastructure for integrated business
applications which extend enterprise technology assets to employees,
customers, suppliers and partners. Our Platform Services include
application server selection, architecture planning, installation and
configuration, clustering for availability, performance assessment and
issue remediation, security services and technology
migrations.
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Service oriented architectures
and enterprise service bus. We design, develop and implement
service oriented architecture and enterprise service bus solutions that
allow our clients to quickly adapt their business processes to respond to
new market opportunities or competitive threats by taking advantage of
business strategies supported by flexible business applications and IT
infrastructures.
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We
conceive, build and implement these solutions through a comprehensive set of
services including business strategy, user-centered design, systems
architecture, custom application development, technology integration, package
implementation and managed services.
In
addition to our business-driven technology solution services, we offer education
and mentoring services to our clients. We operate an IBM-certified advanced
training facility in Chicago, Illinois, where we provide our clients both
customized and established curriculum of courses and other education services in
areas including object-oriented analysis and design immersion, J2EE, user
experience, and an IBM Course Suite with over 20 distinct courses covering the
IBM WebSphere product suite. We also leverage our education practice and
training facility to provide continuing education and professional development
opportunities for our colleagues.
Our
Solutions Methodology
Our
approach to solutions design and delivery is user-centered, technology-based and
business-driven and is:
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iterative
and results oriented;
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centered
around a flexible and repeatable
framework;
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collaborative
and customer-centered in that we work with not only our clients but with
our clients' customers in developing our
solutions;
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focused
on delivering high value, measurable results;
and
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grounded
by industry leading project
management.
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The
eNable Methodology allows for repeatable, high quality services delivery through
a unique and proven execution process map. Our methodology is grounded in a
thorough understanding of our clients' overall business strategy and competitive
environment. The eNable Methodology leverages the thought leadership of our
senior strategists and practitioners and focuses on transforming our clients'
business processes, applications and technology infrastructure. The eNable
Methodology focuses on business value or return-on-investment, with specific
objectives and benchmarks established at the outset.
Our
Strategy
Our goal
is to be the premier technology management consulting firm primarily focused on
the United States. To achieve our goal, our strategy is:
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Grow Relationships with
Existing and New Clients. We intend to continue to solidify and
expand enduring relationships with our existing clients and to develop
long-term relationships with new clients by providing them with solutions
that generate a demonstrable, positive return-on-investment. Our incentive
plan rewards our project managers to work in conjunction with our sales
people to expand the nature and scope of our engagements with existing
clients.
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Continue Making Disciplined
Acquisitions. The information technology consulting market is a
fragmented industry and we believe there are a substantial number of
smaller privately held information technology consulting firms that can be
acquired and be immediately accretive to our financial results. We have a
track record of successfully identifying, executing and integrating
acquisitions that add strategic value to our business. Our established
culture and infrastructure positions us to successfully integrate each
acquired company, while continuing to offer effective solutions to our
clients. Since April 2004, we have acquired and integrated 12 information
technology consulting firms, four of which were acquired in 2007. We
continue to actively look for attractive acquisitions that leverage our
core expertise and look to expand our capabilities and geographic
presence.
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Expand Geographic Base. We
believe we have built one of the leading independent information
technology consulting firms in the United States. We serve our customers
from our network of 18 offices throughout North America. In addition, we
have over 500 colleagues who are part of “national” business units, who
travel extensively to serve clients primarily in the United States. Our
future growth plan includes expanding our business throughout the United
States through expansion of our national travel practices, both
organically and through acquisition. We believe our network provides a
competitive platform from which to expand
nationally.
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Enhance Brand
Visibility. Our focus on a core set of business-driven technology
solutions, applications and software platforms and a targeted customer and
geographic market has given us significant market visibility. In addition,
we believe we have achieved critical mass in size, which has significantly
enhanced our visibility among prospective clients, employees and software
vendors. As we continue to grow our business, we intend to highlight to
customers and prospective customers our thought leadership in
business-driven technology solutions and infrastructure software
technology platforms.
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Invest in Our People and
Culture. We have developed a culture built on teamwork, a passion
for technology and client service, and a focus on cost control and the
bottom line. As a people-based business, we continue to invest in the
development of our professionals and to provide them with entrepreneurial
opportunities and career development and advancement. Our technology,
business consulting and project management ensure that client team best
practices are being developed across the company and our recognition
program rewards teams for implementing those practices. We believe this
results in a team of motivated professionals with the ability to deliver
high-quality and high-value services for our
clients.
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Leverage Existing and Pursue
New Strategic Alliances. We intend to continue to develop alliances
that complement our core competencies. Our alliance strategy is targeted
at leading business advisory companies and technology providers and allows
us to take advantage of compelling technologies in a mutually beneficial
and cost-competitive manner. Many of these relationships, and in
particular IBM, result in our partners, or their clients, utilizing us as
the services firm of choice.
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Use Offshore Services When
Appropriate. Our solutions and services are primarily delivered at
the customer site and require a significant degree of customer
participation, interaction and specialized technology expertise, which we
can use lower cost offshore technology professionals to perform less
specialized roles on our solution engagements, enabling us to fully
leverage our United States colleagues while offering our clients a highly
competitive blended average rate. We own a CMMI Level 4 certified global
development center in Hangzhou, China that is staffed with Perficient
colleagues who provide offshore custom application development, quality
assurance and testing services and we maintain an arrangement with an
offshore development and delivery firm in Macedonia. In addition to our
offshore capabilities, we employ a substantial number of H1-B foreign
nationals in the United States. In 2007, we acquired a
recruiting facility in Chennai, India, to continue to grow our base of
H1-B foreign national colleagues.
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Sales
and Marketing
As of
December 31, 2007, we had a 49 person direct solutions-oriented sales force. Our
sales team is experienced and connected through a common services portfolio,
sales process and performance management system. Our sales process utilizes
project pursuit teams that include those of our information technology
professionals best suited to address a particular prospective client's needs. We
reward our sales force for developing and maintaining relationships with our
clients and seeking out follow-on engagements as well as leveraging those
relationships to forge new ones in different areas of the business and with our
clients' business partners. More than 90% of our sales are executed
by our direct sales force.
Our
target client base includes companies in North America with annual revenues in
excess of $500 million. We believe this market segment can generate the repeat
business that is a fundamental part of our growth plan. We pursue only solutions
opportunities where our domain expertise and delivery track record give us a
competitive advantage. We also typically target engagements of up to $3 million
in fees, which we believe to be below the target project range of most large
systems integrators and beyond the delivery capabilities of most local
boutiques.
We have
sales and marketing partnerships with software vendors including IBM
Corporation, TIBCO Software, Inc., Microsoft Corporation, ECM Documentum,
Oracle-Siebel, BEA, and webMethods, Inc. These companies are key vendors of open
standards based software commonly referred to as middleware application servers,
enterprise application integration platforms, business process management,
business activity monitoring and business intelligence applications and
enterprise portal server software. Our direct sales force works in tandem with
the sales and marketing groups of our partners to identify potential new clients
and projects. Our partnerships with these companies enable us to reduce our cost
of sales and sales cycle times and increase win rates by leveraging our
partners' marketing efforts and endorsements. In particular, the IBM software
sales channel provides us with significant sales lead flow and joint selling
opportunities.
As we
continue to grow our business, we intend to highlight our thought leadership in
solutions and infrastructure software technology platforms. Our efforts will
include technology white papers, by-lined articles by our colleagues in
technology and trade publications, media and industry analyst events,
sponsorship of and participation in targeted industry conferences and trade
shows.
Clients
During
the year ended December 31, 2007, we provided services to more
than 470 customers. No one customer provided more than 10% of our total
revenues in 2007, 2006 or 2005.
Competition
The
market for the information technology consulting services we provide is
competitive and has low barriers to entry. We believe that our competitors fall
into several categories, including:
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small
local consulting firms that operate in no more than one or two geographic
regions;
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regional
consulting firms such as Brulant, MSI Systems Integrators and
Prolifics;
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national
consulting firms, such as Answerthink, Inc., Accenture, BearingPoint,
Inc., Ciber, Inc., Electronic Data Systems Corporation and Sapient
Corporation;
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in-house
professional services organizations of software companies;
and
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to
a limited extent, offshore providers such as Cognizant Technology
Solutions Corporation, Infosys Technologies Limited, Satyam Computer
Services Limited and Wipro Limited.
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We
believe that the principal competitive factors affecting our market include
domain expertise, track record and customer references, quality of proposed
solutions, service quality and performance, reliability, scalability and
features of the software platforms upon which the solutions are based, and the
ability to implement solutions quickly and respond on a timely basis to customer
needs. In addition, because of the relatively low barriers to entry into this
market, we expect to face additional competition from new entrants. We expect
competition from offshore outsourcing and development companies to
continue.
Some of
our competitors have longer operating histories, larger client bases and greater
name recognition and possess significantly greater financial, technical and
marketing resources than we do. As a result, these competitors may be better
able to attract customers to which we market our services and adapt more quickly
to new technologies or evolving customer or industry requirements.
Employees
As of
December 31, 2007, we had 1,427 employees, 1,260 of which were billable
professionals, including 185 subcontractors, and 167 of which were involved in
sales, general administration and marketing. None of our employees are
represented by a collective bargaining agreement and we have never experienced a
strike or similar work stoppage. We consider our relations with our employees to
be good.
Recruiting. We are dedicated
to hiring, developing and retaining experienced, motivated technology
professionals who combine a depth of understanding of current Internet and
legacy technologies with the ability to implement complex and cutting-edge
solutions.
Our
recruiting efforts are an important element of our continuing operations and
future growth. We generally target technology professionals with extensive
experience and demonstrated expertise. To attract technology professionals, we
use a broad range of sources including on-staff recruiters, outside recruiting
firms, internal referrals, other technology companies and technical
associations, the Internet and advertising in technical periodicals. After
initially identifying qualified candidates, we conduct an extensive screening
and interview process.
Retention. We believe that
our rapid growth, focus on a core set of business-driven technology solutions,
applications and software platforms and our commitment to career development
through continued training and advancement opportunities make us an attractive
career choice for experienced professionals. Because our strategic partners are
established and emerging market leaders, our technology professionals have an
opportunity to work with cutting-edge information technology. We foster
professional development by training our technology professionals in the skills
critical to successful consulting engagements such as implementation methodology
and project management. We believe in promoting from within whenever possible.
In addition to an annual review process that identifies near-term and
longer-term career goals, we make a professional development plan available to
assist our professionals with assessing their skills and developing a detailed
action plan for guiding their career development. For the year ended December
31, 2007, our voluntary attrition rate was approximately 19%.
Training. To ensure continued
development of our technical staff, we place a high priority on training. We
offer extensive training for our professionals around industry-leading
technologies. We utilize our education practice and IBM-certified advanced
training facility in Chicago, Illinois to provide continuing education and
professional development opportunities for our colleagues. Additionally, most
newly-hired Perficient colleagues attend Perficient 101, an orientation training
course held frequently at our operational headquarters location in St. Louis
where they learn general company procedures and protocols and benefit from a
role-based curriculum.
Compensation. Our employees
have a compensation model that includes a base salary and an incentive
compensation component. Our tiered incentive compensation plans help us reach
our overall goals by rewarding individuals for their influence on key
performance factors. Key performance metrics include client satisfaction,
revenues generated, utilization, profit and personal skills growth.
Leadership Councils. Our
technology leadership council performs a critical role in maintaining our
technology leadership. Consisting of key employees from each of our practice
areas, the council frames our new strategic partner strategies and conducts
regular Internet webcasts with our technology professionals on specific partner
and general technology issues and trends. The council also coordinates thought
leadership activities, including white paper authorship and publication and
speaking engagements by our professionals. Finally, the council identifies
services opportunities between and among our strategic partners' products,
oversees our quality assurance programs and assists in acquisition-related
technology due diligence.
Culture
The Perficient Promise. We
have developed the “Perficient Promise,” which consists of the following six
simple commitments our colleagues make to each other:
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we
believe in long-term client and partner relationships built on investment
in innovative solutions, delivering more value than the competition and a
commitment to excellence;
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we
believe in growth and profitability and building meaningful
scale;
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we
believe each of us is ultimately responsible for our own career
development and has a commitment to mentor
others;
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we
believe that Perficient has an obligation to invest in our consultants'
training and education;
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we
believe the best career development comes on the job;
and
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we
love challenging new work
opportunities.
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We take
these commitments extremely seriously because we believe that we can succeed
only if the Perficient Promise is kept.
Knowledge
Management
MyPerficient.com--The Corporate
Portal. To ensure easy access to a wide range of information and tools,
we have created a corporate portal, MyPerficient.com. It is a secure,
centralized communications tool. It allows each of our colleagues unlimited
access to information, productivity tools, time and expense entry, benefits
administration, corporate policies and forms and quality management information
directories and documentation.
Professional Services Automation
Technology. We maintain a Professional Services application as the
enabling technology for many of our business processes, including knowledge
management. We possess and continue to aggregate significant knowledge including
marketing collateral, solution proposals, work product and client deliverables.
Primavera's technology allows us to store this knowledge in a logical manner and
provides full-text search capability allowing our colleagues to deliver
solutions more efficiently and competitively.
General
Information
Our stock
is traded on the Nasdaq Global Select Market, a tier of The NASDAQ Stock Market
LLC, under the symbol “PRFT.” Our website can be visited at www.perficient.com.
We make available free of charge through our website our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as
reasonably practicable after we electronically file such material, or furnish it
to, the Securities and Exchange Commission. The information contained or
incorporated in our website is not part of this document.
You
should carefully consider the following risk factors together with the other
information contained in or incorporated by reference into this annual report
before you decide to buy our common stock. If any of these risks actually occur,
our business, financial condition, operating results or cash flows could be
materially and adversely affected. This could cause the trading price of our
common stock to decline and you may lose part or all of your
investment.
Risks
Related to Our Business
Prolonged
economic weakness, particularly in the middleware, software and services market,
could adversely affect our business, financial condition and results of
operations.
Our
results of operations are affected by the levels of business activities of our
clients, which can be affected by economic conditions in the U.S. and
globally. During periods of economic downturns, our clients may
decrease their demand for information technology services. Our
business is particularly influenced by the market for middleware, software and
services which has changed rapidly and experienced volatility over the last
eight years. The market for middleware and software and services expanded
dramatically during 1999 and most of 2000, but declined significantly in 2001
and 2002. Market demand for software and services began to stabilize and improve
from 2003 through the first half of 2007. As we enter 2008, it appears that the
United States economy is beginning to experience a slowdown in
growth. It is clear that the slowdown will have an effect on the
information technology consulting industry in general and on demand for our
services in particular, but the amount of that impact is uncertain. Our future
growth is dependent upon the demand for software and services, and, in
particular, the information technology consulting services we provide. Demand
and market acceptance for services are subject to a high level of uncertainty.
Prolonged weakness in the middleware, software and services industry has caused
in the past, and may cause in the future, business enterprises to delay or
cancel information technology projects, reduce their overall information
technology budgets and/or reduce or cancel orders for our services. This, in
turn, may lead to longer sales cycles, delays in purchase decisions, payment and
collection issues, and may also result in price pressures, causing us to realize
lower revenues and operating margins. Additionally, if our clients cancel or
delay their business and technology initiatives or choose to move these
initiatives in-house, our business, financial condition and results of
operations could be materially and adversely affected.
Pursuing
and completing potential acquisitions could divert management's attention and
financial resources and may not produce the desired business
results.
If we
pursue any acquisition, our management could spend a significant amount of time
and financial resources to pursue and integrate the acquired business with our
existing business. To pay for an acquisition, we might use capital stock, cash
or a combination of both. Alternatively, we may borrow money from a bank or
other lender. If we use capital stock, our stockholders will experience
dilution. If we use cash or debt financing, our financial liquidity may be
reduced and the interest on any debt financing could adversely affect our
results of operations. From an accounting perspective, an acquisition that does
not perform as well as originally anticipated may involve amortization or the
write-off of significant amounts of intangible assets that could adversely
affect our results of operations.
Despite
the investment of these management and financial resources, and completion of
due diligence with respect to these efforts, an acquisition may not produce the
anticipated revenues, earnings or business synergies for a variety of reasons,
including:
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difficulties
in the integration of services and personnel of the acquired
business;
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the
failure of management and acquired services personnel to perform as
expected;
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the
risks of entering markets in which we have no, or limited, prior
experience, including offshore operations in countries in which we have no
prior experience;
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the
failure to identify or adequately assess any undisclosed or potential
liabilities or problems of the acquired business including legal
liabilities;
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the
failure of the acquired business to achieve the forecasts we used to
determine the purchase price;
or
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the
potential loss of key personnel of the acquired
business.
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These
difficulties could disrupt our ongoing business, distract our management and
colleagues, increase our expenses and materially and adversely affect our
results of operations.
If
we do not effectively manage our growth, our results of operations and cash
flows could be adversely affected.
Our
ability to operate profitably with positive cash flows depends partially on how
effectively we manage our growth. In order to create the additional capacity
necessary to accommodate the demand for our services, we may need to implement
new or upgraded operational and financial systems, procedures and controls, open
new offices and hire additional colleagues. Implementation of these new or
upgraded systems, procedures and controls may require substantial management
efforts and our efforts to do so may not be successful. The opening of new
offices (including international locations) or the hiring of additional
colleagues may result in idle or underutilized capacity. We continually assess
the expected capacity and utilization of our offices and professionals. We may
not be able to achieve or maintain optimal utilization of our offices and
professionals. If demand for our services does not meet our expectations, our
revenues and cash flows may not be sufficient to offset these expenses and our
results of operations and cash flows could be adversely affected.
We
may not be able to attract and retain information technology consulting
professionals, which could affect our ability to compete
effectively.
Our
business is labor intensive. Accordingly, our success depends in large part upon
our ability to attract, train, retain, motivate, manage and effectively utilize
highly skilled information technology consulting professionals. There is often
considerable competition for qualified personnel in the information technology
services industry. Additionally, our technology professionals are primarily
at-will employees. We also use independent subcontractors where appropriate to
supplement our employee capacity. Failure to retain highly skilled technology
professionals or hire qualified independent subcontractors would impair our
ability to adequately manage staff and implement our existing projects and to
bid for or obtain new projects, which in turn would adversely affect our
operating results.
Our
success depends on attracting and retaining senior management and key
personnel.
The
information technology services industry is highly specialized and the
competition for qualified management and key personnel is intense. We believe
that our success depends on retaining our senior management team and key
technical and business consulting personnel. Retention is particularly important
in our business as personal relationships are a critical element of obtaining
and maintaining strong relationships with our clients. In addition, as we
continue to grow our business, our need for senior experienced management and
implementation personnel increases. If a significant number of these individuals
depart the Company, or if we are unable to attract top talent, our level of
management, technical, marketing and sales expertise could diminish or otherwise
be insufficient for our growth. We may be unable to achieve our revenues and
operating performance objectives unless we can attract and retain technically
qualified and highly skilled sales, technical, business consulting, marketing
and management personnel. These individuals would be difficult to replace, and
losing them could seriously harm our business.
We
may have difficulty in identifying and competing for strategic acquisition and
partnership opportunities.
Our
business strategy includes the pursuit of strategic acquisitions. We may acquire
or make strategic investments in complementary businesses, technologies,
services or products, or enter into strategic partnerships or alliances with
third parties in the future in order to expand our business. We may be unable to
identify suitable acquisition, strategic investment or strategic partnership
candidates, or if we do identify suitable candidates, we may not complete those
transactions on terms commercially favorable to us, or at all. We have
historically paid a portion of the purchase price for acquisitions with shares
of our common stock. Volatility in our stock prices, or a sustained
price decline, could adversely affect our ability to attract acquisition
candidates. If we fail to identify and successfully complete these transactions,
our competitive position and our growth prospects could be adversely affected.
In addition, we may face competition from other companies with significantly
greater resources for acquisition candidates, making it more difficult for us to
acquire suitable companies on favorable terms.
The
market for the information technology consulting services we provide is
competitive, has low barriers to entry and is becoming increasingly
consolidated, which may adversely affect our market position.
The
market for the information technology consulting services we provide is
competitive, rapidly evolving and subject to rapid technological change. In
addition, there are relatively low barriers to entry into this market and
therefore new entrants may compete with us in the future. For example, due to
the rapid changes and volatility in our market, many well-capitalized companies,
including some of our partners, that have focused on sectors of the software and
services industry that are not competitive with our business may refocus their
activities and deploy their resources to be competitive with us.
An
increasing amount of information technology services are being provided by
lower-cost non-domestic resources. The increased utilization of these resources
for US-based projects could result in lower revenues and margins for US-based
information technology companies. Our ability to compete utilizing higher-cost
domestic resources and/or our ability to procure comparably priced off-shore
resources could adversely impact our results of operations and financial
condition.
Our
future financial performance will depend, in large part, on our ability to
establish and maintain an advantageous market position. We currently compete
with regional and national information technology consulting firms, and, to a
limited extent, offshore service providers and in-house information technology
departments. Many of the larger regional and national information technology
consulting firms have substantially longer operating histories, more established
reputations and potential partner relationships, greater financial resources,
sales and marketing organizations, market penetration and research and
development capabilities, as well as broader product offerings and greater
market presence and name recognition. We may face increasing competitive
pressures from these competitors as the market for software and services
continues to grow. This may place us at a disadvantage to our competitors, which
may harm our ability to grow, maintain revenues or generate net
income.
In recent
years, there has been substantial consolidation in our industry, and we expect
that there will be significant additional consolidation in the future. As a
result of this increasing consolidation, we expect that we will increasingly
compete with larger firms that have broader product offerings and greater
financial resources than we have. We believe that this competition could have a
significant negative effect on our marketing, distribution and reselling
relationships, pricing of services and products and our product development
budget and capabilities. One or more of our competitors may develop and
implement methodologies that result in superior productivity and price
reductions without adversely affecting their profit margins. In addition,
competitors may win client engagements by significantly discounting their
services in exchange for a client’s promise to purchase other goods and services
from the competitor, either concurrently or in the future. These activities may
potentially force us to lower our prices and suffer reduced operating margins.
Any of these negative effects could significantly impair our results of
operations and financial condition. We may not be able to compete successfully
against new or existing competitors.
Our
business will suffer if we do not keep up with rapid technological change,
evolving industry standards or changing customer requirements.
Rapidly
changing technology, evolving industry standards and changing customer needs are
common in the software and services market. We expect technological developments
to continue at a rapid pace in our industry. Technological developments,
evolving industry standards and changing customer needs could cause our business
to be rendered obsolete or non-competitive, especially if the market for the
core set of business-driven technology solutions and software platforms in which
we have expertise does not grow or if such growth is delayed due to market
acceptance, economic uncertainty or other conditions. Accordingly, our success
will depend, in part, on our ability to:
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continue
to develop our technology
expertise;
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enhance
our current
services;
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develop
new services that meet changing customer
needs;
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advertise
and market our services;
and
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influence
and respond to emerging industry standards and other technological
changes.
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We must
accomplish all of these tasks in a timely and cost-effective manner. We might
not succeed in effectively doing any of these tasks, and our failure to succeed
could have a material and adverse effect on our business, financial condition or
results of operations, including materially reducing our revenues and operating
results.
We may
also incur substantial costs to keep up with changes surrounding the Internet.
Unresolved critical issues concerning the commercial use and government
regulation of the Internet include the following:
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intellectual
property
ownership;
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Any costs
we incur because of these factors could materially and adversely affect our
business, financial condition and results of operations, including reduced net
income.
A
significant portion of our revenue is dependent upon building long-term
relationships with our clients and our operating results could suffer if we fail
to maintain these relationships.
Our
professional services agreements with clients are in most cases terminable on 10
to 30 days' notice. A client may choose at any time to use another consulting
firm or choose to perform services we provide through their own internal
resources. A sustained decrease in a client’s business activity could cause the
cancellation of projects. Accordingly, we rely on our clients' interests in
maintaining the continuity of our services rather than on contractual
requirements. Termination of a relationship with a significant client or with a
group of clients that account for a significant portion of our revenues could
adversely affect our revenues and results of operations.
If
we fail to meet our clients' performance expectations, our reputation may be
harmed.
As a
services provider, our ability to attract and retain clients depends to a large
extent on our relationships with our clients and our reputation for high quality
services and integrity. We also believe that the importance of reputation and
name recognition is increasing and will continue to increase due to the number
of providers of information technology services. As a result, if a client is not
satisfied with our services or does not perceive our solutions to be effective
or of high quality, our reputation may be damaged and we may be unable to
attract new, or retain existing, clients and colleagues.
We
may face potential liability to customers if our customers' systems
fail.
Our
business-driven technology solutions are often critical to the operation of our
customers' businesses and provide benefits that may be difficult to quantify. If
one of our customers' systems fails, the customer could make a claim for
substantial damages against us, regardless of our responsibility for that
failure. The limitations of liability set forth in our contracts may not be
enforceable in all instances and may not otherwise protect us from liability for
damages. Our insurance coverage may not continue to be available on reasonable
terms or in sufficient amounts to cover one or more large claims. In addition, a
given insurer might disclaim coverage as to any future claims. In addition, due
to the nature of our business, it is possible that we will be sued in the
future. If we experience one or more large claims against us that exceed
available insurance coverage or result in changes in our insurance policies,
including premium increases or the imposition of large deductible or
co-insurance requirements, our business and financial results could
suffer.
The
loss of one or more of our significant software business partners would have a
material and adverse effect on our business and results of
operations.
Our
business relationships with software vendors enable us to reduce our cost of
sales and increase win rates through leveraging our partners’ marketing efforts
and strong vendor endorsements. The loss of one or more of these relationships
and endorsements could increase our sales and marketing costs, lead to longer
sales cycles, harm our reputation and brand recognition, reduce our revenues and
adversely affect our results of operations.
In
particular, a substantial portion of our solutions are built on IBM WebSphere
platforms and a significant number of our clients are identified through joint
selling opportunities conducted with IBM and through sales leads obtained from
our relationship with IBM. The loss of our relationship with, or a
significant reduction in the services we perform for IBM, would have a material
adverse effect on our business and results of operations.
Our
quarterly operating results may be volatile and may cause our stock price to
fluctuate.
Our
quarterly revenues, expenses and operating results have varied in the past and
are likely to vary significantly in the future, which could lead to volatility
in our stock price. In addition, many factors affecting our operating results
are outside of our control, such as:
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demand
for software and services;
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customer
budget cycles;
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changes
in our customers' desire for our partners' products and our
services;
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pricing
changes in our industry; and
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government
regulation and legal developments regarding the use of the
Internet.
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As a
result, if we experience unanticipated changes in the number or nature of our
projects or in our employee utilization rates, we could experience large
variations in quarterly operating results in any particular
quarter.
Our
services revenues may fluctuate quarterly due to seasonality or timing of
completion of projects.
We may
experience seasonal fluctuations in our services revenues. We expect that
services revenues in the fourth quarter of a given year may typically be lower
than in other quarters in that year as there are fewer billable days in this
quarter as a result of vacations and holidays. In addition, we generally perform
services on a project basis. While we seek wherever possible to counterbalance
periodic declines in revenues on completion of large projects with new
arrangements to provide services to the same client or others, we may not be
able to avoid declines in revenues when large projects are completed. Our
inability to obtain sufficient new projects to counterbalance any decreases in
work upon completion of large projects could adversely affect our revenues and
results of operations.
Our
software revenues may fluctuate quarterly, leading to volatility in our results
of operations.
Our
software revenues may fluctuate quarterly and be higher in the fourth quarter of
a given year as procurement policies of our clients may result in higher
technology spending towards the end of budget cycles. This seasonal trend may
materially affect our quarter-to-quarter revenues, margins and operating
results.
Our
overall gross margin fluctuates quarterly based on our services and software
revenues mix, impacting our results of operations.
The gross
margin on our services revenues is, in most instances, greater than the gross
margin on our software revenues. As a result, our gross margin will be higher in
quarters where our services revenues, as a percentage of total revenues, has
increased, and will be lower in quarters where our software revenues, as a
percentage of total revenues, has increased. In addition, gross margin on
software revenues may fluctuate as a result of variances in gross margin on
individual software products. Our stock price may be negatively affected in
quarters in which our gross margin decreases.
Our
services gross margins are subject to fluctuations as a result of variances in
utilization rates and billing rates.
Our
services gross margins are affected by trends in the utilization rate of our
professionals, defined as the percentage of our professionals' time billed to
customers divided by the total available hours in a period, and in the billing
rates we charge our clients. Our operating expenses, including employee
salaries, rent and administrative expenses, are relatively fixed and cannot be
reduced on short notice to compensate for unanticipated variations in the number
or size of projects in process. If a project ends earlier than scheduled, we may
need to redeploy our project personnel. Any resulting non-billable time may
adversely affect our gross margins.
The
average billing rates for our services may decline due to rate pressures from
significant customers and other market factors, including innovations and
average billing rates charged by our competitors. If there is a sustained
downturn in the U.S. economy or in the information technology services industry,
rate pressure may increase. Also, our average billing rates will decline if we
acquire companies with lower average billing rates than ours. To sell our
products and services at higher prices, we must continue to develop and
introduce new services and products that incorporate new technologies or
high-performance features. If we experience pricing pressures or fail to develop
new services, our revenues and gross margins could decline, which could harm our
business, financial condition and results of operations.
If
we fail to complete fixed-fee contracts within budget and on time, our results
of operations could be adversely affected.
In 2007,
approximately 13% of our projects were performed on a fixed-fee basis, rather
than on a time-and-materials basis. Under these contractual arrangements, we
bear the risk of cost overruns, completion delays, wage inflation and other cost
increases. If we fail to estimate accurately the resources and time required to
complete a project or fail to complete our contractual obligations within the
scheduled timeframe, our results of operations could be adversely affected. We
cannot guarantee that in the future we will not price these contracts
inappropriately, which may result in losses.
We
may not be able to maintain our level of profitability.
Although
we have been profitable for the past four years, we may not be able to sustain
or increase profitability on a quarterly or annual basis in the future and in
fact could experience decreased profitability. If we fail to meet public market
analysts' and investors' expectations, the price of our common stock will likely
fall.
Our
services may infringe upon the intellectual property rights of
others.
We cannot be sure that our services do
not infringe on the intellectual property rights of third parties, and we may
have infringement claims asserted against us. These claims may harm
our reputation, cause our management to expend significant time in connection
with any defense and cost us money. We may be required to indemnify
clients for any expense or liabilities they incur resulting from claimed
infringement and these expenses could exceed the amounts paid to us by the
client for services we have performed. Any claims in this area, even
if won by us, can be costly, time-consuming and harmful to our
reputation.
International operations subject us
to additional political and economic risks that could have an adverse impact on
our business.
In
connection with our acquisition of BoldTech Systems, Inc. (“BoldTech”) in 2007,
we acquired a global development center in Hangzhou, China. In
connection with our acquisition of ePairs, Inc. (“ePairs”), we acquired an 80%
equity interest in ePairs India Private Limited, which operates a technology
consulting recruiting office in Chennai, India. We also have an agreement with a
third party offshore facility in Eastern Europe to provide the Company offshore
resources on an exclusive basis. Because of our limited experience
with facilities outside of the United States, we are subject to certain risks
related to expanding our presence into non-U.S. regions, including risks related
to complying with a wide variety of national and local laws, restrictions on the
import and export of certain technologies and multiple and possibly overlapping
tax structures. In addition, we may face competition from companies that may
have more experience with operations in such countries or with international
operations generally. We may also face difficulties integrating new facilities
in different countries into our existing operations, as well as integrating
employees that we hire in different countries into our existing corporate
culture.
Furthermore,
there are risks inherent in operating in and expanding into
non-U.S. regions, including, but not limited to:
|
§
|
political
and economic instability;
|
|
§
|
global
health conditions and potential natural
disasters;
|
|
§
|
unexpected
changes in regulatory requirements;
|
|
§
|
international
currency controls and exchange rate
fluctuations;
|
|
§
|
reduced
protection for intellectual property rights in some countries;
and
|
|
§
|
additional
vulnerability from terrorist groups targeting American interests
abroad.
|
Any one
or more of the factors set forth above could have a material adverse effect on
our international operations, and, consequently, on our business, financial
condition and operating results.
Immigration
restrictions related to H-1B visas could hinder our growth and adversely affect
our business, financial condition and results of operations.
Approximately
25% of our work force is comprised of skilled foreigners holding H-1B
visas. In 2007, we acquired a recruiting facility in Chennai, India,
to continue to grow our base of H-1B foreign national colleagues. The
H-1B visa classification enables us to hire qualified foreign workers in
positions that require the equivalent of at least a bachelor’s degree in the
U.S. in a specialty occupation such as technology systems engineering and
analysis. The H-1B visa generally permits an individual to work and
live in the U.S. for a period of three to six years, with some extensions
available. The number of new H-1B petitions approved in any federal
fiscal year is limited, making the H-1B visas necessary to bring foreign
employees to the U.S. unobtainable in years in which the limit is
reached. If we are unable to obtain all of the H-1B visas for which
we apply, our growth may be hindered.
There are
strict labor regulations associated with the H-1B visa classification and users
of the H-1B visa program are subject to investigations by the Wage and Hour
Division of the United States Department of Labor. If we are
investigated, a finding by the United States Department of Labor of willful or
substantial failure by us to comply with existing regulations on the H-1B
classification could result in back-pay liability, substantial fines, or a ban
on future use of the H-1B program and other immigration benefits, any of which
could materially and adversely affect our business, financial condition and
results of operations.
We
have recorded deferred offering costs in connection with a shelf registration
statement, and our inability to offset these costs against the proceeds of
future offerings from our shelf registration statement could result in a
non-cash expense in our Statement of Income in a future period.
We
initially filed a registration statement with the Securities and Exchange
Commission in March 2005 to register the offer and sale by the Company and
certain selling stockholders of shares of our common stock. Due to overall
market conditions in 2006, we converted our registration statement into a shelf
registration statement to allow for offers and sales of common stock from time
to time as market conditions permit. As of December 31, 2007, we have recorded
approximately $943,000 of deferred offering costs (approximately $579,000 after
tax, if ever expensed) in connection with the offering and have classified these
costs as prepaid expenses in other non-current assets on our balance
sheet.
If we
sell shares of common stock from our shelf registration statement, we will
offset these accumulated deferred offering costs against the proceeds of the
offering. If we do not raise funds through an equity offering from the shelf
registration statement or fail to maintain the effectiveness of the shelf
registration statement, the currently capitalized deferred offering costs will
be expensed. Such expense would be a non-cash accounting charge as all of these
expenses have already been paid.
Risks Related to
Ownership of Our Common Stock
Our
stock price has been volatile and may continue to fluctuate widely.
Our
common stock is traded on the Nasdaq Global Select Market, a tier of The NASDAQ
Stock Market LLC, under the symbol “PRFT.” Our common stock price has been
volatile. Our stock price may continue to fluctuate widely as a result of
announcements of new services and products by us or our competitors, quarterly
variations in operating results, the gain or loss of significant customers,
changes in public market analysts' estimates and market conditions for
information technology consulting firms and other technology stocks in
general.
We
periodically review and consider possible acquisitions of companies that we
believe will contribute to our long-term objectives. In addition, depending on
market conditions, liquidity requirements and other factors, from time to time
we consider accessing the capital markets. These events may also affect the
market price of our common stock.
Our
officers, directors, and 5% and greater stockholders own a large percentage of
our voting securities and their interests may differ from other
stockholders.
Our
executive officers, directors and 5% and greater stockholders beneficially own
or control approximately 18% of the voting power of our common stock. This
concentration of voting power of our common stock may make it difficult for our
other stockholders to successfully approve or defeat matters that may be
submitted for action by our stockholders. It may also have the effect of
delaying, deterring or preventing a change in control of our
company.
We
may need additional capital in the future, which may not be available to us. The
raising of any additional capital may dilute your ownership percentage in our
stock.
We intend
to continue to make investments to support our business growth and may require
additional funds to pursue business opportunities and respond to business
challenges. Accordingly, we may need to engage in equity or debt financings to
secure additional funds. If we raise additional funds through further issuances
of equity or convertible debt securities, our existing stockholders could suffer
dilution, and any new equity securities we issue could have rights, preferences
and privileges superior to those of holders of our common stock. Any debt
financing secured by us in the future could involve restrictive covenants
relating to our capital raising activities and other financial and operational
matters, which may make it more difficult for us to obtain additional capital
and to pursue business opportunities, including potential acquisitions. In
addition, we may not be able to obtain additional financing on terms favorable
to us, if at all. If we are unable to obtain adequate financing or financing on
terms satisfactory to us, when we require it, our ability to continue to support
our business growth and to respond to business challenges could be significantly
limited.
It
may be difficult for another company to acquire us, and this could depress our
stock price.
In
addition to the large percentage of our voting securities held by our officers,
directors and 5% and greater stockholders, provisions contained in our
certificate of incorporation, bylaws and Delaware law could make it difficult
for a third party to acquire us, even if doing so would be beneficial to our
stockholders. Our certificate of incorporation and bylaws may discourage, delay
or prevent a merger or acquisition that a stockholder may consider favorable by
authorizing the issuance of “blank check” preferred stock. In addition,
provisions of the Delaware General Corporation Law also restrict some business
combinations with interested stockholders. These provisions are intended to
encourage potential acquirers to negotiate with us and allow the board of
directors the opportunity to consider alternative proposals in the interest of
maximizing stockholder value. However, these provisions may also discourage
acquisition proposals or delay or prevent a change in control, which could harm
our stock price.
Item
1B.
|
Unresolved
Staff Comments.
|
None.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of
the statements contained in this annual report that are not purely historical
statements discuss future expectations, contain projections of results of
operations or financial condition or state other forward-looking information.
Those statements are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those
contemplated by the statements. The “forward-looking” information is based on
various factors and was derived using numerous assumptions. In some cases, you
can identify these so-called forward-looking statements by words like “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential” or “continue” or the negative of those words and other
comparable words. You should be aware that those statements only reflect our
predictions. Actual events or results may differ substantially. Important
factors that could cause our actual results to be materially different from the
forward-looking statements are disclosed under the heading “Risk Factors” in
this annual report.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We are under no duty to update any of the forward-looking
statements after the date of this annual report to conform such statements to
actual results.
All
forward-looking statements, express or implied, included in this report and the
documents we incorporate by reference and attributable to Perficient are
expressly qualified in their entirety by this cautionary
statement. This cautionary statement should also be considered in
connection with any subsequent written or oral forward-looking statements that
Perficient or any persons acting on our behalf may issue.
Our
principal executive, administrative, finance and marketing operations are
located in St. Louis, Missouri, where we have leased approximately 20,594 square
feet of office space, and Austin, TX, where we have leased approximately 2,700
square feet of office space. We lease 18 offices in major cities across North
America and China. We do not own any real property. We believe our facilities
are adequate to meet our needs in the near future.
Item 3.
|
Legal
Proceedings.
|
Although
we may become a party to litigation and claims arising in the course of our
business, management currently does not believe the results of these actions
will have a material adverse effect on our business or financial
condition.
Item 4.
|
Submission
of Matters to a Vote of Security
Holders.
|
No
matters were submitted to a shareholder vote during the quarter ended December
31, 2007.
PART
II
Item 5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Our
common stock is quoted on the Nasdaq Global Select Market, a tier of The NASDAQ
Stock Market LLC, under the symbol “PRFT.” The following table sets forth, for
the periods indicated, the high and low sale prices per share of our common
stock as reported on the Nasdaq Global Select Market, a tier of The NASDAQ Stock
Market LLC, since January 1, 2006.
|
|
High
|
|
|
Low
|
|
Year
Ending December 31, 2007:
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
21.50 |
|
|
$ |
16.31 |
|
Second
Quarter
|
|
|
23.03 |
|
|
|
18.62 |
|
Third
Quarter
|
|
|
24.61 |
|
|
|
19.35 |
|
Fourth
Quarter
|
|
|
24.19 |
|
|
|
15.09 |
|
|
|
|
|
|
|
|
|
|
Year
Ending December 31, 2006:
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
12.01 |
|
|
$ |
8.76 |
|
Second
Quarter
|
|
|
14.29 |
|
|
|
11.52 |
|
Third
Quarter
|
|
|
15.68 |
|
|
|
11.55 |
|
Fourth
Quarter
|
|
|
19.16 |
|
|
|
15.31 |
|
On
February 27, 2008, the last reported sale price of our common stock on the
Nasdaq Global Select Market, a tier of The NASDAQ Stock Market LLC, was $8.44
per share. There were approximately 190 stockholders of record of our common
stock as of February 27, 2008.
We have
never declared or paid any cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. Our credit facility
currently prohibits the payment of cash dividends without the prior written
consent of the lenders.
Information
on our Equity Compensation Plan has been included at Part III, Item 12, of the
consolidated financial statements.
Item 6.
|
Selected
Financial Data.
|
The
selected financial data presented for, and as of the end of, each of the years
in the five-year period ended December 31, 2007, has been prepared in accordance
with United States generally accepted accounting principles. All amounts shown
are in thousands. The financial data presented is not directly comparable
between periods as a result of the adoption of Statement of Financial Accounting
Standards No. 123R (As Amended), Share Based Payment (“SFAS
123R”) in 2006, and four acquisitions in 2007, three acquisitions in 2006, two
acquisitions in 2005, and three acquisitions in 2004.
The
following data should be read in conjunction with the Consolidated Financial
Statements and the Notes to Consolidated Financial Statements appearing in Part
II, Item 8, and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing in Part II, Item 7.
|
|
|
|
|
Year Ended December
31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
218,148 |
|
|
$ |
160,926 |
|
|
$ |
96,997 |
|
|
$ |
58,848 |
|
|
$ |
30,192 |
|
Gross
margin
|
|
$ |
75,690 |
|
|
$ |
53,756 |
|
|
$ |
32,418 |
|
|
$ |
18,820 |
|
|
$ |
11,375 |
|
Selling,
general and administrative
|
|
$ |
41,963 |
|
|
$ |
32,268 |
|
|
$ |
17,917 |
|
|
$ |
11,068 |
|
|
$ |
7,993 |
|
Depreciation and
intangibles amortization
|
|
$ |
6,265 |
|
|
$ |
4,406 |
|
|
$ |
2,226 |
|
|
$ |
1,209 |
|
|
$ |
1,281 |
|
Income
from operations
|
|
$ |
27,462 |
|
|
$ |
17,082 |
|
|
$ |
12,275 |
|
|
$ |
6,543 |
|
|
$ |
2,102 |
|
Interest
income (expense)
|
|
$ |
172 |
|
|
$ |
(407 |
) |
|
$ |
(643 |
) |
|
$ |
(134 |
) |
|
$ |
(283 |
) |
Other
income (expense)
|
|
$ |
20 |
|
|
$ |
174 |
|
|
$ |
43 |
|
|
$ |
32 |
|
|
$ |
(13 |
) |
Income
before income taxes
|
|
$ |
27,654 |
|
|
$ |
16,849 |
|
|
$ |
11,675 |
|
|
$ |
6,441 |
|
|
$ |
1,805 |
|
Net
income
|
|
$ |
16,230 |
|
|
$ |
9,567 |
|
|
$ |
7,177 |
|
|
$ |
3,913 |
|
|
$ |
1,050 |
|
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Balance
Sheet Data:
|
|
(In
thousands)
|
|
Cash
and cash equivalents
|
|
$ |
8,070 |
|
|
$ |
4,549 |
|
|
$ |
5,096 |
|
|
$ |
3,905 |
|
|
$ |
1,989 |
|
Working
capital
|
|
$ |
41,368 |
|
|
$ |
24,859 |
|
|
$ |
17,078 |
|
|
$ |
9,234 |
|
|
$ |
4,013 |
|
Property
and equipment, net
|
|
$ |
3,226 |
|
|
$ |
1,806 |
|
|
$ |
960 |
|
|
$ |
806 |
|
|
$ |
699 |
|
Goodwill
and intangible assets, net
|
|
$ |
121,339 |
|
|
$ |
81,056 |
|
|
$ |
52,031 |
|
|
$ |
37,340 |
|
|
$ |
11,694 |
|
Total
assets
|
|
$ |
189,992 |
|
|
$ |
131,000 |
|
|
$ |
84,935 |
|
|
$ |
62,582 |
|
|
$ |
20,260 |
|
Current
portion of long term debt and line of credit
|
|
$ |
-- |
|
|
$ |
1,201 |
|
|
$ |
1,581 |
|
|
$ |
1,379 |
|
|
$ |
367 |
|
Long-term
debt and line of credit, less current portion
|
|
$ |
-- |
|
|
$ |
137 |
|
|
$ |
5,338 |
|
|
$ |
2,902 |
|
|
$ |
436 |
|
Total
stockholders' equity
|
|
$ |
165,562 |
|
|
$ |
107,352 |
|
|
$ |
65,911 |
|
|
$ |
44,622 |
|
|
$ |
16,016 |
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
You
should read the following summary together with the more detailed business
information and consolidated financial statements and related notes that appear
elsewhere in this annual report and in the documents that we incorporate by
reference into this annual report. This annual report may contain certain
“forward-looking” information within the meaning of the Private Securities
Litigation Reform Act of 1995. This information involves risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in “Risk
Factors.”
Overview
We are an
information technology consulting firm serving Forbes Global 2000 (“Global
2000”) and large enterprise companies primarily in the United States. We help
clients gain competitive advantage by using Internet-based technologies to make
their businesses more responsive to market opportunities and threats, strengthen
relationships with customers, suppliers and partners, improve productivity and
reduce information technology costs. Our solutions enable these benefits by
integrating, automating and extending business processes, technology
infrastructure and software applications end-to-end within an organization and
with key partners, suppliers and customers. This provides real-time access to
critical business applications and information and a scalable, reliable, secure
and cost-effective technology infrastructure.
Services
Revenues
Services
revenues are derived from professional services performed developing,
implementing, integrating, automating and extending business processes,
technology infrastructure and software applications. Most of our projects are
performed on a time and materials basis, and a smaller amount of revenues is
derived from projects performed on a fixed fee basis. Fixed fee engagements
represented approximately 13% of our services revenues for the year ended
December 31, 2007. For time and material projects, revenues are recognized and
billed by multiplying the number of hours our professionals expend in the
performance of the project by the established billing rates. For fixed fee
projects, revenues are generally recognized using the proportionate performance
method. Revenues on uncompleted projects are recognized on a
contract-by-contract basis in the period in which the portion of the fixed fee
is complete. Amounts invoiced to clients in excess of revenues recognized are
classified as deferred revenues. The Company’s average bill rates increased
slightly from $109 per hour in 2006 to $114 per hour in 2007. The Company is
anticipating modest increases in billing rates in 2008. On most projects, we are
also reimbursed for out-of-pocket expenses such as airfare, lodging and meals.
These reimbursements are included as a component of revenues. The aggregate
amount of reimbursed expenses will fluctuate depending on the location of our
customers, the total number of our projects that require travel, and whether our
arrangements with our clients provide for the reimbursement of travel and other
project related expenses.
Software
Revenues
Software
revenues are derived from sales of third-party software. Revenues from sales of
third-party software are recorded on a gross basis provided we act as a
principal in the transaction. In the event we do not meet the requirements to be
considered a principal in the software sale transaction and act as an agent, the
revenues are recorded on a net basis. Software revenues are expected to
fluctuate from quarter-to-quarter depending on our customers' demand for
software products.
If we
enter into contracts for the sale of services and software, Company management
evaluates whether the services are essential to the functionality of the
software and whether the Company has objective fair value evidence for each
deliverable in the transaction. If management concludes the services to be
provided are not essential to the functionality of the software and can
determine objective fair value evidence for each deliverable of the transaction,
then we account for each deliverable in the transaction separately, based on the
relevant revenue recognition policies. Generally, all deliverables of our
multiple element arrangements meet these criteria.
Cost
of revenues
Cost of
revenues consists primarily of cash and non-cash compensation and benefits
associated with our technology professionals and subcontractors. Non-cash
compensation includes stock compensation expenses arising from restricted stock
and option grants to employees. Cost of revenues also includes third-party
software costs, reimbursable expenses and other unreimbursed project related
expenses. Project related expenses will fluctuate generally depending on outside
factors including the cost and frequency of travel and the location of our
customers. Cost of revenues does not include depreciation of assets used in the
production of revenues which are primarily personal computers, servers and other
IT related equipment.
Gross
Margins
Our gross
margins for services are affected by the utilization rates of our professionals,
defined as the percentage of our professionals' time billed to customers divided
by the total available hours in the respective period, the salaries we pay our
consulting professionals and the average billing rate we receive from our
customers. If a project ends earlier than scheduled or we retain professionals
in advance of receiving project assignments, or if demand for our services
declines, our utilization rate will decline and adversely affect our gross
margins. Subject to fluctuations resulting from our acquisitions, we expect
these key metrics of our services business to remain relatively constant for the
foreseeable future assuming there are no further declines in the demand for
information technology software and services. Gross margin percentages of third
party software sales are typically lower than gross margin percentages for
services, and the mix of services and software for a particular period can
significantly impact total combined gross margin percentage for such period. In
addition, gross margin for software sales can fluctuate due to pricing and other
competitive pressures.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses (“SG&A”) consist of salaries, benefits,
bonuses, non-cash compensation, office costs, recruiting, professional fees,
sales and marketing activities, training, and other miscellaneous expenses.
Non-cash compensation includes stock compensation expenses related to restricted
stock and option grants to employees and non-employee directors. We work to
minimize selling costs by focusing on repeat business with existing customers
and by accessing sales leads generated by our software business partners, most
notably IBM, whose products we use to design and implement solutions for our
clients. These partnerships enable us to reduce our selling costs and sales
cycle times and increase win rates through leveraging our partners' marketing
efforts and endorsements. A substantial portion of our SG&A costs are
relatively fixed.
Plans
for Growth and Acquisitions
Our goal
is to continue to build one of the leading independent information technology
consulting firms in North America by expanding our relationships with existing
and new clients, leveraging our operations to expand nationally and continuing
to make disciplined acquisitions. We believe the United States represents an
attractive market for growth, primarily through acquisitions. As demand for our
services grows, we believe we will attempt to increase the number of
professionals in our 18 North American offices and to add new offices throughout
the United States, both organically and through acquisitions. We also intend to
continue to leverage our existing ‘offshore’ capabilities to support our growth
and provide our clients flexible options for project delivery. In addition, we
believe our track record for identifying acquisitions and our ability to
integrate acquired businesses helps us complete acquisitions efficiently and
productively, while continuing to offer quality services to our clients,
including new clients resulting from the acquisitions.
Consistent
with our strategy of growth through disciplined acquisitions, we consummated
nine acquisitions since January 1, 2005, including four in 2007.
Results
of Operations
The
following table summarizes our results of operations as a percentage of total
revenues:
Revenues:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Services
revenues
|
|
|
87.8
|
% |
|
|
85.6
|
% |
|
|
86.3
|
% |
Software
revenues
|
|
|
6.5 |
|
|
|
9.0 |
|
|
|
9.7 |
|
Reimbursable
expenses
|
|
|
5.7 |
|
|
|
5.4 |
|
|
|
4.0 |
|
Total
revenues
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost
of revenues (exclusive of depreciation and amortization, shown separately
below):
|
|
|
|
|
|
|
|
|
|
|
|
|
Project
personnel costs
|
|
|
52.6 |
|
|
|
52.3 |
|
|
|
52.7 |
|
Software
costs
|
|
|
5.5 |
|
|
|
7.5 |
|
|
|
8.0 |
|
Reimbursable
expenses
|
|
|
5.7 |
|
|
|
5.4 |
|
|
|
4.0 |
|
Other
project related expenses
|
|
|
1.5 |
|
|
|
1.3 |
|
|
|
1.9 |
|
Total
cost of revenues
|
|
|
65.3 |
|
|
|
66.5 |
|
|
|
66.6 |
|
Services
gross margin
|
|
|
38.4 |
|
|
|
37.4 |
|
|
|
36.7 |
|
Software
gross margin
|
|
|
15.9 |
|
|
|
16.1 |
|
|
|
17.8 |
|
Total
gross margin
|
|
|
34.7 |
|
|
|
33.5 |
|
|
|
33.4 |
|
Selling,
general and administrative
|
|
|
19.2 |
|
|
|
20.1 |
|
|
|
18.5 |
|
Depreciation
and amortization
|
|
|
2.9 |
|
|
|
2.7 |
|
|
|
2.3 |
|
Income
from operations
|
|
|
12.6 |
|
|
|
10.6 |
|
|
|
12.6 |
|
Interest
income (expense), net
|
|
|
0.1 |
|
|
|
(0.2
|
) |
|
|
(0.7
|
) |
Income
before income taxes
|
|
|
12.7 |
|
|
|
10.5 |
|
|
|
11.9 |
|
Provision
for income taxes
|
|
|
5.2 |
|
|
|
4.5 |
|
|
|
4.6 |
|
Net
income
|
|
|
7.5
|
% |
|
|
6.0
|
% |
|
|
7.3
|
% |
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues. Total revenues
increased 36% to $218.1 million for the year ended December 31, 2007 from $160.9
million for the year ended December 31, 2006.
|
|
Financial
Results
|
|
|
Explanation
for Increases Over Prior Year Period
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
For
the Year Ended December 31, 2007
|
|
|
For
the Year Ended December 31, 2006
|
|
|
Total
Increase Over Prior Year Period
|
|
|
Increase
Attributable to Acquired Companies*
|
|
|
Increase
Attributable to Base Business**
|
|
|
%
Increase in Total Revenue Attributable to Base Business
|
|
Services
Revenues
|
|
$ |
191,395 |
|
|
$ |
137,722 |
|
|
$ |
53,673 |
|
|
$ |
43,437 |
|
|
$ |
10,236 |
|
|
|
19 |
% |
Software
Revenues
|
|
|
14,243 |
|
|
|
14,435 |
|
|
|
(192 |
) |
|
|
1,570 |
|
|
|
(1,762 |
) |
|
|
921 |
% |
Reimbursable
Expenses
|
|
|
12,510 |
|
|
|
8,769 |
|
|
|
3,741 |
|
|
|
2,578 |
|
|
|
1,163 |
|
|
|
31 |
% |
Total
Revenues
|
|
$ |
218,148 |
|
|
$ |
160,926 |
|
|
$ |
57,222 |
|
|
$ |
47,585 |
|
|
$ |
9,637 |
|
|
|
17 |
% |
*Defined
as companies acquired during 2006 and 2007.
**Defined
as businesses owned as of January 1, 2006.
Services revenues increased 39% to
$191.4 million for the year ended December 31, 2007 from $137.7 million for the
year ended December 31, 2006. Base business accounted for 19% of the increase in
services revenues for the year ended December 31, 2007 compared to the year
ended December 31, 2006. The remaining 81% of the increase is attributable
to revenues generated from the companies acquired during 2006 and
2007.
Software
revenues decreased 1% to $14.2 million in 2007 from $14.4 million in
2006. Software revenues attributable to our base business decreased $1.8
million while software revenues attributable to acquired companies increased
$1.6 million, resulting in a net decrease of $192,000. Reimbursable expenses
increased 43% to $12.5 million in 2007 from $8.8 million in 2006 due to
acquisitions and an increased number of projects requiring consultant travel. We
do not realize any profit on reimbursable expenses.
Cost of revenues. Cost of
revenues increased 33% to $142.5 million for the year ended December 31, 2007
from $107.2 million for the year ended December 31, 2006. Base business
accounted for 14% of the $35.3 million increase in cost of revenues for the year
ended December 31, 2007 compared to the year ended December 31, 2006. The
remaining increase in cost of revenues is attributable to the acquired
companies. The average number of professionals performing services, including
subcontractors, increased to 1,026 for the year ended December 31, 2007 from 686
for the year ended December 31, 2006.
Costs
associated with software sales decreased 1% to $12.0 million for year
ended December 31, 2007 from $12.1 million for the year ended December 31,
2006 due to an increase in sales of our higher margin internally developed
software. Costs associated with software sales attributable to our base business
decreased $1.4 million, while costs associated with software sales attributable
to acquired companies increased $1.3 million, resulting in a net decrease of
$135,000.
Gross Margin. Gross margin
increased 41% to $75.7 million for the year ended December 31, 2007 from $53.8
million for the year ended December 31, 2006. Gross margin as a percentage of
revenues increased to 34.7% for the year ended December 31, 2007 from 33.4% for
the year ended December 31, 2006 due primarily to an increase in services gross
margin offset by a slight decrease in margin from software. Services gross
margin, excluding reimbursable expenses, increased to 38.4% in 2007 from 37.4%
in 2006 primarily due to lower bonus as a percent of revenues and lower direct
labor cost as a percent of revenues driven by improved billing rates. The
average utilization rate of our professionals, excluding subcontractors,
decreased slightly to 81% for the year ended December 31, 2007 from 83%
for the year ended December 31, 2006. Average billing rates were $114 for
2007 and $109 for 2006. Software gross margin decreased to 15.9% in 2007 from
16.1% in 2006 primarily as a result of fluctuations in vendor and competitive
pricing based on market conditions at the time of the sales.
Selling, General and
Administrative. Selling, general and administrative expenses increased
30% to $42.0 million for the year ended December 31, 2007 from $32.3 million for
the year ended December 31, 2006 due primarily to fluctuations in expenses
as detailed in the following table:
|
|
Increase
/ (Decrease)
|
|
Selling,
General, and Administrative Expense
|
|
(in
millions)
|
|
Sales
related costs
|
|
$ |
3.4 |
|
Stock
compensation expense
|
|
|
2.5 |
|
Salary
expense
|
|
|
1.9 |
|
Bad
debts
|
|
|
0.8 |
|
Office
and technology-related costs
|
|
|
1.6 |
|
Recruiting
and training-related costs
|
|
|
0.8 |
|
Other
|
|
|
0.5 |
|
Bonus
expense
|
|
|
(1.8 |
) |
Net
increase
|
|
$ |
9.7 |
|
Selling,
general and administrative expenses as a percentage of revenues decreased
to 19% for the year ended December 31, 2007 from 20% for the year ended December
31, 2006, primarily driven by lower bonus costs as a percent of revenue and the
Company leveraging its infrastructure. Bonus costs, as a percentage of
service revenues, excluding reimbursable expenses, decreased to 1.6% for the
year ended December 31, 2007 compared to 3.5% for the year ended December 31,
2006 due to increasingly challenging growth and profitability targets in 2007.
Stock compensation expense, as a percentage of services revenues, excluding
reimbursed expenses, increased to 2.4% for the year ended December 31, 2007
compared to 1.6% for the year ended December 31, 2006.
Depreciation. Depreciation
expense increased 64% to $1.6 million during 2007 from approximately $0.9
million during 2006. The increase in depreciation expense is due to the addition
of software programs, servers, and other computer equipment to enhance our
technology infrastructure and support our growth, both organic and
acquisition-related. Depreciation expense as a percentage of services revenue,
excluding reimbursable expenses, was 0.8% and 0.7% for the years ended December
31, 2007 and 2006, respectively.
Intangible Amortization.
Intangible amortization expense increased 36% to $4.7 million for the year ended
December 31, 2007 from approximately $3.5 million for the year ended December
31, 2006. The increase in amortization expense reflects the acquisition of
intangibles acquired in 2006 and 2007, as well as the amortization of
capitalized costs associated with internal use software. The
valuations and estimated useful lives of acquired identifiable intangible assets
are outlined in Note 13,
Business Combinations, of our consolidated financial
statements.
Net Interest Income or
Expense. We had interest income, net of interest expense, of
$172,000 for the year ended December 31, 2007 compared to interest
expense, net of interest income, of $407,000 during the year ended December
31, 2006. We repaid all outstanding debt in May 2007 and incurred no debt or
interest expense during the rest of the fiscal year.
Provision for Income Taxes. We provided for
federal, state and foreign income taxes at the applicable statutory rates
adjusted for non-deductible expenses. Our effective tax rate decreased to 41.3%
for the year ended December 31, 2007 from 43.2% for the year ended December 31,
2006. The effective income tax rate decreased as a result of the increased
tax benefit of certain dispositions of incentive stock options by holders and a
decrease in the state income taxes, net of the federal benefit.
Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenues. Total revenues
increased 66% to $160.9 million for the year ended December 31, 2006 from $97.0
million for the year ended December 31, 2005.
|
|
Financial
Results
|
|
|
Explanation
for Increases Over Prior Year Period
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
For
the Year Ended December 31, 2006
|
|
|
For
the Year Ended December 31, 2005
|
|
|
Total
Increase Over Prior Year Period
|
|
|
Increase
Attributable to Acquired Companies*
|
|
|
Increase
Attributable to Base Business**
|
|
|
%
Increase in Total Revenue Attributable to Base Business
|
|
Services
Revenues
|
|
$ |
137,722 |
|
|
$ |
83,740 |
|
|
$ |
53,982 |
|
|
$ |
38,715 |
|
|
$ |
15,267 |
|
|
|
28 |
% |
Software
Revenues
|
|
|
14,435 |
|
|
|
9,387 |
|
|
|
5,048 |
|
|
|
1,201 |
|
|
|
3,847 |
|
|
|
76 |
% |
Reimbursable
Expenses
|
|
|
8,769 |
|
|
|
3,870 |
|
|
|
4,899 |
|
|
|
2,735 |
|
|
|
2,164 |
|
|
|
44 |
% |
Total
Revenues
|
|
$ |
160,926 |
|
|
$ |
96,997 |
|
|
$ |
63,929 |
|
|
$ |
42,651 |
|
|
$ |
21,278 |
|
|
|
33 |
% |
*Defined
as companies acquired during 2005 and 2006.
**Defined
as businesses owned as of January 1, 2005.
Services
revenues increased 65% to $137.7 million for the year ended December 31, 2006
from $83.7 million for the year ended December 31, 2005. Base business
accounted for 28% of the increase in services revenues for the year ended
December 31, 2006 compared to the year ended December 31, 2005. The remaining
72% of the increase is attributable to revenues generated from the
companies acquired during 2005 and 2006.
Software
revenues increased 54% to $14.4 million in 2006 from $9.4 million in
2005. Base business accounted for 76% of the increase in software revenues
for the year ended December 31, 2006 compared to the year ended December 31,
2005. The remaining 24% of the increase is attributable to revenues
generated from the companies acquired during 2005
and 2006. Reimbursable expenses increased 127% to $8.8 million in 2006
from $3.9 million in 2005 due to acquisitions and an increased number of
projects requiring consultant travel. We do not realize any profit on
reimbursable expenses.
Cost of revenues. Cost of
revenues increased 66% to $107.2 million for the year ended December 31, 2006
from $64.6 million for the year ended December 31, 2005. Base business accounted
for 40% of the $42.6 million increase in cost of revenues for the year ended
December 31, 2006 compared to the year ended December 31, 2005. The
remaining increase in cost of revenues is attributable to the acquired
companies. The average number of professionals performing services, including
subcontractors, increased to 686 for the year ended December 31, 2006 from 431
for the year ended December 31, 2005. Stock compensation expense included in
cost of revenues for the year ended December 31, 2006 was nearly $1 million. No
stock compensation expense was recognized in cost of revenues prior to January
1, 2006. The increase in stock compensation expense is the result of our
adoption of Statement of Financial Accounting Standards No. 123 (revised) (“SFAS
123R”), Share Based
Payment, on January 1, 2006.
Costs
associated with software sales increased 57% to $12.1 million for year
ended December 31, 2006 from $7.7 million for the year ended December 31,
2005 in connection with the increased software revenues in 2006 compared to
2005. Base business accounted for 76% of the $4.4 million increase in
costs associated with software sales for the year ended December 31, 2006
compared to the year ended December 31, 2005. The remaining 24%
increase in costs associated with software sales is attributable to acquired
companies.
Gross Margin. Gross margin
increased 66% to $53.8 million for the year ended December 31, 2006 from $32.4
million for the year ended December 31, 2005. Gross margin as a percentage of
revenues remained consistent at 33.4% for the years ended December 31,
2006 and 2005. Services gross margin, excluding reimbursable expenses,
increased to 37.4% in 2006 from 36.7% in 2005 primarily due to an increase in
average billing rates and improved project pricing. This increase is
partially offset by $1.0 million of stock compensation expense recognized in
cost of revenues during the year ended December 31, 2006, as discussed
above. The average utilization rate of our professionals, excluding
subcontractors, remained consistent at 83% for the years ended December 31, 2006
and 2005. Average billing rates were $109 for 2006 and $110 for 2005. Software
gross margin decreased to 16.1% in 2006 from 17.7% in 2005, primarily as a
result of fluctuations in vendor and competitive pricing based on market
conditions at the time of the sales.
Selling, General and
Administrative. Selling, general and administrative expenses increased
80% to $32.3 million for the year ended December 31, 2006 from $17.9 million for
the year ended December 31, 2005 due primarily to fluctuations in
expenses as detailed in the following table:
|
|
Increase
/(Decrease)
|
|
Selling,
General, and Administrative Expense
|
|
(in
millions)
|
|
Bonus
expense
|
|
$ |
3.5 |
|
Sales
related costs
|
|
|
3.2 |
|
Salary
expense
|
|
|
1.9 |
|
Stock
compensation expense
|
|
|
1.9 |
|
Recruiting
and training-related costs
|
|
|
1.4 |
|
Office
and technology-related costs
|
|
|
1.2 |
|
Other
|
|
|
0.9 |
|
Bad
debts
|
|
|
0.4 |
|
Net
increase
|
|
$ |
14.4 |
|
Selling,
general and administrative expenses as a percentage of revenues increased
to 20% for the year ended December 31, 2006 from 19% for the year ended December
31, 2005, primarily due to higher bonus and recruiting, partially offset by
lower office costs, salaries, and professional fees. Bonus costs, as a
percentage of service revenues, excluding reimbursable expenses, increased to
3.5% for the year ended December 31, 2006 compared to 1.6% for the year ended
December 31, 2005 due to strong operating performance. Stock compensation
expense, as a percentage of services revenues, excluding reimbursed expenses,
increased to 1.6% for the year ended December 31, 2006 compared to 0.3% for the
year ended December 31, 2005.
Depreciation. Depreciation
expense increased 54% to $948,000 during 2006 from approximately $615,000 during
2005. The increase in depreciation expense is due to the addition of software
programs, servers, and other computer equipment to enhance our technology
infrastructure and support our growth, both organic and acquisition-related.
Depreciation expense as a percentage of services revenue, excluding reimbursable
expenses, was 0.6% for the years ended December 31, 2006 and 2005.
Intangible Amortization.
Intangible amortization expense increased 115% to $3.5 million for the year
ended December 31, 2006 from approximately $1.6 million for the year ended
December 31, 2005. The increase in amortization expense reflects the acquisition
of intangibles acquired in 2005 and 2006.
Interest Expense. Interest
expense decreased 23% to $509,000 for the year ended December 31, 2006 compared
to approximately $658,000 during the year ended December 31, 2005. This decrease
is primarily due to a lower average amount of debt outstanding during 2006
compared to 2005. As of December 31, 2006, there was approximately $1.3 million
outstanding on the acquisition line of credit and no amounts outstanding on the
accounts receivable line of credit. Our outstanding borrowings on the
acquisition line of credit had an average interest rate of 7.0% for the year
ended December 31, 2006 while the average interest rate on our accounts
receivable line of credit borrowings for the year ended December 31, 2006 was
7.96%. During 2006, we drew down $34.9 million on the accounts receivable line
of credit and repaid $38.9 million.
Provision for Income Taxes. We provided for
federal, state and foreign income taxes at the applicable statutory rates
adjusted for non-deductible expenses. Our effective tax rate increased to 43.2%
for the year ended December 31, 2006 from 38.5% for the year ended December 31,
2005 as a result of non-deductible stock compensation related to incentive
stock options included in our statement of operations in 2006 as a result of the
adoption of SFAS 123R on January 1, 2006 and certain non-deductible compensation
related to Section 162(m) of the Internal Revenue Code, which imposes a
limitation on the deductibility of certain compensation in excess of $1 million
paid to covered employees.
Liquidity
and Capital Resources
Selected
measures of liquidity and capital resources are as follows (in
millions):
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
and cash equivalents
|
|
$ |
8.1 |
|
|
$ |
4.5 |
|
Working
capital
|
|
$ |
41.4 |
|
|
$ |
24.9 |
|
Amounts
available under credit facilities
|
|
$ |
49.8 |
|
|
$ |
49.5 |
|
Net
Cash Provided By Operating Activities
We expect
to fund our operations from cash generated from operations and short-term
borrowings as necessary from our credit facilities. We believe that these
capital resources will be sufficient to meet our needs for at least the next
twelve months. Net cash provided by operations for the year ended December 31,
2007 was $23.1 million compared to $13.1 million for the year ended December 31,
2006. For the year ended December 31, 2007, net income of $16.2 million plus
non-cash charges of $12.0 million were offset by investments in working capital
of $5.1 million. The primary components of operating cash flows for
the year ended December 31, 2006 were net income of $9.6 million plus non-cash
expenses of $8.9 million offset by investments in working capital of $5.4
million. The Company’s days sales outstanding as of December 31, 2007
increased to 73 days from 70 days at December 31, 2006.
Net
Cash Used in Investing Activities
For the
year ended December 31, 2007, we used approximately $26.8 million in cash, net
of cash acquired, to acquire E Tech, Tier1, BoldTech, and ePairs. In addition,
we used approximately $2.2 million during 2007 to purchase equipment and develop
certain software. For the year ended December 31, 2006, we used approximately
$17.2 million in cash, net of cash acquired, to acquire Bay Street, Insolexen,
and EGG. In addition, during 2006 we used approximately $1.7 million to purchase
equipment and develop certain software, and $250,000 to repay the promissory
notes related to the Javelin acquisition.
Net
Cash Provided By Financing Activities
During
the year ended December 31, 2007 our financing activities consisted of $1.3
million of payments on long-term debt. Also, we received $3.9 million primarily
from proceeds related to exercises of stock options and purchases under our
Employee Stock Purchase Plan and we realized tax benefits related to stock
option exercises and restricted stock vesting of $6.9 million during 2007.
During the year ended December 31, 2006 our financing activities consisted of
net payments totaling $4.0 million on our accounts receivable line of credit and
$1.3 million of payments on long-term debt. We received $4.2 million primarily
from proceeds related to exercises of stock options and warrants, and purchases
under our Employee Stock Purchase Plan, and we realized tax benefits related to
stock option exercises of $6.6 million during 2006.
Availability
of Funds from Bank Line of Credit Facilities
We have a
$50 million credit facility with Silicon Valley Bank and Key Bank National
Association (“Key Bank”) comprising a $25 million accounts receivable line
of credit and a $25 million acquisition line of credit. Borrowings under
the accounts receivable line of credit bear interest at the bank's prime
rate (7.25% on December 31, 2007). As of December 31, 2007, there was no
outstanding balance under the accounts receivable line of credit and
$24.8 million of available borrowing capacity due to an outstanding letter
of credit to secure an office lease. Additionally, the line of credit
bears an annual commitment fee of 0.12% on the unused portion of the line of
credit.
Our $25 million term acquisition line of credit with Silicon Valley Bank
and Key Bank provides an additional source of financing for certain qualified
acquisitions. As of December 31, 2007, there was no balance outstanding under
this acquisition line of credit. Borrowings under this acquisition line of
credit bear interest equal to the four year U.S. Treasury note yield plus 3%
based on the spot rate on the day the draw is processed (6.29% on December 31,
2007). Draws under this acquisition line may be made through June 2008. We
currently have $25 million of available borrowing capacity under this
acquisition line of credit. Additionally, the line of credit bears an
annual commitment fee of 0.12% on the unused portion of the line of
credit.
As of
December 31, 2007, we were in compliance with all covenants under our credit
facility and we expect to be in compliance during the next twelve months.
Substantially all of our assets are pledged to secure the credit
facility.
Lease
Obligations
There
were no material changes outside the ordinary course of our business in lease
obligations or other contractual obligations in 2007. We believe that the
current available funds, access to capital from our credit facilities, possible
capital from registered placements of equity through the shelf registration, and
cash flows generated from operations will be sufficient to meet our working
capital requirements and meet our capital needs to finance acquisitions for the
next twelve months.
Shelf
Registration Statement
We have
filed a shelf registration statement with the Securities and Exchange Commission
to allow for offers and sales of our common stock from time to time.
Approximately 5 million shares of common stock may be sold under this
registration statement if we choose to do so.
Contractual
Obligations
In
connection with an acquisition, we were required to establish a letter
of credit totaling $150,000 to serve as collateral to secure a facility
lease. The letter of credit reduces the borrowings available under our accounts
receivable line of credit.
We have
incurred commitments to make future payments under contracts such as leases.
Maturities under these contracts are set forth in the following table as of
December 31, 2007 (in thousands):
|
Payments Due by
Period
|
|
Contractual Obligations
|
Total
|
|
Less
Than
1
Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More
Than
5
Years
|
|
Operating
lease obligations
|
$ |
8,268 |
|
$ |
2,363 |
|
$ |
3,832 |
|
$ |
1,853 |
|
$ |
220 |
|
Total
|
$ |
8,268 |
|
$ |
2,363 |
|
$ |
3,832 |
|
$ |
1,853 |
|
$ |
220 |
|
See Note
9, Income
Taxes, in Notes
to Consolidated Financial Statements for information related to the Company's
obligations for taxes.
If our
capital is insufficient to fund our activities in either the short or long term,
we may need to raise additional funds. In the ordinary course of business, we
may engage in discussions with various persons in connection with additional
financing. If we raise additional funds through the issuance of equity
securities, our existing stockholders' percentage ownership will be diluted.
These equity securities may also have rights superior to our common stock.
Additional debt or equity financing may not be available when needed or on
satisfactory terms. If adequate funds are not available on acceptable terms, we
may be unable to expand our services, respond to competition, pursue acquisition
opportunities or continue our operations.
Critical
Accounting Policies
The
Company's accounting policies are described in Note 2, Summary of Significant Accounting
Policies, in Notes to Consolidated Financial Statements. The Company
believes its most critical accounting policies include revenue recognition,
estimating the allowance for doubtful accounts, accounting for goodwill and
intangible assets, purchase accounting allocation, accounting for stock-based
compensation, deferred income taxes and estimating the related valuation
allowance.
Revenue
Recognition and Allowance for Doubtful Accounts
Revenues
are primarily derived from professional services provided on a time and
materials basis. For time and material contracts, revenues are recognized
and billed by multiplying the number of hours expended in the performance of the
contract by the established billing rates. For fixed fee projects,
revenues are generally recognized using the proportionate performance
method based on the ratio of hours expended to total estimated hours. Billings
in excess of costs plus earnings are classified as deferred revenues. On many
projects the Company is also reimbursed for out-of-pocket expenses such as
airfare, lodging and meals. These reimbursements are included as a
component of revenues. Revenues from software sales are recorded on a gross
basis based on the Company's role as principal in the transaction.
Revenues
are recognized when the following criteria are met: (1) persuasive evidence
of the customer arrangement exists, (2) fees are fixed and determinable,
(3) delivery and acceptance have occurred, and (4) collectibility is
deemed probable. The Company's policy for revenue recognition in instances where
multiple deliverables are sold contemporaneously to the same counterparty is in
accordance with American Institute of Certified Public Accountants (“AICPA”)
Statement of Position 97-2,
Software Revenue Recognition, Emerging Issues Task Force ("EITF") Issue
No. 00-21, Revenue
Arrangements with Multiple Deliverables, and SEC Staff Accounting
Bulletin No. 104, Revenue
Recognition. Specifically, if the Company enters into contracts for the
sale of services and software, then the Company evaluates whether the services
are essential to the functionality of the software and whether it has objective
fair value evidence for each deliverable in the transaction. If the Company has
concluded that the services to be provided are not essential to the
functionality of the software and it can determine objective fair value evidence
for each deliverable of the transaction, then it accounts for each deliverable
in the transaction separately, based on the relevant revenue recognition
policies. Generally, all deliverables of the Company's multiple element
arrangements meet these criteria. The Company follows the guidelines
discussed above in determining revenues; however, certain judgments and
estimates are made and used to determine revenues recognized in any accounting
period. Material differences may result in the amount and timing of revenues
recognized for any period if different conditions were to
prevail.
Our
allowance for doubtful accounts is based upon specific identification of likely
and probable losses. Each accounting period, we evaluate accounts receivable for
risk associated with a client's inability to make contractual payments or
unresolved issues with the adequacy of our services. Billed and unbilled
receivables that are specifically identified as being at risk are provided for
with a charge to revenue or bad debts as appropriate in the period the risk is
identified. We use considerable judgment in assessing the ultimate realization
of these receivables, including reviewing the financial stability of the client,
evaluating the successful mitigation of service delivery disputes, and gauging
current market conditions. If our evaluation of service delivery issues or a
client's ability to pay is incorrect, we may incur future reductions to revenue
or bad debt expense.
Goodwill,
Other Intangible Assets and Impairment of Long-Lived Assets
Goodwill
represents the excess purchase price over the fair value of net assets acquired,
or net liabilities assumed, in a business combination. In accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), the Company performs an annual impairment test of
goodwill. The Company evaluates goodwill at the enterprise level as of October 1
each year or more frequently if events or changes in circumstances indicate that
goodwill might be impaired. As required by SFAS 142, the impairment test is
accomplished using a two-stepped approach. The first step screens for
impairment and, when impairment is indicated, a second step is employed to
measure the impairment. The Company also reviewed other factors to determine the
likelihood of impairment. No impairment was indicated using data as of October
1, 2007.
Other
intangible assets include customer relationships, non-compete arrangements and
internally developed software, and are being amortized over the assets'
estimated useful lives using the straight-line method. Estimated useful lives
range from three to eight years. Amortization of customer relationships,
non-compete arrangements and internally developed software are considered
operating expenses and are included in “Amortization of intangible assets” in
the accompanying consolidated Statements of Income. The Company periodically
reviews the estimated useful lives of its identifiable intangible assets, taking
into consideration any events or circumstances that might result in a lack of
recoverability or revised useful life.
Purchase
Price Allocation
We
allocate the purchase price of our acquisitions to the assets and liabilities
acquired, including identifiable intangible assets, based on their respective
fair values at the date of acquisition. Some of the items, including accounts
receivable, property and equipment, other intangible assets, certain accrued
liabilities, and other reserves require a high degree of management judgment.
Certain estimates may change as additional information becomes available.
Goodwill is assigned at the enterprise level and is deductible for tax purposes
for certain types of acquisitions. The purchase price is allocated to
intangibles based on management's estimate and an independent valuation.
Management finalizes the purchase price allocation within twelve months of the
acquisition date as certain initial accounting estimates are
resolved.
Accounting
for Stock-Based Compensation
We
adopted SFAS No. 123R, Share-Based Payment (“SFAS No. 123R”), on
January 1, 2006, using the modified prospective application transition method.
SFAS No. 123R requires that the costs of employee share-based payments be
measured at fair value on the awards' grant date and recognized in the financial
statements over the requisite service period.
The
Company estimates the fair value of stock option awards on the date of grant
utilizing a modified Black-Scholes option pricing model. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
short-term traded options that have no vesting restrictions and are fully
transferable. However, certain assumptions used in the Black-Scholes model, such
as expected term, can be adjusted to incorporate the unique characteristics of
the Company’s stock option awards. Option valuation models require the input of
somewhat subjective assumptions including expected stock price volatility and
expected term. The Company believes it is unlikely that materially different
estimates for the assumptions used in estimating the fair value of stock options
granted would be made based on the conditions suggested by actual historical
experience and other data available at the time estimates were made. Restricted
stock awards are valued at the price of our common stock on the date of the
grant.
Prior to
January 1, 2006, the Company accounted for share-based compensation using
the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, Accounting
for Stock Issued to Employees (“APB No. 25”), and related interpretations
and elected the disclosure option of SFAS No. 123 (“SFAS No. 123”) as amended by
SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure (“SFAS No. 148”). SFAS
No. 123 required that companies either recognize compensation expense for grants
of stock, stock options and other equity instruments based on fair value, or
provide pro-forma disclosure of net income and earnings per share in the notes
to the financial statements. Accordingly, the Company measured compensation
expense for stock options as the excess, if any, of the estimated fair market
value of the Company's stock at the date of grant over the exercise price. The
Company provided pro-forma effects of this measurement in a footnote to its
financial statements for the year ended December 31, 2005.
Income
Taxes
To record
income tax expense, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. In addition, income tax expense at interim
reporting dates requires us to estimate our expected effective tax rate for the
entire year. This involves estimating our actual current tax liability together
with assessing temporary differences that result in deferred tax assets and
liabilities and expected future tax rates.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141 (revised 2007), Business
Combinations (“SFAS 141R”), which is a revision of SFAS No. 141, Business
Combinations. SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree, recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase, and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R applies prospectively to business combinations
for which the acquisition date is on or after January 1, 2009. The
revised statement will require that transaction costs be expensed instead of
recognized as purchase price. The Company is currently evaluating the impact of
SFAS 141R on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including an amendment of SFAS
No. 115 (“SFAS 159”). SFAS 159 permits companies to choose
to measure many financial instruments and certain other items at fair value.
SFAS 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company does not expect that the
pronouncement will have a material impact on its consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 will be applied prospectively and will
be effective for periods beginning after November 15, 2007. The FASB
issued Staff Position No. 157-2 (“FSP 157-2”) in February 2008, which delayed
the effective date of SFAS 157 for certain nonfinancial assets and liabilities
to fiscal years beginning after November 15, 2008. The Company is currently
evaluating the effect, if any, of SFAS 157 and does not expect that the
pronouncement will have a material impact on its consolidated financial
statements.
In June
2006, the FASB issued Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes – an
interpretation of FASB Statement No. 109 (“FIN 48”), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
treatment of interest and penalties, and disclosure of such positions. The
Company adopted the provisions of FIN 48 on January 1, 2007 as required and such
adoption did not have a material impact to the consolidated financial
statements.
In June
2006, the EITF ratified EITF Issue No. 06-3, How Taxes Collected From Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation) (“EITF
06-3”). A consensus was reached that entities may adopt a policy of
presenting taxes in the income statement on either a gross or net basis. An
entity should disclose its policy of presenting taxes and the amount of any
taxes presented on a gross basis should be disclosed, if significant. The
Company adopted EITF 06-3 on January 1, 2007. There was no effect of
the adoption on the consolidated financial statements as of December 31,
2007. The Company presents revenues net of taxes as disclosed in Note 2,
Summary of Significant
Accounting Policies.
Off-Balance
Sheet Arrangements
The
Company currently has no off-balance sheet arrangements, except operating lease
commitments as disclosed in Note 10, Commitments and
Contingencies.
|
Quantitative and Qualitative
Disclosures About Market
Risk.
|
We are
exposed to market risks related to changes in foreign currency exchange rates
and interest rates. We believe our exposure to market risks is
immaterial.
Exchange
Rate Sensitivity
During
the year ended December 31, 2007, $1.0 million and $0.6 million of our total
revenues were attributable to our Canadian operations and revenues
generated in Europe, respectively. Our exposure to changes in foreign currency
rates primarily arises from short-term intercompany transactions with our
Canadian, Chinese, and India subsidiaries and from client receivables
denominated in other than our functional currency. Our foreign
subsidiaries incur a significant portion of their expenses in their applicable
currency as well, which helps minimize our risk of exchange rate
fluctuations. Based on the amount of revenues attributed to clients
in Canada, and Europe during the year ended December 31, 2007, this
exchange rate risk will not have a material impact on our financial position or
results of operations.
Interest
Rate Sensitivity
We had
unrestricted cash and cash equivalents totaling $8.1 million and
$4.5 million at December 31, 2007 and December 31, 2006,
respectively. These amounts were invested primarily in money market
funds. The unrestricted cash and cash equivalents are held for working capital
purposes. We do not enter into investments for trading or speculative purposes.
Due to the short-term nature of these investments, we believe that we do not
have any material exposure to changes in the fair value of our investment
portfolio as a result of changes in interest rates. Declines in interest rates,
however, will reduce future investment income.
|
Financial Statements and
Supplementary Data.
|
PERFICIENT,
INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2007 AND 2006
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
(In
thousands, except share data)
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
8,070 |
|
|
$ |
4,549 |
|
Accounts
receivable, net of allowance for doubtful accounts of $1,475 in 2007 and
$707 in 2006
|
|
|
50,855 |
|
|
|
38,600 |
|
Prepaid
expenses
|
|
|
1,182 |
|
|
|
1,171 |
|
Other
current assets
|
|
|
4,142 |
|
|
|
2,799 |
|
Total
current assets
|
|
|
64,249 |
|
|
|
47,119 |
|
Property
and equipment, net
|
|
|
3,226 |
|
|
|
1,806 |
|
Goodwill
|
|
|
103,686 |
|
|
|
69,170 |
|
Intangible
assets, net
|
|
|
17,653 |
|
|
|
11,886 |
|
Other
non-current assets
|
|
|
1,178 |
|
|
|
1,019 |
|
Total
assets
|
|
$ |
189,992 |
|
|
$ |
131,000 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
4,160 |
|
|
$ |
5,025 |
|
Current
portion of long-term debt
|
|
|
-- |
|
|
|
1,201 |
|
Other
current liabilities
|
|
|
18,721 |
|
|
|
16,034 |
|
Total
current liabilities
|
|
|
22,881 |
|
|
|
22,260 |
|
Long-term
debt, less current portion
|
|
|
-- |
|
|
|
137 |
|
Deferred
income taxes
|
|
|
1,549 |
|
|
|
1,251 |
|
Total
liabilities
|
|
$ |
24,430 |
|
|
$ |
23,648 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (see Note 4 and 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock ($0.001 par value per share; 50,000,000 shares authorized and
29,423,296 shares issued and outstanding as of December 31, 2007;
26,699,974 shares issued and outstanding as of December 31, 2006)
|
|
$ |
29 |
|
|
$ |
27 |
|
Additional
paid-in capital
|
|
|
188,998 |
|
|
|
147,028 |
|
Accumulated
other comprehensive loss
|
|
|
(117
|
) |
|
|
(125
|
) |
Accumulated
deficit
|
|
|
(23,348
|
) |
|
|
(39,578
|
) |
Total
stockholders' equity
|
|
|
165,562 |
|
|
|
107,352 |
|
Total
liabilities and stockholders' equity
|
|
$ |
189,992 |
|
|
$ |
131,000 |
|
See
accompanying notes to consolidated financial statements.
PERFICIENT, INC.
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
(In
thousands, except share data)
|
|
Services
|
|
$ |
191,395 |
|
|
$ |
137,722 |
|
|
$ |
83,740 |
|
Software
|
|
|
14,243 |
|
|
|
14,435 |
|
|
|
9,387 |
|
Reimbursable
expenses
|
|
|
12,510 |
|
|
|
8,769 |
|
|
|
3,870 |
|
Total
revenues
|
|
|
218,148 |
|
|
|
160,926 |
|
|
|
96,997 |
|
Cost
of revenues (exclusive of depreciation and amortization, shown separately
below):
|
|
|
|
|
|
|
|
|
|
|
|
|
Project
personnel costs
|
|
|
114,692 |
|
|
|
84,161 |
|
|
|
51,140 |
|
Software
costs
|
|
|
11,982 |
|
|
|
12,118 |
|
|
|
7,723 |
|
Reimbursable
expenses
|
|
|
12,510 |
|
|
|
8,769 |
|
|
|
3,870 |
|
Other
project related expenses
|
|
|
3,274 |
|
|
|
2,122 |
|
|
|
1,846 |
|
Total
cost of revenues
|
|
|
142,458 |
|
|
|
107,170 |
|
|
|
64,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
75,690 |
|
|
|
53,756 |
|
|
|
32,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
41,963 |
|
|
|
32,268 |
|
|
|
17,917 |
|
Depreciation
|
|
|
1,553 |
|
|
|
948 |
|
|
|
615 |
|
Amortization
of intangible assets
|
|
|
4,712 |
|
|
|
3,458 |
|
|
|
1,611 |
|
Income
from operations
|
|
|
27,462 |
|
|
|
17,082 |
|
|
|
12,275 |
|
Interest
income
|
|
|
239 |
|
|
|
102 |
|
|
|
15 |
|
Interest
expense
|
|
|
(67
|
) |
|
|
(509
|
) |
|
|
(658
|
) |
Other
income
|
|
|
20 |
|
|
|
174 |
|
|
|
43 |
|
Income
before income taxes
|
|
|
27,654 |
|
|
|
16,849 |
|
|
|
11,675 |
|
Provision
for income taxes
|
|
|
11,424 |
|
|
|
7,282 |
|
|
|
4,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
16,230 |
|
|
$ |
9,567 |
|
|
$ |
7,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$ |
0.58 |
|
|
$ |
0.38 |
|
|
$ |
0.33 |
|
Diluted
net income per share
|
|
$ |
0.54 |
|
|
$ |
0.35 |
|
|
$ |
0.28 |
|
Shares
used in computing basic net income per share
|
|
|
27,998,093 |
|
|
|
25,033,337 |
|
|
|
22,005,154 |
|
Shares
used in computing diluted net income per share
|
|
|
30,121,962 |
|
|
|
27,587,449 |
|
|
|
25,242,496 |
|
See
accompanying notes to consolidated financial statements.
PERFICIENT, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In
thousands)
|
|
Common
Stock
Shares
|
|
|
Common
Stock
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Accumulated
Deficit
|
|
|
Total
Stockholders'
Equity
|
|
Balance
at January 1, 2005
|
|
|
20,657 |
|
|
$ |
21 |
|
|
$ |
100,982 |
|
|
$ |
(58 |
) |
|
$ |
(56,322 |
) |
|
$ |
44,623 |
|
Warrants
exercised
|
|
|
88 |
|
|
|
-- |
|
|
|
157 |
|
|
|
-- |
|
|
|
-- |
|
|
|
157 |
|
Stock
options exercised
|
|
|
1,354 |
|
|
|
1 |
|
|
|
2,703 |
|
|
|
-- |
|
|
|
-- |
|
|
|
2,704 |
|
iPath
and Vivare acquisitions
|
|
|
1,196 |
|
|
|
1 |
|
|
|
8,708 |
|
|
|
-- |
|
|
|
-- |
|
|
|
8,709 |
|
Tax
benefit of stock option exercises
|
|
|
-- |
|
|
|
-- |
|
|
|
2,306 |
|
|
|
-- |
|
|
|
-- |
|
|
|
2,306 |
|
Stock
compensation
|
|
|
-- |
|
|
|
-- |
|
|
|
264 |
|
|
|
-- |
|
|
|
-- |
|
|
|
264 |
|
Foreign
currency translation adjustment
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(29
|
) |
|
|
-- |
|
|
|
(29
|
) |
Net
income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
7,177 |
|
|
|
7,177 |
|
Total
comprehensive income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
7,148 |
|
Balance
at December 31, 2005
|
|
|
23,295 |
|
|
$ |
23 |
|
|
$ |
115,120 |
|
|
$ |
(87
|
) |
|
$ |
(49,145
|
) |
|
$ |
65,911 |
|
Bay
Street, Insolexen, and EGG acquisitions
|
|
|
1,499 |
|
|
|
2 |
|
|
|
17,989 |
|
|
|
-- |
|
|
|
-- |
|
|
|
17,991 |
|
Warrants
exercised
|
|
|
145 |
|
|
|
-- |
|
|
|
146 |
|
|
|
-- |
|
|
|
-- |
|
|
|
146 |
|
Stock
options exercised
|
|
|
1,672 |
|
|
|
2 |
|
|
|
4,001 |
|
|
|
-- |
|
|
|
-- |
|
|
|
4,003 |
|
Purchases
of stock from Employee Stock Purchase
Plan
|
|
|
6 |
|
|
|
-- |
|
|
|
86 |
|
|
|
-- |
|
|
|
-- |
|
|
|
86 |
|
Tax
benefit of stock option exercises and restricted stock
vesting
|
|
|
-- |
|
|
|
-- |
|
|
|
6,554 |
|
|
|
-- |
|
|
|
-- |
|
|
|
6,554 |
|
Stock
compensation
|
|
|
83 |
|
|
|
-- |
|
|
|
3,132 |
|
|
|
-- |
|
|
|
-- |
|
|
|
3,132 |
|
Foreign
currency translation adjustment
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(38
|
) |
|
|
-- |
|
|
|
(38
|
) |
Net
income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
9,567 |
|
|
|
9,567 |
|
Total
comprehensive income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
9,529 |
|
Balance
at December 31, 2006
|
|
|
26,700 |
|
|
$ |
27 |
|
|
$ |
147,028 |
|
|
$ |
(125 |
) |
|
$ |
(39,578 |
) |
|
$ |
107,352 |
|
E-Tech,
Tier1, BoldTech, and ePairs acquisitions
|
|
|
1,250 |
|
|
|
1 |
|
|
|
24,975 |
|
|
|
-- |
|
|
|
-- |
|
|
|
24,976 |
|
Stock
options exercised
|
|
|
1,160 |
|
|
|
1 |
|
|
|
3,696 |
|
|
|
-- |
|
|
|
-- |
|
|
|
3,697 |
|
Purchases
of stock from Employee Stock Purchase
Plan
|
|
|
11 |
|
|
|
-- |
|
|
|
206 |
|
|
|
-- |
|
|
|
-- |
|
|
|
206 |
|
Tax
benefit of stock option exercises and restricted stock
vesting
|
|
|
-- |
|
|
|
-- |
|
|
|
6,889 |
|
|
|
-- |
|
|
|
-- |
|
|
|
6,889 |
|
Stock
compensation
|
|
|
302 |
|
|
|
-- |
|
|
|
6,204 |
|
|
|
-- |
|
|
|
-- |
|
|
|
6,204 |
|
Foreign
currency translation adjustment
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
8 |
|
|
|
-- |
|
|
|
8 |
|
Net
income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
16,230 |
|
|
|
16,230 |
|
Total
comprehensive income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
16,238 |
|
Balance
at December 31, 2007
|
|
|
29,423 |
|
|
$ |
29 |
|
|
$ |
188,998 |
|
|
$ |
(117 |
) |
|
$ |
(23,348 |
) |
|
$ |
165,562 |
|
See accompanying notes to
consolidated financial statements.
PERFICIENT, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
(In
thousands)
|
|
|
|
|
Net
income
|
|
$ |
16,230 |
|
|
$ |
9,567 |
|
|
$ |
7,177 |
|
Adjustments
to reconcile net income to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,553 |
|
|
|
948 |
|
|
|
615 |
|
Amortization
of intangibles
|
|
|
4,712 |
|
|
|
3,458 |
|
|
|
1,611 |
|
Deferred
income taxes
|
|
|
(495
|
) |
|
|
1,393 |
|
|
|
(219
|
) |
Non-cash
stock compensation
|
|
|
6,204 |
|
|
|
3,132 |
|
|
|
264 |
|
Non-cash
interest expense
|
|
|
-- |
|
|
|
6 |
|
|
|
24 |
|
Tax
benefit on stock options
|
|
|
-- |
|
|
|
-- |
|
|
|
2,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,589
|
) |
|
|
(5,771
|
) |
|
|
148 |
|
Other
assets
|
|
|
3,256 |
|
|
|
(294
|
) |
|
|
(1,714
|
) |
Accounts
payable
|
|
|
(1,694
|
) |
|
|
1,251 |
|
|
|
(3,155
|
) |
Other
liabilities
|
|
|
(5,126
|
) |
|
|
(543
|
) |
|
|
2,157 |
|
Net
cash provided by operating activities
|
|
|
23,051 |
|
|
|
13,147 |
|
|
|
9,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(2,035
|
) |
|
|
(1,518
|
) |
|
|
(691
|
) |
Capitalization
of software developed for internal use
|
|
|
(181
|
) |
|
|
(136
|
) |
|
|
(599
|
) |
Purchase
of businesses, net of cash acquired
|
|
|
(26,774
|
) |
|
|
(17,210
|
) |
|
|
(11,231
|
) |
Payments
on Javelin notes
|
|
|
-- |
|
|
|
(250
|
) |
|
|
(250
|
) |
Net
cash used in investing activities
|
|
|
(28,990
|
) |
|
|
(19,114
|
) |
|
|
(12,771
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowings
|
|
|
11,900 |
|
|
|
34,900 |
|
|
|
12,000 |
|
Payments
on short-term borrowings
|
|
|
(11,900
|
) |
|
|
(38,900
|
) |
|
|
(8,000
|
) |
Payments
on long-term debt
|
|
|
(1,338
|
) |
|
|
(1,338
|
) |
|
|
(1,135
|
) |
Deferred
offering costs
|
|
|
-- |
|
|
|
-- |
|
|
|
(942
|
) |
Tax
benefit on stock options and restricted stock vesting
|
|
|
6,889 |
|
|
|
6,554 |
|
|
|
-- |
|
Proceeds
from the exercise of stock options and Employee Stock Purchase
Plan
|
|
|
3,903 |
|
|
|
4,089 |
|
|
|
2,704 |
|
Proceeds
from the exercise of warrants
|
|
|
-- |
|
|
|
146 |
|
|
|
157 |
|
Net
cash provided by financing activities
|
|
|
9,454 |
|
|
|
5,451 |
|
|
|
4,784 |
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
6 |
|
|
|
(31
|
) |
|
|
(37
|
) |
Change
in cash and cash equivalents
|
|
|
3,521 |
|
|
|
(547
|
) |
|
|
1,190 |
|
Cash
and cash equivalents at beginning of period
|
|
|
4,549 |
|
|
|
5,096 |
|
|
|
3,906 |
|
Cash
and cash equivalents at end of period
|
|
$ |
8,070 |
|
|
$ |
4,549 |
|
|
$ |
5,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
40 |
|
|
$ |
540 |
|
|
$ |
594 |
|
Cash
paid for income taxes
|
|
$ |
3,680 |
|
|
$ |
3,156 |
|
|
$ |
3,684 |
|
Non-cash
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for purchase of businesses
|
|
$ |
24,976 |
|
|
$ |
17,991 |
|
|
$ |
8,709 |
|
Change
in goodwill
|
|
$ |
(1,957 |
) |
|
$ |
318 |
|
|
$ |
670 |
|
See
accompanying notes to consolidated financial statements.
PERFICIENT,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business and Principles of Consolidation
Perficient, Inc.
(the “Company”) is an information technology consulting firm. The Company helps
its clients use Internet-based technologies to make their businesses more
responsive to market opportunities and threats, strengthen relationships with
customers, suppliers and partners, improve productivity and reduce information
technology costs. The Company designs, builds and delivers solutions using a
core set of middleware software products developed by third party vendors. The
Company's solutions enable its clients to meet the changing demands of an
increasingly global, Internet-driven and competitive marketplace.
The
Company is incorporated in Delaware. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
2.
Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates, and such
differences could be material to the financial statements.
Reclassification
The Company has reclassified the
presentation of certain prior period information to conform to the current year
presentation.
Revenue
Recognition
Revenues
are primarily derived from professional services provided on a time and
materials basis. For time and material contracts, revenues are recognized
and billed by multiplying the number of hours expended in the performance of the
contract by the established billing rates. For fixed fee projects,
revenues are generally recognized using the proportionate performance
method based on the ratio of hours expended to total estimated hours. Billings
in excess of costs plus earnings are classified as deferred revenues. On many
projects the Company is also reimbursed for out-of-pocket expenses such as
airfare, lodging and meals. These reimbursements are included as a
component of revenues. Revenues from software sales are recorded on a gross
basis based on the Company's role as principal in the transaction.
Revenues
are recognized when the following criteria are met: (1) persuasive evidence
of the customer arrangement exists, (2) fees are fixed and determinable,
(3) delivery and acceptance have occurred, and (4) collectibility is
deemed probable. The Company's policy for revenue recognition in instances where
multiple deliverables are sold contemporaneously to the same counterparty is in
accordance with American Institute of Certified Public Accountants (“AICPA”)
Statement of Position 97-2,
Software Revenue Recognition, Emerging Issues Task Force ("EITF") Issue
No. 00-21, Revenue
Arrangements with Multiple Deliverables, and SEC Staff Accounting
Bulletin No. 104, Revenue
Recognition. Specifically, if the Company enters into contracts for the
sale of services and software, then the Company evaluates whether the services
are essential to the functionality of the software and whether it has objective
fair value evidence for each deliverable in the transaction. If the Company has
concluded that the services to be provided are not essential to the
functionality of the software and it can determine objective fair value evidence
for each deliverable of the transaction, then it accounts for each deliverable
in the transaction separately, based on the relevant revenue recognition
policies. Generally, all deliverables of the Company's multiple element
arrangements meet these criteria. The Company follows the guidelines
discussed above in determining revenues; however, certain judgments and
estimates are made and used to determine revenues recognized in any accounting
period. Material differences may result in the amount and timing of revenues
recognized for any period if different conditions were to prevail.
Revenues
are presented net of taxes assessed by governmental
authorities. Sales taxes are generally collected and subsequently
remitted on all software sales and certain services transactions as
appropriate.
Cash
and Cash Equivalents
Cash
equivalents consist primarily of cash deposits and investments with original
maturities of ninety days or less when purchased.
PERFICIENT,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded at the invoiced amount. The allowance for doubtful
accounts is the Company’s best estimate of the amount of uncollectible amounts
in its existing accounts receivable. Management analyzes historical collection
trends and changes in its customer payment patterns, customer concentration, and
credit worthiness when evaluating the adequacy of its allowance for doubtful
accounts. The Company includes any receivables balances that are determined to
be uncollectible in its overall allowance for doubtful accounts. The Company
reviews its allowance for doubtful accounts monthly.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation of property and equipment is
computed using the straight-line method over the useful lives of the assets
(generally one to five years). Leasehold improvements are amortized over
the shorter of the life of the lease or the estimated useful life of the
assets.
Intangible
Assets
Goodwill
represents the excess purchase price over the fair value of net assets acquired,
or net liabilities assumed, in a business combination. In accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), the Company performs an annual impairment test of
goodwill. The Company evaluates goodwill at the enterprise level as of October 1
each year or more frequently if events or changes in circumstances indicate that
goodwill might be impaired. As required by SFAS 142, the impairment test is
accomplished using a two-stepped approach. The first step screens for
impairment and, when impairment is indicated, a second step is employed to
measure the impairment. The Company also reviewed other factors to determine the
likelihood of impairment. No impairment was indicated using data as of October
1, 2007.
Other
intangible assets include customer relationships, non-compete arrangements and
internally developed software, and are being amortized over the assets'
estimated useful lives using the straight-line method. Estimated useful lives
range from three to eight years. Amortization of customer relationships,
non-compete arrangements and internally developed software are considered
operating expenses and are included in “Amortization of intangible assets” in
the accompanying consolidated Statements of Income. The Company periodically
reviews the estimated useful lives of its identifiable intangible assets, taking
into consideration any events or circumstances that might result in a lack of
recoverability or revised useful life.
Deferred
Offering Costs
Costs
incurred related to equity offerings under effective registration statements are
deferred until the offering occurs or management does not intend to complete the
offering. At the time that the issuance of new equity occurs, these costs are
netted against the proceeds received. These costs are expensed if the offering
does not occur. Approximately $943,000 of these costs were recorded as part of
Other Non-Current Assets on the Balance Sheet as of December 31, 2007 and
2006.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes
(“SFAS 109”), and Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes – an interpretation of SFAS 109 (“FIN 48”). SFAS 109
prescribes the use of the liability method whereby deferred tax asset and
liability account balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Deferred tax assets are subject to tests of recoverability.
A valuation allowance is provided for such deferred tax assets to the extent
realization is not judged to be more likely than not. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, treatment of interest and penalties, and disclosure of such
positions. The Company adopted the provisions of FIN 48 on January 1, 2007 as
required and such adoption did not have a material impact to the consolidated
financial statements.
Earnings
Per Share
Basic
earnings per share is computed by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share includes the weighted average number of
common shares outstanding and the number of equivalent shares which would be
issued related to the stock options and warrants using the treasury method,
contingently issuance shares, and convertible preferred stock using the
if-converted method, unless such additional equivalent shares are
anti-dilutive.
PERFICIENT,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123R
(As Amended), Share Based
Payment (“SFAS 123R”), using the modified prospective application
transition method. Under this method, compensation cost for the portion of
awards for which the requisite service has not yet been rendered that are
outstanding as of the adoption date is recognized over the remaining service
period. The compensation cost for that portion of awards is based on the
grant-date fair value of those awards as calculated for pro-forma disclosures
under SFAS No. 123. All new awards and awards that are modified,
repurchased, or cancelled after the adoption date are accounted for under the
provisions of SFAS 123R. Prior periods are not restated under this transition
method. The Company recognizes share-based compensation ratably using the
straight-line attribution method over the requisite service period. In addition,
pursuant to SFAS 123R, the Company is required to estimate the amount of
expected forfeitures when calculating share-based compensation, instead of
accounting for forfeitures as they occur, which was the Company's practice prior
to the adoption of SFAS 123R.
Deferred
Rent
Certain of the Company’s operating
leases contain predetermined fixed escalations of minimum rentals during the
original lease terms. For these leases, the Company recognizes the related
rental expense on a straight-line basis over the life of the lease and records
the difference between the amounts charged to operations and amounts paid as
accrued rent expense.
Fair
Value of Financial Instruments
Cash
equivalents, accounts receivable, accounts payable, other accrued liabilities,
and debt are stated at amounts which approximate fair value due to the near term
maturities of these instruments.
Recently
Issued Accounting Standards
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141 (revised 2007), Business
Combinations (“SFAS 141R”), which is a revision of SFAS No. 141, Business
Combinations. SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree, recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase, and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R applies prospectively to business combinations
for which the acquisition date is on or after January 1, 2009. The revised
statement will require that transaction costs be expensed instead of recognized
as purchase price. The Company is currently evaluating the impact of SFAS 141R
on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including an amendment of SFAS
No. 115 (“SFAS 159”). SFAS 159 permits companies to choose
to measure many financial instruments and certain other items at fair value.
SFAS 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company does not expect that the
pronouncement will have a material impact on its consolidated financial
statements.
In September 2006, the FASB issued SFAS
No. 157, Fair Value
Measurements (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS 157 will be applied prospectively and will be
effective for periods beginning after November 15, 2007. The FASB
issued Staff Position No. 157-2 (“FSP 157-2”) in February 2008, which delayed
the effective date of SFAS 157 for certain nonfinancial assets and liabilities
to fiscal years beginning after November 15, 2008. The Company is currently
evaluating the effect, if any, of SFAS 157 and does not expect that the
pronouncement will have a material impact on its consolidated financial
statements.
In June
2006, the FASB issued Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes – an
interpretation of FASB Statement No. 109 (“FIN 48”), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
treatment of interest and penalties, and disclosure of such positions. The
Company adopted the provisions of FIN 48 on January 1, 2007 as required and such
adoption did not have a material impact to the consolidated financial
statements.
In June
2006, the EITF ratified EITF Issue No. 06-3, How Taxes Collected From Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation) (“EITF
06-3”). A consensus was reached that entities may adopt a policy of
presenting taxes in the income statement on either a gross or net basis. An
entity should disclose its policy of presenting taxes and the amount of any
taxes presented on a gross basis should be disclosed, if significant. The
Company adopted EITF 06-3 on January 1, 2007. There was no effect of
the adoption on the consolidated financial statements as of December 31,
2007. The Company presents revenues net of taxes as disclosed in Note 2,
Summary of Significant
Accounting Policies.
PERFICIENT,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.
Net Income Per Share
The
following table presents the calculation of basic and diluted net income per
share (in thousands, except per share information):
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
income
|
|
$ |
16,230 |
|
|
$ |
9,567 |
|
|
$ |
7,177 |
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
27,442 |
|
|
|
23,783 |
|
|
|
20,868 |
|
Weighted-average
shares of common stock subject to contingency (i.e., restricted
stock)
|
|
|
556 |
|
|
|
1,250 |
|
|
|
1,137 |
|
Shares
used in computing basic net income per share
|
|
|
27,998 |
|
|
|
25,033 |
|
|
|
22,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,707 |
|
|
|
2,281 |
|
|
|
3,088 |
|
Warrants
|
|
|
8 |
|
|
|
74 |
|
|
|
149 |
|
Restricted
stock subject to vesting
|
|
|
409 |
|
|
|
199 |
|
|
|
-- |
|
Shares
used in computing diluted net income per share
|
|
|
30,122 |
|
|
|
27,587 |
|
|
|
25,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$ |
0.58 |
|
|
$ |
0.38 |
|
|
$ |
0.33 |
|
Diluted
net income per share
|
|
$ |
0.54 |
|
|
$ |
0.35 |
|
|
$ |
0.28 |
|