PERFICIENT INC (PRFT)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/03/2011
Filed Period 12/31/2010
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
þ
o
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2010
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 001-15169
PERFICIENT, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other jurisdiction of incorporation or organization)
No. 74-2853258
(I.R.S. Employer Identification No.)
520 Maryville Centre Drive, Suite 400
Saint Louis, Missouri 63141
(Address of principal executive offices)
(314) 529-3600
(Registrant's telephone number, including area code)
Title of each class:
Common Stock, $0.001 par value
Name of each exchange on which registered:
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(b) of the Act:
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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. o
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 filero
Non-accelerated filero
Accelerated filerþ
Smaller reporting companyo
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 $241.3 million based on the last reported sale price
of the Company's common stock on The Nasdaq Global Select Market on June 30, 2010.
As of February 28, 2011, there were 29,623,398 shares of Common Stock outstanding.
Portions of the definitive proxy statement in connection with the 2011 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission no later than April 30, 2011, are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Reserved.
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
PART III
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits, Financial Statement Schedules.
PART IV
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Item 1. Business.
Overview
PART I
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. Our solutions include
portals and collaboration, business integration, customer relationship management, custom applications, technology platform implementations, business
intelligence, enterprise content management, enterprise performance management, eCommerce, and customer self service, among others. Our solutions enable
our clients to operate a real-time enterprise that dynamically adapts business processes and the systems that support them 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 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 technology
solutions.
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 and through the continuation of our disciplined acquisition strategy. 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 identifying, executing, and integrating
acquisitions that add strategic value to our business. From April 2004 through November 2007, we acquired and integrated 12 information technology
consulting firms. Given the economic conditions during 2008 and 2009 we suspended acquisition activity pending improved visibility into the health of the
economy. With the return to growth in 2010 we have resumed our disciplined acquisition strategy as evidenced by our acquisition of Kerdock Consulting,
LLC (“Kerdock”) in March and speakTECH in December.
We serve our customers from locations in 18 markets throughout North America and, in addition, we have billable employees who are part of
“national” business units and travel extensively to serve clients primarily in the United States. Our future growth plan includes expanding our business both
organically and through acquisitions, with a continued focus on the United States. We also intend to further leverage our existing offshore capabilities to
support our future growth and provide our clients flexible options for project delivery. In 2010, 96% of our revenues were derived from clients in the United
States while 4% of our revenues were derived from clients in Canada and Europe. In 2009 and 2008, 96% and 97%, respectively, of our revenues were
derived from clients in the United States while 4% and 3%, respectively, of our revenues were derived from clients in Canada and Europe. Approximately
97% of our total assets were located in the United States in 2010 and 2009 with the remainder located in Canada, China, and India.
We place strong emphasis on building lasting relationships with clients. Over the past three years ending December 31, 2010, an average of 87% of
services revenues were derived from clients who continued to utilize our services from the prior year, excluding any revenues from acquisitions completed in
that year. We have also built meaningful relationships with software providers whose products we use to design and implement solutions for our clients.
These relationships 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 Economy. In 2008 and 2009, the United States economy experienced a recession. It is clear that the recession had an effect on the
information technology consulting industry in general and on demand for our services. We experienced a return to organic growth in 2010 and expect it to
continue in 2011. According to the most recent forecast from independent market research firm Forrester Research, the United States technology market will
grow by 7.4% in 2011 and demand for software and information technology services will grow 8.4% and 8.2%, respectively. We have provided services
revenue guidance for 2011 of $235 million to $255 million which would represent an increase from 2010 revenues of 9% to 19%.
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Need to Rationalize Complex, Heterogeneous Enterprise Technology Environments. The information systems of many Global 2000 and large
enterprise companies continue to evolve 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 generally have complex enterprise technology environments with, in some
cases, incompatible technologies and high costs of integration. These increases in complexity, cost, and risk, combined with the business and technology
transformation resulting from 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 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.
These factors continue to drive spending on software and related consulting services in the areas of application integration, middleware and portals,
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. Companies are expected to continue to spend on integration broker suites, enterprise portal services, application platform suites, and message-
oriented middleware. As companies continue to spend on software and related consulting services, their spending on services will also continue, often by a
multiplier of each dollar spent on software.
Quarterly Fluctuations. Our quarterly operating results are subject to seasonal fluctuations. The fourth quarter is impacted by fewer billable days as
a result of professional staff vacation and holidays, and the first quarter is impacted by diminished opportunities to sell services through the fourth quarter
holiday period. 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 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 fourth quarter as procurement policies of our clients may result in higher technology spending towards the end of
budget cycles. 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:
• Domain Expertise. We have acquired significant domain expertise in a core set of technology solutions and software platforms. These solutions include
portals and collaboration, business integration, customer relationship management, custom applications, technology platform implementations, business
intelligence, enterprise content management, enterprise performance management, eCommerce, and customer self service, among others. The platforms
in which we have significant domain expertise and on which these solutions are built include IBM, Oracle, Microsoft, TIBCO, and Documentum,
among others.
• 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 methodology includes a proven execution process map we developed, which allows for repeatable, high quality services delivery.
The 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, 2010, an average of 87% of services revenues were
derived from clients who continued to utilize our services from the prior year, excluding any revenues from acquisitions completed in that year.
• Vendor Relationship and Endorsements. We have built meaningful relationships with software providers, whose products we use to design and
implement solutions for our clients. These relationships 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 Certified Oracle Partner, a Microsoft Gold Certified Partner, a TeamTIBCO partner, and an EMC
Documentum Select Services Team Partner. Our vendors have recognized our relationships with several awards. Most recently, we were named IBM’s
2010 InfoSphere Warehouse Pack Partner of the Year. The honor marked the fifth consecutive year that we have received a major business partner
award from IBM, which also recognized Perficient with the Impact 2010 Smarter Decision Management Award. Also in 2010, Perficient was named
Microsoft’s Public Sector Healthcare Provider Partner of the Year and was a recipient of the 2010 Greater St. Louis Top 50 Businesses Shaping our
Future Award.
• 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 locations in 18 markets throughout North America and, in addition, we have billable employees who are part of “national” business units
and travel extensively to serve clients primarily in the United States. Our future growth plan includes expanding our business both organically and
through acquisitions, with a primary focus on the United States.
• Offshore Capability. We own and operate a CMMI Level 5 certified global development center in Hangzhou, China. This facility is staffed with
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 these facilities we utilize a team of colleagues with expertise in IBM, Microsoft, and
TIBCO 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
number of foreign nationals in the United States on H1-B visas. We also maintain a recruiting and development facility in Chennai, India, to continue
to grow our base of H1-B foreign national colleagues. As of December 31, 2010, we had 170 colleagues at the Hangzhou, China facility and 178
colleagues with H1-B visas. We intend to continue to leverage our existing offshore capabilities to support our growth and provide our clients flexible
options for project delivery.
Our Solutions
We help clients gain competitive advantage by using technology 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:
• 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;
• improve the quality and lower the cost of customer acquisition and care through web-based customer self-service and provisioning;
• 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;
• 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
• 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:
• Enterprise portals and collaboration. We design, develop, implement, and integrate secure and scalable enterprise portals and collaboration solutions 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, content management, social media/networking tools, and personalization.
• Business integration and service oriented architectures (SOA). We design, develop, and implement business integration and SOA 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, 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.
• Customer relationship management (CRM). We design, develop, and implement advanced CRM solutions that facilitate customer acquisition, service
and support, and sales and marketing by understanding our customers’ needs through interviews, requirement gathering sessions, call center analysis,
developing an iterative prototype driven solution, and integrating the solution to legacy processes and applications.
• 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. Our substantial experience with platforms including J2EE, .Net, and Open-source enables enterprises
of all types to leverage cutting-edge technologies to meet business-driven needs.
• 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.
• Business intelligence. We design, develop, and implement business intelligence solutions that allow companies to interpret and act upon accurate,
timely, and integrated information. Business intelligence solutions help our clients make more informed business decisions by classifying, aggregating,
and correlating data into meaningful business information. 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.
• 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. Our
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.
• Enterprise performance management (EPM). We design, develop, and implement EPM 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.
• Business Process Management & Analysis. We design, develop, and implement business strategy solutions, technology roadmaps, competitor
benchmarks, and current-state assessments. Our business consultants analyze existing initiatives, infrastructure, and investments and counsel our clients
on how to leverage technology to achieve maximum return-on-investment and business impact.
• Interactive Design. We design, develop, and implement interactive data solutions that provide our clients with a quality user experience, which ensures
our clients will be able to achieve their goals easily and efficiently through expertise in custom multimedia design, information architecture, rich-media
interfaces, and innovative interactive platforms such as Microsoft Surface and iPhone. We combine creative expertise, inspired ideas, and emerging
technologies including social networking, collaboration tools, and multi-touch interfaces with broad vertical industry expertise to build rich, relevant,
compelling business solutions. These end-to-end interactive design and technology solutions allow our clients to connect with their clients, employees,
and partners, drive revenue, encourage people to work smarter, and innovate the way the world does business.
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• Maintenance and Support Offerings. We design, develop, and implement maintenance and support offerings for our clients who are interested in the
ongoing support of applications. These arrangements are typically structured on a fee retainer basis and provide a recurring revenue stream for
Perficient.
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 technology solution services, we offer education and mentoring services to our clients. We conduct IBM- and Oracle-certified
training, where we provide our clients both a customized and established curriculum of courses and other education services.
Our Strategy
Our goal is to be the premier technology management consulting firm in North America. To achieve our goal, our strategy is to:
• 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.
• Continue Making Disciplined Acquisitions. With the return to growth in 2010, we have resumed our disciplined acquisition strategy that was suspended
in 2008. This is evidenced by our acquisition of Kerdock in March and speakTECH in December. 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 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.
• Expand and Enhance Our Industry Vertical Focus. We have industry focused practices such as healthcare, communications, and consumer
products. The goal of these industry verticals is to recruit and retain consultants with specific industry expertise and to ‘mine’ and leverage the
intellectual property we have as we serve clients within these industries. Expanding these verticals will help us in terms of revenue generation as well
as market expansion beyond our geographic and solution focused business units.
• Expand Technical Skill and 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 locations in 18 markets throughout North America and, in addition, we have billable employees who are
part of “national” business units and travel extensively to serve clients primarily in North America and Europe. Our future growth plan includes
expanding our business both organically and through acquisitions, with a primary focus on the United States. This growth plan also includes expanding
the technical skills we offer our clients as evidenced by our acquisition of Kerdock and speakTECH. These acquisitions allow us to offer more
specialized Oracle EPM and Microsoft SharePoint solutions.
• Enhance Brand Visibility. Our focus on a core set of technology solutions, applications, and software platforms and a targeted customer and geographic
market has given us brand visibility. In addition, we believe we have achieved the size necessary to enhance our visibility among prospective clients,
employees, and software vendors. As we continue to grow our business, we intend to highlight to current and prospective customers our leadership in
technology solutions and infrastructure software technology platforms.
• Leverage Offshore Capabilities. Our solutions and services are primarily delivered at the customer site and require a significant degree of customer
participation, interaction, and specialized technology expertise. We can complement this with lower cost offshore technology colleagues 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 and operate a CMMI Level 5 certified global development center in Hangzhou, China that is staffed with
colleagues who provide offshore custom application development, quality assurance, and testing services and we have a relationship with an offshore
development facility in Bitola, Macedonia. In addition to our offshore capabilities, we employ a substantial number of H1-B foreign nationals in the
United States. A recruiting and development facility in Chennai, India is maintained to continue to grow our base of H1-B foreign national
colleagues. As of December 31, 2010 we had 170 colleagues at the Hangzhou, China facility and 178 colleagues with H1-B visas. We intend to
continue to leverage our existing offshore capabilities to support our growth and provide our clients flexible options for project delivery.
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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 colleagues 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 colleagues with the ability to deliver high-quality and high-value services for our clients.
• 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, their
clients, or clients using IBM platforms; utilizing us as the services firm of choice.
Sales and Marketing
As of December 31, 2010, we had a 36 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 colleagues 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-up engagements as well as leveraging those relationships to forge new relationships in different areas of the business
and with our clients’ business partners. Approximately 82% of our sales are executed by our direct sales force. In addition to our direct sales team, we also
have 22 dedicated sales support employees, 18 general managers and three vice-presidents who are engaged in the sales and marketing efforts.
Our primary 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 primarily pursue solutions opportunities where our domain
expertise and delivery track record give us a competitive advantage. We also typically target engagements of up to $5 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, Oracle, Microsoft, TIBCO, and Documentum. 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.
Clients
During the year ended December 31, 2010, we provided services to 481 customers. No one customer provided more than 10% of our total revenues
in 2010, 2009 or 2008.
Competition
The market for the services we provide is competitive and has low barriers to entry. We believe that our competitors fall into several categories,
including:
• small local consulting firms that operate in no more than one or two geographic regions;
• boutique consulting firms such as Prolifics and Avanade;
• national consulting firms, such as Accenture, Deloitte Consulting, and Sapient;
• in-house professional services organizations of software companies; and
• offshore providers such as Infosys Technologies Limited and Wipro Limited.
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, efficiency, 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.
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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 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, 2010, we had 1,088 colleagues, 924 of which were billable (excludes 185 billable subcontractors) and 164 which were
involved in sales, administration, and marketing. None of our colleagues are represented by a collective bargaining agreement and we have never experienced
a strike or similar work stoppage. We are committed to the continued development of our colleagues.
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, and the Internet. After initially identifying qualified candidates, we
conduct an extensive screening and interview process.
Retention. We believe that our 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 makes us an attractive career choice for experienced
professionals. Because our strategic partners are established and emerging market leaders, our technology colleagues have an opportunity to work with
cutting-edge information technology. We foster professional development by training our technology colleagues 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 colleagues with
assessing their skills and developing a detailed action plan for guiding their career development.
Training. To ensure continued development of our technical staff, we place a priority on training. We offer extensive training for our colleagues
around industry-leading technologies. We utilize our education practice to provide continuing education and professional development opportunities for our
colleagues.
Compensation. Our employees have a compensation model that includes 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. Senior level employees are eligible to receive restricted
stock awards, which generally vest ratably over a minimum three year period.
Company Wide Practice (CWP) Leaders. Our CWP leadership performs a critical role in maintaining our technology leadership. Consisting of key
employees from several practice areas, the CWP leadership assesses new technologies, partnership opportunities, and serves as lead internal subject matter
experts for their respective domain. The CWP leaders also coordinate thought leadership activities, including white paper authorship and publication and
speaking engagements by our colleagues. Finally, the CWP team 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:
• we believe in long-term client and vendor relationships built on investment in innovative solutions, delivering more value than the competition, and a
commitment to excellence;
• we believe in growth and profitability and building meaningful scale;
• we believe each of us is ultimately responsible for our own career development and has a commitment to mentor others;
• we believe that Perficient has an obligation to invest in our consultants’ training and education;
• we believe the best career development comes on the job; and
• we love challenging new work opportunities.
We take these commitments seriously because we believe that we can succeed only if the Perficient Promise is kept.
7
General Information
Our stock is traded on The Nasdaq Global Select Market 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.
Item 1A.
Risk Factors.
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 United
States (“U.S.”) and worldwide. For example, the general worldwide economic downturn in 2008 and 2009 reduced demand for our services and caused
clients to request additional price concessions. Changes in economic conditions could cause our clients 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. On-
going economic uncertainties also affect our business in a number of other ways, making it more difficult to accurately forecast and plan our future business
activities. Specifically, if we are unable to forecast client demand for our services accurately, we might be unable to effectively plan for or respond to
economic changes. This could result, for example, in not having the appropriate personnel where they are needed, and could have a significant negative
impact on our results of operations. Any of these economic conditions could have a material adverse effect on our results of operations.
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 U.S.-based projects could result in lower revenues and margins for U.S.-based information technology companies. Our ability to compete
utilizing higher-cost domestic resources and/or our ability to procure comparably priced offshore 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 vendor relationships, greater financial resources, sales and marketing organizations, market penetration, and research and
development capabilities, as well as broader product offerings, greater market presence, and name recognition. We may face increasing competitive pressures
from these competitors. This may place us at a disadvantage to our competitors, which may harm our ability to grow, maintain revenues, or generate net
income.
8
In recent years, there has been consolidation in our industry and we expect that there will be additional consolidation in the future. As a result of
this 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 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:
• continue to develop our technology expertise;
• enhance our current services;
• develop new services that meet changing customer needs;
• advertise and market our services; and
• influence and respond to emerging industry standards and other technological changes.
Our success will depend on our ability to 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.
Our results of operations could materially suffer if we are not able to obtain favorable pricing.
If we are not able to obtain favorable pricing for our services, our revenues and profitability could materially suffer. The rates we are able to charge
for our services are affected by a number of factors, including:
• general economic and political conditions;
• our ability to differentiate, and/or clearly convey the value of, our services;
• the pricing practices of our competitors, including the aggressive use by our competitors of offshore resources to provide lower-cost service delivery
capabilities, or the introduction of new services or products by our competitors;
• our clients’ desire to reduce their costs;
• our ability to charge higher prices where market demand or the value of our services justifies it;
• our ability to accurately estimate, attain, and sustain contract revenues, margins, and cash flows over long contract periods; and
• procurement practices of clients and their use of third-party advisors.
International operations subject us to additional political and economic risks that could have an adverse impact on our business.
We maintain a global development center in Hangzhou, China and a technology consulting recruiting and development facility in Chennai,
India. 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.
9
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 H1-B visas could hinder our growth and adversely affect our business, financial condition and results of
operations.
Approximately 19% of our billable workforce is comprised of skilled foreign nationals holding H1-B visas. We also own a recruiting and
development facility in Chennai, India to continue to grow our base of H1-B foreign national colleagues. The H1-B 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 H1-B 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 H1-B petitions approved in any federal fiscal year is limited, making the H1-B 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 H1-B visas for which we apply, our growth
may be hindered.
We may not be able to attract and retain information technology consulting professionals, which could affect our ability to compete effectively.
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 colleagues 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
grow our business, our need for senior experienced management and implementation personnel increases. If a significant number of these individuals resign,
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.
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, choose to perform services we provide through their own internal resources, choose not to retain us for additional stages of a project
that involves multiple stages, or try to renegotiate the terms of its contract or cancel or delay additional planned work. Terminations, cancellations, or delays
could result from factors that are beyond our control and unrelated to our work product or the progress of the project, including the business or financial
conditions of the client, changes in ownership or management at our clients, and changes in client strategies, the economy, or markets generally. When
contracts are terminated, we lose the anticipated revenues and might not be able to replace, or it may take significant time to replace, the lost revenue with
other work or eliminated associated costs. Consequently, our results of operations in subsequent periods could be materially lower than expected.
Additionally, 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.
10
Our ability to attract and retain business may depend on our reputation in the marketplace.
Our services are marketed to clients and prospective clients based on a number of factors. Our corporate reputation is a significant factor in our
clients’ evaluation of whether to engage our services. We believe the Perficient brand name and our reputation are important corporate assets that help
distinguish our services from those of our competitors and also contribute to our efforts to recruit and retain talented employees. However, our corporate
reputation is potentially susceptible to material damage by events such as disputes with clients, information technology security breaches or service outages,
or other delivery failures. Similarly, our reputation could be damaged by actions or statements of current or former clients, competitors, vendors, as well as
members of the investment community and the media. There is a risk that negative information could adversely affect our business. Damage to our reputation
could be difficult and time-consuming to repair, could make potential or existing clients reluctant to select us for new engagements, resulting in a loss of
business, and could adversely affect our efforts with regard to the recruitment and retention of employees and subcontractors. Damage to our reputation could
also reduce the value and effectiveness of the Perficient brand name and could reduce investor confidence in us, materially adversely affecting our share price.
We could have liability or our reputation could be damaged if we do not protect client data or information systems or if our information systems are
breached.
We are dependent on information technology networks and systems to process, transmit, and store electronic information and to communicate
among our locations and with our partners and clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and
potential unauthorized disclosure of confidential information. We are also required at times to manage, utilize, and store sensitive or confidential client or
employee data. As a result, we are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as various
U.S. federal and state laws governing the protection of individually identifiable information. If any person, including any of our employees, negligently
disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be
subject to monetary damages, fines, and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential client or employee data, whether through
systems failure, employee negligence, fraud or misappropriation could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or
through our information systems or those we develop for our clients, whether by our employees or third parties, could result in negative publicity, legal
liability, and damage to our reputation.
We may face potential liability to customers if our customers’ systems fail.
Our 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. 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, the
imposition of large deductible, or co-insurance requirements, our business and financial results could suffer.
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.
We have only a limited ability to protect our intellectual property rights, which are important to our success.
Our success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property. Existing laws of some
countries in which we provide services or solutions might offer only limited protection of our intellectual property rights. We rely upon a combination of trade
secrets, confidentiality policies, nondisclosure, and other contractual arrangements to protect our intellectual property rights. The steps we take in this regard
might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we might not be able to detect unauthorized
use of, or take appropriate and timely steps to enforce, our intellectual property rights.
Depending on the circumstances, we might need to grant a specific client greater rights in intellectual property developed in connection with a
contract than we otherwise generally do. In certain situations, we might forego all rights to the use of intellectual property we help create, which would limit
our ability to reuse that intellectual property for other clients. Any limitation on our ability to provide a service or solution could cause us to lose revenue-
generating opportunities and require us to incur additional expenses to develop new or modified solutions for future projects.
11
If our negotiated fees do not accurately anticipate the cost and complexity of performing our work, then our contracts could be unprofitable.
We negotiate fees with our clients utilizing a range of pricing structures and conditions, including time and materials and fixed fee contracts. Our
fees are highly dependent on our internal forecasts and predictions about our projects and the marketplace, which might be based on limited data and could
turn out to be inaccurate. If we do not accurately estimate the costs and timing for completing projects, our contracts could prove unprofitable for us or yield
lower profit margins than anticipated. We could face greater risk when negotiating fees for our contracts that involve the coordination of operations and
workforces in multiple locations and/or utilizing workforces with different skillsets and competencies. There is a risk that we will under-price our contracts,
fail to accurately estimate the costs of performing the work, or fail to accurately assess the risks associated with potential contracts. In particular, any
increased or unexpected costs, delays or failures to achieve anticipated cost savings, or unexpected risks we encounter in connection with the performance of
this work, including those caused by factors outside our control, could make these contracts less profitable or unprofitable, which could have an adverse effect
on our profit margin.
We could be subject to liabilities if our subcontractors or the third parties with whom we partner cannot deliver their project contributions on time
or at all.
Large and complex arrangements often require that we utilize subcontractors or that our services and solutions incorporate or coordinate with the
software, systems, or infrastructure requirements of other vendors and service providers. Our ability to serve our clients and deliver and implement our
solutions in a timely manner depends on the ability of these subcontractors, vendors, and service providers to meet their project obligations in a timely
manner, as well as on our effective oversight of their performance. The quality of our services and solutions could suffer if our subcontractors or the third
parties with whom we partner do not deliver their products and services in accordance with project requirements. If our subcontractors or these third parties
fail to deliver their contributions on time or at all or if their contributions do not meet project requirements or require us to incur unanticipated costs to meet
these requirements, then our ability to perform could be adversely affected and we might be subject to additional liabilities, which could have a material
adverse effect on our business, revenues, profitability, or cash flow.
Our profitability could suffer if we are not able to control our costs.
Our ability to control our costs and improve our efficiency affects our profitability. As the continuation of pricing pressures could result in
permanent changes in pricing policies and delivery capabilities, we must continuously improve our management of costs. Our short-term cost reduction
initiatives, which focus primarily on reducing variable costs, might not be sufficient to deal with all pressures on our pricing. Our long-term cost-reduction
initiatives, which focus on reductions in costs for service delivery and infrastructure, rely upon our successful introduction and coordination of multiple
geographic and competency workforces and a growing focus on our offshore capabilities. As we increase the number of our colleagues and execute our
strategies for growth, we might not be able to manage significantly larger and more diverse workforces, control our costs or improve our efficiency, and our
profitability could be negatively affected.
We are subject to credit risk related to our accounts receivable.
We provide credit to our customers in the normal course of business and we do not generally obtain collateral or up-front payments. Accordingly,
we are not protected against accounts receivable default or bankruptcy by our customers. Although we perform ongoing credit evaluations of our customers
and maintain allowances for potential credit losses, such actions and procedures may not be effective in reducing our credit risks and our business, financial
condition and results of operations could be materially and adversely affected. During periods of economic decline, our exposure to credit risks related to our
accounts receivable increases.
If we are unable to collect our receivables or unbilled services, our results of operations, financial condition, and cash flows could be adversely
affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. We evaluate
the financial condition of our clients and usually bill and collect on relatively short cycles. In limited circumstances, we also extend financing to our clients.
We maintain allowances against receivables and unbilled services. Actual losses on client balances could differ from those that we currently anticipate and as
a result we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. Macroeconomic
conditions could also result in financial difficulties for our clients, and as a result could cause clients to delay payments to us, request modifications to their
payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Recovery of client financing and timely
collection of client balances also depends on our ability to complete our contractual commitments and bill and collect our contracted revenues. If we are
unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our
results of operations, financial condition, and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect
for our services, our cash flows could be adversely affected.
12
The loss of one or more of our significant software vendors 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 vendors’
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.
If we do not effectively manage expected future 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 expected future growth. In order to
create the additional capacity necessary to accommodate an increase in 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 colleagues. We may not be able to achieve or maintain optimal utilization of our offices and colleagues. 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.
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 could vary 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:
• demand for software and services;
• customer budget cycles;
• changes in our customers’ desire for our partners’ products and our services;
• pricing changes in our industry; and
• government regulation and legal developments regarding the use of the Internet.
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.
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 as there are fewer billable days as a result of vacations and holidays. In addition, we generally perform services on a project basis. While
we seek to counterbalance periodic declines in services revenues when a project or engagement is completed or canceled by entering into arrangements to
provide additional services to the same or other clients, we may not be able to avoid declines in services revenues when projects are completed. Our inability
to obtain sufficient new projects to counterbalance any decreases in work may materially affect our quarter-to-quarter revenues, margins and operating results.
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 services gross margins are subject to fluctuations as a result of variances in utilization and billing rates.
Our services gross margins are affected by trends in the utilization rate of our colleagues, defined as the percentage of our colleagues’ 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 salary, 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.
13
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.
Many of our contracts include performance payments that link some of our fees to the attainment of performance or business targets. This could
increase the variability of our revenues and margins.
Many of our contracts include performance clauses that require us to achieve agreed-upon performance standards or milestones. If we fail to satisfy
these measures, it could reduce our fees under the contracts, increase the cost to us of meeting performance standards or milestones, delay expected payments
or subject us to potential damage claims under the contract terms. These provisions could increase the variability in revenues and margins earned on those
contracts.
If we fail to complete fixed fee contracts within budget and on time, our results of operations could be adversely affected.
In 2010, approximately 13% of our services revenues were earned from engagements 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 accurately estimate 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 we will price these contracts appropriately in the future, which may result in
losses.
We may not be able to maintain profitability.
Although we have been profitable for the past seven 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.
Changes in our level of taxes, and tax audits, investigations and proceedings, could have a material adverse effect on our results of operations and
financial condition.
We are subject to income taxes in numerous jurisdictions. We calculate and provide for income taxes in each tax jurisdiction in which we operate. Tax
accounting often involves complex matters and judgment is required in determining our corporate provision for income taxes and other tax liabilities. We are
subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our judgments. We regularly assess the likely outcomes of these
audits in order to determine the appropriateness of our tax liabilities. However, our judgments might not be sustained as a result of these audits, and the
amounts ultimately paid could be different from the amounts previously recorded. In addition, our effective tax rate in the future could be adversely affected
by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in
tax laws. Furthermore, changes in tax laws, treaties, or regulations, or their interpretation or enforcement, may be unpredictable and could materially
adversely affect our tax position. Any of these occurrences could have a material adverse effect on our results of operations and financial condition.
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 the potential acquisition.
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 impairment of significant amounts of intangible assets that could adversely affect our results of operations.
14
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:
• the failure of management and acquired services personnel to perform as expected;
• the acquisition of fixed fee customer agreements that require more effort than anticipated to complete;
• 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;
• the failure to identify or adequately assess any undisclosed or potential liabilities or problems of the acquired business including legal liabilities;
• the failure of the acquired business to achieve the forecasts we used to determine the purchase price; or
• the potential loss of key personnel of the acquired business.
These difficulties could disrupt our ongoing business, distract our management and colleagues, increase our expenses, and materially and adversely
affect our results of operations.
We may not be successful at identifying, acquiring, or integrating other businesses.
We have resumed our disciplined acquisition strategy designed to enhance our capabilities, expand in emerging markets or develop new services
and solutions. We may not successfully identify suitable acquisition candidates, succeed in completing targeted transactions, or achieve desired results of
operations. Furthermore, we face risks in successfully integrating any businesses we might acquire. We might need to dedicate additional management and
other resources, and our organizational structure could make it difficult for us to efficiently integrate acquired businesses into our ongoing operations and
assimilate employees of those businesses into our culture and operations. Accordingly, we might fail to realize the expected benefits or strategic objectives of
any acquisition we undertake. We might not achieve our expected return on investment, or may lose money. If we are unable to complete the number and kind
of acquisitions for which we plan, or if we are inefficient or unsuccessful at integrating any acquired businesses into our operations, we may not be able to
achieve our planned rates of growth or improve our market share, profitability, or competitive position in specific markets or services.
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 under the symbol “PRFT.” Our common stock price has been volatile and 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, and 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 26% 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.
15
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 had unrestricted cash, cash equivalents, and investments totaling $26 million and a borrowing capacity of $50 million, and a commitment to
increase our borrowing capacity by $25 million, at December 31, 2010. We intend to continue to make investments to support our business growth and may
require additional funds if our capital is insufficient 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 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 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.
Item 2. Properties.
Our principal executive operations are located in St. Louis, Missouri where we have leased approximately 5,100 square feet for these functions. We
lease 31 offices in major markets throughout North America, China, and India. 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.
We are involved from time to time in various legal proceedings arising in the ordinary course of business. Although the outcome of lawsuits or other
proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be
predicted accurately, we do not expect any currently pending matters to have a material adverse effect on the financial position, results of operations, or cash
flows of our company.
Item 4. Reserved.
16
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 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 since January 1, 2009.
PART II
Year Ending December 31, 2010:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ending December 31, 2009:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
Low
$
$
12.01
12.99
9.71
13.00
5.71
7.44
8.64
9.50
8.50
8.91
8.21
9.17
3.10
5.12
6.31
7.73
On February 28, 2011, the last reported sale price of our common stock on The Nasdaq Global Select Market was $12.43 per share. There were
approximately 296 stockholders of record of our common stock as of February 28, 2011, including 190 restricted account holders.
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 11 of this Form 10-K.
Unregistered Sales of Securities
Our acquisition of substantially all of the assets of Kerdock Consulting, LLC (“Kerdock”) in March 2010 included an earnings-based contingency,
pursuant to which additional consideration could be realized by Kerdock if certain earnings-based requirements were met. This contingency was achieved
during 2010 and, as such, we paid the additional consideration on November 15, 2010. In connection with this payment, we issued 108,173 unregistered
shares of our common stock to Kerdock. We relied on Section 4(2) of the Securities Act of 1933, as amended, as the basis for exemption from
registration. These shares were issued to Kerdock in a privately negotiated transaction and not pursuant to a public solicitation.
Issuer Purchases of Equity Securities
Prior to 2010, our Board of Directors authorized the repurchase of up to $40.0 million of our common stock. In 2010, the Board of Directors
authorized the repurchase of up to an additional $10.0 million of our common stock for a total repurchase program of $50.0 million. The repurchase program
expires June 30, 2011. While it is not our intention, the program could be suspended or discontinued at any time, based on market, economic, or business
conditions. The timing and amount of repurchase transactions will be determined by our management based on its evaluation of market conditions, share
price, and other factors.
17
Since the program’s inception in 2008, we have repurchased approximately $42.2 million of our outstanding common stock through December 31,
2010.
Period
Beginning Balance as of
October 1, 2010
October 1-31, 2010
November 1-30, 2010
December 1-31, 2010
Ending Balance as of
December 31, 2010
Total Number of
Shares Purchased
Average Price Paid
Per
Share (1)
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
Approximate Dollar Value of Shares
that May Yet Be Purchased Under the
Plans or Programs
5,977,474 $
--
50,000
70,000
6,097,474 $
6.82
--
11.25
12.17
6.92
5,977,474 $
-- $
50,000 $
70,000 $
6,097,474
9,210,066
9,210,066
8,647,490
7,795,387
(1) Average price paid per share includes commission.
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, 2010, has been
prepared in accordance with accounting principles generally accepted in the United States. The financial data presented is not directly comparable between
periods as a result of the two acquisitions in 2010, four acquisitions in 2007, and three acquisitions in 2006.
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.
2010 2009
2007 2006
Year Ended December 31,
2008
(In thousands)
Income Statement Data:
$214,952 $188,150 $
Revenues
Gross margin
$ 62,767 $ 48,333 $
Selling, general and administrative $ 45,477 $ 40,042 $
5,750 $
Depreciation and amortization
-- $
Acquisition costs
-- $
Impairment of intangible assets
2,541 $
Income from operations
209 $
Net interest income (expense)
260 $
Net other income (expense)
3,010 $
Income before income taxes
1,463 $
Net income
4,784 $
$
993 $
$
$
-- $
$ 11,513 $
163 $
$
$
72 $
$ 11,748 $
6,480 $
$
6,265 $
-- $
-- $
231,488 $218,148 $160,926
73,502 $ 75,690 $ 53,756
47,242 $ 41,963 $ 32,268
4,406
6,949 $
--
-- $
1,633 $
--
17,678 $ 27,462 $ 17,082
(407)
174
17,291 $ 27,654 $ 16,849
9,567
10,000 $ 16,230 $
528 $
(915) $
172 $
20 $
As of December 31,
2010 2009 2008 2007 2006
(In thousands)
Balance Sheet Data:
$ 24,008 $ 24,302 $ 22,909 $
4,549
Cash, cash equivalents, and short-term investments
$ 47,632 $ 50,205 $ 56,176 $ 41,368 $ 24,859
Working capital
--
$
Long-term investments
$
1,806
Property and equipment, net
$124,056 $111,773 $115,634 $121,339 $ 81,056
Goodwill and intangible assets, net
$207,678 $184,810 $194,247 $189,992 $131,000
Total assets
1,201
Current portion of long-term debt and line of credit
$
Long-term debt and line of credit, less current portion $
137
$177,164 $168,348 $174,818 $165,562 $107,352
Total stockholders' equity
-- $
3,226 $
-- $
2,345 $
3,652 $
1,278 $
2,254 $
2,355 $
-- $
-- $
-- $
-- $
-- $
-- $
-- $
-- $
8,070 $
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 that are attributable
to Perficient, Inc. 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, Inc. or any persons acting on our behalf may issue.
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 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. Our solutions include
business analysis, portals and collaboration, business integration, user experience, enterprise content management, customer relationship management,
interactive design, enterprise performance management, business process management, business intelligence, eCommerce, mobile platforms, custom
applications, and technology platform implementations, among others. Our solutions enable our clients to operate a real-time enterprise that dynamically
adapts business processes and the systems that support them to meet the changing demands of an increasingly global, Internet-driven, and competitive
marketplace.
Services Revenues
Services revenues are derived from professional services that include 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, while a smaller portion of
our revenues are 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, 2010 compared to 11% for the year ended December 31, 2009. For time and material projects, revenues are recognized and billed
by multiplying the number of hours our colleagues expend in the performance of the project by the established billing rates. For fixed fee projects, revenues
are generally recognized using an input method based on the ratio of hours expended to total estimated hours. Amounts invoiced and collected in excess of
revenues recognized are classified as deferred revenues. 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 and Hardware Revenues
Software and hardware revenues are derived from sales of third-party software and hardware. Revenues from sales of third-party software and
hardware are generally recorded on a gross basis provided we act as a principal in the transaction. On rare occasions, we do not meet the requirements to be
considered a principal in the transaction and act as an agent. In these cases, revenues are recorded on a net basis. Software and hardware revenues are
expected to fluctuate depending on our customers’ demand for these products.
19
If we enter into contracts for the sale of services and software or hardware, management evaluates whether the services are essential to the
functionality of the software or hardware and whether objective fair value evidence exists for each deliverable in the transaction. If management concludes
the services to be provided are not essential to the functionality of the software or hardware and can determine objective fair value evidence exists 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 separation criteria.
Cost of revenues
Cost of revenues consists primarily of cash and non-cash compensation and benefits, including bonuses and non-cash compensation related to
equity awards, associated with our technology colleagues. Cost of revenues also includes the costs associated with subcontractors. Third-party software and
hardware costs, reimbursable expenses, and other unreimbursed project related expenses are also included in cost of revenues. 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 information technology related
equipment.
Gross Margins
Our gross margins for services are affected by the utilization rates of our colleagues (defined as the percentage of our colleagues’ time billed to
customers divided by the total available hours in the respective period), the salaries we pay our consulting colleagues, and the average billing rate we receive
from our customers. If a project ends earlier than scheduled, 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. Gross margin percentages of third-party software and hardware sales are
typically lower than gross margin percentages for services, and the mix of services and software and hardware for a particular period can significantly impact
our total combined gross margin percentage for such period. In addition, gross margin for software and hardware sales can fluctuate due to pricing and other
competitive pressures.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) are primarily composed of sales related costs, general and administrative salaries, variable
compensation costs, office costs, stock compensation expense, bad debts, and other miscellaneous expenses. We work to minimize selling costs by focusing
on repeat business with existing customers and by accessing sales leads generated by our software vendors, most notably IBM, Oracle, and Microsoft, whose
products we use to design and implement solutions for our clients. These relationships enable us to reduce our selling costs and sales cycle times and increase
win rates through leveraging our partners’ marketing efforts and endorsements.
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 and through the continuation of our disciplined acquisition strategy. Our future growth plan includes expanding
our business with a primary focus on the United States, both organically and through acquisitions. Given the economic conditions during 2008 and 2009 we
suspended acquisition activity pending improved visibility into the health of the economy. With the return to growth in 2010 we have resumed our disciplined
acquisition strategy as evidenced by our acquisition of Kerdock Consulting, LLC (“Kerdock”) in March and speakTECH in December. We also intend to
further leverage our existing offshore capabilities to support our future growth and provide our clients flexible options for project delivery.
20
Results of Operations
The following table summarizes our results of operations as a percentage of total revenues:
Revenues:
Services revenues
Software and hardware revenues
Reimbursable expenses
Total revenues
Cost of revenues (depreciation and amortization, shown separately below):
Project personnel costs
Software and hardware costs
Reimbursable expenses
Other project related expenses
Total cost of revenues
Services gross margin
Software and hardware gross margin
Total gross margin
Selling, general and administrative
Depreciation and amortization
Acquisition costs
Impairment of intangible assets
Income from operations
Net interest income
Net other income (expense)
Income before income taxes
Provision for income taxes
Net income
2010
2009
2008
86.1%
9.6
4.3
100.0
88.4%
6.9
4.7
100.0
89.6%
4.6
5.8
100.0
55.5
8.4
4.3
2.6
70.8
32.6
11.9
29.2
21.2
2.2
0.5
0.0
5.3
0.1
0.0
5.4
2.5
2.9%
61.0
6.2
4.7
2.4
74.3
28.2
10.2
25.7
21.3
3.0
0.0
0.0
1.4
0.1
0.1
1.6
0.8
0.8%
56.6
3.7
5.7
2.2
68.2
34.4
19.4
31.8
20.4
3.0
0.0
0.7
7.7
0.2
(0.4)
7.5
3.2
4.3%
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenues. Total revenues increased 14% to $215.0 million for the year ended December 31, 2010 from $188.2 million for the year ended
December 31, 2009.
For the Year Ended
December
31, 2010
Financial Results
(in thousands)
For the Year Ended
December
31, 2009
Explanation for Increases Over Prior Year Period
(in thousands)
Total Increase Over
Prior Year Period
Increase Attributable to
Acquired Companies*
Increase Attributable to Base
Business**
Services
Revenues
Software and
Hardware
Revenues
Reimbursable
Expenses
Total Revenues
$
$
185,173
$
166,397
$
18,776
$
7,956
20,556
9,223
214,952
$
12,968
8,785
188,150
$
7,588
438
26,802
$
1,667
470
10,093
$
$
10,820
5,921
(32)
16,709
*Defined as companies acquired during 2010; no companies were acquired in 2009.
**Defined as businesses owned as of January 1, 2010.
Services revenues increased 11% to $185.2 million for the year ended December 31, 2010 from $166.4 million for the year ended December 31,
2009. The increase in services revenues is due to an increase in demand for our services and the acquisition of Kerdock and speakTECH. Services revenues
attributable to our base business increased $10.8 million while services revenues attributable to acquired companies increased $8.0 million, resulting in a total
increase of $18.8 million.
21
Software and hardware revenues increased 59% to $20.6 million for the year ended December 31, 2010 from $13.0 million for the year ended
December 31, 2009 due to an increase in the sale of new software licenses and renewals of software licenses. Reimbursable expenses increased 5% to $9.2
million for the year ended December 31, 2010 from $8.8 million for the year ended December 31, 2009 as a result of the increase in services revenue. We do
not realize any profit on reimbursable expenses.
Cost of Revenues. Cost of revenues increased 9% to $152.2 million for the year ended December 31, 2010 from $139.8 million for the year ended
December 31, 2009. The increase in cost of revenues is directly related to the increase in revenues, specifically the increase in services revenues. The average
number of colleagues performing services, including subcontractors, increased to 1,065 for the year ended December 31, 2010 from 1,028 for the year ended
December 31, 2009. Management will continue to manage the cost structure to match demand.
Gross Margin. Gross margin increased 30% to $62.8 million for the year ended December 31, 2010 from $48.3 million for the year ended
December 31, 2009. Gross margin as a percentage of revenues increased to 29.2% for the year ended December 31, 2010 from 25.7% for the year ended
December 31, 2009 primarily due to an increase in services gross margin. Services gross margin, excluding reimbursable expenses, increased to 32.6% or
$60.3 million for the year ended December 31, 2010 from 28.2% or $47.0 million for the year ended December 31, 2009. The increase in services gross
margin is primarily a result of higher utilization and management’s continued efforts to manage the cost structure. The average utilization rate of our
colleagues, excluding subcontractors, increased to 81% for the year ended December 31, 2010 compared to 75% for the year ended December 31, 2009. The
average bill rate for our colleagues, excluding subcontractors, remained flat at $106 per hour for the year ended December 31, 2010 compared to the year
ended December 31, 2009. The average bill rate for our colleagues, excluding subcontractors and offshore employees, increased to $119 for the year ended
December 31, 2010 from $114 for the year ended December 31, 2009. Software and hardware gross margin increased to 11.9% or $2.4 million for the year
ended December 31, 2010 from 10.2% or $1.3 million for the year ended December 31, 2009. The increase in software and hardware margin is directly
related to the increase in higher margin software and hardware sales during 2010.
Selling, General and Administrative. SG&A expenses increased 14% to $45.5 million for the year ended December 31, 2010 from $40.0 million for
the year ended December 31, 2009 due primarily to fluctuations in expenses as detailed in the following table:
Increase
Selling, General and Administrative Expense (in millions)
1.9
Bonus expense
1.5
Stock compensation expense
0.5
Bad debt expense
0.5
Recruiting expense
0.4
Salary expense
0.3
Sales-related costs
0.4
Other
5.5
Net increase
$
$
SG&A expenses, as a percentage of revenues, decreased slightly to 21.2% for the year ended December 31, 2010 from 21.3% for the year ended
December 31, 2009. Bonus and stock compensation expense increased as a percentage of revenues compared to the prior year period as a result of achieving
the company-wide performance goals and the separation of the Chairman of the Board, respectively. These increases were offset by a decrease in sales-related
costs and salary expenses as a percentage of revenues. These decreases were primarily related to management’s continued efforts to manage the cost structure.
Depreciation. Depreciation expense decreased 44% to $0.8 million for the year ended December 31, 2010 from $1.5 million for the year ended
December 31, 2009. The decrease in depreciation expense is mainly attributable to various assets becoming fully depreciated and the modification of the
estimated useful life of computer hardware from two to three years in first quarter of 2010. Depreciation expense as a percentage of services revenue,
excluding reimbursable expenses, was 0.4% and 0.9% for the year ended December 31, 2010 and 2009, respectively.
Amortization. Amortization expense decreased 7% to $4.0 million for the year ended December 31, 2010 from $4.3 million for the year ended
December 31, 2009 due to the completion of amortization of certain acquired intangible assets during 2009 and 2010, partially offset by the addition of
amortization related to acquired intangible assets.
Acquisition Costs. Acquisition-related costs of $1.0 million were incurred during 2010 related to the acquisition of Kerdock and
speakTECH. Acquisition-related costs were incurred for legal, accounting, and valuation services performed by third parties.
22
Net Interest Income. We had interest income of $163,000, net of interest expense, for the year ended December 31, 2010, compared to interest
income of $209,000, net of interest expense, for the year ended December 31, 2009. Net interest income in 2009 included interest received on the outstanding
balance of a client note receivable.
Net Other Income or Expense. We had other income of $72,000, net of other expense, for the year ended December 31, 2010 compared to other
income of $260,000, net of other expense, for the year ended December 31, 2009. Net other income during 2009 was primarily related to government
incentives received by our China operations.
Provision for Income Taxes. We provide for federal, state, and foreign income taxes at the applicable statutory rates adjusted for non-deductible
expenses. Our effective tax rate decreased to 44.8% for the year ended December 31, 2010 from 51.4% for the year ended December 31, 2009. The decrease
in the effective rate is due primarily to the effect of state taxes and permanent items over a larger income base and larger earnings in certain nontaxable
foreign jurisdictions.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues. Total revenues decreased 19% to $188.2 million for the year ended December 31, 2009 from $231.5 million for the year ended
December 31, 2008. Services revenues decreased 20% to $166.4 million for the year ended December 31, 2009 from $207.5 million for the year ended
December 31, 2008. Revenue contraction during the year is due to the decreased demand for information technology services market wide and delays in
information technology spending by customers, which we believe is related to the general economic slowdown.
Software and hardware revenues increased 21% to $13.0 million for the year ended December 31, 2009 from $10.7 million for the year ended
December 31, 2008 due mainly to the renewal of several larger software licenses and an overall increase in software sales during the first and third quarters of
2009. Reimbursable expenses decreased 34% to $8.8 million for the year ended December 31, 2009 from $13.3 million for the year ended December 31, 2008
as a result of the decline in services revenue. We do not realize any profit on reimbursable expenses.
Cost of Revenues. Cost of revenues decreased 12% to $139.8 million for the year ended December 31, 2009 from $158.0 million for the year ended
December 31, 2008. The decrease in cost of revenues is directly related to the decrease in revenues and management’s efforts in managing costs, primarily
headcount. The average number of colleagues performing services, including subcontractors, decreased to 1,028 for the year ended December 31, 2009 from
1,165 for the year ended December 31, 2008. Management will continue to manage the cost structure to match demand.
Gross Margin. Gross margin decreased 34% to $48.3 million for the year ended December 31, 2009 from $73.5 million for the year ended
December 31, 2008. Gross margin as a percentage of revenues decreased to 25.7% for the year ended December 31, 2009 from 31.8% for the year ended
December 31, 2008 primarily due to a decrease in services gross margin. Services gross margin, excluding reimbursable expenses, decreased to 28.2% or
$47.0 million for the year ended December 31, 2009 from 34.4% or $71.4 million for the year ended December 31, 2008. The decrease in services gross
margin is primarily a result of lower utilization due to the decreased demand for information technology services. The average utilization rate of our
colleagues, excluding subcontractors, decreased to 75% for the year ended December 31, 2009 compared to 79% for the year ended December 31, 2008. The
average bill rate for our colleagues, excluding subcontractors, decreased to $106 per hour for the year ended December 31, 2009 from $109 per hour for the
year ended December 31, 2008, primarily due to competition in the marketplace and increased usage of China offshore resources. Software and hardware
gross margin decreased to 10.2% or $1.3 million for the year ended December 31, 2009 from 19.4% or $2.1 million for the year ended December 31,
2008. Software revenues have increased while margin is down primarily due to the competition in the marketplace causing lower margin software sales.
Selling, General and Administrative. SG&A expenses decreased 15% to $40.0 million for the year ended December 31, 2009 from $47.2 million
for the year ended December 31, 2008 due primarily to fluctuations in expenses as detailed in the following table:
Increase / (Decrease)
(in millions)
Selling, General and Administrative Expense
Stock compensation expense
Bonus expense
Office and technology-related costs
Salary expense
Sales-related costs
Bad debt expense
Other
Net decrease
$
$
0.7
(0.1)
(0.5)
(0.6)
(1.7)
(3.1)
(1.9)
(7.2)
23
SG&A expenses, as a percentage of revenues, increased to 21.3% for the year ended December 31, 2009 from 20.4% for the year ended December
31, 2008. Stock compensation expense, salary expense, office and technology-related costs, and sales-related costs all increased as a percentage of revenues
compared to the prior year period. Stock compensation expense, as a percentage of revenues, increased due to lower revenues and the restricted stock awards
granted in 2008 and 2009. The increase in salary expense, as a percentage of revenues, was primarily the result of lower revenues and the addition of new
marketing roles during 2009. Office and technology-related costs, as a percentage of revenues, increased primarily due to the costs associated with the
abandonment of office space and lower revenues during 2009. These increases were offset by a decrease in bad debt expense. During 2008, the allowance for
doubtful accounts increased due to additional uncertainties regarding collectibility as a result of the overall economic downturn and its impact on certain
outstanding receivables. The reserve has decreased in 2009 due to either the collection of previously reserved for balances or write-off of such amounts.
Depreciation. Depreciation expense decreased 31% to $1.5 million for the year ended December 31, 2009 from $2.1 million for the year ended
December 31, 2008. The decrease in depreciation expense is mainly attributable to various assets becoming fully depreciated during 2008 and 2009 and lower
spending on capital assets during 2009. Depreciation expense as a percentage of services revenue, excluding reimbursable expenses, was 0.9% and 1.0% for
the year ended December 31, 2009 and 2008, respectively.
Amortization. Amortization expense decreased 11% to $4.3 million for the year ended December 31, 2009 from $4.8 million for the year ended
December 31, 2008. The decrease in amortization expense reflects the completion of the amortization of certain acquired intangible assets and the impact of
the impairment charge recorded in the fourth quarter of 2008. The impairment charge will also result in lower amortization expense in future periods.
Impairment of Intangible Assets. During the fourth quarter of 2008, we performed an impairment test as of December 31, 2008. As a result of the
test performed, we recorded a $1.6 million impairment charge primarily related to customer relationships we acquired from e tech solutions, Inc. (“E
Tech”). The value of these relationships was affected primarily by the loss of a key customer acquired from E Tech, which caused cash flows from the asset
group to be lower than originally projected.
Net Interest Income. We had interest income of $0.2 million, net of interest expense, for the year ended December 31, 2009, compared to interest
income of $0.5 million, net of interest expense, for the year ended December 31, 2008. The decrease in interest income in 2009 resulted from a decrease in
the interest earned on the note receivable and the money market account. The note receivable was fully repaid in October 2009 and while our average cash
and investments balances increased during 2009, the average interest rates on our accounts decreased compared to the same prior year period.
Net Other Income or Expense. We had other income of $0.3 million, net of other expense, for the year ended December 31, 2009 compared to other
expense of $0.9 million, net of other income, for the year ended December 31, 2008. Other income for the year ended December 31, 2009 is primarily related
to government incentives received by our China operations. Additionally, during the third quarter 2008, we expensed $0.9 million of previously capitalized
deferred offering costs related to our shelf registration statement.
Provision for Income Taxes. We provide for federal, state and foreign income taxes at the applicable statutory rates adjusted for non-deductible
expenses. Our effective tax rate increased to 51.4% for the year ended December 31, 2009 from 42.2% for the year ended December 31, 2008. The increase in
the effective rate is due primarily to the magnified effect of certain state taxes, which are generally based on gross receipts instead of income, permanent items
such as meals and entertainment, and non-deductible executive compensation under Section 162(m) of the Code, relative to a smaller income base.
Liquidity and Capital Resources
Selected measures of liquidity and capital resources are as follows (in millions):
As of December 31,
2010 2009 2008
Cash, cash equivalents, and investments
$ 26.3 $ 28.0 $ 22.9
Working capital (including cash and cash equivalents) $ 47.6 $ 50.2 $ 56.2
$ 50.0 $ 50.0 $ 49.9
Amounts available under credit facilities
24
Net Cash Provided By Operating Activities
Net cash provided by operating activities for the year ended December 31, 2010 was $18.7 million compared to $22.6 million and $25.1 million for
the years ended December 31, 2009 and 2008, respectively. For the year ended December 31, 2010, the components of operating cash flows were net income
of $6.5 million plus non-cash charges of $14.3 million, partially offset by investments in working capital of $2.1 million. The primary components of
operating cash flows for the year ended December 31, 2009 were net income of $1.5 million plus non-cash charges of $15.0 million and net working capital
reductions of $6.1 million. The primary components of operating cash flows for the year ended December 31, 2008 were net income of $10.0 million plus
non-cash charges of $15.0 million and net working capital reductions of $0.1 million. Lower accounts receivable balances due to decreased revenue during
2009 caused a decline in net cash provided by operating activities for the year ended December 31, 2010 compared to the year ended December 31,
2009. Our days sales outstanding as of December 31, 2010 remained flat at 73 days days compared to December 31, 2009 and increased from 71 days at
December 31, 2008.
Net Cash Used in Investing Activities
For the year ended December 31, 2010, we used $4.3 million in cash to purchase investments, $4.9 million for the purchase of Kerdock and
speakTECH, and $1.3 million in cash to purchase equipment and develop software. For the year ended December 31, 2009, we used $10.0 million in cash to
purchase investments and $0.7 million in cash to purchase equipment and develop software. For the year ended December 31, 2008, we used $0.8 million in
cash to pay certain acquisition-related costs and $1.5 million in cash to purchase equipment and develop software.
Net Cash Provided By Financing Activities
During the year ended December 31, 2010, we received proceeds of $1.5 million from exercises of stock options and sales of stock through our
Employee Stock Purchase Plan and we realized an excess tax benefit of $1.5 million related to vesting of stock awards and stock option exercises. We used
$1.9 million to settle the contingent consideration for the purchase of Kerdock and $14.7 million to repurchase shares of our common stock through the stock
repurchase program. For the year ended December 31, 2009, we received proceeds of $1.0 million from exercises of stock options and sales of stock through
our Employee Stock Purchase Plan and we realized an excess tax benefit of $0.6 million related to vesting of stock awards and stock option exercises. We
used $18.4 million to repurchase shares of our common stock through the stock repurchase program. For the year ended December 31, 2008, we made
payments of $0.4 million in fees to establish our new credit facility. We received proceeds of $0.9 million from exercises of stock options and sales of stock
through our Employee Stock Purchase Plan and we realized an excess tax benefit of $0.7 million related to vesting of stock awards and stock option
exercises. We used $9.2 million to repurchase shares of our common stock through the stock repurchase program.
Availability of Funds from Bank Line of Credit Facilities
In May 2008, we entered into a Credit Agreement (the “Credit Agreement”) with Silicon Valley Bank (“SVB”) and KeyBank National Association
(“KeyBank”). The Credit Agreement provides for revolving credit borrowings up to a maximum principal amount of $50.0 million, subject to a commitment
increase of $25.0 million. The Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to $500,000 at any one time;
outstanding letters of credit reduce the credit available for revolving credit borrowings. Substantially all of our assets are pledged to secure the credit
facility. In July 2009, U.S. Bank National Association assumed $10.0 million of KeyBank’s commitment. In March 2010, Bank of America, N.A. assumed
the remaining $15.0 million of KeyBank’s commitment.
All outstanding amounts owed under the Credit Agreement become due and payable no later than the final maturity date of May 30,
2012. Borrowings under the credit facility bear interest at our option of SVB’s prime rate (4.00% on December 31, 2010) plus a margin ranging from 0.00%
to 0.50% or one-month LIBOR (0.26% on December 31, 2010) plus a margin ranging from 2.50% to 3.00%. The additional margin amount is dependent on
the level of outstanding borrowings. As of December 31, 2010, we had $50.0 million of maximum borrowing capacity. We incur an annual commitment fee
of 0.30% on the unused portion of the line of credit.
As of December 31, 2010, we were in compliance with all covenants under our credit facility and we expect to be in compliance during the next
twelve months.
Stock Repurchase Program
Prior to 2010, our Board of Directors authorized the repurchase of up to $40.0 million of our common stock. In 2010, the Board of Directors
authorized the repurchase of up to an additional $10.0 million of our common stock for a total repurchase program of $50.0 million. The repurchase program
expires June 30, 2011.
25
We established a written trading plan in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the “Exchange Act”), under which
we made a portion of our stock repurchases. Additional repurchases will be at times and in amounts as the Company deems appropriate and will be made
through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other
factors.
Since the program’s inception in 2008, we have repurchased approximately $42.2 million of our outstanding common stock through December 31,
2010.
Lease Obligations
During 2009 and 2010, we vacated certain office space as part of ongoing cost reduction initiatives. We subleased some of the vacated office
space. The accounting for costs associated with the abandonment of office space was calculated using the guidance in Financial Accounting Standards Board
Accounting Standards Codification (“ASC”) Subtopic 420-10, Exit or Disposal Cost Obligations. A liability of approximately $0.2 million for lease
abandonment costs was recorded as of December 31, 2010. The lease abandonment costs were classified as “Selling, general and administrative” expense in
our Consolidated Statement of Operations.
There were no other material changes outside the ordinary course of business in lease obligations or other contractual obligations in 2010 as
disclosed in Note 12, Commitments and Contingencies, in the Notes to Consolidated Financial Statements.
Shelf Registration Statement
In July 2008, we filed a shelf registration statement with the U.S. Securities and Exchange Commission (“SEC”) to allow for offers and sales of our
common stock from time to time. Approximately four million shares of common stock may be sold under this registration statement if we choose to do so.
The shelf registration will expire in July 2011.
Contractual Obligations
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, 2010 (in thousands):
Payments Due by Period
Contractual Obligations Total
Operating lease obligations $6,057 $
$6,057 $
Total
Less Than
1 Year
3-5
1-3
Years
Years
2,451 $2,482 $ 942 $
2,451 $2,482 $ 942 $
More
Than 5
Years
182
182
See Note 11, Income Taxes, in the Notes to Consolidated Financial Statements for information related to our obligations for taxes.
Conclusion
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.
We believe that the currently available funds, access to capital from our credit facility, and cash flows generated from operations will be sufficient
to meet our working capital requirements and other capital needs for the next twelve months.
26
Critical Accounting Policies
Our accounting policies are described in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
We believe our most critical accounting policies include revenue recognition, accounting for goodwill and intangible assets, purchase accounting, accounting
for stock-based compensation, and income taxes.
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 an input method based on the ratio of hours expended to total estimated hours. Amounts invoiced and collected in
excess of revenues recognized are classified as deferred revenues. On many 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. Revenues from software and hardware sales are generally recorded on a
gross basis based on our role as a principal in the transaction. On rare occasions, we enter into a transaction where we are not the principal. In these cases,
revenue is recorded on a net basis.
Unbilled revenues represent the project time and expenses that have been incurred, but not yet billed to the client, prior to the end of the fiscal
period. For time and materials projects, the client is invoiced for the amount of hours worked multiplied by the billing rates as stated in the contract. For fixed
fee arrangements, the client is invoiced according to the agreed-upon schedule detailing the amount and timing of payments in the contract. Clients are
typically billed monthly for services provided during that month, but can be billed on a more or less frequent basis as determined by the contract. If the time
and expenses are worked/incurred and approved at the end of a fiscal period and the invoice has not yet been sent to the client, the amount is recorded as
unbilled revenue once we verify all other revenue recognition criteria have been met.
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. Our policy for revenue recognition in instances where
multiple deliverables are sold contemporaneously to the same counterparty is in accordance with ASC Subtopic 985-605, Software – Revenue Recognition,
ASC Subtopic 605-25, Revenue Recognition – Multiple-Element Arrangements), and ASC Section 605-10-S99 (Staff Accounting Bulletin (“SAB”) Topic 13,
Revenue Recognition). Specifically, if we enter into contracts for the sale of services and software or hardware, we evaluate whether the services are essential
to the functionality of the software or hardware and whether there is objective fair value evidence for each deliverable in the transaction. If we conclude the
services to be provided are not essential to the functionality of the software or hardware and we 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. We may provide multiple services under the terms of an arrangement and are
required to assess whether one or more units of accounting are present. Service fees are typically accounted for as one unit of accounting as fair value
evidence for individual tasks or milestones is not available. We follow the guidelines discussed above in determining revenues; however, certain judgments
and estimates are made and used to determine revenues recognized in any accounting period. If estimates are revised, material differences may result in the
amount and timing of revenues recognized for a given period.
Revenues are presented net of taxes assessed by governmental authorities. Sales taxes are generally collected and subsequently remitted on all
software and hardware sales and certain services transactions as appropriate.
Allowance for doubtful accounts is based upon specific identification of likely and probable losses. Each accounting period, accounts receivable is
evaluated for risk associated with a client’s inability to make contractual payments, historical experience and other currently available information. 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. Considerable judgment is used 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 the evaluation of service delivery issues or a
client’s ability to pay is incorrect, future reductions to revenue or bad debt expense may be incurred.
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 ASC Topic 350, Intangibles – Goodwill and Other (“ASC Topic 350”), we perform an annual impairment test of goodwill. We evaluate
goodwill as of October 1 each year and more frequently if events or changes in circumstances indicate that goodwill might be impaired. As required by ASC
Topic 350, the impairment test is accomplished using a two-step approach. The first step screens for impairment and, when impairment is indicated, a second
step is employed to measure the impairment.
27
Our annual goodwill impairment test was performed as of October 1, 2010. Our fair value as of the annual testing date exceeded our book value
and consequently, no impairment was indicated.
Our fair value was determined by weighting the results of two valuation methods: 1) market capitalization based on the average price of our
common stock, including a control premium, for a reasonable period of time prior to the evaluation date (generally 15 days) and 2) a discounted cash flow
model. The fair value calculated using our average common stock price (including a control premium) was weighted 40% while the value calculated by the
discounted cash flow model was weighted 60% in our determination of our overall fair value. While the use of our average common stock price, plus a
control premium, may be considered the best evidence of fair value in ASC Topic 350, we believe the declines in our stock price over the past two years, and
in the market overall, are not consistently aligned with our financial results or outlook. The discounted cash flow approach allows us to calculate our fair
value based on operating performance and meaningful financial metrics.
A key assumption used in the calculation of our fair value using our average common stock price was the consideration of a control premium. We
reviewed industry premium data and determined an appropriate control premium for the analysis based on the low end of any premium received in
transactions over the past several years.
Significant estimates used in the discounted cash flow model included projections of revenue growth, net income margins, discount rate, and
terminal business value. The forecasts of revenue growth and net income margins are based upon our long-term view of the business and are used by senior
management and the Board of Directors to evaluate operating performance. The discount rate utilized was estimated using the weighted average cost of
capital for our industry. The terminal business value was determined by applying a growth factor to the latest year for which a forecast exists.
Other intangible assets include customer relationships, non-compete arrangements, customer backlog, trade name, and internally developed
software, which are being amortized over the assets’ estimated useful lives using the straight-line method. Estimated useful lives range from seven months to
eight years. Amortization of customer relationships, non-compete arrangements, customer backlog, trade name, and internally developed software is
considered an operating expense and is included in “Amortization” in the accompanying Consolidated Statements of Operations. We periodically review the
estimated useful lives of our identifiable intangible assets, taking into consideration any events or circumstances that might result in a lack of recoverability or
revised useful life.
Purchase Accounting
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. Such fair market value assessments require significant judgments and estimates that can change materially as
additional information becomes available. The purchase price is allocated to intangibles based on our estimate and an independent valuation. We finalize the
purchase price allocation within twelve months of the acquisition date as certain initial accounting valuation estimates are finalized.
Accounting for Stock-Based Compensation
We estimate 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 our stock option awards. Option valuation models require the input of somewhat subjective assumptions including expected stock price volatility and
expected term. We believe 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.
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.
28
Recent Accounting Pronouncements
Our recent accounting pronouncements are fully described in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated
Financial Statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, except operating lease commitments as disclosed in Note 12, Commitments and Contingencies, in the
Notes to Consolidated Financial Statements.
Item 7A.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
We are exposed to market risks associated with changes in foreign currency exchange rates because we generate a portion of our revenues and incur
a portion of our expenses in currencies other than the U.S. dollar. As of December 31, 2010, we were exposed to changes in exchange rates between the U.S.
dollar and the Canadian dollar, between the U.S. dollar and the Chinese Yuan, and between the U.S. dollar and the Indian Rupee. We have not hedged
foreign currency exposures related to transactions denominated in currencies other than U.S. dollars. Our exposure to foreign currency risk is not significant.
Interest Rate Sensitivity
We had unrestricted cash, cash equivalents, and investments totaling $26.3 million at December 31, 2010 and $28.0 million at December 31,
2009. The cash equivalents consist of commercial paper and time deposits, and the investments consist of corporate bonds, commercial paper, U.S. treasury
bills, and U.S. agency bonds, which are subject to market risk due to changes in interest rates. Fixed interest rate securities may have their market value
adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. We believe that we
do not have any material exposure to changes in the market value of our investment portfolio as a result of changes in interest rates. Declines in interest rates,
however, will reduce future interest income.
29
Item 8. Financial Statements and Supplementary Data.
PERFICIENT, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2010 AND 2009
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Total cash, cash equivalents, and short-term investments
Accounts receivable, net of allowance for doubtful accounts of $228 in 2010 and $315 in 2009
Prepaid expenses
Other current assets
Total current assets
Long-term investments
Property and equipment, net
Goodwill
Intangible assets, net
Other non-current assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Other current liabilities
Total current liabilities
Other non-current liabilities
Total liabilities
Commitments and contingencies (see Note 12)
Stockholders’ equity:
Common stock ($0.001 par value per share; 50,000,000 shares authorized and 33,373,410 shares issued and
27,275,936 shares outstanding as of December 31, 2010; 31,621,089 shares issued and 27,082,569 shares
outstanding as of December 31, 2009)
Additional paid-in capital
Accumulated other comprehensive loss
Treasury stock, at cost (6,097,474 shares as of December 31, 2010; 4,538,520 shares as of December 31, 2009)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
30
December 31,
2010
2009
(In thousands, except share information)
$
$
$
$
$
$
12,707
11,301
24,008
48,496
1,270
2,584
76,358
2,254
2,355
115,227
8,829
2,655
207,678
6,072
22,654
28,726
1,788
30,514
33
224,966
(225)
(42,205)
(5,405)
177,164
207,678
$
$
$
$
$
$
17,975
6,327
24,302
38,244
1,258
1,534
65,338
3,652
1,278
104,168
7,605
2,769
184,810
3,657
11,476
15,133
1,329
16,462
--
32
208,003
(273)
(27,529)
(11,885)
168,348
184,810
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Revenues:
Services
Software and hardware
Reimbursable expenses
Total revenues
Cost of revenues (exclusive of depreciation and amortization, shown separately below):
Project personnel costs
Software and hardware costs
Reimbursable expenses
Other project related expenses
Total cost of revenues
Gross margin
Selling, general and administrative
Depreciation
Amortization
Acquisition costs
Impairment of intangible assets
Income from operations
Net interest income
Net other income (expense)
Income before income taxes
Provision for income taxes
Net income
Basic net income per share
Diluted net income per share
Shares used in computing basic net income per share
Shares used in computing diluted net income per share
$
$
$
2010
Year Ended December 31,
2009
(In thousands, except share and per share information)
207,480
$
10,713
13,295
231,488
166,397
12,968
8,785
188,150
185,173
20,556
9,223
214,952
2008
$
$
119,304
18,108
9,223
5,550
152,185
62,767
45,477
830
3,954
993
--
11,513
163
72
11,748
5,268
6,480
0.24
0.23
26,856,481
28,303,547
114,877
11,641
8,785
4,514
139,817
48,333
40,042
1,483
4,267
--
--
2,541
209
260
3,010
1,547
1,463
0.05
0.05
27,538,300
28,558,160
131,019
8,639
13,295
5,033
157,986
73,502
47,242
2,139
4,810
--
1,633
17,678
528
(915)
17,291
7,291
10,000
0.34
0.33
29,412,329
30,350,616
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
31
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
Balance at December 31, 2007
Acquisition purchase accounting adjustments
Proceeds from the exercise of stock options and sales of
stock through the Employee Stock Purchase Plan
Net tax shortfall from stock option exercises and restricted
stock vesting
Stock compensation related to restricted stock vesting and
retirement savings plan contributions
Purchases of treasury stock
Foreign currency translation adjustment
Net income
Total comprehensive income
Balance at December 31, 2008
Proceeds from the exercise of stock options and sales of
stock through the Employee Stock Purchase Plan
Net tax shortfall from stock option exercises and restricted
stock vesting
Stock compensation related to restricted stock vesting and
retirement savings plan contributions
Purchases of treasury stock
Net unrealized loss on investments
Foreign currency translation adjustment
Net income
Total comprehensive income
Balance at December 31, 2009
Proceeds from the exercise of stock options and sales of
stock through the Employee Stock Purchase Plan
Net tax benefit from stock option exercises and restricted
stock vesting
Stock compensation related to restricted stock vesting and
retirement savings plan contributions
Purchases of treasury stock
Issuance of stock for acquisitions
Net unrealized gain on investments
Foreign currency translation adjustment
Net income
Total comprehensive income
Balance at December 31, 2010
Accumulated
Other
Common Common Additional
Stock Stock Paid-in Comprehensive Treasury Accumulated Stockholders'
Shares Amount Capital
29,423 $
(19)
Stock Deficit
-- $
--
29 $ 188,998 $
(290)
--
(23,348) $
--
(117) $
--
165,562
(290)
Equity
Total
Loss
367
--
1
--
922
(922)
579
(1,848)
--
--
--
28,502 $
8,945
--
--
--
--
--
--
--
--
--
30 $ 197,653 $
298
--
1
--
974
(459)
973
(2,690)
--
--
--
--
27,083 $
1
9,835
--
--
--
--
--
--
--
--
--
--
32 $ 208,003 $
381
--
--
--
1,468
1,038
920
(1,559)
451
--
--
--
--
27,276 $
10,830
1
--
--
3,627
--
--
--
--
--
--
--
--
--
33 $ 224,966 $
--
--
--
--
--
--
(221)
--
--
--
(9,179)
--
--
--
(338) $ (9,179) $
--
--
--
--
--
--
-- (18,350)
--
(5)
--
70
--
--
--
--
(273) $ (27,529) $
--
--
--
--
--
--
-- (14,676)
--
--
--
25
--
23
--
--
--
--
(225) $ (42,205) $
--
--
--
--
--
10,000
--
(13,348) $
--
--
--
--
--
--
1,463
--
(11,885) $
--
--
--
--
--
--
--
6,480
--
(5,405) $
923
(922)
8,945
(9,179)
(221)
10,000
9,779
174,818
975
(459)
9,836
(18,350)
(5)
70
1,463
1,528
168,348
1,468
1,038
10,831
(14,676)
3,627
25
23
6,480
6,528
177,164
See accompanying notes to consolidated financial statements.
32
PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operations:
Depreciation
Amortization
Impairment of intangible assets
Deferred income taxes
Non-cash stock compensation and retirement savings plan contributions
Tax benefit from stock option exercises and restricted stock vesting
Adjustment to fair value of contingent consideration for purchase of business
Changes in operating assets and liabilities, net of acquisitions:
Accounts and note receivable
Other assets
Accounts payable
Other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchase of investments
Purchase of property and equipment
Capitalization of software developed for internal use
Cash paid for acquisitions and related costs
Net cash used in investing activities
2010
Year Ended December 31,
2009
(In thousands)
2008
$ 6,480 $
1,463 $10,000
830
3,954
--
205
10,831
(1,531)
(4)
(5,491)
1,626
642
1,189
18,731
(4,252)
(1,161)
(160)
(4,941)
(10,514)
1,483 2,139
4,267 4,810
-- 1,633
(18) (1,769)
9,836 8,945
(700)
(583)
--
--
9,427 3,081
(568)
(342)
399
(884)
(2,086) (2,824)
22,563 25,146
(9,984)
--
(415) (1,320)
(185)
(311)
--
(836)
(10,710) (2,341)
FINANCING ACTIVITIES
Payments for credit facility financing fees
Payment of contingent consideration for purchase of business
Tax benefit from stock option exercises and restricted stock vesting
Proceeds from the exercise of stock options and sales of stock through the Employee Stock Purchase Plan
Purchases of treasury stock
Net cash provided by (used in) financing activities
Effect of exchange rate on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
--
(1,875)
1,531
1,468
(14,676)
(13,552)
67
(5,268)
17,975
$ 12,707 $
--
--
583
975
(420)
--
700
923
(18,350) (9,179)
(16,792) (7,976)
10
(4,934) 14,839
22,909 8,070
17,975 $22,909
5
Supplemental disclosures:
Cash paid for interest
Cash paid for income taxes
Non-cash activities:
Stock issued for purchase of businesses (stock reacquired for escrow claim)
Stock issued for settlement of contingent consideration for purchase of business
Estimated fair value of contingent consideration for purchase of business
$
22 $
$ 4,265 $
$ 2,859 $
768 $
$
$ 3,339 $
50 $
15
1,831 $10,206
-- $ (290)
--
-- $
--
-- $
See accompanying notes to consolidated financial statements.
33
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
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.
Revision of Previously Issued Financial Statements
During the third quarter of 2009, the Company identified a cash flow presentation adjustment related to the reversal of a deferred tax asset resulting
from the exercise of stock options or vesting of stock awards. The Company has determined the impact of the adjustment is not considered material to the
consolidated results of operations, financial position, or cash flows for the year ended December 31, 2008. The Company revised the previously issued
Consolidated Statement of Cash Flows for the year ended December 31, 2008, as presented in this Form 10-K.
The revision decreased the “Net cash provided by operating activities” and decreased the “Net cash used in financing activities” in the Consolidated
Statement of Cash Flows for the year ended December 31, 2008 by approximately $1.6 million. The adjustment had no impact on the Consolidated Balance
Sheet or the Consolidated Statement of Operations for the year ended December 31, 2008.
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 an input method based on the ratio of hours expended to total estimated hours. Amounts invoiced and collected in
excess of revenues recognized 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 and hardware sales are generally
recorded on a gross basis based on the Company’s role as a principal in the transaction. On rare occasions, the Company enters into a transaction where it is
not the principal. In these cases, revenue is recorded on a net basis.
Unbilled revenues represent the project time and expenses that have been incurred, but not yet billed to the client, prior to the end of the fiscal
period. For time and materials projects, the client is invoiced for the amount of hours worked multiplied by the billing rates as stated in the contract. For fixed
fee arrangements, the client is invoiced according to the agreed-upon schedule detailing the amount and timing of payments in the contract. Clients are
typically billed monthly for services provided during that month, but can be billed on a more or less frequent basis as determined by the contract. If the time
and expenses are worked/incurred and approved at the end of a fiscal period and the invoice has not yet been sent to the client, the amount is recorded as
unbilled revenue once the Company verifies all other revenue recognition criteria have been met.
34
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
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 Financial Accounting Standards Board
Accounting Standards Codification (“ASC”) Subtopic 985-605, Software – Revenue Recognition (“ASC Subtopic 985-605”), ASC Subtopic 605-25, Revenue
Recognition – Multiple-Element Arrangements), and ASC Section 605-10-S99 (Staff Accounting Bulletin (“SAB”) Topic 13, Revenue Recognition).
Specifically, if the Company enters into contracts for the sale of services and software or hardware, then the Company evaluates whether the services are
essential to the functionality of the software or hardware 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 or hardware and it can determine objective fair
value evidence exists 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 may provide multiple
services under the terms of an arrangement and is required to assess whether one or more units of accounting are present. Service fees are typically accounted
for as one unit of accounting as fair value evidence for individual tasks or milestones is not available. 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. If
estimates are revised, material differences may result in the amount and timing of revenues recognized for a given period.
Revenues are presented net of taxes assessed by governmental authorities. Sales taxes are generally collected and subsequently remitted on all
software and hardware sales and certain services transactions as appropriate.
Allowance for doubtful accounts is based upon specific identification of likely and probable losses. Each accounting period, accounts receivable is
evaluated for risk associated with a client’s inability to make contractual payments, historical experience, and other currently available information.
Cash and Cash Equivalents
Cash equivalents consist primarily of cash deposits and investments with original maturities of 90 days or less when purchased.
Investments
The Company invests a portion of its excess cash in short-term and long-term investments. The short-term investments consist of U.S treasury
bills, U.S. agency bonds, corporate bonds, and commercial paper with original maturities greater than three months and remaining maturities of less than one
year. The long-term investments consist of corporate bonds with original maturities of greater than one year (maximum original maturity is 24 months as of
December 31, 2010). At December 31, 2010, all of the Company’s investments were classified as available-for-sale and were valued in accordance with the
fair value hierarchy specified in ASC Subtopic 820-10, Fair Value Measurements and Disclosures (“ASC Subtopic 820-10”).
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.
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 ASC Topic 350, Intangibles – Goodwill and Other (“ASC Topic 350”), the Company performs an annual impairment test of goodwill. The
Company evaluates goodwill as of October 1 each year and more frequently if events or changes in circumstances indicate that goodwill might be impaired.
As required by ASC Topic 350, the impairment test is accomplished using a two-step approach. The first step screens for impairment and, when impairment
is indicated, a second step is employed to measure the impairment.
35
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
Other intangible assets include customer relationships, non-compete arrangements, customer backlog, trade name, and internally developed
software, which are being amortized over the assets’ estimated useful lives using the straight-line method. Estimated useful lives range from seven months to
eight years. Amortization of customer relationships, non-compete arrangements, customer backlog, trade name, and internally developed software is
considered an operating expense and is included in “Amortization” in the accompanying Consolidated Statements of Operations. 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.
The Company will continue to monitor the trend of its stock price, other market indicators, and its operating results to determine whether there is a
triggering event that may require the Company to perform an interim impairment test in the future and record impairment charges to earnings, which could
adversely affect the Company’s financial results.
Income Taxes
The Company accounts for income taxes in accordance with ASC Subtopic 740-10, Income Taxes (“ASC Subtopic 740-10”), and ASC Section
740-10-25, Income Taxes – Recognition (“ASC Section 740-10-25”). ASC Subtopic 740-10 prescribes the use of the asset and 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. ASC Subtopic
740-10-25 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. ASC Subtopic 740-10-25 also provides guidance on derecognition, classification, treatment of interest and penalties, and
disclosure of such positions.
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, unvested restricted stock, and warrants using the treasury method, unless such additional equivalent
shares are anti-dilutive.
Stock-Based Compensation
Stock-based compensation is accounted for in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC Topic 718”). Under
this method, the Company recognizes share-based compensation ratably using the straight-line attribution method over the requisite service period. In
addition, pursuant to ASC Topic 718, 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 ASC Topic 718.
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. Investments are stated at amounts which approximate fair value based on quoted market prices or other
observable inputs.
Treasury Stock
The Company uses the cost method to account for repurchases of its own stock.
36
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
Segment Information
The Company operates as one reportable operating segment according to ASC Topic 280, Segment Reporting, which establishes standards for the
way that business enterprises report information about operating segments. The chief operating decision maker formulates decisions about how to allocate
resources and assess performance based on consolidated financial results. The Company also has one reporting unit for purposes of the goodwill impairment
analysis discussed above.
Recent Accounting Pronouncements
Effective January 1, 2010, the Company adopted ASC Topic 810, Consolidation (“ASC Topic 810”). This statement changes how a company
determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of
whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impacts the entity’s economic performance. The adoption of ASC Topic 810 did not have a material impact on
the Company’s consolidated financial statements.
Effective January 1, 2010, the Company adopted FASB Accounting Standards Update No. 2010-06, Fair Value Measurements and
Disclosures (ASC Topic 820): Improving Disclosures about Fair Value Measurements. This standard amends the disclosure guidance with respect to fair
value measurements for both interim and annual reporting periods. Specifically, this standard requires new disclosures for significant transfers of assets or
liabilities between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3 fair value
items on a gross, rather than net basis; and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and Level 3 assets and
liabilities. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2009, the Company adopted ASC Paragraph 350-30-50-2, General Intangibles Other than Goodwill – Disclosure (“ASC
Paragraph 350-30-50-2”). ASC Paragraph 350-30-50-2 requires companies estimating the useful life of a recognized intangible asset to consider their
historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market
participants would use about renewal or extension as adjusted for ASC Topic 350’s entity-specific factors. The adoption of ASC Paragraph 350-30-50-2 did
not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2009, the Company adopted ASC Topic 805, Business Combinations (“ASC Topic 805”). ASC Topic 805 establishes
principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and
any non-controlling 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. The revised statement requires, among other things, that transaction costs be expensed instead of recognized as purchase price. ASC Topic 805
applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009.
Effective January 1, 2009, the Company adopted ASC Subtopic 805-20, Business Combinations – Identifiable Assets and Liabilities, and Any
Noncontrolling Interest (“ASC Subtopic 805-20”), to amend and clarify the initial recognition and measurement, subsequent measurement and accounting,
and related disclosures arising from contingencies in a business combination under ASC Topic 805. Under the new guidance, assets acquired and liabilities
assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined
during the measurement period. If fair value cannot be determined, acquired contingencies should be accounted for using existing guidance. ASC Subtopic
805-20 applies to business combinations for which the acquisition date is on or after January 1, 2009.
In June 2009, the FASB issued SFAS 168. This statement modifies the GAAP hierarchy by establishing only two levels of GAAP, authoritative
and non-authoritative. Effective July 1, 2009, the ASC is considered the single source of authoritative U.S. accounting and reporting standards, except for
additional authoritative rules and interpretive releases issued by the SEC. The Codification was developed to organize GAAP pronouncements by topic so
that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a
numerical designation. This statement was applied beginning in the third quarter of 2009. All accounting references herein have been updated with ASC
references.
37
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
In October 2009, the FASB issued ASC Subtopic 605-25, Revenue Recognition – Multiple-Element Arrangements (“ASC Subtopic 605-25”). This
statement is an amendment to the accounting standards related to the accounting for revenue in arrangements with multiple deliverables including how the
arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the amendments, this standard eliminates the use
of the residual method for allocating arrangement consideration and requires an entity to allocate the overall consideration to each deliverable based on an
estimated selling price of each individual deliverable in the arrangement in the absence of having vendor-specific objective evidence or other third party
evidence of fair value of the undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in a multiple-
deliverable revenue arrangement and expands the disclosure requirements about the judgments made in applying the estimated selling price method and how
those judgments affect the timing or amount of revenue recognition. This standard is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact of ASC Subtopic 605-25 on its
financial statements; however, management does not believe that it will have a material impact on the Company’s consolidated financial statements.
In October 2009, the FASB issued an amendment to ASC Subtopic 985-605. This standard clarifies the existing accounting guidance such that
tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality shall be
excluded from the scope of the software revenue recognition accounting standards. Accordingly, sales of these products may fall within the scope of other
revenue recognition accounting standards or may now be within the scope of this standard and may require an allocation of the arrangement consideration for
each element of the arrangement. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company is currently evaluating the impact of ASC Subtopic 985-605 on its financial statements; however,
management does not believe that it will have a material impact on the Company’s consolidated financial statements.
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):
Net income
Basic:
Weighted-average shares of common stock outstanding
Weighted-average shares of common stock subject to contingency (i.e. restricted stock)
Shares used in computing basic net income per share
Year Ended December 31,
2010 2009 2008
$ 6,480 $ 1,463 $10,000
26,856 27,538 29,338
74
26,856 27,538 29,412
--
--
Effect of dilutive securities:
Stock options
Warrants
Restricted stock subject to vesting
Shares issuable for acquisition consideration (1)
Shares used in computing diluted net income per share (2)
Basic net income per share
Diluted net income per share
659
7
774
8
835
6
98
--
28,304 28,558 30,351
610
6
404
--
$
$
0.24 $
0.23 $
0.05 $
0.05 $
0.34
0.33
(1) Represents the shares held in escrow pursuant to the Merger Agreement with speakTECH as part of the consideration paid. These shares were not
included in the calculation of basic net income per share due to the uncertainty of their ultimate status.
(2) As of December 31, 2010, approximately 26,000 options for shares and 512,000 shares of restricted stock were excluded. These shares were excluded
from shares used in computing diluted net income per share because they would have had an anti-dilutive effect.
38
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
4. Investments and Fair Value Measurement
During 2009, the Company began investing a portion of its excess cash in short-term and long-term investments. The short-term investments
consist of U.S. treasury bills, U.S. agency bonds, corporate bonds, and commercial paper with original maturities greater than three months and remaining
maturities of less than one year. The long-term investments consist of corporate bonds with original maturities of greater than one year (maximum original
maturity is 24 months as of December 31, 2010). At December 31, 2010, all of the Company’s investments were classified as available-for-sale and were
valued in accordance with the fair value hierarchy specified in ASC Subtopic 820-10. As of December 31, 2010, gross accumulated unrealized gains and
losses for these investments were immaterial.
ASC Subtopic 820-10 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and
related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or
unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from
independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists
of the following three levels:
• Level 1 – Quoted prices in active markets for identical assets or liabilities.
• Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Investments were classified as the following (in thousands):
As of
December 31, 2010
Quoted Prices in
Active Markets
(Level 1)
Observable Inputs
(Level 2)
Unobservable Inputs
(Level 3)
Short-term investments:
U.S. treasury bills
U.S. agency bonds
Corporate bonds
Commercial paper
Long-term investments:
Corporate bonds
Total investments
Cash and cash equivalents
Total cash, cash equivalents, & investments
$
$
$
1,614 $
2,031
7,077
579
2,254
13,555 $
12,707
26,262
1,614 $
-
-
-
-
1,614 $
- $
2,031
7,077
579
2,254
11,941 $
-
-
-
-
-
-
Investments are generally classified as Level 1 or Level 2 because they are valued using quoted market prices in active markets, quoted prices in
less active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. U.S. treasury bills are valued
based on unadjusted quoted prices in active markets for identical securities. The Company uses consensus pricing, which is based on multiple observable
pricing sources, to value its investment in corporate bonds and U.S. agency bonds.
39
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
5. Concentration of Credit Risk and Significant Customers
Cash and accounts receivable potentially expose the Company to concentrations of credit risk. Cash is placed with highly rated financial
institutions. The Company provides credit, in the normal course of business, to its customers. The Company generally does not require collateral or up-front
payments. The Company performs periodic credit evaluations of its customers and maintains allowances for potential credit losses. Customers can be denied
access to services in the event of non-payment. During 2010, a substantial portion of the services the Company provided were built on IBM, Oracle,
Microsoft, and TIBCO platforms, among others, and a significant number of the Company’s clients are identified through joint selling opportunities
conducted with and through sales leads obtained from the relationships with these vendors. Due to the Company’s significant fixed operating expenses, the
loss of sales to any significant customer could result in the Company’s inability to generate net income or positive cash flow from operations for some time in
the future. However, the Company has remained relatively diversified, with no one customer providing more than 10% of total revenues during 2010, 2009 or
2008.
6. Employee Benefit Plans
The Company has a qualified 401(k) profit sharing plan available to full-time employees who meet the plan’s eligibility requirements. This defined
contribution plan permits employees to make contributions up to maximum limits allowed by the Internal Revenue Code of 1986 (the “Code”). The Company,
at its discretion, matches a portion of the employee’s contribution under a predetermined formula based on the level of contribution and years of service. For
2010, the Company made matching contributions of 50% (25% in cash and 25% in Company stock) of the first 6% of eligible compensation deferred by the
participant. The Company recognized $2.5 million, $2.6 million, and $2.8 million of expense for the matching cash and Company stock contribution in 2010,
2009, and 2008, respectively. All matching contributions vest over a three year period of service.
The Company has a deferred compensation plan for officers, directors, and certain sales personnel. The plan is designed to allow eligible
participants to accumulate additional income through a nonqualified deferred compensation plan that enables them to make elective deferrals of compensation
to which they will become entitled in the future. As of December 31, 2010, the deferred compensation liability balance was $1.5 million compared to $1.1
million as of December 31, 2009.
7. Business Combinations
Acquisition of Kerdock Consulting, LLC (“Kerdock”)
On March 26, 2010, the Company acquired substantially all of the assets of Kerdock, pursuant to the terms of an Asset Purchase
Agreement. Kerdock is located in Houston, Texas and is an Oracle business intelligence and enterprise performance management consulting firm. The
acquisition of Kerdock provides the Company with high-end expertise in enterprise performance management solutions and existing client relationships with
enterprise customers, as well as extends the Company’s presence in the Southwest United States.
The Company has estimated the total allocable purchase price consideration to be $5.3 million. The purchase price estimate is comprised of
$1.5 million in cash paid and $1.1 million of Company common stock issued at closing, increased by $2.7 million representing the fair value of additional
earnings-based contingent consideration. The contingency was achieved during 2010 and as such, the Company accelerated the payment of the contingent
consideration and paid $1.9 million in cash and issued stock worth $0.8 million in November 2010. The Company incurred approximately $0.4 million in
transaction costs, which were expensed when incurred.
The Company has estimated the allocation of the total purchase price consideration between tangible assets, identified intangible assets, liabilities,
and goodwill as follows (in millions):
Acquired tangible assets
Acquired intangible assets
Liabilities assumed
Goodwill
Total purchase price
$
$
2.1
1.6
(1.2)
2.8
5.3
The Company estimates that the intangible assets acquired have useful lives of nine months to five years.
40
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
The amounts above represent the fair value estimates as of December 31, 2010 and are subject to subsequent adjustment as the Company obtains
additional information during the measurement period and finalizes its fair value estimates. Any subsequent adjustments to these fair value estimates
occurring during the measurement period will result in an adjustment to goodwill or income, as applicable.
Acquisition of speakTECH
On December 10, 2010, the Company acquired speakTECH, pursuant to the terms of an Agreement and Plan of Merger. speakTECH is located in
Costa Mesa, California and is an interactive design firm and Microsoft National Systems Integrator partner. The acquisition of speakTECH provides the
Company with expertise in interactive design, social media, and collaboration consulting capabilities, as well as extends the Company’s presence in California
and Texas.
The Company has estimated the total allocable purchase price consideration to be $9.4 million. The purchase price estimate is comprised of
$4.3 million in cash paid (includes $0.9 million in assumed shareholder debt) and $1.8 million of Company common stock issued at closing, increased by $3.3
million representing the fair value estimate of additional earnings-based contingent consideration that may be realized by speakTECH’s interest holders 12
months after the closing date of the acquisition. The first 40% of the earnings-based contingent consideration is to be paid in Company common stock while
the remaining 60% is to be paid equally in cash and stock. The contingent consideration is recorded in “Other current liabilities” on the Consolidated Balance
Sheet as of December 31, 2010. The Company incurred approximately $0.6 million in transaction costs, which were expensed when incurred.
The Company has estimated the allocation of the total purchase price consideration between tangible assets, identified intangible assets, liabilities,
and goodwill as follows (in millions):
Acquired tangible assets
Acquired intangible assets
Liabilities assumed
Goodwill
Total purchase price
$
$
5.0
3.3
(7.2)
8.3
9.4
The Company estimates that the intangible assets acquired have useful lives of seven months to five years.
The amounts above represent the fair value estimates as of December 31, 2010 and are subject to subsequent adjustment as the Company obtains
additional information during the measurement period and finalizes its fair value estimates. Any subsequent adjustments to these fair value estimates
occurring during the measurement period will result in an adjustment to goodwill or income, as applicable.
The results of the Kerdock and speakTECH operations have been included in the Company’s consolidated financial statements since the
acquisition date. The amounts of revenue and net income of Kerdock and speakTECH included in the Company’s Consolidated Statements of Operations
from the acquisition date to December 31, 2010 is as follows (in thousands):
Acquisition Date to
December 31, 2010
10,093
648
Revenues $
Net income $
41
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
Pro-forma Results of Operations (Unaudited)
The following presents the unaudited pro-forma combined results of operations of the Company with Kerdock and speakTECH for the years ended
December 31, 2010 and 2009, after giving effect to certain pro-forma adjustments related to the amortization of acquired intangible assets and assuming these
companies were acquired as of the beginning of each period presented. These unaudited pro-forma results are not necessarily indicative of the actual
consolidated results of operations had the acquisitions actually occurred on January 1, 2009 and January 1, 2010 or of future results of operations of the
consolidated entities (in thousands):
Revenues
Net income (loss) $
December 31,
2010 2009
$232,170 $208,466
(237)
5,743 $
8. Goodwill and Intangible Assets
The Company performed its annual impairment test of goodwill as of October 1, 2010. As required by ASC Topic 350, the impairment test is
accomplished using a two-step approach. The first step screens for impairment and, when impairment is indicated, a second step is employed to measure the
impairment. The Company also reviews other factors to determine the likelihood of impairment. Based on the test performed, the Company’s fair value as of
the annual testing date exceeded its book value and consequently, no impairment was indicated.
The Company’s fair value was determined by weighting the results of two valuation methods: 1) market capitalization based on the average price of
the Company’s common stock, including a control premium, for a reasonable period of time prior to the evaluation date (generally 15 days) and 2) a
discounted cash flow model. The fair value calculated using the Company’s average common stock price (including a control premium) was weighted 40%
while the value calculated by the discounted cash flow model was weighted 60% in the Company’s determination of its overall fair value.
Goodwill
Activity related to goodwill consisted of the following (in thousands):
Balance, beginning of year
Preliminary purchase price allocations for acquisitions (Note 7)
Adjustments to preliminary purchase price allocations for acquisitions
Balance, end of year
Intangible Assets with Definite Lives
Following is a summary of the Company’s intangible assets that are subject to amortization (in thousands):
Year ended December 31,
2010
2009
104,168 $
11,059
--
115,227 $
104,178
--
(10)
104,168
$
$
Customer relationships
Non-compete agreements
Customer backlog
Trade name
Internally developed software
Total
Gross
Carrying
Amount
$
$
19,543
1,031
151
169
1,039
21,933
2010
Accumulated
Amortization
(12,169)
$
(413)
(100)
(25)
(397)
(13,104)
$
42
Net
Carrying
Amount
$
7,374
618
51
144
642
8,829
$
Gross
Carrying
Amount
$
$
16,613
683
--
--
1,669
18,965
2009
Accumulated
Amortization
(9,752)
$
(483)
--
--
(1,125)
(11,360)
$
Net
Carrying
Amount
$
6,861
200
--
--
544
7,605
$
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
The estimated useful lives of identifiable intangible assets are as follows:
relationships
agreements
Customer
Non-compete
Internally
developed software
Trade name
Customer
backlog
4 - 8 years
3 - 5 years
3 - 5 years
1 - 3 years
7 - 9 months
The weighted average amortization periods for customer relationships and non-compete agreements are 6 years and 5 years, respectively. Total
amortization expense for the years ended December 31, 2010, 2009, and 2008 was approximately $4.0 million, $4.3 million, and $4.8 million,
respectively. In addition, the Company recorded an impairment charge of $1.6 million related to customer relationships in 2008.
Estimated annual amortization expense for the next five years ended December 31 is as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
9. Stock-Based Compensation
Stock Option Plans
$
$
$
$
$
$
4,398
2,163
1,342
847
79
--
The Company made various stock option and award grants under the 1999 Stock Option/Stock Issuance Plan (the “1999 Plan”) prior to May
2009. In April 2009, the Company’s stockholders approved the 2009 Long-Term Incentive Plan (the “Incentive Plan”), which had been previously approved
by the Company’s Board of Directors. The Incentive Plan allows for the granting of various types of stock awards, not to exceed a total of 1.5 million shares,
to eligible individuals. The Compensation Committee of the Board of Directors will administer the Incentive Plan and determine the terms of all stock awards
made under the Incentive Plan.
A summary of changes in stock options during 2010, 2009, and 2008 is as follows (in thousands, except exercise price information):
Options outstanding at January 1, 2008
Options granted
Options exercised
Options canceled
Options outstanding at December 31, 2008
Options granted
Options exercised
Options canceled
Options outstanding at December 31, 2009
Options granted
Options exercised
Options canceled
Options outstanding at December 31, 2010
Options vested, December 31, 2008
Options vested, December 31, 2009
Options vested, December 31, 2010
Shares Range of Exercise Prices Weighted-Average Exercise Price Aggregate Intrinsic Value
2,379 $
--
(338)
(11)
2,030 $
0.02 – 16.94 $
--
0.02 – 10.00
0.50 – 13.25
0.03 – 16.94 $
4.44
--
2.15 $
7.57
4.81
2,726
--
(279)
(47)
1,704 $
--
(369)
(136)
1,199 $
1,773 $
1,532 $
1,113 $
--
0.10 – 7.48
0.03 – 13.25
0.03 – 16.94 $
--
0.03 – 10.00
1.01 – 16.94
0.03 – 9.19 $
0.03 – 16.94 $
0.03 – 16.94 $
0.03 – 9.19 $
43
--
3.04 $
5.35
5.08
--
3.66 $
13.53
4.56 $
4.59
4.95
4.43 $
1,043
2,480
9,514
8,983
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
The following is additional information related to stock options outstanding at December 31, 2010:
Options Outstanding
Options Exercisable
Range of Exercise
Prices
0.03 – 2.28
2.77 – 4.40
4.50 – 4.72
6.31 – 9.19
0.03 – 9.19
Options
302,137 $
300,532 $
13,887 $
582,143 $
1,198,699 $
$
$
$
$
$
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
1.65
3.61
4.63
6.56
4.56
1.68
0.94
2.02
1.77
1.54
Options
302,137
300,532
13,887
496,428
1,112,984
$
$
$
$
$
Weighted
Average
Exercise
Price
1.65
3.61
4.63
6.61
4.43
At December 31, 2010, 2009, and 2008, the weighted-average remaining contractual life of outstanding options was 1.54, 3.40, and 4.21 years,
respectively. Generally stock options have a maximum contractual term of ten years.
Restricted stock activity for the year ended December 31, 2010 was as follows (in thousands, except fair value information):
Restricted stock awards outstanding at January 1, 2010
Awards granted
Awards vested
Awards canceled or forfeited
Restricted stock awards outstanding at December 31, 2010
Shares
3,133
745
(832)
(440)
2,606
$
$
$
$
$
Weighted-Average
Grant Date Fair
Value
8.79
10.42
9.78
8.64
8.97
The total fair value of restricted shares vesting during the years ended December 31, 2010, 2009, and 2008 was $9.3 million, $6.7 million, and
$2.3 million, respectively.
The Company recognized $10.8 million, $9.8 million, and $8.9 million of share-based compensation expense during 2010, 2009, and 2008,
respectively, which included $0.9 million, $0.9 million, and $1.0 million of expense for retirement savings plan contributions, respectively. The associated
current and future income tax benefit recognized during 2010, 2009, and 2008 was $3.8 million, $3.4 million, and $2.9 million, respectively. As of December
31, 2010, there was $17.0 million of total unrecognized compensation cost related to non-vested share-based awards. This cost is expected to be recognized
over a weighted-average period of three years. The Company’s average estimated forfeiture rate for share based awards for the year ended December 31, 2010
was 9%, which was calculated using historical forfeiture experience. Generally restricted stock awards vest over a five year requisite service period.
At December 31, 2010, 1.2 million shares were reserved for future issuance upon exercise of outstanding options and 8,075 shares were reserved
for future issuance upon exercise of outstanding warrants. The majority of the outstanding warrants expire in December 2011. At December 31, 2010, there
were 2.6 million shares of restricted stock outstanding under the 1999 Plan and the Incentive Plan.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “ESPP”) was initiated January 1, 2006 and is a broadly-based stock purchase plan in which any eligible
employee may elect to participate by authorizing the Company to make payroll deductions in a specific amount or designated percentage to pay the exercise
price of an option. In no event will an employee be granted ability under the ESPP that would permit the purchase of common stock with a fair market value
in excess of $25,000 in any calendar year and the Compensation Committee of the Company has set the current annual participation limit at $12,500. During
the year ended December 31, 2010, approximately 12,000 shares were purchased under the ESPP.
44
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
There are four three-month offering periods in each calendar year beginning on January 1, April 1, July 1, and October 1, respectively. The
purchase price of shares offered under the ESPP is an amount equal to 95% of the fair market value of the common stock on the date of purchase (occurring
on, respectively, March 31, June 30, September 30, and December 31). The ESPP is designed to comply with Section 423 of the Code and thus is eligible for
the favorable tax treatment afforded by Section 423.
10. Line of Credit
In May 2008, the Company entered into a Credit Agreement (the “Credit Agreement”) with Silicon Valley Bank (“SVB”) and KeyBank National
Association (“KeyBank”). The Credit Agreement provides for revolving credit borrowings up to a maximum principal amount of $50.0 million, subject to a
commitment increase of $25.0 million. The Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to $500,000 at
any one time; outstanding letters of credit reduce the credit available for revolving credit borrowings. Substantially all of the Company’s assets are pledged to
secure the credit facility. In July 2009, U.S. Bank National Association assumed $10.0 million of KeyBank’s commitment. In March 2010, Bank of America,
N.A. assumed the remaining $15.0 million of KeyBank’s commitment.
All outstanding amounts owed under the Credit Agreement become due and payable no later than the final maturity date of May 30,
2012. Borrowings under the credit facility bear interest at the Company’s option of SVB’s prime rate (4.00% on December 31, 2010) plus a margin ranging
from 0.00% to 0.50% or one-month LIBOR (0.26% on December 31, 2010) plus a margin ranging from 2.50% to 3.00%. The additional margin amount is
dependent on the level of outstanding borrowings. As of December 31, 2010, the Company had $50.0 million of maximum borrowing capacity. An annual
commitment fee of 0.30% is incurred on the unused portion of the line of credit.
The Company is required to comply with various financial covenants under the Credit Agreement. Specifically, the Company is required to
maintain a ratio of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) plus stock compensation and minus income taxes paid and
capital expenditures to interest expense and scheduled payments due for borrowings on a trailing three months basis annualized of not less than 2.00 to 1.00
and a ratio of current maturities of long-term debt to EBITDA plus stock compensation and minus income taxes paid and capital expenditures of not more
than 2.75 to 1.00.
11. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Internal Revenue Service
(“IRS”) has completed examinations of the Company’s U.S. income tax returns for 2002, 2003 and 2004 and the statute for review has passed for 2005 and
2006. As of December 31, 2010, the IRS has proposed no significant adjustments to any of the Company’s tax positions. The Company was notified in
January 2011 that its 2009 income tax return will be audited by the IRS.
Under the provisions of the ASC Subtopic 740-10-25, the Company had no unrecognized tax benefits as of December 31, 2010 or 2009.
As of December 31, 2010, the Company had U.S. Federal tax net operating loss carry forwards of approximately $4.5 million that will begin to
expire in 2020 if not utilized. Utilization of net operating losses may be subject to an annual limitation due to the “change in ownership” provisions of the
Code. The annual limitation may result in the expiration of net operating losses before utilization.
45
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
Significant components of the provision for income taxes are as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Year Ended December 31,
2010 2009 2008
$ 4,009 $ 1,173 $ 7,278
385 1,463
1,043
(9)
11
5,063 1,565 8,732
7
Deferred:
(16) (1,304)
Federal
(137)
(2)
State
Total deferred
(18) (1,441)
Total provision for income taxes $ 5,268 $ 1,547 $ 7,291
192
13
205
The components of pretax income for the years ended December 31, 2010, 2009, and 2008 are as follows (in thousands):
Year Ended December 31,
2010 2009 2008
Domestic $ 9,770 $ 2,995 $ 16,879
Foreign 1,978
412
$ 11,748 $ 3,010 $ 17,291
Total
15
For the year ended December 31, 2010, 2009, and 2008, foreign operations included Canada, China, and India.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes as of December 31, 2010 and
2009 are as follows (in thousands):
December 31,
2010 2009
Deferred tax assets:
Current deferred tax assets:
Accrued liabilities
Net operating losses
Bad debt reserve
$ 539 $ 426
272
273
118
260
816
1,072
--
(13)
$1,072 $ 803
Valuation allowance
Net current deferred tax assets
Non-current deferred tax assets:
Net operating losses and capital loss $1,407 $1,773
599
Fixed assets
2,785 1,988
Deferred compensation
456
678
Intangibles
170
222
Accrued liabilities
253
--
Foreign tax credits
--
Acquisition-related costs
152
--
Foreign earnings previously taxed 1,406
6,559 5,513
--
(125)
$6,559 $5,388
Valuation allowance
Net non-current deferred tax assets
183
46
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
Deferred tax liabilities:
Current deferred tax liabilities:
Deferred income
Prepaid expenses
Net current deferred tax liabilities
Non-current deferred tax liabilities:
Equity in undistributed foreign earnings
Deferred compensation
Goodwill and intangibles
Total non-current deferred tax liabilities
December 31,
2010 2009
$
--
53 $
363 367
$ 416 $ 367
$1,363 $
82
275 258
5,338 4,217
$6,976 $4,557
Net current deferred tax asset
$ 656 $ 436
Net non-current deferred tax asset (liability) $ (417) $ 831
The Company established a valuation allowance in 2005 to offset a portion of the Company’s deferred tax assets due to uncertainties regarding the
realization of deferred tax assets based on the Company’s earnings history and limitations on the utilization of acquired net operating losses. During 2007, the
Company released approximately $1.9 million of its valuation allowance after determining that the acquired net operating losses would be realized. The
remaining valuation allowance of $0.1 million was released during 2010. Management regularly assesses the likelihood that deferred tax assets will be
recovered from future taxable income. To the extent management believes that it is more likely than not that a deferred tax asset will not be realized, a
valuation allowance is established. Management believes it is more likely than not that the Company will generate sufficient taxable income in future years to
realize the benefits of its deferred tax assets, except for those deferred tax assets for which an allowance has been provided. The Company’s net current
deferred tax asset is included in other assets and the net non-current deferred tax liability is included in other non-current liabilities on the Consolidated
Balance Sheet.
Changes to the valuation allowance are summarized as follows for the years presented (in thousands):
Balance, beginning of year
Additions (Reductions)
Additions (Reductions) from purchase accounting
$
Balance, end of year
Year ended December 31,
2009 2008
2010
$ 130
$ 138
$ 140
9
(138)
1
--
$ 140
--
(2)
--
$ 138
The federal corporate statutory rate is reconciled to the Company’s effective income tax rate as follows:
Federal corporate statutory rate
Year Ended December 31,
2010
2008
2009
34.2% 34.0% 35.0%
State taxes, net of federal benefit
Effect of foreign operations
Stock compensation
Non-deductible acquisition costs
Other
5.7
(3.7)
4.5
1.7
2.4
8.4
--
7.4
--
1.6
4.5
--
0.9
--
1.7
Effective income tax rate
44.8% 51.4% 42.1%
The effective income tax rate decreased to 44.8% for the year ended December 31, 2010 from 51.4% for the year ended December 31, 2009
primarily due to the effect of state taxes and permanent items over a larger income base and a larger benefit for certain nontaxable foreign income.
47
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
12. Commitments and Contingencies
The Company leases office space under various operating lease agreements. The Company has the option to extend the term of certain lease
agreements. Future minimum commitments under these lease agreements as of December 31, 2010 are as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
Total minimum lease payments $
Operating
Leases
2,451
$
1,424
1,058
681
261
182
6,057
Rent expense for the years ended December 31, 2010, 2009, and 2008 was approximately $2.5 million, $2.7 million, and $2.9 million, respectively.
13. Balance Sheet Components
December 31,
2010 2009
(In thousands)
Accounts and note receivable:
Accounts receivable
Unbilled revenues
Allowance for doubtful accounts
Total
$33,406 $26,632
15,318 11,927
(315)
$48,496 $38,244
(228)
Other current liabilities:
Accrued variable compensation
Estimated fair value of contingent consideration liability (Note 7)
Accrued subcontractor fees
Acquired liabilities
Payroll related costs
Deferred revenues
Accrued medical claims expense
Other current liabilities
Total
Other non-current liabilities:
Deferred compensation liability
Deferred income taxes
Other non-current liabilities
Total
Property and Equipment:
Computer hardware (useful life of 3 years)
Software (useful life of 1 year)
Leasehold improvements (useful life of 5 years)
Furniture and fixtures (useful life of 5 years)
Less: Accumulated depreciation
Total
48
$
$
8,456 $
3,339
2,631
2,172
1,986
1,121
810
2,139
22,654 $
$
$
1,162
417
209
1,788
$
$
$
$
5,064
1,287
1,159
1,160
(6,315)
2,355
$
$
4,561
--
1,847
--
1,510
898
703
1,957
11,476
1,104
--
225
1,329
4,724
1,002
1,016
1,409
(6,873)
1,278
PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2010
14. Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is summarized as follows for the years presented (in thousands):
Balance, beginning of year
Charges (reductions) to expense
Additions (reductions) resulting from purchase accounting
Uncollected balances written off, net of recoveries
Balance, end of year
Year ended December 31,
2009 2008
2010
$ 1,497 $ 1,475
$ 315
(448) 1,822
(203)
(734) (1,597)
315 $ 1,497
(68)
--
(19)
$
$ 228
--
15. Quarterly Financial Results (Unaudited)
The following tables set forth certain unaudited supplemental quarterly financial information for the years ended December 31, 2010 and 2009. The
quarterly operating results are not necessarily indicative of future results of operations (in thousands except per share data).
March 31,
2010
June 30,
2010
Three Months Ended,
September 30,
2010
(Unaudited)
December 31,
2010
$
Total revenues
$
Gross margin
Income from operations
$
Income before income taxes $
Net income
$
Basic net income per share $
Diluted net income per share $
48,915 $ 55,460 $
13,419 $ 16,952 $
1,542 $ 3,240 $
1,575 $ 3,303 $
868 $ 2,051 $
0.08 $
0.03 $
0.07 $
0.03 $
54,648 $
16,451 $
3,546 $
3,599 $
2,253 $
0.08 $
0.08 $
March 31,
2009
June 30,
Three Months Ended,
September 30,
2009
(Unaudited)
2009
$
Total revenues
$
Gross margin
Income (loss) from operations
$
Income (loss) before income taxes $
Net income (loss)
$
Basic net income (loss) per share $
Diluted net income (loss) per share $
51,292 $ 44,929 $
13,339 $ 11,703 $
56 $
1,242 $
228 $
1,516 $
915 $
(196) $
0.03 $ (0.01) $
0.03 $ (0.01) $
44,489 $
10,857 $
(294) $
(282) $
115 $
-- $
-- $
55,929
15,945
3,185
3,271
1,308
0.05
0.05
December 31,
2009
47,440
12,434
1,537
1,548
629
0.02
0.02
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Perficient, Inc.:
We have audited the accompanying consolidated balance sheets of Perficient, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the
related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010.
We also have audited the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control –
Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations
50
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Company acquired Kerdock Consulting, LLC (Kerdock) and speakTECH during 2010, and management excluded from its assessment of the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, Kerdock’s and speakTECH’s internal control over financial
reporting associated with 9% and 4% of the Company’s total assets and total revenues, respectively, as of and for the year ended December 31, 2010. Our
audit of internal control over financial reporting of the Company as of December 31, 2010 also excluded an evaluation of the internal control over financial
reporting of Kerdock and speakTECH.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Perficient, Inc. as of
December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010,
in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the COSO.
St. Louis, Missouri
March 2, 2011
/s/ KPMG LLP
51
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated
subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of
Directors.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to management, including the principal executive officer and principal financial officer of the Company, as
appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s principal
executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the
fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Company’s principal executive and principal financial officers have
determined that the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act
Rules 13a-15(f). In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of
control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded
against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to
permit the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States. Under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under those criteria, management concluded that the
Company’s internal control over financial reporting was effective as of December 31, 2010.
The Company acquired Kerdock Consulting, LLC (“Kerdock”) and speakTECH in March and December of 2010, respectively. As permitted by
SEC guidance, management excluded these acquired companies from its assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2010. In total, Kerdock and speakTECH represented 9% and 4% of the Company’s total assets and total revenues, respectively,
as of and for the year ended December 31, 2010. Excluding identifiable intangible assets and goodwill recorded in the business combination, Kerdock and
speakTECH represented 2% of the Company’s total assets as of December 31, 2010.
KPMG LLP, our independent registered public accounting firm, has audited our financial statements for the year ended December 31, 2010
included in this Form 10-K, and has issued its report on the effectiveness of internal control over financial reporting as of December 31, 2010, which is
included herein.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the
quarter ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Item 9B. Other Information.
None.
52
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers
Our executive officers, including their ages as of the date of this filing are as follows:
Name
Jeffrey S. Davis
Kathryn J. Henely
Paul E. Martin
Age
46
46
50
Position
President and Chief Executive Officer
Chief Operating Officer
Chief Financial Officer, Treasurer and Secretary
Jeffrey S. Davis became the Chief Executive Officer and a member of the Board on September 1, 2009. He previously served as the Chief
Operating Officer of the Company after the closing of the acquisition of Vertecon in April 2002 and was named the Company’s President in 2004. He served
the same role of Chief Operating Officer at Vertecon from October 1999 to its acquisition by Perficient. Before Vertecon, Mr. Davis was a Senior Manager
and member of the leadership team in Arthur Andersen’s Business Consulting Practice, where he was responsible for defining and managing internal
processes, while managing business development and delivery of all products, services and solutions to a number of large accounts. Mr. Davis also served in
a leadership position at Ernst & Young LLP in the Management Consulting practice and in industry at Boeing, Inc. and Mallinckrodt, Inc. Mr. Davis is an
active volunteer member of the board of directors of the Cystic Fibrosis Foundation of St. Louis and a member of the University of Missouri Trulaske College
of Business advisory board. Mr. Davis has a M.B.A. from Washington University and a B.S. degree in Electrical Engineering from the University of Missouri.
Kathryn J. Henely was appointed the Company’s Chief Operating Officer on November 3, 2009. Ms. Henely joined the Company in 1999 as a
Director in the St. Louis office. She was promoted to General Manager in 2001 and to Vice President of Corporate Operations in 2006. Ms. Henely has been
the Vice President for the Company’s largest business group including several local and national business units along with our offshore development center in
China. She actively participated in the due diligence and integration of several acquisitions within her business group. Additionally, she led the establishment
of our Company Wide Practices and Corporate Recruiting organization. Ms. Henely received her M.S. in Computer Science from the University of Missouri-
Rolla and her B.S. in Computer Science from the University of Iowa.
Paul E. Martin joined the Company in August 2006 as Chief Financial Officer, Treasurer and Secretary. From August 2004 until February 2006,
Mr. Martin was the Interim co-Chief Financial Officer and Interim Chief Financial Officer of Charter Communications, Inc. (“Charter”), a publicly traded
multi-billion dollar revenue domestic cable television multi-system operator. From April 2002 through April 2006, Mr. Martin was the Senior Vice President,
Principal Accounting Officer and Corporate Controller of Charter and was Charter’s Vice President and Corporate Controller from March 2000 to April 2002.
Prior to Charter, Mr. Martin was Vice President and Controller for Operations and Logistics for Fort James Corporation, a manufacturer of paper products
with multi-billion dollar revenues. From 1995 to February 1999, Mr. Martin was Chief Financial Officer of Rawlings Sporting Goods Company, Inc., a
publicly traded multi-million dollar revenue sporting goods manufacturer and distributor. Mr. Martin received a B.S. degree with honors in accounting from
the University of Missouri – St. Louis. Mr. Martin is also a member of the University of Missouri – St. Louis School of Business Leadership Council.
Additional information with respect to Directors and Executive Officers of the Company is incorporated by reference to the Proxy Statement under
the captions “Directors and Executive Officers”, “Composition and Meetings of the Board of Directors and Committees”, and “Section 16(a) Beneficial
Ownership Reporting Compliance.” The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the end of the Company's fiscal year.
Codes of Conduct and Ethics
Information on this subject is found in the Proxy Statement under the caption “Certain Relationships and Related Transactions” and is incorporated
herein by reference. The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the end of the Company's fiscal year.
Audit Committee of the Board of Directors
Information on this subject is found in the Proxy Statement under the caption “Compensation and Meetings of the Board of Directors and
Committees” and is incorporated herein by reference. The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the end of the
Company’s fiscal year.
53
Item 11. Executive Compensation.
Information on this subject is found in the Proxy Statement under the captions “Compensation of Directors and Executive Officers,” “Directors and
Executive Officers,” “Compensation Committee Report,” and “Compensation Committee Interlocks and Insider Participation” and is incorporated herein by
reference. The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the end of the Company's fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information on this subject is found in the Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and
Management,” “Directors and Executive Officers,” and “Equity Compensation Plan Information” and is incorporated herein by reference. The Proxy
Statement will be filed pursuant to Regulations 14A within 120 days of the end of the Company’s fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information on this subject is found in the Proxy Statement under the caption “Certain Relationships and Related Transactions” and incorporated
herein by reference. The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the end of the Company’s fiscal year.
Item 14. Principal Accounting Fees and Services.
Information on this subject is found in the Proxy Statement under the caption “Principal Accounting Firm Fees and Services” and incorporated
herein by reference. The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the end of the Company’s fiscal year.
54
Item 15. Exhibits, Financial Statement Schedules.
1. Financial Statements
PART IV
The following consolidated statements are included within Item 8 under the following captions:
Page(s)
Index
30
Consolidated Balance Sheets
31
Consolidated Statements of Operations
32
Consolidated Statements of Changes in Stockholders’ Equity
33
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
34
Report of Independent Registered Public Accounting Firm 50-51
2. Financial Statement Schedules
No financial statement schedules are required to be filed by Items 8 and 15(b) because they are not required or are not applicable, or the required
information is set forth in the applicable financial statements or notes thereto.
3. Exhibits
See Index to Exhibits starting on page 57.
55
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 3, 2011
PERFICIENT, INC.
By:
/s/ Paul E. Martin
Paul E. Martin
Chief Financial Officer(Principal Financial Officer and Principal
Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey S. Davis and Paul E.
Martin, and each of them (with full power to each of them to act alone), his or her true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign on his or her behalf individually and in each
capacity stated below any and all amendments (including post-effective amendments) to this annual report, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents
and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and either of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
/s/ Jeffrey S. Davis
Jeffrey S. Davis
/s/ Paul E. Martin
Paul E. Martin
/s/ Ralph C. Derrickson
Ralph C. Derrickson
/s/ Edward L. Glotzbach
Edward L. Glotzbach
/s/ John S. Hamlin
John S. Hamlin
/s/ James R. Kackley
James R. Kackley
/s/ David S. Lundeen
David S. Lundeen
/s/ David D. May
David D. May
Title
Director, President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
56
Date
March 3, 2011
March 3, 2011
March 3, 2011
March 3, 2011
March 3, 2011
March 3, 2011
March 3, 2011
March 3, 2011
Exhibit
Number Description
INDEX TO EXHIBITS
3.1
3.2
3.3
3.4
4.1
4.2
10.1†
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
Certificate of Incorporation of Perficient, Inc., previously filed with the Securities and Exchange Commission as an Exhibit to our Registration
Statement on Form SB-2 (File No. 333-78337) declared effective on July 28, 1999 by the Securities and Exchange Commission and
incorporated herein by reference
Certificate of Amendment to Certificate of Incorporation of Perficient, Inc., previously filed with the Securities and Exchange Commission as
an Exhibit to our Form 8-A filed with the Securities and Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act of
1934 on February 15, 2005 and incorporated herein by reference
Certificate of Amendment to Certificate of Incorporation of Perficient, Inc., previously filed with the Securities and Exchange Commission as
an Exhibit to our Registration Statement on Form S-8 (File No. 333-130624) filed on December 22, 2005 and incorporated herein by reference
Bylaws of Perficient, Inc., previously filed with the Securities and Exchange Commission as an Exhibit to our Current Report on Form 8-K
filed November 9, 2007 and incorporated herein by reference
Specimen Certificate for shares of Perficient, Inc. common stock, previously filed with the Securities and Exchange Commission as an Exhibit
to our Quarterly Report on Form 10-Q (File No. 001-15169) filed May 7, 2009 and incorporated herein by reference
Form of Common Stock Purchase Warrant, previously filed with the Securities and Exchange Commission as an Exhibit to our Current
Report on Form 8-K (File No.001-15169) filed on January 17, 2002 and incorporated herein by reference
Perficient, Inc. Amended and Restated 1999 Stock Option/Stock Issuance Plan, previously filed with the Securities and Exchange
Commission as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated by reference herein
Perficient, Inc. 2009 Long-Term Incentive Plan, as amended, previously filed with the Securities and Exchange Commission as an Exhibit to
our Current Report on Form 8-K filed February 25, 2010 and incorporated herein by reference
Form of Stock Option Agreement, previously filed with the Securities and Exchange Commission as an Exhibit to our Annual Report on Form
10-KSB for the fiscal year ended December 31, 2004 and incorporated herein by reference
Perficient, Inc. Employee Stock Purchase Plan, previously filed with the Securities and Exchange Commission as Appendix A to the
Registrant's Schedule 14A (File No. 001-15169) on October 13, 2005 and incorporated herein by reference
Form of Restricted Stock Agreement, previously filed with the Securities and Exchange Commission as an Exhibit to our Annual Report on
Form 10-K for the year ended December 31, 2005 and incorporated by reference herein
Form of Restricted Stock Agreement, previously filed with the Securities and Exchange Commission as an Exhibit to our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2010 and incorporated by reference herein
Offer Letter, dated July 20, 2006, by and between Perficient, Inc. and Mr. Paul E. Martin, previously filed with the Securities and Exchange
Commission as an Exhibit to our Current Report on Form 8-K filed on July 26, 2006 and incorporated herein by reference
57
Exhibit
Number
10.8†
Description
Offer Letter Amendment, dated August 31, 2006, by and between Perficient, Inc. and Mr. Paul E. Martin, previously filed with the Securities
and Exchange Commission as an Exhibit to our Current Report on Form 8-K filed on September 1, 2006 and incorporated herein by reference
10.9†
Employment Agreement between Perficient, Inc. and Paul E. Martin dated and effective May 5, 2010, previously filed as an Exhibit to our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and incorporated herein by reference
10.10†
10.11†
10.12†
10.13†
10.14
10.15
10.16
Employment Agreement between Perficient, Inc. and John T. McDonald dated March 3, 2009, and effective as of January 1, 2009, previously
filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference
Employment Agreement between Perficient, Inc. and Jeffrey S. Davis dated March 3, 2009, and effective as of January 1, 2009, previously
filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference
Transition Agreement between John T. McDonald and Perficient, Inc. dated October 25, 2010, and effective November 2, 1010, previously
filed as an Exhibit to our Current Report on Form 8-K filed on November 2, 2010 and incorporated herein by reference
Form of Letter Agreement between Perficient, Inc. and Richard Kalbfleish, dated July 30, 2010, previously filed as an Exhibit to our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2010
Credit Agreement by and among Silicon Valley Bank, KeyBank National Association, U.S. Bank National Association, and Perficient, Inc.
dated effective as of May 30, 2008, previously filed with the Securities and Exchange Commission as an Exhibit to our Current Report on
Form 8-K (File No. 001-15169) filed on June 3, 2008 and incorporated herein by reference
First Amended and Restated Investor Rights Agreements dated as of June 26, 2002 by and between Perficient, Inc. and the Investors listed on
Exhibits A and B thereto, previously filed with the Securities and Exchange Commission as an Exhibit to our Current Report on Form 8-K
(File No. 001-15169) filed on July 18, 2002 and incorporated by reference herein
Securities Purchase Agreement, dated as of June 16, 2004, by and among Perficient, Inc., Tate Capital Partners Fund, LLC, Pandora Select
Partners, LP, and Sigma Opportunity Fund, LLC, previously filed with the Securities and Exchange Commission as an Exhibit to our Current
Report on Form 8-K filed on June 23, 2004 and incorporated by reference herein
21.1*
Subsidiaries
23.1*
Consent of KPMG LLP
24.1*
Power of Attorney (included on the signature page hereto)
31.1*
Certification by the Chief Executive Officer of Perficient, Inc. as required by Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification by the Chief Financial Officer of Perficient, Inc. as required by Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification by the Chief Executive Officer and Chief Financial Officer of Perficient, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
† Identifies an Exhibit that consists of or includes a management contract or compensatory plan or arrangement.
* Filed herewith.
58
Subsidiaries
Perficient, Inc.
Perficient Canada Corp.
BoldTech International LLC
Perficient China, Ltd.
Perficient India Private Limited
Kiwi MergeCo, Inc.
Subsidiaries
Jurisdiction
Delaware
Province of Ontario, Canada
Colorado
People’s Republic of China
India
Delaware
Exhibit 21.1
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors and Stockholders
Perficient, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-89076, No. 333-42624, No. 333-100490, No. 333-116549,
No. 333-117216, No. 333-123177, No. 333-129054, No. 333-138602, No. 333-142267, No. 333-145899, No. 333-147687, No. 333-148978, and
No. 333-152274) on Form S-3 and (No. 333-42626, No. 333-44854, No. 333-75666, No. 333-118839, No. 333-130624, No. 333-147730, No. 333-157799,
and No. 333-160465) on Form S-8 of Perficient, Inc. (the Company) of our report dated March 2, 2011, with respect to the consolidated balance sheets of the
Company as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2010, and the effectiveness of internal control over financial reporting as of December 31, 2010, which report
appears in the December 31, 2010 annual report on Form 10-K of the Company.
Our report dated March 2, 2011, on the effectiveness of internal control over financial reporting as of December 31, 2010, contains an explanatory paragraph
that states the Company acquired Kerdock Consulting, LLC (Kerdock) and speakTECH during 2010, and management excluded from its assessment of the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, Kerdock’s and speakTECH’s internal control over financial
reporting associated with 9% and 4% of the Company’s total assets and total revenues, respectively, as of and for the year ended December 31, 2010. Our
audit of internal control over financial reporting of the Company as of December 31, 2010 also excluded an evaluation of the internal control over financial
reporting of Kerdock and speakTECH.
/s/ KPMG LLP
St. Louis, Missouri
March 2, 2011
Exhibit 31.1
I, Jeffrey S. Davis, certify that:
1. I have reviewed this annual report on Form 10-K of Perficient, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 3, 2011
By:
/s/ Jeffrey S. Davis
Jeffrey S. Davis
Chief Executive Officer and President
Exhibit 31.2
I, Paul E. Martin, certify that:
1. I have reviewed this annual report on Form 10-K of Perficient, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 3, 2011
By:
/s/ Paul E. Martin
Paul E. Martin
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
Exhibit 32.1
Pursuant to 18 U.S.C. Sec. 1350 and in connection with the accompanying report on Form 10-K for the fiscal year ended December 31, 2010 that contains
financial statements for such period and that is being filed concurrently with the Securities and Exchange Commission on the date hereof (the “Report”), each
of the undersigned officers of Perficient, Inc. (the “Company”), hereby certifies that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 3, 2011
Date: March 3, 2011
By:
By:
/s/ Jeffrey S. Davis
Jeffrey S. Davis
Chief Executive Officer and President
/s/ Paul E. Martin
Paul E. Martin
Chief Financial Officer