Part I.	Financial Information	1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006	2
	Condensed Consolidated Statement of Stockholders' Equity for the Three Months Ended March 31, 2007	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
Part II.	Other Information	21
Item 1A.	Risk Factors	21
Item 6.	Exhibits	21
Signatures		22

 

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Condensed Consolidated Balance Sheets

 

		March 31,  2007				December 31, 2006
ASSETS		(In thousands)
Current assets:
Cash and cash equivalents		$	996			$	4,549
Accounts receivable, net			40,930				38,600
Prepaid expenses			681				1,171
Other current assets			2,071				2,799
Total current assets			44,678				47,119
Property and equipment, net			2,006				1,806
Goodwill			77,748				69,170
Intangible assets, net			14,620				11,886
Other non-current assets			1,017				1,019
Total assets		$	140,069			$	131,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	3,234			$	5,025
Current portion of long-term debt			989				1,201
Other current liabilities			11,078				16,034
Total current liabilities			15,301				22,260
Long-term borrowings, net of current portion			1,900				137
Deferred income taxes			2,093				1,251
Total liabilities			19,294				23,648
Stockholders' equity:
Common stock (par value $.001 per share; 50,000,000 shares authorized and
27,389,734 shares issued and outstanding as of March 31, 2007;
26,699,974 shares issued and outstanding as of December 31, 2006)			27				27
Additional paid-in capital			157,297				147,028
Accumulated other comprehensive loss			(131	)			(125	)
Accumulated deficit			(36,418	)			(39,578	)
Total stockholders' equity			120,775				107,352
Total liabilities and stockholders' equity		$	140,069			$	131,000

See accompanying notes to interim unaudited condensed consolidated financial statements.

 

 

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Perficient, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended March 31,
		2007				2006
		(in thousands, except per share data)
Revenues
Services		$	43,297			$	25,606
Software			4,192				2,682
Reimbursable expenses			2,560				1,356
Total revenues			50,049				29,644
Cost of revenues (exclusive of depreciation and amortization, shown separately below)
Project personnel costs			26,266				16,265
Software costs			3,486				2,288
Reimbursable expenses			2,560				1,356
Other project related expenses			685				447
Total cost of revenues			32,997				20,356
Gross margin			17,052				9,288
Selling, general and administrative			10,299				5,638
Depreciation			337				168
Amortization of intangible assets			846				425
Income from operations			5,570				3,057
Interest income			49				2
Interest expense			(50	)			(84	)
Other			6				59
Income before income taxes			5,575				3,034
Provision for income taxes			2,415				1,329
Net income		$	3,160			$	1,705
Basic net income per share		$	0.12			$	0.07
Diluted net income per share		$	0.11			$	0.07
Shares used in computing basic net income per share			27,081,425				23,537,534
Shares used in computing diluted net income per share			29,448,512				26,183,393

See accompanying notes to interim unaudited condensed consolidated financial statements.

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Perficient, Inc.

Condensed Consolidated Statement of Stockholders' Equity

Three Months Ended March 31, 2007

(Unaudited)

(In thousands)

 

 

														Accumulated
		Common				Common				Additional				Other								Total
		Stock				Stock				Paid-in				Comprehensive				Accumulated				Stockholders'
		Shares				Amount				Capital				Loss				Deficit				Equity
Balance at December 31, 2006			26,700			$	27			$	147,028			$	(125	)		$	(39,578	)		$	107,352
E Tech acquisition			306				--				5,755				--				--				5,755
Stock options exercised			341				--				1,188				--				--				1,188
Purchases of stock from Employee Stock Purchase Plan			2				--				44				--				--				44
Tax benefit of stock option exercises			--				--				1,702				--				--				1,702
Stock compensation			--				--				1,580				--				--				1,580
Vested stock compensation			41				--				--				--				--				--
Foreign currency translation adjustment			--				--				--				(6	)			--				(6	)
Net income			--				--				--				--				3,160				3,160
Total comprehensive income																							3,154
Balance at March 31, 2007			27,390			$	27			$	157,297			$	(131	)		$	(36,418	)		$	120,775

See accompanying notes to interim unaudited condensed consolidated financial statements.

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Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended March 31,
		2007				2006
		As Restated, Note 2
		(In thousands)
OPERATING ACTIVITIES
Net income		$	3,160			$	1,705
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation			337				168
Amortization of intangibles			846				425
Non-cash stock compensation			1,580				724
Non-cash interest expense			--				5
Change in deferred income taxes			928				(572	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(140	)			(158	)
Other assets			1,643				896
Accounts payable			(1,791	)			(1,123	)
Other liabilities			(7,829	)			(2,777	)
Net cash used in operating activities			(1,266	)			(707	)
INVESTING ACTIVITIES
Purchase of property and equipment			(406	)			(278	)
Capitalization of software developed for internal use			(50	)			(47	)
Purchase of businesses, net of cash acquired			(6,306	)			--
Net cash used in investing activities			(6,762	)			(325	)
FINANCING ACTIVITIES
Proceeds from short-term borrowings			9,100				--
Payments on short-term borrowings			(7,200	)			(3,000	)
Payments on long-term debt			(350	)			(326	)
Tax benefit on stock options			1,702				895
Proceeds from exercise of stock options and Employee Stock Purchase Plan			1,232				666
Proceeds from exercise of warrants			--				46
Net cash provided by financing activities			4,484				(1,719	)
Effect of exchange rate on cash and cash equivalents			(9	)			(9	)
Change in cash and cash equivalents			(3,553	)			(2,760	)
Cash and cash equivalents at beginning of period			4,549				5,096
Cash and cash equivalents at end of period		$	996			$	2,336
Supplemental disclosures:
Interest paid		$	26			$	111
Cash paid for income taxes		$	177			$	215
Non cash activities:
Stock issued for Purchase of Business		$	5,755			$	--
Change in goodwill		$	(257	)		$	62

See accompanying notes to interim unaudited condensed consolidated financial statements.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation

 

   The accompanying unaudited interim condensed consolidated financial statements of Perficient, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States and are presented in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial information. Accordingly, certain footnote disclosures have been condensed or omitted. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the Company's Annual Report on Form 10-K for the year ended December 31, 2006, as amended. Operating results for the three months ended March 31, 2007 may not be indicative of the results for the full fiscal year ending December 31, 2007.

 

2. Restatement of Financial Information

   In August of 2007, an error was identified in the previously reported Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2007 related to certain previously reported cash payments for acquisitions that were shown as cash used in operating activities, rather than investing activities. Consequently, the Company has restated the presentation of the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007. For the three months ended March 31, 2006, no restatement was necessary to the Condensed Consolidated Statement of Cash Flows.  The error does not change the total amount of cash and cash equivalents or have any impact on the previously reported income statement (including earnings per share), balance sheet or statement of stockholders’ equity amounts.

   The effect of the restatement on specific line items in the Condensed Consolidated Statement of Cash Flows is as follows:

		Three Months Ended March 31, 2007
		As previously reported				As restated
		(In thousands)
Cash flows from operating activities:
Other liabilities		$	(8,297	)		$	(7,829	)
Net cash provided by operating activities			(1,734	)			(1,266	)
Cash flows from investing activities:
Purchase of businesses, net of cash acquired			(5,838	)			(6,306	)
Net cash used in investing activities			(6,294	)			(6,762	)

3. Summary of Significant Accounting Policies

 

Stock-Based Compensation

 

   Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (As Amended), Share Based Payment (“SFAS No. 123R”), using the modified prospective application transition method. Under this method, compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date is recognized over the remaining service period. The compensation cost for that portion of awards is based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123. All new awards and awards that are modified, repurchased, or cancelled after the adoption date are accounted for under the provisions of SFAS No. 123R. Prior periods are not restated under this transition method. The Company recognizes share-based compensation ratably using the straight-line attribution method over the requisite service period. In addition, pursuant to SFAS No. 123R, the Company is required to estimate the amount of expected forfeitures when calculating share-based compensation, instead of accounting for forfeitures as they occur, which was the Company's practice prior to the adoption of SFAS No. 123R.

 

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Revenue Recognition

 

    Revenues are primarily derived from professional services provided on a time and materials basis. For time and material contracts, revenues are recognized and billed by multiplying the number of hours expended in the performance of the contract by the established billing rates. For fixed fee projects, revenues are generally recognized using the proportionate performance method based on the ratio of hours expended to total estimated hours. Billings in excess of costs plus earnings are classified as deferred revenues. On many projects the Company is also reimbursed for out-of-pocket expenses such as airfare, lodging and meals. These reimbursements are included as a component of revenues. Revenues from software sales are recorded on a gross basis based on the Company's role as principal in the transaction. The Company is considered a “principal” if the Company is the primary obligor and bears the associated credit risk in the transaction. In the event the Company does not meet the requirements to be considered a principal in the software sale transaction and acts as an agent, the revenues would be recorded on a net basis.

 

Revenues are recognized when the following criteria are met: (1) persuasive evidence of the customer arrangement exists, (2) fees are fixed and determinable, (3) delivery and acceptance have occurred, and (4) collectibility is deemed probable. The Company's policy for revenue recognition in instances where multiple deliverables are sold contemporaneously to the same counterparty is in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 97-2, Software Revenue Recognition, Emerging Issues Task Force ("EITF") Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Specifically, if the Company enters into contracts for the sale of services and software, then the Company evaluates whether the services are essential to the functionality of the software and whether it has objective fair value evidence for each deliverable in the transaction. If the Company has concluded the services to be provided are not essential to the functionality of the software and can determine objective fair value evidence for each deliverable of the transaction, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition policies. All deliverables of the Company's multiple element arrangements meet these criteria. We follow very specific and detailed guidelines, discussed above, in determining revenues; however, certain judgments and estimates are made and used to determine revenues recognized in any accounting period. Material differences may result in the amount and timing of revenues recognized for any period if different conditions were to prevail.  

Revenues are presented net of taxes assessed by governmental authorities. Sales taxes are generally collected and subsequently remitted on all software sales and certain services transactions as appropriate.

 

Intangible Assets

 

Goodwill represents the excess purchase price over the fair value of net assets acquired, or net liabilities assumed, in a business combination. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company performs an annual impairment test of goodwill. The Company evaluates goodwill at the enterprise level as of October 1 each year or more frequently if events or changes in circumstances indicate that goodwill might be impaired. As required by SFAS No.142, 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. During the three months ended March 31, 2007, there were no triggering events that may indicate an impairment of goodwill has occurred.

 

Other intangible assets include customer relationships, customer backlog, non-compete arrangements and internally developed software, and are being amortized over the assets' estimated useful lives using the straight-line method. Estimated useful lives range from four months to eight years. Amortization of customer relationships, customer backlog, non-compete arrangements and internally developed software are considered operating expenses and are included in “Amortization of intangible assets” in the accompanying consolidated Statements of 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.

 

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.

 

 

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4. Stock-Based Compensation

 

Stock Option Plans

 

In May 1999, the Company's Board of Directors and stockholders approved the 1999 Stock Option/Stock Issuance Plan (the “1999 Plan”). The 1999 Plan contains programs for (i) the discretionary granting of stock options to employees, non-employee board members and consultants for the purchase of shares of the Company's commons stock, (ii) the discretionary issuance of common stock directly to eligible individuals, and (iii) the automatic issuance of stock options to non-employee board members. The Compensation Committee of the Board of Directors administers the 1999 Plan, and determines the exercise price and vesting period for each grant. Options granted under the 1999 Plan have a maximum term of 10 years. In the event that the Company is acquired, whether by merger or asset sale or board-approved sale by the stockholders of more than 50% of the Company's voting stock, each outstanding option under the discretionary option grant program which is not to be assumed by the successor corporation or otherwise continued will automatically accelerate in full, and all unvested shares under the discretionary option grant and stock issuance programs will immediately vest, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the successor corporation or otherwise continued in effect. The Compensation Committee may grant options under the discretionary option grant program that will accelerate in the acquisition even if the options are assumed or that will accelerate if the optionee's service is subsequently terminated.

  

The Compensation Committee may grant options and issue shares that accelerate in connection with a hostile change in control effected through a successful tender offer for more than 50% of the Company's outstanding voting stock or by proxy contest for the election of board members, or the options and shares may accelerate upon a subsequent termination of the individual's service.

Total share-based compensation cost recognized for the three months ended March 31, 2007 and 2006 was approximately $1.6 million and $0.7 million, respectively, and the associated current and future income tax benefits recognized for the three months ended March 31, 2007 and 2006 was approximately $0.5 million and $0.1 million, respectively.  As of March 31, 2007, there was $18.9 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 2.5 years.

 

Stock option activity for the three months ended March 31, 2007 was as follows (in thousands, except exercise price information):

 

			Shares			Range of Exercise Prices			Weighted-Average Exercise Price
Options outstanding at January 1, 2007			3,552		$	0.02 - $16.94		$	4.03
Options granted			--			--			--
Options exercised			(341	)	$	0.03 - $16.94		$	3.47
Options canceled			--			--		$	--
Options outstanding at March 31, 2007			3,211		$	0.02 - $16.94		$	4.09
Options vested at March 31, 2007			2,223		$	0.02 - $16.94		$	3.72

Restricted stock activity for the three months ended March 31, 2007 was as follows (in thousands, except fair value information):

 

			Shares			Weighted-Average Grant Date Fair Value
Restricted stock awards outstanding at January 1, 2007			1,429		$	12.74
Awards granted			16		$	19.70
Awards vested			(41	)	$	7.13
Awards canceled			(6	)	$	13.50
Restricted stock awards outstanding at March 31, 2007			1,398		$	12.98

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5. Net Income per Share

The following table presents the calculation of basic and diluted net income per share (in thousands, except per share information):

 

		Three months ended March 31,
		2007				2006
Net income		$	3,160			$	1,705
Basic:
Weighted-average shares of common stock outstanding			27,081				23,537
Shares used in computing basic net income per share			27,081				23,537
Effect of dilutive securities:
Stock options			2,004				2,385
Warrants			8				125
Restricted stock subject to vesting			356				136
Shares used in computing diluted net income per share			29,449				26,183
Basic net income per share		$	0.12			$	0.07
Diluted net income per share		$	0.11			$	0.07

6. Commitments and Contingencies

 

The Company leases its office facilities and certain equipment under various operating lease agreements. The Company has the option to extend the term of certain of its office facilities leases. Future minimum commitments under these lease agreements are as follows (table in thousands):

   

		Operating Leases
2007 remaining		$	1,098
2008			1,313
2009			1,164
2010			768
2011			340
Thereafter			61
Total minimum lease payments		$	4,744

 

In connection with certain of its acquisitions, the Company was required to establish various letters of credit totaling $400,000 with Silicon Valley Bank to serve as collateral to secure facility leases. These letters of credit reduce the borrowings available under the Company's accounts receivable line of credit. One letter of credit for $250,000 expires in June 2007 and the other for $150,000 expires in October 2009.

7. Balance Sheet Components

 

     The components of accounts receivable are as follows (in thousands):

 

		March 31, 2007				December 31, 2006
Accounts receivable		$	25,605			$	29,461
Unbilled revenue			15,786				9,846
Allowance for doubtful accounts			(461	)			(707	)
Total		$	40,930			$	38,600

 

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     The components of other current assets are as follows (in thousands):

 

		March 31, 2007				December 31, 2006
Income tax receivable		$	1,438			$	2,150
Receivables associated with the E Tech acquisition			187				--
Miscellaneous receivables			194				16
Deferred current tax assets			134				43
Other current assets			118				590
Total		$	2,071			$	2,799

The components of other current liabilities are as follows (in thousands):

 

		March 31, 2007				December 31, 2006
Accrued bonus		$	3,970			$	9,851
Accrued subcontractor fees			1,962				1,803
Deferred revenue			1,296				1,318
Payroll related costs			883				805
Accrued medical claims expense			609				--
Accrued vacation			424				453
Accrued acquisition costs related to Insolexen			287				311
Sales and use taxes			47				326
Other accrued expenses			1,600				1,167
Total		$	11,078			$	16,034

 

Property and equipment consist of the following (in thousands):

 

		March 31, 2007				December 31, 2006
Computer Hardware (useful life of 2 years)		$	4,434			$	3,933
Furniture & Fixtures (useful life of 5 years)			985				980
Leasehold Improvements (useful life of 3 years)			295				275
Software (useful life of 1 year)			714				702
Less: Accumulated Depreciation			(4,422	)			(4,084	)
Total		$	2,006			$	1,806

 

8. Business Combinations

 

Acquisition of Bay Street Solutions, Inc.

 

On April 7, 2006, the Company acquired Bay Street Solutions, Inc. (“Bay Street”), a national customer relationship management consulting firm, for approximately $9.8 million.  The purchase price consists of approximately $4.1 million in cash, transaction costs of $636,000, and 464,569 shares of the Company's common stock valued at approximately $12.18 per share (approximately $5.7 million worth of the Company's common stock) less the discount ascribed to those shares subject to a lapse acceleration right of approximately $630,000, as determined by a third party valuation firm.  The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Goodwill is assigned at the enterprise level. The purchase price was allocated to intangibles based on management's estimate and an independent valuation. Management expects to finalize the purchase price allocation within twelve months of the acquisition date as certain initial accounting estimates are resolved. The results of Bay Street's operations have been included in the Company's consolidated financial statements since April 7, 2006.

 

 

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The preliminary purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	1.6
Customer backlog			0.2
Non-compete agreements			0.1
Goodwill			6.4
Tangible assets acquired:
Accounts receivable			2.4
Other assets			0.6
Property and equipment			0.1
Accrued expenses			(1.6	)
Net assets acquired		$	9.8

The Company estimates that the intangible assets acquired have useful lives of four months to six years.

Acquisition of Insolexen, Corp.

 

On May 31, 2006, the Company acquired Insolexen, Corp. (“Insolexen”), a business integration consulting firm, for approximately $15.1 million. The purchase price consists of approximately $7.7 million in cash, transaction costs of $695,000, and 522,944 shares of the Company's common stock valued at approximately $13.72 per share (approximately $7.2 million worth of the Company's common stock) less the discount ascribed to those shares subject to a lapse acceleration right of approximately $613,000, as determined by a third party valuation firm. The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Goodwill is assigned at the enterprise level. The purchase price was allocated to intangibles based on management's estimate and an independent valuation. Management expects to finalize the purchase price allocation within twelve months of the acquisition date as certain initial accounting estimates are resolved. The results of Insolexen's operations have been included in the Company's consolidated financial statements since May 31, 2006.

The preliminary purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	2.8
Customer backlog			0.4
Non-compete agreements			0.1
Goodwill			10.5
Tangible assets and liabilities acquired:
Accounts receivable			3.9
Other assets			2.1
Accrued expenses			(4.7	)
Net assets acquired		$	15.1

The Company estimates that the intangible assets acquired have useful lives of seven months to six years.

Acquisition of the Energy, Government and General Business (EGG) division of Digital Consulting & Software Services, Inc.

On July 21, 2006, the Company acquired the Energy, Government and General Business (“EGG”) division of Digital Consulting & Software Services, Inc., a systems integration consulting business, for approximately $13.1 million. The purchase price consists of approximately $6.4 million in cash, transaction costs of approximately $275,000, and 511,382 shares of the Company's common stock valued at approximately $12.71 per share (approximately $6.5 million worth of the Company's common stock) less the discount ascribed to those shares subject to a lapse acceleration right of approximately $92,000, as determined by a third party valuation firm. The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Goodwill is assigned at the enterprise level. The purchase price was allocated to intangibles based on management's estimate and an independent valuation. Management expects to finalize the purchase price allocation within twelve months of the acquisition date as certain initial accounting estimates are resolved. The results of EGG's operations have been included in the Company's consolidated financial statements since July 21, 2006.

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The preliminary purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	3.7
Customer backlog			0.5
Non-compete agreements			0.1
Goodwill			6.2
Tangible assets and liabilities acquired:
Accounts receivable			3.8
Other assets			0.4
Accrued expenses			(1.6	)
Net assets acquired		$	13.1

The Company estimates that the intangible assets acquired have useful lives of five months to six years.

 

 Acquisition of the E Tech Solutions, Inc.

On February 20, 2007, the Company acquired e tech solutions, Inc. (“E Tech”), a solutions-oriented IT consulting firm, for approximately $12.3 million. The purchase price consists of approximately $5.8 million in cash, transaction costs of approximately $663,000, and 306,247 shares of the Company's common stock valued at approximately $20.34 per share (approximately $6.2 million worth of the Company's common stock) less the value of those shares subject to a lapse acceleration right of approximately $474,000, as determined by a third party valuation firm. The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Goodwill is assigned at the enterprise level. The purchase price was allocated to intangibles based on management's estimate and an independent valuation. Management expects to finalize the purchase price allocation within twelve months of the acquisition date as certain initial accounting estimates are resolved. The results of E Tech's operations have been included in the Company's consolidated financial statements since February 20, 2007.

The preliminary purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	3.0
Customer backlog			0.5
Non-compete agreements			0.1
Goodwill			8.9
Tangible assets and liabilities acquired:
Accounts receivable			2.2
Property and equipment			0.1
Other assets			0.1
Accrued expenses			(2.6	)
Net assets acquired		$	12.3

The Company estimates that the intangible assets acquired have useful lives of ten months to eight years.

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Pro forma Results of Operations

 

The following presents the unaudited pro forma combined results of operations of the Company with Bay Street, Insolexen, EGG, and E Tech for the three months ended March 31, 2007 and 2006, after giving effect to certain pro forma adjustments related to the amortization of acquired intangible assets. These unaudited pro forma results are not necessarily indicative of the actual consolidated results of operations had the acquisitions actually occurred on January 1, 2007 and January 1, 2006 or of future results of operations of the consolidated entities (in thousands, except per share information):

 

		Three Months Ended March 31,
		2007				2006
Revenues		$	51,730			$	43,750
Net income		$	3,033			$	1,996
Basic net income per share		$	0.11			$	0.08
Diluted net income per share		$	0.10			$	0.07

 

9. Intangible Assets

 

     Intangible Assets with Indefinite Lives

 

          The changes in the carrying amount of goodwill for the three months ended March 31, 2007 are as follows (in thousands):

 

Balance at December 31, 2006		$	69,170
E Tech Acquisition			8,932
Miscellaneous adjustments to Insolexen and EGG goodwill			(97	)
Adjustment to goodwill related to deferred taxes associated with acquisitions			(257	)
Balance at March 31, 2007		$	77,748

 

     Intangible Assets with Definite Lives

     Following is a summary of Company's intangible assets that are subject to amortization (in thousands):

		March 31, 2007												December 31, 2006
		Gross Carrying Amounts				Accumulated Amortization				Net Carrying Amounts				Gross Carrying Amounts				Accumulated Amortization				Net Carrying Amounts
Customer relationships		$	15,850			$	(3,425	)		$	12,425			$	12,860			$	(2,808	)		$	10,052
Non-compete agreements			2,473				(1,222	)			1,251				2,393				(1,094	)			1,299
Customer backlog			460				(59	)			401				--				--				--
Internally developed software			806				(263	)			543				755				(220	)			535
Total		$	19,589			$	(4,969	)		$	14,620			$	16,008			$	(4,122	)		$	11,886

The estimated useful lives of acquired identifiable intangible assets are as follows:

 

Customer relationships	3 - 8 years
Non-compete agreements	2 - 5 years
Customer backlog	4 months to 1 year
Internally developed software	5 years

10. Line of Credit and Long-Term Debt

 

On June 29, 2006, the Company entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank and KeyBank National Association. The amended agreement increased the total size of the Company's senior bank credit facilities from $28.5 million to $51.0 million by increasing the accounts receivable line of credit from $15 million to $25 million and increasing the acquisition term line of credit from $13.5 million to $26.0 million.

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The accounts receivable line of credit, which expires in June 2009, provides for a borrowing capacity equal to all eligible accounts receivable, including 80% of unbilled revenues, subject to certain borrowing base calculations as defined in the agreement, but in no event more than $25 million. Borrowings under this line of credit bear interest at the bank's prime rate (8.25% at March 31, 2007). As of March 31, 2007, there was $1.9 million outstanding under the accounts receivable line of credit and $22.7 million of available borrowing capacity.

 

The Company's $26.0 million term acquisition line of credit provides an additional source of financing for certain qualified acquisitions. As of March 31, 2007, the balance outstanding under this acquisition line of credit was approximately $1.0 million. Borrowings under this acquisition line of credit bear interest equal to the four year U.S. Treasury note yield plus 3% based on the spot rate on the day the draw is processed (7.5% at March 31, 2007). Borrowings under this acquisition line are repayable in thirty-six equal monthly installments after the initial interest only period which continues through June 29, 2007. Draws under this acquisition line may be made through June 29, 2008. As of March 31, 2007, the balance outstanding under this acquisition line of credit of $1.0 million had an average interest rate of 7.0%. The Company currently has approximately $25.0 million of available borrowing capacity under this acquisition line of credit.

 

   The Company is required to comply with various financial covenants under the $51.0 million credit facility. Specifically, the Company is required to maintain a ratio of after tax earnings before interest, depreciation and amortization, and other non-cash charges, including but not limited to stock and stock option compensation expense on trailing three months annualized, to current maturities of long-term debt and capital leases plus interest of at least 1.50 to 1.00, a ratio of cash plus eligible accounts receivable including 80% of unbilled revenues less principal amount of all outstanding advances on accounts receivable line of credit to advances under the term acquisition line of credit of at least 0.75 to 1.00, and a maximum ratio of all outstanding advances under the entire credit facility to earnings before taxes, interest, depreciation, amortization and other non-cash charges, including but not limited to, stock and stock option compensation expense including pro forma adjustments for acquisitions on a trailing twelve month basis of no more than 2.50 to 1.00. As of March 31, 2007, the Company was in compliance with all covenants under this facility. This credit facility is secured by substantially all assets of the Company.

11. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005. The Internal Revenue Service (IRS) has completed examinations of the Company's U.S. income tax returns for 2002, 2003 and 2004. As of March 31, 2007, the IRS has proposed no significant adjustments to any of the Company's tax positions.

The Company adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no increases or decreases in the total amount of previously unrecognized tax benefits. As of January 1, 2007, the Company had no unrecognized tax benefits.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in its tax accruals. The Company had no amounts accrued for the payment of interest or penalties at January 1, 2007, respectively.

The Company's effective tax rate was 43.3% for the three months ended March 31, 2007 compared to 43.8% for the three months ended March 31, 2006. The difference between the Company's federal statutory rate of 35% and effective tax rate relates primarily to state income taxes, net of the federal benefit, and non-deductible expense related to incentive stock options. The decrease in the Company's effective tax rate was due to a larger number of disqualifying dispositions of stock options for which the Company receives a tax deduction. The Company has deferred tax assets resulting from net operating losses and capital loss carry forwards of acquired companies amounting to approximately $2.3 million, for which a valuation allowance of $1.8 million is recorded. Additionally, the Company has deferred tax assets of $1.2 million related to fixed assets, reserves and accruals. Deferred tax assets net of the valuation allowance total $1.7 million and are offset by deferred tax liabilities of $3.8 million related to identifiable intangibles and cash to accrual adjustments from current and prior acquisitions. Any reversal of the valuation allowance on the deferred tax assets will be adjusted against goodwill and will not have an impact on our statement of operations. All of the net operating losses and capital loss carry forwards relate to acquired entities, and as such are subject to annual limitations on usage under the “change in control” provisions of the Internal Revenue Code.

12.  Recent Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and will be effective for periods beginning after November 15, 2007. The Company is currently evaluating the effect, if any, of SFAS 157 on the Company's condensed consolidated financial statements.

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In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure of such positions. The Company adopted the provisions of FIN 48 on January 1, 2007 as required and discussed in Note 11 to the condensed consolidated financial statements.

   In June 2006, the EITF ratified EITF Issue 06-3, How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF 06-3”). A consensus was reached that entities may adopt a policy of presenting taxes in the income statement on either a gross or net basis. An entity should disclose its policy of presenting taxes and the amount of any taxes presented on a gross basis should be disclosed, if significant. The Company adopted EITF 06-3 on January 1, 2007. There was no effect of the adoption on the condensed consolidated financial statements as of March 31, 2007. The Company presents revenues net of taxes as disclosed in Note 3 to the condensed consolidated financial statements.

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Item 1A. Risk Factors

 

In evaluating all forward-looking statements, you should specifically consider various risk factors that may cause actual results to vary from those contained in the forward-looking statements. Our risk factors are included in our Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the U.S. Securities and Exchange Commission on March 5, 2007 and available at  www.sec.gov . There have been no material changes to these risk factors since the filing of our Form 10-K.