sv3
 

As filed with the Securities and Exchange Commission on March 7, 2005
Registration No. 333-                    


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
Perficient, Inc.
(Exact name of registrant as specified in its charter)
1120 South Capital of Texas Highway
Building 3, Suite 220
Austin, Texas 78746
(512) 531-6000
(Address, including zip code, and telephone number, including area code of registrant’s principal executive offices)
     
Delaware   74-2853258
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
John T. McDonald
1120 South Capital of Texas Highway
Building 3, Suite 220
Austin, Texas 78746
(512) 531-6000
(512) 531-6011 (Fax)
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
     
J. Nixon Fox III
Vinson & Elkins LLP
The Terrace 7
2801 Via Fortuna, Suite 100
Austin, Texas 78746-7568
(512) 542-8400
(512) 542-8612 (Fax)
  P. Kevin Trautner
King & Spalding LLP
1100 Louisiana Street
Suite 4000
Houston, Texas 77002-5213
(713) 751-3273
(713) 751-3290 (Fax)
      Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
      If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box.    o
      If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box.    o
      If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
      If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
      If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o
CALCULATION OF REGISTRATION FEE
                 
 
 
    Proposed Maximum   Proposed Maximum    
Title of Each Class of   Amount to be   Offering Price Per   Aggregate Offering   Amount of
Securities to be Registered   Registered(1)   Unit(2)   Price(1)   Registration Fee
 
Common Stock, par value $0.001 per share
  5,787,490 shares   $8.44   $48,846,416   $5,750
 
 
(1)  Includes 754,890 shares of common stock to cover over-allotments.
 
(2)  Estimated solely to compute the amount of the registration fee under Rule 457(c) under the Securities Act of 1933 based on the average of the high and low prices of the common stock reported on the Nasdaq National Market as of March 3, 2005.
 
      The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.



 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION—DATED MARCH 7, 2005
PRELIMINARY PROSPECTUS
5,032,600 Shares
(PERFICIENT LOGO)
Common Stock
 
        We are offering 4,250,000 shares of our common stock and the selling stockholders identified in this prospectus are offering 782,600 shares of our common stock. We will not receive any proceeds from the sale of the shares by the selling stockholders.
      Our shares of common stock are listed on the Nasdaq National Market under the symbol “PRFT.” The last reported sale price of our common stock on the Nasdaq National Market on March 4, 2005 was $9.06 per share.
       Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 8 of this prospectus.
                 
    Per Share   Total
         
Public offering price
  $       $    
Underwriting discounts and commissions
  $       $    
Proceeds, before expenses, to us
  $       $    
Proceeds, before expenses, to selling stockholders
  $       $    
      We and some of our existing stockholders have granted the underwriters a 30-day option to purchase up to 754,890 additional shares of our common stock at the public offering price, less the underwriting discounts and the commissions, solely to cover over-allotments, if any. In the event the underwriters exercise their over-allotment option, we will not receive any of the proceeds from any shares sold by the selling stockholders.
      Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
      We expect that the shares of our common stock will be ready for delivery to purchasers on or about                     , 2005.
     
Friedman Billings Ramsey   Stifel, Nicolaus & Company
    Incorporated
 Roth Capital Partners
                                                      Gilford Securities Incorporated
The date of this prospectus is                     , 2005.


 

TABLE OF CONTENTS
         
    Page
     
Prospectus Summary
    1  
Summary Consolidated Financial Data
    5  
Risk Factors
    8  
Special Note Regarding Forward-Looking Statements
    15  
Use of Proceeds
    16  
Price Range of Common Stock and Dividend Policy
    17  
Capitalization
    18  
Dilution
    19  
Selected Consolidated Financial Data
    20  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    23  
Business
    35  
Management
    47  
Certain Relationships and Related Transactions
    51  
Principal and Selling Stockholders
    52  
Description of Capital Stock
    55  
Underwriting
    58  
Legal Matters
    61  
Experts
    61  
Where You Can Find More Information
    61  
Incorporation of Certain Information by Reference
    61  
Index to Financial Statements
    F-1  
You should rely only on the information contained or incorporated by reference in this prospectus. We, the selling stockholders and the underwriters have not authorized anyone to provide you with additional information or information different from that contained in this prospectus. We, the selling stockholders and the underwriters are not making an offer to sell these securities in any jurisdiction where any offer or sale is not permitted. You should assume that the information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

i


 

PROSPECTUS SUMMARY
      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 prospectus and in the documents that we incorporate by reference into this prospectus. This prospectus 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.”
Perficient, Inc.
      We are a rapidly growing information technology consulting firm serving Global 2000 and midsize companies in the central 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 customers, suppliers and partners, improve productivity and reduce information technology costs. We design, build and deliver solutions using a core set of middleware software products developed by our partners. Our solutions enable our clients to operate a real-time enterprise that dynamically adapts business processes and the systems that support them to the changing demands of an increasingly global, Internet-driven and competitive marketplace.
      We are expanding our business through a combination of organic growth and acquisitions. We believe that information technology consulting is a fragmented industry and that there are a substantial number of privately held information technology consulting firms in the central United States that can be acquired on financially accretive terms. We have a track record of successfully identifying, executing and integrating acquisitions that add strategic value to our business. Over the past five years, we have acquired and integrated seven privately held information technology consulting firms, three of which were acquired in 2004.
      We are addressing a large and growing market. Gartner Dataquest, an independent market research firm, projects that growth in middleware software spending, and specifically the integration broker suites, enterprise portal services, application platform suites and message-oriented middleware in which we specialize, will outpace general software spending and increase from approximately $4.33 billion in 2004 to $6.67 billion in 2007, a compound annual growth rate of 15.5%. As companies increase spending on software, their overall spending on services typically also increases, often by a multiple of each dollar spent on software.
      Our competitive strengths include:
      Domain Expertise. Through our experience developing and delivering solutions for more than 380 Global 2000 and midsize companies, we have acquired significant domain expertise in a core set of eBusiness solutions and software platforms. These solutions include eBusiness infrastructure, enterprise portals, ecommerce platforms, ecustomer relationship management and supply chain Web enablement. The platforms on which these solutions are built include IBM WebSphere®, TIBCO® BusinessWorks and Microsoft®.NET.
      Delivery Model and Methodology. We believe our significant expertise enables us to provide high-value solutions through small, expert project teams that deliver measurable results by working collaboratively with clients through a user-centered, technology-based and business-driven solutions methodology. Our eNable Methodology, a unique and proven execution process map we developed, allows for repeatable, high quality services delivery.
      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 excellent references for us. In fiscal years 2002 and 2003, and during

1


 

the nine months ended September 30, 2004, 81%, 85% and 92% of revenue, respectively, excluding from the calculation for any single period revenue from acquisitions completed in that single period, was derived from customers that were clients in the prior year.
      Vendor Partnerships and Endorsements. We have built meaningful partnerships with software vendors, most notably IBM, whose products we use to design and implement solutions for our clients. These partnerships enable us to reduce our cost of sales and sales cycle times and increase win rates through leveraging our partners’ marketing efforts and endorsements. We are a Premier IBM business partner, a TeamTIBCO partner and a Microsoft Gold Certified Partner.
      Geographic Focus. With nine offices spanning the central United States from Houston, Texas, to Detroit, Michigan, we focus on Global 2000 and midsize companies that have a presence in the central United States. We believe this geographic focus helps position us as the provider of choice for companies in the area that seek information technology consulting services and for software vendors that seek consulting firm partners to sell and deliver solutions that use their products.
      Emerging Offshore Capability. Our recently acquired subsidiary, Perficient ZettaWorks, Inc., maintains a small offshore development facility in Bitoli, Macedonia. Through this facility and our partnerships with offshore providers based in India, we are developing implementation tools and project delivery capabilities that we believe will enable us to more efficiently deliver our solutions.
      Our goal is to be the leading independent information technology consulting firm in the central United States.
      To achieve our goal, our strategy is to:
  grow our relationships with existing and new clients;
 
  continue making disciplined acquisitions;
 
  expand throughout the central United States;
 
  enhance brand visibility;
 
  invest in our people and culture;
 
  leverage existing, and pursue new, strategic alliances; and
 
  use offshore services when appropriate to deliver our solutions.
Recent Developments
      For the fourth quarter ended December 31, 2004, we announced that:
  revenue from services and software increased 180% to $20.9 million compared to $7.5 million during the fourth quarter of 2003;
 
  net income increased 150% to $1.3 million compared to $534,000 during the fourth quarter of 2003; and
 
  diluted earnings per share increased 100% to $0.06 per share compared to $0.03 per share during the fourth quarter of 2003.
      In addition, for the year ended December 31, 2004, we announced that:
  revenue from services and software increased 99% to $56.5 million compared to $28.3 million during 2003;
 
  net income increased 273% to $3.9 million compared to $1.1 million during 2003; and
 
  diluted earnings per share increased 171% to $0.19 per share compared to $0.07 per share during 2003.

2


 

General Information
      We were incorporated in Texas in September 1997 and reincorporated in Delaware in May 1999. Our principal executive offices are located at 1120 South Capital of Texas Highway, Building 3, Suite 220, Austin, Texas 78746, and our telephone number is (512) 531-6000. Our website may be visited at www.perficient.com. The information contained on our website is not a part of this prospectus.

3


 

The Offering
Common stock offered by us 4,250,000 shares of common stock
 
Common stock offered by the selling stockholders 782,600 shares of common stock
 
Common stock to be outstanding after this offering 25,163,532 shares of common stock
 
Use of proceeds We intend to use a substantial portion of the net proceeds from this offering for future acquisitions. We will also use a portion of the net proceeds from this offering for repayment of debt, working capital and other general corporate purposes. See “Use of Proceeds.”
 

We will not receive any proceeds from the sale of shares by the selling stockholders.
 
Nasdaq National Market Symbol “PRFT”
      Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters’ over-allotment option.
      The number of shares to be outstanding after this offering is based on the number of shares outstanding as of December 31, 2004. This number does not include:
  6,264,757 shares issuable under our stock option plan, consisting of:
  6,106,111 shares underlying outstanding options at a weighted average price of $3.06 per share, of which 2,571,033 shares were exercisable; and
 
  158,646 shares available for future issuance under our stock option plan.
  372,140 shares underlying outstanding options granted outside of our stock option plan at a weighted average price of $1.61 per share, all of which were exercisable.
 
  513,784 shares issuable upon the exercise of outstanding warrants at a weighted average exercise price of $5.73 per share, all of which are exercisable.
      As a result of automatic increases to the shares reserved for issuance under our stock option plan in January of each year, an additional 1,000,000 shares became available for future issuance under our stock option plan on January 1, 2005.
      The terms “Perficient,” “we,” “our” and “us” refer to Perficient, Inc. and its subsidiaries unless the context suggests otherwise. In addition, we refer to our employees as “colleagues” and will use that term in this prospectus.

4


 

Summary Consolidated Financial Data
(In thousands, except per share data)
      The summary consolidated financial data as of September 30, 2004 and for the nine-month periods ended September 30, 2003 and 2004 are derived from the unaudited consolidated financial statements that appear in this prospectus. The summary consolidated financial data for the years ended December 31, 2001, 2002 and 2003 are derived from the audited consolidated financial statements that appear in this prospectus.
      The pro forma statement of operations data combines the consolidated historical statements of operations of Perficient and of the acquired businesses of Genisys Consulting, Inc., or Genisys, Meritage Technologies, Inc., or Meritage, and ZettaWorks LLC, or ZettaWorks, as if the Genisys, Meritage and ZettaWorks acquisitions had been completed on January 1, 2003. The historical results presented are not necessarily indicative of future results. The pro forma statement of operations data and pro forma balance sheet data excludes the assets and liabilities of ZettaWorks Australia Pty. Ltd., a wholly owned subsidiary of ZettaWorks, that we did not acquire when we acquired the business of ZettaWorks. The pro forma balance sheet data combines the historical balance sheets as if the ZettaWorks acquisition had been completed on September 30, 2004. The as adjusted balance sheet data gives effect upon the closing of this offering to the sale of 4,250,000 shares of common stock, after deducting underwriting discounts and commissions and estimated offering expenses, and application of estimated net proceeds. The pro forma as adjusted consolidated statement of operations data presented eliminates interest expense related to the acquisition line of credit we have with Silicon Valley Bank, which is being repaid with a portion of the net proceeds from this offering, and includes in the computation of earnings per share that number of shares issued in this offering from which we will use the proceeds, net of underwriting discounts and commissions and estimated offering expenses, to repay that line of credit.
      The financial data presented are not directly comparable between periods as a result of the acquisitions of Genisys and Meritage in the nine months ended September 30, 2004 and the acquisitions of Javelin Solutions, Inc., or Javelin, and Primary Webworks, Inc. d/b/a Vertecon, Inc., or Vertecon, in 2002. Revenue and cost of revenue are not directly comparable between periods because revenue and cost of revenue for 2001 are shown net of project related expenses, consisting of reimbursable expenses and other project related expenses. Revenue and cost of revenue were not reclassified for periods ending on or before December 31, 2001 because it was impractical for the individual reimbursable expenses and other project related expenses to be reasonably identified. The characterization of project related expenses for 2001 has no effect on periods beginning after December 31, 2001. In addition, stock compensation expense has been reclassified as part of selling, general and administrative expense for purposes of this presentation.
      You should read the information set forth below in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and the related notes.

5


 

                                                           
    Historical   Pro Forma
         
        Nine Months Ended       Nine Months
    Year Ended December 31,   September 30,   Year Ended   Ended
            December 31,   September 30,
    2001   2002   2003   2003   2004   2003   2004
                             
                (Unaudited)   (Unaudited)
Consolidated Statements of Operations Data:
                                                       
Revenue
                                                       
 
Services
  $ 20,416,643     $ 20,391,587     $ 24,534,617     $ 18,381,926     $ 29,771,852     $ 66,289,037     $ 51,448,364  
 
Software
    —        402,889       3,786,864       2,462,582       5,793,600       3,786,864       5,793,600  
 
Reimbursable expenses
    —        1,655,808       1,870,441       1,385,074       1,658,251       2,840,230       2,157,094  
                                           
Total revenue
    20,416,643       22,450,284       30,191,922       22,229,582       37,223,703       72,916,131       59,399,058  
Cost of revenue(1)
                                                       
 
Project personnel costs
    11,879,224       11,210,272       13,411,762       10,161,342       17,763,263       38,098,232       31,605,082  
 
Software costs
    —        343,039       3,080,894       2,084,047       4,898,381       3,080,894       4,898,381  
 
Reimbursable expenses
    —        1,655,808       1,870,441       1,385,074       1,658,251       2,843,888       2,145,816  
 
Other project related expenses
    —        330,100       453,412       321,056       218,173       2,404,924       1,565,116  
                                           
Total cost of revenue
    11,879,224       13,539,219       18,816,509       13,951,519       24,538,068       46,427,938       40,214,395  
                                           
Gross margin
    8,537,419       8,911,065       11,375,413       8,278,063       12,685,635       26,488,193       19,184,663  
Selling, general and administrative
    9,001,405       8,567,698       7,993,008       5,873,314       7,585,858       22,683,872       13,905,012  
Depreciation
    494,586       687,570       670,436       560,543       363,593       1,135,249       546,242  
Amortization of intangibles
    15,312,280       1,285,524       610,421       554,170       446,320       1,817,921       858,195  
Restructuring, severance and other
    766,477       579,427       —        —        —        —        —   
Impairment charge
    26,798,178       —        —        —        —        —        —   
                                           
Income (loss) from operations
    (43,835,507 )     (2,209,154 )     2,101,548       1,290,036       4,289,864       851,151       3,875,214  
Interest income
    31,093       17,732       3,286       2,926       1,706       —        —   
Interest expense
    (122,395 )     (203,569 )     (285,938 )     (199,172 )     (82,116 )     (515,834 )     (268,509 )
Other
    (1,608 )     (53 )     (13,459 )     (22,197 )     22,514       (32,788 )     23,134  
                                           
Income (loss) before income taxes
    (43,928,417 )     (2,395,044 )     1,805,437       1,071,593       4,231,968       302,529       3,629,839  
(Provision) benefit for income taxes
    42,261       —        (755,405 )     (555,405 )     (1,655,338 )     (1,851,996 )     (1,420,508 )
                                           
Net income (loss)
  $ (43,886,156 )   $ (2,395,044 )   $ 1,050,032     $ 516,188     $ 2,576,630     $ (1,549,467 )   $ 2,209,331  
                                           
Beneficial conversion charge on preferred stock
    —        (1,672,746 )     —        —        —        —        —   
Accretion of dividends on preferred stock
    —        (163,013 )     (157,632 )     (138,025 )     —        (157,632 )     —   
                                           
Net income (loss) available to common stockholders
  $ (43,886,156 )   $ (4,230,803 )   $ 892,400     $ 378,163     $ 2,576,630     $ (1,707,099 )   $ 2,209,331  
                                           

6


 

                                                         
    Historical   Pro Forma
         
        Nine Months Ended       Nine Months
    Year Ended December 31,   September 30,   Year Ended   Ended
            December 31,   September 30,
    2001   2002   2003   2003   2004   2003   2004
                             
                (Unaudited)   (Unaudited)
Basic net income (loss) per share(2)
  $ (7.01 )   $ (0.46 )   $ 0.08     $ 0.04     $ 0.15     $ (0.10 )   $ 0.11  
                                           
Diluted net income (loss) per share
  $ (7.01 )   $ (0.46 )   $ 0.07     $ 0.04     $ 0.13     $ (0.10 )   $ 0.10  
                                           
Shares used in computing basic net income (loss) per share(2)
    6,261,053       9,173,657       11,364,203       10,683,958       17,013,579       16,763,040       20,096,827  
                                           
Shares used in computing diluted net income (loss) per share
    6,261,053       9,173,657       15,306,151       14,727,460       19,904,355       16,763,040       22,932,116  
                                           
Pro Forma As Adjusted:
                                                       
Interest expense
                                          $     $  
Income (loss) before income taxes
                                                       
                                           
(Provision) benefit for income taxes
                                          $     $  
Net income (loss)
                                                       
                                           
Net income (loss) available to common stockholders
                                          $       $    
                                           
Basic net income (loss) per share(2)
                                          $       $    
                                           
Diluted net income (loss) per share
                                          $       $    
                                           
Shares used in computing basic net income (loss) per share(2)
                                                       
                                           
Shares used in computing diluted net income (loss) per share
                                                       
                                           
 
(1) Exclusive of depreciation shown separately below gross margin.
 
(2) In accordance with the transition provisions of the Emerging Issues Task Force (EITF) 03-06 “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings Per Share” our basic net income per share and shares used in computing basic net income per share for year 2003 will be conformed for current period presentation in our annual Form 10-KSB for the year ended December 31, 2004 when filed. The impact of the adoption of this pronouncement is shown retroactively for all periods presented.
                         
    As of September 30, 2004
     
    (Unaudited)
        As
    Actual   Pro Forma   Adjusted
             
Balance Sheet Data:
                       
Cash
  $ 2,786,639     $ 1,268,650     $    
Working capital
    7,791,756       7,394,819          
Total assets
    47,039,098       58,435,379          
Current portion of long term debt
    815,471       815,471          
Long term debt, net of current portion
    2,145,949       3,645,949          
Stockholders’ equity
    34,798,171       42,589,627          

7


 

RISK FACTORS
      You should carefully consider the following risk factors together with the other information contained in or incorporated by reference into this prospectus 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 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 in the Internet software and services market could adversely affect our business, financial condition and results of operations.
      The market for Internet software and services has changed rapidly over the last six years. The market for Internet software and services expanded dramatically during 1999 and most of 2000, but declined significantly in 2001 and 2002. Market demand for Internet software and services began to stabilize and improve throughout 2003 and 2004, but this trend may not continue. Our future growth is dependent upon the demand for Internet software and services, and, in particular, the information technology consulting services we provide. Demand and market acceptance for Internet services are subject to a high level of uncertainty. Prolonged weakness in the Internet software and services industry has caused in the past, and may cause in the future, business enterprises to delay or cancel information technology projects, reduce their overall 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, and may also result in price pressures, causing us to realize lower revenues and operating margins. If companies cancel or delay their business and technology initiatives or choose to move these initiatives in-house, our business, financial condition and results of operations could be materially and adversely affected.
We may not be able to attract and retain information technology consulting professionals, which could affect our ability to compete effectively.
      Our business is labor intensive. Accordingly, our success depends in large part upon our ability to attract, train, retain, motivate, manage and effectively utilize highly skilled information technology consulting professionals. Additionally, our technology professionals are primarily at-will employees. Failure to retain highly skilled technology professionals 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 will depend on retaining our senior management team and key personnel.
      Our industry is highly specialized and the competition for qualified management and key personnel is intense. We expect this to remain so for the foreseeable future. We believe that our success will depend 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. If a significant number of these individuals stop working for us, our level of management, technical, marketing and sales expertise could diminish. We may be unable to achieve our revenue and operating performance objectives unless we can attract and retain technically qualified and highly skilled sales, technical, business consulting, marketing and management personnel. These individuals would be difficult to replace, and losing them could seriously harm our business.
We may have difficulty in identifying and competing for strategic acquisition and partnership opportunities.
      Our business strategy includes the pursuit of strategic acquisitions. We may acquire or make strategic investments in complementary businesses, technologies, services or products, or enter into

8


 

strategic partnerships or alliances with third parties in the future in order to expand our business. We may be unable to identify suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially favorable to us, or at all. If we fail to identify and successfully complete these transactions, our competitive position and our growth prospects could be adversely affected. In addition, we may face competition from other companies with significantly greater resources for acquisition candidates, making it more difficult for us to acquire suitable companies on favorable terms.
Pursuing and completing potential acquisitions could divert management’s attention and financial resources and may not produce the desired business results.
      We do not have specific personnel dedicated to pursuing and making strategic acquisitions. As a result, if we pursue any acquisition, our management could spend a significant amount of time and financial resources to pursue and integrate the acquired business with our existing business. To pay for an acquisition, we might use capital stock, cash or a combination of both. Alternatively, we may borrow money from a bank or other lender. If we use capital stock, our stockholders will experience dilution. If we use cash or debt financing, our financial liquidity may be reduced and the interest on any debt financing could adversely affect our results of operations. From an accounting perspective, an acquisition may involve amortization or the write-off of significant amounts of intangible assets that could adversely affect our results of operations.
      Despite the investment of these management and financial resources, and completion of due diligence with respect to these efforts, an acquisition may not produce the anticipated revenues, earnings or business synergies for a variety of reasons, including:
  difficulties in the integration of the technologies, services and personnel of the acquired business;
 
  the failure of management and acquired services personnel to perform as expected;
 
  the risks of entering markets in which we have no, or limited, prior experience;
 
  the failure to identify or adequately assess any undisclosed or potential legal liabilities of the acquired business;
 
  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.
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 Internet software and services industry that are not competitive with our business may refocus their activities and deploy their resources to be competitive with us.
      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

9


 

technology consulting firms, and, to a limited extent, offshore service providers and in-house information technology departments. Many of the larger regional and national information technology consulting firms have substantially longer operating histories, more established reputations and potential partner relationships, greater financial resources, sales and marketing organizations, market penetration and research and development capabilities, as well as broader product offerings and greater market presence and name recognition. We may face increasing competitive pressures from these competitors as the market for Internet software and services continues to grow. This may place us at a disadvantage to our competitors, which may harm our ability to grow, maintain revenue or generate net income.
      In recent years, there has been substantial consolidation in our industry, and we expect that there will be significant additional consolidation in the near future. As a result of this increasing consolidation, we expect that we will increasingly compete with larger firms that have broader product offerings and greater financial resources than we have. We believe that this competition could have a significant negative effect on our marketing, distribution and reselling relationships, pricing of services and products and our product development budget and capabilities. 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 Internet 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 eBusiness 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.
We must accomplish all of these tasks in a timely and cost-effective manner. We might not succeed in effectively doing any of these tasks, and our failure to succeed could have a material and adverse effect on our business, financial condition or results of operations, including materially reducing our revenue and operating results.
      We may also incur substantial costs to keep up with changes surrounding the Internet. Unresolved critical issues concerning the commercial use and government regulation of the Internet include the following:
  security;
 
  intellectual property ownership;
 
  privacy;
 
  taxation; and
 
  liability issues.

10


 

Any costs we incur because of these factors could materially and adversely affect our business, financial condition and results of operations, including reduced net income.
A significant portion of our revenue is dependent upon building long-term relationships with our clients and our operating results could suffer if we fail to maintain these relationships.
      Our professional services agreements with clients are in most cases terminable on 10 to 30 days’ notice. A client may choose at any time to use another consulting firm or choose to perform services we provide through their own internal resources. Accordingly, we rely on our clients’ interests in maintaining the continuity of our services rather than on contractual requirements. Termination of a relationship with a significant client or with a group of clients that account for a significant portion of our revenues could adversely affect our revenues and results of operations.
If we fail to meet our clients’ performance expectations, our reputation may be harmed.
      As a services provider, our ability to attract and retain clients depends to a large extent on our relationships with our clients and our reputation for high quality services and integrity. We also believe that the importance of reputation and name recognition is increasing and will continue to increase due to the number of providers of information technology services. As a result, if a client is not satisfied with our services or does not perceive our solutions to be effective or of high quality, our reputation may be damaged and we may be unable to attract new, or retain existing, clients and colleagues.
We may face potential liability to customers if our customers’ systems fail.
      Our eBusiness integration 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. If we experience one or more large claims against us that exceed available insurance coverage or result in changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, our business and financial results could suffer.
The loss of one or more of our significant software partners would have a material adverse effect on our business and results of operations.
      Our partnerships with software vendors enable us to reduce our cost of sales and increase win rates through leveraging our partners’ marketing efforts and strong vendor endorsements. The loss of one or more of these relationships and endorsements could increase our sales and marketing costs, lead to longer sales cycles, harm our reputation and brand recognition, reduce our revenues and adversely affect our results of operations.
      In particular, a substantial portion of our solutions are built on IBM WebSphere platforms and a significant number of our clients are identified through joint selling opportunities conducted with IBM, through sales leads obtained from our relationship with IBM and through a services agreement we have with IBM. Revenue from IBM was approximately 35% of total revenue for the year ended December 31, 2003 and approximately 24% of total revenue for the nine months ended September 30, 2004. The loss of our relationship with, or a significant reduction in the services we perform for IBM would have a material adverse effect on our business and results of operations.

11


 

Our quarterly operating results may be volatile and may cause our stock price to fluctuate.
      Our quarterly revenue, expenses and operating results have varied in the past and may vary significantly in the future. In addition, many factors affecting our operating results are outside of our control, such as:
  demand for Internet software and services;
 
  customer budget cycles;
 
  changes in our customers’ desire for our partners’ products and our services;
 
  pricing changes in our industry;
 
  government regulation and legal developments regarding the use of the Internet; and
 
  general economic conditions.
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 and losses in any particular quarter.
Our services revenues may fluctuate quarterly due to seasonality or timing of completion of projects.
      We may experience seasonal fluctuations in our services revenues. We expect that services revenues in the fourth quarter of a given year may typically be lower than in other quarters in that year as there are fewer billable days in this quarter as a result of vacations and holidays. In addition, we generally perform services on a project basis. While we seek wherever possible to counterbalance periodic declines in revenues on completion of large projects with new arrangements to provide services to the same client or others, we may not be able to avoid declines in revenues when large projects are completed. Our inability to obtain sufficient new projects to counterbalance any decreases in work upon completion of large projects could adversely affect our revenues and results of operations.
Our software revenue may fluctuate quarterly, leading to volatility in the price of our stock.
      Our quarterly revenues from sales of third-party software have varied in the past and may vary significantly from quarter to quarter, making them difficult to predict. This may lead to volatility in our share price. The factors that are likely to cause these variations are:
  the business decisions of our clients regarding the investment in new technology;
 
  customer demand in any given quarter; and
 
  the stage of completion of existing projects and/or their termination.
      Our software revenue may fluctuate quarterly and be higher in the fourth quarter of a given year as procurement policies of our clients may result in higher technology spending towards the end of budget cycles. This seasonal trend may materially affect our quarter-to-quarter revenues, margins and operating results.
Our overall gross margin fluctuates quarterly based on our services and software revenue mix, which may cause our stock price to fluctuate.
      The gross margin on our services revenue is, in most instances, greater than the gross margin on our software revenue. As a result, our gross margin will be higher in quarters where our services revenue, as a percentage of total revenue, has increased, and will be lower in quarters where our software revenue, as a percentage of total revenue, has increased. In addition, gross margin on software revenue may fluctuate as a result of variances in gross margin on individual software products. Our stock price may be negatively affected in quarters in which our gross margin decreases.

12


 

Our services gross margins are subject to fluctuations as a result of variances in utilization rates and billing rates.
      Our services gross margins are affected by trends in the utilization rate of our professionals, defined as the percentage of our professionals’ time billed to customers divided by the total available hours in a period, and in the billing rates we charge our clients. Our operating expenses, including employee salaries, rent and administrative expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variations in the number or size of projects in process. If a project ends earlier than scheduled, we may need to redeploy our project personnel. Any resulting non-billable time may adversely affect our gross margins.
      The average billing rates for our services may decline due to rate pressures from significant customers and other market factors, including innovations and average billing rates charged by our competitors. Also, our average billing rates will decline if we acquire companies with lower average billing rates than ours. To sell our products and services at higher prices, we must continue to develop and introduce new services and products that incorporate new technologies or high-performance features. If we experience pricing pressures or fail to develop new services, our revenues and gross margins could decline, which could harm our business, financial condition and results of operations.
If we fail to complete fixed-fee contracts within budget and on time, our results of operations could be adversely affected.
      We perform a limited number of projects on a fixed-fee, turnkey basis, rather than on a time-and-materials basis. Under these contractual arrangements, we bear the risk of cost overruns, completion delays, wage inflation and other cost increases. If we fail to estimate accurately the resources and time required to complete a project or fail to complete our contractual obligations within the scheduled timeframe, our results of operations could be adversely affected. We cannot assure you that in the future we will not price these contracts inappropriately, which may result in losses.
We may not be able to maintain our level of profitability.
      Although we have been profitable for the past six quarters, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. We cannot assure you of any operating results. In future quarters, our operating results may not meet public market analysts’ and investors’ expectations. If this occurs, the price of our common stock will likely fall.
If we do not effectively manage our growth, our results of operations could be adversely affected.
      Our ability to operate profitably depends largely on how effectively we manage our growth. In order to create the additional capacity necessary to accommodate the demand for our services, we may need to implement a variety of new and upgraded operational and financial systems, procedures and controls, open new offices or hire additional colleagues. Implementation of these new systems, procedures and controls may require substantial management efforts and our efforts to do so may not be successful. The opening of new offices or the hiring of additional colleagues may result in idle or underutilized capacity. We periodically assess the expected long-term capacity utilization of our offices and professionals. We may not be able to achieve or maintain optimal utilization of our offices and professionals. If demand for our services does not meet our expectations, our revenues will not be sufficient to offset these expenses and our results of operations could be adversely affected.
We may be exposed to potential risks resulting from new requirements under Section 404 of the Sarbanes-Oxley Act of 2002.
      Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required, beginning with our fiscal year ending December 31, 2005, to include in our annual report our assessment of the effectiveness of our internal control over financial reporting as of the end of fiscal 2005. Furthermore,

13


 

our independent registered public accounting firm, BDO Seidman, LLP, will be required to attest to whether our assessment of the effectiveness of our internal control over financial reporting is fairly stated in all material respects and separately report on whether it believes we have maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005. We have not yet completed our assessment of the effectiveness of our internal control over financial reporting. We expect to incur additional expenses and diversion of management’s time as a result of performing the system and process evaluation, testing and remediation required in order to comply with the management certification and auditor attestation requirements. If we fail to timely complete this assessment, or if our independent registered public accounting firm cannot timely attest to our assessment, we could be subject to regulatory sanctions and a loss of public confidence in our internal control. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations.
Risks Relating to this Offering and Ownership of Our Common Stock
The trading volume of our common stock has been limited and, as a result, our stock price may fluctuate widely.
      Our common stock is traded on the Nasdaq National Market under the symbol “PRFT.” The trading volume of our common stock has been limited and our stock price has been volatile. Our stock price may continue to fluctuate widely as a result of the limited trading volume, announcements of new services and products by us or our competitors, quarterly variations in operating results, the gain or loss of significant customers, changes in public market analysts’ estimates and market conditions for information technology consulting firms and other technology stocks in general.
      We periodically review and consider possible acquisitions of companies that we believe will contribute to our long-term objectives. In addition, depending on market conditions, liquidity requirements and other factors, from time to time we consider accessing the capital markets. These events may also affect the market price of our common stock.
Our management has broad discretion over the use of proceeds from this offering and may use the proceeds in ways with which you do not agree.
      We estimate the net proceeds of this offering to us to be approximately $          million after deducting underwriting discounts and commissions and estimated offering expenses. Our management will maintain broad discretion to allocate the proceeds of this offering and the failure of management to apply these funds effectively could materially harm our results of operations.
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 existing 5% and greater stockholders beneficially own or control approximately 26% of the voting power of our common stock. This concentration of ownership of our common stock may make it difficult for our other stockholders to successfully approve or defeat matters that may be submitted for action by our stockholders. It may also have the effect of delaying, deterring or preventing a change in control of our company.
We may need additional capital in the future, which may not be available to us. The raising of any additional capital may dilute your ownership percentage in our stock.
      Our existing accounts receivable line of credit expires in December 2005 and our term loan acquisition facility advance period expires in June 2005. If we are unable to renew our line of credit, we

14


 

may need to obtain an alternate debt financing facility. In the future we may decide to raise additional funds through public or private debt or equity financing in order to:
  take advantage of opportunities, including more rapid expansion or acquisitions of, or investments in, businesses or technologies;
 
  develop new services; or
 
  respond to competitive pressures.
      Any additional capital raised through the sale of equity will dilute your ownership percentage in our stock. Furthermore, we cannot assure you that any additional financing we may need will be available on terms favorable to us, or at all. In that case, our business results would suffer.
It may be difficult for another company to acquire us, and this could depress our stock price.
      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.
      In addition, under our agreement with IBM, we have granted IBM a right of first offer and a right to terminate its agreement with us with respect to any transaction involving a change of control of us with a company that has a substantial portion of its business in the web application server product and services market, other than a systems integrator or professional services firm. As a result, a potential acquirer may be discouraged from making an offer to buy us.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
      Some of the statements contained in this prospectus 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 prospectus.
      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 prospectus to conform such statements to actual results.

15


 

USE OF PROCEEDS
      We estimate that the net proceeds to us from the sale of 4,250,000 shares of our common stock pursuant to this offering, based upon the public offering price of $           per share, will be approximately $      million after deducting underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of shares offered by the selling stockholders.
      We expect to use a substantial portion of the net proceeds from this offering for expansion of our business, including future acquisitions of information technology consulting firms.
      We will also use a portion of the net proceeds from this offering to repay all amounts outstanding under our credit facility with Silicon Valley Bank. Borrowings under the accounts receivable line of credit bear interest at a rate equal to the bank’s prime rate plus 1.00%, or 5.75%, as of December 31, 2004. Borrowings under the acquisition line of credit bear interest at a rate equal to the average four-year U.S. Treasury Note yield plus 3.50%. As of December 31, 2004, the balance outstanding under this acquisition credit facility was $3.8 million, of which $2.3 million was bearing interest at a rate of 7.11%, and $1.5 million was bearing interest at a rate of 6.90%.
      We will use any remaining net proceeds from this offering for working capital and other general corporate purposes. The amounts actually spent by us may vary significantly and will depend upon a number of factors, including our future revenue and the other factors described under “Risk Factors.” Accordingly, our management has broad discretion in the allocation of the net proceeds from this offering.

16


 

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
      Our common stock is quoted on the Nasdaq National Market under the symbol “PRFT.” Prior to February 2, 2005, our common stock was quoted on the Nasdaq SmallCap Market under the same symbol. 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 SmallCap Market prior to February 2, 2005 and on the Nasdaq National Market beginning February 2, 2005.
                   
    High   Low
         
Year Ending December 31, 2003:
               
 
First Quarter
  $ 1.07     $ 0.50  
 
Second Quarter
    1.29       0.55  
 
Third Quarter
    3.03       0.94  
 
Fourth Quarter
    3.82       2.15  
Year Ending December 31, 2004:
               
 
First Quarter
  $ 4.32     $ 2.36  
 
Second Quarter
    5.00       3.10  
 
Third Quarter
    4.00       2.91  
 
Fourth Quarter
    6.96       3.84  
Year Ending December 31, 2005:
               
 
First Quarter (through March 4, 2005)
  $ 9.29     $ 6.83  
      On March 4, 2005, the last reported sale price of our common stock on the Nasdaq National Market was $9.06 per share. There were approximately 124 stockholders of record of our common stock as of December 31, 2004.
      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 Silicon Valley Bank.

17


 

CAPITALIZATION
      The following table sets forth our capitalization as of September 30, 2004 on an actual basis, on a pro forma basis and on an as adjusted basis. The pro forma data gives effect to the issuance of 1,193,179 shares to ZettaWorks in our acquisition of the business of ZettaWorks. The as adjusted data gives effect to the sale of 4,250,000 shares of common stock offered by us at the public offering price of $           per share after deducting underwriting discounts and commissions and estimated offering expenses, and the application of the net proceeds to the repayment of long-term debt. See “Use of Proceeds.”
      Please read this capitalization table together with the sections of this prospectus entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus or incorporated by reference into this prospectus.
                             
    As of September 30, 2004
     
        As Adjusted
        for the
    Actual   Pro Forma   Offering
             
Cash
  $ 2,786,639     $ 1,268,650     $    
                   
Liabilities:
                       
 
Current portion of long term debt
  $ 815,471     $ 815,471     $    
 
Long-term debt, net of current portion
    2,145,949       3,645,949          
                   
      2,961,420       4,461,420          
                   
Stockholders’ equity:
                       
 
Common stock, $0.001 par value; 40,000,000 shares authorized; 19,267,069 shares issued and outstanding— actual; 20,460,248 issued and outstanding— pro forma; 24,710,248 shares issued and outstanding— as adjusted
    19,267       20,457          
 
Additional paid-in capital
    92,500,743       100,291,009          
 
Deferred stock compensation
    (8 )     (8 )        
 
Accumulated other comprehensive loss
    (63,139 )     (63,139 )        
 
Accumulated deficit
    (57,658,692 )     (57,658,692 )        
                   
   
Total stockholders’ equity
  $ 34,798,171     $ 42,589,627     $    
                   
   
Total capitalization
  $ 37,759,591     $ 47,051,047     $    
                   

18


 

DILUTION
      Purchasers of common stock in this offering will experience immediate dilution in the net tangible book value of the common stock from the public offering price. As of September 30, 2004, our net tangible book value was approximately $6.3 million, or approximately $0.33 per share of common stock. Net tangible book value per share represents the amount of total tangible assets less total liabilities of Perficient, divided by the number of shares of common stock outstanding. After giving effect to our acquisition of the business of ZettaWorks, our pro forma net tangible book value as of September 30, 2004 would have been $          , or            per share. After our sale of common stock in this offering at the public offering price of $           per share and after the deduction of underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2004 would have been approximately $           million, or $           per share. This represents an immediate increase in net tangible book value of $           per share to existing stockholders and an immediate dilution of $           per share to new investors in this offering. The following table illustrates this per share dilution:
                   
Public offering price per share
          $    
 
Net tangible book value per share as of September 30, 2004
  $            
 
Pro forma change attributable to acquisition of the business of ZettaWorks
  $            
 
Pro forma change attributable to new investors
  $            
             
Pro forma as adjusted net tangible book value per share after this offering
          $    
             
Dilution per share to new investors
          $    
             
      If the underwriters fully exercise their over-allotment option to purchase additional shares in this offering, the net tangible book value per share after this offering will be $           per share, the pro forma change attributable to new investors will be $          and the dilution to new investors will be $           per share.
      The foregoing discussion and tables do not assume exercise of any stock options or warrants after December 31, 2004. As of December 31, 2004, there were 3,263,099 shares of common stock issuable upon exercise of exercisable stock options at a weighted average exercise price of $2.96 per share, 6,264,257 shares of common stock reserved for issuance under our stock option plan and 513,784 shares of common stock issuable upon exercise of outstanding warrants, at a weighted average exercise price of $5.73 per share, all of which were exercisable. To the extent that these options and warrants are exercised, there will be further dilution to new investors.

19


 

SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
      You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in this prospectus. The following table sets forth the selected consolidated financial data for each of the fiscal years indicated and for the nine months ended September 30, 2003 and September 30, 2004.
      The pro forma statement of operations data combines the consolidated historical statements of operations of Perficient and of the acquired businesses of Genisys Consulting, Inc., or Genisys, Meritage Technologies, Inc., or Meritage, and ZettaWorks LLC, or ZettaWorks, as if the Genisys, Meritage and ZettaWorks acquisitions had been completed on January 1, 2003. The historical results presented are not necessarily indicative of future results. The pro forma statement of operations data and pro forma balance sheet data excludes the assets and liabilities of ZettaWorks Australia Pty. Ltd., a wholly owned subsidiary of ZettaWorks, that we did not acquire when we acquired the business of ZettaWorks. The pro forma balance sheet data combines the historical balance sheets as if the acquisition of ZettaWorks had been completed on September 30, 2004.
      The financial data presented are not directly comparable between periods as a result of the acquisitions of Genisys and Meritage in the nine months ended September 30, 2004, the acquisitions of Javelin and Vertecon in 2002, and the acquisitions of Compete, Inc., or Compete, LoreData, Inc. and Core Objective, Inc., or Core Objective, in 2000.
      Revenue and cost of revenue are not directly comparable between periods because revenue and cost of revenue for 1999, 2000 and 2001 are shown net of project related expenses, consisting of reimbursable expenses and other project related expenses. Revenue and cost of revenue were not reclassified for periods ended on or before December 31, 2001 because it was impractical for the individual reimbursable expenses and other project related expenses to be reasonably identified. The characterization of project related expenses for 1999, 2000 and 2001 has no effect on periods beginning after December 31, 2001. In addition, stock compensation expense has been reclassified as part of selling, general and administrative expense for purposes of this presentation.

20


 

                                                                           
    Historical   Pro Forma
         
        Nine Months Ended       Nine Months
    Year Ended December 31,   September 30,   Year Ended   Ended
            December 31,   September 30,
    1999   2000   2001   2002   2003   2003   2004   2003   2004
                                     
                        (Unaudited)   (Unaudited)
Consolidated Statements of Operations Data:
                                                                       
Revenue
                                                                       
 
Services
  $ 2,647,878     $ 19,963,759     $ 20,416,643     $ 20,391,587     $ 24,534,617     $ 18,381,926     $ 29,771,852     $ 66,289,037     $ 51,448,364  
 
Software
    —        —        —        402,889       3,786,864       2,462,582       5,793,600       3,786,864       5,793,600  
 
Reimbursable expenses
    —        —        —        1,655,808       1,870,441       1,385,074       1,658,251       2,840,230       2,157,094  
                                                       
Total revenue
    2,647,878       19,963,759       20,416,643       22,450,284       30,191,922       22,229,582       37,223,703       72,916,131       59,399,058  
Cost of revenue(1)
                                                                       
 
Project personnel costs
    1,034,331       9,931,064       11,879,224       11,210,272       13,411,762       10,161,342       17,763,263       38,098,232       31,605,082  
 
Software costs
    —        —        —        343,039       3,080,894       2,084,047       4,898,381       3,080,894       4,898,381  
 
Reimbursable expenses
    —        —        —        1,655,808       1,870,441       1,385,074       1,658,251       2,843,888       2,145,816  
 
Other project related expenses
    —        —        —        330,100       453,412       321,056       218,173       2,404,924       1,565,116  
                                                       
Total cost of revenue
    1,034,331       9,931,064       11,879,224       13,539,219       18,816,509       13,951,519       24,538,068       46,427,938       40,214,395  
                                                       
Gross margin
    1,613,547       10,032,695       8,537,419       8,911,065       11,375,413       8,278,063       12,685,635       26,488,193       19,184,663  
Selling, general and administrative
    3,153,560       10,655,652       9,001,405       8,567,698       7,993,008       5,873,314       7,585,858       22,683,872       13,905,012  
Depreciation
    —        —        494,586       687,570       670,436       560,543       363,593       1,135,249       546,242  
Amortization of intangibles
    —        12,941,570       15,312,280       1,285,524       610,421       554,170       446,320       1,817,921       858,195  
Restructuring, severance, and other
    —        —        766,477       579,427       —        —        —               
Impairment charge
    —        —        26,798,178       —        —        —        —        —        —   
                                                       
Income (loss) from operations
    (1,540,013 )     (13,564,527 )     (43,835,507 )     (2,209,154 )     2,101,548       1,290,036       4,289,864       851,151       3,875,214  
Interest income
    127,518       263,263       31,093       17,732       3,286       2,926       1,706       —        —   
Interest expense
    (13,380 )     (151,086 )     (122,395 )     (203,569 )     (285,938 )     (199,172 )     (82,116 )     (515,834 )     (268,509 )
Other
    —        —        (1,608 )     (53 )     (13,459 )     (22,197 )     22,514       (32,788 )     23,134  
                                                       
Income (loss) before income taxes
    (1,425,875 )     (13,452,350 )     (43,928,417 )     (2,395,044 )     1,805,437       1,071,593       4,231,968       302,529       3,629,839  
(Provision) benefit for income taxes
    20,912       (175,000 )     42,261       —        (755,405 )     (555,405 )     (1,655,338 )     (1,851,996 )     (1,420,508 )
                                                       
Net income (loss)
  $ (1,404,963 )   $ (13,627,350 )   $ (43,886,156 )   $ (2,395,044 )   $ 1,050,032     $ 516,188     $ 2,576,630     $ (1,549,467 )   $ 2,209,331  
                                                       
Beneficial conversion charge on preferred stock
    —        —        —        (1,672,746 )     —        —        —        —        —   
Accretion of dividends on preferred stock
    —        —        —        (163,013 )     (157,632 )     (138,025 )     —        (157,632 )     —   
                                                       
Net income (loss) available to common stockholders
  $ (1,404,963 )   $ (13,627,350 )   $ (43,886,156 )   $ (4,230,803 )   $ 892,400     $ 378,163     $ 2,576,630     $ (1,707,099 )   $ 2,209,331  
                                                       
Basic net income (loss) per share(2)
  $ (0.47 )   $ (2.52 )   $ (7.01 )   $ (0.46 )   $ 0.08     $ 0.04     $ 0.15     $ (0.10 )   $ 0.11  
                                                       
Diluted net income (loss) per share
  $ (0.47 )   $ (2.52 )   $ (7.01 )   $ (0.46 )   $ 0.07     $ 0.04     $ 0.13     $ (0.10 )   $ 0.10  
                                                       
Shares used in computing basic net income (loss) per share(2)
    3,000,556       5,409,353       6,261,053       9,173,657       11,364,203       10,683,958       17,013,579       16,763,040       20,096,827  
                                                       
Shares used in computing diluted net income (loss) per share
    3,000,556       5,409,353       6,261,053       9,173,657       15,306,151       14,727,460       19,904,355       16,763,040       22,932,116  
                                                       
 
(1)  Exclusive of deprecation shown separately below gross margin.
 
(2)  In accordance with the transition provisions of the Emerging Issues Task Force (EITF) 03-06 “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings Per Share” our basic net income per share and shares used in computing basic net income per share for year 2003 will be conformed for current period presentation in our annual Form 10-KSB for the year ended December 31, 2004 when filed. The impact of the adoption of this pronouncement is shown retroactivity for all periods presented.

21


 

                                                                 
    Historical   Pro-Forma
         
        As of    
    As of December 31,   September 30,   As of
            September 30,
    1999   2000   2001   2002   2003   2003   2004   2004
                                 
                            (Unaudited)
                        (Unaudited)    
Balance Sheet Data:
                                                               
Cash
  $ 5,818,918     $ 842,481     $ 1,412,238     $ 1,525,002     $ 1,989,395     $ 1,994,094     $ 2,786,639     $ 1,268,650  
Working capital
    6,171,264       3,373,522       2,494,191       1,854,276       4,013,373       3,224,502       7,791,756       7,394,819  
Property and equipment, net
    80,827       804,406       533,948       1,211,018       699,145       761,178       782,916       888,651  
Intangible assets, net
    —        45,558,173       3,550,100       12,380,039       11,693,834       11,750,084       28,532,584       38,097,654  
Total assets
    6,616,417       54,614,942       9,117,695       19,593,103       20,259,983       20,593,302       47,039,098       58,435,379  
Line of credit and current portion of long term debt
    —        1,728,307       703,144       1,025,488       366,920       1,128,530       815,471       815,471  
Long term debt, net of current portion
    —        7,232       3,667       745,318       436,258       428,179       2,145,949       3,645,949  
Stockholders’ equity
    6,252,091       49,973,947       6,836,301       14,521,483       16,016,038       15,291,287       34,798,171       42,589,627  
Recent Developments
      For the fourth quarter ended December 31, 2004, we announced that:
  •  revenue from services and software increased 180% to $20.9 million compared to $7.5 million during the fourth quarter of 2003;
 
  •  net income increased 150% to $1.3 million compared to $534,000 during the fourth quarter of 2003; and
 
  •  diluted earnings per share increased 100% to $0.06 per share compared to $0.03 per share during the fourth quarter of 2003.
      In addition, for the year ended December 31, 2004, we announced that:
  •  revenue from services and software increased 99% to $56.5 million compared to $28.3 million during 2003;
 
  •  net income increased 273% to $3.9 million compared to $1.1 million during 2003; and
 
  •  diluted earnings per share increased 171% to $0.19 per share compared to $0.07 per share during 2003.

22


 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
      You should read the following summary together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this prospectus and in the documents that we incorporate by reference into this prospectus. This prospectus 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 a rapidly growing information technology consulting firm serving Global 2000 and midsize companies in the central United States. We help clients gain competitive advantage by using Internet-based technologies to make their businesses more responsive to market opportunities and threats, strengthen relationships with customers, suppliers and partners, improve productivity and reduce information technology costs. Our solutions enable these benefits by integrating, automating and extending business processes, technology infrastructure and software applications end-to-end within an organization and with key partners, suppliers and customers. This provides real-time access to critical business applications and information and a scalable, reliable, secure and cost-effective technology infrastructure.
Services Revenue
      Our services revenue is derived from professional services performed developing, implementing, integrating, automating and extending business processes, technology infrastructure and software applications. Most of our projects are performed on a time and materials basis, and a smaller amount of revenue is derived from projects performed on a fixed fee basis. Fixed fee engagements represented approximately 8.1% of our services revenue for the nine months ended September 30, 2004. For time and material projects, revenue is recognized and billed by multiplying the number of hours our professionals expend in the performance of the project by the established billing rates. For fixed fee projects, revenue is generally recognized using the proportionate performance method. Provisions for estimated profits or losses on uncompleted projects are made on a contract-by-contract basis and are recognized in the period in which such profits or losses are determined. Billings in excess of costs plus earnings 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 revenue. 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 Revenue
      A smaller but growing portion of our revenue is derived from sales of third-party software, particularly IBM WebSphere products. Revenue from sales of third-party software is recorded on a gross basis provided we act as a principal in the transaction. In the event we do not meet the requirements to be considered a principal in the software sale transaction and act as an agent, the revenue is recorded on a net basis. Software revenue is expected to fluctuate from quarter to quarter depending on our customers’ demand for our partners’ software products. Generally, spending on software sales is a strong indicator of future spending on software services.

23


 

Cost of Revenue
      Cost of revenue consists primarily of salaries and benefits associated with our technology professionals and subcontractors. Cost of revenue also includes third-party software costs, reimbursable expenses and other unreimbursed project related expenses. Project related expenses will fluctuate generally depending on outside factors including the cost and frequency of travel and the location of our customers. Cost of revenue does not include depreciation of assets used in the production of revenues.
Gross Margins
      Our gross margins for services are affected by the utilization rates of our professionals, defined as the percentage of our professionals’ time billed to customers divided by the total available hours in the respective period, the salaries we pay our consulting professionals and the average billing rate we receive from our customers. If a project ends earlier than scheduled or we retain professionals in advance of receiving project assignments, or if demand for our services declines, our utilization rate will decline and adversely affect our gross margins. Over the past two years, as the information technology software and services industry has recovered from the protracted downturn experienced in 2001 and 2002, we have seen an improvement in our utilization rates while our billing, retention and base salary rates have remained relatively stable. Subject to fluctuations resulting from our acquisitions, we expect these key metrics of our services business to remain relatively constant for the foreseeable future assuming there are no further declines in the demand for information technology software and services. Gross margin percentages of third party software sales are typically much lower than gross margin percentages for services and the mix of services and software for a particular period can significantly impact total combined gross margin percentage for such period. In addition, gross margin for software sales can fluctuate due to pricing and other competitive pressures.
Selling, General and Administrative Expenses
      Selling, general and administrative expenses consist of cash and non-cash compensation for sales, executive and administrative employees, training, sales and marketing activities, investor relations, recruiting, travel costs and expenses, and miscellaneous expenses. Non-cash compensation includes stock compensation expenses arising from various option grants to employees with exercise prices below fair market value at the date of grant and compensation expense associated with unvested stock options assumed in business combinations. Such stock compensation is generally expensed across the vesting periods of the related equity grants. We work to minimize selling costs by focusing on repeat business with existing customers and by accessing sales leads generated by our software company partners, most notably IBM, whose products we use to design and implement solutions for our clients. These partnerships enable us to reduce our selling costs and sales cycle times and increase win rates through leveraging our partners’ marketing efforts and endorsements.
Quarterly Fluctuations
      Our quarterly operating results are subject to seasonal fluctuations. Our fourth and first quarters include the months of December and January, when billable services activity by professional staff, as well as engagement decisions by clients, may be reduced due to client budget planning cycles. Demand for our services generally has been lower in the fourth quarter due to reduced activity during the holiday season. Our results will also fluctuate, in part, based on whether we succeed in counterbalancing periodic declines in services revenues when a project or engagement is completed or cancelled by entering into arrangements to provide additional services to the same clients or others. Software sales tend to show some seasonality as well, in that we tend to see higher software demand during the third and fourth quarter of the calendar year due to client budget planning and usage cycles, though this is not always the case. These and other seasonal factors may contribute to fluctuations in our operating results from quarter to quarter.

24


 

Plans for Growth & Acquisitions
      Our goal is to be the leading independent information technology consulting firm in the central United States through, among other things, expanding our relationships with existing and new clients, expanding our operations in the central United States and continuing to make disciplined acquisitions. We believe the central United States represents an attractive market for growth, both organically and through acquisitions. As demand for our services grows in the central United States, we believe we will attempt to increase the number of professionals in our nine central United States offices to meet such demand and, as a result, increase our services revenue. In addition, we believe our track record for identifying attractive acquisitions and our ability to integrate acquired businesses helps us successfully complete acquisitions efficiently and productively, while continuing to offer quality services to our clients, including new clients resulting from the acquisitions.
      Consistent with our strategy of growth through disciplined acquisitions, during 2004 we consummated three acquisitions: Genisys on April 2, 2004; Meritage on June 18, 2004; and ZettaWorks on December 20, 2004.

25


 

Results of Operations
Summary Table
      The following table summarizes our results of operations as a percentage of total services and software revenue:
                                         
                Nine Months
        Ended
    Year Ended December 31,   September 30,
         
    2001   2002   2003   2003   2004
                     
Services revenue
    100.0 %     98.1 %     86.6 %     88.2 %     83.7 %
Software revenue
    0.0       1.9       13.4       11.8       16.3  
Reimbursed expenses
    0.0       8.0       6.6       6.6       4.7  
                               
Total revenue
    100.0       108.0       106.6       106.6       104.7  
Cost of revenue
                                       
Project personnel costs
    58.2       53.9       47.4       48.7       49.9  
Software costs
    0.0       1.6       10.9       10.0       13.8  
Reimbursable expenses
    0.0       8.0       6.6       6.6       4.7  
Other project related expenses
    0.0       1.6       1.6       1.5       0.6  
                               
Total cost of revenue
    58.2       65.1       66.4       66.9       69.0  
                               
Services gross margin
    41.8       43.4       43.5       43.0       39.6  
Software gross margin
    0.0       14.9       18.6       15.4       15.5  
                               
Total gross margin
    41.8       42.9       40.2       39.7       35.7  
Selling, general and administrative
    44.1       41.2       28.2       28.2       21.3  
Depreciation and amortization
    2.4       9.5       4.5       5.3       2.3  
Restructuring, severance, and other
    75.0       2.8       0.0       0.0       0.0  
Impairment charge
    131.3       0.0       0.0       0.0       0.0  
                               
Income (loss) from operations
    (214.7 )     (10.6 )     7.4       6.2       12.1  
Interest expense, net
    (0.5 )     (0.9 )     (1.0 )     (1.0 )     (0.2 )
                               
Income (loss) before income taxes
    (215.2 )     (11.5 )     6.4       5.1       11.9  
Provision for income taxes
    (0.2 )     0.0       2.7       2.7       4.7  
                               
Net income (loss)
    (215.0 )     (11.5 )     3.7       2.5       7.2  
Beneficial conversion charge on preferred stock
    0.0       (8.0 )     0.0       0.0       0.0  
Accretion of dividends on preferred stock
    0.0       (0.8 )     (0.6 )     (0.7 )     0.0  
                               
Net income (loss) available to common stockholders
    (215.0 )%     (20.3 )%     3.2 %     1.8 %     7.2 %
                               
Nine months ended September 30, 2004 compared to nine months ended September 30, 2003
      Revenue. Total revenue increased 67.5% to $37.2 million for the nine months ended September 30, 2004 from $22.2 million for the nine months ended September 30, 2003. Services revenue increased 62.0% to $29.8 million for the nine months ended September 30, 2004 from $18.4 million for the nine months ended September 30, 2003. The increase in services revenue resulted from increases in average project size and quantity of projects. These increases were largely attributable to the acquisitions of Genisys and Meritage, which accounted for $5.2 million and $3.8 million, respectively, of services revenue for the nine months ended September 30, 2004. The utilization rate of our professionals, excluding subcontractors, also increased to 82% for the nine months ended September 30, 2004 from 75% for the nine months ended September 30, 2003. Software revenue increased 135.3% to $5.8 million

26


 

for the nine months ended September 30, 2004 from $2.5 million for the nine months ended September 30, 2003. Reimbursed expenses increased to approximately $1.7 million for the nine months ended September 30, 2004 from approximately $1.4 million for the nine months ended September 30, 2003.
      Cost of Revenue. Cost of revenue increased 75.9% to $24.5 million for the nine months ended September 30, 2004 from $14.0 million for the nine months ended September 30, 2003. The increase in cost of revenue is attributable to an increase in the number of professionals, due to hiring and the acquisitions of Genisys and Meritage. Additionally, the average number of professionals performing services, including subcontractors, increased to 193 for the nine months ended September 30, 2004 from 120 for the nine months ended September 30, 2003. Also, costs associated with software sales increased in connection with increased software revenue during the nine months ended September 30, 2004.
      Gross Margin. Gross margin increased 53.2% to $12.7 million for the nine months ended September 30, 2004 from $8.3 million for the nine months ended September 30, 2003. Gross margin as a percentage of revenue decreased to 36% for the nine months ended September 30, 2004 from 40% for the nine months ended September 30, 2003. Services gross margin decreased to 40% for the nine months ended September 30, 2004 from 43% for the nine months ended September 30, 2003. Software gross margin increased slightly to 16% for the nine months ended September 30, 2004 from 15% for the nine months ended September 30, 2003. The decrease in services gross margin as a percentage of revenue is primarily due to lower gross margins on consulting services contracts acquired from Genisys and Meritage. The decrease in gross margin as a percentage of total revenue is due to the decrease in services gross margin and to an increase in software sales as a percentage of total revenue.
      Selling, General and Administrative. Selling, general and administrative expenses increased 29.2% to $7.6 million for the nine months ended September 30, 2004 from $5.9 million for the nine months ended September 30, 2003. The increase in these costs is primarily related to the acquisitions of Genisys and Meritage. Selling, general and administrative expenses as a percentage of total revenue decreased to 21% for the nine months ended September 30, 2004 from 28% for the nine months ended September 30, 2003 as a result of increased selling and operating efficiencies.
      Depreciation. Depreciation expense decreased 35.1% to $363,593 during the nine months ended September 30, 2004 from $560,543 during the nine months ended September 30, 2003. The decrease is due to an increasing number of fully depreciated assets.
      Intangibles Amortization. Intangibles amortization expense, arising from acquisitions, decreased 19.5% to $446,320 during the nine months ended September 30, 2004 from $554,170 during the nine months ended September 30, 2003. The decrease in amortization expense reflects the end of the assigned three-year useful life relating to intangibles for the acquisition of Compete in May 2000 and the acquisition of Core Objective in November 2000, partially offset by an increase in amortization of intangibles acquired from Genisys and Meritage.
      Interest Expense. Interest expense decreased 58.8% to $82,116 during the nine months ended September 30, 2004 compared to $199,172 during the nine months ended September 30, 2003. The decrease in interest expense is due to decreases in the principal balances on the notes payable issued in our acquisition of Javelin and our accounts receivable line of credit since the same period in 2003. These decreasing balances are partially off-set by the interest expense now being incurred on the newly funded acquisition line of credit which was drawn down in connection with the acquisition of Meritage in June 2004.
      Provision for Income Taxes. We accrue a provision for federal, state and foreign income tax at the applicable statutory rates adjusted for non-deductible expenses. Our tax provision rate decreased to 39% for the nine months ended September 30, 2004 from 52% for the nine months ended September 30, 2003 as a result of a decrease in non-deductible expenses. We have deferred tax assets resulting from net operating losses of acquired companies amounting to approximately $3.4 million for which we have

27


 

a valuation allowance of $2.9 million. The remaining deferred tax asset of $0.5 million is completely off-set by deferred tax liabilities of $1 million related to identifiable intangibles and cash to accrual adjustments from the Genisys acquisition. 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 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.
     Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
      Revenue. Total gross revenue increased 34.5% to $30.2 million for the year ended December 31, 2003 from $22.5 million for the year ended December 31, 2002. Services revenue increased 20.3% to $24.5 million in 2003 from $20.4 million in 2002. The increase in services revenue resulted from an increase in the average project size and the number of projects. These increases were largely attributable to the April 2002 acquisitions of Vertecon and Javelin, which impacted revenue for the full period in 2003. For the years ended December 31, 2003 and 2002, 35% of our revenue was derived from IBM. Software revenue increased 839.9% to $3.8 million in 2003 from $0.4 million in 2002. Reimbursable expenses increased slightly to $1.9 million in 2003 from $1.7 million in 2002.
      Cost of Revenue. Cost of revenue increased 39.3% to $18.8 million for the year ended December 31, 2003 from $13.5 million for the year ended December 31, 2002. The increase in cost of revenue is due to the increase in average salaries of our employees as compared to the same period in 2002, as well as an increase in the number of billable employees, and the increase in headcount as a result of the acquisitions of Vertecon and Javelin in April 2002 being included in the full year for 2003. In addition, costs associated with software sales increased by $2.7 million in connection with the increased software revenue in 2003 compared to 2002.
      Gross Margin. Gross margin increased 27.7% to $11.4 million for the year ended December 31, 2003 from $8.9 million for the year ended December 31, 2002. Gross margin as a percentage of revenue decreased to 40% in 2003 from 43% in 2002. The decrease in gross margin as a percentage of revenue is primarily due to the increase in software sales revenue in proportion to total revenue, which typically yields a lower margin than our services revenue. Services gross margin was 43% in 2003 and 2002. Software gross margin was 19% in 2003 and 15% in 2002.
      Selling, General and Administrative. Selling, general and administrative expenses decreased 6.7% to $8.0 million for the year ended December 31, 2003 from $8.6 million for the year ended December 31, 2002. The decrease is the result of deliberate cost reductions, including a $292,000 reduction in administrative salaries and benefits, a $189,000 reduction in computer equipment leasing costs and other information technology related expenses, which were partially offset by a $151,000 increase in office costs resulting from the inclusion of Javelin and Vertecon expenses for the full period in 2003, and a $150,000 increase in costs related to the 2003 company meeting. Selling, general and administrative expenses as a percentage of revenue decreased to 28% for the year ended December 31, 2003 from 41% for the year ended December 31, 2002. The decrease in selling, general and administrative expenses as a percentage of revenue is the result of an increase in software sales, for which there are generally less incremental costs, as well as a general reduction of costs in proportion to total revenue during the applicable periods.
      Depreciation. Depreciation expense decreased slightly to $670,000 during 2003 from $688,000 during 2002. The decrease is due to a general decrease in purchases along with an increasing number of fully depreciated assets.
      Restructuring. During 2002, we implemented certain workforce reductions and office closures resulting in charges of $579,000, consisting of severance pay and related benefits for former employees, as well as costs associated with the closure of our London office. We recognized approximately $118,000 in restructuring expenses during 2002 related to the closure of our London office, which consisted of severance and benefits, lease commitments, as well as expected losses on the disposal of fixed assets,

28


 

attorney and accounting fees, and other costs. As part of these restructurings, we reduced our workforce by a total of 30 employees, 17 of which were technology professionals and 13 of which were involved in selling, general administration and marketing. As of December 31, 2002, approximately $228,000 of restructuring costs are included in other current liabilities, all of which were paid during 2003. There was no workforce restructuring during 2003.
      Intangibles Amortization. Intangibles amortization expense consists of amortization of intangibles arising from our acquisitions of Compete in May 2000, Core Objective in November 2000, and Vertecon and Javelin in April 2002. Amortization decreased 52.5% to $610,000 during the year ended December 31, 2003 from $1.3 million during the year ended December 31, 2002. The decrease in amortization expense reflects the end of the assigned three-year useful life for the Compete and Core Objective intangible assets.
      Interest Expense. Interest expense increased 40.5% to $286,000 for the year ended December 31, 2003 compared to $204,000 during the year ended December 31, 2002. The increase in interest expense is due to increases of approximately $31,000 related to capital leases, approximately $9,000 related to imputed interest expense on the notes issued to the Javelin shareholders, and approximately $43,000 in bank audit fees, letter of credit renewal fees, and other costs associated with our line of credit.
      Provision for Income Taxes. Our 2003 income tax provision was accrued for federal, state and foreign income taxes at the applicable statutory rates. The 2003 income tax provision differed from the statutory rate primarily due to non-deductible expenses and the use of net operating losses (other than those related to acquired entities) that were previously subject to a valuation allowance. All net operating losses remaining as of December 31, 2003 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. Accordingly, a valuation allowance has been established. Any decrease in the valuation allowance will be applied first to reduce goodwill and then to reduce other acquisition related non-current intangible assets to zero. Any remainder would be recognized a reduction of income tax expense. There was no income tax provision for 2002 as a result of the net loss for that period.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
      Revenue. Revenue, including rebilled out-of-pocket expenses, decreased 4.6% to $22.5 million for the year ended December 31, 2002 from $23.5 million for the year ended December 31, 2001. The decrease in revenue is the result of a decrease in rebilled out-of-pocket expenses. Revenue net of project expenses remained consistent at $20.4 million during 2002 and 2001 as a result of similar average headcount for both years. The results of Vertecon and Javelin are included with our results for the period from April 27, 2002 to December 31, 2002. During the year ended December 31, 2002, 35% of our revenue was derived from IBM. Software resale revenue increased 13.5% to $395,000 during 2002 from $348,000 during 2001.
      Cost of Revenue. Cost of revenue decreased slightly to $11.6 million for the year ended December 31, 2002 from $11.9 million for the year ended December 31, 2001. Cost of revenue remained consistent between the periods as a result of similar average headcount for 2002 and 2001.
      Gross Margin. Gross margin increased slightly to $8.9 million for the year ended December 31, 2002 from $8.5 million for the year ended December 31, 2001. Gross margin as a percentage of revenue increased slightly to 43% for the year ended December 31, 2002 from 42% for the year ended December 31, 2001. The increase in gross margin as a percentage of revenue is due to higher utilization rates during the year ended December 31, 2002 compared to the year ended December 31, 2001, off-set by a decline in average rates. In addition, the increase in gross margin is due to the decrease of out-of-pocket reimbursable expenses, which have zero margin, relative to total revenue during 2002 compared to 2001.

29


 

      Selling, General and Administrative. Selling, general and administrative expenses decreased 4.8% to $8.6 million for the year ended December 31, 2002 from $9.0 million for the year ended December 31, 2001. The decrease in these costs was attributable to a decrease in stock compensation as a result of fewer stock option grants to employees with exercise prices below fair market value at the date of grant. Selling, general and administrative expenses as a percentage of revenue net of project expenses decreased to 41% for the year ended December 31, 2002 from 44% for the year ended December 31, 2001.
      Depreciation. Depreciation expense increased 39.0% to $688,000 during 2002 from $495,000 during 2001. The increase is related to additional depreciation expense associated with fixed assets recorded in connection with the acquisitions of Vertecon and Javelin.
      Restructuring. Restructuring, severance and other expense consists of severance payments and related benefits, the remaining lease commitment for unused office space, costs associated with the shutdown of our London office and postponed offering costs. The costs to close our London office totaled approximately $118,000 and included severance and related benefits, the remaining office lease commitment, loss on disposal of fixed assets, and associated legal and accounting fees. Restructuring expense decreased 24.4% to $579,000 during the year ended December 31, 2002 from $766,000 during the year ended December 31, 2001. The decrease in restructuring expense is due in part to $123,000 of costs in 2001 related to a proposed offering of our common stock that was postponed and an absence of postponed offering costs during 2002. Period specific charges and the difference in the number of people and type of positions terminated in the related period also impact our restructuring expenses. During 2002 and 2001, we reduced our workforce by a total of 30 employees and 84 employees, respectively.
      Impairment Charge. There was no impairment charge during the year ended December 31, 2002. During the year ended December 31, 2001, we recorded an impairment charge of $26.8 million to write down the carrying value of our goodwill for the amount by which the carrying value of goodwill exceeded fair value based on undiscounted cash flows and other factors including market capitalization, net book value, and other indicators of value.
      Intangibles Amortization. Intangibles amortization expense consists of amortization of goodwill and other intangibles arising from our acquisitions of LoreData, Inc. in January 2000, Compete in May 2000, Core Objective in November 2000, and Vertecon and Javelin in April 2002. Amortization decreased 91.6% to $1.3 million during the year ended December 31, 2002 from $15.3 million during the year ended December 31, 2001. The decrease in amortization during the year ended December 31, 2002 compared to the year ended December 31, 2001 is due to our accounting for amortization in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002, that eliminated the amortization of goodwill and certain indefinite lived intangibles, as well as the impairment to goodwill recorded in the third quarter of 2001.
      Interest Income (Expense). Interest income decreased 41.9% to $18,000 for the year ended December 31, 2002 from $31,000 for the year ended December 31, 2001. The decrease in interest income was due to a general decline in interest rates during 2002 and a lower average cash balance during the year ended December 31, 2002 compared to the year ended December 31, 2001. We recognized interest income of approximately $11,000 during 2002 and $3,500 during 2001 related to advances totaling $800,000 made to Vertecon prior to the acquisition of Vertecon. The interest receivable from Vertecon was eliminated upon the acquisition of Vertecon. Interest expense increased 67.2% to $204,000 during the year ended December 31, 2002 from approximately $122,000 during the year ended December 31, 2001. The increase in interest expense is the result of the imputed interest expense on the notes issued to the Javelin shareholders in the acquisition of Javelin. Imputed interest expense recognized during 2002 related to these notes was approximately $63,000. The remaining increase in interest expense is the result of interest expense on capital lease obligations assumed in the acquisitions of Vertecon and Javelin. Interest expense on capital leases increased 680% to $39,000 during 2002 from $5,000 during 2001.

30


 

Liquidity And Capital Resources
      Selected measures of liquidity and capital resources are as follows:
                 
    As of
     
    December 31,   September 30,
    2003   2004
         
    (In millions)
Cash
  $ 2.0     $ 2.8  
Working capital
  $ 4.0     $ 7.8  
      Had the acquisition of the business of ZettaWorks occurred in the nine month period ending September 30, 2004, our cash and working capital at September 30, 2004 would have been $1.4 million and $7.4 million, respectively, taking into account $2.9 million in cash used to acquire ZettaWorks and $1.5 million in cash drawn from our acquisition line of credit with Silicon Valley Bank.
Net Cash Provided By Operating Activities
      We expect to fund our operations during 2005 from cash generated from operations and short-term borrowings as necessary from our credit facility. We believe that these capital resources will be sufficient to meet our needs for at least the next twelve months. Net cash generated by operations for the nine months ended September 30, 2004 was approximately $1.7 million. Cash provided by operations for the year ended December 31, 2003 was $1.9 million.
      Accounts receivable, net of allowance for doubtful accounts, totaled $14.4 million at September 30, 2004, representing approximately 69 days of sales outstanding, excluding end-of-quarter software sales, compared to $5.5 million, or 64 days at December 31, 2003.
      A significant amount of our revenue is derived from IBM. Accordingly, our accounts receivable generally includes significant amounts due from IBM. As of September 30, 2004, approximately 11% of our accounts receivable was due from IBM.
Net Cash Used in Investing Activities
      For the nine months ended September 30, 2004, we used $7.9 million in cash, net of cash acquired, to acquire Genisys and Meritage and used $315,000 to purchase equipment fixed assets. On December 20, 2004, we used $2.9 million in cash to acquire ZettaWorks.
Estimated Net Cash from this Stock Offering
      We estimate that the net proceeds from the sale of 4,250,000 shares of our common stock pursuant to this offering will be approximately $           million, after deducting underwriting discounts and commissions and estimated offering expenses. We expect to use a substantial portion of the net proceeds from this offering for expansion of our business, including future acquisitions. We will also use a portion of the net proceeds from this offering to repay all amounts outstanding under our credit facility with Silicon Valley Bank. We will use any remaining net proceeds from this offering for working capital and other general corporate purposes.
Availability of Funds from Bank Line of Credit Facilities
      We have a $13.0 million credit facility with Silicon Valley Bank which includes a $9.0 million accounts receivable line of credit and a $4.0 million acquisition term line of credit. We amended this credit facility on January 31, 2005 to increase the accounts receivable line of credit from $6.0 million to $9.0 million. The accounts receivable line of credit, which expires in December 2005, allows us to borrow up to an amount equal to 80% of eligible accounts receivable, as defined in the agreement, but in no event more than $9.0 million. Borrowings under this line of credit bear interest at the bank’s

31


 

prime rate plus 1.00%, or 5.75%, as of December 31, 2004. As of December 31, 2004, there were no amounts outstanding under the accounts receivable line of credit.
      Our $4.0 million term acquisition line of credit with Silicon Valley Bank provides an additional source of financing for certain qualified acquisitions. As of December 31, 2004 the balance outstanding under this acquisition line of credit was approximately $3.8 million. Borrowings under this acquisition line of credit bear interest equal to the average four year U.S. Treasury note yield plus 3.50%— the initial $2.5 million draw, of which $2.3 million remains outstanding, bears interest of 7.11% and the subsequent $1.5 million draw, all of which remains outstanding, bears interest of 6.90% as of December 31, 2004 and are repayable in thirty-six equal monthly installments. We are entitled to make payments of accrued interest only for the first three monthly installments.
      We are required to comply with various financial covenants under our Silicon Valley Bank credit facility. We are required to maintain a minimum tangible net worth of at least $3,000,000, to maintain a ratio of after tax earnings before interest, depreciation and amortization, annualized, divided by current maturities of long-term debt plus interest of at least 1.50 to 1.00, and, pursuant to the January 31, 2005 amendment, to maintain a ratio of cash plus accounts receivable including 50% of unbilled revenue to all outstanding obligations to the bank of at least 1.50 to 1.00. As of December 31, 2004, we were in compliance with all covenants under this credit facility.
Contractual Obligations
      In connection with certain of our acquisitions, we were required to establish various letters of credit totaling $550,000 with Silicon Valley Bank and $65,000 with Key Bank to serve as collateral for certain office space and equipment leases. We expect to retire the Key Bank letter of credit in the first half of 2005. The letters of credit with Silicon Valley Bank reduce the borrowings available under our line of credit with Silicon Valley Bank. One letter of credit of $300,000 will remain in effect through 2005, and the other letter of credit of $250,000 will remain in effect through 2007.
      In connection with the acquisition of Javelin, we issued $1.5 million in notes, $1 million of which was payable in four equal annual installments on the anniversary of the closing date of the acquisition in April 2002. The other $500,000 is payable in eight equal quarterly installments that commenced in July 2002. We paid $125,000 in 2002, $500,000 in 2003 and $375,000 in 2004. Accordingly, annual installments of $250,000 remain to be paid in each of 2005 and 2006.
      We have incurred commitments to make future payments under contracts such as leases and certain long-term liabilities. Maturities, excluding interest, under these contracts are set forth in the following table as of September 30, 2004:
                                         
    Payment Due by Period
     
        Less Than       More Than
Contractual Obligations   Total   1 Year   1-3 Years   3-5 Years   5 Years
                     
    (In thousands)
Long-term debt obligations, excluding interest
  $ 2,970     $ 1,019     $ 1,951             —   
Operating lease obligations
  $ 3,533     $ 1,949     $ 1,440     $ 144       —   
      If our capital, including proceeds from this offering, 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.

32


 

Critical Accounting Policies
Revenue Recognition and Allowance for Doubtful Accounts
      Consulting revenues are comprised of revenue from professional services fees recognized primarily on a time and materials basis as performed. For fixed fee engagements, revenue is recognized using the proportionate performance method based on the ratio of hours expended to total estimated hours. Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. Billings in excess of costs plus earnings are classified as deferred revenues. Our normal payment terms are net 30 days. Our agreement with IBM provides for net 60 days payment terms. Reimbursements for out-of-pocket expenses are included in gross revenue. Revenue from the sale of third-party software is recorded on a gross basis provided that we act as the principal in the transaction. In the event we do not meet the requirements to be considered the principal in the software sale transaction, we record the revenue on a net basis. There is no effect on net income between recording the software sales on a gross basis versus a net basis. We assess our allowance for doubtful accounts at each financial reporting date based on expected losses on uncollectible accounts receivable with known facts and circumstances for the respective period.
Goodwill and Other Intangible Assets
      We adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement 142”) on January 1, 2002. In accordance with Statement 142, we replaced the ratable amortization of goodwill with a periodic review and analysis of such intangibles for possible impairment. In accordance with Statement 142, we assess our goodwill on October 1 of each year or more frequently if events or changes in circumstances indicate that goodwill might be impaired.
      Business acquisitions typically result in goodwill and other intangible assets, and the recorded values of those assets may become impaired in the future. The determination of the value of such intangible assets requires us to make estimates and assumptions that affect our consolidated financial statements. We assess potential impairments to intangible assets on an annual basis or when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of the acquired businesses, market conditions and other factors. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with the acquired businesses is impaired. Any resulting impairment loss could have an adverse impact on our results of operations by decreasing net income.
Accounting for Stock-Based Compensation
      We apply APB 25 and related interpretations in accounting for our stock option plans. Accordingly, compensation cost is recognized only when options are granted below market price on the date of grant. Had compensation cost for our stock compensation plans been determined based on fair value at the grant dates for awards under these plans consistent with SFAS 123, our net income and earnings per share would have been reduced to pro forma amounts indicated in the notes to our financial statements included in this prospectus.
Income Taxes
      Management believes that our net deferred tax asset should continue to be reduced by a full valuation allowance. Future operating results and projections could alter this conclusion, potentially resulting in an increase or decrease in the valuation allowance. Since the valuation allowance relates solely to net operating losses from acquired companies which are subject to usage limitations, any decrease in the valuation allowance will be applied first to reduce goodwill and then to reduce other acquisition related non-current intangible assets to zero. Any remaining decrease in the valuation allowance would be recognized as a reduction of income tax expense.

33


 

Recent Accounting Pronouncements
      On December 16, 2004, the Financial Accounting Standards Board issued Statement No. 123 (revised 2004), Share-Based Payment (“Statement 123(R)”). Statement 123(R) replaces Statement No. 123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement No. 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values (i.e., pro forma disclosure is no longer an alternative to financial statement recognition). Statement 123(R) is effective for public companies at the beginning of the first interim or annual period beginning after June 15, 2005. We are currently assessing the impact, the amount of compensation based upon the Black-Scholes model versus a binomial model, of Statement 123(R) on our financial statements and related disclosures. Both models will increase compensation expense related to past grants which are not fully vested as of June 30, 2005 and all future grants.

34


 

BUSINESS
Overview
      We are a rapidly growing information technology consulting firm serving Global 2000 and midsize companies in the central 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 customers, suppliers and partners, improve productivity and reduce information technology costs. We design, build and deliver software solutions using a core set of software products developed by our partners. These products, which are based on open standards such as the Java 2 Enterprise Edition, or J2EE, are commonly referred to as middleware and include application servers, enterprise application integration platforms, business process management, business activity monitoring and business intelligence applications and enterprise portal software. Using these products, our solutions enable our clients to operate a real-time enterprise that dynamically adapts business processes and the systems that support them to the changing demands of an increasingly global, Internet-driven and competitive marketplace.
      Through our experience in developing and delivering eBusiness integration solutions for more than 380 Global 2000 and midsize companies, we have acquired significant domain expertise that we believe differentiates our firm. We use small, 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 eBusiness integration solutions.
      We believe that the central United States represents an attractive geographic market and that our focus on this region and our network of nine offices throughout the central United States are additional competitive differentiators. We believe this geographic focus makes us the partner of choice both for Global 2000 and midsize companies in the area that seek business and technology consulting services and for software vendors that seek consulting firm partners to sell and deliver solutions that use their products.
      We place strong emphasis on building lasting relationships with clients. In fiscal years 2002 and 2003, and during the nine months ended September 30, 2004, 81%, 85% and 92% of revenue, respectively, excluding from the calculation for any single period revenue from acquisitions completed in that single period, was derived from customers that were clients in the prior year. We have also built meaningful partnerships with software providers, most notably IBM, whose products we use to design and implement solutions for our clients. These partnerships enable us to reduce our cost of sales and sales cycle times and increase win rates through leveraging our partners’ marketing efforts and endorsements.
      We are expanding through a combination of organic growth and acquisitions. We believe that information technology consulting is a fragmented industry and that there are a substantial number of privately held information technology consulting firms in our target markets that can be acquired on financially accretive terms. We have a track record of successfully identifying, executing and integrating acquisitions that add strategic value to our business. Over the past five years, we have acquired and integrated seven privately held information technology consulting firms, three of which were acquired in 2004. We believe that we can achieve significantly faster growth in revenues and profitability through a combination of organic growth and acquisitions than we could through organic growth alone.

35


 

Industry Background
      A number of factors are shaping the information technology industry and, in particular, the market for our information technology consulting services:
      United States Economic Recovery. The years 2001 and 2002 saw a protracted downturn in information technology spending as a result of an economic recession in the United States and the collapse of the Internet “bubble.” The information technology consulting industry began to experience a recovery in the second half of 2003 which continued through 2004. The industry is benefiting from the overall improvement in the United States economy as well as a need by businesses to continue the transformation that they began in the 1990s with the commercialization of the Internet. It is expected that information technology services spending will continue to increase in the foreseeable future. According to independent market research firm IDC, total information technology services spending in the United States is expected to increase 6.4% in 2005 to $272 billion and to achieve a 6.7% compound annual growth rate through 2008.
      Need to Rationalize Complex, Heterogeneous Enterprise Technology Environments. Over the past 15 years, the information systems of many Global 2000 and midsize companies have evolved from traditional mainframe-based systems to include distributed computing environments. This evolution has been driven by the benefits offered by distributed computing, including lower incremental technology costs, faster application development and deployment, increased flexibility and improved access to business information. Organizations have also widely installed enterprise resource planning, or ERP, supply chain management, or SCM, and customer relationship management, or CRM, applications in order to streamline internal processes and enable communication and collaboration.
      As a result of investment in these different technologies, organizations now have complex, heterogeneous enterprise technology environments with incompatible technologies and high costs of integration. These increases in complexity, cost and risk, combined with the business and technology transformation caused by the commercialization of the Internet, have created demand for information technology consultants with experience in enabling the integration of disparate platforms and leveraging Internet-based technologies to support business and technology goals.
      Increased Competitive Pressures. Over the past five years, the marketplace has become increasingly global, Internet-driven and competitive. To gain and maintain a competitive advantage in this environment, Global 2000 and midsize 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 numerous disparate information resource types, databases, legacy mainframe applications, packaged application software, custom applications, trading partners, people and Web services, but also to manage the business processes that govern the interactions between these resources so that organizations can engage in “real-time business.” Real-time business refers to the use of current information in business to execute critical business processes.
      These factors are driving increased spending on software and related consulting services in the areas of application integration, middleware and portals, or AIMP, as these segments play critical roles in the integration between new and extant systems and the extension of those systems to customers, suppliers and partners via the Internet. Companies are expected to increase software spending on

36


 

integration broker suites, enterprise portal services, application platform suites and message-oriented middleware. Gartner Dataquest, or Gartner, an independent market research firm, projects that growth in these specific sub-segments within the AIMP software area will outpace general software spending. Gartner expects worldwide spending in these four specific software sub-segments to increase from approximately $4.33 billion in 2004 to $6.67 billion in 2007, a compound annual growth rate of 15.5%. As companies increase spending on software, their overall spending on services will also increase, often by a multiple of each dollar spent on software. For example, IDC projects that in 2005, across 17 industries, spending on services, as a multiple of software spending, will range from a high of 3.19 to a low of 1.28, with an average of 2.14.
Competitive Strengths
      We believe our competitive strengths include:
  Domain Expertise. Through our experience developing and delivering solutions for more than 380 Global 2000 and midsize companies, we have acquired significant domain expertise in a core set of eBusiness solutions, applications and software platforms. These solutions include eBusiness infrastructure, enterprise portals, ecommerce platforms, eCRM and supply chain Web enablement. The applications include enterprise application integration software, business process management and business activity monitoring applications and enterprise portal software. The platforms in which we have significant domain expertise and on which these solutions are built include IBM WebSphere, TIBCO BusinessWorks and Microsoft.NET.
 
  Delivery Model and Methodology. We believe our significant domain expertise enables us to provide high-value solutions through small, expert project teams that deliver measurable results by working collaboratively with clients through a user-centered, technology-based and business-driven solutions methodology. Our eNable Methodology, a unique and proven execution process map we developed, allows for repeatable, high quality services delivery. The eNable Methodology leverages the thought leadership of our senior strategists and practitioners to support the client project team and focuses on transforming our clients’ business processes to provide enhanced customer value and operating efficiency, enabled by Web technology. As a result, we believe we are able to offer our clients the dedicated attention that boutiques usually provide and the delivery and project management that larger firms usually offer.
 
  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 excellent references for us. In fiscal years 2002 and 2003, and during the nine months ended September 30, 2004, 81%, 85% and 92% of revenue, respectively, excluding from the calculation for any single period revenue from acquisitions completed in that single period, was derived from customers that were clients in the prior year.
 
  Vendor Partnerships and Endorsements. We have built meaningful partnerships with software providers, most notably IBM, whose products we use to design and implement solutions for our clients. These partnerships enable us to reduce our cost of sales and sales cycle times and increase win rates by leveraging our partners’ marketing efforts and endorsements. We also serve as a sales channel for our partners, helping them market and sell their software products. We are a Premier IBM business partner, a TeamTIBCO partner and a Microsoft Gold Certified Partner.
 
  Geographic Focus. With nine offices spanning the central United States from Houston, Texas, to Detroit, Michigan, we focus on Global 2000 and midsize companies that have a presence in the central United States. We believe this geographic focus helps position us as the provider of choice for these companies in the area that are seeking business and technology consulting

37


 

  services and for software vendors that seek consulting firm partners to sell and deliver solutions that leverage their products.
 
  Emerging Offshore Capability. Our recently acquired subsidiary, Perficient ZettaWorks, Inc. maintains a small offshore development facility in Bitoli, Macedonia. Through this facility we contract with a team of professionals with expertise in IBM, TIBCO and Microsoft technologies and with specializations that include application development, adapter and interface development, quality assurance and testing, monitoring and support, product development, platform migration, and portal development. This expertise, as well as our partnerships with offshore services providers based in India, will enable us to more effectively deliver our solutions.
Our Solutions
      We help clients gain competitive advantage by using Internet-based technologies to make their businesses more responsive to market opportunities and threats, strengthen relationships with customers, suppliers and partners, improve productivity and reduce information technology costs. Our 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.
Our eBusiness integration solutions include the following:
  eBusiness Infrastructure. Our eBusiness infrastructure solutions use the latest Internet-based technologies to integrate, leverage and extend our clients’ legacy ERP systems. We design, build and deploy infrastructure solutions that are scalable, reliable, secure and cost-effective. We deliver eBusiness infrastructure solutions around all market-leading middleware and EAI platforms/tools. In particular, we maintain an Advanced Technology Services group, which is a 53-person team dedicated exclusively to IBM WebSphere infrastructure solutions.
 
  Enterprise Portals. We design, develop, implement and integrate secure and scalable enterprise portals for our clients, their customers, suppliers and partners that include searchable data systems, collaborative systems for process improvement, transaction processing, unified and extended reporting and content management and personalization.

38


 

  eCommerce Platforms. We develop secure and reliable ecommerce infrastructures that dynamically integrate with back-end systems and complementary applications, provide for transaction volume scalability and sophisticated content management.
 
  eCRM. We create advanced eCRM solutions that facilitate customer acquisition, service and support, sales, and marketing by understanding our customers’ needs through interviews, facilitated requirements gathering sessions and call center analysis, developing an iterative, proto-type driven solution and integrating the solution to legacy processes and applications.
 
  Supply Chain Web Enablement. We help companies develop secure, standards-based Internet platforms based on unique design and build requirements to support purchasing, distribution, sales and service with their trading partners.
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.
      The following case studies represent eBusiness integration and middleware solutions delivered to four of our customers.
      eCRM Solution for an Insurance and Financial Services Company. A Midwestern based division of a large provider of insurance and other financial services retained us to address slowing sales of its group variable life products and rising operating costs due to inefficient customer policy enrollment and customer service processes.
      We designed, developed and delivered an effective eEnrollment and eService portal that provides the client with critical online enrollment and customer self-service functionality. Our solution, built on IBM WebSphere, includes online customer self-enrollment with full eSignature capability, single sign-on integration with customer and client portals, enhances case administration capabilities for the client and intuitive calculators and forecasting tools for its customers.
      We believe our solution enabled the client to enhance its competitive advantage by offering customers a differentiated Web-based self-service portal and by reducing customer provisioning and support costs. Our solution was designed to eliminate paper forms through paperless workflow capability, reduce call center volume and enable increased sales volume on constant headcount. We believe the benefits of our services to this client included significant cost savings and increased productivity and growth in customer site satisfaction.
      eBusiness Infrastructure Solution for a Television Home Shopping Channel. A large television home shopping channel based in the midwestern United States retained us to help overcome growth constraints and transaction processing inefficiencies caused by myriad back-end systems serving their broadcast, Internet and direct mail supply chains.
      We designed, developed and delivered an enterprise application integration solution that linked 70 disparate back-end distribution, payment and production systems across the company into an efficient, manageable platform. The solution, built on TIBCO BusinessWorks, included a standard transaction protocol across the enterprise, a messaging layer that manages enterprise information flow and a more robust e-commerce engine and platform.
      We believe our solution enabled the client to overcome growth constraints and leverage real-time business capabilities to improve supply-chain efficiency. Our solution was designed to enable real-time access to one million transactions per day, including order entry and payment processing tasks and reduce the cost of future integration, development and data access.
      Web-based Budgeting Solution for a Financial Services Company and Brokerage Firm. A leading brokerage and financial services firm based in the Midwest retained us to help them streamline annual budgeting and planning processes for more than 180 individual branch offices.

39


 

      We designed, built and delivered a Web-enabled enterprise revenue forecasting and budgeting system. Our solution, built on Microsoft.NET, establishes multi-year revenue projections and estimates appropriate budgets for each branch office, creates scorecards to set compensation metrics for key employees and aggregates annual revenue projections and goals across the company. In connection with delivering this solution, we performed requirements analysis, collected details of data and process flow, designed an object-oriented component architecture and created a testing environment for stress testing to ensure performance under demanding circumstances.
      We believe our solution enabled this client to improve its financial planning and budgeting process and improved market responsiveness.
      eBusiness Strategy Engagement for a Specialty Pharmaceutical Company. A fully integrated specialty pharmaceutical company based in the Midwest engaged us to develop and implement a comprehensive eBusiness strategy for their growing enterprise.
      We delivered a three-year eBusiness strategy based on our client’s business strategy and emerging trends in the pharmaceutical industry. The strategy focused on maximizing knowledge capital and strengthening customer bonds. We developed an employee portal to deliver business intelligence through executive dashboards and foster knowledge sharing through the aggregation of intellectual assets. We also implemented a customer self service site that now provides 24-hour support to customers seven days a week.
      We believe we have created a means for the client to have faster and more in-depth access to key information which will lead to better business decisions. This will enable our client to service their customers in an effective and efficient manner.
      In addition to our eBusiness solution services, we offer education and mentoring services to our clients. We operate an IBM-certified advanced training facility in Chicago, Illinois, where we provide our clients both customized and established curriculum of courses and other education services in areas including object-oriented analysis and design immersion, J2EE, user experience, MQSeries, VisualAge Generator and Wireless, and an IBM Course Suite with over 20 distinct courses covering the IBM WebSphere product suite including WebSphere Application Server, WebSphere Commerce, WebSphere Portal, and VisualAge for Java/WebSphere Studio Application Developer. We also leverage our education practice and training facility to provide continuing education and professional development opportunities for our colleagues.
Our Solutions Methodology
      Our approach to solutions design and delivery is user-centered, technology-based and business-driven and is executed through a methodology, which we refer to as the eNable Methodology, that is:
  iterative and results oriented;
 
  centered around a flexible and repeatable framework;
 
  collaborative and customer-centered in that we work with not only our clients but with our clients’ customers in developing our solutions;
 
  focused on delivering high value, measurable results; and
 
  grounded by industry leading project management.
      The eNable Methodology allows for repeatable, high quality services delivery through a unique and proven execution process map. Our methodology is grounded in a thorough understanding of our clients’ overall business strategy and competitive environment. The eNable Methodology leverages the thought leadership of our senior strategists and practitioners and focuses on transforming our clients’ business processes, applications and technology infrastructure. The eNable Methodology approach focuses on

40


 

business value or return-on-investment, with specific objectives and benchmarks established at the outset.
Our Strategy
      Our goal is to be the leading independent information technology consulting firm in the central United States. 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 our customers 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. 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 on financially accretive terms. 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. Over the past five years, we have acquired and successfully integrated seven privately held information technology consulting firms. We continue to actively look for attractive acquisitions that leverage our core expertise, particularly in the central United States, and look to expand our capabilities and geographic presence, including offshore.
 
  Expand in the central United States. We believe the central United States represents an attractive geographic market for organic growth and we plan on expanding further in this region. We currently have nine offices in the central United States and expect to grow the number of professionals in these offices as our business expands. In addition, we expect to grow our presence in the central United States through targeted acquisitions.
 
  Enhance Brand Visibility. Our focus on a core set of eBusiness solutions, applications and software platforms and a targeted customer and geographic market has given us significant market visibility for a firm of our size. In addition, we believe we have in the past year achieved critical mass in size, which has significantly enhanced our visibility among prospective clients, employees and software vendors. As we continue to grow our business, we intend to increase our marketing activities to highlight our thought leadership in eBusiness solutions and infrastructure software technology platforms.
 
  Invest in Our People and Culture. We have cultivated a culture built on teamwork, a passion for technology and client service, and a focus on cost control and the bottom line. As a people-based business, we continue to invest in the development of our professionals and to provide them with entrepreneurial opportunities and career development and advancement. Our technology, business consulting and project management councils ensure that each client team learns best practices being developed across the company and our recognition program rewards teams for implementing those practices. We believe this results in a team of motivated professionals armed 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, also lead to a sales channel whereby our partners, or their

41


 

  clients, utilize us as the services firm of choice to help a partner’s client integrate their technology.
 
  Use Offshore Services When Appropriate. Our solutions and services are typically delivered at the customer site and require a significant degree of customer participation, interaction and specialized technology expertise which tends to offset the potential savings from utilizing offshore resources. However, there are projects in which we can use lower cost offshore technology professionals to perform less specialized roles on our solution engagements, enabling us to fully leverage our United States colleagues while offering our clients a highly competitive blended average rate. We have established partnerships with a number of offshore staffing firms from whom we source offshore technology professionals on an as-needed basis. Additionally, through our acquisition of ZettaWorks, we maintain a small offshore development and delivery facility in Macedonia.
Sales and Marketing
      We have a 21 person direct solutions-oriented sales force that sells from 9 of our 11 offices. Our sales team is experienced and connected through a common services portfolio, sales process and performance management system. Our sales process utilizes project pursuit teams that include those of our information technology professionals best suited to address a particular prospective client’s needs. We reward our sales force for developing and maintaining relationships with our clients and seeking out follow-on engagements as well as leveraging those relationships to forge new ones in different areas of the business and with our clients’ business partners. More than 80% of our sales are executed by our direct sales force.
      Our target client base includes companies in the central United States with annual revenues in excess of $1 billion. We believe this market segment can generate the repeat business that is a fundamental part of our growth plan. We pursue only solutions opportunities where our domain expertise and delivery track record give us a competitive advantage. We also typically target engagements of up to $3 million in fees, which we believe to be below the target project range of most large systems integrators and beyond the delivery capabilities of most local boutiques.
      We have sales and marketing partnerships with software vendors including IBM Corporation, TIBCO Software, Inc., Microsoft Corporation, Art Technology Group, Inc., or ATG, Wily Technology, Inc., Bowstreet, Adobe Systems Incorporate and Stellent, Inc. These companies are key vendors of open standards based software commonly referred to as middleware application servers, enterprise application integration platforms, business process management, business activity monitoring and business intelligence applications and enterprise portal server software. Our direct sales force works in tandem with the sales and marketing groups of our partners to identify potential new clients and projects. Our partnerships with these companies enable us to reduce our cost of sales and sales cycle times and increase win rates by leveraging our partners’ marketing efforts and endorsements. In particular, the IBM software sales channel provides us with significant sales lead flow and joint selling opportunities.
      As we continue to grow our business, we intend to increase our marketing activities to highlight our thought leadership in eBusiness solutions and infrastructure software technology platforms. Our efforts will include technology white papers, by-lined articles by our colleagues in technology and trade publications, media and industry analyst events, sponsorship of and participation in targeted industry conferences and trade shows.
Clients
      We have developed and delivered eBusiness integration solutions for more than 380 Global 2000 and midsize companies to date. In the nine months ended September 30, 2004, we provided services to

42


 

approximately 160 customers. The following is a list of our top 10 customers by revenue, for the nine months ended September 30, 2004:
  Assurant/ Fortis, Inc.;
 
  IBM Corporation;
 
  KV Pharmaceutical Company;
 
  Nash Finch Company;
 
  Paragon Life Insurance Company, a MetLife Company;
 
  Penguin Group;
 
  ShopNBC;
 
  Union Bank of California;
 
  Wachovia Corporation; and
 
  Zions Bancorporation.
Competition
      The market for the information technology consulting services we provide is competitive and has low barriers to entry. We believe that our competitors fall into several categories, including:
  small local consulting firms that operate in no more than one or two geographic regions;
 
  regional consulting firms such as Software Architects, Inc., Haverstick Consulting, Inc. and Quilogy, Inc.;
 
  national consulting firms, such as Answerthink, Inc., Accenture, BearingPoint, Inc., Ciber, Inc., Electronic Data Systems Corporation and Sapient Corporation;
 
  in-house professional services organizations of software companies; and
 
  to a limited extent, offshore providers such as Cognizant Technology Solutions Corporation, Infosys Technologies Limited, Satyam Computer Services 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, 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 increase in the future.
      Some of our competitors have longer operating histories, larger client bases and greater name recognition and possess significantly greater financial, technical and marketing resources than we do. As a result, these competitors may be better able to attract customers to which we market our services and adapt more quickly to new technologies or evolving customer or industry requirements.
Colleagues
      As of December 31, 2004, we had 424 colleagues, 369 of which were billable professionals, including 80 subcontractors and 55 of which were involved in sales, general administration and marketing.

43


 

      Recruiting. We are dedicated to hiring, developing and retaining experienced, motivated technology professionals who combine a depth of understanding of current Internet and legacy technologies with the ability to implement complex and cutting-edge solutions.
      Our recruiting efforts are an important element of our continuing operations and future growth. We generally target technology professionals with extensive experience and demonstrated expertise. To attract technology professionals, we use a broad range of sources including on-staff recruiters, outside recruiting firms, internal referrals, other technology companies and technical associations, the Internet and advertising in technical periodicals. After initially identifying qualified candidates, we conduct an extensive screening and interview process.
      Retention. We believe that our rapid growth, focus on a core set of eBusiness solutions, applications and software platforms and our commitment to career development through continued training and advancement opportunities make us an attractive career choice for experienced professionals. Because our strategic partners are established and emerging market leaders, our technology professionals have an opportunity to work with cutting-edge information technology. We foster professional development by training our technology professionals in the skills critical to successful consulting engagements such as implementation methodology and project management. We believe in promoting from within whenever possible. In addition to an annual review process that identifies near-term and longer-term career goals, we make a professional development plan available to assist our professionals with assessing their skills and developing a detailed action plan for guiding their career development. Over the past two years, our voluntary attrition rate has been approximately 15%, which we believe is well below the industry average.
      Training. To ensure continued development of our technical staff, we place a high priority on training. We offer extensive training for our professionals around industry-leading technologies, including an on-line, Internet-based education and training program that offers more than 200 topics, including CORBA, EJB architecture, HTML, J2EE, Linux, Network Security and XML fundamentals. This web-based education system is offered to all of our technology professionals to facilitate their ongoing professional development and increase their technical expertise. We also utilize our education practice and IBM-certified advanced training facility in Chicago, Illinois to provide continuing education and professional development opportunities for our colleagues.
      Compensation. Our colleagues have a compensation model that includes a base salary and an incentive compensation component. Our tiered incentive compensation plans help us reach our overall goals by rewarding individuals for their influence on key performance factors. Key performance metrics include client satisfaction, revenue generated, utilization, profit and personal skills growth. Our colleagues are not represented by any collective bargaining unit, and we have never experienced a work stoppage.
      Leadership Councils. Our technology leadership council performs a critical role in maintaining our technology leadership. Consisting of key employees from each of our practice areas, the council frames our new strategic partner strategies and conducts regular Internet webcasts with our technology professionals on specific partner and general technology issues and trends. The council also coordinates thought leadership activities, including white paper authorship and publication and speaking engagements by our professionals. Finally, the council identifies services opportunities between and among our strategic partners’ products, oversees our quality assurance programs and assists in acquisition-related technology due diligence.
Culture
      Culture Committee. We continue to build our corporate culture around a common set of values based on expertise, honesty and teamwork. Our Culture Committee consists of a member from each of our offices and focuses on defining and supporting activities and events that bind our colleagues together and promote an esprit de corps. We believe in a strong corporate culture and make a substantial

44


 

investment in supporting activities and events through an annual budget that our Culture Committee may allocate in its sole discretion. Some activities have included a rewards and recognition program, work-life balance programs and internal social events among our colleagues.
      The Perficient Promise. We have codified our commitments to each other in what we call the “Perficient Promise,” which consists of the following six simple commitments our colleagues make to each other:
  we believe in long-term client and partner relationships built on investment in innovative solutions, delivering more value than the competition and a commitment to excellence;
 
  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 extremely seriously because we believe that we can succeed only if the Perficient Promise is kept.
Knowledge Management
      MyPerficient.com—The Corporate Portal. To ensure easy access to a wide range of information and tools, we have created a corporate portal, MyPerficient.com. It is a secure, centralized communications tool implemented using IBM’s WebSphere Portal Server product. It allows each of our colleagues unlimited access to information, productivity tools, time and expense entry, benefits administration, corporate policies and forms and quality management information directories and documentation.
      Professional Services Automation Technology. We recently completed the implementation of Primavera’s Professional Services application as the enabling technology for many of our business processes, including, and perhaps most importantly, knowledge management. We possess and continue to aggregate significant knowledge including marketing collateral, solution proposals, work product and client deliverables. Primavera’s technology allows us to store this knowledge in a logical manner and provides full-text search capability allowing our colleagues to deliver solutions more efficiently and competitively.
Properties
      We lease office space in St. Louis, Missouri (10,517 square feet), Minneapolis, Minnesota (18,889 square feet), Downers Grove, Illinois (4,187 square feet), Chicago, Illinois (5,927 square feet), Franklin, Ohio (6,684 square feet), Denver, Colorado (5,241 square feet), Carmel, Indiana (5,194 square feet), Columbus, Ohio (7,550 square feet), Detroit, Michigan (5,500 square feet), Houston, Texas (8,135 square feet), and London, Ontario (2,447 square feet). Our corporate headquarters are located in Austin, Texas (2,701 square feet).
Legal Proceedings
      Although we are a party to litigation and claims arising in the course of our business, management does not expect the results of these actions to have a material adverse effect on our business or financial condition.

45


 

General Information
      We were incorporated in Texas in September 1997 and reincorporated in Delaware in May 1999. Our principal executive offices are located at 1120 South Capital of Texas Highway, Building 3, Suite 220, Austin, Texas 78746 and our telephone number is (512) 531-6000. Our stock is traded on the Nasdaq National Market under the symbol “PRFT.” Our website can be visited at www.perficient.com.

46


 

MANAGEMENT
      Our directors and executive officers, including their ages as of January 31, 2005, are as follows:
             
Name   Age   Position
         
John T. McDonald
    41     Chairman of the Board and Chief Executive Officer
Jeffrey S. Davis
    40     President and Chief Operating Officer
Michael D. Hill
    36     Chief Financial Officer
Ralph C. Derrickson
    46     Director
Max D. Hopper
    70     Director
Kenneth R. Johnsen
    51     Director
David S. Lundeen
    43     Director
Robert E. Pickering, Jr. 
    53     Director
      John T. McDonald joined us in April 1999 as Chief Executive Officer and was elected Chairman of the Board in March 2001. From April 1996 to October 1998, Mr. McDonald was president of VideoSite, Inc., a multimedia software company that was acquired by GTECH Corporation in October 1997, 18 months after Mr. McDonald became VideoSite’s president. From May 1995 to April 1996, Mr. McDonald was a Principal with Zilkha & Co., a New York-based merchant banking firm. From June 1993 to April 1996, Mr. McDonald served in various positions at Blockbuster Entertainment Group, including Director of Corporate Development and Vice President, Strategic Planning and Corporate Development of NewLeaf Entertainment Corporation, a joint venture between Blockbuster and IBM. From 1987 to 1993, Mr. McDonald was an attorney with Skadden, Arps, Slate, Meagher & Flom in New York, focusing on mergers and acquisitions and corporate finance. Mr. McDonald currently serves as a member of the board of directors of Interstate Connections, Inc. Mr. McDonald received a B.A. in Economics from Fordham University and a J.D. from Fordham Law School.
      Jeffrey S. Davis became our Chief Operating Officer upon the closing of the acquisition of Vertecon in April 2002 and was named our President in 2004. He previously served the same role since October 1999 at Vertecon prior to its acquisition by Perficient. Mr. Davis has 13 years of experience in technology management and consulting. Prior to Vertecon, Mr. Davis was a Senior Manager and member of the leadership team in Arthur Andersen’s Business Consulting Practice starting in January 1999 where he was responsible for defining and managing internal processes, while managing business development and delivery of products, services and solutions to a number of large accounts. Prior to Arthur Andersen, Mr. Davis worked at Ernst & Young LLP for two years, Mallinckrodt, Inc. for two years, and spent five years at McDonnell Douglas in many different technical and managerial positions. Mr. Davis has a M.B.A. from Washington University and a B.S. degree in Electrical Engineering from the University of Missouri.
      Michael D. Hill joined us in February 2004 as Chief Financial Officer. From June 2002 through February 2004, Mr. Hill served as Director of Finance and Controller of PerformanceRetail, Inc., a software company. From February 1999 to June 2002, Mr. Hill served as a finance executive with several technology companies including CreditMinders, Inc., Kinetrix Solutions, Inc. and Agillion, Inc. Prior to February 1999, Mr. Hill was an Assurance and Advisory Business Services manager with Ernst & Young LLP’s Assurance and Advisory Business Services practice in Austin. Mr. Hill held various other positions at Ernst & Young LLP since December 1991. Mr. Hill received a B.B.A. in Accounting from The University of Texas at Austin and is a licensed certified public accountant in the State of Texas.
      Ralph C. Derrickson became a member of our board of directors in July 2004. In 2001, he founded the RCollins Group, LLC, a management company that specializes in early stage technology companies, and is currently its Managing Director. Mr. Derrickson was managing director of venture

47


 

investments at Vulcan Inc., an investment management firm with headquarters in Seattle, Washington from October 2001 to July 2004. Mr. Derrickson has more than 20 years of technology management experience in a wide range of settings including start-up, interim management and restructuring situations. He served as a board member of Metricom, Inc., a publicly traded company, from April 1997 to November 2001 and as Interim CEO of Metricom from February 2001 to August 2001. Metricom, Inc. voluntarily filed a bankruptcy petition in US Bankruptcy Court for the Northern District of California in July of 2001. Mr. Derrickson was also a founding partner of Watershed Capital, a private equity investment management company established August in 1998. Prior to Watershed, Mr. Derrickson managed venture investments at Vulcan Ventures. He served as vice president of product development at Starwave Corporation, one of the pioneers of the Internet. Earlier, Mr. Derrickson held senior management positions at NeXT Computer, Inc. and Sun Microsystems, Inc. He has served on the boards of numerous start-up technology companies. Mr. Derrickson is active in the business and entrepreneurship programs at the University of Washington and is a member of the advisory board of the Center for Technology Entrepreneurship. He also serves on the board of the Northwest Entrepreneur Network, or NWEN. Mr. Derrickson holds a BT in systems software from the Rochester Institute of Technology.
      Max D. Hopper became a member of our board of directors in September 2002. Mr. Hopper began his information systems career in 1960 at Shell Oil and served with EDS, United Airlines and Bank of America prior to joining American Airlines. During Mr. Hopper’s twenty-year tenure at American Airlines he served as CIO, and as CEO of several business units. Most recently, he founded Max D. Hopper Associates, Inc., a consulting firm that specializes in the strategic use of information technology and eBusiness. Mr. Hopper currently serves on the board of directors for several companies such as Gartner Group, United Stationers and Airgate PCS.
      Kenneth R. Johnsen became a member of our board of directors in July 2004. He is the President and Chief Executive Officer of Parago Inc., a marketing services transaction processor. Before joining Parago Inc. in 1999, he served as President, Chief Operating Officer and Board Member of Metamor Worldwide Inc., an $850 million public technology services company specializing in information technology consulting and implementation. Metamor was later acquired by PSINet for $1.7 billion. At Metamor, Mr. Johnsen grew the IT Solutions Group revenue from $20 million to over $300 million within two years. His experience also includes 22 years at IBM where he held general management positions, including Vice President of Business Services for IBM Global Services and General Manager of IBM China/Hong Kong Operations. He achieved record revenue, profit and customer satisfaction levels in both business units.
      David S. Lundeen became a member of our board of directors in April 1998. From March 1999 through 2002, Mr. Lundeen was a partner with Watershed Capital, a private equity firm based in Mountain View, California. From June 1997 to February 1999, Mr. Lundeen was self-employed, managed his personal investments and acted as a consultant and advisor to various businesses. From June 1995 to June 1997, he served as the Chief Financial Officer and Chief Operating Officer of BSG. From January 1990 until June 1995, Mr. Lundeen served as President of Blockbuster Technology and as Vice President of Finance of Blockbuster Entertainment Corporation. Prior to that time, Mr. Lundeen was an investment banker with Drexel Burnham Lambert in New York City. Mr. Lundeen currently serves as a member of the board of directors of Parago, Inc., and as Chairman of the Board of Interstate Connections, Inc. Mr. Lundeen received a B.S. in Engineering from the University of Michigan in 1984 and an M.B.A. from the University of Chicago in 1988. The board of directors has determined that Mr. Lundeen is an audit committee financial expert, as such term is defined in the rules and regulations promulgated by the Securities and Exchange Commission.
      Robert E. Pickering, Jr. became a member of our board of directors in August 2002. He has held the position of CEO of IconMedialab International, an information technology services company with headquarters in The Netherlands beginning in 2002. Mr. Pickering began his information technology services career in 1974 at Andersen Consulting, now Accenture, where he was a partner. After 11 years

48


 

at Andersen, where he managed and directed several system development and outsourcing projects, Mr. Pickering joined First City Bankcorp in 1996, as Chief Information Officer. Three years later in 1999, he became Chief Information Officer of Continental Airlines. Mr. Pickering was also Chairman and CEO of Origin from 1998 to 2000, one of the largest information technology services companies in Europe. Mr. Pickering was Chairman and CEO of e2i Inc. from May 2000 to December 2001, which filed for protection under the federal bankruptcy laws in December 2001. Mr. Pickering also serves on the boards of a variety of organizations including the American Chamber of Commerce in The Netherlands, B&J Foodservice in Kansas City, and Ora Oxygen, a travel spa based in The Netherlands. Mr. Pickering is a graduate of Baylor University.
      All directors hold office until the next annual meeting of our stockholders and until their respective successors have been duly elected and qualified or until their earlier death, resignation or removal. There are no family relationships between any of our directors and executive officers.
Independent Directors
      Our board of directors is comprised of six directors. The board of directors has affirmatively determined that a majority of the directors qualify as independent directors as defined by Securities and Exchange Commission regulations and Nasdaq National Market listing standards. The independent directors are Ralph C. Derrickson, Max D. Hopper, Kenneth R. Johnsen, David S. Lundeen and Robert E. Pickering, Jr.
Committees of the Board of Directors
      The board of directors has created a compensation committee, an audit committee and a nominating committee. Each committee member is independent as defined by Securities and Exchange Commission regulations and Nasdaq National Market listing standards.
      The compensation committee establishes salaries, incentives and other forms of compensation for our directors, executive officers and key employees and administers our equity incentive plans and other incentive and benefits plans. The members of the compensation committee are Max D. Hopper, Kenneth R. Johnsen and David S. Lundeen. Mr. Lundeen serves as chairman of the compensation committee.
      The audit committee has the sole authority to appoint, retain and terminate our independent accountants and is directly responsible for the compensation, oversight and evaluation of the work of the independent accountants. The independent accountants report directly to the audit committee. The audit committee also has the sole authority to approve all audit engagement fees and terms and all non-audit engagements with our independent accountants and must pre-approve all auditing and permitted non-audit services to be performed for us by the independent accountants, subject to certain exceptions provided by the Securities Exchange Act of 1934. The members of the audit committee are, Max D. Hopper, David S. Lundeen and Robert E. Pickering, Jr. Mr. Lundeen serves as chairman of the audit committee. The board of directors has determined that Mr. Lundeen is qualified as our audit committee financial expert within the meaning of Securities and Exchange Commission regulations and that he has accounting and related financial management expertise within the meaning of the listing standards of the Nasdaq National Market.
      The nominating committee was formed in April 2004 and is responsible for advising the board of directors on appropriate composition of the board and its committees, evaluating potential director nominees and nominating directors for election, approving the compensation for non-employee directors, advising the board of directors on corporate governance practices and overseeing new director orientation and the annual review of the performance of the board of directors. The members of the nominating committee are David S. Lundeen and Robert E. Pickering, Jr. Mr. Pickering serves as chairman of the nominating committee.

49


 

      The nominating committee is responsible for evaluating potential or suggested director nominees and identifying individuals qualified to become members of the board of directors. This committee will also evaluate persons suggested by stockholders and conduct the appropriate inquiries into the backgrounds and qualifications of all possible nominees. The nominating committee will establish criteria for selecting new director nominees and will determine each proposed nominee’s qualifications for service on the board of directors. Each nominee should be a person of integrity and be committed to devoting the time and attention necessary to fulfill his or her duties to Perficient.
      Our bylaws include a procedure whereby our stockholders can nominate director candidates. Our board of directors will consider director candidates recommended by stockholders in a similar manner to those recommended by members of management and other directors, provided the stockholder submitting such nomination has complied with the notice procedures set forth in our bylaws.

50


 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
      On June 26, 2002, Perficient entered into a Convertible Preferred Stock Purchase Agreement with 2M Technology Ventures, L.P., or 2M, pursuant to which 2M purchased 1,111,000 shares of Series B Preferred Stock for a purchase price of $0.900090009 per share. Pursuant to the Certificate of Designation, Rights and Preferences of the Series B Preferred Stock, on November 10, 2003, all then outstanding shares of Series B Preferred Stock automatically converted into shares of common stock. In connection with its purchase of Series B Preferred Stock, 2M also received a warrant to purchase up to 555,500 shares of common stock. 2M exercised this warrant on February 3, 2004 and March 29, 2004. We received proceeds of $1,100,000 as a result of the exercise of this warrant. We have registered 2,166,500 shares of our common stock, pursuant to a Registration Statement on Form S-3 (File No. 333-100490), for resale by 2M of the shares issued upon conversion of the shares of Series B Preferred Stock purchased from us, shares issued upon exercise of the warrant, and shares acquired upon purchase from certain of our stockholders in a private transaction
      In the acquisition of ZettaWorks, we paid $10.7 million, consisting of approximately $2.9 million in cash and 1.2 million shares of our common stock. We also granted certain registration rights in connection with the issuance of these shares and are registering 482,600 shares in this offering in partial satisfaction of those registration rights.
      In the acquisition of Meritage, we paid approximately $7.1 million to the Meritage stockholders consisting of approximately $2.9 million in cash and 1.2 million shares of our common stock. In connection with the acquisition of Meritage, on June 16, 2004 we raised approximately $2.5 million through a private placement of 800,000 shares of our common stock to a group of institutional investors led by Tate Capital Partners. The investors were also issued warrants for the purchase of an additional 160,000 shares of our common stock. In our acquisition of Meritage, we granted certain registration rights to the stockholders of Meritage, and in our private placement we granted certain registration rights to the investors in the private placement. As a result, we have registered 1.9 million shares of our common stock, pursuant to a Registration Statement on Form S-3 (File No. 333-117216) for resale by the former stockholders of Meritage and by the investors in the private placement.
      In the acquisition of Genisys, we paid approximately $7.9 million to the Genisys stockholders consisting of approximately $1.5 million in cash and 1.7 million shares of our common stock. In our acquisition of Genisys, we granted certain registration rights to the stockholders of Genisys. As a result, we have registered 253,116 shares of our common stock, pursuant to a Registration Statement on Form S-3 (File No. 333-116549), for resale by the former stockholders of Genisys.
      On December 15, 2004, we granted restricted stock awards under our 1999 Stock Option/Stock Issuance Plan to John T. McDonald, our Chief Executive Officer, and Jeffrey S. Davis, our President and Chief Operating Officer, of 175,000 and 87,500 shares of our common stock, respectively. These restricted stock awards vest over seven years with 50% of the vesting in the last two years, subject to partial acceleration if certain revenue growth and operating profitability targets are met.

51


 

PRINCIPAL AND SELLING STOCKHOLDERS
      The following table sets forth information as of January 31, 2005 regarding the beneficial ownership of our common stock before and after this offering of:
  each of our directors;
 
  each of our executive officers;
 
  our executive officers and directors as a group;
 
  each person or group known to us to beneficially own five percent or more of the outstanding shares of our common stock; and
 
  each stockholder selling shares in this offering.
      The percentage of shares beneficially owned prior to this offering in the following table is based on 21,102,011 shares of common stock outstanding as of January 31, 2005.
      Beneficial ownership is determined under the rules of the Securities and Exchange Commission. These rules deem common stock subject to options currently exercisable, or exercisable within 60 days, to be outstanding for purposes of computing the percentage ownership of the person holding the options or of a group of which the person is a member, but they do not deem such stock to be outstanding for purposes of computing the percentage ownership of any other person or group. To our knowledge, except under applicable community property laws, or as otherwise indicated, each person named in the table has sole voting and sole investment control with regard to all shares beneficially owned by such person.

52


 

      Except as noted below, the address of each person listed on the table is c/o Perficient, Inc., 1120 South Capital of Texas Highway, Building 3, Suite 220, Austin, Texas 78746.
                                         
    Shares Beneficially        
    Owned Prior to       Shares Beneficially Owned
    Offering       After Offering(1)
        Number of Shares    
Name of Beneficial Owner   Number   Percent   Being Offered   Number   Percent(2)
                     
John T. McDonald(3)
    2,283,692       10.3 %     250,000 (4)     2,033,692       7.6 %
Jeffrey S. Davis(5)
    411,950       1.9 %     45,000 (4)     366,950       1.4 %
Michael D. Hill(6)
    12,500       *       —        12,500       *  
David S. Lundeen(7)
    447,416       2.1 %     125,000 (4)     322,416       1.3 %
Robert E. Pickering, Jr.(8)
    65,500       *       —        65,500       *  
Max D. Hopper(9)
    20,000       *       —        20,000       *  
Kenneth R. Johnsen(10)
    10,000       *       —        10,000       *  
Ralph C. Derrickson(11)
    5,000       *       —        5,000       *  
Beekman Ventures, Inc. 
    267,342       1.3 %             267,342       1.0 %
AB Holdings L.L.C.(12)
    1,042,757       4.9 %     517,500 (13)     525,257       2.1 %
Morton Meyerson(14)
    2,358,013       11.2 %     —        2,358,013       9.2 %
2M Technology Ventures, L.P.(15)
    2,166,500       10.3 %     —        2,166,500       8.5 %
The Morton Meyerson Family Foundation(16)
    400,000       1.9 %     300,000       100,000       *  
Kenneth Neusanger
    55,863       *       20,000       35,863       *  
Thomas Pash(17)
    55,863       *       8,500       47,363       *  
Keith Brenton(18)
    6,664       *       1,300       5,364       *  
Douglas Kelly
    5,060       *       1,800       3,260       *  
John Biedermann
    3,771       *       1,000       2,771       *  
All executive officers and directors as a group (8 persons)
    3,256,058       14.4 %     420,000 (4)     2,836,058       10.5 %
TOTAL
    7,184,049       31.8 %     1,270,100 (4)     5,913,949       21.8 %
 
  * Represents less than 1% of the outstanding shares.
  (1) Assumes the exercise by the underwriters of their over-allotment option in full and also assumes the selling stockholders dispose of all the shares of common stock covered by this prospectus and do not acquire any additional shares.
  (2) The percentage of common stock owned after the offering is based on total shares outstanding of 21,102,011 as of January 31, 2005, and assumes the exercise of the over-allotment option.
  (3) Includes 1,008,085 shares of common stock issuable upon the exercise of options, 50,500 shares of common stock issuable upon exercise of a warrant and 267,342 shares held by Beekman Ventures, Inc. of which Mr. McDonald is the sole stockholder.
  (4) The shares being offered by Mr. McDonald, Mr. Davis and Mr. Lundeen will only be sold if the underwriters exercise their over-allotment option.
  (5) Includes 297,110 shares of common stock issuable upon the exercise of options. Mr. Davis’s address is 622 Emerson Road, Suite 400, Creve Coeur, Missouri 63141.
  (6) Includes 12,500 shares of common stock issuable upon the exercise of options.
  (7) Includes 75,833 shares of common stock issuable upon the exercise of options.
  (8) Includes 15,000 shares of common stock issuable upon the exercise of options.
  (9) Includes 20,000 shares of common stock issuable upon the exercise of options.
(10) Includes 10,000 shares of common stock issuable upon the exercise of options.
(11) Includes 5,000 shares of common stock issuable upon the exercise of options.

53


 

(12) Robert G. Ackerley and Leland C. Ackerley have investment authority, shared voting power and discretionary authority to vote and dispose of the shares of common stock held by this selling stockholder. AB Holdings L.L.C.’s address is 2215 B. Renaissance Drive, Suite 5, Las Vegas, Nevada 89119. Beneficial ownership of the shares is as follows:
  a. 70,087 shares of common stock are beneficially owned by the Eve E. Ackerley 1999 Trust. Bernard Smith, in his capacity as trustee of the Eve E. Ackerley 1999 Trust may be deemed to have investment discretion and voting power over the 70,087 shares of common stock beneficially owned by the Eve E. Ackerley 1999 Trust. Bernard Smith disclaims any such beneficial ownership of the shares.
  b. 70,087 shares of common stock are beneficially owned by the Sydney E. Ackerley 1999 Trust. Bernard Smith, in his capacity as trustee of the Sydney E. Ackerley 1999 Trust may be deemed to have investment discretion and voting power over the 70,087 shares of common stock beneficially owned by the Sydney E. Ackerley 1999 Trust. Bernard Smith disclaims any such beneficial ownership of the shares.
  c. 52,565 shares of common stock are beneficially owned by the Andrew L. Ackerley 1999 Trust. Margaret Ackerley, in her capacity as trustee of the Andrew L. Ackerley 1999 Trust may be deemed to have investment discretion and voting power over the 52,565 shares of common stock beneficially owned by the Andrew L. Ackerley 1999 Trust. Margaret Ackerley disclaims any such beneficial ownership of the shares.
  d. 52,565 shares of common stock are beneficially owned by the Leland T. Ackerley 1999 Trust. Margaret Ackerley, in her capacity as trustee of the Leland T. Ackerley 1999 Trust may be deemed to have investment discretion and voting power over the 52,565 shares of common stock beneficially owned by the Leland T. Ackerley 1999 Trust. Margaret Ackerley disclaims any such beneficial ownership of the shares.
  e. 52,565 shares of common stock are beneficially owned by the William B. Ackerley 1999 Trust. Margaret Ackerley, in her capacity as trustee of the William B. Ackerley 1999 Trust may be deemed to have investment discretion and voting power over the 52,565 shares of common stock beneficially owned by the William B. Ackerley 1999 Trust. Margaret Ackerley disclaims any such beneficial ownership of the shares.
  f. 52,565 shares of common stock are beneficially owned by the Alexis A. Ackerley 1999 Trust. Margaret Ackerley, in her capacity as trustee of the Alexis A. Ackerley 1999 Trust may be deemed to have investment discretion and voting power over the 52,565 shares of common stock beneficially owned by the Alexis A. Ackerley 1999 Trust. Margaret Ackerley disclaims any such beneficial ownership of the shares.
  g. 70,087 shares of common stock are beneficially owned by the Benjamin L. Ackerley 1999 Trust. Bernard Smith, in his capacity as trustee of the Benjamin L. Ackerley 1999 Trust may be deemed to have investment discretion and voting power over the 70,087 shares of common stock beneficially owned by the Benjamin L. 1999 Trust. Bernard Smith disclaims any such beneficial ownership of the shares.
(13) 67,500 of such shares will only be sold if the underwriters exercise their over-allotment option.
(14) Includes 2,166,500 shares beneficially owned by 2M Technology Ventures, L.P. Morton H. Meyerson’s address is 3401 Armstrong Avenue, Dallas, Texas 75205.
(15) 2M Technology Ventures, L.P.’s address is 3401 Armstrong Avenue, Dallas, Texas 75205.
(16) Morton H. Meyerson acts as investment advisor to this selling stockholder and may be deemed to beneficially own shares owned by or for the account of this selling stockholder. The board of the foundation has investment authority over the shares of common stock held by this selling stockholder. The board consists of Morton H. Meyerson, A. Reid Heller, Scott Letier, David Agronin, Roberta Herman, Gary Weinstein and Herbert S. Rosenthal. The Foundation’s address is 7800 Northaven Road, Dallas, Texas 75230.
(17) Mr. Pash is general manager of our wholly owned subsidiary, Perficient ZettaWorks, Inc.
(18) Mr. Brenton is a business development director for us.

54


 

DESCRIPTION OF CAPITAL STOCK
      We are authorized to issue 40,000,000 shares of common stock, par value $0.001 per share, and 8,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2004, we had outstanding 20,913,532 shares of common stock owned by approximately 124 holders of record.
Common Stock
      The holders of our common stock are entitled to one vote for each share held of record in the election of directors and in all other matters to be voted on by the stockholders. There is no cumulative voting with respect to the election of directors. As a result, the holders of more than 50 percent of the shares voting for the election of directors can elect all of the directors. Holders of common stock are entitled:
  to receive any dividends as may be declared by the board of directors out of funds legally available for such purpose; and
 
  in the event of our liquidation, dissolution, or winding up, to share ratably in all assets remaining after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock.
      All of the outstanding shares of common stock are, and the shares of common stock offered through this prospectus will be, upon issuance and sale, validly issued, fully paid and nonassessable. Holders of our common stock have no preemptive right to subscribe for or purchase additional shares of any class of our capital stock.
Preferred Stock
      The board of directors has the authority, within the limitations stated in our certificate of incorporation, to provide by resolution for the issuance of shares of preferred stock, in one or more classes or series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of such series. The issuance of preferred stock could have the effect of decreasing the market price of our common stock and could adversely affect the voting and other rights of the holders of our common stock.
Delaware Anti-Takeover Law and Our Certificate of Incorporation and Bylaws
      Delaware Business Combination Statute. We are subject to Section 203 of the Delaware General Corporation Law. Such section provides that, subject to exceptions set forth therein, an interested stockholder of a Delaware corporation shall not engage in any business combination, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the date that such stockholder becomes an interested stockholder unless:
  prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
 
  upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, other than statutorily excluded shares; or
 
  on or subsequent to such date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66% of the outstanding voting stock which is not owned by the interested stockholder.

55


 

      Except as otherwise set forth in Section 203, an interested stockholder is defined to include:
  any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date of determination; and
 
  the affiliates and associates of any such person.
      Section 203 may make it more difficult for a person who would be an interested stockholder to effect various business combinations with a corporation for a three-year period. The provisions of Section 203 may encourage persons interested in acquiring us to negotiate in advance with our board of directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approves either the business combination or the transaction which results in any such person becoming an interested stockholder. Such provisions also may have the effect of preventing changes in our management. It is possible that such provisions could make it more difficult to accomplish transactions which our stockholders may otherwise deem to be in their best interests.
      Limitation on Call of Special Meetings of Stockholders. Under the Delaware General Corporation Law, special meetings of stockholders may be called by our board of directors or by such other persons as may be authorized by our certificate of incorporation or bylaws. Our certificate of incorporation and bylaws provide that special meetings may be called by the Chairman of the board of directors, the President or by the board of directors pursuant to a resolution adopted by a majority of the members of our board of directors. Except as otherwise required by law or our certificate of incorporation, no business may be transacted at any special meeting of stockholders other than the items of business stated in the notice of such meeting.
      Advance Notice Requirements. Our bylaws establish advance notice procedures with regard to (a) the nomination, other than by or at the direction of our board of directors, of candidates for election to our board of directors and (b) certain business to be brought by a stockholder before an annual meeting of stockholders.
      The provision regarding nomination, by requiring advance notice of nominations by stockholders, affords our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders about such qualifications.
      The other provision, by requiring advance notice of business proposed by a stockholder to be brought before an annual meeting, provides a more orderly procedure for conducting annual meetings of stockholders and provides our board of directors with a meaningful opportunity prior to the meeting to inform stockholders, to the extent deemed necessary or desirable by our board of directors, of any business proposed to be conducted at such meeting, together with any recommendation of our board of directors. This provision does not affect the right of stockholders to make stockholder proposals for inclusion in proxy statements for our annual meetings of stockholders pursuant to the rules of the Securities and Exchange Commission.
      Although these bylaw provisions do not give our board of directors any power to approve or disapprove of stockholder nominations for the election of directors or of any other business desired by stockholders to be conducted at an annual meeting of stockholders if the proper procedures are followed, these bylaw provisions may have the effect of precluding a nomination or precluding the conduct of business at a particular annual meeting, and may make it difficult for a third party to conduct a solicitation of proxies to elect its own slate of directors or otherwise attempt to obtain control of us, even if such a solicitation or attempt might be beneficial to us and our stockholders.

56


 

Stock Transfer Agent and Registrar
      The stock transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company.
Stockholder Reports
      We furnish our stockholders with annual reports containing audited financial statements and may furnish our stockholders quarterly or semi-annual reports containing unaudited financial information.
Listing
      Our common stock is quoted on the Nasdaq National Market under the symbol “PRFT.”

57


 

UNDERWRITING
      The underwriters named below are acting through their representative, Friedman, Billings, Ramsey & Co., Inc. Subject to the terms and conditions contained in the underwriting agreement, we and the selling stockholders have agreed to sell to the underwriters, and each underwriter has agreed to purchase, the number of shares set forth opposite its name below. The underwriting agreement provides that the obligation of the underwriters to pay for and accept delivery of our common stock is subject to certain conditions. The underwriters are obligated to take and pay for all shares of our common stock offered (other than those covered by the over-allotment option described below) if any of the shares are taken.
           
    Number of
Underwriters   Shares
     
Friedman, Billings, Ramsey & Co., Inc. 
       
Stifel, Nicolaus & Company, Incorporated
       
Roth Capital Partners, LLC
       
Gilford Securities Incorporated
       
       
 
Total
       
       
      We and some of our existing stockholders have granted the underwriters an option exercisable for 30 days after the date of this prospectus to purchase up to 754,890 additional shares of common stock to cover over-allotments, if any, at the public offering price less the estimated underwriting discounts and commissions set forth on the cover page of this prospectus.
      The following table shows the per share and total estimated underwriting discounts and commissions we and the selling stockholders will pay to the underwriters. The amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase 754,890 additional shares of our common stock to cover over-allotments.
                                 
    Perficient   Selling Stockholders
         
    No Exercise   Full Exercise   No Exercise   Full Exercise
                 
Per share
  $       $       $       $    
Total
  $       $       $       $    
      The underwriters propose to offer our common stock directly to the public at $           per share and to various dealers at this price less a concession not in excess of $           per share. The underwriters may allow, and the dealers may reallow, a concession not in excess of $           per share to various other dealers.
      We expect to incur expenses, excluding underwriting fees, of approximately $850,000 in connection with this offering, including fees and expenses of counsel to the underwriters which we have agreed to pay. Additionally, we have agreed to reimburse Friedman, Billings, Ramsey & Co., Inc. for its other out-of-pocket expenses, including road show expenses, in connection with this offering.
      Our common stock is listed on the Nasdaq National Market under the symbol “PRFT.”
      In connection with this offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Exchange Act.
  Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
 
  Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number

58


 

  of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by exercising their over-allotment option and/or purchasing shares in the open market.
 
  Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering.
 
  Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
 
  In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchases of our common stock until the time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.
      We and the selling stockholders have agreed to indemnify the underwriters against various liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make in respect thereof.
      Our officers, directors, holders of five percent or more of our common stock, and the selling stockholders have agreed with the underwriters not to, directly or indirectly, offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any securities convertible into or exchangeable for shares of common stock (or to engage in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a disposition of any such securities, even if such securities would be disposed of by someone other than one of our officers, our directors, holders of five percent or more of our common stock, or the selling stockholders), for a period continuing through the 90th day after the date of this prospectus, except with the prior written consent of Friedman, Billings, Ramsey & Co., Inc. These transfer restrictions do not apply to bona fide gifts, provided the donees agree in writing to be bound by the terms of these transfer restrictions, or sales or purchases of common stock acquired in the open market.
      In addition, we have agreed, for a period continuing through the 90th day after the date of this prospectus, not to, except with the prior written consent of Friedman, Billings, Ramsey & Co., Inc., directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option for the sale of, or otherwise dispose of or transfer (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any share of common stock or any securities convertible into or exercisable or exchangeable for common stock, or file any registration statement under the Securities Act with respect to any of the foregoing, or (ii) enter into any swap or other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic

59


 

consequences of ownership of the common stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of common stock or such other securities, in cash or otherwise. These restrictions do not apply to the shares to be sold in this offering or any shares issued by us upon the exercise of outstanding options or warrants or pursuant to any of our stock plans or any shares issued by us as consideration for the acquisition of another business or entity.
      A prospectus in electronic format will be made available on Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocations for online distributions will be made by the representatives on the same basis as other allocations.
      Other than the prospectus in electronic format, the information on any underwriter’s or selling group member’s web site and any information contained in any other web site maintained by an underwriter or selling group member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as underwriter or selling group member and should not be relied upon by investors.

60


 

LEGAL MATTERS
      The validity of the securities offered by this prospectus will be passed upon for us by Vinson & Elkins LLP, Austin, Texas. Legal matters will passed upon for the underwriters by King & Spalding LLP, Houston, Texas.
EXPERTS
      The consolidated financial statements of Perficient, Inc. and its subsidiaries at December 31, 2001, 2002 and 2003, and for each of the three years in the period ended December 31, 2003 appearing in this prospectus have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere in this prospectus and are included in reliance upon such report given on their authority as experts in accounting and auditing.
      The financial statements of Genisys Consulting, Inc. as of December 31, 2002 and 2003, and for each of the two years in the period ended December 31, 2003, appearing in this prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere in this prospectus, and are included in reliance upon such report, given on their authority as experts in accounting and auditing.
      The financial statements of Meritage Technologies, Inc. as of December 31, 2002 and 2003 included in this prospectus have been audited by Grant Thornton LLP as set forth in their report appearing elsewhere in this prospectus, and are included in reliance upon such report, given on their authority as experts in accounting and auditing.
      The financial statements of ZettaWorks LLC as of December 31, 2002 and 2003 included in this prospectus have been audited by BKD LLP as set forth in their report appearing elsewhere in this prospectus, and are included in reliance upon such report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
      We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. We have filed a registration statement to register with the SEC the shares of our common stock listed in the prospectus. This prospectus does not contain all the information contained in the registration statement and the exhibits to the registration statement. For further information with respect to us our common stock, we refer you to the registration statement and to the exhibits to the registration statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document to which we make reference are not necessarily complete, and in each instance, we refer you to the copy of the contract, agreement or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference. You may read and copy all or any portion of the registration statement or any reports, statements or other information we file at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. You can receive copies of these documents upon payment of a duplicating fee by writing to the SEC. Our SEC filings, including the registration statement, will also be available to you on the SEC’s website at www.sec.gov. Our website can be visited at www.perficient.com. Information contained on our website is not a part of this prospectus.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
      Some of the important business and financial information that you may want to consider is not included in this prospectus, but rather is “incorporated by reference” to documents that have been filed

61


 

by us with the Securities and Exchange Commission pursuant to the Exchange Act of 1934. The information that is incorporated by reference consists of:
  Perficient’s Annual Report on Form 10-KSB for the year ended December 31, 2003, as amended by Amendment No. 1;
 
  Perficient’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004;
 
  Perficient’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004;
 
  Perficient’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2004;
 
  Perficient’s Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders;
 
  Our Current Reports on Form 8-K filed on April 16, 2004, as amended on June 16, 2004 and on June 17, 2004; filed on June 23, 2004, as amended on August 30, 2004; filed on September 28, 2004; filed on October 12, 2004; filed on December 22, 2004, as amended on March 4, 2005; and filed on February 3, 2005; and
 
  The description of our common stock contained in the section entitled “Description of Registrant’s Securities to be Registered” contained in our registration statement on Form 8-A filed on July 22, 1999 (File No. 000-15169).
      All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of the initial registration statement and prior to the effectiveness of the registration statement and subsequent to the date of this prospectus and prior to the termination of this offering, shall be deemed incorporated by reference in this prospectus and made a part hereof from the date of filing of those documents. Any statement contained in a document incorporated or deemed incorporated by reference in this prospectus shall be deemed modified or superseded for purposes of this prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed incorporated by reference herein or in any prospectus supplement modifies or supersedes that statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus.
      We will provide without charge to each person who is delivered a prospectus, on written or oral request, a copy of any or all of the documents incorporated by reference herein (other than exhibits to those documents unless those exhibits are specifically incorporated by reference into those documents). Requests for copies should be directed to Investor Relations, Perficient, Inc., 1120 South Capital of Texas Highway, Building 3, Suite 220, Austin, Texas 78746, Telephone: (512) 531-6000.

62


 

INDEX TO FINANCIAL STATEMENTS
         
    Page
     
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
       
Condensed Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004 (unaudited)
    F-3  
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2004 (unaudited)
    F-4  
Condensed Consolidated Statement of Stockholders’ Equity for the nine month ended September 30, 2004 (unaudited)
    F-5  
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2004 (unaudited)
    F-6  
Notes to Unaudited Condensed Consolidated Financial Statements
    F-7  
 
CONSOLIDATED FINANCIAL INFORMATION
       
Report of Independent Registered Public Accounting Firm dated January 9, 2004
    F-16  
Consolidated Balance Sheets at December 31, 2002 and 2003
    F-17  
Consolidated Statements of Operations for the years ended December 31, 2002 and 2003
    F-18  
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2002 and 2003
    F-19  
Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2003
    F-20  
Notes to Consolidated Financial Statements
    F-21  
Report of Independent Registered Public Accounting Firm dated February 19, 2003
    F-39  
Consolidated Balance Sheets at December 31, 2001 and 2002
    F-40  
Consolidated Statements of Operations for the years ended December 31, 2001 and 2002
    F-41  
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2001 and 2002
    F-42  
Consolidated Statements of Cash Flows for the years ended December 31, 2001 and 2002
    F-43  
Notes to Consolidated Financial Statements
    F-44  
 
GENISYS CONSULTING, INC.
       
Report of Independent Auditors dated June 10, 2004
    F-64  
Balance Sheets at December 31, 2002 and 2003 and March 31, 2004 (unaudited)
    F-65  
Statements of Operations for the years ended December 31, 2002 and 2003, and for the three months ended March 31, 2003 (unaudited) and 2004 (unaudited)
    F-66  
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2002 and 2003
    F-67  
Statements of Cash Flows for the years ended December 31, 2002 and 2003, and for the three months ended March 31, 2003 (unaudited) and 2004 (unaudited)
    F-68  
Notes to Financial Statements
    F-69  

F-1


 

         
    Page
     
MERITAGE TECHNOLOGIES, INC. AND SUBSIDIARIES
       
Report of Independent Certified Public Accountants dated April 13, 2004
    F-74  
Consolidated Balance Sheets at December 31, 2002 and 2003 and March 31, 2004 (unaudited)
    F-75  
Consolidated Statements of Operations for the years ended December 31, 2002 and 2003, and for the three months ended March 31, 2003 (unaudited) and 2004 (unaudited)
    F-76  
Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2002 and 2003
    F-77  
Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2003, and for the three months ended March 31, 2003 (unaudited) and 2004 (unaudited)
    F-78  
Notes to Consolidated Financial Statements
    F-79  
 
ZETTAWORKS LLC AND SUBSIDIARIES
       
Report of Independent Registered Public Accounting Firm
    F-88  
Consolidated Balance Sheets at December 31, 2002 and 2003, and September 30, 2004 (unaudited)
    F-89  
Consolidated Statements of Operations for the years ended December 31, 2002 and 2003, and for the nine months ended September 30, 2003 and 2004 (unaudited)
    F-90  
Consolidated Statement of Members’ Equity
    F-91  
Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2003, and for the nine months ended September 30, 2003 and 2004 (unaudited)
    F-92  
Notes to Consolidated Financial Statements
    F-93  
 
PERFICIENT, INC. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
       
Preliminary Notes
    F-101  
Pro Forma Condensed Combined Balance Sheet as of September 30, 2004
    F-103  
Unaudited Pro Forma Condensed Combined Statements of Operations for the nine month period ended September 30, 2004
    F-104  
Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2003
    F-105  
Notes to Pro Forma Condensed Combined Financial Statement
    F-106  

F-2


 

PERFICIENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
                   
    December 31,   September 30,
    2003   2004
         
        (Unaudited)
ASSETS
               
Current assets:
               
 
Cash
  $ 1,989,395     $ 2,786,639  
 
Accounts receivable, net
    5,534,607       14,352,505  
 
Other current assets
    297,058       450,806  
             
Total current assets
    7,821,060       17,589,950  
Net property and equipment
    699,145       782,916  
Net intangible assets
    11,693,834       28,532,584  
Other non-current assets
    45,944       133,648  
             
Total assets
  $ 20,259,983     $ 47,039,098  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 775,980     $ 3,595,912  
 
Current portion of long-term debt
    —        576,140  
 
Other current liabilities
    2,664,787       5,386,811  
 
Current portion of notes payable to related parties
    366,920       239,331  
             
Total current liabilities
    3,807,687       9,798,194  
Long-term borrowings, net of current portion
    —        1,923,860  
Deferred taxes
    —        296,784  
Notes payable to related parties, net of current portion
    436,258       222,089  
             
Total liabilities
    4,243,945       12,240,927  
Stockholders’ equity:
               
 
Common stock
    14,033       19,267  
 
Additional paid-in capital
    76,315,780       92,500,743  
 
Deferred stock compensation
    (26,623 )     (8 )
 
Accumulated other comprehensive loss
    (51,830 )     (63,139 )
 
Accumulated deficit
    (60,235,322 )     (57,658,692 )
             
Total stockholders’ equity
    16,016,038       34,798,171  
             
Total liabilities and stockholders’ equity
  $ 20,259,983     $ 47,039,098  
             
See accompanying notes to interim unaudited condensed consolidated financial statements.

F-3


 

PERFICIENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                   
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
         
    2003   2004   2003   2004
                 
Revenue
                               
 
Services
  $ 6,516,153     $ 13,454,616     $ 18,381,926     $ 29,771,852  
 
Software
    705,463       3,391,358       2,462,582       5,793,600  
 
Reimbursable expenses
    433,835       677,158       1,385,074       1,658,251  
                         
Total revenue
    7,655,451       17,523,132       22,229,582       37,223,703  
Cost of revenue (exclusive of depreciation shown separately below)
                               
 
Project personnel costs
    3,686,578       8,199,266       10,161,342       17,763,263  
 
Software costs
    564,901       2,913,946       2,084,047       4,898,381  
 
Reimbursable expenses
    433,835       677,158       1,385,074       1,658,251  
 
Other project related expenses
    121,661       55,875       321,056       218,173  
                         
Total cost of revenue
    4,806,975       11,846,245       13,951,519       24,538,068  
                         
Gross margin
    2,848,476       5,676,887       8,278,063       12,685,635  
Selling, general and administrative
    1,927,548       3,391,899       5,873,314       7,585,858  
Depreciation
    165,943       138,718       560,543       363,593  
Amortization of intangibles
    62,502       233,541       554,170       446,320  
                         
Income from operations
    692,483       1,912,729       1,290,036       4,289,864  
Interest income
    297       1,069       2,926       1,706  
Interest expense
    (55,771 )     (52,983 )     (199,172 )     (82,116 )
Other
    17,814       20,612       (22,197 )     22,514  
                         
Income before income taxes
    654,823       1,881,427       1,071,593       4,231,968  
Provision for income taxes
    230,558       735,338       555,405       1,655,338  
                         
Net income
  $ 424,265     $ 1,146,089     $ 516,188     $ 2,576,630  
                         
Accretion of dividends on preferred stock
  $ (44,899 )   $ —      $ (138,025 )   $ —   
                         
Net income available to common stockholders
  $ 379,366     $ 1,146,089     $ 378,163     $ 2,576,630  
                         
Basic net income per share
  $ 0.04     $ 0.06     $ 0.04     $ 0.15  
                         
Diluted net income per share
  $ 0.03     $ 0.05     $ 0.04     $ 0.13  
                         
Shares used in computing basic net income per share
    10,748,580       19,227,873       10,683,958       17,013,579  
                         
Shares used in computing diluted net income per share
    15,036,570       21,844,127       14,727,460       19,904,355  
                         
See accompanying notes to interim unaudited condensed consolidated financial statements.

F-4


 

PERFICIENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
                                                                 
                        Accumulated        
    Common   Common   Common   Additional       Other       Total
    Stock   Stock   Stock   Paid-in   Deferred   Comprehensive   Accumulated   Shareholders’
    Shares   Amount   Warrants   Capital   Compensation   Loss   Deficit   Equity
                                 
Balance at December 31, 2003
    14,033,246     $ 14,033     $ 538,740     $ 75,777,040     $ (26,623 )   $ (51,830 )   $ (60,235,322 )   $ 16,016,038  
Warrants exercised
    1,111,000       1,111       (406,585 )     2,616,474                         2,211,000  
Stock options exercised
    69,570       69             92,732                         92,801  
Amortization of deferred compensation
                            12,469                   12,469  
Foreign currency translation adjustment
                                  (12,276 )           (12,276 )
Net income
                                        620,518       620,518  
                                                 
Balance at March 31, 2004
    15,213,816     $ 15,213     $ 132,155     $ 78,486,246     $ (14,154 )   $ (64,106 )   $ (59,614,804 )   $ 18,940,550  
Warrants exercised
    110,595       111       (47,085 )     265,974                         219,000  
Stock options exercised
    153,030       153             122,242                         122,395  
Amortization of deferred compensation
                            12,301                   12,301  
Issuance of stock for Genisys acquisition
    1,687,439       1,687             6,780,864                         6,782,551  
Issuance of stock for Meritage acquisition
    1,168,219       1,168             4,198,832                         4,200,000  
Issuance of common stock for private placement
    800,000       800       388,800       1,983,562                         2,373,162  
Foreign currency translation adjustment
                                  (4,876 )           (4,876 )
Net income
                                        810,023       810,023  
                                                 
Balance at June 30, 2004
    19,133,099     $ 19,132     $ 473,870     $ 91,837,720     $ (1,853 )   $ (68,982 )   $ (58,804,781 )   $ 33,455,106  
                                                 
Warrants exercised
    42,925       43       (18,275 )     103,102                         84,870  
Stock options exercised
    91,045       92             117,696                         117,788  
Amortization of deferred compensation
                            1,845                   1,845  
Additional costs related to private placement
                      (13,370 )                       (13,370 )
Foreign currency translation adjustment
                                  5,843             5,843  
Net income
                                        1,146,089       1,146,089  
                                                 
Balance at September 30, 2004
    19,267,069     $ 19,267     $ 455,595     $ 92,045,148     $ (8 )   $ (63,139 )   $ (57,658,692 )   $ 34,798,171  
                                                 
See accompanying notes to interim unaudited condensed consolidated financial statements.

F-5


 

PERFICIENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                     
    Nine Months Ended September 30,
     
    2003   2004
         
    (Unaudited)
OPERATING ACTIVITIES
               
Net income
  $ 516,188     $ 2,576,630  
Adjustments to reconcile net income to net cash
provided by operations:
               
 
Depreciation
    560,543       363,593  
 
Intangibles amortization
    554,170       446,320  
 
Non-cash stock compensation
    110,038       26,613  
 
Non-cash interest expense
    57,121       33,242  
 
Loss on disposal of assets
    30,954       —   
 
Changes in operating assets and liabilities (net of the effect of acquisitions):
               
   
Accounts receivable
    (1,680,350 )     (5,439,935 )
   
Other assets
    86,146       (93,658 )
   
Accounts payable
    235,012       3,100,372  
   
Other liabilities
    425,702       683,260  
             
Net cash provided by operating activities
    895,524       1,696,437  
             
 
INVESTING ACTIVITIES
               
Purchase of property and equipment
    (143,392 )     (315,371 )
Purchase of businesses, net of cash acquired
    (437,500 )     (7,905,159 )
Proceeds from disposal of assets
    1,950       —   
             
Net cash used in investing activities
    (578,942 )     (8,220,530 )
             
 
FINANCING ACTIVITIES
               
Payments on capital lease obligation
    (235,034 )     —   
Proceeds from borrowings
    166,282       2,500,000  
Payments on long-term debt
    —        (375,000 )
Proceeds from stock issuances, net
    226,176       5,207,646  
             
Net cash provided by financing activities
    157,424       7,332,646  
Effect of exchange rate on cash
    (4,914 )     (11,309 )
             
Change in cash
    469,092       797,244  
Cash at beginning of period
    1,525,002       1,989,395  
             
Cash at end of period
  $ 1,994,094     $ 2,786,639  
             
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
               
Issuance of stock for acquisitions
  $ —      $ 10,982,551  
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid for income taxes
  $ 83,691     $ 1,432,487  
             
Cash paid for interest expense
  $ 196,165     $ 98,120  
             
See accompanying notes to interim unaudited condensed consolidated financial statements.

F-6


 

PERFICIENT, INC.
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-KSB for the year ended December 31, 2003, as amended. Operating results for the three months and nine months ended September 30, 2004 may not be indicative of the results for the full fiscal year ending December 31, 2004. Certain balances have been reclassified to conform with current period presentation.
Summary of Significant Accounting Policies
Stock-Based Compensation
      Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options. As allowed by SFAS No. 123, the Company has elected to account for its employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting For Stock Issued To Employees, and (“APB 25”), which allows the use of the intrinsic value method. The Company’s basis for electing accounting treatment under APB 25 is principally due to the incorporation of the dilutive effect of these shares in the reported earnings per share calculation and the presence of pro forma supplemental disclosure of the estimated fair value methodology prescribed by SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. The fair value of options was calculated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions for the three and nine months ended September 30, 2003 and 2004 respectively: risk free interest rate of 3.50% and 3.75%; dividend yield of 0%; weighted-average expected life of options of 5 years; and a volatility factor of 1.066 and 1.515.
      The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and which are fully transferable. In addition, option valuation models in general require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different than traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a single reliable measure of the fair value of its stock options.

F-7


 

PERFICIENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
      The following table illustrates the effect on net income (loss) and net income (loss) per share if the company had applied the fair value recognition provisions of SFAS 123:
                                   
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
         
    2003   2004   2003   2004
                 
Net income—as reported
  $ 424,265     $ 1,146,089     $ 516,188     $ 2,576,630  
Total stock-based compensation costs included in the determination of net income as reported
    25,889       1,845       110,038       26,613  
The stock-based employee compensation cost that would have been included in the determination of net income (loss) if the fair value based method had been applied to all awards
    (448,028 )     (315,351 )     (1,624,250 )     (825,554 )
                         
Pro forma net income (loss)
  $ 2,126     $ 832,583     $ (998,024 )   $ 1,777,689  
Accretion of dividends on preferred stock
    (44,899 )     —        (138,025 )     —   
                         
Pro forma net income (loss) available to common stockholders
  $ (42,773 )   $ 832,583     $ (1,136,049 )   $ 1,777,689  
                         
Earnings per share:
                               
 
Basic—as reported
  $ 0.04     $ 0.06     $ 0.04     $ 0.15  
                         
 
Basic—pro forma
  $ (0.00 )   $ 0.04     $ (0.11 )   $ 0.10  
                         
 
Diluted—as reported
  $ 0.03     $ 0.05     $ 0.04     $ 0.13  
                         
 
Diluted—pro forma
  $ (0.00 )   $ 0.04     $ (0.11 )   $ 0.09  
                         
Revenue Recognition
      Revenues are primarily derived from professional services provided on a time and materials basis. For time and material contracts, revenue is 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, revenue is generally recognized using the proportionate performance method based on the ratio of hours expended to total estimated hours. Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. 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 revenue in accordance with the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. In accordance with EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, revenue from software sales is recorded on a gross basis based on the Company’s role as principal in the transaction. As provided in EITF 99-19 criteria to be considered “principal”, the Company is the primary obligator 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 revenue would be recorded on a net basis.

F-8


 

PERFICIENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible Assets
      Intangible assets, primarily resulting from purchased business combinations, are being amortized using the straight-line method with a life of two to five years for employment and non-compete agreements and a life of three to eight years for customer relationship intangibles. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement 142”), we assess our goodwill on October 1 of each year or more frequently if events or change in circumstances indicate that goodwill might be impaired.
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and such differences could be material to the financial statements.
2.     Segment Information
      The Company operates as a single segment. The Company’s chief operating decision maker is considered to be the Chief Executive Officer and Chairman of the Board. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the consolidated level.
3.     Net Income Per Share
      The following table presents the calculation of basic and diluted net income per share:
                                   
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
         
    2003   2004   2003   2004
                 
Net income
  $ 424,265     $ 1,146,089     $ 516,188     $ 2,576,630  
Accretion of dividends on preferred stock
    (44,899 )     —        (138,025 )     —   
                         
Net income available to common stockholders
  $ 379,366     $ 1,146,089     $ 378,163     $ 2,576,630  
                         
Basic:
                               
 
Weighted-average shares of common stock outstanding
    10,748,580       18,275,616       10,683,958       16,421,481  
 
Weighted-average shares of common stock outstanding subject to contingency
    —        952,257       —        592,098  
                         
 
Shares used in computing basic net income per share
    10,748,580       19,227,873       10,683,958       17,013,579  
                         

F-9


 

PERFICIENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
                                   
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
         
    2003   2004   2003   2004
                 
Effect of dilutive securities:
                               
 
Preferred stock
    2,902,174       —        2,947,998       —   
 
Stock options
    1,385,816       2,510,433       1,095,504       2,662,470  
 
Warrants
    —        105,821       —        228,306  
                         
 
Shares used in computing diluted net income per share
    15,036,570       21,844,127       14,727,460       19,904,355  
                         
Basic net income per share
  $ 0.04     $ 0.06     $ 0.03     $ 0.15  
                         
Diluted net income per share
  $ 0.03     $ 0.05     $ 0.04     $ 0.13  
                         
4.     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:
         
    Operating
    Lease
     
2004 remaining
  $ 484,934  
2005
    1,809,010  
2006
    778,453  
2007
    337,946  
2008
    86,610  
Thereafter
    34,671  
       
Total minimum lease payments
  $ 3,531,624  
       
5.     Balance Sheet Components
      The components of accounts receivables are as follows:
                   
    December 31,   September 30,
    2003   2004
         
        (Unaudited)
Accounts receivable
  $ 4,932,165     $ 11,702,300  
Unbilled revenue
    1,225,437       3,303,691  
Allowance for doubtful accounts
    (622,995 )     (653,486 )
             
 
Total
  $ 5,534,607     $ 14,352,505  
             

F-10


 

PERFICIENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
      The components of other current liabilities are as follows:
                   
    December 31,   September 30,
    2003   2004
         
        (Unaudited)
Accrued income taxes
  $ 425,977     $ 731,828  
Accrued transaction costs
    —        67,788  
Accrued bonus and commissions
    1,150,614       1,545,038  
Accrued exit and severance costs
    —        206,409  
Accrued vacation
    220,443       361,269  
Other payroll related liabilities
    30,934       448,937  
Sales and use taxes
    85,187       288,747  
Other accrued expenses
    489,525       1,055,830  
Deferred revenues
    262,107       680,965  
             
 
Total
  $ 2,664,787     $ 5,386,811  
             
6.     Comprehensive Income
      The components of comprehensive income are as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
         
    2003   2004   2003   2004
                 
Net income
  $ 424,265     $ 1,146,089     $ 516,188     $ 2,576,630  
Foreign currency translation adjustments
    (14,592 )     5,843       (18,105 )     (11,309 )
                         
Total comprehensive net income
  $ 409,673     $ 1,151,932     $ 498,083     $ 2,565,321  
                         
7.     Business Combinations
Acquisition of Genisys Consulting, Inc.
      On April 2, 2004, the Company consummated the acquisition of Genisys Consulting, Inc, a privately held company, for approximately $8.8 million, consisting of approximately $1.5 million in cash, transaction costs of approximately $0.5 million, approximately 1.7 million shares of Perficient’s common stock valued at $3.77 per share and stock options valued at approximately $0.4 million. The common stock issued in connection with the merger included 825,459 shares which are restricted based upon the continued employment with Perficient of certain employees of Genisys through April 1, 2007, and another 352,055 shares held in escrow until April 1, 2005.
      The total purchase consideration of $8.8 million has been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Such allocation resulted in Goodwill of approximately $7.4 million. Goodwill is assigned at the enterprise level and is not expected to be deductible for tax purposes. The purchase price was allocated to intangibles based on an independent appraisal and management’s estimate. Management expects to finalize the purchase price allocation within twelve months from the acquisition.

F-11


 

PERFICIENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
      The preliminary purchase price allocation is as follows:
           
Intangibles:
       
 
Customer relationships
  $ 1.1 million  
 
Non-compete agreements
    0.4 million  
 
Customer backlog
    0.2 million  
Goodwill
    7.4 million  
Less fair value of liabilities acquired in excess of tangible assets acquired
    (0.3) million  
       
Net assets acquired
  $ 8.8 million  
       
      The Company believes that the intangible assets acquired have useful lives of nine months to eight years.
Acquisition of Meritage Technologies, Inc.
      On June 18, 2004, the Company consummated the acquisition of Meritage Technologies, Inc., a privately held company for approximately, $10.4 million, consisting of approximately $2.9 million in cash, $2.4 of liabilities repaid on behalf of Meritage Technologies, Inc., transaction costs of approximately $0.9 million, and approximately 1.2 million shares of Perficient’s common stock valued at approximately $3.595 per share.
      The total purchase price consideration of $10.4 million, including transaction costs of $0.9 million, have been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Such preliminary allocation resulted in Goodwill of approximately $7.4 million. The Company has yet to finalize the purchase price allocation pending resolution of certain contingent liabilities. Goodwill is assigned at the enterprise level and is not expected to be deductible for tax purposes. The purchase price was allocated to intangibles based on management’s estimate with assistance from an independent appraisal firm. Management expects to finalize the purchase price allocation within twelve months from acquisition.
      The preliminary purchase price allocation is as follows:
           
Intangibles:
       
 
Customer relationships
  $ 0.3 million  
 
Non-compete agreements
    1.5 million  
Goodwill
    7.4 million  
Add fair value of assets acquired in excess of liabilities
    1.2 million  
       
Net assets acquired
  $ 10.4 million  
       
      The Company believes that the intangible assets acquired have useful lives of five years. Accrued exit costs of approximately $0.2 million relate to lease obligations for excess office space that the Company has vacated or intends to vacate under the approved facilities exit plan. The estimated costs of vacating these leased facilities, including estimated costs to sub-lease, and sub-lease income were based on market information and trend analysis as estimated by the Company. It is reasonably possible that actual results could differ from these estimates in the near term.
      Accrued severance of $0.2 million relates to severance and related payroll taxes for certain employees of Meritage Technologies, Inc. impacted by the approved plan of termination.

F-12


 

PERFICIENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
      The Company acquired net deferred tax assets of approximately $2.1 million, which included gross deferred tax assets of $3.1 million off-set by gross deferred tax liabilities of $1.0 million. The gross deferred tax assets relate primarily to net operating losses incurred by Meritage Technologies, Inc. prior to the acquisition, and as such are subject to annual limitations on usage under the “change in control” provisions of the Internal Revenue Code. The Company has placed a full valuation allowance on the net deferred tax assets given the level of cumulative historical losses for both Meritage Technologies, Inc. and the Company. Any reversal of the valuation allowance on the acquired net deferred tax assets will be applied first to reduce goodwill and then other acquisition related noncurrent intangible assets to zero and any remainder would be recognized as a reduction of income tax expense.
Pro forma Results of Operations
      The following presents the unaudited pro forma combined results of operations of the Company with Genisys Consulting, Inc., and Meritage Technologies, Inc. for the three months ended September 30, 2003 and 2004, and nine months ended September 30, 2003 and 2004, 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, 2003 and 2004 or of future results of operations of the consolidated entities:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
         
    2003   2004   2003   2004
                 
Revenues
  $ 14,786,451     $ 17,523,132     $ 43,142,582     $ 47,058,557  
Net income (loss)
  $ (222,190 )   $ 1,146,089     $ 63,185     $ 2,462,506  
Basic income (loss) per share
  $ (0.01 )   $ 0.06     $ 0.00     $ 0.13  
Diluted income (loss) per share
  $ (0.01 )   $ 0.05     $ 0.00     $ 0.11  
8.     Intangible Assets
Intangible Assets with Indefinite Lives
      The changes in the carrying amount of Goodwill for the three months ended September 30, 2004 is as follows:
         
Balance at June 30, 2004
  $ 25.1 million  
Adjustment to goodwill relating to transaction costs
    0.1 million  
       
Balance at September 30, 2004
  $ 25.2 million  
       

F-13


 

PERFICIENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible Assets with Definite Lives
      Following is a summary of Company’s intangible assets (in millions) that are subject to amortization:
                                                 
    December 31, 2003   September 30, 2004
         
    Gross       Net   Gross       Net
    Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying
    Amounts   Amortization   Amounts   Amounts   Amortization   Amounts
                         
Customer relationships
  $ 3.6     $ (3.3 )   $ 0.3     $ 5.0     $ (3.4 )   $ 1.6  
Non-compete
    0.5       (0.5 )     —        2.4       (0.8 )     1.6  
Customer backlog
    —        —        —        0.2       (0.1 )     0.1  
                                     
Total
  $ 4.1     $ (3.8 )   $ 0.3     $ 7.6     $ (4.3 )   $ 3.3  
                                     
9.     Borrowings
      We have a line of credit arrangement with Silicon Valley Bank that will expire in December 2004. The agreement allows us to borrow up to an amount equal to 80% of eligible accounts receivable as defined in the credit agreement but in no event more than $6.0 million. We are required to comply with certain financial covenants under this agreement, which require us to maintain a minimum tangible net worth of at least $3,000,000 and to maintain a ratio of cash plus accounts receivable including 50% of unbilled revenue to current liabilities of at least 1.50 to 1.00. Borrowings under the agreement bear interest at the bank’s prime rate plus 1.00% (5.75% as of September 30, 2004). As of September 30, 2004, there were no amounts outstanding under this line of credit and the Company was in compliance with all covenants.
      During the nine months ended September 30, 2004, we amended our credit facility with Silicon Valley Bank to provide a $4.0 million credit facility to be used to finance certain qualified acquisitions. We are also required to comply with certain financial covenants under this acquisition credit facility, which require us to maintain a minimum tangible net worth of at least $3,000,000, to maintain a ratio of cash plus accounts receivable including 50% of unbilled revenue to current liabilities of at least 1.50 to 1.00, and to maintain a ratio of after tax earnings before interest, depreciation and amortization, annualized, divided by current maturities of long-term debt plus interest of at least 1.50 to 1.00. Borrowings under this arrangement bear interest equal to the average four year U.S. Treasury note yield plus 3.5% (7.11% as of September 30, 2004), and are repayable in thirty-six equal installments. We are entitled to make payments of accrued interest only for the first three monthly installments. As of September 30, 2004 the balance outstanding under this acquisition credit facility was $2.5 million and the Company was in compliance with all covenants.
      In connection with the acquisitions of Javelin Solutions, Inc., Vertecon, Inc. and Meritage Technologies, Inc., we were required to establish various letters of credit totaling $615,000 to serve as collateral for certain office space and equipment leases. These letters of credit reduce the borrowings available under our line of credit facility with Silicon Valley Bank. Two letters of credit totaling $365,000 will remain in effect through 2005, and the other letter of credit of $250,000 will remain in effect through 2007.
10.     Subsequent Events
      On December 15, 2004, we granted restricted stock awards under our 1999 Stock Option/Stock Issuance Plan to John T. McDonald, our Chief Executive Officer, and Jeffrey S. Davis, our President and Chief Operating Officer, of 175,000 and 87,500 shares of our common stock, respectively. These

F-14


 

PERFICIENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
restricted stock awards vest over seven years with 50% of the vesting in the last two years, subject to partial acceleration if certain revenue growth and operating profitability targets are met.
      On December 17, 2004, we, Perficient ZettaWorks, Inc., our wholly owned subsidiary (the “Acquisition Sub”) and ZettaWorks LLC entered into an Asset Purchase Agreement pursuant to which Acquisition Sub acquired substantially all of the assets and assumed certain liabilities of ZettaWorks (the “Acquisition”). The Acquisition closed on December 20, 2004. The total consideration paid in the Acquisition is $10.7 million, which amount includes approximately $2.9 million in cash and up to $7.8 million of our common stock, based on the average closing price of our common stock for the three trading days immediately preceding the acquisition, which amount remains subject to certain post-closing adjustments.
      On January 31, 2005 we amended our credit facility with Silicon Valley Bank. The amendment increased the total size of the Silicon Valley Bank credit facilities from $10 million to $13 million by increasing the accounts receivable line of credit from $6 million to $9 million. The amendment also modified the calculation of the ratio of cash plus accounts receivable to current liabilities to exclude all liabilities other than those to Silicon Valley Bank.

F-15


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Perficient, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Perficient, Inc. and Subsidiaries as of December 31, 2002 and 2003, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes 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. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Perficient, Inc. and Subsidiaries at December 31, 2002 and 2003, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
January 9, 2004

F-16


 

PERFICIENT, INC.
CONSOLIDATED BALANCE SHEETS
                   
    December 31,
     
    2002   2003
         
ASSETS
Current assets:
               
 
Cash
  $ 1,525,002     $ 1,989,395  
 
Accounts receivable, net of allowance for doubtful accounts of $661,248 in 2002 and $622,995 in 2003
    3,938,373       5,534,607  
 
Other current assets
    382,542       297,058  
             
Total current assets
    5,845,917       7,821,060  
Property and equipment:
               
 
Hardware
    1,496,429       1,685,577  
 
Furniture and fixtures
    726,861       655,662  
 
Leasehold improvements
    234,285       234,671  
 
Software
    248,697       263,059  
 
Accumulated depreciation
    (1,495,254 )     (2,139,824 )
             
Net property and equipment
    1,211,018       699,145  
Net intangible assets
    12,380,039       11,693,834  
Other noncurrent assets
    156,129       45,944  
             
Total assets
  $ 19,593,103     $ 20,259,983  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Accounts payable
  $ 426,686     $ 129,895  
 
Line of credit
    540,011       —   
 
Current portion of capital lease obligation
    235,034       —   
 
Other current liabilities
    2,304,433       3,310,872  
 
Current portion of note payable to related party
    485,477       366,920  
             
Total current liabilities
    3,991,641       3,807,687  
Note payable to related party, less current portion
    745,318       436,258  
Capital lease obligation, less current portion
    334,661       —   
             
Total liabilities
    5,071,620       4,243,945  
Stockholders’ equity:
               
 
Preferred stock, $0.001 par value; 8,000,000 shares authorized; 3,095,000 shares in 2002 and 0 shares in 2003 issued and outstanding
    3,095       —   
 
Common stock, $0.001 par value; 40,000,000 shares authorized; 10,537,226 shares in 2002 and 14,033,246 shares in 2003 issued and outstanding
    10,537       14,033  
 
Additional paid-in capital
    75,993,344       76,315,780  
 
Unearned stock compensation
    (164,773 )     (26,623 )
 
Accumulated other comprehensive loss
    (35,366 )     (51,830 )
 
Retained deficit
    (61,285,354 )     (60,235,322 )
             
Total stockholders’ equity
    14,521,483       16,016,038  
             
Total liabilities and stockholders’ equity
  $ 19,593,103     $ 20,259,983  
             
See accompanying notes.

F-17


 

PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
                   
    Year Ended December 31,
     
    2002   2003
         
Revenue
               
 
Services
  $ 20,391,587     $ 24,534,617  
 
Software
    402,889       3,786,864  
 
Reimbursable expenses
    1,655,808       1,870,441  
             
Total revenue
    22,450,284       30,191,922  
Cost of revenue
               
 
Project personnel costs
    11,210,272       13,411,762  
 
Software costs
    343,039       3,080,894  
 
Reimbursable expenses
    1,655,808       1,870,441  
 
Other project related expenses
    330,100       453,412  
             
Total cost of revenue
    13,539,219       18,816,509  
             
Gross margin
    8,911,065       11,375,413  
Selling, general and administrative
    8,327,010       7,857,081  
Stock compensation
    240,688       135,927  
Depreciation
    687,570       670,436  
Intangibles amortization
    1,285,524       610,421  
Restructuring, severance and other
    579,427       —   
             
Income (loss) from operations
    (2,209,154 )     2,101,548  
Interest income
    17,732       3,286  
Interest expense
    (203,569 )     (285,938 )
Other
    (53 )     (13,459 )
             
Income (loss) before income taxes
    (2,395,044 )     1,805,437  
Provision for income taxes
    —        755,405  
             
Net income (loss)
  $ (2,395,044 )   $ 1,050,032  
             
Beneficial conversion charge on preferred stock
    (1,672,746 )     —   
Accretion of dividends on preferred stock
    (163,013 )     (157,632 )
             
Net income (loss) available to common stockholders
  $ (4,230,803 )   $ 892,400  
             
Basic net income (loss) per share
  $ (0.53 )   $ 0.08  
             
Diluted net income (loss) per share
  $ (0.53 )   $ 0.07  
             
See accompanying notes.

F-18


 

PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
                                                                                         
                        Unearned   Accumulated        
    Preferred Stock   Common Stock           Additional   Stock   Other       Total
            Subscription       Paid-In   Compen-   Comprehensive   Retained   Stockholders’
    Shares   Amount   Shares   Amount   Receivable   Warrants   Capital   sation   Loss   Deficit   Equity
                                             
Balance at January 1, 2002
    —      $ —        6,288,566     $ 6,289     $ —      $ —      $ 66,140,446     $ (348,021 )   $ (72,103 )   $ (58,890,310 )   $ 6,836,301  
Issuance of common stock and options in purchase of businesses
    —        —        4,210,799       4,211       —        —        7,213,875       (266,173 )     —        —        6,951,913  
Issuance of Series A preferred stock, net of amount held in escrow
    1,984,000       1,984       —        —        (1,984,000 )     —        1,982,016       —        —        —        —   
Issuance of warrants in connection with Series A preferred stock issuance
    —        —        —        —        —        426,560       (426,560 )     —        —        —        —   
Release of preferred stock proceeds from escrow
    —        —        —        —        1,984,000       —        —        —        —        —        1,984,000  
Issuance cost for Series A preferred stock
    —        —        —        —        —        6,595       (109,040 )     —        —        —        (102,445 )
Issuance of Series B preferred stock
    1,111,000       1,111       —        —        —        —        998,889       —        —        —        1,000,000  
Issuance cost for Series B preferred stock
    —        —        —        —        —        —        (38,284 )     —        —        —        (38,284 )
Issuance of warrants in connection with Series B preferred stock issuance
    —        —        —        —        —        170,085       (170,085 )     —        —        —        —   
Stock options exercised
    —        —        37,861       37       —        —        7,580       —        —        —        7,617  
Deferred stock compensation
    —        —        —        —        —        —        (208,733 )     208,733       —        —        —   
Amortization of unearned compensation
    —        —        —        —        —        —        —        240,688       —        —        240,688  
Foreign currency translation adjustment
    —        —        —        —        —        —        —        —        36,737       —        36,737  
Net loss
    —        —        —        —        —        —        —        —        —        (2,395,044 )     (2,395,044 )
                                                                   
Total comprehensive loss
                                                                                    (2,358,307 )
                                                                   
Balance at December 31, 2002
    3,095,000     $ 3,095       10,537,226     $ 10,537     $ —      $ 603,240     $ 75,390,104     $ (164,773 )   $ (35,366 )   $ (61,285,354 )   $ 14,521,483  
Conversion of preferred stock
    (3,095,000 )     (3,095 )     3,114,840       3,115       —        —        (20 )     —        —        —        —   
Forfeiture of merger consideration
    —        —        (44,787 )     (45 )     —        —        (64,448 )     —        —        —        (64,493 )
Series A dividend payment
    —        —        —        —        —        —        (45,457 )     —        —        —        (45,457 )
Other
    —        —        10,327       10       —        —        10,215       —        —        —        10,225  
Warrants exercised
    —        —        151,500       151       —        (64,500 )     364,349       —        —        —        300,000  
Stock options exercised
    —        —        264,140       265       —        —        133,185       —        —        —        133,450  
Deferred stock compensation
    —        —        —        —        —        —        (2,223 )     2,223       —        —        —   
Amortization of unearned compensation
    —        —        —        —        —        —        —        135,927       —        —        135,927  
Preferred stock issuance costs
    —        —        —        —        —        —        (8,665 )     —        —        —        (8,665 )
Foreign currency translation adjustment
    —        —        —        —        —        —        —        —        (16,464 )     —        (16,464 )
Net income
    —        —        —        —        —        —        —        —        —        1,050,032       1,050,032  
                                                                   
Total comprehensive income
                                                                                    1,033,568  
                                                                   
Balance at December 31, 2003
    —      $ —        14,033,246     $ 14,033     $ —      $ 538,740     $ 75,777,040     $ (26,623 )   $ (51,830 )   $ (60,235,322 )   $ 16,016,038  
                                                                   
See accompanying notes.

F-19


 

PERFICIENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
                     
    Year Ended December 31,
     
    2002   2003
         
OPERATING ACTIVITIES
               
Net income (loss)
  $ (2,395,044 )   $ 1,050,032  
Adjustments to reconcile net income (loss) to net cash provided by operations:
               
 
Depreciation
    687,570       670,436  
 
Intangibles amortization
    1,285,524       610,421  
 
Non-cash stock compensation
    240,688       135,927  
 
Non-cash interest expense
    63,295       72,383  
 
Non-cash interest income
    (11,017 )     —   
 
Loss on disposal of assets
    11,341       30,954  
 
Changes in operating assets and liabilities (net of the effect of acquisitions):
               
   
Accounts receivable
    887,275       (1,577,259 )
   
Other assets
    (85,167 )     199,753  
   
Accounts payable
    149,608       (297,185 )
   
Other liabilities
    (476,737 )     990,015  
             
Net cash provided by operating activities
    357,336       1,885,477  
INVESTING ACTIVITIES
               
Purchase of property and equipment
    (167,323 )     (191,207 )
Purchase of businesses, net of cash acquired
    (725,848 )     —   
Payments on Javelin notes
    (125,000 )     (500,000 )
Advances to Vertecon
    (200,000 )     —   
Proceeds from disposal of assets
    1,700       1,950  
             
Net cash used in investing activities
    (1,216,471 )     (689,257 )
             
FINANCING ACTIVITIES
               
Payments on capital lease obligation
    (352,575 )     (569,695 )
Proceeds from short-term borrowings
    533,641       166,282  
Payments on short-term borrowings
    (2,089,030 )     (706,293 )
Payments on long-term debt
    (6,903 )     —   
Proceeds from issuance of preferred stock
    2,984,000       —   
Preferred stock issuance costs
    (130,504 )     (8,665 )
Payment of dividends
    —        (45,457 )
Proceeds from stock issuances, net
    7,617       433,450  
             
Net cash provided by (used in) financing activities
    946,246       (730,378 )
Effect of exchange rate on cash and cash equivalents
    25,653       (1,449 )
             
Change in cash and cash equivalents
    112,764       464,393  
Cash and cash equivalents at beginning of period
    1,412,238       1,525,002  
             
Cash and cash equivalents at end of period
  $ 1,525,002     $ 1,989,395  
             
Supplemental disclosures:
               
 
Interest paid
  $ 176,453     $ 207,326  
             
 
Cash paid for income taxes
  $ —      $ 449,768  
             
Non cash activities:
               
 
Common stock and options issued in purchase of businesses
  $ 7,218,086     $ —   
             
 
Issuance of note payable in purchase of business
  $ 1,292,500     $ —   
             
See accompanying notes.

F-20


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
1.     Business Overview
      Perficient, Inc. (the “Company”) is an eBusiness solutions provider to large and major midsize companies and Internet software vendors. The Company enables its clients and partners to optimize profitability and strengthen customer relationships through reliable, quick-to-market eBusiness solutions. The Company provides a broad range of end-to-end business and technology solutions with a focus on serving the financial services, healthcare, technology and energy industries.
      The Company was incorporated on September 17, 1997 in Texas. The Company began operations in 1997 and is structured as a “C” corporation. On May 3, 1999 the Company reincorporated in Delaware. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material inter-company 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and such differences could be material to the financial statements.
Revenue Recognition
      Revenues are primarily derived from professional services provided on a time and materials basis, with the remaining revenue derived from fixed fee engagements and software sales. For time and material contracts, revenue is 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, revenue is generally recognized using the proportionate performance method based on the ratio of hours expended to total estimated hours. Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. 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 revenue in accordance with the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. In accordance with EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, revenue from software resales is recorded on a gross basis based on the Company’s role as principal in the transaction. As provided in EITF 99-19 criteria to be considered “principal”, the Company is the primary obligator 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 resale transaction and acts as an agent, the revenue would be recorded on a net basis.
Cash Equivalents
      Cash equivalents consist primarily of cash deposits and investments with original maturities of ninety days or less when purchased.

F-21


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2003
Advertising Expense
      The cost of advertising is expensed as incurred. Advertising costs for the years ended December 31, 2002 and 2003 were not material.
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 2 to 5 years). Leasehold improvements are amortized over the shorter of the life of the lease or the estimated useful life of the assets. Amortization of assets recorded under capital leases is computed using the straight-line method and is included in depreciation expense. The cost and accumulated amortization of assets recorded under capital leases was approximately $412,000 and $52,000, respectively, at December 31, 2002 and approximately $412,000 and $134,000, respectively, at December 31, 2003.
Intangible Assets
      Intangible assets, primarily resulting from purchase business combinations, are being amortized using the straight-line method with a life of two to three years for employment and non-compete agreements and a life of three to five years for customer relationship intangibles. Intangible assets consist of the following:
                 
    December 31,
     
    2002   2003
         
Cost:
               
Employment and noncompete agreements
  $ 550,000     $ 550,000  
Customer relationships
    3,600,000       3,600,000  
Goodwill
    36,384,000       36,308,000  
Accumulated amortization:
               
Employment and noncompete agreements
    (370,000 )     (518,000 )
Customer relationships
    (2,805,000 )     (3,267,000 )
Goodwill
    (24,979,000 )     (24,979,000 )
             
Net Book Value:
  $ 12,380,000     $ 11,694,000  
             
      Amortization expense for employment, non-compete agreements, and customer relationships is expected to be approximately $132,237 in 2004, $100,000 in 2005, $100,000 in 2006, and $32,237 in 2007.
      On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Under these rules, ratable amortization of intangibles assets with indefinite lives, including goodwill, has been replaced with periodic review and analysis to assess possible impairment. Intangible assets with definite lives must be amortized over their estimated useful lives. In accordance with SFAS No. 142, the Company assesses its goodwill on October 1 of each year or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares the fair value to the net book value. In determining fair value, management utilizes a blended approach and calculates fair value based on market capitalization, revenue and earnings multiples based on industry comparables, and discounted

F-22


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2003
cash flow analysis. Step two of the analysis compares the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess.
      Business acquisitions typically result in goodwill and other intangible assets, and the recorded values of those assets may become impaired in the future. The determination of the value of such intangible assets requires us to make estimates and assumptions that affect the Company’s consolidated financial statements. Management assesses potential impairments to intangible assets on an annual basis or when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Management’s judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of the acquired businesses, market conditions and other factors. Future events could cause management to conclude that impairment indicators exist and that goodwill associated with the acquired businesses is impaired. Any resulting impairment loss could have an adverse impact on the Company’s results of operations by decreasing net income.
Impairment of Long-Lived Assets
      The Company evaluates its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets. Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be entirely recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination was made. The Company adopted SFAS No. 144 as of January 1, 2002.
Income Taxes
      The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This Statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Foreign Currency Transactions
      For the Company’s foreign subsidiaries, the functional currency has been determined to be the local currency, and therefore, assets and liabilities are translated at year-end or period-end exchange rates, and income statement items are translated at average exchange rates prevailing during the year or period. Such translation adjustments are recorded in aggregate as a component of stockholders’ equity. Gains and losses from foreign currency denominated transactions, including a $7,500 loss during 2002 and a $15,800 gain in 2003, are included in other income (expense). Due to the on-going liquidation of the United Kingdom subsidiary, a foreign currency gain of $15,500 was transferred from cumulative translation adjustments and included as a component of net income for the year ended December 31, 2003.

F-23


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2003
Segments
      The Company follows the provisions of the SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 requires a business enterprise, based upon a management approach, to disclose financial and descriptive information about its operating segments. Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by the chief operating decision maker(s) of an enterprise. Under this definition, the Company operates as a single segment for all periods presented. The Company’s chief operating decision maker is considered to be the Chief Executive Officer and Chairman of the Board. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the consolidated level.
Earnings Per Share
      The Company follows the provisions of SFAS No. 128, Earnings Per Share. Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes the weighted average number of common shares outstanding and the number of equivalent shares which would be issued related to the stock options and warrants using the treasury method, contingently issuance shares, and convertible preferred stock using the if-converted method, unless such additional equivalent shares are anti-dilutive.
Stock-Based Compensation
      SFAS No. 123, Accounting for Stock-Based Compensation, prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options. As allowed by SFAS No. 123, the Company has elected to account for its employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting For Stock Issued To Employees, (“APB 25”), which allows the use of the intrinsic value method. The Company’s basis for electing accounting treatment under APB 25 is principally due to the satisfactory incorporation of the dilutive effect of these shares in the reported earnings per share calculation and the presence of pro forma supplemental disclosure of the estimated fair value methodology prescribed by SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based Compensation— Transition and Disclosure. The fair value of options was calculated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions for the year ended December 31, 2002 and 2003, respectively: risk free interest rate of 3.5% and 2.98%; dividend yield of 0%; weighted-average expected life of options of 5 years; and a volatility factor of 1.066 and 1.515.
      The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and which are fully transferable. In addition, option valuation models in general require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different than traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a single reliable measure of the fair value of its stock options.

F-24


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2003
      The following table illustrates the effect on net income (loss) and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123:
                   
    Year Ended December 31,
     
    2002   2003
         
Net income (loss) available to common stockholders— as reported
  $ (4,230,803 )   $ 892,400  
Total stock-based compensation costs included in the determination of net income (loss) available to common stockholders as reported
    240,688       135,927  
The stock-based employee compensation cost that would have been included in the determination of net income (loss) available to common stockholders if the fair value based method had been applied to all awards
    (2,783,044 )     (1,147,235 )
             
Pro forma net income (loss)
  $ (6,773,159 )   $ (118,908 )
             
Earnings per share
               
 
Basic— as reported
  $ (0.53 )   $ 0.08  
             
 
Diluted— as reported
  $ (0.53 )   $ 0.06  
             
 
Basic and diluted— pro forma
  $ (0.84 )   $ (0.01 )
             
Fair Value of Financial Instruments
      Cash equivalents, accounts receivable, accounts payable, other accrued liabilities, and debt are stated at cost which approximates fair value due to the short-term maturity of these instruments.
Recently Issued Accounting Standards
      In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. Management does not believe that the adoption of FIN 46 will have a material impact on the Company’s consolidated results of operations or financial position.
      In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The changes that resulted from the issuance of SFAS No. 150 did not have a material effect on the Company’s consolidated results of operations or financial position.
      In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which codifies, revises and rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make this interpretive guidance consistent with current

F-25


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2003
authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the Company’s consolidated results of operations, consolidated financial position or consolidated cash flows.
3.     Net Income (Loss) Per Share
      Computations of the net income (loss) per share are as follows:
                   
    Year Ended December 31,
     
    2002   2003
         
 
Net income (loss)
  $ (2,395,044 )   $ 1,050,032  
 
Beneficial conversion charge on preferred stock
    (1,672,746 )     —   
 
Accretion of dividends on preferred stock
    (163,013 )     (157,632 )
             
 
Net income (loss) available to common stockholders
  $ (4,230,803 )   $ 892,400  
             
Basic:
               
 
Weighted-average shares of common stock outstanding
    9,173,657       11,364,203  
 
Weighted-average shares of common stock subject to contingency
    (1,132,506 )     (545,786 )
             
 
Shares used in computing basic net income (loss) per share
    8,041,151       10,818,417  
             
Effect of dilutive securities:
               
 
Weighted-average shares of common stock subject to contingency
    —        545,786  
 
Preferred stock
    —        2,531,436  
 
Stock options
    —        1,410,512  
 
Warrants
    —        —   
             
Shares used in computing diluted net income (loss) per share
    8,041,151       15,306,151  
             
Basic net income (loss) per share
  $ (0.53 )   $ 0.08  
             
Diluted net income per share
  $ (0.53 )   $ 0.06  
             
      Diluted net loss per share is the same as basic net loss per share for the year ended December 31, 2002, as the effect of the assumed exercise of stock options and warrants, the issuance of contingently issuable shares resulting from business combinations, and shares of common stock issuable upon the conversion of convertible preferred stock is anti-dilutive due to the Company’s net loss for that period. Diluted net loss per share for the year ended December 31, 2002 excludes common stock equivalents of 4,274,225.
4. Concentration of Credit Risk and Significant Customers
      Cash and accounts receivable potentially expose the Company to concentrations of credit risk. Excess 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. In August 2003, the Company entered into a one-year extension of its existing services

F-26


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2003
agreement with IBM under which the Company provides deployment, integration and training services to IBM’s WebSphere customers which are billed on a time and materials basis. The agreement will expire on September 1, 2004. The current contract stipulates that IBM may cancel the contract prior to its expiration date of September 1, 2004 upon 5 days written notice. Revenue from IBM accounted for approximately 35% of total revenue for both 2002 and 2003, and accounts receivable from IBM accounted for approximately 35% and 37% of total accounts receivable as of December 31, 2002 and December 31, 2003, respectively. In the event that IBM is no longer a customer following the cancellation or termination of the Company’s current agreement, the Company’s revenue would decrease significantly and, as with the loss of any significant customer, management may need to counteract this type of revenue decrease by reducing headcount to align with the lower demand for the Company’s services. Due to the Company’s significant fixed operating expenses, the loss of sales to IBM could result in the Company’s inability to generate net income for some time in the future.
5.     Employee Benefit Plan
      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. 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 vesting services. The Company made matching contributions equal to 25% of the first 6% of employee contributions totaling $130,000 and $143,000 during 2002 and 2003, respectively, which vest over a three year period of service. The Company’s related costs for the plan were approximately $32,000 and $19,000 during 2002 and 2003, respectively.
6.     Stockholders’ Equity
Preferred Stock
      The Company entered into a Convertible Preferred Stock Purchase Agreement, dated as of June 26, 2002, with 2M Technology Ventures, L.P. (“2M”) under which the Company sold 1,111,000 shares of Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred Stock”), to 2M for a purchase price of approximately $0.90 per share. The Company used the proceeds from the sale of the Series B Preferred Stock to strengthen its working capital position and for other corporate purposes. Each share of Series B Preferred Stock was initially convertible into one share of Perficient common stock at the election of the holder. The agreement also stipulated criteria for the automatic conversion of Series B preferred shares into common shares in the event that the closing price for Perficient’s common stock is greater than $3 per share for 20 consecutive days with an average trading volume greater than 50,000 shares over that same period. As of November 11, 2003, the criteria for automatic conversion were met, and accordingly, all outstanding shares of Series B preferred stock were converted to 1,111,000 shares of common stock. The Company has also issued to 2M a Warrant to purchase up to 555,500 shares of Perficient common stock in connection with this sale of Series B Preferred Stock.
      2M was given the option to purchase up to an additional 1,666,500 shares of Series B Preferred Stock on the same terms as described above, however, this option was not exercised and expired on June 26, 2003.
      Simultaneously with the sale of shares to 2M by the Company, 2M purchased from Steven Papermaster, Robert Anderson and Bryan Menell, 300,000, 100,000 and 100,000 shares of Perficient common stock, respectively, for $0.75 per share. Mr. Papermaster was a member of the Company’s

F-27


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2003
Board of Directors at the time of the transaction and each of Messrs. Papermaster, Menell and Anderson are or had been significant holders of Perficient common stock.
      In addition, the Company entered into Registration Rights Agreements with 2M pursuant to which the Company filed on October 10, 2002 a preliminary registration statement with the Securities and Exchange Commission covering the resale of the shares of common stock issuable upon the conversion of the Series B preferred stock (and exercise of the Warrants) sold in the private placement. Each share of Series B preferred stock had voting rights equal to the number of shares of common stock into which the preferred stock could then be converted. The Series B preferred stock accrued dividends payable in our common stock at an annual rate per share equal to $0.90 multiplied by an 8% interest rate. Accrued dividends on the Series B preferred stock totaled approximately $41,205 as of December 31, 2002 and $110,027 as of November 10, 2003, the date of the automatic conversion. The accrued dividends on the Series B preferred stock were forfeited under the terms of the automatic conversion.
      In connection with Series B preferred stock issuance, the Company recognized a beneficial conversion charge equal to approximately $459,000, which represents the intrinsic value of the feature using a fair market value of common stock of $1.16 and an exchange ratio of 1.34:1, in accordance with EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of EITF Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features, or Contingently Adjustable Conversion Ratios, to Certain Convertible Instruments. The beneficial conversion charge was calculated by first deducting the value of the warrants issued from the proceeds to compute an effective conversion ratio. The warrants were valued at approximately $170,000 using the Black-Scholes valuation model, an assumed volatility of 50%, a risk-free interest rate of 3.5%, a weighted-average expected life of 4 years, and a dividend rate of 0%.
      The Company entered into a Convertible Preferred Stock Purchase Agreement, dated as of December 21, 2001, with a limited number of investors under which the Company sold 1,984,000 shares of Series A Convertible Preferred Stock (“Series A”) to such investors for a purchase price of $1.00 per share, for gross proceeds of $1,984,000. The Company used the proceeds from the sale of the Series A Preferred Stock to strengthen its working capital position and for other corporate purposes. Each share of Series A preferred stock was initially convertible into one share of Perficient common stock at the election of the holder, based on a conversion ratio as defined in the agreement, initially set at $1 and adjusted from time to time based on certain anti-dilution provisions. The Company has also issued warrants to purchase 992,000 shares of Perficient common stock in connection with this sale of Series A preferred stock. For every two shares of Series A preferred stock purchased by an investor, such investor received a Warrant to purchase one share of Perficient common stock at an initial exercise price of $2.00 per share of common stock. In addition, the Company entered into Registration Rights Agreements with each of the purchasers pursuant to which the Company filed a registration statement with the Securities and Exchange Commission covering the resale of the shares of common stock issuable upon the conversion of the Series A preferred stock (and exercise of the Warrants) sold in the private placement which registration statement was declared effective by the Securities and Exchange Commission on October 10, 2002. Each share of Series A preferred stock had voting rights equal to the number of shares of common stock into which the preferred stock could then be converted. The Series A preferred stock accrues dividends at an annual rate per share equal to $1.00 multiplied by the prime rate plus 150 basis points. Accrued dividends on the Series A preferred stock totaled approximately $121,808 as of December 31, 2002 and $210,617 on November 10, 2003, the automatic conversion date. The company paid cash dividends totaling $45,457 to certain holders of Series A

F-28


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2003
Preferred Stock who had voluntarily elected to convert their holdings to common stock prior to the automatic conversion date. The accrued dividends on the Series A preferred stock that was not voluntarily converted prior to November 10, 2003 were forfeited under the terms of the automatic conversion.
      In connection with Series A preferred stock issuance, the Company recognized a beneficial conversion charge equal to approximately $1,180,000, which represents the intrinsic value of the feature using a fair market value of common stock of $1.38 and an exchange ratio of 1.27:1, in accordance with EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of EITF Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features, or Contingently Adjustable Conversion Ratios, to Certain Convertible Instruments. The beneficial conversion charge was calculated by first deducting the value of the warrants issued from the proceeds to compute an effective conversion ratio. The warrants were valued at approximately $427,000 using the Black-Scholes valuation model, an assumed volatility of 50%, a risk-free interest rate of 3.5%, a weighted-average expected life of 4 years, and a dividend rate of 0%.
      The Company obtained access to $825,000 of the proceeds from the Series A preferred stock issuance in January 2002. The remainder of the funds remained in escrow subject to the completion of the acquisitions of Javelin Solutions, Inc. and Primary Webworks, Inc. d/b/a Vertecon, Inc. The Company obtained access to the remaining $1,159,000 in May 2002.
      As a result of the Series B issuance discussed above, the conversion ratio for the Series A preferred stock decreased to approximately $0.99. Additionally, as a result of the Series B preferred stock issuance, the number of warrants issued to the Series A investors increased to 1,001,920 and the exercise price was adjusted to approximately $1.98 per share. A beneficial conversion charge of $22,000 related to the change in the Series A preferred stock conversion ratio and a beneficial conversion charge of $11,000 related to the increase in the number of common shares issuable upon the exercise of the warrants was recognized during the second quarter of 2002.
Common Stock
      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

F-29


 

PERFICIENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2003
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.
      The Company has granted stock options to various employees under the terms of the respective employee agreements. The stock options generally vest over three years. The term of each option is ten years from the date of grant.
      The Company recognized $240,688 and $135,927 of stock compensation expense during 2002 and 2003, respectively, as a result of options granted to employees with exercise prices below the fair market value of the underlying common stock on the date of grant, certain modifications to existing options, and the grant of options to certain non-employees. During 2002, the Company recognized deferred compensation totaling $266,173 related to the acquisition of Javelin that is being amortized over the vesting period of the related options. Stock-compensation expense is recognized on a straight-line basis over the related vesting periods. Stock compensation expense for option grants to non-employees was determined using a Black-Scholes pricing model.
      A summary of changes in common stock options during 2002 and 2003 is as follows:
<
                           
            Weighted-
            Average
        Range of