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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
PEROT SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2230700
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12377 MERIT DRIVE, SUITE 1100
DALLAS, TEXAS 75251
(Address of Principal Executive Offices) (Zip Code)
(972) 383-5600
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK
PAR VALUE $.01 PER SHARE
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ITEM 1. BUSINESS.
Perot Systems Corporation (the "Company") was founded as a Texas
corporation in 1988 by Ross Perot and eight business associates. The Company
reincorporated in Delaware in December 1995. The Company is an information
technology ("IT") services and business transformation company helping clients
devise, plan, implement and manage business and IT solutions.
SERVICES
The Company pursues both opportunities to provide its services under
long-term operations contracts and on shorter-term systems integration,
development and consulting projects. The benefits of this approach include more
efficient use of staff between large engagements, the assimilation of new
industry expertise and diversification of the Company's client base. The
Company's service offerings include the following:
Systems Integration - The Company designs and implements IT systems for
clients, including constructing network architectures, integrating system
components and implementing the migration of application systems to new
platforms.
Systems Operation - The Company manages, operates and maintains client
data processing systems, including networks, desktop computing environments,
data centers, print centers and support functions.
Technical Consulting - The Company assists clients with strategic
decisions regarding platforms, networks and delivery media, the development of
overall architectures for IT systems, the selection of vendors and planning
transitions from one platform, technology or application to another.
Business Consulting - The Company assesses and develops business
strategies, evaluates and designs organizational structures, assists clients in
managing major change events, reengineers client operational processes and
assists clients with people programs.
Software Development - The Company develops application software solutions
for its clients.
The Company creates integrated service offerings to meet a client's needs
from the Company's technical and business core competencies. Examples of these
core competencies include network and client/server applications, internet and
intranet services, object-oriented technology, data mining and data
warehousing, business process automation, legacy systems, customer relationship
management and consulting.
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MARKETS
The Company conducts its business and provides its services in North
America, Europe and Asia through a combination of industry groups,
geographically based project offices, consulting groups and competency groups.
Industry groups focus on delivering services which are customized to the
particular client and are designed by business and technical experts with
extensive knowledge of the group's industry. The industry groups package and
deliver services using skills and technologies within the industry group and
may also call on discrete competency groups maintained by the Company, such as
business consulting and object-oriented technology, in order to bring
cross-industry skills to the client engagement. The Company's industry groups
include the following:
Global Financial Services. The Global Financial Services group serves
wholesale, commercial and retail banks, investment banks, brokerage firms and
other financial institutions. The Global Financial Services group helps clients
understand and capitalize on emerging market opportunities, including the
support of global infrastructure systems, electronic commerce over the
internet, customer relationship management and state-of-the-art trading and
settlement systems.
Healthcare. The Healthcare group serves managed care networks, hospital
groups, healthcare product distributors and other healthcare companies. The
Healthcare group's services emphasize the creation of integrated health
networks with the tools to manage and evaluate care, cost and quality outcomes.
The Healthcare group assists its clients with information access and
connectivity to provide tools for transaction management, care management,
decision support and internet-based demand management systems.
Energy. The Energy group serves municipal and private utilities, related
service providers and other energy companies. The Energy group helps clients
transform their businesses to commercially driven, open-competition models. In
addition, the Energy group is actively involved in the creation and management
of power exchange projects.
Communications and Media. The Communications and Media group serves
providers of voice, data, image, video, entertainment, media and information
services through wireless and wireline networks. The Communications and Media
group assists its clients with business strategy, billing, online and customer
care programs, quality assurance and testing.
Manufacturing. The Manufacturing group serves a variety of manufacturing
clients, including companies in the automobile manufacturing, automobile parts
manufacturing, steel and plastics businesses. The group provides
industry-specific solutions, including supply chain management, planning and
scheduling, order
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management and assistance with warehousing, distribution, production and
finance applications.
Travel & Transportation. The Travel and Transportation group serves rental
car companies, airlines, travel agencies and other companies in the travel and
transportation industry. This group provides its clients with expertise in
business planning, reservations systems, inventory and asset management,
customer service, billing, communications and quality assurance.
The Company has project offices in Dallas, Texas, Detroit, Michigan,
Reston, Virginia and Denver, Colorado. The project offices provide services to
a wide range of clients not encompassed by the Company's specific industry
groups and support the industry groups. The project offices typically pursue
shorter-term systems integration, software development and consulting projects.
As with the industry groups, the project offices package and deliver services
using skills and technologies within those offices and, in some cases, call on
the Company's discrete competency groups.
The Company's business consulting groups market and deliver their services
directly to clients and as part of integrated service offerings by the Company.
The Company maintains technical competency groups in order to leverage
certain technical skills across the Company's industry groups and project
offices. These groups support the design and delivery of services by the
Company's industry groups and project offices. The Company's object-oriented
group also markets and delivers its services directly to clients.
SWISS BANK CORPORATION
In January 1996, the Company formed a strategic alliance with Swiss Bank
Corporation ("Swiss Bank") which involved (i) a long-term contract for the
Company to deliver IT services to Swiss Bank's SBC Warburg Division ("SBC
Warburg"), (ii) separate agreements to provide services to other Swiss Bank
operating units and to permit the Company to use certain Swiss Bank assets and
(iii) the grant to Swiss Bank of options to acquire stock of the Company. In
April 1997, the Company concluded the renegotiation of the terms of its
strategic alliance with Swiss Bank. The new terms are effective from January 1,
1997 and involve (i) the restructuring of the IT services contract for SBC
Warburg, (ii) the termination of all options to acquire stock of the Company
that were granted in connection with the original transactions and (iii) the
sale to Swiss Bank of stock of the Company and options to purchase stock of the
Company. The agreements that contain the terms of the Swiss Bank alliance, as
renegotiated, are collectively called the "Swiss Bank Agreements". Pursuant to
the terms of the Swiss Bank Agreements, the Company also continues to hold a
40% stake in Swiss Bank's IT subsidiary, Systor AG ("Systor"). A portion of the
Company's interest in Systor will be returned to Swiss Bank if the SBC Warburg
EPI Agreement is terminated. The portion that would be returned to Swiss Bank
upon such a termination declines ratably over a 10-year period which began on
January 1, 1997.
The following summary of the principal Swiss Bank Agreements is qualified
in its entirety by reference to such agreements, copies of which are attached
hereto as Exhibits 10.30, 10.31 and 10.32.
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Master Operating Agreement
The Amended and Restated Master Operating Agreement, dated as of January
1, 1997, between the Company and Swiss Bank (the "Master Operating Agreement"),
contains the standard terms and conditions that apply to all agreements ("EPI
Agreements") pursuant to which the Company provides or may, in the future,
provide operational management services to Swiss Bank and its affiliates. As of
the date of this Registration Statement, the SBC Warburg EPI Agreement (as
defined below) is the only EPI Agreement in effect. The Master Operating
Agreement has an indefinite term; however, it may be terminated by either party
on or after December 31, 2008. In addition, the Company may terminate the Master
Operating Agreement and certain EPI Agreements for cause, non-payment, Swiss
Bank's insolvency and certain cross-defaults. Swiss Bank may terminate the
Master Operating Agreement and certain EPI Agreements for cause, the Company's
insolvency, a change in control of the Company, the Company's discontinuance of
its provision of IT services, certain cross-defaults, the occurrence of certain
significant events at Swiss Bank and the Company's non-compliance with Swiss
Bank's security procedures.
SBC Warburg EPI Agreement
The Amended and Restated Agreement for EPI Operational Management, dated
as of January 1, 1997, between Swiss Bank and the Company (the "SBC Warburg EPI
Agreement"), governs the relationship between Swiss Bank and the Company with
respect to SBC Warburg. The SBC Warburg EPI Agreement requires that Swiss Bank
obtain from the Company SBC Warburg's requirements for the operational
management of its technology resources (including mainframes, desktops, and
voice and data networks), excluding hardware and proprietary software
applications development. The term of the SBC Warburg EPI Agreement is 10 years
beginning January 1, 1997.
The Company's charges for services provided under the SBC Warburg EPI
Agreement are generally based on reimbursement of all costs, other than Company
corporate overhead, incurred by the Company in the performance of services for
SBC Warburg. In addition, the Company will receive an agreed annual amount
subject to bonuses and penalties related to the Company's performance on
certain defined metrics.
PSC Stock Agreement
Pursuant to the Amended and Restated PSC Stock Option and Purchase
Agreement, dated as of April 24, 1997 (the "PSC Stock Agreement"), the Company
issued and sold to Swiss Bank options (the "SBC Options"), including options to
purchase 3,617,160 shares of the Company's nonvoting Class B Common Stock, par
value $.01 per share ("Class B Common Stock," and such shares, "Class B
Shares") at a purchase price of $2.25 per option
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share (the "SBC Warburg Options"). The Company also issued and sold to Swiss
Bank 50,000 Class B Shares at a purchase price of $7.30 per share (the "SBC
Warburg Shares"). Subject to regulatory limits, the SBC Warburg Options are
exercisable immediately and from time to time until they expire at an exercise
price of $7.30 per share. The SBC Warburg Options expire five years after they
vest; provided that the five-year periods are tolled during any time that
ownership restrictions prevent Swiss Bank from exercising such options.
The SBC Warburg Options and the SBC Warburg Shares were issued and sold in
connection with the execution and delivery of the SBC Warburg EPI Agreement.
The SBC Warburg Options and the SBC Warburg Shares continue to vest at a rate
of 31,953 shares per month for the first five years of the SBC Warburg EPI
Agreement and at a rate of 29,167 shares per month thereafter. In the event of
termination of the SBC Warburg EPI Agreement for any reason, (i) all unvested
SBC Warburg Options will be terminated and (ii) Swiss Bank will deliver to the
Company, against the payment of the purchase price of $7.30 per share, title to
all unvested SBC Warburg Shares.
Pursuant to the PSC Stock Agreement, the Company also agreed to issue and
sell to Swiss Bank, upon the occurrence of the "SBC Domestic Event", additional
SBC Options (the "SBC Domestic Options") and/or Class B Shares (the "SBC
Domestic Shares"), for an aggregate total of 3,500,000 SBC Domestic Options and
SBC Domestic Shares, in such combination of options and shares to be determined
in the discretion of Swiss Bank. The "SBC Domestic Event" means the entering
into by the Company and Swiss Bank, on or prior to December 31, 1998, of a
definitive agreement, having a term of 10 years and a similar scope and size to
the SBC Warburg EPI Agreement, relating to Swiss Bank apart from SBC Warburg,
including such terms and conditions consistent with those set forth in the SBC
Warburg EPI Agreement as may be agreed upon by the Company and Swiss Bank (the
"SBC Domestic Agreement").
The purchase price for the SBC Domestic Options will be an amount per
share equal to a defined fair value for the SBC Domestic Options as of
the date of the occurrence of the SBC Domestic Event. The exercise price per
share for the SBC Domestic Options will also be the defined fair value per
share as of the date of grant. The SBC Domestic Options expire five years after
they vest; provided that the five-year periods are tolled during any time that
ownership restrictions prevent Swiss Bank from exercising such options.
SBC Domestic Options and SBC Domestic Shares will vest ratably over 10
years commencing on the SBC Domestic Event, and will continue to vest until the
SBC Domestic Agreement is terminated. In the event of termination of the SBC
Domestic Agreement for any reason, (i) all unvested SBC Domestic Options will
be terminated and (ii) Swiss Bank will deliver to the Company, against payment
therefor, per share of the purchase and exercise price for the SBC Domestic
Options, all unvested SBC Domestic Shares.
The SBC Warburg Options and the SBC Domestic Options will generally be
exercisable immediately upon grant. Swiss Bank is, however, subject to certain
regulatory limitations upon its exercise of SBC Options. After giving effect to
any purchase of SBC Options, purchase of Class B Shares and exercise of SBC
Options by
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Swiss Bank, (i) the number of Class B Shares owned by Swiss Bank
(including any Class B Shares then owned by any employee of Swiss Bank),
together with the number of any Class B Shares owned by Swiss Bank at any time
prior to such exercise, may not exceed 10% of the number of shares of Common
Stock outstanding, and (ii) the aggregate purchase and exercise prices paid by
Swiss Bank on the acquisition of Class B Shares and exercise of SBC Options may
not exceed 10% of the consolidated stockholders' equity of the Company. If,
however, on certain specified anniversaries of the date of the PSC Stock
Agreement, beginning in 2004 (each, a "Trigger Date"), the number of Class B
Shares for which SBC Options are exercisable is limited because an insufficient
number of the shares of Common Stock are outstanding, Swiss Bank has, subject
to certain exceptions, the right to initiate certain procedures to eliminate
such deficiency. These procedures may result in the Company issuing additional
Common Stock and Swiss Bank requesting that the Federal Reserve Board approve
an increase in the percentage of Common Stock of the Company that Swiss Bank
may own or the Company purchasing shares of Class B Stock from Swiss Bank at
the then fair market value defined in the SBC Stock Agreement.
Swiss Bank may not sell or otherwise transfer any Options or any Class B
shares that have not vested. In addition, subject to certain exceptions, the
PSC Stock Agreement restricts the right of Swiss Bank to transfer Class B
Shares (i) within certain periods surrounding an IPO or (ii) if the transfer
would contravene applicable banking law. In addition, in certain limited
circumstances, the Company has a right of first refusal to purchase Class B
Shares that Swiss Bank desires to sell.
RELIANCE ON MAJOR CLIENTS
During the year ended December 31, 1996, approximately 28% of the Company's
revenues were earned in connection with services performed on behalf of Swiss
Bank and its affiliates. If certain competitors of Swiss Bank acquire more than
25% of the shares of Class A Common Stock of the Company ("Class A Common
Stock," and such shares, "Class A Shares") or another party (other than an
affiliate of Ross Perot) acquires more than 50% of the Class A Shares and, if
in either case, that acquisition is reasonably likely to have a significant
adverse impact on the performance of or the charges for the services rendered
by the Company, Swiss Bank has the right to terminate the Swiss Bank
Agreements. The loss of Swiss Bank as a client would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "- Swiss Bank Corporation."
The Company's two most significant clients (after Swiss Bank) accounted
for an aggregate of approximately 15% of the Company's contract revenues during
the year ended December 31, 1996. Neither of these clients accounted for more
than 10% of the Company's contract revenues. The loss of one or more of these
clients could have a material adverse effect on the Company's business,
financial condition and results of operations.
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COMPETITION
The Company's markets are intensely competitive and are characterized by
continuous changes in customer requirements and the technology available to
satisfy those requirements. With respect to large contracts, the Company's
principal competitors include International Business Machines Corporation
("IBM"), Andersen Consulting LLP, Computer Sciences Corporation and Electronic
Data Systems Corporation. Each of these companies, as well as some other
competitors, has greater financial, technical, sales and marketing resources,
greater name recognition and a larger customer base than the Company. The
Company expects to see additional competition as it addresses new markets and as
the computing and communications markets converge. The Company competes on the
basis of a number of factors both within and outside of its control, including
price, technological innovation, ability to invest in or acquire assets of
potential customers and strategic relationships with customers and suppliers.
There can be no assurance that the Company will be able to compete successfully
against its current or future competitors with respect to these or other factors
in the future. In addition, there can be no assurance that competition will not
have a material adverse effect on the Company's results of operations.
MERGERS AND ACQUISITIONS
In the second half of 1996 and the first quarter of 1997, the Company
consummated several acquisitions which contributed technical personnel and
expertise in specific technologies and markets as well as certain in-process
technologies. None of these acquisitions was material in the context of the
Company taken as a whole. The Company continually evaluates the possibility of
further acquisitions and intends to continue to complement its internal growth
through acquisitions and other business affiliations. See Note 4 to the
Consolidated Financial Statements, "Acquisitions."
INFORMATION REGARDING GEOGRAPHIC REGIONS
For information regarding geographic regions in which the Company
operates, see Note 12 to the Consolidated Financial Statements, "Certain
Geographic Data and Segment Information." The Company derives a substantial
portion of its revenues from international operations. Risks inherent in
international operations include risks of material increases in taxes and
changes in laws and policies governing operations of other companies that are
or may become clients of the Company. Other risks inherent in international
operations are the possibility of realizing economic currency exchange losses
when transactions are completed in currencies other than United States dollars
and possible restrictions on the Company's ability to freely repatriate its
earnings under exchange control laws.
TRADEMARKS, PATENTS AND COPYRIGHTS
The Company owns or has obtained licenses for a number of copyrights and
trademarks relating to its products and services. The Company does not believe
that any particular copyright, trademark or group of copyrights and trademarks
is of material importance to the Company's business taken as a whole.
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EMPLOYEES
As of March 31, 1997, the Company employed approximately 4,900 persons
located in the United States and several other countries. None of the Company's
United States employees are currently employed under an agreement with a
collective bargaining unit. The Company's employees in France and Germany are
generally members of work councils and have worker representatives. These
representatives must be consulted on any major change in operations that
affects such employees. The Company believes that its relations with employees
are good.
ITEM 2. FINANCIAL INFORMATION.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated historical financial data as of and
for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 is unaudited
but has been derived from the Company's Consolidated Financial Statements,
which have been audited by Coopers & Lybrand L.L.P. ("Coopers & Lybrand"),
independent auditors. The Company has retained Coopers & Lybrand as its
auditors for each of the five years listed in the table below. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's Consolidated
Financial Statements and the Notes to the Consolidated Financial Statements,
which are included herein.
<TABLE>
<CAPTION>
As of and for the years ended December 31,
1996 1995 1994 1993 (1) 1992
---- ---- ---- -------- ----
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Results:
Contract revenue $ 599.4 $ 342.3 $ 292.2 $ 291.8 $ 247.1
Direct cost of services 465.1 268.6 246.1 251.1 197.7
Operating income (loss) 41.4 20.9 10.9 (19.7) 20.2
Net income (loss) 20.5 10.8 6.3 (14.7) 10.7
Primary and full diluted earnings
(loss) per common share 0.40 0.30 0.18 (0.51) 0.41
Balance Sheet Data:
Cash and cash equivalents 27.5 17.4 9.2 26.9 15.2
Total assets 232.2 130.5 91.2 122.1 118.9
Long-term debt 5.2 6.1 10.0 18.7 22.9
</TABLE>
(1) During the fourth quarter of 1993, the Company recorded a charge to
earnings reversing amounts previously recognized as recoverable costs
under the percentage-of-completion method of accounting in recognition of
delays and cost overruns related to the development of a software
application for a client.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements, which are included herein.
OVERVIEW
The Company is an IT services and business transformation company helping
clients devise, plan, implement and manage business and IT solutions. The
services offered by the Company include systems integration, systems operation
and software development, as well as business and IT consulting. The Company's
clients represent a broad range of industries, including financial services,
healthcare, communications and media, energy, manufacturing and travel and
transportation.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 1996 to the year ended December 31,
1995
Contract revenue increased in 1996 by 75% to $599.4 million from $342.3
million in 1995. The primary growth factor was an increase in revenue from
sales to new clients, including $168.9 million generated by the Swiss Bank
Agreements. In addition, $20.8 million of total contract revenue in 1996
resulted from the expansion of a contract with an existing client that merged
with another entity and $10.7 million of total contract revenue in 1996 was
related to businesses acquired during 1996. The remaining contract revenue
increase of $56.7 million was related to growth in short-term project
engagements, expansion of business with existing clients and the addition of
new clients (other than Swiss Bank).
Domestic contract revenue increased in 1996 by 53% to $365.2 million from
$238.8 million in 1995 due to the recognition of $53.9 million in domestic
Swiss Bank revenue and 30% growth in other domestic business. The growth in
non-Swiss Bank domestic business was due to the factors discussed in connection
with the growth of total contract revenue above. Domestic contract revenue
declined as a percentage of total contract revenue to 61% from 70% in 1995 due
to Swiss Bank contract revenue, of which $159.6 million was earned in Europe
and $9.3 million in Asia.
Non-domestic contract revenue, which included European and Asian
operations, increased in 1996 by 126% to $234.2 million from $103.5 million in
1995, due in large part to the previously discussed Swiss Bank revenue. As a
result, non-domestic contract revenue grew in 1996 to 39% of total contract
revenue in 1996 from 30% in 1995. For additional information on the geographic
breakdown of revenue, see Note 12 to the Consolidated Financial Statements,
"Certain Geographic Data and Segment Information".
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Direct cost of services increased in 1996 by 73% to $465.1 million from
$268.6 million in 1995. The increase in the direct cost of services was
primarily the result of growth in the Company's business. In addition, direct
cost of services were increased by a $4.2 million write-off of software license
transfer rights and a $3.9 million write-off of purchased research and
development expenses in connection with 1996 business acquisitions accounted
for under the purchase method. Selling, general and administrative expenses
("SG&A") increased in 1996 by 76% to $92.9 million from $52.9 million in 1995,
due to the addition of key executives, expansion of the sales force, and staff
growth in administrative support areas such as communications, finance, human
resources, legal, strategy, marketing, resourcing and internal systems.
Operating income nearly doubled in 1996 to $41.4 million from $20.9
million in 1995, reflecting business growth and other factors previously
discussed in connection with revenue, direct cost of services and SG&A.
Operating margin increased in 1996 to 6.9% from 6.1% in 1995 due to a decline
in direct cost of services as a percentage of contract revenue in 1996 to 77.6%
from 78.5% in 1995. The after tax margin increased in 1996 to 3.4% from 3.2% in
1995.
The effective tax rate increased in 1996 to 48.9% from 46.6% in 1995, due
primarily to an increase in non-deductible expense items.
Comparison of the year ended December 31, 1995 to the year ended December 31,
1994
Contract revenue increased in 1995 by 17% to $342.3 million from $292.2
million in 1994, primarily as a result of growth in sales to new clients. This
net increase in contract revenue was reduced by $24.3 million due to the April
1995 restructuring of a facilities management contract with NationsBanc
Services, Inc. ("NBS," and such contract, the "NBS Agreement"). Under the terms
of the NBS Agreement, the Company received $12.0 million as prepayment for
services to be rendered over four years. The Company is recognizing this
prepayment ratably over the four-year term of the contract. In addition, the
Company transferred property, equipment and purchased software to the client
for $5.8 million, representing the approximate net book value of the assets.
Domestic contract revenue increased in 1995 by 23% to $238.8 million from
$193.9 million in 1994. Offsetting a $24.3 million decline in 1995 from the
restructuring of the NBS Agreement, revenue from other domestic contracts
increased by $69.2 million, or 52% due primarily to growth in short-term
project sales to new clients. For 1995 and 1994, domestic contract revenue
represented 70% and 66%, respectively, of total contract revenue.
Non-domestic contract revenue increased in 1995 by 5% to $103.5 million
from $98.3 million in 1994. As a percentage of total contract revenue,
non-domestic contract revenue declined in 1995 to 30% from 34% in 1994,
primarily because two major European software development projects were
completed in 1994, after which the
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Company's services to these clients became more operational in nature. The net
impact of this change on 1995 contract revenue was a decrease of $18.9 million.
For additional information on the geographic breakdown of revenue, see Note 12
to the Consolidated Financial Statements, "Certain Geographic Data and Segment
Information".
Direct cost of services as a percentage of contract revenue declined in
1995 to 78% from 84% in 1994, due to growth in short-term consulting projects,
a larger concentration of operations staff in sales roles, and the
restructuring of the NBS Agreement. SG&A increased as a percentage of revenue
to 15% in 1995, from 14% in 1994, due to a larger use of operations staff in
sales roles.
Operating income nearly doubled in 1995 to $20.9 million from $10.9
million in 1994, despite the fact that 1994 operating income included
recognition of a $6.7 million net gain from fees received in connection with
the December 1993 exercise of an IT services contract termination clause by
First American Bankshares, Inc. and its subsidiary banks ("FAB"). Upon exercise
of FAB's termination clause, the Company received a cash payment of $17.4
million, of which $7.4 million was used to cover 1994 expenses related to the
contract, and $3.3 million was accrued to cover estimated future facility lease
costs. Further, in 1994, the Company was successful in obtaining a more
favorable facility sublease arrangement than originally estimated, thereby
resulting in the recognition of a $6.7 million benefit from the termination
fee.
Operating margin improved in 1995 to 6.1% from 3.7% in 1994 as a result of
the decline in direct cost of services as a percentage of contract revenue.
This was due to growth in higher margin short-term systems integration
projects, more efficient staff utilization and the restructuring of the NBS
Agreement. The after tax margin improved in 1995 to 3.2% from 2.2% in 1994. The
effective income tax rate increased in 1995 to 46.6% from 37.6% in 1994,
attributable primarily to the increase in certain non-deductible items.
LIQUIDITY AND CAPITAL RESOURCES
Driven by Swiss Bank and other general business growth, cash flows from
operating activities increased in 1996 to $53.9 million from $24.0 million in
1995. Key growth factors underlying this increase included net income, accrued
liabilities and deferred revenue, the effects of which were partially offset by
growth in accounts receivable and deferred income taxes. Net income increased
in 1996 to $20.5 million from $10.8 million in 1995, and accrued liabilities
grew to $83.0 million in 1996 from $38.9 million in 1995, due to Swiss Bank
related expense growth. Deferred revenue increased in 1996 to $22.0 million
from $5.9 million in 1995, due to advance payments on new contracts and the
deferred recognition of a $5.1 million contract termination fee received in
1996 which will be recognized in 1997 as expenses associated with the
disposition of the contract are incurred. The impact of these net increases in
cash from operating activities was reduced because accounts receivable grew in
1996 to $113.8 million from $61.2 million in 1995 and because deferred income
taxes increased in 1996
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to $30.5 million from $16.1 million in 1995. The accounts receivable growth
from 1995 to 1996 was due primarily to the significant increase in sales to new
clients, especially to Swiss Bank, which accounted for $26.5 million of the net
change. The increase in deferred income taxes from 1995 to 1996 was due
primarily to growth in accrued expenses not deductible in the current period.
Cash flows from operating activities increased in 1995 to $24.0 million
from $1.3 million in 1994, reflecting business growth and the effect of a $12.0
million advance payment received in 1995, in connection with the restructuring
of the NBS Agreement. Although business growth caused accounts receivable to
grow by $34.2 million, this change was more than offset by related growth in
accrued liabilities, accounts payable and accrued compensation. Also,
depreciation and amortization declined by $6.5 million. Income tax payments
made in 1995 relating to 1994 tax liabilities were $0.2 million compared to
$9.4 million in income tax payments made in 1994 relating to 1993 tax
liabilities.
Net cash used in investing activities increased in 1996 to $41.9 million
from $12.4 million in 1995 due to growth-related increases in capital
expenditures, a decline in asset sales, new businesses acquired and increased
investments in unconsolidated subsidiaries. In 1996, the Company increased its
investment in property, equipment and software to $27.5 million from $18.3
million in 1995, to accommodate overall staff growth of 50%. Cash paid in 1996
for business interests acquired was $15.0 million, of which $9.5 million was
used to acquire 100% equity interests in three IT services companies and one
business consulting firm, and $5.5 million was used to purchase minority
interests in other companies. These entities are expected to contribute
significant knowledge and new expertise to the Company's service offerings,
assist in the development of new products and software applications and to
provide new business opportunities. There can be no assurance that the acquired
businesses will provide new opportunities or that new products or software
applications will be developed or, if developed, successfully brought to
market. The Company is committed to investing a maximum of $16.6 million to
fund additional future capital requirements of the unconsolidated entities. The
actual amounts invested in these businesses will vary depending on their needs
for cash and the opportunities available to them. Cash proceeds on sales of
property, equipment and software declined in 1996 to $0.7 million from $6.0
million in 1995, reflecting no large asset sales in 1996, as opposed to 1995,
in which property, equipment and purchased software valued at $5.8 million was
sold in connection with the restructuring of the NBS Agreement.
Net cash used in investing activities increased in 1995 to $12.4 million
from $10.1 million in 1994, reflecting a business growth related increase of
$8.0 million in capital expenditures, offset by an increase of $5.8 million in
cash proceeds on sales of property, equipment and software related to the
restructuring of the NBS Agreement.
Net cash used in financing activities increased in 1996 to $4.5 million
from $3.6 million in 1995. In 1996, the Company redeemed 100% of its
outstanding Series A
12
<PAGE> 14
Preferred Stock for $8.5 million to eliminate dividends with no tax benefit.
Other significant cash changes included a $4.2 million increase in net proceeds
from the issuance of Class A Common Stock, which reflected a significant
increase in the exercise of stock options by employees in 1996. In addition,
there was a $2.1 million increase in repayments of stockholder notes
receivable, a $0.7 million decrease in debt and capital lease obligation
repayments, and a $0.6 million decrease in dividends paid on preferred stock.
Net cash used in financing activities decreased in 1995 to $3.6 from $9.4
million in 1994, due primarily to reductions in repayments of debt and capital
lease obligations.
Because of growth in its international operations, the Company, in certain
instances, utilizes foreign currency exchange contracts to manage its exposure
and to mitigate the effects of currency fluctuations. See Note 13 to the
Consolidated Financial Statements, "Commitments and Contingencies".
The Company increased its credit line in August 1996 to $40.0 million from
$10.0 million to fund general corporate purposes and potential business
acquisitions. As of December 31, 1996, there were no borrowings outstanding
under this line.
The Company expects that its principal use of funds for the foreseeable
future will be for acquisitions, capital expenditures and working capital. In
addition, the Company expects to use funds for the development of in-process
software applications, which were acquired as part of the 1996 business
combinations. Capital expenditures may consist of purchases of computer and
related equipment and software. The Company anticipates that cash flows from
operating activities and unused borrowing capacity under its existing line of
credit will provide sufficient funds to meet its needs for the remainder of
1997. Significant growth in the Company's business in 1997 and 1998 could
result in the need for private or public offerings of debt or equity
instruments of the Company to provide the funds necessary to support its
growth.
SWISS BANK ALLIANCE
The Company experienced substantial growth in 1996. A significant portion
of that growth resulted from the formation of the Company's strategic alliance
with Swiss Bank in January 1996, which was revised in April 1997. The alliance
includes a long-term contract for the Company to deliver IT services to SBC
Warburg and the grant to Swiss Bank of the SBC Options. Pursuant to the terms
of the Swiss Bank Agreements, the Company also acquired a 40% interest in
Systor. A portion of the Company's interest in Systor will be returned to Swiss
Bank if the SBC Warburg EPI Agreement is terminated. The portion that would be
returned to Swiss Bank upon such a termination declines ratably over a 10-year
period which began on January 1, 1997. During the year ended December 31, 1996,
approximately 28% of the Company's revenues were earned in connection with
services performed on behalf of Swiss Bank and its affiliates. For more
information regarding the Swiss Bank alliance, see "Swiss Bank Corporation".
13
<PAGE> 15
ITEM 3. PROPERTIES.
As of March 31, 1997, the Company had 28 locations in the United States
and five locations in three countries outside the United States. The Company
owns no real estate, and leased properties consist primarily of office and
warehouse facilities. Current leases have expiration dates that range from 1997
to 2012. Upon expiration of its leases, the Company does not anticipate any
significant difficulty in obtaining renewals or alternative space. In addition
to the leased property referred to above, the Company occupies office space at
customer locations throughout the world. Such space is generally occupied
pursuant to the terms of the respective customer contract.
The Company's management believes that its facilities are suitable and
adequate for its business. However, the Company has plans for expansion and is
currently negotiating for expanded facilities for several of its locations. The
Company does not anticipate any difficulty in obtaining sufficient space to
accommodate the planned expansion.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to the Company
with respect to beneficial ownership of Class A Shares as of April 2, 1997 for
(i) all persons who are beneficial owners of five percent or more of the
Company's common stock, (ii) each director of the Company, (iii) the Company's
CEO and the other executive officers named in the Summary Compensation Table
below, and (iv) all executive officers and directors as a group:
14
<PAGE> 16
<TABLE>
<CAPTION>
5% Beneficial Owners, Number of Class A Percent
Directors and Executive Officers (1) Shares Beneficially Owned (2) of Class (2)
- ------------------------------------ ----------------------------- ------------
<S> <C> <C>
HWGA, Ltd. (3) 16,000,000 40.8%
Morton H. Meyerson (4) 4,017,110 10.2
James A. Cannavino 2,000,245 5.1
James Champy(5) 500,000 1.3
Guillermo G. Marmol (6) 310,201 *
Donald D. Drobny (7) 764,293 1.9
John E. King (8) 803,406 2.0
David M. Cohen (9) 152,000 *
Steve Blasnik 0 *
Craig Fields (10) 62,000 *
Raymond L. Golden 60,000 *
Carl Hahn 200,000 *
Ross Perot, Jr. (11) 16,000,000 40.8
John L. Segall 60,000 *
All Executive Officers and Directors as a
Group (17 persons) 25,685,181 65.4
</TABLE>
* Less than 1%
(1) The address for Messrs. Meyerson and Cannavino is 12377 Merit Drive, Suite
1100, Dallas, Texas 75251. The address for HWGA, Ltd. is 12377 Merit
Drive, Suite 1700, Dallas, Texas 75251.
(2) Percentages are based on the total number of Class A Shares outstanding at
April 2, 1997, plus the total number of outstanding options and warrants
held by each person that are exercisable within 60 days of such date.
Class A Shares issuable upon exercise of outstanding options and warrants,
however, are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Except as indicated in the
footnotes to this table, other than shared property rights created under
joint tenancy or marital property laws as between the Company's directors
and executive officers and their respective spouses, each stockholder
named in the table has sole voting and investment power with respect to
the Class A Shares set forth opposite such stockholder's name. The Class A
Shares listed include Class A Shares held by the Company's Retirement
Savings Plan and Trust for the benefit of the named individuals. Voting
and investment power over such Class A Shares is held by the trustee of
such trust subject to the direction of the Company's 401(k) Plan
Committee.
(3) Ross Perot is the managing general partner of HWGA, Ltd. ("HWGA"). In
addition, Ross Perot, Jr., a director of the Company, is a general partner
of HWGA. Shares owned by HWGA are also shown in this table as being
beneficially owned by Ross Perot, Jr.
15
<PAGE> 17
(4) Includes 4,000,000 Class A Shares owned by the Meyerson Family Limited
Partnership (the "Meyerson Partnership"), of which Mr. Meyerson is the
sole general partner, and 15,200 Class A Shares held by various trusts
established by Mr. Meyerson (the "Trusts"). As the general partner of the
Meyerson Partnership and the trustee of the each of the Trusts, Mr.
Meyerson has sole voting and investment power with respect to Class A
Shares held by the Meyerson Partnership and the Trusts and, therefore, is
deemed the beneficial owner of such Class A Shares.
(5) Includes 100,000 Class A Shares held by the Champy Family Irrevocable
Trust (the "Champy Trust") of which Mr. Champy is a trustee. As trustee,
Mr. Champy shares voting and investment power with respect to the Class A
Shares held by the Champy Trust and, therefore, is deemed the beneficial
owner of such Class A Shares.
(6) Includes 4,000 Class A Shares held by Mr. Marmol as custodian for his
children.
(7) Includes 80,000 Class A Shares held by Mr. Drobny's son, 80,000 Class A
Shares held by Mr. Drobny's daughter and 2,000 Class A Shares held by Mr.
Drobny's spouse. Mr. Drobny shares voting and investment power with the
respective holders of such Class A Shares.
(8) Includes 2,000 Class A Shares held by Mr. King's spouse with respect to
which Mr. King shares voting and investment power.
(9) Includes 30,000 Class A Shares held of record by Mr. Cohen's children,
with respect to which Mr. Cohen has sole voting and investment power.
(10) Includes 2,000 Class A Shares held by Mr. Fields' spouse, as to which Mr.
Fields disclaims beneficial ownership.
(11) All Class A Shares are held by HWGA, Ltd., a limited partnership of which
Ross Perot, Jr. is a general partner. As a general partner, Ross Perot,
Jr. shares voting and investment power with respect to Class A Shares held
by such partnership and, therefore, may be deemed the beneficial owner of
such Class A Shares. Ross Perot, Jr. is the son of Ross Perot, the
managing general partner of HWGA, Ltd.
16
<PAGE> 18
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The Company's Board of Directors (the "Board") currently has nine members,
three of whom are executive officers of the Company. The names, ages and
positions of the Company's directors and executive officers are set forth
below.
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Morton H. Meyerson ....... 58 Chairman of the Board
James A. Cannavino ....... 52 President, Chief Executive Officer and Director
Peter Altabef ............ 37 Vice President, General Counsel and Secretary
Terry Ashwill ............ 52 Vice President and Chief Financial Officer
James Champy ............. 55 Vice President and Director
David E. Cohen ........... 48 Vice President
Donald D. Drobny ......... 54 Vice President
Susan Fairty ............. 38 Vice President
John E. King ............. 50 Vice President
Guillermo G. Marmol ...... 44 Vice President
Ron Nash ................. 48 Vice President
Steve Blasnik ............ 39 Director
Craig Fields ............. 50 Director
Raymond L. Golden ........ 59 Director
Carl Hahn ................ 70 Director
Ross Perot, Jr ........... 38 Director
John L. Segall ........... 70 Director
</TABLE>
Directors are elected to serve for one-year terms and until their
successors are elected and qualified. Executive officers serve at the
discretion of the Board. Set forth below is a description of the backgrounds of
the directors and executive officers of the Company.
Morton H. Meyerson has served as Chairman of the Board and a director of
the Company since June 1992. In addition, from June 1992 until September 1996,
Mr. Meyerson also served as Chief Executive Officer of the Company ("CEO").
From May 1986 until June 1992, Mr. Meyerson was a private investor. Prior to
that time, Mr. Meyerson held a variety of positions with Electronic Data
Systems Corporation, most recently as Vice Chairman of the Board. Mr. Meyerson
also serves as a director of Energy Services Company International, Inc. and
Crescent Real Estate Equities, Inc.
James A. Cannavino has served as President and a director of the Company
since October 1995. In addition, he was elected CEO in September 1996. Mr.
Cannavino was also the Chief Operating Officer of the Company from October 1995
until September 1996. Prior to that time, Mr. Cannavino held a variety of
positions during his 32-year career with IBM where he served, from January 1993
until March 1995, as Senior Vice President for Strategy and Development and,
from January 1991 until
17
<PAGE> 19
January 1993, as Senior Vice President and General Manager of IBM's Personal
Systems Group. Mr. Cannavino also serves as a director of 7th Level, Inc.
Peter Altabef joined the Company in June 1993 and was elected Vice
President in June 1995 and Secretary in March 1996. Mr. Altabef became General
Counsel in April 1994. From January 1991 until May 1993, Mr. Altabef was a
partner in the Dallas law firm of Hughes & Luce, L.L.P.
Terry Ashwill joined the Company in January 1997 as a Vice President and
Chief Financial Officer. From August 1991 until January 1997, Mr. Ashwill
served as Executive Vice President, Chief Financial Officer of True North
Communications, Inc.
James Champy joined the Company in August 1996 as Vice President and a
director. Mr. Champy oversees the Company's consulting practice. From 1993
until 1996, Mr. Champy was Corporate Vice President and Chairman -- Consulting
Group of Computer Sciences Corporation. Mr. Champy was one of the founders of,
and from 1969 until 1996 served in a variety of capacities for, Index (a
management consulting firm) and CSC Index (the management consulting arm of
Computer Sciences Corporation formed upon the acquisition of Index by Computer
Sciences Corporation in 1988). Most recently, Mr. Champy was Chairman and Chief
Executive Officer of CSC Index.
David Cohen joined the Company in December 1993 and was elected Vice
President in August 1994. From August 1988 until September 1993, Mr. Cohen was
the Chief Financial Officer and a director of Alexon Group PLC, a clothing
retailer based in the United Kingdom. Mr. Cohen has oversight responsibility
for the Company's finance and several other support and delivery operations in
Europe. Mr. Cohen also oversees the Company's participation in a joint venture
with HCL Corporation in India and Asia.
Donald D. Drobny is one of the Company's founders. Mr. Drobny joined the
Company in June 1988, and was elected a Vice President in April 1989. Mr.
Drobny currently has oversight responsibility for all of the Company's project
offices.
Susan Fairty joined the Company as a Vice President in April 1996. Ms.
Fairty currently serves as the Company's Chief Technology Officer overseeing
the development of the Company's technical competencies and technical
strategies. From June 1981 until March 1996, Ms. Fairty held a variety of
positions with IBM.
John E. King is one of the Company's founders. Mr. King joined the Company
in June 1988, and was elected a Vice President in April 1989. Mr. King
currently has oversight responsibility for the Company's Global Financial
Services group.
Guillermo G. Marmol joined the Company in January 1996 as a Vice
President. Prior to joining the Company, Mr. Marmol held a variety of positions
during an 18-year career with McKinsey & Company, Inc., an international
management consulting firm. He was elected a director (senior partner) in 1991
and most recently held leadership positions in the firm's director election
committee, Dallas office and organization practice.
18
<PAGE> 20
Ron Nash joined the Company in March 1993 and was elected Vice President
in May 1995. From November 1985 until March 1993, Mr. Nash held a variety of
positions with Advanced Telemarketing Corporation and, following its
acquisition by ATC Communications Group, with its parent corporation. From
September 1992 until March 1993, Mr. Nash served as Vice President,
International and a director of ATC Communications Group. Immediately prior to
that time, Mr. Nash served as President, Chief Operating Officer and a director
of Advanced Telemarketing Corporation. Mr. Nash currently has oversight
responsibility for the Company's industry group (which consists of all
industries other than Global Financial Services).
Steve Blasnik was elected a director of the Company in September 1994.
Since 1991, Mr. Blasnik has served as President of Perot Investments, Inc., a
private investment firm and an affiliate of Ross Perot ("PII"). Mr. Blasnik
also serves as a director of Zonagen, Inc.
Craig Fields was elected a director of the Company in November 1992. Mr.
Fields has served as Vice Chairman of Alliance Gaming Corporation since
September 1994. Prior to that time, Mr. Fields was Chairman and Chief Executive
Officer of the Microelectronics and Computer Consortium from May 1990 until
March 1994. Mr. Fields also serves as a director of Energy Services Company
International, Inc., Projectavision, Inc. and Firearms Training Systems, Inc.
Raymond L. Golden was elected a director of the Company in November 1992.
In August 1996, Mr. Golden became Chairman of BT Wolfensohn, a division of BT
Securities Corporation. From March 1995 until August 1996, Mr. Golden was
President of Wolfensohn & Co., Inc., a predecessor of BT Wolfensohn. From
January 1989 until March 1995, Mr. Golden was a shareholder of Wolfensohn, Inc.
Carl Hahn was elected a director of the Company in April 1993. Since June
1996, Mr. Hahn has been a private investor. From June 1993 until June 1996, Mr.
Hahn served as Chairman of the Board of Directors of Saurer Ltd., a
manufacturer of textile machines. Prior to that time, Mr. Hahn served as
Chairman of the Board of Management of Volkswagen AG until December 1992. Mr.
Hahn also serves as a director of PACCAR, Inc., TRW Inc., Thyssen AG, AGIV,
Gerling AG, Volkswagen AG and a number of other European companies.
Ross Perot, Jr. was elected a director of the Company in 1988. Since March
1988, Mr. Perot has served as Chairman of Hillwood Development Corporation, a
real estate development company.
John L. Segall was elected a director of the Company in November 1992. Mr.
Segall served as Vice Chairman of GTE Corporation from March 1991 until March
1994 and has been a private investor since that time. Mr. Segall also serves as
a director of Norwalk Savings and General Data Communications Corporation.
ITEM 6. EXECUTIVE COMPENSATION.
The Summary Compensation Table below shows compensation for the 1996
fiscal year of each person who served in the capacity of CEO during the year
and the four most highly compensated executive officers other than the CEO who
were serving as executive officers at the end of the 1996 fiscal year.
19
<PAGE> 21
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------ Awards (1)
----------------------
Other Restricted Securities
Annual Stock Under- All Other
Bonus Compen- Award(s) Lying Compen-
Name and Principal Salary ($) sation (3) (4) Options sation (5)
Position Year ($) (2) ($) ($) (#) ($)
------------------ ---- ------ ----- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Morton H. Meyerson
Chairman & CEO (6) ..... 1996 583,333 180,000 10,507 -- -- 40,216
James A. Cannavino
President & CEO (7) .... 1996 538,542 180,000 189,579 -- -- 17,232
Guillermo G. Marmol
Vice President ......... 1996 400,000 110,000 -- -0- 200,000 6,639
Donald D. Drobny
Vice President ......... 1996 377,195 75,000 6,725 -- -- 17,232
John E. King
Vice President ......... 1996 300,000 85,000 8,543 -- -- 17,232
David M. Cohen
Vice President ......... 1996 269,534 83,334 -- -- -- 15,703
</TABLE>
(1) On January 2, 1996, Mr. Marmol purchased 200,000 restricted Class A
Shares for $1.75 per share (the fair value of such shares on the date
of purchase) and was granted options with an exercise price of $1.75
per share to purchase an additional 200,000 Class A Shares. The
shares and options vest ratably a ten-year period. The first vesting
date was January 2, 1997. On June 17, 1996, Mr. Marmol purchased an
additional 100,000 restricted Class A Shares for $2.50 per share (the
fair value of such shares on the date of purchase). In connection
with the June 17 purchase, Mr. Marmol surrendered options to purchase
100,000 shares of Class A Stock that had been granted on January 2.
All of Mr. Marmol's restricted stock and options will vest ratably
over ten years. The first vesting date remained January 2, 1997.
(2) Bonus amounts shown were earned in 1996 and paid in 1997.
(3) With respect to Mr. Cannavino, represents (i) $182,854 paid in
connection with the maintenance of living quarters and payment of
certain other living expenses pending his permanent relocation and
(ii) $6,725 for the payment of taxes related to the life insurance
policy referenced in Note 5 to this table. With respect to all other
named executive officers, represents the payment of taxes related to
the life insurance policies referenced in Note 5 to this table.
(4) The number of restricted Class A Shares held by the named executive
officers and the value of such Class A Shares (less the amount paid
therefor) at December 31, 1996 is as follows: Mr. Meyerson - 637,500
Class A Shares (held by the Meyerson Partnership), $1,875,000; Mr.
Cannavino - 1,800,000 Class A Shares, $4,950,000; and Mr. Marmol -
300,000 Class A Shares, $525,000.
20
<PAGE> 22
(5) Represents (i) $17,550, $11,232, $693, $11,232 and $11,232 in life
insurance premiums paid for the benefit of Messrs. Meyerson,
Cannavino, Marmol, Drobny and King, respectively; (ii) $6,000 in
Company contributions to the Company's 401(k) plan for the benefit of
each of Messrs. Meyerson, Cannavino, Marmol, Drobny and King; (iii)
$16,666 for the retroactive application of a salary increase for Mr.
Meyerson, which amount relates to compensation for services rendered
in 1995; and (iv) $17,330 contributed to a retirement fund on behalf
of Mr. Cohen by Perot Systems Europe Limited.
(6) Mr. Meyerson served as CEO of the Company until September 1996.
(7) Mr. Cannavino has held the post of CEO since September 1996.
The following table provides information relating to option grants in 1996
to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- ---------------------------------------------------------------------------
Percent of
Total Potential Realized Value at
Number of Options Assumed Annual Rates of Stock
Securities Granted Price Appreciation For Option
underlying to Term (1)
Options Employees Exercise -------------------------------
Granted in Fiscal Price Expiration
Name (2) Year ($/Sh) Date 5% ($) 10% ($)
- -------------------------- ------------- ------------- ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Morton H. Meyerson........ -0- -- -- -- -- --
James A. Cannavino........ -0- -- -- -- -- --
Guillermo G. Marmol (3)... 200,000 2.8% 1.75 1/2/2007 248,619 648,591
Donald D. Drobny.......... -0- -- -- -- -- --
John E. King.............. -0- -- -- -- -- --
David M. Cohen............ -0- -- -- -- -- --
</TABLE>
(1) These amounts represent assumed rates of appreciation in market value
from the date of grant until the end of the option term, at the rates
set by the Securities and Exchange Commission and, therefore, are not
intended to forecast possible future appreciation, if any, in the
Class A Shares.
(2) Mr. Marmol's options were granted under the Company's 1991 Stock
Option Plan with an exercise price equal to the fair value of the
underlying Class A Shares on the date of the grant. The Company has
engaged an independent valuation consultant to conduct periodic
appraisals of the value of its Class A Shares. The Company determines
fair value of the Class A Shares underlying option grants by reference
to the most recent appraisal performed by such consultant. Such
options are exercisable as follows: one-tenth on the first anniversary
of the grant date and an additional one-tenth on each succeeding
anniversary date until such options are fully vested, subject to
continued employment.
(3) On June 17, 1996, Mr. Marmol surrendered options to purchase 100,000
Class A Shares (which options are included in the described grant) in
connection with his purchase of 100,000 restricted Class A Shares.
The remaining options to purchase 100,000 Class A Shares will
continue to vest as described in Note 2.
21
<PAGE> 23
The following table provides information regarding exercises of stock
options by named executive officers during 1996:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options at Options at
Class Fiscal Year- Fiscal Year-
A Shares Value End (#) End ($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- -------------------------- ------------ -------- --------------- -------------
<S> <C> <C> <C> <C>
Morton H. Meyerson ....... -0- -0- -0-/-0- -0-/-0-
James A. Cannavino ....... -0- -0- -0-/-0- -0-/-0-
Guillermo G. Marmol ...... -0- -0- -0-/100,000 -0-/200,000
Donald D. Drobny ......... -0- -0- -0-/-0- -0-/-0-
John E. King ............. -0- -0- -0-/-0- -0-/-0-
David M. Cohen ........... 150,000 187,500 -0-/250,000 -0-/687,500
</TABLE>
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
Morton H. Meyerson. Mr. Meyerson's assignee, the Meyerson Partnership,
purchased 4,000,000 Class A Shares from the Company pursuant to the terms of a
stock purchase agreement between Mr. Meyerson and the Company (the "MFLP
Agreement"). Under the MFLP Agreement, the Company has the right to repurchase
a portion of the Class A Shares held by the Meyerson Partnership if Mr.
Meyerson voluntarily resigns as Chairman unless the parties agree to an
arrangement for Mr. Meyerson to remain with the Company. The agreement provides
for a formula to determine how many Class A Shares the Company would have the
right to repurchase. The number of Class A Shares that the Company would have
the right to repurchase declines over five years from the date of the MFLP
Agreement. In June 1997, the Company's right to repurchase Class A Shares held
by the Meyerson Partnership will terminate.
James. A. Cannavino. Mr. Cannavino's employment agreement with the Company
provides for a base salary of $500,000 per year, subject to adjustment from
time to time by the Board of Directors; provided, however, that a decrease in
Mr. Cannavino's base salary is grounds for Mr. Cannavino to terminate his
employment for good reason (as discussed below). Mr. Cannavino's employment
agreement provides for additional benefits, including: (i) cash bonuses that
may be paid in the discretion of the Board of Directors, (ii) payment of life
insurance premiums, (iii) relocation benefits and (iv) certain travel benefits.
Mr. Cannavino's employment agreement also provides that, in the event that the
Company terminates his employment other than for cause (as defined in the
agreement) or he terminates his employment agreement for good reason (as
defined in the agreement), Mr. Cannavino will receive a severance payment equal
to two years'
22
<PAGE> 24
base salary (computed using the highest base salary previously paid to him).
The second year's salary would be reduced by amounts earned by Mr. Cannavino
from other sources during that year unless termination of Mr. Cannavino's
employment occurred within six months of a change in control (as defined in his
employment agreement) of the Company.
The 2,000,000 restricted Class A Shares acquired by Mr. Cannavino pursuant
to his stock option grant vest in equal installments over ten years beginning
on the first anniversary of the commencement of Mr. Cannavino's employment by
the Company. Vesting is contingent on continued employment; provided, however,
that Mr. Cannavino's restricted Class A Shares will continue to vest for
limited periods following the termination of his employment if such termination
is by the Company other than for cause (as defined in his employment agreement)
or by Mr. Cannavino for good reason (as defined in his employment agreement).
If Mr. Cannavino's employment is terminated without cause by the Company or for
good reason by Mr. Cannavino (except, in either case, if the termination is
related to a change in control of the Company (as defined in his employment
agreement)) on or before the vesting date for 1998, Mr. Cannavino's Class A
Shares will continue to vest through that vesting date, as scheduled. In the
event such a termination is not related to a change in control of the Company
and follows the vesting date for 1998, Mr. Cannavino's Class A Shares will
continue to vest through the vesting date following the termination of
employment, as scheduled. In addition, if there is a change in control of the
Company during Mr. Cannavino's employment or Mr. Cannavino's employment is
terminated prior to but in connection with a change in control of the Company,
Mr. Cannavino's Class A Shares will vest as follows: (i) if the termination or
change in control occurs on or before Mr. Cannavino's scheduled vesting date in
1999, all Class A Shares scheduled to vest through his vesting date in the year
2000 will immediately vest upon the change in control or termination or (ii) if
the termination or change in control occurs after Mr. Cannavino's scheduled
vesting date in 1999, all Class A Shares scheduled to vest through the next two
vesting dates will immediately vest upon the change in control or termination.
If the Class A Shares are not publicly traded prior to the year 2010, Mr.
Cannavino has the right to require the Company to repurchase his Class A Shares
at their then fair value.
James Champy. Mr. Champy's associate agreement provides for a base salary
of $500,000 per year, which is to be reviewed at least annually by the Board of
Directors to determine whether such salary should be increased. Mr. Champy's
associate agreement provides for additional benefits, including: (i) a bonus to
be determined in accordance with the then current bonus plan applicable to the
most senior officers of the Company, (ii) payment of life insurance premiums
and (iii) certain travel benefits. Mr. Champy's associate agreement also
provides that, in the event that Mr. Champy is terminated by the Company other
than for cause or substantial misconduct (as defined in his associate
agreement) or Mr. Champy is deemed to have been constructively terminated (as
defined in his associate agreement), Mr. Champy will receive a severance
payment equal to (i) one year of Mr. Champy's then current base salary if such
termination occurs on or before August 12, 1997 or (ii) six months of Mr.
Champy's then current base salary if such termination occurs after August 12,
1997. If Mr. Champy's employment is
23
<PAGE> 25
terminated by either party (other than for cause by the Company) within one
year of a change in control of the Company (as defined in his associate
agreement), Mr. Champy would be entitled to receive a severance payment equal
to (i) one year of Mr. Champy's then current base salary if the change in
control occurs on or before August 12, 1997 or (ii) six months of Mr. Champy's
then current base salary if the change in control occurs after August 12, 1997.
The 500,000 restricted Class A Shares acquired by Mr. Champy pursuant to
his restricted stock agreement vest in equal installments over ten years
beginning on the first anniversary of the commencement of Mr. Champy's
employment by the Company. Vesting is contingent on continued employment;
provided, however, that Mr. Champy's restricted Class A Shares will continue to
vest for limited periods following the termination of his employment if his
employment is terminated by the Company other than for cause or substantial
misconduct (as defined in his associate agreement) or Mr. Champy is deemed to
have been constructively terminated (as defined in his associate agreement). If
Mr. Champy's employment is terminated by the Company other than for cause or
substantial misconduct effective after August 12, 1997 and on or before August
12, 1998 or Mr. Champy is deemed to have been constructively terminated on or
before August 12, 1998, Mr. Champy's restricted Class A Shares will continue to
vest to and including the vesting date in 2000, as scheduled. If Mr. Champy's
employment is terminated by the Company other than for cause or substantial
misconduct or Mr. Champy is deemed to have been constructively terminated after
August 12, 1998, Mr. Champy's restricted Class A Shares will continue to vest
as scheduled for two years following termination of employment. If there is a
change in control of the Company (as defined in his associate agreement) and
Mr. Champy's employment is terminated within one year of such change in control
by either party (other than for cause by the Company), Mr. Champy's Class A
Shares will continue to vest as follows: (i) if the change in control occurs on
or before August 12, 1998, all Class A Shares scheduled to vest to and
including his vesting date in the year 2000 will vest on schedule or (ii) if
the change in control occurs after August 12, 1998, all Class A Shares
scheduled to vest through the next two vesting dates will vest on schedule. In
the event that Mr. Champy is terminated for any reason by either party, Mr.
Champy has the right to require the Company to purchase his shares for their
original cost plus simple interest at the rate of eight percent per year.
DIRECTOR COMPENSATION
Directors receive no cash compensation for their service on the Board of
Directors or any committee of the Board of Directors, except that directors are
reimbursed for their reasonable out-of-pocket expenses associated with
attending Board of Directors and committee meetings. Except for Mr. Hahn, in
the past, upon their election to the Board of Directors, non-employee directors
(other than affiliates of Ross Perot) were offered either (i) the opportunity
to purchase 60,000 restricted Class A Shares or (ii) the grant of an option to
acquire 60,000 Class A Shares at a purchase or exercise price equal to the fair
value of such Class A Shares at the date of purchase or grant, which restricted
shares
24
<PAGE> 26
or options vest ratably over a five-year period. In April 1993, Mr. Hahn
purchased 200,000 restricted Class A Shares at a price equal to the fair value
of such shares at the date of purchase, which shares vest ratably over a
five-year period.
In December 1996, the Company adopted the 1996 Non-Employee Director Stock
Option/Restricted Stock Plan (the "Non-Employee Director Plan"). The
Non-Employee Director Plan provides for the issuance of nonqualified stock
options or restricted stock to non-employee directors of the Company and any of
its majority-owned subsidiaries. The Non-Employee Director Plan is administered
by the Board of Directors, which has the authority to interpret the
Non-Employee Director Plan. Directors eligible to receive awards under the
Non-Employee Director Plan are those who are not employees of the Company
(other than Ross Perot, Jr.). Each eligible existing director will receive
comparable grants at completion of the original vesting schedule for such
director's current options or restricted shares. Grants are made, subject to
the discretion of the Chairman of the Board of Directors, upon election to the
Board of Directors for new directors and, for existing directors, at completion
of the original vesting schedule for the director's existing options or
restricted shares. The Non-Employee Director Plan provides for a grant to each
eligible director of (i) an option to purchase 30,000 Class A Shares or (ii)
the right to purchase 30,000 restricted Class A Shares. The exercise price of
options or the purchase price of restricted Class A Shares awarded under the
Non-Employee Director Plan must be at least equal to 100% of the fair value of
a Class A Share on the date of the award.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board consists of three non-employee
directors, Messrs. Fields, Segall and Ross Perot, Jr.
On September 30, 1996, the Company redeemed the 4,000,000 shares of the
Company's Series A Preferred Stock, all of which was held by Ross Perot, the
managing general partner of HWGA, for a redemption price equal to the par value
of $2.125 per share plus all accrued and unpaid dividends, or an aggregate of
$8,797,500. In addition, effective September 30, 1996, HWGA converted its
16,000,000 shares of the Company's Liquidation Preference Common Stock to
16,000,000 Class A Shares. Ross Perot, Jr. is a general partner of HWGA.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has entered into an agreement with PII pursuant to which the
Company licensed certain software from PII. The Company sublicensed such
software to The Witan Company L.P. ("Witan"). Witan has paid a license fee of
$1,000,000 directly to PII in connection with the license. The Company has a
separate contract with Witan to perform development work on the licensed
software. PII is an affiliate of Ross Perot, the managing general partner of
HWGA. Mr. Blasnik is the President of PII.
25
<PAGE> 27
The Company has loaned funds to each of James A. Cannavino, Susan Fairty,
Ron Nash and Guillermo G. Marmol in connection with the purchase by such
persons of Class A Common Stock from the Company. Each of such loans accrues
interest at the rate of eight percent per annum and is secured by the purchased
stock. As of March 31, 1997, the total amount outstanding for each such loan
(including accrued interest) was $1,546,224, $267,337 and $133,795 for Messrs.
Cannavino, Nash and Marmol, respectively, and $570,380 for Ms. Fairty. Such
amounts were the highest amounts outstanding with respect to such loans since
their inception.
In addition to amounts loaned to Mr. Cannavino in connection with his
purchase of stock, the Company has agreed to loan Mr. Cannavino up to an
additional $2,415,000 secured by his Class A Shares. An initial advance of
$614,587 was made on March 11, 1996 and bears interest at the federal
applicable rate. The initial advance, in general, is non-recourse to Mr.
Cannavino, except with respect to the pledged stock. All advances (other than
the initial advance) are full recourse to Mr. Cannavino. On March 18, 1997, the
Company advanced Mr. Cannavino an additional $125,000 under this arrangement,
which advance bears interest at 7.25% per year. As of March 31, 1996, the total
amount outstanding (including accrued interest) relating to this these loans
was $819,042. During April 1997, the Company advanced Mr. Cannavino an
additional $1,146,685 pursuant to this agreement. Interest will accrue at the
rate of 7.25% per year with respect to these amounts. Any future advances will
bear interest at the greater of 7.25% and the federal applicable rate at the
time of the loan.
The Company has also loaned Mr. Cannavino $1,000,000 in connection with
his purchase of a permanent residence in Dallas. This note is secured by a
mortgage on such residence and bears interest at 7.25% per year.
Messrs. Marmol and Nash, Donald D. Drobny and Peter A. Altabef have
outstanding loans with NationsBank of Texas, N.A. ("NationsBank") in the
respective principal amounts of $350,000, $125,000, $207,868 and $126,400.
Interest accrues on all such loans at the rate of 9.50%. The Company has agreed
that it will, at the request of NationsBank, purchase such loans from
NationsBank for an amount equal to principal plus accrued and unpaid interest
if, by the later of June 30, 1998 or the maturity of the relevant note, the
Company has not had an initial public offering that results in the Class A
Shares being publicly traded. The maturity dates are February 26, 2000, July 1,
1998, July 1, 1998 and July 5, 1998 for amounts borrowed by Messrs. Drobny,
Marmol, Nash and Altabef, respectively. Each loan is secured by a pledge of
Class A Shares.
ITEM 8 LEGAL PROCEEDINGS.
The Company is, from time to time, involved in various litigation matters
arising in the ordinary course of its business. The Company believes that the
resolution of currently pending legal proceedings, either individually or taken
as a whole, will not have
26
<PAGE> 28
a material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
There is no established trading market for the Class A Common Stock or any
other class of the Company's securities. As of April 2, 1997, there were 1,133
holders of the Class A Common Stock and no holders of Class B Common Stock. As
of April 2, 1997, the Company had outstanding options to purchase 16,293,868
Class A Shares and 10,500,000 Class B Shares. Pursuant to the amendment of the
Swiss Bank Agreements on April 24, 1997, the number of outstanding options to
purchase Class B Shares has been reduced to 3,617,160. The Company has not paid
dividends on its Class A Common Stock since the formation of the Company and
does not currently have any intention of doing so.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has issued 4,927,782 Class A Shares and options to purchase an
additional 17,457,434 Class A Shares to employees from January 1, 1994 to March
31, 1997. Class A Shares were sold at the fair value of such shares at the time
of sale and the exercise price of each option was the fair value at the time of
the grant of the option. The fair value ranged from $1.00 per share to $6.75
per share. The Company issued an additional 4,012,800 shares pursuant to the
exercise of stock options held by its employees, former employees and directors.
The exercise price paid in connection with these transactions ranged from $.50
per share to $2.50 per share. The Company relied on Rule 701 promulgated under
the Securities Act of 1933, as amended (the "Securities Act"), or Section 4(2)
of the Securities Act with respect to all sales and offers of its securities to
its employees and directors.
During the past 3 years, the Company has also issued 1,650,372 Class A
Shares in connection with the acquisition of a number of businesses by the
Company. The Company relied on Section 4(2) of the Securities Act with respect
to such issuances. Shares were issued at their fair value at the time of the
transaction. Fair value ranged from $3.25 per share to $4.90 per share.
The Company issued SBC Options pursuant to the PSC Stock Agreement to
Swiss Bank in connection with the strategic alliance formed in January 1996. On
April 24, 1997, the Company and Swiss Bank completed the renegotiation of the
terms of the Swiss Bank alliance. Pursuant to the renegotiated terms, all
options to acquire the Company's stock issued in connection with the original
transactions were terminated and Swiss Bank purchased from the Company 50,000
Class B Shares and options to purchase an additional 3,617,160 Class B Shares.
See Item 1, "Description of Business - Swiss Bank Corporation -PSC Stock
Agreement" for the terms of such options. The Company relied on Section 4(2) of
the Securities Act in connection with all sales and offers of its securities to
Swiss Bank.
27
<PAGE> 29
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
CLASS A COMMON STOCK
The Certificate of Incorporation of the Company (the "Certificate of
Incorporation") authorizes 100,000,000 Class A Shares. As of April 2, 1997, the
Company had issued and outstanding 39,245,748 Class A Shares held by 1,133
holders of record.
Holders of Class A Common Stock are entitled to receive such dividends, if
any, as may be declared by the Board out of legally available funds. In the
event of the liquidation, dissolution or winding up of the Company, holders of
Class A Common Stock are entitled to share equally and ratably with the holders
of Class B Common Stock, based on the number of shares held, in the assets, if
any, remaining after payment of all of the Company's debts and liabilities.
Holders of Class A Common Stock are entitled to one vote per share for
each share held of record on any matter submitted to the stockholders for a
vote. Any amendment to the Certificate of Incorporation, merger or
consolidation of the Company, sale, lease or exchange of all or substantially
all of the Company's property and assets or voluntary dissolution of the
Company that requires approval by the Company shareholders under Delaware law
must be approved by the affirmative vote of the holders of at least 66-2/3% of
the outstanding Common Stock of the Company entitled to vote thereon, and the
holders of at least 66-2/3% of the outstanding Common Stock of each class
entitled to vote thereon as a class. Class A Shares are neither redeemable nor
convertible, and the holders thereof have no preemptive rights to subscribe for
or purchase any additional shares of capital stock issued by the Company.
The summary description of the relative rights and limitations of the
Class A Common Stock is qualified in its entirety by reference to the
Certificate of Incorporation and Bylaws of the Company (the "Bylaws").
CLASS B COMMON STOCK
In addition to Class A Common Stock, the Certificate of Incorporation
authorizes 24,000,000 Class B Shares. As of April 2, 1997, the Company had no
Class B Shares issued and outstanding and 10,500,000 Class B Shares were
subject to outstanding options. Pursuant to the amendment of the Swiss Bank
Agreements on April 24, 1997, Swiss Bank purchased 50,000 Class B Shares and
the number of outstanding options to purchase Class B Shares was reduced to
3,617,160. Swiss Bank Corporation is the beneficial owner of all outstanding
options to acquire Class B Common Stock. For additional information on the
potential issuance of Class B Shares pursuant to the exercise of outstanding
options, see Item 1, "Description of Business - Swiss Bank Corporation -PSC
Stock Agreement".
28
<PAGE> 30
Holders of Class B Common Stock will be entitled to receive such
dividends, if any, as may be declared by the Board out of legally available
funds equally and ratably with the Class A Common Stock. In the event of the
liquidation, dissolution or winding up of the Company, holders of Class B Common
Stock are entitled to share equally and ratably with the holders of Class A
Common Stock, based on the number of shares held, in the assets, if any,
remaining after payment of all of the Company's debts and liabilities.
Class B Shares have no voting rights, except to the extent that the
Delaware General Corporation Law requires a vote of the Class B Common Stock
with respect to an amendment to the Certificate of Incorporation that would
increase or decrease the par value of the Class B Common Stock or alter or
change the powers, preferences or special rights of Class B Shares. The number
of authorized Class B Shares may be increased or decreased by the affirmative
vote of the holders of a majority of voting stock of the Company, voting as a
single class, without any vote by holders of the Class B Common Stock. Class B
Shares are not redeemable, and the holders thereof have no preemptive rights to
subscribe for or purchase any additional shares of capital stock issued by the
Company. Under the terms of the Certificate of Incorporation, Swiss Bank does,
however, have the right to purchase shares of capital stock of the Company in
certain circumstances under the terms of the PSC Stock Agreement.
Each Class B Share is convertible, on a share for share basis, at the
option of the holder thereof, into one fully paid and nonassessable Class A
Share if such Class B Share is sold or otherwise transferred to a person not
affiliated with Swiss Bank and the sale or transfer is made in accordance with
certain conditions described in the Certificate of Incorporation.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
A director of the Company may not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived any improper personal
benefit. The provisions of the Certificate of Incorporation eliminating the
liability of directors for monetary damages do not affect the standard of
conduct to which directors must adhere, nor do such provisions affect the
availability of equitable relief. In addition, such limitations on personal
liability do not affect the availability of monetary damages under causes of
action based on federal law.
The Certificate of Incorporation provides for indemnification of its
officers and directors to the fullest extent permitted by the Delaware General
Corporation Law. In addition, the Company provides director and officer
insurance coverage for the benefit of its directors and officers.
29
<PAGE> 31
In addition to provisions made by the Company, Mr. Blasnik is indemnified
for actions taken in his capacity as a director of the Company as part of his
employment arrangement with PII.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is identified in the section "Index
to Consolidated Financial Statements" on page F-1 hereof and is contained in
the section "Perot Systems Corporation - Consolidated Financial Statements"
attached hereto and such sections are incorporated herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
The information required by this item is contained in the "Index to
Consolidated Financial Statements" on page F-1 hereof and such information is
incorporated herein by reference.
(b) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
10.1 1991 Stock Option Plan
10.2 Form Option Agreement (1991 Option Plan)
10.3 Restricted Stock Plan
10.4 Form Restricted Stock Agreement (Restricted Stock Plan)
10.5 1996 Non-employee Director Stock Option/Restricted Stock Incentive Plan
10.6 Form Restricted Stock Agreement (Non-Employee Director Stock Option/
Restricted Stock Plan
10.7 Form option Agreement (Non-Employee Stock Option/Restricted Stock Plan)
10.8 Advisor Stock Option/Restricted Stock Incentive Plan
10.9 Form Restricted Stock Agreement (Advisor Stock Option/Restricted Stock
Plan)
10.10 Form Option Agreement (Advisor Stock Option/Restricted Stock Plan)
10.11 Stock Purchase Agreement dated as of August 20, 1992, between the
Company and Meyerson Family Limited Partnership
10.12 Stock Option Grant dated as of June 27, 1995, by the Company in favor
of James A. Cannavino
10.13 Employment Agreement dated as of September 16, 1995, by and between the
Company and James A. Cannavino
10.14 Promissory Note dated December 18, 1995, made by James A. Cannavino in
favor of the Company in the principal amount of $1,400,000
10.15 Promissory Note dated January 1, 1996, made by James A. Cannavino in
favor of the Company in the principal amount of $1,500,000
10.16 Pledge Agreement made as of December 18, 1995, by James A. Cannavino in
favor of the Company
10.17 Modification Agreement dated as of March 7, 1997, between the Company
and James A. Cannavino.
30
<PAGE> 32
10.18 Deed of Trust dated April 15, 1997, made by James A. Cannavino in
favor of the Company
10.19 Promissory Note dated April 14, 1997, made by James A. Cannavino in
favor of the Company
10.20 Associate Agreement dated July 8, 1996, between the Company and James
Champy
10.21 Restricted Stock Agreement dated July 8, 1996, between Company and James
Champy
10.22 Letter Agreement dated July 8, 1996, between James Champy and the
Company
10.23 Promissory Note dated June 17, 1996, made by Guillermo G. Marmol in
favor of the Company
10.24 Pledge dated June 17, 1996, made by Guillermo G. Marmol in favor of the
Company
10.25 Agreement dated June 17, 1996, among the Company, Guillermo G. Marmol
and NationsBank of Texas, N.A.
10.26 Promissory Note dated June 17, 1996, made by Guillermo G. Marmol in
favor of NationsBank of Texas, N.A.
10.27 Agreement dated August 26, 1996, among the Company, Donald D. Drobny
and NationsBank of Texas, N.A.
10.28 Promissory Note dated August 26, 1996, made by Donald D. Drobny in favor
of NationsBank of Texas, N.A.
10.29 Promissory Note dated July 31, 1996, made by the Company in favor of
NationsBank N.A.
10.30 Amended and Restated PSC Stock Option and Purchase Agreement dated as
of April 24, 1997, by and between Swiss Bank Corporation and the
Company
10.31 Amended and Restated Master Operating Agreement dated as of January 1,
1997, between Swiss Bank Corporation and the Company
10.32 Amended and Restated Agreement for EPI Operational Management Services
dated as of January 1, 1997
11 Statement re Computation of Earnings Per Share
21 Subsidiaries of the Registrant
27 Financial Data Schedule
All Exhibits were previously filed with the Company's Registration Statement on
Form 10 filed on April 30, 1997.
31
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
PEROT SYSTEMS CORPORATION
(Registrant)
Date April 30, 1997 By /s/ JAMES A. CANNAVINO
-------------------------------------
James A. Cannavino
President and Chief Executive Officer
<PAGE> 34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-7
</TABLE>
<PAGE> 35
Report of Independent Accountants
To the Board of Directors of
Perot Systems Corporation:
We have audited the accompanying consolidated balance sheets of Perot
Systems Corporation and Subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 generally accepted auditing
standards. 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 examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as 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 Perot Systems
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
McLean, Virginia
April 1, 1997
F-2
<PAGE> 36
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,516 $ 17,357
Accounts receivable, net 113,804 61,208
Prepaid expenses and other 9,450 5,660
Deferred income taxes 25,935 13,710
---------- ----------
Total current assets 176,705 97,935
Property and equipment, net 29,335 19,363
Purchased software, net 6,413 6,241
Investments in and advances to unconsolidated affiliates 6,582 114
Deferred income taxes 4,531 2,433
Other assets 8,681 4,387
---------- ----------
Total assets $ 232,247 $ 130,473
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on capital lease obligations and long-term debt $ 2,377 $ 2,375
Accounts payable 14,081 12,175
Income taxes payable 13,039 7,481
Accrued liabilities 82,973 38,938
Deferred revenue 22,003 5,930
Accrued compensation 20,240 10,097
---------- ----------
Total current liabilities 154,713 76,996
Capital lease obligations and long-term debt, less current maturities 2,796 3,682
Other long-term liabilities 3,976 6,918
---------- ----------
Total liabilities 161,485 87,596
---------- ----------
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock; par value $2.125; stated at
redemption and liquidation value; authorized and
outstanding 4,000,000 shares in 1995 -- 8,946
Convertible Liquidation Preference Common Stock;
par value $.01 (liquidation preference $20,000); authorized
and outstanding 16,000,000 shares in 1995 -- 160
Class A Common Stock; par value $.01; authorized 100,000,000 shares;
outstanding 39,630,487 and 18,030,562 shares, 1996 and 1995 respectively 396 180
Class B Common Stock; par value $.01; authorized 24,000,000
shares; no shares outstanding -- --
Additional paid-in-capital 51,461 31,099
Retained earnings 27,830 7,778
Cumulative translation adjustment 1,009 (172)
Notes receivable from stockholders (4,286) (3,658)
Contract rights (4,342) --
Deferred compensation (1,306) (1,456)
---------- ----------
Total stockholders' equity 70,762 42,877
---------- ----------
Total liabilities and stockholders' equity $ 232,247 $ 130,473
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 37
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Contract revenue $ 599,438 $ 342,306 $ 292,155
Costs and expenses:
Direct cost of services 465,140 268,553 246,084
Selling, general and administrative expenses 92,947 52,891 41,853
Contract termination gain -- -- (6,697)
---------- ---------- ----------
Operating income 41,351 20,862 10,915
Interest income 1,540 1,988 1,140
Interest expense (770) (650) (1,141)
Equity in losses of unconsolidated affiliates, net (312) -- --
Other expense (1,658) (1,950) (775)
---------- ---------- ----------
Income before taxes 40,151 20,250 10,139
Provision for income taxes 19,652 9,437 3,810
---------- ---------- ----------
Net income $ 20,499 $ 10,813 $ 6,329
========== ========== ==========
Net income attributed to common shareholders $ 20,052 $ 10,218 $ 5,734
Primary and fully diluted earnings per common share:
Earnings per common share $ 0.40 $ 0.30 $ 0.18
Weighted average common shares
outstanding 51,770 34,526 32,393
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 38
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (PAGE 1 OF 2)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible
Liquidation Preference Retained
Preferred Stock Common Stock Class A Common Stock Additional earnings
Shares Amount Shares Amount Shares Amount paid-in-capital (deficit)
------ ------ ------ ------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 4,000,000 $ 9,293 16,000,000 $ 160 15,021,234 $ 150 $ 26,181 $( 8,174)
Issuance of shares
under incentive plans -- -- -- -- 54,800 -- 142 --
Issuance of shares to
401(k)and U.K. Trust -- -- -- -- -- -- 18 --
Exercise of stock options -- -- -- -- 9,360 -- 7 --
Shares repurchased -- -- -- -- -- -- (13) --
Dividends accrued -- 595 -- -- -- -- -- (595)
Note repayments -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- 6,329
Translation adjustment -- -- -- -- -- -- -- --
--------- -------- ---------- ----- ---------- ----------- ----------- --------
Balance, December 31, 1994 4,000,000 $ 9,888 16,000,000 $ 160 15,085,394 $ 150 $ 26,335 $( 2,440)
Issuance of shares
under incentive plans -- -- -- -- 826,976 10 1,284 --
Issuance of shares to
401(k)and U.K. Trust -- -- -- -- 111,412 -- -- --
Exercise of stock options -- -- -- -- 2,006,780 20 1,980 --
Shares repurchased -- -- -- -- -- -- -- --
Deferred compensation
from options -- -- -- -- -- -- 1,500 --
Amortization of deferred
compensation -- -- -- -- -- -- -- --
Dividends paid -- (1,537) -- -- -- -- -- --
Dividends accrued -- 595 -- -- -- -- -- (595)
Note repayments -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- 10,813
Translation adjustment -- -- -- -- -- -- -- --
--------- -------- ---------- ----- ---------- ----------- ----------- --------
Balance, December 31, 1995 4,000,000 $ 8,946 16,000,000 $ 160 18,030,562 $ 180 $ 31,099 $ 7,778
Issuance of shares
for businesses acquired -- -- -- -- 1,460,372 $ 15 $ 6,530 --
Issuance of shares
under incentive plans -- -- -- -- 2,420,667 24 5,844 --
Issuance of shares
to 401(k)and U.K. Trust -- -- -- -- 168,468 3 676 --
Exercise of stock options -- -- -- -- 1,550,418 14 1,167 --
Shares repurchased -- -- -- -- -- -- -- --
Redemption of preferred
stock (4,000,000) (8,500) -- -- -- -- -- --
Shares converted to
Class A common -- -- (16,000,000) (160) 16,000,000 160 -- --
Amortization of deferred
compensation -- -- -- -- -- -- -- --
Options issued for
contract rights -- -- -- -- -- -- 4,544 --
Amortization of contract
rights -- -- -- -- -- -- -- --
Dividends paid -- (893) -- -- -- -- -- --
Dividends accrued -- 447 -- -- -- -- -- (447)
Note repayments -- -- -- -- -- -- -- --
Equity investment -- -- -- -- -- -- 706 --
Tax benefit of employee
options exercised -- -- -- -- -- -- 895 --
Net income -- -- -- -- -- -- -- 20,499
Translation adjustment -- -- -- -- -- -- -- --
--------- -------- ---------- ----- ---------- ----------- ----------- --------
Balance, December 31, 1996 -- -- -- -- 39,630,487 $ 396 $ 51,461 $ 27,830
========= ======== ========== ===== ========== =========== =========== ========
</TABLE>
<PAGE> 39
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (PAGE 2 OF 2)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Total
Cumulative Notes receiv- stock-
translation Treasury stock able from Contract Deferred holders'
adjustment Shares Amount stockholders rights compensation equity
---------- ---------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $( 226) -- -- $( 1,455) -- -- $ 25,929
Issuance of shares
under incentive plans -- 339,000 242 (315) -- -- 69
Issuance of shares
to 401(k)and U.K. Trust -- 70,134 70 -- -- -- 88
Exercise of stock options -- 23,400 23 -- -- -- 30
Shares repurchased -- (889,998) (652) 671 -- -- 6
Dividends accrued -- -- -- -- -- -- --
Note repayments -- -- -- 212 -- -- 212
Net income -- -- -- -- -- -- 6,329
Translation adjustment 5 -- -- -- -- -- 5
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1994 $( 221) (457,464) $( 317) $( 887) -- -- $ 32,668
Issuance of shares
under incentive plans -- 600,904 397 (901) -- -- 790
Issuance of shares
to 401(k)and U.K. Trust -- -- -- -- -- -- --
Exercise of stock options -- 9,560 14 (2,000) -- -- 14
Shares repurchased -- (153,000) (94) -- -- -- (94)
Deferred compensation
from options -- -- -- -- -- (1,500) --
Amortization of deferred
compensation -- -- -- -- -- 44 44
Dividends paid -- -- -- -- -- -- (1,537)
Dividends accrued -- -- -- -- -- -- --
Note repayments -- -- -- 130 -- -- 130
Net income -- -- -- -- -- -- 10,813
Translation adjustment 49 -- -- -- -- -- 49
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 $( 172) -- -- $( 3,658) -- $( 1,456) $ 42,877
Issuance of shares
for businesses acquired -- -- -- -- -- -- 6,545
Issuance of shares
under incentive plans -- -- -- (3,065) -- -- 2,803
Issuance of shares
to 401(k)and U.K. Trust -- -- -- -- -- -- 679
Exercise of stock options -- 204,330 313 -- -- -- 1,494
Shares repurchased -- (204,330) (313) 225 -- -- (88)
Redemption of preferred
stock -- -- -- -- -- -- (8,500)
Shares converted to
Class A common -- -- -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 150 150
Options issued for
contract rights -- -- -- -- (4,544) -- --
Amortization of contract
rights -- -- -- -- 202 -- 202
Dividends paid -- -- -- -- -- -- (893)
Dividends accrued -- -- -- -- -- -- --
Note repayments -- -- -- 2,212 -- -- 2,212
Equity investment -- -- -- -- -- -- 706
Tax benefit of employee
options exercised -- -- -- -- -- -- 895
Net income -- -- -- -- -- -- 20,499
Translation adjustment 1,181 -- -- -- -- -- 1,181
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 $ 1,009 -- -- $( 4,286) $( 4,342) $( 1,306) $ 70,762
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 40
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 20,499 $ 10,813 $ 6,329
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,715 14,083 20,539
Contract termination benefit -- -- 6,697
Write-off of software license transfer rights 4,156 -- --
Write-off of purchased research and development 3,948 -- --
Equity in losses of unconsolidated affiliates, net 312 -- --
Change in deferred income taxes (17,776) (8,372) 7,827
Loss/(gain) on sale of property, equipment and software 360 (47) 37
Provision for bad debt expense 5,953 920 264
Other 500 -- (162)
Changes in assets and liabilities (net of effects
from acquisition of businesses):
Accounts receivable (49,137) (34,183) (2,978)
Prepaid expenses and other (4,037) 6,760 (5,074)
Other assets 895 196 533
Accounts payable 290 4,276 (304)
Accrued liabilities 39,111 13,514 (17,317)
Income taxes payable 7,998 6,873 (4,345)
Deferred revenue 15,388 (4,685) (8,676)
Accrued compensation 9,852 7,155 (1,611)
Other long-term liabilities (3,095) 6,746 (486)
-------- -------- --------
Total adjustments 33,433 13,236 (5,056)
-------- -------- --------
Net cash provided by operating activities 53,932 24,049 1,273
-------- -------- --------
Cash flows from investing activities:
Purchase of property, equipment and software (27,534) (18,342) (10,312)
Proceeds from sale of property, equipment and software 713 5,975 175
Investments in and advances to unconsolidated affiliates (5,536) -- --
Acquisition of businesses, net of cash acquired of $149 (9,520) -- --
-------- -------- --------
Net cash used in investing activities (41,877) (12,367) (10,137)
-------- -------- --------
Cash flows from financing activities:
Principal payments on debt and
capital lease obligations (2,162) (2,896) (9,780)
Proceeds from issuance of common stock 4,686 528 155
Repayment of stockholder notes receivable 2,212 130 212
Proceeds from issuance of treasury stock 197 273 39
Purchase of treasury stock (88) (94) --
Redemption of preferred stock (8,500) -- --
Dividends paid on preferred stock (893) (1,537) --
-------- -------- --------
Net cash used in financing activities (4,548) (3,596) (9,374)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 2,652 28 629
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 10,159 8,114 (17,609)
Cash and cash equivalents at beginning of year 17,357 9,243 26,852
-------- -------- --------
Cash and cash equivalents at end of year $ 27,516 $ 17,357 $ 9,243
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 41
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Nature of Operations and Summary of Significant Accounting Policies
Perot Systems Corporation (the "Company") was originally
incorporated in the state of Texas in 1988 to provide systems
outsourcing, systems integration, software development, consulting, and
other information technology services. On December 19, 1995, the Company
reincorporated in the state of Delaware. The significant accounting
policies of the Company are described below. Dollar amounts presented
are in thousands, except as otherwise noted.
Principles of consolidation
The consolidated financial statements include the accounts of
the Company and all domestic and foreign subsidiaries that are
more than 50% owned and controlled. All significant intercompany
balances and transactions have been eliminated.
The Company's investments in 20% to 50% owned companies in
which it has the ability to exercise significant influence over
operating and financial policies are accounted for by the equity
method. Accordingly, the Company's share of the earnings (losses)
of these companies is included in consolidated net income.
Investments in unconsolidated companies and limited partnerships
that are less than 20% owned, where the Company has virtually no
influence over operating and financial policies, are carried at
cost.
The Company periodically evaluates whether impairment losses
must be recorded on each investment by comparing the projection of
the undiscounted future operating cash flows to the carrying
amount of the investment. If this evaluation indicates that
future undiscounted operating cash flows are less than the
carrying amount of the investments, the underlying assets are
written down by charges to expense so the carrying amount equals
the future discounted cash flows.
F-7
<PAGE> 42
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expense during the reporting
period. These estimates involve judgments with respect to, among
other things, various future economic factors which are difficult
to predict and are beyond the control of the Company. Therefore,
actual amounts could differ from these estimates.
Cash equivalents
All highly liquid investments with original maturities of
three months or less are considered to be cash equivalents.
Revenue recognition
Revenue from contracts is generally recognized based on the
performance of tasks as defined in the contracts. Revenue and
fees on certain cost reimbursable contracts are recognized as
costs are incurred. Revenue from certain long-term contracts has
been recognized by the percentage-of-completion method of
accounting. Provisions for estimated losses on contracts are
recorded when identified. Billings for services or products
acquired for clients when the Company acts as an agent on behalf
of the client are excluded from revenue.
Deferred revenue is comprised of payments from customers for
which services have not yet been performed, or prepayments against
development work in process. These unearned revenues are deferred
and recognized as future contract costs are incurred and contract
services are rendered.
F-8
<PAGE> 43
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Property and equipment
Property and equipment are stated at cost. Property and
equipment under capital leases are recorded at the lower of their
fair market value or the present value of future minimum lease
payments determined at the inception of the lease.
Depreciation and amortization are calculated on a
straight-line basis, using estimated useful lives of two to seven
years. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life of the improvement.
Property and equipment recorded under capital leases are amortized
on a straight-line basis over the lease term.
Upon sale or retirement of property and equipment, the costs
and related accumulated depreciation are eliminated from the
accounts, and any gain or loss on such disposition is reflected in
the statement of operations. Expenditures for repairs and
maintenance are charged to operations as incurred.
Software, goodwill and other intangibles
Software purchased by the Company and utilized in providing
contract services is capitalized at cost and amortized on a
straight-line basis over the lesser of three to five years or the
term of the related contract.
The cost of acquired entities is allocated first to
identifiable assets based on estimated fair values. The excess of
the purchase price over the fair value of identifiable assets
acquired, net of liabilities assumed, is recorded as goodwill and
amortized on a straight-line basis over the estimated productive
life of the assets acquired. Due to the fact that acquired skills
and technological advantages are subject to rapid obsolescence,
and thus continuous reinvestment, the Company's general policy is
to amortize goodwill over a three to five year period.
F-9
<PAGE> 44
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The Company periodically evaluates the carrying amount of
software, goodwill, other intangibles and other long-lived assets,
as well as the related amortization periods, to determine whether
adjustments to these amounts or useful lives are required based on
current events and circumstances. The evaluation is based on the
Company's projection of the undiscounted future operating cash
flows of the acquired operation over the remaining useful lives of
the related intangible assets. To the extent such projections
indicate that future undiscounted cash flows are not sufficient to
recover the carrying amounts of related intangibles, the
underlying assets are reduced by charges to expense so that the
carrying amount is equal to future discounted cash flows.
Income taxes
The Company uses the liability method to compute the income
tax provision. Under this method, deferred income taxes are
determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Income tax expense consists of the Company's current provision
for federal and state income taxes and the change in the Company's
deferred income tax assets and liabilities.
The Company does not provide for foreign withholding and
income taxes on the undistributed earnings amounting to $30,304
through 1996, cumulatively, for its foreign subsidiaries, as such
earnings are intended to be permanently invested in those
operations. The ultimate tax liability related to repatriation of
such earnings is dependent upon future tax planning opportunities
and is not estimable at the present time.
Foreign operations
The consolidated balance sheets include foreign assets and
liabilities of $101,481 and $77,914, respectively as of December
31, 1996, and $37,760 and $34,459, respectively, as of December
31, 1995.
F-10
<PAGE> 45
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Assets and liabilities of subsidiaries located outside the
United States are translated into U.S. dollars at current exchange
rates as of the balance sheet date, and revenue and expenses are
translated at average exchange rates during each reporting period.
Translation gains and losses are recorded as a separate component
of stockholders' equity.
The Company periodically enters into foreign exchange forward
contracts to hedge certain foreign currency transactions for
periods consistent with the terms of the underlying transactions.
The forward exchange contracts generally have maturities that do
not exceed one year.
The net foreign currency transaction losses reflected in
other expense were $1,715, $892 and $433 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Earnings per common share
Earnings per common share has been computed by dividing net
income, less preferred stock dividend requirements, by the
weighted average number of shares of common stock and common stock
equivalents outstanding, when dilutive. Common stock equivalents
include the weighted average number of shares issuable upon the
assumed exercise of outstanding stock options, assuming the
applicable proceeds from such exercise, increased by the estimated
tax benefit of assumed option exercises, are used to acquire
outstanding shares. In accordance with the modified treasury
stock method, shares assumed acquired were limited in each period
to 20% of the shares outstanding at the end of the period. Excess
proceeds not utilized to repurchase shares are assumed invested at
a yield of 5.1%, the 1996 average short term investment rate, and
net income is increased by the interest assumed earned, net of
tax, under this provision for the purpose of calculating earnings
per share. Fully diluted earnings per share are the same as
primary earnings per share for all periods presented.
F-11
<PAGE> 46
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Concentrations of credit risk
Financial instruments which potentially subject the Company
to concentrations of credit risk consist of cash and cash
equivalents and accounts receivable. The Company's cash
equivalents consist primarily of short-term money market deposits.
The Company has deposited its cash and cash equivalents with
reputable financial institutions, from which the Company believes
the risk of loss to be remote. The Company has accounts
receivable from its customers who are engaged in the banking,
insurance, healthcare, manufacturing, communications, travel and
energy industries, and are not concentrated in any specific
geographic region. These specific industries may be affected by
economic factors, and, therefore, accounts receivable may be
impacted. Generally, the Company does not require collateral from
its customers, since the receivables are supported by long-term
contracts. Management does not believe that any single customer,
industry or geographic area represents significant credit risk.
At December 31, 1996, one customer accounted for 27% of the
Company's accounts receivables. At December 31, 1995, no customers
exceeded 10% of the Company's accounts receivables.
Financial instruments
The fair value of the Company's financial instruments is
estimated using bank or market quotes or discounted cash flows at
year-end foreign exchange and interest rates. The fair value of
the financial instruments is disclosed in the relevant notes to the
financial statements. The carrying amount of short-term financial
instruments (cash and cash equivalents, accounts receivable, and
certain other liabilities) approximates fair value due to the short
maturity of those instruments.
Treasury stock
Treasury stock transactions are accounted for under the cost
method.
Reclassifications
Certain of the 1995 and 1994 amounts in the accompanying
financial statements have been reclassified to conform to the
current presentation.
F-12
<PAGE> 47
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Accounting for Stock Based Compensation
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock Based Compensation", effective for fiscal years beginning
after December 15, 1995. SFAS 123 allows companies which grant
employee stock options a choice to either continue current
accounting treatment under Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees", or adopt
a new set of fair value accounting rules for recognizing
compensation expense related to employee stock and stock option
awards. The Company elected to continue reporting pursuant to the
provisions of APB 25.
Accounting standard issued
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings Per Share", effective for fiscal years ending after
December 15, 1997. SFAS 128 replaces the presentation of primary
earnings per common share with basic earnings per share, with the
principal difference being that common stock equivalents are not
considered in computing basic earnings per share. SFAS 128 also
eliminates the modified treasury stock method, and requires
reconciliation of the numerator and denominator used in computing
basic and diluted earnings per share. The Company has not yet
determined the effect of SFAS 128 on the Company's earnings per
share.
F-13
<PAGE> 48
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
2. Accounts Receivable
Accounts receivable consist of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Amounts billed $ 88,577 $43,383
Amounts to be invoiced 13,548 11,665
Recoverable costs and profits 7,744 3,183
Rebillable costs 8,436 2,929
Other 2,286 1,400
Allowance for doubtful accounts (6,787) (1,352)
-------- -------
$113,804 $61,208
======== =======
</TABLE>
With regard to amounts billed, allowances for doubtful accounts are
provided based on specific identification where less than full recovery
of accounts receivable is expected. Amounts to be invoiced represent
revenue contractually earned for services performed, which are invoiced
to the customer in the following month. Recoverable costs and profits
represent amounts previously recognized as revenue, that have not yet
been billed, in accordance with the contract terms. In certain cases,
the period of recovery may extend beyond one year. However,
classification of these amounts within current assets has been made in
accordance with common industry practice. It is anticipated that $6,892
of the recoverable costs and profits as of December 31, 1996 will be
billed in 1997 and $852 will be billed in 1998. Rebillable costs are
amounts paid by the Company for goods and services on behalf of its
customers.
F-14
<PAGE> 49
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. Property and Equipment and Purchased Software
Property and equipment and purchased software consist of the
following as of December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Owned assets:
Computer equipment $ 48,500 $ 26,054
Furniture and equipment 15,760 12,670
Leasehold improvements 5,897 5,590
70,157 44,314
Less accumulated depreciation
and amortization (41,276) (26,950)
-------- --------
28,881 17,364
-------- --------
Assets under capital leases:
Computer equipment 3,930 5,114
Furniture and equipment 1,581 2,871
-------- --------
5,511 7,985
Less accumulated amortization (5,057) (5,986)
454 1,999
-------- --------
Property and equipment, net $ 29,335 $ 19,363
======== ========
Purchased software $ 21,322 $21,135
Less accumulated amortization (14,909) (14,894)
-------- --------
Purchased software, net $ 6,413 $ 6,241
======== ========
</TABLE>
The significant increase in computer equipment in 1996 is attributed
to the investment in new integrated corporate information systems and
general business growth throughout the year. The decrease in software in
1996 is attributable to the write-off of assets placed into service from
the Company's March 1993 software license transfer rights agreement.
F-15
<PAGE> 50
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
4. Acquisitions
During 1996, the Company acquired all of the equity interests in
four companies: RothWell International, Inc. ("RothWell"), based in
Houston, Texas, an object-oriented programming company; Doblin Group,
Inc. ("Doblin"), a Chicago-based consulting company, engaging in
strategic design planning and consulting for breakthrough products and
services; CommSys Corporation ("CommSys"), located in Reston, Virginia, a
developer of billing systems for telecommunication companies; and The
Technical Resource Connection, Inc. ("TRC"), based in Tampa, Florida,
specializing in object-oriented programming and software development.
The four acquisitions were recorded under the purchase method of
accounting; and accordingly, the results of operations of RothWell,
Doblin, CommSys, and TRC for the periods from the date of the acquisition
agreements to December 31, 1996 are included in the accompanying 1996
consolidated statement of operations. The dates of the acquisition
agreements for RothWell, Doblin, CommSys, and TRC were August 2,
September 10, September 16 and October 25, respectively. The purchase
prices have been allocated to assets acquired and liabilities assumed
based on the estimated fair values at the dates of acquisition. In
addition, a portion of the CommSys purchase price and the TRC purchase
price was allocated to in-process product development that had not
reached technological feasibility and had no probable alternative future
uses, which the Company recorded as direct cost of services at the date
of acquisition.
Under the terms and conditions of the various acquisition
agreements, the Company paid a total of $9,669 in cash and issued
1,460,372 shares of the Class A Common Stock valued at $6,545 for a total
purchase price of $16,214. The Company allocated the total purchase
price to $4,286 of the tangible net assets acquired, $3,948 of expensed
in-process product development and $7,980 of goodwill.
F-16
<PAGE> 51
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The following table reflects unaudited pro forma combined results of
operations of the Company and RothWell, Doblin, CommSys, and TRC on the
basis that the acquisitions had taken place and the related product
development expense was recorded at the beginning of the calendar year
for each of the periods presented:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Contract revenue $628,585 $368,933
Net income 19,079 4,889
Primary and fully diluted earnings per common share 0.37 0.12
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisitions been consummated at the beginning of 1996
and 1995, respectively or of future operations of the combined companies
under the ownership and management of the Company.
5. Investments in Unconsolidated Affiliates
At December 31, 1996, investments in and advances to unconsolidated
affiliates include two equity investments made in 1996. On January 5,
1996, the Company acquired 40% of the equity interest in Systor AG
("Systor"), a Swiss information services company, from Swiss Bank
Corporation as part of a larger services agreement. On March 26, 1996,
the Company entered into a joint venture with HCL Corporation Limited and
HCL Europe Limited whereby the Company owns 49% of HCL Perot Systems NV
("HCL"), an information services company based in India. The Company is
required to contribute additional capital to HCL up to a limit of $6,900,
on a call basis. The Company's investment in HCL and Systor at December
31, 1996 was $524 and $2,266, respectively. No dividends or
distributions were received from investments in unconsolidated affiliates
in 1996 or 1995.
In May 1996, the Company purchased 1,471,000 shares of a class of
preferred stock for $2,500, which currently represents a 12% equity
interest in a software company. As part of the purchase agreement, the
Company is subject to a call option which, if exercised, would require
the Company to purchase additional shares for a total commitment of up to
$1,000.
F-17
<PAGE> 52
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
In April 1996, the Company entered into an agreement to join a
limited partnership venture capital fund. The Company has committed to
invest up to a total of $10,000, or a 2.75% interest, over a five-year
period in connection with this agreement. As of December 31, 1996,
$1,292 in capital contributions have been made by the Company. Capital
contributions are used to fund the partnership's investment in companies
specializing in information technology, telecommunications, and travel
and leisure.
6. Other Assets
Software license transfer rights
In March 1993, the Company entered into an agreement to obtain
software license transfer rights for the purpose of lowering its future
direct costs of service relating to the acquisition, operation or
transfer of mainframe data-processing contracts. The original cost of
the transfer rights was $7,552. The cost of the rights was divided into
five equal assets, whereby one-fifth of the original cost would be placed
in service each year over a five year period. As of December 31, 1995,
$4,530 of the rights had been placed in service. During 1996, an
additional $1,511 was placed into service with $1,511 of software license
transfer rights remaining.
In July 1996, the Company determined that these rights and assets
placed in service were impaired due to the market shift from mainframe
systems to client/server and network based systems. In addition, the
Company's business mix had gradually shifted from outsourcing to
application development, systems integration, and consulting. As a
result, the $7,552 of transfer rights and assets in service and the
$3,396 of related accumulated amortization were written off resulting in
a loss of $4,156 classified as direct cost of services.
Goodwill
Total goodwill related to the Company's acquisitions of $7,294, net
of accumulated amortization of $686, is recorded as other noncurrent
assets as of December 31, 1996.
F-18
<PAGE> 53
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
7. Line of Credit
Effective July 31, 1996, the Company established a bank line of
credit, which allows borrowings up to $40,000 at either the adjusted
Eurodollar rate plus 1%, or the bank's prime lending rate. There were no
borrowings outstanding under the line at December 31, 1996. This
facility expires July 31, 1998.
8. Accrued Liabilities
Accrued liabilities consist of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Operating expenses $53,533 $19,314
Taxes other than income, insurance,
rents, licenses and maintenance 3,519 2,914
Other contract-related 25,921 16,710
------- -------
$82,973 $38,938
======= =======
</TABLE>
Operating expenses
The largest increase in operating expense related accrued
liabilities was due to Swiss Bank which, as of December 31, 1996 and
1995, accounted for $26,696 and $363, respectively.
Other contract-related
Other contract-related accrued liabilities represent provisions to
match contract-related liabilities in the period in which revenues from
those contracts are recognized. These include claims made by the
customer for services that require additional effort and costs by the
Company to satisfy contractual requirements.
F-19
<PAGE> 54
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
In 1993, a client was acquired by another entity, whose management
chose to exercise the termination clause in the client's contract with
the Company. As a result, the Company received a cash payment of $17,400
in December of 1993. As of December 31, 1993, the Company established an
accrual for estimated future lease, service contract and asset
disposition costs in the amount of $16,224 by deferring recognition of
the cash termination payment. During 1994, $7,433 of the cash
termination payment was utilized to offset expenses related to the
contract. Further, in 1994, the Company was successful in obtaining a
more favorable facility sublease arrangement than originally estimated,
thereby resulting in the recognition of a $6,697 benefit from the
termination fee.
9. Capital Lease Obligations and Long-Term Debt
Capital lease obligations and long-term debt consist of the
following as of December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Computer equipment capital leases containing
various payment terms through
March 2000 with implicit interest rates
ranging from 9.14% to 17.40% $ 666 $ 985
Furniture capital leases containing payment
terms through August 2001 with implicit
interest rates ranging from 9.14% to 13.12% 1,111 1,276
Note payable for software license transfer
rights, financed at 8.35%, payable in monthly
installments through March 1998 2,197 3,796
Note payable for software financed at
10.23%, payable monthly through July 2001 1,199 -
------- -------
5,173 6,057
Less current maturities (2,377) (2,375)
------- -------
$ 2,796 $ 3,682
======= =======
</TABLE>
F-20
<PAGE> 55
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Capital lease payments and long-term debt maturities for years
ending after December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Capital lease Long-term
obligations debt
------------- ---------
<S> <C> <C>
1997 $ 727 $1,955
1998 570 697
1999 472 265
2000 210 293
2001 and thereafter 87 186
------------ ---------
Total minimum lease payment and
long-term debt maturities $2,066 $3,396
=========
Less amounts representing interest (289)
------------
Present value of net minimum
capital lease payments $1,777
============
</TABLE>
10. Stockholders' Equity
Preferred stock
At December 31, 1995, the Company had 4,000,000 shares of $2.125 par
value Series A Preferred Stock outstanding. The shareholders were
entitled to receive cumulative cash dividends at the rate of 1.75%
quarterly, and had equal voting rights with holders of the common stock
on all matters submitted to a vote of the Company's shareholders. The
Company had the option at any time to redeem the outstanding shares at
par value, plus unpaid dividends, and were required to redeem when the
book value of stockholders' equity exceeded $250,000. In 1996 the
Company exercised its right to redeem the 4,000,000 shares of Series A
Preferred Stock for $8,500 cash, plus accrued dividends of $298.
F-21
<PAGE> 56
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Common stock and convertible liquidation preference common stock
Class A Common Stock ("Class A") of the Company consists of
100,000,000 authorized shares of $0.01 par value common stock, of which
there are 39,630,487 shares issued and outstanding as of December 31,
1996. In 1996, at the initiation of the holder, and under the terms of
the Company's Certificate of Incorporation, the 16,000,000 outstanding
shares of Convertible Liquidation Preference Common Stock were converted
on a one-for-one basis into fully paid and non-assessable shares of Class
A Common Stock. The Company is authorized to issue, under its existing
stock plans, up to 37,400,000 shares of Class A Common Stock, of which
23,630,487 are outstanding at year end. In addition, 24,000,000 Class A
shares are reserved for future conversion of Class B shares.
Class B Common Stock ("Class B") of the Company consists of
24,000,000 authorized shares of $0.01 par value common stock, of which
none were issued at year end. The Class B shares were authorized in
conjunction with the provisions of a major new contract, which was signed
in January 1996. Class B shares are non-voting and convertible, but
otherwise are equivalent to the Class A shares.
Each share of Class B Common Stock shall be converted, at the option
of the holder, on a share for share basis, into a fully paid and
non-assessable share of Class A Common Stock, upon sale of the share to a
third-party purchaser under one of the following circumstances: 1) in a
widely dispersed offering of the Class A Common Stock; 2) to a purchaser
of Class A Common Stock who prior to the sale holds a majority of the
Company's stock; 3) to a purchaser that after the sale holds less than 2%
of the Company's stock; 4) in a transaction that complies with Rule 144
under the Securities Act of 1933, as amended; or 5) any sale approved by
a certain regulatory agency of the U.S. Government.
F-22
<PAGE> 57
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Restricted Stock Plan
In 1988, the Company adopted a Restricted Stock Plan, which was
amended in 1993, to attract and retain key employees, and to reward
outstanding performance. Employees selected by management may elect to
become participants in the plan by entering into an agreement that
provides for vesting of the Class A Common Stock over a five to ten year
period and establishes a two-year holding period on one-half of the
shares prior to the sale of vested common stock. Each participant has
voting, dividend and distribution rights with respect to all shares of
both vested and unvested common stock. Prior to an underwritten public
offering of its Class A Common Stock registered with the Securities and
Exchange Commission, the Company retains the right of first refusal to
buy the employees' vested and unvested shares at a formula price set
forth in each agreement, based on fair value, book value or the
employees' cost plus interest at 8%. After such an offering, the right
of first refusal no longer exists. The Company may repurchase unvested
shares, and under certain circumstances, vested shares of participants
whose employment with the Company terminates. The repurchase price under
these provisions is determined by the underlying agreement, generally the
employees' cost plus interest at 8%, or fair value. Common stock issued
under the Restricted Stock Plan has been purchased by the employees at
varying prices, determined by the Board of Directors and estimated to be
the fair value of the shares based upon an independent third-party
appraisal. The Company has from time to time financed the issuance of
shares under the Restricted Stock Plan by executing promissory notes with
the employees, with repayment terms ranging from one to fifteen years.
These notes bear interest at 8%, payable at least annually, and are with
recourse. Principal and interest payments vary from monthly to 5 years,
and the loans are collateralized by the shares financed by the notes.
The balance of the outstanding notes is included as a reduction to
stockholders' equity.
F-23
<PAGE> 58
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1991 Stock Option Plan
In 1991, the Company adopted the 1991 Stock Option Plan (the "1991
Plan"), which was amended in 1993. Pursuant to the 1991 Plan, options to
purchase the Company's Class A Common Stock can be granted to eligible
employees. The stock options are granted at a price not less than 100%
of the fair value of the Company's Class A Common Stock, as determined by
the Board of Directors, based upon an independent third-party valuation.
The stock options vest over a three to ten year period based on the
provisions of each grant, and in some cases can be accelerated through
attainment of financial performance criteria. All stock options require
a two-year holding period for one half of the shares purchased once the
options are exercised, and are usually exercisable from the vesting date
until the eleventh anniversary from the date of grant, and unvested
options are canceled following the expiration of a certain period after
the employee leaves the employment of the Company. Prior to an
underwritten public offering of its common stock, the Company has certain
rights of first refusal to repurchase employees' shares obtained through
exercise of the stock options at either fair value or the employees' cost
plus 8%. Options issued after April 1, 1996 may not be exercised until
the earlier of an initial public offering of the Company's common stock,
or January 1, 1999.
Advisor Stock Option/Restricted Stock Incentive Plan
In 1992, the Company adopted the Advisor Stock Option/Restricted
Stock Incentive Plan (the "Advisor Plan"), which was modified in 1993, to
enable non-employee directors and advisors to the Company and consultants
under contract with the Company to acquire shares of the Company's Class
A Common Stock, at a price not less than 100% of the fair value of the
Company's common stock, as determined by the Board of Directors, based
upon an independent third-party valuation. The options and shares are
subject to a vesting schedule and restrictions associated with their
transfer. Under certain circumstances, the shares can be repurchased by
the Company at cost plus 8% from the date of issuance.
In 1996, the Board approved the 1996 Non-Employee Director Stock
Option/Stock Incentive Plan and the 1996 Advisor and Consultant Stock
Option/Stock Incentive Plan, which together supersede and replace the
Advisor Plan. Provisions of the Advisor Plan will remain in effect for
outstanding stock and options but no new issuances will be made pursuant
to the plan.
F-24
<PAGE> 59
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1996 Non-Employee Director Stock Option/Stock Incentive Plan
In 1996, the Company adopted the 1996 Non-Employee Director Stock
Option/Stock Incentive Plan (the "Director Plan"). The Director Plan
provides for the issuance of up to 400,000 Class A common shares or
options to Board members who are not employees of the Company. Shares or
options issued under the plan would be subject to five year vesting, with
options expiring after an eleven year term. The purchase price for
shares issued and exercise price for options issued will be the fair
value of the shares at the date of issuance. Other restrictions would be
established upon issuance. There were no issuances under the Director
Plan in 1996.
1996 Advisor and Consultant Stock Option/Stock Incentive Plan
In 1996, the Company adopted the 1996 Advisor and Consultant Stock
Option/Stock Incentive Plan (the "Consultant Plan"). The Consultant Plan
provides for the issuance of Class A common shares or options to advisors
or consultants who are not employees of the Company, subject to
restrictions established at time of issuance. The option exercise price
will be the fair value of the shares on the date of grant. The purchase
price for share issuances will be determined by a committee appointed by
the Board of Directors. The fair value of issuances under the plan will
be estimated at the time of issuance and amortized ratably over the
vesting period as compensation expense. There were no issuances under
the Consultant Plan in 1996.
F-25
<PAGE> 60
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Other stock and option activity
During 1995, options for the purchase of 2,000,000 shares of Class A
Common Stock, with an exercise price of $1.00 per share, were granted to
an officer of the Company when the fair value of the stock was estimated
to be $1.75 per share. This resulted in deferred compensation of $1,500,
which is recorded as a reduction to stockholders' equity and is being
amortized as compensation expense over the vesting period of ten years.
These options were exercised in 1995, whereby the Company received cash
of $600, and a promissory note for $1,400 in consideration for the
shares, under the terms of the original grant. The note bears interest
at 8% or a market rate defined in the agreement, whichever is greater,
and with principal and interest due in full on the earlier of: 1) the
fifteenth anniversary of the effective date; 2) three years after the
stock is publicly traded; or 3) when the fair value of the vested shares
is equal to or greater than two times the outstanding principal and
interest balance of the promissory note. The agreement provides for
vesting ratably over a ten year period and establishes a two-year holding
period on one-half of the shares prior to the sale of vested shares.
The shareholder has voting, dividend and distribution rights with
respect to both vested and unvested shares. Prior to an underwritten
public offering of its common stock, the Company retains the right of
first refusal to buy back the vested shares for cash at a purchase price
equal to fair value, and the unvested shares at the cost paid by the
shareholder. After such an offering, the right of first refusal no
longer exists. The Company has the right, under certain circumstances, to
repurchase certain shares at cost if employment with the Company
terminates.
F-26
<PAGE> 61
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
On January 5, 1996, the Company entered into a series of agreements
with Swiss Bank. These agreements included an information processing, a
stock option and a stock purchase agreement, among the various associated
contracts, all of which were effective as of January 1, 1996. Under the
terms and conditions of the stock option agreement, the Company granted
the customer an option to acquire 10,500,000 shares of Class B Common
Stock at a price of $2.50 per share. In return, the company received a
twenty-five year information processing agreement, a 40% interest in the
voting common stock of the customer's information systems subsidiary
("Systor"), the right to utilize certain infrastructure and restricted
applications to process other third party contracts, and a commitment for
future project work for the customer. Stock options to acquire 9,000,000
shares vest ratably over 13 years beginning on January 1, 1998. The
start date of this 13 year vesting period can potentially be adjusted to
either January 1, 1996, or January 1, 1994, upon termination of the
contract by certain defaults of the Company. Either early vesting
scenario would accelerate the overall vesting of shares, but would not
change the length of the vesting period or the annual rate of vesting.
Stock options to acquire the remaining 1,500,000 shares vest ratably over
13 years beginning on January 1, 1996, with no adjustment of the vesting
period possible. In the event of a termination of the information
processing agreement, the Company will return a portion of the Systor
shares based on the time elapsed since the signing of the information
processing agreement. The number of shares to be returned to Swiss Bank
declines ratably over a period of thirteen years beginning January 1,
1996. The Company believes that the likelihood of a termination of the
information processing agreement is remote.
The stock option agreement provides that the Company will pay to
Swiss Bank the excess of (a) the aggregate exercise price paid by Swiss
Bank (up to $5.00 per share) for all shares purchased by Swiss Bank prior
to the eighth, eleventh, fourteenth, seventeenth and twentieth
anniversary dates ("Trigger Dates") of the stock option agreement and
subsequent to the immediately preceding Trigger Date (or, in the case of
the first Trigger Date, subsequent to the execution of the stock option
agreement) (a "Trigger Date Period") over (b) the (i) number of the
Calculation Base Shares (as defined below) times (ii) a defined fair
value. Swiss Bank will pay to the Company the excess of (a) (i) the
number of the Calculation Base Shares (as defined below), multiplied by
(ii) the defined fair value of a share of Class A Common Stock of the
Company ("Class A Common Stock", and such shares, "Class A Shares") over
(b) the aggregate exercise price paid by Swiss Bank (up to $5.00 per
share) for all shares purchased by Swiss Bank
F-27
<PAGE> 62
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
during the relevant Trigger Date Period. "Calculation Base Shares" means
five percent of such shares purchased by Swiss Bank during the Trigger
Date Period ending on such Trigger Date.
The value of the options granted was estimated to be $5,250, based
upon an independent third-party appraisal. Based upon their respective
fair values, $706 was allocated to the equity interest acquired in
Systor, and $4,544 to the value of contract rights received. The
contract rights are recorded as a reduction to stockholders' equity, and
are being amortized ratably over the fifteen year vesting period. Upon
award, the underlying book value of the Company's acquired interest in
Systor approximated $2,614, which exceeded the original estimated
carrying value of $706. The excess of $1,908 is being amortized as a
reduction of direct expense over a three year period. The full value of
the options granted of $5,250 is recorded in additional paid-in-capital.
The Company also granted the customer additional stock options to
acquire up to 9,420,900 shares of Class B Common Stock if certain other
information technology service agreements were executed on or before
December 31, 1996. As the agreements were not executed, the options
expired December 31, 1996.
Pursuant to the Bank Holding Company Act of 1965 (the "Act") and
subsequent regulations and interpretations put forth by the Federal
Reserve Board, the customer's holdings in terms of shares of the
Company's common stock may not reach or exceed 10% of the total of all
classes of the Company's common stock. Similarly, the total
consideration paid by the customer for the exercising its stock options
may not at any time reach or exceed 10% of the Company's consolidated
stockholders' equity as determined in accordance with generally accepted
accounting principles.
If on the eighth, eleventh, fourteenth, seventeenth, or twentieth
anniversary date ("Trigger Dates") of the stock option agreement, the
number of Class B shares for which the options are exercisable but
limited from exercise by the Act, the Company will, within three years
from the Trigger Date, issue additional shares to cure the limitation or
purchase the shares which are limited at the fair value on the required
date of payment.
F-28
<PAGE> 63
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
If, during the term of the SBC Warburg EPI Agreement, Swiss Bank
desires to sell its shares, Swiss Bank must first offer such Class B
shares or options in respect thereof to the Company for a price specified
in writing. If the Company does not accept such offer within 20 days of
its such offer, Swiss Bank will be entitled to offer and sell the Class B
shares for at least the price and other terms specified to the Company
within three months of the date of the notice to the Company.
Activity in Liquidation Preference Common and Class A Common Stock:
<TABLE>
<CAPTION>
Weighted
Restricted Advisor Option Liquidation Average
Plan Plan Plans Other Preference Share Total Price
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 Beginning shares 9,237,982 410,000 464,636 4,908,616 16,000,000 31,021,234 0.85
Issuance 363,800 30,000 - 70,134 - 463,934 1.02
Option Exercise - - 32,760 - - 32,760 0.92
Repurchase (883,198) - - (6,800) - (889,998) 0.75
----------- ------- --------- ---------- ---------- ----------
December 31, 1994 8,718,584 440,000 497,396 4,971,950 16,000,000 30,627,930 0.86
Issuance 1,300,202 60,000 67,678 111,412 - 1,539,292 1.10
Option Exercise - - 2,016,340 - - 2,016,340 1.00
Repurchase (153,000) - - - - (153,000) 0.61
----------- ------- --------- ---------- ---------- ----------
December 31, 1995 9,865,786 500,000 2,581,414 5,083,362 16,000,000 34,030,562 0.88
Issuance 2,367,359 - - 1,682,148 - 4,049,507 3.23
Option Exercise - - 1,754,748 - - 1,754,748 0.85
Conversion - - - 16,000,000 16,000,000) -
Repurchase (204,330) - - - - (204,330) 1.53
----------- ------- --------- ---------- ---------- ----------
December 31, 1996 12,028,815 500,000 4,336,162 22,765,510 - 39,630,487 1.12
=========== ======= ========= ========== ========== ==========
</TABLE>
F-29
<PAGE> 64
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Activity in Options for Class A Common Stock:
<TABLE>
<CAPTION>
Weighted
Average
1991 Plan Advisor Plan Other Options Total Exercise Price
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 Outstanding at beginning of year 6,111,460 160,000 6,800 6,278,260 0.82
Granted 2,753,300 - - 2,753,300 1.00
Exercised (32,760) - - (32,760) 0.67
Forfeited (941,708) - (4,800) (946,508) 0.98
------------------------------------------------------------
Outstanding at December 31, 1994 7,890,292 160,000 2,000 8,052,292 0.87
Granted 2,846,100 - 2,000,000 4,846,100 1.15
Exercised (14,340) - (2,002,000) (2,016,340) 1.00
Forfeited (435,232) - - (435,232) 0.95
------------------------------------------------------------
Outstanding at December 31, 1995 10,286,820 160,000 - 10,446,820 0.97
Granted 7,227,632 - - 7,227,632 2.71
Exercised (1,754,748) - - (1,754,748) 0.85
Forfeited (1,431,892) - - (1,431,892) 1.52
------------------------------------------------------------
Outstanding at December 31, 1996 14,327,812 160,000 - 14,487,812 1.81
============================================================
Exercisable at December 31, 1996 1,465,594 108,000 - 1,573,594 0.88
</TABLE>
F-30
<PAGE> 65
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The following table summarizes information about options for Class A
common shares outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted-Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
-------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.50 457,192 5.2 92,821
$0.75 1,576,360 5.9 686,480
$1.00 4,873,420 8.1 756,660
$1.75 1,032,404 6.6 35,233
$2.50 5,079,096 10.4 2,400
$3.75 1,469,340 9.3 -
----------- -----------
$1.81 14,487,812 8.6 1,573,594
=========== ===========
</TABLE>
Weighted average exercise price of exercisable options $0.88
As previously noted, the Company has continued to account for its
stock option activity under APB 25. Had the Company elected to adopt
SFAS 123, the pro forma impact on net income and earnings per share would
have been as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net income
As reported $20,499 $10,813
Pro forma $20,063 $10,734
Primary and fully diluted earnings per share
As reported $ 0.40 $ 0.30
Pro forma $ 0.40 $ 0.29
</TABLE>
F-31
<PAGE> 66
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
All options issued by the Company in 1996 and 1995 were issued at
the estimated fair value in effect at the date of issuance, vest ratably
over the vesting period, and expire one year after the final vesting
date. The fair value of each option grant was estimated on the date of
grant using the Minimum Value option pricing model with the following
assumptions for 1996 and 1995, respectively; risk free weighted average
interest rates of 6.8% for both years; dividend yield and volatility of
zero for both years. The expected life for each issuance was equal to the
midpoint of the vesting period, plus one year. For example, an option
vesting ratably over ten years has an expected life of 6 years. The
weighted-average grant-date fair value of options issued in 1996 and 1995
was $5,938 and $1,916, respectively. The Company expects that the impact
of future option issuances will be to increase overall pro forma
compensation expense, thereby reducing pro forma net income reported in
future periods.
11. Income Taxes
Income before taxes for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Domestic $10,151 $12,518 $ 7,304
Foreign 30,000 7,732 2,835
------- ------- -------
$40,151 $20,250 $10,139
======= ======= =======
</TABLE>
F-32
<PAGE> 67
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The provision for income taxes charged to operations was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current:
U.S. Federal $ 21,794 $ 4,444 $(4,268)
State and local 3,583 766 (384)
Foreign 10,319 7,825 742
------- ------- -------
Total current 35,696 13,035 (3,910)
------- ------- -------
Deferred:
U.S. Federal (14,400) (4) 6,780
State and local (2,242) 32 929
Foreign 598 (3,626) 11
-------- ------- -------
Total deferred (16,044) (3,598) 7,720
-------- ------- -------
Total provision for income taxes $ 19,652 $ 9,437 $ 3,810
======== ======= =======
</TABLE>
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred compensation $ 536 $ 615
Conversion of acquired entity from
cash basis to accrual basis of
accounting 989 -
Amortization 178 -
Other 315 25
--------- ---------
Gross deferred tax liabilities 2,018 640
--------- ---------
Depreciation (5,557) (1,751)
Accrued liabilities (21,233) (10,701)
Equity investments (517) -
Amortization (171) -
Deferred revenue (4,877) (3,998)
Other (129) (333)
--------- ---------
Gross deferred tax assets (32,484) (16,783)
--------- ---------
Net deferred tax asset $ (30,466) $ (16,143)
========= =========
</TABLE>
F-33
<PAGE> 68
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
A valuation allowance has not been established for the net deferred
tax asset as of December 31, 1996 or 1995, due to a significant contract
backlog and the availability of loss carrybacks.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax
rate to income before taxes, as a result of the following differences:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $14,053 35.0% $7,087 35.0% $3,447 34.0%
Non-deductible items 3,017 7.5 1,829 9.0 181 1.8
State and local taxes 609 1.5 751 3.7 545 5.4
Nondeductible
amortization and write -
off of intangible assets 1,900 4.7 - - - -
Effect of foreign operations 79 0.2 - - - -
Net operating loss carryover - - - - 132 1.3
Reversal of accrued liability - - - - (404) (4.0)
Other (6) - (230) (1.1) (91) (0.9)
------- ---- ------ ---- ------ ----
Total provision for
income taxes $19,652 48.9% $9,437 46.6% $3,810 37.6%
======= ===== ====== ===== ====== =====
</TABLE>
12. Certain Geographic Data and Segment Information
The Company operates in one industry segment which includes the
development, implementation, operation and management of information
systems. Services are provided through the parent company in the United
States, and through a worldwide network of subsidiaries located in the
United Kingdom, Germany, France, Switzerland, the Netherlands, Monaco,
Singapore, Hong Kong and Japan. Financial information by geographic
region is as follows:
F-34
<PAGE> 69
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
United States:
Total revenue $365,211 $238,783 $193,828
Operating income 11,019 12,802 7,230
Identifiable assets at December 31 130,766 90,632 67,298
Europe and Asia:
Total revenue 234,227 103,523 98,327
Operating income 30,332 8,060 3,685
Identifiable assets at December 31 101,481 39,841 23,035
Consolidated:
Total revenue 599,438 342,306 292,155
Operating income 41,351 20,862 10,915
Identifiable assets at December 31 232,247 130,473 90,333
</TABLE>
Greater than 10% of the Company's contract revenue was earned from
one customer for the year ended December 31, 1996, two customers for the
year ended December 31, 1995, and four customers for the year ended
December 31, 1994. Revenue from these customers comprised 28% of total
revenue in 1996, 12% and 10% of total revenue in 1995, and 20%, 15%, 15%
and 11% of total revenue in 1994, respectively.
13. Commitments and Contingencies
Deferred revenue
In 1996 a client was acquired by another entity, and the
contract with the Company was terminated. The Company received a
cash payment of $5,100. This payment was recorded as deferred
revenue which will be recognized in 1997 as expenses associated
with the disposition of the contract are incurred.
In April 1995, one of the Company's major contracts was
renegotiated. Under the terms of the new agreement, the Company
received $12,000 as prepayment for services to be rendered over
the four year term of the new agreement. This prepayment is being
recognized as contract revenue ratably over the term of the
contract.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Operating leases and maintenance agreements
The Company has commitments related to data processing
facilities, office space and computer equipment under
non-cancelable operating leases and fixed maintenance agreements
for periods ranging from one to ten years. Future minimum
commitments under these agreements as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year ending Lease and Maintenance
December 31: Commitments
------------ -----------
<S> <C>
1997 $17,037
1998 8,873
1999 6,083
2000 4,002
2001 and thereafter 7,754
-------
Total $43,749
=======
</TABLE>
The Company is obligated under certain operating leases for
its pro rata share of the lessors' operating expenses. Rent
expense was $18,212, $23,731 and $41,927 for 1996, 1995 and 1994,
respectively.
Letters of credit
The Company had $1,217 in irrevocable letters of credit as of
December 31, 1996. The letters of credit were issued in
conjunction with the provisions of certain contracts. The fair
value of these letters of credit is estimated to be equal to the
face values of the letters of credit, based on the nature of the
fee arrangements with the issuing banks.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Financial instruments with off-balance sheet risk
Interest rate swap
In December 1993, the Company entered into an agreement with
a customer to reduce future monthly billings in exchange for a
non-refundable payment for work performed involving the
development and installation of a major new system. Under the
terms of this agreement, the Company is required to make an
interest sensitive payment to the customer if a defined variable
interest rate ("Rate") exceeds 8.5% based upon a declining
notional amount ($67,716 and $82,686 as of December 31, 1996 and
1995, respectively) over the term of the contract. If the Rate is
less than 8.5%, the customer is required to pay the Company for
the difference in the interest rates based upon the same declining
notional amount.
In January 1994, the Company entered into an interest rate
swap agreement with a bank to eliminate its exposure to the
interest sensitive payment. Under the terms of the swap
agreement, the Company is required to pay a fixed interest rate of
7.32% to a bank in exchange for being paid the Rate.
The differences to be paid or received on the interest
sensitive payment and swap are included as an adjustment to direct
cost of services. The Company recorded a reduction to direct cost
of services of $852 and $1,008 for the years ended December 31,
1996 and 1995, respectively. Based on anticipated cash flows,
discounted at the U.S. prime lending rate of 8.5%, the fair value
of these instruments was estimated to be a $1,877 benefit as of
December 31, 1996. The Company's remaining risk associated with
these transactions is risk of default by the customer or the bank,
which the Company believes to be remote.
Foreign currency exchange forward contracts
At December 31, 1996, the Company had one forward exchange
contract maturing in January 1997. This British pounds to U.S.
dollar trade totaled $4,551 as of December 31, 1996.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The estimated fair value of the Company's forward exchange
contract using bank or market quotes and the year end foreign
exchange rates was a net liability of $117 as of December 31,
1996. The Company's remaining risk associated with this
transaction is the risk of default by the bank, which the Company
believes to be remote.
Contingent put rights
Under the terms of various stock agreements, a total of
2,905,372 shares of Class A Common Stock are subject to contingent
put rights. For 2,000,000 and 325,372 of these shares, the
holders may require the Company to repurchase the shares at fair
value in the event the Company's Class A Common Stock is not
publicly traded by the years 2010 and 2000, respectively. For
580,000 of these shares, the holders may require the Company to
repurchase the shares at the original cost plus 8% interest,
accrued from the date of purchase, in the event the holders'
employment or directorship terminates.
Litigation
There are various claims and pending actions against the
Company arising in the ordinary course of the conduct of its
business. The Company believes that these claims and actions will
have no material adverse effect on the Company's financial
condition, results of operations or cash flows.
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
14. Retirement Plan and Other Employee Trusts
During 1989, the Company established the Perot Systems 401(k)
Retirement Plan, a qualified defined contribution retirement plan. The
plan year is January 1 to December 31 and allows eligible employees to
contribute between 1% and 15% of their annual compensation, including
overtime pay, bonuses and commissions. The Plan was amended effective
January 1, 1996 to change the Company's contribution from 2% of the
participants' defined annual compensation, to a formula matching
employees' contributions at a two-thirds rate, up to a maximum Company
contribution of 4%. The Company's cash contribution for the years ended
December 31, 1996, 1995 and 1994 amounted to $4,785, $1,919 and $1,680,
respectively. The Company's contribution of common stock for the years
ended December 31, 1996, 1995 and 1994 totaled 6,325, 99,486, and 70,134
shares, respectively, which were allocated to participants' plan accounts
using a formula based on compensation. Compensation expense of $14, $224
and $123, respectively, was recorded as a result of these share
contributions.
In 1992 the company established a European trust, for the benefit of
non-U.S. based employees, to which 11,926 shares were contributed in
1995. Compensation expense of $26 was recorded as a result of this
grant.
In 1996, the company contributed 162,143 shares to several trusts
established for the benefit of employees transitioning to the company
pursuant to certain contracts. Compensation expense of $405 was recorded
related to these grants.
F-39
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
15. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 1,877 $ 671 $ 1,213
======= ====== =======
Income taxes $28,032 $7,031 $ 5,027
======= ====== =======
Non-cash investing and financing activities:
Capital lease obligations incurred for
acquisition of computer equipment $ - $ - $ 274
======= ====== =======
Property, equipment and software financed with
long-term debt and notes payable $ - $ - $ 682
======= ====== =======
Repurchase of shares issued under
Restricted Stock Plan in exchange for
reductions in notes receivable from
stockholders $ 225 $ - $ 646
======= ====== =======
Transfer of assets upon assignment of lease obligation $ - $1,008 $ -
======= ====== =======
Issuance of common stock for acquisition
of businesses $ 6,545 $ - $ -
======= ====== =======
Purchase of shares financed by notes
receivable from stockholders $ 3,065 $ 901 $ 315
======= ====== =======
Stock options issued for contract rights $ 4,544 $ - $ -
======= ====== =======
Stock options issued for investments in
and advances to unconsolidated
affiliates $ 706 $ - $ -
======= ====== =======
</TABLE>
16. Related Party Transactions
During 1996, certain officers financed the purchase of Class A
Common Stock with a bank. In addition, the Company entered into an
agreement with this bank under which, if the Company's Class A common
shares are not publicly traded prior to June 30, 1998 or the maturity
date of the individual loans, the Company will purchase, at the bank's
option, any of these loans. As of December 31, 1996, approximately $809
remain outstanding under these loans. All of these loans bear interest
at a rate of 9.50% and are due at various dates between July 1, 1998 and
February 26, 2000.
In March 1996, the Company loaned $615 to an executive. The note
bears interest at a rate of 5.98% per annum and is payable at the
fifteenth anniversary of
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
the date of the note or at an earlier date if the Company's common stock
is publicly traded. In April 1997, the Company committed to loan up to
an additional $2,500 to this officer. For these additional loans, up to
$1,500 will be collateralized by Class A Common Shares held by this
officer and up to $1,000 will be collateralized by a mortgage on the
officer's residence. These additional loans will bear interest at the
greater of 7.25% or the applicable federal rate.
The Company has entered into an agreement with Perot Investments,
Inc. ("PII") pursuant to which the Company licensed certain software from
PII. The Company sublicensed such software to The Witan Company, L.P.
("Witan"). Witan has paid a license fee of $1,000 directly to PII in
connection with the license. The Company has a separate contract with
Witan to perform development work on the licensed software. PII is an
affiliate of a stockholder of the Company.
17. Subsequent Event (Unaudited)
Swiss Bank
On April 24, 1997, the Company concluded the renegotiation of the
terms of its strategic alliance with Swiss Bank, initially entered into
in January 1996. The new terms are effective from January 1, 1997 and
involve (i) a 10 year contract for the Company to provide information
technology ("IT") services to SBC Warburg ("SBC Warburg EPI Agreement"),
(ii) separate agreements to provide IT services to other Swiss Bank
operating units and to permit the Company to use certain Swiss Bank
assets, (iii) the sale to Swiss Bank of options to acquire shares of the
Company's Class B Common Stock, (iv) the sale to Swiss Bank of shares of
the Company's Class B Common Stock, and (v) the termination of all
options to acquire shares of the Company's Class B Common Stock granted
under the terms and conditions of prior Swiss Bank agreements. The
Company continues to hold a 40% stake in Systor. In the event of
termination of the SBC Warburg EPI Agreement, a portion of the Company's
interest in Systor would be returned to Swiss Bank. The portion that
would be returned to Swiss Bank upon such a termination declines ratably
over the 10-year period which began on January 1, 1997. The renegotiation
of the terms of the strategic alliance with Swiss Bank resulted in the
following impact to stockholders' equity on a going forward basis. The
contract rights totaling $4,544 at December 31, 1996 were eliminated with
an offsetting reduction in additional paid-in capital. The $8,503 cash
proceeds from the sale of options and stock will be reflected in
additional paid-in capital in the second quarter of 1997.
The new terms of the SBC Warburg EPI Agreement require the Company
to provide operational management for SBC Warburg's technology resources
(including mainframes, desktops, and voice and data networks), excluding
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
hardware and proprietary software applications development. The Company
is to be reimbursed for all costs, excluding corporate overhead, related
to services provided under the SBC Warburg EPI Agreement. In addition,
the Company will receive a management fee, subject to bonuses and
penalties, depending upon the achievement of certain defined performance
criteria.
Under the terms and conditions of the new agreement, the Company
sold to Swiss Bank options to purchase 3,617,160 shares of the Company's
Class B Common Stock at a cash non-refundable purchase price of $2.25 per
option. These shares of the Company's Class B Common Stock are subject to
certain transferability and holding-period restrictions, which lapse over
a defined vesting period. These options are exercisable immediately and
for a period of 5 years after the date that the underlying shares become
vested, at an exercise price of $7.30 per share. In addition, the Company
sold to Swiss Bank 50,000 shares of the Company's Class B Common Stock,
subject to the same transferability and holding-period restrictions, at a
purchase price of $7.30 per share. These options and shares were sold in
connection with the execution and delivery of the 10 year SBC Warburg EPI
Agreement. Both the 50,000 shares of Class B Common Stock and the
3,617,160 shares of Class B Common Stock subject to options vest at a
rate, in the aggregate, of 31,953 shares per month for the first five
years of the agreement, and at a rate of 29,167 shares per month
thereafter. In the event of termination of the SBC Warburg EPI
Agreement, options to acquire unvested shares would be forfeited, and the
Company would have the right to buy back any previously acquired unvested
shares for the original purchase price of $7.30 per share
The Company also agreed to issue and sell to Swiss Bank additional
shares and/or options to purchase shares of the Company's Class B Common
Stock, subject to the same transferability and holding-period
restrictions, up to a maximum of 3,500,000 shares, in such combination of
options and shares that Swiss Bank deems appropriate, provided the
Company and Swiss Bank, on or prior to December 31, 1998, enter into a
second IT services agreement, having a term of 10 years, and being of a
size and scope similar to that of the SBC Warburg EPI Agreement. The
purchase price and exercise price for these options, as well as the
purchase price for these shares will be the defined fair value as of the
date of grant. These shares will vest ratably over 10 years commencing
on the date of execution of the new agreement. In the event of
termination, options to acquire unvested shares would be forfeited, and
the Company would have the right to buy back any previously acquired
unvested shares for the original purchase price.
Pursuant to the Bank Holding Company Act of 1965 and subsequent
regulations and interpretations put forth by the Federal Reserve Board,
(the "regulations") Swiss Bank's holdings in terms of shares of the
Company's common stock may not reach or exceed 10% of the total of all
classes of the Company's common stock. Similarly, the total
consideration paid by Swiss Bank for the purchase of shares plus the
purchase and exercise of options may not at any time reach or exceed
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PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
10% of the Company's consolidated stockholder's equity as determined in
accordance with generally accepted accounting principles. If, however,
on certain specified anniversaries of the execution date of the new
agreement, beginning in 2004, the number of shares of Class B Common
Stock, for which Swiss Bank's options are exercisable, is limited due to
an insufficient number of shares outstanding, Swiss Bank has the right to
initiate procedures to eliminate such deficiency. These procedures may
involve (i) issuance of additional shares of Class A Common Stock by the
Company, (ii) a formal request to the Federal Reserve Board from Swiss
Bank for authorization to exceed its allowable percentage of ownership,
or (iii) the purchase of shares of Class B Common Stock by the Company
from Swiss Bank at a defined fair value. In addition, the exercise period
for options to purchase vested shares would be increased beyond the normal
5 years to account for any time during such exercise period in which
Swiss Bank is unable to exercise its options as a result of the
regulations.
F-43
