<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
PEROT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7374 75-2230700
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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12377 MERIT DRIVE, SUITE 1100
DALLAS, TEXAS 75251
(972) 383-5600
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
TERRY ASHWILL
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
PEROT SYSTEMS CORPORATION
12377 MERIT DRIVE, SUITE 1100
DALLAS, TEXAS 75251
(972) 383-5600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
ALAN J. BOGDANOW BRUCE K. DALLAS
GLEN J. HETTINGER DAVIS POLK & WARDWELL
HUGHES & LUCE, L.L.P. 450 LEXINGTON AVENUE
1717 MAIN STREET, SUITE 2800 NEW YORK, NEW YORK 10017
DALLAS, TEXAS 75201 (212) 450-4000
(214) 939-5500
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock, $.01 par value............ $115,000,000 $33,925
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o).
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of Prospectus: one to be
used in connection with a U.S. and Canadian offering of the registrant's Class A
Common Stock (the "U.S. Prospectus") and one to be used in connection with a
concurrent international offering of the Class A Common Stock (the
"International Prospectus"). The International Prospectus will be identical to
the U.S. Prospectus except that it will have a different front cover page. The
U.S. Prospectus is included herein and is followed by the alternate cover page
to be used in the International Prospectus, which has been labeled "Alternate
Page for International Prospectus."
<PAGE> 3
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued August 5, 1998
Shares
LOGO
CLASS A COMMON STOCK
------------------------
PEROT SYSTEMS CORPORATION IS OFFERING SHARES OF ITS CLASS A
COMMON STOCK. INITIALLY, THE U.S. UNDERWRITERS ARE OFFERING
SHARES OF OUR CLASS A COMMON STOCK IN THE UNITED STATES AND CANADA, AND THE
INTERNATIONAL UNDERWRITERS ARE OFFERING SHARES OF OUR CLASS A
COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA.
THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR
OUR STOCK. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$ AND $ PER SHARE.
------------------------
WE INTEND TO APPLY TO LIST THE CLASS A COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE.
------------------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company
-------- ------------- -----------
<S> <C> <C> <C>
Per Share....................... $ $ $
Total........................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Perot Systems Corporation has granted the underwriters the right to purchase up
to an additional shares of Class A common stock to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
of Class A common stock to purchasers on , 1998.
------------------------
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO.
WARBURG DILLON READ LLC
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
, 1998
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 7
Special Note Regarding
Forward-Looking Statements......... 13
Use of Proceeds...................... 14
Dividend Policy...................... 14
Capitalization....................... 15
Selected Consolidated Financial
Data............................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 17
Business............................. 25
Management........................... 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Certain Relationships and Related
Transactions....................... 47
Principal Stockholders............... 49
Description of Capital Stock......... 51
Shares Eligible for Future Sale...... 57
Certain United States Federal Income
Tax Considerations for Non-United
States Holders..................... 58
Underwriters......................... 61
Legal Matters........................ 64
Experts.............................. 64
Additional Information............... 65
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
------------------------
We are a Delaware corporation. Our principal executive offices are located
at 12377 Merit Drive, Suite 1100, Dallas, Texas 75251, and our telephone number
is (972) 383-5600. We maintain a world wide web site at www.perotsystems.com.
The reference to our world wide web address does not constitute incorporation by
reference of the information contained at the site. In this Prospectus, the
"Company," "Perot Systems," "we," "us," and "our" refer to Perot Systems
Corporation and its subsidiaries, unless the context otherwise requires. In
addition, "Class A Common Stock" refers to our Class A common stock, $.01 par
value per share; "Class B Common Stock" refers to our Class B common stock, $.01
par value per share; and "Common Stock" refers to the Class A Common Stock and
Class B Common Stock. See "Description of Capital Stock."
You should rely only on the information contained in this Prospectus. We
have not authorized anyone to provide you with information different from that
contained in this Prospectus. We are offering to sell, and seeking offers to
buy, shares of Class A Common Stock only in jurisdictions where offers and sales
are permitted. The information contained in this Prospectus is accurate only as
of the date of this Prospectus, regardless of the time of delivery of this
Prospectus or of any sale of the Class A Common Stock.
2
<PAGE> 5
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
and our financial statements and notes appearing elsewhere in this Prospectus.
You should carefully consider, among other things, the matters set forth in
"Risk Factors."
THE COMPANY
We are a worldwide provider of information technology services and business
solutions, serving a broad range of clients. We serve our clients by delivering
services and solutions focused on each client's needs, with particular emphasis
on helping clients more effectively serve their customers.
We integrate three core disciplines in providing solutions and services to
our clients:
- business integration;
- systems integration and applications development; and
- information technology infrastructure services.
Business integration services include working with clients to develop and
implement business strategy, information technology strategy, process redesign,
and change management. Systems integration and applications development includes
the design and implementation of information technology systems for clients,
including both custom-developed and packaged software. Information technology
infrastructure services combine information technology outsourcing, staffing,
and infrastructure management.
Our approach is to provide clients with an "integrated service
offering" -- a combination of multiple disciplines that assists our clients in
improving their business operations or in creating new business offerings. With
this approach, we are able to create long-term relationships with our clients
that begin with an analysis of our clients' business strategies and continue
through the implementation of information technology solutions and the
realization of the clients' goals.
In marketing our services, we are primarily focused on four industries:
Financial Services, Energy, Healthcare, and Travel and Transportation. We target
these industries to capture the opportunities arising from these industries'
rapid rates of change, growth, and the increasing importance of information
technology in driving and managing this change and growth. We also have
significant clients in the Communications and Media and Manufacturing industries
and continually evaluate additional industries for future growth opportunities.
THE PEROT SYSTEMS APPROACH
We provide services on a worldwide basis that are uniquely structured to
each client, combining the appropriate industry expertise and core disciplines
to solve the client's business problems and implement new strategies to generate
future growth. Our approach includes:
- Providing Integrated Service Offerings. We combine our business
integration, systems integration and applications development, and
information technology infrastructure services to analyze and address our
clients' business and information technology challenges and
opportunities. Rather than narrowly focusing on isolated problems, we
design our integrated service offerings to allow a client to achieve
growth and efficiencies through the implementation of broader business
solutions.
- Structuring Creative Long-Term Relationships. We seek to create long-term
relationships with clients that begin with the initial analysis of a
client's business and information technology problems and opportunities
and continue through implementation of solutions and the realization of
benefits. We strive to maximize revenues and client satisfaction by
creatively structuring contracts with economic incentives that link our
compensation to the client's business results or the level of our
performance.
3
<PAGE> 6
- Employing Multi-disciplinary Teams. We employ multi-disciplinary teams of
associates with industry-specific expertise and associates with superior
technical skills to best formulate and implement integrated information
technology solutions for clients.
- Formulating Unbiased Client-Based Solutions. We analyze our clients'
business problems and opportunities from the perspective of the clients
and their customers. We then impartially assemble the best combination of
our services and third party products to meet the clients' needs.
PEROT SYSTEMS GROWTH STRATEGY
Our strategic objective is to become the provider of choice for information
technology services and business solutions. Key elements of our growth strategy
include:
- Expand Value-Added Service Offerings. We believe that services aimed at
growing a client's business and making a client more productive and
competitive will create more value for our clients, and accordingly
generate more growth, than traditional technology functional services.
Our strategy includes an increasing focus on systems integration and
applications development and business integration services, supported by
value-added information technology infrastructure services.
- Target Rapidly Changing Industries. We target rapidly changing industries
that are substantially affected by the increasing need for information
technology. We utilize associates with operating expertise in these
specific industries as a competitive advantage in providing superior
services to our clients.
- Create and Leverage Growth Engines. In each industry, we have the
opportunity to create "growth engines" -- sets of skills, business
processes, and know-how that, when combined, create leverageable business
solutions for clients. We can use these growth engines to build our
presence in our targeted industries and adapt them to develop or enter
other industries.
- Develop Select Clients. We believe that client selection is key to growth
and profitability. We target market leaders and aspiring market leaders
that are committed to using information technology strategically and are
willing to develop long-term relationships.
- Attract, Train, and Retain Associates with Strong Character. We believe
that attracting, training, and retaining high quality associates is
essential to our growth. We hire motivated individuals with strong
character and leadership traits and provide them with ongoing
technological and leadership skills training. We emphasize retaining our
associates with challenging work assignments and incentive programs,
including rewarding outstanding performance with equity interests. More
than 90% of our associates hold equity interests in our company.
4
<PAGE> 7
THE OFFERING
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<S> <C> <C>
Class A Common Stock offered(1):
United States offering............................. shares
International offering............................. shares
---------
Total........................................... shares
=========
Common Stock to be outstanding after the offering:
Class A Common Stock............................... shares(1)(2)
Class B Common Stock............................... 50,000 shares(3)
---------
Total........................................... shares(1)(2)(3)
=========
Overallotment option................................. shares of Class A Common Stock
Voting rights:
Class A Common Stock............................... One vote per share
Class B Common Stock............................... Non-voting
Use of proceeds...................................... For working capital, business expansion, and
other general corporate purposes.
Dividend policy...................................... We do not anticipate paying any cash dividends
in the foreseeable future. Any future
determination to pay dividends will be at the
discretion of our Board of Directors and will be
dependent upon then existing conditions,
including our financial condition, results of
operations, contractual restrictions, capital
requirements, business prospects, and such other
factors as our Board of Directors deems
relevant.
</TABLE>
- ---------------
(1) Unless otherwise specifically stated, the information throughout this
Prospectus does not take into account the possible issuance of additional
shares of Class A Common Stock to the Underwriters pursuant to their rights
to purchase additional shares to cover over-allotments.
(2) Based on 38,308,790 shares of Class A Common Stock and 50,000 shares of
Class B Common Stock outstanding as of June 30, 1998. Excludes (i)
16,173,178 shares of Class A Common Stock subject to outstanding options as
of June 30, 1998 at a weighted average exercise price of $3.24 per share,
(ii) 70,000 shares of Class A Common Stock subject to options issued to
non-executive associates in July 1998 at an exercise price of $6.75 per
share, and (iii) 4,811,450 shares of Class A Common Stock subject to options
issued to non-executive associates in a broad-based distribution in July
1998 at an exercise price per share equal to the initial public offering
price (if this offering is completed by January 20, 1999) or otherwise as
determined by our Board of Directors.
(3) Does not include 3,617,160 shares of Class B Common Stock subject to options
granted to UBS AG at an exercise price of $7.30 per share. See
"Business -- UBS Agreements." Each share of our Class B Common Stock
converts into one share of our Class A Common Stock for purposes of a sale
or distribution to a third party purchaser who is not an affiliate of ours.
Holders of Class B Common Stock have no voting rights, except as required by
the Delaware General Corporation Law. See "Description of Capital Stock."
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data for the years ended
December 31, 1997, 1996, and 1995 have been derived from our consolidated
financial statements, which have been audited by PricewaterhouseCoopers LLP,
independent auditors. We derived the following summary consolidated financial
information as of June 30, 1998 and for the six months ended June 30, 1998 and
1997 from unaudited consolidated financial statements, which, in our opinion,
reflect all adjustments (consisting of only normal and recurring accruals)
necessary to present fairly our financial position and results of operations for
those periods. Interim results do not necessarily indicate the results that you
may expect for any other interim period or for the full year. You should read
this information in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes thereto, which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ------------------------
1998 1997 1997 1996 1995
------- ------- ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Revenue..................................................... $452.7 $354.1 $781.6 $599.4 $342.3
Direct cost of services(2).................................. 359.9 278.6 636.3 461.2 268.6
------ ------ ------ ------ ------
Gross profit................................................ 92.8 75.5 145.3 138.2 73.7
Selling, general and administrative expenses(3)............. 66.1 63.7 125.7 92.9 52.8
Purchased research and development.......................... -- -- 2.0 4.0 --
------ ------ ------ ------ ------
Operating income............................................ 26.7 11.8 17.6 41.3 20.9
Interest income, net........................................ 1.4 0.4 0.6 0.8 1.3
Equity in earnings/(losses) of unconsolidated affiliates.... 2.5 0.2 4.1 (0.3) --
Write-down of nonmarketable equity securities(4)............ -- -- (3.9) -- --
Other income/(expense)(5)................................... 2.6 1.7 1.1 (1.6) (2.0)
------ ------ ------ ------ ------
Income before taxes......................................... 33.2 14.1 19.5 40.2 20.2
Provision for income taxes.................................. 14.1 6.0 8.3 19.7 9.4
------ ------ ------ ------ ------
Net income.................................................. $ 19.1 $ 8.1 $ 11.2 $ 20.5 $ 10.8
====== ====== ====== ====== ======
Basic earnings per common share(6).......................... $ 0.50 $ 0.20 $ 0.29 $ 0.54 $ 0.33
Weighted average common shares outstanding.................. 38.2 39.8 39.2 37.1 31.2
Diluted earnings per common share(6)........................ $ 0.40 $ 0.16 $ 0.24 $ 0.48 $ 0.31
Weighted average diluted common shares outstanding.......... 47.5 49.2 47.6 42.2 33.4
OTHER DATA:
Capital expenditures........................................ $ 12.6 $ 23.6 $ 46.1 $ 27.5 $ 18.3
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
------------------------
ACTUAL AS ADJUSTED(7)
------ --------------
(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 68.3
Total assets................................................ 331.6
Long-term debt(8)........................................... 2.4
Stockholders' equity........................................ 115.5
</TABLE>
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(1) Our results of operations include the effects of business acquisitions made
in 1996 and 1997. See Note 4 of the notes to our consolidated financial
statements included elsewhere in this Prospectus.
(2) During the first half of 1998, direct cost of services included $2.8 million
in leasehold abandonment losses. During the second half of 1997, direct cost
of services included a one-time loss accrual of $10.2 million, representing
management's estimate of known future losses associated with the termination
or completion of two long-term contracts. Also included in 1997 direct cost
of services was a $3.6 million write-off of acquired intellectual property
and $3.1 million in leasehold abandonment losses. For 1996, direct cost of
services included a $4.2 million write-off of impaired software license
transfer rights.
(3) During the second half of 1997, selling, general, and administrative
expenses included a $2.0 million charge for executive severance and related
expenses.
(4) In the second half of 1997, we wrote down our minority interest in two
nonmarketable equity securities to zero and recognized a $3.9 million non-
operating loss.
(5) During the first half of 1998, we sold an interest in a minority investment
and recognized a one-time, non-operating gain of $3.0 million.
(6) Years 1995 and 1996 and the six month period ended June 30, 1997 are
restated for the effect of Statement of Financial Accounting Standards No.
128, "Earnings Per Share." See Note 17 of the notes to our consolidated
financial statements included elsewhere in this Prospectus.
(7) As adjusted amounts give effect to the issuance and sale of shares
of Class A Common Stock at an assumed initial public offering price of $
per share and the application of the net proceeds therefrom (after deducting
underwriting discounts and commissions and offering expenses payable by us)
as set forth under "Use of Proceeds."
(8) Amounts classified as long-term debt consist primarily of current and
long-term capital lease obligations.
6
<PAGE> 9
RISK FACTORS
You should carefully consider the following risk factors and warnings
before making an investment decision. The risks described below are not the only
ones facing our company. Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations. If any
of the following risks actually occur, our business, financial condition, or
results of operations could be materially adversely affected. In such case, the
trading price of our Class A Common Stock could decline, and you may lose all or
part of your investment. You should also refer to the other information set
forth in this Prospectus, including our financial statements and the related
notes.
This Prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms and other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined below. These
factors may cause our actual results to differ materially from any
forward-looking statement.
LOSS OF MAJOR CLIENTS COULD ADVERSELY AFFECT OUR BUSINESS
Our ten largest clients accounted for approximately 64.3% of our revenue
for the six month period ended June 30, 1998. For the year ended December 31,
1997, our ten largest clients accounted for approximately 64.1% of our revenue.
Only two clients, UBS and East Midlands Electricity, accounted for more than 10%
of our revenue during 1997 and the first six months of 1998.
Our largest client is UBS. Approximately 23.4% of our revenue came from
services performed on behalf of UBS for the six month period ended June 30,
1998. For the year ended December 31, 1997, approximately 27.2% of our revenue
came from UBS. We expect UBS to account for a substantial portion of our revenue
and earnings for the foreseeable future. See "Business -- UBS Agreements."
Approximately 12.1% of our revenue came from services performed on behalf
of East Midlands Electricity for the six month period ended June 30, 1998. For
the year ended December 31, 1997, approximately 10.2% of our revenue came from
East Midlands Electricity. In July 1998, PowerGen plc acquired East Midlands
Electricity from Dominion Resources, Inc. Our agreement with East Midlands
Electricity contains provisions allowing East Midlands Electricity to terminate
the contract in specified circumstances, including the sale of East Midlands
Electricity. See "Business -- Agreement with EME." We cannot assure you that
they will not cancel or modify the contract or that we will maintain our
historic level of revenue or profits from this relationship.
After UBS and East Midlands Electricity, our next eight largest customers
accounted for approximately 28.8% of our revenue in the first six months of
1998. Our success depends substantially upon the retention of UBS, East Midlands
Electricity, and a majority of our other major clients as ongoing clients.
Generally, we may lose a client as a result of a merger or acquisition, business
failure, contract expiration, or the selection of another provider of
information technology services. Of our top ten clients as of June 30, 1998, two
contracts (representing approximately $53 million in revenue during 1997) will
expire in 1998 and one contract (representing approximately $26 million in
revenue during 1997) will expire in 1999. Of the three relationships, two are
long-term contractual relationships that we do not expect will be renewed and
one is a short-term agreement that we believe will be renewed. We cannot
guarantee that we will be able to retain long-term relationships or secure
renewals of short-term relationships with our major clients in the future. See
"-- Our Contracts Contain Termination Provisions and Pricing Risks."
CHANGES IN OUR UBS RELATIONSHIP AND VARIABILITY OF PROFITS FROM UBS COULD
ADVERSELY AFFECT OUR BUSINESS
Our relationship with UBS is a long-term strategic relationship that we
formed by entering into several agreements with UBS in January 1996. These
contracts were renegotiated in April 1997 and June 1998. The
7
<PAGE> 10
April 1997 renegotiation reduced the term of the agreements from 25 years to ten
years beginning January 1997. We cannot guarantee that our current relationship
with UBS will continue on the same terms in the future.
Revenue derived from this relationship depends upon the level of services
we perform, which may vary from period to period depending on UBS's
requirements. The agreement with UBS that covers a majority of our business with
UBS entitles us to recover our costs plus an annual fee in an agreed amount with
a bonus or penalty that can cause this annual fee to vary up or down by as much
as 15%, depending on our level of performance as determined by UBS.
Determination of whether our performance merits a bonus or a penalty depends on
many subjective factors, including service quality, client satisfaction, and our
effectiveness in assisting UBS in meeting its business goals. As a result, we
cannot predict with certainty the future level of revenue or profit from our
relationship with UBS. See "Business -- UBS Agreements."
FAILURE TO RECRUIT, TRAIN, AND RETAIN SKILLED PERSONNEL COULD INCREASE COSTS OR
LIMIT GROWTH
We must continue to grow internally by hiring and training technically
skilled people in order to perform services under our existing contracts and new
contracts that we will enter into. The people capable of filling these positions
are in great demand and recruiting and training such personnel requires
substantial resources. We have to pay an increasing amount to hire and retain a
technically-skilled workforce. Our business also experiences significant
turnover of technically-skilled people. These factors create variations and
uncertainties in our compensation expense and directly affect our profits. If we
fail to attract, train, and retain sufficient numbers of these
technically-skilled people, our business, financial condition, and results of
operations will be materially and adversely affected.
WE COULD LOSE RIGHTS TO OUR COMPANY NAME
We do not own the right to our company name. In 1988, we entered into a
license agreement with Ross Perot and the Perot Systems Family Corporation that
allows us to use the name "Perot" and "Perot Systems" in our business on a
royalty-free basis. Mr. Perot and the Perot Systems Family Corporation may
terminate this agreement at any time and for any reason. Beginning one year
following such a termination, we would not be allowed to use the names "Perot"
or "Perot Systems" in our business. Mr. Perot's or the Perot Systems Family
Corporation's termination of our license agreement could materially and
adversely affect our business, financial condition, and results of operations.
See "Certain Relationships and Related Transactions."
ROSS PEROT'S STOCK OWNERSHIP PROVIDES SUBSTANTIAL CONTROL OVER THE COMPANY
Ross Perot, our Chairman, President, and Chief Executive Officer, is the
managing general partner of HWGA, Ltd., a partnership that owned 15,853,000
shares of our Class A Common Stock as of June 30, 1998. Accordingly, upon
completion of the offering, Mr. Perot, through HWGA, Ltd., will control
approximately % of our outstanding voting common stock. As a result, Mr.
Perot, through HWGA, Ltd., will have the power to block corporate actions such
as an amendment to our Amended and Restated Certificate of Incorporation, the
consummation of any merger, or the sale of all or substantially all of our
assets. In addition, Mr. Perot may significantly influence the election of
directors and any other action requiring shareholder approval. The other general
partner of HWGA, Ltd. is Ross Perot, Jr., a director of our company, who has the
authority to manage the partnership and direct the voting or sale of the shares
of Class A Common Stock held by HWGA, Ltd. if Ross Perot is no longer the
managing general partner.
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
Our success depends largely on the skills, experience, and performance of
some key members of our management, including our Chairman, President, and Chief
Executive Officer, Ross Perot. The loss of any key members of our management may
materially and adversely affect our business, financial condition, and results
of operations.
8
<PAGE> 11
OUR CONTRACTS CONTAIN TERMINATION PROVISIONS AND PRICING RISKS
Many of the services we provide are critical to our clients' business. Some
of our contracts with clients permit termination in the event our performance is
not consistent with service levels specified in our contracts. The ability of
our clients to terminate contracts creates an uncertain revenue stream. If
clients are not satisfied with our level of performance, our reputation in the
industry may suffer, which may also materially and adversely affect our
business, financial condition, and results of operations.
Some of our contracts contain pricing provisions that require the payment
of a set fee by the client for our services regardless of the costs we incur in
performing these services, or provide for penalties in the event we fail to
achieve certain contract milestones. In such situations, we are exposed to the
risk that we will incur significant unforeseen costs or such penalties in
performing the contract.
FAILURE TO PROPERLY MANAGE GROWTH COULD ADVERSELY AFFECT OUR BUSINESS
We have expanded our operations rapidly in recent years. We intend to
continue expansion in the foreseeable future to pursue existing and potential
market opportunities. This rapid growth places a significant demand on
management and operational resources. In order to manage growth effectively, we
must implement and improve our operational systems, procedures, and controls on
a timely basis. If we fail to implement these systems, our business, financial
condition, and results of operations will be materially and adversely affected.
SIGNIFICANT UNALLOCATED NET PROCEEDS
We have not designated any specific uses for the net proceeds of this
offering. Therefore, we will have broad discretion in how we use such net
proceeds, which may include working capital, business expansion, and other
general corporate purposes.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS
Our markets are intensely competitive. Our customers' requirements and the
technology available to satisfy those requirements continually change.
Our principal competitors include Andersen Consulting LLP, Cambridge
Technology Partners, Inc., Cap Gemini Group, Computer Sciences Corporation,
debis Systemhaus GmbH (the information technology division of Daimler-Benz AG),
Electronic Data Systems Corporation, Ernst & Young LLP, IBM Global Services (a
division of International Business Machines Corporation), KPMG Peat Marwick LLP,
MCI Systemhouse, Oracle Corporation, PricewaterhouseCoopers LLP, and The SABRE
Group Holdings, Inc.
Many of these companies, as well as some other competitors, have greater
financial resources and a larger customer base than we do and may have larger
technical, sales, and marketing resources than we do. We expect to encounter
additional competition as we address new markets and as the computing and
communications markets converge.
We must frequently compete with a client's own internal information
technology capability, which may constitute a fixed cost for the client. This
may increase pricing pressure on us. If we are forced to lower our pricing or if
demand for our services decreases, our business, financial condition, and
results of operations will be materially and adversely affected.
We compete on the basis of a number of factors, including the
attractiveness of the business strategy and services that we offer, breadth of
services we offer, pricing, technological innovation, quality of service, and
ability to invest in or acquire assets of potential customers. Some of these
factors are outside our control. We cannot be sure that we will compete
successfully against our competitors in the future. If we fail to compete
successfully against our current or future competitors with respect to these or
other factors, our business, financial condition, and results of operations will
be materially and adversely affected.
9
<PAGE> 12
VARIABILITY OF QUARTERLY OPERATING RESULTS
We expect our revenues and operating results to vary from quarter to
quarter. Such variations are likely to be caused by many factors that are, to
some extent, outside our control, including:
- mix and timing of client projects;
- completion of client projects;
- hiring, integration, and utilization of associates; and
- timing of new contracts.
Accordingly, we believe that quarter-to-quarter comparisons of operating results
for preceding quarters are not necessarily meaningful. You should not rely on
the results of one quarter as an indication of our future performance.
CHANGES IN TECHNOLOGY COULD ADVERSELY AFFECT OUR BUSINESS
The markets for our information technology services change rapidly because
of technological innovation, new product introductions, changes in customer
requirements, declining prices, and evolving industry standards, among other
factors. New products and new technology often render existing information
services or technology infrastructure obsolete, excessively costly, or otherwise
unmarketable. As a result, our success depends on our ability to timely innovate
and integrate new technologies into our service offerings. We cannot guarantee
that we will be successful at adopting and integrating new technologies into our
service offerings in a timely manner.
Advances in technology also require us to commit substantial resources to
acquiring and deploying new technologies for use in our operations. We must
continue to commit resources to train our personnel and our clients' personnel
in the use of these new technologies. We must continue to train personnel to
maintain the compatibility of existing hardware and software systems with these
new technologies. We cannot be sure that we will be able to continue to commit
the resources necessary to refresh our technology infrastructure at the rate
demanded by our markets.
UNCERTAIN INTELLECTUAL PROPERTY RIGHTS
In recent years, there has been significant litigation in the United States
involving patent and other intellectual property rights. We are not currently
involved in any such litigation. We may, however, be a party to such litigation
in the future to protect our trade secrets or know-how.
Our suppliers, clients, and competitors may have patents and other
proprietary rights that cover technology employed by us. Such persons may also
seek patents in the future. United States patent applications are confidential
until a patent is issued and most technologies are developed in secret.
Accordingly, we are not, and cannot, be aware of all patents or other
intellectual property rights of which our services may pose a risk of
infringement. Others asserting rights against us could force us to defend
ourselves or our clients against alleged infringement of intellectual property
rights. We could incur substantial costs to prosecute or defend any such
litigation and intellectual property litigation could force us to do one or more
of the following:
- cease selling or using products or services that incorporate the
challenged technology;
- obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology; and
- redesign those services or products that incorporate such technology.
10
<PAGE> 13
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS, AND DELAWARE LAW COULD
DETER TAKEOVER ATTEMPTS
Our Board of Directors may issue up to 5,000,000 shares of Preferred Stock
and may determine the price, rights, preferences, privileges, and restrictions,
including voting and conversion rights, of these shares of Preferred Stock.
These determinations may be made without any further vote or action by our
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may make it
more difficult for a third party to acquire a majority of our outstanding voting
stock.
In addition, we intend to adopt a stockholders' rights plan. Under this
plan, after the occurrence of specified events that may result in a change of
control, our stockholders will be able to buy stock from us or our successor at
half the then current market price. These rights will not extend, however, to
persons participating in takeover attempts without the consent of our Board of
Directors. Accordingly, this plan could deter takeover attempts. See
"Description of Capital Stock -- Provisions Relating to Change in Control --
Stockholder Rights Plan."
Some provisions of our Amended and Restated Certificate of Incorporation
and Bylaws and of Delaware law could also delay, prevent, or make more difficult
a merger, tender offer, or proxy contest involving our company. See "Description
of Capital Stock." Among other things, these provisions:
- require an 80% vote of the stockholders to amend our bylaws;
- require advance notice for stockholder proposals and director nominations
to be considered at a vote of a meeting of stockholders;
- permit only our Chairman, President, or a majority of our Board of
Directors to call stockholder meetings, unless our Board of Directors
otherwise approves;
- prohibit actions by stockholders without a meeting, unless our Board of
Directors otherwise approves; and
- limit transactions between our company and persons that acquire
significant amounts of stock without approval of our Board of Directors.
NO DIVIDENDS
We have never declared or paid a cash dividend on our Common Stock. We do
not anticipate paying any cash dividends on our Common Stock in the foreseeable
future.
RISKS RELATED TO INTERNATIONAL OPERATIONS
We have operations in many countries around the world. International
operations are subject to various risks, including:
- fluctuations in currency exchange rates;
- complicated licensing and work permit requirements;
- variations in the protection of intellectual property rights;
- restrictions on the ability to convert currency; and
- additional expenses and risks inherent in conducting operations in
geographically distant locations, with customers speaking different
languages and having different cultural approaches to the conduct of
business.
To attempt to mitigate the effects of foreign currency fluctuations on the
results of our foreign operations, we sometimes utilize forward exchange
contracts and other hedging techniques to help protect us from large swings in
currency exchange rates.
11
<PAGE> 14
ABSENCE OF PRIOR PUBLIC MARKET OF COMMON STOCK CREATES UNCERTAINTY IN MARKET
PRICE
Prior to this offering, you could not buy or sell our Common Stock
publicly. An active public market for the Class A Common Stock may not develop
or be sustained after the offering. We negotiated and determined the initial
public offering price with the representatives of the Underwriters based on
several factors. This price may vary from the market price of the Class A Common
Stock after the offering. See "Underwriters." The market price of the Class A
Common Stock may fluctuate significantly in response to a number of factors,
some of which are beyond our control, including:
- quarterly variations in operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of information technology service and
solution companies;
- announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures, or capital commitments;
- loss of a major client;
- additions or departures of key personnel; and
- sales of Class A Common Stock.
In addition, the stock market experiences significant price and volume
fluctuations, which may materially and adversely affect the market price of the
Class A Common Stock.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF CLASS A COMMON STOCK FOR SALE COULD
ADVERSELY AFFECT ITS MARKET PRICE
shares of Class A Common Stock and 50,000 shares of Class B
Common Stock will be outstanding after consummation of this offering. The
shares of Class A Common Stock being offered hereby will be eligible
for immediate resale in the public market without restriction, unless any such
shares are acquired by one or more of our affiliates.
Following the offering, there will be approximately 41,059,097 additional
shares of Class A Common Stock outstanding or subject to currently exercisable
options. We believe that substantially all of these shares of Class A Common
Stock, and shares of Class A Common Stock issuable upon the exercise of such
options, will be freely tradable under Federal securities laws following this
offering, subject to some limitations. These limitations include vesting
provisions in option and restricted stock agreements, restrictions in lock-up
agreements, and volume and manner-of-sale restrictions under Rule 144. In
addition, UBS holds immediately exercisable options to purchase 3,617,160 shares
of our Class B Common Stock, of which 575,148 shares could be sold without
restriction under Federal securities laws following the offering. The future
sale of a substantial number of shares of Common Stock in the public market
following this offering, or the perception that such sales could occur, could
adversely affect the prevailing market price.
Stockholders holding more than % of the outstanding Common Stock and
currently exercisable options to purchase Common Stock have executed lock-up
agreements that limit their ability to sell Common Stock. These stockholders
have agreed not to sell or otherwise dispose of any shares of Common Stock for a
period of at least 180 days after the date of this Prospectus without the prior
written approval of Morgan Stanley & Co. Incorporated and us. Morgan Stanley &
Co. Incorporated and we may, in our sole discretion and at any time without
notice, release all of any portion of the securities subject to lock-up
agreements. See "Shares Eligible for Future Sale."
RISKS RELATED TO POTENTIAL YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR BUSINESS
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result, some of
these systems could fail to operate or fail to produce correct results because
they may interpret "00" to mean 1900, rather than 2000 -- widely known as the
"Year 2000
12
<PAGE> 15
Problem." These problems are likely to increase in frequency and severity as the
year 2000 approaches. The Year 2000 Problem affects some of our computers,
software, and other equipment. If we fail to properly recognize and address the
Year 2000 Problem in our systems, our business, financial condition, and results
of operations could be materially and adversely affected.
Some of our clients will be affected by the Year 2000 Problem. In some
situations, we agreed to modify, upgrade, or replace our clients' systems. We
have estimated our costs to perform these services and included these costs in
our existing contracts, although we cannot guarantee that our estimates are
accurate. If we fail to adequately assess such costs, our business, financial
condition, and results of operations could be materially and adversely affected.
The Year 2000 Problem also affects some of our major suppliers of
computers, software, and other equipment. We have discussed the Year 2000
Problem with some of these suppliers, but we cannot guarantee that these
suppliers will resolve any or all Year 2000 Problems. If our suppliers fail to
resolve Year 2000 Problems, our business could be materially disrupted.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Issues."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this Prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, those listed under "Risk Factors" and elsewhere
in this Prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements.
Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of such statements. We are under no duty to update any
of the forward-looking statements after the date of this Prospectus to conform
such statements to actual results.
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Class A Common
Stock in this offering are estimated to be $ million ($ million if the
Underwriters exercise their over-allotment option in full), after deducting
underwriting discounts and commissions and estimated offering expenses of
$ payable by the Company. The principal purposes of this offering are
to create a public market for the Class A Common Stock, which will facilitate
future access by the Company to public equity markets and enhance the ability of
the Company to use its Class A Common Stock as a means for attracting and
retaining key employees, and to obtain additional capital. The Company expects
to use the net proceeds from the offering primarily for working capital,
business expansion, and other general corporate purposes. The Company will have
significant discretion in the use of the net proceeds of this offering.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on the Common Stock.
The Company currently does not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay dividends will be at the
discretion of the Company's Board of Directors and will be dependent upon then
existing conditions, including the Company's financial condition, results of
operations, contractual restrictions, capital requirements, business prospects,
and such other factors as the Company's Board of Directors deems relevant.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of the Company as of June 30, 1998 and on an as adjusted basis to
reflect (i) an increase in the authorized number of shares of Class A Common
Stock subsequent to June 30, 1998, and (ii) the sale of the shares of Class A
Common Stock offered hereby and the application of the net proceeds received
therefrom. This table should be read in conjunction with the Company's
consolidated financial statements (the "Consolidated Financial Statements") and
related Notes contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 68,256 $
======== ========
Capital lease obligations and long-term debt, less current
maturities................................................ $ 1,150 $ 1,150
Other long-term liabilities................................. 1,922 1,922
-------- --------
Total long-term liabilities....................... 3,072 3,072
-------- --------
Stockholders' equity:
Class A Common Stock; par value $.01; authorized
100,000,000 shares (200,000,000 shares as adjusted);
38,308,790 shares outstanding(1)....................... 406
Class B Common Stock; par value $.01; authorized
24,000,000 shares; 50,000 shares outstanding(2)........ -- --
Additional paid-in capital................................ 67,562
Retained earnings......................................... 58,191 58,191
Other stockholders' equity(3)............................. (10,618) (10,618)
-------- --------
Total stockholders' equity........................... 115,541
-------- --------
Total capitalization.............................. $118,613 $
======== ========
</TABLE>
- ---------------
(1) Excludes (i) 16,173,178 shares of Class A Common Stock subject to
outstanding options as of June 30, 1998 at a weighted average exercise price
of $3.24 per share, (ii) 70,000 shares of Class A Common Stock subject to
options issued to non-executive associates in July 1998 at an exercise price
of $6.75 per share, and (iii) 4,811,450 shares of Class A Common Stock
subject to options issued to non-executive associates in a broad-based
distribution in July 1998 at an exercise price per share equal to the
initial public offering price in this offering (if this offering is
completed by January 20, 1999) or otherwise as determined by the Board of
Directors.
(2) Excludes 3,617,160 shares of Class B Common Stock reserved for issuance to
UBS AG ("UBS") pursuant to options granted under the Company's agreements
with UBS (the "UBS Agreements") at an exercise price of $7.30 per share. See
"Business -- UBS Agreements."
(3) Consists of deferred compensation, treasury stock, accumulated other
comprehensive income, and notes receivable from stockholders. See the
Consolidated Statements of Changes in Stockholders' Equity included in the
Consolidated Financial Statements.
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<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the years
ended December 31, 1997, 1996, 1995, 1994, and 1993 have been derived from the
Company's consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent auditors. The selected consolidated
financial information as of and for the six months ended June 30, 1998 and 1997
have been derived from unaudited consolidated financial statements, which, in
management's opinion, reflect all adjustments (consisting of only normal and
recurring accruals) necessary to present fairly the Company's financial position
and results of operations for those periods. Interim results are not necessarily
indicative of the results that may be expected for any other interim period or
for the full year. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto, which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Revenue.................................... $452.7 $354.1 $781.6 $599.4 $342.3 $292.2 $291.7
Direct cost of services(2)................. 359.9 278.6 636.3 461.2 268.6 239.4 270.4
------ ------ ------ ------ ------ ------ ------
Gross profit............................... 92.8 75.5 145.3 138.2 73.7 52.8 21.3
Selling, general, and administrative
expenses(3).............................. 66.1 63.7 125.7 92.9 52.8 41.9 41.0
Purchased research and development......... -- -- 2.0 4.0 -- -- --
------ ------ ------ ------ ------ ------ ------
Operating income/(loss).................... 26.7 11.8 17.6 41.3 20.9 10.9 (19.7)
Interest income, net....................... 1.4 0.4 0.6 0.8 1.3 -- (2.0)
Equity in earnings/(losses) of
unconsolidated affiliates................ 2.5 0.2 4.1 (0.3) -- -- --
Write-down of nonmarketable equity
securities(4)............................ -- -- (3.9) -- -- -- --
Other income/(expense)(5).................. 2.6 1.7 1.1 (1.6) (2.0) (0.8) (0.7)
------ ------ ------ ------ ------ ------ ------
Income (loss) before taxes................. 33.2 14.1 19.5 40.2 20.2 10.1 (22.4)
Provision (benefit) for income taxes....... 14.1 6.0 8.3 19.7 9.4 3.8 (7.9)
------ ------ ------ ------ ------ ------ ------
Net income (loss).......................... $ 19.1 $ 8.1 $ 11.2 $ 20.5 $ 10.8 $ 6.3 $(14.5)
====== ====== ====== ====== ====== ====== ======
Basic earnings (loss) per common
share(6)................................. $ 0.50 $ 0.20 $ 0.29 $ 0.54 $ 0.33 $ 0.19 $(0.51)
Weighted average common shares
outstanding.............................. 38.2 39.8 39.2 37.1 31.2 30.7 29.9
Diluted earnings (loss) per common
share(6)................................. $ 0.40 $ 0.16 $ 0.24 $ 0.48 $ 0.31 $ 0.18 $(0.51)
Weighted average diluted common shares
outstanding.............................. 47.5 49.2 47.6 42.2 33.4 32.2 29.9
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.................. $ 68.3 $ 17.0 $ 35.3 $ 27.5 $ 17.4 $ 9.2 $ 26.9
Total assets............................... 331.6 248.1 267.1 232.2 130.5 90.3 121.3
Long-term debt(7).......................... 2.4 4.0 2.9 5.2 6.1 10.0 18.7
Stockholders' equity....................... 115.5 89.2 93.3 70.8 42.9 32.7 25.9
OTHER DATA:
Capital expenditures....................... $ 12.6 $ 23.6 $ 46.1 $ 27.5 $ 18.3 $ 10.3 $ 15.0
</TABLE>
- ---------------
(1) The Company's results of operations include the effects of business
acquisitions made in 1996 and 1997. See Note 4 of the Notes to the
Consolidated Financial Statements included elsewhere in this Prospectus.
(2) During the first half of 1998, direct cost of services included $2.8 million
in leasehold abandonment losses. During the second half of 1997, direct cost
of services included a one-time loss accrual of $10.2 million, representing
management's estimate of known future losses associated with the termination
or completion of two long-term contracts. Also included in 1997 direct cost
of services was a $3.6 million write-off of acquired intellectual property
and $3.1 million in leasehold abandonment losses. For 1996, direct cost of
services included a $4.2 million write-off of impaired software license
transfer rights. During 1994, direct cost of services included a one-time
gain of $6.7 million on the termination of a significant contract. During
1993, the Company recorded a $19.3 million 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.
(3) During the second half of 1997, selling, general, and administrative
expenses included a $2.0 million charge for executive severance and related
expenses.
(4) In the second half of 1997, the Company wrote-down its minority interest in
two nonmarketable equity securities to zero, and recognized a $3.9 million
non-operating loss.
(5) During the first half of 1998, the Company sold an interest in a minority
investment, and recognized a one-time non-operating gain of $3.0 million.
(6) Years 1993 through 1996 and the six month period ended June 30, 1997 are
restated for the effect of Statement of Financial Accounting Standards No.
128, "Earnings Per Share." See Note 17 of the Notes to the Consolidated
Financial Statements included elsewhere in this Prospectus.
(7) Amounts classified as long-term debt consist primarily of current and
long-term capital lease obligations.
16
<PAGE> 19
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 elsewhere herein.
OVERVIEW
The Company is a worldwide provider of information technology services and
business solutions to a broad range of clients. The Company integrates three
core disciplines in providing solutions and services to its clients: information
technology infrastructure services, systems integration and applications
development, and business integration. Information technology infrastructure
services combine information technology outsourcing, staffing, and
infrastructure management. Systems integration and applications development
includes implementation of new and existing systems, including both
custom-developed and packaged software. Business integration services include
working with clients to develop and implement business strategy, information
technology strategy, process redesign, and change management.
From 1993 through the first half of 1998, the Company's business mix
shifted from being predominantly an information technology infrastructure
services provider, where revenue was obtained through long term unit-price or
fixed-price facilities management contracts, to a more balanced mix with
increased emphasis on systems integration and applications development and
business integration. Information technology infrastructure services currently
make up less than half of the Company's revenue, and newer engagements are
primarily level-of-effort based contracts that combine several service
offerings. The Company's strategy is to continue this increased focus on systems
integration and applications development and business integration services,
supported by value-added information technology infrastructure services.
During 1996 and 1997, the Company made several acquisitions. The acquired
firms added strength in the areas of business integration and consulting,
business-to-business electronic commerce over the Internet, business
reengineering, object-oriented applications development, data mining, and
systems management. These acquisitions contributed revenue of $42.4 million for
the six months ended June 30, 1998.
The Company's top 10 clients accounted for approximately 64.3% of total
revenue for the six months ended June 30, 1998, 64.1% for the year ended
December 31, 1997, and 68.3% for the year ended December 31, 1996. See "Risk
Factors -- Loss of Major Clients Could Adversely Affect Our Business."
Approximately 34.6% of the Company's total revenue was derived from
international operations for the six months ended June 30, 1998, 33.6% for the
year ended December 31, 1997, and 33.2% for the year ended December 31, 1996.
The Company provides services under contracts containing pricing provisions
that relate to the level of services supplied by the Company
("level-of-efforts"), provide for a set fee to be received by the Company
("fixed-price"), or link the revenue to the Company to a client-specific data
point, such as the number of transactions processed or CPU minutes consumed
("unit-price"). Many of the Company's contracts combine one or more of these
types of provisions. The majority of revenue for the six months ended June 30,
1998 and year ended December 31, 1997 was derived from level-of-efforts pricing.
Revenue from level-of-efforts pricing is based on time and materials, direct
costs plus an administrative fee (which may be either a fixed amount or a
percentage of direct costs incurred), or a combination of these methods and may
be based on a set fee for a specified level of resources that is adjusted for
incremental resource usage. Revenue from fixed-price contracts is recognized on
the percentage-of-completion method, and is earned based on the percentage
relationship of incurred contract costs to date to total estimated contract
costs, after giving effect to the most recent estimates of total cost. Revenue
from unit-price contracts is recognized based on technology units utilized or by
number of transactions processed during a given period. For unit-price
contracts, the Company establishes a per-unit fee based on the cost structure
associated with the delivery of that unit of service.
The Company continuously monitors its contract performance in light of
client expectations, the complexity of work, project plans, delivery schedules,
and other relevant factors. Provisions for estimated losses, if any, are made in
the period in which the loss first becomes probable and reasonably estimable.
Other
17
<PAGE> 20
contract-related accrued liabilities are also recorded to match contract-related
expenses in the period in which revenues from those contracts are recognized.
The Company experienced substantial growth in 1996, 1997, and during the
first six months of 1998. A significant portion of the growth in 1996 resulted
from the Company's entry into the UBS Agreements in January 1996. The Company's
operating UBS relationship comprises two main components, the IT Services
Agreement, which is a level-of-effort contract, and various project assignments.
See "Business -- UBS Agreements." During the years ended December 31, 1997 and
1996, approximately 21.7% and 22.9%, respectively, of the Company's revenues
were earned in connection with services performed under the IT Services
Agreement, and 5.5% and 5.3%, respectively, of the Company's revenues were
earned in connection with the various projects performed for UBS. For the six
month period ended June 30, 1998, approximately 19.8% of the Company's revenues
were earned in connection with services performed under the IT Services
Agreement and approximately 3.6% of the Company's revenues were earned in
connection with other services performed for UBS.
The Company has increased its focus on expense reduction and cost control
over the last year in numerous ways. The most significant savings in
administrative expenses included reductions in executive compensation expense,
the cancellation of discretionary projects, and reductions in marketing and
promotional expenses, and non-essential travel. In addition, the Company
established more stringent expense policies and created a capital expenditures
review committee. These cost control measures contributed to a decrease in
selling, general, and administrative expenses as a percentage of revenue from
16.1% in 1997 to 14.6% for the six months ended June 30, 1998. The Company
anticipates that expansion in the areas of recruiting, training, and business
development will increase during the second half of 1998. As a result, the
Company expects selling, general, and administrative expenses as a percentage of
revenue will increase from its current level.
RESULTS OF OPERATIONS
Comparison of the six months ended June 30, 1998 and 1997
Revenue increased in the six months ended June 30, 1998 by 27.9% to $452.7
million from $354.1 million in the six months ended June 30, 1997, due to the
entry into two significant contracts in the third quarter of 1997 that generated
$43.9 million in the six months ended June 30, 1998, $13.3 million in additional
revenue resulting from the inclusion of businesses acquired in the first six
months of 1997 for the entire six month period in 1998, and a $41.4 million
increase in revenue from other new and existing business, including $3.9 million
from UBS.
Domestic revenue grew by 24.7% in the six months ended June 30, 1998 to
$296.1 million from $237.4 million in the six months ended June 30, 1997, and
decreased slightly as a percentage of total revenue to 65.4% from 67.0% over the
same period.
Non-domestic revenue, comprising European and Asian operations, grew by
34.2% in the six months ended June 30, 1998 to $156.6 million from $116.7
million in the six months ended June 30, 1997, and increased as a percentage of
total revenue to 34.6% from 33.0%. Asian operations represented $6.0 million, or
1.3%, and $4.5 million, or 1.3%, of total revenue for the six months ended June
30, 1998 and 1997, respectively.
Direct cost of services increased in the six months ended June 30, 1998 by
29.2% to $359.9 million from $278.6 million in the six months ended June 30,
1997, due primarily to continued growth in the Company's business. Gross margin
decreased slightly to 20.5% from 21.3% for the six months ended June 30, 1998
compared to the six months ended June 30, 1997, due in part to the recognition
of a $5.2 million charge in the second quarter of 1998 to address Year 2000
Problem-related exposures for certain client contracts, and an additional
expense of $2.8 million recognized in the first half of 1998 related to the
abandonment and sublease of unused office space.
Selling, general, and administrative expenses increased in the six months
ended June 30, 1998 by 3.8% to $66.1 million from $63.7 million in the six
months ended June 30, 1997, but decreased as a percentage of total
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contract revenue to 14.6% from 18.0%, respectively, due primarily to the
Company's cost control measures. As a result, operating income increased in the
six months ended June 30, 1998 to $26.7 million from $11.8 million in the six
months ended June 30, 1997, and operating margin (operating income as a
percentage of contract revenue) increased to 5.9% from 3.3%.
Equity in earnings of unconsolidated affiliates, net, increased in the six
months ended June 30, 1998 to $2.5 million from $0.2 million during the six
months ended June 30, 1997 due to improved results at Systor AG ("Systor"), a
subsidiary of UBS, and at HCL Perot Systems N.V. ("HPS"), a software joint
venture based in India. The equity in earnings for Systor increased to $1.2
million from $0.4 million and for HPS increased to equity in earnings of $1.3
million from equity in losses of $0.2 million during the six months ended June
30, 1998 and 1997, respectively. Other income/(expense) increased in the six
months ended June 30, 1998 to $2.6 million from $1.7 million in the six months
ended June 30, 1997 primarily due to a $3.0 million gain on the sale of the
Company's limited partnership interest in a venture capital fund, which was
offset in part by a $1.3 million decrease in foreign exchange gains and a $0.8
million decrease in gains on asset sales.
Net income increased 135.8% in the six months ended June 30, 1998 to $19.1
million from $8.1 million in the six months ended June 30, 1997 and net income
margin increased to 4.2% from 2.3%.
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996
Revenue increased in 1997 by 30.4% to $781.6 million from $599.4 million in
1996, due to $43.6 million in revenue growth from the UBS Agreements, $60.2
million in revenue representing the inclusion of a full year's results from
certain businesses acquired in the second half of 1996 and revenue received from
businesses acquired during the first half of 1997, and a $78.4 million increase
in revenue from other new and existing contracts.
Domestic revenue grew by 29.7% in 1997 to $519.1 million from $400.2
million in 1996, and decreased slightly as a percentage of total revenue to
66.4% from 66.8% over the same periods.
Non-domestic revenue, consisting of European and Asian operations, grew by
31.8% in 1997 to $262.5 million from $199.2 million in 1996, and increased
slightly as a percentage of total revenue to 33.6%, from 33.2% over the same
periods. Asian operations represented $9.7 million, or 1.2%, and $7.3 million,
or 1.2%, of total revenue in 1997 and 1996, respectively.
Direct cost of services increased in 1997 by 38.0% to $636.3 million from
$461.2 million in 1996. Gross margin decreased to 18.6% in 1997 as compared to
23.1% in 1996. The decrease in gross margin was due in part to a margin decline
from 1996 to 1997 related to the renegotiation of the UBS Agreements, which took
effect on January 1, 1997. The Company also incurred expenses of $4.3 million in
1997 resulting from an expansion of business integration activities. In
addition, the Company incurred several special charges in 1997, including
special contract loss provisions of $10.2 million related to known termination
and contract completion losses on two long-term contracts, a $3.6 million
write-off of intellectual property rights acquired, and a $3.1 million charge
related to the abandonment and sub-lease of unused office space, collectively
resulting in a 2.7% increase in direct cost of services.
Selling, general, and administrative expenses increased in 1997 to 16.1% of
total revenue from 15.5% of total revenue in 1996, due primarily to expansion of
the sales force, staff growth in management and administrative support areas,
severance for senior executives and increased goodwill amortization associated
with businesses acquired. As a result of the factors noted above, operating
income decreased in 1997 to $17.6 million from $41.3 million in 1996, and
operating margin declined to 2.3% from 6.9%.
Equity in earnings of unconsolidated affiliates, net, increased in 1997 to
$4.1 million from a loss of $0.3 million in 1996 due to improved results at
Systor and HPS. The equity in earnings for Systor increased to $3.6 million from
$0.9 million and the equity in earnings of HPS increased to $0.5 million from a
loss of $1.2 million in 1997 and 1996, respectively. Other income, net,
increased in 1997 to $1.1 million from a net expense of $1.6 million in 1996.
The positive impact of the above items was substantially offset by a $3.9
million write down of non-marketable equity securities to net realizable value
during 1997.
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The decrease in the effective tax rate to 42.5% in 1997 from 48.9% in 1996
was due to both a decrease in nondeductible amortization related to acquisitions
and increased earnings in foreign jurisdictions in which the Company intends to
permanently invest subsidiary profits.
Net income decreased 45.4% in 1997 to $11.2 million from $20.5 million in
1996 and net income margin decreased to 1.4% from 3.4%.
Prior to special charges, which included special contract loss provisions,
the write-off of purchased research and development, the write-off of acquired
intellectual property rights, and the write-down of non-marketable equity
securities, income before taxes decreased to $39.2 million in 1997 from $44.1
million in 1996. Net income, excluding the after tax effect of these charges,
increased to $22.6 million in 1997 from $22.5 million in 1996.
Comparison of the year ended December 31, 1996 to the year ended December 31,
1995
Revenue increased in 1996 by 75.1% to $599.4 million from $342.3 million in
1995, due to $161.5 million in revenue from the UBS Agreements, $10.7 million in
revenue from businesses acquired in the second half of 1996, and a $84.9 million
increase in revenue from other new and existing business.
Domestic revenue grew by 67.6% in 1996 to $400.2 million from $238.8
million in 1995, but declined as a percentage of total revenue to 66.8% from
69.8% over the same periods. UBS accounted for $88.9 million of the domestic
revenue in 1996 compared to $2.8 million in 1995.
Non-domestic revenue, consisting of European and Asian operations, grew by
92.5% in 1996 to $199.2 million from $103.5 million in 1995, and increased as a
percentage of total revenue to 33.2% from 30.2% over the same periods. The key
factor was the UBS revenue of which $72.7 million was earned in Europe and $7.3
million in Asia. Asian operations represented $7.3 million, or 1.2%, of total
revenue in 1996, the first year the Company had operations in Asia.
Direct cost of services increased by 71.7% in 1996 to $461.2 million from
$268.6 million in 1995 and gross margin increased to 23.1% in 1996 from 21.5% in
1995, due primarily to the UBS Agreements entered into in 1996.
Selling, general, and administrative expenses increased in 1996 to 15.5% of
total revenue from 15.4% of total revenue in 1995, due primarily to significant
increases in revenue, offset by the addition of senior executives, expansion of
the sales force, and staff growth in management and administrative support
areas. As a percentage of revenues, selling, general, and administrative
expenses remained essentially unchanged. Operating income increased in 1996 to
$41.3 million from $20.9 million in 1995, reflecting business growth and other
factors discussed above. Operating margin increased in 1996 to 6.9% from 6.1% in
1995, due to a decline in direct costs of services as a percentage of contract
revenue in 1996 to 76.9% from 78.5% 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.
Net income increased to $20.5 million in 1996 from $10.8 million in 1995.
Net income margin increased in 1996 to 3.4% from 3.2% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, cash and cash equivalents
increased 93.5% to $68.3 million from $35.3 million at December 31, 1997
primarily due to increased cash flow from operating activities.
Cash flow provided by operating activities increased to $32.4 million from
$5.7 million for the periods ended June 30, 1998 and 1997, respectively. The
increase in cash flow from operating activities was due primarily to general
business growth and increased focus on the timely collection of accounts
receivable. There was a $65.0 million increase in current liabilities such as
accounts payable, deferred revenue, and accrued compensation, offset in part by
a $46.1 million increase in current assets consisting primarily of increased
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accounts receivable. Cash flow from operating activities was $71.0 million in
1997 compared to $54.0 million in 1996 and $24.0 million in 1995.
Net cash used in investing activities was $0.3 million for the six months
ended June 30, 1998. Cash expenditures for property, equipment, and software
during the six months ended June 30, 1998 was $12.6 million and was
substantially offset by proceeds from the sale of property and equipment and the
sale of the Company's limited partnership interest in a venture capital fund.
Cash used for business acquisitions was $13.5 million for the six months ended
June 30, 1997 compared to zero in the six months ended June 30, 1998. Net cash
used in investing activities was $65.9 million in 1997, compared to $41.9
million in 1996 and $12.4 million in 1995.
For the six months ended June 30, 1998, net cash provided by financing
activities was approximately $1.0 million, compared to $25.1 million for the six
months ended June 30, 1997. This decrease was due primarily to a $18.8 million
borrowing on the Company's line of credit at June 30, 1997, which was paid off
in full by December 31, 1997 and there were no borrowings at June 30, 1998. Net
cash provided by financing activities was $4.4 million in 1997 due primarily to
the proceeds from the sale of stock options to UBS compared to net cash used in
financing activities of $4.5 million in 1996 and $3.6 million in 1995.
As of July 31, 1998, the Company had a $40.0 million undrawn line of credit
with a financial institution that expires in January 1999. The Company
anticipates that cash flows from operating activities will provide sufficient
funds to meet its operating needs for the foreseeable future. From time to time,
the Company may consider repurchasing its Class A Common Stock depending on
price and availability and alternative uses for its financial resources.
NEW ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement 131") effective for years beginning after December 15, 1997.
Statement 131 requires that a public company report financial and descriptive
information about its reportable operating segments pursuant to criteria that
differ from current accounting practice. Operating segments, as defined, are
components of an enterprise about which separate financial information is
available that is evaluated regularly by management in deciding how to allocate
resources and in assessing performance. The financial information to be reported
includes segment profit or loss, certain revenue and expense items and segment
assets and reconciliations to corresponding amounts in the financial statements.
Statement 131 also requires information about revenues from products or
services, countries where the company has operations or assets and major
customers. Management does not believe the implementation of Statement 131 will
have a material impact on its consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133 which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. A specific accounting treatment applies to
each type of hedge. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. SFAS No. 133 is not expected to have a
material impact on the Company's financial statements.
The American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," in March 1998. SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and requires costs incurred in the application
development stage (whether internal or external) to be capitalized. This SOP is
applicable to all financial statements for fiscal years beginning after December
15, 1998, and should be applied to internal-use computer software costs incurred
in those fiscal years for all projects, including those projects in progress
upon initial application of this SOP. Costs incurred prior to initial
application of this SOP, whether or not capitalized, should not be adjusted to
the amounts that would have been capitalized had this SOP been in effect when
those costs were incurred. The adoption of this
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SOP is not expected to have a material impact on the annual financial position
or operating results of the Company.
YEAR 2000 ISSUES
Some computers, software, and other equipment includes computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are commonly referred to as the "Year 2000 Problem".
Assessment. The Year 2000 Problem affects computers, software, and other
equipment used, operated, or maintained by the Company for itself and its
customers. Accordingly, the Company is currently assessing the potential impact
of, and costs of remediating, the Year 2000 Problem for its internal systems
and, where the Company is contractually obligated to remediate the Year 2000
Problem, on systems operated or maintained on behalf of its customers. In
addition, the Company is performing assessments for some other customers.
Because the Company's business involves the assessment, implementation, and
operation of computer systems, the Company has not generally obtained
verification or validation by independent third parties of its processes to
assess Year 2000 Problems or its corrections of Year 2000 Problems. However, the
Company's Year 2000 project team is reviewing the project plans prepared by each
of the Company's business units and monitoring their methods and progress
against those plans.
Internal Infrastructure. The Company believes that it has identified most
of the major computers, software applications, and related equipment used in
connection with its internal operations that must be modified, upgraded, or
replaced to minimize the possibility of a material disruption to its business.
The Company has commenced the process of modifying, upgrading, and replacing
major systems that have been assessed as adversely affected, and expects to
complete this process before the occurrence of any material disruption of its
business.
The Company has commenced the process of identifying other computers,
software, and other equipment that may be affected by the Year 2000 Problem, and
determining whether remedial action is needed. The Company expects to complete
this process before the end of 1998.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 Problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 Problem on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems to
be approximately $1.0 million, almost all of which the Company believes will be
incurred during 1998 and 1999. This estimate is being monitored and will be
revised as additional information becomes available.
Based on the activities described above, the Company does not believe that
the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations.
Client Systems. During 1997, the Company initiated assessments of the
effect of the Year 2000 Problem on computers, software, and other equipment it
operates or maintains for its customers, and its obligations to modify, upgrade,
or replace these systems. As part of this process, the Company has been
estimating the costs and revenues to the Company for performing any necessary
services. The Company is monitoring and updating this assessment on an ongoing
basis. Management believes that the estimated cost associated with making
clients' systems Year 2000 compliant for contracts where the Company is
obligated to perform these services at its expense has been and will be treated
as a contract cost and is included in the estimate of total contract costs for
the respective contract under the Company's revenue recognition policy. The
Company believes that its clients have been deferring other projects pending
resolution of their Year 2000 Problems. The
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Company recorded a $5.2 million charge in direct cost of services during the
second quarter of 1998 to address Year 2000 Problem exposures for certain client
contracts.
Suppliers. The Company has initiated communications with third party
suppliers of the major computers, software, and other equipment used, operated,
or maintained by the Company for itself or its customers to identify and, to the
extent possible, to resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over the actions of these third party
suppliers. Thus, while the Company expects that it will be able to resolve any
significant Year 2000 Problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 Problems with these
systems before the occurrence of a material disruption to the business of the
Company or any of its customers. Any failure of these third parties to timely
resolve Year 2000 Problems with their systems could have a material adverse
effect on the Company's business, financial condition, and results of operation.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company or its clients have been identified or corrected. The
number of devices that could be affected and the interactions among these
devices are simply too numerous. In addition, no one can accurately predict how
many Year 2000 Problem-related failures will occur or the severity, duration, or
financial consequences of these perhaps inevitable failures. As a result,
management expects that the Company will likely suffer the following
consequences:
- a significant number of operational inconveniences and inefficiencies for
the Company and its clients that will divert management's time and
attention and financial and human resources from its ordinary business
activities;
- a lesser number of serious system failures that will require significant
efforts by the Company or its clients to prevent or alleviate material
business disruptions;
- several routine business disputes and claims for pricing adjustments or
penalties due to Year 2000 Problems by clients, which will be resolved in
the ordinary course of business; and
- a few serious business disputes alleging that the Company failed to
comply with the terms of its contracts or industry standards of
performance, some of which could result in litigation or contract
termination.
Contingency Plans. The Company is currently developing contingency plans to
be implemented if its efforts to identify and correct Year 2000 Problems
affecting its internal systems are not effective. The Company expects to
complete its contingency plans by the end of 1998. Depending on the systems
affected, these plans could include accelerated replacement of affected
equipment or software, short- to medium-term use of backup sites, equipment and
software, increased work hours for Company personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000 Problems that
arise or to provide manual workarounds for information systems, and similar
approaches. If the Company is required to implement any of these contingency
plans, it could have a material adverse effect on the Company's financial
condition and results of operations.
The Company is also developing contingency plans for certain clients where
such plans are contractually required or are otherwise appropriate to be
developed. In most cases, these contingency plans are being developed jointly by
the Company and its clients. Depending on the systems affected, these plans
could include accelerated replacement of affected equipment or software, short-
to medium-term use of backup sites, equipment and software, increased work hours
for Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds for
information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
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Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
IMPACT OF EUROPEAN MONETARY UNION
The European Union is moving towards economic and monetary union in Europe,
with the goal of introducing a single currency called the EURO. The Company is
currently assessing the effect of the EURO conversion.
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BUSINESS
OVERVIEW
The Company is a worldwide provider of information technology services and
business solutions to a broad range of clients. The Company serves its clients
by delivering services and solutions focused on each client's needs, with
particular emphasis on helping clients more effectively serve their customers.
The Company integrates three core disciplines in providing solutions and
services to its clients: (i) business integration; (ii) systems integration and
applications development; and (iii) information technology infrastructure
services. Business integration services include working with clients to develop
and implement business strategy, information technology strategy, process
redesign, and change management. Systems integration and applications
development includes the design and implementation of information technology
systems for clients, including both custom-developed and packaged software.
Information technology infrastructure services combine information technology
outsourcing, staffing, and infrastructure management.
The Company's approach is to provide clients with an "integrated service
offering" -- a combination of multiple disciplines that assists its clients in
improving their business operations or in creating new business offerings. With
this approach, the Company is able to create long-term relationships with its
clients that begin with an analysis of its clients' business strategies and
continue through the implementation of information technology solutions and the
realization of the clients' goals.
In marketing its services, the Company is primarily focused on four
industries: Financial Services, Energy, Healthcare, and Travel and
Transportation. The Company targets these industries to capture the
opportunities arising from these industries' rapid rates of change, growth, and
the increasing importance of information technology in driving and managing this
change and growth. The Company also has significant clients in the
Communications and Media and Manufacturing industries and continually evaluates
additional industries for future growth opportunities. As these opportunities
develop, the Company may allocate resources to target them as additional focal
industries. The Company's clients include: UBS, East Midlands Electricity (IT)
Limited (together with its parent company, East Midlands Electricity plc,
"EME"), Tenet Healthcare Corporation, National Car Rental System, Inc.,
Volkswagen of America, Inc., Parsons Corporation, and Cedel Global Services,
S.A.
Ross Perot and eight associates founded the Company in June 1988. Since
then, the Company has grown to over 5,600 associates with operations worldwide.
The Company's revenues have grown from $291.7 million in 1993 to $781.6 million
in 1997 and $452.7 million for the six months ended June 30, 1998.
INDUSTRY BACKGROUND
Worldwide demand for information technology services and solutions is
growing at a rapid rate. According to industry sources, the aggregate worldwide
market for business integration, systems integration and applications
development, and information technology infrastructure services was an estimated
$178.2 billion in 1997 and is expected to increase to $307.4 billion in 2002,
representing a compound annual growth rate of 11.5%. These sources also indicate
that the estimated worldwide market size for 1997 and the projected market size
for 2002 for business integration is $46.3 billion and $88.4 billion,
respectively; for systems integration and applications development is $41.6
billion and $76.0 billion, respectively; and for information technology
infrastructure services is $90.3 billion and $143.0 billion, respectively. In
2002, the United States market is expected to account for 51.4% of the global
market with an estimated market size of $158.0 billion, and Western Europe is
expected to account for 27.7% of the global market with an estimated market size
of $85.1 billion.
The broad presence of technology in global markets, both in the hands of
businesses and consumers, continually changes the way businesses operate and
compete. Businesses that operate in industries characterized by rapid
technological change and consolidation, such as Financial Services, Energy,
Healthcare, and Travel and Transportation, must increasingly rely on information
technology to remain competitive.
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Several factors contribute to growth in the information technology industry
as it transitions from a back office role in business to a key driver in
competitively positioning enterprises, including the rapid pace of technological
change, the globalization and consolidation of industry, and the shift towards
the deregulation of certain industries. Using information technology as a
strategic tool enables enterprises to reduce cycle times and production costs,
improve the rate of introduction of new products, services and pricing, and
better serve the needs of their customers. According to industry experts, the
utilities, transportation, banking and financial services, and communications
sectors are among the industries experiencing the fastest growth in information
technology services expenditures.
Designing, developing, and implementing information technology solutions
for individual businesses has become increasingly complex. Many businesses do
not have the time, resources, or expertise to keep pace with industry and
technological change or to efficiently build information technology solutions.
Globally, businesses are increasingly focusing on their core business
competencies and are turning to outside sources to provide information
technology services and skills tailored to create timely solutions and change
business processes to meet specific business objectives.
To date, it has been difficult for businesses to find solutions tailored to
their complex information technology needs. Although there are many suppliers of
information technology solutions, few are able to combine large, integrated
service offerings, global presence, and capital strength with customer focus and
a strong, cohesive culture.
THE PEROT SYSTEMS APPROACH
The Company provides services on a worldwide basis that are uniquely
structured to each client, combining the appropriate industry expertise and core
disciplines to solve the client's business problems and implement new strategies
to generate future growth. The Company's approach includes:
- Providing Integrated Service Offerings. The Company combines its business
integration, systems integration and applications development, and
information technology infrastructure services to analyze and address its
clients' business and information technology challenges and
opportunities. Rather than narrowly focusing on isolated problems, the
Company's integrated service offerings are designed to allow a client to
achieve growth and efficiencies through the implementation of broader
business solutions.
- Structuring Creative Long-Term Relationships. The Company seeks to create
long-term relationships with clients that begin with the initial analysis
of a client's business and information technology problems and
opportunities and continue through implementation of solutions and the
realization of benefits. By creatively structuring contracts with
economic incentives that link the Company's compensation to the client's
business results or the level of the Company's performance, the Company
strives to maximize revenues and client satisfaction.
- Employing Multi-disciplinary Teams. The Company employs
multi-disciplinary teams of associates with industry-specific expertise
and associates with superior technical skills to best formulate and
implement integrated information technology solutions for clients.
- Formulating Unbiased Client-Based Solutions. The Company analyzes its
clients' business problems and opportunities from the perspective of the
clients and their customers. The Company then impartially assembles the
best combination of Company services and third party products to meet the
clients' needs.
PEROT SYSTEMS GROWTH STRATEGY
The Company's strategic objective is to become the provider of choice for
information technology services and business solutions. Key elements of the
Company's growth strategy include:
- Expand Value-Added Service Offerings. The Company believes that services
aimed at growing a client's business and making a client more productive
and competitive will create more value for the Company's clients, and
accordingly generate more growth, than traditional technology functional
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services. The Company's strategy includes an increasing focus on systems
integration and applications development and business integration
services, supported by value-added information technology infrastructure
services.
- Target Rapidly Changing Industries. The Company targets rapidly changing
industries that are substantially affected by the increasing need for
information technology. The Company utilizes associates with operating
expertise in these specific industries as a competitive advantage in
providing superior services to its clients.
- Create and Leverage Growth Engines. In each industry, the Company has the
opportunity to create "growth engines" -- sets of skills, business
processes, and know-how that, when combined, create leverageable business
solutions for clients. The Company can use these growth engines to build
its presence in its targeted industries and adapt them to develop or
enter other industries.
- Develop Select Clients. The Company believes that client selection is key
to growth and profitability. The Company targets market leaders and
aspiring market leaders that are committed to using information
technology strategically and are willing to develop long-term
relationships.
- Attract, Train, and Retain Associates with Strong Character. The Company
believes that attracting, training, and retaining high quality associates
is essential to its growth. The Company hires motivated individuals with
strong character and leadership traits and provides them with ongoing
technological and leadership skills training. The Company emphasizes
retaining its associates with challenging work assignments and incentive
programs, including rewarding outstanding performance with equity
interests in the Company. More than 90% of the Company's associates hold
equity interests in the Company.
CORE DISCIPLINES
The Company's broad range of service offerings are classified within three
core disciplines: (i) business integration; (ii) systems integration and
applications development; and (iii) information technology infrastructure
services.
[Pyramid Graphic]
[The Prospectus contains a graphic representation of a triangle divided into
three horizontal segments labeled Business Integration, Systems
Integration/Applications Development, and Infrastructure Services.]
The Company combines these disciplines into an integrated service offering
to create a customized solution for its clients. The Company believes that, in
addition to providing clients with more comprehensive information technology and
business solutions, its integrated service offerings allow the Company to
attract strategically motivated clients, focus on our clients' business
objectives, and ultimately generate higher value for our clients.
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Business Integration
In providing business integration services, the Company works with clients
to, among other things, develop and implement business strategy, information
technology strategy, process redesign, and change management. These services
include:
- Business Strategy. To help clients develop and implement business
strategies, the Company offers strategic advice designed by business and
technical experts with industry-specific knowledge to align client
capabilities with the demands of the market in which they compete.
- Information Technology Strategy. The Company helps its clients create and
implement an information technology strategy that optimizes the use of
information technology to achieve the client's business objectives. The
Company employs its extensive knowledge of information technology
architectures, infrastructures, and technologies to continually refine
and update its clients' information technology strategies.
- Process Redesign. The Company works with clients to systematically
reengineer their business processes with innovative approaches
incorporating cross-industry best practices.
- Change Management. The Company advises clients with respect to major
business and cultural changes by assessing current skills and resource
requirements, implementing organizational changes and associated
measurement systems, and creating employee communication plans.
In order to expand and further develop its business integration
capabilities, the Company has acquired several specialized businesses,
including:
Benton International, Inc. Acquired in February 1997, Benton International
is a financial services consulting organization, specializing in telephone and
Internet-based direct banking and electronic payments systems. The firm employs
associates with experience in the financial services industry, including senior
positions at major financial institutions and on governmental advisory boards.
The firm provides strategic business advice to its financial clients, including
advising major retail banks on their mergers and acquisitions strategy.
Stamos Associates, Inc. Acquired in June 1997, Stamos Associates is a
healthcare consulting organization providing business integration services to
regional health and managed care organizations. The firm employs physicians,
health policy experts, health insurance experts, and attorneys. Stamos
Associates provides health system merger consulting, post-merger integration
services, product service line rationalization, clinical pathways design, and
functional business process reengineering.
Systems Integration and Applications Development
As part of its systems integration and applications development discipline,
the Company designs and implements information technology systems, including
both custom-developed and packaged software, for clients by offering the
following portfolio of services:
- Systems Integration. The Company assists clients in designing,
evaluating, and implementing information technology systems comprising
software applications and hardware components. Services performed by the
Company range from migrating systems from an existing platform to a new
platform to installing, configuring, and testing a new system, and
providing associated training support.
- Applications Development. The Company develops custom software
applications ranging from modifications and enhancements of existing
packaged software to completely custom-developed applications. These
applications are designed for various environments including web-based
systems, distributed networks, and mainframes.
- Project Management. Company associates manage client staff to perform
systems integration and applications development projects, including
project scope, change control.
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In order to expand and further develop its systems integration and
applications development capabilities, the Company has acquired or established
several specialized business units, including:
The Technical Resource Connection, Inc. Acquired in October 1996, The
Technical Resource Connection has expertise in enterprise computing
architectures, distributed-object computing technologies, Internet/intranet
applications, and software engineering processes. The Technical Resource
Connection employs experienced and innovative software technologists -- software
architects, designer/developers, modelers, and systems engineers -- who focus on
software development processes and technology skills to reduce the complexity
and risk associated with building powerful business computing systems.
Time O (TM). In May 1997, the Company formed its Time O (TM) electronic
commerce business unit by hiring a core team of technologists and business
experts. Time O (TM) builds business-to-business digital marketplaces to
enable groups of businesses to engage in electronic commerce. Time O (TM)
brings together its proprietary software platform, customization tools, and
design processes that enable businesses to operate more efficiently and
effectively by using Internet-based electronic commerce.
Syllogic, B.V. Acquired in June 1997, Syllogic has extensive expertise in
the creation of flexible, structured, and manageable data warehouses and data
mining tools. Syllogic has created the Syllogic Data Mining Tool, a system that
combines several different data mining technologies into a single graphical user
interface. Syllogic also assists clients in managing systems and networks
through Adaptive Systems Management, a suite of applications that learns from
past experience and uses that knowledge to prevent errors from recurring in the
future.
HCL Perot Systems N.V. HPS is a joint venture currently 50% owned by each
of the Company and the HCL corporate group. HPS provides systems integration,
onsite consulting, applications development, legacy applications maintenance,
process reengineering, Year 2000 remediation, and European Monetary Union
modifications. Due to its access to a large pool of software talent in India,
HPS is able to provide international services at competitive prices. HPS has
software development centers in Noida and Bangalore, India.
Information Technology Infrastructure Services
Information technology infrastructure services combine information
technology outsourcing, staffing, and infrastructure management. The Company's
information technology infrastructure services include:
- Operations and Maintenance. The Company manages, updates, and maintains
data processing systems, networks and technical infrastructures, operates
help desks, and manages, resolves, and documents problems in the client's
computing environment. These activities can be performed at client
facilities or delivered through data processing centers maintained by the
Company. The Company also coordinates all change activities through
standardized and automated change management processes, checks and
monitors systems and networks for unauthorized use, manages various types
of storage media, and provides data backup and recovery services.
- Monitoring and Planning. The Company offers comprehensive monitoring and
planning of information technology systems, including monitoring network
status and availability through periodic polling of network resources.
The Company also collects and analyzes data and applies corrective
measures when information technology systems and networks do not meet
requirements and measures and monitors the availability of sufficient
capacity in order to ensure continuity and quality of service.
CHANNELS TO MARKET
The Company delivers its services primarily through industry groups
representing its four targeted industries and the other industries in which the
Company has significant customers. The Company also offers services through its
geographically-based project offices.
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Targeted Industries
The Company's targeted industry groups are Financial Services, Energy,
Healthcare, and Travel and Transportation. The Company targets these industries
to capture the opportunities arising from their rapid rates of change, growth,
and the increasing importance of information technology in driving and managing
this change and growth. Group associates have broad technical and operational
experience and expertise in addressing the technical and business challenges
faced by clients in these industries. The following is a brief description of
the Company's main industry groups:
Financial Services Group. The Company provides a full range of business
integration and information technology service line offerings to wholesale,
commercial, and retail banks, investment banks, private banks, asset management
companies, brokerage firms, securities clearing banks, and other financial
institutions. The financial services team includes professionals with
backgrounds in investment banking and commercial banking, and former senior
level consultants to the financial services industry. The Company utilizes its
industry-specific and technical expertise to help clients capitalize on emerging
market opportunities as financial services markets converge and the Internet and
other technologies create new markets. Some of the sector specific offerings
are:
- Capital Markets. The financial services group provides services that
include re-engineering and automation of front and back office functions,
project management and implementation of global trading floors, and
integration and operational management of secure information technology
infrastructures.
- Retail Banking. The financial services group offers retail banks
telephone and Internet-based direct banking design services and project
implementation, assistance with customer relationship management, and
expertise in electronic payment systems. The Company also provides
infrastructure operations services to retail banks.
- Mortgage Banking. Associates in the financial services group provides
process improvement consulting and implementation to mortgage lenders and
servicers to automate the processing of mortgage applications and to
increase productivity.
Energy Services Group. The Company serves municipal and private utilities,
related service providers, new entrants in deregulated markets, and other energy
companies. The energy services group comprises experts in such key areas as
energy power systems restructuring and automation, transmission congestion
management and modeling, market simulation design analysis, and power management
system economics. Offerings in this sector include:
- Regulated Utilities. Energy services group professionals design,
implement, and operate information technology systems to support core
business functions of major utilities, including billing and collections,
customer service, and supply chain management. These associates also
advise energy industry organizations with regulatory compliance and
prepare them to take advantage of deregulating markets.
- Unregulated Markets/New Market Entrants. The energy services group
assists unregulated entities in building and operating retail systems and
infrastructure, settlements and clearing systems, trading and risk
management systems, and provides product and service innovations to
exploit competitive markets.
Healthcare Services Group. Focusing on the requirements of integrated
healthcare networks, the Company serves managed care providers, hospital groups,
healthcare product distributors, and other healthcare companies. The healthcare
services team includes physicians, nurses, health policy experts, managed care
executives, and health insurance experts. The Company assists clients with
information access and connectivity and provides tools for transaction
management, care management, decision support, and Internet-based demand
management systems. Some of the sector specific offerings are:
- Multi-Hospital Systems and Regional Integrated Delivery
Networks. Professionals in the healthcare services group advise clients
on preparing for, and assist clients in managing the business
opportunities of, acquisitions and divestitures of discrete care units.
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- Managed Care Organizations. The healthcare services group offers clients
expertise in managed care administrative systems, including claims
processing, and operates an industry service bureau priced on a per
member per month basis.
- Physician Practice Management Companies. The healthcare services group
offers clients specialized knowledge of physician practice management
systems and operates a business service bureau on a transaction services
basis.
Travel and Transportation Services Group. The Company serves rental car
companies, hotels, airlines, travel agencies, and companies in other sectors of
the travel and transportation industry. The travel and transportation services
group includes former business executives from the rental car, travel agency,
and airline industries. Certain sectors served by this group are:
- Rental Cars. Travel and transportation services group professionals
provide industry-specific expertise, systems, and processes in business
planning, reservations systems, fleet management, counter operations,
billing, and yield management.
- Hospitality. The travel and transportation services group offers
assistance with integration of hotel chain property management and
central reservation systems, travel agent commission settlement systems,
and loyalty program offerings.
Existing Business and Opportunities in Other Industries
In addition to its targeted industries, the Company has significant clients
in the Communications and Media and the Manufacturing industries. The Company
believes that its business in these areas has the potential to mature into
fully-developed targeted industry groups. Services and types of clients include:
- Communications and Media. The Company assists with business strategy,
billing, online, and customer care programs, quality assurance and
testing, and customer revenue enhancement programs to providers of voice,
data, image, video, entertainment, media, and information services
through wireless and wireline networks.
- Manufacturing. Knowledgeable associates provide industry-specific
solutions, including supply chain management, planning and scheduling,
order management and assistance with warehousing, distribution,
production, and finance applications to a variety of manufacturing
clients, including companies in the automobile manufacturing, automobile
parts manufacturing, steel, and plastics industries.
Other Channels to Market: Project Offices
The Company also offers shorter term services on a project basis, which are
typically delivered through the Company's geographically-based project offices
and its business consulting units. Project offices sell short-term business
integration, systems integration and applications development, and information
technology infrastructure services within targeted and other industries, both on
an integrated and an individual service offering basis.
The Company has project offices in Reston, Virginia; Denver, Colorado;
Dallas, Texas; Amersfoort, The Netherlands; London, England; Detroit, Michigan;
Atlanta, Georgia; and Munich, Germany. These project offices, which employ
approximately 650 associates, also serve as a location to provide technology
training and staffing pools for the Company's long-term relationships.
ILLUSTRATIVE RELATIONSHIPS
Some recent examples of the Company's relationships with clients in each of
the Company's targeted industries follow.
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Financial Services
In January 1996, the Company entered into a long-term strategic
relationship with Swiss Bank Corporation. In June 1998, Swiss Bank Corporation
merged with Union Bank of Switzerland to form UBS. As a result, UBS is among the
world's leading financial institutions with assets of approximately $600
billion.
As part of this relationship, the Company assumed responsibility for
management of the information technology infrastructure for Warburg Dillon Read,
the investment banking division of UBS. The Company's activities have included
project management, implementation of two new Warburg Dillon Read trading floors
(in London, England and Stamford, Connecticut), and centrally engineering and
integrating Warburg Dillon Read's workstations globally. The Company is also in
the forefront of integrating information technology infrastructures as UBS
expands, including the integration of such infrastructures with the bank's joint
venture operations. The Company also provides services to UBS's private banking,
commercial banking, and asset management divisions.
As part of its strategic relationship with UBS, the Company received a 40%
equity interest in UBS's Switzerland-based information technology subsidiary,
Systor, and UBS holds an option to purchase shares of the Company's Class B
Common Stock.
The Company's strategic relationship with UBS has enabled it to develop
leading edge expertise in the design, development, and operation of global
trading infrastructures. The Company has utilized, and intends to continue to
utilize, this expertise to attract other client relationships in the financial
services industry on a world-wide basis.
Energy
In 1992, the Company signed a comprehensive, long-term information
technology outsourcing agreement with EME, one of the leading regional electric
companies in the United Kingdom in terms of distribution volume. The Company
assisted EME's reorganization from a consolidated business into separate
operating entities for energy generation, distribution, and supply.
EME's operating environment includes over 75 applications operated across
seven major hardware platforms that utilize 34 programming languages and nine
different databases.
Through project management and the integration of several disparate
computer systems, the Company assisted EME's regulated and non-regulated
businesses in meeting the challenges of the United Kingdom's deregulating energy
sector.
Through its work with EME, the Company has developed an expertise in the
emerging deregulated utility markets. The Company has utilized and intends to
use this expertise and experience as a means to attract other client
relationships, particularly in the United States utility industries, as those
markets deregulate.
Healthcare
In 1991, the Company entered into a long-term, comprehensive information
technology agreement with American Medical Holdings, Inc., a large for-profit
hospital company. In 1996, American Medical Holdings, Inc. merged with National
Medical Enterprises, Inc. to form Tenet Healthcare Corporation ("Tenet"), which
is the second largest for-profit hospital company in the United States. At the
time of that merger, Tenet invited the Company to propose an information
technology solution for the combined company. After evaluating various
approaches, Tenet entered into a comprehensive agreement with the Company for a
full range of information technology outsourcing and other services for all of
their operating companies.
Tenet has an ambitious growth strategy and a business objective of moving
to become a fully integrated healthcare network. Part of this growth strategy is
an aggressive acquisition program that also included disposition of hospital
units that did not fit the company's strategic model. Implementing this strategy
proved challenging from an information technology perspective and required the
Company to develop an integrated layer of systems that could support the rapid
acquisition or disposition of hospital units and allow Tenet to efficiently
manage and operate its business during and following such activities.
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The Company merged disparate networks into a single multi-protocol wide
area network and consolidated multiple computing facilities into a single
environment. This resulted in increased flexibility and reduced costs for Tenet.
The Company developed and implemented a "best-of-breed" applications
architecture that provided access to data from multiple sources and systems to
create unified financial, clinical, materials management, and executive
information systems.
This relationship has resulted in Tenet having a fast and flexible
information technology capability and infrastructure that is a strategic
advantage as Tenet executes its growth strategy. During the last two years,
Tenet has grown from 75 hospitals to 125.
This relationship has enabled the Company to develop the knowledge and
tools to leverage efficiencies, stabilize and enhance applications, form
integrated healthcare networks, and to serve other clients in the rapidly
evolving managed care market. The Company intends to capitalize on this
experience and expertise to pursue other opportunities in the healthcare market.
Travel and Transportation
The car rental industry has recently undergone significant structural
change. Most major car rental companies were previously owned by major
automobile manufacturers, which used the car rental companies to a substantial
degree as a means of purchasing their excess production and as a distribution
channel. Recently, several of the major car rental companies have been acquired
by investors that do not have a business objective of distribution of their
manufactured cars. This development has led to the emergence of new business
strategies in the industry focused more on growth, profit, customer service, and
business change.
National Car Rental is one of the largest car rental firms in the world
with operations in the United States and Europe. National is implementing a
strategic plan for fleet management and customer reservations using technology
to transform the company, provide prompt information about its performance and
markets, and differentiate and improve customer service.
National Car Rental selected the Company over several of its competitors as
its technology partner to assist in the implementation of this plan. In
addressing National's information technology requirements, the Company
successfully replicated a previously devised travel industry "growth engine."
This growth engine enabled the Company to rapidly fashion an integrated business
solution tailored to National's specific needs. The Company and National are
implementing Odyssey, an integrated reservations system, rental operations
system, fleet inventory capability, sales and marketing system, and billing and
collections package. These capabilities will enable National to expand the scope
of its operations, achieve operating efficiencies, differentiate its service
offerings, and rapidly grow its business.
The Company believes that this engagement will augment its existing
expertise and infrastructure in the car rental industry and poise the Company to
exploit other opportunities in this rapidly evolving area.
PEROT SYSTEMS ASSOCIATES
The market for information technology personnel and business integration
professionals is intensely competitive. A key part of the Company's business
strategy is the hiring, training, and retention of highly motivated personnel
with strong character and leadership traits. The Company believes that employing
associates with such traits is and will continue to be an integral factor in
differentiating the Company from its competitors in the information technology
industry. In seeking such associates, the Company screens candidates for
employment through a rigorous interview process.
The Company devotes a significant amount of resources to training its
associates. Associates undergo continual training throughout their employment
with the Company. Entry level training programs develop the skill sets necessary
to serve the Company's clients. These entry level apprentice training programs
are augmented by engineering development programs and periodic continuing
education. In addition, the Company operates a leadership training course that
each manager and executive must complete. This program includes a workshop
stressing the fundamentals of team leadership. The Company augments its
extensive
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personnel and leadership training through its TRAIN(TM) (The Real-time Associate
Information Network) system, a company-wide intranet featuring training courses
that develop both technical and leadership skills.
The Company employs a performance-based incentive compensation program that
provides guidelines for career development, encourages the development of
skills, provides a tool to manage the associate development process, and
establishes compensation guidelines as part of its retention program. In
addition to competitive salaries, the Company distributes cash bonuses that are
paid promptly to reward excellent performance. The Company seeks to align the
interests of its associates with those of its stockholders by compensating
outstanding performance with equity interests in the Company, which the Company
believes fosters loyalty and commitment to Company goals. More than 90% of the
Company's associates hold equity interests in the Company.
As of June 30, 1998, the Company employed approximately 5,600 associates
located in the United States and several other countries. None of the Company's
United States associates is currently employed under an agreement with a
collective bargaining unit. The Company's associates in France and Germany are
generally members of work councils and have worker representatives. The Company
believes that its relations with its associates are good.
UBS AGREEMENTS
In January 1996, the Company entered into a series of agreements to form a
strategic relationship with Swiss Bank Corporation, one of the predecessors to
UBS. This relationship involves a long-term contract (the "IT Services
Agreement"), and a separate agreement to provide services to other UBS operating
units and to permit the Company to use certain UBS assets. Other agreements with
UBS provide for the sale to UBS of stock and options in the Company, and the
transfer to the Company of a 40% stake in UBS's European information technology
subsidiary, Systor.
IT Services Agreement
Under the IT Services Agreement, the Company provides Warburg Dillon Read,
the investment banking division of UBS, with services meeting its 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 IT Services
Agreement is 11 years beginning January 1, 1996. The Company's charges for
services provided under the IT Services Agreement are generally based on
reimbursement of all costs, other than Company corporate overhead, incurred by
the Company in the performance of services covered by the contract. In addition
to this cost reimbursement, the Company receives an agreed annual fee, subject
to bonuses and penalties of up to 15% of such fee related to its performance.
UBS determines the bonus or penalty based on many subjective factors, including
service quality, client satisfaction, and the effectiveness of the Company in
assisting UBS in meeting its business goals.
Approximately 23.4% and 27.2% of the Company's revenues were earned in
connection with services performed on behalf of UBS and its affiliates for the
six months ended June 30, 1998 and the year ended December 31, 1997,
respectively. If some competitors of UBS acquire more than 25% of the shares of
Class A Common Stock of the Company or another party (other than an affiliate of
Ross Perot) acquires more than 50% of the shares of Class A Common Stock and, if
in either case, that acquisition is reasonably likely to have a significant
adverse effect on the performance of or the charges for the services rendered by
the Company, UBS has the right to terminate its agreements with the Company. The
loss of UBS as a client would materially and adversely affect the Company's
business, financial condition, and results of operations.
Equity Interests
Under the Amended and Restated PSC Stock Option and Purchase Agreement (the
"Stock Agreement"), the Company sold UBS 50,000 shares of Class B Common Stock
for $7.30 a share and 3,617,160 options to purchase shares of Class B Common
Stock for $2.25 an option (the "UBS Options"). UBS can exercise the UBS Options
at any time for $7.30 a share, subject to United States bank-regulatory limits
on UBS's shareholdings. In addition to other limits set forth in the Stock
Agreement, the number of shares of
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Class B Common Stock owned by UBS and its employees may not exceed 10% of the
number of shares of outstanding Common Stock. Once the underlying shares of
Class B Common Stock vest, the corresponding UBS Options are void unless
exercised by UBS within five years of such vesting. This five-year period is
tolled at any time when bank-regulatory limits prohibit UBS from acquiring the
shares.
Beginning on January 1, 1997, the shares of Class B Common Stock subject to
the UBS Options vest at a rate of 31,953 shares per month until January 1, 2002
and a rate of 29,167 shares per month thereafter until the IT Services Agreement
terminates. Upon termination of the IT Services Agreement, (i) UBS is required
to sell to the Company all unvested shares of Class B Common Stock and (ii) UBS
Options with respect to unvested shares of Class B Common Stock are void.
UBS cannot transfer the UBS Options and unvested shares of Class B Common
Stock. Subject to exceptions relating to certain transfers to UBS affiliates and
transfers in connection with widely dispersed offerings, before transferring any
shares of Class B Common Stock UBS must first offer such shares to the Company.
Because UBS has elected not to sell shares in connection with this offering, UBS
cannot sell Class B Common Stock, except for limited sales to UBS affiliates,
until the first anniversary of the closing date of this offering.
Pursuant to the Stock Agreement, the Company also agreed to issue and sell
to UBS, additional options or shares of Class B Common Stock if UBS, on or prior
to December 31, 1998, enters into an agreement with the Company of the similar
size and scope as the IT Services Agreement covering the remaining operations of
UBS. The purchase price and the exercise price for the additional options or
shares of Class B Common Stock would be an amount per share equal to a defined
fair value for the options or shares of Class B Common Stock as of the date of
the occurrence of such event.
A portion of the Company's interest in Systor will be returned to UBS if
the IT Services Agreement is terminated. The portion that would be returned to
UBS upon such a termination declines ratably over a ten year period which began
on January 1, 1997.
AGREEMENT WITH EME
The Company provides systems services for EME, one of the largest regional
electricity companies in the United Kingdom in terms of distribution volume,
under an Information Technology Services Agreement initially entered into on
April 8, 1992 (as amended, the "EME Agreement"). The EME Agreement remains in
effect until either party gives eight months' prior notice to terminate on or
after March 31, 2004, unless earlier terminated in accordance with the terms of
the EME Agreement. The Company provides systems operation services on the basis
of cost reimbursement and a management fee and applications systems support,
development services, and consultancy services generally on the basis of time
and materials. The EME Agreement also provides for an incentive payment to the
Company if it is able to reduce costs from contract year to contract year.
In addition to termination rights for cause, non-payment, insolvency and an
EME change of control, the EME Agreement also provides for a good faith
termination right that gives either EME or the Company the right to terminate
the EME Agreement upon giving eight months' written notice if in the good faith
view of the terminating party certain objectives of the EME Agreement are not
being met and are unlikely to be achieved.
For the six month period ended June 30, 1998 and the year ended December
31, 1997, approximately 12.1% and 10.2%, respectively, of the Company's revenues
were earned in connection with services performed on behalf of EME.
In July 1998, PowerGen plc acquired EME from Dominion Resources, Inc. The
EME agreement contains provisions allowing EME to terminate all or part of the
contract upon eight months' notice due to the sale of EME. EME is obligated to
pay a termination fee upon exercise of this termination right. The Company
cannot assure that EME will not cancel or modify the contract or that the
Company will maintain its historic level of revenues or profits from this
relationship.
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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.
The Company's principal competitors include Andersen Consulting LLP,
Cambridge Technology Partners, Inc., Cap Gemini Group, Computer Sciences
Corporation, debis Systemhaus GmbH (the information technology division of
Daimler-Benz AG), Electronic Data Systems Corporation, Ernst & Young LLP, IBM
Global Services (a division of International Business Machines, Inc.), KPMG Peat
Marwick LLP, MCI Systemhouse, Oracle Corporation, PricewaterhouseCoopers LLP,
and The SABRE Group Holdings, Inc.
Many of these companies, as well as some other competitors, have greater
financial resources and larger customer bases than the Company and may have
larger technical, sales, and marketing resources than the Company. The Company
expects to encounter additional competition as it addresses new markets and as
the computing and communications markets converge. In addition, the Company must
frequently compete with a client's own internal information technology
capability, which may constitute a fixed cost for the client. This may increase
pricing pressure on the Company.
The Company competes on the basis of a number of factors, both within and
outside of its control, including the attractiveness of the business strategy
and services that the Company offers, breadth of service line offerings,
technological innovation, pricing, quality of service, and ability to invest in
or acquire assets of potential customers. The Company differentiates itself from
its competitors by providing clients with integrated service offerings,
emphasizing the creation of long-term relationships with its clients, and
working with the client to define the business problem to be solved and the
potential business opportunity from the point of view of the client and the
client's customers. There can be no assurance that the Company will be able to
compete successfully against its current or future competitors in the future or
that competition will not have a material adverse effect on the Company's
results of operations.
INTELLECTUAL PROPERTY
While the Company attempts to retain intellectual property rights arising
from client engagements, the Company's clients often have the contractual right
to retain such intellectual property. The Company relies on a combination of
nondisclosure and other contractual arrangements and trade secret, copyright,
and trademark laws to protect its proprietary rights and the proprietary rights
of third parties from whom the Company licenses intellectual property. The
Company enters into confidentiality agreements with its associates and limits
distribution of proprietary information. There can be no assurance that the
steps taken by the Company in this regard will be adequate to deter
misappropriation of proprietary information or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce its intellectual
property rights.
The Company licenses the right to use the names "Perot Systems" and "Perot"
(collectively, the "Perot Name") in its current and future businesses, products,
or services from the Perot Systems Family Corporation and Ross Perot. The
license is a non-exclusive, royalty-free, worldwide, non-transferable license.
The Company may also sublicense its rights to the Perot Name to its affiliates.
Under the license agreement, as amended, either party may, in their sole
discretion, terminate the license at any time, with or without cause and without
penalty, by giving the other party written notice of such termination. Upon
termination by either party, the Company must discontinue all use of the Perot
Name within one year following receipt of the notice of termination. The
termination of this license agreement may materially and adversely affect the
Company's business, financial condition, and results of operations. Except for
the license of the Company's name, 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.
PROPERTIES
As of June 30, 1998, the Company had approximately 40 locations in the
United States and five countries outside the United States, all of which were
leased. The Company's leases cover approximately 1.0 million square feet of
office and other facilities and have expiration dates ranging from 1998 to 2016.
Upon expiration
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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 client locations
throughout the world. Such space is generally occupied pursuant to the terms of
the agreement with the particular client. The Company currently anticipates
consolidating some or all of its operations located principally in Dallas, Texas
during the next two years. The Company's management believes that its current
facilities are suitable and adequate for its business.
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, 1997 are disclosed in Note
13 to the Consolidated Financial Statements.
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 a material adverse effect on the Company's
consolidated financial position or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ross Perot(1)....................... 68 Chairman of the Board, President, and Chief Executive
Officer
James Champy........................ 56 Vice President and Director
Terry Ashwill....................... 53 Vice President and Chief Financial Officer
Peter Altabef....................... 39 Vice President, General Counsel, and Secretary
Joseph Boyd......................... 38 Vice President
Donald Drobny....................... 55 Vice President
John King........................... 51 Vice President
Ron Nash............................ 49 Vice President
Ross Reeves......................... 53 Vice President
Steven Blasnik(1)................... 41 Director
Carl Hahn(2)........................ 72 Director
George Heilmeier(2)................. 62 Director
Ross Perot, Jr.(1).................. 39 Director
</TABLE>
- ---------------
(1) Executive committee member.
(2) Audit committee member.
Ross Perot, one of the Company's founders, has served as a director,
President and Chief Executive Officer of the Company since November 1997, and
Chairman of the Board since February 1998. In addition, from April 1988 to June
1992, Mr. Perot held the position of Chairman of the Company. Following his
resignation as Chairman, Mr. Perot remained a director until August 1994. Mr.
Perot was a private investor from June 1992 to November 1997.
James Champy joined the Company in August 1996 as a 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 to 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.
Terry Ashwill joined the Company in January 1997 as a Vice President and
Chief Financial Officer. From August 1991 to January 1997, Mr. Ashwill served as
Executive Vice President and Chief Financial Officer of True North
Communications, Inc.
Peter Altabef joined the Company in June 1993 and was elected as a 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.
Joseph Boyd joined the Company in January 1990 and was elected as a Vice
President in March 1996. Mr. Boyd currently serves as the General Manager of
North American Operations for the Company. In the past, Mr. Boyd has served as
the General Manager of the Company's Healthcare Group and as an account manager.
Donald Drobny is one of the Company's founders. Mr. Drobny joined the
Company in June 1988 and was elected as a Vice President in April 1989. Mr.
Drobny currently has oversight responsibility for the Company's
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<PAGE> 41
training and recruiting activities. Previously, Mr. Drobny had oversight
responsibility for the Company's project offices.
John King is one of the Company's founders. Mr. King joined the Company in
June 1988 and was elected as a Vice President in April 1989 and currently has
responsibility for the Company's Financial Services Group.
Ron Nash joined the Company in March 1993 and was elected as a 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, Inc., with its parent corporation. From
September 1992 to March 1993, Mr. Nash served as Vice President, International
and a director of ATC Communications Group, Inc. 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 Major Account Sales and European Operations. Previously, Mr.
Nash had oversight responsibility for the Company's industry groups.
Ross Reeves is one of the Company's founders. Mr. Reeves joined the Company
in June 1988 and was elected as a Vice President in April 1989. Mr. Reeves
currently has oversight responsibility for the Company's technology
infrastructure and procurement. Previously, Mr. Reeves had oversight
responsibility for the UBS account.
Steven Blasnik was elected a director of the Company in September 1994.
Since 1987, Mr. Blasnik has served as President of Perot Investments, Inc.
("PII"), a private investment firm and an affiliate of Ross Perot. Mr. Blasnik
also serves as a director of Zonagen, 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. ("TRW"), Thyssen AG, and Gerling AG.
George Heilmeier was elected a director of the Company in September 1997.
Dr. Heilmeier formerly served as a consultant to the Company. Dr. Heilmeier is
Chairman Emeritus of Bell Communications Research, Inc. ("Bellcore"). He served
as Chairman and Chief Executive Officer of Bellcore from 1991 to 1997. He was a
Senior Vice President and Chief Technical Officer of Texas Instruments, Inc.
from 1983 to 1991. He is a member of the Defense Science Board, the President's
National Security Telecommunications Advisory Committee and the National Academy
of Engineering. Dr. Heilmeier is also a director of TRW, Compaq Computer
Corporation, MITRE Corporation, and Automatic Data Processing Inc.
Ross Perot, Jr. was elected a director of the Company in 1988. Since March
1988, Ross Perot, Jr. has served as Chairman of Hillwood Development
Corporation, a real estate development company. Ross Perot, Jr. is the son of
Ross Perot.
Each executive officer of the Company serves at the discretion of the Board
of Directors, subject to the provisions of any applicable employment agreements.
INSIDER PARTICIPATION IN COMPENSATION DECISIONS AND BOARD INTERLOCKS
As members of the Board of Directors, Messrs. Perot and Champy will
participate in future compensation decisions.
In January 1996, the Company entered into an agreement with PII pursuant to
which the Company licensed some software from PII. PII is an affiliate of Ross
Perot. Mr. Blasnik is the President of PII. The Company sublicensed such
software to The Witan Company L.P. ("Witan"). In connection with this project,
Witan paid a license fee of $1,000,000 directly to PII in connection with the
license. The Company had a separate contract with Witan to perform development
work on the licensed software, which was terminated in May 1997.
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<PAGE> 42
BOARD COMMITTEES AND MEETINGS
The Board of Directors has established two committees to assist in the
discharge of its responsibilities: the Executive Committee and the Audit
Committee. The Executive Committee consists of Ross Perot, Ross Perot, Jr., and
Steven Blasnik. The Audit Committee consists of Carl Hahn and George Heilmeier.
The Executive Committee has the full power and authority of the Board of
Directors in the management of the business and affairs of the Company, except
with respect to matters that cannot be delegated under Delaware law.
The Audit Committee reviews the annual financial statements of the Company
and the professional services provided by the Company's independent public
accountants, including the scope of their audit coverage, the auditor's reports
to management and management's responses to such reports, and the independence
of such accountants from the management of the Company. The Audit Committee also
reviews the scope of the Company's internal audits, the internal auditors'
reports to management and management's responses to such reports, the
effectiveness of the Company's internal audit staff, possible violations of the
Company's Standards and Ethical Principles, and such other matters with respect
to the accounting, auditing and financial reporting practices and procedures of
the Company as it may find appropriate or as have been brought to its attention.
The Board of Directors may, from time to time, establish other committees
to facilitate the management of the Company or for other purposes it may deem
appropriate.
DIRECTOR COMPENSATION
In October 1997, the Company began compensating its non-employee directors
(other than Ross Perot, Jr.) $2,000 for each meeting of the Board of Directors
attended in person. Employee directors receive no cash compensation for
attending committee meetings. Directors are also reimbursed for their reasonable
out-of-pocket expenses associated with attending Board of Directors and
committee meetings. Prior to October 1997, directors received no cash
compensation for their service on the Board of Directors or any committee of the
Board of Directors.
Except for Mr. Hahn, prior to December 1996, 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 shares of
Class A Common Stock or (ii) the grant of an option to acquire 60,000 shares of
Class A Common Stock at a purchase or exercise price equal to the fair value of
such Class A Common Stock at the date of purchase or grant, with such restricted
shares of Class A Common Stock or options to acquire shares of Class A Common
Stock vesting ratably over a five-year period. In April 1993, Mr. Hahn received
200,000 restricted shares of Class A Common Stock at a price equal to the fair
value of such shares at the date of purchase, which 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 (other than Ross Perot, Jr.) who are not employees of
the Company. 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 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 20,000 shares of Class A Common Stock or (ii) the right to
purchase 20,000 restricted shares of Class A Common Stock. (The number of shares
of Class A Common Stock or options issuable to each director were reduced from
30,000 to 20,000 on September 30, 1997.) The exercise price of options or the
purchase price of restricted shares of Class A Common Stock awarded under
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<PAGE> 43
the Non-Employee Director Plan must be at least equal to 100% of the fair value
of a share of Class A Common Stock on the date of the award.
Dr. Heilmeier also served as a consultant of the Company under an agreement
that has been terminated effective as of August 31, 1998.
Mr. Hahn purchased 20,000 shares of Restricted Stock under the Non-Employee
Director Plan in May 1998.
EXECUTIVE COMPENSATION
The Summary Compensation Table below shows compensation for the 1997 fiscal
year of each person who served in the capacity of Chief Executive Officer during
the year, the four most highly compensated executive officers other than the
Chief Executive Officer who were serving as executive officers at the end of the
1997 fiscal year, and one person who served as an executive officer for a
portion of 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
---------------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDER- ALL OTHER
------------------------------------- STOCK LYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OTHER($)(2) AWARD(S)($)(3) OPTIONS SATION($)(4)
--------------------------- ---- --------- ----------- ----------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ross Perot...................... 1997 $ -- $ -- $ -- $ -- -- $ --
Chairman, President & Chief
Executive Officer(5)
Morton Meyerson................. 1997 600,000 180,000 10,286 -- -- 34,173
Former Chairman & Chief
Executive 1996 583,333 180,000 10,507 -- -- 40,216
Officer(6)
James Cannavino................. 1997 475,000 180,000 -- 1,531,353
Former President & Chief
Executive 1996 538,542 180,000 6,725 -- -- 200,086
Officer(7)
James Champy.................... 1997 500,000 -- 5,738 -- -- 23,307
Vice President(8) 1996 195,192 117,115 -- --(9) -- 3,744
John King....................... 1997 308,000 50,000 5,293 22,862
Vice President 1996 300,000 85,000 8,543 -- -- 17,232
Terry Ashwill................... 1997 324,876 -- 96,276 --(11) 350,000 --
Vice President & Chief
Financial Officer(10)
Ross Reeves..................... 1997 319,849 -- 205,255 -- -- 17,569
Vice President 1996 356,249 110,000 263,207 17,232
Guillermo Marmol................ 1997 400,000 50,000 -- -- -- 7,740
Former Vice President(12) 1996 400,000 110,000 -- --(13) 200,000 6,639
</TABLE>
- ---------------
(1) Bonus amounts shown for 1997 were earned and paid in 1997. Bonus amounts
shown for 1996 were earned in 1996 and paid in 1997.
(2) With respect to Mr. Ashwill, represents $92,668 paid in connection with his
relocation and $3,608 for home office equipment. With respect to Mr.
Reeves, represents $125,479 in taxes paid for Mr. Reeves and $79,776 in
perquisites during 1997 and $263,207 in perquisites during 1996, which
were, in all cases, primarily related to an overseas assignment (including
relocation expenses). With respect to all other named executive officers,
represents the payment of taxes related to the life insurance policies
referenced in Note 4 to this table.
(3) The number of restricted shares of Class A Common Stock held by the named
executive officers and the value of such shares of Class A Common Stock
(less the amount paid therefor) at December 31, 1997 were as follows: Mr.
Meyerson -- 28,800 shares of Class A Common Stock, $144,000; Mr. Champy --
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<PAGE> 44
450,000 shares of Class A Common Stock, $1,912,500; Mr.
Cannavino -- 200,000 shares of Class A Common Stock, $1,150,000; and Mr.
Marmol -- 240,000 unvested shares of Class A Common Stock, $1,140,000.
Prior to this offering, there was no market for the Class A Common Stock.
Therefore, the values in the preceding sentence are based on periodic
appraisals of the shares of Class A Common Stock made for the Company by
independent appraisers.
(4) In 1997, represents (i) with respect to Mr. Cannavino, in addition to other
amounts provided in items (ii) and (iii) below, $1,440,000 in accrued
severance obligations and $74,121 paid in connection with the maintenance
of living quarters and payment of some other living expenses pending his
permanent relocation; (ii) $27,836, $11,232, $16,970, $16,525 and $11,232
in life insurance premiums paid for the benefit of Messrs. Meyerson,
Cannavino, Champy, King and Reeves respectively; (iii) $6,337 in Company
contributions to the Company's 401(k) plan for the benefit of each of
Messrs. Meyerson, Champy, King, Marmol and Reeves, and $6,000 for the
benefit of Mr. Cannavino. In 1996, represents (i) $17,550, $11,232, $693,
$11,232, $3,744 and $11,232 in life insurance premiums paid for the benefit
of Messrs. Meyerson, Cannavino, Marmol, King, Champy and Reeves; (ii)
$16,666 for the retroactive application of a salary increase for Mr.
Meyerson, which amount relates to compensation for services rendered in
1995; and (iii) $6,000 in Company contributions to the Company's 401(k)
plan for the benefit of each of Messrs. Meyerson, Cannavino, Marmol, King
and Reeves.
(5) Mr. Perot has served as President and Chief Executive Officer since
November 7, 1997 and Chairman since February 25, 1998. Mr. Perot serves the
Company without compensation.
(6) Mr. Meyerson served as Chairman until he resigned from the Company on
January 5, 1998. Mr. Meyerson also served as interim President and Chief
Executive Officer of the Company from July 25, 1997 until November 7, 1997.
(7) Mr. Cannavino held the posts of President and Chief Executive Officer until
July 25, 1997.
(8) Mr. Champy joined the Company as an executive officer on July 8, 1996.
(9) Mr. Champy purchased 500,000 restricted shares of Class A Common Stock for
$2.50 per share (the fair value of such shares on the date of purchase).
The shares vest ratably over a ten-year period. The first vesting date was
August 12, 1997.
(10) Mr. Ashwill joined the Company and was elected Vice President and Chief
Financial Officer as of January 28, 1997.
(11) Mr. Ashwill purchased 100,000 restricted shares of Class A Common Stock on
January 28, 1997, and an additional 20,000 restricted shares of Class A
Common Stock on February 14, 1997. In each case, the purchase price was
$3.75 per share (the fair value of such shares on the respective dates of
the purchase). The restricted shares of Class A Common Stock were scheduled
to vest ratably over a ten-year period. On December 23, 1997, Mr. Ashwill
sold all of such shares to the Company for an amount equal to the cost of
purchase plus 8% interest accrued from the respective purchase dates. The
sale was in connection with the issuance of options described in the table
"Option Grants in the Last Fiscal Year".
(12) Mr. Marmol resigned his position with the Company on March 31, 1998.
(13) On January 2, 1996, Mr. Marmol purchased 200,000 restricted shares of Class
A Common Stock 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 shares of Class A Common Stock.
The shares and options vest ratably over a ten-year period. The first
vesting date was January 2, 1997. On June 17, 1996, Mr. Marmol purchased an
additional 100,000 restricted shares of Class A Common Stock for $2.50 per
share (the fair value of such shares on the date of purchase). In
connection with the June 17 purchase, Mr. Marmol surrendered options to
purchase 100,000 shares of Class A Stock that had been granted on January
2. At the time of his resignation from the Company, Mr. Marmol held 240,000
unvested shares of restricted Class A Common Stock. All of Mr. Marmol's
unvested shares of restricted stock were repurchased by the Company.
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<PAGE> 45
STOCK OPTIONS
The following table provides information relating to option grants in 1997
to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED VALUE
-------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ---------- ------------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ross Perot....................... -- --% $ -- -- $ -- $ --
Morton Meyerson.................. -- -- -- -- -- --
James Cannavino.................. -- -- -- -- -- --
James Champy..................... -- -- -- -- -- --
John King........................ -- -- -- -- -- --
Terry Ashwill.................... 230,000 3.29% $3.75 01/28/08 $612,668 $1,598,313
120,000(2) 1.71% $6.75 01/28/08 $575,375 $1,501,025
Ross Reeves...................... -- -- -- -- -- --
Guillermo Marmol................. -- -- -- -- -- --
</TABLE>
- ---------------
(1) These amounts represent assumed rates of appreciation in value from the date
of grant until the end of the option term, at the rates set by the
Securities and Exchange Commission and, therefore, are not intended to
forecast possible future appreciation, if any, in the shares of Class A
Common Stock.
(2) Grant was made in connection with the repurchase of restricted stock from
Mr. Ashwill by the Company on December 23, 1997.
OPTION EXERCISES AND HOLDINGS
The following table provides information regarding exercises of stock
options by named executive officers during 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE(1) OF UNEXERCISED
CLASS A UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($)
ACQUIRED ON VALUE(1) --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ross Perot............. -- -- -- -- -- --
Morton Meyerson........ -- -- -- -- -- --
James Cannavino........ -- -- -- -- -- --
James Champy........... -- -- -- -- -- --
John King.............. -- -- -- -- -- --
Terry Ashwill.......... -- -- -- 350,000 -- 690,000
Ross Reeves............ -- -- 20,000 20,000 125,000 125,000
Guillermo Marmol....... 10,000 $20,000 -- 90,000 -- 450,000(2)
</TABLE>
- ---------------
(1) There is currently no market for the shares of Class A Common Stock.
Therefore, the values set forth in these columns are based on periodic
appraisals of the shares of Class A Common Stock made for the Company by
independent appraisers.
(2) Following Mr. Marmol's resignation from the Company, options held by him to
purchase 80,000 shares of Class A Common Stock expired unvested.
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<PAGE> 46
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
Morton Meyerson. Mr. Meyerson's assignee, the Meyerson Family Limited
Partnership ("MFLP"), purchased 4,000,000 shares of Class A Common Stock 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, prior
to June 1997, the Company had the right to repurchase a portion of the shares of
Class A Common Stock held by the MFLP Partnership if Mr. Meyerson voluntarily
resigned as Chairman unless the parties agreed to an arrangement for Mr.
Meyerson to remain with the Company. In June 1997, the Company's right to
repurchase shares of Class A Common Stock held by the MFLP terminated.
In December 1995, Mr. Meyerson purchased 200,000 restricted shares of Class
A Common Stock pursuant to the terms of a Restricted Stock Agreement between Mr.
Meyerson and the Company (the "Meyerson Agreement"). Under the Meyerson
Agreement, the Company had the right to purchase unvested shares of Class A
Common Stock if Mr. Meyerson voluntarily resigned. There were 28,800 unvested
shares of Class A Common Stock at Mr. Meyerson's resignation in January 1998.
The Company exercised its right to repurchase for a price equal to Mr.
Meyerson's cost plus 8% interest per annum.
James Cannavino. Mr. Cannavino's employment agreement (the "Cannavino
Agreement") with the Company provided for a base salary of $500,000 per year,
subject to adjustment from time to time by the Board of Directors. Mr.
Cannavino's base salary was increased by the Board to $600,000 for 1997. On July
25, 1997, Mr. Cannavino resigned his positions with the Company. Under the terms
of the Cannavino Agreement, Mr. Cannavino will receive a severance payment equal
to two years of his highest base salary. The second year's salary will be
reduced by amounts earned by Mr. Cannavino from other sources during that year.
The 2,000,000 restricted shares of Class A Common Stock acquired by Mr.
Cannavino pursuant to his stock option grant were scheduled to vest in equal
installments over ten years beginning on the first anniversary of the
commencement of Mr. Cannavino's employment by the Company. Mr. Cannavino's
restricted shares of Class A Common Stock are scheduled to continue to vest
through October 1998. The Company has repurchased 1,400,000 of the shares of
Class A Common Stock formerly owned by Mr. Cannavino that will not vest under
the terms of his stock option grant for a price equal to his after-tax cost of
purchase for those shares plus eight percent per annum. Mr. Cannavino continues
to hold 550,000 shares of Class A Common Stock. Mr. Cannavino has transferred
50,000 shares of Class A Common Stock to his former spouse. If the shares of
Class A Common Stock are not publicly traded prior to the year 2010, Mr.
Cannavino has the right to require the Company to repurchase his shares of Class
A Common Stock 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. 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) some 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 six months of
Mr. Champy's then current base salary. If Mr. Champy's employment is 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 six months of
Mr. Champy's then current base salary.
The 500,000 restricted shares of Class A Common Stock 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 shares of Class A
Common Stock 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 on or before August 12,
1998 or Mr. Champy is deemed to have been constructively terminated on or
44
<PAGE> 47
before August 12, 1998, Mr. Champy's restricted shares of Class A Common Stock
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 shares of Class A
Common Stock 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 shares of Class A Common Stock will continue to
vest as follows: (i) if the change in control occurs on or before August 12,
1998, all shares of Class A Common Stock 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 shares of Class A Common Stock
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 annum.
Terry Ashwill. Pursuant to the letter agreement pursuant to which Mr.
Ashwill accepted employment with the Company, he is assured that at least 50,000
options and/or shares of the Company's stock will vest if his employment is
terminated (i) by Mr. Ashwill and he does not work for a competitor of the
Company for 12 months or, within six months of the date of termination, work for
a company with which he discussed employment prior to the termination of his
employment or (ii) by the Company without cause. This special vesting provision
is only applicable to the extent necessary to cause the value of vested shares
and options to be equal to $1,500,000 on the third anniversary of his employment
by the Company. In addition, the Company agreed to pay some expenses related to
Mr. Ashwill's relocation to Dallas.
STOCK PLANS
The Company's currently active stock plans include: the 1991 Stock Option
Plan, Restricted Stock Plan, 1996 Non-Employee Directors Plan (the "Non-Employee
Directors Plan") and 1996 Advisors and Consultants Plan (collectively, the
"Plans"). In addition, the Company has options that remain outstanding under its
former Advisors and Consultants Plan, which was terminated in 1996.
The purpose of the Plans is to attract and retain outstanding associates,
directors, consultants, and advisors and provide them with a strong incentive to
contribute to the success of the Company by granting them options to acquire, or
allowing them to purchase, shares of Class A Common Stock. The Plans are not
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), nor do they meet the requirements of Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
As of June 30, 1998, an aggregate of 5,471,486 shares of Class A Common
Stock were available for issue under the Plans (other than the Non-Employee
Directors Plan under which 340,000 shares of Class A Common Stock were
available). Shares of Class A Common Stock available under the Plans or subject
to existing Stock Option Agreements are subject to adjustment in the event of a
stock dividend, stock split, or merger or consolidation to preserve the
respective rights of the participants in the respective Plans. In July, 1998,
the Company set aside an additional 5,000,000 shares for issuance under the
Plans (other than the Non-Employee Directors Plan) and issued additional options
to purchase 4,881,450 shares of Class A Common Stock to non-executive associates
in a broad-based distribution under the 1991 Stock Option Plan.
1998 ASSOCIATE STOCK PURCHASE PLAN
The Board of Directors adopted the 1998 Associate Stock Purchase Plan (the
"1998 Associate Stock Purchase Plan") to become effective immediately after this
offering. A summary of the material features of the 1998 Associate Stock
Purchase Plan follows. Capitalized terms not defined in this Prospectus have the
meaning given them in the 1998 Associate Stock Purchase Plan.
General. The purpose of the 1998 Associate Stock Purchase Plan is to
provide employees of the Company and of majority owned subsidiaries
("Participating Affiliates") of the Company with the opportunity and a
convenient means to purchase Common Stock of the Company at a discount from the
market price
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<PAGE> 48
through a program of voluntary, regular payroll deductions. The Company intends
to have the 1998 Associate Stock Purchase Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Code.
A total of 10,000,000 shares of Class A Common Stock are authorized and
reserved for issuance under the 1998 Associate Stock Purchase Plan. Appropriate
adjustments in the aggregate number of shares subject to the 1998 Associate
Stock Purchase Plan will be made in the event of any merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company.
The 1998 Associate Stock Purchase Plan permits "Eligible Associates" to
participate in the plan. An Eligible Associate is generally an employee of the
Company and Participating Affiliates who works more than 20 hours per week on a
regular basis and is not engaged under an independent contractor or similar
agreement, whether or not such person is determined to be an independent
contractor. Eligible Associates who own five percent or more of the Company's
outstanding Class A Common Stock may not purchase shares under the 1998
Associate Stock Purchase Plan.
The 1998 Associate Stock Purchase Plan permits Eligible Associates to
purchase, through regular payroll deductions, shares of Common Stock at a price
equal to 85% of the fair market value of one share of the Class A Common Stock
on the Exercise Date for the Offering Period.
The Board of Directors may amend the 1998 Associate Stock Purchase Plan
without notice, at any time, subject to certain restrictions set forth in the
1998 Associate Stock Purchase Plan. The 1998 Associate Stock Purchase Plan will
automatically terminate after ten years, or on the date all shares authorized to
be sold under the 1998 Associate Stock Purchase Plan have been sold, subject to
the right of the Board of Directors to terminate the 1998 Associate Stock
Purchase Plan at an earlier time.
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<PAGE> 49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company licenses the right to use the Perot Name in its current and
future businesses, products, or services from the Perot Systems Family
Corporation and Ross Perot. The license is a non-exclusive, royalty-free,
non-transferable license without geographic restriction. The Company may also
sublicense its rights to the Perot Name to its affiliates. Under the License
Agreement, as amended, either party may, in their sole discretion, terminate the
license at any time, with or without cause and without penalty, by giving the
other party written notice of such termination. Upon termination by either
party, the Company must discontinue all use of the Perot Name within one year
following receipt of the notice of termination.
The Company made loans to each of Ron Nash, Joseph Boyd, Guillermo Marmol
(a former executive) and Susan Fairty (a former executive) in connection with
the purchase by such persons of shares of Class A Common Stock from the Company.
Each of such loans accrues interest at the rate of 8% per annum and is secured
by the purchased stock. As of June 30, 1998, the total amount outstanding for
each such loan (including accrued interest) was $265,912, $70,782, $0, and $0
for Messrs. Nash, Boyd, Marmol and Ms. Fairty, respectively. The highest amounts
outstanding under such loans since January 1, 1996 were as follows: Mr. Nash,
$267,377; Mr. Boyd, $75,600; Mr. Marmol, $133,795; and Ms. Fairty, $570,380.
The Company made loans to Terry Ashwill in connection with his purchase of
shares of Class A Common Stock from the Company. Mr. Ashwill's loans accrued
interest at the rate of 8% per annum and were secured by the purchased stock. On
December 23, 1997, the aggregate amount outstanding for Mr. Ashwill's loans
(including accrued interest) was $474,859, the highest amount outstanding with
respect to such loans since their inception. On December 23, 1997, the Company
repurchased the 120,000 shares of Class A Common Stock held by Mr. Ashwill for
$3.75 per share plus 8% per annum for the time that he held the stock (an
aggregate of $481,364). The Company paid the purchase price of the stock by
offsetting the amounts due Mr. Ashwill against the principal and accrued
interest on his loans and paying the remaining $6,875 in cash (which is equal to
amounts previously paid by Mr. Ashwill for interest that had accrued on his
loans). In connection with the repurchase, the Company granted Mr. Ashwill
options to purchase 120,000 shares of Class A Common Stock with an exercise
price of $6.75 per share.
On August 27, 1997, the Company loaned $250,000 to John King secured by his
shares of Class A Common Stock. Mr. King's loan accrues interest at 8% per
annum. The total amount outstanding for Mr. King's loan (including accrued
interest) on June 30, 1998 was $266,822, the highest amount outstanding since
the inception of the loan.
The Company has made loans to James Cannavino secured by his shares of
Class A Common Stock. As of June 30, 1998, Mr. Cannavino had the outstanding
principal amounts of $420,000 and $1,169,624 accruing interest at the rates of
8% per annum and 7.25% per annum, respectively. As of June 30, 1998, the
aggregate amount outstanding (including accrued interest) relating to these
loans was $1,774,857. The highest amount outstanding with respect to such loans
(including accrued interest) since its inception was $3,695,375. The Company
also loaned Mr. Cannavino $1,000,000 in connection with his purchase of a
permanent residence in Dallas. This loan is secured by a mortgage on such
residence and bears interest at 7.25% per year. As of June 30, 1998, the total
amount outstanding (including accrued interest) relating to this loan was
$1,035,952. Since its inception, the highest amount outstanding for this loan
was $1,052,041.
Messrs. Nash, Drobny, and Altabef have outstanding loans with NationsBank
of Texas, N.A. ("NationsBank") in the respective principal amounts of $207,800,
$350,000, and $126,400. Interest accrues on all such loans at the rate of
NationsBank prime plus 1% (currently 9.75%). The Company had agreed that it
would, at the request of NationsBank, purchase such loans from NationsBank for
an amount equal to principal plus accrued and unpaid interest if the Company has
not had an initial public offering that results in the shares of Class A Common
Stock being publicly traded before the maturity of the notes. The maturity dates
are February 26, 2000, July 1, 2000, and July 20, 2000 for amounts borrowed by
Messrs. Drobny, Nash, and Altabef, respectively. Each loan is secured by a
pledge of shares of Class A Common Stock held by the borrower.
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<PAGE> 50
The Company paid $91,425 to the law firm of Locke Purnell Rain Harrell for
services rendered to the Company during 1997. The spouse of Mr. Altabef is a
shareholder of that firm.
For the years ended December 31, 1995, 1996, and 1997, and for the seven
month period ended July 31, 1998, the Company paid to Hughes & Luce, L.L.P.
$394,509, $635,665, $650,779, and $55,846, respectively, for services rendered
to the Company. Mr. Perot's son-in-law is a partner in that firm.
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<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of shares of Common Stock as of June 30,
1998 for (i) all persons who are beneficial owners of five percent or more of
the Company's Common Stock, (ii) each director and nominee for director, (iii)
the Company's Chief Executive Officer and the other executive officers named in
the Summary Compensation Table below, and (iv) all executive officers and
directors as a group:
<TABLE>
<CAPTION>
CLASS B
COMMON
CLASS A COMMON STOCK STOCK
---------------------------------- ------------
PERCENT OF
OWNERSHIP
SHARES ------------------- SHARES
BENEFICIALLY BEFORE AFTER BENEFICIALLY
OWNED(2) OFFERING OFFERING OWNED(2)
------------ -------- -------- ------------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS(1)
Ross Perot(3)........................................ 15,853,000 41.4% % --
James Champy(4)...................................... 500,067 1.3% --
John King(5)......................................... 803,448 2.1% --
Terry Ashwill(6)..................................... 40,047 * * --
Ross Reeves(7)....................................... 983,475 2.6% --
Guillermo Marmol(8).................................. 80,254 * * --
Steven Blasnik(9).................................... 9,000 * * --
Carl Hahn............................................ 220,000 * * --
George Heilmeier(10)................................. 6,000 * * --
Ross Perot, Jr.(3)................................... 15,853,000 41.4% --
ADDITIONAL 5% BENEFICIAL OWNERS
Morton Meyerson(11).................................. 4,000,390 10.4% --
UBS AG(12)........................................... -- * 3,667,160
ALL EXECUTIVE OFFICERS AND DIRECTORS as a Group (13
persons)........................................... 19,828,429 51.8%
</TABLE>
- ---------------
* Less than 1%
(1) The address for Ross Perot, Ross Perot, Jr., and HWGA, Ltd. ("HWGA") is
12377 Merit Drive, Suite 1700, Dallas, Texas 75251. The address for Mr.
Meyerson is 4514 Cole Ave., Suite 400, Dallas, Texas 75205.
(2) Percentages are based on the total number of shares of Common Stock
outstanding at June 30, 1998, plus the total number of outstanding options
and warrants held by each person that are exercisable within 60 days of such
date. Shares of Common Stock 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 shares
of Class A Common Stock set forth opposite such stockholder's name. The
shares of Class A Common Stock listed include shares of Class A Common Stock
held by the Company's Retirement Savings Plan and Trust for the benefit of
the named individuals. Voting and investment power over such shares of Class
A Common Stock is held by the trustee of such trust subject to the direction
of the Company's 401(k) Plan Committee.
(3) Shares are owned by HWGA. Ross Perot, Chairman, President, and Chief
Executive Officer of the Company, is the managing general partner of HWGA.
Mr. Perot has voting and investment power over such shares. Ross Perot, Jr.
is a general partner of HWGA who has authority to manage HWGA if Ross Perot
ceases to be managing general partner of HWGA. Accordingly, shares owned by
HWGA are also shown in this table as being beneficially owned by Ross Perot,
Jr. Subsequent to June 30, 1998, Mr. Perot agreed to acquire an additional
200,000 shares of Class A Common Stock from an existing stockholder at a
price per share equal to the initial public offering price less $.10 per
share.
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<PAGE> 52
(4) Includes 100,000 shares of Class A Common Stock 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
shares of Class A Common Stock held by the Champy Trust and, therefore, is
deemed the beneficial owner of such shares of Class A Common Stock.
(5) Includes 2,000 shares of Class A Common Stock held by Mr. King's spouse
with respect to which Mr. King shares voting and investment power.
(6) Includes 40,000 shares of Class A Common Stock that Mr. Ashwill has the
right to acquire upon the exercise of vested options.
(7) Includes 2,000 shares of Class A Common Stock held by Mr. Reeves' spouse
with respect to which Mr. Reeves shares voting and investment power and
20,000 shares of Class A Common Stock that Mr. Reeves has the right to
acquire upon the exercise of vested options.
(8) Includes 4,000 shares of Class A Common Stock held by Mr. Marmol's children
over which Mr. Marmol has voting and investment power.
(9) Includes 3,000 shares of Class A Common Stock held by Mr. Blasnik's spouse.
Mr. Blasnik disclaims beneficial ownership of such shares.
(10) Includes 6,000 shares of Class A Common Stock that Mr. Heilmeier has the
right to acquire upon the exercise of vested options.
(11) Includes 3,971,200 shares held by the Meyerson Family Limited Partnership,
and 27,200 shares held by four trusts of which Mr. Meyerson is the Trustee.
(12) Includes 3,617,160 shares of Class B Common Stock that UBS AG has the right
to acquire upon the exercise of options.
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<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of
229,000,000 shares, of which 200,000,000 shares are designated as Class A Common
Stock, $.01 par value per share, 24,000,000 shares are designated as Class B
Common Stock, $.01 par value per share, and 5,000,000 shares are designated as
Preferred Stock, $.01 par value per share. As of June 30, 1998, there were
38,308,790 shares of Class A Common Stock issued and outstanding and held of
record by 1,389 stockholders, 50,000 shares of Class B Common Stock issued and
outstanding and held of record by 1 stockholder, and no shares of Preferred
Stock issued and outstanding. In addition, a total of 19,790,338 shares of
Common Stock are reserved for issuance upon exercise of options outstanding as
of the date of this Prospectus.
CLASS A COMMON STOCK
Holders of shares of Class A Common Stock are entitled to one vote per
share for each share held of record on any matter submitted to the holders of
Common Stock for a vote. All shares of Class A Common Stock and Class B Common
Stock outstanding are fully paid and nonassessable, and all of the shares of
Class A Common Stock and Class B Common Stock to be outstanding upon completion
of this offering will be fully paid and nonassessable. Subject to the rights of
the holders of any outstanding shares of Preferred Stock and any restrictions
that may be imposed by any lender to the Company, holders of Class A Common
Stock are entitled to receive such dividends, if any, as may be declared by the
Board of Directors 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, based on the number of shares
held, in the assets, if any, remaining after payment of all of the Company's
debts and liabilities and the liquidation preference of any outstanding
Preferred Stock. The shares of Class A Common Stock are neither redeemable nor
convertible, and the holders of Class A Common Stock have no preemptive rights
to subscribe for or purchase any additional shares of capital stock issued by
the Company.
CLASS B COMMON STOCK
Holders of shares of Class B Common Stock 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 Amended and Restated
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 shares of Class B Common Stock so as to affect them adversely. The
Amended and Restated Certificate of Incorporation provides that the number of
authorized shares of Class B Common Stock may be increased or decreased (but not
below the number of shares of Class B Common Stock then outstanding or reserved
for issuance pursuant to outstanding options, warrants or similar rights) by the
affirmative vote of the holders of a majority of the voting stock of the
Company, voting as a single class, without any vote by the holders of the Class
B Common Stock. Subject to the rights of the holders of any outstanding shares
of Preferred Stock and any restrictions that may be imposed by any lender to the
Company, holders of Class B Common Stock are entitled to receive such dividends,
if any, as may be declared by the Board of Directors out of legally available
funds. 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, based on the number of shares held, in the assets, if any, remaining
after payment of all of the Company's debts and liabilities and the liquidation
preference of any outstanding Preferred Stock. Each share of Class B Common
Stock is convertible, on a share for share basis, at the option of the holder
into a fully paid and nonassessable share of Class A Common Stock for the
purpose of the transfer, sale, or other disposition to a third party purchaser
that is not an affiliate of UBS if such sale is made (a) in a widely dispersed
public offering of the Class A Common Stock, (b) to a third party that, prior to
such sale, controls more than 50% of the then outstanding voting securities of
the Company, (c) to a third party that, after such sale, is the beneficial owner
of not more than 2% of the outstanding voting stock of the Company having power
to elect directors, (d) in a transaction that complies with Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), or (e) by UBS or its
affiliates in a transaction approved in advance by the Board of Governors of the
Federal Reserve System. UBS is the only holder of Class B Common Stock.
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<PAGE> 54
PREFERRED STOCK
The Company is authorized to issue shares of Preferred Stock in one or more
series, and to designate the rights, preferences, limitations, and restrictions
of and upon shares of each series, including voting, redemption and conversion
rights. The Board of Directors also may designate dividend rights and
preferences in liquidation. It is not possible to state the actual effect of the
authorization and issuance of additional series of Preferred Stock upon the
rights of holders of Common Stock until the Board of Directors determines the
specific terms, rights and preferences of a series of Preferred Stock. Such
effects, however, might include, among other things, granting the holders of
Preferred Stock priority over the holders of Common Stock with respect to the
payment of dividends, diluting the voting power of the Common Stock, or granting
the holders of Preferred Stock preference with respect to liquidation rights. In
addition, under some circumstances, the issuance of Preferred Stock may render
more difficult or tend to discourage a merger, tender offer or proxy contest,
the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management.
REGISTRATION RIGHTS
Pursuant to a Stock Purchase Agreement dated August 20, 1992 between the
Company and the MFLP (which Morton Meyerson, former Chairman of the Company,
controls), the Company sold to MFLP 4,000,000 shares of Class A Common Stock,
and in connection with such sale, granted MFLP "piggyback" registration rights
for such shares of Class A Common Stock. MFLP's "piggyback" registration rights
do not apply in this offering. These registration rights could arise in
connection with any other offering to the public under the Securities Act on
Form S-1, S-2, or S-3, or any successor registration form then in effect.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which prohibits a Delaware corporation from engaging in a
"business combination" with certain persons ("Interested Stockholders") for
three years following the time any such person becomes an Interested Stockholder
unless (i) before a person becomes an Interested Stockholder, the Board of
Directors of the corporation approved the transaction in which the Interested
Stockholder became an Interested Stockholder or approved the business
combination, (ii) upon consummation of the transaction that resulted in the
Interested Stockholder becoming an Interested Stockholder, the Interested
Stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned by (a) persons
who are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer,
or (iii) at or subsequent to the time the person became an Interested
Stockholder, the business combination is approved by the Board of Directors of
the corporation and authorized at a regular or special meeting of stockholders,
and not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock not owned by the Interested Stockholder.
In general, an Interested Stockholder means any person that (i) is the
beneficial owner of 15% or more of the outstanding voting stock of the
corporation or (ii) is an affiliate or associate of the corporation and was the
beneficial owner of 15% or more of the corporation's outstanding voting stock at
any time within three years before the date on which such person's status as an
Interested Stockholder is determined.
Subject to some exceptions, a business combination includes, among other
things, (i) mergers or consolidations, (ii) the sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets having an aggregate market value
equal to 10% or more of either the aggregate market value of all assets of the
corporation determined on a consolidated basis or the aggregate market value of
all the outstanding stock of the corporation, (iii) transactions that result in
the issuance or transfer by the corporation or any majority-owned subsidiary of
any stock of the corporation to the Interested Stockholder, except pursuant to
certain corporate distributions and issuances that do not increase the
Interested Stockholder's proportionate shareholding, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
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<PAGE> 55
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder, or (v) any receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
PROVISIONS RELATING TO CHANGE IN CONTROL
Stockholder Rights Plan
The Company's Board of Directors has authorized a Stockholder Rights Plan
(the "Rights Plan") that provides that one Class A right (a "Class A Right")
will be attached to each share of Class A Common Stock and one Class B right (a
"Class B Right", and together with the Class A Rights, the "Rights") will be
attached to each share of Class B Common Stock as of , 1998 (the "Record
Date"). Each Right will entitle the registered holder to purchase from the
Company a unit (a "Unit") consisting of one one-hundredth of a share of Series A
Junior Participating Preferred Stock, par value $.01 per share (the "Preferred
Stock"), at a purchase price of $ per Unit (the "Purchase Price"), subject
to adjustment. The description and terms of the Rights are set forth in the
Rights Agreement (the "Rights Agreement"), dated as of , 1998, between
the Company and , as Rights Agent (the "Rights Agent").
Initially, the Class A Rights will be attached to all Class A Common Stock
certificates representing shares outstanding as of the Record Date and the Class
B Rights will be attached to all Class B Common Stock certificates representing
shares outstanding as of the Record Date, and no separate Rights Certificate
will be distributed. The Rights will separate from the Common Stock and a
Distribution Date (as defined in the Rights Plan) will occur upon the earlier of
(i) 10 days following a public announcement (the "Stock Acquisition Date") that
a person or group of affiliated or associated persons has acquired, or obtained
the right to acquire, beneficial ownership of 20% or more of the outstanding
shares of Common Stock or 20% or more of the outstanding shares of Class A
Common Stock (an "Acquiring Person"), (ii) 10 business days following the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning 20% or more of the outstanding shares of Common
Stock or 20% or more of the outstanding shares of Class A Common Stock or (iii)
10 business days after the Board of Directors of the Company determines that any
person or persons have become the beneficial owner of an amount of Common Stock
that the Board of Directors determines to be substantial (which amount will in
no event be less than 10% of the shares of Common Stock outstanding) and that
(a) such person or persons intend to cause the Company to repurchase the Common
Stock beneficially owned by such person or persons or to exert pressure against
the Company to take any action or enter into any transaction or series of
transactions with the intent or the effect of providing such person or persons
with short-term gains or profits under circumstances in which the Board of
Directors determines that the long-term interests of the Company and its
stockholders would not be served by taking such action or entering into such
transactions or series of transactions or (b) beneficial ownership by such
person or persons is reasonably likely to have a material adverse effect on the
business, competitive position, prospects, or financial condition of the Company
and its subsidiaries (an "Adverse Person"). Until the Distribution Date, (i) the
Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates, (ii) new Common
Stock certificates will contain a legend incorporating the Rights Agreement by
reference; and (iii) the surrender for transfer of any certificates for Common
Stock outstanding will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate.
The Rights Agreement will provide that Ross Perot, and certain of his
transferees, donees or successors, and affiliates, including HWGA, who together
will be beneficial owners of more than 42% of the Common Stock of the Company
outstanding on June 30, 1998, are excluded from the definitions of "Acquiring
Person" and "Adverse Person."
The Rights will not be exercisable until the Distribution Date and will
expire at the close of business on , 2008, unless earlier redeemed
by the Company as described below.
As soon as practicable after the Distribution Date, Rights certificates
will be mailed to holders of record of the Common Stock as of the Distribution
Date and, thereafter, the separate Rights Certificates alone will
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<PAGE> 56
represent the Rights. Except as otherwise determined by the Board of Directors,
only shares of Common Stock outstanding prior to the Distribution Date will be
issued with Rights.
In the event that (i) the Company is the surviving corporation in a merger
or combination with any Acquiring Person or any Adverse Person, or any Associate
or Affiliate (as defined in the Rights Plan) of any Acquiring Person or Adverse
Person, and its Common Stock remains outstanding, (ii) any Acquiring Person or
any Adverse Person, or any Associate or Affiliate of any Acquiring Person or
Adverse Person, engages in one or more "self-dealing" transactions as set forth
in the Rights Agreement, (iii) a person becomes an Acquiring Person, (iv) during
such time as there is an Acquiring Person or Adverse Person an event occurs that
results in such Acquiring Person's or Adverse Person's proportionate ownership
interest being increased by more than 1% (e.g., a reverse stock split or
recapitalization), or (v) the Board of Directors determines that a person is an
Adverse Person, each holder of a Class A Right will thereafter have the right to
receive, upon exercise, Class A Common Stock (or, in certain circumstances,
cash, property, or other securities of the Company) and each holder of a Class B
Right will thereafter have the right to receive, upon exercise, Class B Common
Stock (or, in certain circumstances, cash, property or other securities of the
Company), having a value equal to two times the Exercise Price of the Right. The
Exercise Price is the Purchase Price multiplied by the number of shares of
Common Stock associated with each Right (initially, one). Notwithstanding any of
the foregoing, following the occurrence of any of the events set forth in
clauses (i) through (v) of this paragraph (the "Flip-In Events"), all Rights
that are, or (under certain circumstances specified in the Rights Agreement)
were, beneficially owned by any Acquiring Person or any Adverse Person, or an
Associate or Affiliate of any Acquiring Person or Adverse Person, will be null
and void. However, a holder cannot exercise the Rights following the occurrence
of any of the Flip-In Events until the termination of the Company's redemption
rights set forth below.
For example, at an exercise price of $ per Right, each Right not
owned by an Acquiring Person or an Adverse Person (or by certain related
parties) following an event set forth in the preceding paragraph would entitle
its holder to purchase Common Stock with a value of $ (or other
consideration, as noted above) for $ . Assuming that the Common Stock
had a per share value of $ at such time, the holder of each valid Right
would be entitled to purchase shares of Common Stock for $ .
Alternatively, the Company could permit the holder to surrender each Right in
exchange for stock or cash equivalent to one share of Common Stock (with a value
of $ ) without the payment of any consideration other than the
surrender of the Right.
In the event that following the Stock Acquisition Date, (i) the Company is
acquired in a merger or consolidation in which the Company is not the surviving
corporation or (ii) 50% or more of the Company's assets or earning power is sold
or transferred, each holder of a Right (except Rights which have previously been
voided as set forth above) will thereafter have the right to receive, upon
exercise of the Right, common stock of the acquiring company having a value
equal to twice the Exercise Price of the Right.
The Purchase Price payable, and the number of Units of Preferred Stock or
other securities or property issuable, upon exercise of the Rights will be
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) if holders of the Preferred Stock are granted certain
rights or warrants to subscribe for Preferred Stock or securities convertible
into Preferred Stock at less than the current market price of the Preferred
Stock, or (iii) upon the distribution to holders of the Preferred Stock of
evidences of indebtedness, cash or assets (excluding regular quarterly cash
dividends or dividends payable in shares of Preferred Stock) or of subscription
rights or warrants (other than those referred to above).
With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment in
cash will be made based on the market price of the Preferred Stock on the last
trading day prior to the day of exercise.
At any time until the close of business on the tenth day following the
Stock Acquisition Date, the Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right. The ten day redemption period may be
extended by the Board of Directors so long as the Rights are still redeemable.
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<PAGE> 57
Under certain circumstances, the decision to redeem will require the concurrence
of a majority of the Continuing Directors referred to below. Immediately upon
the action of the Board of Directors ordering redemption of the Rights, the
Rights will terminate and the only right of the holders of Rights will be to
receive the $.01 redemption price.
The term "Continuing Director" means any member of the Board of Directors
of the Company who was a member of the Board prior to the adoption of the Rights
Plan and any person who is subsequently elected to the Board if such person is
recommended or approved by a majority of the Continuing Directors, or if such
person has been elected to the Board of Directors at two successive annual
meetings of shareholders held within not less than a twelve-month period, but in
any case will not include an Acquiring Person or any Adverse Person, or an
Affiliate or Associate of an Acquiring Person or Adverse Person, or any
representative of the foregoing entities.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company as set
forth above.
Any of the provisions of the Rights Agreement may be amended by the Board
of Directors of the Company prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board (in certain circumstances, with the concurrence of the Continuing
Directors) in order to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights (excluding the interest of
any Acquiring Person or any Adverse Person), or to shorten or lengthen any time
period under the Rights Agreement; provided that no amendment to adjust the time
period governing redemption will be made at a time when the Rights are not
redeemable.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
in certain circumstances. Accordingly, the existence of the Rights may deter
certain acquirors from making takeover proposals or tender offers.
Charter and Bylaw Provisions
Prior to this offering, the Company, subject to stockholder approval,
intends to amend its Certificate of Incorporation and Bylaws to add several
provisions that could have the effect of delaying, deterring, or preventing the
acquisition of control of the Company by means of tender offer, open market
purchases, proxy contest or otherwise. Set forth below is a description of those
provisions.
Special Meetings of Stockholders. The Company's Bylaws provide that special
meetings of stockholders may be called only by the Chairman of the Board or the
President, or by the Chairman of the Board, President, or the Secretary at the
request in writing of a majority of the Board of Directors. Stockholders are not
permitted to call a special meeting or to require that the Board of Directors
call a special meeting unless authorized by the Board of Directors. The business
permitted to be conducted at such meetings is limited to that brought before the
meetings by or at the direction of the Board of Directors. This provision in the
Bylaws provides for the orderly conduct of all Company affairs at special
meetings of stockholders. Accordingly, a stockholder could not force stockholder
consideration of a proposal over the opposition of the Board of Directors by
calling a special meeting of stockholders prior to the next annual meeting or
prior to such time that the Board of Directors believes such consideration to be
appropriate. This change limits a potential acquiror's ability to choose an
advantageous time to launch a takeover bid.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws establish advance notice procedures for stockholder
proposals and the nomination, other than by or at the direction of the Board of
Directors or a committee thereof, of candidates for election of directors. These
procedures provide that notice of stockholder proposals and stockholder
nominations for the election of directors at an annual meeting must be in
writing and received by the Secretary of the Company no less than 60 days nor
more than 90 days prior to the annual meeting; provided, however, that in the
event that less than
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70 days' notice or prior public disclosure of the date of the annual meeting is
given or made to stockholders, notice by a stockholder, to be timely, must be
received no later than the close of business on the tenth day following the date
on which such notice of the date of the annual meeting was made or such public
disclosure was made, whichever first occurs. The notice of stockholder
nominations must set forth certain information with respect to each nominee who
is not an incumbent director. Other stockholder proposals must also set forth
certain information about such proposal and about the stockholder who proposes
to bring the proposal before the meeting. These Bylaw provisions do not give the
Board of Directors any power to approve or disapprove stockholder nominees for
director or stockholder proposals. These provisions may have the effect of (i)
precluding or obstructing the inclusion of stockholder proposals or stockholder
nominees for director by requiring stockholders to act well in advance of a
particular meeting and to comply with specific procedures in order to submit
such proposals or nominees at that meeting and (ii) discouraging a stockholder
from soliciting proxies to elect its own slate of directors or otherwise
attempting to obtain control of the Company through shareholder action, even if
such proxy solicitation or attempt might be beneficial to the Company and its
stockholders.
No Action by Stockholder Consent. The Company's Certificate of
Incorporation and Bylaws provide that actions required or permitted to be taken
at any annual or special meeting of the stockholders may, unless authorized by
the Board of Directors, be taken only upon the vote of the stockholders at a
meeting duly called and may not be taken by written consent of the stockholders.
This provision increases the opportunity of all stockholders to participate in
voting on any proposed action and prevents the holders of the requisite voting
power of the Company from using the written consent procedure to take
stockholder action without a meeting. This provision eliminates the ability of
the Company's stockholders to act by written consent in lieu of a meeting
without the approval of the Board of Directors. This provision may effectively
deter or delay certain actions by a person or a group acquiring a substantial
percentage of the Company's stock, even though such actions might be desired by,
or be beneficial to, the holders of a majority of the Company's stock.
Amendments to the Bylaws. The Bylaws provide that any amendment to the
Bylaws requires the affirmative vote of 80% of the outstanding shares of Common
Stock entitled to vote to adopt, amend, or repeal the Bylaws. This
super-majority vote requirement promotes stability for the Company's internal
operating procedures, thereby helping the Company to attain its long term goals
and manage its corporate affairs. This provision makes it more difficult for
stockholders to change the internal operating procedures of the Company, which
may further discourage potentially unfriendly bids for shares of the Company.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services has been appointed as the transfer agent
and registrar for the Common Stock.
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<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
There was no public market for the Common Stock before this offering.
Future sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could adversely affect the prevailing
market price for the Common Stock. After this offering is completed, the number
of shares available for future sale into the public markets will be restricted
by legal and contractual restrictions, certain of which are described below. The
lapsing of these restrictions will permit sales of substantial amounts of Common
Stock in the public market or could create the perception that such sales could
occur, which could adversely affect the prevailing market price for the Common
Stock.
As of June 30, 1998, (i) approximately 38,308,790 shares of Class A Common
Stock were issued and outstanding; (ii) 16,173,178 shares of Class A Common
Stock were subject to issuance on exercise of outstanding options; (iii) 50,000
shares of Class B Common Stock were issued and outstanding; and (iv) 3,617,160
shares of Class B Common Stock were subject to issuance on exercise of
outstanding options. Each share of Class B Common Stock is convertible into one
share Class A Common Stock for purposes of sale of such share of Class B Common
Stock. See "Description of Capital Stock -- Class B Common Stock." In July 1998,
the Company granted options to purchase approximately 4,881,450 shares of Class
A Common Stock to its non-executive associates. The ability of the holders of
options to sell or otherwise transfer shares of Common Stock is subject to
restrictions under their option agreements.
The shares of Class A Common Stock being offered by this Prospectus
may be freely sold in the public market without restriction under the Securities
Act, except for shares purchased by "affiliates" of the Company within the
meaning of Rule 144 under the Securities Act. The remaining shares of Common
Stock may be resold after termination of certain contractual restrictions, in
transactions exempt from the registration requirements of the Securities Act
(pursuant to Rule 144 or Rule 701 under the Securities Act or otherwise) or
pursuant to a registration statement filed under the Securities Act covering the
sale of such securities. In connection with this offering, all holders of
registration rights have agreed not to exercise such rights until at least 180
days after the date of this Prospectus.
Holders of more than % of the outstanding Common Stock and % of
the outstanding options to purchase Common Stock have executed lock-up
agreements (the "Lock-Up Agreements"). The Lock-Up Agreements provide that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the Underwriters, and the Company, the persons executing the Lock-Up
Agreements will not, until at least 180 days after the date of this Prospectus,
transfer or sell any shares of Common Stock covered thereby, and, in a
substantial majority of cases, that they will not (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise for a period ending 180 days after the date of this Prospectus
without the prior written consent of Morgan Stanley & Co. Incorporated and the
Company. The foregoing restrictions do not apply to (a) transfers of shares of
Common Stock or other securities acquired in open market transactions after the
completion of this offering or (b) the sale to the Company of a number of shares
necessary to satisfy any obligation to pay or to withhold taxes that arises as
the result of the exercise of any option to purchase shares granted pursuant to
the Company's 1991 Stock Option Plan. In certain cases, the Lock-Up Agreements
also restrict the transfer of shares of Common Stock following such 180 day
period without the consent of the Company for certain periods of time.
Rule 144 under the Securities Act is a non-exclusive exemption from the
registration requirements of the Securities Act. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated),
including an affiliate, who has beneficially owned "restricted securities" for
at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of (i) 1% of the number of
shares of Common stock then outstanding (which will equal shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common stock on the New
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<PAGE> 60
York Stock Exchange during the four calendar weeks preceding the filing of a
notice on form 144 with respect to such sale with the Commission. Sales under
Rule 144 are also subject to certain other requirements regarding the manner of
sale, notice, and availability of current public information about the Company.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation, or notice provisions of Rule 144.
The holding periods referred to above do not commence to run until the full
purchase price for the Common Stock has been paid in full to the Company.
Subject to the Lock-Up Agreements and the contractual restrictions set forth in
the agreements granting stock options or restricted stock, the Company believes
that substantially all outstanding shares of Common Stock held by persons other
than HWGA, Ltd. may be freely sold without regard to the volume limitations and
other requirements regarding manner-of-sale, notice, and availability of public
information.
The Company has filed and the Commission has declared effective a
registration statement on Form S-8 covering all shares of Common Stock issued or
issuable under the terms of the Company's 1991 Stock Option Plan, Restricted
Stock Plan, 1996 Advisor and Consultant Stock Option/Restricted Stock Incentive
Plan, and the Advisor Stock Option/Restricted Stock Incentive Plan and 400,000
shares of Common Stock that are issuable pursuant to the 1996 Non-Employee
Director Stock Option/Restricted Stock Incentive Plan. As of June 30, 1998 there
were approximately 30,000,000 shares of Common Stock subject to these plans and
covered by this registration statement. Subject to the terms of the Lock-Up
Agreements and the terms of the options granted under these plans, the shares of
Common Stock registered on this registration statement may, subject to the Rule
144 volume limitations described above applicable to affiliates of the Company,
be resold in the public market without restriction.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States Federal
income and estate tax considerations with respect to the ownership and
disposition of Common Stock applicable to Non-U.S. Holders. In general, a
"Non-U.S. Holder" is any holder other than (i) a citizen or resident of the
United States; (ii) a corporation created or organized in the United States or
under the laws of the United States or of any state; (iii) an estate, the income
of which is includable in gross income for United States federal income tax
purposes regardless of its source; or (iv) a trust if (a) a court within the
United States is able to exercise primary supervision over the administration of
the trust and (b) one or more United States persons have the authority to
control all substantial decisions of the trust. This discussion is based on
current provisions of the Internal Revenue Code of 1986, as amended, Treasury
Regulations promulgated thereunder, judicial opinions, published positions of
the Internal Revenue Service (the "IRS"), and all other applicable authorities,
all of which are subject to change (possibly with retroactive effect). This
discussion does not address all aspects of income and estate taxation or any
aspects of state, local or non-United States taxes, nor does it consider any
specific facts or circumstances that may apply to a particular Non-U.S. Holder
that may be subject to special treatment under the United States federal income
tax laws (such as insurance companies, tax-exempt organizations, financial
institutions, brokers, dealers in securities, and certain U.S. expatriates).
ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL, AND NON-UNITED STATES INCOME
AND OTHER TAX CONSIDERATIONS OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF
COMMON STOCK.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate of the gross amount (or a lower rate
prescribed by an applicable income tax treaty) unless the dividends
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are effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States. Dividends effectively connected with such a
United States trade or business generally will not be subject to United States
withholding tax if the Non-U.S. Holder files certain forms, including IRS Form
4224 (or any successor form), with the payor of the dividend, and generally will
be subject to United States federal income tax on a net income basis, in the
same manner as if the Non-U.S. Holder were a resident of the United States. A
Non-U.S. Holder that is a corporation may be subject to an additional branch
profits tax at a rate of 30% (or such lower rate as may be specified by an
applicable income tax treaty) on the repatriation from the United States of its
"effectively connected earnings and profits," subject to certain adjustments. To
determine the applicability of a tax treaty providing for a lower rate of
withholding under the currently effective Treasury Regulations (the "Current
Regulations") and published IRS positions, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country absent
knowledge to the contrary. Under Treasury Regulations issued on October 6, 1997
(the "Final Regulations"), generally effective for payments made after December
31, 1999, a Non-U.S. Holder (including, in certain cases of Non-U.S. Holders
that are entities, the owner or owners of such entities) will be required to
satisfy certain certification requirements in order to claim a reduced rate of
withholding pursuant to an applicable income tax treaty.
GAIN OR SALE OR OTHER DISPOSITION OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the sale or other disposition of such
holder's shares of Common Stock unless (i) the gain is effectively connected
with a trade or business carried on by the Non-U.S. Holder within the United
States (in which case the branch profits tax discussed above may also apply if
the Non-U.S. Holder is a corporation); (ii) the Non-U.S. Holder is an individual
who holds shares of Common Stock as a capital asset and is present in the United
States for 183 days or more in the taxable year of disposition and certain other
tests are met; (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of the Code regarding the taxation of U.S. expatriates or (iv) the
Company is or has been a United States real property holding corporation (a
"USRPHC") for United States Federal income tax purposes (which the Company does
not believe that it has been, currently is, or will become) at any time within
the shorter of the five-year period preceding such disposition or such Non-U.S.
Holder's holding period. If the Company were or were to become a USRPHC at any
time during this period, gains realized upon a disposition of Common Stock by a
Non-U.S. Holder that did not directly or indirectly own more than 5% of the
Common Stock during this period generally would not be subject to United States
Federal income tax, provided that the Common Stock is "regularly traded on an
established securities market (within the meaning of Section 897(c)(3) of the
Code)."
ESTATE TAX
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States Federal estate tax purposes)
of the United States at the time of death will be includable in the individual's
gross estate for United States Federal estate tax purposes unless an applicable
estate tax treaty provides otherwise, and therefore may be subject to United
States Federal estate tax.
BACKUP WITHHOLDING, INFORMATION REPORTING, AND OTHER REPORTING REQUIREMENTS
The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of this information also may be made available under the provisions of a
specific treaty or agreement with the tax authorities in the country in which
the Non-U.S. Holder resides or is established.
Under the Current Regulations, United States backup withholding tax (which
generally is imposed at the rate of 31% on certain payments to persons that fail
to furnish the information required under the United States information
reporting requirements) and information reporting requirements (other than those
discussed above under "Dividends") generally will not apply to dividends paid on
Common Stock to a Non-U.S. holder at an address outside the United States.
Backup withholding and information reporting generally will apply, however, to
dividends paid on shares of Common Stock to a Non-U.S. Holder at an
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address in the United States, if such holder fails to establish an exemption or
to provide certain other information to the payor.
Under the Current Regulations, the payment of proceeds from the disposition
of Common Stock to or through a United States office of a broker will be subject
to information reporting and backup withholding unless the beneficial owner,
under penalties of perjury, certifies, among other things, its status as a Non-
U.S. Holder or otherwise establishes an exemption. The payment of proceeds from
the disposition of Common Stock to or through a non-U.S. office of a broker
generally will not be subject to backup withholding and information reporting
except as noted below. In the case of proceeds from a disposition of Common
Stock paid to or through a non-U.S. office of a broker that is (i) a United
States person; (ii) a "controlled foreign corporation" for United States Federal
income tax purposes; or (iii) a foreign person 50% or more of whose gross income
from certain periods is effectively connected with a United States trade or
business, information reporting (but not backup withholding) will apply unless
the broker has documentary evidence in its files that the owner is a Non-U.S.
Holder and certain other conditions are satisfied, or the beneficial owner
otherwise establishes an exemption, (and the broker has no actual knowledge to
the contrary).
Under the Final Regulations, the payment of dividends or the payment of
proceeds from the disposition of Common Stock to a Non-U.S. Holder may be
subject to information reporting and backup withholding unless such recipient
satisfies applicable certification requirements or otherwise establishes an
exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder can be refunded or
credited against the Non-U.S. Holder's United States Federal income tax
liability, if any, provided that the required information is furnished to the
Internal Revenue Service in a timely manner.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Warburg Dillon Read LLC, a
subsidiary of UBS AG, Bear, Stearns & Co. Inc. and Hambrecht & Quist LLC are
acting as U.S. Representatives, and the International Underwriters named below
for whom Warburg Dillon Read, a division of UBS AG, Morgan Stanley & Co.
International Limited, Merrill Lynch International, Bear, Stearns & Co. Inc. and
Hambrecht & Quist LLC are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective number of shares of Class A Common Stock set forth
opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................
Warburg Dillon Read LLC, a subsidiary of UBS AG...........
Bear, Stearns & Co. Inc...................................
Hambrecht & Quist LLC.....................................
--------
Subtotal...............................................
--------
International Underwriters:
Warburg Dillon Read, a division of UBS AG.................
Morgan Stanley & Co. International Limited................
Merrill Lynch International...............................
Bear, Stearns & Co. Inc...................................
Hambrecht & Quist LLC.....................................
--------
Subtotal...............................................
--------
Total.............................................
========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Class A Common Stock offered
hereby are subject to the approval of certain legal matters by their counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all of the shares of Class A Common Stock offered hereby (other than those
covered by the U.S. Underwriters' over-allotment option described below) if any
such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any Prospectus relating to the Shares in the United States
or Canada or to any United States or Canadian Person. With respect to any
Underwriter that is a U.S. Underwriter and an International Underwriter, the
foregoing representations and agreements (i) made by it in its capacity as a
U.S. Underwriter apply only to it in its capacity as a U.S. Underwriter and (ii)
made by it in its capacity as an International Underwriter apply only to it in
its capacity as an International Underwriter. The foregoing limitations do not
apply to stabilization
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transactions or to certain other transactions specified in the Agreement between
U.S. and International Underwriters. As used herein, "United States or Canadian
Person" means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person), and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Class A Common Stock to be purchased by the Underwriters under the
Underwriting Agreement are referred to herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of Shares as may be mutually agreed. The per share of any Shares
so sold shall be the public offering price set forth on the cover page hereof,
in United States dollars, less an amount not greater than the per share amount
of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a Prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a Prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind described in
Article 11(e) of the Financial Services Act 1986 (Investment
Advertisements)(Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such Shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in
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compliance with applicable provisions of Japanese law, and that such dealer will
send to any other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other Underwriters or to certain other dealers. After the
initial offering of the shares of Class A Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
additional shares of Class A Common Stock at the public offering
price set forth on the cover page hereof, less underwriting discounts and
commissions. The U.S. Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Class A Common Stock offered hereby. To the extent
such option is exercised, each U.S. Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares of Class A Common Stock as the number set forth next to such
U.S. Underwriter's name in the preceding table bears to the total number of
shares of Class A Common Stock set forth next to the names of all U.S.
Underwriters in the preceding table.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
The Company plans to apply for the listing of the Class A Common Stock on
the NYSE.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to shares of the Class A Common Stock
for directors, officers, employees, business associates, and related persons of
the Company. The number of shares of Class A Common Stock available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares that are not so purchased will be offered
by the Underwriters to the general public on the same basis as the other shares
offered hereby.
Each of the Company and the directors, executive officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, and the
Company, it will not, during the period ending 180 days after the date of this
Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of Class A Common Stock or any securities
convertible into or exercisable or exchangeable for Class A Common Stock or (ii)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Class A Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Class A Common Stock or such other securities, in cash
or otherwise. The restrictions described in this paragraph do not apply to (x)
the sale of the Shares to the Underwriters, (y) the issuance by the Company of
shares of Class A Common Stock upon the exercise of an option or a warrant or
the conversion of a security outstanding on the date of this Prospectus of which
the Underwriters have been advised in writing or (z) transactions by any person
other than the Company relating to shares of Class A Common Stock or other
securities acquired in open market transactions after the completion of the
offering of the Shares or the sale to the Company of a number of shares
necessary to satisfy any obligation to pay or to withhold taxes that arises as
the result of the exercise of any option to purchase shares granted pursuant to
the Company's 1991 Stock Option Plan. See "Shares Eligible for Future Sale."
In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters may
over-allot in connection with the offering, creating a short position in the
Class A Common Stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the
63
<PAGE> 66
Class A Common Stock, the Underwriters may bid for, and purchase, shares of
Class A Common Stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Class A Common Stock in the offering, if the syndicate
repurchases previously distributed Class A Common Stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the Class A
Common Stock above independent market levels. The Underwriters are not required
to engage in these activities, and may end any of these activities at any time.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
Warburg Dillon Read LLC is a subsidiary of UBS AG, the Company's largest
customer. See "Business -- UBS Agreements."
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Class A
Common Stock. The initial public offering price will be determined by
negotiations between the Company and the U.S. Representatives. Among the factors
to be considered in determining the initial public offering price will be the
future prospects of the Company and its industry in general, sales, earnings and
certain other financial and operating information of the Company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Company. The estimated initial public
offering price range set forth on the cover page of this Preliminary Prospectus
is subject to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the Class A Common Stock will be passed upon for the
Company by Hughes & Luce, L.L.P., Dallas, Texas. Certain legal matters relating
to the offering of Class A Common Stock will be passed upon for the Underwriters
by Davis Polk & Wardwell, New York, New York.
EXPERTS
The consolidated financial statements of Perot Systems Corporation and
Subsidiaries as of December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997 included in this Prospectus and the
Registration Statement, have been included herein in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
64
<PAGE> 67
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Class A Common Stock offered hereby. This Prospectus, which
constitutes part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement or the exhibits and
schedules thereto, certain portions having been omitted as permitted by the
rules and regulations of the Commission. Statements made in this Prospectus
concerning the contents of any contract, agreement, or other document referred
to herein are not necessarily complete. With respect to each such contract,
agreement, or other document filed with the Commission as an exhibit to the
Registration Statement, reference is hereby made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the Commission. The Registration Statement and such reports and
other information may be inspected without charge at the public reference
facility maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at
Seven World Trade Center, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington D.C. 20549, at prescribed rates. Information on the operation of the
Public Reference Section is available by calling the Commission at
1-800-SEC-0330. In addition, the Commission maintains a Web site where the
Registration Statement and other information filed with the Commission may be
retrieved, and the address of such site is http://www.sec.gov. Statements made
in this Prospectus concerning the contents of any document referred to herein
are not necessarily complete.
65
<PAGE> 68
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index....................................................... F-1
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of June 30, 1998 (unaudited) F-3
and December 31, 1997 and 1996............................
Consolidated Statements of Operations for the six months F-4
ended June 30, 1998 and 1997 (unaudited) and for the years
ended December 31, 1997, 1996 and 1995....................
Consolidated Statements of Changes in Stockholders' Equity F-5
for the six months ended June 30, 1998 (unaudited) and for
the years ended December 31, 1997, 1996 and 1995..........
Consolidated Statements of Cash Flows for the six months F-7
ended June 30, 1998 and 1997 (unaudited) and for the years
ended December 31, 1997, 1996 and 1995....................
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 69
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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 25, 1998
F-2
<PAGE> 70
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 68,256 $ 35,298 $ 27,516
Accounts receivable, net.................................. 140,527 105,230 113,804
Prepaid expenses and other................................ 16,721 12,578 9,450
Deferred income taxes..................................... 28,958 24,962 25,935
-------- -------- --------
Total current assets.............................. 254,462 178,068 176,705
Property, equipment and purchased software, net............. 40,663 50,703 35,748
Goodwill.................................................... 12,752 16,596 7,293
Deferred income taxes....................................... 10,829 10,269 4,531
Other assets................................................ 12,916 11,467 7,970
-------- -------- --------
Total assets...................................... $331,622 $267,103 $232,247
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on capital lease obligations and
long-term debt......................................... $ 1,241 $ 1,367 $ 2,377
Accounts payable.......................................... 56,313 35,760 43,711
Income taxes payable...................................... 13,895 10,287 13,039
Accrued liabilities....................................... 82,800 76,040 53,343
Deferred revenue.......................................... 24,578 23,258 22,003
Accrued compensation...................................... 34,182 23,449 20,240
-------- -------- --------
Total current liabilities......................... 213,009 170,161 154,713
Capital lease obligations and long-term debt, less current
maturities................................................ 1,150 1,532 2,796
Other long-term liabilities................................. 1,922 2,094 3,976
-------- -------- --------
Total liabilities................................. 216,081 173,787 161,485
-------- -------- --------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock; par value $.01; authorized
100,000,000 shares; outstanding 38,308,790, 38,227,707
and 39,623,848 shares, at June 30, 1998, December 31,
1997 and 1996, respectively............................ 406 406 396
Class B Convertible Common Stock; par value $.01;
authorized 24,000,000 shares; issued and outstanding
50,000 shares at June 30, 1998 and December 31, 1997,
respectively, and 0 shares at December 31, 1996........ -- -- --
Additional paid-in-capital................................ 67,562 61,546 51,461
Other stockholders' equity................................ 48,402 32,158 17,896
Accumulated other comprehensive income.................... (829) (794) 1,009
-------- -------- --------
Total stockholders' equity........................ 115,541 93,316 70,762
-------- -------- --------
Total liabilities and stockholders' equity........ $331,622 $267,103 $232,247
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 71
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(SHARES AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................................. $452,712 $354,082 $781,621 $599,438 $342,306
Costs and expenses:
Direct cost of services............... 359,891 278,650 636,296 461,192 268,553
Selling, general and administrative
expenses........................... 66,050 63,659 125,732 92,997 52,891
Purchased research and development.... -- -- 2,000 3,948 --
-------- -------- -------- -------- --------
Operating income........................ 26,771 11,773 17,593 41,301 20,862
Interest income......................... 1,579 923 1,916 1,540 1,988
Interest expense........................ (126) (500) (1,282) (770) (650)
Equity in earnings/(losses) of
unconsolidated affiliates............. 2,511 226 4,136 (312) --
Write-down of nonmarketable equity
securities............................ -- -- (3,900) -- --
Other income/(expense).................. 2,554 1,660 1,045 (1,608) (1,950)
-------- -------- -------- -------- --------
Income before taxes..................... 33,289 14,082 19,508 40,151 20,250
Provision for income taxes.............. 14,145 5,984 8,291 19,652 9,437
-------- -------- -------- -------- --------
Net income.............................. $ 19,144 $ 8,098 $ 11,217 $ 20,499 $ 10,813
======== ======== ======== ======== ========
Basic and diluted earnings per common
share:
Basic earnings per common share....... $ 0.50 $ 0.20 $ 0.29 $ 0.54 $ 0.33
Weighted average common shares
outstanding........................ 38,224 39,754 39,168 37,055 31,151
Diluted earnings per common share..... $ 0.40 $ 0.16 $ 0.24 $ 0.48 $ 0.31
Weighted average diluted common shares
outstanding........................ 47,456 49,159 47,596 42,171 33,366
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 72
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND THE YEARS ENDED DECEMBER
31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
LIQUIDATION
PREFERENCE CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- ----------- ------ ---------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995................. 4,000,000 $9,888 16,000,000 $ 160 15,056,080 $150 $26,335
Issuance of shares under incentive
plans................................... -- -- -- -- 841,904 10 3,264
Exercise of stock options................ -- -- -- -- 2,008,980 20 --
Shares repurchased....................... -- -- -- -- -- -- --
Deferred compensation, net of
amortization............................ -- -- -- -- -- -- 1,500
Dividends paid and accrued............... -- (942) -- -- -- -- --
Note repayments.......................... -- -- -- -- -- -- --
Net income............................... -- -- -- -- -- -- --
Other comprehensive income, net of tax
Translation adjustment.................. -- -- -- -- -- -- --
Comprehensive income.....................
---------- ------- ----------- ----- ---------- ---- -------
Balance, December 31, 1995............... 4,000,000 $8,946 16,000,000 $ 160 17,906,964 $180 $31,099
Issuance of shares for business
acquired................................ -- -- -- -- 1,460,372 15 6,530
Issuance of shares under incentive
plans................................... -- -- -- -- 2,642,624 27 6,520
Exercise of stock options................ -- -- -- -- 1,613,888 14 1,167
Shares repurchased....................... (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 and accrued............... -- (446) -- -- -- -- --
Note repayments.......................... -- -- -- -- -- -- --
Equity investment........................ -- -- -- -- -- -- 706
Tax benefit of employee options
exercised............................... -- -- -- -- -- -- 895
Net income............................... -- -- -- -- -- -- --
Other comprehensive income, net of tax
Translation adjustment.................. -- -- -- -- -- -- --
Comprehensive income.....................
---------- ------- ----------- ----- ---------- ---- -------
Balance, December 31, 1996............... -- -- -- -- 39,623,848 $396 $51,461
Issuance of shares for business
acquired................................ -- -- -- -- 370,000 4 2,697
Issuance of options for business
acquired................................ -- -- -- -- -- -- 1,500
Issuance of shares under incentive
plans................................... -- -- -- -- 513,471 6 1,935
Exercise of stock options................ -- -- -- -- 17,500 -- (350)
<CAPTION>
ACCUMULATED NOTES
OTHER TREASURY STOCK RECEIVABLE
RETAINED COMPREHENSIVE -------------------- FROM CONTRACT DEFERRED
EARNINGS INCOME SHARES AMOUNT STOCKHOLDERS RIGHTS COMPENSATION
-------- ------------- ---------- ------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995................. $(2,440) $ (221) (457,464) $ (317) $ (887) -- --
Issuance of shares under incentive
plans................................... -- -- 600,904 397 (901) -- --
Exercise of stock options................ -- -- 9,560 14 (2,000) -- --
Shares repurchased....................... -- -- (153,000) (94) -- -- --
Deferred compensation, net of
amortization............................ -- -- -- -- -- -- (1,456)
Dividends paid and accrued............... (595) -- -- -- -- -- --
Note repayments.......................... -- -- -- -- 130 -- --
Net income............................... 10,813 -- -- -- -- -- --
Other comprehensive income, net of tax
Translation adjustment.................. -- 49 -- -- -- -- --
Comprehensive income.....................
------- ------- ---------- ------- ------- ------- -------
Balance, December 31, 1995............... $ 7,778 $ (172) -- -- $(3,658) -- $(1,456)
Issuance of shares for business
acquired................................ -- -- -- -- -- --
Issuance of shares under incentive
plans................................... -- -- -- (3,065) -- --
Exercise of stock options................ -- -- 204,330 313 -- -- --
Shares repurchased....................... -- -- (204,330) (313) 225 -- --
Shares converted to Class A Common....... -- -- -- -- -- -- --
Amortization of deferred compensation.... -- -- -- -- -- -- 150
Options issued for contract
rights.................................. -- -- -- -- -- (4,544) --
Amortization of contract rights.......... -- -- -- -- -- 202 --
Dividends paid and accrued............... (447) -- -- -- -- -- --
Note repayments.......................... -- -- -- -- 2,212 -- --
Equity investment........................ -- -- -- -- -- -- --
Tax benefit of employee options
exercised............................... -- -- -- -- -- -- --
Net income............................... 20,499 -- -- -- -- -- --
Other comprehensive income, net of tax
Translation adjustment.................. -- 1,181 -- -- -- -- --
Comprehensive income.....................
------- ------- ---------- ------- ------- ------- -------
Balance, December 31, 1996............... $27,830 $ 1,009 -- -- $(4,286) $(4,342) $(1,306)
Issuance of shares for business
acquired................................ -- -- -- -- -- -- --
Issuance of options for business
acquired................................ -- -- -- -- -- -- --
Issuance of shares under incentive
plans................................... -- -- 105,000 263 (1,427) -- --
Exercise of stock options................ -- -- 637,020 1,215 (39) -- --
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance, January 1, 1995................. $ 32,668
Issuance of shares under incentive
plans................................... 2,770
Exercise of stock options................ (1,966)
Shares repurchased....................... (94)
Deferred compensation, net of
amortization............................ 44
Dividends paid and accrued............... (1,537)
Note repayments.......................... 130
Net income............................... 10,813
Other comprehensive income, net of tax
Translation adjustment.................. 49
--------
Comprehensive income..................... 10,862
--------
Balance, December 31, 1995............... $ 42,877
Issuance of shares for business
acquired................................ 6,545
Issuance of shares under incentive
plans................................... 3,482
Exercise of stock options................ 1,494
Shares repurchased....................... (8,588)
Shares converted to Class A Common....... --
Amortization of deferred compensation.... 150
Options issued for contract
rights.................................. --
Amortization of contract rights.......... 202
Dividends paid and accrued............... (893)
Note repayments.......................... 2,212
Equity investment........................ 706
Tax benefit of employee options
exercised............................... 895
Net income............................... 20,499
Other comprehensive income, net of tax
Translation adjustment.................. 1,181
--------
Comprehensive income..................... 21,680
--------
Balance, December 31, 1996............... $ 70,762
Issuance of shares for business
acquired................................ 2,701
Issuance of options for business
acquired................................ 1,500
Issuance of shares under incentive
plans................................... 777
Exercise of stock options................ 826
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 73
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND THE YEARS ENDED DECEMBER
31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
LIQUIDATION PREFERENCE CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
---------- ------- ------------ ------- ---------- ------ --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares repurchased......... -- -- -- -- -- -- -- --
Sale of stock and options
to UBS AG................ -- -- -- -- -- -- 8,503 --
Amortization of deferred
compensation............. -- -- -- -- -- -- -- --
Reversal of deferred
compensation............. -- -- -- -- -- -- (1,050) --
Amortization of contract
rights................... -- -- -- -- -- -- -- --
Elimination of contract
rights................... -- -- -- -- -- -- (4,146) --
Note repayments and
other.................... -- -- -- -- -- -- (125) --
Tax benefit of employee
options exercised........ -- -- -- -- -- -- 1,121 --
Net income................. -- -- -- -- -- -- -- 11,217
Other comprehensive income,
net of tax
Translation adjustment... -- -- -- -- -- -- -- --
Comprehensive income.......
---------- ------- ----------- ----- ---------- ---- ------- -------
Balance, December 31,
1997..................... -- -- -- -- 40,524,819 $406 $61,546 $39,047
Unaudited:
Issuance of shares under
incentive plans.......... -- -- -- -- 6,125 -- 216 --
Exercise of stock
options.................. -- -- -- -- -- -- (14) --
Shares repurchased......... -- -- -- -- -- -- -- --
Note repayments and
other.................... -- -- -- -- -- -- 378 --
Tax benefit of employee
options exercised........ -- -- -- -- -- -- 1,854 --
Deferred compensation, net
of amortization.......... -- -- -- -- -- -- 3,582 --
Net income................. -- -- -- -- -- -- -- 19,144
Other comprehensive income,
net of tax
Translation adjustment... -- -- -- -- -- -- -- --
Comprehensive income.......
---------- ------- ----------- ----- ---------- ---- ------- -------
Balance, June 30, 1998..... -- -- -- 40,530,944 $406 $67,562 $58,191
========== ======= =========== ===== ========== ==== ======= =======
<CAPTION>
ACCUMULATED NOTES
OTHER TREASURY STOCK RECEIVABLE TOTAL
COMPREHENSIVE -------------------- FROM CONTRACT DEFERRED STOCKHOLDERS'
INCOME SHARES AMOUNT STOCKHOLDERS RIGHTS COMPENSATION EQUITY
------------- ---------- ------- ------------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares repurchased......... -- (3,039,132) (5,344) 2,603 -- -- (2,741)
Sale of stock and options
to UBS AG................ -- -- -- -- -- -- 8,503
Amortization of deferred
compensation............. -- -- -- -- -- 256 256
Reversal of deferred
compensation............. -- -- -- -- -- 1,050 --
Amortization of contract
rights................... -- -- -- -- 196 -- 196
Elimination of contract
rights................... -- -- -- -- 4,146 -- --
Note repayments and
other.................... -- -- (84) 210 -- -- 1
Tax benefit of employee
options exercised........ -- -- -- -- -- -- 1,121
Net income................. -- -- -- -- -- -- 11,217
Other comprehensive income,
net of tax
Translation adjustment... (1,803) -- -- -- -- -- (1,803)
--------
Comprehensive income....... 9,414
------- ---------- ------- ------- ------- ------- --------
Balance, December 31,
1997..................... $ (794) (2,297,112) $(3,950) $(2,939) -- -- $ 93,316
Unaudited:
Issuance of shares under
incentive plans.......... -- 40,000 54 -- -- -- 270
Exercise of stock
options.................. -- 814,863 1,336 (46) -- -- 1,276
Shares repurchased......... -- (779,905) (2,138) 1,130 -- -- (1,008)
Note repayments and
other.................... -- -- 11 179 -- -- 568
Tax benefit of employee
options exercised........ -- -- -- -- -- -- 1,854
Deferred compensation, net
of amortization.......... -- -- -- -- -- (3,426) 156
Net income................. -- -- -- -- -- -- 19,144
Other comprehensive income,
net of tax
Translation adjustment... (35) -- -- -- -- -- (35)
--------
Comprehensive income....... 19,109
------- ---------- ------- ------- ------- ------- --------
Balance, June 30, 1998..... $ (829) (2,222,154) $(4,687) $(1,676) -- $(3,426) $115,541
======= ========== ======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 74
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 19,144 $ 8,098 $ 11,217 $ 20,499 $ 10,813
-------- -------- -------- -------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 16,826 15,162 35,363 18,715 14,083
Write-off of purchased research and development......... -- -- 2,000 3,948 --
Write-off or impairment of software..................... 425 -- -- 4,156 --
Write-off of intellectual property rights............... 853 -- 3,623 -- --
Loss/(gain) on nonmarketable equity securities.......... (2,986) -- 3,900 -- --
Equity in (earnings)/losses of unconsolidated
affiliates............................................ (2,511) (284) (4,136) 312 --
Change in deferred income taxes......................... 101 3,969 (10,423) (16,044) (3,598)
Loss/(gain) on sale of property, equipment and
software.............................................. 468 (490) 455 860 (47)
Changes in assets and liabilities (net of effects from
acquisition of businesses):
Accounts receivable................................... (35,338) 13,863 16,039 (43,184) (33,263)
Prepaid expenses...................................... (4,149) (7,266) (3,010) (4,037) 6,760
Other assets.......................................... (342) (793) 5,843 (837) (4,578)
Accounts payable and accrued liabilities.............. 27,154 4,146 13,244 39,401 17,790
Income taxes payable.................................. 724 (11,204) (3,550) 7,998 6,873
Deferred revenue...................................... 1,243 (5,972) 372 15,388 (4,685)
Accrued compensation.................................. 10,831 (11,996) 3,295 9,852 7,155
Other long-term liabilities........................... (14) (1,500) (3,260) (3,095) 6,746
-------- -------- -------- -------- --------
Total adjustments................................... 13,285 (2,365) 59,755 33,433 13,236
-------- -------- -------- -------- --------
Net cash provided by operating activities........... 32,429 5,733 70,972 53,932 24,049
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, equipment and software.............. (12,613) (23,633) (46,054) (27,534) (18,342)
Proceeds from sale of property, equipment and software.... 7,530 525 2,366 713 5,975
Proceeds from sale of nonmarketable equity securities..... 5,162 -- -- -- --
Investments in and advances to minority interests......... (358) (3,082) (2,891) (5,536) --
Acquisition of intellectual property rights............... -- -- (5,623) -- --
Acquisition of businesses, net of cash acquired of $532 at
June 30, 1997 and $665 and $149 at December 31, 1997 and
1996, respectively...................................... -- (13,452) (13,721) (9,520) --
-------- -------- -------- -------- --------
Net cash used in investing activities............... (279) (39,642) (65,923) (41,877) (12,367)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Principal payments on debt and capital lease
obligations............................................. (513) (1,571) (3,725) (2,162) (2,896)
Proceeds from short-term borrowings....................... -- 18,800 -- -- --
Proceeds from issuance of common stock.................... -- 381 381 4,686 528
Proceeds from sale of stock options....................... -- 8,139 8,139 -- --
Repayment of stockholder notes receivable................. 164 171 266 2,212 130
Proceeds from issuance of treasury stock.................. 2,247 560 1,125 197 273
Purchase of treasury stock................................ (890) (1,388) (1,834) (88) (94)
Redemption of preferred stock............................. -- -- -- (8,500) --
Dividends paid on preferred stock......................... -- -- -- (893) (1,537)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities........................................ 1,008 25,092 4,352 (4,548) (3,596)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (200) (1,716) (1,619) 2,652 28
-------- -------- -------- -------- --------
Net increase/(decrease) in cash and cash equivalents........ 32,958 (10,533) 7,782 10,159 8,114
Cash and cash equivalents at beginning of period............ 35,298 27,516 27,516 17,357 9,243
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period.................. $ 68,256 $ 16,983 $ 35,298 $ 27,516 $ 17,357
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 75
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
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 and on December 19, 1995, the Company reincorporated
in the state of Delaware. The Company provides industry-specific business
solutions and information technology services to clients on a worldwide basis.
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.
Interim financial information
The consolidated financial statements and following notes, insofar as they
are applicable to the six-months ended June 30, 1998 and 1997 and transactions
subsequent to March 25, 1998, the date of the Report of Independent Accountants,
are not covered by the Report of Independent Accountants. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented have been made.
Operating results for the six months ended June 30, 1998, are not necessarily
indicative of the results for the year ended December 31, 1998.
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.
F-8
<PAGE> 76
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Revenue recognition
The Company provides services under level-of-effort, fixed-price, and
unit-price contracts, with the length of existing contracts ranging up to 12
years. Revenue from level-of-effort pricing is based on time and materials,
direct costs plus an administrative fee (which may be either a fixed amount or a
percentage of direct costs incurred), or a combination of these methods and may
be based on a set fee for a specified level of resources that is adjusted for
incremental resource usage. Revenue from fixed-price contracts is recognized on
the percentage-of-completion method, and is earned based on the percentage
relationship of incurred contract costs to date to total estimated contract
costs, after giving effect to the most recent estimates of total cost.
Provisions for estimated losses, if any, are made in the period in which the
loss first becomes probable and reasonably estimable. Revenue from unit-price
contracts is recognized based on technology units utilized or by number of
transactions processed during a given period. For unit-price contracts, the
Company establishes a per-unit fee based on the cost structure associated with
the delivery of that unit of service, after an appropriate risk factor is
applied.
Billings for products or services for which the Company acts as an agent on
behalf of the client and bears no risk of non-performance, are excluded from the
Company's revenue, except to the extent of any mark-up added.
Deferred revenue is comprised of payments from clients 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.
Research and development costs
Research and development costs are charged to expense as incurred and were
$572 and $674 for the six months ended June 30, 1998 and 1997, respectively, and
$3,243 and $4,486 for the years ended December 31, 1997 and 1996, respectively.
The write-off of purchased research and development costs made up $2,000 and
$3,948 of the total in 1997 and 1996, respectively.
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 consolidated 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
F-9
<PAGE> 77
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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 ten year period.
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 $60,764 at June 30, 1998 and $47,033 at
December 31, 1997, 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
$122,651 and $86,850 as of June 30, 1998, $95,600 and $73,490, respectively, as
of December 31, 1997, and $101,481 and $77,914, respectively, as of December 31,
1996.
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 gains/(losses) reflected in other
income/(expense) were $(313) and $959 for the six months ended June 30, 1998 and
1997; $736, ($1,715) and ($892) for the years ended December 31, 1997, 1996 and
1995, respectively.
Concentrations of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash equivalents and accounts
receivable. The Company's cash equivalents consist primarily of short-term money
market deposits. The Company has deposited its 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
F-10
<PAGE> 78
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
Two customers accounted for 12% each of the Company's accounts receivables
for the six months ended June 30, 1998. One customer accounted for 11% and 27%
of the Company's accounts receivables at December 31, 1997 and 1996,
respectively.
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.
The Company uses derivative financial instruments for the purpose of
hedging specific exposures as part of its risk management program and holds all
derivatives for purposes other than trading. Deferral (hedge) accounting is
applied only if the derivative reduces the risk of the underlying hedged item
and is designated at inception as a hedge with respect to the underlying hedged
item. Additionally, the derivative must result in cash flows that are expected
to be inversely correlated to those of the underlying hedged item. Such
instruments to date have been limited to interest rate swap and foreign currency
exchange forward contracts.
Treasury stock
Treasury stock transactions are accounted for under the cost method.
Reclassifications
Certain of the 1997, 1996 and 1995 amounts in the accompanying financial
statements have been reclassified to conform to the current presentation.
Certain stockholders' equity share numbers for 1995, 1996 and 1997 have been
adjusted. These adjustments had no material effect on the Company's consolidated
financial statements.
Stock based compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its employee stock options. Under APB 25,
compensation expense is recorded when the exercise price of employee stock
options is less than the fair value of the underlying stock on the date of
grant. The Company has implemented the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation".
F-11
<PAGE> 79
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Accounting standards issued
The Company implemented Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" during the first quarter of
1998. The Company's total comprehensive income for six months ended June 30,
1997 (unaudited) was as follows:
<TABLE>
<S> <C>
Net income.................................................. $8,098
Foreign currency translation adjustment..................... (467)
------
Total comprehensive income.................................. $7,631
======
</TABLE>
In June 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement 131") effective for years beginning after December 15, 1997.
Statement 131 requires that a public company report financial and descriptive
information about its reportable operating segments pursuant to criteria that
differ from current accounting practice. Operating segments, as defined, are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the management in deciding how to
allocate resources and in assessing performance. The financial information to be
reported includes segment profit or loss, certain revenue and expense items and
segment assets and reconciliations to corresponding amounts in the financial
statements. Statement 131 also requires information about revenues from products
or services, countries where the company has operations or assets and major
customers. Management does not believe the implementation of Statement 131 will
have a material impact on its consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133 which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Statement requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. A specific accounting treatment applies to
each type of hedge. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. SFAS No. 133 is not expected to have a
material impact on the Company's financial statements.
The American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," in March 1998. SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and requires costs incurred in the application
development stage (whether internal or external) to be capitalized. This SOP is
applicable to all financial statements for fiscal years beginning after December
15, 1998, and should be applied to internal-use computer software costs incurred
in those fiscal years for all projects, including those projects in progress
upon initial application of this SOP. Costs incurred prior to initial
application of this SOP, whether or not capitalized, should not be adjusted to
the amounts that would have been capitalized had this SOP been in effect when
those costs were incurred. The adoption of this SOP is not expected to have a
material impact on the annual financial position or operating results of the
Company.
F-12
<PAGE> 80
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Amounts billed...................................... $ 92,130 $ 77,119 $ 88,577
Amounts to be invoiced.............................. 33,300 22,409 13,548
Recoverable costs and profits....................... 9,715 2,798 7,744
Other............................................... 8,818 4,089 10,722
Allowance for doubtful accounts..................... (3,436) (1,185) (6,787)
-------- -------- --------
$140,527 $105,230 $113,804
======== ======== ========
</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. At December 31, 1997,
it is anticipated that $2,210 of the recoverable costs and profits will be
billed in 1998 and $588 will be billed in 1999. At June 30, 1998, it is
anticipated that $9,179 of the recoverable costs and profits will be billed in
1998 and $536 will be billed in 1999.
3. PROPERTY AND EQUIPMENT AND PURCHASED SOFTWARE
Property and equipment and purchased software consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Owned assets:
Computer equipment................................ $ 54,177 $ 68,188 $ 48,500
Furniture and equipment........................... 22,657 24,193 15,760
Leasehold improvements............................ 12,738 11,070 5,897
Automobiles....................................... 511 669 --
-------- -------- --------
90,083 104,120 70,157
Less accumulated depreciation and
amortization................................. (59,184) (62,808) (41,276)
-------- -------- --------
30,899 41,312 28,881
-------- -------- --------
Assets under capital leases:
Computer equipment................................ 1,735 1,735 3,930
Furniture and equipment........................... 1,582 1,582 1,581
-------- -------- --------
3,317 3,317 5,511
Less accumulated depreciation and
amortization................................. (2,983) (2,909) (5,057)
-------- -------- --------
334 408 454
-------- -------- --------
Property and equipment, net......................... $ 31,233 $ 41,720 $ 29,335
======== ======== ========
Purchased software.................................. $ 31,374 $ 28,635 $ 21,322
Less accumulated amortization.................. (21,944) (19,652) (14,909)
-------- -------- --------
Purchased software, net............................. $ 9,430 $ 8,983 $ 6,413
======== ======== ========
</TABLE>
F-13
<PAGE> 81
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
4. ACQUISITIONS
During 1997, the Company acquired 100% of the equity interests or assets in
four companies: Business Architects, LLP, ("BA"), based in Waltham,
Massachusetts, a business process reengineering consulting company; Benton
International, Inc. ("Benton"), a retail banking consulting firm located in New
York, California and Florida; Syllogic B.V. ("Syllogic"), a company based in The
Netherlands, specializing in the implementation, integration and control of
information systems with expertise in data warehousing and data mining; and
Stamos Associates, Inc. ("Stamos"), based in New York and California, a
strategic management consulting company in the healthcare industry. Also, the
Company acquired 70% of the equity interests in Icarus Consulting AG ("Icarus"),
a company specializing in airline and related industry consulting.
These five acquisitions were recorded under the purchase method of
accounting; and accordingly, the results of operations of these companies for
the periods from the date of the acquisition agreements to December 31, 1997 are
included in the accompanying 1997 consolidated statement of operations. The
dates of the 1997 acquisition agreements for BA, Benton, Icarus, Syllogic, and
Stamos were January 15, February 14, March 21, May 27 and June 17, respectively.
The purchase prices have been allocated to assets acquired and liabilities
assumed based on the estimated fair values at the dates of acquisition.
Under the terms and conditions of the various acquisition agreements
executed in 1997, the Company paid a total of $18,587 for the equity interests
acquired, $14,386 in cash, $2,701 in the form of 370,000 shares of the Company's
Class A Common Stock, and $1,500 in the form of 550,000 options to purchase the
Company's Class A Common Stock. The Company allocated $3,513 of the purchase
price to the tangible net assets acquired and $15,074 to goodwill.
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.
These 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, 1997 are included in the accompanying 1996 and 1997 consolidated
statements of operations. The dates of the 1996 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, portions of the purchase price of CommSys and TRC
were allocated to in-process product development that had not reached
technological feasibility and had no probable alternative future uses, which the
Company recorded at the date of acquisition.
Under the terms and conditions of the various acquisition agreements
executed in 1996, the Company paid a total of $16,214 for the equity interests
acquired, $9,669 in cash, and $6,545 in the form of 1,460,372 shares of the
Company's Class A Common Stock. The Company allocated $4,286 of the purchase
price to the tangible net assets acquired, $3,948 to expensed in-process product
development and $7,980 of goodwill.
F-14
<PAGE> 82
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The following table reflects unaudited pro forma combined results of
operations of the Company and the 1997 and 1996 acquisitions 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>
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $790,174 $665,035
Net income.................................................. 11,065 16,548
Basic earnings per common share............................. 0.28 0.42
Diluted earnings per common share........................... 0.23 0.37
</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 1997 and 1996,
respectively, or of future operations of the combined companies under the
ownership and management of the Company.
At June 30, 1998 and December 31, 1997 and 1996, goodwill of $12,752,
$16,596 and $7,293, net of $10,114, $6,309 and $686 in accumulated amortization,
respectively, related solely to 1997 and 1996 business acquisitions.
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES AND MINORITY INTERESTS
At December 31, 1997, 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 UBS AG as part of a larger services
agreement. The Company's investment in Systor at June 30, 1998 and at December
31, 1997 and 1996 was $8,401, $7,188 and $3,538, respectively. Summarized
financial data for Systor is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets.............................................. $ 99,976 $ 70,216
Noncurrent assets........................................... 11,134 17,134
Current liabilities......................................... 95,149 79,797
Noncurrent liabilities...................................... -- --
Revenue..................................................... 212,296 180,601
Gross profit................................................ 15,562 11,706
Net income.................................................. 9,118 1,942
</TABLE>
On March 26, 1996, the Company entered into a joint venture with HCL
Corporation Limited and HCL Europe Limited whereby the Company owns 50% of HCL
Perot Systems NV ("HPS"), an information technology services company based in
India. The Company contributed capital of $500 and $1,760 to HPS during 1997 and
1996, respectively, and is required to contribute additional capital up to a
limit of $6,900, on a call basis. The Company's investment in HPS at June 30,
1998 and at December 31, 1997 and 1996 was $3,044, $1,742 and $524,
respectively.
No dividends or distributions were received from investments in
unconsolidated affiliates in 1998, 1997 or 1996. The amount of undistributed
earnings from investments in unconsolidated affiliates recorded in retained
earnings at June 30, 1998 and at December 31, 1997 and 1996 was $7,571, $5,060
and $924, respectively.
In April 1996, the Company entered into an agreement to join a limited
partnership venture capital fund, and committed to invest $10,000, representing
a 2.75% interest in the fund. In 1997 and 1996, the Company
F-15
<PAGE> 83
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
made net capital contributions of $834, and $1,292, respectively. In January
1998, the Company sold its entire investment for $5,162 and recognized a gain of
$2,986, and has no future commitments to the fund.
In May 1996, the Company purchased 1,471,000 shares of a class of preferred
stock in a software company for $2,500. The Company purchased an additional
867,000 shares of the preferred stock for $400 in June 1997, representing a
total 12.3% equity interest. 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 commitment of up to $1,000.
In January 1997, the Company purchased 4,000 shares of 5% cumulative
convertible preferred stock for $1,000, representing a 4.5% interest in a
privately held company specializing in the electronic transmission, storage and
retrieval of documents.
In December 1997, the Company wrote both of these investments down by the
entire book value of $3,900 due to a decline in value considered to be other
than temporary.
6. OTHER ASSETS
Intellectual property rights
In July 1997, the Company acquired certain assets of Nets, Inc., an
internet development company in bankruptcy, for $8,755 in cash. Included in the
asset purchase were $2,132 of property and equipment and $6,623 of intellectual
property rights ("IP rights"). The Company recorded a write-off of $2,000 of the
$6,623 in IP rights as purchased research and development costs. This amount
represented an estimate of the fair market value of development cost related to
software for which technological feasibility had not been established and for
which there was no alternative future use. The completed IP rights were
capitalized due to the expectation that the assets would be used in several
contracts under negotiation.
During the fourth quarter of 1997, the Company determined that it was not
probable that the Company would generate future undiscounted cash flows
sufficient to recover the recorded value of the IP rights. The Company sold
$1,000 of the intellectual property in October 1997, and charged $3,623 to
direct cost of services to reflect the impairment of the remaining IP rights.
Software license transfer rights
In July 1996, the Company determined that certain software rights and
assets placed in service in 1993 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.
7. LINE OF CREDIT
Effective July 31, 1996, the Company established its 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 June 30, 1998 and December 31, 1997. This facility expired
July 31, 1998 and was renewed pursuant to the same terms until January 31, 1999.
F-16
<PAGE> 84
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1998 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Operating expenses.................................... $38,887 $33,160 $18,203
Taxes other than income, insurance, rents, licenses
and maintenance..................................... 4,855 3,433 3,519
Other contract-related................................ 39,058 39,447 31,621
------- ------- -------
$82,800 $76,040 $53,343
======= ======= =======
</TABLE>
Other contract-related
Other contract-related accrued liabilities represent provisions to match
contract-related expenses in the period in which revenues from those contracts
are recognized. These include claims made by customers for services that require
additional effort and costs by the Company to satisfy contractual requirements.
The Company continually monitors contract performance in light of client
expectations, the complexity of work, project plans, delivery schedules, and
other relevant factors. Provisions for estimated losses, if any, are made in the
period in which the loss first becomes probable and reasonably estimable. An
expense of $10,200 was recorded in 1997 to recognize management's estimate of
known future losses associated with the termination or completion of two
long-term contracts.
9. CAPITAL LEASE OBLIGATIONS AND LONG-TERM DEBT
Capital lease obligations and long-term debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1998 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and furniture capital leases
containing various payment terms through August 2001
with implicit interest rates ranging from 7.9% to
17.40%.............................................. $ 1,516 $ 1,308 $ 1,777
Notes payable for software and software license
transfer rights, financed at various rates from
8.35% to 13.92%, payable in monthly installments
through July 2001................................... 875 1,591 3,396
------- ------- -------
2,391 2,899 5,173
Less current maturities............................... (1,241) (1,367) (2,377)
------- ------- -------
$ 1,150 $ 1,532 $ 2,796
======= ======= =======
</TABLE>
Capital lease payments and long-term debt maturities for years ending after
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASE LONG-TERM
OBLIGATIONS DEBT
------------- ---------
<S> <C> <C>
1998........................................................ $ 696 $ 848
1999........................................................ 460 265
2000........................................................ 207 293
2001........................................................ 87 185
------ ------
Total minimum lease payment and long-term debt maturities... $1,450 $1,591
======
Less amounts representing interest.......................... (142)
------
Present value of net minimum capital lease payments......... $1,308
======
</TABLE>
F-17
<PAGE> 85
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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. In 1996 the Company exercised its right to
redeem these shares for $8,500 cash, plus accrued dividends of $298. The
authorized preferred stock was subsequently removed from the Company's charter
in 1997.
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. At June 30, 1998 there were
40,530,944 shares issued and 38,308,790 shares outstanding. At December 31, 1997
there were 40,524,819 shares issued and 38,227,707 shares outstanding and at
December 31, 1996 there were 39,623,848 shares issued and outstanding. The
Company is authorized to issue, under its existing stock plans, up to 37,400,000
shares of Class A Common Stock. At June 30, 1998 there were 17,843,090 shares
outstanding. At December 31, 1997 there were 17,586,207 shares outstanding and
at December 31, 1996 there were 17,582,348 shares outstanding.
Class B shares consist of 24,000,000 authorized shares of $0.01 par value
common stock, of which there are 50,000 shares issued and outstanding as of June
30, 1998. At December 31, 1997 there were 50,000 shares issued and outstanding
and at December 31, 1996 there were no shares issued and outstanding. The Class
B shares were authorized in conjunction with the provisions of the original UBS
AG service agreements, which were signed in January 1996. Class B shares are
non-voting and convertible, but otherwise are equivalent to the Class A shares.
Under the terms and conditions of the UBS AG agreements, each Class B share
shall be converted, at the option of the holder, on a share-for-share basis,
into a fully paid and non-assessable Class A share, 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 shares; 2) to a purchaser of Class A shares
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 the Federal Reserve Board of the United
States.
At December 31, 1995, the Company had 16,000,000 shares of $0.01 par value
Convertible Liquidation Preference Common Stock. 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
Class A shares. The Convertible Liquidation Preference Common Stock was removed
from the Company's charter in 1997.
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 shares 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 the Class A shares
becoming publicly traded, the Company retains the right of first refusal to buy
the employees' vested shares at a formula price set forth in each agreement,
based on fair value or book value. After the Class A shares become publicly
traded, 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
F-18
<PAGE> 86
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
under these provisions is determined by the underlying agreement, generally the
employees' cost plus interest at 8%. 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.
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 shares 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 shares, 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. For options
issued before July, 1998, 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 cancelled following the expiration of a
certain period after the employee leaves the employment of the Company. Prior to
the common stock becoming publicly traded, the Company has certain rights of
first refusal to repurchase employees' shares obtained through exercise of the
stock options at the employees' cost plus 8%. For options issued after April 1,
1997, the agreements provide that shares issued upon the exercise of the options
may not be sold until six months following an initial public offering.
In July 1998, the Company issued options to acquire 4,800,000 shares of
Class A Common Stock. The exercise price of these options will be the price of
Class A Common Stock offered to the public in an initial public offering if such
offering is completed by January 20, 1999 or otherwise as determined by the
Board of Directors.
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 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 replaced the Advisor Plan for
subsequent grants of options. 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.
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 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
F-19
<PAGE> 87
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
issued and exercise price for options issued is the fair value of the shares at
the date of issuance. Other restrictions are established upon issuance. In 1997,
60,000 options were granted under the plan.
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 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 is the fair value of
the shares on the date of grant. The purchase price for share issuances is
determined by a committee appointed by the Board of Directors. The fair value of
issuances under the plan is estimated at the time of issuance and amortized
ratably over the vesting period as compensation expense. In 1997, 24,000 options
were granted under the plan.
Other stock and option activity
During 1995, options for the purchase of 2,000,000 Class A shares, with an
exercise price of $1.00 per share, were granted to an executive 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 was recorded as a
reduction to stockholders' equity. 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.
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 had the right, under certain circumstances, to repurchase
certain shares at cost if employment with the Company terminates.
During the third quarter of 1997, the executive terminated his employment
and the Company made a non-cash repurchase of 1,400,000 shares of common stock
through a reduction of $1,830 in outstanding notes receivable. The unamortized
balance of deferred compensation was reclassified to additional paid-in-capital.
UBS AG Agreement
On April 24, 1997, the Company concluded the renegotiation of the terms of
its strategic alliance with UBS AG, initially entered into in January 1996. The
new terms were effective from January 1, 1997 and involve (i) a 10-year contract
for the Company to provide information technology ("IT") services to UBS Warburg
("UBS Warburg EPI Agreement"), (ii) separate agreements to provide IT services
to other UBS AG operating units and to permit the Company to use certain UBS AG
assets, (iii) the sale to UBS AG of options to acquire shares of the Company's
Class B stock, (iv) the sale to UBS AG of shares of the Company's Class B stock,
and (v) the termination of all options to acquire shares of the Company's Class
B stock granted under the terms and conditions of prior UBS AG agreements. The
Company continues to hold a 40% stake in Systor. In the event of termination of
the UBS Warburg EPI Agreement, a portion of the Company's interest in Systor
would be returned to UBS AG, declining ratably over the 10-year period which
began on January 1, 1997.
The new terms of the UBS Warburg EPI Agreement require the Company to
provide operational management for UBS investment banking division, Warburg
Dillon Read, technology resources (including mainframes, desktops, and voice and
data networks), excluding hardware and proprietary software applications
development. The Company is to be reimbursed for all costs, excluding corporate
overhead, related to services provided under the UBS 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.
F-20
<PAGE> 88
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Under the terms and conditions of the new agreement, the Company sold to
UBS AG options to purchase 3,617,160 shares of the Company's Class B stock at a
non-refundable cash purchase price of $2.25 per option. These Class B shares 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 such shares become vested, at an
exercise price of $7.30 per share. In addition, the Company sold to UBS AG
50,000 shares of the Company's Class B 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 UBS Warburg EPI Agreement. Both the 50,000 shares of
Class B stock and the 3,617,160 shares of Class B 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 UBS 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 UBS AG additional shares
and/or options to purchase Class B shares, 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 UBS AG deems appropriate, provided the
Company and UBS AG, 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 UBS 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 be required to buy back any previously acquired
unvested shares for the original purchase price.
Pursuant to the Bank Holding Company Act of 1956 and subsequent regulations
and interpretations by the Federal Reserve Board (the "regulations"), UBS AG's
holdings in terms of shares of the Company's Class B common stock may not exceed
10% of the total of all classes of the Company's common stock. Similarly, the
total consideration paid by UBS AG for the purchase of shares plus the purchase
and exercise of options may not exceed 10% of the Company's consolidated
stockholders' 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 Class B
shares, for which UBS AG's options are exercisable, is limited due to an
insufficient number of shares outstanding, UBS AG has the right to initiate
procedures to eliminate such deficiency. These procedures may involve (i)
issuance of additional Class A shares by the Company, (ii) a formal request to
the Federal Reserve Board from UBS AG for authorization to exceed the 10% limit
on ownership, or (iii) the purchase of Class B shares by the Company from UBS AG
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 UBS AG is unable to exercise
its options as a result of the regulations.
Deferred Compensation
The Company recorded $3,582 of deferred compensation expense for options
granted during the six months ended June 30, 1998 representing the difference
between the option exercise price and the fair value of the underlying common
stock. The Company recognized $156 of compensation expense during the six months
ended June 30, 1998 and will amortize the remaining deferred compensation
ratably over the respective vesting periods of the option grants. Prior to any
option forfeitures resulting from employee attrition, the estimated amount of
deferred compensation to be recognized during 1998 is $273 and approximately
$362 for each year through 2008.
F-21
<PAGE> 89
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Activity in Liquidation Preference Common and Class A Common Stock:
<TABLE>
<CAPTION>
Weighted
Liquidation Average
Restricted Plan Advisor Plan Option Plan Other Preference Share Total Price
--------------- ------------ ----------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning shares..... 8,851,920 404,000 61,920 5,280,776 16,000,000 30,598,616 0.70
Issuance............. 1,237,661 60,000 -- 145,147 -- 1,442,808 1.22
Options exercised.... -- -- 18,540 2,000,000 -- 2,018,540 1.00
Repurchased.......... (153,000) -- -- -- -- (153,000) 0.70
---------- ------- --------- ---------- ----------- ----------
December 31, 1995.... 9,936,581 464,000 80,460 7,425,923 16,000,000 33,906,964 0.74
Issuance............. 3,899,344 15,367 206 188,079 -- 4,102,996 2.92
Options exercised.... -- -- 1,818,218 -- -- 1,818,218 0.84
Conversion........... -- -- -- 16,000,000 (16,000,000) -- 0.01
Repurchased.......... (204,330) -- -- -- -- (204,330) 1.53
---------- ------- --------- ---------- ----------- ----------
December 31, 1996.... 13,631,595 479,367 1,898,884 23,614,002 -- 39,623,848 1.01
Issuance............. 831,102 100 -- 157,269 -- 988,471 5.42
Options exercised.... -- 120,000 534,520 -- -- 654,520 1.03
Repurchased.......... (1,638,988) -- -- (1,400,144) -- (3,039,132) 1.58
---------- ------- --------- ---------- ----------- ----------
December 31, 1997.... 12,823,709 599,467 2,433,404 22,371,127 -- 38,227,707 1.29
========== ======= ========= ========== =========== ==========
(unaudited)
Issuance............. 20,326 -- 20,000 5,799 -- 46,125 6.72
Options exercised.... -- 43,500 771,363 -- -- 814,863 1.63
Repurchased.......... (734,188) -- (2,518) (43,199) -- (779,905) 2.27
---------- ------- --------- ---------- ----------- ----------
June 30, 1998........ 12,109,847 642,967 3,222,249 22,333,727 -- 38,308,790 1.31
========== ======= ========= ========== =========== ==========
</TABLE>
Activity in Options for Class A Common Stock:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
ADVISOR OTHER EXERCISE
1991 PLAN PLAN OPTIONS TOTAL PRICE
---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1995 Outstanding at beginning of
year............................... 6,675,992 160,000 311,288 7,147,280 0.86
Granted.............................. 2,255,000 -- 2,000,000 4,255,000 1.13
Exercised............................ (17,180) -- (2,001,360) (2,018,540) 1.00
Forfeited............................ -- -- -- -- --
---------- -------- ---------- ----------
Outstanding at December 31, 1995..... 8,913,812 160,000 309,928 9,383,740 0.96
========== ======== ========== ==========
Exercisable at December 31, 1995..... 1,858,166 205,214 96,000 2,159,380 0.78
1996 Outstanding at beginning of
year............................... 8,913,812 160,000 309,928 9,383,740 0.96
Granted.............................. 6,848,240 65,000 -- 6,913,240 2.73
Exercised............................ (1,776,626) -- (41,592) (1,818,218) 0.84
Forfeited............................ (41,392) -- (512) (41,904) 2.29
---------- -------- ---------- ----------
Outstanding at December 31, 1996..... 13,944,034 225,000 267,824 14,436,858 1.82
========== ======== ========== ==========
Exercisable at December 31, 1996..... 1,389,546 152,000 189,484 1,731,030 0.84
</TABLE>
F-22
<PAGE> 90
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
ADVISOR OTHER EXERCISE
1991 PLAN PLAN OPTIONS TOTAL PRICE
---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1997 Outstanding at beginning of
year............................... 13,944,034 225,000 267,824 14,436,858 1.82
Granted.............................. 6,891,352 84,000 -- 6,975,352 5.39
Exercised............................ (485,680) (120,000) (48,840) (654,520) 1.03
Forfeited............................ (2,858,289) -- (7,184) (2,865,473) 3.09
---------- -------- ---------- ----------
Outstanding at December 31, 1997..... 17,491,417 189,000 211,800 17,892,217 3.04
========== ======== ========== ==========
Exercisable at December 31, 1997..... 2,310,825 44,500 140,192 2,495,517 1.32
(unaudited)
1998 Outstanding at beginning of
year............................... 17,491,417 189,000 211,800 17,892,217 3.04
Granted.............................. 901,000 15,000 -- 916,000 6.65
Exercised............................ (743,483) (43,500) (27,880) (814,863) 1.63
Forfeited............................ (1,812,736) -- (7,440) (1,820,176) 3.46
---------- -------- ---------- ----------
Outstanding at June 30, 1998......... 15,836,198 160,500 176,480 16,173,178 3.24
========== ======== ========== ==========
Exercisable at June 30, 1998......... 2,664,445 11,600 114,312 2,790,357 2.11
</TABLE>
The following table summarizes information about options for Class A common
shares outstanding at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.50 362,500 4.22 210,528
$0.75 1,204,260 6.59 658,390
$1.00 4,316,100 7.10 1,003,310
$1.75 697,044 6.33 100,978
$2.50 4,130,321 9.51 393,720
$3.00 71,500 9.69 --
$3.75 3,551,542 8.97 114,306
$4.00 65,000 10.04 --
$6.75 3,493,950 8.84 14,285
---------- ---------
17,892,217 8.26 2,495,517
========== =========
Weighted average exercise price of
exercisable options..................... $ 1.32
</TABLE>
F-23
<PAGE> 91
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income
As reported........................................... $11,217 $20,499 $10,813
Pro forma............................................. $ 9,948 $20,063 $10,734
Basic earnings per common share
As reported........................................... $ 0.29 $ 0.54 $ 0.33
Pro forma............................................. $ 0.25 $ 0.53 $ 0.33
Diluted earnings per common share
As reported........................................... $ 0.24 $ 0.48 $ 0.31
Pro forma............................................. $ 0.21 $ 0.47 $ 0.31
</TABLE>
All options issued by the Company in 1997, 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 1997, 1996 and 1995,
respectively; risk free weighted average interest rates of 6.5% for 1997 and
6.8% for 1996 and 1995; dividend yield and volatility of zero for all 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 1997, 1996 and 1995 was $2,709, $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>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Domestic................................................ $(4,054) $10,151 $12,518
Foreign................................................. 23,562 30,000 7,732
------- ------- -------
$19,508 $40,151 $20,250
======= ======= =======
</TABLE>
F-24
<PAGE> 92
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The provision for income taxes charged to operations was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Current:
U.S. Federal........................................ $ 9,159 $ 21,794 $ 4,444
State and local..................................... 1,383 3,583 766
Foreign............................................. 8,172 10,319 7,825
-------- -------- -------
Total current............................... 18,714 35,696 13,035
-------- -------- -------
Deferred:
U.S. Federal........................................ (8,902) (14,400) (4)
State and local..................................... (1,392) (2,242) 32
Foreign............................................. (129) 598 (3,626)
-------- -------- -------
Total deferred.............................. (10,423) (16,044) (3,598)
-------- -------- -------
Total provision for income taxes............ $ 8,291 $ 19,652 $ 9,437
======== ======== =======
</TABLE>
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred compensation....................................... $ 431 $ 536
Conversion of acquired entity from cash basis to accrual
basis of accounting....................................... 1,171 989
Other....................................................... 664 493
-------- --------
Gross deferred tax liabilities.............................. 2,266 2,018
-------- --------
Property, plant and equipment............................... (11,050) (5,557)
Accrued liabilities......................................... (22,958) (21,233)
Equity investments.......................................... (817) (517)
Intangibles................................................. (1,134) (171)
Deferred revenue............................................ (1,538) (4,877)
Other....................................................... -- (129)
-------- --------
Gross deferred tax assets................................... (37,497) (32,484)
-------- --------
Net deferred tax asset............................ $(35,231) $(30,466)
======== ========
</TABLE>
A valuation allowance has not been established for the net deferred tax
asset as of December 31, 1997 or 1996, due to a significant contract backlog and
the availability of loss carrybacks.
F-25
<PAGE> 93
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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>
1997 1996 1995
----------------- ----------------- -----------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates.......... $6,828 35.0% $14,053 35.0% $7,087 35.0%
Non-deductible items.............. 528 2.7 3,017 7.5 1,829 9.0
State and local taxes............. (215) (1.1) 609 1.5 751 3.7
Nondeductible amortization and
write-off of intangible
assets.......................... 1,765 9.0 1,900 4.7 -- --
U.S. rates in excess of foreign
rates and others................ (615) (3.1) 73 .2 (230) (1.1)
------ ---- ------- ---- ------ ----
Total provision for
income taxes.......... $8,291 42.5% $19,652 48.9% $9,437 46.6%
====== ==== ======= ==== ====== ====
</TABLE>
12. CERTAIN GEOGRAPHIC DATA AND SEGMENT INFORMATION
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, Singapore, Hong Kong and Japan.
Financial information by geographic region is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1996 1995
----------- -------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States:
Total revenue.......................... $296,140 $519,122 $400,211 $238,783
Operating income....................... 8,329 (5,507) 10,969 12,802
Identifiable assets.................... 208,971 171,503 130,766 90,632
Europe and Asia:
Total revenue.......................... 156,572 262,499 199,227 103,523
Operating income....................... 18,442 23,100 30,332 8,060
Identifiable assets.................... 122,651 95,600 101,481 39,841
Consolidated:
Total revenue.......................... 452,712 781,621 599,438 342,306
Operating income....................... 26,771 17,593 41,301 20,862
Identifiable assets.................... 331,622 267,103 232,247 130,473
</TABLE>
Greater than 10% of the Company's revenue was earned from two clients for
the six months ended June 30, 1998, two clients for the year ended December 31,
1997, one client for the year ended December 31, 1996, and two clients for the
year ended December 31, 1995. Revenue from these clients comprised 23% and 12%
of total revenue for the six months ended June 30, 1998, 27% and 10% of total
revenue in 1997, 28% of total revenue in 1996, and 12% and 10% of total revenue
in 1995.
13. COMMITMENTS AND CONTINGENCIES
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
F-26
<PAGE> 94
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
one to ten years. Future minimum commitments under these agreements as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING LEASE AND MAINTENANCE
DECEMBER 31, COMMITMENTS
- ------------------------------------------------------------ ---------------------
<S> <C>
1998........................................................ $25,599
1999........................................................ 20,559
2000........................................................ 15,556
2001........................................................ 10,783
2002........................................................ 11,168
-------
Total............................................. $83,665
=======
</TABLE>
The Company is obligated under certain operating leases for its pro rata
share of the lessors' operating expenses. Rent expense was $12,394 and $8,626
for the six months ended June 30, 1998 and 1997, and $17,958, $18,212, and
$23,731 for the years ended December 31, 1997, 1996 and 1995, respectively.
Additionally, in 1997, the Company established a loss accrual of $3,125 in
connection with the planned abandonment of certain leased properties. During the
first half of 1998, the Company revised its estimate of that loss accrual to
$5,875.
Letter of credit
The Company had a $1,000 irrevocable letter of credit as of June 30, 1998.
The letter of credit was issued in conjunction with the provisions of a certain
contract. The fair value of the letter of credit was estimated to be equal to
the face value based on the nature of the fee arrangements with the issuing
bank.
Financial instruments with off-balance sheet risk
Interest rate swap
In December 1993, the Company entered into an agreement with a client 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 was required to make an
interest-sensitive payment to the client if a defined variable interest rate
("Rate") exceeded 8.5% based upon a declining notional amount ($48,756 and
$67,716 as of December 31, 1997 and 1996, respectively) over the term of the
contract. If the Rate was less than 8.5%, the client was 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 was 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 were included as an adjustment to direct cost of services. The Company
recorded a reduction to direct cost of services of $643 and $852 for the years
ended December 31, 1997 and 1996, 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 $1,102 benefit as of December 31, 1997. The
Company's remaining risk associated with these transactions was risk of default
by the client or the bank, which the Company believed to be remote.
In April 1998, the Company paid a fee of $536 to terminate the above
interest rate swap agreement.
F-27
<PAGE> 95
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Foreign currency exchange forward contracts
At June 30, 1998, the Company had two British pound to U.S. dollar forward
contracts in the amount of $6,758 and $3,080, respectively. These contracts will
expire on August 28, 1998. As of December 31, 1997, the Company had two British
pound to U.S. dollar forward contracts totaling $10,177 and $6,684 which matured
in February 1998 and January 1998, respectively. A third forward contract of
Swiss franc to U.S. dollar totaling $8,108 matured in January 1998.
The estimated fair value of the Company's forward exchange contracts using
bank or market quotes and the month end foreign exchange rates was a net
receivable of $4 as of June 30, 1998, and a net liability of $18 as of December
31, 1997. The Company's remaining risk associated with this transaction is the
risk of default by the bank, which the Company believes to be remote.
Contracts
In the normal course of business, the Company provides services to its
clients which may require the Company to comply with certain performance
criteria. The Company believes that the ultimate liability, if any, incurred
under these contracts will not have a material adverse effect on the Company's
consolidated results of operations or financial position.
Contingent put rights
Under the terms of various stock agreements, a total of 1,423,376 and
1,463,376 shares of Class A Common Stock are subject to contingent put rights at
June 30, 1998 and December 31, 1997, respectively. For 600,000 and 323,376 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 500,000 of these shares at
June 30, 1998 and 540,000 at December 31, 1997, 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 flow.
License Agreement
In 1988, the Company entered into a license agreement with the Perot
Systems Family Corporation and Ross Perot that allowed the Company to use the
name "Perot" and "Perot Systems" in its business on a royalty-free basis. Mr.
Perot and the Perot Systems Family Corporation may terminate this agreement at
any time and for any reason. Beginning one year following such a termination,
the Company would not be allowed to use the "Perot" name in its business. Mr.
Perot's or the Perot Systems Family Corporation's termination of the Company's
license agreement could materially and adversely affect the Company's business,
financial condition and results of operations.
Year 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process date fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems could be unable to accurately process certain
date-based information. The Company believes it has identified all significant
applications that will require modification
F-28
<PAGE> 96
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
to ensure Year 2000 Compliance and does not believe compliance with the Year
2000 requirements will have a material adverse effect on the Company's business
or results of operations. The Company is performing an assessment of its
obligations to make any of its clients' systems Year 2000 compliant, including
an estimate of the cost and revenues to be incurred in fulfilling such
obligations, and monitors this assessment on an ongoing basis.
The Company estimates the total cost of completing any required
modifications, upgrades, or replacements of its internal systems to be
approximately $1,000, almost all of which the Company believes will be incurred
during 1998 and 1999. This estimate is being monitored and will be revised as
additional information becomes available. In addition, the Company recorded a
$5,196 charge in direct cost of services during the second quarter of 1998 to
address Year 2000 exposures for certain client contracts.
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 six months
ended June 30, 1998 and 1997 and the years ended December 31, 1997, 1996 and
1995 amounted to $4,076; $4,246; $7,388; $4,785 and $1,919, respectively. The
Company's contribution of common stock for the six months ended June 30, 1998
and 1997 and the years ended December 31, 1997, 1996 and 1995 totaled 0;
123,795; 128,795; 6,325 and 99,486 shares, respectively, which were allocated to
participants' plan accounts using a formula based on compensation. Compensation
expense of $0, $607, $631, $14, and $224, 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 in 1995 as a result of this grant.
In 1996, the company contributed 162,143 shares to certain trusts
established for the benefit of employees transitioning to the company pursuant
to certain contracts. Compensation expense of $405 was recorded in 1996 related
to these grants.
F-29
<PAGE> 97
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
15. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996 1995
----------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest............................................ $ 126 $ 1,283 $ 1,877 $ 671
======= ======= ======= ======
Income taxes........................................ $12,995 $23,325 $28,032 $7,031
======= ======= ======= ======
Non-cash investing and financing activities:
Issuance of common stock for acquisition of
businesses.......................................... $ -- $ 2,701 $ 6,545 $ --
======= ======= ======= ======
Issuance of stock options for acquisition of
business............................................ $ -- $ 1,500 $ -- $ --
======= ======= ======= ======
Liabilities assumed in acquisition of businesses...... $ -- $ 7,693 $ 4,150 $ --
======= ======= ======= ======
Repurchase of shares issued under Restricted Stock
Plan in exchange for reductions in notes receivable
from stockholders................................... $ 1,013 $ 2,603 $ 225 $ --
======= ======= ======= ======
Purchase of shares financed by notes receivable from
stockholders........................................ $ -- $ 1,427 $ 3,065 $ 901
======= ======= ======= ======
Deferred compensation, net of amortization............ $ 3,426 $ -- $ -- $1,456
======= ======= ======= ======
Reclassification of deferred compensation to
paid-in-capital..................................... $ -- $ 1,050 $ -- $ --
======= ======= ======= ======
Contract rights issued (cancelled) at inception and
renegotiation of UBS AG Agreement................... $ -- $(4,146) $ 4,544 $ --
======= ======= ======= ======
Stock options issued for investments in and advances
to unconsolidated affiliates........................ $ -- $ -- $ 706 $ --
======= ======= ======= ======
Transfer of assets upon assignment of lease
obligation.......................................... $ -- $ -- $ -- $1,008
======= ======= ======= ======
</TABLE>
16. RELATED PARTY TRANSACTIONS
During 1996, 1997 and 1998 certain officers financed the purchase of Class
A Common Stock with a bank. All of these loans bear interest at the prime rate
plus 1% (currently 9.5%) and are due at various dates between February 26, 2000
and July 20, 2000. The Company had agreed that it would, at the request of
NationsBank, purchase such loans from NationsBank for an amount equal to
principal plus accrued and unpaid interest if the Company has not had an initial
public offering that results in the shares of Class A Common Stock being
publicly traded before the maturity of the notes. As of June 30, 1998 and
December 31, 1997, approximately $1,770 and $1,546, respectively, remain
outstanding under these loans.
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 the date of the note or at an earlier date if the Company's
common stock is publicly traded. In April 1997, the Company loaned an additional
$2,397 to this executive. For these additional loans, up to $1,169 is
collateralized by the Company's Class A common shares held by this executive and
$1,000 is collateralized by a mortgage on the executive's residence. These
additional loans will bear interest at the greater of 7.25% or the applicable
federal rate. As of June 30, 1998 and December 31, 1997, the principal balance
remaining on these notes was $2,169. In July 1997, the Company repurchased
1,400,000 shares of common stock from this executive, following his resignation,
through a reduction of $1,830 in outstanding notes receivable.
F-30
<PAGE> 98
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
In August 1996, an officer of the Company obtained funding in the amount of
$350 from a bank. The Company entered into a third party agreement with this
bank under which, if the Company's Class A common shares are not publicly traded
prior to the maturity date of the loan, the Company will purchase the loan at
the bank's option. The maturity date of this loan is February 26, 2000.
In 1996, the Company 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
paid a license fee of $1,000 directly to PII in connection with the license. The
Company had a separate contract with Witan to perform development work on the
licensed software. The contract was terminated in 1997. PII is an affiliate of a
stockholder of the Company.
In January and February 1997, the Company loaned $450 to an executive at
the rate of 8%. The notes were collateralized by the executive's Class A common
shares. Prior to year end, the notes and the related shares were canceled.
In August 1997, the Company also loaned $250 to an executive at the rate of
8%. This note is collateralized by the executive's Class A common shares and is
payable in August 2000.
A former officer of the Company has three outstanding loans totaling $349
with the Company. These loans are secured by the Company's Class A common shares
held by the executive and are due by December 31, 1999.
In November 1997, Ross Perot became chief executive officer of the Company
and has been serving the Company without cash or non-cash compensation. For the
six months ended June 30, 1998, the Company has recorded a compensation expense
of $390 with an offset to additional paid-in capital.
17. EARNINGS PER SHARE
In 1997, the Company adopted 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 common share, with the principal
difference being that common stock equivalents are not considered in computing
basic earnings per share. The following chart is a reconciliation of the
numerators and the denominators of the basic and diluted per-share computations.
<TABLE>
<CAPTION>
PER-SHARE
INCOME SHARES AMOUNT
------- ------ ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED 1995
Net income.................................................. $10,813
Less preferred stock dividend............................... (595)
-------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders................ 10,218 31,151 $0.33
=====
Dilutive options............................................ 2,215
------- ------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions.................................. $10,218 33,366 $0.31
======= ====== =====
</TABLE>
F-31
<PAGE> 99
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PER-SHARE
INCOME SHARES AMOUNT
------- ------ ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED 1996
Net income.................................................. $20,499
Less preferred stock dividend............................... (447)
-------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders................ 20,052 37,055 $0.54
=====
Dilutive options............................................ 5,116
------- ------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions.................................. $20,052 42,171 $0.48
======= ====== =====
FOR THE YEAR ENDED 1997
Net income.................................................. $11,217
Less preferred stock dividend............................... --
-------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders................ 11,217 39,168 $0.29
=====
Dilutive options............................................ 8,428
------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions.................................. $11,217 47,596 $0.24
======= ====== =====
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
Net income.................................................. $ 8,098
Less preferred Stock Dividend............................... --
-------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders................ $ 8,098 39,754 $0.20
=====
Dilutive options............................................ 9,405
------- ------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders Plus assumed
conversions............................................... $ 8,098 49,159 $0.16
======= ====== =====
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
Net income.................................................. $19,144
Less preferred stock dividend............................... --
-------
BASIC EARNINGS PER COMMON SHARE
Net income attributed to common shareholders................ $19,144 38,224 $0.50
=====
Dilutive options............................................ 9,232
------- ------
DILUTED EARNINGS PER COMMON SHARE
Net income attributed to common shareholders
Plus assumed conversions.................................. $19,144 47,456 $0.40
======= ====== =====
</TABLE>
F-32
<PAGE> 100
PEROT SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The effect of this accounting change on previously reported earnings per
share data was as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
ENDED DECEMBER 31,
JUNE 30, --------------
1997 1996 1995
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
PER SHARE AMOUNTS
Primary EPS as reported.................................. $0.15 $0.40 $0.30
Effect of SFAS No. 128................................... 0.05 0.14 0.03
----- ----- -----
Basic EPS as restated.................................... $0.20 $0.54 $0.33
===== ===== =====
Fully diluted EPS as reported............................ $0.15 $0.40 $0.30
Effect of SFAS No. 128................................... 0.01 0.08 0.01
----- ----- -----
Diluted EPS as restated.................................. $0.16 $0.48 $0.31
===== ===== =====
</TABLE>
18. SUBSEQUENT EVENTS
In August 1998, the Company expects to file a registration statement with
the Securities and Exchange Commission for an initial public offering of
approximately shares of the Company's Common Stock.
In July, 1998, the Board of Directors adopted an employee stock purchase
plan ("the ESPP"), which provides for the issuance of a maximum of 10,000,000
shares of Common Stock. Eligible employees may have up to 10% of their earnings
withheld, to be used to purchase shares of the Company's Common Stock on
specified dates determined by the Board of Directors. The price of the Common
Stock purchased under the ESPP will be equal to 85% of the fair value of the
stock on the exercise date for the offering period.
In July, 1998, the Board of Directors approved an increase in the
authorized number of shares of Common Stock to 200,000,000 from 100,000,000
shares. The Company's shareholders are scheduled to vote on this matter through
a consent statement delivered to the shareholders on or about , 1998.
The Board of Directors of Perot Systems anticipates authorizing the Company
to enter into a Stockholder Rights Plan (the "Rights Plan"), providing that one
Class A right (a "Class A Right") will be attached to each share of Class A
Common Stock and one Class B right (a "Class B Right", and together with the
Class A Rights, the "Rights") will be attached to each share of Class B Common
Stock as of , 1998 (the "Record Date"). Each Right will entitle the
registered holder to purchase from the Company a unit (a "Unit") consisting of
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
par value $ per share (the "Preferred Stock"), at a Purchase Price of $
per Unit (the "Purchase Price"), subject to adjustment. The Rights will not be
exercisable until the Distribution Date and will expire at the close of business
on , 2008, unless earlier redeemed by the Company as described below.
At any time until 10 days following the Stock Acquisition Date, the Company may
redeem the Rights in whole, but not in part, at a price of $.01 per Right. The
ten day redemption period may be extended by the Board of Directors so long as
the Rights are still redeemable. Immediately upon the action of the Board of
Directors ordering redemption of the Rights, the Rights will terminate and the
only right of the holders of Rights will be to receive the $.01 redemption
price.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
in certain circumstances. Accordingly, the existence of the Rights may deter
certain acquirors from making takeover proposals or tender offers. The Rights
are designed to enhance the ability of the Board of Directors to negotiate with
an acquiror on behalf of all of the shareholders.
F-33
<PAGE> 101
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission
is effective. This prospectus is not an offer to sell these securities and we
are not soliciting offers to buy these securities in any state where the offer
or sale is not permitted.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued August 5, 1998
Shares
LOGO
CLASS A COMMON STOCK
------------------------
PEROT SYSTEMS CORPORATION IS OFFERING SHARES OF ITS CLASS A COMMON
STOCK. INITIALLY, THE INTERNATIONAL UNDERWRITERS ARE OFFERING SHARES
OF OUR CLASS A COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA, AND THE U.S.
UNDERWRITERS ARE OFFERING SHARES OF OUR CLASS A COMMON STOCK IN THE
UNITED STATES AND CANADA.
THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR
OUR STOCK. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$ AND $ PER SHARE.
------------------------
WE INTEND TO APPLY TO LIST THE CLASS A COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE.
------------------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company
-------- ------------- -----------
<S> <C> <C> <C>
Per Share............................ $ $ $
Total................................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Perot Systems Corporation has granted the underwriters the right to purchase up
to an additional shares of Class A Common Stock to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
of Class A Common Stock to purchasers on , 1998.
------------------------
WARBURG DILLON READ
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
, 1998
<PAGE> 102
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the expenses to be incurred in connection
with the offering described in this Registration Statement, all of which will be
paid by the Company. All amounts are estimates, other than the registration fee,
the NASD fee, and the New York Stock Exchange listing fee.
<TABLE>
<S> <C>
Registration fee............................................ $33,925
NASD fee.................................................... 12,000
New York Stock Exchange listing fee.........................
Accounting fees and expenses................................
Legal fees and expenses.....................................
Director and officer insurance expenses.....................
Printing and engraving......................................
Transfer Agent fees and expenses............................
Blue sky fees and expenses..................................
Miscellaneous expenses......................................
-------
Total............................................. $
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws provide that officers and directors who are made a party to
or are threatened to be made a party to or is otherwise involved in any action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was an officer or a
director of the Company or is or was serving at the request of the Company as a
director or an officer of another corporation or of a partnership, joint
venture, trust, or other enterprise, including service with respect to an
employee benefit plan (an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any other
capacity while serving as a director or officer, shall be indemnified and held
harmless by the Company to the fullest extent authorized by the Delaware General
Corporation Law ("DGCL"), as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than permitted
prior thereto), against all expense, liability, and loss (including, without
limitation, attorneys' fees, judgments, fines, excise taxes or penalties, and
amounts paid or to be paid in settlement) incurred or suffered by such
indemnitee in connection therewith and such indemnification shall continue with
respect to an indemnitee who has ceased to be a director or officer and shall
inure to the benefit of the indemnitee's heirs, executors and administrators;
provided, however, that the Company shall indemnify any such indemnitee in
connection with a proceeding initiated by such indemnitee only if such
proceeding was authorized by the Board of Directors. The right to
indemnification includes the right to be paid by the Company for expenses
incurred in defending any such proceeding in advance of its final disposition.
Officers and directors are not entitled to indemnification if such persons did
not meet the applicable standard of conduct set forth in the DGCL for officers
and directors.
DGCL Section 145 provides, among other things, that the Company may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of the Company) by reason of the fact that the
person is or was a director, officer, agent or employee of the Company or is or
was serving at the Company's request as a director, officer, agent, or employee
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The power to
indemnify applies to actions brought by
II-1
<PAGE> 103
or in the right of the Company as well, but only to the extent of defense
expenses (including attorneys' fees but excluding amounts paid in settlement)
actually and reasonably incurred and not to any satisfaction of a judgment or
settlement of the claim itself, and with the further limitation that in such
actions no indemnification shall be made in the event of any adjudication of
negligence or misconduct in the performance of his duties to the Company, unless
the court believes that in light of all the circumstances indemnification should
apply.
The indemnification provisions contained in the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws are not
exclusive of any other rights to which a person may be entitled by law,
agreement, vote of stockholders or disinterested directors or otherwise. In
addition, the Company maintains insurance on behalf of its directors and
executive officers insuring them against any liability asserted against them in
their capacities as directors or officers or arising out of such status.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In reliance on Rule 701 under the Securities Act, the Company issued
options to purchase the number of shares of Class A Common Stock to its
employees, consultants, and directors during the periods or on the dates and
with the exercise prices reflected in the table below:
<TABLE>
<CAPTION>
SHARES SUBJECT EXERCISE
DATES TO OPTION PRICE
- ----- -------------- --------
<S> <C> <C>
March 10, 1997 -- June 30, 1997............................. 2,689,000 $6.75
January 15, 1997............................................ 65,000 $4.00
January 13, 1997............................................ 26,400 $2.50
September 26, 1996 -- January 31, 1997...................... 3,924,442 $3.75
September 10, 1996.......................................... 80,000 $3.00
January 19, 1996 -- September 15, 1996...................... 5,017,696 $2.50
August 4, 1995 -- January 26, 1996.......................... 905,204 $1.75
</TABLE>
In reliance on Section 4(2) of the Securities Act, during the periods set
forth below the Company issued to certain employees options to purchase the
number of shares of Class A Common Stock and at the exercise prices reflected in
the table below:
<TABLE>
<CAPTION>
SHARES SUBJECT EXERCISE
DATES TO OPTION PRICE
- ----- -------------- --------
<S> <C> <C>
September 26, 1996 -- January 31, 1997...................... 200,000 $3.75
January 19, 1996 -- September 15, 1996...................... 25,000 $2.50
January 1, 1996 -- January 26, 1996......................... 200,000 $1.75
</TABLE>
In reliance on Rule 701 under the Securities Act, the Company sold the
number of shares of Class A Common Stock to its employees, consultants, and
directors during the periods and at the prices reflected in the table below:
<TABLE>
<CAPTION>
DATES SHARES PRICE
- ----- --------- -----
<S> <C> <C>
September 15, 1996 -- January 31, 1997...................... 58,000 $3.75
January 19, 1996 -- September 15, 1996...................... 1,731,950 $2.50
August 23, 1995 -- January 26, 1996......................... 175,000 $1.75
August 4, 1995 -- September 22, 1995........................ 10,000 $1.00
</TABLE>
In reliance on Section 4(2) of the Securities Act, the Company sold to its
employees (i) 750,000 shares of Class A Common Stock for $2.50 per share between
February 2, 1996 and September 15, 1996 and (ii) 230,000 shares of Class A
Common Stock for $3.75 per share between September 15, 1996 and January 31,
1997.
In reliance on Section 4(2) of the Securities Act, on January 1, 1996, the
Company issued options to purchase 10,500,000 shares of Class B Common Stock at
an exercise price of $2.50 per share to UBS AG. In connection with the
renegotiation of the agreements with UBS AG effective January 1, 1997, such
options were cancelled and, in reliance on Section 4(2) of the Securities Act,
the Company sold UBS (i) 50,000 shares of Class B Common Stock at $7.30 per
share and (ii) options, at a price of $2.25 per option, to purchase 3,617,160
shares of Class B Common Stock at an exercise price of $7.30 per share.
II-2
<PAGE> 104
The Company used the proceeds of stock sales and from option exercises for
working capital and other general corporate purposes.
In reliance on Section 4(2) of the Securities Act, the Registrant issued
the following numbers of shares of its Class A Common Stock in connection with
the acquisition of the indicated businesses.
<TABLE>
<CAPTION>
COMPANY ACQUIRED DATE SHARES ISSUED
- ---------------- ---- -------------
<S> <C> <C>
Business Architects L.L.P........................... January 15, 1997 120,000
CommSys Corporation................................. September 16, 1996 224,997
Doblin Group, Inc................................... September 10, 1996 60,000
Icarus AG........................................... March 21, 1997 31,500
Icarus GmbH......................................... March 21, 1997 38,500
Rothwell Group, Inc................................. August 2, 1996 85,375
Syllogic, B.V....................................... May 23, 1997 180,000
The Technical Resource Connection, Inc.............. October 22, 1996 1,090,000
</TABLE>
In addition, the Company issued options to purchase 550,000 shares to the
owners of Benton International, Inc. in reliance on Section 4(2) of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1** -- Underwriting Agreement
3.1+ -- Amended and Restated Certificate of Incorporation
3.2+ -- Amended and Restated Bylaws
4.1+ -- Specimen of Class A Common Stock Certificate
4.2** -- Form of Rights Agreement
5.1 -- Opinion of Hughes & Luce, L.L.P. regarding legality of
securities being registered
10.1+ -- 1991 Stock Option Plan
10.2+ -- Form of Option Agreement (1991 Option Plan)
10.3+ -- Restricted Stock Plan
10.4+ -- Form of Restricted Stock Agreement (Restricted Stock
Plan)
10.5+ -- 1996 Non-employee Director Stock Option/Restricted Stock
Plan
10.6+ -- Form of Restricted Stock Agreement (Non-employee Stock
Option/Restricted Stock Plan)
10.7+ -- Form of Option Agreement (Non-employee Stock
Option/Restricted Stock Plan)
10.8+ -- Advisor Stock Option/Restricted Stock Incentive Plan
10.9+ -- Form of Restricted Stock Option Agreement (Advisor Stock
Option/Restricted Stock Incentive Plan)
10.10+ -- Form of Option Agreement (Advisor Stock Option/Restricted
Stock Incentive 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 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 $1,500,000
</TABLE>
II-3
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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
10.18+ -- Deed of Trust dated April 15, 1997 made by James A.
Cannavino in favor of the Company
10.19+ -- Promissory Note dated July 8, 1996 made by James Champy
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 the
Company and James Champy
10.22+ -- Letter Agreement dated July 8, 1996 between the Company
and James Champy
10.23+ -- Promissory Note dated June 17, 1996 made by Guillermo G.
Marmol in favor of the Company
10.24+ -- Pledge Agreement 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+ -- Amended and Restated PSC Stock Option and Purchase
Agreement dated as of April 24, 1997 by and between Swiss
Bank Corporation and the Company
10.28+ -- Amended and Restated Master Operating Agreement dated as
of January 1, 1997 between Swiss Bank Corporation and the
Company
10.29+ -- Amended and Restated Agreement for EPI Operational
Management Services dated as of January 1, 1997
10.30* -- Amendment to Amended and Restated Master Operating
Agreement dated June 28, 1998 between UBS AG and the
Company
10.31* -- Amendment to Amended and Restated Agreement for EPI
Operational Management Services dated June 28, 1998
between Swiss Bank Corporation and the Company
10.32* -- 1998 Associate Stock Purchase Plan
10.33* -- Form of Amended and Restated 1991 Stock Option Plan
10.34* -- Form of Amended Stock Option Agreement
10.35+ -- Promissory Note dated July 31, 1998 made by the Company
in favor of NationsBank of Texas, N.A.
10.36* -- Promissory Note dated August 27, 1997 made by John E.
King in favor of the Company in the principal amount of
$250,000
10.37* -- Pledge Agreement dated August 27, 1997 made by John E.
King in favor of the Company
21.1** -- Subsidiaries of the Company
23.1** -- Consent of Hughes & Luce, L.L.P.
</TABLE>
II-4
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2* -- Consent of PricewaterhouseCoopers LLP
24.1* -- Power of Attorney (included in Part II to this
Registration Statement)
27.1* -- Financial Data Schedule for the Six Month Period Ended
June 30, 1998
27.2* -- Financial Data Schedule for the Year Ended December 31,
1997
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
+ Incorporated by reference to the Company's Form 10 dated April 30, 1997.
b. Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing certificates in such denominations and registered in such names
as required by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification by the registrant against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on August 5, 1998.
PEROT SYSTEMS CORPORATION,
a Delaware corporation
By: /s/ TERRY ASHWILL
----------------------------------
Name: Terry Ashwill
Title: Vice President and
Chief Financial Officer
Each person whose signature appears below hereby constitutes and appoints
Terry Ashwill and Peter Altabef, and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place, and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) and addition to
this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to such attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or his substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ ROSS PEROT Chairman, President, and Chief August 5, 1998
- ----------------------------------------------------- Executive Officer
Ross Perot
/s/ TERRY ASHWILL Vice President, Chief Financial August 5, 1998
- ----------------------------------------------------- Officer, and Principal
Terry Ashwill Accounting Officer
/s/ JAMES CHAMPY Vice President and Director August 5, 1998
- -----------------------------------------------------
James Champy
/s/ STEVEN BLASNIK Director August 5, 1998
- -----------------------------------------------------
Steven Blasnik
/s/ CARL HAHN Director August 5, 1998
- -----------------------------------------------------
Carl Hahn
/s/ GEORGE HEILMEIER Director August 5, 1998
- -----------------------------------------------------
George Heilmeier
/s/ ROSS PEROT, JR. Director August 5, 1998
- -----------------------------------------------------
Ross Perot, Jr.
</TABLE>
II-6
<PAGE> 108
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Perot Systems Corporation:
Our report on the consolidated financial statements of Perot Systems
Corporation and Subsidiaries is included herein. In connection with our audits
of such financial statements, we have also audited the related financial
statement schedule of Perot Systems Corporation and Subsidiaries.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 25, 1998
S-1
<PAGE> 109
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF DEDUCTIONS BALANCE AT END
PERIOD ADDITIONS (WRITE-OFFS) OF PERIOD
------------ --------- ------------ --------------
<S> <C> <C> <C> <C>
December 31, 1997.............................. $6,787 $1,167 $6,769 $1,185
December 31, 1996.............................. $1,352 $5,625 $ 190 $6,787
December 31, 1995.............................. $ 382 $1,068 $ 98 $1,352
</TABLE>
S-2
<PAGE> 110
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1** -- Underwriting Agreement
3.1+ -- Amended and Restated Certificate of Incorporation
3.2+ -- Amended and Restated Bylaws
4.1+ -- Specimen of Class A Common Stock Certificate
4.2** -- Form of Rights Agreement
5.1 -- Opinion of Hughes & Luce, L.L.P. regarding legality of
securities being registered
10.1+ -- 1991 Stock Option Plan
10.2+ -- Form of Option Agreement (1991 Option Plan)
10.3+ -- Restricted Stock Plan
10.4+ -- Form of Restricted Stock Agreement (Restricted Stock
Plan)
10.5+ -- 1996 Non-employee Director Stock Option/Restricted Stock
Plan
10.6+ -- Form of Restricted Stock Agreement (Non-employee Stock
Option/Restricted Stock Plan)
10.7+ -- Form of Option Agreement (Non-employee Stock
Option/Restricted Stock Plan)
10.8+ -- Advisor Stock Option/Restricted Stock Incentive Plan
10.9+ -- Form of Restricted Stock Option Agreement (Advisor Stock
Option/Restricted Stock Incentive Plan)
10.10+ -- Form of Option Agreement (Advisor Stock Option/Restricted
Stock Incentive 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 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 $1,500,000
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
10.18+ -- Deed of Trust dated April 15, 1997 made by James A.
Cannavino in favor of the Company
10.19+ -- Promissory Note dated July 8, 1996 made by James Champy
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 the
Company and James Champy
10.22+ -- Letter Agreement dated July 8, 1996 between the Company
and James Champy
10.23+ -- Promissory Note dated June 17, 1996 made by Guillermo G.
Marmol in favor of the Company
</TABLE>
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24+ -- Pledge Agreement 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+ -- Amended and Restated PSC Stock Option and Purchase
Agreement dated as of April 24, 1997 by and between Swiss
Bank Corporation and the Company
10.28+ -- Amended and Restated Master Operating Agreement dated as
of January 1, 1997 between Swiss Bank Corporation and the
Company
10.29+ -- Amended and Restated Agreement for EPI Operational
Management Services dated as of January 1, 1997
10.30* -- Amendment to Amended and Restated Master Operating
Agreement dated June 28, 1998 between UBS AG and the
Company
10.31* -- Amendment to Amended and Restated Agreement for EPI
Operational Management Services dated June 28, 1998
between Swiss Bank Corporation and the Company
10.32* -- 1998 Associate Stock Purchase Plan
10.33* -- Form of Amended and Restated 1991 Stock Option Plan
10.34* -- Form of Amended Stock Option Agreement
10.35+ -- Promissory Note dated July 31, 1998 made by the Company
in favor of NationsBank of Texas, N.A.
10.36* -- Promissory Note dated August 27, 1997 made by John E.
King in favor of the Company in the principal amount of
$250,000
10.37* -- Pledge Agreement dated August 27, 1997 made by John E.
King in favor of the Company
21.1** -- Subsidiaries of the Company
23.1** -- Consent of Hughes & Luce, L.L.P.
23.2* -- Consent of PricewaterhouseCoopers LLP
24.1* -- Power of Attorney (included in Part II to this
Registration Statement)
27.1* -- Financial Data Schedule for the Six Month Period Ended
June 30, 1998
27.2* -- Financial Data Schedule for the Year Ended December 31,
1997
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
+ Incorporated by reference to the Company's Form 10 dated April 30, 1997.
<PAGE> 1
EXHIBIT 10.30
AMENDMENT TO
AMENDED AND RESTATED MASTER AGREEMENT
THIS AMENDMENT TO AMENDED AND RESTATED MASTER AGREEMENT (this
"Amendment"), dated as of June 28, 1998, is entered into between Swiss Bank
Corporation ("SBC") and Perot Systems Corporation ("PSC") for the purpose of
amending that certain Amended and Restated Master Agreement, dated as of
January 1, 1997, between SBC and PSC (as amended, modified or supplemented from
time to time, the "Master Agreement"), as follows:
1. Section 4.1(a) of the Master Agreement is hereby amended in its
entirety to read as follows:
Section 4.1 Designated PSC Employee. (a) PSC and SBC hereby acknowledge
and agree that (i) as of the Merger Date (as defined below), Lynn Dukes, (the
"Designated PSC Employee") will be the PSC employee with primary responsibility
for the coordination and oversight of the services to be provided by PSC to SBC
and its Subsidiaries pursuant to this Agreement and the Principal Agreements and
(ii) the Designated PSC Employee shall act as the main liaison between PSC and
its Subsidiaries, on the one hand, and SBC and its Subsidiaries on the other
hand, for the implementation, coordination and oversight of the services to be
provided by PSC and its Subsidiaries to SBC and its Subsidiaries pursuant to
this Agreement and the Principal Agreements. In such capacity, the Designated
PSC Employee shall have the authority to (1) hire or terminate all employees of
PSC assigned to perform services on a permanent, full-time basis hereunder or
under any Principal Agreement, subject to such employees meeting the minimum
standards imposed by PSC on the hiring or termination of employees of PSC and
any standards required by regulatory authorities to whose jurisdiction either
PSC or SBC and their respective Subsidiaries may be subject, (2) establish
salaries and bonuses and other compensation for employees
<PAGE> 2
assigned on a permanent, full time basis to perform services under this
Agreement or under any Principal Agreement consistent with information
technology salary standards for personnel performing information technology
services for organizations having similar status to SBC, provided, however,
that such employees shall receive the benefits generally received by all PSC
employees and any such compensation costs shall be within the PSC portion of
the SBC budget unless PSC and the Designated PSC Employee receive approval from
SBC to exceed such budget.
2. Section 4.1(c) of the Master Agreement is hereby amended to read
in its entirety as follows:
(c) PSC further covenants and agrees that any Designated PSC
Employee who leaves the employ of PSC or who is reassigned in compliance with
the provisions of Section 4.1(b) shall only be replaced by PSC after
consultation with SBC regarding its then current needs and giving SBC the
opportunity to propose a candidate which meets PSC employee standards and
criteria. Such Designated PSC employee shall require the consent of SBC, which
consent shall not be unreasonably withheld.
3. Section 4.1(e) of the Master Agreement is hereby amended in its
entirety to read as follows:
(e) SBC and PSC agree that all PSC employees dedicated to
performing Services on a permanent, full-time basis for SBC pursuant to the SBC
Warburg EPI Agreement as of the date hereof and who were hired by PSC
specifically to perform such services for SBC, or who become employees
transferred to PSC from Union Bank of Switzerland or UBS AG as a result of the
merger of SBC and Union Bank of Switzerland through UBS AG for the purpose of
being assigned to perform services pursuant to this
2
<PAGE> 3
Agreement or the SBC Warburg EPI Agreement, for so long as the SBC Warburg EPI
Agreement has not been terminated in accordance with the terms thereof, will
not be transferred by PSC without the written consent of SBC, which consent
will not be unreasonably withheld, and each of such employees who, while
performing services for SBC, may only work for other PSC clients for up to
twenty percent (20%) of such person's time with the prior consent of SBC, which
consent will not be unreasonably withheld.
4. In the event an employee of PSC is terminated by PSC, the provisions
of Section 11.3 of the Master Operating Agreement shall not apply; provided,
however, that before hiring such employee, SBC will consult with PSC, and if
SBC hires such employee, SBC agrees that the employee will not be involved in
any aspect of the PSC-SBC relationship during his or her employment by SBC
without the prior written consent of PSC. In the event an employee of PSC
voluntarily resigns from PSC through no action or solicitation of SBC, if SBC
believes that such employee is important to the satisfactory performance of the
PSC-SBC relationship, then PSC and SBC agree to work together in good faith in
an attempt to retain such employee. If such efforts fail, then the provisions
of Section 11.3 of the Master Operating Agreement shall not apply.
Notwithstanding this Section 4, in no circumstance may SBC have any
discussions, directly or indirectly, with PSC employees, during their employment
by PSC, concerning possible employment by SBC.
5. Except as otherwise provided in this Amendment, the Master Agreement
remains in full force and effect.
6. This Amendment shall become effective as of the date of the merger of
SBC and Union Bank of Switzerland through UBS AG as designated in a notice from
SBC to PSC sent within two days of the completion of such merger (the "Merger
Date"), which is
3
<PAGE> 4
currently scheduled to be completed on June 29, 1998. If the Merger Date does
not occur on or before October 1, 1998, then this Agreement will terminate and
neither PSC nor SBC will have any further rights or obligations hereunder.
7. This Agreement may be executed in several counterparts, all of which
taken together constitute one single agreement between the parties hereto.
IN WITNESS WHEREOF, each of PSC and SBC has caused this Agreement to be
signed and delivered by its duly authorized representative(s) as of the date
first set forth above.
PEROT SYSTEMS CORPORATION
By: /s/ JOHN E. KING
-------------------------------
Name: John E. King
Title: Vice President
SWISS BANK CORPORATION
By: /s/ DAVID SOLOS
-------------------------------
Name: David Solos
Title: Authorized Signatory
By: /s/ MARIO CUENI
-------------------------------
Name: Mario Cueni
Title: Managing Director
4
<PAGE> 1
EXHIBIT 10.31
AMENDMENT TO AMENDED AND RESTATED
AGREEMENT FOR EPI OPERATIONAL MANAGEMENT SERVICES
THIS AMENDMENT TO AMENDED AND RESTATED AGREEMENT FOR EPI OPERATIONAL
MANAGEMENT SERVICES (this "Amendment"), dated as of June 28, 1998, is entered
into between Swiss Bank Corporation ("SBC") and Perot Systems Corporation
("PSC") for the purpose of amending that certain Amended and Restated Agreement
for EPI Operational Management Services, dated as of January 1, 1997, between
SBC and PSC (as amended, modified or supplemented from time to time, the "EPI
Agreement"), as follows:
1. Section 2 of the EPI Agreement is hereby amended by deleting the last
sentence thereof.
2. Section 3(c) of the EPI Agreement is hereby amended by changing the
last sentence thereof to read in its entirety as follows: "The Performance
Metrics for the Budget Period commencing on the Merger Date are as designated
on Schedule G hereto."
3. For purposes of Section 3(f) of the EPI Agreement each reference to
"Adjustment Date" shall hereafter be deemed to be a reference to the Merger
Date (as defined below).
4. New subsection (i) shall be added to Section 3 of the EPI Agreement as
follows:
"(i) "Merger Date" means the date of the merger of SBC and Union Bank
of Switzerland through UBS AG as designated in a notice from SBC
to PSC sent within two days of the completion of such merger."
5. The introduction to Section 5(c) of the EPI Agreement is hereby
amended to
<PAGE> 2
read in its entirety as follows: "The Performance Metrics contained in Schedule
G hereto shall continue in effect until changed by the parties by mutual
agreement."
6. Each of Sections 5(c)(1), 5(c)(2), 5(c)(4) and 5(c)(6) of the EPI
Agreement is hereby amended to read in its entirety as follows: "Intentionally
Deleted".
7. Section 5(c)(3) of the EPI Agreement is hereby amended to read in its
entirety as follows: "Subject to the SBC Operational Manager's rights and
obligations under Section 2 of Schedule G hereto, if PSC's actual level of
performance meets the anticipated typical or median (neither superior nor
inferior) performance expected by the parties, it is expected that PSC will be
paid an amount equal to the Annual Profit Amount (as defined in Schedule F
hereto)."
8. Section 5(c)(5) of the EPI Agreement is hereby amended to read in its
entirety as follows: On or before December 15 of each Budget Period, PSC will
deliver to the SBC Operational Manager in writing its estimate of the total PSC
Costs for the current Budget Period. Within seven (7) days thereafter, the SBC
Operational Manager and the PSC Relationship Manager will meet at a mutually
agreed time to discuss SBC's good faith estimate of the Annual Profit Amount
for such Budget Period. Thereafter, PSC will deliver to SBC its final invoice
for the Budget Period and within seven (7) days of receipt thereof SBC will
deliver its final determination of the Annual Profit Amount, as adjusted in
accordance with Schedule G."
9. Each of Sections 5(d) and 5(e) of the EPI Agreement is hereby amended
to read in its entirety as follows: "Intentionally Deleted".
2
<PAGE> 3
10. Section 5(h) of the EPI Agreement is hereby amended by changing the
last sentence thereof to read in its entirety as follows: "Notwithstanding the
foregoing, PSC employees shall remain employees of PSC."
11. Section 8 of the EPI Agreement is hereby amended by changing the last
sentence thereof to read in its entirety as follows: "Thereafter, so long as
such disagreement continues, and notwithstanding Schedule G hereto, the Reward
Pool will be an amount equal to seven and one half percent (7.5%) of the Annual
Profit Amount and the Penalty Pool will be an amount equal to seven and one
half percent (7.5%) of the Annual Profit Amount."
12. The last sentence of the second paragraph of Schedule A to the EPI
Agreement is deleted and the following two sentences are added to read in
their entirety as follows:
"Likewise, if there is a substantial increase in the services necessary to
support services in the Scope of Services beyond the level of services as
of the Merger Date, as requested by SBC (for example, such as an increase
of more than 7% during any Budget Period or 35% in the aggregate in the
number of workstations (not bandwidth) supported by PSC) from and after the
Merger Date, or if the services are required to support the SBC Private
Banking Division in Switzerland or the SBC Brinson Division in Chicago,
then these additional services would be outside the Scope of Services and
require additional compensation as described in Schedule F to this EPI
Agreement. Additionally, any offices of the SBC Private Banking Division
and the SBC Brinson Division not serviced on the Merger Date are also
outside the Scope of Services and require additional compensation as
described in Schedule F to the EPI Agreement."
3
<PAGE> 4
13. Section 1(a) of Schedule F (PSC Charges) to the EPI Agreement is
hereby amended to change the words and figure "Forty One Million Dollars
($41,000,000)" to "Forty Six Million Dollars ($46,000,000)"; and Section 1 and
Section 2(c) of Appendix 2 to Schedule F (Inflation Adjustment) to the EPI
Agreement is hereby amended to change the figure "$41,000,000" to "$46,000,000."
14. Section 3 of Schedule F of the EPI Agreement is hereby amended to add
Section 3(d) to read in its entirety as follows:
(d) In a given budget year, PSC has the right to limit the growth in the
PSC Costs Budget by not providing expanded services or by ceasing to
provide services in specific functional or geographic areas. In such
case, SBC has the right to perform such services itself, and PSC and
SBC shall mutually agree on which services or functional areas shall
no longer be supported by PSC, and to the extent that PSC is no longer
providing such services in such functional or geographic area. PSC
shall accommodate SBC by permitting SBC to hire the permanent,
full-time PSC employees who were providing such services.
15. Section 4 of Schedule F of the EPI Agreement is hereby amended in its
entirety to read as follows:
4. Services Not Within the Scope of Services. PSC shall not be required
to provide any services outside the Scope of Services defined in
Section 3(f) and Schedule A hereto unless SBC and PSC mutually agree
on the compensation for such additional services; provided, however,
that PSC shall not be entitled to withhold or withdraw any services
previously provided except to the extent that PSC may determines to
stop performing services which it
4
<PAGE> 5
deems to be outside the Scope of Services and for which compensation has
not been established, in which case SBC shall be free to hire the
permanent, full-time PSC employees who are performing such services for
SBC. Anything to the contrary notwithstanding, SBC shall have the right in
its sole discretion to perform for itself services outside the Scope of
Services except to the extent that such services are specifically
contracted for with PSC for additional compensation. Upon the occurrence of
any event or events that would provide PSC with the opportunity to provide
services outside the Scope of Services or development, maintenance or
enhancement services related to the Restricted Application Systems, PSC
will so notify SBC and unless SBC, in its sole discretion, determines to
perform such services itself, SBC will pay PSC for the resources required
to provide those services as follows:
(a) If PSC and SBC are unable to agree on an amount to be paid for the
required resources, PSC will be relieved of any responsibility for the
services with respect to the required resources and SBC may, in its
sole discretion, perform the services itself; provided, however, that
if SBC desires to have the right to have another third party provide
the services that are not within the Scope of Services, subject to
PSC's final right of refusal in the case that SBC elects to use a
third party, PSC will have a final right of refusal as follows:
(1) SBC will give PSC notice of the services and related resources
that it is proposing be provided by a third party. The notice
will include the amounts that the third party proposes to charge
for those services and related resources.
5
<PAGE> 6
(2) PSC will be given thirty (30) days to respond to the notice
by notifying SBC whether it desires to provide those
services and related resources and the price it offers to
charge for those services.
(3) Within thirty (30) days of receiving PSC's response, SBC
will grant PSC the right to provide those services and
related resources, unless either the price for such services
offered by PSC is meaningfully worse or SBC in good faith
believes that PSC has not demonstrated proficiency in the
area of the applicable services.
(4) SBC may use a PSC Competitor to provide the applicable
services only if SBC and the PSC Competitor act in good
faith and not with the intent to have the PSC Competitor
"buy" the business and the PSC Competitor charges SBC no
less than its typical retail rates for similar services.
(b) If the required resources are resources for which PSC and SBC
have established unit prices as described in Section 5(d) of the
EPI Agreement PSC will be paid pursuant to the established unit
prices.
16. Each of Section 1.a. and 1.c. of Schedule G to the EPI Agreement
is hereby amended to read in its entirety as follows: "Intentionally
Deleted".
17. Section 1.b. of Schedule G to the EPI Agreement is hereby amended to
read in its entirety as follows:
6
<PAGE> 7
"b. "Penalty Pool" is, with respect to any Budget Period during the
term of this EPI Agreement, an amount equal to fifteen percent
(15%) of the Annual Profit Amount."
18. Section 2 of Schedule G to the EPI Agreement is hereby amended to
read in its entirety as follows:
"2. Performance Metrics. The Performance Metrics listed below are in
effect at the Merger Date:
o Service Quality/Product Delivery
o Business User Satisfaction
o Cost Effectiveness
o Corporate Level Support
Each of the four metrics above is a subjective criteria, and the SBC
Operational Manager will make a good faith assessment of PSC's
performance under the foregoing metrics taking into consideration all
information and factors he deems appropriate. The SBC Operational
Manager will also provide the PSC CEO or his designee with his good
faith outlook in accordance with any request made pursuant to Section
5(c)(7) of this EPI Agreement."
19. Except as otherwise provided in this Amendment, the EPI Agreement
remains in full force and effect.
20. This Amendment shall become effective as of the Merger Date. If the
Merger Date does not occur on or before October 1, 1998, then this Amendment
will terminate and neither PSC nor SBC will have any further rights or
obligations hereunder.
7
<PAGE> 8
21. This Amendment may be executed in several counterparts, all of which
taken together constitute one single agreement between the parties hereto.
IN WITNESS WHEREOF, each of PSC and SBC has caused this Amendment to be
signed and delivered by its duly authorized representative(s) as of the date
first set forth above.
PEROT SYSTEMS CORPORATION
By: /s/ JOHN E. KING
---------------------------------
Name: John E. King
Title: Vice President
SWISS BANK CORPORATION
By: /s/ DAVID SOLO
---------------------------------
Name: David Solo
Title: Authorized Signatory
By: /s/ MARIO CUENI
---------------------------------
Name: Mario Cueni
Title: Managing Director
8
<PAGE> 1
EXHIBIT 10.32
PEROT SYSTEMS CORPORATION
1998 Associate Stock Purchase Plan
Effective as of July 17, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. PURPOSE OF THE PLAN
1.1 General .......................................................................... 1
1.2 Tax Treatment...................................................................... 1
2. PARTICIPATION IN THE PLAN
2.1 Eligibility........................................................................ 1
2.2 Enrollment to Buy Stock............................................................ 2
2.3 Designation of Beneficiary......................................................... 2
2.4 Contributions; Payroll Deductions; Account; No Interest............................ 2
2.5 Changes in Contributions........................................................... 2
2.6 Withdrawal......................................................................... 3
2.7 Termination of Employment; Leave of Absence........................................ 3
2.8 Transferability.................................................................... 4
3. PURCHASE OF STOCK
3.1 Offering Periods................................................................... 4
3.2 Grant of Option; Exercise Price.................................................... 4
3.3 Automatic Exercise of Option....................................................... 4
3.4 Payment for Stock.................................................................. 5
3.5 Delivery of Shares; Voting......................................................... 5
3.6 Periodic Reports................................................................... 5
3.7 No Rights in Common Stock Prior to Exercise........................................ 6
4. OPERATION OF THE PLAN
4.1 Effective Date and Term of Plan.................................................... 6
4.2 Shares Authorized for Sale and Issuance Under the Plan............................. 6
4.3 Conditions Upon Issuance of Shares................................................. 6
4.4 Administration; Committee.......................................................... 7
4.5 Amendment or Termination........................................................... 9
4.6 Approval of the Board of Directors and Shareholders................................ 9
4.7 No Liability for Good Faith Determinations......................................... 9
5. MISCELLANEOUS LEGAL PROVISIONS
5.1 Definitions........................................................................ 10
5.2 Adjustments Upon Changes in Capitalization......................................... 12
5.3 Notices; Waiver of Notice.......................................................... 12
5.4 Severability....................................................................... 12
5.5 Successors and Assigns............................................................. 12
5.6 Headings .......................................................................... 12
5.7 Governing Law...................................................................... 12
5.8 No Right to Employment............................................................. 12
</TABLE>
1998 Associate Stock Purchase Plan Page i
<PAGE> 3
PEROT SYSTEMS CORPORATION
1998 Associate Stock Purchase Plan
1. PURPOSE OF THE PLAN
1.1 General. Perot Systems has adopted this Plan to provide Eligible
Associates with the opportunity and a convenient means to purchase Common Stock
as an incentive (i) to exert their maximum efforts for the success of the
Company, and (ii) to remain employed with the Company.
1.2 Tax Treatment. Perot Systems intends that options to purchase to
purchase stock granted under this Plan qualify as options granted under an
"employee stock purchase plan" as defined in Section 423(b) of the Tax Code, and
this Plan will be construed so as to extend and limit participation in a manner
consistent with the requirements of that Section.
1.3 Parallel Plans. If the economic and tax benefits extended under this
Plan to Eligible Associates who reside outside the United States are lower due
to local tax laws and regulations, with the exception of tax rates, than those
enjoyed by Eligible Associates who reside in the United States under the Tax
Code, the Stock Administrator may implement separate plans for those Eligible
Associates that are revised as necessary to conform to local tax laws and
regulations.
2. PARTICIPATION IN THE PLAN
2.1 Eligibility.
(a) General Rule. Each Eligible Associate who is employed by an
Employer on an Enrollment Date may participate in the Plan during the
relevant Offering Period, unless the Tax Code prohibits his or her
participation in that Offering Period because:
(i) The Eligible Associate (together with certain
affiliates of the Eligible Associate described in Section
424(d) of the Tax Code), would be deemed to own a number of
shares of stock and certain exercisable options to purchase
stock that together represent 5% or more of the total combined
voting power or value of all classes of stock of Perot Systems
or any Participating Affiliate (computed in accordance with
Section 423(b)(3) of the Tax Code; or
(ii) The Eligible Associate would have the right to purchase
stock under all the employee stock purchase plans described in
Section 423 of the Tax Code of the Company and its
Subsidiaries more than $25,000 of stock (computed based on the
fair market value on the Enrollment Date in accordance with
Section 423(b)(3) of the Tax Code) during the calendar year of
that Offering Period.
2.2 Enrollment to Buy Stock. Each Eligible Associate who:
(a) completes an Enrollment Agreement in the form, format, and as
otherwise required by the Stock Administrator, and
1998 Associate Stock Purchase Plan Page 1 of 14
<PAGE> 4
(b) delivers that Enrollment Agreement to the Stock Administrator
at least 10 business days before the Enrollment Date for an
Offering Period,
may purchase Common Stock on the Exercise Date for that Offering
Period, subject to the other provisions of this Plan.
2.3 Designation of Beneficiary. Each Participant may designate a
beneficiary by filing a written beneficiary designation form with the Stock
Administrator. Such beneficiary shall receive any refunds under Section 2.7 of
amounts not used to purchase Shares prior to Participant's death. Shares issued
prior to the Participant's death shall be delivered to the appropriate
representative of Participant's estate. If no beneficiary was designated, any
cash refunds shall be made to the appropriate representative of Participant's
estate.
2.4 Contributions; Payroll Deductions; Account; No Interest.
(a) The Company will withhold from each Participant's paycheck the
percentage (not to exceed 10% or, in the case of Incentive
Compensation, a percentage not to exceed 50% selected by the Committee
from time to time) of Eligible Compensation specified in his or her
then-current Enrollment Agreement commencing on the first pay date
after the next Enrollment Date of an Offering Period and continuing
throughout that Offering Period and each future Offering Period until
he or she ceases to be a Participant.
(b) Perot Systems will hold and use the amounts withheld from each
Participant's paycheck until the earlier of the date those amounts are
(i) used to purchase Common Stock, or (ii) refunded to the Participant.
Perot Systems will not be required to segregate any of these funds from
its general corporate funds, and will not pay interest on any of these
funds.
(c) If the funds in the payroll deduction account of a Participant
are in a currency other than United States dollars on any Exercise
Date, for purposes of determining the maximum whole number of shares
that may be purchased under this Plan, such funds will be deemed to
have been converted into United States dollars based upon the foreign
exchange selling rates, as reported by the Dow Jones News/Retrieval
Service of Dow Jones and Company, Inc., on such date, or if not so
reported on such date, as reported on the next preceding date on which
such rates are reported.
2.5 Changes in Contributions. During an Offering Period, a Participant may
not change the percentage of Eligible Compensation to be withheld from his or
her paycheck, except by withdrawing from the Plan.
1998 Associate Stock Purchase Plan Page 2 of 14
<PAGE> 5
2.6 Withdrawal.
(a) A Participant may stop participating in the current Offering
Period and each future Offering Period by delivering a Withdrawal
Agreement to the Stock Administrator at least 10 business days before
the Exercise Date for then-current Offering Period. Delivery of a
Withdrawal Agreement will:
(i) permanently and irrevocably terminate the Withdrawing
Associate's participation in the then-current Offering Period,
and
(ii) suspend the Withdrawing Associate's participation in
any future Offering Periods until he or she delivers an
Enrollment Agreement to the Stock Administrator.
An election to stop participating in one Offering Period will not
prevent an Eligible Associate from participating in any future Offering
Period or in any other Plan adopted by Perot Systems, provided that the
Eligible Associate will not participate in any future Offering Period
until he or she submits a new Enrollment Agreement.
(b) As soon as practical after receiving a Withdrawal Agreement,
Perot Systems will:
(i) stop withholding the applicable percentage of
Eligible Compensation from the Withdrawing
Associate's paychecks, and
(ii) refund to the Withdrawing Associate all amounts
previously withheld from his or her paychecks during
the then-current Offering Period, plus any other
amounts carried over from a previous Offering Period
as provided in Section 3.3.
2.7 Termination of Employment; Leave of Absence.
(a) If a Participant's employment with the Company terminates on
or before an Exercise Date, he or she will be deemed to have elected to
withdraw from the applicable Offering Period effective as of the date
his or her employment terminated.
(b) As soon as practical after a Participant's termination of
employment, Perot Systems will:
(i) refund all amounts withheld from his or her paycheck
under this Plan that have not been used to purchase Common
Stock from Perot Systems or otherwise refunded; and
(ii) distribute, or direct the Plan Custodian to
distribute, any Shares held by the Employer or the Plan
Custodian on the Participant's behalf to the Participant or
his or her designee.
(c) If a Participant begins an approved leave of absence from his
or her Employer on or before an Exercise Date, he or she will remain in
the Plan for the applicable Offering
1998 Associate Stock Purchase Plan Page 3 of 14
<PAGE> 6
Period, but will be deemed to have elected to stop participating in the
Plan for each future Offering Period until he or she returns to work
and submits a new Enrollment Form.
2.8 Transferability. Neither any monies credited to Participant's
Participant Account nor any rights with regard to the exercise of an option to
purchase Common Stock under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way (other than by will or the laws of descent and
distribution) by the Participant. Any such attempt at assignment, transfer,
pledge, or other disposition will be without effect, except that Perot Systems
will treat such act as an election to withdraw funds in accordance with Section
2.6.
3. PURCHASE OF STOCK
3.1 Offering Periods. Except for the first Offering Period, each Offering
Period will start on the first day of the second month of a calendar quarter and
end on the last day of the first month of the next calendar quarter. The first
Offering Period will start on the date public trading of the Stock commences or
such other date specified by the Board and end on the last day of the first
month of the next calendar quarter (or the current calendar quarter if the first
Offering Period commences during the first month of a calendar quarter).
3.2 Grant of Option; Exercise Price.
(a) On each Enrollment Date, Perot Systems will grant each
Participant an option to purchase on the next Exercise Date a number of
whole Shares equal to (i) his or her then-current Withholding
Percentage, multiplied by his or her Eligible Compensation for the
Offering Period, divided by the Exercise Price for the next Exercise
Date, (ii) minus the number of whole Shares, if any, necessary to
prevent (A) that Participant from exceeding the limits referred to in
Section 2.1(a), or (B) the Plan from issuing more shares than are
authorized as provided in Section 4.2.
(b) The Exercise Price for each Offering Period will be 85% of the
fair market value of one share of the Common Stock on the Exercise Date
for that Offering Period.
3.3 Automatic Exercise of Option. On each Exercise Date, each Participant's
option to purchase Shares will be exercised automatically to purchase:
(a) the maximum number of whole Shares that may be bought with the
funds withheld from his or her paycheck during the applicable Offering
Period, minus
(b) any number of Shares required to comply with any limitations
described in Section 2.1 of this Plan on the maximum number of Shares
that may be purchased by that Participant.
If the funds withheld from the Participant's paycheck during the
applicable Offering Period exceed the funds necessary to purchase the
number of whole shares described above by less than the Fair Market
Value of a whole Share, the excess amount will be retained by
1998 Associate Stock Purchase Plan Page 4 of 14
<PAGE> 7
Perot Systems or the Employer for the benefit of the Participant as his
or her additional contribution for the next Offering Period. If the
excess amount represents more than the Fair Market Value of a
fractional Share, such excess funds shall be refunded to the
Participant as soon as feasible after the Exercise Date.
3.4 Payment for Stock. Immediately upon each exercise of each Participant's
option to purchase shares, the amount held by Perot Systems for the benefit of
that Participant will be reduced by the Fair Market Value of the number of whole
Shares of Common Stock purchased by that Participant in that exercise.
3.5 Delivery of Shares; Voting.
(a) Subject to the restrictions of Section 3.5(b), as soon as
practical after each Exercise Date, a stock certificate will be issued
to each Participant or to the Plan Custodian for the benefit of each
Participant for the Shares purchased on that Exercise Date. Such
certificate may be issued in nominee name.
(b) All Shares purchased under this Plan will be held by Perot
Systems or the Plan Custodian until the earlier of (i) a request for
delivery of the shares by the associate, or (ii) the termination of the
Eligible Associate's employment by the Employer.
(i) As soon as practical after termination of an Eligible
Associate's employment by an Employer, certificates
representing shares purchased under the Plan will be issued in
the name of that Eligible Associate or, if timely requested by
that Associate in a form approved by the Plan Custodian, his
or her designee.
(ii) All Shares purchased under this Plan shall be
nontransferable and nonassignable for six months after the
date such Shares are issued to the Eligible Associate. Any
attempt to sell, gift, pledge or otherwise transfer any Shares
prior to the expiration of six months from issuance shall be
ineffective and void.
Perot Systems will pay all issue or initial transfer taxes of the Company with
respect to the issuance or initial transfer of shares, as well as all fees and
expenses necessarily incurred by Perot Systems in connection with such issuance
or initial transfer.
3.6 Periodic Reports. As soon as practical after each Exercise Date, a
statement will be sent to each person who has been a Participant under this
Plan, which statement will include (i) the total amount, in United States
dollars or local currency, of all payroll deductions made during the applicable
Offering Period or otherwise held under this Plan for the benefit of that person
by Perot Systems, and any applicable currency conversion rate, (ii) the number
of Shares purchased by that person on each applicable Exercise Date, (iii) the
per share and aggregate purchase price per Share for those Shares, (iv) the
remaining cash balance, if any held by any Employer for the benefit of that
person, and (v) such other information as the Stock Administrator or Plan
Custodian deems appropriate.
1998 Associate Stock Purchase Plan Page 5 of 14
<PAGE> 8
3.7 No Rights in Stock Prior to Exercise. Neither a Participant nor his or
her beneficiaries will have any interest or voting right in Common Stock covered
by an option granted this Plan until such option has been exercised and the
Shares purchased.
4. OPERATION OF THE PLAN
4.1 Effective Date and Term of Plan. This Plan will become effective upon
its adoption by the Board, provided that no Offering Period may commence until
the later of (i) the day on which the Common Stock is listed for trading
(including any listing on a when-issued basis) on a national securities
exchange or the national market system of the National Association of
Securities Dealers Automated Quotation system, or (ii) the day on which a
Registration Statement under the Securities Act of 1933, as amended, covering
the shares to be issued under the Plan becomes effective. This Plan will remain
effective for a term of ten years, unless sooner terminated under Section 4.5.
4.2 Shares Authorized for Sale and Issuance Under the Plan.
(a) The maximum number of Shares that may be sold and issued under
this Plan will be 10,000,000 Shares, which number will be adjusted as
provided in Section 5.2 below. If any option to purchase Shares granted
under this Plan is not exercised for any reason, the Shares subject to
that option will remain available to be sold and issued under this
Plan.
(b) If, for any reason, the number of Shares available for sale
and issuance under this Plan under Section 4.2(a) is less than the
number of Shares to be sold and issued under Section 3.3 on an Exercise
Date, Perot Systems will allocate the Shares available for sale and
issuance pro rata among the Participants in as uniform a manner as it
determines to be equitable. In such event, the Stock Administrator or
Plan Custodian will notify each Participant of the reduction in the
number of Shares and the reason for such reduction.
(c) Shares sold and issued under this Plan may, in the sole and
absolute discretion of the Board, be either authorized and unissued
Shares or treasury Shares that are bought or otherwise acquired in
public or private transactions.
4.3 Conditions Upon Issuance of Shares.
(a) Compliance With Laws. Perot Systems will not be required to
grant an option or to sell or issue any Shares under this Plan to any
Associate unless that option and the sale, issuance and delivery of
Shares upon exercise of that option complies, in the opinion of Perot
Systems' counsel, with all laws and regulations of each applicable
country and other jurisdiction, including, but not limited to, the
Securities Act of 1933 and the rules and regulations of the United
States Securities Exchange Commission, and all rules and regulations of
the New York Stock Exchange or other applicable stock exchange upon
which the Common Stock is listed.
1998 Associate Stock Purchase Plan Page 6 of 14
<PAGE> 9
(b) Investment Intent. As a condition to the exercise of an
option, Perot Systems may require the person exercising such option to
represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
4.4 Administration; Committee.
(a) Board of Directors. This Plan will be administered by the
Board. Unless otherwise provided in this Plan, the Board has the power:
(i) To determine when and how rights to purchase Shares
will be granted and the provisions of each offering of such
rights (which need not be identical).
(ii) To designate Participating Affiliates.
(iii) To construe and interpret the Plan and rights granted
under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise
of this power, may correct any defect, omission or
inconsistency in the Plan, in a manner and to the extent it
will deem necessary or expedient to make the Plan fully
effective.
(iv) To amend or terminate this Plan as provided in
Section 4.5.
(v) To delegate administration of this Plan to a
Committee of two or more members of the Board.
(vii) Generally, to exercise such powers and to perform
such acts as the Board deems necessary or expedient to promote
the best interests of Perot Systems.
(b) Committee. If administration of this Plan is delegated to a
Committee, it will have all the powers of the Board with respect to
this Plan, subject to any limitations on such powers stated in the
Board's resolutions delegating administration to the Committee. Whether
or not the Board delegates administration of this Plan to a Committee,
the Board retains the final power to determine all questions of policy,
procedure, and expediency that arise in the administration of this
Plan.
(c) Participation by Members of the Board or Committee. Members
of the Board who are Eligible Associates are permitted to participate
in this Plan; provided that (A) no member of the Board may vote on any
matter affecting the administration of, or the grant of any option
pursuant to, this Plan, and (B) if a Committee is appointed to
administrate this Plan, no member of the Committee will be eligible to
participate in this Plan.
(d) Stock Administrator. Perot Systems' day to day obligations
under this Plan will be administered by a Stock Administrator appointed
by the Board, subject to the Board's
1998 Associate Stock Purchase Plan Page 7 of 14
<PAGE> 10
final power to determine all questions of policy, procedure, and
expediency that arise in the administration of this Plan. The Stock
Administrator will have all of the following powers of the Board:
(i) To administer, or select and direct a Plan Custodian
to administer, this Plan in accordance with its terms;
(ii) To adopt rules of procedure and regulations necessary
for the administration of this Plan, provided they are
consistent with the terms of this Plan;
(iii) To determine all questions with regard to rights of
Eligible Associates and Participants under the Plan,
including, but not limited to, the eligibility of an Eligible
Associate to participate in the Plan;
(iv) To enforce the terms, rules and regulations of this
Plan;
(v) To direct the distribution of the Shares purchased
hereunder;
(vi) To furnish the Company with information which it
requires for tax or other purposes;
(vii) To engage the service of counsel (who may, if
appropriate, be counsel for the Company) and a Plan Custodian
or other agents he or she deems advisable to assist it with
the performance of its duties;
(viii) To prescribe procedures to be followed by
Participants in electing to participate in this Plan;
(ix) To receive from each Company and Associate any
information necessary to administer this Plan;
(x) To maintain, or cause Perot Systems, the Employer or
the Plan Custodian to maintain, an account in the name of each
Participant to reflect his or her participation in this Plan;
(xi) To interpret and construe the Plan; and
(xii) To make any changes or modifications necessary to
administer and implement the provisions of this Plan in any
foreign country to the fullest extent possible, including but
not limited to creation of parallel plans as contemplated by
Section 1.3.
1998 Associate Stock Purchase Plan Page 8 of 14
<PAGE> 11
4.5 Amendment or Termination.
(a) The Board may amend or terminate this Plan without notice,
provided that the Board will not, without the approval of the
stockholders of Perot Systems, (i) increase the maximum number of
Shares that may be sold or issued under this Plan (except pursuant to
Section 5.1) or (ii) amend the requirements as to the class of
Associates eligible to purchase Shares under this Plan, or, if a
Committee is appointed to administrate this Plan, permit the members of
the Committee to participate in this Plan.
(i) Except as specifically provided in this Plan, as
required to comply with Code section 423, or as required to
obtain a favorable ruling from the Internal Revenue Service,
no amendment may make any change in any option granted under
this Plan that adversely affects the rights of any Participant
without the consent of that Participant.
(b) This Plan will automatically terminate on the Exercise Date
that Participants become entitled to purchase a number of Shares
greater than the number available for purchase under Section 4.2. In
the event of an automatic termination, reserved Shares remaining as of
such Exercise Date will be sold to Participants on a pro rata basis, as
described in Section 4.2(b).
4.6 Approval of the Shareholders. Commencement of the Plan will be subject
to approval by the shareholders of the Company within 12 months after the date
the Plan is adopted. Notwithstanding any provision to the contrary, failure to
obtain such shareholder approval will void the Plan, any options granted under
the Plan, any Share purchases pursuant to the Plan, and all rights of all
Participants.
4.7 No Liability for Good Faith Determinations. Neither the members of the
Board, the Stock Administrator or the Plan Custodian (nor their delegates) will
be liable for any act, omission, or determination taken or made in good faith
with respect to the Plan or any right to purchase Shares granted under it, and
members of the Board and the Stock Administrator (and their delegates) will be
entitled to indemnification and reimbursement by Perot Systems in respect of any
claim, loss, damage, or expense (including attorneys' fees, the costs of
settling any suit, provided such settlement is approved by independent legal
counsel selected by Perot Systems, and amounts paid in satisfaction of a
judgment, except a judgment based on a finding of bad faith) arising therefrom
to the full extent permitted by law and under any directors and officers
liability or similar insurance coverage that may from time to time be in effect.
5. MISCELLANEOUS LEGAL PROVISIONS
5.1 Definitions.
(1) "Board" means the Board of Directors of Perot Systems or a
duly appointed committee of the Board.
(2) "Common Stock" means the Class A Common Stock, $.01 par value
per share, of Perot Systems.
1998 Associate Stock Purchase Plan Page 9 of 14
<PAGE> 12
(3) "Company" means Perot Systems, its subsidiaries and
affiliates.
(4) "Eligible Associate" means a natural person who on an
Enrollment Date is (i) employed as an employee of an Employer for more
than 20 hours per week on a regular basis by an Employer, and (ii) not
engaged under an independent contractor or similar agreement, whether
or not such person is determined to be an independent contractor.
(5) "Eligible Compensation" means the total compensation paid to a
Participant by any Employer during an Offering Period, including wages,
salary, overtime, holiday, vacation, sick pay, shift premiums, bonuses
and salary continuations, but shall not include relocation assistance
payments, geographical hardship pay, noncash prizes and awards,
automobile allowances, severance type payments and nonqualified
deferred executive compensation.
Eligible Compensation includes the amount of a Participant's elective
contributions that are made by the Employer on behalf of that
Participant that are not includable in gross income under Tax Code
Sections 125, 402(e)(3), 402(h), and 401(k).
(6) "Employer" means Perot Systems or the Participating Affiliate
by which an Eligible Associate is employed.
(7) "Enrollment Agreement" means the agreement submitted to the
Stock Administrator pursuant to Section 2.2.
(8) "Enrollment Date" means the first day of the applicable
Offering Period.
(9) "Exercise Date" means the last day of the applicable Offering
Period.
(10) "Exercise Price" means the price defined in Section 3.2(b).
(11) "Fair Market Value" of one share of Common Stock on a
particular date will be (i) if the Common Stock is listed or admitted
to trading on the New York Stock Exchange, then (a) if sales of Common
Stock occurred on that date, the mean of the high and low sale prices
for the Stock on the New York Stock Exchange Composite Tape for that
date (1) as reported by the Dow Jones News/Retrieval Service of Dow
Jones and Company, Inc., or (2) if not so reported, in a newspaper of
national circulation selected by the Board , or (b) if no sales of
Common Stock occurred on that date, the mean of the closing bid and
asked prices (regular way) on the New York Stock Exchange Composite
Tape on that date, or (ii) in all other cases, determined in a
reasonable way selected by the Board for that purpose.
(12) "Incentive Compensation" means bonuses and other incentive
compensation specified by the Committee that forms part of Eligible
Compensation. Incentive Compensation shall not include wages, salary,
overtime, holiday, vacation, sick pay, shift premiums and salary
continuations.
1998 Associate Stock Purchase Plan Page 10 of 14
<PAGE> 13
(13) "Offering Period" means each period commencing on the first
day of the second month following the end of a calendar quarter (except
as provided in Section 3.1), and ending on the last day of the first
month following the end of the calendar quarter, during which a
Participant has an option to purchase Common Stock.
(14) "Participant" means an Eligible Associate who has elected to
participate in an Offering Period and continues to participate in the
Offering Period through the Exercise Date.
(15) "Participant Account" means any account or accounting entry
maintained by Perot Systems, the Employer or the Plan Custodian to
record the amount that a Participant has contributed to the Plan during
an Offering Period and the Common Stock purchased under this Plan.
(16) "Participating Affiliate" means (1) each corporation, domestic
or foreign, of which Perot Systems, directly or indirectly, holds, on
the applicable Enrollment Date, not less than 50% of the total combined
voting power of all classes of stock, whether or not such corporation
now exists or is hereafter organized or acquired by Perot Systems or
any of its subsidiaries which are approved by the Board to participate
in this Plan, and (2) each other corporation, joint venture, general or
limited partnership, limited liability company or other business
entity, domestic or foreign; both (1) and (2) as approved by the Board
to participate in this Plan, provided that the Board will not approve
any business entity for participation in this Plan (although such
participation may be approved in a parallel plan as contemplated in
Section 1.3) if its participation would disqualify this Plan under the
Tax Code.
(17) "Perot Systems" means Perot Systems Corporation, a Delaware
corporation, or any successor in interest that adopts this Plan.
(18) "Plan" means this Perot Systems Corporation 1998 Associate
Stock Purchase Plan, as amended from time to time.
(19) "Plan Custodian" means the third party administrator appointed
by Perot Systems to administer this Plan in accordance with its terms.
(20) "Share" means one share of Common Stock.
(21) "Stock Administrator" means the person appointed by the Board
to act on behalf of the Board and administer the day to day operations
of this Plan in accordance with its terms.
(22) "Tax Code" means the Internal Revenue Code of 1986, as
amended.
(23) "Withdrawal Agreement" means the agreement submitted to the
Stock Administrator pursuant to Section 2.2.
1998 Associate Stock Purchase Plan Page 11 of 14
<PAGE> 14
(24) "Withdrawing Associate" means a Participant who withdraws from
this Plan as provided in Section 2.6(a).
(25) "Withholding Percentage means the percentage of Eligible
Compensation that a Participant elects, from time to time, to have
withheld as his or her contribution during an Offering Period.
5.2 Adjustments Upon Changes in Capitalization.
(a) If any change is made in the Common Stock, or subject to any
rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property
other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or other
transaction not involving the receipt of consideration by the Company),
the Plan and outstanding rights will be appropriately adjusted in the
class(es) and maximum number of Shares subject to the Plan and the
class(es) and number of Shares and price per Share of Common Stock
subject to outstanding rights. Such adjustments will be made by the
Board, the determination of which will be final, binding and
conclusive. The conversion of any convertible securities of the Company
will not be treated as a "transaction not involving the receipt of
consideration by the Company."
(b) If (1) a dissolution or liquidation of Perot Systems or a sale
of all or substantially all of Perot Systems' assets; (2) a merger or
consolidation in which Perot Systems is not the surviving corporation;
(3) a reverse merger in which Perot Systems is the surviving
corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other
property, whether in the form of securities, cash or otherwise; or (4)
any other capital reorganization in which more than 50% of the shares
of the Company entitled to vote are exchanged, is proposed to be
consummated, then, the Exercise Date for the applicable Offering Period
will be accelerated to the date such transaction is consummated, and
the payroll deductions of the Participants made through the Exercise
Date will be used to purchase Common Stock immediately prior to such
transaction and all further rights of the Participants will terminate,
unless otherwise provided by the Board in its sole discretion.
5.3 Notices; Waiver of Notice.
(a) To a Participant. All notices or other communications relating
to the Plan given to a Participant or former Participant by the Board,
Perot Systems, or any Employer will be deemed delivered on the day the
notice or other communication is (1) personally delivered to that
person, (2) electronically transmitted to a person who on the date of
that transmission either is an Associate or has consented to receiving
notices by electronic transmission to the last known electronic
transmission address of that person, or (3) placed in the official
government mail of the country of the sender in an envelope addressed
to the last known address of that person, whichever is earlier.
1998 Associate Stock Purchase Plan Page 12 of 14
<PAGE> 15
(b) By a Participant. All notices or other communications relating
to the Plan given to the Board, Perot Systems, or an Employer will be
deemed delivered on the day the notice or other communication is (1)
received in tangible written form by the Stock Administrator at Perot
Systems' Corporate Headquarters address, or (2) electronically
transmitted by an Associate to the Stock Administrator by means of
Perot Systems' internal corporate e-mail or intranet system, provided
that such notice is in the form specified by Perot Systems.
(c) CONSENT TO ELECTRONIC DELIVERY OF NOTICES, PLAN DOCUMENTS AND
PROSPECTUSES. BY REQUESTING TO PARTICIPATE IN THE PLAN, AN ELIGIBLE
ASSOCIATE WILL BE DEEMED TO CONSENT TO RECEIVING COPIES OF ALL NOTICES
AND OTHER COMMUNICATIONS RELATING TO THE PLAN BY ELECTRONIC
TRANSMISSION, INCLUDING BUT NOT LIMITED TO THE PROSPECTUS RELATING TO
THE PLAN, ALL ENROLLMENT AND OTHER PARTICIPATION MATERIALS, AND ALL
OTHER DOCUMENTS REQUIRED TO BE DELIVERED IN CONNECTION WITH THE PLAN.
UPON REQUEST, PEROT SYSTEMS WILL PROVIDE ANY SUCH DOCUMENTS TO ANY
ELIGIBLE ASSOCIATE IN TANGIBLE WRITTEN FORM.
(d) Waiver of Notice. Any person entitled to notice under the Plan
may waive the notice.
5.4 Severability. If any provision of this Plan is held to be illegal or
invalid for any reason, the illegality or invalidity will not affect the other
provisions of this Plan, but will be fully severable and the Plan will be
construed and enforced as if the illegal or invalid provision had never been
included in this Plan.
5.5 Successors and Assigns. The Plan is binding on all Participants and
their respective heirs, legatees, and legal representatives, including but not
limited to their estate and the executors, any receiver, trustee in bankruptcy
or representative of creditors of such person, and upon the Employer, its
successors and assigns.
5.6 Headings. The titles and headings of the paragraphs are included for
convenience of reference only and are not to be considered in construction of
the provisions hereof.
5.7 Governing Law. This Plan and rights to purchase Shares that may be
granted under this Plan will be governed by and construed in accordance with the
laws of the State of Texas, without giving effect to any conflicts-of-law rules
or principles that might require the application of the laws of another
jurisdiction, except to the extent this Plan or those rights are governed by the
Delaware General Corporation Law, or the Federal law of the United States.
5.8 No Right to Employment. Nothing in this Plan, any amendment to this
Plan, or the creation of any Participant Account, the execution or submission of
any Enrollment Agreement or Withdrawal Agreement, or the issuance of any Shares
of Common Stock, will give any Eligible Associate any right (i) to continue
employment with any Employer, (ii) any legal or equitable right
1998 Associate Stock Purchase Plan Page 13 of 14
<PAGE> 16
against Perot Systems or any Employer, or any officer, director, or Associate of
Perot Systems or its Participating Affiliates, in connection with his or her
employment by the Company, or (iii) interfere in any way with the Employer's
right to terminate or otherwise modify his or her employment at any time, except
as expressly provided by the Plan or by applicable law.
This 1998 Associate Stock Purchase Plan has been adopted by the Board of
Directors of Perot Systems on July 17, 1998.
PEROT SYSTEMS CORPORATION
By:
----------------------------------
Date:
--------------------------------
1998 Associate Stock Purchase Plan Page 14 of 14
<PAGE> 1
EXHIBIT 10.33
PEROT SYSTEMS CORPORATION
1991 STOCK OPTION PLAN
AMENDED AND RESTATED AS OF JULY 17, 1998
This 1991 Stock Option Plan, as amended and restated as of July 17,
1998, of Perot Systems Corporation is for the purpose of attracting and
retaining outstanding employees of Perot Systems and any of its majority-owned
subsidiaries and providing them with a strong incentive to contribute to the
success of the Company by granting them options to acquire shares of Common
Stock, $0.01 par value, of Perot Systems in accordance with the provisions of
the Plan, as set forth below.
Certain capitalized terms used in this Plan are defined at the end of
the Plan. Other terms used in the Plan are defined in the text as they occur and
have the meanings there indicated.
1. Term and Amendments.
The Plan is effective when approved by the Board of Directors of Perot
Systems. Either the Board of Directors or the shareholders may amend or
terminate the Plan in their sole discretion. Neither the Board of Directors nor
the shareholders, however, may amend or terminate the Plan in a way that
adversely affects any rights relating to stock options granted under the Plan
before the amendment or termination without the consent of the person whose
rights are adversely affected.
2. Administration.
The Board of Directors is responsible for administering and
interpreting the Plan, which responsibility may be delegated to a Committee of
the Board or to the Chief Executive Officer or other officer of Perot Systems
(collectively, the "Committee"). The Committee may from time to time adopt,
amend, waive, and rescind such procedures for the administration of the Plan as
it deems advisable, consistent with the provisions of the Plan. To the extent
permitted by law, any determination made by the Committee in administering or
interpreting the Plan is conclusive.
3. Available Shares.
The Board of Directors shall reserve for issuance not more than 42
million shares of Common Stock to be available for issue pursuant to stock
options granted under the Plan and stock options and restricted shares of Common
Stock issued under the Company's Restricted Stock Plan, 1996 Advisor and
Consultant Stock Option/Restricted Stock Incentive Plan, 1996 Non-Employee
Director Stock Option/Restricted Stock Incentive Plan, and Advisor Stock
Option/Restricted Stock Incentive Plan. Shares made available upon the exercise
of stock options granted under the Plan may be either treasury shares or
authorized but unissued shares or a combination of the two. If any change is
made in the shares of Common Stock (including, but not limited to, by stock
dividend, stock split, or merger or consolidation, but not including the
issuance of additional shares for consideration), the Board of Directors or the
Committee, as appropriate, will make such adjustments in the number and kind of
shares (which may consist of shares of a surviving corporation to a merger) that
may thereafter be optioned and sold under the Plan and the number and kind of
shares (which may consist of shares of a surviving corporation to a merger) and
purchase price per share of shares subject to outstanding Stock Option
Agreements under the Plan as the Board of Directors or the Committee determines
are equitable to preserve the respective rights of the Participants in the Plan.
1
1991 Stock Option Plan
Amended and Restated as of July 17, 1998
<PAGE> 2
4. Participants; Stock Option Agreements.
The Committee shall select the employees of the Company who will be
granted stock options under the Plan and shall determine the terms of the stock
options to be granted to each selected employee, including (i) the number of
shares of Common Stock to be covered by each option; (ii) the purchase price per
share of the Common Stock (consistent with applicable law) covered by each
option, which must be at least equal to the fair market value of the Common
Stock at the time of the grant or, in the case of grants after July 17, 1998, at
a future time selected by the Committee; (iii) the term of each option, which
may not exceed 11 years; (iv) the vesting schedule for each option; (v) any
holding period or other restriction applicable to shares of Common Stock
purchased pursuant to each option; and (vi) any other terms deemed appropriate
by the Committee. Each such employee may elect to become a Participant in the
Plan by entering into a Stock Option Agreement approved by the Committee. The
Committee and the Participant may thereafter amend, modify, or waive the
provisions of the Stock Option Agreement by mutual written agreement. The Stock
Option Agreement will contain provisions to reflect and enforce the applicable
provisions of the Plan and any other provisions deemed appropriate by the
Committee, including the following:
(a) Payment of Purchase Price Upon Exercise.
Each Stock Option Agreement will provide that the purchase
price of the shares as to which an option is exercised must be paid to
Perot Systems at the time of exercise either in cash or in such other
consideration as the Committee may approve having a total fair market
value, as determined by the Committee, equal to the purchase price, or
a combination of cash and such other consideration. Other consideration
may include shares of Common Stock already held by a Participant or
Common Stock withheld upon the exercise of the option, which will be
accepted at Market Value.
(b) Investment Representation.
Each Stock Option Agreement will provide that, upon demand by
the Committee, any person exercising a stock option under the Plan may
be required to deliver to the Committee, at the time of any exercise of
the option, a written representation that the shares acquired upon the
exercise are being acquired for investment and not for resale or with a
view to distribution.
5. Payment of Taxes with Common Stock.
If the Common Stock is not Publicly Traded within five years of the
effective date of the Plan, the Committee may elect to assist Participants in
satisfying an obligation to pay or withhold taxes required as a result of the
exercise of an option by accepting shares of Common Stock at Market Value to
satisfy the tax obligation. The shares of Common Stock accepted may be either
shares withheld upon the exercise of an option or other shares already owned by
the Participant. In determining whether to approve acceptance of shares of
Common Stock to satisfy a tax obligation, the Committee may consider whether the
shares proposed to be accepted are subject to any holding period or other
restrictions on transfer and may waive or arrange for the waiver of any such
restrictions.
6. Restrictions and Conditions Applicable to Stock Options and Purchased
Stock.
All stock options granted to a Participant pursuant to a Stock Option
Agreement and shares of Purchased Stock shall, except as otherwise provided in
the Stock Option Agreement, be subject to the following restrictions and
conditions:
2
1991 Stock Option Plan
Amended and Restated as of July 17, 1998
<PAGE> 3
(a) Non-transferability of Options.
No option granted under the Plan may be sold or otherwise
transferred other than by will or by the laws of descent and
distribution upon the Participant's death. During the lifetime of the
Participant, the option is exercisable only by the Participant.
(b) Restricted Stock.
Unless Perot Systems otherwise agrees in writing, shares of
Purchased Stock may not be sold or otherwise transferred, other than by
will or under the laws of descent and distribution upon the
Participant's death, until and unless (i) any holding period or other
restriction on such a sale or other transfer specified in the Stock
Option Agreement has expired, and (ii) Perot Systems has waived in
writing any option to buy back such shares that it may have under the
Stock Option Agreement.
(c) Buyback of Purchased Stock and Payback of Certain
Profits.
Perot Systems will have the right to buy back from a
Participant any Purchased Stock then owned by the Participant and the
right to require a Participant to pay back to Perot Systems the amount
of the Participant's Net Investment Proceeds with respect to shares of
Purchased Stock that have been sold or otherwise transferred by the
Participant in the circumstances and on the terms and conditions
specified in the Participant's Stock Option Agreement.
7. Valuation.
The Board of Directors will determine the Market Value of shares of
Purchased Stock as of each Valuation Date.
8. Stock Certificates; Rights as Shareholder.
A Stock Option Agreement may provide that Perot Systems will retain for
safekeeping all certificates representing shares of Purchased Stock issued under
the agreement. Each such certificate may bear such legends as the Committee
determines are necessary or appropriate. Whether or not certificates
representing such shares have been issued or delivered, each Participant upon
purchasing such shares will have all the rights of a shareholder of Common
Stock, including voting, dividend, and distribution rights, with respect to all
shares of Purchased Stock owned by the Participant, except as may otherwise be
provided in the Participant's Stock Option Agreement. No Participant will have
any rights as a shareholder with respect to any shares of Common Stock subject
to options granted under the Plan before the date of issuance to the Participant
of shares upon the exercise of such options.
9. Compliance with Laws and Regulations.
The Plan, the grant and exercise of options under the Plan, and the
obligation of Perot Systems to sell and deliver shares under such options, are
subject to all applicable federal and state laws, rules, and regulations and to
such approvals by any government or regulatory agency as may be required. Perot
Systems is permitted a reasonable delay in issuing any shares of Common Stock
pursuant to the exercise of options granted under the Plan in order to
accommodate compliance with such laws, rules, regulations, and approvals,
including (i) the listing of such stock on any registered national securities
exchange or approval for quotation in the National Association of Securities
Dealers Automated Quotation ("NASDAQ") system and (ii) the completion of any
registration or qualification of such shares under any federal or state
3
1991 Stock Option Plan
Amended and Restated as of July 17, 1998
<PAGE> 4
law, or any ruling or regulation of any governmental body that Perot Systems
may, in its sole discretion, determine to be necessary or advisable.
10. Severability.
If any provision of the Plan is held invalid or unenforceable for any
reason, the validity and enforceability of all other provisions of the Plan will
not be affected.
11. Effect on Other Plans.
The adoption of this Plan has no effect on awards made or to be made
under other equity incentive plans covering employees of Perot Systems or any of
its subsidiaries or any of their predecessors or subsidiaries.
12. Governing Law.
The Plan shall be governed by and construed in accordance with the law
of the State of Texas, without regard to the choice of law rules in such law.
13. Definitions.
As used in this Plan, the following terms have the meanings indicated:
"Board of Directors" means the Board of Directors of Perot Systems.
"Committee" means the Committee established by the Board of Directors
under Section 2 of the Plan.
"Common Stock" means the Class A Common Stock, $0.01 par value, of
Perot Systems.
"Company" means Perot Systems and its majority-owned subsidiaries, if
any.
"Market Value" of a share of Common Stock on a given date means (i) if
the Common Stock is Publicly Traded, the closing sale price for Common Stock, as
determined in good faith by the Board of Directors, on such date or, if no
closing sale price is available for such date, on the most recent prior date for
which a closing sale price is available or, if no closing sale price is
available, the closing bid price, as so determined, on such date or, if no
closing bid price is available for such date, the closing bid price on the most
recent prior date for which a closing bid price is available, or (ii) if the
Common Stock is not Publicly traded, its fair market value, as determined in
good faith by the Board of Directors, as of the most recent Valuation Date on or
before such date.
"Net Investment Proceeds", with respect to any share of Purchased Stock
sold or otherwise transferred by a Participant or a Participant's successor in
interest, means the greater of the value of the gross proceeds received for such
share or the Market Value of such share on the date of sale or transfer less, in
either case, (i) the exercise price of the option for such share plus simple
interest on such amount at the rate of 8% per annum to the date of the sale or
transfer, (ii) reasonable and customary commissions paid for the sale or
transfer, and (iii) the verified amount of any income taxes paid or payable on
the sale or transfer.
"Participant" means a person who has entered into a Stock Option
Agreement and the person's successors and permitted assigns.
"Perot Systems" means Perot Systems Corporation.
4
1991 Stock Option Plan
Amended and Restated as of July 17, 1998
<PAGE> 5
"Plan" means this Stock Option Plan, as it may be amended.
"Publicly Traded" means Common Stock has been listed on a registered
national securities exchange or approved for quotation in the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system.
"Purchased Stock" means outstanding Common Stock purchased pursuant to
options granted under the Plan.
"Stock Option Agreement" means an agreement entered into by an employee
and Perot Systems under which the employee accepts options granted under the
Plan.
"Valuation Date" means each date as of which the Board of Directors
determines the Market Value of shares of Purchased Stock.
5
1991 Stock Option Plan
Amended and Restated as of July 17, 1998
<PAGE> 1
EXHIBIT 10.34
PEROT SYSTEMS CORPORATION
1991 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
NON-QUALIFIED STOCK OPTION GRANT
THIS STOCK OPTION AGREEMENT IS NOT VALID UNTIL A PROPERLY EXECUTED ORIGINAL
COPY IS RETURNED TO PEROT SYSTEMS. IF YOU DO NOT RETURN A PROPERLY EXECUTED
ORIGINAL COPY WITHIN 60 DAYS AFTER THE EFFECTIVE DATE SET FORTH BELOW, YOU
WILL BE DEEMED TO HAVE REJECTED THE AGREEMENT UNLESS PEROT SYSTEMS, IN ITS SOLE
DISCRETION, DETERMINES OTHERWISE.
Participant: <<First Name>> <<Last Name>>
Effective Date: July 20, 1998
Option Shares: <<Option Shares>>
Exercise Price: The Exercise Price will be the price at which shares
of Common Stock are offered to the public in an
initial public offering, provided that if the Company
does not complete an initial public offering of
Common Stock within six months after the Effective
Date, the Exercise Price will be a price established
by the Board not later than January 20, 1999.
Vesting Schedule: 100% of the Option Shares on the third anniversary of
the Effective Date
Expiration Date: Five years after the Effective Date, unless
terminated earlier under the Agreement or the Plan.
BY SIGNING THIS AGREEMENT, THE PARTICIPANT:
o Agrees to be bound by the terms of this Agreement and the Plan;
o Acknowledges receiving an electronic or paper copy of (1) the Plan, (2)
the Prospectus for the Plan, and (3) Perot Systems' most recent Annual
Report on Form 10-K; and
o Consents to receiving delivery of the all future communications and
required documents relating to the Plan or this Agreement via TRAIN or
other electronic transmission.
<<First Name>> <<Last Name>> PEROT SYSTEMS CORPORATION
Signature: By:
----------------- -----------------------------------
Date: Chairman of the Board
-----------------------
[The remainder of this page is intentionally blank.]
1991 Stock Option Plan Page 1 of 10 Stock Option Agreement
<PAGE> 2
1. Certain Definitions. As used in this Agreement, the following terms
have the meanings indicated:
(a) "Agreement" means this Stock Option Agreement between Perot
Systems and Participant.
(b) "Committee" means the Board of Directors of Perot Systems or
the committee of the Board, Chief Executive Officer or other
officer of Perot Systems appointed to administer the Plan.
(c) "Common Stock" means the Class A Common Stock, $.01 par value
per share, of Perot Systems.
(d) "Company" means Perot Systems and its majority-owned
subsidiaries.
(e) "Confidential Information" means all written, machine
reproducible, oral and visual data, information and material,
including but not limited to the terms of this Agreement and
the Plan, business, financial and technical information,
computer programs, documents and records (including those that
Participant develops in the scope of his or her employment)
that (i) the Company or any of its customers or suppliers
treats as proprietary or confidential through markings or
otherwise, (ii) relates to the Company or any of its customers
or suppliers or any of their business activities, products or
services (including software programs and techniques) and is
competitively sensitive or not generally known in the relevant
trade or industry, or (iii) derives independent economic value
from not being generally known to, and is not readily
ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use. Confidential
Information does not include any information or material that
is approved by Perot Systems for unrestricted public
disclosure.
(f) "Effective Date" means the date set forth on the first page of
this Agreement on which the term of this Agreement commenced.
(g) "Expiration Date" means the date and time as of which the
Option expires, which is the earlier of (i) the close of
business on the date one year (two years if the Vesting Period
is three years or less) after the entire Option has Vested or
(ii) the date and time as of which all rights to exercise the
Option are terminated under Section 2(d).
(h) "Market Value" of a share of Purchased Stock on a given date
means (i) if the Purchased Stock is Publicly Traded, the
closing sale price for Purchased Stock, as determined in good
faith by the Board of Directors, on such date or, if no
closing sale price is available for such date, on the most
recent prior date for which a closing sale price is available
or, if no closing sale price is available, the closing bid
price, as so determined, on such date or, if no closing bid
price is available for such date, the closing bid price on the
most recent prior date for which a closing bid price is
available, or (ii) if the Purchased Stock is not Publicly
Traded, its fair market value, as determined in good faith by
the Board of Directors, as of the most recent Valuation Date
on or before such date.
1991 Stock Option Plan Page 2 of 10 Stock Option Agreement
<PAGE> 3
(i) "Net Investment Proceeds," with respect to any share of
Purchased Stock sold or otherwise transferred by Participant
or Participant's successor in interest, means the greater of
the value of the gross proceeds received for such share or the
Market Value of such share on the date of sale or transfer
less, in either case, (i) the exercise price of the Option for
such share plus simple interest on such amount at the rate of
8% per annum to the date of the sale or transfer, (ii) any
reasonable and customary commission paid for the sale or
transfer, and (iii) the verified amount of any income taxes
paid or payable on the sale or transfer.
(j) "Option" means the right and option evidenced by this
Agreement.
(k) "Participant" means the individual named on the first page of
this Agreement.
(l) "Perot Systems" means Perot Systems Corporation, a Delaware
corporation.
(m) "Plan" means Perot Systems' 1991 Stock Option Plan, as amended
and restated as of July 17, 1998, as amended from time to
time.
(n) "Publicly Traded" means Purchased Stock has been listed on a
registered national securities exchange or approved for
quotation in the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system.
(o) "Purchased Stock" means any Common Stock purchased upon the
exercise of this Option, together with any successor security,
property or cash issued or distributed by Perot Systems or any
successor entity, whether by way of merger, consolidation,
share exchange, reorganization, liquidation, recapitalization
or otherwise.
(p) "Termination for Substantial Misconduct" means termination of
employment for conduct resulting in a felony conviction of the
Participant; actions involving moral turpitude, theft, or
dishonesty in a material matter; breach of any obligation
under Section 5 of this Agreement; or failure by Participant
to carry out the directions, instructions, policies, rules,
regulations, or decisions of the Board of Directors of Perot
Systems including, without limitation, those relating to
business ethics and the ethical conduct of the business of the
Company.
(q) "Transfer" or "transfer" or derivations thereof includes any
sale, assignment, gift, pledge, encumbrance, hypothecation,
mortgage, exchange or any other disposition.
(r) "Valuation Date" means each date as of which the Board of
Directors determines the Market Value of Purchased Stock.
(s) "Vesting," or "vesting" or derivations thereof with respect to
any Option issued under this Agreement, means receiving the
right to exercise the Option.
1991 Stock Option Plan Page 3 of 10 Stock Option Agreement
<PAGE> 4
(t) "Vesting Period" means the period of time commencing on the
Effective Date of this Agreement and ending on the date on
which the entire Option has Vested.
2. Grant of Option; Exercise of Option; Purchase of Stock.
(a) Subject to the terms, conditions, and restrictions set forth
in the Plan (which is incorporated herein by reference) and
this Agreement, Perot Systems hereby grants to Participant,
and Participant hereby accepts from Perot Systems, the option
to purchase from Perot Systems
(i) the number of shares of Common Stock specified as
the "Option Shares" on the first page of this Agreement,
(ii) at the purchase price per share of Common Stock
specified as the "Exercise Price" on the first page of this
Agreement,
(iii) which option will Vest in Participant in accordance
with the Vesting Schedule specified on the first page of this
Agreement.
The Option shall only continue to Vest only for as long as
Participant is an employee of Company, unless the Committee,
in its sole discretion, agrees in writing otherwise.
Participant will have the right to exercise the Vested Option
and purchase Common Stock after the Option Vests as provided
in Section 2(d) below.
(b) The purchase price of shares as to which the Option is
exercised must be paid to Perot Systems at the time of the
exercise either in cash or in such other consideration as the
Committee may approve having a total fair market value, as
determined by the Committee, equal to the purchase price, or a
combination of cash and such other consideration.
(c) The Committee may elect to assist Participant in satisfying an
obligation to pay or withhold taxes required as a result of
the exercise of this Option by accepting shares of Purchased
Stock at Market Value to satisfy the tax obligation. The
shares of Purchased Stock accepted may be either shares
withheld upon the exercise of this Option or other shares
already owned by Participant. In determining whether to
approve acceptance of Purchased Stock to satisfy such a tax
obligation, the Committee may consider whether the shares
proposed to be delivered are subject to any holding period or
other restrictions on transfer and may waive or arrange for
the waiver of any such restrictions.
(d) The Option is only exercisable as to Vested Options. Once
Vested, the Option may be exercised until the Expiration Date,
provided, however, (i) if the Participant ceases to be an
employee for any reason other than death, the Option may be
exercised only for sixty days after the date of cessation of
employment, and in any case no later than the Expiration Date,
and (ii) if the Participant ceases to be an Employee because
of death of the Participant, the Option may be exercised by
the Participant's estate only for two years after the
Participant's Death and in any case no later than the
Expiration Date.
1991 Stock Option Plan Page 4 of 10 Stock Option Agreement
<PAGE> 5
(e) The Option is exercisable by delivery of an exercise notice,
in the form and format and by the method approved by Perot
Systems stock administrator, which form and format may be
electronic and solely available by access through Perot
Systems internal computer network, which notice will state the
election to exercise the Option, the number of Vested shares
of Common Stock with respect to which the Option is being
exercised, and such other representations and agreements as
may be required by the Company in accordance with the terms of
the Plan. The Option will be deemed to be exercised upon
receipt by the Company of such exercise notice and the
purchase price of the Vested shares of Common Stock as to
which the Option is exercised, provided that Participant has
concurrently made adequate provision for fulfilling all
applicable tax withholding requirements and other tax
obligations.
3. Restrictions on Transfer. The following restrictions on transfer apply
unless the Committee otherwise agrees in writing or unless the transfer
is by will or the laws of descent and distribution upon Participant's
death:
(a) The Option may not be sold or otherwise transferred and is
exercisable only by Participant during Participant's lifetime.
(b) Shares of Purchased Stock may not be sold or otherwise
transferred unless the holder has given Perot Systems any
notice required under Section 4(a) and Perot Systems has
waived in writing any right it has to buy back the shares
under Section 4(a).
(c) Shares of Purchased Stock may not be sold or otherwise
transferred for six months after the Purchased Stock (or stock
of the same class as the Purchased Stock) is Publicly Traded.
Perot Systems is not obligated to recognize any purported sale or other
transfer of the Option or any Purchased Stock in violation of this
Section 3 and, unless it elects to do otherwise, may treat any such
purported sale or transfer as null, void, and of no effect.
4. Rights to Buy Back Purchased Stock and to Require Payback of Certain
Profits.
(a) At any time before the Purchased Stock is Publicly Traded, if
Participant or any subsequent holder of shares of Purchased
Stock desires or is obligated to sell or otherwise transfer
any such shares (including any distribution to heirs or other
beneficiaries of Participant's estate), the holder is required
to give Perot Systems written notice of the proposed sale or
transfer, including notice of the proposed purchaser or
transferee, and, for a period of 30 days after receipt of such
notice, Perot Systems will have the right to buy back such
shares for cash at a purchase price equal to the Market Value.
(b) If the Committee discovers that Participant has engaged in any
conduct prohibited by Section 5 or if Participant ceases to be
employed by the Company and the Committee, in its sole
discretion, determines that Participant's cessation of
employment resulted from a Termination for Substantial
Misconduct or would have resulted in a Termination for
1991 Stock Option Plan Page 5 of 10 Stock Option Agreement
<PAGE> 6
Substantial Misconduct had the relevant facts been known at
the time of Participant's cessation of employment, Perot
Systems will have the right for 150 days after the Committee
discovers the relevant facts to cancel any unexercised Option,
whether or not Vested, and to buy back from Participant any
shares of Purchased Stock then owned by Participant, at a
purchase price equal to the price per share paid by
Participant for the shares plus simple interest on such amount
at the rate of 8% per annum from the date of payment by
Participant to the date of tender of payment by Perot Systems
as set forth in Section 4(c) below, and the right to require
Participant to pay back to Perot Systems in cash the Net
Investment Proceeds with respect to any shares of Purchased
Stock that have been sold or otherwise transferred by
Participant.
(c) Whenever Perot Systems has a right to buy back shares of
Purchased Stock or to require Participant to pay back to Perot
Systems Participant's Net Investment Proceeds with respect to
any shares of Purchased Stock under this Section 4, Perot
Systems may exercise its right by notifying Participant or the
subsequent holder of Perot Systems' election to exercise its
right within the designated exercise period. In the case of a
buyback under Section 4(a) or Section 4(b), the giving of such
notice will give rise to an obligation on the part of
Participant or the subsequent holder to tender to Perot
Systems, within 10 days, any previously issued certificate
representing shares of Purchased Stock to be bought back, duly
endorsed in blank or having a duly executed stock power
attached in proper form for transfer. If any such certificate
is not tendered within 10 days, Perot Systems may cancel any
outstanding certificate representing shares to be bought back.
Perot Systems is required to tender the purchase price for
shares to be bought back under this Section 4 within 20 days
of giving notice of its election to exercise its right to buy
back shares. If the person from whom the shares are to be
bought back has not complied with an obligation to return a
certificate representing shares to be bought back, however,
Perot Systems is not required to tender the purchase price
until 20 days after the certificate is returned or 20 days
after it cancels the certificate, whichever occurs first.
5. Non-Competition and Non-Disclosure. Participant acknowledges that: (i)
in the course and as a result of employment with the Company,
Participant will obtain special training and knowledge and will come in
contact with the Company's current and potential customers, which
training, knowledge, and contacts would provide invaluable benefits to
competitors of the Company; (ii) the Company is continuously developing
or receiving Confidential Information, and that during Participant's
employment he or she will receive Confidential Information from the
Company, its customers and suppliers and special training related to
the Company's business methodologies; and (iii) Participant's
employment by Company creates a relationship of trust that extends to
all Confidential Information that becomes known to Participant.
Accordingly, and in consideration of Perot Systems' granting this
Option to Participant, Participant agrees that Perot Systems will be
entitled to terminate all rights to exercise the Option and to exercise
the rights specified in Section 4 above if Participant does any of the
following without the prior written consent of the Company:
(a) while employed by the Company or within one year thereafter:
1991 Stock Option Plan Page 6 of 10 Stock Option Agreement
<PAGE> 7
(i) competes with, or engages in any business that is
competitive with, the Company within 250 miles of any
location at which Participant was employed by or
provided services to the Company;
(ii) solicits or performs services, as an employee,
independent contractor, or otherwise, for any person
(including any affiliates or subsidiaries of that
person) that is or was a customer or prospect of the
Company during the two years before Participant's
employment with the Company ended if Participant
solicited business from or performed services for
that customer or prospect while employed by Company;
or
(iii) recruits, hires, or helps anyone to recruit or hire
anyone who was an employee of Perot Systems, or of
any of its customers for whom Participant performed
services of from whom Participant solicited business,
within the six months before Participant's employment
with the Company ended; or
(b) discloses or uses any Confidential Information, except in
connection with the good faith performance of Participant's
duties as an employee or, solely with respect to the terms of
this Agreement or the Plan, to Participant's spouse; or fails
to take reasonable precautions against the unauthorized
disclosure or use of Confidential Information; or fails, upon
Perot Systems' request, to execute and comply with a third
party's agreement to protect its confidential and proprietary
information; or solicits or induces the unauthorized
disclosure or use of Confidential Information.
If any court of competent jurisdiction finds any provision of this
Section 5 to be unreasonable, then that provision shall be considered
to be amended to provide the broadest scope of protection to the
Company that such court would find reasonable and enforceable.
6. Compliance with Securities Laws. Participant hereby agrees that, upon
demand by Perot Systems, any person exercising this Option, at the time
of such exercise, will deliver to Perot Systems a written
representation to the effect that the shares of Purchased Stock being
acquired are being acquired for investment and not with a view to any
resale or distribution thereof. Participant further agrees that neither
Participant nor any successor in interest of Participant will sell or
otherwise transfer the Option or any shares of Purchased Stock in any
way that might result in a violation of any federal or state securities
laws or regulations. Participant further acknowledges and agrees that
Perot Systems may require Participant or any subsequent holder of the
Option or of any shares of Purchased Stock to provide Perot Systems,
prior to any sale or other transfer, with such other representations,
commitments, and opinions regarding compliance with applicable
securities laws and regulations as Perot Systems may deem necessary or
advisable.
7. Stock Certificates; Rights as Shareholder. Perot Systems or its
designee may retain for safekeeping all certificates representing
shares of Purchased Stock. Each such certificate will bear such legends
as the Committee determines are necessary or appropriate. Whether or
not certificates representing shares of Purchased Stock have been
issued or delivered, Participant will have all the rights of a
shareholder of Purchased Stock, including voting, dividend and
1991 Stock Option Plan Page 7 of 10 Stock Option Agreement
<PAGE> 8
distribution rights, with respect to shares of Purchased Stock owned by
Participant. Participant will not have any rights as a shareholder with
respect to any shares of Purchased Stock subject to the Option before
the date of issuance to Participant of shares upon exercise of the
Option.
8. Income Tax Withholding. Participant shall, upon request by the Company,
reimburse the Company for, or the Company may withhold from sums or
property otherwise due or payable to Participant, any amounts the
Company is required to remit to applicable taxing authorities as income
tax withholding with respect to the Option or any Purchased Stock. If
shares of Purchased Stock are withheld for such purpose, they will be
withheld at Market Value. If Participant fails to reimburse the Company
for any such amount when requested, the Company has the right to
recover that amount by selling or canceling sufficient shares of any
Purchased Stock held by Participant.
9. Compliance with Plan. If the provisions of the Plan are inconsistent
with the provisions of this Agreement, the provisions of the Plan
supersede the provisions of this Agreement.
10. Notices.
(a) All notices or other communications relating to this Plan or
any other matter relating to this Agreement given to the
Committee, Perot Systems, or any Company will be deemed
delivered on the day the notice or other communication is
received in tangible written form by the Stock Administrator
at Perot Systems' corporate headquarters address, provided
that such notice is in the form specified by Perot Systems.
(b) All notices or other communications relating to this Plan or
any other matter relating to this Agreement given to a
Participant by the Committee, Perot Systems, or any Company
will be deemed delivered on the first day the notice or other
communication is (1) personally delivered to that person, (2)
electronically transmitted to a person who on the date of that
transmission either is an employee of any Company or has
consented to receiving notices by electronic transmission to
the last known electronic transmission address of that person,
provided that an acknowledgement of receipt is returned, or
(3) placed in the official government mail of the country of
the sender in an envelope with proper postage paid addressed
to the last known address of that person as reflected in Perot
Systems' personnel or stock records.
(c) Either party may at any time change its address for
notification purposes by giving the other written notice of
the new address and the date upon which it will become
effective.
(d) CONSENT TO ELECTRONIC DELIVERY OF NOTICES, PLAN DOCUMENTS AND
PROSPECTUSES. BY EXECUTING THIS AGREEMENT, THE PARTICIPANT
WILL BE DEEMED TO CONSENT TO RECEIVING COPIES OF ALL NOTICES
AND OTHER COMMUNICATIONS RELATING TO THE PLAN AND THIS
AGREEMENT BY ELECTRONIC TRANSMISSION, INCLUDING BUT NOT
LIMITED TO THE PROSPECTUS RELATING TO THE PLAN, ALL
PARTICIPATION MATERIALS, AND ALL OTHER DOCUMENTS REQUIRED TO
BE DELIVERED IN CONNECTION WITH THE PLAN. UPON REQUEST, PEROT
SYSTEMS WILL PROVIDE ANY SUCH DOCUMENTS TO ANY ELIGIBLE
ASSOCIATE IN TANGIBLE WRITTEN FORM.
1991 Stock Option Plan Page 8 of 10 Stock Option Agreement
<PAGE> 9
11. Remedies. Perot Systems is entitled, in addition to any other remedies
it may have at law or in equity, to temporary and permanent injunctive
and otherwise equitable relief to enforce the provisions of this
Agreement. ANY ACTION TO ENFORCE THE PROVISIONS OF, OR OTHER RELATING
TO, THIS AGREEMENT MAY BE BROUGHT IN THE STATE OR FEDERAL COURTS HAVING
JURISDICTION IN DALLAS, DALLAS COUNTY, TEXAS. BY SIGNING THIS
AGREEMENT, PARTICIPANT CONSENTS TO THE PERSONAL JURISDICTION OF SUCH
COURTS IN ANY SUCH ACTION.
12. Assignment. This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, personal
representatives, successors, and assigns. However, Participant does not
have the power or right to assign this Agreement without the prior
written consent of Perot Systems.
13. Attorneys' Fees. If any legal proceeding is brought to enforce or
interpret the terms of this Agreement, the prevailing party will be
entitled to reasonable attorneys' fees, costs, and necessary
disbursements in addition to any other relief to which that party may
be entitled.
14. Severability. If any provision of this Agreement is held invalid or
unenforceable for any reason, the validity and enforceability of all
other provisions of this Agreement will not be affected.
15. Headings. The section headings used herein are for reference and
convenience only and do not affect the interpretation of this
Agreement.
16. Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Texas, without regard to the
choice of law rules in such law.
17. Entire Agreement. This Agreement, together with the Plan and any
procedure adopted by the Committee thereunder, constitutes the entire
agreement between the parties with respect to its subject matter and
may be waived or modified only in writing.
18. Changes in Capitalization. If any change is made in the Common Stock
(including, but not limited to, changes resulting from a stock
dividend, stock split, merger, consolidation, reorganization,
recapitalization, exchange of shares, change in corporate structure or
other transaction not involving the receipt of consideration by Perot
Systems), the Committee will equitably adjust the number of shares of
Common Stock and the Exercise Price for those shares that are subject
to outstanding rights under this Agreement to preserve the rights of
Participant under this Agreement. The determination of the Committee
with respect to any such adjustments shall be final, binding and
conclusive.
19. No Guarantee of Continued Employment. Participant acknowledges and
agrees that the Vesting of shares of Common Stock under this Agreement
is earned only while continuing service to the Company as an employee
at the will of the Company (and not through the act of being hired,
being granted an Option or purchasing shares under this Agreement).
Participant further acknowledges and agrees that this Agreement, the
transactions contemplated hereunder and the Vesting schedule set forth
herein do not constitute an express or implied promise of continued
employment by the Company for the Vesting Period, for any period, or at
all, and shall not
1991 Stock Option Plan Page 9 of 10 Stock Option Agreement
<PAGE> 10
interfere with Participant's right or the Company's right to terminate
Participant's employment relationship with the Company at any time,
with or without cause.
1991 Stock Option Plan Page 10 of 10 Stock Option Agreement
<PAGE> 1
PROMISSORY NOTE
$250,000.00 August 27, 1997
FOR VALUE RECEIVED, John E. King ("Associate"), promises to pay to Perot Systems
Corporation, a Delaware corporation (the "Company"), or order, at the principal
offices of the Company or at such other place as the holder of this Note may
designate, the principal sum of $250,000.00, payable, along with interest
calculated at eight percent per annum (8%), compounded quarterly, on or before
August 27, 2000, or earlier if otherwise required pursuant to the terms of this
Note. Interest will be payable when the principal becomes due, whether on August
27, 2000 or earlier under the terms of this Note.
The Company has the right to offset amounts due under this Note against
payroll payments to be made by the Company to Associate.
This Note shall become immediately due and payable in full without
notice or demand upon the earlier of (i) termination of Associate's employment
with the Company for any reason, with or without cause, or (ii) six months after
the expiration of any period of time for which the underwriters of the initial
underwritten public offering of common stock of the Company, or of any successor
company, or of stock of the type issued in exchange for any common stock of the
Company pursuant to a merger or otherwise ("Common Stock"), request that the top
five executive officers of the Company (as designated by the Chief Executive
Officer of the Company) as a group refrain from selling, transferring, or
otherwise disposing or any of their shares of Common Stock.
Payment of this Note is secured by 50,000 vested shares of Associate's
Class A common stock of the Company pursuant to a Pledge Agreement of even date
herewith between the Company and Associate (the "Pledge Agreement"). The holder
of this Note shall have full recourse against the Associate with respect to, and
Associate shall be personally liable for, all amounts that become due under this
Note. The holder of this Note shall have no obligation to proceed against or
collect amounts that may be due from the Collateral prior to proceeding against
Associate personally.
Nothing in this Note shall confer upon Associate any right to continue
in the employ of the Company or interfere in any way with the right of the
Company to terminate such employment at any time.
Every amount overdue under this Note shall bear interest from and after
the date on which such amount first became overdue at an annual rate (compounded
annually) which is the lesser of (a) two percentage points above the rate
designated from time to time by NationsBank of Texas as its prime lending rate
or (b) the maximum amount permitted by law. Such interest on overdue amounts
under this Note shall be payable on demand and shall accrue until the obligation
of Associate with respect to the payment of such interest has been discharged
(whether before or after judgment).
In no event shall any interest charged, collected or reserved under
this Note exceed the maximum rate then permitted by applicable law and if any
such payment is paid by Associate, then such excess sum shall be credited by the
holder as a payment of principal.
<PAGE> 2
All payments by Associate under this Note shall be made without set-off
or counterclaim and be free and clear and without any deduction or withholding
for any taxes or fees of any nature whatever, unless the obligation to make such
deduction or withholding is imposed by law.
Associate agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, incurred by the holder in enforcing the obligations
of Associate under this Note.
No delay or omission on the part of the holder in exercising any right
under this Note or the Pledge Agreement under which the Restricted Stock is
pledged shall operate as a waiver of such right or of any other right of such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion.
Associate hereby waives presentment, demand, protest and notices of every kind
and assents to any extension or postponement of the time of payment or any other
indulgence, to any substitution, exchange or release of collateral, and to the
addition or release of any other party or person primarily or secondarily
liable.
This Note may be prepaid in whole or in part at any time or from time
to time in the sole discretion of the holder. Any such prepayment shall be
without premium or penalty.
None of the terms or provisions of this Note may be waived, modified or
amended except by a written instrument duly executed on behalf of the holder
expressly referring to this Note and setting forth the provision so waived,
modified or amended.
All rights and obligations hereunder shall be governed by the laws of
the State of Texas. Any action to enforce the provisions of, or otherwise
relating to, this Note may be brought in the appropriate courts in Dallas
County, Texas.
/s/ JOHN E. KING
-------------------------------
John E. King
<PAGE> 1
PLEDGE AGREEMENT
This Pledge Agreement (the "Agreement") is made as of August 27, 1997,
by and between Perot Systems Corporation, a Delaware corporation ("PSC"), and
John E. King ("Pledgor").
WHEREAS, Pledgor owns certain shares of PSC's Class A common stock
pursuant to a Restricted Stock Agreement dated as of June 1, 1988 (the
"Restricted Stock Agreement");
WHEREAS, PSC has extended credit to Pledgor and may extend additional
credit pursuant to the terms of a Promissory Note, dated as of the date hereof,
in the amount of $250,000 (the "Note");
NOW, THEREFORE, to secure the Obligations (as defined below), Pledgor
and PSC hereby agree as follows:
1. Definitions. Capitalized terms that are not otherwise defined in
this Agreement have the meanings assigned to such terms in the Restricted Stock
Agreement or the Note, as appropriate.
2. Pledge of Securities. Pledgor hereby pledges and grants to PSC a
security interest in the following:
(a) 50,000 shares of the Restricted Stock purchased by Pledgor
pursuant to the Restricted Stock Agreement, being those shares
evidenced by certificate no. 3539, together with any other shares of
capital stock of PSC that may be distributed with respect to such
Restricted Stock (collectively, the "Securities"), and all rights and
privileges pertaining thereto;
(b) all proceeds, products, cash, securities, dividends, increases,
distributions and profits received from or on the Securities (the
"Proceeds"), including without limitation distributions or payments in
partial or complete liquidation or redemption, or as a result of
reclassifications, readjustments, reorganizations or changes in the
capital structure of the issuer of the Securities; and
(c) all subscriptions, warrants, options, preemptive rights and
other rights issued or otherwise granted by the issuer of the
Securities or any other person on or in connection with the Securities
or any other item of the Collateral (as defined below);
(all of such property and rights described in items (a), (b) and (c)
above are herein collectively called the "Collateral");
TO HAVE AND TO HOLD the Collateral, together with all rights, titles, interests,
privileges and preferences appertaining to or incidental thereto, unto PSC, and
its respective successors and
Page 1
<PAGE> 2
assigns, forever, subject, however, to the terms, covenants and conditions
hereinafter set forth. The security interest granted and the assignments made
hereunder are made as security only and shall not subject PSC to, or transfer or
in any way affect or modify, any obligation of Pledgor with respect to any of
the Collateral or any transaction involving or giving rise thereto.
3. Obligations Secured. The pledge and security interest in the
Collateral granted hereby secures payment and performance of the following
obligations of Pledgor to PSC, whether now outstanding or incurred after the
date hereof (the "Obligations"): (a) all principal, interest, fees, expenses,
obligations and liabilities of Pledgor arising pursuant to or represented by the
Note; (b) all taxes, assessments, insurance premiums, brokerage fees, reasonable
attorneys' fees and other expenses of sale of the Collateral; (c) Pledgor's
performance of his obligations under the Note, this Agreement and the Restricted
Stock Agreement; and (d) all renewals, extensions and modifications of the
indebtedness and obligations referred to in the foregoing clauses, or any part
thereof.
4. Pledgor's Warranties and Indemnity. Pledgor represents, warrants and
covenants to PSC (a) that Pledgor is and will be the lawful owner of the
Securities, (b) that the Securities are and will remain free and clear of all
liens, encumbrances and security interests other than the security interest
granted by Pledgor hereunder, and (c) that Pledgor has the right and authority
to pledge the Securities and otherwise to comply with the provisions hereof. If
any adverse claim is asserted in respect of the Securities or any portion
thereof, except such as may result from an act of PSC not authorized hereunder,
Pledgor shall indemnify PSC and hold PSC harmless from and against any losses,
liabilities and expenses (including reasonable counsel fees) incurred by PSC in
exercising any right, power or remedy of PSC hereunder or defending, protecting
or enforcing the security interests created hereunder. Any such loss, liability
or expense so incurred shall be paid by Pledgor upon demand, and shall become
part of the Obligations of Pledgor secured pursuant to this Agreement. Pledgor
agrees to execute a stock power in blank for each certificate evidencing any of
the Securities and to deliver all such Securities certificates with stock powers
to PSC. PSC hereby consents to the pledge of the Securities to PSC hereunder,
notwithstanding any restrictions on transfer of the Securities set forth in the
Restricted Stock Agreement.
5. Negative Covenants. Pledgor covenants and agrees that, unless PSC
otherwise consents in writing Pledgor will not: (a) sell, assign or transfer any
rights of Pledgor in the Collateral; or (b) create any lien in, or security
interest in, or otherwise encumber, the Collateral, or any part thereof, or
permit the same to be or become subject to any lien, attachment, execution,
sequestration, other legal or equitable process, or any encumbrance of any kind
or character, except the security interest herein created in favor of PSC.
6. Dividends and Other Distributions.
(a) Pledgor shall cause all non-cash dividends and distributions
with respect to the Securities (including without limitation any stock
dividends and any distributions made on or in respect of the
Securities, whether resulting from a subdivision, combination or
reclassification of the Securities or received in exchange for or in
respect of the Securities or any part thereof or as a result of any
merger, consolidation,
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<PAGE> 3
acquisition or other transaction) to be distributed directly to PSC, to
be held by PSC as additional Collateral; and if any such distribution
is made to Pledgor, he shall receive such distribution in trust for PSC
and shall immediately transfer it to PSC.
(b) So long as no Event of Default or Potential Default has occurred
and is continuing, Pledgor shall be entitled to receive any cash
dividends payable in respect of the Securities; provided that, upon
receipt of any such cash dividend, Pledgor will promptly (and in any
event within 30 days) pay to PSC in respect of the Obligations (to the
extent of the Obligations then outstanding) the full amount of such
cash dividend less any income taxes payable by Pledgor as a result of
such cash dividend, and, pending such payment, such cash dividend will
continue to constitute Collateral hereunder.
7. Voting Rights. So long as no Event of Default or Potential Default
has occurred and is continuing, Pledgor shall be entitled to exercise any and
all voting rights pertaining to the Securities for any purpose not inconsistent
with the terms of the Note or this Agreement.
8. Termination of Rights. During any period when an Event of Default
has occurred and is continuing, all rights of Pledgor to receive dividends
pursuant to Section 6(b) or to exercise voting rights pursuant to Section 7
shall cease and all such rights shall thereupon become vested in PSC, which
shall have the sole and exclusive right and authority to dispose of the
Securities and to receive dividends and exercise voting rights in respect of the
Securities. Further, PSC shall have the right, during the continuance of any
Event of Default, to notify and direct the issuer of the Securities to make all
payments, distributions, dividends and any other distributions payable in
respect thereof directly to PSC. The issuer of the Securities making any payment
or distribution to PSC hereunder shall be fully protected in relying on the
written statement of PSC that it then holds a security interest that entitles
PSC to receive such payments and distributions. Any and all money and other
property paid over to or received by PSC pursuant to the provisions of this
Section 8 shall be retained by PSC as additional collateral hereunder and may be
applied in accordance with the provisions hereof.
9. Rights and Remedies of PSC Upon and After Default.
(a) Remedies. Upon the occurrence of an Event of Default, and in
addition to any and all other rights and remedies which PSC may then
have under this Agreement, the Restricted Stock Agreement, the laws of
the United States or the Uniform Commercial Code, as then in effect in
Texas (the "Code"), or otherwise, PSC may: (i) declare the entire
unpaid balance of principal of and all accrued interest on the
Obligations immediately due and payable, without notice (including
notice of intention to accelerate and notice of acceleration) except as
required under the Note, demand or presentment, which are hereby
waived; (ii) reduce its claim to judgment, foreclose or otherwise
enforce its security interest in all or any part of the Obligations by
any available judicial procedure; (iii) after notification, if any,
expressly provided for herein, sell or otherwise dispose of, at the
office of PSC, or elsewhere as chosen by PSC, all or any part of the
Collateral, and any such sale or other disposition may be as a unit or
in parcels, by public or private proceedings, and by way of one or more
contracts, (it being
Page 3
<PAGE> 4
agreed that the sale of any part of the Collateral shall not exhaust
the power of sale granted hereunder, but sales may be made from time to
time until all of the Collateral has been sold or until the Obligations
have been paid in full), and at any such sale it shall not be necessary
to exhibit the Collateral; (iv) at PSC's discretion, retain the
Collateral in satisfaction of the Obligations whenever the
circumstances are such that PSC is entitled to do so under the Code;
(v) apply by appropriate judicial proceedings for appointment of a
receiver for the Collateral, or any part thereof, and Pledgor hereby
consents to any such appointment; (vi) purchase the Collateral at any
public sale; (vii) purchase the Collateral at any private sale if
permitted by the Code; and/or (viii) exercise the rights set forth in
Section 10 hereof.
(b) Sale of Securities. Pledgor recognizes that PSC may be unable to
effect a public sale of any or all of the Securities by reason of
certain prohibitions contained in the federal securities laws and
applicable state or foreign securities laws, and thus may resort to one
or more private sales thereof to a restricted group of purchasers who
will be obliged to agree, among other things, to acquire such
securities for their own account for investment and not with a view to
the distribution or resale thereof. Pledgor acknowledges and agrees
that any such private sale may result in prices and other terms less
favorable to the seller than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale
shall be deemed to have been made in a commercially reasonable manner.
PSC shall be under no obligation to delay a sale of any of the
Securities for the period of time necessary to permit the issuer of
such securities to register such securities for public sale under the
federal securities laws, or under applicable state securities laws,
even if such issuer would agree to do so. Upon the consummation of any
private or public sale, PSC shall have the right to deliver, assign,
and transfer to the purchaser thereof the Securities so sold. Each
purchaser at any such sale shall hold the property sold absolutely free
from any claim or right of whatsoever kind, and Pledgor hereby waives
(to the extent permitted by law) all rights of redemption, stay and/or
appraisal which it has or may at any time in the future have under any
rule of law or statute now existing or hereafter enacted. PSC shall
give Pledgor notice of PSC's intention to make any such public or
private sale at broker's board or on a securities exchange to the
extent required hereunder or by the Code. Such notice, in case of sale
at broker's board or on a securities exchange, shall state the board or
exchange at which such sale is to be made and the day on which the
Securities, or that portion thereof so being sold, will first be
offered for sale at such board or exchange. At any such sale the
Securities may be sold in one lot as an entirety or in separate
parcels, as PSC may determine. PSC shall not be obligated to make any
such sale pursuant to any such notice if PSC shall determine not to do
so, regardless of the fact that notice of sale of the Securities may
have been given. PSC may without notice or publication, adjourn any
public or private sale or cause the same to be adjourned from time to
time by announcement at the time and place fixed for the sale, and such
sale may be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the Securities on
credit or for future delivery, the Securities so sold may be retained
by PSC until the selling price is paid by the purchaser thereof, but
PSC shall not incur any liability in case of the failure of such
purchaser to take up and pay for the
Page 4
<PAGE> 5
Securities so sold and, in case of any such failure, such Securities
may again be sold upon like notice. PSC may also, at its discretion,
proceed by a suit or suits at law, or in equity to foreclose its
security interest and sell the Securities, or any portion thereof,
under a judgment or decree of a court or courts of competent
jurisdiction. If any consent, approval or authorization of any state,
municipal or other governmental department, agency or authority should
be necessary to effectuate any sale or other disposition of the
Securities or any part thereof, Pledgor shall execute all such
applications and other instruments as may be required in connection
with securing any such consent, approval or authorization, and will
otherwise use Pledgor's best efforts to secure the same.
(c) Notification. Reasonable notification of the time and place of
any public sale of the Collateral, or reasonable notification of the
time after which any private sale or other intended disposition of the
Collateral is to be made, shall be sent to Pledgor and to any other
person entitled under the Code to notice; provided, that if the
Collateral threatens to decline quickly in value, or if otherwise
permitted by the Code, PSC may (but shall not be obligated to) sell or
otherwise dispose of the Collateral without notification, advertisement
or other notice of any kind. It is agreed that notice sent or given not
less than ten calendar days prior to the taking of the action to which
the notice relates is reasonable notification and notice for the
purposes of this section.
(d) Application of Proceeds. Upon the maturity of the Obligations or
any part thereof, whether such maturity be by such terms of such
instruments or through the exercise of any power of acceleration, PSC
is authorized and empowered to apply any and all funds realized from
the sale of the Collateral not previously credited against the
Obligations first toward the payment of the costs, charges and
expenses, if any, incurred in connection with the collection of such
funds hereunder, and then toward the payment of the Obligations in such
order as PSC, in its sole discretion, shall deem appropriate, and shall
pay the balance remaining (if any) to Pledgor as prescribed by the Code
or as a court of competent jurisdiction may direct.
10. Attorney-in-Fact. Pledgor hereby appoints PSC as the
attorney-in-fact for Pledgor for the purpose of carrying out the provisions of
this Agreement and taking any action and executing any instrument which PSC may
deem necessary or advisable to accomplish the purposes hereof, which appointment
is irrevocable and coupled with an interest. Without limiting the generality of
the foregoing, PSC shall have the right and power to receive, endorse and
collect all checks and other orders for the payment of money made payable to
Pledgor and included within the Collateral and to give full discharge for the
same. Neither PSC nor any director or officer of the issuer of the Securities
shall have any liability for the distribution to and collection of the Proceeds
by PSC, but shall be fully protected in relying on the written statement of PSC
as to its authorization pursuant to this paragraph. Any and all amounts
collected by PSC pursuant hereto shall be applied against the Obligations in the
manner that PSC shall determine, in PSC's sole and absolute discretion.
Page 5
<PAGE> 6
11. Certain Other Rights of PSC.
(a) Duty of Care. PSC's only duty with respect to the Collateral
shall be to exercise reasonable care to secure the safe custody
thereof. PSC shall not have a duty to fix or preserve rights against
prior parties to the Collateral, and shall never be liable for its
failure to use diligence to collect any amount payable with respect to
the Collateral, but shall be liable only to the account of Pledgor for
what PSC may actually collect or receive thereon.
(b) Financing Statement. PSC shall have the right at any time to
execute and file this Agreement or a copy of this Agreement as a
financing statement, but the failure of PSC to do so shall not impair
the validity or enforceability of this Agreement.
(c) Payment of Expenses. At PSC's option, PSC may discharge taxes,
liens and interest, perform or cause to be performed, for and on behalf
of Pledgor, any actions and conditions, obligations or covenants which
Pledgor has failed or refused to perform and may pay for the repair,
maintenance or preservation of any of the Collateral, and all sums so
expended, including, but not limited to, attorneys' fees, court costs,
agents' fee or commissions, or any other costs or expenses, shall bear
interest from the date of payment at the highest legal rate and shall
be deemed to constitute part of the Obligations secured by this
Agreement.
12. Cumulative Rights and Remedies. All rights and remedies of PSC
hereunder are cumulative of each other and of every other right or remedy which
PSC may otherwise have at law or in equity or under any other contract or other
writing for the enforcement of the security interest herein or the collection of
the Obligations, and the exercise by PSC of one or more rights or remedies shall
not prejudice or impair the concurrent or subsequent exercise of other rights or
remedies. Should Pledgor have heretofore executed or hereafter executed any
other security agreement in favor of PSC in which a security interest is created
as security for the debts of another or others, in respect of which Pledgor may
not be personally liable, the security interest therein created and all other
rights, powers and privileges vested in PSC by the terms thereof shall exist
concurrently with the security interest created herein, and, in addition, all
property in which PSC holds a security interest under any such other security
agreement shall also be part of the Collateral hereunder, and all or any part of
the proceeds of the sale or other disposition of such property may, in the
discretion of PSC, be applied by PSC in accordance with the terms hereof, and of
such other security agreement, or agreements, or any of them.
13. Termination. Upon payment in full by Pledgor of all Obligations in
accordance with their terms, this Agreement shall terminate and PSC shall return
to Pledgor all certificates evidencing the Securities (and any related stock
powers) then held under this Agreement.
14. Repurchase Option. If PSC exercises its right to cancel or
repurchase any of the Securities under the Restricted Stock Agreement, PSC shall
be entitled to release such Securities from the pledge under this Agreement and
cancel or repurchase such Securities in accordance with the terms of the
Restricted Stock Agreement.
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<PAGE> 7
15. Further Assurances. Pledgor agrees to execute and deliver such
further instruments and take such further actions as PSC may reasonably request
from time to time to preserve or give effect to its rights under this Agreement.
16. Action by PSC. Any election, consent, waiver or other action that
may be taken by PSC hereunder will be taken by the Chairman of the Board, unless
Pledgor is then serving in such capacity, in which case such action will be
taken by the Board.
17. Notices. Any notice to PSC that is required or permitted by this
Agreement must be addressed to PSC at its principal office to the attention of
the President, with a copy to the General Counsel. Any notice to Pledgor that is
required or permitted by this Agreement must be addressed to Pledgor at the most
recent address for Pledgor reflected in the appropriate records of PSC. Either
party may at any time change its address for notification purposes by giving the
other prior written notice of the new address and the date upon which it will
become effective. Whenever this Agreement requires or permits any notice from
one party to another, the notice must be in writing and must be sent by courier,
overnight delivery service, facsimile or certified mail, return receipt
requested, and such notice will be deemed to be given (a) if sent by courier, on
the date actually delivered, (b) if sent by overnight delivery service, one day
after being sent, (c) if sent by telecopy, on the date that confirmation of
transmission is received by the sender, or (d) if sent by certified mail, on the
third business day after being mailed.
18. Enforcement. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas, without regard to the choice of
law rules thereof. PSC will be entitled, in addition to any other remedies it
may have at law or in equity, to temporary and permanent injunctive and other
equitable relief to enforce the provisions of this Agreement. Any action to
enforce the provisions of, or otherwise relating to, this Agreement may be
brought in the appropriate courts in Dallas, Dallas County, Texas, and Pledgor
hereby consents to the personal jurisdiction of such courts in any such action;
provided that, at the request of PSC or Pledgor, any claim or dispute arising
out of or relating to this Agreement or Pledgor's employment by PSC or the
termination of such employment, including any federal or state statutory claims,
will be resolved without resort to the courts solely through mediation and, if
mediation is not successful, through binding arbitration pursuant to the rules
of the American Arbitration Association. Neither party will be liable to the
other for punitive damages for any such claim or dispute. If any action at law
or in equity is necessary to enforce or interpret the terms of this Agreement,
the prevailing party will be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which that party may
be entitled; provided that, if Pledgor becomes liable for any such fees, costs
or other disbursements, such amounts will become Obligations under the
applicable Note secured by this Agreement.
19. Entire Agreement. This Agreement and the other documents and
instruments specifically referenced herein constitute the entire agreement
between the parties hereto with respect to the subject matter hereof and
thereof, and except as expressly set forth herein or therein, there are no
agreements or representations, written or oral, express or implied, with
respect to such subject matter. No provision of this Agreement may be modified,
waived or
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<PAGE> 8
discharged unless such waiver, modification or discharge is agreed to in writing
signed by Pledgor and PSC. No waiver by either party hereto of any condition or
provision of this Agreement to be performed by the other party will be deemed a
waiver of any other provisions or conditions at the same or at any prior or
subsequent time.
20. Severability. If any provision of this Agreement is held to be
invalid or unenforceable for any reason, the validity and enforceability of all
other provisions of this Agreement will not be affected thereby.
21. Counterparts. This Agreement may be executed in any number of
multiple counterparts and by different parties on separate counterparts, all of
which when taken together will constitute one and the same agreement.
22. Assignment. Pledgor may not assign this Agreement or any rights or
obligations hereunder.
IN WITNESS WHEREOF, and intending to be legally bound, Pledgor and a
duly-authorized representative of PSC have executed this Agreement as of the
date first above written.
/s/ JOHN E. KING
---------------------------------
John E. King, Pledgor
PEROT SYSTEMS CORPORATION
By: /s/ ROB MORGAN
------------------------------
Name: Rob Morgan
----------------------------
Title: Assistant Secretary
---------------------------
Page 8
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of
our reports dated March 25, 1998, on our audits of the consolidated financial
statements and financial statement schedule of Perot Systems Corporation and
Subsidiaries. We also consent to the references to our firm under the captions
"Experts," "Summary Consolidated Financial Data" and "Selected Consolidated
Financial Data."
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
August 5, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 68,256
<SECURITIES> 0
<RECEIVABLES> 143,963
<ALLOWANCES> 3,436
<INVENTORY> 0
<CURRENT-ASSETS> 254,462
<PP&E> 125,918
<DEPRECIATION> 85,255
<TOTAL-ASSETS> 331,622
<CURRENT-LIABILITIES> 213,009
<BONDS> 0
0
0
<COMMON> 406
<OTHER-SE> 115,135
<TOTAL-LIABILITY-AND-EQUITY> 331,622
<SALES> 452,712
<TOTAL-REVENUES> 452,712
<CGS> 359,891
<TOTAL-COSTS> 425,941
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> 33,289
<INCOME-TAX> 14,145
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,144
<EPS-PRIMARY> .50
<EPS-DILUTED> .40
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 35,298
<SECURITIES> 0
<RECEIVABLES> 106,415
<ALLOWANCES> 1,185
<INVENTORY> 0
<CURRENT-ASSETS> 178,068
<PP&E> 136,072
<DEPRECIATION> 85,369
<TOTAL-ASSETS> 267,103
<CURRENT-LIABILITIES> 170,161
<BONDS> 0
0
0
<COMMON> 406
<OTHER-SE> 92,910
<TOTAL-LIABILITY-AND-EQUITY> 267,103
<SALES> 781,621
<TOTAL-REVENUES> 781,621
<CGS> 636,296
<TOTAL-COSTS> 764,028
<OTHER-EXPENSES> 1,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,282
<INCOME-PRETAX> 19,508
<INCOME-TAX> 8,291
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,217
<EPS-PRIMARY> .29
<EPS-DILUTED> .24
</TABLE>
